By Harshita Goel
The term “corporate crime” is one which may be defined and would have been interpreted by several jurists.
To understand the types and what all acts constitute corporate crimes, it is important to understand the meaning of corporate crimes. Corporate crimes consist of two words – corporate and crime.
The term ‘corporate’ means any corporation or any organisation. The term ‘crime’ refers to ‘any act which has been committed is against the law and is punishable under the law’.
Therefore, any act which has been committed in an organisation or by an organisation or for an organisation, which is punishable under the eyes of law, are known as corporate crimes.
Corporate crimes are also known as organisational or occupational crimes in White Collar crimes. Corporation or Organisation plays a major role in any economy, which works for the betterment and development of society and hence, it difficult to understand the nature of crime which could have been committed in such a nature.
But the major issue which pertains is not only with regard to understanding the crime committed by the corporation, but also in case the crime has been proved, the liability of the crime.
A company or a corporation has its own legal entity as per The Companies Act, 2013, but in case of an offence being committed, cannot be put behind the bars, rather can be made to pay fines for the commission of crime.
But, is it actually the company who commits crime or is it the functionaries in the company who do so? In Companies Act, 2013, the illegal act which is committed by the directors or any other member of the company.
Corporate crimes are an issue which is having a wider compass including corporate frauds as a major aspect into its ambit. Corporate frauds are types of crimes which are punishable under the Companies Act 2013.
The crime of corporate fraud can be committed in way of financial frauds or misappropriation of assets or by the way of corruption. It is these corporate frauds which are considered to be mother of financial scam.
There are several legislations which deal with the corporate crimes, which may include Indian Contract Act, Indian Penal Code, Prevention of Corruption Act, Prevention of Money Laundering Act, The companies Act, Clause 49 of Listing Agreement, Securities and Exchange Board of India Act, CARO Act, Essential Commodities act and even Information Technologies Act.
In this article the corporate crime would be studied with special reference to the provisions of Companies Act, dealing with the different types of crime of corporate crime and punishments with respect to such corporate crimes.
Corporate Fraud under Companies Act, 2013
Under the Companies Act, 2013, there are several sections which define with the fraud which may be committed by the members of the company. Some of these provisions may include:
Section 7(5) of the Companies Act, 2013
This provision of the Companies Act, 2013 imposes the act of furnishing false and incorrect information during the registration of the company, which may include concealment of facts. The act punishable under this section cane be well understood from the case of Satyam scam (2009).
The case of Satyam scam is considered to be one of the biggest scams, in the history of India which shattered the investors in the share market.
In the following case the Chairman of the Satyam, Ramalinga Raju, manipulated the financial statements of the books of the account of the company and overstated the assets of the company, presented a fake balance in the account of the company and even understated the liabilities of the company.
This was not all. There were manipulations made to the revenues and net profit figures of the company. It generally started with a small amount, however, increased to large amount gradually.
After this scam disclosed, the stock market of Satyam, crashed immediately with the price of its share falling from Rs 300 to Rs 6.30. It further led the shareholders to suffer huge losses.
It not only made a large number of employees to lose their jobs, but also made the GDP of the country to fall dramatically. The Chairman and 6 other members of the company were held liable and punished with the imprisonment of 6 months.
Section 7(6) of the Companies Act, 2013
The following provision provides with incorporation of a company by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration at the time of incorporation of the company.
It further includes the fraudulent acts of promoters or the persons, acting as first directors of the company.
Section 34 of the Companies Act, 2013
The provision of S. 34 deals with the criminal liability for mis-statements in prospectus. It provides that in case where the prospectus is issued, circulated or distributed and there is any statement which is included in the prospectus and is untrue or misleading by the way of inclusion or omission of any such matter which is likely to mislead the people and the other authorities. The landmark case under this provision was of Sahara vs. SEBI.
The following case was related to the issue of misleading information and clause in the prospectus of the company.
In this case Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) floated an issue of option of fully convertible debenture (OFCD’s) to more than million investors and termed their issued debenture as private placement, with a defence that the company did not intend to get their OFCD’s listed because the security which have been issued is a Hybrid Security. There was a large amount of money which was collected from the investors.
The Supreme Court in this case gave a landmark judgement in the following case wherein, it directed both SIRECL and SHICL were held liable for fraud and were made to refund Rs. 17,400 crores to their investors within 3 months.
It further provided the Securities Exchange Board of India (SEBI) with the power to invest listed and unlisted companies functioning regarding the issue of securities in order to secure the interest of investors.
