Serious Fraud Investigation Office – Keeping a close watch on frauds in India Inc

The Serious Fraud Investigation Office (‘SFIO’) is an organisation established under the aegis of the Ministry of Corporate Affairs (‘MCA’) – for investigation and prosecution of white-collar crimes. The SFIO was constituted in July 2003 following the recommendations of the Naresh Chandra Committee. In 2002, the Naresh Chandra Committee had recommended setting up a ‘Corporate Serious Fraud Office’, to uncover corporate fraud, and supervise prosecutions under various economic legislations.

The Naresh Chandra Committee had also suggested that the organisation responsible for detecting and investigating fraud should have legislative backing – along the lines of the Serious Fraud Office of the UK, which was established in 1988 under the UK Criminal Justice Act, 1987. Under the Companies Act, 1956 (‘1956 Act’), the SFIO operated without a statutory backing.

The SFIO was granted statutory force for the first time through the Companies Act, 2013 (‘2013 Act’). To combat the rising number of corporate fraud cases in India, the 2013 Act introduced Section 447, which, for the first time, provided a definition of fraud as well as punishment for such an offence. It seems that Satyam and a few other corporate scandals, which surfaced during the period when the 2013 Act was before the consideration of Parliament, were the primary cause for inclusion of this very widely worded definition of fraud – which is an amalgam of several sections of the Indian Penal Code (‘IPC’).

It was felt that the MCA should have the powers to investigate serious frauds without depending on police investigation under the IPC. Section 447 has been invoked in a few recent corporate scandals which are still at different stages of investigation. Given that it is a relatively new provision, there are no direct pronouncements on this Section so far either by the NCLT, the HC or the SC.

Keeping this context in mind, this blog examines certain aspects relating to the powers and functions of the SFIO, under Section 210 and 212 of the 2013 Act, and the important role assigned to it for investigation of ‘fraud’ as defined under Section 447.

SFIO under the 2013 Act

Although the SFIO did not have statutory backing under the 1956 Act, Section 235 of the 1956 Act allowed a member of a company to make an application for investigating the company’s affairs.  Section 210 of the 2013 Act broadly corresponds to Section 235 of the 1956 Act and allows for an investigation into the affairs of a company.

Section 210(1) states that where the Central Government is of the opinion that it is necessary to investigate into the affairs of a company — (a) on the receipt of a report of the Registrar or inspector under Section 208; (b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or (c) in public interest, it ‘may’ order an investigation into the affairs of the company. The use of the word ‘may’ indicates that the Central Government can exercise its discretion, and need not compulsorily order an investigation.

On the other hand, Section 210(2) is a mandatory provision which states that the Central Government ‘shall’ order an investigation into the affairs of that company – when an order to this effect is passed by a Court/ Tribunal.

“Opinion” of the Central Government

The procedure for investigation by the SFIO is laid down under Section 212. Section 212(1) provides that without prejudice to the provisions of Section 210, where the Central Government “is of the opinion” that it is necessary for the SFIO to investigate into the affairs of a company, as per the grounds provided under Section 212(1), the Central Government may, by order, assign the investigation of the said company to the SFIO. No other investigative agency can proceed with an investigation for any offence under the 2013 Act,  if a case has been ‘assigned’ by the Central Government to the SFIO.

Recently, the Madras High Court in the case of Church of South India v. Union of India[1] held that the words ‘is of the opinion’ under Section 212 imposes a jurisdictional duty on the Central Government to form an opinion on the necessity of an investigation by the SFIO.  Any order passed by the Central Government without forming an “opinion” under Section 212 shall lack merit.

Investigation Report and its evidentiary value

Under Section 212(3), where the investigation into the affairs of a company has been assigned by the Central Government to the SFIO, it shall conduct the investigation and submit its report within such period as may be specified in the Central Government order. However, there is no time limit prescribed under the 2013 Act for completion of investigation, and the submission of the investigation report by the SFIO. This raises an important question – will the mandate of the SFIO end if the investigation report is not submitted within the time-period specified in the Central Government order?

This question was answered by the Supreme Court (‘SC’) in the case of SFIO v. Rahul Modi[2]. The SC held that since Section 212 does not prescribe any specific time-period for submission of the investigation report, the mandate in favour of SFIO shall not come to an end once the time-period mentioned in the Central Government order has been exhausted. It was held that the time-period specified in the order is only directory, and not mandatory. The authority to investigate shall not end once the time-period specified by the Central Government has been extinguished.

