An overview of corporate scams that have
effectuated the changes in company law
PES UNIVERSITY FACULTY OF LAW, BENGALURU
Submitted to: - Ms. Ankita Pandey Mam
Assistant professor
PES University
Submitted by: - [Link] Kumar Reddy
SRN: - PES1UG22AL032
BALLB, 3rd YEAR, 6th SEMESTER
Table of content
Topic page number
1. Abstract 03
2. introduction 04
3. Objective of study 05
4. Research problem 05
5. Research question 05
6. Hypothesis 06
7. Research methodology 06
8. Literature review 06
9. Analysis 07
10. Conclusion 10
11. Bibliography 11
Abstract: -
Corporate fraud is a false operation carried out by a corporate organization or
people who operate under a corporate regime, which brings severe implications
as most of the events result in grave and serious consequences. Many instances
exist where organizations or individuals are acting on behalf of a corporation that
finally becomes disastrous for everyone. When such fraudulent activity comes to
light, organizations generally face the consequences of the crimes committed by
their employees. Nowadays, corporate culture is more prone to white-collar crime
that immediately affects the Nation's trade and economies with a weak financial
position and also affects the institutions under attack.
This research article will focus on the importance, categories, and punishments
under different enactments while determining corporate liability. It will also
discuss the most important case laws and some of the biggest corporate frauds
that have taken place in India.
Key words: -
Fraud, Scam, Corporate, violation etc.
Introduction: -
White-collar crimes refer to offenses that are committed by senior individuals
within government and private institutions. Their secretive nature and the fact
that no one reports them usually presents difficulties in uncovering and
investigation for the regulating bodies. These are defined as "illegitimate acts
involving deceit, concealment, or breach of trust, without reliance on physical
force or violence." According to the FBI, white-collar crime is any action by
individuals or organizations for financial gain or to avoid loss or to achieve some
business or personal advantage through deception, concealment, embezzlement,
misrepresentation, false pretenses, theft, or other fraudulent schemes.
Organizations seem to play a significant role in these crimes, but they can
sometimes be committed by individuals alone or with the aid of others. White-
collar crime is not limited to corporate fraud.1
Fraud can be defined as a broad concept that deals with the intention of
misrepresenting facts in order to get an undue benefit or cause damage to an
individual or organization. The principle "Fraus Omnia Vitiate" is emphasized
since fraud corrupts everything it touches. Corporate fraud occurs when a
1
Sanjeev Gupta, India: Corporate frauds in India – perceptions and emerging issues, Emerald’s Journal of
Financial Crime (2015).
company intends to disseminate false information so as to cover the truth and
deceive the recipients in order to get an undue advantage.
In simple words, corporate fraud refers to the intentional manipulation and
concealment of vital information that portrays an unattractively glamorous image
of the organization. Organizations use a variety of fraudulent techniques that
involve emitting false information in prospectuses, manipulating financial
reports, and concealing debt. Specific techniques of falsification of financial
information include creating false accounting entries, fictitious trades in case of
inflation, disclosure of sensitive price information due to acts of insider trading
and fabrication of a transaction that leads to attraction to investors and lenders.
For various motives, such as claiming increased and artificial profits that would
be recorded in the books, manipulating their market reputation, and cheating
government coffers to avoid taxes, such fraud is committed by businesses. This
trend further leads to a vast gap between the general public and a minority
controlling elite, promoting monopolies, managerial class, and intricate
institutional mechanisms. According to the report by the Commission on
'Prevention of Corruption' in India, in contemporary social, political, and
economic structures emerging out of transformation there, moral stature demands
outstanding qualities.". The Vivian Bose Commission, which had inquired into
the Dalmia Jain group of companies in 1963, exposed how major industries had
indulged in such fraudulent practices as account falsification, record tampering,
and other illegal practices to ensure benefits for the top management as well as
avoid taxation.2
Frauds and corporate scams in India are as old as the hills. Still, it was only the
first big financial fraud in free India that had occurred in the 1950s through the
now-notorious LIC/Mundhra scam. Thereafter, every decade witnessed
alarmingly frequent cases of fraud: among them Harshad Mehta, Ketan Parekh,
Sahara, and Satyam scams are to be cited to name only a few. With the relevant
provisions of Indian Penal Code, 1860 these frauds have been dealt within by
police, the terms fraud was defined but not included as a different and separate
act the Companies Act in 1956. it did not all essentially require its particular
statutory since entire Lord Macaulay IPC is fully used which covers it absolutely.