Section 36 of the Companies Act, 2013
The following provision imposes the civil liability for the mis-statements in the prospectus. It provides that in the case of inclusion or omission of any matter in the prospectus, which is misleading and causes loss or damage to the subscribers of such prospectus, the directors, promoters, experts or any other person authorised in this behalf shall be liable to pay compensation for the loss suffered by the parties.
This provision can be well understood from the case of Sahara vs SEBI, wherein the Sahara Group was made to pay compensation to the investors of the loss suffered by them.
Section 38 of the Companies Act, 2013
The following provision provides with the punishment for personation for acquisition, etc of securities, wherein it provides that if there is making or abetting to make any application in fictious name for the purpose of acquiring or subscribing to the shares and securities of a company, such an act would also amount to corporate fraud, and would be considered punishable under section 447 of the Companies Act, 2013.
Section 46(5) of the Companies Act, 2013
The following provision under Certificate of shares, provides with the issue of duplicate certificate of shares, as a punishable offence. It further provides that any such person issuing such certificates shall be liable to pay the fine, five times more than the value of the shares involved in the duplicate certificate.
It further provides that the amount of fine of such certificate shall also increase to ten times the value of the shares or ten crores of rupees, which shall further be liable under section 447 of the Companies Act, 2013.
Section 140(5) of the Companies Act, 2013
The following provision deals with fraudulent act on the part of the auditors. It provides that in case there is any fraudulent practice o the part of the auditors, if the Central Government is satisfied of such act, shall order the removal of such auditors and appointment of new auditors in the place of such auditors.
Further, it prohibits the appointment of such auditors for a period of five years, with further being liable for action under section 447 of the Companies Act.
Section 66(10) of the Companies Act, 2013
The following provision of reduction in share capital provides that in case of concealment, misrepresentation of the financial statements being made knowingly or abets to make such concealment knowingly shall be liable to action under section 447 of the Companies Act.
Section 447 of the Companies Act, 2013
The following provision deals with the punishment for fraud and provides that any person guilty of commission of corporate fraud shall be liable for imprisonment for not less than six months but which may extend to ten years and shall also be liable for fine which shall not be less than the amount of fraud but may extend to three times the amount of fraud.
There are several cases in corporate fraud wherein the parties involved in such fraud have been imprisoned or fined.
In the case of Harshad Mehta scam (1992), Harshad Mehta was a broker who would secretly embezzle huge sums of money from the government securities market for a short duration.
He would then invest this money in a few selected securities and drive their prices insanely high. When people would get excited about a particular security, Harshad Mehta would slowly liquidate his holdings, pay off the embezzled money and pocket the huge difference caused by rising prices.
The scale at which Harshad Mehta was doing this was unimaginable. In one year, he had driven the Sensex i.e. the index of the Bombay Stock Exchange from 1000 to 4500! It was an unprecedented bull run, never seen in the history of a conservative Indian market.
Also, there was a time lag in the disbursement of money and depositing of collateral. Hence, for this short time duration, the money was essentially an unsecured loan to the broker and could be used to rig the markets. After, the scam was broke out the valuations in the Bombay Stock Exchange collapsed.
The mega growth that had been witnessed by the exchange in one year came crashing down in a matter of days. People lost their life savings in the scam. Some investors were heavily leveraged and as a result committed suicide as a result of the fallout.
A CBI investigation was undertaken in this case and the committee found that Harshad Mehta was directly responsible for embezzling worth Rs 1439 crores ($3 billion) and causing a scam that led to the loss of wealth to the tune of Rs 3542 crores ($7 billion).
Similar was the case of Ketan Parekh Scam, wherein Ketan Parekh who was a Chartered Accountant by professional training was looking out for stocks which had a low market capitalization and low liquidity. He would then pump money into these shares and start fictitious trading within his own network of companies.
The average person on the bourses may begin to believe that his stocks were rising and they too would start investing driving the prices even higher. Then, as the market took over Ketan Parekh would liquidate his holdings slowly, once again making less noise than his mentor Harshad Mehta would have done.
Ketan Parekh used this modus operandi repeatedly for 10 stocks which he had picked. These stocks came to be known as the K-10 stocks and the market always seemed to be bullish about the future of these stocks.
The major issue in the case of Ketan Parekh was two folded, firstly, he had been accepting money from the promoters of many companies to take their share prices up which could be seen as insider trading and by itself was enough to get Ketan Parekh into severe trouble and secondly, Ketan Parekh had embezzled large amounts of cash from the Madhavapura Mercantile Commercial Bank (MMCB).
He was believed to have bribed the officials of the said bank to persuade them to lend against shares to a greater extent than was permitted by law. At first, the bank crossed its prescribed limits to lend against market securities as it extended credit to Ketan Parekh.
