Corporate Fraud under the Companies Act 2013

Corporate fraud consists of illegal, deceptive actions committed either by a company or an individual through highly qualified accounting techniques which is used to inflate a company's apparent profits and may take years to detect. In addition these paper attempts to identify the cause and effects of fraud on the stakeholder of the business. This Article gives us the idea about the financial scams and development of judiciary on day to day basis.

Introduction
The Companies Act 2013 deals with provisions relating to Corporate fraud. According to section 447 of the Companies Act, 2013 any person who is found guilty of fraud shall be punishable with imprisonment of a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to the three times the amount involved in the fraud.

Corporate fraud means illegal practices undertaken by a corporate or an individual person to make a tremendous profit and to have an edge over another. Corporate Fraud results in huge losses of public funds which they have entrusted to the company for better functioning.

There are various types of Corporate Fraud:

1. Financial Misappropriation:
   Misappropriation of payments, Fudging the books of Account, misleading the investors to invest by rapidly increasing the share price.
2. Misappropriation of Assets:
   Embezzling receipts, stealing physical assets, intellectual property rights, Dummy payments using an entity assets for personal use.
3. Corruption:
   Making or receiving improper payments, offering bribes to public officials or private officials, Abetting, taking political support to commit fraud.

Financial Scams

1. Haridas Mundhra Scam 1957:
   The story starts near about 1930s when a person is born in the small businessman house named Haridas Mundhra. The beginning of his profession started very well as he used to sell bulbs. Afterwards, he was addicted to money and his passion to earn money was always high which kept him attractive, he reached Mumbai around the 1950s. He reached Dalal Street where he sees how people with some thousands/lakhs make crores and therefore he started working himself as a jobber & rigger.
   
   While doing his work so well he started shares rigging. Haridas Mundhra was not only manipulating shares but also floating false shares. In 1957 Haridas earned 4 crore rupees. Later on he got six hot shares, some of the are- Angelo brothers and British India Corporation. After that he realised that if he wants to progress in India and he requires a political support. He knew that to maintain sentiments he has to bring huge investments and there is no one better than institutional investors other than LIC to do so. He took the help of politics and pressurised LIC to buy these five to six shares.
   
   The question was raised in the Rai Bareilly seat sitting in Parliament that why would someone invest in sinking company? There was lot of ruckus that time. But on 16th December 1957 Firoz Gandhi as per his investigative journalism proved by the confidential documents that T.T krishnamachari (Finance Minister) was involved in this. Haridas Mundhra was sentenced to 22 years of imprisonment and finance minister was told to resigned. The result of this scam was Around 55 lakhs investors who invested in LIC lost their money.
    
2. Satyam Scam:
   In 1987 with the group of ten engineers he formed Satyam Computers. In 1988 he incorporated Maytas Infrastructure where he got more than 150-180 clients. The moment Y2K name and fame started fading, Ramalinga Raju realized that money will not come like this. The listing was done in 2001. Ramalinga Raju incorporated 340 small companies with CA.
   
   They used to circulate money through this and buy property of Maytas and they also created many fake accounts for circulation . The problem came from the Lehman Brothers Crisis in 2008 of United States. Due to this there was depression in real estates and it spread globally. The lands they were buying at 30k per square foot have dropped to half the price. In Satyam the entire MIS (Management Information System ) was fudged as it was made entirely by Raju.
   
   Infrastructure Companies was in depression. Ramalinga planned Satyam to overtake Maytas Infra and constructions. He thought that if he do so than it will fill the gap. The compliance of the shareholders permission was not made which made shareholders very disturbing and they denied the overtake. He tried every aspect possible to overcome such harm but there was no way out left so finally he decided to write a letter and confess about the scam. The current position of Satyam Computers is it is merged with Tech Mahindra.
    
3. Ketan Parekh Scam:
   Ketan Parekh was a CA and he started working with Harshad Mehta. Ketan was a big player in ITC. Now around 1998, Ketan starts thinking and decided to get involved in one or more counters and decided to manipulate it i.e ACC Cement. Due to nuclear tests of Pokhran and trades from the USSR also started giving him negative vibes.
   
   The biggest comeback of Ketan after this was that he was trying to bring excitement in the market with the help of multiple brokers and now some of the favourite stocks were Zee, HFCL, DSQ Software, Kadila Healthcare, ESSEL, Korpan, Nirma. Now the question arises why Ketan wanted to enter into IT/Telecom Companies and the secret behind this is one of the report of 1995 from foreign media "The Age of Internet" where it was seen that Internet is going to be everything and that's why commotion is started.
   
