Fraud is a deception deliberately practiced in order to secure unfair or unlawful gain. As a legal construct, fraud is both a civil wrong (i.e., a fraud victim may sue the fraud perpetrator to avoid the fraud and/or recover monetary compensation) and a criminal wrong (i.e., a fraud perpetrator may be prosecuted and imprisoned by governmental authorities). Fraud has become a big topic of discussion with the coming of the new Companies Act '13. It is now vital that the companies understand the need for fraud mitigation. This presentation provides a brief idea as to what the new provisions with regard to fraud are and what are the penalties applicable in case such a fraud is detected. Hence fraud management should be put under a zero tolerance banner by the top management of any company.

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BlueLotus Strategy Consulting ©
FRAUD
CURBING ECONOMIC CRIMES AS PER
NEW COMPANIES ACT , 2013

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Section 447- FRAUD
Wrongful gain
“Gain by unlawful means to
which gainer is not entitled”
Wrongful loss
“Loss by unlawful means to
which loser is legally entitled”
Any act/omission/concealment of
any fact or
Abuse of position
Committed by any person or
other person with connivance
with intent to
• Deceive/gain undue advantage
• Injure interest of
• Company
• Shareholders
• Creditors
• Third party
Whether or not there is wrongful gain
or loss

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Section 448- PUNISHMENT FOR FRAUD
PROTECTING PUBLIC INTEREST
“If the fraud involves public interest
the penalty shall not be less than
3 years of imprisonment”
Statutory body for reporting Fraud:
Serious Fraud Investigation Office
Criminal Liability- Imprisonment
Minimum- 6 months
Maximum- 10 years
and
Civil Liability- Fine
Minimum- Amount of Fraud
Maximum- 3 times of amount
involved in Fraud
It should be noted herewith that
penalty is non compoundable

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OBJECTIVE BEHIND INTRODUCTION OF FRAUD
To curb the following:
Corrupt Practices
Deceit
Conflicts of Interest
Bribery

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ACTS AMOUNTING TO FRAUD
Incorporation of Company with charitable
object- Section 8(11)
If affairs of the company are
conducted fraudulently
Every officer in default is liable
Incorporation of Company –Section 7(5) &
(6)
At the time of incorporation
Furnishing false or incorrect
information
After the incorporation
Any false statement is
submitted by promoters/first
directors/person making
declaration, comes into
notice
Every person making such
declaration is liable

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ACTS AMOUNTING TO FRAUD
For fraudulently inducing any person to
invest money- Section 36
If any person is making statement
or promise to another person to
induce him into an agreement for:
Underwriting of securities
Earning profits by fluctuation
of value of securities
Obtaining credit facility from
bank or public financial
institution
Such person is liable for the
penal actions under section
448
Misrepresentation in prospectus- Section
34
If prospectus carrying any untrue
or misleading statement or
context
Every person who is authorized
for issue of prospectus
Exception
If the officer in default proves
that such statement or
omission was immaterial

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ACTS AMOUNTING TO FRAUD
Issue of Certificate of shares- Section 46(5)
Issue of duplicate shares by
company with intent to
Defraud
Deceive
Every officer of the company
who is in default is liable
For Personation for acquisition of
securities- Section 38(1)
The person shall be liable for:
Making an application in
fictitious name for acquisition
of securities
Making multiple application
in different fictitious names for
acquisition of securities
Induce a company to allot or
transfer securities in the name
of other person which is
fictitious

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ACTS AMOUNTING TO FRAUD
Reduction of Share Capital- Section 66(10)
Knowingly concealment of name
of any creditor
Knowingly misrepresent the
amount of claim of any creditor
Every officer of the company who is
in default shall be liable under
fraud
Transfer and Transmission of Securities-
Section 56(7)
If Depositor and Depository
Participants transfer any shares
with intent to
Defraud
Deceive any person
Every such Depository and
Depository Participant is liable
under fraud

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ACTS AMOUNTING TO FRAUD
Furnishing of false statement, multilation,
destruction of documents-Section 229
Furnishing any false statement
Destruction/tempering of any
document
Concealment of any facts
During investigation proceedings
Every officer of the company
who is in default shall be
liable under fraud
Repayments of Deposits- Section 75(1)
Company fails to repay deposit
and interest thereon within
specified time period
Deposits had been accepted with
intent to defraud depositor
Every officer in default is liable
without any limitation of
liability as prescribed under
section 448

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ACTS AMOUNTING TO FRAUD
Removal, Resignation and Furnishing
special notice to Auditors- Section
140(5)
Tribunal either suo moto or an
application by central
government or any other person,
satisfied that the auditor has
acted fraudulently, it can direct
the company to change its
auditors
Tribunal can pass the order for
change of auditor within 15days of
receipt of such application
Auditor against whom final order
has been passed shall not be
eligible for appointment as an
auditor in any company for a
period of 5 years from the date of
order and liable under section 447.
Investigation into company’s affairs
Section 213 (provisio)
if after investigation it has been
proved that
Business is being conducted to
defraud its creditors, members or
any other person
Any person concerned in
formation of company or
management of its affairs have
been guilty of any fraud
Every officer in default and
persons concerned for
incorporation or
management of affairs is
liable

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On the basis of this we can say that there is a need
•educate and train independent directors and audit
committees
•set up robust internal controls to identify, prevent and
report fraud
•use of information technology for monitoring
•use of internal audit to strengthen internal control
systems
•Specifying strong code of conduct and ethics policies for
all KMP and employees

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