TOPIC 16 - THE COMPANIES ACT, 2013

BY

MRS. ALOK SHARMA

PROFESSOR

FACULTY OF LAW

UNIVERSITY OF DELHI

The Companies Act, 2013 was enacted on 29 August 2013 replacing

the Companies Act, 1956.

In addition, the Ministry of Corporate Affairs has also notified on 31

March 2014, the Companies Rules, 2014 on Management and
Administration, Appointment and Qualification of Directors,
Meetings of Board and its powers and Accounts. -era of special legislation
-for eg, IT Act and IT Rules
-the benefit is transparency
-surveillance of regulators

This legislation depicts a sense of modern need fulfilment while

introducing regulatory controls to enhance transparency,
-to compete with

accountability, and compliance in corporate India.

international organisations
-to rectify mistakes in 1956
act
-very few countries with

Most of the changes found in areas, including the composition of

concept of CSR

boards, financial reporting, and corporate social responsibility, are

incorporated with the rights and responsibilities of stakeholders.

The Companies Act, 2013, has brought comfort to doing business in

India by giving utmost importance to providing investor protection,
ethics to corporate business practices, and sustainability.

Compliance and corporate governance remain core concerns under

this Act.

Salient Features of Companies Act, 2013

The Companies Act, 2013 is highly beneficial in reforming corporate

governance, transparency, and accountability in India. Salient features
are as follows:

1. Corporate Social Responsibility (CSR) Mandate

The Act lays down CSR obligations on eligible companies to split out
a percentage of their net profit towards CSR activities. This provision
has made India one of the first countries to provide legal mandates for
CSR for eligible companies. This promotes social welfare and
sustainable development.
-pollutor pays principle
-conceretly work
-to donate funds for
education, healthcare etc.

2. One Person Company (OPC)

The Act has provided for a One Person Company wherein any single
person can form a private limited company. Provision for the same
will be made wherein the benefits of limited liability will accrue to
individuals without the necessity of the presence of multiple
shareholders, hence facilitating enhanced entrepreneurship.

3. Independent Directors and Board Composition

The Companies Act, 2013 brings about independent directors to the

extent required in corporate boards so that better oversight and
fairness are assured. Qualifications and responsibilities of
independent directors are also addressed so that board control and
decision-making become objective. -concept of person in jurisprudence
-company is a person, but artificial
person

4. Auditor Rotation and Independence

This Act calls for auditor rotation so as not to indulge in conflict of

interest and better audit quality. The size of an audit firm dictates
whether they change auditors every 5 or 10 years. This has helped to
ensure that the independence of the auditor is unbiased. -concept of lead and review
auditor
-to prevent conspiracy and
bias
-auditor will also be an
independent person

5. Financial Reporting and Disclosure

With greater concern for financial reporting and disclosure, the

Corporation Accounts and Companies Act 2013 mandates accurate
financial record-keeping and timely disclosure that increases
transparency. This Act safeguards the interests of investors as well as
other stakeholders.

6. Harsh Penalties for Non-Compliance

The Companies Act, 2013 has infused fiercer punishment for non-
compliance, which would help curb corporate fraud and adherence to
the legal framework. This includes board members, auditors, and
senior management being punished for any kind of contravention
under the Act.

7. Protection of Minority Shareholders

The Act introduces specific provisions that offer protection to the

interests of minority shareholders in terms of fair treatment and
protection from the powers of major shareholders.
8. National Company Law Tribunal (NCLT)

The Act established the National Company Law Tribunal (NCLT) to

adjudicate disputes related to companies, providing a specialized
forum for resolving corporate matters. The NCLT has been given
powers to deal with matters like mergers, amalgamations, and
winding up of companies.
-FIITJEE case : Noida Police have frozen over 300
bank accounts linked to the FIITJEE coaching
centre and seized Rs 60 lakh in cash. The
investigation follows a case filed against FIITJEE
owner Dinesh Goyal and eight others for alleged
financial misconduct, including criminal breach of
trust and criminal conspiracy.

9. Other Key Features

 Dormant Companies:

The Act introduced the concept of "dormant companies," which are

companies that are registered but not actively conducting business.

 Mergers and Amalgamations:

The Act simplifies the procedure for mergers and amalgamations,

making it faster and easier for companies to restructure.

 Common Seal Optional:

The Companies Act, 2013, has made the use of a common seal
optional, and the Director's signature is acceptable in lieu of the
common seal of the Company.

 Liability of Directors:

The Act defines the duties of directors and makes them liable for
criminal and civil offences under the Act.

