Corporate Frauds in India-Recent Developments,Strategie&Regulations to combat fraud;Case-law summary
Updated: Nov 14, 2020
Author: Aniket Pandey, II year of B.A.,LL.B. from Department of Law, University of Calcutta.
Brief Description: Classes of Offences & Meaning of Socio-Economic offence
Offences have been primarily classified into two main classes, namely,
(a) Traditional offences
(b) Socio-Economic offences
The former mainly comprise theft, robbery, murder, rape, etc. While the latter are those which both affect Public welfare and overall health of the society. This class of crime is mainly done by people from the middle and upper strata of society. Sutherland has thus named these crimes as, ‘White Collar Crimes’, while some others have also named it, ‘Regulatory Offence’ or ‘Public Welfare Offences’. This class of crime has spread almost in every corner of the world. Not only developed countries, but even under-developed countries are not free from this vice. The main motive behind such crimes is the greed for money. Promulgating Fake or deceptive advertisement, misbranding goods and services, evading legally inflicted taxes have all been branded as, Socio-economic offences by Sutherland. Other than this, embezzlement and misappropriation are also regarded as what is known, as ‘White-Collar Crimes’. Likewise, we have Corporate Fraud which obstructs the economic development of a country and also harms the overall economic health. In this piece, we would discuss the increasing Corporate Frauds in India vis a vis some popular case law judgement. The National Crime Report Bureau of India classifies Company Frauds as one of the economic offences along with some terrorist activities.
Definition & Meaning of Fraud under India Law
“Fraud Omnia Vitiate” or Fraud violates everything. Section 17 of the Indian Contract Act, 1872, Fraud has been defined as some act committed by a party, or in collusion with someone, or even by his agent to a legally enforced agreement with the sole intention to deceive another party or his agent to it, or in some cases to induce the same to enter into a contract:
1. The proposal which in-fact is not genuine, by one who does not believe the same to be genuine,
2. The active seclusion of a fact by the one who possesses the knowledge of the fact,
3. A promise made devoid of any intention or deliberation to act upon it,
4. Any other act purely fitted to defraud or any act or omission which has been particularly declared fraudulent by law.
In-State of Maharashtra v. Dhawan v Shaw Brothers, the apex court defined Fraud as a frivolous representation by one who possesses the knowledge that the same is not true, with the sole motive to deceive and mislead the other who may act on it to his prejudice and the benefit of the person representing.
In a wider sense, a fraud is a deliberate deception made for one’s profit, or in other words to destroy and damage another person/entity/corporate. Section 25
Corporate Scam- Meaning & Types
Corporate Fraud or Company Fraud is an economic offence in which a corporate or entity intentionally or deliberately alters and hides sensitive information, to make the entity appear healthier. In such offences, a company adopts numerous modus- operandi to commit such company fraud, which includes wrong information in the prospectus and debt concealment etc. It comprises illegitimate or unethical and fraudulent acts which are often complicated and therefore difficult to make out. Overall, it refers to the unlawful activities carried out by an individual or a corporate executed or done in a dishonest or unethical manner. It has been observed that these type of economic offences or business fraud has given an advantage or benefit of the committing individual or corporate.
There are different types of Corporate Frauds which are:
1. Financial Fraud- Manipulating, Falsifying, Changing Accounting Records. It also includes deliberately projecting frivolous, misleading advertisements
2. Corruption- Acquiring illegitimate advantage of one’s position and abusing one’s power for private gains.
3. Misappropriating assets- Acquiring tangible assets illegally from one’s possession either by internal or external parties. Selling Trade secrets and causing improper payments are also included under the dimension of Misappropriation of Assets.
4. Fraud related to Bankruptcy- Even though it is difficult to generalise across dominions, yet the same typically includes hiding assets, destruction of documents, interest conflicts, deceptive claims and falsifying documents.
5. Investment scams- Schemes involving getting oneself or one’s business to be part of the money put on the promise of a questionable investment.
6. Customer/Consumer Fraud- Financial deprivation caused to a consumer through deceptive and fraudulent business practices or transactions.
7. Vendor Fraud- Committed by employees when acting on their own or in connivance with vendors. One form includes billing schemes, i.e. generating frivolous payments to oneself through the application of corporate’s vendor payment system either by the creation of a fictitious vendor or by manipulating the account of the subsisting vendor.
Corporate Frauds in India- Reports based upon different commissions & regulations against such fraud
The commission on ‘Prevention of Corruption’ in its report has observed that large application of new-age technology and innovative schemes and prospects along with encouragement to the growth of monopolies have contributed in the Corporate Fraud cases in India. Other than this, lack of proper efficient internal control/compliance system, decreasing ethical values and override of controls by senior management are some top reasons for company fraud in India. In its report observed that bribery and corruption have been major dangers in a developing country like India. It has also been the reason why India alone contributed three-fourth of the total corporate fraud cases in South Asia. 
