By Sandeep Das
The current engrossing Netflix documentary ‘Bad Boy Billionaires: India’ has as soon as once more highlighted situations of monumental corporate frauds. YES Bank, Dewan Housing, IL&FS, Kingfisher Airlines, Gitanjali Group and Nirav Modi (the fugitive diamantaire), which had as soon as enjoyed stellar reputation, are now reeling beneath the allegations of gigantic corporate frauds.
While these scams involve thoughts-boggling amounts, their tracing and recovery have been slow and ineffectual. In most situations, a fraction of the sum involved is traced right after protracted and arduous investigations. These frauds impair the economy and also jeopardise interests of public shareholders because huge corporates are largely public-listed organizations exactly where promoters conduct enterprise with funds from other individuals.
In most such situations, the promoters/management siphon off corporate funds by means of structured and seemingly genuine transactions, which are essentially illegal. A classic ploy has been organizations transacting enterprise with entities that on paper seem genuine third parties, but are either de facto controlled by the promoters/management or act in cahoots with them to conceal the ultimate beneficiary of such transactions. Often, there is an offshore leg of such transactions to guarantee that monies are routed by means of foreign jurisdictions with the connivance of sophisticated specialists.
The sophisticated nature of monetary crimes necessary a specialised agency to investigate and prosecute white-collar criminals. While most state police forces have a separate Economic Offences Wing, these departments have been identified to be inept in investigating complicated monetary crimes. A big hurdle in investigating complicated monetary crimes across the globe has been jurisdictional overlap in between investigative agencies, top to divergent findings.
Against this backdrop, the Serious Fraud Investigation Office (SFIO) was established on the recommendation of the Naresh Chandra Committee. The objective was to build a multidisciplinary body that could single-handedly tackle complicated corporate frauds. Patterned on the Serious Fraud Office (SFO) of the UK and the Corporate Fraud Task Force of the US, the SFIO is envisaged as the single agency for directing and supervising investigations and prosecutions beneath numerous financial legislations.
Initially, the SFIO was established by a government resolution inside the Department of Company Affairs to take up investigation of frauds obtaining complicated and interdepartmental and multidisciplinary ramifications substantial involvement of public interest in terms of monetary misappropriation or quantity of persons impacted and the possibility of investigations top to a clear improvement in systems, laws or procedures.
However, rather of being the premier investigative agency, the SFIO remained a paper tiger, hunting into offences beneath the Companies Act, 1956. Shockingly, it lacked even the energy to arrest an accused, a energy that came to the agency only in August 2017. The greatest hurdle was the lack of legislative backing, which was remedied by according it statutory recognition in the Companies Act, 2013. It could now arrest the accused whilst the threshold for getting bail was created extremely higher. However, the concern no matter if it could exclusively investigate and prosecute offences associated to corporate frauds but punishable beneath other statutes remained unaddressed.
Also, the SFIO has been granted recognition by means of the Companies Act and not a separate statute like the Criminal Justice Act, 1987, in the UK. This has led to several believing that it is only accountable for offences punishable beneath the Companies Act, and not beneath other statutes. Due to such doubt, many law enforcement agencies are nonetheless conducting investigations into the identical monetary crime. This seems to be the case in the matters regarding IL&FS, YES Bank and Dewan Housing.
The report that formed the basis of setting up of the SFIO envisaged it as a new ‘super agency’ to tackle intricate frauds that could only be unravelled by a multidisciplinary activity force. Such a purpose could only be fulfilled if the SFIO have been to move beyond the scope of the Companies Act and also work in tandem with other agencies by supervising and assisting them with the investigation (as is the case with the SFO). Thus, for the SFIO to fetch the preferred final results, it should either appear into investigations alone or at least act as a supervising agency.
Under the Companies Act, investigation into corporate frauds by other investigation agencies beneath numerous statues, like the IPC, are to be transferred to the SFIO, as soon as it starts its probe. It also directs other investigative agencies, like the police, to provide all the data/documents out there with them to the SFIO so as to keep away from duplication of work. Under the Companies Act, specific courts have been established to adjudicate upon situations of corporate fraud. Such specific courts are empowered to attempt offences beneath other statutes which emanate from the identical transaction. Thus, no other court can take cognisance if the offence is punishable beneath this Act. A combined reading of the provisions of law tends to make it evident that as soon as the SFIO is investigating a case of corporate fraud, it may perhaps also investigate offences punishable beneath other statutes but aspect of the identical transaction.
By ignoring all the added benefits of obtaining a single, all-encompassing investigative agency, the current scenario is 1 of considerable overlap, which leads to prolonged litigation. In view of the burgeoning situations of corporate fraud, it is crucial to arm the SFIO with enough teeth and take away all ambiguities.
(The author is founding companion, AP & Partners, a New Delhi-primarily based law firm)