THE VAST POWERS OF SFIO: A RISK OF MISUSE?
The “Serious Fraud Investigation Office (SFIO)” has been making headlines recently. The investigating authority is investigating the highly-publicized case of Heera Gold Exim Pvt. Ltd. The company has been accused of fraud and cheating by the investors who have not received the promised dividends and maturity amount from Heera Gold Exim Pvt. Ltd.[1] The investigation is still underway and the case is yet to be decided. However, the news would have piqued curiosity of many who are following the case. What is SFIO? What are its roles and functions? Does it actually contribute to the corporate governance in India? This blog answers all such questions relating to SFIO.
Introduction to SFIO
Corporate Governance is a set of rules that govern the affairs of a company. They are sine qua non for effective functioning of a corporate body as well as maintaining transparency with its investors. Corporate Governance is helpful in preventing corporate frauds that not only harm the investors but the public at large. “Serious Fraud Investigation Office (SFIO)” was established for this very purpose in the 2003 to address the increasing number of frauds which were committed under the garb of corporate veil. However, the SFIO was a toothless bulldog. The “Companies Act, 1956” did not confer significant powers upon SFIO at that time. With the enactment of “Companies Act, 2013”, the SFIO became a more powerful and robust investigation agency. The act provides for the establishment as well as the procedure of investigation for SFIO. The institution comes under “Ministry of Corporate Affairs”[2] and collaborates with Income Tax Department and CBI for investigation of frauds.
Legal Provisions relating to SFIO
“Section 211” of the “Companies Act, 2013” relates to the “Establishment of Serious Fraud Investigation Office”. [3]The section states that the SFIO is to be established by the “Central Government” for the purposes of investigating corporate frauds. The section also states that the office shall be led by a Director who shall at least be a Joint Secretary and must have expertise in corporate affairs. The section, further goes on to state that the Office shall include several experts of various fields such as banking, corporate affairs, taxation, forensic audits, capital markets, information technology, and law. These experts will also be appointed by the “Central Government”. The Government may hire other staff if needed.
“Section 212” of the “Companies Act, 2013” states that the “Central Government” has the authority to assign any investigation to SFIO on receipt of a report of Registrar, on intimation of special resolution passed by a company and its affairs are required to be investigated (3) in public interest (4) on request of any Department of the “Central Government”/ “State Government”.[4] Once assigned, no other agency can investigate the same case and they must send any related document to SFIO. SFIO, after investigation, must send a report to the “Central Government” within the specified time period. The section casts a duty upon the staff and the employees of the company investigated to provide all the necessary information. The section also authorizes the agency to arrest a person if suspected of committing the crime but he must be produced before the Magistrate within 24 hours. After investigation, SFIO is required to submit its findings to the “Central Government”, which can decide to take legal action against the company or its employees.
Potential Misuse of the SFIO’s Powers
The provisions of the “” give wide powers to SFIO. The use of vague terms such as “opinion” or “reason to believe” makes the provisions vulnerable to misuse by the authorities. Such huge powers granted to SFIO have the potential to be misused for ulterior motives by the authorities. For example, under “Section 212” of “Companies Act”, it is the “opinion” of the “Central Government” that decides whether the case is to be assigned to SFIO or not. Mere opinion of the “Central Government” is enough to direct SFIO to investigate a case. [5]“Opinion” is a highly subjective term and one can never come to know what made the “Central Government” formulate such an “opinion”. This has been an issue at several cases and it is an established principle now that there must exist such circumstances that justify the formulation of the opinion. [6]
It has also been pointed out that the power to arrest granted to the SFIO under “Section 212(8)” is also vulnerable to be misused. The investigation agency only has to have a “reason to believe” that the offence has been committed by such person to arrest him/her. [7]The “reason to believe” is again an ambiguous term which has a subjective interpretation. In addition to this, unlike “Bhartiya Nagarik Suraksha Sanhita”, which provides for bail as a right in case the investigation is not completed within the required time, “Companies Act” has no such corresponding provision. Hence, the person arrested by SFIO cannot demand bail as a matter of right even if the stipulated time for investigation has elapsed. The provisions of SFIO has extremely stringent provisions regarding bail which defeats the concept of “Bail is the rule, Jail is the exception”.
