Continuing Scams in the Post Enactment of Companies Act 2013

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Anu Bhuvanachandran
Anu Bhuvanachandranhttp://www.outsaylegal.com
Anu Bhuvanchandra is the Partner at Outsay Legal, New Delhi, Advocate, Supreme Court of India. She is engaged in maritime litigation, consumer matters, and constitutional litigation. She is practicing IP filings, NCLT matters, policy-making, and mediation.

The learning of company law starts with Salomon v. Salomon. Since the concept imbibes English origin, Indian history with regard to the formation of companies and governing laws always take the attention to English history and the famous South Sea Bubble case with its destructor Bubble Act 1720. History tells us there was a period where companies were similar to bubbles i.e. they form fast and break soon. This trend was completely demolished by the above said Act by bringing in disclosure norms for the first time in the legal framework of a company.

Our country is inspired by the framed Companies Act 1956 which proved itself incompatible with the environment of companies in India. From 1956, there was an array of scams that led to economic instability in India, and various amendments were made to combat the situation. Unfortunately, the statute had to quit all its power to regulate, enforce, and administer with the outbreak of the Sahara scam. In virtue of the same, Companies Bill, 2011 which was winded with the below-mentioned features.

  1. E-Governance by maintenance and inspection of documents by companies in the electronic form being allowed for the first time.
  2. The concept of Corporate Social Responsibility is being introduced.
  3. Enhanced accountability of the companies by introducing independent directors, CSR committee, remuneration committee, shareholder relationship committee, and audit committee.
  4. Additional disclosure norms.
  5. Facilitate the raising of capital by companies.
  6. Audit accountability.
  7. Managerial remuneration.
  8. Facilitates mergers and acquisitions.
  9. Protection of minority shareholders and small shareholder along with investor protection.
  10. Introducing woman director and Serious Fraud Investigation Officer.
  11. Introducing National Company Law Tribunal and mediation and conciliation panel.

Companies Act 2013 is the outcome of the Sahara scam where the need for disclosure and governance of corporations was alarmingly proclaimed. J.J. Irani Committee was appointed for crafting the 2013 Act aimed to include strict disclosure norms. The Act came with a completely new picture with respect to compliance, disclosure, administration, penalty, and proceedings. It has made the audience forget the 1956 Act and forced to welcome, adapt, and accustom in a very short span of time. Life of Company Law Board was easily replaced by the Company Law Tribunal vested with extraordinary powers. With respect to disclosure norms there exists a need to carve out from the entire Act and identify which all provisions exactly pointing towards disclosure and enforcing the same.

Disclosure Norms in the 2013 Act

Section 4 of the Act deals with the formation of the company wherein disclosure of name, registered office, objects, and nature of liabilities of its members in the MoA. 

Section 5 mandates disclosure in AoA with respect to regulations for the management of the company, provisions as to alteration or amendment with notice to the Registrar of Companies. In a few sections filing of altered AoA before the tribunal is required. Disclosure of details of the company, auditors, shares, creditors, etc. shall be made in the prospectus. 

Section 60 says publication of authorized, subscribed and paid capital in case there is no advertisement is made. In the Act, all the copies filed before the RoC shall be available on application for the same with requisite fee payment. 

Section 132 constitutes the National Financial Reporting Authority to give the opportunity to report financial irregularities in companies. 

Further section 135 of the Act provides for Corporate Social Responsibility and reporting and filing of reports in this behalf. 

Further, the directors are under surveillance through DIN and for companies it is CIN. Section 171 provides the right to inspect the register of directors and key managerial personnel and receive copies at free of cost. 

Section 177(9) and (10) introduces a vigil mechanism which gives legal sanctity to whistleblowing mechanism in the companies. 

Section 211 envisages the establishment of Serious Fraud Investigating Office [SFIO] to put a bar and penalize all fraudulent activities. The scope of this section is that noon disclosure or insufficient disclosure if missed by the law which purports to serious fraud causing grave loss to the public at large, this office may utilize its powers. The insertion of this provision is to wind up the saga of scams sprouted from Kethan Parek’s to the Sahara financial tornado. 

Section 307 narrates publication of wind up resolution voluntarily through advertisement in the official gazette and in a newspaper. 

S.380 deals with documents that have to be delivered to the registrar by the foreign company and includes certified copies of the charter, memorandum, articles, etc. full address of the registered or the principal office, a list of directors and secretaries, name and address of one or more persons resident in India authorized to accept on behalf of company’s service, full address of the office of the company in India and related requirements. It shows that no foreign company in India is free from the disclosure norms imbibed in the Companies Act. 

Section 394 says the annual report of the government companies with respect to affairs of the company shall be filed within three months of annual general meetings and comments in this regard shall be given by the Audit General of India. It is mandatory that a copy of the report shall be available in the interest of the public.

