1

CHAPTER III

SENTENCING PROCESS IN INDIA

3.1. SENTENCING PROCESS

The evolution of punishment structure in India since ancient times

witnesses its gradual changes in sentencing and correctional policies which

can be characterized, in part, by emphasizing on four major goals which

are usually attributed to the sentencing process, namely, retribution,

rehabilitation, deterrence, and incapacitation. Although sentences

frequently address several of these goals in practice, the characterization of

goals on the basis of priority has changed dramatically in the recent

decades. India does not have a profound sentencing guideline for its

criminal justice system. Several ministries have pointed towards the need

for adopting a structured sentencing guideline to decrease the ambiguity

while awarding sentences.177 Recognising the need for the same, several

courts have provided distinct factors and principles for other courts to

practice on the grounds of exercising discretion while awarding

sentences.178 However, a structured sentencing guideline is yet to be issued

either by the legislature or the judiciary.

The Ministry of Home Affairs established the Committee on

Reforms of Criminal Justice System (hereinafter “Malimath Committee”)

for proposing required reforms in the administration of criminal justice

in

177
Honey Malhotra, ‘Sentencing Policy in Indian Criminal Justice System: An Analysis with
Reference to Compoundable Offences’ (2021) SSRN 3873358/
178
Balyan, Chirag, and Gopal Gour, ‘Critical Analysis of the Sentencing Policy of the Apex
Court in Respect to Offences Falling under Exceptions to Section 300 of Indian Penal Code’
(2017) IJC 44 2016-17.
 2

India179 The report exerted importance towards introducing structured

sentencing guideline for India. It expressed concerns underlining that even

though the Indian Penal Code provides for the maximum and minimum

punishment in certain offences, the lack of sentencing guideline has led to

a conspicuous ambiguity in Indian judiciary. Thus, there is wide

discretionary power available with the judges. Even though, this discretion

is within the statutory limits, the judges do not have any guideline

regarding the most appropriate sentence in relation to a particular offence.

This uncertainty has led to lack of uniformity in approach among the

judges considering that some judges are lenient and others are harsh. This

varied exercise of the wide discretionary power can also cause conflicts

among the judgements of different sub-ordinate Courts and High courts of

the country. Countries like UK and USA have already brought in

structured sentencing guidelines to establish uniformity in their respective

judiciary.180 Moreover, the factors of sentencing need to be put through

thorough scrutiny to achieve the objective of a structured sentencing

policy.

It was further iterated by the Malimath Committee that “in order to

bring “predictability in the matter of sentencing,” a statutory committee

should be established “to lay guidelines on sentencing processes and

policy under the Chairmanship of a former Judge of Supreme Court or a

former Chief Justice of a High Court experienced in criminal law with

other members representing the prosecution, legal profession, police, social

scientist and women representative.”181

179
Government of India, Ministry of Home Affairs, Committee on Reforms of Criminal
Justice System Report 170 (Mar. 2003)
<http://www.mha.nic.in/hindi/sites/upload_files/mhahindi/files/pdf/criminal_justice_syste
m.pdf> accessed December 2021.
180
US Federal Sentencing Guidelines Manual 2006, §8B2.1.
181
Government of India, Ministry of Home Affairs, Committee on Reforms of Criminal
Justice System Report 170 (Mar. 2003)
 3

The Indian parliament had also taken cognizance of the matter in

2010 when the then Law Minister was quoted stating that “the government

is looking into establishing a “uniform sentencing policy” in line with the

United States and the United Kingdom in order to ensure that judges do

not issue varied sentences.” Before moving further, the general provisions

for the punishment in the Indian criminal law needs to be analysed.

In Chapter III of IPC, section 53182 deals with the kinds of

punishments which can be inflicted on the offenders. They are as follows:

“1. Death penalty,

2. Imprisonment for life,

3. Imprisonment,

4. Forfeiture of property and

5. Fine.”

Section 29 of Cr. PC provides that the magistrate “may pass a

sentence of imprisonment for a term not exceeding 3 years or fine not

exceeding ten thousand rupees”, considering that the offender is not a

juvenile.183 The punishment provided under many offences in IPC have

sentences of higher degree than the prescribed limit in section 29.

However, section 325 CrPC allows the magistrate to forward the accused

to the Chief Judicial Magistrate.184

A sentence of imprisonment in default, as per section 30 CrPC 185,

should not be in excess of power under section 29 of CrPC and should not

exceed 1/4th of the term of imprisonment which the magistrate is

<http://www.mha.nic.in/hindi/sites/upload_files/mhahindi/files/pdf
/criminal_justice_system.pdf> accessed 21 December 2021.
182
Indian Penal Code 1860, s 53.
183
The Code of Criminal Procedure 1974, s 29.
184
The Code of Criminal Procedure 1974, s. 325.
185
The Code of Criminal Procedure 1974, s. 30.
 4

empowered to inflict. However, it may be in addition to substantive

sentence of imprisonment for the maximum term awarded by the

Magistrate under section 29. In case of conviction in several offences at one

trial, as per section 31 CrPC186, the court may pass separate sentences,

subject to the provisions of section 71 of the IPC. The aggregate

punishment and the length of the period of imprisonment must not exceed

the limit prescribed by section 71 of the IPC.

“Section 71 of IPC187 provides

(1) that where an offence is made up of parts each of which parts is itself an

offence the offender can be punished only for one of such offences.

(2) That where an offence falls under two or more definitions of offences or

where several acts, each of which is a offence, constitute when combined a

different offence, then the punishment could be awarded only for any one

of such offences.”

In case of several sentences to run concurrently it is not necessary

to send offender for trial before higher court only for the reason that

aggregate punishment for several offences is in excess of punishment

which the magistrate is competent to inflict on conviction of single offence.

However, proviso to section 31 of CrPC provides that (a) in no case shall

such person be sentenced to imprisonment for a longer period that 14 years

(b) the aggregate punishment shall not exceed twice the amount of

punishment which the court is competent to inflict for single offence.

The general procedure for post-conviction hearings on sentence is set out

in section 235 of the 1973 Code, which provides that:

186
The Code of Criminal Procedure 1974, s. 31.
187
Indian Penal Code 1860, s. 71.
 5

Section 235. Judgment of acquittal or conviction

1) After hearing arguments and points of law (if any), the Judge

shall give a judgment in the case.

2) If the accused is convicted, the Judge shall, unless he proceeds in

accordance with the provisions of section 360 hear the accused on the

question of sentence, and then pass sentence on him according to law.

This is consistent with sentencing procedure in most jurisdictions

where the offender has the opportunity to make representations to the

sentencing judge (whether or not he is the trial judge), prior to the sentence

being imposed, in order to mitigate the sentence that they will ultimately

receive. The effect of this section (namely sentence post-conviction and

after representations from the convicted individual) is mirrored in other

parts of the 1973 Code. The sentencing judge is instructed to "hear" the

accused on the issue of sentence and then must pass the sentence in

accordance with the statutory punishments as set out for the range of

criminal offences. It is thus for the judge to adjudicate upon relevant

mitigating factors and aggravating factors, with little or no guidance other

than judicial experience and limited submissions from counsel.

Section 325 provides for the committal of the convicted person for

sentence to a Chief Judicial Magistrate if the sentencing judge is of the

opinion that his or her legal powers of sentence are not great enough to

provide for the imposition of sufficiently severe sentence. S. 325 of the 1973

Code provides that:

Section 325. Procedure when Magistrate cannot pass sufficiently

severe sentence.(l) Whenever a Magistrate is of the opinion, after hearing

the evidence for the prosecution and the accused, that the accused is guilty,

and that he ought to receive a punishment different in kind, or more severe

than,
 6

that which such Magistrate is empowered to inflict, or, if a Magistrate of

the second class, is of opinion that the accused ought to be required to

execute a bond under section 106, he may record the opinion and submit

his proceeding, forward the accused, to the Chief Judicial Magistrate to

whom he is subordinate to.

However, as under s. 235, there is no guidance as to how a

magistrate may form such an opinion because the powers of sentence

available to them are insufficient to adequately punish the convicted

person.

S. 360(1) of the 1973 Code legislates for situations in which the

offender has no previous convictions and (a) the offender is under 21 years

of age and the offence is (a) punishable with less than life imprisonment or

the death penalty, or (b) the offender is a woman and the offence is

punishable with less than life imprisonment or the death penalty, or (c)

where the offender is over 21 and the offence is punishable with seven

years imprisonment or less. In such situations, the sentencing judge may,

having regard to the age, character or antecedents of the offender, and to

the circumstances in which the offence was committed, release the offender

with a bond (with or without sureties) if it appears to the court that it is

expedient to do so. Section 360(3) legislates for situations where a first-time

offender is convicted of theft, theft in a building, dishonest

misappropriation, cheating or any other offence under the Indian Penal

Code 1860, punishable with not more than two years imprisonment or any

offence punishable with a fine only. In such situations the court may,

having regard the age, character, antecedents or physical or mental

condition of the offender and to the trivial nature of the offence or any

extenuating circumstances under which the offence was committed, release

the offender after “due admonition”.

 7

Finally, Section 361 of the 1973 Code imposes a duty on the

sentencing judge to provide reasons for the sentence that they have

selected to impose in cases where the offence is under the Probation of

Offenders Act 1958, or the Children's Act 1960. Both of these Acts provide

for alternative sentences rather than the conventional sentences in

accordance with the statutory minima and/or maxima as set out by statute,

with the 1958 Act providing for sentences of probation/supervision for

certain offenders in some circumstances at the discretion of the court, and

the 1960 Act providing for detention in special schools, safe custody, and

the sentencing of delinquent children.

3.2. Judicial Response to sentencing:

What is apparent is that aside from the limited restrictions created

by statutory maxima and/or minima, sentencing judges essentially exercise

unfettered discretion with regard to the choice of sentence they wish to

impose on an offender after hearing any pleas in mitigation on their behalf

or aggravation as against them. Indeed, where there is a primary

alternative disposition available in relation to an offender, for example as

can be seen in Sections 360(1) and (3) of the 1973 Code where the judge has

a prerogative to award an alternative sentence other than the norm, there is

no guidance as to how that prerogative can and should be exercised. These

issues can be illustrated by examining, for example, Section 379 of the

Indian Penal Code 1860, which provides for the offence of theft that

“Whoever commits theft shall be punished with imprisonment of either

description for a term which may extend to three years, or with a fine , or

with both.”