 Corporate Veil:
The Act recognizes the concept of corporate veil, where the company
is treated as a separate legal entity from its members, with limited
liability.

 Class Action Suits:

The Companies Act, 2013 accommodates class action claims, which

can permit countless number of shareholders with common interest
for an issue to sue or be sued as a group.

Importance of the Companies Act, 2013

The Companies Act, 2013 has played a vital role in modernizing and
giving a new dimension to the regulatory environment for India's
corporate sector. It has its effect on various areas:

 Improved Corporate Governance: Enforcing rigid governance

requirements by board composition and enhancing transparency.
Thus, the Act builds trust among the investors as corporate
governance improves.
 Improved Investor Confidence: Enhanced disclosures,
financial reporting, and independence of auditors have been
boosting investor confidence.

 Facilitating Ease of Business: The introduction of One Person

Company (OPC) and other business-friendly provisions ease the
entry of small enterprises and start-ups into the market.

 Social Responsibility and Development: The CSR mandate

has helped companies invest in social welfare. This has
benefitted communities and brought about sustainable practices.

 Protection to Stakeholders: The Act protects the rights of

shareholders and imposes penalties in case of non-compliance.
This ensures that companies remain responsive to the
stakeholders. -Sec 195 of companies act abt insider
trading has been deleted now
-Complete autonomy has been given to
SEBI - to prevent any dupliticious legislation
and redundancy

Key Amendments to the Companies Act, 2013

The Companies Act, 2013 has undergone amendments since the day
of enactment based on dynamic business practices and regulatory
requirements, some of them are as follows:

Companies (Amendment) Act, 2017

This amendment reduced the criminalization of certain offences by

corporate companies, reducing the burden of regulations on
corporations and incorporating easy compliance requirements. The
major changes included an enhanced punishment for fraud, amongst
other CSR compliance and disclosure amendments.

Companies (Amendment) Act, 2019

The 2019 amendment made further decriminalization of minor

offenses, revised CSR provisions, and allowed companies the liberty
to transfer unspent CSR funds to a designated fund. Director
disqualification and beneficial ownership were also dealt with more
stringent regulations, along with expanding the concept of beneficial
ownership.

Companies Amendment Act, 2020

This amendment was welcoming greater ease in business by

procedural simplification for small and unlisted companies, especially
decriminalizing compoundable offences, and making incorporation
easy for doing business in India.

Companies (Amendment) Act, 2021

This amendment in 2021 has given more stringent regulations for

corporate compliance in areas like the remuneration of independent
directors, filing requirements, and provisions related to CSR.
Concurrently, relaxation in the timeline of the approval of mergers
and demergers would be useful for business houses in finding ways to
systematize their operations.

Other Key Provisions of the Companies Act, 2013

Along with these main characteristics, the Companies Act 2013

carries very distinct features, like introducing a concept of dormant
company status and prohibiting insider trading, besides deciding the
financial year for better flexibility in regulation and corporate
practices ethics in India.

 Dormant Company Status: The Act provides a facility for any

company not conducting any significant operations to apply for
dormant status and thus help the businesses operate
subsequently without full compliance.

 Insider Trading Prohibition: The Act prohibits insiders of the

company from insider trading, including the employees, board
of directors, and executives of the company, and thus helps to
curb unfair trade practices and safeguard the interests of
investors.

 Financial Year: It requires the company to align its financial

year with the Indian fiscal year, which is from April to March,
for ease of reporting and compliance under the indirect tax law.

Challenges and Criticisms of Companies Act, 2013

It has been criticized on several counts:

 Excessive Compliance Costs: Any organization, be it small or

medium-sized, is hugely exposed to high compliance costs,
which cannot be easy for some newly born startup
organizations.

 Complexity of Regulations: The regulations of the Act, though

originally meant to bring greater transparency in business
operations, are complex and force companies into investing in
legal and financial expertise to comply with the provisions.

 Impact on Business Flexibility: Some provisions, such as

independent directors and CSR mandates, increase
administrative costs that may reduce business agility and
flexibility.

CORPORATE GOVERNANCE AND ETHICS

Corporate governance and ethics are two interrelated concepts that
play a crucial role in shaping the behaviour and decision-making
processes within organizations. The relationship between corporate
governance and the importance of ethics is fundamental to
maintaining transparency, accountability, and sustainable business
practices.

Ethics is closely linked to transparency and accountability, two pillars

of good corporate governance. An ethically governed organization is
more likely to provide accurate and transparent information to
stakeholders.

