Corporate Frauds under Companies Act, 2013

Last Updated : 05 Mar, 2024

India being a fast-growing economy, has seen huge ups and downs in the economy along with the huge influx of money flowing in and out of the economy. Growing GDP has surely paved the way for economic growth in the country, but it has also allowed some people and groups to enter the loopholes in the system to take unfair advantages. Frauds of any kind not only leave a huge impact on the economy but also pressure the government to come up with strict laws to tackle such fraud in the future.

In India, the Companies Act, 2013 is the umbrella act regulating companies and all related compliances. The purpose of forming the Companies Act is to provide a legal framework for the formation of companies, covering the strata of incorporation, compliance, accountability, management, administration, etc. A company is an artificial person created by law and has a separate legal entity, perpetual succession, a common seal, and limited liability.

Section 2(20) of the Companies Act, 2013 defines a company as a “Company incorporated under this act or any previous company law.”

Geeky Takeaways:

As the economy is increasing, the chances of companies getting into dishonest acts are also increasing day by day. Frauds have a significant impact on the economy as well.
When corporations get into unfair, illegal, and dishonest acts, such acts are referred to as corporate fraud.
Corporate fraud may be done via creating falsified accounting, illegally transferring funds proceed, or shell companies to suppress profits.
Major corporate frauds were the Satyam scam, the Kingfisher scam, and the Harshad Mehta scam.

Table of Content

What is Corporate Fraud under Companies Act 2013?
Types of Corporate Fraud
Examples of Corporate Fraud
Important Sections under Companies Act, 2013
Conclusion
Corporate Frauds under Companies Act, 2013- FAQs

What is Corporate Fraud under Companies Act 2013?

Corporate fraud means undertaking any illegal activities or any dishonest act by an individual or company, to deceive rules and regulations and earn profits in an unethical manner. Corporate fraud is the illegal acts done by the companies or office bearers of the company to earn profit or to suppress profits to deceive tax liabilities. Corporate frauds majorly include insider trading, false financial data, bribery, etc. These actions are performed to deceive stakeholders. The effects of corporate fraud are serious, including capital loss to shareholders, hampers company image, impacts the market overall, and legal trouble for the company and shareholders. Corporate fraud is a serious widespread issue in business not only in India but around the globe. Even international organizations like the EU, G20, SAARC, QUAD, etc. have corporate fraud as an agenda.

Types of Corporate Fraud

1. Financial Statement Fraud: Financial statement fraud refers to faking or changing financial data on purpose to suppress or inflate sales or by any other means to deceive the end user of the financial statement. The objective behind committing financial fraud is to trick stakeholders, like investors, loan officers, regulators, or tax authorities. Financial statement fraud gives a company a financial situation that is better than what it is. This helps to make revenue higher, show a higher value of the assets, or suppress the debt from its original existence.

2. Asset Misappropriation: It is an illegal activity where the employees or management use their power to commit theft or misuse of the company’s assets. Any theft or misuse of assets by a company is known as asset misappropriation. Corporate fraud can occur in different ways, for example, by using fake bills, committing payroll scams, booking extra expenses in books of accounts, stealing stock, etc. This kind of behavior can hamper the financial health of the companies, ruining their financial health and trust.

3. Corruption and Bribery: Corruption and bribery refer to misusing power to take personal advantage. This usually involves asking for or receiving illegal payments. People at all levels in an organization, like top-level executives, workers, suppliers, or government officials, can be involved. Corruption and bribery create the scope for black money and hamper the economy.

4. Insider Trading: Insider trading refers to when people who have classified information or important details about a company buy or sell its securities illegally. Often, it is observed that the management and employees of the company, like executive officers, board members, or employees, do this. They possess classified knowledge, which they exchange for money to gain an undeniable advantage in the stock market.

5. Tax Evasion and Fraud: Tax evasion and fraud happen when companies, with the intention of tricking tax authorities, illegally reduce their tax liabilities. It may involve falsely reporting the wrong income, which suppresses the profits, booking too many expenses, hiding proceeds or profits in overseas accounts, or using unfair tax practices.

6. Cyber Fraud and Data Breaches: Cyber fraud and data breaches are the unwanted access to or stealing of important information about a company, like customer data, trade secrets, any IPR, records of receivables, etc. Cyber fraud happens through cyberattacks. This fraud can lead to a loss of money, a damaged reputation, penalties, and legal trouble for the companies.

Examples of Corporate Fraud

1. Harshad Mehta Scam (1992): Harshad Mehta was a stockbroker who set up a very big money scam in India. He was widely known as the “Big Bull.” Harshad Mehta exploited the loopholes and used tricks on the Bombay Stock Exchange by finding and using flaws in the banking system. He mainly committed this through an illegal act called ‘circular trading‘ and misappropriating bank receipts.

