FRAUD FRAUD REPORTING SFIO COMPOUNDING GP Madaan CoFounder

FRAUD, FRAUD REPORTING, SFIO, COMPOUNDING GP Madaan Co-Founder & Partner, Madaan Law Offices, Advocates & Solicitors Co-Chairman, ASSOCHAM M&A National Council Co-Founder, Corporate Knowledge Foundation Member, Secretarial Standards Board, ICSI Former Chairman, ICSI-Northern Region Presented by – G P Madaan 91 -9810530312 gpm@madaanlaw. in Co-Founder, Corporate Knowledge Foundation Member, Secretarial Standards Board, ICSI Former Chairman, ICSI-Northern Region GP Madaan Co-Founder & Partner, Madaan Law Offices, Advocates & Solicitors Co-Chairman, ASSOCHAM M&A National Council Co-Founder, Corporate Knowledge Foundation Member, Secretarial Standards Board, ICSI Former Chairman, ICSI-Northern Region • Partner, Madaan Law Offices, Advocates & Solicitors 91 -9810530312 gpm@madaanlaw. in • Founder, Corporate Knowledge Foundation 91 -9810530312 gpm@madaanlaw. in GP Madaan Co-Founder & Partner, Madaan Law Offices, Advocates & Solicitors • Past Chairman, ICSI-NIRC Co-Chairman, ASSOCHAM M&A National Council Co-Founder, Corporate Knowledge Foundation Member, Secretarial Standards Board, ICSI • Co-Chairman, ASSOCHAM M&A Former Chairman, ICSI-Northern Region. National Council 91 -9810530312 gpm@madaanlaw. in • Member, Secretarial Standards Board, ICSI 25 -10 -2021 1

Definition • In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another person/entity • Wrongful or criminal deception intended to result in financial or personal gain 25 -10 -2021 2

• Indian Contract Act, 1872 • Section 17 of the Act defines “Fraud” as "Fraud" means and include any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into a contract: • the suggestion as a fact, of that which is not true, by one who does not believe it to be true; • the active concealment of a fact by one having knowledge or belief of the fact; • a promise made without any intention of performing it; • any other act fitted to deceive; • any such act or omission as the law specially declares to be fraudulent. 25 -10 -2021 3

Indian Penal Code, 1860 Section 25 of IPC defines "Fraudulently”as: A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise. 25 -10 -2021 4

SEBI(PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO SECURITIES MARKET) REGULATIONS, 2003 (PFUTP Clause. Regulations) 2(c) "fraud" includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include- • a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; • a suggestion as to a fact which is not true by one who does not believe it to be true; • an active concealment of a fact by a person having knowledge or belief of the fact; • a promise made without any intention of performing it; • a representation made in a reckless and careless manner whether it be true or false; • any such act or omission as any other law specifically declares to be fraudulent; • deceptive behaviour by a person depriving another of informed consent or full participation; • a false statement made without reasonable ground for believing it to be true; • the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. And "fraudulent" shall be construed accordingly; 25 -10 -2021 5

Nothing contained in this clause shall apply to any general comments made in good faith in regard to – (a) the economic policy of the government (b) the economic situation of the country (c) trends in the securities market or (d) any other matter of a like nature whether such comments are made in public or in private. 25 -10 -2021 6

FRAUD-Section 447 of Companies Act, 2013 Fraud Act Omission Concealment of fact Abuse of position By any person or any other person with connivance With intent to Deceive Company Gain undue advantage from Creditors Shareholders Whether or not there is Wrongful gain 25 -10 -2021 Wrongful loss 7 Injure interest of Any other person

Stringent Punishment for fraud Imprisonment minimum 6 months and maximum up to 10 years & fine which may go up to to 3 times of the amount involved Imprisonment shall not be less than 3 years if the fraud involves public interest 25 -10 -2021 8

FRAUD REPORTING – Section 143(12) • Procedure for Fraud Reporting: • Reporting of frauds by auditor involving amount more than Rs. 1 crore • If an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government. • Auditor should report such frauds as soon as possible but not later than 62 days of his knowledge about the frauds: 25 -10 -2021 9

