Corporate Fraud is a major problem i.e. increasing both in its frequency and severity. The growing number of frauds undermines the integrity of financial reports, contributes to substantial economic losses, and eroded investors’ confidence regarding the usefulness and reliability of financial statements. Our country has witnessed several corporate frauds till now. To address these shortcomings and effectively deal with corporate fraud, the Companies Act, 2013 was enacted with certain new provisions and modified old provisions to deal with fraud. The provisions relating to Fraud are in force w.e.f. 12th September, 2013 and Fraud Reporting provisions are brought in force w.e.f. 1st April, 2014 under the Companies Act, 2013.

1. BY: P MANASA REDDY
BA LLB
University College of Law,
Osmania University
PREVENTION AND PUNISHMENT
OF CORPORATE FRAUD UNDER
THE COMPANIES ACT 2013

2. COMPANIES ACT, 2013
 The Companies Act, 2013
was enacted with certain
new provisions and modified
old provisions to deal with
fraud.
 The provisions relating to
Fraud are in force w.e.f. 12th
September, 2013
 Fraud Reporting provisions
are in force w.e.f. 1st April,
2014

3. DEFINITION OF FRAUD
 Companies Act, 2013 defined the term Fraud in
Section 447 which is as follows:
“Fraud” in relation to affairs of a company or any body
corporate, includes:
 Any act, omission, concealment of any fact or abuse of
position
 Committed by any person or any other person with the
connivance in any manner,
 With intent to deceive or to gain undue advantage
from or to injure the interests of
 The company or its shareholders or its creditors or any
other person,
 Whether or not there is any wrongful gain or wrongful
loss.

4.  Section 25 of the Indian Penal Code, 1860 defines
Fraudulently as:
“Fraudulently”.—A person is said to do a thing
fraudulently if he does that thing with intent to defraud
but not otherwise.

5.  Section 17 of the Indian Contract Act, 1872
defines Fraud as: ‘
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.

6. IS THERE ANYTHING DIFFERENT IN THE 2013 ACT
AS COMPARED TO THE 1956 ACT?
Definition of Fraud
 The Companies Act 1956 Act dealt with Fraud; but has
not defined Fraud
 The Companies Act, 2013 for the first time defined
fraud under Section 447
 The definition of fraud in 2013 Act uses the term
“Person” which gives it a very wide coverage

7.  Punishment for Fraud
Section 447 deals with the provisions
relating to Punishment for Fraud:
“Without prejudice to any liability including repayment of
any debt under this Act or any other law for the time
being in force, 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:
 Provided that where the fraud in question involves
public interest, the term of imprisonment shall not be
less than three years.”

8. The Companies Act, 1956 too has provisions relating to
fraud. It provides for punishment for frauds in various
sections.
For Example,
 When a person fraudulently induces others to
invest money in a Company, then imprisonment of 5
years or fine or both was prescribed. (Sec 68)
 If a person is found falsifying books during the
course of winding up then imprisonment of 7 years
was prescribed. (Section 539)
 Penalty for fraud by officers attracts imprisonment
of 2 years or fine or both. (Sec 540)
 Fraudulent conduct of business in the course of
winding up attracts an imprisonment of 2 years or fine
or both.(Sec 542)

9.  Punishment for fraud to
be in addition to any
other liability provided
“Without prejudice to any
liability including repayment
of any debt under this Act or
any other law for the time
being in force, any person
who is found to be guilty of
fraud…….”
 Offence of Fraud non-
compoundable

10. OFFENCES PUNISHABLE FOR FRAUD
Section Nature of Offence Person liable for Offence
Sec. 7(5);
7(6);
Furnishing false or incorrect information
or suppressing material facts during
incorporation
Promoters, first directors,
and persons giving
declaration
Sec.8 Fraudulently conducting affairs of
company having charitable objects
Directors and officers of the
company.
Sec. 34 Issuing prospectus containing untrue/
misleading information
Person authorising
someone to issue
prospectus
Sec. 36 Inducing others to invest money on the
basis of false, deceptive, misleading and
concealed information and to obtain credit
facilities from banks/financial institutions
on false grounds
Person inducing other
persons

11. Section Nature of Offence Person liable for Offence
Sec. 38 (1) Making applications in fictitious names or
multiple applications to acquire shares, or
inducing the company to allot or register
shares in fictitious names.
Person who makes the
application and who
induces the company.
Sec. 46 (5) Issuing of duplicate share certificates with
intent to defraud.
Officers in default.
Sec. 56 (7) Transferring/transmitting of shares by
depository with intent to defraud.
Depository/ depository
participant.
Sec. 66
(10)
Concealing the name of the creditor who-
(1) objects to the reduction of capital, or
(2) Who misrepresent the nature of debt
amount or claim of any creditor
Officers who conceal and
misrepresent.

