This article is written by Varchaswa Dubey, from JECRC University, Jaipur. This article is concerned with the Yes Bank scam, with special emphasis on legal aspects of corporate fraud.
The concept of scams is not new for India and various scams have been witnessed from time to time. One such scam is the Yes Bank loan fraud of Rs. 2,435 crores. It is the greed of money and the lack of proper functioning of the laws which lead to such a large scam being committed by one of the largest and most trusted private banks in India.
Background of Yes bank
The Yes Bank is one of the top private sector banks in India which was incorporated in the year 2003 and began functioning in the year 2004 after a partnership of its Founder Rana Kapoor and Ashok. Initiated to provide a high-quality private Indian bank with a customer-centric approach.
The Yes Bank is the fourth-largest private sector bank in India which is currently functioning across all 29 states and 7 Union territories in India with more than 1000 branches and 800 ATMs in the country.
What was the Yes bank scam
The scam began between April and June 2018, when Yes back invested Rs. 3,700 Crore in the form of short-term debentures of DHFL. The founders of DHFL agreed to pay back the amount in the form of loans to DoIT Urban Ventures to Rana Kapoor and his family as an inside trade after the stock price of the company fell at an alarming rate and the customers started withdrawing money from the bank.
A charge sheet was filed in May by the Enforcement Directorate under the Prevention of Money Laundering Act, 2002 regarding Rana Kapoor’s illegal gratification of Rs. 5,050 crores along with several other cases of providing inside loans to many corporate entities. Yes bank also used customers’ money to cover the debts of the bank. It also diverted Rs. 2,185 Crore to Morgan Credit, one of the holding companies of Yes bank.
Yes Bank was found liable for not only insider trading but also illegal lending practices, evergreening of loans, the high charge from borrowers which was not the policy of the bank, overstatement of profits, and violations of RBI guidelines.
What were the after-effects of the scam
A case against Rana Kapoor, his wife, and his three daughters who were the owners of the companies was filed in Mumbai Sessions Court. Rana Kapoor was asked to step down from the top position of the company and the management of Yes bank came under Reserve Bank of India (RBI) under Section 45 of the Banking Regulation Act, 1949 which reserves the power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare a scheme of reconstitution of amalgamation.
RBI also enacted a draft scheme for the reconstruction of Yes Bank in the year 2020 under which Yes Bank was placed under a moratorium period under which the deposit withdrawals by customers of the bank during this period were limited to Rs 50,000 per person.
The State Bank of India also showed interest in the reconstruction scheme of the bank and it got 49% shares of the Yes Bank.
What are the other corporate scams India has witnessed
Corporate crime, which is also referred to as organized crime or white-collar crime, being committed by individuals in their occupation, for maximizing their profit. India has witnessed many corporate scams since its independence and each scam has always affected the economy of the country. Other corporate scams in India are:
- Mundhra scam: The first-ever big scam in independent India was witnessed in 1957 when Haridas Mudhra, a stock speculator manipulated Life Insurance Corporation (LIC) to invest Rs. 1,26,86,100 in his own companies by putting political pressure. Consequently, the M.C. Chagla committee was formed which submitted its report within 24 days in a transparent manner exposing the scam of the politicians and Haridas Mudhra, who was imprisoned for 22 years.
- Sahara scam: A scam of more than 24,000 Crore, the Sahara group’s owner Subrata Roy failed to return the money of its more than 30 million small investors despite the Securities and Exchange Board of India ordering the company to return the money of its investors.
- Satyam computers scam: The scam was unearthed when the founder of the company Ramalinga Raju admitted that he increased the company’s revenue, 13,000 fake employees, profit and profit margins of all the quarters of the company for a period of 5 years, i.e. from the year 2003-2008 and the estimated money involved in the scam is around Rs. 7,000 Crore.
- Ketan Parekh securities scam: Ketan Parekh, was involved in the manipulation of stocks and circular trading from 1999-2001. Parekh used to borrow from banks and manipulated the host of stocks. The amount of scams committed by Parekh is around 1,250 Crore Rs.
- Harshad Mehta scam: Popularly known as ‘big bull’, Harshad Mehta was associated with one of the largest and most economically affected scams ever. The scam began when Harshad Mehta obtained fake bank receipts from small banks and such receipts were given to other banks to obtain cash from that bank and the money obtained was put in the stock market. Later, when the scam was unearthed, the amount of said scam was around Rs. 5000 Crores. While some refer to this scam as corporate fraud others refer to it as exploitation of loopholes in the system.
How industrialists practice abuse of power in the corporate sector
The Tendolkar committee report highlighted reasons how industrialists practice abuse of power:
- Loans and advances: The companies and industries where the general public has invested provide loans and advance money in the absence of any security or surety and at low rates of investment to lure people to invest in the company. Many companies are provided with huge amounts of cash which have uncertain positions in the market. Despite Section 85 of Companies Act, 2013, which states that no company shall advance any loan to any director or any firm in which such director is a partner, loans are being provided to the directors of the company, while Section 86 reserves that no employee shall be provided with any loan or advance to an employee.
