Corporate Fraud under the Companies Act 2013
Corporate fraud consists of illegal, deceptive actions committed either by a
company or an individual through highly qualified accounting techniques which is
used to inflate a company's apparent profits and may take years to detect. In
addition these paper attempts to identify the cause and effects of fraud on the
stakeholder of the business. This Article gives us the idea about the financial
scams and development of judiciary on day to day basis.
The Companies Act 2013 deals with provisions relating to Corporate fraud.
According to section 447 of the Companies Act, 2013 any person who is found
guilty of fraud shall be punishable with imprisonment of 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 the three times the amount involved in the fraud.
Corporate fraud means illegal practices undertaken by a corporate or an
individual person to make a tremendous profit and to have an edge over another.
Corporate Fraud results in huge losses of public funds which they have entrusted
to the company for better functioning.
There are various types of Corporate Fraud:
- Financial Misappropriation:
Misappropriation of payments, Fudging the books of Account, misleading the
investors to invest by rapidly increasing the share price.
- Misappropriation of Assets:
Embezzling receipts, stealing physical assets, intellectual property rights,
Dummy payments using an entity assets for personal use.
Making or receiving improper payments, offering bribes to public officials
or private officials, Abetting, taking political support to commit fraud.
- Haridas Mundhra Scam 1957:
The story starts near about 1930s when a person is born in the small
businessman house named Haridas Mundhra. The beginning of his profession
started very well as he used to sell bulbs. Afterwards, he was addicted to
money and his passion to earn money was always high which kept him
attractive, he reached Mumbai around the 1950s. He reached Dalal Street
where he sees how people with some thousands/lakhs make crores and therefore
he started working himself as a jobber & rigger.
While doing his work so well he started shares rigging. Haridas Mundhra was
not only manipulating shares but also floating false shares. In 1957 Haridas
earned 4 crore rupees. Later on he got six hot shares, some of the are-
Angelo brothers and British India Corporation. After that he realised that
if he wants to progress in India and he requires a political support. He
knew that to maintain sentiments he has to bring huge investments and there
is no one better than institutional investors other than LIC to do so. He
took the help of politics and pressurised LIC to buy these five to six
The question was raised in the Rai Bareilly seat sitting in Parliament that
why would someone invest in sinking company? There was lot of ruckus that
time. But on 16th December 1957 Firoz Gandhi as per his investigative
journalism proved by the confidential documents that T.T krishnamachari
(Finance Minister) was involved in this. Haridas Mundhra was sentenced to 22
years of imprisonment and finance minister was told to resigned. The result
of this scam was Around 55 lakhs investors who invested in LIC lost their
- Satyam Scam:
In 1987 with the group of ten engineers he formed Satyam Computers. In 1988
he incorporated Maytas Infrastructure where he got more than 150-180
clients. The moment Y2K name and fame started fading, Ramalinga Raju
realized that money will not come like this. The listing was done in 2001.
Ramalinga Raju incorporated 340 small companies with CA.
They used to circulate money through this and buy property of Maytas and
they also created many fake accounts for circulation . The problem came from
the Lehman Brothers Crisis in 2008 of United States. Due to this there was
depression in real estates and it spread globally. The lands they were
buying at 30k per square foot have dropped to half the price. In Satyam the
entire MIS (Management Information System ) was fudged as it was made
entirely by Raju.
Infrastructure Companies was in depression. Ramalinga planned Satyam to
overtake Maytas Infra and constructions. He thought that if he do so than it
will fill the gap. The compliance of the shareholders permission was not
made which made shareholders very disturbing and they denied the overtake.
He tried every aspect possible to overcome such harm but there was no way
out left so finally he decided to write a letter and confess about the scam.
The current position of Satyam Computers is it is merged with Tech Mahindra.
- Ketan Parekh Scam:
Ketan Parekh was a CA and he started working with Harshad Mehta. Ketan was a
big player in ITC. Now around 1998, Ketan starts thinking and decided to get
involved in one or more counters and decided to manipulate it i.e ACC
Cement. Due to nuclear tests of Pokhran and trades from the USSR also
started giving him negative vibes.
The biggest comeback of Ketan after this was that he was trying to bring
excitement in the market with the help of multiple brokers and now some of
the favourite stocks were Zee, HFCL, DSQ Software, Kadila Healthcare, ESSEL,
Korpan, Nirma. Now the question arises why Ketan wanted to enter into
IT/Telecom Companies and the secret behind this is one of the report of 1995
from foreign media "The Age of Internet" where it was seen that
Internet is going to be everything and that's why commotion is started.
