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Role of Serious Fraud Investigation Office (SFIO) in Protection of Investor's

Interest: An Overview

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 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 69

Role of Serious Fraud Investigation Office (SFIO) in Protection of

Investor’s Interest: An Overview

Radheshyam Prasad &

Prof. (Dr.) Tabrez Ahmad

I-Introduction
A Company is basically a form of business organization and it runs according to the business
traits and commercial practices. Being a sub system of the economic-social system operating in the
society, it affects and is affected by the economic and cultures of the society. The concept of social
responsibilities of companies is now so widely accepted that it is rare to bear any view expressed to
contrary. Even those who stoutly defend company’s primary object to make profits agree that the
profit-making should be pursued in a socially responsible way, by which they usually mean that it
should be done for the well being of their employees giving due regards to public, its shareholders and
keeping paramount also the national interest. The Companies Act 2013, guarantees several rights to
investors and also regulates the affairs of a company with a view to ensure efficient functioning of a
company so that investors may receive their due returns of the capital invested by them and their
rights and interests are adequately protected. Investors are the real owners of a company but the power
of management of the company is vested in the Board of Directors.
There are chances to abuse of power like committing fraud, by few directors of the
company. As we know that there is close nexus between corporate governance and ethics but conflicts
between these two are also bound to occur. Corporate fraud, an inevitable incident occurring, in
recent, is an aggravated form of corruption in corporate world. It is difficult to prevent and to catch
such white collar crimes. Such incidents reduce the interest and trust in corporate investments and in
turn reduce the confidence on the government. The Companies Act empowers the Central
Government with the right to investigate the affairs of the company, especially in cases of an alleged
fraud or even in the oppression of the minority shareholders.

There are three types of investigation mentioned in the Companies Act 2013
1. An investigation into the affairs of the Companies 1
2. An investigation into company’s affairs in other cases2
3. An investigation into the ownership of the Companies3

The Central Government is empowered to appoint inspectors to investigate either on its own if it is of
the opinion that such investigation is required on the report of the Registrar or Inspector under section
208 or in public interest or on the request of the company on the basis of a special resolution or on the
Direction of the court/tribunal or from such members of the company having requisite number of
shares as specified in section 213 of the Companies Act, 2013.


Research Scholar (Law), College of Legal Studies, University of Petroleum and Energy Studies, Dehradun
(Uttrakhand).

Professor of Law and Associate Director, College of Legal Studies, University of Petroleum and Energy
Studies, Dehradun (Uttrakhand)
1
section 210 of the Companies Act, 2013
2
s. 213
3
s. 216
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 70

The Central Government has also set up the Serious Fraud Investigation Office (SFIO) in the
ministry of corporate affairs, a specialized, multi-disciplinary organization to deal with serious cases
of corporate fraud. This was also a major recommendation made by the Naresh Chandra Committee
which was set up by the government on 21 August 2002 on corporate governance. Headquarters of
this office is located in New Delhi, with field offices located in major cities throughout India. The
SFIO is headed by a director not below the rank of a Joint Secretary to the Government of India
having knowledge and experience in dealing with the matters relating to corporate affairs and also
consist of experts from various disciplines4. The SFIO will only deal with investigation of corporate
frauds characterized by
a) Complexity and having inter- departmental and multi-disciplinary ramifications.
b) Substantial involvement of public interest in terms of monetary misappropriation or in terms
of number of persons affected and
c) The possibility of investigations leading to or contributing towards a clear improvement in
systems, law of procedure5.
The other experts are appointed by the Central Government from amongst persons of ability, integrity
and experience in the field of banking, Corporate Affairs, Taxation, Forensic audit, Capital
Market, Information Technology, Law, or Other fields as required.

II-Role of Serious Fraud Investigation Office (SFIO)

SFIO, in following circumstances, investigate into the affairs of a company when the Central
Government assigns6 –
(a) on receipt of a report of the Registrar or inspector under section 208 where further investigation
into the affairs of the company is necessary;
(b) on intimation of a special resolution passed by a company that its affairs are required to be
investigated;
(c) in the public interest; or
(d) on request from any Department of the Central Government or a State Government,

Director of SFIO, may designate such number of inspectors, as he may consider necessary for the
purpose of such investigation and such investigating officer have the power of the inspector according
to section 217 of the Act7. Hence, inspectors may also be empowered to investigate the affairs of -
(a) any other body corporate which is, or has at any relevant time been the company's subsidiary
company or holding company, or a subsidiary company of its holding company;
(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 whose Board of Directors comprises nominees of the company or is
accustomed to act in accordance with the directions or instructions of the company or any of its
directors; or

4
s.211
5
Ramaiya, Guide to the Companies Act, 16th edn. p. 2525
6
s. 212(1)
7
s. 212(4)
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 71

(d) any person who is or has at any relevant time been the company's managing director or manager or
employee, he shall investigate into and report on the affairs of the other body corporate or of the
managing director or manager, in so far as he considers that the results of his investigation are
relevant to the investigation of the affairs of the company8.

