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Serious Fraud Investigation Office (SFIO): Analysis & Suggestions

The Indian Government set up a committee on corporate governance under the chairmanship of Naresh Chandra, former Cabinet secretary. Based on the recommendations of the committee, the Central Government issued a resolution on 2 July 2003 constituting the Serious Fraud Investigation Office (“SFIO”), which works under the MCA.

SFIO was set up as a multi-disciplinary organization with experts in the field of accountancy, forensic audit, law, investigation, company law, capital markets and taxation for detecting and prosecuting or recommending for prosecution while collar crimes and frauds. It is statutorily recognized under section 211 and its powers are defined under section 212 of the Companies Act 2013 (“Act”).

As a matter of practice, it takes up cases involving Rs. 500 crore or more. It also undertakes matters which involve:

  1. a) Complexity and having inter- departmental and multi-disciplinary ramifications.
  2. b) Substantial involvement of public interest in terms of monetary misappropriation or in terms of the number of persons affected and
  3. c) The possibility of investigations leading to or contributing towards a clear improvement in systems, the law of procedure.

Functioning of SFIO

  • The SFIO is to be headed by a director who should not be below the rank of a Joint Secretary to the Government of India having expertise in dealing with the matters relating to company frauds.
  • Central Government has the power to appoint other experts as members from those who have experience in the field of Corporate  Affairs, Banking, Taxation,  Capital Market, Forensic audit, law, and Information Technology amongst other fields as required. 

Corporate frauds in India come under the ambit of Companies Act. The Act empowers the Central Government with the right to investigate the affairs of the company, especially in cases of an alleged fraud or even in the oppression of the minority shareholders.

As per section 212 of the Act, the Central Government may refer any matter for investigation to SFIO, if:

  1. a) on receipt of a report of the Registrar or inspector under section 208 where a further   investigation into the affairs of the company is necessary;
  2. b) on intimation of a  special resolution passed by a  company that  its affairs  are required  to be investigated;
  3. c) in the public interest; or
  4. d) on request from any Department of the Central Government or a State Government

When a case has already been assigned to the SFIO no other agency of the government has the authority to proceed to investigate an offense which is committed under this Act and the same is to be transferred to the SFIO. The company and its officers and employees, who are or have been in the employment of the company, shall be responsible to provide all information, explanation, documents, and assistance to the investigating officer as he may require for the conduct of the investigation.

Primary limitation of SFIO:

Too much dependence on central government for accountability; insufficient manpower compared to notified requirement; discrepancies inadequate prosecution; shoddy enforcement of penalties; and MCA’s lackings:

As per data available on its website, SFIO has investigated 312 cases in total up to 2016-17, since its inception in 2003. It claims to have filed 1,237 prosecution cases in various designated courts and forums as on 15 March 2017. Regretfully there is no data on the website to indicate the number of prosecutions that resulted in convictions or even otherwise. Notably, as per the information provided by the Ministry of Corporate Affairs to a Parliamentary Panel, till march 2015, merely 6 convictions have resulted out of 162 investigations.

The strike rate of SFIO, India for over a 12-year period, has been at 3.7%. In contrast, the conviction rate of UK’s SFO, on whose lines SFIO was modeled, was as high as 85% as per a progress report submitted on 23 June 2014.

Poor track record of SFIO has been on many instances attributed to MCA. In July 2018, the minister of state for law, justice, and corporate affairs highlighted in Lok Sabha that out of the sanctioned strength of 133 posts, only 59 were in place i.e. 44% of the required strength. The above information is quite concerning in light of the fact that Corporate frauds are rising at an alarming rate, not merely in number but also value.

To make up the shortage of staff, often, consultants are employed by SFIO. Local staff from the regional directorate of MCA is also engaged on a part-time basis. Officials are also deputed from the police department. This effectively leads to a lot of floating population but with little accountability and it severely jeopardizes the effective functioning of SFIO.

Additionally, the funding of SFIO is done through Government exchequer. The budget for SFIO has seen a jump of 400 in this year itself. Improper utilization of funds is evident from the lapses in making due and timely appointments and failures ineffective investigations and the same has not caused a decrease or even metastasis in taxpayer’s money allotment towards SFIO. Funding is provided to SFIO has been increasing with every year even though the office has less than half the requisite manpower.

