NEW GOVERNMENT AUTHORITY TO INVESTIGATE FINANCIAL FRAUDS

BY CA A. K. JAIN

Introduction

Taking clue from the developed nations Indian Government has also established a multi-disciplinary organization under Ministry of Corporate Affairs to investigate serious financial frauds committed in India. This office known as “SFIO” is working with the help of experts in the filed of accountancy, forensic science, auditing, law, information technology, investigation, company law, capital market and taxation. SFIO is extensively being used by the government for detecting and prosecuting white-collar crimes / frauds. The SFIO investigation is generally undertaken in the circumstances where public interest is involved or the fraud has multi-disciplinary ramifications.

Serious Fraud Offices Abroad

United Kingdom     

The Serious Fraud Office is an arm of the Government of the United Kingdom, accountable to the Attorney General. Established by the Criminal Justice Act 1987, the Serious Fraud Office is responsible for the investigation and prosecution of suspected cases of serious or complex fraud where 1 million Pounds or more are involved or covers more than one national jurisdiction, though it is rare for cases involving less than 1 million to be taken. It has jurisdiction over England and Wales and Northern Ireland but not Scotland, the Isle of Man or the Channel Islands, though the Serious Fraud Office's compulsory information powers contained in section 2 of the Criminal Justice Act 1987 do so under invitation from the relevant prosecuting body. The vast majority of fraud in the United Kingdom remains the responsibility of police forces. The SFO is not a police force and its members have no direct personal executive powers, such as the power of arrest. Each case is dealt with by a case team made up of various professionals such as lawyers, forensic accountants and police officers seconded from police forces. The police officers remain members of their relevant police force for the duration of their secondment and it is they who would arrest if the investigation.

New Zealand

The New Zealand Serious Fraud Office is based upon the British model. The SFO works closely with the New Zealand Police in trying to prevent serious and complex fraud. Established by the Serious Fraud Office Act 1990, the Serious Fraud Office is responsible for the investigation and prosecution of suspected cases of serious or complex fraud. Suspects questioned by the SFO have no right to silence and must answer questions and produce requested evidence, even if it incriminates them. Anyone who refuses to comply can be jailed.The New Zealand Government announced in September 2007 that the SFO would be replaced by a new Organised Crime Agency. However, the bill to disband the SFO was delayed by the inquiry into donations received by the political party New Zealand First.

Structure

The Government approved setting up of this organization on 9th January 2003 on the basis of the recommendations made by the Naresh Chandra Committee which was set up by the government to study corporate governance. The Charter of SFIO was issued by the Government on 21st August 2003. Serious Fraud Investigation Office started functioning from 1st October 2003. This organization was set up in the backdrop of stock market scams, failure of non financial banking companies, phenomena of vanishing companies and plantation companies etc. This is a new organization and does not have separate statute to govern it for the present and in the interim period the investigations are being carried out under the provisions of Companies Act 1956. SFIO takes up investigation of the cases of alleged frauds referred to it by the Central Government under section 235 / 237 of the Companies Act 1956.

Companies Act

The Central Government is empowered under the provisions of sub-section (1) of section 235 of the Companies Act, 1956 to appoint one or more competent persons as Inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct where a report has been made by the Registrar under sub-section (6) of section 234.

Similarly, the Central Government under the provisions of section 237 of the Companies Act 1956 shall appoint one or more competent persons as Inspectors to investigate the affairs of the company if -

(a) The company, by special resolution or the Court, by order declares that the affairs of the company ought to be investigated.

(b) In the opinion of the Company Law Board there are circumstances suggesting that,

(i) That the business of the company is being conducted with intend to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose.

(ii) That persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members.

(iii) That the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director or the manager, of the company.

The Powers - The powers of the Inspector for carrying out the investigation, as listed in section 239, 240 and 240 (A) of the Companies Act are as follows:-

The appointed inspectors may investigate the following entities and may use other avenues of investigation mentioned herein below:

(a) Any other body corporate which is, or has at any relevant time been the company’s subsidiary or the holding company, or a subsidiary of its holding company, or a holding company of its subsidiary;

(b) Any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was at the relevant time, the managing director or the manager of the company;

(c) Any other body corporate which is, or has at any relevant time been, managed by the company or whose board of directors comprises of nominees of the company or, is accustomed to act in accordance with the directions or instructions of the company, or any of the director of the company, or any company, any of whose directorships is held by the employees or nominees of those having; the control and management of the first mentioned company;

(d) Any person who is or has at any relevant time been the company’s managing director or manager, the Inspector shall subject to the prior approval of the Central Government have power so to do and shall report on the affairs of the other body corporate or of the managing director or manager, so far as he thinks that the results of his investigation thereof are relevant to the investigation of the affairs of the first mentioned company.