STEPS OF REPORTING STEP-I • REPORT TO BOARD & AUDIT COMMITTEE: Auditor shall forward his report to the Board of Directors or the Audit Committee, as the case may be, within 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days; STEP-II • Report to Govt. after reply of the Board On receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within 15 days of receipt of such reply or observations; 25 -10 -2021 10

STEPS contd…. STEP-III • Report to Government if no reply received In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he failed to receive any reply or observations within the stipulated time. 25 -10 -2021 11

Reporting of frauds involving amount less than Rs. 1 crore • The auditor shall report the matter of fraud to the Audit Committee or to the Board within 2 days of his knowledge of the fraud. • The report should specify the nature of the fraud with description, approximate amount of the fraud and parties involved in the fraud. • In such case, the Board shall disclose in its report (Board’s Report) the nature of fraud with description, approximate amount of the fraud, parties involved in the fraud and remedial action taken. • Name of parties should be disclosed only when the Board or Audit Committee has not taken any remedial action against the fraud. 25 -10 -2021 12

Implications-some examples • Certification of forms-Attention is drawn to provisions of Section 448 and 449 of the Companies Act, 2013 which provide punishment for false statement / certificate and punishment for false evidence respectively • Directors Report • UFR • FS • Auditors Report • ITR • Fraud Reporting • CSR • Disclosure of interest by directors 25 -10 -2021 13

REPORTING UNDER CARO 2016 Whether any fraud by the company or any fraud on the company by its officers or employees has been noticed or reported during the year? If yes, the nature and the amount involved is to be indicated in the Auditors’ Report 25 -10 -2021 14

Types of Fraud • Fraudulent Financial Statements (Banks, FIs, Shareholders, Tax authorities, Govt. ) • Employee Fraud • Vendor Fraud • Customer Fraud • Investment Scams • Insolvency and Bankruptcy Frauds • Miscellaneous The common element is deceit 25 -10 -2021 15

Instances of Fraud • Pay-offs from Vendors (collision between employee and suppliers) • Sharing of passwords • Bid rigging/bid splitting • Creation of shell companies to facilitate fraudulent payments • Fictitious Bills (Zodiac) • Fraudulent expense claims of employees • Misappropriation of assets • CSR Frauds • 11000 NGOs not renewed-no foreign funding (as on 4 th November, 2016) No. of NGOs reduced from 42500 to 20500 25 -10 -2021 16

Instances of Fraud • • • Fudging of Account Books Multiple set of account books Related Party Transactions Concessionary loans to related parties Insider Trading Misstatement in Prospectus Issue of duplicate certificates Destruction of records Non Payment of Dividend after declaration • In case of directors-Knowledge test 25 -10 -2021 17

Real Estate related frauds • False Advertisements • Assured returns • Title frauds • Deliberate delays • Deviation from approved plans • Delayed Govt approvals • Siphoning of funds to other projects/entities 25 -10 -2021 18

Satyam –Enron of India • The biggest corporate scam in India has come from one of the respected business family • Satyam -Fourth largest Indian IT Company listed in India & US • Over US $ 2 billion annual revenue size co. • Established in mid 1980 s, grown to 53, 000 employees. • 600 plus customers including 185 fortune 500 Cos. • Operations in 66 countries across the globe. • Financial advisor: Merrill Lynch (now Bank of America). • Auditors: Price Water House Coopers. • Bankers: Citi bank; BNP Paribas, HSBC & HDFC. 25 -10 -2021 19

Cause behind Satyam • Fudging of Accounts. • Over stated Assets of Rs. 490 crore. • Fake cash balances over Rs. 5, 000 crore in the Balance Sheet. • Interest component of Rs. 376 crore which never flowed into the company’s coffers. • Understated Liabilities of Rs. 1, 230 crore 25 -10 -2021 20