Some major lapses: cases: –

  • Section 212(12) requires that on completion of an investigation, the SFIO must submit a report to the Central Government and Section 212(14) states that on the submission of the report, the Central Government, after taking the appropriate legal advice may direct the SFIO to initiate prosecution. This gives the Central Government ultimate discretion on initiating prosecution.  It is unclear whether SFIO can suo moto undertake an investigation with the assent of the Central Government. Furthermore, there is also no certainty as to under what precise circumstances, the Courts can direct SFIO t undertake an investigation as courts have usually taken an ad hoc approach in giving directions to SFIO.
  • Convictions by SFIO are not taken to their logical conclusion: In the high profile 2009 case of Satyam Computers, a Special CBI Court in 2015 sentenced several of Satyam’s top management members, two partners of PwC and its auditors, to seven years in jail besides imposing fines. The convicted individuals managed to get their sentences suspended in less than a month from the Sessions Court. The government is yet to challenge the order of the sessions court. 
  • A query filed under the Right to Information (RTI) Act revealed in the case of PricewaterhouseCoopers Pvt Ltd, PWC and 14 of its directors, including four past and present chairmen who were found guilty by Registrar of Companies (RoC) for violating various sections of the Companies Act 1956 and relevant Accounting Standards over  three years, were charged with compounding which varied from Rs1.26 lakh to just Rs30,000 for each director. The value of violative transactions exceeded Rs2,460 crore. Add to that, the directors were likely drawing a remuneration of 10-15 crores. These violations were flagrantly in violation of the Companies Act. Taking all this into account, the scant amount of compounding fee charged was nothing less than a joke.
  • Demonetization happened in the November 2016 and in the present date, the probe report into three companies based in Telangana and Andhra Pradesh out of 18 that deposited huge money during demonetization is yet to be submitted.
  • A Parliamentary Standing Committee, chaired by former Corporate Affairs Minister M. Veerappa Moily in its report submitted in April 2015, apart from heavily criticizing SFIO for taking a lackadaisical approach in fulfilling the sanctioned manpower, further criticized the agency with regard technical capability. While highlighting the limits of the agency’s technical capability,  the committee stated: “The Early Warning System (EWS), which was instituted mainly with the purpose of dealing with chit fund scams and Ponzi schemes has been dumped for want of encouraging results.” And that “The Computer Forensic Lab set up in Market Research and Analysis Unit (MRAU) of SFIO is yet to show tangible results, by way of timely identification and detection of high tech corporate frauds,”. Both the statements concerning inadequate manpower and technical capability raises serious concerns about the agency’s credentials.

The deterrence that SFIO was envisioned to create has clearly not materialized. There are many instances wherein, in high-state corporate crimes, fines of merely 2-3 lakhs have been imposed by SFIO.

Suggested way forward:

  • Penalties and compounding fees should be enhanced drastically. Besides acting as a strong deterrent, it will ensure that sufficient funds are available for SFIO initiatives without burdening the taxpayers.
  • Steps must be taken to ensure that convictions by SFIO are taken to their logical conclusion in a time bound fashion to send a strong message to the violators. Apart from working on increasing the rightful conviction rate, it must also ensure that convictions attain their logical conclusion to bring about the desired effect i.e. deterrence. Instances such as the above-discussed case of Satyam Computers must be avoided at all costs.
  • Steps to ensure that the heavy reliance on the Central Government, for funds, manpower and sanction is reduced. Further, the overlapping mandate that it has with SEBI, Central Economic Intelligence Bureau, the Reserve Bank of India and the Central Bureau of Investigation can also be streamlined so that the agency has more autonomy and promptness in its undertakings.
  • Measures must be taken to ensure objective evaluation of the performance of SFIO and further erring officials should be held accountable.
  • Website UK SFO can be taken as a model example to increase transparency and accountability of the body. Like UK SFO, SFIO as well could start with posting the details of the cases: pending and closed on its website. The increased transparency will lead to more accountability of the Government body and will likely help all stakeholders.
  • MCA in alliance with the Government must ensure that SFIO is provided with adequate resources, skilled manpower, and state of the art technology support.

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