With the lack of judicial guidance for this offence, two similar first-time

offenders perhaps having been found guilty of joint-enterprise theft may

easily be sentenced to vastly differing sentences in terms of punitiveness,

with Offender A, say, given 3 years imprisonment, and Offender B

released
 8

without a surety. It cannot be said that this discretion automatically

offends the principles of sentencing per se. In our example, one offender

may have significant mitigation which may render an appreciably lower

sentence entirely appropriate. However, the lack of guidance as to levels of

severity (as is present in the England and Wales guidelines system, for

example in cases of robbery - see subsequent sections of this paper) and

mitigation, may result in an offender with the same or very similar profile

as Offender B being sentenced to 3 years imprisonment by another judge in

another court.

The system of unfettered discretion leaves the sentencing system open to

the vagaries of individual judges, negating nationwide or even courthouse-

wide consistency - the consistency that is a cardinal aim in any sentencing

model. It thus seems that the primary controlling influence on sentences

that are imposed by Indian trial courts is that of appellate review, as

provided for in the 1973 Code in circumstances where a sentence passed is

excessive, where a sentence is insufficient, or where there has been an error

of law in the sentencing process.

The considerable discretion enjoyed by courts in sentencing has also

revealed that it takes a long time before a case is resolved. Judicial officers

satisfy themselves that they have paid close attention to every evidential

aspect of the case before a decision is taken. This also extends the defence,

the opportunity to delay trials by insisting that courts deliberate over

minutest details of the criminal act in question. This state of affairs has

resulted in a huge backlog of cases and a judicial logjam of unmanageable

proportions. It can take up to five years before a case has its first before a

trial court. If the accused is detained in custody he stands to years of his

freedom even if he is ultimately found not guilty. Efforts have been made

to streamline the sentencing process at several levels, all of which have had

a sentencing procedure and doctrine. The most significant step in this

 9

direction was the Criminal (Amendment) Act 2005 which for the first time

introduced the concept of plea bargaining in India. It is a formal, statutory

recognition of a discount for offenders who plead guilty. Interestingly, this

sort of reform was introduced despite opposition of judiciary, especially to

the concept in the beginning. In State of Uttar Pradesh v. Chandrika188, the

Court said: "It is settled law that on the basis of plea bargaining courts

cannot decide criminal cases. The court has to decide it on merits. If the

accused confesses to guilt, sentence is required to be implemented." The

court further held that in the same case that the acceptance or admission of

the guilt should not be a ground for reduction of sentence. The accused

claimed that since he is pleading guilty the sentence needs to be reduced.

However, in 2005, the Government added sections 265-A to 265-Code of

Criminal Procedure 1973 to provide for plea bargaining in certain cases.

Currently, it is applicable only in respect of those offences where

punishment of imprisonment is up to period of 7 years, but does not

include offences that affect the socio-economic condition of the country, or

been committed against a woman or a child below the age of 14 years.

An accused who enters a guilty plea can expect to serve as little as one-

fourth of the minimum sentence associated with his offence. First-time

offenders can also be released on probation. Enthusiastic support for the

concept of guilty plea has come from prisoners and the judiciary alike,

with a serving judge of the Bombay High Court even visiting a local prison

to encourage individuals to take advantage of this criminal law reform.

That the change has been well received was evident in the observation of a

division bench of the Gujarat High Court in State of Gujarat v. Natwar

Harchanji Thakor189 where it was observed: "The very object of law is to

188
State of Uttar Pradesh v. Chandrika, AIR 1999 SC 164.
189
State of Gujarat v. Natwar Harchanji Thakor, (2005) Cr. L.J. 2957.
 10

provide easy, cheap and expeditious justice by resolution disputes,

including the trial of criminal cases... "

 11

3.3. Sentencing of Corporations

The issue of sentencing of corporation was briefly discussed in the case of

Oswal Vanaspati & Allied Industries v. State of Uttar Pradesh 190 in the following

words:

“A company being a juristic person cannot obviously be sentenced to

imprisonment as it cannot suffer imprisonment. The question that

requires determination is whether a sentence of fine alone can be

imposed on it under Section 16 of the Act or whether such a sentence

would be illegal and hence cannot be awarded to it. It is settled law that

sentence or punishment must follow conviction and if only corporal

punishment is prescribed a company which is a juristic person cannot

be prosecuted as it cannot be punished. If, however, both sentence of

imprisonment and fine is prescribed for natural persons and juristic

persons jointly then though the sentence of imprisonment cannot be

awarded to a company, the sentence of fine can be imposed on it. Thus,

it cannot be held that in such a case the entire sentence prescribed

cannot be awarded to a company as a part of the sentence, namely, that

of fine can be awarded to it. Legal sentence is the sentence prescribed by

law. A sentence which is in excess of the sentence prescribed is always

illegal but a sentence which is less than the sentence prescribed may not

in all cases be illegal. It would depend on whether the entire sentence

prescribed can be awarded to the convicted person or only a part of the

prescribed sentence can be awarded to him. If the entire prescribed

sentence can be awarded to a convicted person, then awarding only a

part of the prescribed sentence is illegal. But if only a part of the

prescribed sentence can be imposed on a convicted person and not the

entire sentence prescribed, then imposition of that part of sentence

cannot be held to be illegal. Thus, if the prescribed sentence is

190
Oswal Vanaspati & Allied Industries v. State of Uttar Pradesh 1992 75 CompCas 770 All.
 12

of imprisonment and fine, then both these sentences must be awarded to

a natural person as he can suffer both. If part of such a sentence is

awarded to a natural person, it would be illegal. In the case of a

company, however, awarding only a part of such a prescribed sentence,

namely, fine, cannot be held to be illegal as a company cannot suffer

imprisonment. We are, therefore, of the opinion that awarding a

sentence of fine only to a company under Section 16 of the Act wherein

both the sentence of imprisonment and fine is jointly prescribed for

offences committed by a natural person as well as a company is not

illegal.”

Until recently, Indian courts were of the opinion that corporations could

not be criminally prosecuted for offenses requiring mens rea as they could

not possess the requisite mens rea. Mens rea is an essential element for

majority, if not all, of offenses that would entail imprisonment or other

penalty for its violation. Adopting an overly generalized rationale, pre–

Standard Chartered decision, Indian courts held that corporations could

not be prosecuted for offenses requiring a mandatory punishment of

imprisonment, as they could not be imprisoned.

In A.K. Khosla v. T.S. Venkatesan191, two corporations were charged with

having committed fraud under the IPC. The Magistrate issued process

against the corporations. In the Calcutta High Court, the counsel for the

defendants argued, inter alia, that the corporations, as juristic persons,

could not be prosecuted for offenses under the IPC for which mens rea is

an essential ingredient. The court agreed. The court pointed out that there

were two prerequisites for the prosecution of corporate bodies, the first

being that of mens rea and the other being the ability to impose the

mandatory sentence of imprisonment. Each of these prerequisites rendered

the prosecution of the

191
A.K. Khosla v. T.S. Venkatesan 1994 80 CompCas 81 Cal.
 13

defendant corporations futile: a corporate body could not be said to have

the necessary mens rea, nor can it be sentenced to imprisonment as it has

no physical body.

In Kalpanath Rai v. State192, a company, accused and arraigned under the

Terrorists and Disruptive Activities Prevention ("TADA") Act, was alleged

to have harbored terrorists. In a bench trial, the trial court convicted the

company of the offense punishable under section 3(4) of the TADA. On

appeal, the Indian Supreme Court referred to the definition of the word

"harbor" ["harbour"] as provided in Section 52A of the IPC and pointed out

that there was nothing in TADA, either express or implied, to indicate that

the mens rea element had been excluded from the offense under Section

3(4) of TADA.

The Supreme Court referred to its earlier decisions in State of Maharashtra v.

Mayer Hans George193 and Nathulal v. State of M.P.194 and observed that there

was a plethora of decisions by Indian courts which had settled the legal

proposition that unless the statute clearly excludes mens rea in the

commission of an offense, the same must be treated as an essential

ingredient of the act in order for the act to be punishable with

imprisonment and/or fine. Taking this reasoning a step further, the Indian

Supreme Court held that an accused corporation could not possess the

requisite mens rea, even if any terrorist had been allowed to occupy the

rooms in its hotel. The Court observed:

“We are aware that in many recent penal statutes, companies or

corporations are deemed to be offenders on the strength of the acts

committed by persons responsible for the management or affairs of such

192
Kalpanath Rai v. State 1997 (6) SCALE 689.
193
State of Maharashtra v. Mayer Hans George 1965 AIR 722.
194
Nathulal v. State of M.P. AIR 1966 SC 43.
 14

company or corporations e.g. Essential Commodities Act, Prevention of

Food Adulteration Act, etc. But there is no such provision in TADA

which makes the Company liable for the acts of its officers. Hence, there

is no scope whatsoever to prosecute a company for the offense under

Section 3(4) of TADA.”

Similarly, in Zee Telefilms Ltd. v. Sahara India Co. Corp. Ltd. 195, the court

dismissed a complaint filed against Zee under Section 500 of the IPC. The

complaint alleged that Zee had telecasted a program based on falsehood

and thereby defamed Sahara India. The court held that mens rea was one

of the essential elements of the offense of criminal defamation and that a

company could not have the requisite mens rea. In another case, Motorola

Inc. v. UOI196, the Bombay (now "Mumbai") High Court quashed a

proceeding against a corporation for alleged cheating, as it came to the

conclusion that it was impossible for a corporation to form the requisite

mens rea, which was the essential ingredient of the offense. Thus, the

corporation could not be prosecuted under section 420 of the IPC.

3.3.1. Vicarious Liability and State of Confusion

It seems that there is some confusion as to the concept of vicarious

liability when it comes to prosecuting officers of the company. The

following cases, throws ample light on this issue:

In State of Madras v. C.V. Parekh197 when the question was raised as

to whether officers of the company may be prosecuted and punished

accordingly without being ranged with company in the said prosecution,

the court clarified that such prosecution is possible only when first

condition

195
Zee Telefilms Ltd. v. Sahara India Co. Corp. Ltd (2001) 1 CALLT 262 HC.
196
Motorola Inc. v. Union of India 2004 CriLJ 1576.
197
AIR 1971 SC 447.
 15

is fulfilled i.e., the company is found in violation of certain provisions. The

observation of the court was explicit but limited:

“It was urged that the two respondents were in charge of, and were

responsible to, the company for the conduct of the business of the

Company and, consequently, they must be held responsible for the sale

and for thus contravening the provisions of clause 5 of the Iron and Steel

(Control) order. This argument cannot be accepted, because it ignores the

first condition for the applicability of S. 10 to the effect that the person

contravening the order must be a company itself. In the present case,

there is no finding either by the Magistrate OR by the High Court that

the sale in convention of clause 5 of the Iron & Steel (Control) order was

made by the Company. In fact, the Company was not charged with the

offence at all. The liability of the persons in charge of the Company only

arises when the contravention is by the Company itself. Since, in this

case, there is no evidence and no finding that the Company contravened

Cl. 5 of the Iron & Steel (Control), order the two respondents could not be

held responsible.”

