6DEC 2020

Corporate Frauds in India: From Scam 1992 to TodayBy Pratham Mohanty, SkillxPro

Abstract: With the Harshad Mehta story, or better known as the Scam 1992, trending with the Indian viewers, white-collar frauds have tickled the curiosity of the general public. However, a recent report by Deloitte has alarmed businesses across the nation on the possible increase in cases of Corporate Frauds. Thus, with such limelight, it is important to understand the basics of these frauds, the existing legal framework, and its future.

The Harshad Mehta securities fraud or, now popularly known as the Scam 1992, a web series, has opened the gates of Corporate Frauds to the wide public. However, the buzzword Corporate Frauds is not new for the people in business and banking Since, independence, India has seen a steep rise in cases of corporate frauds, or high profile frauds, which usually goes unnoticed and are less-talked about. Some major of such scams in the last few decades are Harshad Mehta fraud, Satyam fraud, Sahara estate Corporation fraud, Sharda Chit Fraud Fund, etc. This never ending list of frauds have constantly raised questions on the loopholes in corporate governance and its effect on investor’s trust, company’s reputation and eventually the economy.

A Corporate Fraud is essentially a fraud by a corporate entity through deceptive actions, which includes but is not limited to concealment of facts, embezzlement, money laundering, etc, for personal gain and interests, without use of physical force or coercion.

Before the enactment of the Companies Act, 2013 [“Companies Act”], such frauds were mostly governed by the broad provisions of the Indian Penal Code, 1860. However, Section 447 of the Companies Act have specific recognition to such economic frauds and laid down necessary guidelines. Expanding the existing definition of Fraud, the Section added that the questioned act must be confined to acts committed by a party to contract with an intention to deceive another party or his agent or to induce him to enter into a contract. Fraud, which vitiates the contract, must have a nexus with the acts of the parties entering into the contract

This definition highlights the precondition to prove the intention of the person who has committed the fraud. The succeeding provisions, i.e. till Sec. 454, covers the necessary procedure, penalties and punishment. Another key feature was introduced under Sec. 211, which empowers the Central Government to establish an office called Serious Fraud Investigation Office [“SFIO”] to investigate frauds relating to companies.

Apart from these, institutions like Securities and Exchange Board of India [“SEBI”] through its guidelines and other supporting legislation aim at protecting the finances of investors and ensure hassle less corporate governance. However, even with such restrictive laws and watchdog agencies, the trends seem to show a sharp increase in cases of corporate frauds in India. The recent cases of Vijay Mallya Scam, Yes Bank scam, Cafe Coffee Day scam and others have shed light on the still existing loopholes in the existing laws.

Additionally, with the onset of COVID-19 pandemic and economic recession which has followed, speculations have been raised on the possible increase in such cases of corporate frauds. A recently published report by Deloitte has shown that 80.3% of the respondents expect a spur in fraud cases in the coming two years. The same report shows the possible increase in cases of cyber frauds, partner favourism and corruption in the recent future. Thus, the said prediction has alarmed investors and companies across the nation and about 43% of the respondents of the study believed that a review of existing laws to accommodate the business trends brought upon by the pandemic is necessary to ensure the such cases of fraud don’t further hamper the already struggling economy.

Therefore, it will be interesting to see the following course of action chosen by the Govt., to ensure a smooth recovery of the economy, while ensuring a better management and restriction of Corporate Frauds.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at [email protected]

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