Companies Bill, 2008 was the first statutory draft of Companies Act, 1956, as per
Dr. J.J. Irani Committee Report.( Irani Report ).
Objective of the study: -
2
Ankush Banga, India: The Journey of Companies Act from 1956 to 2021, The Taxman Journal (2021)
This paper will attempt to be a review of corporate scams directly influencing
changes in company law. It will define and expound on the multifaceted nature
of corporate fraud, encompassing its varied forms, motives, and even the potential
it has to impact stakeholders and the economy. Important to this objective will be
giving detailed coverage to certain, high-profile corporate scams-primarily those
that initiated legislative reform. This would include the minute mechanics of the
scams themselves, who perpetrated and facilitated them, and, above all, the
regulatory vulnerabilities they uncovered. The subsequent revisions and
amendments of the company law due to these scams will be followed to assess
their direct response about the adequacy of such legal amendment that prevents
another scam of this kind. Lastly, it will determine other openings and weaknesses
remaining in the legal and regulatory structures and possible suggestions and
future revisions that will definitely ensure the solidification of corporate
governance practice towards increasing efforts of not repeating this type of
financial malpractices in the face of offering protections to the investors as well
as keeping the market.
Research question: -
The research questions are:
1. What is corporate fraud?
2. How has Indian company law evolved as responses to different scams India?
3. Which of the new amendments was brought out in company law to address
the fraud and scams?
Research hypothesis: -
Alternative Hypothesis: Corporate scams have not effectuated changes in
company law in any way.
Null Hypothesis: Corporate scams have effectuated changes in company law.
Research methodology: -
There are two research methods:
1) Doctrinal Research Method :This is the method, which uses books, journals,
articles, and case laws. The process popularly known is library-based research.
2) Non-Doctrinal Research Method : The approach might be in form of field
survey, interview and practical investigation. Such research will be both time
consuming and expensive.
For the present research, the researcher has used the doctrinal research method,
as it mainly depends on books, journals, and articles.
Literature review: -
1) Sanjeev Gupta, India: Corporate frauds in India3 – This work explores the
public perception of, and emerging issues with respect to corporate fraud in
India. This study probably briefs on these developments and takes a closer
look at the differing patterns of fraud prevalent in the Indian context. It further
probes into reasons for such fraudulent activities to supposedly cause
damages to stakeholders. The studies are insightful toward the various
facades and scope of fraud in India.
2) Ankush Banga, India: The Journey of Companies Act from 1956 to 20214 –
There is an article on *The Taxman Journal*, tracing the changes in the
Companies Act from 1956 up to 2021. History will be relevant to
understanding the development of corporate governance in India and the anti-
fraud legislation. The paper would probably report various significant
amendments and their effect on preventing or addressing corporate fraud.
3) Dipak Mondal, India: Companies Act amendments aim to curb fraud, increase
accountability, Business Today (2019)5 - In "Business Today," Mondal
explores the amendments of the Companies Act in 2019. Such amendments
are directed at fraud-checking and ensuring accountability. In this article, the
piece likely discusses certain provisions that were aimed at making the
corporate governance strong by internal checks and fraudulent tendencies. It
is also possible to evaluate the amendments and their scope.
4) Akansha Tomar, India: Corporate Frauds6 – His analysis would be more a
research-based study on corporate fraud, probably with one or more case
studies or typologies of fraudulent activity. It would probably analyze the
3
Sanjeev Gupta, India: Corporate frauds in India
4
Ankush Banga, India: The Journey of Companies Act from 1956 to 2021
5
Dipak Mondal, India: Companies Act amendments aim to curb fraud, increase accountability, Business Today
(2019)
6
Akansha Tomar, India: Corporate Frauds
methods used in committing frauds as well as its impact upon the businesses
and the broader economy.
