Corporate Fraud In India Rises In Last 3 Yrs

At a time when the government and India Inc. are both aggressively focusing on corporate governance and transparency, the picture on the ground seems to be quite a contrasting one. If data from the Ministry of Corporate Affairs is to be believed, then the number of cases of alleged corporate fraud has increased manifold in the last 3 years.

In fact, the Ministry has ordered an investigation to be undertaken by its main sniffing arm, the Serious Fraud Investigation Office (SFIO), in 139 cases under Section 237 of the Companies Act. This includes 58 cases of frauds against 5 groups in West Bengal and other states for chit fund fraud. Such cases have jumped from 46 in FY13 to a startling 76 in FY14 (till date).

However, the Ministry has not acknowledged that there is any grave rise in frauds and irregularities by the companies. In a written reply to Lok Sabha, Sachin Pilot, Minister of Corporate Affairs has said that these cases involve cases of alleged siphoning off or diversion of funds belonging to companies by the promoters and directors, manipulation of books of accounts and other records and frauds through running of pyramidal schemes, and misuse of collective investment schemes by companies for collecting money from the public.

The Minister has asserted that no new instance of a Satyam-like fraud has come to light till now, and that it has, vide various activities, undertaken measures to enquire upon irregularities reported in various companies including technical scrutiny of balance sheets and other documents.

In any case, the emergence of such frauds has certainly meant that the government is geared better to meet this challenge. The new Companies Act, 2013 has included definition of fraud as a substantive offence, while corporate governance and its implementation have become stricter under the new law. Experts also believe that conferring statutory status on the SFIO and increasing application of technology to detect potential frauds via data mining and forensic audit techniques would be helpful in curbing fraudulent activities by corporates.

In another development, the Ministry has also tabled the Securities Laws (Amendments) Ordinance amending the Securities and Exchange Board of India (SEBI) Act, the Securities Contracts (Regulation) Act (SCRA) and the Depositories Act. The idea behind this was to enable the SEBI to deal effectively with violations of laws by companies and individuals, including those running Ponzi schemes.