Corporate Governance

o Corporate governance is the set of rules and processes that

guide how a company is managed and overseen. It's vital
for ensuring that businesses operate ethically and in
the best interests of those involved. A primary goal of
corporate governance is to prevent corporate greed and
promote responsible and transparent business practices.

o By establishing and enforcing high ethical standards and

holding individuals accountable for their actions, corporate
governance serves as a safeguard against misconduct,
protecting the interests of shareholders, customers, and
the wider community.

Principles of Corporate Governance:

o Fairness: The board of directors must treat shareholders,

employees, vendors, and communities fairly and with
equal consideration.

o Transparency: The board should provide timely, accurate,

and clear information about such things as financial
performance, conflicts of interest, and risks to shareholders
and other stakeholders.

o Risk Management: The board and management must

determine risks of all kinds and how best to control them.
They must act on those recommendations to manage them.
They must inform all relevant parties about the existence
and status of risks.

o Responsibility: The board is responsible for the oversight

of corporate matters and management activities. It must be
aware of and support the successful, ongoing
performance of the company. Part of its responsibility is
to recruit and hire a Chief Executive Officer (CEO). It
must act in the best interests of a company and its
investors.

o Accountability: The board must explain the purpose of a

company's activities and the results of its conduct. It and
company leadership are accountable for the assessment
of a company's capacity, potential, and performance. It
must communicate issues of importance to shareholders.

Four Ps of Corporate Governance:

o People: This 'P' emphasizes the importance of the

individuals involved in corporate governance, including
the board of directors, executives, and employees. The
composition of the board, their skills, independence, and
diversity are crucial factors.

o Purpose: Purpose refers to the overarching mission and

goals of the company. Corporate governance ensures that
the company's purpose aligns with ethical standards and is
focused on creating long-term value for shareholders and
stakeholders.

o Processes: This 'P' involves the systems and procedures

established to oversee and manage the company.
Governance processes include how decisions are made,
how risk is assessed and managed, and how accountability
is maintained.

o Practices: Performance in corporate governance relates to

the company's overall success in achieving its goals while
adhering to ethical standards. The governance framework
monitors and evaluates the performance of the company
against established benchmarks.

Key Components of Corporate Governance

 Board of Directors:

o Composition and Independence:

 The number of directors can vary depending on the
size of the company. The board of directors must
have a minimum of three directors if it is a public
company, two directors if it is a private company,
and one director in a one-person company.
The maximum number of members a company can
assign as directors is fifteen.

 At least one director, who has lived in India for a

minimum of 182 calendar days of the previous
year, shall be appointed by every company’s board. It
is a mandatory rule.

 At least, one woman director must be appointed by

the company. All listed companies must have at least
one-third proportion of their board of directors as
independent directors.

o Board Committees:

 Board committees are sub-groups of the board of

directors that are formed to focus on specific areas of
responsibility. Not every board of directors has
committees, but they are common in larger
organisations.

 Some of the most common board committees include

audit committees, compensation committees, and
nominating committees.
 Shareholders and Stakeholders:

o Rights and Responsibilities:

 Shareholders have the right to vote on important

company decisions, such as electing the board of
directors, approving mergers and acquisitions,
and making changes to the company’s articles of
incorporation.

 They also have the right to receive dividends and to

inspect the company’s books and records.

o Minority Shareholder Protection:

 Minority shareholders are shareholders who own less

than 50% of a company’s shares and do not have
full control over the corporation.

 However, they still have the right to vote and can

hold directors and officers accountable for their
actions, which ultimately leads to greater efficiency
and increases financial returns.

 Disclosure and Transparency:

o Financial Reporting:

 Financial reporting is the process of disclosing

financial information to stakeholders. It includes the
preparation of financial statements, such as
balance sheets, income statements, and cash flow
statements.

 Financial reporting is governed by various

accounting standards, such as Generally Accepted
Accounting Principles (GAAP) and International
Financial Reporting Standards (IFRS).

o Non-Financial Disclosure:

 Non-financial disclosure refers to the disclosure of

information that is not directly related to a
company’s financial performance. This can include
information about a company’s Environmental,
Social, and Governance practices.

Environmental, Social and Governance (ESG) Goals

 ESG goals are a set of standards for a company’s operations that

force companies to follow better governance, ethical
practices, environment-friendly measures and social
responsibility.

o Environmental criteria consider how a company performs

as a steward of nature.

o Social criteria examine how it manages relationships with

employees, suppliers, customers, and the communities
where it operates.

o Governance deals with a company’s leadership, executive

pay, audits, internal controls, and shareholder rights.