12. Section Nature of Offence Person liable for Offence
Sec. 75 (1) Accepting deposits with intent to
defraud or for fraudulent purposes,
or failure to repay deposits/interest
within the specified time.
Every officer responsible for
acceptance of deposits.
Sec. 140
(5)
Auditors acting in a fraudulent
manner or found guilty of abetting
or colluding in any fraud by the
company or its directors or officers.
Auditor individually or firm
or partner/partners of the
audit firm jointly or
severally.
Sec. 206
(4)
Carrying on of business by company
for fraudulent or unlawful purpose.
Officers in default
Sec. 213 Forming of a company with
fraudulent/ unlawful purpose or
conducting business to defraud
members/creditors.
Officers in default and
persons concerned with the
formation of the
company/managing its
affairs.

13. Section Nature of Offence Person liable for Offence
Sec. 229 Furnishing false statement, or mutilating,
destroying, concealing, tampering with,
or removing any document relating to
company’s property, assets or affairs.
Persons who furnishes
false information or
mutilates, destroys,
conceals, tampers with, or
removes any document.
Sec. 251
(1)
Filing application for removal of name
(voluntarily striking off of the name) for
evading liabilities of the company or for
defrauding its creditors or any person(s).
Person in charge of
management of the
company.
Sec. 266
(1)
Misapplication of money or property
found guilty of any misfeasance in
relation to sick company.
Person found guilty of any
misfeasance.
Sec. 339
(3)
Carrying on the business with an
intention to defraud creditors/ other
persons.
Person who was
knowingly a party to the
carrying on the company’s
business.
Sec. 448 Furnishing of false statement, in any
return, report, certificate, financial
statement and prospectus, etc.
Persons making such false
statement

14. PROHIBITION OF INSIDER TRADING (SECTION 195):
Sec. 195 (1)(a) defines Insider
Trading
Insider trading means
a) an act of subscribing, buying,
selling, dealing or agreeing to
subscribe, buy, sell or deal in
any securities by any director
or key managerial personnel or
any other officer of a company
either as principal or agent if
such director or key managerial
personnel or any other officer
of the company is reasonably
expected to have access to any
non-public price sensitive
information in respect of
securities of company; or
b) an act of counseling about
procuring or communicating
directly or indirectly any non-
public price-sensitive
information to any person;

15.  Sections 12A of the SEBI
Act, 1992 prohibits insider
trading
 15G of SEBI Act provides
Penalty of not less than 10
lakh but may extent to 25
crore rupees or 3 times
the profit made;
whichever is higher
 SEBI (Prohibition of
Insider Trading)
Regulation, 2015 prohibits
an insider from profiting
while he is in the possession
of unpublished price sensitive
information

16. SERIOUS FRAUD INVESTIGATION
OFFICE (SEC.211)
 Probe agency under the Ministry
of Corporate Affairs
 Setup in 2003; attained statutory recognition only
under the Companies Act 2013
 No other investigating agency shall proceed with
investigation once the case has been assigned to SFIO.
 All agencies to provide information or documents
available with them to SFIO
 Shall submit report to the Central Government after
investigation.
 Have no power to take suo motu cognizance.

17. REPORTING OF FRAUD (SECTION 143)
 Section 143(12) to 143(14)
of the Act contains provisions
relating to reporting of fraud
which require the statutory
auditor, cost auditor and the
secretarial auditor to report
to the Central Government
about every fraud suspected
or committed against the
company by the officers or
employees of the Company.
 In the event of detection of
any fraud, they have to first
inform the Board of Directors
and then to the Central
Government.

