Law, Management & Entrepreneurship Corporate Criminal Liability: Recent Cases in India

LAW, MANAGEMENT &
ENTREPRENEURSHIP
Corporate Criminal Liability: Recent
Cases in India
Dr. Shannu Narayan

Session 25 & 26 (PGP 23-TERM IV)
07 October 2020
● Sunil Bharti Mittal Case held that other than any vicarious
liability provision, individual directors can be made accused
only if there is sufficient material to prove their active role
coupled with criminal intent.
● Principle of Attribution
● Principle of vicarious liability
● Corporate Mens Rea
Definition
• In the broadest sense, a fraud is an intentional deception made for personal
gain or to damage another person/entity
Civil violations
• Fraud
Criminal
• Wrongful or criminal deception intended to result in financial or

personal gain
Defining Fraud
Fraud is an intentional act or failure to act to obtain an unauthorized benefit to take away a legal
right or property by misrepresenting the facts.
1. Corruption: It includes conflicts of interest, bribery, illegal gratuities and extortion.
2. Misappropriation of Cash Asset: It includes ―larceny; skimming; check tampering; and
fraudulent disbursements, including billing, payroll, and expense reimbursement schemes‖.
3. Misappropriation of Non-cash Asset: It includes ―larceny; false asset requisitions;
destruction, removal or inappropriate use of records and equipment; inappropriate disclosure of
confidential information; and document forgery or alteration.
4. Fraudulent Statements: It includes ―financial reporting, employment credentials, and
external reporting
5. Fraudulent Practices by Customers, Vendors or other Parties: It includes bribes or
inducements, and fraudulent (rather than erroneous) invoices from a supplier or information
from a customer
Definition of fraud under Indian Law
• Section 17 of the Indian Contract Act, 1872:
• "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.
• Section 447 of the Companies Act, 2013 :

●“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."
Section 25 of the Indian Penal Code, 1860 defines "Fraudulently” as:

●A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise.
Regulatory Legislations
 Indian Contract Act 1872
 Indian Penal Code 1860
 Prevention of Corruption Act 1988
 Prevention of Money Laundering Act 2002
 The Companies Act 2013
 Clause 49 of Listing Agreement
 Companies (Auditor Report Order) 2003 revised in 2015 (amended)
Fraud Offences under Companies Act, 2013
● Misstatements in prospectus – imprisonment upto 2 yrs and fine INR 50,000
● Fraudulently inducing persons to invest money - imprisonment upto 5 yrs and
fine INR 100,000
● Personation for acquisition etc. of securities - imprisonment upto 5 yrs
● Issuance of duplicate certificate of shares - imprisonment upto 6 months and fine
INR 100,000
● Reduction of share capital
(a) knowingly concealing the name of any creditor entitled to object to the
reduction;
(b) knowingly misrepresenting the nature or amount of the debt or claim of any
creditor; or
(c) abetting or being privy to any such concealment or misrepresentation
- imprisonment upto 1 yr and fine
● Penalty for furnishing false statement, mutilation,
destruction of documents - imprisonment upto 3 yrs and
fine INR 10,00,000
● Fraudulent conduct of business - imprisonment upto 3 yrs
and fine INR 50,000
● False statement / omission of material statement in any
return, report, certificate, financial statement, prospectus,
statement or other document required under the Act -
imprisonment upto 2 yrs and fine
Types of Fraud
• Fraudulent Financial Statements
• Employee Fraud
• Vendor Fraud
• Customer Fraud
• Investment Scams
• Bankruptcy Frauds
• Miscellaneous
● Common element is trickery and deceit

Financial Statement Frauds
o East India Company Fraud

o Mundhra Scam
o Enron Fiasco
o Satyam – Enron of India
o Harshad Mehta Scam
East India Company Fraud
• It was the first multinational corporation in the world and the

first company to issue stock.
• In the late 1700s Edmund Burke had Robert Clive, “the founder
of the empire” and Warren Hastings, India’s Governor-General,
brought up on impeachment charges laden with corruption
issues. Though the trials failed to convict anybody.
• The Company was subsequently wound up under the East
India Company Stock Redemption Act, 1874.
Mundhra Scam- First Scam of Independent India
• First successful trial of a financial scandal in Independent India.