- Improper transfer of assets: By merely inserting the transaction in the books while no real transaction exists, assets are transferred from one company to another like the subscription to share capital, transaction of sale and purchase, etc and no cash transaction or any other type of payment is made, which results in manipulation of rates.
- Liquidations: After a public company is disassociated from operating, one technique is the liquidation of the company and look for a liquidator which shall arrange sanctions from the courts and hand over all the assets and records to the liquidator company and then after obtaining a transfer fee destroy all the fake records. Section 361 of the Companies Act, 2013 gives the summary procedure for liquidation of the company.
- Courts and arbitrators: The system is corrupt and all the legal safeguards are weak, therefore, an illegal act can be easily carried out like jurisdictions of the court and liquidators were bribed. Such events attract provisions of the Prevention of Corruption Act, 1988.
- Registrar of companies: The registrars of the company also lack competent jurisdictions in the matters and it has been found that registrars have been exploited by money. The registrar of companies is appointed under Section 609 of the Companies Act, 1956.
- Auditors: The bookkeepers are responsible for keeping the true accounts of the public however the auditors are themselves at fault for dishonestly manipulating the records leading to corporate fraud. Section 139 of Companies Act, 2013 deals with the appointment of auditors in a company, while Section 139-148 of Companies Act, 2013 deals with different provisions concerning auditors.
- Selling and managing agencies: The agencies get their part of the money and the shareholders of the company did not get any remuneration they were entitled to.
- Manipulations: The whole administration of the books, including transactions of sales and purchase, inter-company loans, and investments are being manipulated. It is done by taking advantage of the different financial years of different companies, no disclosure of dividends earned by the company, converting public companies to private companies, and avoiding tax.
What are the laws to tackle corporate fraud
The Indian laws which aim at combating corporate fraud and punish those who are involved in corporate fraud are:
Prevention of Money Laundering Act, 2002
The legislation aims at the prevention of any activity concerned with money laundering, which refers to the concealing of origins of the money which is obtained illegally.
According to Section 4 of PMLA, any person who is involved in any money laundering activities shall be imprisoned for a term not less than 3 years but may extend to 7 years and fine.
Prevention of Corruption Act, 1988
In most of the scams, it has been witnessed that the offenders bribe the government officials to not take any action against their illegal acts and this leads to the amount of corporate fraud being large in amount. To prevent this, the Prevention of Corruption Act, 1988 is legislation that seeks to eliminate corruption.
According to Section 7 of PCA, any public servant who is found to be taking, agreeing, attempting, any illegal gratification for himself or someone else shall be imprisoned for a term which shall not be less than 6 months but may extend to 5 years and fine.
The Companies Act, 2013
The Companies Act, 2013 is another significant legislation concerning corporate frauds, although the companies act is primarily concerned with high standards of corporate governance and putting restrictions on insider trading, and protecting the interest of the investors.
- Section 212 provides the Investigation into the affairs of the Company by the Serious Fraud Investigation Office.
- Section 447 of the said act provides for the punishment for fraud for a period not less than six months but which may extend to ten years and shall also be liable to fine.
- Section 449 provides for the punishment for false evidence, for a term which shall not be less than three years but which may extend to seven years, and with a fine which may extend to ten lakh Rs.
- Section 451 provides for punishment for repeat offenders, which may be imposed if an offence has been committed within three years, then the person guilty shall be punished with twice the amount of fine for such offence and to any imprisonment provided for that offence.
The Securities and Exchange Board of India Act, 1992
The Securities and Exchange Board of India Act, 1992 provides the rules and regulations required by the board to avoid any circumstances which shall originate any irregularities among corporate fields.
- Section 15A provides punishment for failure to furnish information, return, etc. with one lakh Rs. for each day during which such failure continues or one crore Rs., whichever is less.
- Section 15B provides punishment for entering into any agreement with the client, with one lakh Rs. for each day during which such failure continues or one crore Rs., whichever is less.
- Section 15G of the Act is a significant one because it provides for the punishment for insider trading with twenty-five crore Rs. or three times the amount of profits made out of insider trading, whichever is higher.
After scrutiny of the legal provisions bestowed by the parliament of India to its legal mechanism, it can be concluded that our corporate system lacks enforceability of laws and a strict rule of checks and balances, which is the primary reason for huge corporate frauds and a loss to the economy of the country.
The practice of corruption in the system is certainly a matter of grave concern, however, the unlawful and mala fide practice of corporate sectors can be eliminated if the safeguarding laws are more stringent and are equally enforced.
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