WHAT IS SFIO AND WHY IT WAS ESTABLISHED
In India, SFIO investigates fraud. It lies under the administration of the Indian government. it is engaged in significant fraud investigations and serves as the mediator between the Income Tax and the CBI. The body is a multidisciplinary organisation formed of various fields including law, finance, forensic audit, taxes, law, company law, and investigative professionals. These professionals have been recruited from many organisations and feilds, including banks, SEBI, CAG, and government offices and departments. The government authorised the formation of this organisation on 2 July 2003 accordance of the recommendations of the committee made for corporate frauds called Naresh Chandra Committee on corporate governance, which was constituted by the government on 21 August 2002. The agency’s headquarters are located in New Delhi, the capital of India, with field offices in significant locations across India. The majority of SFIO officials are drawn from the IAS, IPS, and IRS. SFIO does not begin investigations on its own, but it used to investigate based on complaints and documents obtained from any source. In accordance with sections 235, 237, 239, and 247 of the defunct businesses act (1956), the government, represented by the minister of corporate affairs, investigates the cases. In effect, this rendered SFIO as an organisation with limited investigative authority that served mostly as a CBI auxiliary. Until now, with limited powers, SFIO was a toothless tiger and an assisting body of CBI, but the government has incorporated many radical provisions relating to SFIO into the new Companies Act, 2013, transforming it into a statutory body of investigation and strengthening its power & responsibilities relating to investigation.
ROLES AND RESPONSIBILITIES
The SFIO, assigned by the Central Government, is responsible for investigating a company’s affairs under certain circumstances. These include when a report from the Registrar or inspector under section 208 indicates that further investigation is necessary, when a company passes a special resolution indicating a need for investigation, when it is in the public interest, or when requested by a government department. Additionally, inspectors may investigate other bodies corporate, including subsidiaries or holding companies, those managed by past or present managing directors or managers, those directed by the company’s board of directors, or individuals who have been or are currently managing directors, managers, or employees of the company. The inspector must investigate and report on the affairs of these other entities or individuals if he deems the relationship to be improper.
Furthermore, the SFIO has the responsibility of identifying and pursuing legal action or suggesting legal action against white-collar crimes or corporate frauds. Typically, the SFIO will focus its investigation efforts on cases that are intricate and involve multiple departments and disciplines, as well as cases that significantly impact the public, whether in terms of monetary loss or the number of individuals affected. Additionally, the SFIO is accountable for investigating significant instances of fraud that are reported to the Department of Company Affairs.
COMPOSITION OF SFIO
The office is directed by a director who is also the head of department and holds the status of Joint secretary to the government of India and is well-versed in corporate affairs. Additional Directors, joint Directors, Deputy Directors, Senior Assistant Directors, and other sectarian employees support the Director in carrying out their duties. Experts in accounting, forensic auditing, banking, law, and other relevant fields round up the rest of the team here, all of whom work together to investigate and, if necessary, bring legal action against those responsible for white-collar crimes and frauds.
DEVELOPMENT OF SFIO THROUGH LEGAL FRAMEWORKS
PRE-SFIO ERA
The Companies Act of 1956 did not explicitly include provisions for the SFIO, the Central Government had the authority to investigate corporate fraud under its purview. This included investigating the affairs of a company, related companies, and the ownership of a company. Prior to the SFIO becoming legally recognized in 2003, the Companies Act of 1956 allowed for the appointment of inspectors by the Central Government, based on reports made by the Registrar or the Company Law Board[1]. These inspectors could investigate and report on the fraudulent or unlawful nature of a company’s affairs, but only if it was in the interest of the public or shareholders, not due to their dissatisfaction. The Central Government had discretionary powers to appoint inspectors and approve investigations into related companies or individuals during the course of the investigation. Certain powers must be exercised as required by law, such as when a company is ordered by special resolution or a court to investigate its affairs with the help of an inspector[2]. The CLB can also request the appointment of inspectors by the Central Government, provided that a company with a share capital has applied for it, and this application has been supported by at least 200 members or 1/10th of the total voting members, or a company with no share capital. The inspector has the authority to investigate and interview the company’s officers, employees, and agents, and submit an interim or final report to the court regarding their findings.