2. Saradha Group Scam (2013): The Saradha Group was a bunch of companies from Eastern India. The company took part in a big Ponzi scheme that tricked millions of customers who invested money in it. Sudipta Sen, the group’s top officer, guaranteed investors to generate guaranteed profit. The company made claims that investments would be made in things like real estate, media, or hotels. But this was not the case in reality. Instead, the amount gathered by the general public was used to pay other investors.

3. Kingfisher Airlines Debacle (2012): The Kingfisher Airlines fall is a very famous and popularly known business failure in India. It’s linked to money issues and wrongdoing by its head, Vijay Mallya. The airline had huge debts and didn’t pay back loans or dues to its vendors and lending banks. In the search, the investigating agencies found that the funds had been moved and the money rules were broken.

Important Sections under Companies Act, 2013

Section 447: Punishment for Fraud

Where the offense of fraud, as established under Section 447 of the Companies Act 2013, has been carried out. The person who has been found guilty of committing such fraud shall be:

Imprisoned for a period that may extend to ten years but not less than six months, and
Shall be liable to pay a fine that may extend to three times the amount involved in the fraud but not less than the amount involved in the fraud.

The punishment shall vary in the following cases.

1. Fraud involving Public Interest: In a case where the fraud committed involves the public interest, the term of imprisonment shall not be less than three years.

2. Fraud involving amounts less than ₹10 lakhs, or 1%:

Imprisonment for a period that may extend to five years or
A fine that may extend to fifty lakh rupees or
or both

Section 448: Punishment for False Statement

In case, while publishing or authorizing any return, report, certificate, financial statement, prospectus, statement, or other document required under this section, any person who makes a statement,

Which is false in material particulars, knowing it to be false; or
Which omits material fact, knowing it to be material,

Such a person shall be liable for the proceedings given under Section 447.

Sec. 449, 450: Punishment for Forgery

Section 449: Punishment for False Statement

In the event that a person intentionally gives false evidence under this act,

Upon any examination on oath or solemn affirmation, or
In any affidavit or deposition about the winding up of any company under this Act or any other matter under this Act

Such a person providing a false statement shall be punishable with imprisonment for a term that may extend to seven years and shall not be less than three years, and with a monetary fine that may extend to ten lakh rupees.

Section 450: Punishment where no specific penalty is provided

If a company or any authorized officer of a company contravenes any of the provisions of this Companies Act of 2013, it commits any contravention for which no penalty or punishment has been mentioned under the act. In such a case, the company and the defaulting officer of the company shall be punishable with:

Liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in the case of a company and fifty thousand rupees in the case of an officer who is in default or any other person.

Section 517: Punishment for non-compliance with orders of the central government

Section 517 of the Companies Act of 2013 establishes the legal sanction and punishment for non-compliance with the orders issued by the Central Government in respect of any fraud and misfeasance committed by any company or any officer of the company. The section provides that in case any company or any officer of the company is found guilty relating to the non-compliance of the Central Government’s orders, it shall be liable to a fine that may extend to one lakh rupees, and in case of continuing default, a further fine that may extend to five thousand rupees for each day during which such default continues.

Sec. 542 to 548: Penalty for non-compliance with various provisions of the Companies Act, 2013

These sections from 542 to 548 of the Companies Act of 2013 establish legal sanction and punishment for non-compliance of various provisions as mentioned under the Companies Act of 2013 by any company or any of its defaulting officers. Any officer who is found in default for non-compliance with any provisions mentioned under the Companies Act of 2013 shall be liable to a fine that may extend to five thousand rupees and, in the case of continuing defaults, to a further fine that may extend to one hundred rupees for each day during which such default continues.

Conclusion

The last two decades have seen a rapid rise in the number of scams and frauds in India. With India being a fast-growing economy, there has been a huge influx of money flowing in and out of the system. While this has surely paved the way for economic growth, it has also allowed some individuals to use the loopholes in the financial system to their advantage. Such frauds not only leave a huge impact on India’s economy but also force the government to come up with stringent laws for the future. Corporate fraud refers to all the illegal activities that are undertaken by an individual or company that are done in an unethical manner or in a dishonest way to earn profits. Corporate fraud is all about illegal actions by companies for profit. It often includes theft, bribery, insider trading, and false financial data. These actions are performed to trick stakeholders. The effects of corporate fraud can be serious, including lost money for shareholders, harm to the company’s image, and legal trouble. Corporate fraud is a widespread problem for businesses everywhere. It involves a lot of different illegal activities aimed at getting money. Major corporate frauds were the Satyam scam, the Kingfisher scam, and the Harshad Mehta scam.