January 18, 2022

Corporate offences in India: To criminalize or to not to criminilize



Corporate law, corporate crimes, corporate governance all these terms are quite trending nowadays. But what actually a corporation is? And why there’s a need to understand this in detail. Well in a gentle manner, corporation is a “Legal entity that exists to conduct business.” It can also be called as C Corp and is a legal entity which is separate from its owners. Corporations are more of to make profit. They cannot lose more than their investment in the corporations. It can sometimes be taxed and can held liable for their illegal offences. Basically, corporation is a way to do business and business is nothing but to make money, to have huge shares. It also offers security to its owners from personal liability, but it costs a lot to build a corporation. In the past two decades, it has been observed that there’s an increment in this arena. Many businessmen and financially rich people have brought a lot of shares and made money like Dhirubhai Ambani, Ratan Tata, Narayana Murthy and so on. However, conducting business is not always legal, it does involve various activities which can be held illegal before the law. We all are quite familiar with the term ‘corporate offences/crimes’, when we talk or heard about the business in television or newspapers. So, what exactly corporate offences are? Well, when a crime is conducted collectively by group of people or association in any business, then such crime becomes corporate crimes, these crimes are also known as White collar crimes as it is conducted by rich people. According to Professor Sutherland, white collar crimes are those, “where a person of respectability and high social status in course of his legitimate occupation commits an act which is approximately a crime or offence.” This after undergoing certain changes and the modified definition is “When a person of upper socio-economic class violates the criminal law in course of occupational or professional activities, then those activities are considered as the white-collar crimes/offences.” So, what do you people think about the reason behind the rise in these corporate offences? clearly, white collar crimes are steadily increased/increasing only because of the advancement in technology in our society, due to which the amount of using cell phones and computers increased which leads to easy access for personal and financial information. With these white-collar crimes, the economy of the nation got threaten because of the frauds and theft, evasion of tax and all. These crimes affect the financial status of a nation or a person and some of them like bribery and corruption put a negative impact on the society as well. Whenever these offences occurred, employers and workers are the most affective ones, can be said as “victims”, when it comes to some form of workplace crime, especially theft and embezzlement, and health and safety offences. Thus, overall, there’s so much of negative impact of such offences. Therefore, for us, it’s been a necessary to know, to understand, what are these crimes, how the system works etc. This essay is all about the corporate offences, its types, laws for the corporate criminals and finally a summation in the conclusion part.

Corporate Offences

As the meaning and definition of corporate offences has provided above, summing up them once again, a corporate crime (fraud) occurs when a company or corporation i.e., “an entity deliberately changes and conceals sensitive information which then apparently makes it look healthier”. Companies then adopts various Modus – operandi to commit such corporate frauds, which may include misrepresentation in prospectus, manipulation of accounting records, hide debts, and so on. However, this is not just all what we think; there’re around thousands of corporate crimes came into light these days. It’s shocking to know that many of the corporations just mysteriously disappeared, out of 5,651 companies that were listed on Bombay Stock Exchange (BSE) to raise crores of money from investors, 2,750 of them have vanished i.e., loot or run away. Around 11 million investors have invested 10,000 crores in these 2750 companies, it causes huge loss financially and this is all because of these offences. The most commonly known corporate offence is Fraud.

  1. Fraud

Fraud is defined under section 17 of Indian Contract Act, 1872, which states that “‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

  1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
  2. The active concealment of a fact by one having knowledge or belief of the fact;
  3. A promise made without any intention of performing it;
  4. Any other act fitted to deceive;
  5. Any such act or omission as the law specially declares to be fraudulent.”

