Corporate Fraud in India & Abroad under Companies Act, 2013


Fraud has emerged as a worrying problem in business and commerce that can have negative effects on businesses and their stakeholders. Today, we will delve into the area of corporate fraud looking at its prevalence, the laws surrounding it both domestically and internationally, and the repercussions for companies operating under the Companies Act of 2013. Let’s take a look at how corporate fraud is handled in India.

What Is Corporate Fraud?

Any illegal or immoral behaviors carried out by a corporation, or by its workers or executives, to deceive others for personal or organizational advantage, are referred to as corporate fraud. Usually, it entails the purposeful falsification or manipulation of financial records, commercial dealings, or activities. Embezzlement, bribery, insider trading, fabricating documents, tax evasion, and money laundering are just a few examples of the many ways that corporations commit fraud.

Corporate fraud can have serious and far-reaching repercussions. In addition to damaging the integrity and trust of the impacted organization, it also hurts the economy as a whole and shareholders, employees, and customers. Corporate fraud can result in severe monetary losses, insolvency, reputational harm, a loss of investor trust, and legal penalties for those responsible. To uphold accountability, transparency, and ethical business practices, regulatory organizations and law enforcement organizations must actively investigate and prosecute corporate fraud. Strong internal controls, moral standards, and corporate governance procedures can all be used to stop and catch fraud in organizations.

Types Of Corporate Fraud In India

Numerous forms of corporate fraud have been reported in India. These are some essential types:

  1. Financial Statement Fraud: This refers to the manipulation of financial statements, such as exaggerating revenues or understating expenses, to provide a false picture of a company's financial health.
  2. Insider Trading: This is the illegal trading of stocks using material, non-public knowledge about a firm to obtain an unfair competitive advantage.
  3. Corruption: Offering or taking bribes or engaging in corrupt activities to obtain business advantages, contracts, or favorable treatment is known as bribery and corruption.
  4. Money Laundering: This is the process of making illegally obtained funds appear legitimate by hiding their true sources through a series of transactions.
  5. Embezzlement: This is the unlawful theft of corporate finances or assets for personal use by employees or executives.
  6. Ponzi Schemes: These are dishonest investment schemes where returns to earlier investors are paid with funds from new investors rather than from actual earnings or reliable investments.
  7. Tax Evasion: It is the practice of fraudulently avoiding or lowering tax obligations, such as through underreporting income or inflating deductions.
  8. IP Theft: The unauthorized use, copying, or theft of a company's intellectual property, such as patents, trademarks, copyrights, or trade secrets, is known as intellectual property theft.
  9. Information misrepresentation: Giving incorrect or misleading information about a company's activities, financial situation, or prospects to investors, stakeholders, or regulatory authorities.
  10. Cyber Fraud: Using digital tools to commit fraud, such as hacking, phishing, or identity theft, to get unauthorized access to confidential company information.

Biggest Corporate Frauds In India

Here are a few of India's largest corporate frauds:

Satyam Computers Scam: Ramalinga Raju, the founder, and chairman of Satyam Computers, acknowledged inflating the business's earnings and assets by over $1.5 billion in the Satyam Computers Scandal of 2009. Raju and other significant participants faced legal prosecution as a result of the scandal that rocked the Indian corporate sector.

Nirav Modi-PNB Scam: In this 2018 Scam using false letters of undertaking (LoUs) to get loans from other banks abroad, famed diamond jeweler Nirav Modi and his colleagues conned Punjab National Bank (PNB). One of the biggest banking frauds in Indian history, the scandal involved almost $2 billion.

Sahara Group Scam: Scam of 2014 involved the well-known business group illegally using optionally fully convertible debentures (OFCDs) to raise money from investors. Sahara was mandated by the Indian Supreme Court to repay investors $5 billion.

Saradha Group Scam: Chit fund provider The Saradha Group defrauded hundreds of investors in West Bengal and other states in 2013 by promising large profits. The swindle, which cost the company's top executives almost $4 billion, sparked protests and legal action.

Winsome Diamonds and Jewellery Scam: Winsome Diamonds and Jewellery, a diamond exporter, fell behind on loans taken out from multiple banks totaling over $1 billion in 2013. The business was charged with fraud, including embezzling money and forging documents.

Vijay Mallya-Kingfisher Airlines Scam: The 2012 scam where Business tycoon Vijay Mallya missed payments on loans from many banks totaling over $1.4 billion. Mallya is facing extradition from the UK to India on charges of misappropriating money for personal benefit.

IL&FS Scam: Infrastructure Leasing & Financial Services, a significant infrastructure development and financing company, was the target of the 2018 IL&FS scam. The company's financial records were found to be falsified, and it had amassed a debt of about $12 billion.

