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INSIDE THE SERIOUS FRAUD INVESTIGATION OFFICE:SHEDDING LIGHT ON WHITE- COLLAR CRIME INVESTIGATION

Author: Niharika Kohli, III year of B.B.A.,LL.B.(Hons.) (Corporate Law) from University of Petroleum and Energy Studies


Abstract

India is a land of diversity where people forget scandals as quickly as sorrows. Along the lines of its growth, the distinct ways of committing fraud are also growing. Each and every corporate in our country are subject to fraud risks. Large value frauds have led to the overall downfall of the entire organization, massive investment losses, significant legal costs, imprisonment of key personnel, and erosion of confidence in capital markets.In present days most corporate frauds are transformed intowhite-collar crimes, which are difficult to detect because they are the outcome of well-trained brains.[i]


Many corporate frauds, like the Satyam case, and many other cases, that surfaced during the period when the Companies Act, 2013 (the 2013 Act) was before the Parliament for consideration, were the main reason for inclusion of the definition of fraud.There was a need to provide powers to the Ministry of Corporate Affairs (MCA) to investigate cases of serious frauds without the help of the police. Therefore, Section 447 has been invoked in various cases of corporate frauds. But, due to it being a new provision, there has been no direct pronouncements on it either by National Company Law Tribunal (NCLT), High Court or Supreme Court.[ii]


Having the right legal system has always been a challenge in attempting to minimize the corporate frauds taking place in our country. The sole and primary reason for this is the connection between the auditors and the management. This blog acknowledges the emergence of the Serious Fraud Investigation Office (SFIO), through the Naresh Chandra Committee, its responsibilities, and SFIO under the Companies Act, 2013.I also intend to put forth my views regarding SFIO.


What Is Serious Fraud Investigation Office

TheSFIO is an organization established under the MCA,for the investigation and prosecution of white-collar crimes. The SFIO was constituted in July 2003, following the recommendation of the Naresh Chandra Committee. In 2002, the Naresh Chandra Committee recommended setting up the “Corporate Serious Fraud Office” to unveil corporate frauds and also to supervise prosecutions under various economic legislations.[iii]


The SFIO has been given wide powers to investigate cases of fraud, along with the power to search and seize documents or records, conduct raids when it deems fit and also interrogate individuals. In cases where people are found guilty of committing fraud, the SFIO also has the power to initiate criminal proceedings against them.


The SFIO is headed by a director, who is assisted by Additional Directors and other staff members. The Central Government appoints the Director and Additional Director. The tenure of their office is 3 years.[iv]


The Naresh Chandra Committee had also suggested that the organization responsible for detecting and investigating fraud should have legislative backing – along the lines of the Serious Fraud Office of the UK, which was established in 1988 under the UK Criminal Justice Act, 1987. Under the Companies Act, 1956 (‘1956 Act’), the SFIO operated without statutory backing.[v]


The SFIO was granted statutory force for the first time through the 2013 Act. Due to the rising corporate frauds, the 2013 Act introduced section 447 to combat the rise in corporate frauds. This section provided for the definition of fraud.

It is a multi-disciplinary organization under the MCA, comprising experts in the fields of accountancy, forensic auditing, banking, law, information technology, investigation, company law, capital markets and taxation etc. for detection and prosecution.Investigation into the affairs of a company is entrusted to it, where the Government is of the opinion that it is necessary to investigate into the affairs of the company.[vi]


The responsibilities of SFIO are as follows:

(a) Detection and prosecution of white-collar crimes.

(b) It normally takes up for investigation only such cases, which are characterized as follows:

  • having complexity, inter-departmental and multi-disciplinary ramifications;

  • substantial involvement of public interest to be judged by size, either in terms of monetary misappropriation or in terms of persons affected, and;

  • the possibility of investigation leading to or contributing towards a clear improvement in systems, laws, or procedures. It investigates serious cases of fraud received from the Department of Company Affairs.[vii]


Investigation Into Affairs of a Company by SFIO (Section 212)

Investigation is done the following grounds:

  • On receipt of report of Registrar or Inspector under Section 208;

  • On imitation of Special Resolution by the Company;

  • In public interest;

  • On request of any department of Central or State Government;


  1. Central Government considers it necessary to investigate into the affairs of the Company by SFIO, may order/assign an investigation by SFIO.[viii]

  2. SFIO may designate inspectors after being assigned for the investigation.

  3. In case the investigation into the affairs of the Company is pending in any other investigating agency, then the investigating agency should transfer all the necessary documents and records to SFIO.

  4. The investigation procedure will be organized and administered by SFIO in the way and manner provided under Chapter XIV of the 2013 Act.

  5. Investigation Officer has the power of Inspector under Section 217.

  6. The Company and its officers shall provide all the assistance required by the investigating officer.

  7. Offences that come under Section 447, are cognizable and persons accused of those offences are not to be released on bail/bond, except under certain circumstances.[ix]

  8. The investigating officer can arrest the accused/guilty person if he has reasons to believe so. The accused/guilty person should be informed about the grounds of his/her arrest.