The provisions of “Companies Act” also confer the powers of investigating the affairs of the company by an investigating officer having same powers as an inspector under “Section 217”, [8]“Companies Act”. Such an inspector is also competent to examine any person upon oath and such an examination can be used against the person being examined. This is strictly opposed to the “Section 23” of “Bhartiya Sakshya Adhiniyam” that states that statement given to a police officer shall not be used against the person giving such statement.[9] Therefore, it is a general rule that statements given to an investigative officer shall not be used against the person. The provisions conferring powers upon SFIO, however, pay no heed to such a rule.
Conclusion
The existence of an investigating agency devoted only to the investigation of corporate frauds has definitely made the investigation more swift and effective. The establishment of SFIO was a significant step towards addressing this issue which affects the investors and the general public at large. The wide powers granted to the organization act as a deterrent to such frauds but they also violate certain important rights as well as principles of criminal investigation. The use of ambiguous terms, stringent provisions of bail as well as potential misuse of the power to arrest pose significant risks. It is important that the legislators pay attention to these issues and provide sufficient safeguards for the same. The use of clear terms and adherence to the generally accepted ruled of investigation would be a small but significant step towards redressing the issue.
Author: Priyanshi Mukati, 2nd Year, National Law University Odisha, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing
References
- Bakshi GK and Law L, “Live Law” Live Law (October 18, 2024) <https://www.livelaw.in/top-stories/where-is-the-money-supreme-court-cancels-bail-to-md-of-heera-gold-on-failure-to-raise-rs580-crores-to-settle-claims-272909>
- Ahmad T and Prasad R, “Role of Serious Fraud Investigation Office (SFIO) in Protection of Investor’s Interest: An Overview” [2014] ResearchGate <https://www.researchgate.net/publication/273189171_Role_of_Serious_Fraud_Investigation_Office_SFIO_in_Protection_of_Investor’s_Interest_An_Overview>
- Companies Act, 2013, § 211, No. 18, Acts of Parliament, 2013 (India).
- Companies Act, 2013, § 212, No. 18, Acts of Parliament, 2013 (India).
- Karvy Stock Broking Limited v. Union of India and Ors, 2021 SCC OnLine TS 1850.
- Companies Act, 2013, § 217, No. 18, Acts of Parliament, 2013 (India).
- Bhartiya Sakshya Adhiniyam, 2023, § 23, No. 47, Acts of Parliament, 2023 (India).
[1] Gursimran Kaur Bakshi and Live Law, “Live Law” Live Law (October 18, 2024) <https://www.livelaw.in/top-stories/where-is-the-money-supreme-court-cancels-bail-to-md-of-heera-gold-on-failure-to-raise-rs580-crores-to-settle-claims-272909?fromIpLogin=56603.6940029903>.
[2] Radheshyam Prasad, Role of Serious Fraud Investigation Office (SFIO) in Protection of Investor’s Interest: An Overview (2015).
[3] Companies Act, 2013, § 211, No. 18, Acts of Parliament, 2013 (India).
[4] Companies Act, 2013, § 212, No. 18, Acts of Parliament, 2013 (India).
[5] Companies Act, 2013, § 212, No. 18, Acts of Parliament, 2013 (India).
[6] Karvy Stock Broking Limited v. Union of India and Ors, 2021 SCC OnLine TS 1850.
[7] Companies Act, 2013, § 212(8), No. 18, Acts of Parliament , 2013 (India).
[8] Companies Act, 2013, § 217, No. 18, Acts of Parliament, 2013 (India).
[9] Bhartiya Sakshya Adhiniyam, 2023, § 23, No. 47, Acts of Parliament, 2023 (India).
