INVESTIGATION INTO

AFFAIRS OF COMPANIES
BY SFIO
Corporate Law

Submitted by – Naimish Tripathi

B.A.LL.B. (4th year) Self – financed
Faculty of Law, Jamia Millia Islamia
 ACKNOWLEDGEMENT

Though this project has been presented by me but there are many people who remained behind
veil, who gave their all support and helped me to complete this project. First of all I am very
grateful to my subject teacher Prof. Qazi Usman for giving me this topic to research on.

I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project. I acknowledge my friends who gave their valuable and
meticulous advice which was very useful and could not be ignored in writing the project.

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 RESEARCH METHODOLOGY

In this project, the researcher has relied on the ‘Doctrinal Method’, which is primarily based
upon books, journals, news, articles and from various online sources and publications. A
comprehensive study is made in order to arrive at analytical & critical support of the arguments.
The segments are structured and written actively. The writing style is descriptive as well as
analytical. This project has been done after a thorough research based upon intrinsic and
extrinsic aspect of the assigned topic.

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 CONTENTS

TOPIC PAGE NO.

 Introduction……………………………………………………………………………04
 Investigation by SFIO…………………………………………………………………05
 Role of SFIO…………………………………………………………………………..06
 Powers of SFIO………………………………………………………………………..07
 Submission of investigation report and final investigation report……………………..08
 Powers and responsibilities of SFIO…………………………………………………..09
 Shortcomings in the working of SFIO under Companies Act 1956…………………09-10
 Empowerment of SFIO through Companies Act 2013……………………………...10-12
 Eminent and important investigation by SFIO………………………………………12-13
 Adequacy of SFIO…………………………………………………………………….14
 Bibliography……………………………………………………………………………15

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Introduction:

The Serious Fraud Investigation Office (SFIO) under the jurisdiction of the Department of
Company Affairs, Ministry of Finance of The Government of India is a fraud investigating
agency working in collaboration with the Income Tax office and Criminal Bureau of
Investigation in professionally investigating and probing major or serious white-collar crimes
and frauds committed in India1. It is a multi disciplinary organization having experts from
various fields such as the financial sector, capital market, accountancy, forensic, audit, taxation,
law, information technology, company law, customs and investigation2. The setting up of an
organization specifically to look into such matters was approved by the Government of India on
the basis of the recommendations made by the Naresh Chandra Committee for advice on the
matters of Corporate Governance on 9th January 20033. The Committee had made a number of
recommendations in connection with the setting up of the Serious Fraud Investigation Office
which in no certain terms included not only the creation of the main organization but also asked
for the constitution of a task force for each cases under a designated team leader. Moreover it
also laid down the nature that the organization was supposed to have and supposed to function
with, which was to be in the form of the SFO in the UK. In the interest of adequate control and
efficiency all the appointments made to and the functioning of the office was to be overseen by a
committee each, headed by the Cabinet Secretary4.

1
The Serious Fraud Investigation Office, available at http://sfio.nic.in/websitenew/proactive_disclosure.pdf#P1,
visited on 13/8/2014.
2
Ibid.
3
Kurthalanathan M, The Serious fraud Investigation Office under Sec 211 and 212 of the Companies Act 3013,
available at http://www.easylaw.in/articles/serious-fraud-investigation-officesfio-under-sec211212-companies-
act2013, visited on 13/8/2014.
4
Supra note 1.

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INVESTIGATION BY SERIOUS FRAUD INVESTIGATION OFFICE
(SFIO) :-

Section 211 of the Companies Act, 2013 provides that the Central Government shall constitute
the Serious Fraud Investigation Office (SFIO). Accordingly, the Central Government has also set
up the Serious Fraud Investigation Office (SFIO) in the ministry of corporate affairs. This is a
specialized, multi-disciplinary organization to deal with serious cases of corporate fraud. This
was also a major recommendation made by the Naresh Chandra Committee which was set up by
the Government on 21 August 2002 on corporate governance.