As the time passed various countries liberalised and open up the barriers to form multinational companies in order to increase economy. Due to the rapid expansion in the development of corporations, competition increases and to obtain more profit and revenue, they adopt fraudulent and misleading practises that cause corporate failure and it led to the formation of the Sarbanes-Oxley Act[3]. This has also drawn the attention of the Indian government, which established a committee in 2002 to analyse and suggest ways to improve corporate governance, chaired by Naresh Chandra[4]. The committees known as Naresh Chandra committee and it had made 30 recommendations in total, with one of them being:
“that the government of India should make legislative framework, along with the lines of the SFO as in U.K, should be set up to enable the CSFO to investigate all aspects of the fraud, and direct the prosecution in appropriate courts.”[5]
The committee recommended that India adopt the UK pattern for its SFIO, although this was not mandatory. However, the role of the UK’s SFO is broader and more powerful than that of the Indian SFIO. Unlike the Indian SFIO, the UK’s SFO not only deals with fraud, but also investigates cases of bribery and corruption. Additionally, the director of the SFO has the discretion to decide whether to investigate a particular case based on a set of principles. Furthermore, the SFO has a unique mechanism for receiving complaints about potential criminal activities from various sources, including whistle blowers, victims, corporations (self-reporting), media outlets, and other law enforcement agencies. In contrast, these attributes are not present in the Indian SFIO. In India, the SFIO’s work is carried out under Sections 235 to 247 of the Companies Act of 1956, although there is no specific mention of the SFIO. It was only after the Companies Act of 2013 was amended that the SFIO was specifically recognized under the statute.
LAWS EMPOWERING SFIO
The provisions of the Companies Act 2013 and other relevant laws empower the SFIO to investigate such offenses by granting them certain powers and authorities. Here are some of the key provisions. The provisions of Companies act 2013 are used as act.
- “Section 211 of the Act: This section empowers the Central Government to order an investigation into the affairs of a company if it is satisfied that there is a fraud or a serious irregularity in the company’s affairs. The SFIO can be appointed to conduct such an investigation.
- Section 212 of the Act: This section empowers the Central Government to order an investigation into the affairs of a company by the SFIO if it is of the opinion that the company’s affairs are being conducted in a fraudulent manner or for any unlawful purpose.
- Section 217 of the Act: This section empowers the SFIO to arrest any person if they have reason to believe that the person has committed an offense punishable under the Companies Act or any other law.
- Section 218 of the Act: This section empowers the SFIO to seek assistance from the police authorities or any other government agencies in the course of its investigation.
- Section 219 of the Act: This section empowers the SFIO to access books of account and other relevant documents of a company for investigation purposes.
- Section 220 of the Act: This section empowers the SFIO to summon and examine any person during the course of an investigation.”[6]
- The Prevention of Money Laundering Act, 2002: This law empowers the SFIO to investigate money laundering cases and take appropriate action under the law.
- The Indian Penal Code, 1860: This law provides for the punishment of offenses such as cheating, forgery, and criminal breach of trust, which are often associated with financial frauds.
So, there are various acts along with the Companies Act 2013 that provide the SFIO with comprehensive powers and authorities to investigate frauds and other economic offenses. These provisions help the SFIO to effectively carry out its mandate of detecting and investigating white-collar crimes.
EVOLUTION OF THE ROLE OF SFIO THROUGH CASE LAWS
There has been many laws and regulations that empowers SFIO and provides power to the body, however there has been cases laws which has led to establishment of power in a more proper way. Although the following case was adjudicated after the founding of the SFIO, it clarifies the scope and jurisdiction of the organisation.
The SFIO has concluded its investigation into the Satyam Computers Scam within an unprecedented three-month timeframe. This scandal, which involved collusion with auditing firm PricewaterhouseCoopers and resulted in a loss of approximately Rs. 14,162 crores to investors in 2009, has severely damaged corporate governance in India. The role and vulnerability of Independent directors have also come under scrutiny. Satyam Computer Services Ltd., which operates in the information technology (IT) services sector and is listed on the New York Stock Exchange and Euronext, operates in 67 countries across six continents. The SFIO investigation found that the Independent directors were purportedly under the control of the company’s management and other top IT officials. The Independent directors had no involvement in the multi-billion dollar accounting fraud perpetrated by the company’s management, and were kept unaware of the fraud by the executives. The SFIO was not aware of the manipulation of records and inflated profits that took place at Satyam’s development centers in Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, and Kolkata.
