Bharat's CORPORATE FRAUDS And Their Regulation In India

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Bharat'sCORPORATEFRAUDSand theirRegulation in IndiaDr. Sanjeev GuptaM.Com., FCS, LL.B., Ph.D.BHARAT LAW HOUSE PVT. LTD.New Delhi2016

First Edition 2016 PUBLISHERSNO PART OF THIS BOOK MAY BE REPRODUCED IN ANY MANNERWHATSOEVER OR TRANSLATED IN ANY OTHER LANGUAGEWITHOUT PERMISSION IN WRITING OF THE PUBLISHERSWhile every effort has been taken to avoid errors, the author,publishers and their agents/dealers are not responsible for theconsequences of any action taken on the basis of this bookPRICE 650ISBN: 978-93-5139-363-4CPrinted in IndiaWITH THE BLESSINGS OF "MATA VAISHNO DEVI"Published by D.C. Puliani for Bharat Law House Pvt. Ltd.T-1/95, Mangolpuri Industrial Area, Phase-I, New Delhi-110 083.Printed at Shanti Enterprises, New Delhi(Phones 2791 0001-03)

Bharat?Bharat BharatBharatBharat BharatBharatBharat BharatBharatBharat BharatBharatBharat BharatBharatBharat BharatBharatBharat BharatBharatBharat BharatBharatBharat BharatBharatBharat BharatBharatBharat is a 'trade-name' for a group ofconcerns, popularly known as Bharat LawHouse and Bharat Law House Pvt. Ltd.Bharat is one of the most reputed publishersof law books with an experience of over fivedecades. We possess a very diverse range ofpublications covering not only the area oftaxation — direct and indirect — but alsocompany law, capital market, finance,industriallaw,foreignexchange,commercial, civil and criminal laws.Bharat's new and most ambitious venture ofpublishing the Budget Publications hasreceived an unprecedented success. Theyestablish new heights of accuracy,authenticity and excellence. The studentspublications for CA, CS, CMA, CFA, MBA,graduate and post-graduate studies havecarved out a niche for themselves. As such,we adequately serve the needs of studentsand the professionals.Bharat works hard to make things easy foryou. We want our passion for excellence totranslate in your satisfaction. Ours is aprofessionally qualified team-work withstrong in-house capabilities. Our strengthlies in the patronage of legal luminaries inevery field. We strive for accuracy,authenticity and sincerity. No wonder ourpublications adorn the bookshelves of thediscerning, judicious and the learned readers.Bharat invites you to be a member of itsfamily; share your thoughts and expertisewith the readers and 'live forever'.

Dedicatedto my revered father(Late) Shri Prem Chand Gupta

PREFACEFrauds have been rampant in the business world, and India has had itsshare of corporate frauds. The incidence of corporate frauds hassignificantly impacted the stakeholders’ confidence. The scope of a fraudis not limited to a monetary figure. At the same time, many largecorporations maintain consistently good record of ethical practices andcompliance with the law that contrast sharply with the behaviour of othercorporations. The reasons for these differences present several importantissues.Corporate frauds and abuse of position have been seen in various cases,like National Spot Exchange, Satyam, Ketan Parekh, C.R. Bhansali, UTI,Enron, WorldCom, and Tyco, which have cost the organisations crores ofrupees. The perpetrators of corporate fraud are apparently suave, softspoken, and well educated in the formal sense and these perpetrators aresocially respectable and economically sound having political influence.The losses in human terms are almost incalculable. Business firms face anumber of challenges – globalisation, rapidly-evolving technology, rapiddevelopment in business and industry, risk and complexity of data.Consequently, the risk faced by such organisations increases manifold andthere arises the need to effectively manage and mitigate the risk.The present book is intended to serve as a handbook to professionals,auditors, investors, directors, company executives, investigators andgovernment agencies whose job is to reduce losses and to regulateCorporate Frauds in India. It examines the nature and types of corporatefraud in India and further discusses about the relevant provisions ofdifferent legislations along with various regulating agencies working orset-up for curbing and reducing corporate frauds. Major cases of corporatefrauds in India and abroad are discussed in this book. The major causes ofcorporate frauds have also been addressed.The book has been organised into ten chapters. Chapter 1 is introductoryin nature and provides an understanding of corporate frauds, with somecases and characteristics of those who commit fraud. Chapter 2 describesthe types of corporate frauds and the modus operandi of committingvarious types of frauds. Chapter 3 gives an insight into major corporatefrauds in India and abroad and the features of corporate frauds. Chapter 4examines the relevant statutory provisions of major Indian legislations.Chapter 5 analyses the relevant provisions of various other enactments