18.  Punishment for
default by the
Professional
(Section 143(15))
“If any auditor, cost
accountant or company
secretary in practice do
not comply with the
provisions of sub-section
(12), he shall be
punishable with fine
which shall not be
less than one lakh
rupees but which may
extend to twenty-five
lakh rupees.”

19. FRAUD REPORTING PROCEDURE
 Rule 13 of the Companies (Audit and Auditors) Rules,
2014 contains the operational procedure for reporting of
fraud prescribed in Section 143(12) of the Act.
 The Companies (Audit
and Auditors)
Amendment Rules,
2015 has made
amendment to the
Companies (Audit and
Auditors) Rules, 2014
in respect of provisions
relating to reporting of
frauds by Auditors and
other matters.

20. CLASS ACTION SUIT AGAINST COMPANY (SEC. 245)
Members or depositors can claim damages or
compensation or demand any other suitable action from
or against:
 The company or its directors for any fraudulent,
unlawful or wrongful act or omission or conduct or any
likely act or omission or conduct on its or their part,
 The auditor including audit firm of the company for any
improper or misleading statement of particulars made
in his audit report or for any fraudulent, unlawful or
wrongful act or conduct or
 Any expert or advisory or consultant or any other
person for any incorrect or misleading statement made
by the company or for any fraudulent, unlawful or
wrongful act or conduct or any likely act or conduct on
his part.
 To be filed before the National Company Law Tribunal

21. OTHER ANTI-FRAUD LAWS
 SEBI Act, 1992
 SEBI (Prohibition of Insider Trading) Regulation, 2015
 SEBI(Prohibition of Fraudulent and Unfair Trade
Practices relating to Securities Market) Regulations,
2003
 Indian Contract Act, 1872
 Indian Penal Code, 1860
 Foreign Contribution (Regulation) Act, 2010
 Companies (Auditor’s Report) Order, 2003

22. MAJOR FRAUDS IN INDIA
 Mundra Scam
 Harshad Mehta Fraud
 Ketan Parekh Fraud
 Satyam Fraud
 Sahara India Pariwar
Investor Fraud
 Sharada Chit Fund
Fraud

23. IN RE. SATYAM COMPUTERS SERVICES LTD
& ORS 2014 SEBI
CBI HYD. VS. B. RAMALINGA RAJU & ORS
2015
 Satyam - Fourth largest Indian IT Company listed in
India & US.
 Established in mid 1980’s, grown to 53,000 employees
 Total amount of financial irregularities in the - Rs.7,855
Cr.
 Inflated cash & bank balances of Rs.5040 Cr.
 Accrued interest of 376 Cr.
 Understated liabilities of Rs.1,230 Cr.
 Overstated assets by Rs. 490 Cr.
 No. of ficticious invoices discovered – 7,500

24. SAHARA INDIA REAL ESTATE CORP. LTD. VS.
SEBI & ANR SC 2012
 Sahara Group Companies – Sahara India Real Estate
Corporation & Sahara Housing Investment Corporation
 Raised funds by issue of Optionally Fully Convertible
Debentures (OFCD) & calls it Private issue
 OFCD – Security within the meaning of Companies Act,
SEBI
 Raised capital from 6 million people without the
permission from SEBI
 Failed to return Rs. 24,000 Crore to investors as
directed by the Supreme Court
 Supreme Court ordered Sahara to return to investors
the full outstanding amount of Rs.20,000 Crore along
with 15% interest

25. SUBRATA CHATTORAJ VS. UNION OF INDIA
2014 SC
 Saradha Group - Consortium of 200 Pvt. Companies
 Running Collective Investment Scheme in the name of
chit fund
 Raised capital from more than 50 people without
issuing prospectus and without the permission from
SEBI
 Continued operations in spite of SEBI Orders & finally
collapsed in April, 2013
 Estimated loss of Rs.10000 Cr. to over 1.7 million
depositors
 Supreme Court Ordered CBI to conduct investigation
into the affairs of the Saradha Group

26. CONCLUSION
 The provisions of the Companies Act, 2013 would
bridge the gap between increasing corporate frauds and
statutory regime
 The problem in India lies in the enforcement machinery
of any law
 Corporate Governance should be strengthened
 Mundhra Fraud – Transparent and speedy justice was
rendered

27. THANK YOU