Satyam, Kingfisher, Nirav Modi, Mehul Choksi, Fortis… umpteen other scams and the ever growing bad loans have a common thread running through them: manipulation of accounts which is the genesis of corruption and financial frauds.
Ensuring that various stakeholders are able to take informed decisions and protect their interests and facilitating good governance, are supposedly the two most important objectives of the Companies Act (Act). For this, it is imperative that the books of accounts give a true and fair view of the state of affairs of the company.
The above noble objectives can be achieved only by ensuring strict compliance of the Act. Failure to do so can result in immense agony (see “ramifications” below).
Deterrent punishment, including by way of imprisonment, is therefore a must.
The Companies Act 2013, which replaced the half a century old Act of 1956 was expected to usher in a new era of accountability, transparency and governance. It claimed to draw heavily on the lessons learnt from the Satyam scam and imposed significant responsibilities on Key Managerial Persons, Independent Directors and the Auditors for strict compliance with the Act. A few sections, amongst the few that are currently non-compoundable in view of Section 441 of the Act, deserve special mention.
Section 447 was introduced to deal severely with cases of fraud. Violation can attract imprisonment of up to 10 years and fines of upto three times the amount involved in the fraud.
Section 448 relates to giving material false particulars or omission to give any material fact in any return, financial statements, prospectus etc. Violations would attract the same punishment as for fraud under Section 447.
Similarly, pursuant to Section 449, giving false evidence could attract imprisonment ranging from minimum of three years to upto seven years and fine of upto Rs. 10 lakhs.
All these sections are set to be diluted.
At a time when more and more skeletons are tumbling out of the closet, the Ministry of Corporate Affairs (MCA) is ironically considering making several non-compoundable offences compoundable.
As the Act stands today, most of the offences are anyway compoundable. Where is the need for further dilution unless the intention is to surreptitiously make even Sections 447, 448 and 449 compoundable? If implemented, it will encourage blatant violations at the cost of the public and national interest.
It will also be against the basic tenets of good corporate governance. Ease of doing business should not be achieved at the cost of encouraging ease of doing corruption.
More baffling is the undue haste at which it wants to do this. The committee formed for this purpose is to give its recommendations within 30 days!
Broader ramifications of violations of the Companies Act
It is extremely dangerous to look at the violations of the Companies Act in isolation.
Manipulation of accounts, frauds, misrepresentations must not be viewed from the accounting prism alone. They have deep and far-reaching impact on the economic, moral and ethical spine of the country. They can even jeopardize national security. A few examples will drive home this point.
Bribes of Rs450 crore are alleged to have been paid in the Agusta Westland deal (VVIP chopper scam). The funds were allegedly generated on the basis of fake invoices. Blatant violation of the Act resulted in compromising the security of the nation. Much more importantly, it has shaken public confidence in the hitherto sacrosanct defense institutions.
Vijay Mallya, Malvinder Singh and Shivinder Singh of Fortis and many others are alleged to have diverted huge funds from their companies. Non-detection of the same in time has resulted in many of these accounts turning bad with their attendant problems. Bankers are now wary of taking decisions resulting in economic stalemate.
Nirav Modi, Mehul Choksi and others of their tribe, window dressed their accounts to obtain larger credit limits from the banks, which were then milked for their personal use. It is the poor taxpayer who is left holding the can.
As per the CBI Court order in the Satyam scam, 15 Indian Institutional Investors had suffered wrongful losses of about Rs1,611 crore and further, the notional losses suffered by the retail investors and other institutional investors was calculated as around Rs14,162 crore. LIC alone suffered loss of Rs950 crore.
Weak case for dilution
The argument being advocated is that decriminalization of some of the offences will free the courts to focus on the more important ones.
The intentions may be noble but the proposed modus operandi is not. Some of the more important reasons for over burdening of the courts are lack of effective deterrence, unnecessary litigations, and misuse of process of law. More so, if the violators happens to be rich and powerful.
Satyam, the biggest accounting scandal till date in the history of corporate India came to light on 7 January 2009. The Serious Frauds and Investigation Office (SFIO) submitted its report in April 2009 confirming: (1) falsification of accounts and (2) complicity of the auditors, Price Waterhouse, in the fraud.
The United States Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) vide their orders of 5 April 2011 also found Price Waterhouse guilty and collectively fined them $7.5 million (about Rs38 crore).
Stung by the scale and its impact, the Supreme Court of India had ordered the trial to be completed within two years. For various reasons, the Special CBI Court finally gave its verdict on 9 April 2015; almost six years after the fraud came to light. It handed out a jail terms of seven years to S Ramalinga Raju and nine others accused including, two Price Waterhouse Partners.
Barely a month later, a metropolitan Sessions Court in Hyderabad granted them bail and suspended their seven-year rigorous imprisonment.
CBI is yet to appeal against the order of the Session Court. The case is rooted in blatant violations of the Companies Act. Is this case not important enough in the eyes of the Regulators and Authorities and taking up Court’s time?
Glaring dichotomies in approach of the Regulators
Less than a week ago, the government announced higher thresholds for filing appeals at various forums in case of disputes related to income tax. This has been done without amending the Income tax act and reflects a more pragmatic approach. The higher thresholds will not come in the way of filing appeals even for lower amounts if it involves a substantive question of law. Why can’t a similar approach be adopted in case of Companies Act? Two articles which appeared side by side in The Times of India edition recently, perhaps best exemplify the dichotomy in the approach of the regulators.
The MCA is considering decriminalisation of the Companies Act for those who are primarily responsible for adherence to the same. The Securities and Exchange Board of India (SEBI) on the other hand is mulling tighter rules for auditors and valuers!
Scams, by the time they are unearthed, if at all, result in irreversible damage. The effective and economical way of avoiding them is by instilling strong deterrents and quick and effective punishment in case of defaults. Litigation and pressure on courts would reduce automatically. The government is however considering dilution of existing provisions.
The panel formed by MCA to consider decriminalization of certain sections of the Companies Act has some respected names including those of Uday Kotak, and Shardul Shroff. One sincerely hopes that they will adopt an objective and holistic approach and not let down the common man by allowing dilution of the Act, especially in cases involving fraud, material misrepresentations etc. At the very least, no amendment should be allowed with retrospective effect. The timing of the proposal, the haste with which the panel has to give its recommendations creates a doubt whether there is more than what meets the eye.
(Sarvesh Mathur is a senior financial professional, who has earlier worked as CFO of Tata Telecom Ltd and PricewaterhouseCoopers.)