Headquarters of this office is located in New Delhi, with field offices located in major cities
throughout India. The SFIO is headed by a Director not below the rank of a Joint Secretary to the
Government of India having knowledge and experience in dealing with the matters relating to
corporate affairs and also consist of experts from various disciplines. The SFIO will only deal
with investigation of corporate frauds characterized by –

(a) Complexity and having inter- departmental and multi-disciplinary

ramifications.
(b) Substantial involvement of public interest in terms of monetary
misappropriation or in terms of number of persons affected and
(c) The possibility of investigations leading to or contributing towards a clear
improvement in systems, law of procedure
The other experts are appointed by the Central Government from amongst persons of ability,
integrity and experience in the field of banking, Corporate Affairs, Taxation, Forensic audit,
Capital Market, Information Technology, Law, or Other fields as required.

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ROLE OF SERIOUS FRAUD INVESTIGATION OFFICE :-

SFIO, in following circumstances, investigate into the affairs of a company when the Central
Government assigns–

(a) on receipt of a report of the Registrar or inspector under section 208 where

further investigation into the affairs of the company is necessary;

(b) on intimation of a special resolution passed by a company that its affairs are

required to be investigated;

(c) in the public interest; or

(d) on request from any Department of the Central Government or a State

Government,

Director of SFIO, may designate such number of inspectors, as he may consider necessary for

the purpose of such investigation and such investigating officer have the power of the

inspector according to section 217 of the Act. Hence, inspectors may also be empowered to

investigate the affairs of –

(a) any other body corporate which is, or has at any relevant time been the
company's subsidiary company or holding company, or a subsidiary company of
its holding company;
(b) any other body corporate which is, or has at any relevant time been managed
by any person as managing director or as manager, who is, or was, at the
relevant time, the managing director or the manager of the company;
(c) any other body corporate whose Board of Directors comprises nominees of
the company or is accustomed to act in accordance with the directions or
instructions of the company or any of its directors; or
(d) any person who is or has at any relevant time been the company's

managing director or manager or employee, he shall investigate into and report

on the affairs of the other body corporate or of the managing director or

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 manager, in so far as he considers that the results of his investigation are relevant
to the investigation of the affairs of the company.

POWERS OF SFIO :-
As we know that the SFIO deals only with serious cases of corporate fraud, when it appoints any
person as investigating officer to cause the affairs of any company to be investigated, such
person enjoys with certain powers during investigation. Section 212(4) of the Act prescribed the
powers of the investigating officer. It states that such investigating officer shall have the power
of the inspector under section 217 of the Act. It means such investigating officer has the
following powers-
(a) Power to compel production of documents

(b) Power to examine on oath

(c) Power to take down notes of examination in writing

(d) Power of seizure of documents

(e) Power to seek support from other authorities

(f) Power to seek evidence in other countries

In addition to these, the Director or Additional Director or Assistant Director of SFIO also has
the power to arrest the accused, if authorised by the Central government.

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SUBMISSION OF INVESTIGATION REPORT BY SFIO :-

SFIO has to submit the investigation report, on completion of the investigation to the Central
Government. If the Central Government so desire, SFIO shall also submit interim report before
submission of final investigation report. The detail and final report is to be submitted, in due
course of time, after completion of investigation.

SUBMISSION OF FINAL INVESTIGATION REPORT :-

SFIO shall submit the detail and final investigation report on completion of the investigation to
the Central Government. A copy of the investigation report may be obtained by any person
concerned by making an application in this regard to the court.

On receipt of the investigation report, the Central Government will, after examination of the
report (and after taking such legal advice, as it may think fit), may direct the SFIO to initiate
prosecution against the company and its officers or employees, who are or have been in
employment of the company or any other person directly or indirectly connected with the
affairs of the company. The investigation report filed with the Special Court for framing of
charges shall be deemed to be a report filed by a police officer under section 173 of the Code of
Criminal Procedure, 1973.