The case shall not be investigated by other departments when assigned to SFIO
In order to bring integrity and acceleration in investigation in serious corporate frauds, when
any case has been assigned by the Central Government to the SFIO for investigation under this Act,
no other investigating agency of Central Government or any State Government shall proceed with
investigation in such case in respect of any offence under this Act and in case any such investigation
has already been initiated, it shall not be proceeded further with and the concerned agency shall
transfer the relevant documents and records in respect of such offences under this Act to SFIO 9. The
company and its officers and employees, who are or have been in employment of the company, shall
be responsible to provide all information, explanation, documents and assistance to the investigating
officer as he may require for conduct of the investigation. SFIO shall conduct the investigation in the
manner and follow the procedure provided in chapter XIV of the Companies Act, 2013 and submit its
report to the Central Government within such period as may be specified in the order.

Power of SFIO to arrest the accused

Director, Additional Director or Assistant Director of SFIO, if authorized by Central Govern-
ment by general or special law, may arrest such person, who is found guilty of cases of fraud as
mentioned above. Every person arrested shall, as soon as possible, be intimated the ground of arrest
and within twenty-four hours, be taken to a Judicial Magistrate or a Metropolitan Magistrate, as the
case may be, having jurisdiction; provided that the period of twenty-four hours shall be excluded the
time necessary for the journey from the place of arrest to the Magistrate's court.10
No person accused of any offence under those sections shall be released on bail or on his own bond
unless
1. the Public Prosecutor has been given an opportunity to oppose the application for such release;
and
2. where the Public Prosecutor opposes the application, the court is satisfied that there are
reasonable grounds for believing that he is not guilty of such offence and that he is not likely to
commit any offence while on bail.
A person, who, is under the age of sixteen years or is a woman or is sick or infirm, may be released on
bail, if the Special Court so directs. The Special Court shall not take cognizance of any offence except
upon a complaint in writing made by
1. the Director, Serious Fraud Investigation Office; or

8
s. 219
9
s. 212(2)
10
s. 212(6)
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 72

2. any officer of the Central Government authorised, by a general or special order in writing in
this behalf by that Government.

Submission of Investigation Report by SFIO

Submission of Interim Investigation Report- the Central Government if so directs, the
SFIO will submit an interim report to the Central Government within stipulated time. This report may
contain the preliminary findings related with seriousness, wrongdoers of the fraud etc.

Submission of final Investigation Report- SFIO shall submit the detail and final investigation
report, on completion of the investigation to the Central Government. A copy of the investigation
report may be obtained by any person concerned by making an application in this regard to the court.
On receipt of the investigation report, the Central Government will, after examination of the report
(and after taking such legal advice, as it may think fit), may direct the SFIO to initiate prosecution
against the company and its officers or employees, who are or have been in employment of the
company or any other person directly or indirectly connected with the affairs of the company.

The investigation report filed with the Special Court for framing of charges shall be deemed
to be a report filed by a police officer under section 173 of the Code of Criminal Procedure, 1973. In
case SFIO has been investigating any offence under this Act, any other investigating agency, State
Government, police authority, income-tax authorities having any information or documents in respect
of such offence shall provide all such information or documents available with it to the SFIO.

The SFIO will also share any information or documents available with it, with any
investigating agency, State Government, police authority or income tax authorities, which may be
relevant or useful for such investigating agency, State Government, police authority or income-tax
authorities in respect of any offence or matter being investigated or examined by it under any other
law.11

III-Criminal Liabilities of Company in cases of Fraud

The following corporate activities have been regarded as fraud and kept under the category of
cognizable as well as non-bailable offences and punishable under section 447 of the Companies Act,
2013
(a) Furnishing False or incorrect information during registration of company- If any person
furnishes any false or incorrect particulars of any information or suppresses any material information,
of which he is aware in any of the documents filed with the Registrar in relation to the registration of
a company12.
(b) Incorporation of company by fraudulent means- Any company incorporated by furnishing any
false or incorrect information or representation or by suppressing any material fact or information in
any of the documents or declaration filed or made for incorporating such company, or by any
fraudulent action.13

