Corporate fraud has emerged as one of the significant issues in the recent times. It refers to the dishonest or deceptive conduct carried out by a person with the intention of causing injury or damage to the shareholders, creditors or any other person or securing any undue advantage to himself by such practice. Company act comprehensive deals with corporate fraud as it is not merely limited to internal affairs of the company rather the consequences of corporate fraud extend far beyond the company. Thus, the companies Act, 2013 deals corporate fraud under section 447 of the same Act.

It may take different forms which may include accounts manipulation, concealment of material facts, inflating the revenue, understating the liabilities, and misuse of corporate authority. It affects the shareholders, and investors in the company causing them financial loss as they would not have assumed the risk and they may not have been prepared for such loss. Which results in the loss of confidence of shareholders and investors in the company and causes reluctance on their part to involve with the company. For these reasons corporate fraud cannot only be considered an internal matter of the company and to prevent the repetitive occurrence of the same some mechanism was needed. Section 447 of the Companies Act, 2013 in this respect plays an important role by providing the punishment for corporate fraud.

however, the punishment is provided for the offence it is alone not sufficient as what requires is that the instances of occurrence of fraud be decreased. For this the role of effective mechanism, implementation of statutory provisions and investigating authorities becomes important. The effective implementation then raises the question of who is empowered to set the criminal law in motion in cases of corporate fraud. The supreme court recently dealt with this question in Union of India v State of Telangana.

The legal framework governing corporate fraud in India

The companies Act, 2013 under section 447 of the Act deals with corporate fraud. It is the key provision dealing with the corporate fraud in India. As per this section, the definition of corporate fraud is broad and covers not only the commissions but also the omissions and it also provides that it is not necessary that person has actually caused the wrongful loss or wrongfully gained an undue advantage. The intention to cause wrongful loss and to gain undue advantage to himself is sufficient for the purpose of attracting the liability under this section. It also provides for the punishment for fraud which includes imprisonment for at least 6 months which may extend to ten years and fine which shall not be less than the amount of fraud but which may extend to three times the amount of the fraud, if the person is found to be guilty of fraud involving an amount of at least ten lakh rupees or one percent. of the turnover of the company, whichever is lower.

However, the effective enforcement requires more than the existence of a penal provision. The Act, therefore provides for specialised investigation through the serious fraud investigation officer. Under section 212 of the Companies Act, 2013 where the central government feels it necessary, it may assign the investigation into the affairs of the company

To the serious fraud investigation office (SFIO). And once the investigation is assigned to SFIO, other agencies of the central government or state government cannot investigate the same offences and any existing records, documents etc are to be transferred to SFIO. After conducting the investigation SFIO is required to submit its report to the central government.

The Act under section 213 also recognises the role of National company law tribunal (NCLT). It empowers NCLT to investigate into the affairs of the company where circumstances suggest fraud, misfeasance, oppression, or unlawful conduct.Though there are mechanisms provided and the authorities are empowered to investigate the matters, the effectiveness of the framework depends upon the manner in which the investigation is translated into criminal prosecution. This then raises the question as to who is legally authorised to initiate the prosecution under the law?

Criminal Prosecution for Corporate Fraud: The Supreme Court's Clarification on Section 212(6)

Section 212 of the companies Act, 2013 provides for investigation of the affairs of a company by the SFIO. Section 212 (6) is particularly significant here as it provides that no special court shall take cognizance of any offence relating to fraud as mentioned in section 447 of the Act except upon the complaint made in writing by Director of SFIO or any officer of central government who has been authorised by a special or general order in this behalf by the government. so, it provides the specific manner in which the complaint may be raised.

In Yerram Vijay Kumar v. State of Telangana, the question before the supreme court was raised whether a person can directly approach the court alleging corporate fraud or the requirement of section 212 is to be followed? The complainant had filed a complaint under section 448 and 451 of the Companies Act, 2013. The supreme court held that section 448 can not be read independently of section 447 as section 448 makes person liable of the offences mentioned under section 447. So, the court answered the question in negative and held that a private person cannot initiate criminal prosecution for corporate fraud before a special court. However, the court also held that, it doesn't leave the person without remedy. The appropriate course of action available to him is to approach National Company Law Tribunal. The supreme court just clarified that a statutory route is provided under section 212(6) of the Companies Act, so it cannot be bypassed and indicated that section 212 is the recourse to the private individual.

This case then raised an important issue that is if the private person cannot initiate criminal prosecution then who can? The supreme court recently dealt with this question in the central government's review petition in Union of India v. State of Telangana, though the supreme court in this case also held that a private person cannot bring the criminal prosecution under section 212 of the Companies Act, the court however, held that apart from the director of SFIO the Central Government may, by a general or special written order, authorise an officer to institute the complaint. This judgment becomes important in the context that it clarifies that director of SFIO is not the only authority which can initiate the prosecution the central government can also authorise a person to do that on its behalf.

Strengthening Corporate Fraud Enforcement: Accountability and Procedural Safeguards

Through its judgment the supreme court has clarified the authority which can institute the criminal prosecution for corporate fraud. However, the effective implementation of corporate fraud provision does not merely depend upon who the authority is rather it is important that criminal prosecution is based on genuine grounds through the properly authorised institutions. The judgment putting the restrictions on private individual is important as the allegations of fraud can have serious implications for the company, its shareholders, creditors and other persons involved. Thus, requiring the prosecution to be initiated through authorised authorities ensures that frivolous or vexatious complaints are not filed without the scrutiny. However, one thing to consider is that the requirement should not be so restrictive that genuine instances of fraud are left unchecked. Thus, there should be a balance between preventing misuse and ensuring accountability of corporate entities. The ruling of the supreme court in this respect is important as it creates a balance between taking action against genuine complaints and preventing the criminal process from being misused. for the effective enforcement of corporate fraud provision it is important that the authorities empowered to take cognizance coordinate among themselves and the focus should not be on increasing the criminal prosecution cases rather on ensuring that right cases are prosecuted and it should be through the proper legal mechanism.

Author is an LLM student at Gujarat national law University, Gandhinagar. Views are personal.