(e) To call all officers and other employees and agents of the company to preserve and produce before him or any person authorized by him in this behalf with the previous approval of the Central Government, all books and papers of, or relating to, the company or, as the case may be, or of relating to the other body corporate which are in their custody or power.

(f) With the prior approval of the Central Government may require any body corporate other than a body corporate first one to furnish such information to, or produce such books and papers before him or any persons authorized by him in this behalf (with the previous approval of the Government) as he may consider necessary if the furnishing of such information or production of such books and papers is relevant or necessary for the purposes of his investigation.

(g) Under the provisions of section 240A of the Act where the Inspector has reasonable ground to believe that the books and papers of, or relating to any company or other body corporate or managing director or manager of such company or body corporate may be destroyed, mutilated, altered, falsified or secreted, he may make an application to the Magistrate of the First Class or, as the case may be, the Presidency Magistrate, having jurisdiction for an order for the seizure of such books and papers.

The Procedure

As the investigations are carried out under the provisions of the Companies Act, the Officer appointed as Investigating Officer by the Government has the final say in the matter related to investigation. The working groups of the officers constituted by the Director, SFIO in consultation with the I O, to assist the Investigating Officer are required to render him all possible assistance in the respective areas of their specialization so that the issues are examined from a multidisciplinary angle. He supervises the entire investigation and coordinates with subject specific team leaders in the matters related thereto. The Investigating Officer, after conclusion of his investigation, submits the Investigation Report to the Central Government in the Ministry of Corporate Affairs.

Administration

For smooth functioning of the administration of the SFIO office, the Director has been declared ‘Head of the Department’. He exercises the powers of HOD. He is assisted in this task by one of the Additional Directors who has been given the charge of Administration. Under him there is an administration unit headed by a Deputy Director who is assisted by two Assistants.

Time Frame

For each investigation that is to be carried out by the officers of this organization, the Central Government while ordering the same assigns a time frame. The investigation has to be completed within that time frame. The subject specific groups of officers which render necessary assistance to the Investigating Officer have to examine the issues involved in the case within a given time frame and give requisite inputs to the Investigating Officer.

Recommended Prosecutions

As per the information available, SFIO after their investigation has recommended prosecution the following companies.

Daewoo Motors India Ltd., Design Auto Systems Ltd., Bonanza Biotech Ltd., Vatsa Corporation Ltd., Mardia Chemicals Ltd., Soundcraft Industries Ltd., Kolar Biotech Ltd., Adam Comsof Ltd., DSQ Software Ltd., Usha India Ltd., Malvika Steels Ltd., Koshika Telecom Ltd., Chitrakoot Computers, Classic Credit Ltd., Classic Shares & Stock Broking Services Ltd., Goldifsh Computer Pvt. Ltd., KNP Securities Pvt. Ltd, Luminant Investrade Pvt. Ltd, Manmandir Estate Dev., N. H. Securities Ltd., Panther Fincap and Management Services Ltd., Panther Industrial Products Ltd., Panther Investrade Ltd., Saimangal Investrade Ltd., Triumph International Finance India Ltd., V. N. Parekh Securities Pvt. Ltd., Triumph Securities Pvt. Ltd., Nakshatra Software Pvt. Ltd., Morepen Laboratories Ltd., Shonk Tech. Ltd., Shonk Tech. Int. Ltd.

SFIO Addresses - The addresses of SFIO offices are as follows:

Delhi Office - Serious Fraud Investigation Office, Ministry of Company Affairs, 2nd Floor, ‘B’ Wing, Paryaveran Bhawan, CGO Complex, Lodhi Road, New Delhi, India.

Mumbai Office - Everest Building, 6th Floor, 100 Marine Drive, N.S Marg, Mumbai.

Tapuriah Jain & Associates
Chartered Accountants
21,. Skipper House, 9, Pusa Road, New Delhi - 110 005
Tele : 91-11-28754012 & 13, Mobile : 91-98-100-46108, E-Mail : caindia@hotmail.com

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