Aftermath Effect • Investors-Panicked as Stock plummeted. • Employees -stranded in many ways-morally, financially, legally and socially. • The incident resulted in immeasurable and unjustifiable damage to Brand India and Brand IT in particular. • Chairman, MD and CEO, CFO, Key associates arrested. • Partners of Audit Firm were also arrested. • People lost a staggering Rs 100 billion in Satyam in market capitalisation as investors reacted sharply and dumped shares, pushing down the scrip by 95 per cent. 25 -10 -2021 21

FRAUD IN CAPITAL MARKET PAN Asia Advisors Limited and its promoter, Arun Panchariya (AP)-SAT Order dt 25 th October, 2016 PAN Asia was a lead manager to several companies in connection with the issuance of GDRs by such companies. In one of the cases (involving Asahi Infrastructure & Projects Ltd) , an overseas company (Vintage) owned by AP obtained a loan from a bank in order to acquire the GDRs to be issued by Asahi itself provided some form of security (pledge to the Euram Bank the GDR subscription amount of 5. 98 Million USD as security for the loan taken by Vintage) to the bank towards repayment of the loan by Vintage. Thus, the investors in India were made to believe that in the global market the issuer companies have acquired high reputation in terms of investment potential and hence the foreign investors have fully subscribed to the GDRs. HELD : Such a modus operandi was found to create an artificial impression in the minds of investors that the GDRs of Asahi had commanded considerable interest. This misled the investors. Any attempt to mislead the investors in India constitutes fraud on the investors under the PFUTP Regulations 25 -10 -2021 22

Dhyana Finstock (1 st Novemebr 2016) • Sebi and BSE busted a Pakistan-based entity that was being used to lure investors through fraudulent SMSes • Preferential allotment to Promoters and their associates/associate companies • website www. bsebull. in was created, shown to have been registered in Pakistan • Several investors entered into buy trades in based on the stock tips received through SMS • misuse of stock exchange system to generate fictitious Long Term Capital Gains (LTCG) where buyers were lured to buy in the scrip to give exit to preferential allottees • Share price rose substantially – in one month despite co. having no prior trading history • Entities of Dhyana group also bought substantial shares from the preferential allottees • 39 preferential allottees made a collective profit Rs 107. 43 crores on an investment of 5. 22 Crore, a whopping return of 2, 060 per cent on their investment in 20 months. 25 -10 -2021 23

• Probe by Sebi and BSE began after the stock exchange received complaints from several investors • As a pre-emptive measure, pending investigation and in the interest of the investors, BSE proposed to withhold the pay-out in the shares for trading carried out between July 27 -29, 2015 (days of “abnormal and unprecedented rise in volume and fluctuation in price”) • BSE conducted a surprise inspection at the registered office (RO) of the co. in Ahmedabad, where premises were found to be closed, empty premises without any furniture or office equipment, no operations from said RO • Trading suspended, punitive action taken 25 -10 -2021 24

PANCARD CLUBS • Pancard Clubs, part of the BSE-listed Panoramic Universal group, had collected over Rs 7, 000 crore under a time-share scheme from investors. • the company faced SEBI ban following irregularities in fund collection. • SEBI ordered to refund the money to investors • Pancard Clubs, however, used the Sebi ban order to convince its investors to part with their original documents and post-dated cheques (PDCs) so that the payment could be directly transferred to their bank accounts • After these investors parted with their documents and PDCs, the company refused payment. • Matter before SAT 25 -10 -2021 25

Excuses for doing Fraud • • • Everyone else was doing it I/They can afford it I needed the money It was just a loan…I would have repaid it I felt used and wanted revenge I meant no harm and did no harm I did it to keep the business afloat Bribery is the norm in this type of business What I did was entirely appropriate for someone in my position My employer didn’t compensate me well enough, so I took what was due to me 25 -10 -2021 26

What an Organization can do to mitigate Fraud • Tone at the top; create an ethical environment • Lead by Example • Corporate Code of Conduct/Ethics Code • Fraud Prevention Policies (example Auditors’ Rotation) • Whistle Blower/complaint reporting mechanism • Robust Internal Controls 25 -10 -2021 27