However, in the recent past bribery and corruption are no longer present in the top three risks faced by companies in India. The report further observes that this may be due to stringent laws introduced in the last decade that inflicts huge penalties on corporates caught indulging in bribery and corruption. It may be interesting to note that the said report has also revealed that the majority of the companies have indicated that their entity has not experienced any fraud. However, in the past, the report of Vivian Bose Commission underlined the methodology opted by the company like Dalmia Jain group of companies to commit fraud, indulge in falsifying accounts and tampering record for personal benefits. Other than this it also mentioned evasion of legally inflicted tax as one of other methodology for committing such white-collar crimes. and etc.
In India, we have few regulations and guidance in respect of Corporate Scams, namely
1. Prevention of Corruption Act- This act has been enacted by the Parliament of India to combat cases related to corruption in government bodies and businesses based in the Public sector.
2. The Companies Act, 2013- It was first to introduce the scheme of, ‘internal financial controls’ with an effort to have a crackdown on corporate scams in India. The given act directs the company to ensure that, there is an adherence to the corporate’s policies, its assets are safeguarded, there is the mechanism to prevent and detect scams and frauds, there is maintained accuracy in the firm’s accounting records, and time-bound preparation of genuine financial data.
3. Whistleblower Protection Act, 2011, the Right to Information Act, 2005 (RTI), the Information Technology Act, 2000 and the Prevention of Money Laundering Act, 2002 majorly target to secure companies from scams and fraud.
Punishment for Fraud
Section 447 of the Companies Act, 2013 act or omission and hiding of facts or even abuse of the position by any person, or by any other person in collusion by any means, with the sole intention to defraud, or to injure the company’s interests of the corporate or the same shareholders, or creditors irrespective of the fact that there exists any wrongful profit or loss is considered Corporate fraud. Any su ch person shall be imprisoned for a term which may not be less than a period of six months but which may extend to ten years and further shall also be liable to a monetary fine which shall not be less than the amount in the fraud. But this may extend up to three times the amount indulged in the fraud.
Penalty for False and Frivolous Statement
Section 448 of the Company Act, 2013- It states that such person shall be punished who makes a false statement relating to any return, certificate, prospectus, or any specific document, possessing the knowledge that the same is false, or omits such material fact, possessing the knowledge as to its material nature.
N.V Subba Rao v. State of Andhra Pradesh: Corporate Scam- Case Law Summary
Facts: In N.V Subba Rao v. State of Andhra Pradesh, through Inspector of Police (Criminal Appeal No. 1688/2008), based upon the information provided by the Prosecution, there was a First Information Report registered by the Inspector of Police and Special CBI, Visakhapatnam against Shri. N.V Subba Rao, Branch Manager at Central Bank of India, Guntur in Andhra Pradesh and Shri Attur Prabhakar Hegde, Proprietor of A.P Enterprises, in Guntur, Andhra-Pradesh. This said report was filed under Section 120-B (Penalty for Criminal Conspiracy) read with (r/w) Section 420 (Dishonestly persuading delivery of Property & cheating) of the Indian Penal Code, Sections 468 (Forgery with the objective of cheating) and Section 471 (Usage of the forged document or electronic record) as genuine) read with (r/w) Section 468 (Forgery with the objective of cheating) of the Indian Penal Code and lastly, Section 13(2) read with (r/w) Section 13(1)(d) of the Prevention of Corruption Act. The report accused Shri. N.V Subba Rao of abusing his official position as a branch manager and entering into a criminal conspiracy with Shri Attur Prabhakar Hegde, Proprietor of A.P Enterprises, in Guntur, Andhra-Pradesh. The branch manager, Shri. N.V Subba Rao has said to deceive and defraud the bank to the tune of 1.168 Crore Rupees by providing temporary overdrafts and term loans to several individuals subsidized by Shri Attur Prabhakar Hegde, Proprietor of A.P Enterprises. Now, after a full-fledged investigation by the Central Bureau of Investigation, a charge sheet was registered against both the accused in which following allegations were stated.
a. The Branch Manager was clearly instructed by the Controlling officer to expend loans to the employees of Railways and some other organisations.
b. Paying out the loan would be subject to obtaining an undertaking from the employers, here borrowers that as primary security certain monthly partial payment shall be deducted from employee’s salary for the repayment of the loan.
c. The Branch Manager was also advised to obtain the mortgage on the plots sold to the borrowers (employers) through Shri Attur Prabhakar Hegde’s A.P Enterprises.
d. However, the Branch Manager, N.V Subba Rao paid out 494 loans each of Rupees 10,000/- to various railway employees which amounted to Rupees 49,40,000/- and credited the returns to the bank account of Shri Attur Prabhakar Hegde. The same was done without obtaining the said undertaking from the employers and without primary security of monthly partial payments to be subtracted from employee’s salaries.
e. The Prosecution identified around forty-five people out of the 494 loan seekers. Further, it was also discovered that Shri Attur Prabhakar Hegde, the proprietor had deceptively and dishonestly received the returns of the above-mentioned forty-five borrowers and neither did these borrowers get the forty-five plots registered in their names nor the loan sum from the Bank.