In Sheoratan Agarwal v. State Of Madhya Pradesh198, the appellants

were the Managing Director and the Production-Manager of a public

limited company. The appellants were sued for alleged violations under

the Madhya Pradesh Pulses, Edible Oil Seeds and Edible Oil Dealers

Licensing Order, 1977 and the Madhya Pradesh Essential Commodities

(Price Exhibition and Price Control) Order, 1977 read with sections 3 and 7

of the Essential Commodities Act. In response, the appellants moved the

High Court under sections 397 and 482 of Code of Criminal Procedure for

quashing the entire proceeding on the ground that they could not, in law,

be

198
(1984) 4 SCC 352.
 16

prosecuted unless the company itself was prosecuted. The High Court

rejected this contention.

In Special Leave Appeal before the Supreme Court, the Apex Court

while dismissing the appeal opined that the said Act lists the persons who

may be held guilty and punished when it is a company that contravenes an

order under the said Act. Elaborating this point, the court observed that

‘It is clear from the language of Section 10 that there is no statutory

compulsion that the person-in-charge or an officer of the company

may not be prosecuted unless he be ranged alongside the company

itself. Each or any of them may be separately prosecuted or along

with the company if there is a contravention of an order made under

Section 3 of the Act by the company. It does no lay down any

condition that the person-in-charge or an officer of the company may

not be separately prosecuted if the company itself is not prosecuted.”

What the court clarified that “naturally, before the person in-charge or an

officer of the Company is held guilty in that capacity it must be established that

there has been a contravention of the order by the Company.”

In this case while explaining about observation in C.V. Parekh case the

apex court observed that:

“The sentences underscored by us clearly show that what sought to be

emphasised was that there should be a finding that the contravention was by the

Company before the accused could be convicted and not that the Company itself

should have been prosecuted along with the accused.”

Thus, it was clear that for vicarious liability of officers of the

company, company may or may not be prosecuted but there must be a

definite finding about violation attributable to the company. If the

company itself cannot be blamed, there can be no fastening of guilt on

officers of the
 17

company in the name of vicarious liability. However, this does not mean

that in every case of vicarious liability on officers of the company need to

be necessarily prosecuted. Reading too rigidly will not only be dangerous

but also provide procedural complications.

In the case of Anil Hada v. Indian Acrylic Limited,199 a question arose

that if the company eludes prosecution in accordance to section 138 of the

N.I Act, can the directors of the same company be prosecuted on its behalf?

In the said case, one of the directors of the company was prosecuted. The

concerned director sought the intervention of the High Court to quash the

conviction against him. However, a single judge of the court rejected the

contention that the company is the principal offender as per section 141 of

the N.I Act and that the directors are merely deemed offenders. The Court

held that establishing the guilt of the company is an essential condition for

the operation of the deeming provision to the prejudice of the Director.

Justice K. T. Thomas, writing the opinion in the Special leave petition

argued that:

“The provisions do not contain a condition that prosecution

of the company is sine qua non for prosecution of the other persons

who fall within the second and the third categories mentioned above.

No doubt a finding that the offence was committed by the company is

sine qua non for convicting those other persons. But if a company is

not prosecuted due to any legal snag or otherwise, the other

prosecuted persons cannot, on that score alone, escape from the penal

liability crestatated through the legal fiction envisaged in Section 141

of the Act.”

199
Appeal (crl.) 1258-63 of 1999.
 18

Thus, it was again made clear that prosecution of company is not

necessary pre-condition except the one that there must be a clear and

cogent finding as to violation on the part the company whereby court may

affix vicarious liability of officer in-charge.

3.3.2. Independent & Non-Executive Directors

The Companies Act defines an independent director as someone

who does not have a financial relationship with the company and does not

have a direct or indirect connection with the company's promoters or

directors. The Act also provides that an independent director is not

associated with the company's directors or its promoters. In addition, they

are also entitled to various duties and responsibilities under Schedule IV of

the Act.200 Schedule IV also contains the code of professional conduct for

non-executive and independent directors. This means that they do not

have to follow the same set of rules and regulations as the company's

executives and directors.

In the case of independent directors and non-executive directors, the

Companies Act,2013 creates specific safe harbour provisions, in an attempt

to balance the extensive nature of their duties and the liabilities imposed

on them. The supreme court, in Pooja Ravinder Devidasani v State of

Maharashtra & Ors201 held that

“…although a non-executive director is no doubt a custodian of the

governance of the company and is not usually involved in the day-to-day affairs of

the running of its business, if it is proved that at the time the specific decision was

taken, the director was at the helm of affairs of the company, he may be made liable,

but simply because a person is a director of a company, he does not become liable

for all the actions of the company.”

Companies Act 2013, Schedule IV.

200

Criminal Appeal Nos. 2604-2610 of 2014 arising out of Special Leave Petition (CRL)
201

Nos. 9133-9139 of 2010.

 19

The objective of these safeguards is to prevent non-executive and

independent directors from being held liable for actions taken by the

company that are not within their mandate. This is done through the use of

mitigating factors.

Section 149(12) of the Companies Act provides that an independent

director and a nonexecutive director can only be held liable in respect of

such acts of omission or commission by a company which had occurred

with:

(i) his knowledge;

(ii) attributable through board processes; and

(iii) with his consent or connivance; or

(iv) where he had not acted diligently.

The Companies Act provides that companies can provide insurance on

the behalf of their key managerial personnel to protect them from various

liability in the event that they are found guilty of any wrongdoing.202 This

means that the premium that the company pays for this insurance is

considered a part of the compensation of its officers and directors. 203 LODR

Regulations require the top 500 companies by market capitalisation to have

directors and liability insurance. This insurance can be provided for all

independent directors.204

Indian companies are also allowed to indemnify their directors

against various liabilities, such as breach of trust, negligence, and

misfeasance. This is done through the articles of association provided

under the Act. These include providing financial and other support to the

directors in defending their actions in any civil or criminal proceeding in

which the

202
Companies Act 2013, s.197(13).
203
Companies Act 2013, s.197.
204
LODR Regulations, Regulation 25(10).
 20

judgement is given in his favour, or in which he/she is discharged or

acquitted at their own cost. However, it is to be understood that these

liabilities differ greatly from that of directors who incur liability in the

ordinary course of managing the company’s affairs.

While acting as the company's agents, directors are treated as such

and have the right to seek compensation from the principal if they are

injured as a result of their duties. These safeguards are provided under the

Indian Contract Act, 1872.205 In general practice, the indemnification of the

directors is effectuated through specific provisions in the articles of

association and such indemnities are legally required to be in consonance

with the provisions of the Companies Act.

3.3.3. India’s Existing Director Liability Framework

In India, statutes governing various offences, such as tax evasion,

securities frauds, money laundering and environmental degradation,

impose liability on corporate officers for the company’s wrongful actions.

These statutes typically contain a provision titled “offences by companies”

which impose liability on directors as follows:

(i) every person in charge of, and responsible to the company

for the conduct of its business at the time of the commission

of the offence under the specific statute is deemed guilty of

the offence and is liable to be proceeded against and

punished; and

(ii) where an offence has been committed by a company and it is

proved that the offence:

a. has been committed with the consent or connivance

of; or

205
Indian Contract Act, 1872, s.124.
 21

b. is attributable to neglect on part of any director,

manager, secretary or other officer, such director,

manager, secretary or other officer is deemed guilty of

the offence and is liable to be proceeded against and

punished accordingly.

For persons falling within the scope of (i), the carve out limiting liability is

that such persons shall not be liable to any punishment under the specific

statute if he proves that the offence was committed without his knowledge

or that he had exercised due diligence to prevent the commission of such

offence. For persons covered under (ii), it has to be proved that the offence

had been committed either with the consent or connivance of, or that it was

attributable to neglect on part of such persons, for them to be held liable

and punished.

A careful reading of such provisions demonstrates that Indian

statutes impose liability on directors in primarily two ways:

(i) vicarious liability on those officers who are in charge of and

responsible to the company for the conduct of its business -

this imposition of liability is based on the powers and

responsibilities assigned to the directors, and the actual

commission of any particular wrong by a director is not a

prerequisite to be held liable; and

(ii) vicarious liability on those officers who have contributed to

the contravention or the offence by consenting, conniving or

not acting diligently, thereby allowing the offence to take

place - this imposition of liability requires some wrong doing

on part of the directors, through means such as consent or

connivance.120
 22

In this regard, the supreme court in SEBI v Gaurav Varshney206 held as

follows:

“…a company being a juristic person, all its deeds and

functions are the result of acts of others. Therefore, officers of a

company who are responsible for acts done in the name of the

company are sought to be made personally liable for acts which

result in criminal action being taken against the company. It

makes every person who, at the time the offence was committed,

was in charge of, and was responsible to the company for the

conduct of business of the company, as well as the company, liable

for the offence. The liability arises from being in charge of and

responsible for the conduct of business of the company at the

relevant time when the offence was committed and not on the basis

of merely holding a designation or office in a company.

Conversely, a person not holding any office or designation in a

company may be liable if he satisfies the main requirement of

being in charge of and responsible for the conduct of business of a

company at the relevant time. Liability depends on the role one

plays in the affairs of a company and not on designation or

status.”

In the case of National Small Industries v. Harmeet Singh Paintal 207, the

Supreme Court has held that a director of a company is liable for offences

committed by the company. The court has also stated that there must be

specific evidence against the director to establish his or her liability.

However, the court also opined that in circumstances where the person

(2016) 14 SCC 430.

206

Criminal Appeal No. 320-336 of 2010 (arising out of Special Leave Petition (CRL) Nos.
207

445-461 of 2010)).
 23

concerned is not in charge of the conduct of the company, the liability can

only be ascertained on the grounds of consent, connivance and

negligence.208

Recently, in Shiv Kumar Jatia v State of NCT of Delhi 209, the Supreme

court has reiterated the principles laid down by it in the Sunil Bharti Mittal

case and stated the following:

“...while considering the circumstances when a director/person in

charge of the affairs of the company can also be prosecuted, when the

company is an accused person, this court has held, a corporate entity is

an artificial person which acts through its officers, directors, managing

director, chairman etc. If such a company commits an offence

involving mens rea, it would normally be the intent and action of that

individual who would act on behalf of the company. At the same time,

it is observed that it is the cardinal principle of criminal jurisprudence

that there is no vicarious liability unless the statute specifically

provides for it. …it is clear that an individual either as a director or a

managing director or chairman of the company can be made an

accused, along with the company, only if there is sufficient material to

prove his active role coupled with criminal intent. Further, the

criminal intent alleged must have direct nexus with the accused.”