• Haridas Mundhra, a industrialist & stock speculator sold fictitious shares
to LIC and thereby defrauding LIC by Rs. 125 crores.
• Mr. Jawahar Lal Nehru, set up a one-man commission headed by Justice M
C Chagla to investigate.
• Justice Chagla concluded the matter; Haridas was found guilty and was
sentenced to imprisonment for 22 years.
• T.T. Krishnamachari, the then Finance Minister, resigned from his position.
Harshad Mehta Scam
• Mehta obtained fake Bank Receipts from small banks.
• The said Bank Receipts were further passed on to other banks
as security to obtain cash.
• This money was used to drive up the prices of stocks in the
stock market.
• Bubble of stock market manipulation and fake BRs busted.
• Drastically impacted the Stock Market, Economy and progress
of the Country.
• Banking system was swindled of a whopping of Rs. 4,000
crore.
• Even, the Chairman of one of the Bank committed suicide.
Management encourages through these measures
• Responsibility, accountability and authority not established

or documented
• Goals and objectives neither established nor monitored for success
• No written policies or procedures
- low priority for the establishment of internal controls
- no separation of duties
- inadequate cash controls - documents
- inadequate physical security for assets and records
- no independent inventory of assets
• Inconsistent application of policies or procedures - may result in unfair
• treatment of employees - favoritism - low morale
How to curb these unethical practices
• Tone at the top; create an ethical environment
• Lead by Example
• Corporate Code of Conduct
• Call in Services for reporting unethical practices
• Reliable Internal Controls
• Training Courses on
• Ethics Training
• Internal Controls
• Fraud Prevention
• Technological and business changes
• Special training for monitors
• Reference Checks on New Employees
• Code of Sanction for Suppliers/Contractors
India’s Initiative towards Business Safeguarding
● The Ministry of Corporate Affairs is steering the process of

formulating a National Action Plan on Business and Human
Rights (NAP).
● The obligation to draft a NAP stems from India’s endorsement

of the United Nations Guiding Principles (UNGPs) on Business
and Human Rights adopted in the UN Human Rights Council
(UNHRC).
Corporate Social Responsibility
● Mandatory Section 135 in Indian Companies Act, 2013
● Many guidelines by Indian government such as:

~ National Voluntary Guidelines on Social, Environmental and
Economic Responsibilities of Business 2011
~ CSR provisions in Companies Act, 2013
~ Model Bilateral Investment Treaty, 2015
~ August 2019 Amendment to Companies Act, 2013
National Guidelines on Responsible Business Conduct
(NGRBC), 2019
These guidelines urge businesses to actualise the principles in letter and spirit.
● 1. Businesses should conduct and govern themselves with integrity in a manner that is Ethical,
Transparent and Accountable.
● 2. Businesses should provide goods and services in a manner that is sustainable and safe
● 3. Businesses should respect and promote the well-being of all employees, including those in their
value chains.
● 4. Businesses should respect the interests of and be responsive to all their stakeholders.
● 5. Businesses should respect and promote human rights.
● 6. Businesses should respect and make efforts to protect and restore the environment.
● 7. Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is
responsible and transparent.
● 8. Businesses should promote inclusive growth and equitable development.
● 9. Businesses should engage with and provide value to their consumers in a responsible manner.
● https://pib.gov.in/Pressreleaseshare.aspx?PRID=1568750
● SEBI through its ‘Listing Regulations’ in 2012 mandated
the top 100 listed entities by market capitalisation to file
Business Responsibility Reports (BRRs) from an
environmental, social and governance perspective.
● A Zero Draft of India’s NAP has been released and

uploaded on the website of the Ministry.
● http://www.mca.gov.in/Ministry/pdf/ZeroDraft_11032
020.pdf
● Beti Padhao Beti Bachao, Namami Gange, Swatcch

Bharat Abhiyan, Divyang Jan, PM Jan Dhan Yojana

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LAW, MANAGEMENT &

Dr. Shannu Narayan

• Wrongful or criminal deception intended to result in financial or

• Section 447 of the Companies Act, 2013 :

Section 25 of the Indian Penal Code, 1860 defines "Fraudulently” as:

● Common element is trickery and deceit

o East India Company Fraud

• It was the first multinational corporation in the world and the

• First successful trial of a financial scandal in Independent India.

• Responsibility, accountability and authority not established

- low priority for the establishment of internal controls

● The Ministry of Corporate Affairs is steering the process of

● The obligation to draft a NAP stems from India’s endorsement

● Mandatory Section 135 in Indian Companies Act, 2013

● Many guidelines by Indian government such as:

● A Zero Draft of India’s NAP has been released and

● Beti Padhao Beti Bachao, Namami Gange, Swatcch

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