 It focuses on non-financial factors as a metric for guiding

investment decisions wherein increased financial returns is no
longer the sole objective of investors.

 Ever since the introduction of the United Nations Principles for

Responsible Investing in 2006, the ESG framework has been
recognised as an inextricable link of modern-day businesses.

 ESG Framework relates to intangible aspects of corporate

governance unlike Corporate Social Responsibility which fulfils
the tangible aspects through implementation of projects.

o In developing economies like India, CSR is seen as part

of corporate philanthropy in which corporations
augment the social development to support the initiatives
of the government, and it also synchronises the concept of
good governance with corporate governance.

Regulatory Framework for Corporate Governance in India

 Evolution of Regulatory Framework:

o Regulatory Authorities for Corporate Governance:

 The Ministry of Corporate Affairs and the Securities

and Exchange Board of India play pivotal roles in
overseeing corporate governance initiatives in India.

 Their responsibilities encompass establishing and

enforcing regulations to ensure ethical business
practices and safeguard the interests of stakeholders.

o Corporate Governance Regulation:

 In the 1990s, SEBI took charge of regulating

corporate governance through key laws such as
the Security Contracts (Regulation) Act, 1956;
Securities and Exchange Board of India Act,
1992; and the Depositories Act of 1996, marking a
crucial period of regulatory development.

o Introduction of Formal Regulatory Framework:

 In a landmark move in 2000, SEBI instituted the first

formal regulatory framework for corporate
governance in response to recommendations from
the Kumar Mangalam Birla Committee, 1999.

 This initiative aimed to enhance corporate

governance standards in India and laid down
guidelines for transparent and accountable business
practices.

o Subsequent Governance Initiatives:

 Building on these developments, a significant

corporate governance initiative unfolded in 2002
when the Naresh Chandra Committee on
Corporate Audit and Governance extended its
recommendations to address various governance
issues.

 Notable examples include setting up the

Confederation of Indian Industry (CII), National
Foundation for Corporate Governance (NFCG),
and the Institute of Chartered Accountants of
India (ICAI), all working collectively to foster
responsible and transparent corporate practices in the
country.

 Companies Act, 2013:

o Provisions Related to Corporate Governance:

 These provisions include greater accountability on

companies through the appointment of Key
Managerial Personnel (KMPs), the role of audit
committees, independent audits, stricter
regulation of related party transactions, and
restrictions on layers of companies.

 Enhanced disclosures are mandated, including

through the board’s report, financial statements,
and filings with the Registrar of Companies, to
ensure that all relevant information is available to
investors and regulatory agencies.

o Amendments and Updates:

 Some of the key amendments include the
introduction of the National Company Law Tribunal
(NCLT) and the National Company Law Appellate
Tribunal (NCLAT) to replace the Company Law
Board, the introduction of the Insolvency and
Bankruptcy Code, 2016.

 The amendment of the definition of “related party”

to include entities holding equity shares of 10% or
more in the listed entity either directly or on a
beneficial interest basis.

 The Act has also been amended to provide for

the appointment of an independent director in
case of a company with a paid-up share capital of
ten crore rupees or more, and the requirement of a
special resolution for the appointment of an auditor.

 National Financial Reporting Authority (NFRA):

o NFRA is an Indian regulatory body that was established in

2018, under section 132 of the Companies Act, 2013. The
duties of the NFRA include recommending accounting
and auditing policies and standards to be adopted by
companies for approval by the Central Government
etc.
Ethical Challenges Associated with Corporate Governance

 Selection Procedure and Term of Board: The selection of

board members and their term is highly misused in Indian
corporate governance. The term of the board members should be
long enough to ensure stability, but not so long that they become
complacent.

 Performance Evaluation of Directors: The performance

evaluation of directors is a challenging aspect of corporate
governance. It helps to identify areas of improvement and
ensure that the board is functioning effectively. However, the
evaluation process should be transparent and objective.

 Missing Independence of Directors: In many cases, the

independence of directors is compromised due to their close
association with the promoters or management.
 Removal of Independent Directors: The removal of
independent directors is a serious issue in corporate governance.
It is important to ensure that independent directors are not
removed for raising concerns or dissenting opinions.

 Liability Toward Stakeholders: In many cases, companies

prioritize the interests of their promoters or management over
the interests of their stakeholders.

 Founder/Promoter’s Extensive Role: The role of the founder

or promoter in the company’s governance can be a double-edged
sword. While their vision and leadership can be beneficial, their
extensive role can lead to conflicts of interest and lack of
transparency.