Deccan Chronicle Holdings Ltd, which is the owner of Deccan Chronicle and Asian Age newspapers, was investigated by the SFIO due to a loan default case that occurred in Hyderabad. The company was unable to repay a loan of about Rs. 1,230 billion between 2009-2011, and also engaged in financial irregularities. Moreover, the SFIO found that several violations of the Companies Act of 1956 were committed. The company had acquired funds by issuing non-convertible debentures and other financial papers through different banks. The Board of Financial Reconstructions (BIFR) declared the company insolvent, however, legal action was continued by the lenders against the company under the SARFAESI Act.
The Saradha Chit Fund fraud of West Bengal was investigated by the SFIO. In 2013, the Corporate Affairs Ministry requested an investigation into a scheme that deceived a number of unsophisticated speculators by operating fraudulent cash pooling plans under the guise of chit reserves. SFIO is examining more than sixty organisations, the bulk of which are based in the eastern states, that are believed to have defrauded victims of their money. In intermediate findings, SFIO stated that groups under investigation exhibited genuine financial mismanagement, as opposed to their promoters abusing administrative loopholes to shift funds. There has been an increase in creative financial products on the market as a result of technological advancements and widespread use of the Internet to advertise these products to investors. It has been determined that SFIO is incapable of resolving cases on its own. It oversees the study of corporate frauds characterised by unpredictability, interdepartmental, multidisciplinary repercussions, and a large contribution of open enthusiasm in terms of financial theft or number of persons affected. Upon completion of the examination, it provides the Central Government with a detailed investigation report. After examining the report, the Central Government may issue further instructions.
THE NEW DEVELOPMENTS
ARRESTING POWER OF SFIO
The SFIO was granted legal status and authority to investigate matters under the Companies Act of 2013, but it was not given the power to make arrests until August 24, 2017, when the “Company (Arrest in connection with investigation by Serious Fraud Investigation Office) Rules, 2017”[7] were introduced. The rules of new regulation authorized the SFIO to arrest people holding position of directors, Key Managerial Persons (KMPs), and any other individuals suspected of committing an offense under the Companies Act of 2013. Section 212 gives power to the SFIO Director, Assistant Director, the authority to arrest anyone they believe is liable to be punished under Section 212 of the Act, with the exception of government or foreign companies[8]. If an arrest is made by the Additional or Assistant Director it is required that the director’s written approval is provided.. The final decision on whether to make an arrest is with the SFIO Director.
SFIO can only arrest government and foreign company officials after obtaining written approval from the Central Government[9]. These rules were carefully designed because arrests are a serious matter, especially when it involves senior officials of reputable companies. SFIO arrests have stringent procedures in place due to the potential harm that arrests can cause, not just to an individual’s reputation, but also to the company and its employees’ financial, economic, and social well-being. The misuse of the power of arrest and intentional manipulation of records can lead to severe consequences. In the Rohtas Industries Ltd. v SD Agarwal case[10], it has been held and pointed out that conducting investigations on serious fraud can result in considerable harm to a company, therefore, they must only be performed when there is significant evidence. Arrests and investigations are grave actions that must not be taken unless there are compelling and satisfactory reasons.
INTRODUCTION OF EARLY WARNING SYSTEM
The SFIO is determined to prevent white collar crimes and is implementing a comprehensive system to identify and prevent corporate fraud. One of the strategies being developed is an Early Warning System that will detect fraudulent activity at an early stage, preventing losses to investors and the economy. The SFIO has established a consulting agency to design the system’s framework, which will use information from the MCA 21 database and other sources, including social media, to identify potential fraud. The system will generate alerts using business intelligence and analysis capabilities and help protect investors from deceptive companies or individuals. It will also identify companies for further investigation or scrutiny by the ROCs, other offices of the Ministry of Corporate Affairs, or the SFIO. The system will proactively monitor companies’ activities and protect against disruptions caused by corporate fraud events by using statutory reporting components and publicly available information. The need for an EWS was first recognized after the Satyam scam in 2009. The implementation of an EWS system aims to eradicate shell companies, which are typically established for illicit purposes and have no active business operations or assets under their name. Anonymous corporations have been recognized in various reports and studies as a critical issue to tackle to address several pressing international issues, such as terrorism, the drug trade, organized crime, money laundering, tax evasion, corporate crime, corruption, and systemic financial instability.[11] It is usually challenging to monitor the financial records of these companies with the RoC, but the EWS system will use artificial intelligence to identify them, thereby enhancing corporate governance.