In case, SFIO has been investigating any offence under this Act, any other
investigating agency, State Government, police authority, income-tax authorities
having any information or documents in respect of such offence shall provide all such
information or documents available with it to the SFIO.

The SFIO will also share any information or documents available with it, with any investigating
agency, State Government, police authority or income tax authorities, which may be relevant
or useful for such investigating agency, State Government, police authority or income-tax
authorities in respect of any offence or matter being investigated or examined by it under any
other law.

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Powers and Responsibilities of the SFIO:

The organization has been trusted with various powers and responsibilities in order to inspire
confidence and reduce the instances of white color crimes. It is not only required to detect and
prosecute corporate frauds but also nonetheless investigate into matters and cases which are
complex in nature due to having inter departmental and multi disciplinary ramifications. The
SFIO is required to bring about a clear improvement in the laws and the system of the country in
favor of public interests, which is to be judged by the size, either in terms of monetary
misappropriation or in terms of persons affected5.

Shortcomings in the working of SFIO under the Companies Act 1956:

Under the provisions of the Companies act 1956, the working of the SFIO was restricted by
various provisions. The SFIO under the old act largely had to operate in cooperation with various
other bodies like CBI, RBI and SEBI. Moreover, the powers of the organization were largely
confined to only the examination of the documents and the body did not have the authority to
search and seize documents or arrest people6. Earlier the SFIO also suffered from the problems
of un-adequate man power as well as un-adequate and shortage of financial and legal resources
to investigate cases too.
According to Pradeep S.Mehta, secretary-general of CUTS International, the SFIO and its
creation during the pendency of the Companies Bill 1956 was largely a token effort which
required much more efficiency and powers in order to compete with other foreign agencies7.
Foreign agencies like the US Department of Justice as well as the Serious Fraud Office in the
UK are independent government departments, which are a part of the country’s criminal justice
system, themselves. They all have special legislative powers to search, seize and gather evidence
without the interference of any other body. Most importantly under the provision of the earlier
act the SFIO lacked legislative recognition, neither did it have the power to search and seize
documents it also did not have the cognizance to arrest the perpetrators of these white color

5
Kurtalanathan, Supra note 3.
Bhargavi T.M, ‘Giving Teeth to Serious Fraud Office’, The Hindu, June 13, 2013, available at
6

http://www.thehindu.com/opinion/op-ed/giving-teeth-to-the-serious-fraud-office/article4807786.ece, visited on
13/8/2014.
Sushmi Dey, ‘SFIO fights on’, Business Standards, August 1, 2012, available at http://www.business-
7

standard.com/article/economy-policy/sfio-fights-on-112080100056_1.html, visited on 13/8/2014.

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crimes. It was more of a case of the SFIO having the job of post mortem and not the prevention
of such crimes.

Empowerment of SFIO through the provisions of the Companies Act 2013:

The enactment of the Companies Act 2013, which completely overhauls the Companies Act
1956, has given a shot in the arm of the Serious Fraud Investigation Office. Section 211 and 212
of the act has been constructed to specifically deal with the SFIO, talking about the establishment
of the organization and the conduct of its affairs, respectively8. Historically, the SFIO lacked any
statutory power or authority. Moreover its report was also not a cognizable report by itself, since
the organization was only a department under the Ministry of Corporate affairs. However with
the provisions of the new companies act, the SFIO has been granted statutory recognition
bringing it in par with the other investigating foreign agencies9. In its new avatar, the SFIO,
being a statutory body all on its own will not only have the affect of its investigation report being
deemed a report filed by the police under the Croc, when it is filed in any criminal court for
framing of charges but the organization will also be able to initiate prosecution on its own when
directed by the Central Government. The director of the SFIO will also have the power to arrest
persons who he believes to be guilty of fraud offences under the companies act. All these
measure will no doubt go a long way in avoiding delay and mismanagement in the agency.
Moreover with the advent of the new companies act, the SFIO just like a civil court will have the
power of searching and seizure of accounting books and other documents, summoning of
attendance of any person connected with the company and inspection of the books of accounts of
the company. Most importantly perhaps, the new act gives the SFIO, sole jurisdiction in matters
which has been assigned to the SFIO, barring the interference of any other investigating agency
into such matters. Moreover such other agencies are also required to make such documents or
information available to the SFIO which is likely to have some material importance in any matter
being investigated by the SFIO. Such measures no doubt will go a long way in reducing the
confusion caused by multiple agencies investigating the same case10. The SFIO may also be