   Ketan picks up a stock in January whose volume was 1000 shares traded per day and in the same year in the month of May the same stock 10-15Lakhs shares were started traded per day .HFCL which was loss making company quoting 700. F-Tech moved from 45 to 2100, Ranbaxy moved from 270 to 1000 and the similar pack was known as K-10 stocks. Ketan Parekh purchased some shares of Madhavpura Mercantile Cooperative Bank to sway the bank loans decision in his favour . MMCB issued pay orders for 137 crores for Ketan Companies, MMCB was unable to clear the payments because it lacked adequate money.
   
   RBI marked MMCB as defaulter. Ketan Parekh with his dump and pump strategy was to inflate stock value.He invested In K-10 stocks by acquiring 20-30% of the Company stock which was well known in the stock market and inflated the price of the share leading to attract the institutional investors to invest into shares.

Judicial Precedents

1. Vimla vs State of NCT, Delhi:
   The Supreme Court held that that the idea of deceit is a necessary ingredient of fraud,but it did not exhaust it . The expression " defraud ' involves two elements ,namely deceit and injury to the person deceived . Injury is something other than economic loss that is deprivation of property, whether movable or immovable or of money and it will include any harm whatever caused to any person in body, mind, reputation or such others. A benefit or advantage to the deceiver will almost cause a loss or detriment the deceived . Even in those rare cases when there is benefit or advantage to the deceived but no corresponding loss to the deceived, the second condition is satisfied.
    
2. Vikas Agarwal vs Serious Fraud Investigation Office:
   The petitioner was summoned for the charge of criminal conspiracy and Section 447 of the Companies Act 2013. It was alleged that mining activity carried on by firm was illegal. An unsecured loan was also advanced to it by trust. The Supreme Court in this case observed that definition of fraud provided in the explaination section 447 of the Companies Act 2013 makes it clear that the instance and also to other persons who have in any manner in commission of the offence to gain undue advantage.
    
3. Devas Multimedia Pvt Ltd vs Antrix Corporations Ltd:
   The Supreme Court upheld the orders of National Company Law Appellate Tribunal and held that allowing Devas and its shareholders to reap the benefits of their fraudulent action , may nevertheless send wrong message namely that by adopting fraudulent means and bringing into india an investment in a sum of INR 579 crores, the investors can hope to get tens of thousands of crore of rupees even after shiponing of 448 crores.

Conclusion
Corporate frauds and scams greatly erode corporate wealth. Corporate India as a whole has a vested interest in preventing and minimising corporate frauds and scams. Independent directors on audit committees provide one of the best ways of reinforcing internal audit and annual statutory audit. Their independence must be strengthened. With respect to incentives, in end executive compensation is about ethics and can only be sparingly controlled.

The solutions to corporate fraud must be comprehensive and all encompassing. As far my opinion there must me more stringent laws under SEBI PMLA, COMPANIES ACT 2013 so that nobody can even think to do that. The Companies Act 2013 should contain more of punishment based sections so that people will refrain from doing any such financial frauds.

End-Notes:

1. Aron Almeida,Satyam Scam- The story of India biggest Corporate fraud"(2022)Trade Brains Satyam Scam - The Story of India's Biggest Corporate Fraud! (tradebrains.in)
2. Ashok k.Singh, "LIC-Mundhra Scam: Independent India first Mega Financial Scandal"(2021) Live History India LIC-Mundhra Scam: Independent India's First Mega Financial Scandal (livehistoryindia.com)
3. Tarini Kalra, "Ketan Parekh Scam" (2022) ipleaders Ketan Parekh scam - iPleader Ketan Parekh scam - iPleaders Ketan Parekh scam - iPleaders
4. Dr. Vimla vs Delhi Administration AIR 1963 SC (2) 585
5. Vikas Agarwal vs Serious Fraud Investigation Office 2019 DC
6. Devas Multimedia Pvt Ltd vs Antrix Corporation Ltd & Anr 5906 of 2021
7. Sakshi Sharda, Corporate Frauds: A Comprehensive Study (2020) Corpbiz Corporate Frauds: A Comprehensive Study - Corpbiz

Written By: Shubham Agarwal, St. Xaviers University Kolkata