Ketan picks up a stock in January whose volume was 1000 shares traded per
day and in the same year in the month of May the same stock 10-15Lakhs
shares were started traded per day .HFCL which was loss making company
quoting 700. F-Tech moved from 45 to 2100, Ranbaxy moved from 270 to 1000
and the similar pack was known as K-10 stocks. Ketan Parekh purchased some
shares of Madhavpura Mercantile Cooperative Bank to sway the bank loans
decision in his favour . MMCB issued pay orders for 137 crores for Ketan
Companies, MMCB was unable to clear the payments because it lacked adequate
RBI marked MMCB as defaulter. Ketan Parekh with his dump and pump strategy
was to inflate stock value.He invested In K-10 stocks by acquiring 20-30% of
the Company stock which was well known in the stock market and inflated the
price of the share leading to attract the institutional investors to invest
- Vimla vs State of NCT, Delhi:
The Supreme Court held that that the idea of deceit is a necessary
ingredient of fraud,but it did not exhaust it . The expression " defraud '
involves two elements ,namely deceit and injury to the person deceived .
Injury is something other than economic loss that is deprivation of
property, whether movable or immovable or of money and it will include any
harm whatever caused to any person in body, mind, reputation or such others.
A benefit or advantage to the deceiver will almost cause a loss or detriment
the deceived . Even in those rare cases when there is benefit or advantage
to the deceived but no corresponding loss to the deceived, the second
condition is satisfied.
- Vikas Agarwal vs Serious Fraud Investigation Office:
The petitioner was summoned for the charge of criminal conspiracy and
Section 447 of the Companies Act 2013. It was alleged that mining activity
carried on by firm was illegal. An unsecured loan was also advanced to it by
trust. The Supreme Court in this case observed that definition of fraud
provided in the explaination section 447 of the Companies Act 2013 makes it
clear that the instance and also to other persons who have in any manner in
commission of the offence to gain undue advantage.
- Devas Multimedia Pvt Ltd vs Antrix Corporations Ltd:
The Supreme Court upheld the orders of National Company Law Appellate
Tribunal and held that allowing Devas and its shareholders to reap the
benefits of their fraudulent action , may nevertheless send wrong message
namely that by adopting fraudulent means and bringing into india an
investment in a sum of INR 579 crores, the investors can hope to get tens of
thousands of crore of rupees even after shiponing of 448 crores.
Corporate frauds and scams greatly erode corporate wealth. Corporate India as a
whole has a vested interest in preventing and minimising corporate frauds and
scams. Independent directors on audit committees provide one of the best ways of
reinforcing internal audit and annual statutory audit. Their independence must
be strengthened. With respect to incentives, in end executive compensation is
about ethics and can only be sparingly controlled.
The solutions to corporate fraud must be comprehensive and all encompassing. As
far my opinion there must me more stringent laws under SEBI PMLA, COMPANIES ACT
2013 so that nobody can even think to do that. The Companies Act 2013 should
contain more of punishment based sections so that people will refrain from doing
any such financial frauds.
Written By: Shubham Agarwal,
- Aron Almeida,Satyam Scam- The story of India biggest Corporate
fraud"(2022)Trade Brains Satyam Scam - The Story of India's Biggest
Corporate Fraud! (tradebrains.in)
- Ashok k.Singh, "LIC-Mundhra Scam: Independent India first Mega Financial
Scandal"(2021) Live History India LIC-Mundhra Scam: Independent India's
First Mega Financial Scandal (livehistoryindia.com)
- Tarini Kalra, "Ketan Parekh Scam" (2022) ipleaders Ketan Parekh scam -
iPleader Ketan Parekh scam - iPleaders Ketan Parekh scam - iPleaders
- Dr. Vimla vs Delhi Administration AIR 1963 SC (2) 585
- Vikas Agarwal vs Serious Fraud Investigation Office 2019 DC
- Devas Multimedia Pvt Ltd vs Antrix Corporation Ltd & Anr 5906 of 2021
- Sakshi Sharda, Corporate Frauds: A Comprehensive Study (2020) Corpbiz
Corporate Frauds: A Comprehensive Study - Corpbiz
St. Xaviers University Kolkata