10Prefacerelated to curbing or controlling corporate frauds. Chapter 6 describes themajor regulatory agencies under the Union Ministry of Corporate Affairs.Chapter 7 examines the working of regulatory agencies under otherministries. Chapter 8 deals with regulatory agencies set-up under an Act ofParliament. An overview on the Indian legal system is given in Chapter 9.Finally, Chapter 10 overviews on culmination, consequences and policyimplications of corporate frauds in India.I would feel amply rewarded if the book serves the purpose for which it iswritten and I would welcome suggestions for its improvement from anycorner.I am grateful to the Puliani brothers of M/s Bharat Law House Pvt. Ltd.for bringing out this publication in its present content and form.11th April, 2016New DelhiDr. SANJEEV GUPTA

ACKNOWLEDGMENTSI am deeply grateful to Prof. D.P.S. Verma, formerly at Delhi School ofEconomics, University of Delhi, for his support and encouragement. His supportand expert guidance have made all the difference in taking this work from scratchto finish.I owe Prof. Ajay K. Rajan, of the Institute of Management Studies and Research,MD University, Rohtak, under whose guidance and supervision I completed mydoctoral research on Corporate Frauds in India. I am thankful to him for hisguidance and constant encouragement during that work.I express my gratitude to Dr. Pankaj Kumar Gupta, Associate Professor at theCentre for Management Studies, Jamia Millia Islamia University, New Delhi,and Prof. R. K. Singh, at Delhi School of Economics, University of Delhi, fortheir valuable comments and suggestions.I record my sincere thanks to Dr. Sanjay Goyal and Shri Ashok Garg, CharteredAccountants, for clarifying the concepts of Financial Statements and their effecton the accounts and profitability of companies.I acknowledge the contribution of my clients, friends and my dedicated staff byway of help in bringing the work into existence. I would like to acknowledge thegenerosity of the company executives who provided me valuable information.My indebtedness to each of them is profound.I am also thankful to the librarians and the staff members of the Ratan TataLibrary, Delhi School of Economics; the Library of Law Faculty, University ofDelhi, the Central Reference Library, University of Delhi, and the UniversityLibrary, Maharshi Dayanad University, Rohtak.I owe a special word of indebtedness to my mother, Shrimati Krishna Gupta, whohas been an eternal source of inspiration and affection to me in all myendeavours. I must also thank my wife, Anubha, who has endured countlessweekends and without whom the book would not have seen the light of the day.My son Sarthak and daughter Ridima, deserve appreciation for their emotionalsupport and the odds faced by them during this period.I would also like to acknowledge the valuable support extended by Pulianis ofBharat Law House Pvt. Ltd. for bringing out this publication in accordance withtheir quality norms.Dr. SANJEEV GUPTA

LIST OF EEICEOWESOPFDIFEMAFERAAssociation of Certified Fraud ExaminersAmerican Institute of Certified Public AccountantsAll India ReporterBoard of Industrial and Financial ReconstructionBank ReceiptBombay Stock ExchangeChartered AccountantComptroller and Auditor - General of IndiaCompanies Auditor’s Report OrderCentral Bureau of InvestigationCentral Board of Direct TaxesCompetition Commission of IndiaCentral Economic Intelligence BureauChief Executive OfficerCentre for Economic Policy ResearchChief Financial OfficerChief Judicial MagistrateConfederation of Indian IndustryCompany Law BoardChief Metropolitan MagistrateConservation of Foreign Exchange and Prevention ofSmuggling Activities Act, 1974Company SecretaryCorporate Social ResponsibilityCentral Vigilance CommissionDepartment of Company AffairsDirectorate of EnforcementEconomic Intelligence CouncilEconomic Offences WingEmployee Stock Ownership PlanForeign Direct InvestmentForeign Exchange Management Act,1999Foreign Exchange Regulation Act,1973

CASMEsUSAUTIXBRLList of AbbreviationsGovernment of IndiaThe Institute of Chartered Accountants of IndiaThe Company's Internal Control Over Financial ReportingThe Institute of Company Secretaries of IndiaInternational Financial Reporting StandardsIndian Penal Code,1860Initial Public OfferInformation TechnologyInformation Technology Amendment ActKey Managerial PersonnelMerger and AmalgamationMinistry of Corporate AffairsManaging DirectorMisappropriation of AssetsNon-Banking Financial CompaniesNational Stock ExchangePrevention of Money Laundering Act, 2002Public Sector UndertakingsPrice Water-House CoopersReserve Bank of IndiaRegional DirectorRegistrar of CompaniesRanbir Penal CodeState Bank of IndiaSecurities Contracts (Regulations) Act,1956Supreme Court (of India)Securities and Exchange Board of IndiaStock Exchange Commission (USA)Serious Frauds Investigation OfficeSick Industrial Companies Act,1985Small and Medium EnterprisesUnited States of AmericaUnit Trust of IndiaExtensible Business Reporting Language