 Transparency and Data Protection: Lack of transparency and

inadequate data protection are the harmful corporate practices.
They should ensure the protection of sensitive data and
information.

 Business Structure and internal conflicts: The business

structure and internal conflicts are often visible in corporate
sector. Companies should have a clear and well-defined business
structure to avoid conflicts of interest. They should also have
mechanisms in place to resolve internal conflicts.

 Conflict of Interest: The challenge of managers potentially

enriching themselves at the cost of shareholders is a significant
issue in corporate governance.

 Weak Board: Lack of diversity of experience and background

represents a major area of weakness for these boards.
Companies should ensure that their board members have diverse
backgrounds and experiences to ensure effective decision-
making.

 Insider Trading:

o Insider Trading occurs when corporate insiders, such as

officers, directors etc use confidential information to make
personal profits. The problem arises because SEBI lacks a
robust investigative mechanism and a vigilant approach,
enabling culprits to escape.
Reforms Needed in Corporate Governance

 Strengthening Board Independence:

o Ensure a balanced board composition with a substantial

number of independent directors who can provide
unbiased perspectives.

o Conduct periodic assessments of the board's

performance and individual director effectiveness.

 Enhancing Transparency and Disclosure:

o Implement rigorous financial reporting practices to

provide stakeholders with accurate and timely information.

o Disclose non-financial information, such as ESG factors,

to give a holistic view of the company's performance.

 Empowering Shareholders:

o Encourage the use of proxy advisory services to facilitate

informed shareholder decision-making, especially
during critical votes.
o Promote shareholder activism to hold the board and
management accountable for their actions.

 Effective Risk Management:

o Establish a dedicated committee to identify, assess, and

manage risks, ensuring that potential threats to the
business are proactively addressed.

o Conduct regular risk assessments to stay ahead of

emerging risks and vulnerabilities.

 Ethical Conduct and Compliance:

o Develop and enforce a comprehensive code of ethics that

outlines expected behaviour and ethical standards for all
employees and stakeholders.

o Implement a robust whistleblower mechanism to

encourage the reporting of unethical practices without fear
of retaliation.

 Executive Compensation Policies:

o Align executive compensation with the company's

performance to ensure that leaders are motivated to drive
sustainable growth.
o Clearly disclose executive compensation structures to
shareholders, promoting accountability.

 Corporate Social Responsibility (CSR):

o Integrate socially responsible practices into business

operations and disclose CSR activities to showcase the
company's commitment to broader societal well-being.

 Board Training and Development:

o Provide ongoing training for board members to keep

them updated on industry trends, regulatory changes, and
governance best practices.

o Develop a robust succession plan for key leadership

positions to ensure continuity and stability.

 Regulatory Compliance:

o Conduct regular audits to ensure compliance with all

relevant laws and regulations.

o Follow established corporate governance codes and

guidelines set by regulatory authorities.
 Engagement with Stakeholders:

o Foster open communication with

stakeholders, including shareholders, employees, and
customers, to build trust and transparency.

o Actively seek and consider feedback from

stakeholders to address their concerns and expectations.

Committee Reports on Corporate Governance

 Kotak Panel Report: The panel constituted by SEBI under the

chairmanship of Uday Kotak has suggested a host of changes for
improving corporate governance standards of firms in 2017:

o Chairman of the board cannot be the Managing Director/

CEO of the company.

o Boards should have minimum of six directors. Of

these 50% should be independent directors including at
least one-woman independent director.

o Mandate minimum qualification for independent

directors and disclose their relevant skills.
o Create a formal channel for sharing of information
between the company and its promoters.

o Public sector companies should be governed by listing

regulations, not by the nodal ministries.

o Auditors should be penalized if lapses are found.

o SEBI should have powers to grant immunity to

whistleblowers Companies should disclose medium-to-
long term business strategy in annual reports.

 TK Viswanathan Committee: The recommendations of TK

Viswanathan committee on fair market conduct which submitted
its report in 2018 are:

o Among a number of recommendations on insider trading,

is the creation of two separate codes of conduct.

 Minimum standards on dealing with insider

information by listed companies.

 Standards for market intermediaries and others who

are handling price-sensitive information.

o Companies should maintain details of immediate

relatives of designated persons who might deal with
sensitive information and of people with whom the
designated person might share a material financial
relationship or who share the same address for a year.

o Such information may be maintained by the company

in a searchable electronic format. It may also be shared
with the SEBI when sought on a case-to-case basis.

o The committee has recommended direct power for SEBI

to tap telephones and other electronic communication
devices. This is to check insider trading and other frauds.

