NATURE OF CORPORATE FRAUDS UNDER

THE COMPANIES ACT, 2013

By: Khushi Goyal

Roll No. 22LLM026

Abstract:
Corporate frauds and scandals in India are as old as hills and mountains. Such
crimes are committed by respectable persons, holding enviable positions, either in
public or private entities. It is practically very difficult for bureaucratic agencies to
track them because these activities are carried out very secretly. Increase in the
number of scams and frauds in India have rekindled the thought on the need for high
standards of corporate governance and stringent provisions to tackle fraud. The new
Act’s focus on the issue of tackling fraud is an indication of the trend in this direction
which is likely to continue in the future. Not only by means of regulations, there is also
a realization in the minds of corporate India to adhere to strict standards and they are
becoming cautious and serious about the problems of fraud

INTRODUCTION
The term ‘fraud’ is very wide in scope. Mundhra scam was first major corporate scam
in Independent India. Hari Das Mundhra, an industrialist and stock speculator, was
found guilty for selling fictitious shares to the Life Insurance Corporation of India
(LIC) and thereby defrauded the corporate by R1.25 crore in 1957 He was sentenced
to imprisonment for 22 years.
According to Section 17 of the Indian Contract Act, "fraud" includes false claims,
active concealment, promises made without the purpose to carry them out, any other
deceptive act, and any act found fraudulent.1
Corporate fraud refers to unethical actions committed by a company or an individual
in order to significantly increase their profits and gain an advantage over rivals.

CORPORATE FRAUD IN INDIA UNDER THE COMPANIES ACT, 2013

1
Rai, D. (2019). Fraud in Contracts- Section 17 of the Indian Contract Act. [online] iPleaders. Available at:
https://blog.ipleaders.in/fraud-in-contracts-section-17-of-the-indian-contract-act/ (Last accessed on 19 April
2023).
1
 There are a lot of regulatory bodies and laws that are being made to tackle this, all
these laws are made with the main motive of protecting the rights and interests of
affected stakeholders, mostly investors.2 An initiative has been taken for preventing
and curbing corporate frauds by including the concept of fraud and provisions for
stringent punishment under the Companies Act, 2013.
" Fraud is "in relation to affairs of a company or anybody corporate, includes any act,
omission, concealment of any fact or abuse of position committed by any person or
any other person with the connivance in any manner, with intent to deceive, to gain
undue advantage from, or to injure the interests of, the company or its shareholders or
its creditors or any other person, whether or not there is any wrongful gain or wrongful
loss."3
This new Act is not comprehensive but inclusive in nature as it pertains only to the
affairs of a company or body corporate. The term fraud not only includes ‘act’ but also
‘the omission to act’, concealment of any fact, and abuse of position by a person. Such
an act, omission and concealment, can be committed by individuals alone or in
collaboration with others.
EXPLAINATION OF INGRIEDIENTS OF FRAUD
Act/Omission to Act- It means failure to perform an act expected to be done by a
person, and act of commission is doing an act that causes harm.
Fraudulent Concealment- It means the intentional suppression of truth or fact known,
to the injury or prejudice of another. 4 The term ‘fraudulently appears in Section 206 of
the IPC cannot be interpreted as meaning ‘dishonestly’.5
Fraud by Abuse of Position- It is defined in section 4 of the Fraud Act, 2006 (UK).6
Intent to Defraud Creditors- The term ‘intent to defraud’ contains two elements,
deceit and injury. A person is said to deceive another if by false suggestion or
suppression or by both intentionally induces another to believe a thing to be true.7