Analysis: -
Definition of Fraud under Section 447 of the Act:
Section 447 is a collection of sections of the Indian Penal Code. These comprise
Criminal Breach of Trust under Section 405, Cheating under Section 415, Forgery
under Section 463, and Falsification of Accounts under Section 477A.
Section 447 is not prejudiced to any pre-existing liability, which means debts such
as under this Act or any other law are not affected. It also ensures that whatever
is done under Section 447 does not hinder any other ongoing legal proceeding for
financial liabilities. Debt payments which were initiated under other statutory
provisions currently in force fall within the scope.
The explanation identifies the key components of fraud as:
(a) any action,
(b) an omission,
(c) concealment of information, or
(d) abuse of power.
Anything done in any manner by any person with intent to deceive or if his act
causes wrongful gain or loss or adverse effect to the company its shareholders,
creditors or any other people. Excepting in so far as he intends to deprive another
of his property—this is fraudulent.
As regarded as the phrase "*intent to deceive*" would be interpreted in Section
463 of the Indian Penal Code :. In *Vimla v. State*, it has been held that though
deception is an ingredient of fraud, it does not embrace the very connotation of
its meaning. Fraud, however, can be construed into two parts-deception and
subsequent damage to the party deceived by the former. *Injury* here goes
beyond financial loss and encompasses damage to health, intellect, reputation, or
any other aspect of a human being, save for economic deprivation- that is,
property loss, whether movable, immovable, or monetary. A general rule with
fraud is a corresponding gain by the wrongdoer and a loss to the injured party.
However, even in cases so rare that the deceiver benefits without an equal
detriment to the victim, the fraudulent nature of the act is not as damaged. Section
447 of the Companies Act has been invoked in several recent corporate scandals,
which are currently at various trial stages. This provision is recently enacted,
hence, there were no direct judicial pronouncements to this effect as of date before
the NCLT, the High Courts and the Supreme Court. In that, the SFIO has freshly
applied this section in some selected cases of corporate frauds.7
The Act imposes stringent punishment upon the person found committing fraud.
Any fraud which involved at least ₹10 lakh or 1% of company turnover,
whichever is lesser, shall be punished with imprisonment not less than six months
and may extend up to ten years. The minimum punishment awarded to the convict
can be no less than the amount of fraud, but it can be up to three times of that.
But in case of fraud against public interest, it has prescribed the minimum
imprisonment to be three years. Under Section 447, the offense has been
considered as cognizable, non-bailable, and also non-compoundable. Besides,
Section 446A provides five considerations of the court to determine the extent of
punishment such as:
(a) size of the company,
(b) nature of business,
(c) public interest harm caused to it,,
(d) the nature of the default, and
(e) recurrence of the offence.
Company Bill 2011: The beginning of Changes and Improvements:
India had employed the 1956 Companies Act but was not consistent with the
vibrant business environment in the country. Every year, a succession of
corporate scams continued to jolt the Indian economy and several amendment
provisions were sought to be adopted to address such issues. The Sahara scam
finally unveiled glaring regulatory failure, causing a loss of the Act's regulatory,
enforcement, and administrative powers. In this context, the Companies Bill,
2011 was proposed and the same was made as follows:
• E-governance was first introduced by providing companies with an
opportunity to keep and inspect the documents in electronic form.
• Introduction of the concept of Corporate Social Responsibility (CSR).
• The company has implemented independent directors, a CSR committee, a
remuneration committee, a shareholder relationship committee, and an
audit committee to improve corporate governance.
• Introduce the additional disclosure requirements.
• Investor-friendly process of capital raising for the company
• Improved accountability of audit
• Managerial remuneration regulation
• Process simplification of merger and acquisition.
7
Madhu Bala, India: Corporate frauds and legal mechanism in india-an overview, Journal IJCAR (2018)
• Protection of minorities and small shareholders together with investor
protection.