 Currently, SEBI has the power to only ask for call

records including numbers and durations.

 Kumar Mangalam Birla Committee Report, 2000:

o Some of the key recommendations of the report

include:

 The separation of the roles of Chairman and CEO.

 The appointment of independent directors to the

board of directors.

 The establishment of an audit committee to oversee

financial reporting.
 The requirement for companies to disclose their
financial and non-financial performance.

 The establishment of a code of conduct for directors

and senior management.

FRAUDULENT TRADING AND MISREPRESENTATION

The Companies Act, 2013, addresses fraudulent trading and

misrepresentation through specific sections like 339, 34, 36, and 447,
outlining liabilities, penalties, and actions for fraudulent conduct,
misleading statements in prospectuses, and inducing investment
through fraud.
1. Fraudulent Conduct of Business (Section 339):

 If a company's business is carried out with the intent to defraud

creditors or others, the Tribunal can declare certain individuals
(directors, managers, officers, etc.) personally responsible for
the company's debts and liabilities.

 Penalties for fraudulent conduct include imprisonment (up to 5

years) or a fine (up to 5 times the amount of fraud), or both.

 For large-scale fraud (involving at least Rs. 10 lakhs or 1% of

the company's turnover), the punishment ranges from 6 months
to 10 years of imprisonment, along with a fine of at least the
amount involved in the fraud and up to 3 times that amount.

2. Misrepresentation in Prospectus (Section 34):

 If a prospectus contains untrue or misleading statements, or

includes or omits material information, every person who
authorizes the issue of such prospectus is liable for action under
Section 447.

3. Fraudulently Inducing Investment (Section 36):

 Any person who knowingly or recklessly makes false,

deceptive, or misleading statements or promises, or conceals
material information to induce another person to invest money
in stocks, debentures, deposits, etc., is liable for punishment.
4. Action by Affected Persons (Section 37):

 Any person, group of persons, or association of persons affected

by misleading statements or omissions in a prospectus can take
action under sections 34, 35, or 36.

Section 339 of the Companies Act 2013 is a critical law that deals
with unfair business practices in India.

Section 339 of the Companies Act 2013 is a significant clause that

addresses India’s unscrupulous business practices. Any shareholder,
officer, or employee of a firm who engages in fraudulent activity that
is detrimental to the interests of the company is subject to this clause.
By placing liability on the dishonest individuals who are in charge of
such actions, Section 339 aims to defend the interests of investors and
other stakeholders.

Section 339 and its Salient Features

Section 339 of the Act deals with the offences of fraud and other
matters related thereto. To elaborate further, Section 339 lays down
the offenses of fraud to be punishable with a fine, imprisonment
and/or both.

Details of the offences discussed under Section 339 are as follows:

1. Fraudulent Conduct of business: As per Section 339, any person

who knowingly conducts the business of the company with intent to
defraud any person, is culpable for fraudulent conduct of business.

2. Wrongful gain: Any person who gains any property or advantage

or induces any other person to deliver any property or advantage to
any person with an intention to defraud or deceive, shall be
punishable under Section 339 of the Act.

3. Misapplication and misappropriation of property: Any person

who misapplies or misappropriates any property of the company or
any other person with an intent of defrauding any person shall be held
guilty of the offence of fraudulent conduct.

4. Discontinuance of corporate activities: The discontinuance of

corporate activities with the intention of defrauding any person shall
be punishable with the provisions of Section 339 of the Act.
5. False representation of affairs of company: Any person who
makes a false representation of any material fact with an intention to
deceive any person and thereby induces such person to act to his own
detriment shall be held guilty of fraudulent conduct.

Penalties under Section 339 of Companies Act 2013

As per Section 339 of the Act, any person found guilty of fraudulent
conduct is liable to be punished with imprisonment for a term which
can extend up to five years, or with a fine which can be up to five
times the amount of fraud, or with both.

Meaning of fraud
Section 447 of the Act provides for the definition of fraud and also
the punishment for committing fraud.

Fraud is defined inclusively as under:

“Fraud in relation to affairs of a company or any body corporate

includes any act, omission, concealment of any fact or abuse of
position committed by any person or any other person with the
connivance in any manner, with intent to deceive, to gain undue
advantage from, or to injure the interests of, the company or its
shareholders or its creditors or any other person, whether or not there
is any wrongful gain or wrongful loss.”