These clearly states that fraud is an illegal act, as the maxim FRAUS OMNIA VITIATE says, meaning “Fraud violates everything”. There are different types of fraud we have, some of them are as follows: –

  1. Bankruptcy Fraud

Bankruptcy fraud is nothing but the act of faking the information when filing for a bankruptcy. There are several fraud schemes involves in bankruptcy such as fraudulent claims, concealment of assets, petition mills, bust-out schemes, etc. For instance, take an example of concealment of assets, in this scheme, when there’s a bankruptcy, debtors need to list all their assets for filing for it so that the creditors will have the opportunity to claim a share of the earnings from the sale of those assets. Debtors who perform concealment of assets will deliberately neglect tot list all their assets, in the credence that creditors cannot obtain payment from sale of assets that are not known. This fraud scheme is the most commonly encountered form of bankruptcy fraud.

  • Investment Fraud

The investment fraud is nothing but the illegal or purported sale of financial assets (instruments). These frauds involve the schemes that are characterised by offers of low risk or no-risk investments and guarantees returns which seems overly consistent, complexity in the strategies and sometimes securities without registration. These schemes generally target the affinity groups i.e., groups with a common religion or ethnicity to build trust so that the investment fraud can be done against them.

  • Fraudulent Financial Statements

Fraudulent financial statements are nothing but the manipulative misrepresentation of financial data or statement done by the corporation or company to commit fraud against the investors to make money. This involves overstating assets, revenues and profits and understating liabilities, expenses and losses. It involves the Misappropriation of assets also.

  • Vendor Fraud

Vendor frauds are the frauds which involves schemes like billing schemes or check tampering schemes. In this the fraudster manipulates accounts payable and payment systems of the company for illegal personal gain.

  • Employee Fraud

Employee fraud is nothing but the fraud when an employee deliberately lies or deceives from a company with the intent to obtain benefits or compensation of some type. It’s basically the fraud which is done by the employee.

  • Corruption

Corruption is the most commonly known fraud; it is the dishonest behaviour by those who are in power like managers and government officials. It involves bribery or double- dealing, diverting funds, money laundering, under-the-table transactions etc.

  • Customer Fraud

These frauds are also known as deceptive business practices that involves unfair and false activities that can cause financial loss to customers. Several schemes like false promises that directly cheat customers out of their money falls under this.

Now, with this, it is clearly indicating the criminal approach towards these acts. Apart from these corporate frauds, there are more other corporate offences that needs to be criminalise, which are as follows: –

  • Bribery

Bribery is well-known to everyone; it occurs when a person offers something valuable to another person in order to receive something in exchange. It is extremely corrosive like imagine a public servant taking illegal gratification as a reward or motive for undertaking (or forbearing to undertake) an official act, or for showing (or forbearing to show) any favour or disfavour to any person in the exercise of his or her official functions, or for rendering any service or disservice to any person.

  • Embezzlement

In layman’s term, Embezzlement is a type of “property theft”. It occurs when a person uses funds for a different purpose than they were intended to be used. Embezzlers might create bills and receipts for activities that did not occur and then use the money paid for personal expenses. Example: – Ponzi schemes.

  • Money Laundering

Basically, it’s a process of converting black money into white. In this, huge amount of money made by a criminal offence like terrorist funding, appears to have come from a legitimate source. As we say that the money from a criminal activity is dirty, this process launders the money to make it look legitimate.

  • Forgery

Forgery is an act of creating false documents, altering them or presenting a false signature for an illegal benefit of the person. Example of forgery is when a person forges (copies) another one’s signature and uses it without their consent (wrongfully).

  • Insider Trading

Insider trading is nothing but “The malpractice wherein trade of securities of company is undertaken by people who by virtue of their work have access to the otherwise non-public information which can be crucial for making investment decisions.” This is estimated to be illegal when the material information is still non-public and this comes with severe penalties, including both fines and imprisonment; where material non-public information is defined as “Any information that could substantially impact the stock price of that company.”

Corporate Laws

The purpose of corporate laws is to impose punishment or liability over corporate criminals or corporations. Earlier there were no such liabilities as there was barely few cases and the concept of these offences just evolved. However, today, due to the advancements in the technology, the number of corporate offences increasing and corporate governance are there for them.

