The recent scam involving the Saradha group of companies has once again brought into sharp focus the need for effective investigation and prosecution of corporate fraud. The Saradha group allegedly utilised a consortium of companies with multiple cross linkages to set in motion an elaborate Ponzi scheme. The scheme was touted as a realty business and there were frequent changes in its operational strategy in an attempt to avoid scrutiny by regulatory authorities. In addition to the Saradha group, it is suspected that several companies are currently running fraudulent chit fund schemes in West Bengal. In an attempt to rein in the operations of such companies, the Central government has announced a probe by the Serious Fraud Investigation Office (SFIO).
The SFIO was established in 2003, as a body of the Ministry of Corporate Affairs, on the basis of the recommendations in the Naresh Chandra Committee Report on Corporate Audit and Governance. The committee felt that there was a need to establish “a multi-disciplinary team that not only uncovers the fraud, but is able to direct and supervise prosecutions under various economic legislations through appropriate agencies.” As per its charter, the SFIO is to investigate those cases that are complex in nature and involve inter-departmental and multi-disciplinary ramifications. Accordingly, the staff of the SFIO includes experts in varied fields such as accountancy, forensic auditing, investigation, law, taxation, information technology, capital markets and financial transactions. Among the high profile cases investigated by the SFIO, the Satyam scandal is perhaps the most notorious. The SFIO has also probed the alleged Rs.870 crore fraud in Reebok India. It has also spearheaded the investigation into Sesa Goa’s alleged over and under invoicing of exports and imports worth over Rs.1,000 crore.
Under the Companies Bill
Despite the tough remit set for the SFIO and the complex nature of the cases handled by it, the functioning of this non-statutory body is hemmed in on many sides. Its powers are largely restricted to examination of documents and it does not have the powers of search, seizure and arrest. The SFIO also operates within an elaborate matrix of investigating bodies with overlapping authority over such cases; the CBI, the Central Economic Intelligence Bureau, the Reserve Bank of India and the Securities and Exchange Board of India (SEBI) being some of the other bodies which have also been granted investigative roles and powers.
Keeping these shortcomings in mind, the Companies Bill 2012 (which was passed in Parliament in December last year) has attempted to strengthen the SFIO. In its new avatar , the SFIO will be a statutory body with the ability to initiate prosecution when directed by the Central government. The investigation report filed by the SFIO with the criminal court, for framing of charges, will be deemed to be a report filed by the police under the Code of Criminal Procedure. This measure will avoid duplication of duties and delay. The director of the SFIO will have the power to arrest persons if he has reason to believe that such persons are guilty of certain offences, including fraud under the Companies Bill. An investigator of the SFIO will have the powers vested in a civil court under the Code of Civil Procedure with respect to discovery and production of books of accounts and other documents, the inspection of books, registers and other documents and the summoning of and enforcing of attendance of persons. Significantly, the Bill attempts to pre-empt the confusion caused by multiple agencies investigating the same case. Where a case has been assigned to the SFIO, no other investigating agency of the Central or the State government is to proceed with investigation. Further, any other investigating agency, State government, police or income tax authority having information or documents with respect to an offence being investigated by the SFIO is required to make such documents available to the SFIO.
While the new framework is a definite step forward, the dependence on the Central government to institute investigations is of some concern. Under the Companies Bill, in order for the SFIO to investigate a company, the Central government must be of the opinion that such investigation is necessary. Additionally, the SFIO may initiate prosecution only when the Central government directs it to do so. The alleged involvement of politicos in the Saradha scam, as well as the recent uproar over the government’s interference with the CBI investigation into Coalgate, sharply highlights the danger of such dependence. Further, the efficacy of the SFIO will also be determined largely by the adequacy of resources and manpower devoted to it by the Central government. It is interesting to note that SEBI also has the powers of a civil court with respect to production of documents — powers which have been granted to the SFIO under the Companies Bill. The Saradha group, nevertheless, allegedly avoided providing pertinent information to SEBI by doing a “document dump” of cartons of irrelevant information. The absence of adequate resources and manpower could, thus, quite easily thwart the new SFIO. It remains to be seen whether SFIO’s authority to arrest will act as a sufficient deterrent to such attempts to cloud the investigation.
One must also keep in mind that the changes contemplated by the Companies Bill are of import only after a scandal breaks out. These measures are not pre-emptive in nature and they are not likely to have a significant effect on the stage at which the government becomes aware of a fraudulent scheme in motion. There is, therefore, an imperative need to strengthen scrutiny at the level of the Registrar of Companies — the first level of detecting the problem. A company is required to submit various documents to the Registrar as a part of the compliance requirements under law. An SFIO investigation may be based on a Registrar’s report that a company’s affairs are being carried out in an unsatisfactory manner. It is also essential to create linkages between complaints made at the first instance by private individuals with the police and other regulatory bodies, on the one hand, and investigative bodies such as the SFIO, on the other hand. Effective corporate governance is, thus, predicated on coordinated action of the various enforcement agencies.
(Bhargavi T.M. is senior associate, Samvâd: Partners. E-mail: firstname.lastname@example.org )
While recent attempts to strengthen the investigation agency probing major fraud are welcome, its dependence on the Central government to initiate action is cause for concern