It is clear from the definition that not all acts, omissions, concealment
of fact or abuse of position will lead to fraud. In order to fall within
the meaning of ‘fraud’ these actions, omissions, concealment of fact
or abuse should be done with an intent to deceive or to gain undue
advantage or to injure the interest of the company or its shareholders
or creditors or any other person. Therefore, this brings in the concept
of mens rea.

Further, it would still constitute fraud whether or not such acts,

omissions, concealment of fact or abuse of position results in
‘wrongful gain’ or ‘wrongful loss’ i.e. commission of crime with that
intent is important not the results thereof.

‘Wrongful gain’ has been defined to mean gain by unlawful means of

property to which the person gaining is not legally entitled.

Similarly, “wrongful loss” has been defined to mean loss by unlawful

means of property to which the person losing is legally entitled.

Therefore, to fall within the meaning of fraud, the following

should have happened:

(a) acts, omissions, concealment of fact or abuse of position should

have taken place;

(b) such acts, omissions, concealment of fact or abuse of position

should have essence of mens rea in them; and

(c) irrespective of the fact whether or not they resulted in ‘wrongful

gain’ or ‘wrongful loss’.

The definition of the term fraud uses the term ‘person’ which gives it
a very wide coverage. Thus, it just doesn’t only mean and cover
certain officers, directors or employees of the company, instead it
covers any person in relation to the affairs of the company. So
irrespective who that person is, including a company, as long as that
person in the context of the affairs of the company falls within the
ambit of the definition of fraud, he will be guilty of committing fraud.

Penalties Charges Under Section 339

According to Section 339 of the Act, anybody found guilty of

engaging in fraudulent behaviour is liable under section 447 of the
Companies Act, 2013.

As per section 447 of the Companies Act, 2013, where any person is
found guilty of fraud involving:

 An amount which is less than Rs. 10 Lakh or 1% of the turnover

of the company, whichever is lower, and does not involve public
interest, then the person will be subject to imprisonment for a
maximum of 5 years or a fine which may extend to Rs. 50 Lakhs
or both.

 An amount of more than Rs. 10 Lakh or 1% of the turnover of

the company, whichever is lower, then the person will be subject
to imprisonment for a minimum 6 months and a maximum of 10
years along with a fine which shall not be less than the amount
involved in the fraud, but which may extend to three times the
amount involved in the fraud.

Further, if the fraud is subject to public interest, then the

imprisonment term shall be a minimum of 3 years.

Punishment to be in addition to any other liability provided

It is noteworthy that the punishment of fraud is in addition to any

other liability provided under the Act including the repayment of debt
wherever the Act requires repayment of debt. This means that the
person guilty of fraud has to suffer that other liability in addition to
the punishment provided for fraud under Section 447. This is what
Section 447 provides that the punishment of fraud provided under
Section 447 is in addition to any other liability provided under the
Act.
USE OF SECTION 447 UNDER VARIOUS OTHER SECTIONS
OF THE ACT

Company Act, 2013 defines fraud under section 447 and the same
is referred under various other sections of the Act.

S.
No. Section Nature of Violation

1. 7 Incorporation of company

2 8 Charitable companies

Criminal liability for misstatement in

3 34 prospectus

Punishment for fraudulently inducing

4 36 persons to invest money

Punishment for personation for

5 38 acquisition etc of securities.

6 46 Certificate of shares

7 56 Transfer and transmission of securities

8 66 Reduction of share capital

9 75 Damage for fraud

Punishment for contravention of section
10 76A 73 or section 76

Punishment for wilfully furnishing any

11 86 false or incorrect information

Register of Significant beneficial owners

12 90 in a company

Removal, the resignation of auditors, and

13 140 giving of special notice.

Power to call for information, inspect

14 206 books and conduct inquiries

Investigation into affairs of company by

15 212 Serious Fraud Investigation Office

Investigation into the company’s affairs in

16 213 other cases

Penalty for furnishing false statement,

17 229 mutilation, destruction of documents

Fraudulent application for removal of

18 251 name

19 339 Liability for fraudulent conduct of

business

20 448 Punishment for false statement

Punishment for false statement or omission of material facts

Section 448 deals with the cases of making false statement (knowing
it be false) or omission of materials facts (knowing it to be material)
in –

(i) Return
(ii) Report
(iii) Certificate
(iv) Financial statement
(v) Prospectus
(vi) Statement
(vii) Other document required for any provision of the Act.
and provides for the same punishment as provided in
Section 447.
Serious Fraud Investigation Office

In order to investigate frauds in companies, it is proposed to set up

Serious Fraud Investigation Office (“SFIO”).

This office already exists but there are no detailed provisions that
exist in respect of SFIO, and now SFIO will have more teeth as
compared to the existing powers that it has.