We have certain laws for corporate offences in India which are as follows: –

The Companies Act, 2013

Section 53- says about the “Prohibition of shares at a discount” whereas section 57 of the act talks about the “punishment for personation of shareholder”, Section 58(6) on the “Refusal for registration and appeal against refusal”, Section 118(12) about the “Minutes of proceedings of General Meeting, Meeting of Board of Directors and other meetings and resolutions passed by Postal Ballot”, Section 128(6) on “Books of Account, etc, to be kept by Company”, Section 129(7) on “Financial Statement”, Section 134 talks about the “Financial Statement, Boards report, etc.” Section 182(4) about the “Prohibitions and restrictions regarding Political Contributions”, Section 184(4) on “Disclosure of Interest by Director”, Section 187(4) says on “Investments of the Company to be held in own name”, Section 188(5) on “Related Party transactions”, lastly, Section 447 provides “Punishment for fraud”.

Next, we have, Section 21 in the Transplantation of Human Organs Act 1994 states about Offences by Companies as; “(1) Where any offence, punishable under this Act, has been committed by a company, every person who, at the time the offence was committed was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to any punishment, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.” And,

“(2) Notwithstanding anything contained in sub-section (1), where any offence punishable under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.”

Section 9(1) of Prevention of Corruption Amendment Act Bill 2013, says that “A commercial organisation shall be guilty of an offence and shall be punishable with fine, if any person associated with the commercial organisation offers, promises or gives a financial or other advantage to a public servant intending- (a) to obtain or retain business for such commercial organisation, and (b) to obtain or retain an advantage in the conduct of business for such commercial organisation.”

Likewise, we have, section 38 of the Narcotic Drugs Psychotropic Substances Act, 1985; section 305 of the Criminal Procedure Code (CrPC) that “mentions the procedure when corporation or registered company is an accused”, section 66 of the Food and Safety Standard Act 2006 and section 21 of the Transplantation of Human Organs Act, 1994. Indian Contract Act of 1872 also have certain laws on corporate offences.  

Conclusion (To Criminalise Or to Not to Criminalise?)

The advancement of science and technologies in last few decades has created a new form of crime which is known as “corporate offences”. And due to personal greed on section of this crime has shown a tremendous growth, i.e., Corporate Fraud. Corporate fraud is responsible for most of the economic loss in the society. The people of nation also lose their trust in the investment in private sector. Where private sector can help in huge economic growth, nowadays it is more indulged in the field of Fraud.

India has come across number of financial and corporate frauds or scams like Harshad Mehta scam, Vijay Mallya scam, Satyam fiasco, Sahara case required the attention of law makers. Such frauds made it imperative to evaluate the standards set in corporate governance and stringent methods were needed to be implemented to tackle corporate frauds. However, government of India has found many steps to forestall this sort of Crime in India. There are sure systems that have been referred to by the Government of India by which the fakes can be forestalled under the Companies Act, 2013.

Though we still do not have any proper legislation for corporate offences. we have The Prevention of Corruption Act, 1988, and Indian Penal Code, 1860 for corruption and fraud, but there’s a severe need of a separate act which will be only for the corporate offences/crimes. Law commission has imposed the request few times however, the legislatures have ignored this recommendation by the Law Commission and failed to incorporate any of this due to which it has become difficult for courts to punish the offenders. It is to be noted that corporate criminal liability can arise from various circumstances.

The corporate scandals are having a bad effect in India. However, with the growth and progresses which take place in India the corporations are not made criminally liable and if punishments are given then no other than except fines are to be imposed. But there’s a need to criminalise these offences.

There is a need to attach the implication of Corporate Culture in both prescribed and unprescribed polices, in rules and practices wherein the corporation is well-thought-out as a conduct component of offence which has been committed by it when their cause was invigorated by the culture of Corporation.

Authors- Garima P. Bhaisare & Anubhav B. Wani (Maharashtra National Law University, Nagpur)

Law Library LawBhoomi

Leave a Reply