11
s. 212(17)
12
s. 7(5)
13
s. 7(6)
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 73

(c) Untrue or Misleading Prospectus- When a prospectus issued, circulated or distributed includes
any statement which is untrue or misleading in form or context in which it is included or where any
inclusion or omission of any matter is likely to mislead.14
(d) Inducing a person to enter into financial matter- Any person who, either knowingly or
recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or
deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into
 any agreement for, or with a view to, acquiring, disposing of, subscribing for or
 underwriting securities; or
 any agreement, the purpose or the pretended purpose of which is to secure a profit to any of
the parties from the yield of securities or by reference to fluctuations in the value of
securities; or
 any agreement for, or with a view to obtaining credit facilities from any bank or financial
institution.15
(e) Any person who makes or abets making of an application in a fictitious name to a
company for acquiring, or subscribing for, its securities; or makes or abets making of multiple
applications to a company in different names or in different combinations of his name or surname for
acquiring or subscribing for its securities; or otherwise induces directly or indirectly
a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious
name.16
(f) If a company with intent to defraud issues a duplicate certificate of shares.17
(g) Without prejudice to any liability under the Depositories Act, 1996, where any depository or
depository participant, with an intention to defraud a person, has transferred shares.118
(h) If any officer of the company knowingly conceals the name of any creditor entitled to
object to the reduction; knowingly misrepresents the nature or amount of the debt or claim of any
creditor; or abets or is privy to any such concealment or misrepresentation as aforesaid.19
(i) When the auditor of the company has acted fraudulently or abetted or colluded in any
fraud by, or in relation to, the company or its directors or officers, such auditor are held liable for
fraud and may be removed from office.20
(j) Where business of a company has been or is being carried on for a fraudulent or unlawful
purpose, or if the grievances of investors are not being addressed, every officer of the company
who is in default shall be held liable for fraud.21
(k) if after investigation it is proved that the business of the company is being conducted with
intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or
unlawful purpose, or that the company was formed for any fraudulent or unlawful purpose; or any
person concerned in the formation of the company or the management of its affairs have in connection
therewith

14
s. 34
15
s. 36
16
s. 38(1)
17
s. 46(5)
18
s. 56(7)
19
s. 66(10)
20
s. 140(5)
21
s. 206(4)
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 74

been guilty of fraud, then, every officer of the company who is in default and the person or persons
concerned in the formation of the company or the management of its affairs shall be held liable of
fraud.22
(l) Furnishing false statement mutilation, destruction of documents- Where a person who is
required to provide an explanation or make a statement during the course of inspection, inquiry or
investigation, or an officer or other employee of a company or other body corporate which is also
under investigation,—
(i) destroys, mutilates or falsifies, or conceals or tampers or unauthorisedly removes,
or is a party to the destruction, mutilation or falsification or concealment or tampering or
unauthorised removal of, documents relating to the property, assets or affairs of the
company or the body corporate;
(ii) makes, or is a party to the making of, a false entry in any document concerning the
company or body corporate; or
(iii) provides an explanation which is false or which he knows to be false.23

(m) Fraudulent application for removal of name- Where it is found that an application by a
company under sub-section (2) of section 248 has been made with the object of evading the liabilities
of the company or with the intention to deceive the creditors or to defraud any other persons, the
persons in charge of the management of the company shall, notwithstanding that the company has
been notified as dissolved—
(i) be jointly and severally liable to any person or persons who had incurred loss or damage as a result
of the company being notified as dissolved; and
(ii) be punishable for fraud as per section 447..24

(n) Fraudulent conduct of business- If in the course of the winding up of a company, it appears that
any business of the company has been carried on with intent to defraud creditors of the company or
any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official
Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it
thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of
the company or any persons who were knowingly parties to the carrying on of the business in the
manner aforesaid shall be personally responsible for fraud.25

(o) False Statement26-any return, report, certificate, financial statement, prospectus, or other
document required by, or for the purposes of any of the provisions of this Act or the rules made
there under, any person makes a statement,—
(i) which is false in any material particulars, knowing it to be false; or
(ii) which omits any material fact, knowing it to be material.