CONCLUSION
The Serious Fraud Investigation Office (SFIO) has been given legal recognition under the Companies Act 2013, which enables it to play a vital role in investigating instances of corporate failure due to fraudulent activities. While the SFIO has been functioning effectively so far, there are concerns about its dependence on the Central government. This is particularly relevant given the increasing number of cases being referred to the SFIO each year. For instance, in the Saradha Chit Fund Scam, there were delays in the Central government authorizing the SFIO to conduct and pursue the investigation and prosecution., even though some Central government officials were implicated in the scam. These issues could pose a serious threat to transparency and accountability in the future, especially if the Central government is found to be at fault.
According to the SFIO’s official website, they have conducted a total of 312 investigations from 2003-04 to 2016-17. This suggests that SFIO is effective in preventing corporate fraud, which is a priority for the government to ensure better corporate governance day by day in the country. Nirmala Sitharaman, the Minister of State for Corporate Affairs, announced on that SFIO has been a efficient body and had detected corporate frauds worth more than Rs 10,800 crores during a three and a half year period, indicating SFIO’s efficiency despite its shortcomings. Despite being a relatively new organization, SFIO is steadily improving and becoming more capable of handling serious fraud cases. As the incidence of corporate fraud continues to increase, SFIO’s role in preventing it is becoming increasingly crucial.
It has also been found that the SFIO has the jurisdiction to investigate incidents under various corporate governance and corporate affairs-related laws and regulations. However, in order for the SFIO to examine the cases, it must first obtain approval and authorization from the central government. In addition, in order to handle matters and cases involving laws other than the Companies Act, they must come within the area of corporate frauds and, to some extent, must have anything to do with the laws of companies act.
SUGESSTIONS
The SFIO is tasked with a challenging and difficult responsibility – combating corporate fraud. While there is no evidence to suggest that the SFIO’s performance has been compromised so far, there is a risk that it could be misused. It is important to question the SFIO’s dependence on the Central Government, especially since there is a possibility of involvement by Central Government officials in cases like the Saradha Chit Fund case where delays in prosecution may have been due to dishonest intentions. This raises concerns about transparency and accountability. So there is scope of amendments which writer suggests to be done to the act to prevent the misuse.
The power to investigate should be given to SFIO to enable it to take up cases and investigate them independently, without excessive control from the Central Government. The SFIO should be able to initiate its own investigations, and an Ombudsman Independent Committee should be created within the SFIO to handle the prosecution process under partial control of the Central Government.
It is essential for SFIO to recruit officials in a timely manner to ensure effective functioning and investigation. Understaffing leads to high payroll costs, low-quality work, employee stress, and missed growth opportunities, which can defeat the purpose of SFIO. To improve the efficiency of investigations, SFIO should increase the number of regional offices in the country. This will help to cover a wider range of companies and yield better results.
[1] Section 234, Companies Act, 1956
[2] Section 237(a), Companies Act, 1956
[3] 116 Stat. 745 (2002).
[4] Government of India, Report: Committee on Corporate Audit and Governance (Naresh Chandra Committee), Ministry of Finance and Company Affairs, December 2002.
[5] See Recommendation no. 26 Government of India, Report: Committee on Corporate Audit and Governance (Naresh Chandra Committee), Ministry of Finance and Company Affairs, December 2002.
[6] Companies Act 2013
[7] Company arrest rules 2017 http://www.mca.gov.in/Ministry/pdf/companiesArrestsconnectionSFIORule_25082017.pdf
[8] Rule 2(1) of the Rules, 2017.
[9] Rule 3 of the Rules, 2017.
[10] Rohtas Industries Limited v S D Agarwal AIR 1969 SC 707 (India)
[11] Sharman, J, Shopping for Anonymous Shell Companies: An Audit Study of Anonymity and Crime in the International Financial System. The Journal of Economic Perspectives, 24(4), 127-140. (2010) http://www.jstor.org/stable/20799176