2
Diganth Raj Sehgal, Ineffectiveness of corporate governance, March 4, 2021,
https://blog.ipleaders.in/ineffectiveness-corporate-governance/#Cafe_Coffee_Day_Case (last visited on 19
April 2023).
3
See Section 447 of the Indian Companies Act, 2013.
4
C.I.T. vs. J.K.A. Subravania Chettiar, (1977) 110 ITR 602, 608 (Mad); [Income Tax act, 1961, s. 271(1)(c)
5
1937 MWN 462; 46 LW 139; AIR 1937 Mad 713(1937) 2 MLJ 802.
6
Fraud by Abuse of Position: (1) A person is in breach of this section if he—
(a) occupies a position in which he is expected to safeguard, or not to act against, the financial interests of
another person,
(b) dishonestly abuses that position, and
(c) intends, by means of the abuse of that position—
(i) to make a gain for himself or another, or
(ii) to cause loss to another or to expose another to a risk of loss.
7
S. Harnam Singh vs. State, AIR 1976 SC 2140
2
 Deceit- It is intentional concealment of truth for the purpose of misleading. A
dishonest concealment of facts, or where there is a legal duty to disclose particular
facts, a dishonest omission to disclose facts, is a deception.8
Wrongful Gain & Wrongful Loss- It means gaining by unlawful means of property to
which the person gaining is not legally entitled 9 and wrongful loss means loss by
unlawful means of property to which the person using it is legally entitled.
Fraudulent Misrepresentation- A false statement as to a material fact, made with the
intent that another relies thereon, which is believed by another party and on which he
relies. The statement is fraudulent if the speaker knows the statement to be false or if it
is made with utter disregard to its truth or falsity.10
DIFFERENT TYPES OF CORPORATE FRAUDS IN INDIA
There are following kinds of corporate frauds:
Misappropriation of Funds: Payment fraud, accounting fraud, and deceiving
investors into investing by sharply boosting the share price.
Assets taken without Authorization: Theft of physical goods, intellectual property
rights, and Dummy payments that exploit an entity’s assets for one’s own benefit.
Corruption: Making or accepting fraudulent payments, giving bribes to public or
private authorities, aiding and abetting, and obtaining political backing to conduct
fraud are all prohibited.
According to this Act, fraud, vitiates the contract, much have a nexus with the acts of
the parties entering into the contract. It highlights the precondition to prove the
intention of the person who has committed fraud.
WHETHER CASES OF FRAUD ONLY RESTRICTED TO PROVISIONS AS
MENTIONED IN THE NEW ACT?
 The provisions of this Act not only apply to those cases of fraud which are specifically
covered under various provisions of the new Act i.e., the punishment for fraud as
provided in Section 447 but also to other cases of fraud which fall within the meaning
of the definition of fraud under Section 447.
 Some instances as provided in the new Act which will attract punishment as provided
in Section 447 are as follows:
(a) incorporation of a company based on false or incorrect information, the first
directors, first subscriber and the professional who made declaration will be liable;

8
See S. 415 of Indian Penal Code, 1860
9
See Sec. 23 of Indian Penal Code, 1860.
10
Cormack vs. American Underwriters Corp., 288 NW 2d 634
3
 (b) for untrue, misleading statement in prospectus or inclusion or omission of any
matter;
(c) for fraudulently inducing persons to invest money;
(e) acceptance of deposits with intent to defraud depositors or for any fraudulent
purpose;
(f) cases where auditor acts in a fraudulent manner or abets or colludes in any fraud
(g) when business of a company is carried on for a fraudulent or unlawful purposes or
with intent to defraud creditors, members or any other persons.
SERIOUS FRAUD INVESTIGATION OFFICE
In order to investigate frauds in companies, it is proposed to set up Serious Fraud
Investigation Office (“SFIO”). This office was already in existence but there were no
detailed provisions, and now SFIO will have more teeth as compared to the existing
powers that it has.11 This body will consist of experts from banking, corporate affairs,
taxation, forensic audit, capital market, information technology, law. The powers
given to SFIO can be examined from the fact that when SFIO investigates, then no
other investigating agency will proceed with the investigation and concerned agency is
already investigating the matter it will have to transfer all the relevant documents and
records to SFIO. Other investigating agencies, such as state Government, police
authority, income tax authorities having any information or documents in respect of
such offence shall provide all such information or documents available with it to the
SFIO. The SFIO will submit its report to the Central Government.
NON-COMPOUNDABLE OFFENCE
The punishment under this Act is both imprisonment and fine. Hence, the offence
under the said Act are considered to be non-compoundable in nature. Almost 20
sections of the Act talk about fraud committed by directors, key managerial personnel,
auditors/or officers of company.12
ARE GOVERNMENT COMPANIES EXEMPTED FROM THE PROVISIONS
OF FRAUD?
Government companies enjoys lot of exemptions under the Companies Act but they
are not eligible for exemption with respect to any provision applicable to fraud under
the Companies Act, 2013.