8
Siddharth Datta, Investigation of Corporate Fraud under the Companies Act, 2013 with effect from April 1, 2014,
9/4/2014, available at http://www.whitecollarcrimeportal.com/wp-content/uploads/2014/05/Briefing-Note_-
Serious-Fraud-Investigation-Office.pdf, visited on 13/8/2014.
9
Ibid.
10
Bhargavi T.M, Supra note 6.

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asked by the Central Government to initiate action or investigation into the affairs of the
company in cases of Public interests, in respect of any request placed before the Government in
order to take such an action by any department of the central or the state government, where
there has been an intimation made to the Government by the majority of the share holders of the
company to look into the its affairs as well as in cases where the Registrar of the company may
after looking into the books of the accounts of the company feel that further investigation is
required to rule out any discrepancy which might have arisen11. Apart from all these changes
which has been brought about by the new act, one of the major if not the most important one
which will no doubt play a large part in reducing delays in the investigation is the granting of
sole jurisdiction to the SFIO in matters relating to white collar crimes. According to the
provisions of the new act even if investigation has already been launched into such matters, the
investigation has to be transferred to the SFIO along with the transfer of all relevant documents
and records, the moment the SFIO takes cognizance of the matter and the initiating agency shall
not proceed with the investigation any further. This provision can and will have the implication
that even if any investigating agency like the CBI starts investigation into matters affecting the
companies act, it will then have to consequently transfer the case to the SFIO if it is required,
thereby making the SFIO, a very powerful body indeed12. The provision of the new act also gives
power to the Director of the SFIO to nominate an investigation officer for conducting inquiries in
the cases of fraud and white collar crimes. Such officer who has been nominated is to have all
the powers of an inspector and any person who refuses to co operate with or act in accordance
with the ongoing investigation without any reasonable cause can be put into prison by the
investigation officer for a maximum period of 6 months and would also be liable to pay fine as
per in accordance of the act13. One of the most significant changes which have been brought
about by the act is in the nature of conducting cross border investigations. Since many corporate
frauds have a cross border nature to them the new act thus provides the central government to
option to enter into various agreements with foreign governments for seizing of evidences
available outside the border of the country, for which the investigating officer of the SFIO has to
approach the courts of the country to provide a letter of request, nonetheless. Such requests can

11
Siddharth Datta, Supra note 8.
12
Ibid.
13
Ibid.

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also be made for oral examination of any witness who might be staying outside India 14. The act
also declares fraud to be a cognizable offence for which it is only after that the public prosecutor
makes his submission and the court is certain of the fact that any person who has been arrested
for any white collar crime is not guilty of his crime or he is not likely to commit any other such
offences while he is on bail, can he or she be granted bail or bond15.

