Corporate Frauds in India: Punishing

Financial crimes are usually crimes that do not rely on external violence rather they usually take place
amidst secrecy and deception and the perpetrators may very well be a respectable member of the
society who work at a public or private institution making them privy to good faith information which
they use to their own advantage. To separate it from other financial crimes we can see that they require
both the parties to be in contract with each other, this establishes intent to deceive. Corporate Fraud
occurs when a corporation provides dishonest information to someone in order to gain some profit or
escape punishment, the recipient of this data is mostly the state e.g. tax evasion and money laundering
but could also be a private entity or entities. The companies act defines punishment for corporate fraud
in section 447 and explains that this dishonesty can be implied by any act/concealment/omission e.g.
altering records relating to profits or debts or changes made in prospectus etc. as long as intent to
deceive is present. Recently a lot of scams are being discovered which show that a lot of collaboration
between public and private entities is required as a necessity to perpetrate such crimes without the
notice of law enforcement e.g. Enron, Harshad Mehta, Satyam etc. These Frauds cause fall in confidence
of investors thus affecting the economy of the whole country thus not only affecting ease of doing
business but also leading to fall in available market capital. 1

Before moving on to the examination of the legal framework lets see one of these scams in a little detail
– Nirav Modi scam is one which was discovered just last year in this scam the perpetrators were Mr.
Nirav Modi, his wife, his brother and Mehul Chinubhai Choksi(partners in-Diamond R US, Solar Exports
and Stellar Diamonds ) as well as employees of the PNB bank who collaborated together to approve
letters of undertaking guaranteeing most of the cash required in transactions. This was discovered
within the bank only when they subsequently tried to claim buyer’s credit again at another branch of the
bank and when the bank asked for equity against which to give such a credit they denied and just
presented the previous transaction documents which made the bank realize that 2 of its own officials
had illegaly authorized those transactions and forwarded the bank details without making entries in
their own bank’s system to escape notice.

When dealing with specific legal instruments which are used to punish various types of corporate fraud
in India we see that they span various laws other than companies act, 2013 as well such as Criminal
procedure code , Customs Act, Foreign Exchange regulation act, Indian penal code etc. Now examining
the companies act,2013 we see that it prescribes punishment for multiple varied acts which come
within the ambit of punishing fraud as they are generally found to be complementary to it. We must also
note that the older companies act did not have such an exhaustive inclusion of frauds of such sort.

Examining Section 447 we see that it prescribes punishment for corporate frauds as a prison term
ranging from 6 months to 10 years and a fine which may under no circumstances be lesser than the
value of the money involved in fraud but upon the discretion of the judge can also go upto 3 times the
said amount – this seems to be pecuniary as well as punitive in nature to act as a substantial deterrence
as the rate at which these types of crimes have been increasing is exponential and the justice system
needed to take a strong stance. Secondly we see section 448 which deals with the provision of false
account/transaction statements to the relevant authorities- it describes what reinstates what kind of

1
https://www.mondaq.com/india/white-collar-crime-anti-corruption-fraud/696380/corporate-frauds-
an-analysis
 alterations would be considered within its ambit e.g. prospectus, annual statements, certificate,
financial statements. It says if any person makes a statement knowing it to be false or omits any
information knowing it to be relevant they shall be said to have given a false statement. The knowledge
requirement here shall probably be determined from the specific expertise of the employee. Section 449
acts as a successive antecedent to the previous section along with other benefits as it covers
punishment for the submission of false evidence thus is inclusive of statements. It activates only when
this evidence is given in the form of a deposition or solemn affirmation. It prescribes a minimum prison
sentence of 3 years which ranges to 7 years and a fine limited at 10 lakh rupees, upon analysis we see
that the minimum prison sentence is higher than that of S.447 and this is so because most investigations
of bigger companies or companies with multiple branches are generally hampered by non-cooperating
employees who either compromise the original data or destroy its validity by altering it, hence the law is
supposed to deter any/most such actions and speed up the investigation by acting as a warning to all
such officers/employees. In examining the lower fine(upto 10 lakh) we also see that this signifies that
this law is intended for people with low paying capacity such as employees rather than executives who
have higher salaries – it is intended to pressurize the employees into cooperating with the investigators
and giving evidence against the higher ups in their organization. Section 450 covers the instances where
no specific penalty or provision is applicable when this law is being applied- its purpose is to encompass
all such innovations that maybe derived by modern criminals in an ever changing world and makes it
universally applicable to any such crime. It says that this person can be fined 10000 rupees plus 1000
rupees each day if such violation continues hence it is not meant to be used exploitatively and rather
gives the perpetrators time and chance to accommodate their actions as well as the legislators the time
to further examine and come up with newer laws to combat the aforesaid innovation after research. 2

Section 451 deals with repeat offenders as the truth of the matter remains one investigation can
not in all probability root out all the offences committed by the person, generally what happens is
he/she may escape with fine and/or a lighter prison sentence because it is their first offence but this
may act to encourage some of these offenders to take more such risks in the future hence this law is
meant to dampen/extinguish their criminal spirit and it prescribes a doubling of the
sentence/punishment of any such offender if the concerned act happens within 3 years of the previous
act. This could effectively prescribe a prison sentence of 14-20 years which if considered is hugely
punitive for white collar criminals thus acts as an effective deterrent.
Section 454 deals with the adjudication of such penalties and says that the central government
shall have the authority to assign officers to investigate and penalize such actions of officers or
companies across the nation. It also appoints a regional director as the appellate authority in such cases.
This law unlike the others mentioned above is actually detrimental to punishing such miscreants as is
seen in numerous cases that the central government may due to its political benefit may allow some
people to escape. As could be seen in the Sahara case where SEBI(Securities and Exchange Board of
India) had actually been telling the central government to prosecute Sahara for a long period before any
such action was even considered as the company had strong ties due to lobbying within the
government and they ignored SEBI’s warnings unfortunately this new act didn’t have any additions in
this respect. Thankfully in the aftermath of the Nirav Modi-PNB Scam and the failure of the auditors to
detect basic fraud, the Union Cabinet has approved formation of National Finance Reporting Authority
(NFRA). NFRA will be an independent regulatory body free from executive control and will get wider
powers to act against erring auditors and auditing firms who are found to have helped economic
offenders. The NFRA would act as a watchdog and take away a large part of powers currently vested

2
https://uk.practicallaw.thomsonreuters.com/w-009-8768?
transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1
 with the Institute of Chartered Accountants of India or ICAI but this move seems a bit idealistic as the
ICAI had many of the above powers rather what is needed is a special investigative authority with its
own imperative.
My recommendation would be an appointment of an independent quasi-judicial organization
working under the authority of the public undertaking committee of the parliament as it is already
supposed to keep a check on the Consolidated Fund of India and is out of the direct influence of the
executive – this does not mean that this authority must be taken away from the government this is just
meant as a supplementary system to examine whatever escapes the first glance. Section 211 and
Section 212 empower the government to establish serious fraud investigation offices for conducting
such investigations exclusively and these investigators shall submit these reports to the governments
who may then decide whether to prosecute at that stage. Section 229 conveys that any person who
destroys or alters or tampers evidence material to the aforementioned investigation shall even be liable
to be tried directly u/s 447 rather than 448/449. An important development which happened was
Section 149 – which mandated that every company shall have at least one-third independent directors
on their board which . 3

3
https://journalijcar.org/issues/corporate-frauds-and-legal-mechanism-india-overview