LATEST DEVELOPMENTS
11
Money control. (n.d.). What Changed In The Legal Landscape Post Satyam Scam. [online] Available at:
https://www.moneycontrol.com/news/opinion/what-changed-in-the-legal-landscape-post-satyam-
scam2480623.html (last visited on 19 April 2023).
12
See section 58, 67, 118, 127, 182 and many more of the Companies Act, 2013.
4
  Section 212(14A) introduced by the Companies (Amendments) Act, 2019 empowers
Central Government can apply to NCLT for appropriate orders for disgorgement of
such asset, property or cash and also hold them personally liable without any
limitation of liability, if the SFIO report concludes that a fraud has taken place in a
company due to which, any director, KMP or other officers have taken undue
advantage or benefit in the form of asset, property or cash.
 The following disclosures shall be made to stock exchanges by the listed entities if
there is an initiation of forensic audit.13:
1. The fact of initiation of forensic audit along-with name of entity initiating the audit
and reasons for the same, if available;
2. Final forensic audit report (other than for forensic audit initiated by regulatory /
enforcement agencies) on receipt by the listed entity along with comments of the
management, if any.
 Sec. 447 of the Act has now been included in the list of scheduled offences under the
PMLA which means that handing of proceeds from corporate frauds will now be a
money laundering offence14 and ED has the power to attach and confiscate property
determined to be ‘proceeds of crime’.15
POPULAR INANCIAL SCAMS
 Satyam Scam: The promoters of the company have started making large scale of
dummy billings for the services rendered to foreign clients and as a result of this fake
proceeds were shown to have been received in multiple bank accounts (which in
reality do not exists.) The financial statements of the bank show hefty bank balances
but reality was different. Fake bank confirmations and statements were produced and
presented to auditors as proof of balances when the financials were closed and please
auditors. The total amount of money involved in the scam was reported to be around
USD 1 billion.
 Telgi Scam: Abdul Karim Telgi, the name is still etched boldly in the memory of the
whole of India. The con artist, who shook the entire nation with his mastered art of
forgery in printing duplicate stamp papers. The scam spanned across 12 states and
estimated to the amount of 20,000 crore plus. With support from numerous
Government Departments this scam one of the first few which brought to light the
shameful corrupt practices of the politicians and the bureaucrats alike.

13
SEBI (LODR) Regulations, 2015 effected from October 08, 2020
14
This was added pursuant to the amendment was made in the Prevention of Money Laundering Act, 2002 by
the Finance Act, 2018.
15
See sec. 2(1)(u) of PMLA, 2002.
5
  Ketan Scam: Ketan Parekh manipulated the stock market by creating a demand for
certain stocks popularly known as the method of pump and dump and then by way of
circular bidding. In order to pump up the stocks of some companies, he took huge
funds from the Banks, institutional investors etc. 
IMPORTANT CASE LAWS
 In Vikas Agarwal v. Serious Fraud Investigation Office 16 the petitioner was
summoned for the charge of criminal conspiracy and Section 447 of the Companies
Act 2013. It was alleged that the mining activity carried on by the firm was illegal. An
unsecured loan was also advanced by it to a trust. The court allowed this petition for
further trial and investigation.
 The Supreme Court stated in Vimla v. State of NCT, Delhi17 that the concept of
deception is a crucial component of fraud, although it does not exhaust it. Deception
and harm to the individual who was duped are two elements of the term “defraud.”
Injury includes any harm committed to a person’s body, mind, reputation, or any
aspects of their personhood other than economic loss, which is the deprivation of
property, whether it be movable or immovable, or of money. A gain or advantage for
the deceiver nearly always results in a loss or disadvantage for the victim. The second
requirement is met even in uncommon situations where the misled receives a profit or
advantage without also suffering a comparable loss.
CONCLUSION
Increasing number of business scams was a matter of great concern for policymakers
and regulators. The frauds can be either civil or criminal in nature. However, the
intention of the perpetrator of fraud is of paramount importance in establishing an
offence as a fraud. The Companies Act, 2013, has included a comprehensive definition
of fraud and stringent provisions regarding punishment for such frauds. The need of
the hour for corporate organisations is thus to invest in right anti-fraud measures, such
as, employee background screening, business partner or third-party due diligence,
effective and well-understood whistleblowing systems and well-tested fraud risk
management systems, which would help reduce losses on account of fraud and
corruption. The combination of effective fraud risk governance, a thorough fraud risk
assessment, strong fraud prevention and detection (including specific anti-fraud
control processes), as well as co-ordinated and timely investigations and corrective
actions, can significantly mitigate fraud risks.

16
2019 DC
17
AIR 1963 SC 1572
6