The 2013 Act mandates the rotation of auditors every five years to prevent chances of insider trading and other manipulations in an audit.

This gives us a clear picture that the Companies Act 2013 has closed all the loopholes that 1956 had and through which the offenders escaped. The provisions of the Act and the machinery constituted were found to be appealing to the legislators, executives, judiciary, and the general public. The question is whether it is just appealing like a doll or like a powerful person to enforce all disciplines, maintain company etiquettes, regulate and sanction the wrongdoers. In order to answer this, we need to analyze the presence of scams in the post-enactment period. 

Any more scams?

There are many more scams clinched after the enactment of the companies Act. Since the list can turn to be a bundle, I will mention almost all the scams from 2014 to 2020 and some of the important scandals will be dealt with in detail. This is to analyze how far the Companies Act 2013 is effective in proceeding against the offenders and penalizing them.

In 2014, Aavin scam in Tamil Nadu, Smart city Kochi scam, Reliance Jio spectrum auction rigging scam, National Herald land scam, Indian Railways- RailTel Corporation of India mobile scam, HAL and Rolls-Royce defence scam of Rs.10,000 crores, Delhi Jal Board scam and Maharashtra money laundering case.

In 2015, Louis Berger Group bribery case, NSE co-location scam, Corporate Espionage by Reliance Industries, Gujarat fisheries case, Delhi power scam, etc.

In 2017, the major scams noted are the Noida Ponzi scheme, Maharashtra scholarship scam, and mining scam by Essar Group, Reliance Group, and Adani Group.

The year 2018 was filled by Rotomac bank fraud and Punjab National Bank scam, which made the depositors and public lose trust with all the banks.

2019 witnessed major scams in India, i.e. PMC Bank scam, DHFL scam, and UPPCL employee provident fund scandal, INX media case, and D.K. Shivakumar money laundering case.

Last but not the least, the first half of 2020 has already run through numerous banking scams.

This list of scams put forth healthy doubt with respect to the effectiveness of the Companies Act 2013. In order to clarify the doubts with respect to the effectiveness of the Act, we need to decode some important scams that came to the public domain in these years.

2013- Shardha Chit Funds Scam

The scam was under the title of Ponzi scheme in West Bengal supported by political patronage made millions of depositors to invest money with a promise to return unbelievably high returns. The defaults were caught by SEBI and RBI. It was identified that the amount involved in the scam is ranging from Rs. 2060- 2400 crores. Chairman and managing director of the Shardha Group were arrested and Enforcement Directorate and SFIO have been granted his custody for probing money laundering. Till now, 1000 depositors were indemnified.

2014- HAL and Rolls-Royce Defence Scam 

It was alleged that London Based Rolls-Royce has committed bribery of Rs.10,000 crores to HAL for the deal to supply of aircraft engines to HAL company owned by the state. The allegation had come through a complaint from the Defense Ministry to check the documents etc. The CBI inquiry had initiated on this behalf and for the time being, HAL is directed to hold all further deals in the future. Later, the Vigilance wing stated that Rolls-Royce had hired a third party for the deal. As the CBI probe heated the Britain Company Rolls-Royce wrote a representation to state-owned HAL that it has paid an amount of Rs. 18 crore to its agent Ashmore Pvt. Ltd as commission and is willing to return the amount to the Government.

2015- NSE Co-location Scam & Corporate Espionage by Reliance Industries

National Stock Exchange Co-location scam involved market manipulation by prior information regarding the market price. The NSE committed insider trading by rigging NSE’s Algo-trading and the use of co-location servers provided substantial profit to a particular category of brokers. P.Chidambaram, then the capital market secretary was accused of misusing his office for incurring huge benefits from the scam. The first complaint was received by the SEBI as whistleblower action. In the complaint, it was noted that the prior informers could capitalize on the advance knowledge with regard to price by colluding with some officials in NSE. The scam amount was estimated to be Rs.50,000 crores in five years.  CBI, SEBI, and the Income Tax Department are investigating this scam.

Shailesh Saxena from Reliance Industries Limited and Rishi Anand from Reliance Anil Dhirubhai Ambani Group paid Rs. 2.5 per month to two persons Lalta Prasad and Rakesh Kumar for stealing confidential documents from the Ministry of Petroleum and Natural Gas. The Delhi Police charged the case. It was admitted by Lalta and Rakesh that they were hired by the company to steal documents from the Ministry for their business gains. The documents stolen were not in the public domain and hence held to be confidential. Several sets of documents were seized from the houses of Saxena and Rishi. In furtherance, SEBI identified that with stolen information would enhance insider trading as well as prevention of fraudulent and unfair trade regulations. 