  9. The interim and investigation report to be submitted to the Central Government.

  10. Central Government may order SFIO to initiate proceedings against the Company, its officers and employees.[x]


Serious Fraud Investigation Office v. Rahul Modi, 2019 SCC Online SC 423, decided on 27.03.2019: The bench of Abhay Manohar Sapre and UU Lalit, JJ has held that Section 212 of the 2013 Act, does not prescribe any period within which a report has to be submitted by SFIO to the Central Government. They listed down the ‘basic features’ that were considered while coming to this conclusion:

1. Absolute transfer of investigation in terms of Section 212(2) of 2013 Act in favour of SFIO and upon such transfer all documents and records are required to be transferred to SFIO by every other Investigating Agency.

2. For completion of investigation, sub-Section (12) of Section 212 does not contemplate any period.

3. Under sub-Section (11) of Section 212 there could be interim reports as and when directed.


In light of these three key points, he further stated that, it cannot be claimed that the deadline by which the SFIO must submit a report under Section 212, sub-section (3), is for the conclusion of the investigation, and that when that deadline passes, the SFIO's mandate must end. If it was to come to an end, the legislation would have contemplated it.


The Court hence concluded that the only construction which was, possible therefore, was that the prescription of period within which a report has to be submitted to the Central Government under sub-Section (3) of Section 212 is purely directory.[xi]


Conclusion

The SFIO is a fraud investigation organization and its primary responsibility is to investigate serious frauds committed by individuals and/or businesses. It also acts as a regulatory agency, that is trusted with resolving white- collar crimes.The 2013 Act has provided a statutory provision to SFIO which was not provided in the 1956 Act.


In my opinion, the statutory provision provided to SFIO proves to be very useful. Corporate Frauds have become very frequent now a days. To curb these frauds, SFIO play a very vital role. The making of a special organization to investigate corporate frauds, in my opinion, is the best way to curb these frauds.

According to the SFIO report, in Financial Year 2019-20, SFIO had completed a thorough investigation in 12 cases involving 361 companies. On the other hand, in FY 2018-19, it had completed thorough investigation in 12 cases involving only 83 companies. This comparison highlights that the SFIO is becoming more active towards its primary function of investigating corporate frauds.[xii]


However, there still continues to be a high number of pending litigations involving the SFIO, especially in situations where there has been a significant delay in completing the investigation and submitting the investigation report.But, the SFIO has been more active in completing its goal/function. Hence, providing statutory provision to SFIO under the 2013 Act, was necessary to reduce the increasing Corporate Frauds and in turn the SFIO has strengthen the working/ regulatory framework of Companies in India and has also promoted transparency and accountability in the Corporate Sector.

[i]CMA Raghabendra Rai, 'CORPORATE FRAUDS AND THEIR REPORTING UNDER THE COMPANIES ACT 2013' 5(12) JETIR, (2018) [ii]Bharat Vasani & CAM corporate team, 'Serious Fraud Investigation Office – Keeping a close watch on frauds in India Inc' Cyril Amarchand Mangaldas, (2021) [iii]Bharat Vasani & CAM corporate team, 'Serious Fraud Investigation Office – Keeping a close watch on frauds in India Inc' Cyril Amarchand Mangaldas, (2021) [iv]Serious Fraud Investigation Office, 'About Serious Fraud Investigation Office' https://sfio.gov.in/about-department/%e0%a4%aa%e0%a5%8d%e0%a4%b0%e0%a4%b8%e0%a5%8d%e0%a4%a4%e0%a4%be%e0%a4%b5%e0%a4%a8%e0%a4%be/ accessed 8th February, 2023 [v]CS N.S. Zad and CS Divya Bajpal, Company Law (4th edn, Taxmann Publications 2022) [vi]Serious Fraud Investigation Office, 'About Serious Fraud Investigation Office' https://sfio.gov.in/about-department/%e0%a4%aa%e0%a5%8d%e0%a4%b0%e0%a4%b8%e0%a5%8d%e0%a4%a4%e0%a4%be%e0%a4%b5%e0%a4%a8%e0%a4%be/ accessed 8th February, 2023 [vii]Id 5 [viii]Church of South India v. Union of India Writ Petition Nos.25236 and 25419 of 2018 & 32587 of 2019, High Court of Madras, Decided on February 01, 2021 [ix]SFIO v. Nitin Johari (2019) 9 SCC 165 [x]Ramaiya, Guide to the Companies Act, 16th edn. p. 2525. [xi]Serious Fraud Investigation Office v. Rahul Modi, 2019 SCC Online SC 423, decided on 27.03.2019 Prachi Bhardwaj, 'No stipulation of period of completion of Serious Fraud Investigations under Companies Act' (No stipulation of period of completion of Serious Fraud Investigations under Companies Act, 28th March)https://www.scconline.com/blog/post/2019/03/28/no-stipulation-of-period-of-completion-of-serious-fraud-investigations-under-companies-act/accessed 13 February 2023 [xii]Serious Fraud Investigation Office, 'About Serious Fraud Investigation Office' https://sfio.gov.in/about-department/%e0%a4%aa%e0%a5%8d%e0%a4%b0%e0%a4%b8%e0%a5%8d%e0%a4%a4%e0%a4%be%e0%a4%b5%e0%a4%a8%e0%a4%be/ accessed 8th February, 2023

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