Investigation Under The Companies Act
1. The Companies Act, 1956 provides for investigation of the affairs of companies under sections 235-250A of the Act. In addition, the Act provides for a separate process of inspection of Books of Accounts of companies under Section 209A. The Committee considered these provisions.
2. A view was taken that inspection of Books of Accounts, taken up in isolation, would not serve much purpose. Indeed, in the present form as provided for under S209 A of the Act, there is a danger that such inspections may be taken as a part of administrative routine. There would be a considerable expenditure of time and energy both on the part of the inspecting agency as well as the company without accomplishing much. Compliance with law cannot be enabled by a presumption of violation. Nor can it be ensured by physically checking of entities involved. If that were the case it would be practically impossible to enforce any legal system. The benefits of having an elaborate framework of statute and rules would be lost if law enforcing agencies are required to also physically inspect the subject entities to be confident that they are complying with it. Compliance should be based on enlightened self interest, requiring intrusion by law enforcement agencies only in limited, well established circumstances. It should not be the intention of the law to establish an “Inspector Raj”
3. The Committee was of the view that state intrusion into the affairs of a corporate entity should be regarded a sign of collapse of its governance structure. However, if and when such intrusion takes place, it should be well directed, effective and should have deterrent effect. More damage would be done by frequent intrusion into the affairs of companies with little or low application of sanctions. Such interaction between the state and the corporate citizen would result in an unhealthy relationship, imposing undesirable transaction costs. Nor, should law provide excessive powers to enforcement agencies to completely disrupt or paralyze the functioning of a corporate entity through arbitrary exercise of statutory powers on mere suspicion or an engineered or a frivolous complaint. The Committee are therefore of the view that instead of separate provisions for both inspection and investigation under the Act, a single comprehensive process of investigation, to be taken up in a manner mandated by law and protecting the rights of the companies, may be provided for. This would enable Government to focus in a better and more result-oriented manner for enquiry into the defaults by the Companies.
4. The Committee felt that overregulation and excessive supervision could disrupt the functioning and the decision making processes in a company. This would also tend to penalize actions taken in good faith by managements particularly of small companies who may not have access to expert professional advice. An atmosphere of suspicion is unlikely to result in improvements in corporate governance. Companies would be wasting resources in evasive tactics which would impose unnecessary costs in a competitive environment. The Committee is of the view that rather than inspection of the working of companies through the enforcement machinery merely to assess whether a company is compliant with the law, the law should place the liability for compliance on the managements and owners/controlling interests of the companies, combined with a system of oversight through random scrutiny of the filings of documents by the companies. This exercise should not only enable up to date filings but should also identify gaps in disclosures by the companies. On the basis of such random scrutiny, the Registrar may also have the power to call for information, documents or records as required under law. If, from such random scrutiny, sufficient grounds arise warranting investigation of the affairs of the company, the same may be considered by the Central Government.
5. The Central Government may be empowered to appoint inspectors to investigate either on its own if it is of the opinion that such investigation is required in public interest, or on the request of the company on the basis of a special resolution, or on the direction of the court/Tribunal or from such members of the company having requisite number of shares as may be specified.
6. The Committee is of the view that investigation of the affairs of a company should be treated seriously. Once taken up, it should result in deterrent imposition of penalties. For the process of investigation to be effective, suitable powers should be provided to compel action by the company to enable proper investigation including production of relevant records. The existing Act provides for a framework to enable this. The Committee however recommends that this framework should be reviewed and made more effective. Powers to call for and inspect records of a company would be a part of this framework.
7. Any reported violation of a specific provision of the law should not become justification for an investigation. It should be possible for prosecution for such offences to take place after issuing a statutory notice. Before an investigation of the affairs of a company is taken up, there should be a reasonable opportunity available to the company to explain its conduct.
8. Complaints against the company should be by clearly identified complainant and should be required to be accompanied by a filing fee. Such complaints should invariably be referred to the company to ascertain the company point of view before any opinion is formed as to justification for investigation.
Private professionals as Inspectors/Investigators
9. The Central Govt. may appoint any officer of Govt., any private professional or group/firm of professionals as inspector for investigation. It should however be ensured that there is no conflict of interest. The Inspector/Investigator or his partners should not have any material relationship with the corporate entity or its holding or subsidiary entities. The present provisions relating to powers of the inspector, duties of directors, officers or other persons during the course of investigation, punishment for non-production of records and furnishing of false information and other related matters may be retained. The Act may provide for punishment for destroying or mutilating company’s records by its director or officers. The provisions of investigation should also be extended to foreign companies which are carrying out business in India.
Expenses of Investigations
10. The expenses of investigation should be borne by the Central Government where such investigation has been ordered on its own. It should however be recovered from the applicant if the investigation has been ordered on the request of an applicant.
Investigation of Serious Frauds
11. The Committee took note of the fact that the Government have established the Serious Frauds Investigation Office (SFIO), a specialized, multi-disciplinary organization to deal with cases of corporate fraud. The Central Government may refer complex cases involving substantial public interest or multi-disciplinary ramifications to the officers of the SFIO. The Committee feel that setting up of such an organization is essential to unravel the complex corporate processes that may hide fraudulent behaviour. The SFIO should be strengthened further and its multi-disciplinary character retained.
12. In addition to investigation, there is also a need to take up prosecution of the concerned corporate and officers in default in the appropriate forum. For this purpose, procedures would need to be simplified to enable SFIO to move swiftly and purposefully for successful prosecution of the guilty. To enable this, there are certain ambiguities in the law which would have to be removed to enable SFIO to take up prosecution under the IPC in addition to violation of the Companies Act. The Committee recommends that a separate statute may be framed to regulate and guide the functioning of the (SFIO) and to address such issues to enable successful investigation and prosecution of cases of corporate fraud. Therefore, presence of SFIO may be recognized in the Companies Act. Officers of the SFIO may also be authorised by Central Government to file complaints for offences under Criminal Procedure Code in addition to for offences under the Companies Act.
13. The Committee took note of the fact that corporate frauds were generally the result of very complex and intricate series of actions. It may not be easy for the law enforcement agencies at the State Government level to respond effectively to such situations in the absence of proper training and development of skills of the concerned law enforcing personnel for such investigations. The Committee recommends that the SFIO, set up by the Central Government, should serve as a Nodal Agency for development of such expertise and its dissemination to the State Governments, who may also be encouraged to set up similar organisations and provide requisite specialization as a part of their action against economic offences. This would also enable better coordination in respect of prosecution of offences under IP