IV-Punishment for Fraud

It is worth to discuss here the punishment of various fraud prescribed by the Companies Act,
2013. The Act prescribes punishment for following frauds-

22
s. 213
23
s. 229
24
s. 251
25
s. 339
26
s. 448
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 75

(a) any person who is found to be guilty of fraud, shall be punishable with imprisonment for 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
three times the amount involved in the fraud.27
(b) where the fraud in question involves public interest, the term of imprisonment shall not be
less than three years.
(c) giving false statement in any return, report, certificate, financial statement, prospectus,
statement or other document required by, or for, the purposes of any of the provisions of this Act,
shall be punishable as per section 447.28
(d) giving intentionally false evidence upon any examination on oath or solemn affirmation,
authorised under this Act; or in any affidavit, deposition or solemn affirmation, in or about the
winding up of any company or otherwise in or about any matter arising under this Act, shall be
punishable with imprisonment for a term which shall not be less than three years but which may
extend to seven years and with fine which may extend to ten lakh rupees.29
(e) punishment where no specific penalty or punishment is provided30- If a company or any
officer of a company or any other person contravenes any of the provisions of this Act or the rules
made there under, or any condition, limitation or restriction subject to which any approval, sanction,
consent, confirmation, recognition, direction or exemption in relation to any matter has been
accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act,
the company and every officer of the company who is in default or such other person shall be
punishable with fine which may extend to ten thousand rupees, and where the contravention is
continuing one, with a further fine which may extend to one thousand rupees for every day after the
first during which the contravention continues.
(f) punishment in case of repeated default- If a company or an officer of a company commits an
offence punishable either with fine or with imprisonment and where the same offence is committed
for the second or subsequent occasions within a period of three years, then, that company and every
officer thereof who is in default shall be punishable with twice the amount of fine for such offence in
addition to any imprisonment provided for that offence.31

V-Evaluation of the role of SFIO

SFIO is a specialist organisation that investigates only the most serious type of corporate
frauds. It has been empowered by the Companies Act, 2013 to investigate all the matters pertaining to
frauds occurred in any company where the investors lost their hard earned money. An inspector can
examine on oath any person involved in the fraud and may thereafter be used in evidence against him.
In this work of inspector, the officers of the Central Government, State government, police or
statutory authorities shall

27
s. 447
28
s. 448
29
s. 449
30
s. 450
31
section 451
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 76

provide assistance to him. They enjoy all the powers as are vested in a civil court under the Code of
Civil Procedure, 1908,while trying a suit in respect of the following matters, namely32:—

(i) the discovery and production of books of account and other documents, at such place and
time as may be specified by such person;
(ii) summoning and enforcing the attendance of persons and examining them on oath; and
(iii) inspection of any books, registers and other documents of the company at any place.
Here, it is worth to mention that investigation proceedings are not judicial proceedings but only
investigatory and quasi-judicial in nature33. If any director or officer of the company disobeys the
direction issued by the Registrar or the inspector, the director or the officer shall be punishable with
imprisonment which may extend to one year and with fine which shall not be less than twenty-five
thousand rupees but which may extend to one lakh rupees.
If a director or an officer of the company has been convicted of an offence under section 217,
the director or the officer shall, on and from the date on which he is so convicted, be deemed to have
vacated his office as such and on such vacation of office, shall be disqualified from holding an office
in any company. The notes of examination of the person as mentioned above are to be taken down in
writing and to be read over to, or by, and signed by, the person examined, and may thereafter be used
in evidence against him. If any person fails without reasonable cause or refuses—
(i) to produce to an inspector or any person authorised by him in this behalf any book or
paper which is his duty to produce; or
(ii) to furnish any information which is his duty to furnish; or
(iii) to appear before the inspector personally when required to do so or
(iv) to answer any question which is put to him by the inspector in pursuance of that; or
(v) to sign the notes of any examination referred to;
he shall be punished with imprisonment for a term which may extend to six months and with
fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh
rupees, and also with a further fine which may extend to two thousand rupees for everyday after the
first during which the failure or refusal continues.34

Satyam Computers Scam was investigated by the SFIO in record three months of time. This
scam of worth Rs.7,200 crore and caused loss of Rs. 14,162 crore (approx.) to its investors in 2009,
has happened with the help of audit firm PricewaterhouseCoopers which is big blow for corporate
governance in India. The role and liability of Independent director were also held suspicious. Satyam
Computer Services Ltd was founded in 1987 by B.Ramalinga Raju.
The company offers information technology (IT) services spanning various sectors, and was
also listed on the New York Stock Exchange and Euronext. Satyam's network has covered 67
countries across six continents. The company employed 40,000 IT professionals across development
centers in India, the United States, the United Kingdom, the United Arab Emirates, Canada, Hungary,
Singapore, Malaysia, China, Japan, Egypt and Australia. It was serving over 654 global companies,
185 of which were Fortune 500 corporations. Satyam has strategic technology and marketing alliances
with over 50 companies. Apart from Hyderabad, it has they