Various statutes, such as the Foreign Exchange Management Act, 1999 and

the Competition Act, 2002 have civil liability provisions for directors for

violations of these laws. The penalties are usually based on the amount

involved and range from a fine of two lakh rupees to one crore rupees. The

manner of attribution of criminal liability is similar to other statutes that

208
K.K. Ahuja v V.K. Vora and Another [(2009) 10 SCC 48].
209
Criminal Appeal No. 1263 of 2019 (arising out of Special Leave Petition (CRL) No. 8008
of 2018)).
 24

make laws for imposition of criminal liability on directors for offences by

companies.

The liability of directors in the Companies Act differs from that of

other statutes. The Companies Act provides that directors have various

duties, and these include acting in good faith and in accordance with the

company's articles of association. Aside from being able to promote the

company's objects, directors also have to exercise due diligence and

independent judgment.210 The duties of directors and its fiduciary nature

are generally based on the principles of the common law. However, if a

director breaches the provisions of section 166, he or she could be liable for

civil liability. This means that if a director is found guilty of violating the

provisions of section 166, they could be fined an amount not less than one

lakh rupees and it may extend to five lakh rupees. Other sections of the

Companies Act also provide that director are liable for civil liability for

various violations. For instance, if a company's prospectus contains a

misstatement, the directors are liable to pay compensation to the other

investors who suffered losses due to the misstatement.211

Section 149(12) of the Companies Act provides that certain directors,

such as those who are independent and non-executive directors, are liable

for substantial risks, without having any influence over the company's

operations. This is an example of the type of liability that can be faced by

non-executive directors and executive directors of companies. However,

the risk faced by independent directors is even more pertinent when it

comes to other statutes like the Negotible Instruments Act, 1881. The NI

Act doesn’t distinguish between executive and non-executive directors

when it comes to attributing liability. Section 138 of the NI Act provides

for dishonour of

210
Companies Act 2013, s.166
211
Companies Act 2013, s. 35
 25

cheques by companies and when such act is done, section 141 of the NI Act

is triggered which provides that “every person who, at the time the offence was

committed, was in charge of, and was responsible to the company for the conduct of

the business of the company, as well as the company, shall be deemed to be guilty

of the offence and shall be liable to be proceeded against and punished

accordingly”.

There are various carve outs for limiting liability under the NI Act.

For instance, if the director can prove that he was not aware of the alleged

offence, he can avoid liability. However, it is still very common for the

courts to incriminate the directors of companies whose cheques have been

dishonoured under section 138 of the NI Act. Although courts have been

careful in interpreting Section 141 of the NI Act, they are still frequently

indicting directors who were in charge of day-to-day operations of the

company when the dishonoured cheque was issued. This is very

problematic as it can affect the operations of non-executive directors and

independent directors through issue of summons which has to be catered

to, irrespective of the outcome of the legal suit.

A recent example of such cautious interpretation mentioned above

is Bhardwaj Thirvenkata Venkatavaraghavan v PVR Ltd 212, where the Delhi

High court was concerned with a non-executive nominee director of a

company that had issued a cheque. The court held that under section 141

of the Negotiable Instruments Act, the person who is in charge of the day-

to-day operations of a company is required to be held responsible for the

conduct of the business of the company.213 It also noted that it is not

enough for a person to arraign a director merely on the basis of his or her

statement that

212
2019 SCC Del 6774.
213
Ibid.
 26

the company is responsible for its actions. On the basis of this rationale, the

court quashed the complaint against the director.214

In the case of Somendra Khosla v. State215, the Delhi High Court was

presented with a complaint against the independent director of the

company. The plaintiff had argued that despite being an independent

director, he was still responsible for the day-to- day operations of the

company. Consequently, the court refused to quash the complaint filed

against him. The Court followed the rationale established in Standard

Chartered Bank where the Supreme Court had summoned the officers in

managerial positions, directors who were responsible in the day-to-day

affairs of the company.

Similarly, in Chitra Sharma and Ors v Union of India and Ors 216, the

Supreme Court held that the restrictions placed on the non-executive

directors of Jaypee Infratech Limited by the company were not different

from those imposed on the executive directors. The court noted that these

restrictions applied to both independent and executive directors to prevent

them from leaving the country without due permission of the court. In

addition, the court also ordered for alienation of assets of directors and

their families.

3.3. Factors in Sentencing

The modes and forms of imposing penalty are generally laid out in

the legislations and the judicial officers adhere to the said guidelines while

prosecuting the offenders. Each offence is governed by a maximum penalty

and the legislature has provided for the adherence of minimum mandatory

214
Ibid.
215
CRI.MC. 3982/2017
216
W.P (C) No. 744 of 2017.
 27

sentencing policy in certain circumstances. Moreover, the period of the

sentence and the corresponding severity depends upon the gravity of the

offence. Further, the gravity of the offence is dependent of existence of

various aggravating and mitigating factors which can either provide for

maximum sentence to be imposed or provide for a lenient alternative. In

circumstances where the aggravating factors add up to the severity of the

crime, the court can prescribe for a stringent punishment and, in

circumstances where the mitigating factors assume significance, the court

can prescribe for imposition of punishment of lesser degree. Generally

speaking, the parliament makes provision for penalties and prescribes the

imposition of same in the ‘worst case scenario’. 217 It is to be understood that

not all aggravating and mitigating factors affect the course of sentencing. It

is only the elements that are intricately related to the aggravating and

mitigating factors which assume relevance in a given circumstance. For

instance, if a juvenile is held criminally liable as per sections of a

designated act, then he/she might be subjected to rehabilitative form of

punishment rather than forms of general deterrence.

3.3.1. Age as a mitigating factor

In the case of Bachan Singh218, Hon’ble Supreme Court opined that in

cases where a juvenile or minor is found as guilty of a criminal

misconduct, then due weightage must be given to his/her age as it acts as

the mitigating factor in sentencing of the accused. The court further stated

that if the accused has committed a criminal offence at a young age, then

relevant actions can be undertaken towards reforming the individual

instead of prosecuting him/her. Further, in the case of Ramnaresh v. State

of

217
Dr. Pratap S. Malik, Law on Sentencing (Aggarwal Law House 2016) 45.
218
Bachan Singh v. State of Punjab (1980) 2 SCC 684.
 28

Chhattisgarh219, where the offence involved gangrape and murder

committed by various persons between 21-30 years of age, the court

sentenced the perpetrators to imprisonment for life keeping in view the

mitigating factor, in the form of age. Similarly, in the case of Ramesh v. State

of Rajasthan220 the court adjudicated upon the offence involving double

murder for gain and held that offender ought to be subjected to

rehabilitative treatment since the mitigating factor in the form of age hints

at the greater possibility of rehabilitation which would not be achieved if

the court were to impose punishment having a deterrent nature. In another

case of Surendra Mahto v. State of Bihar221, the court opined that the offender

was 30 years old and this acted as a mitigating factor which prompted the

court to draw conclusion that the offender could be reformed owing to his

young age. However, it needs to be understood that age as a mitigating

factor has been used quite erratically and inconsistently while prosecuting

offenders guilty of criminal misconducts. In the Bachan Singh case, Justice

Bhagwati cited various cases in his dissent where age as a mitigating factor

was not considered while imposing life imprisonment instead of death

sentence. The trend of inconsistency continued post-Bachan Singh and is

still prevalent in so far as criminal prosecution is concerned.

The trend can be studied through few instances. In the case of

Dhananjoy Chatterjee v. State of West Bengal222, the security guard of an

apartment was sentenced to death for the rape and murder of an 18-year-

old girl living in the said apartment. Subsequently, the said case was

brought into consideration in the case of Rameshbhai Chandubhai Rathod (2)

v. State of Gujarat223 because of the similarity with respect to facts of the

former.

219
Ramnaresh and Ors. v. State of Chhattisgarh (2012) 4 SCC 257.
220
Ramesh v. State of Rajasthan (2011) 3 SCC 685.
221
Surendra Mahto v. State of Bihar Criminal Appeal No. 211/2009.
222
Dhananjoy Chatterjee v. State of West Bengal (1994) 2 SCC 220.
223
Rameshbhai Chandubhai Rathod (2) v. State of Gujarat (2011) 2 SCC 764.
 29

The only difference was that the perpetrator in the latter was 28 years of

age and the court considered the same as a mitigating factor towards

imposing life imprisonment keeping in view the possibility of reform in the

given case.

Thus, it can be construed that both cases with similar set of facts

were decided differently. In one case, age as a mitigating factor was not

considered whereas it was considered in the other and was also made a

basis for the imposition of life imprisonment. Further, in the case of

Purushottam Dashrath Borate v. State of Maharashtra224, the court followed the

rationale laid down in Dhananjoy Chatterjee while imposing death sentence

on perpetrators aged 20 and 26 years respectively. The court didn’t

consider the stance taken in Rameshbhai Chandubhai or Shankar Khade225

where the approach of the decision-making court was criticised for not

considering various mitigating factors before imposing death sentence

upon the accused. Even after doubts regarding the justifiability of decisions

taken in Dhananjoy Chatterjee, the rationale laid down in the case was

followed in deciding plethora of cases which hints at the irregularity and

inconsistency of the courts in following an appropriate process or principle

in reaching conclusion in cases relating to criminal prosecution. The

Supreme Court in Shankar Khade pointed to the inconsistent use of age as a

mitigating factor in otherwise similar cases of rape and murder.

3.3.2. Nature of offence as an Aggravating Factor

The imposition of death penalty as a form of punishment requires

the offence to fall under the ‘rarest of rare’ category. This makes it

imperative for the judges to ascertain as to which cases qualifies or falls

under the ‘rarest of rare’ category through assessing a pool of similar

cases. However, it

224
Purushottam Dashrath Borate v. State of Maharashtra A.I.R. 2015 SC 2170.
225
Shankar Kisanrao Khade v. State of Maharashtra (2013) 5 SCC 546.
 30

becomes impossible to do so as there exists no empirical data or tool to

adjudge as to what case falls under the ‘rarest of rare’ category and on

what basis. The Supreme Court in the recent case of Shankar Khade stressed

for an evidence-based sentencing instead of ‘rarest of rare’ formulation as

the latter required a pool of data which is unavailable. Therefore, the Apex

Court opined that application of rarest of rare formulation is extremely

delicate and subjective and might lead to difference of opinion as it

depends on one’s interpretation of facts and substances.226 However, the

court made an observation that in cases involving rape and murder of a

young child, the death penalty is imposed as the offence is of the nature

that shocks the conscience of the judiciary.