• Inclusion of a position of a woman director and Serious Fraud Investigation
Officer
• National Company Law Tribunal along with the mediation and conciliation
panel.
Direct implication of the Sahara scam is Companies Act, 2013. The draft prepared
by the J.J. Irani headed committee then Director IIM Bangalore responded to an
existing demand by bringing in demand much against it regarding transparency
and corporate accountability. Stricter disclosure norms brought changes into the
very framework of compliance or disclosure norms, administration or penalties
and legal procedure.
The change was so sudden and all-pervasive that business enterprise had little
alternative but to gear up and therefore, effectively and practically, render the
1956 Act useless. Also, the Company Law Tribunal, endowed with far wider
powers than previously, substituted for the Company Law Board. Ensuring that
these disclosure standards become effective must now distinguish between those
provisions concerning disclosure and other ingredients of the Act.
Companies Act 2013: Is it really effective?
The archaic Companies Act of 1956 has been replaced by the Companies Act,
2013. The main objective is to encourage good corporate governance and
accountability through transparency and disclosure. Major financial scandals
from Satyam to Sahara have occurred under the 1956 Act, educating
policymakers and society about the need for much stricter corporate regulations.
For these reasons, the legislators drafted the 2013 Act very cautiously to avoid
such situations in the future. While its predecessor failed to face the highly
complex and widely known legal violations, especially those of foreign
business, the 2013 Act has tolerated them to a greater extent, although
fraudulent activities have gradually crept into the banking sector, and it makes
the issue of how loosely the present legal framework governing corporations
and financial institutions remains connected. Mass scams going on within the
SEBI network raise the extreme aspect-the intervention of regulatory bodies
after considerable damage has already occurred in case of financial misconduct
rather than preventing it.8
8
Akansha Tomar, India: Corporate Frauds - The Analysis, Mondaq Journal (2018)
Some scams that took place are enactment of Companies Act 2013 are:
Shardha Chit Funds Scam (2013) - Millions of gullible investors in West
Bengal fell victim to a "Ponzi scheme" with the patronage of the state, promising
them returns that seemed unreal. Only at the end did SEBI and RBI uncover a
financial scam estimated to be between ₹2,060 crore and ₹2,400 crore. The
Enforcement Directorate and the Serious Fraud Investigation Office have arrested
the chairman and managing director of the Shardha Group on charges of money
laundering. Till now, 1,000 depositors have been compensated.
2014- HAL and Rolls-Royce Defence Scam - Rolls-Royce, a company based in
the UK, had made an accusation that it used ₹10,000 crores from a bribery deal
to sign an aircraft engine supply contract with the state-owned enterprise
Hindustan Aeronautics Limited. Defence ministry filed an FIR after a letter
submission, following which a CBI probe into this matter culminated into a report
advising HAL to put a stop to further talks. The vigilance division also revealed
that it had made the deal through a third party. Rolls-Royce responded to this with
a letter to HAL, stating that it had indeed paid a commission of ₹18 crores to an
agent, Ashmore Pvt. Ltd. and agreed to return the amount to the government.
2017- Mining Scam by Essar Group, Reliance Group, and Adani Group -
The PILs filed against the Adani Group, Essar Group, and other mining
companies for over-invoicing imports of coal from Indonesia have brought the
scandal into public. The case further alleged that such companies have siphoned
off excess funds into offshore accounts. A total of 40 companies were prosecuted
for inflating the price of Indonesian coal, which is estimated at about ₹290 billion.
It was an allegation that through this scheme, the companies used to inflate the
price and, therefore, avoided paying taxes. This case is still pending.9
2018- Punjab National Bank Scam - The cause of the crisis was primarily due
to excessive loan and advances issuance coupled with increased defaults, thereby
stimulating growth in the bank's non-performing assets. This did not only impact
profitability but also the share price. Additionally, the institution had huge
governance-related issues last year. The Reserve Bank of India introduced a
rehabilitation scheme in which State Bank of India agreed to buy 49% of the
share. Customers, who had their salary accounts connected with this bank, were
completely disrupted. The bank was subject to a moratorium of 30 days. With the
complete takeover by RBI, the authority of the decision-making power within the
board also got lost. Compliance experts stated that the promoter-driven banks
require special attention and regulatory oversight and that deficiencies in
corporate governance need to be addressed.