CONTENTS AT A GLANCEBharat?5Preface9Acknowledgments11List of Abbreviations13Detailed Contents17Table of Cases23Chapter 1Nature and Scope of Corporate FraudChapter 2Types of Corporate Frauds32Chapter 3Infamous Corporate Frauds in India and Abroad59Chapter 4Regulatory Measures for Curbing Corporate Frauds112Chapter 5Regulatory Measures for Curbing Corporate Frauds:Incidental Legislations216Regulatory AgenciesCorporate Affairs282Chapter 6Chapter 7underthe1MinistryofRegulatory Agencies under Union Ministry ofFinance and Other Ministries316Chapter 8Statutory Bodies under Parliament Enactment334Chapter 9Indian Legal System358Chapter 10Culmination, Consequences and Policy Implicationsof Corporate Frauds367Annotated Bibliography377Subject Index397

DETAILED CONTENTSBharat?5Preface9Acknowledgments11List of Abbreviations13Contents at a glance15Table of Cases23Chapter 1NATURE AND SCOPE OF CORPORATE FRAUD1.Fraud Taxonomy1.1 Fraud, Theft, and Embezzlement1.2 Fraud and Human Nature1.3 Skimming and Lapping1.4 Fraud defined as Deception1.5 Fraud as a Civil or Criminal Wrong1.6 Internal and External Fraud2. Ingredients of Fraud2.1 Motivation2.2 Opportunity2.3 Rationalisation3. Why is a fraud committed?4. Who commits a fraud?5. Corporate Fraud Defined5.1 Report of Law Commission5.2 Report of the Vivian Bose Commission6. Concept of Fraud under the Companies Act, 20136.1 Any act/Omission to act6.2 Fraudulent Concealment6.3 Abuse of position6.4 By any Person6.5 Intent6.6 Injury6.7 Wrongful Gain and Wrongful Loss7. Nature of Corporate Fraud8. Frauds for and against the Company9. Victims of Corporate Fraud10. 272831

18Detailed ContentsChapter 2TYPES OF CORPORATE FRAUDS1. and Corruption1.1 Modus operandi of Bribery and CorruptionMisappropriation of Assets2.1 Modus operandi of Misappropriation of AssetsFraud through Manipulation of Financial Statements3.1 Modus operandi of Manipulation in Financial StatementsProcedure-Related Fraud4.1 Modus operandi of Procedural LapsesCorporate Espionage5.1 Modus operandi of Corporate EspionageSummary3335374042455153555758Chapter 3INFAMOUS CORPORATE FRAUDSIN INDIA AND ABROAD1.2.Infamous Corporate Frauds in India1.1 The Harshad Mehta Case (1992)1.2 The C R Bhansali Case (1992-96)1.3 The Virendra Rastogi Case (1995-96)1.4 The Cobbler Case (1995)1.5 The JVG Case (1997)1.6 The Anubhav Plantation Case (1998)1.7 The Abdul Karim Telgi Case (2000)1.8 The UTI Case (2000)1.9 The Dinesh Dalmia Case (2001)1.10 The Ketan Parekh Case (2001)1.11 The Sanjay Agarwal Home Trade Case (2001)1.12 The IPO Demat Case (2005)1.13 The Satyam Case (2009)1.14 The Saradha Group-Chit Fund Case (2013)1.15 The National Spot Exchange Limited (NSEL) Case (2013)1.16 The Bank of Baroda Case (2015)1.17 The PACL Case (2015)Infamous Corporate Frauds Abroad2.1 The Enron Case (1985)2.2 The World Com Case (2002)2.3 The Tyco Case (2005)2.4 The Ponzi Scheme (Fort Lauderdale) Case (2009)2.5 The Mark Todd Case (2002-2005)2.6 The President of California Agribusiness Case (1999-2002)2.7 The Maximum Dynamics Case (2000-2005)2.8 The Corporate Funding Financial of America Case (2001)2.9 The Edward Ehee Case (2001-2006)2.10 The Fisher Sand & Gravel Co. Case 9697989899100100