This body will consist of experts from banking, corporate affairs,

taxation, forensic audit, capital market, information technology, law.

The powers given to SFIO can be examined from the fact that when
SFIO investigates, then no other investigating agency will proceed
with the investigation and concerned agency is already investigating
the matter it will have to transfer all the relevant documents and
records to SFIO.

In cases SFIO investigates, then all other investigating agencies, state

Government, police authority, income tax authorities having any
information or documents in respect of such offence shall provide all
such information or documents available with it to the SFIO.
Similarly, SFIO will share any information or documents available
with it, with any investigating agency, State government, police
authority or income tax authorities which may be relevant or useful
for such investigating agency, state government, police authority or
income tax authorities in respect of any offence or matter being
investigated or examined by it under any other law.

The SFIO will submit its report to the Central Government.

INSIDER TRADING AND MARKET MANIPULATION

Section 195 of the Companies Act, 2013 had this provision of

prohibition of insider trading in detail but this provision has been
deleted recently and all such matters have been transferred to SEBI
Act, 1992 to have uniformity in the application and avoiding any
overlapping.

We shall discuss it in next topic.

Corporate Social Responsibility and White-Collar Crime

Corporate Social Responsibility (CSR) can play a crucial role in

preventing white-collar crime by fostering ethical behaviour,
promoting accountability, and enhancing stakeholder trust, ultimately
discouraging illegal activities within organizations.

Corporate social responsibility (CSR) and white-collar crime are two

topics that have gained increasing attention in recent years.

CSR refers to a company's obligation to conduct business in an ethical

and socially responsible manner.

White-collar crime involves illegal activities committed by

individuals in positions of power and authority within organizations.

The relationship between CSR and white-collar crime is complex.

Companies that prioritize CSR may still be vulnerable to white-collar

crime.

This is because white-collar crime often involves individuals who

abuse their positions of power for personal gain, regardless of a
company's ethical standards.
Companies may prioritize CSR for strategic reasons, such as
improving their reputation and avoiding legal sanctions, rather than
out of a genuine commitment to social responsibility.

Despite these obstacles, there is a growing understanding of the

significance of addressing white- collar crime as part of CSR.

This involves initiatives to promote organizational openness and

accountability, as well as increased scrutiny of individuals in positions
of authority.

 Corporate Social Responsibility (CSR)

CSR refers to a business model where companies make a concerted

effort to operate in ways that benefit society and the environment,
rather than just focusing on profit.

 How CSR can prevent white-collar crime:

 Ethical Culture: CSR initiatives that emphasize ethical

behaviour and accountability can create a culture where
employees are less likely to engage in illegal activities.

 Transparency and Accountability: Promoting

transparency and accountability within organizations can
make it harder for individuals to hide or engage in
fraudulent activities.

 Stakeholder Engagement: Engaging with stakeholders,

including employees, customers, and investors, can help
build trust and encourage ethical behaviour.

 Risk Management: CSR can help companies identify and

manage risks, including the risk of white-collar crime, by
implementing strong internal controls and ethical
guidelines.

 Employee Support: CSR activities that support

employees, such as providing training and development
opportunities, can lead to a more engaged and ethical
workforce, reducing the likelihood of criminal behaviour.

 Examples of CSR initiatives that can help prevent white-

collar crime:

 Ethics and Compliance Training: Implementing

comprehensive training programs to educate employees
about ethical standards and compliance requirements.

 Whistleblower Programs: Establishing robust

whistleblower programs to allow employees to report
unethical or illegal activities without fear of retaliation.
 Strong Internal Controls: Implementing strong internal
controls to prevent fraud and other financial crimes.

 Community Engagement: Engaging in community

initiatives can help build trust and foster a positive
reputation, making it harder for companies to engage in
unethical or illegal activities.

 It’s importance:

 Economic Impact: White-collar crime can have a

significant economic impact, leading to financial losses,
job losses, and reduced investor confidence.

 Reputational Damage: Companies involved in white-

collar crime scandals can suffer significant reputational
damage, leading to loss of customers and investors.

 Erosion of Trust: White-collar crime erodes public trust

in businesses and financial institutions.

 Addressing the issue:

 Government and Regulatory Oversight: Strong
government and regulatory oversight is essential to prevent
and punish white-collar crime.

 Collaboration: Collaboration between government,

businesses, and civil society organizations is crucial to
address white-collar crime effectively.

 Public Awareness: Raising public awareness about white-

collar crime and its consequences is important to deter
potential offenders.

Thank You