25 -10 -2021 28

Section 211 and 212 • The Serious Fraud Investigation Office (SFIO) is a multi-disciplinary organization under Ministry of Corporate Affairs headed by its Director and consisting of experts in the field of financial accounting, cost accounting, management accounting, forensic auditing, law, banking, information technology, investigation, company law, capital market, taxation and other specified fields for investigating, prosecuting or recommending for prosecution white-collar crimes/frauds. Normally cases falling under the following categories would be assigned to SFIO up for investigation, which are characterized by: • Complexity and having inter-departmental and multi-disciplinary ramifications; • Substantial involvement of public interest to be judged by size, either in terms of monetary misappropriation or in terms of persons affected, and; • The possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures. The SFIO shall investigate serious cases of fraud received from CG. 25 -10 -2021 29

Investigation by SFIO Where the central government is of the opinion, that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office— (A) on receipt of a report of the registrar or inspector under section 208; (B) on intimation of a special resolution passed by a company that its affairs are required to be investigated; (C) in the public interest; or (D) on request from any department of the Central Government or a State Government, the central government may, by order, assign the investigation into the affairs of the said company to the Serious Fraud Investigation Office and its director may designate inspector(s) for investigation. 25 -10 -2021 30

• Where any case has been assigned by the CG to the SFIO for investigation, no other investigating agency of CG or any state government shall proceed with investigation in such case in respect of any offence under this Act and in case any such investigation has already been initiated, it shall not be proceeded further with and the concerned agency shall transfer the relevant documents and records in respect of such offences under this act to SFIO. • The investigating officer shall have the same powers as of the inspector u/s 217 25 -10 -2021 31

• The company and its officers and employees (including past employees) shall provide all information, documents, explanation and assistance to investigating officer. • Notwithstanding anything contained in Cr. PC, 1973, offences covered u/s 447 shall be cognizable and no person shall be released on bail on his own bond unless PP is given an opportunity to oppose his bail. The court needs to be satisfied that it is a fit case of bail. • However, the court may grant bail to a woman, under sixteen, a sick person, or an infirm. 25 -10 -2021 32

INTERIM/FINAL REPORT CG may ask SFIO to furnish interim report On completion SFIO to submit final investigation report to CG. Any one concerned may obtain a copy of the final report from CG on an application. After receipt of the report, the CG may direct SFIO to initiate prosecution against the company and its officers or employees (past or present) or any other person. • Any other investigating agency, State Govt. , Police, Income Tax department shall provide full assistance to SFIO • SFIO shall also share the information available with it, with the above agencies, if required by them for their own investigation or examination • • 25 -10 -2021 33

SPECIAL COURTS • The Central Government may, for the purpose of providing speedy trial of offences under this Act, by notification, establish or designate as many Special Courts as may be necessary. • A Special Court shall consist of a single judge who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working. • The courts in J&K< Maharashtra, Dadra, Nagar and Haveli, Goa , Gujarat, MP, West Bengal, Andaman & Nikobar, Special Courts have so far been designated for the purposes of trial of offences punishable under the Companies Act, 2013 with imprisonment of two years or more (May 2016). In June and September, certain other courts have been so designated including Court of Additional Session Judge at Dwarka 25 -10 -2021 34

Mediation and Conciliation Panel The Central Government shall maintain a panel of experts to be called as the Mediation and Conciliation Panel for mediation between the parties during the pendency of any proceedings before § the Central Government, or § the Tribunal, or § the Appellate Tribunal Any of the parties to the proceedings may, at any time during the proceedings, apply to the Central Government or the Tribunal or the Appellate Tribunal, as the case may be, for referring the matter pertaining to such proceedings to the Mediation and Conciliation Panel and the Central Government or Tribunal or the Appellate Tribunal, as the case may be, shall appoint one or more experts from the Panel. The Central Government or the Tribunal or the Appellate Tribunal before which any proceeding is pending may also, suo moto, refer any matter pertaining to such proceeding to such number of experts from the Mediation and Conciliation Panel. 25 -10 -2021 35