Observation: It was observed that there was a wrongful loss to both the bank and the buyers. Since no mortgage was created, therefore the bank suffered a loss of Rupees 4,50,000. It was also noted that Shri Attur Prabhakar Hegde, Proprietor of A.P Enterprises took the pain to provide FCNR deposit to the tune of more than Rupees 8 crores/- when the bank had no deposit at all and the call money, they had to pay was up to 70%-75%. However, we have the same person purchasing 60 acres of land in a village near Guntur and there were around 463 plots registered.
The verdict by Special CBI Judge: Both the Branch Manager and the Proprietor were sentenced to one year of imprisonment by the Special Judge for CBI cases at Visakhapatnam and further to undergo rigorous imprisonment for two years complimented with a fine of Rupees 5000 to further undergo sentence under Section 420B of the Indian Penal Code. The Branch Manager was further imprisoned for 2 months under Section 13(1)(d) of the Prevention of Corruption Act.
Rejection of Appeal by the High Court: There were two appeals registered before the High Court of Andhra Pradesh, Hyderabad. These appeals were however rejected, establishing the conviction, but reducing the sentence from two years to one year.
Supreme Court’s decision: Based upon the reasonable facts and materials established before the court of law by the prosecution, the Hon’ble Supreme Court held that both the trial court and the High court were correct in their finding and thus convincing both Shri. N.V Subba Rao, Branch Manager at Central Bank of India, Guntur in Andhra Pradesh and Shri Attur Prabhakar Hegde, Proprietor of A.P Enterprises, in Guntur, Andhra-Pradesh under said sections was totally under the law and thus acceptable.
Corporate Frauds other than causing financial loss, devalues a company’s name, integrity and consequently its overall performance in the market. In recent surveys, it has been discovered that the detection of fraud was the responsibility of internal and external auditors while preventing the same was in the hands of the Board/CEO and Managing Directors. To prevent fraud, internal control systems must be implemented, monitored, and there is a periodic adjustment of risk management strategies. Transparency in accounting and financial reporting is one of the important practices to combat fraud. To foster an ethical mindset, it is important to create a platform to discuss ambiguous issues that can help organizations identify unethical behaviour. This may help the organization institute a mechanism to penalise unethical behaviour. In recent years organizations have proactively instituted various mechanisms to combat the risk of fraud and slowly they have recognized that a change in culture towards zero tolerance is essential in preventing fraud instances.
 https://www.jstor.org/stable/2083937?seq=1 Edwin H. Sutherland, White-Collar Criminality, 5 American Sociological Review 1 (1940)
 https://indiankanoon.org/doc/1697217/ AIR 1992 SC 1555,
https://www.investopedia.com/terms/c/corporate-fraud.asp#:~:text=Corporate%20fraud%20refers%20to%20illegal,the%20perpetrating%20individual%20or%20company James Chen, Understanding Corporate Fraud Investopedia (2020),
https://www2.deloitte.com/content/dam/Deloitte/in/Documents/finance/in-risk-fraud-survey-2018-noexp.pdf, Nikhil Bedi, India Corporate Fraud Perception Survey 2018 (3 ed. 2020),
https://www.mondaq.com/india/white-collar-crime-anti-corruption-fraud/696380/corporate-frauds-an-analysis Akanksha Tomar, Corporate Frauds: An Analysis - Criminal Law - India Mondaq.com (2018),
 https://en.wikipedia.org/wiki/Prevention_of_Corruption_Act,_1988 Sandeep Mukerjee, Commentaries on the Prevention of Corruption Act (Act No. 49 of 1988) (1990).
https://www.india-briefing.com/news/internal-controls-anti-fraud-strategies-companies-india-17148.html/#:~:text=Other%20Indian%20laws%2C%20such%20as,to%20protect%20companies%20from%20fraud India Briefing & Rohini Singh, Internal Controls, Anti-Fraud Strategies for Companies in India - India Briefing News India Briefing News (2018),
 https://indiankanoon.org/doc/101241441/ (2013) 2 SCC 162
Aniket is a second-year student, (LLB 5 years) at the Department of Law, University of Calcutta. He has got several legal articles published in various legal blogs. His articles were mainly based upon subjects of Criminal, IBC, Trademark and Constitutional law. He had secured 12th rank in the legal entrance exam of the University of Calcutta.