So, for instance, the rape and death of a child aged one-and-half-

year old227 and 10-year-old was decided by the courts as not attracting the

death penalty because even though the nature of the crime was heinous

and depraved, the offenders are not a threat to the society and have the

scope to be rehabilitated and reformed. On the other hand, in another set of

instances, the court held that the rape and murder of 5-year-old 228, is

extreme, brutal and gruesome and therefore, should be punished with

death penalty. In the case of Jumman Khan v. State of UP229, the court held

that the only punishment that is plausible to impose for the heinous

offence of rape and murder of a 6-year-old child is death penalty as it is

imperative as a social measure and as a means of deterrence to deter other

imitators from committing the offence.

226
Shivu v. Registrar General, High Court of Karnataka (2007) 4 SCC 713.
227
Mohd. Chaman v. State (NCT of Delhi) (2001) 2 SCC 28.
228
Bantu v. State of U.P. (2008) 11 SCC 113.
229
Jumman Khan v. State of UP AIR 1991 345.
 31

Similarly, in the case of Md. Mannan @ Abdul Mannan v. State of

Bihar230, the court adjudicated upon the facts which involved the

kidnapping, rape and murder of a seven-year-old child. The court while

citing the offence as “extreme indignation of the community” held that the

act had “shocked the collective conscience of the society” as it was directed

against an innocent and defenceless child. The court further stated that

death penalty in the above-mentioned set of facts is the most logical

recourse and should be followed accordingly.

It can thus be observed that there exist two different patterns of

sentencing in more or less similar set of facts. This leads us to the

conclusion that there is a very thin line of difference to separate the

imposition of capital punishment and life imprisonment in matters relating

to rape and murder of a child. In many circumstances, the collective

conscience of the judges is affected when the case is regarding rape and

murder of a young child whereas in similar set of circumstances, many

judges would consider the age as a mitigating factor if the concerned act is

committed by a perpetrator who is of young age. Moreover, the sentencing

of offenders in so far as liability in criminal offences is concerned is subject

to the individual opinion of the judges as the efficacy, morality and the

potential deterrent factor of death penalty cannot be side-lined.

3.3.3. Prior Criminal Record of the Offender as an Aggravating Factor

The Supreme Court in the case of Shankar Khade hinted at numerous

instances where the prior criminal record of the offender played a major

factor in ascertaining the penalty under a given statute. However, the Apex

court also stressed upon plethora of cases where the prior culpability of the

offender was considered by the court even though the same was not

decided

230
Md. Mannan v. State of Bihar (2011) 8 SCC 65.
 32

and charges were framed on that basis. The court opined that the drawing

of adverse inference in circumstances where the case is still pending

against the accused in the court of law, is nothing but a negation of right of

presumption of innocence. Further, in the case of Sushil Murmu v. State of

Jharkhand231 where the factual matrix involved the commission of murder in

furtherance of human sacrifice, the court took into consideration the prior

accusations levied against the accused while deciding upon the matter at

hand. It is to be noted in the given case, the accused was suspected of

carrying out practices relating to human sacrifice but the accusations never

materialized as there existed no evidence on record to prove such thing.

However, in the said case, the accused was sentenced to death penalty on

the grounds that “the fact that similar accusation was made against the

accused-appellant for which he was facing trial, cannot also be lost sight

of.” On this basis, the Court imposed the death sentence on the accused.

Similarly, in the case of B.A. Umesh v. Registrar General, High Court of

Karnataka232, the factual matrix put forth before the court involved the

commission of rape, murder and robbery by the accused. The court

sentenced the accused to death penalty on the premise that he had been

caught while attempting to commit an act of similar nature; two days after

committing the present act. The court didn’t consider whether the

allegations against the accused were still pending or finalized. In real

sense, the allegations labelled against Umesh were never proved or

brought on record and despite these infirmities, a decision to the effect of

pronouncing death penalty against the accused was made. Subsequently, a

review petition was filed against the decision of the court and the same

was dismissed on the grounds that the accused showed no signs of

remorse or

231
Sushil Murmu v. State of Jharkhand (2004) 2 SCC 338.
232
B.A. Umesh v. Registrar General, High Court of Karnataka (2017) 4 SCC 124.
 33

humanity as he attempted to commit an act of similar nature after just two

days. Therefore, it can be construed that while deciding cases of such

nature, the court usually adheres to two lines of reasoning where one line

provides for sentencing on the basis of suspicion owing to prior

accusations (pending or undecided) while the other line provides for

interpretation of prior culpability as an aggravating factor in circumstances

where the offence on the part of the accused is proved/established, like in

Mohd. Farooq Abdul Gafur v. State of Maharashtra233. In Bachan Singh, the

Supreme Court prescribed for the imposition of death penalty only in

‘rarest of rare’ cases where the alternative option is unquestionably

foreclosed.

3.3.4. Doctrine of Proportionality

The Doctrine of Proportionality is referred to as the act of censuring

the offender by communicating the society’s disapproval of his/her actions.

The primary goal of the theory of proportionality is to impose a

proportionate sentence upon the offender which is equivalent to the

gravity of the offence committed by him/her. It must be understood that

the degree of punishment or proportionate sentence must not outweigh the

gravity of the crime. This is done with an objective of making the

individuals repent the consequences of their action/inaction.234 Section

143(1) of the U.K. Criminal Justice Act, 2003 provides an illustration of this

principle.235 It states that “in order to ascertain the seriousness of the offence

committed by the offender, the court needs to consider his/her culpability in

commission of the offence, injury inflicted upon any individual in furtherance of

commission of such offence etc.”

233
Mohd. Farooq Abdul Gafur v. State of Maharashtra (2010) 14 SCC 641.
234
Andrew von Hirsch, ‘Proportionality in the Philosophy of Punishment: From “Why
Punish?” to “How Much?’ (1991) 25 ILR 549, 561.
235
U.K. Criminal Justice Act 2003, s 143(1).
 34

The severity of the sentence that works towards censuring the action

of the accused needs to be proportionate with respect to the gravity of the

offence. The imposition of disproportionate sentence defeats the objective

of theory of proportionality as the doctrine aims towards placing breaks or

limits in the sentencing power and respects the values enshrined in rule of

law.236

The Hon’ble Supreme Court has used the theory of proportionality

as a penological objective while deciding many cases of criminal nature.

The court opined that the principles envisaged in criminal law follow the

same line of reasoning as the theory of proportionality. In accordance to

provisions of the statute, no individual should be subjected to a greater

degree of punishment than what his/her action warrants. Therefore, the

principle of proportionality can be utilised to justify death penalty as

certain acts of depraved and heinous nature calls for a deterrent method

which is proportional to the gravity of the offence committed. Therefore,

the theory of proportionality is of supreme importance in so far as criminal

prosecution in India is concerned as the courts are required to interpret

what is just and what is required on behalf of the society at large.237 It has

also stated that “imposition of sentence without considering its effect on

the social order in many cases may be in reality a futile exercise.”

A three-judge Bench while deciding upon the ways of

implementation of theory of proportionality in the context of death

penalty, held that the imposition of capital punishment is often considered

as a disproportionate sentence owing to circumstantial facts, but the

sentence of

236
Malcolm Thorburn, Proportionate Sentencing and the Rule of Law, in Lucia Zedner and
Julian V. Roberts, Principles And Values In Criminal Law And Criminal Justice: Essays In
Honour Of Andrew Ashworth (2012)
237
Shivu (n 198).
 35

life imprisonment is rarely considered as disproportionate or

incommensurate.238

An accurate depiction and understanding of use of theory of

proportionality in criminal prosecutions has been described in great detail

in the book of Barry Pollock. In the book, the author vouches for the

development of a framework within which the sentencing exercise need to

undertake in a death penalty case. It provided that the courts need to

compare a given set of facts with a “pool of equivalently circumstanced

capital defendants.”239 The mitigating and aggravating factors, thereupon

and the gravity and nature of the offence needs to be construed in great

detail to equate the given set of facts with the pool of previously decided

cases. If all the elements in the given set of facts hints towards imposition

of death penalty after due analysis from the said pool, then the court shall

make orders to such effect. This practice not only highlight the

inconsistency with respect to sentencing patterns, but also sheds light upon

cases where the imposed punishment was blatantly excessive. Importantly,

the court also held that reasoning is the most important element to ensure

“principled” sentencing.

In addition to the IPC offences, there are many offences where the

sentences are prescribed for corporations for their indulgence in illegal

conduct. These statutes not only provide sentencing guidelines to the

judiciary during trial stage but also envisages various sentencing policy at

different stages of the offence. The respective statutes, are, namely, the

Prevention of Corruption Act, Prevention of Money Laundering Act, Food

safety Act, Income Tax Act, GST Act etc.

238
Barry Pollack, ‘Deserts and Death: Limits on Maximum Punishment’ (1992) 44 RLR 985.
239
Ibid.
 36

3.4. The Prevention of Corruption Act, 1988

The legislative penal policy is reflected in Sections 7 to 16 in Chapter III

of The Prevention of Corruption Act, 1988 (hereinafter PCA, 1988), which

deals with offences and penalties. From the study of these sections two

things clearly emerge and they are:

a) “The offences punishable with imprisonment (except Section 15) 240 doesn’t

have a specific term period instead they have an upper and lower threshold.

The courts while sentencing the offender can impose sentences between the

thresholds.

b) Due to presence of a minimum threshold in all sections (except section 15),

the courts cannot utilise the discretionary power to impose sentences below

such thresholds. This expounds the policy of mandatory minimum

sentencing.”

In order to ascertain the sentencing policy of this Act in a clearer way, there

is a need to analyse the penal provisions prior to the 2014 Amendment241

and the position after such amendment. Further, to clarify the existing

confusion and issues, these provisions will be compared with the earlier

statue on corruption, i.e. The Prevention of Corruption Act, 1947

(hereinafter PCA, 1947).

According to section 7 of PCA,1988 (prior to 2014 Amendment), any

public servant taking any gratification other than the legal remuneration in

furtherance of an official work shall be punishable with imprisonment for

not less than six months which may extend up to five years with fine.

Section 8-12 (prior to 2014 Amendment) also provides for imprisonment

for not less than six months which may extend up to five years with fine.

On the contrary, section 13(2) (prior to 2014 Amendment) prescribed

punishment

240
The Prevention of Corruption Act, 1988, s 15.
241
The Lokpal and Lokayuktas Act 2013.
 37

for not less than one year and which may extend upto seven years with

fine for the criminal misconduct defined under the act. In order to ascertain

the change in sentencing policy, there is a need to compare the provisions

of the 1988 Act with the earlier statute i.e., PCA, 1947. Section of the 1947

Act provided that:

“Any public servant involved in a criminal misconduct shall be subjected

to imprisonment for not less than one year which may extend to seven

years with fine: Provided that the court may award sentence of

imprisonment for less than a year for special reasons and such reasons

must be recorded in writing.”242

Thus, it can be found that the earlier statute on prevention of

corruption had a proviso which bestowed certain discretionary powers on

the court to bypass the minimum sentencing policy prescribed by the

legislature. Even though the legislature mandated a minimum sentence for

criminal misconducts, it made exceptions that in cases where the

mitigating factors led the courts to arrive at a different conclusion, the

same can be effected by the operation of proviso and revision of the

sentence. This is an example of the presumptive sentencing model where

the discretion to revise minimum mandatory sentence resided with the

courts.243 Therefore, it can be concluded that in the 1947 Act, the

presumptive sentencing model was used whereas in the 1988 Act,

minimum mandatory sentencing policy was used.