Under the 2013 Act, the SFIO may submit an ‘interim’ report[3] if required or shall submit a report ‘on completion of the investigation’[4] to the Central Government. Section 212(14) states that on receipt of the investigation report, the Central Government may, after examination of the report, direct the SFIO to initiate prosecution against the company and its officers or employees.

But, Section 212(14) does not specify on receipt of ‘which report’ can the Central Government initiate prosecution. This question was answered by the Bombay High Court in the case of N. Sampath Ganesh v. Union of India[5], where it was held that the prosecution can be initiated on the basis of an interim report or an investigation report, as long as it is sufficient to support a charge.

The investigation report filed with the Special Court for framing of charges shall be deemed to be a report filed by a police officer under Section 173 of the CrPC (popularly called the ‘charge-sheet’)[6]. It is pertinent to note that in K. Veeraswami v. Union of India[7], the SC held that the final investigation report filed by an investigating officer under Section 173 of the CrPC is nothing more than an opinion of the investigating officer, and shall not constitute legal evidence.

Power to arrest and stringent bail conditions

Section 212(8) read with the Companies (Arrests in Connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 confers the SFIO with the power to arrest if it has a ‘reason to believe’ that any person has been guilty of any offence punishable under the sections referred to in Section 212(6). This ‘reason to believe’ should be recorded in writing by the investigating officer. Provisions in relation to arrest under the CrPC shall apply mutatis mutandis to arrests made by the SFIO.

Section 212(6) also lays down two pre-conditions for bail, for an offence under Section 447 of the 2013 Act. The two pre-conditions that shall have to be satisfied prior to the grant of bail are as follows –

(a) the Public Prosecutor has been given an opportunity to oppose the release of the accused, and where the Public Prosecutor opposes the application, and (b) the court is satisfied that there are reasonable grounds for believing that the accused is not guilty of such offence and that he is not likely to commit any offence while on bail.

These bail pre-conditions are in addition to the conditions prescribed under Sections 437 and 439 of the CrPC.

The two pre-conditions specified under Section 212(6) are identical to the bail pre-conditions prescribed under Section 45(1) of the Prevention of Money Laundering Act, 2002 (‘PMLA’). The twin bail pre-conditions prescribed under Section 45(1) of the PMLA was struck down by the SC in Nikesh Tarachand Shah v. Union of India[8] on the ground that they were an unreasonable infringement on the rights of the accused under Article 14 and 21 of the Constitution.

Despite the striking down of an identical provision, Section 212(6) is acting as an obstacle to the grant of bail, for offences under Section 447.  In SFIO v. Nitin Johari[9], the SC cancelled the bail granted by the Delhi High Court on the grounds that the twin pre-conditions prescribed under Section 212(6) and the general principles for grant of bail under Section 439 of the CrPC were not satisfied.

Currently, there are over 100 writ petitions pending before the Supreme Court, which have challenged the constitutional validity of Section 212(6).

Concluding Thoughts

In FY 2019-20, the SFIO had completed probes in 12 cases involving 361 companies. On the other hand, in FY 2018-19, it had completed probes in 12 cases involving only 83 companies. This comparison highlights that the SFIO is becoming more active towards its primary function of investigating corporate frauds. However, there continue to be a high number of pending litigations involving the SFIO – especially in situations where there has been a significant delay in completing the investigation and submitting the investigation report.

A former MCA Secretary had highlighted that since corporate frauds are very complex, the SFIO faces a challenge in recruiting personnel who have the competence to investigate complex frauds[10]. For effective enforcement of Section 212, there is an urgent need to scale up the resources and manpower available to the SFIO.

In the UK, the Serious Fraud Office collaborates with other agencies (such as the Financial Conduct Authority and the Economic Crime Directorate) for tackling corporate fraud. A similar model has been adopted by the SFIO in India – which works closely with the other law enforcement agencies such as the Economic Offences Wings of the State Police, the CBI, the Enforcement Directorate, Income Tax Department etc. for early detection and speedy investigation of corporate frauds.

[1] Writ Petition Nos.25236 and 25419 of 2018 & 32587 of 2019, High Court of Madras, Decided on February 01, 2021.

[2] (2019) 5 SCC 266.

[3] Section 212(11) of the Companies Act, 2013.

[4] Section 212(12) of the Companies Act, 2013.

[5] (2020) 222 CompCas 676 (Bom).

[6] Section 212(15) of the Companies Act, 2013.

[7] (1991) 3 SCC 655 Also refer: Satya Narain Musadi v. State of Bihar (1980) 3 SCC 152 and M.C. Mehta v. Union of India, (2007) 1 SCC 110.

[8] (2018) 11 SCC 1.

[9] (2019) 9 SCC 165.