32
section 217(5)
33
Coimbatore Spinning & Weaving Co. Ltd v. M.S Srinivasan (1959) 29 Comp. Cases 97 (Mad).
34
s. 217(8)
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 77

Bhubaneswar, and Visakhapatnam.35 SFIO questioned the independent directors and found that
allegedly at the behest of the chairman and other top executives of the IT giant. SFIO concluded had
no knowledge about the falsification of accounts and overstated profits that happened development
centers in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, that the Independent
directors of Satyam were not involved in the multi-crores accounting fraud in the IT company and
were kept in the dark by the chairman.
SFIO has also investigated Deccan Chronicle Holding Ltd (DCHL) loan default case of Rs.
1,230 crore (approx).36 This is Hyderabad based company, which owns the English dailies Deccan
Chronicle and Asian Age, was under probe for alleged financial irregularities and failure to repay loan
during 2009-11. In a report to the ministry, the SFIO has pointed to violations of several provisions of
the Companies Act, 1956. The SFIO report has confirmed that the money was availed by the
company's management from various banks through sale of non-convertible debentures and other
commercial papers. Later, DCHL declared itself sick and registered with the Board for Industrial and
Financial Reconstruction (BIFR). Although the BIFR has accepted the company's plea under the Sick
Industries Act, the move does not deter DCHL's lenders from taking action against the company under
the Securitisation Act.

The famous Saradha Chit Fund scam of West Bengal is, now, being investigated by the
SFIO. The investigation was ordered by the Corporate Affairs Ministry, in 2013, following huge
public outcry over the scam that duped hundreds of gullible investors by running fraudulent money-
pooling schemes in the garb of chit funds. More than 60 companies, most of them from the eastern
states of the country, which are believed to have cheated the public of their money, are being probed
by SFIO. In its interim report, SFIO had said that companies under the scanner indulged in serious
financial mismanagement besides siphoning off the funds by their promoters, who exploited
regulatory gaps37. There has been proliferation of innovative financial products in the market due to
technological advancement and extensive use of the internet to market such products to investors.

It has been observed that SFIO has no power to settle cases on its own. It deals with
investigation of corporate frauds characterized by complexity and having inter- departmental, multi-
disciplinary ramifications and also having substantial involvement of public interest in terms of
monetary misappropriation or in terms of number of persons affected. It submits the detail and final
investigation report, on completion of the investigation to the Central Government.
The Central Government, after examination of the report (and after taking such legal advice,
as it may think fit), may direct the SFIO to initiate prosecution against the company and its officers or
employees, who are or have been in employment of the company. In U.K., the Serious Fraud Office
(SFO) is an independent department which investigates and also prosecutes serious and complex fraud
and corruption cases. SFO is the principal enforcer of new UK bribery Act, 2010 which has been
designed to prevent fraud and to encourage good corporate governance in that country. Therefore, it is
suggested that, in India, SFIO should also be given power of, at least, imposing penalties on such
company involved in fraud. This will provide speedy relief to investors and also reduce the burden of
the court, up to certain extent.

35
Tabrez Ahmad, Satyam Scam in the Contemporary Corporate World, retrieved from SSRN
36
The Hindu, Hyderabad, Jul 09, 2013.
37
The Hindu, New Delhi, April 20, 2014.
 AD VALOREM - Volume 1, Issue III, July-September – 2014, ISSN : 2348-5485 78

It is concluded that SFIO is performing well to find out the corporate frauds, during recent
time which reflects the good corporate governance in our country. Minister of State for Corporate
Affairs Nirmala Sitharaman has informed the Lok Sabha on 25 July, 2014, in a written reply that
corporate frauds worth more than Rs 10,800 crore have been detected by SFIO during its probes in
nearly three-and-half years. It has completed probes in 78 cases of corporate frauds since 2011-12 till
June-end of this year. Now, Market Research and Analysis Unit (MRAU) has been set up in SFIO to
analyse media reports relating to financial frauds and for conducting market surveillance of such
corporate. In order to strengthen MRAU's functioning, an expert committee was constituted and on
the basis of its recommendations a forensic lab with appropriate technology and skilled technical
manpower has been set up in SFIO. This will, certainly protect the investor’s interest and will also
bring back the confidence of investors in Indian capital market.

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