However, is to be understood that in the presumptive model of

sentencing, the sentence can be modified beyond the lower as well as the

upper threshold. This means that if the court finds it appropriate that the

criminal misconduct in a concerned offence is grave enough to award a

242
The Prevention of Corruption Act, 1947, s 5 (2).
243
Ganesh Bhattarai, ‘Sentencing Policy in Nepal’ (2008) 1(1) KLR 202, 203.
 38

sentence beyond the maximum threshold then it can make orders to that

effect.244 Having said that, here in India in PCA, 1947 and in other socio-

economic laws where presumptive model was or is adopted, that too

through a system of proviso’s, the courts are only empowered to go below

minimum and not above the maximum. Thus, it can be concluded that the

legislature adopted a modified interpretation of the presumptive

sentencing policy which was lenient to the convicted persons.

Due to the operation of the proviso, section 5 of the earlier statute

bestowed discretionary powers in the court to revise the minimum

sentence. The practice of reducing the minimum sentence was dependent

on plethora of elements and was deemed as circumstantial with no

straight-jacket formula to ascertain the same. However, in most cases the

courts stressed upon the mental agony suffered by the offender due to loss

of job and the financial crisis resulting from it. If the court were of the

opinion that the plight of the offender carried the same weight as the

imprisonment he would’ve been subjected to, then it can make orders

reducing the minimum sentence while enhancing or retaining the imposed

fine. This policy was adopted in the case of P.S. Rao v. State of Andhra

Pradesh245 where the Supreme Court further modified the sentence of

imprisonment to three months even after the High Court’s decision to

revise the imprisonment to six months from one year. This was the

sentencing regime followed by the courts with respect to the earlier statute

on the prevention of corruption. According to the current statute i.e., the

1988 Act, the courts are following the mandatory minimum sentencing

policy which can be ascertained from the following cases:

244
Ibid.
245
P.S. Rao v. State of Andhra Pradesh AIR 1994 SC 1407.
 39

In the case of A.B. Bhaskar Rao v. CBI246, the appellant/accused was

an employee of the traffic cadre of the Railways. He was a head clerk in the

concerned department and dealt on matters relating to pension, retirement,

seniority list, resignation etc. The accused/appellant was held guilty of

criminal misconduct under the 1988 Act for asking bribe of two hundred

rupees from the complainant for releasing the transfer order. The trial

court found him guilty in accordance with section 7 of the Act and

sentenced him to undergo rigorous imprisonment for a period of six

months along with a fine of five hundred rupees. He was also found guilty

vide section 13(1)(d) of the Act following which he was sentenced to

undergo rigorous imprisonment for a period of one year along with a fine

of five hundred rupees. Subsequently, he made an appeal to the High

Court to revise the quantum of his sentences as he had already been

dismissed from the service at Railways.

The High Court rejected the appeal following which he preferred an

appeal to the Supreme Court. The Supreme Court while rejecting his

appeal stated that the grounds involving loss of job after conviction or

bribe amounting to only two hundred rupees assume significance in

offences where there is no policy enforcing a minimum mandatory

sentence. The court opined that the earlier statute of 1947 had a proviso in

section 5(2) which gave discretionary powers to the court to impose

sentence below the minimum threshold. However, such proviso has been

done away with in the 1988 Act and hence, awarding sentences below the

minimum threshold is beyond the purview of the court irrespective of how

just or plausible the grounds are in a particular case.

246
A.B. Bhaskar Rao v. CBI (2011) 10 SCC 259.
 40

In the case of B. Noha v. State of Kerala247, the accused/appellant was a

health inspector who was charged of criminal misconduct under the 1988

Act for receiving bribe amounting to one hundred rupees. He was charged

as per section 7 of the Act and was sentenced to three years of rigorous

imprisonment with fine amounting to twenty thousand rupees. He was

also charged under section 13(1)(d) read with section 13(2) of the Act

which also provided for imprisonment for a period of three years. The

Supreme Court after assessing the nature of the offence and the elements

surrounding the same, revised the sentences of the accused/appellant to six

months and one year respectively under section 7 and 13 of the Act. The

Apex Court’s decision reaffirmed the sentencing policy that existed in the

earlier Act i.e., in case of circumstances like loss of job, small amount of

bribe etc, the plight of the accused can be equated to the imprisonment

term and the court, if satisfied that the concerned accused is eligible for

revision of his sentences, then it can make orders to such effect. However,

the existing sentencing policy was adopted in a restricted sense whereby

the courts cannot revise the sentences below the minimum threshold and

must impose sentences within the range devised by the legislature. The

penalty imposed was also reduced to ten thousand rupees. Subsequently,

the legislature passed the Lokpal and Lokayuktas Act, 2013(which is Act

No.1 of 2014 and is also notified in the year 2014) and by the operation of

its provisions,248 various sections of the PCA, 1988 were amended. The 2014

Amendment revised the minimum mandatory imprisonment term in

sections 7, 8, 9 and 12 and increased the same to three years whereas the

maximum limit was increased to seven years.

247
B. Noha v. State of Kerala (2006) 12 SCC 277.
248
The Lokpal and Lokayuktas Act, 2013, s 58 read with part III of The Schedule.
 41

The 2014 Amendment also brought changes to section 13(2) of the

Act whereby the minimum threshold was increased to four years and the

maximum limit was fixated at ten years. It can thus be concluded that the

legislature, in order to the tackle the issue of corruption adopted a

stringent sentencing regime which follows the policy of minimum

mandatory sentencing.

3.5. The Food Safety & Standards Act, 2006

The Food Safety and Standards Act, 2006 (hereinafter FSSA, 2006)

has an entirely different tangent when it comes to penal policy

incorporated in various provisions as compared to other statutes on socio-

economic offences. As far as FSSA, 2006 is concerned, more reliance has

been placed on the economic penalties i.e., fines. Section 52 and 53 of the

Act even provide for economic penalties extending to several lakhs of

rupees. The economic penalties of such degree didn’t exist in earlier

statutes and the subsequent introduction of hefty fines in the FSSA, 2006

only hints at the stringent sentencing policy prescribed by the legislature.

The application of section 53 was recently observed in a case where

Amway India Pvt. Ltd. was penalized with fine amounting to ten lakh

rupees for misleading advertisement by the court of Adjudicating Officer

(FSSA) cum Additional District Magistrate (E), Greater Noida.249

The appropriate reason behind the imposition of hefty fines can be

attributed to the enactment year of the Act i.e., 2006. A statute

implemented and brought to life in 2006 cannot be expected to provide for

appropriate sentences in the form of fines for the offences committed in

present times. The offences defined under the 2006 Act provided for fines

amounting to

Food Safety and Standards Authority of India, ‘Legal: Summary of Court Cases’ (1(4)
249

Newsletter, May 2015) <www.fssai.gov.in/Portals/0/Pdf/NewsLetter_ May_2015.pdf>

accessed 21 December 2021.
 42

five hundred or one thousand rupees which is considered as quite meagre

in the present times and cannot enforce a deterrent effect. Since the profit

margin in the adulteration of food is fairly vast, the big-organized

companies can easily exploit this loophole and generate huge amounts of

profits by committing a socio-economic offence.250 This prompted the

lawmakers to arrive at a conclusion that in cases where the offence is not a

major one, the convicts should be subjected to greater degree of economic

penalties.

In order to get a clearer picture regarding the sentencing policy

adopted by the legislature, there is a need to analyse provisions of chapter

IX (section 48 to 67) which deals with offences and penalties.

 Section 50: When the food items being sold is not of the nature or
quality demanded, then the penalty for the same can extend to

maximum of two lakhs rupees.

 Section 51: It provides that the maximum penalty for selling

substandard food is five lakh rupees.

 Section 52: This section provides that the maximum penalty for
selling misbranded food is three lakh rupees

 Section 53: This provision states that the maximum penalty for
indulging in misleading advertisement is ten lakh rupees.

 Section 59: This provision provides for punishment for the sale and
business of unsafe food. Section 59 consists of four clauses. The first

three clauses deal with punishment when failure exists without any

injury, non-grievous injury and grievous injury respectively. In

these three clauses, the minimum mandatory sentencing policy has

250
Deviprasad Ghosh, ‘Food Adulteration in India: Issue of Policy or Social System?’ (2(1)
International Journal of Social Sciences 66, June 2012) <www.academia
.edu/6271170/Food_Adultration_in_India_Issue_of_Policy_or_Social_System> accessed on
21 December 2021.
 43

not been adopted as they provide for punishments in the form of

good amount of fine and imprisonment, if & when necessary.

However, clause (iv) of the provision deals with situation when the

failure or contravention results in death. In such situations, the

punishment imposed shall be in form of imprisonment for not less

than seven years and which may extend to life and fine which shall

not be less than ten lakh rupees. Thus, clause(iv) of section 59

follows the minimum mandatory sentencing policy while other

three clauses do not.

Hence, it can be concluded that the legislature’s intention while

drafting the provisions of the FSSA, 2006 was not to restrict the statute to

follow a single penal policy. Instead, the statute was devised to follow the

policy of graded penalties which essentially depends upon the nature of

offence committed. An act graver than the other can call for punishment in

the form of imprisonment along with fine while an act of relatively lesser

gravity can be dealt with fine of appropriate amount. 251 The FSSA, 2006

comprises of provisions that keeps a check on the misconduct committed

on day-to-day basis through imposition of fines of appropriate amount and

this acts as an effective method in restoring a sense of responsibility in the

offender and in safeguarding public health and safety.252

The legislature, in addition to imbibing the policy of graded penalties,

has also made an attempt to guide judicial discretion through section 49 of

the Act. Section 49 provides that the adjudicating officer, before coming to

a conclusion in a given case must consider various factors and

consideration of such factors must be instrumental towards deciding

the quantum of

251
M.S. Kachhwaha, ‘Food Safety and Standards Act, 2006 – An Effective Legislation’ (2012)
39(2) IBR 41
252
Ibid.
 44

sentence that is to be imposed. This provision also acts an example for

implementing specific sentencing policy in a statue.

