Treating the SFIO as a Joke is Costing the Country Dear
On 7 August 2018, the minister of state for corporate affairs, PP Chaudhary, informed the Rajya Sabha that the Serious Fraud Investigation Office (SFIO) had launched probe into 21 cases involving 225 entities in 2017-18. He added that during the past three years, 94 complaints and prosecutions were disposed of by the various courts by levying a total fine of Rs5.9 lakh.
This works out to an average fine of a meagre Rs6,276 per case! That too spread over three years. Not enough to even cover the monthly salary of one clerk. What a colossal waste of time and public money. 
Since I was not present, I cannot vouch if this was followed by a loud thumping of desks in the Rajya Sabha!
SFIO’s Abysmal Track Record:
As per data available on its website, SFIO has investigated 312 cases in total since its inception in 2003 up to 2016-17. Inexplicably, it claims to have filed 1,237 prosecution cases in various designated courts and forums as on 15 March 2017. No data is available (on its website) anout how many of these prosecutions actually resulted in convictions. 
However, according to information provided by Ministry of corporate affairs (MCA) to a Parliamentary Panel, only six convictions, including those in the Satyam and Reebok case, had fructified out of 162 investigations completed till March 2015.
The strike rate of SFIO, India over a 12-year period, therefore, works out to an abysmal 3.7%. In contrast, the conviction rate of UK’s SFO on whose lines the former is modelled, was as high as 85% as per its progress report submitted on 23 June 2014.
SFIO’s Origins:
In order to appreciate the critical role that the SFIO is supposed to play, it is important to trace its origins. Stung by a larger number of scams, which lead to huge losses to the public, the Indian Government set up a committee on corporate governance under the chairmanship of Naresh Chandra, former Cabinet secretary. Based on its recommendations, the Central Government issued a resolution on 2 July 2003 constituting the SFIO, which works under the MCA.
SFIO was created as a multi-disciplinary organisation consisting of 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. Generally, it takes up only cases involving Rs500 crore or more. 
SFIO was supposed to be the country’s frontline defence against major corporate frauds. Sadly, its performance does not inspire any confidence.
Treatment of SFIO Like a Step-child by MCA Is Costing the Country Dear
A large part of the blame for the poor track record of SFIO is directly attributable to the MCA. On 20 July 2018, the minister of state for law, justice and corporate affairs had stated in Lok Sabha that against the sanctioned strength of 133 posts, only 59 or 44% of the sanctioned officers were in place. This at a time when corporate frauds are rising at alarming rate, both in terms of number and value. The neglect is all the more surprising at a time when it is claimed that the fight against black money, money laundering, shell companies, etc. is at its zenith. 
The minister also admitted that consequently, the probe report into three companies based in Telangana and Andhra Pradesh out of 18 that deposited huge money during demonetisation is yet to be submitted. Soon everyone will forget about it. 
Even in those rarest of rare cases where conviction is obtained, cases are not taken to their logical conclusion. In the high profile Satyam case of 2009, a Special CBI Court had sentenced, in 2015, several of Satyam’s top management and two partners of PwC, its auditors, to seven years jail besides imposing fines. They, in turn, 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. Hardly anything is known about the Reebok case. Will it be surprising if the much-hyped recent arrest of the Managing Director of Bhushan Steel also goes the same way? 
SFIO Should Not Be Funded with Taxpayers’ Money
To tide over the shortage of staff, consultants are often employed by SFIO. Local staff from regional directorate of MCA also joins in but not on full time basis. Officials are also deputed from police department. Effectively, there is a lot of floating population but with little accountability severely jeopardising the effective functioning of SFIO.
The budget for SFIO has seen almost 400 jump this year: from Rs17 crore last year to Rs62 crore for the current financial year. Add to it the time and cost involved in the courts, and cost of staff on deputation and the expense per year could exceed Rs100 crore. 
In return, what do we get? Multiple scams, heavy losses to public exchequer and the common investor, zero convictions, fines of Rs2 lakh-Rs3 lakh per year. This is because the deterrent that SFIO was supposed to create has simply not materialised. 
Is it then worthwhile to continue with the SFIO at the cost of the poor taxpayer? 
Suggested Way Forward
SFIO must be retained but made meaningful. This can be achieved by taking some simple steps.
Action Points for MCA:
1. Self-funding mechanism with no burden on taxpayers: Penalties and compounding fees should be enhanced drastically. Besides acting as a strong deterrent, it will ensure that sufficient funds are available for initiatives like SFIO without burdening the taxpayers. A simple real-life example will drive home this point.
An query filed under the Right to Information (RTI) Act by this author revealed that PricewaterhouseCoopers Pvt Ltd and 14 of its directors, including four past and present chairmen, were found guilty by Registrar of Companies (RoC) for violating various sections of the Companies Act 1956 and the relevant Accounting Standards over a three year period. These violations were very magnanimously and in violation of the Companies Act wrongly compounded by the Company Law Board. Be that as it may, the meagre amount of compounding fee charged was nothing less than a joke.
The value of transactions involved in the violations exceeded Rs2,460 crore. The compounding fee for each director varied from a meagre Rs1.26 lakh to just Rs30,000. Some of these directors may have earned remuneration of Rs10 to Rs15 crore or even more! Would compounding fee of such a paltry amount be a deterrent?
It is suggested that the compounding fee should be linked to the higher of share capital, total assets, turnover or monetary value of the violations to provide a strong deterrent. Besides ensuring strict compliance, it will reduce the need for larger resources, reduce the number of cases that SFIO has to pursue thereby enhancing its effectiveness, unclog the courts and thereby saving precious amount of taxpayers’ money.
2. As mentioned in my earlier article, the proposed decriminalisation of the Companies Act 2013 should be put on hold. Threat of imprisonment but never to be misused will again help to ensure compliance.
3. Provide adequate resources to SFIO including adequate and skilled manpower, and state of the art technology support.
4. Ensure objective evaluation of the performance of SFIO and take erring officials to task.
5. Ensure that convictions by SFIO are taken to their logical conclusion in a time bound manner to send a strong message to the violators. Immediate appeal against suspension of sentence in Satyam case can help to kick start the process.
Action Points for SFIO
A simple glance at the website of the Serious Fraud Officer, UK, can be very enlightening. It could start with posting the details of the cases; pending and closed on its website. The UK Fraud office has case details of renowned names like ABB Ltd, Rolls Royce, Tata Steel, and Tesco. The transparency will help all stakeholders.
SFIO, India must improve its conviction rate dramatically to gain confidence of the lawmakers and the public. 
Once convicted, SFIO must ensure that relevant the cases are pursued to their logical conclusion. Only then it will have the desired impact. SFIO must learn to celebrate its success. In today’s world, no one notices you till you blow your own trumpet.
SFIO can deliver only if its parent, the ministry of corporate affairs, takes it seriously and supports it by taking the cases to their logical end. Simple and effective changes in law suggested above will not only help to reduce violations, reduce scams, unclog the courts but also ensure that the same is achieved without wasting the taxpayers' money. 
(Sarvesh Mathur is a senior financial professional, who has earlier worked as CFO of Tata Telecom Ltd and PricewaterhouseCoopers.)
Yedhunand Anand
6 years ago
I am a senior professional and wish to submit few suggestions to the author as I am associated in some capacity in its functioning. I would be pleased to receive a mail to provide the suggestions
Qnet Analyst
Replied to Yedhunand Anand comment 6 years ago
Were you contacted? write to @AnalystQnet on twitter please.
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