Mediation and Conciliation Rules (9 th Sept 2016) • The Panel shall be prepared by RD • RD shall invite applications every year in February, to be effective from 1 st April of that year • For 2016 -17, applications to be invited within 60 days • Former judges of SC, HC, District Judge, Member or Registrar of any National Tribunal, Lawyer with 10 years of experience, PCS, CA and CWA with 10 years of experience, ICLS officer eligible to apply • Name may be deleted/withdrawn from the Panel • Principles pf Natural Justice to be followed, not bound by Evidence Act and Cr. PC • Settlement to be arrived at within 3+3 months 25 -10 -2021 36

Compounding of Offences 25 -10 -2021 37

OFFENCE As per section 3(38) of General Clauses Act, 1897 “Offence” shall mean any act or omission made punishable by any law for the time being in force. 25 -10 -2021 | 38

Offences and Penalities Type of Penalties : There are five types of penalties contemplated under the Companies Act, 2013 1. 2. 3. 4. 5. Fine only Imprisonment or fine or with both Imprisonment and fine and With Imprisonment Only only 1 to 3 are compoundable 25 -10 -2021 | 39

COMPOUNDING OF OFFENCESECTION 441 Compounding by Company or Officer can be done on payment of such sums as may be specified by NCLT, RD or any Officer specified by MCA NCLT 25 -10 -2021 • Any offence punishable under the Act with fine only Regional Director/ Prescribed Officer • Where the maximum amount of fine does not exceed Rs 5 lacs Special Court • Any offence liable for imprisonment or fine or both can be compounded with the permission of Special Court u/s 441(6) | 40

COMPOUNDING OF OFFENCE Offences by Company or any Officer shall not be compounded Where similar offence has been compounded within preceding 3 years from the date of offence Any investigation against the Company is initiated or is pending Offences which are liable for penalty by way of Imprisonment or Offences which are liable for penalty by way of Imprisonment and Fine are Non-Compoundable Offences under the Act 25 -10 -2021 | 41

COMPOUNDING OF OFFENCE What is new in Section 441 - • The “Third” proviso to Section 441 of Companies Act, 2013, in case where either the investigation has been initiated or is pending, the offence cannot be compounded. However In Old Act 621 A, offence could have been compounded notwithstanding that either the investigation has been ordered or is pending against the Company. Explanation: • After the expiry of three years from the date of compounding of offence, if the second or subsequent offence had been committed, the same shall be treated as the first offence. 25 -10 -2021 | 42

PROCEDURE • APPLICATION to– Registrar of Companies • ROC will forward the application with his comments to: 1) NCLT or 2) Regional Director or 3) Any other Officer authorized by the Central Govt. for the purpose of adjudication 25 -10 -2021 | 43

PENALTY FOR NON COMPLIANCE OF 441 • NCLT or RD, while dealing with a compounding application for an offence of non-filing with ROC of any return or other document, may order any officer or other employee of the company to file or register such return or document • Penalty for non-compliance – to comply with the order made by Tribunal/RD/Officer authorized by the Central Govt. Any officer or other employee of the company –punishable with imprisonment for term which may extend to six months, or with fine not exceeding one lakh rupee or both 25 -10 -2021 | 44

446 A (BILL)Factors for determining level of punishment The court or the Special Court, while deciding the amount of fine or imprisonment under this Act, shall have due regard to the following factors, namely: — (a) size of the company; (b) nature of business carried on by the company; (c) injury to public interest; (d) nature of the default; and (e) repetition of the default 25 -10 -2021 45

446 B (BILL) Lesser penalties for One person companies or small companies. fine or imprisonment or fine and imprisonment, as the case may be, which shall not be more than one-half of the fine and/or imprisonment of the minimum or maximum fine or imprisonment or fine and imprisonment, as specified in following sections: • 92(5) – Annual Return • 117(2)(c) • 137(3) – Financial Statements 25 -10 -2021 46

I-8, Lajpat Nagar-3, New Delhi-110 024 Ph: +91 11 41630312, M: 9810530312 E: gpm@madaanlaw. in 25 -10 -2021 47