Eminent and Important Investigation by the SFIO:

The SFIO has been credited with doing a stellar job in various cases like Daewoo Motors case
which was referred to it for an alleged mismanagement involving 1000 crores, The Mardia
Chemicals case where the main issue was diversion and siphoning off of funds, DSQ Software
case which was in fact the first company referred to the SFIO in connection with Securities
fraud, The Usha India case connected with the siphoning off of funds, fudging of accounts and
diverting of money via 250 front companies, The Ketan Parekh group of companies case
involved in the stock market scam, Morepen Laboratories case who was convicted of alleged
mismanagement and financial irregularities, the JVG group of companies case including 13
companies like JVG Hotels Ltd, JVG Techno India, JVG Holdings, and JVG Publications
accused of defrauding thousands of investors to the tune of Rs 1,000 crores and The Sesa Goa
case where the SFIO recommended prosecution against mines major Sesa Goa on nine grounds,
including over- and under-invoicing of export and import16.
However the most important and no doubt the most famous bust made by the SFIO till now are
the Satyam scam and the Deccan Chronicle Holding Ltd case. In the Satyam scam, the problem
came on head when a proposal of acquiring two companies promoted by the chairman himself
was mooted but had to be consequently squashed due to the vehement opposition of the investors
even after the independent directors making up the board of the company had approved of the
deal. Consequently the independent directors resigned and an inquiry was made into the matter.
It was concluded by the SFIO that the independent directors of the company was not involved in

14
Ibid.
15
Ibid.
16
Sushmi Dey, Supra note 7.

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the multi crore accounting fraud after extensively questioning them and coming to the conclusion
that the chairman of the company had in fact kept them in the dark and the independent had no
knowledge about the falsification of the accounts. The SFIO was also of the view that there was
no direct link in order to prove that the whole time directors of the company also had any
knowledge regarding the falsifying of the account17. In the DCHL case, the parent company was
charged with financial irregularities and failure to repay loans. The SFIO was directed by the
Ministry of the Corporate Affairs to take cognizance of the matter and search and investigate the
company’s books of accounts for possible irregularities. After going through the company’s
books the SFIO in its report to the ministry pointed out various violations by the company of
various sections of the companies act 1956, including Section 209 and 211 (deviation of
accounting standards and financial statements) section 269 and 309 (contravention of provisions
governing remuneration to directors) section 295 ( non compliance of corporate governance
procedures for entering into related party transactions) and section 628 ( penalty for false
statements)18. Apart from these there also have been the recent cases involving Reebok and the
Sarada chit scam where the organization has played very important role too.

17
Kurtalanathan, Supra note 3.
18
Ibid.

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Is the SFIO in its current form adequate enough or does it need further
improvements:

While it is of no doubt that the new act does indeed do a lot in strengthening the SFIO in order to
make it more viable and on par with the other such foreign agencies but the dependence of the
organization on the central government is of some concern. It is only when the Central
government is of the opinion that investigations must be had on any matter and when it gives a
go ahead to the SFIO to look into a matter, and then only can the SFIO take cognizance of the
matter. Additionally, the SFIO may initiate prosecution only when the Central government
directs it to do so. The dangers of such dependence can easily be understood from the
involvement of political parties and political leaders in the recent Sarada scam as well as the 2G
scam and the Coalgate controversy. Moreover the changes contemplated are only beneficial after
a scam has already been initiated and not as a measure of prevention. There is, therefore, an
imperative need to strengthen scrutiny at the level of the Registrar of Companies — the first
level of detecting the problem. Linkages have to be created between the complaints made by
private individuals to police and other authorities on one hand and investigative bodies such as
the SFIO, on the other. Further, the adequacy of manpower on one hand and the resources on
the other provided by the Central Government will be the determining factor as per the efficacy
of the SFIO is concerned. It is interesting to note that SEBI also has the powers of a civil court
with respect to production of documents — powers which have been granted to the SFIO under
the news Companies Act, however still the Saradha group, nevertheless, bypassed the whole
procedure by allegedly doing a “document dump” of cartons of irrelevant information thereby
avoiding the requirement of providing pertinent information to SEBI. The absence of adequate
resources and manpower could, thus, quite easily be a massive roadblock in the working of the
new SFIO19.

19
Bhargava T.M, Supra note 6.

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 BIBLIOGRAPHY

 www.sfio.nic.in
 www.easylaw.in
 www.thehindu.com
 www.business-standard.com
 www.whitecollarcrimepatrol.com

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