Detailed Contents3.4.2.11 The Marian Gardens Tree Farm Case (2007)2.12 The Quality Trucking Case (2000-2002)2.13 The Philadelphia Academy Charter School Case (2009)2.14 The Rajat Gupta Case (2012)Features of Corporate Frauds in India3.1 Fraud Perpetrators3.2 Common types of Frauds3.3 Lack of Action against Perpetrators3.4 Accountability3.5 Unsufficient authorities3.6 Insufficient Powers with fraud regulating agencies3.7 Approach of the Adjudicating Agencies3.8 Time Taken in Disposal of Cases3.9 Weak anti-fraud 110110110110Chapter 4REGULATORY MEASURES FOR CURBINGCORPORATE FRAUDS1. of Corporate Frauds in IndiaRelevant Provisions of the Companies Act, 2013Relevant Provisions of the Securities and Exchange Board of India Act,1992Relevant Provision of the Securities and Exchange Board of India(Prohibition of Fraudulent and Unfair Trade Practices Relating to SecuritiesMarket) Regulations, 2003Relevant Provisions of the Benami Transaction (Prohibition) Act, 1988Relevant Provisions of the Money Laundering Act, 2002Relevant Provisions of the Conservation of Foreign Exchange andPrevention of Smuggling Activities Act, 1974Relevant Provisions of the Indian Penal Code, 1860Summary112114173190192194199207215Chapter 5REGULATORY MEASURES FOR CURBINGCORPORATE FRAUDS: INCIDENTAL LEGISLATIONS1. Provisions of the Reserve Bank of India Act, 1934Relevant Provisions of the Income Tax Act, 1961Relevant Provisions of the Foreign Exchange Management Act, 1999Relevant Provisions of the Indian Contract Act, 1872Relevant Provisions of the Competition Act, 2002Relevant Provisions of the Black Money (Undisclosed Foreign Income andAssets) and Imposition of Tax Act, 2015Relevant Provisions of the Information Technology Act, 2000Relevant Provisions of the Economic Offences (Inapplicability ofLimitation) Act, 1974Summary218232254264265270277280281

20Detailed ContentsChapter 6REGULATORY AGENCIES UNDER THEMINISTRY OF CORPORATE AFFAIRS1.2.Ministry of Corporate Affairs1.1 National Company Law Tribunal (NCLT) and National CompanyLaw Appellate Tribunal (NCLAT)1.2 Inspection and Investigation Authorities1.3 Serious Fraud Investigation Office (SFIO)1.4 Miscellaneous cells under the Ministry of Corporate AffairsSummary284285297303309315Chapter 7REGULATORY AGENCIES UNDER UNION MINISTRYOF FINANCE AND OTHER MINISTRIES1.2.3.Ministry of Finance1.1 Central Board of Direct Taxes (CBDT)1.2 Income Tax Department1.3 Directorate of Revenue Intelligence (DRI)1.4 Directorate of Enforcement (ED)Authorities under different ministries2.1 Central Bureau of Investigation (CBI)2.2 Central Economic Intelligence Bureau (CEIB)2.3 Economic Intelligence Council (EIC)2.4 Committee of Three-Top Investigative Agencies2.5 Financial Action Task Force (FATF)2.6 Central Vigilance Commission 3Chapter 8STATUTORY BODIES UNDERPARLIAMENT ENACTMENT1.2.3.Securities and Exchange Board of India (SEBI)1.1 Corporate Governance and Clause 49 of Listing Agreement1.2 Investigation by SEBI1.3 Powers of Investigating Authority1.4 Power of the Investigating Authority to be exercised with prior approval1.5 Investigations Conducted by the SEBI1.6 Cases Disposed of by SEBI1.7 Submission of report to the Board1.8 Regulatory Action Taken1.9 Enforcement by the Board1.10 Appeal to the Supreme Court of IndiaCompetition Commission of India (CCI)Reserve Bank of India (RBI)336337341342343343344350350350352352355

Detailed Contents4.5.Insurance Regulatory and Development Authority (IRDA)Summary21356356Chapter 9INDIAN LEGAL SYSTEM1.2.Judicial Authorities for Punishing Fraud Perpetrators1.1 The Supreme Court of India1.2 The High Courts1.3 The District Courts1.4 The Lok AdalatsSummary358361361362362366Chapter 10CULMINATION, CONSEQUENCES AND POLICYIMPLICATIONS OF CORPORATE FRAUDS1.2.3.Conceptual model for culmination of Corporate Fraud in IndiaConsequences of Corporate Fraud2.1 Consequences of Fraud on Company’s Stakeholders2.2 Consequences of Fraud for the Organisation2.3 Consequences of Fraud for the EconomyPolicy Implications3.1 Strengthening of the Internal Audit Department and AuditCommittees3.2 Implementation of Corporate Governance in Small and MediumEnterprises (SMEs)3.3 Adoption of International Financial Reporting Standards (IFRS)3.4 Conducting Due Diligence effectively by Banks and FinancialInstitutions3.5 Appointment of Independent Professionals by Shareholders andFixing of their Responsibility3.6 Setting up of Corporate Offence Wing with Criminal Powers3.7 Approval of Related-Party Transactions by Specific Committee3.8 Publication of Fraud Prevention Policy3.9 Recognition to Companies for Improved Corporate Governance3.10 Co-ordination among different Regulatory 376376376Annotated Bibliography377Subject Index397

House and Bharat Law House Pvt. Ltd. Bharatis one of the most reputed publishers of law books with an experience of over five decades. We possess a very diverse range of publications covering not only the area of taxation — direct and indirect — but also company law, capital market, finance, industrial law, foreign exchange, commercial, civil and criminal laws. Bharat'snew and most .