Section 49 of the FSSA, 2006 comprises of five clauses wherein clause (a)

provides for any unfair gain or advantage obtained by the vendor or

manufacturer by selling food items of objectionable quality. Clause (b)

provides for the damage and injury suffered by any person due to usage of

such food items. If the vendor or manufacturer is a repetitive offender,

then such nature is taken into account by operation of clause (c). The

contravention whether wilful or accidental is to be considered vide the

application of clause (d). Clause (e) provides for consideration of other

circumstantial and residuary factors which must be taken into account by

the judge or adjudicating officer, thereby, paving way for application of

judicial discretion. The legislature’s intention towards shaping the limits

and bounds of judicial discretion should be ingrained in other statutes

concerning socio-economic offences which would not only bolster the

peace and tranquillity in the society but also the conviction rates in various

socio- economic offences.

3.6. Prevention of Money Laundering Act, 2002

“Section 70 of the PMLA, deals with the offences by Companies and the liability of

the persons responsible for the conduct of the business affairs of the Company.

Section 2 (s) of the PMLA define the term Person, who may be held liable for

commission of an offence and related consequence under PMLA. The term Person,

as defined under Section 2 (s) of PMLA, includes the following:

i. an individual,

ii. a Hindu undivided family,

iii. a company,

iv. a firm,
 45

v. an association of persons or a body of individuals, whether

incorporated or not,

vi. every artificial juridical person, not falling within any of the

preceding sub-clauses, and,

vii. any agency, office or branch owned or controlled by any of the above

persons mentioned in the preceding sub-clauses.”

The definition of "company" under PMLA is wide enough and inclusive.

The term "Company" as defined under PMLA includes any Body-

Corporate as well as a firm or other association of individuals, whether

incorporated or not.

Section 70 of the Prevention of the Money Laundering Act, 2002 provides

for punishment when corporations are involved in the offence of money

laundering. It also provides for imposition of punishment to the

individuals who were in control of the affairs within the company. The

rationale behind subjecting the individuals in control of various affairs in a

company is that a company is an artificial legal person incapable of

developing a state of mind or intention to commit crime; therefore, the

commission of the offence takes place through the involvement of agents

and officials within the company.

Any person who is a director, officer, or employee of a company or

any other person who is responsible for the company's operations or the

conduct of its business shall be regarded as guilty of any contravention

under the PMLA. Section 2(s) of Prevention of Money Laundering Act,

2002 defines the term ‘persons’ and it includes artificial or juristic persons

as well as the body corporate, in its purview. The body corporate could be

an association of persons, partnership etc., whether incorporated or not.

Usually, the person who assents to the commission of an illegal activity

under provisions of this act is held liable on behalf of the corporation if the
 46

act concerned is committed for his own personal gain. In cases where the

act has been committed by an individual, in charge of the designated act,

and in furtherance of benefit for the company, then the corporation can be

held guilty along with the concerned individual.

However, such person shall not be held guilty in accordance with

the provisions of the act, if he manages to establish that the concerned act

took place without his knowledge or he had acted diligently, in his own

capacity to prevent the commission of the illegal act.

Moreover, any contravention with respect to provisions, directions

or orders made under the Prevention of Money Laundering Act, 2002, by

any company, shall be subjected to utmost scrutiny. Further, if it is found

that the contravention with respect to PMLA is attributable to negligence

or carelessness of any manager, secretary, director etc or involves their

consent or connivance, then the same shall be proceeded against and

punished accordingly. It is also important to note that by virtue of the

Prevention of Money Laundering Act, 2002, a corporation can be held as

guilty, irrespective of the guilt of the individual offender. In a nutshell, a

corporation can be subjected to orders and provisions of the act even when

no liability is attributed to its agent or any individual offender.

3.7. SEBI (Prohibition of Insider Trading) Regulations, 2015

The Securities and Exchange Board of India through its Gazette

Notification dated January 15, 2015 issued the SEBI (Prohibition of Insider

Trading) Regulations, 2015 (“Regulations”) in order to place a legal

framework for prohibition of insider trading in securities and to strengthen

the same. These Regulations replace the SEBI (Prohibition of Insider

Trading) Regulations, 1992 with effect from January 15, 2015. Some of the

provisions of the said

 47

regulation stipulate the activities which forms a part of deceptive device

like the insider trading.

“Section 12A: Prohibition of manipulative and deceptive devices, insider trading

and substantial acquisition of securities or control.-- No person shall directly or

indirectly—

a) use or employ, in connection with the issue, purchase or sale of any

securities listed or proposed to be listed on a recognised stock exchange,

any manipulative or deceptive device or contrivance in contravention of

the provisions of this Act or the rules or the regulations made thereunder;

b) employ any device, scheme or artifice to defraud in connection with issue

or dealing in securities which are listed or proposed to be listed on a

recognised stock exchange;

c) engage in any act, practice, course of business which operates or would

operate as fraud or deceit upon any person, in connection with the issue,

dealing in securities which are listed or proposed to be listed on a

recognised stock exchange, in contravention of the provisions of this Act or

the rules or the regulations made thereunder;

d) engage in insider trading;

e) deal in securities while in possession of material or non-public

information or communicate such material or non-public information to

any other person, in a manner which is in contravention of the provisions

of this Act or the rules or the regulations made thereunder;

f) acquire control of any company or securities more than the percentage of

equity share capital of a company whose securities are listed or proposed to

be listed on a recognised stock exchange in contravention of the

regulations made under this Act.”

“Section 15G. Penalty for insider trading: If any insider who,

 48

i. either on his own behalf or on behalf of any other person, deals in

securities of a body corporate listed on any stock exchange on the

basis of any unpublished price sensitive information; or

ii. communicates any unpublished price sensitive information to any

person, with or without his request for such information except as

required in the ordinary course of business or under any law; or

iii. counsels, or procures for any other person to deal in any securities

of any body corporate on the basis of unpublished price sensitive

information, shall be liable to a penalty[which shall not be less than

ten lakh rupees but which may extend to twenty-five crore rupees or

three times the amount of profits made out of insider trading,

whichever is higher].”

The offence relating to insider trading has been provided under section 195

of the Companies Act, 2013 read with section 12A & Section 15G of the

SEBI (Prohibition of Insider Trading) Regulations, 2015. Section 12A of

SEBI (Prohibition of Insider Trading) Regulations, 2015 states that any

individual or persons indulging in deceptive and manipulative means in

relation to securities listed or to be listed of a firm shall be punished in

accordance with provisions of the act. It is to be noted that if the concerned

individual has committed the said act in furtherance of instructions or

directions laid out by his own company or any other company for that

matter, then the company shall also be held guilty along with the

individual vis-à-vis the provisions of the SEBI (Prohibition of Insider

Trading) Regulations, 2015. The offence of insider trading takes into

account the aspect of Unpublished Price Sensitive Information (hereinafter

referred as UPSI) and any person who is involved in procuring of such

information through illegal means and conveying the same to

unauthorized persons is deemed to have committed

 49

the offence of insider trading in accordance with section 12A of the SEBI

Regulations.

If an individual or corporation is found guilty as per section 12A of SEBI

(Prohibition of Insider Trading) Regulations, 2015, then they shall be

punished in accordance with section 15G of the SEBI regulations. Section

15G provides for punishment for the offence of insider trading. The

persons found guilty are subjected to monetary penalty or fine of ten lakhs

to twenty- five crore rupees or a penalty of a sum which is three times the

amount of profit made, or whichever is higher.

Section 195 of the Companies Act, 2013253 also provides for imposition of

punishment for the offence of insider trading in the form of imprisonment

for the period of five years and/or a fine amounting to twenty-five crore

rupees.

3.8. Corporate Offences against Environment

The corporations have become an integral part of our life, be it, providing

us with food and water or employment to sustain our lives. There is little

doubt to the fact that the power of corporations is bound to increase by

many folds in the near future. Companies may come and go owing to

preferences of people and the quality of service they provide, but the

concept of corporation is bound to evolve with each year. Therefore, it is

safe to assume that much of the indirect control over the society and the

state as a whole is asserted by the corporation through myriad ways.254

The legislature has granted special rights to the corporations as they act as

the medium of development. India being a developing country, has

253
Companies Act 2013, s 195.
254
Jennifer Hill, ‘Public Beginnings, Private Ends – Should Corporate Law Privilege the
Interests of Shareholders?’ 1 ICLA 17.
 50

numerous problems that dwarf the growth of the country as a whole.

Therefore, the legislature has emphasized on various rights of the

corporations as they act as the most viable medium to facilitate growth and

development in the country. The right of ‘perpetual succession’ is one such

special right that grants the corporation an indefinite lifespan while

limiting the legal and financial ability of the directors and shareholders.

This right also provides the corporations with special tax benefits allowing

them to operate for a long period of time; provided they are not indulged

in illegal activities.255

The favourable policies and laws owing to corporate growth can be

attributed to the legislature’s free market ideology. However, to counter

the abuse of the special rights and corporate menace, there exists little to no

regulations and the policy for the same is yet to be devised by the

legislature. The lack of regulations is a serious concern that needs to be

addressed as the corporations of today have complex structural

frameworks whereby it becomes difficult to locate the decision center of

company due to dispersed shareholding and de-centralized hierarchy of

structure.256

3.8.1. Environmental Pollution by Corporations

A study in the year 2000 revealed that 51 of 100 largest economies in the

world are corporations/companies. This statistic maps the position of

companies in today’s world. Moreover, the autonomy that these

companies command, make them immune to various regulations relating

to environmental pollution and degradation. Further, it has been observed

that most of the corporate offences are related to environmental

degradation which leads to the conclusion that the ramifications of

activities of

255
Ibid.
256
Ibid.
 51

corporations are largely unregulated. A study by Friends of the Earth

International (FOEI) revealed that Exxon Mobil produced 20.3 billion tons

of carbon dioxide emissions in its 120 years of existence which accounts for

three times the annual globe emissions. It can be said that the depletion of

natural resources and extinction of wildlife is more or less a ‘legal action’

as it emanated from exercise of legal rights by the corporations.257

Moreover, these statistics are a result of extensive research in

western countries and the applicability of same in the Indian context is

highly unsustainable due to inadequate resources and infrastructure. India,

being a developing country is plagued by problems relating to

environmental degradation as it is an irrevocable issue that is bound to

arise in the wake of unregulated use of rights and powers by the

corporations.258

The globalization and global warming are very much proportional

to one another. Even though there exists no statistic to affirm the

above- mentioned theory, yet one can relate these. With the globalization,

there was emerge of numerous corporations and as a result, the carbon

emissions went up and has been unsupervised and unregulated since then.