2017- Mining Scam by Essar Group, Reliance Group, and Adani Group

The scam came to the public domain through a Public Interest Litigation filed against Adani Group, Essar Group, Reliance Anil Dhirubhai Ambani Group, and other mining companies for over-invoicing of coal mined from Indonesia. The companies were accused of siphoning off excess funds into offshore accounts. The scam has an estimated involvement of Rs. 290 billion by 40 companies that were accused of the hiking price of Indonesian coal.  This was tricky for tax evasion by the companies. The case is still pending.

2018- Punjab National Bank Scam

The scam occurred at Brady House Punjab National Bank Branch in Mumbai; wherein fraudulent letter of an undertaking of a sum of Rs.11,356.84 crore to Nirav Modi. He along with all the partners of the company M/s. Diamond R US, M/s. Solar Exports and M/s. Stellar Diamonds conducted jewellery and designer business. He along with the family escaped to Britain and the Indian government has asked for extradition. ED has attached the assets of the offenders. The bank said its two employees were involved in the scam which transferred the amount to the overseas account of Allahabad Bank and Axis Bank. The CEO of former bank was arrested and bail was granted with surety of Rs.1 lakh by Special CBI court in Mumbai. The deputy manager of PNB was accused of holding two hundred percent more assets more than his known source of income. Based on requests from Indian agencies, trial for extradition has commenced by the UK court which is adjourned to September 2020.

2019- PMC Bank Scam 

Punjab and Maharashtra Co-operative Bank were established in 1984 with 137 branches located majority in Maharashtra and Punjab. In 2000, it was recognized as Scheduled Commercial Bank. The fraud starts with its activity of granting huge loans by its top management employees to Housing Development and Infrastructure Limited and its allied entities. It has further transferred 70% of its total credit facilities to HDIL and associate companies. The total estimated amount involved in the fraud was Rs.4,355 crores. In furtherance the bank allowed HDIL to operate password protected masked accounts. Finally, it was found that around 22,000 false accounts were opened to hide around 45 loans. ED has sealed assets worth 3,500 crores belonging to the CEO HDIL. The auditor could not detect or failed to report such activities in PMC in the past years. SEBI has recently issued a circular discouraging the auditor from resigning, rather than reporting lapses.

2020- YES BANK Scam

The commencement of crisis is from the act of granting huge loaning spree with advances. Since it was attractive, many borrowers started defaulting and banks NPA has piled up as an outcome. Due to the same, it could not make profits. This has further led to the shedding of share prices. It has also faced severe governance issues in the past year. RBI issued a reconstruction scheme where SBI invests capital to acquire a 49% stake. It will have a huge impact on customers whose salary is linked to this bank’s account. The bank was further placed under a 30-day moratorium and its board no more has any role as it is all controlled by the RBI. It was commented by several compliance experts that promoter-driven banks need special regulatory focus and corporate governance loopholes are to be fixed. 

2013 Act a repetition of the 1956 Act?

The motive of replacing the Companies Act 1956 by the Companies Act 2013 is to serve the best governance of corporations and maintenance of disciple through disclosure. Satyam scam to Sahara case was executed in the presence of the Companies Act 1956, which realized the lawmakers to the general public that there is no relevance and effect of a law to regulate companies in the land. Hence Companies Act 2013 was crafted by the legislators with wholehearted attention and care to ensure that the will not be any new array of Satyam to Sahara after the enactment of the Companies Act 2013. Comparing the lifespan of the 1956 Act, the 2013 Act has witnessed the most complicated and notorious scams ever involving multiple violations of laws especially the overseas concerns. The scams have presently showing drift towards the banking sector. Is it showing a loosely packed structure connecting banking companies statutes and of other companies? In several cases, it can be noted that the scam is happening within the circle of SEBI but the authority makes sure that it is always late to identify and proceed or wait for a whistle blow. 

Whether 2013 Act capable to mitigate future?

The future is in the hands of awaiting new normal in the Post COVID period. During the pandemic, the digitization of all sectors is pushed fast and easily. Nowadays all transactions, contracts, communications, meetings, etc. are done digitally which have multiple chances to be manipulated. There are more chances of being cheated and hence vigil mechanism shall be sharpened to resolve these obstacles. False identity and other offences mentioned under the Information Technology Act 2000 shall be correlated to corporate governance for minimum stress digitized corporate world. In fact Companies Act 2013 imbibes a lot of principles but the action is always delayed. It has already caused irreparable grievances to people belonging to all sectors. I strongly believe this is the right time to modify the system of executing and implementing the Companies Act 2013, so as to provide a healthy platform for all companies in the land, thereby boosting national development. Also, there is a need to think as to “whether we need alternate authority for SEBI or a much-specialized wing to handle issues pertaining at present and in future”.


This Article is written by Anu Bhuvanachandran and Dhanya C. Anu Bhuvanachandran is a Partner at Outsay Legal, New Delhi, Advocate, Supreme Court of India; BBA.LLB (HONS) and LLM (Corporate and Cyber Laws). Dhanya C is an Independent Practitioner, Karnataka High Court, Bangalore.


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