Then, the bank basically started making unsecured loans to him. The loans would be sanctioned first and the collateral would be collected a few days later making the loans unsecured for the interim duration. After the scam broke out Ketan Parekh was immediately arrested and tried in court.
He has been prohibited from trading in the Bombay Stock Exchange for 15 years i.e. till 2017. Also, he had been sentenced to one-year rigorous imprisonment for his economic crimes.
Section 448 of the Companies Act, 2013
The following provision provides with the act of the person who has made a statement of false material particulars, knowing it to be false or who omits any material fact, knowing it to be material, as punishable under the ambit of the following section.
Section 449 of the Companies Act, 2013
The following provision provides with the act of providing the false evidence upon examination on oath or in any affidavit, deposition or solemn affirmation, as a punishable with imprisonment with a period of three years, subject to extension to seven years and or fine which may extend to ten lakh rupees.
Sunil Mittal vs CBI (2015)
In the present case, however, this principle is applied in an exactly reverse scenario. Here, company is the accused person and the learned Special Magistrate has observed in the impugned order that since the appellants represent the directing mind and will of each company, their state of mind is the state of mind of the company and, therefore, on this premise, acts of the company is attributed and imputed to the appellants.
It is difficult to accept it as the correct principle of law. As demonstrated hereinafter, this proposition would run contrary to the principle of vicarious liability detailing the circumstances under which a direction of a company can be held liable.
The court observed that the directors could be prosecuted for an offence committed by the company only in the following two circumstances.
There should either be active involvement and sufficient evidence to adduce the criminal intent of that person, or the legislation should itself impose the liability on the director or person in charge of the affairs of the company.
The court noted that there is no such evidence so as to draw an inference that the directors had a criminal intent. Also, there is no statutory provision to the effect where the vicarious liability of the director is discussed in context of the offences committed by the company.
Thus, it said that mens rea is attributed to the company on the principle of alter ego and it does not apply in reverse where vicarious liability is imputed on the persons dealing with the business of the company.
The SC has referred the decision of Tesco Ltd. in many cases and has very clearly laid down that the vicarious liability under strict liability statutes can be attributed to the person who is actually in charge of the company.
Hence, clarifying the principle of attribution in cases of vicarious liability where they form part of specific offences in the statutes governing strict liability offences.
But this case in general fails to talk about the vicarious liability aspect when it is not clubbed with strict liability offences
Shiv Kumar Jatia vs. State NCT of Delhi (2019)
In the following case the Court observed that principally the allegations were made only against the company and other staff members who were in charge of day to day affairs of the company.
So far as the managing director, the allegations were that he was attending all the meetings of the company and various decisions were being taken under his signatures.
This, the Court held was clearly a vague allegation and does not establish any link between the managing director and the act/omission alleged.
It further held that though there are allegations of negligence on part of hotel and its officers who were in charge of day to day affairs of the hotel, so far as managing director was concerned, no allegation was made directly attributing the negligence with the criminal intent.
Hence, the Court quashed the proceedings so far as the managing director was concerned.
Standard Chartered Bank vs. Directorate of Enforcement
In the following case the court held that that a company can be prosecuted and convicted for an offence which requires a minimum sentence of imprisonment.
However, the constitution bench categorically clarified that it is not expressing any opinion on the question whether a corporation could be attributed with requisite mens rea to prove the guilt.
Iridium India Telecom vs. Motorola Incorporated and Others
In the following case, the court laid down that the criminal intent of the “alter ego” of the company, that is the personal group of persons that guide the business of the company, would be imputed to the company.
Sheoratan Agarwal vs. State of Madhya Pradesh
In the following the Supreme court observed that, “the company alone or the person-in charge of and responsible for the conduct of the business of the company alone, may be prosecuted for the acts of the company as there is no statutory requirement that such person cannot be prosecuted unless the company is also arraigned as an accused alongside him”.
With the advent of urbanisation and modernisation, there is an emergence of white-collar crimes, which was developed as a concept by Edwin Sutherland.
It provides with the crime being committed by the people of high social status in or for or by the organisation. These types of crimes are generally of a nature which are undetectable as they are committed by the people of high status in manner which is unknown to the general public.
Corporate crime is a kind of White-collar crime which is conducted by the corporation or organisation. It has been dealt under several legislations, however, with the specific study to Companies Act, 2013 provides that it is study the corporate crime with the view of company and its directors and members and several functions with respect to the company.
There have been several cases which provide the effectiveness of the provisions of Company Law with respect to the corporate crime.