Sections From the Companies Act, 2013 Related To Corporate Fraud

The following parts of the Companies Act of 2013 deal with corporate fraud:

Section 447: Punishment for Fraud - This section addresses the penalties for fraud and defines it as any act, omission, concealment of facts, or abuse of position with the purpose of misleading, obtaining an unfair advantage, or harming the interests of the firm, its shareholders, or creditors.

Section 452: The usage of the phrases "Limited" or "Private Limited" in a company's name is addressed in Punishment for Improper Use of "Limited" or "Private Limited."

Sections 447 and 452, taken together with Section 83: This is titled "Punishment for Non-Compliance of Section 73 and Section 76." These sections discuss the consequences of failing to abide by rules relating to the reception of public deposits.

Section 206: Power to Call for Information, Inspect Books, and Conduct Inquiries - In situations where there is a suspicion of corporate fraud, this section gives the government the authority to call for information, inspect books, and conduct inquiries.

What Does The Judiciary Think? (Judicial Precedents)

It is viewed as a criminal offense by the Indian judicial system. Corporate fraud can have serious economic repercussions since it erodes investor confidence and the financial system's trust. Courts have often emphasized the significance of maintaining corporate governance norms and making sure that individuals who engage in dishonest behavior face justifiable legal repercussions.

Indian judicial precedents relating to corporate fraud are:

The Satyam Computers incident, popularly dubbed "India's Enron," occurred in 2009. It involved a large accounting fraud. B. Ramalinga Raju, the company's founder, and chairman, fabricated financial data to increase sales and profits. This case significantly changed corporate governance practices in India and rocked the business world. Raju and other important employees received prison terms after being found guilty of fraud.

Sahara India Real Estate Corporation Ltd. & Ors. v. SEBI (2012), In this instance, unlisted businesses owned by the Sahara Group raised money from the public in defiance of securities rules. The investors' money will be refunded to them with interest, under a Supreme Court of India ruling, to Sahara. This important decision reaffirmed the significance of transparency and investor protection in corporate fundraising efforts.

Kingfisher Airlines v. Vijay Mallya Case which is ongoing was a case of financial fraud, debt defaults, and money-diversion were alleged in the case against Vijay Mallya, the former owner of Kingfisher Airlines. The Indian government has been requesting the extradition of Mallya, who left the country and was designated a fugitive economic offender so that he might be brought to justice for corporate fraud.

The judicial perspective on corporate fraud in India has been molded by these examples and many more, and they have set the stage for stronger enforcement of corporate governance standards and legal action against fraudulent practices.

Recent Developments

The Insolvency and Bankruptcy Code (IBC), which was put into effect in 2016 and intends to hasten the resolution of insolvency cases and eliminate fraudulent activity in business entities, is one noteworthy development. The IBC enables the detection and punishment of fraudulent practices and offers a formal framework for the settlement process. Additionally, the Securities and Exchange Board of India (SEBI), the agency responsible for overseeing the securities market, has taken the initiative to enhance laws and increase disclosure requirements to combat corporate fraud. For listed companies, SEBI has enacted strict regulations that include required disclosures, improved surveillance systems, and harsher fines for non-compliance.

Despite these initiatives, corporate fraud is still a major problem in India. There have been cases of financial irregularities, money theft, and financial statement manipulation by firms. To effectively combat corporate fraud, the Indian government is putting its efforts into tightening regulations and enhancing corporate governance standards. Government and business organizations must collaborate to promote a culture of openness, responsibility, and moral behavior. This will help to create economic growth and investor trust in the nation.

What Makes A Corporate Fraud To Be Liable Under The Companies Act, 2013

Corporate fraud is defined under the Companies Act of 2013 as any dishonest or deceptive action taken by a corporation or its executives to mislead or deceive shareholders, investors, or other stakeholders. Two important considerations must be taken into account to establish culpability for corporate fraud under the Act.

First, the fraudulent behavior must entail some element of dishonesty or deceit. This can involve falsifying financial statements, manipulating stock prices, or engaging in any other fraudulent behavior with the intention of misleading stakeholders or gaining an unfair advantage. Any violation of the Act's standards and norms for accurate financial reporting and transparency may subject a corporation to legal action for corporate fraud.

Second, either the corporation or one of its officers must have engaged in fraudulent behavior. According to the Act, the firm is liable for any actions taken by its officers, directors, or employees while performing their official duties. The corporation may be held accountable for corporate fraud if it can be demonstrated that these people committed fraud on its behalf. To prevent such behavior and safeguard the interests of stakeholders and shareholders, the Act sets sanctions based on the seriousness of the deception.

In conclusion, there must be an element of dishonesty or deceit involved for corporate fraud to be considered illegal under the Companies Act, 2013, and the fraudulent behavior must be carried out by the company or its officers.