9
Dipak Mondal, India: Companies Act amendments aim to curb fraud, increase accountability, Business Today
(2019)
Major Amendments in Companies Act 2013
Despite the enactment of Companies Act, 2013, various scams continued to crop
up across India due to which Indian government also made about 40 amendments
to it in 2019; these amendments aimed at improving ease of doing business while
strengthening the regulatory oversight on businesses with questionable practices.
With all these changes, the government was trying to implement the strict
enforcement of much higher punishment and bring the crimes on par with the
world. These 40 amendments include significant ones like:
The government can ask the tribunal to pass an order of disgorgement against
management personnel who have indulged in fraud.
Bar all CAs in audit or value-related activities with the National Financial
Reporting Authority by 6 months to 10 years.
- Non-compliance with CSR law results in imprisonment for officials.
It directs unused CSR funds to be transferred to a designated account and utilized
within three financial years. DVRs with voting rights can now be issued by
companies up to 74% of post-issue paid-up capital as against 26% earlier. More
cases can now be resolved at the level of Regional Director, rather than sending
the case to NCLT that is an adjudicatory body.
- Shareholders of unlisted companies shall mandatorily hold or transfer securities
only in dematerialized form.
- Non-compliance with provisions relating to prohibition on issue of shares at
discount and delay in filing annual return no longer carry imprisonment.
Conclusion: -
Corporate fraud is not something new in India. Over the years, numerous
corporate scandals have been exposed and fraudsters taken to court, but the
financial burden of these crimes remains heavy on the government and investors.
The courts deliver their verdict, but the actual victims-the people who invested
their hard-earned money-will have to wait for years before getting compensation.
Every year, new corporate frauds are registering, which proves that laws alone
are not sufficient to curb such crimes. Corporate fraud remains financially
draining and socially unacceptable. In essence, this crisis is fueled by the
degradation of ethical values at the individual and organizational level. This can
only be done in the face of a deep social change with authority leaders who ensure
discipline is enforced at every [Link] new normal is in charge of the future in
the Post-COVID era. All industries are digitized rapidly and readily during the
pandemic. There are numerous digitally conducted transactions, contracts,
contacts, meetings, etc., nowadays, which offer several scopes for manipulation.
With the rise of fraudulent activities, vigilance mechanisms need to be
strengthened than ever. Effective management of such challenges would only be
possible with the alignment of corporate governance to the offenses described
under the Information Technology Act of 2000 so that disruption to the digital
business sector remains minimal. Despite several progressive measures included
in the Companies Act of 2013, delay in its implementation has resulted in
irrevocable damage across all industries.
This process must be reformed in the execution and enforcement procedures of
the Companies Act of 2013 so that it can provide a robust base to businesses and
contribute to national growth. The question may also arise that whether there is a
need for an alternative regulatory body other than SEBI or a highly specialized
wing, which needs to be formed in order to address more effectively
contemporary and future issues.
Bibliography: -
1) Sanjeev Gupta, India: Corporate frauds in India – perceptions and emerging
issues, Emerald’s Journal of financial crime (2015)
[Link]
0045/full/html?skipTracking=true
2) Sanjeev Gupta, India: Corporate frauds in India nature consequences and
regulation, ShodhGanga (2013). [Link]
3) Ankush Banga, India: The Journey of Companies Act from 1956 to 2021,
The Taxman Journal (2021), [Link]
journey-of-companies-act-from-1956 to-2021/
4) Akansha Tomar, India: Corporate Frauds - The Analysis, Mondaq Journal
(2018). [Link]
fraud/696380/corporate frauds-an-analysis
5) Dipak Mondal, India: Companies Act amendments aim to curb fraud,
increase accountability, Business Today (2019).
[Link]
companies-act-have-a-carrot-and-stick-approach-225016-2019-08-23