Globalization led to the creation of multi-national, transnational and

national corporations which meant these corporations operated in one or

more countries or states. Since the developing countries are dependent on

corporations of all kinds for their growth and development, they fall prey

to the demand of autonomy by these corporations. The autonomy grants

the corporation with an endless authority to exploit the natural resources

of the concerned country/state.259

257
Sarah Anderson and John Cavanagh “Top 200: The Rise of Global Corporate Power” 2000
IPS: DC.
258
Ibid.
259
Stacey Neumann Vu, “Corporate Criminal Liability: Patchwork Verdicts and the
Problem of Locating a Guilty Agent’ (2004) 104 CLR 459.
 52

In order to impute liability upon the corporation, there is a need to

establish that one or more persons committed all the elements in the crime.

Moreover, due to complex structural and hierarchical frameworks and the

size of the corporation, it becomes difficult to impute liability to the

corporation, especially where the offence requires mens rea to be

established. Also, in cases where one or more persons is liable for a given

act, it becomes even more difficult to prove that they acted in common

concert and in furtherance of the same intention to commit the said act.

3.8.2. Corporate Criminal Liability – Position in India

Section 2 of the Indian Penal Code states that every person shall be

subjected to punishment in accordance to the Code. 260 Section 11 of the IPC

provides for the definition of persons and includes ‘any company or

association of persons, whether incorporated or not’.261 Initially, the Indian

Courts were reluctant in so far as convicting corporations is concerned.

They opined that the corporations are devoid of physical existence and

hence, cannot be punished. however, in 2005, the Supreme Court of India

altered the position and stated that in cases where the provision provided

for both fine and imprisonment, fine can be imposed for same. Even

though the position of the court is not clear in cases where the offence

prescribes for the imposition of imprisonment; the discussion with

Directorate of Enforcement suggests that the corporations cannot be

subjected to imprisonment.262

The Environmental Law has character and features of administrative law

but resembles to that of criminal law to a large extent. It is because, the

environmental law consists of strict administrative sanctions and

requirements which need to be catered specifically be it the rate of

260
Indian Penal Code 1860, s 2.
261
Indian Penal Code 1860, s 11.
262
M.C. Mehta v. Union of India AIR 1987 SC 1086.
 53

emissions, the carbon footprint etc. The violation of these administrative

requirements would attract strict action in the form of heavy fines, in case

of corporations. Environmental laws in India were enacted as a compliance

regime to the Stockholm Conference on Human Environment of June 1972.

Even though the legislature adopted a full-bodied form of the

environmental regulations, the application of same was restricted to letters

of the provision. In practicality, the law was devoid of the spirit and

objective to account for prevention, control or abetment of pollution.

As appropriately put forth by Shyam Diwan, the legislature in India

is swift in enacting laws for controlling various aspects of natural

resources, but at the same time, is inept in adopting requisite changes that

would provide for effective implementation.263 The government agencies

possess adequate power to regulate the corporations indulging in

environmental degradation. However, the trend suggests that the

government agencies have been reluctant in imposing sanctions relating to

environmental degradation activities. The first environmental legislation in

India was enacted in the form of Water Act of 1974 which in real sense,

wasn’t different from the existing statutes. It was simply an addition to the

licensing- administered law. The implementation of Environmental laws in

India is a result of judicial activism as the legislature has been incapable in

bringing forth laws that considers all the aspects of environmental

pollution. The Apex Court and the High Court through a plethora of

judgements incorporated strict principles relating to environmental

degradation and subjected the corporates to reformative measures like

cleaning of polluted

Shyam Diwan and Armin Rosencranz, Environmental Law and Policy in India: Cases,
263

Materials and Statutes (2nd edn, Oxford India Paperbacks 2002) 1.

 54

water bodies, afforestation etc. as a part of the corporate social

responsibility.264

3.8.3. Penalties under Water (Prevention and Control of Pollution)

Act, 1974

The provisions of Water Act, 1974 provide for imprisonment for a period

of three months or a fine amounting to ten thousand rupees or both for the

non-compliance of directions given by any authority defined under this

act. Moreover, the provisions of the act also provide for an additional fine

of five thousand rupees per day if the offender continues with the

violation. Further, section 32 and 33A of the Water Act, 1974 provides that

if certain directions devised by the Central Government as a part of the

emergency measure is not complied with, then the person shall be

subjected to imprisonment which may range between twelve and eighteen

months and can be extended up to six years with a fine of five thousand

rupees for each day of violation.265 The organizations and industries or

persons, for that matter are prohibited from using any well or stream as a

dumping ground for polluting matter and the same has been provided

under section 24 of the Act. On the other hand, section 25 of the Act puts a

bar on the industries and factories from opening up new outlets and the

subsequent discharges. Section 26 of the Act makes provision regarding

existing discharge of sewage or trade effluent. It provides that the

person/persons held liable under this provision shall be subjected to

imprisonment which shall not be less than one year, and six months and it

may extend up to six years with fine.266 The Water Act, 1974 also makes

provisions for repetitive offenders in the form of enhanced imprisonment

whereby the offenders are subjected to

264
Mehta (n 234).
265
The Water (Prevention and Control of Pollution) Act 1974, s 32, 33A.
266
The Water (Prevention and Control of Pollution) Act 1974, s 24, 25, 26.
 55

imprisonment for a minimum of two years and it may be extended to

seven years with fine.267

3.8.4. Penalties under Environmental Prevention Act, 1986

The contravention of provisions of Environmental Prevention Act, 1986

imposes penalty in the form of imprisonment for a period which may

extend to five years and fine amounting to one lakh rupees, or both. The

provisions of this Act also provide for an additional penalty of five

thousand rupees per day for contravention of provisions after first

conviction. Additionally, it also provides that in circumstances where the

contravention continues for more than one year from the date of

conviction, the offender shall be subjected to imprisonment for a period of

seven years.268

3.8.5. Special Provision for Corporate Offences

It is interesting to note that provision for ‘corporate offences’ is exactly

same under all the environmental regulations. For instance, under Air Act,

1981 the provision for the offences by companies is as follows:

“Offences by Companies269 – (1) If an act contrary to the provisions of this

Act is committed by a company, then all persons who oversaw the said act

would be held as guilty provided such persons were responsible for the

conduct of business in the company. The company shall also be held guilty

along with the individual offenders and shall be punished accordingly.

However, there is one exception to it. If the individual or group of

individuals found as guilty establish the fact that they acted diligently on

267
The Water (Prevention and Control of Pollution) Act 1974, s 75.
268
The Environment (Protection) Act 1986, s 15 (1).
269
The Air Act 1981, s 40.
 56

their part to prevent the commission of the offence or had no knowledge

about the commission of the act, then they shall be absolved of their

liability.

(2) Sub-section (2) of section 40 of the Air Act provides that if the liability

for the offence is attributable to managers, supervisors, or directors in a

company owing to their consent, connivance or negligence, then they shall

be held as guilty in accordance with the provisions of the act and

proceeded against accordingly.

Explanation: For the purposes of this section-

a. ‘company’ means anybody corporate, and includes a firm or other

association of individuals; and

b. ‘director’, in relation to a firm, means a partner in the firm.”

The above-mentioned provision provides for an ad-hoc approach in light

of corporate criminal liability. The provision prescribes punishment for

defaulting individuals and decision-making officials. If the liability on their

part is proved, then the same can be imputed to the corporation. However,

the exception of exercise of due diligence and lack of knowledge makes the

provision less stringent, and it lacks severity to deter the corporations from

polluting natural resources.

Further, it is to be noted that the Act doesn’t provide for any special

provision relating to pollution created by the corporations. The lack of

provisions with the principle of absolute liability makes the statute like any

other administrative regulation and sanctions. With the rapid

modernization, it is imperative that the provisions of the environmental

statutes be made more ‘corporation compatible’. In order to make the

regulations effective, there is a dire need to amend the same to practically

apply to the corporations.270

270
Bakshi, ‘Corporate Executives and the Pollution Law’ (1986) 2 CLJ 61.
 57

3.8.6. Environmental Laws in India and Criminal Liability of

Corporations

The provisions of the environmental legislations in India are finally seeing

the light of the day owing to striking difference between provision of

penalties in the Acts of 1974, 1981, 1986 and 1995. The severity of the

penalty has increased by many folds but there is one costly omission that

need to be included considering the practicality aspect. It is to be noted

that there exists no provision which exclusively provides for corporate

liability.

The main drawback in majority of environmental provisions is that it

comprises of non-obstante clauses which provides for circumstances when

the officer-in-charge had exercised due diligence on his part to prevent

commission of the offence or had no knowledge about the commission of

the said act. These clauses provide indefinite immunity to the corporations

as its liability depends entirely on the culpability of the officers-in-charge.

So, if the officer-in-charge is successful in proving that he had acted

diligently or had no knowledge, then the liability of both the officer and

the corporation gets absolved at the same time. Therefore, the presence of

proviso in provisions relating to corporate liability imposes a fictitious

liability upon the corporations whose sustainability depends upon proving

or disproving a contingent fact.

1. Prosecuting Corporations – Under Whose Domain? Locus standi

Argument

The liability and the consequent prosecution of the corporations involves

many procedural questions relating to the relationship between the

corporations, the enforcement agency and the prosecutors. In most

environmental legislations, it has been provided that the corporations can

only be subjected to proper scrutiny and inspection if the complaint is

filed/registered by a Central government official or any such official

 58

empowered by the environmental legislations. It has strictly been provided

that any action against any corporation shall not be undertaken on basis of

complaint by any ordinary citizen of the country. The presence of

abovementioned provisions makes it clear that the government acts as the

protector of public interest at large. However, it has been observed from

time to time that the government has not taken any measures on this

regard and the conviction rates of corporations indulged in environmental

degradation is very low.271

The sentencing procedure followed in the prosecution of corporations is

not just archaic but has also been rendered redundant due to emergence of

numerous corporations. Since, the corporations have permeated all spheres

of the society, it is very difficult to control their activities. Moreover, due to

the requirement of designated officials to get the complaint registered

against a company, the actual persons facing the problem cannot approach

the courts or tribunals to impose restrictions or obtain injunction against

the offender.

2. No Natural Person

The corporations are generally considered as fictitious entities which are

granted legal personhood by the action of law. This means that the

corporations neither possess a physical existence, nor a state of mind.

Therefore, a corporation doesn’t have the requisite mens rea to commit a

crime. Also, it needs to be understood that even though the environmental

degradation is caused by agents/employees of the companies, the direction

to act upon the same is often given by higher officials who also constitute

the directing mind and will of the company. So, imputing liability upon

agents/employees would not achieve the true purpose behind

271
Ibid.
 59

environmental legislations. It is imperative that the guilty mind behind the

act contrary to the law, be punished so as to deter the imitators from

committing the same wrong. Moreover, in cases of environmental

degradation, there are numerous victims as the activities of the companies’

contributing to environmental degradation is often spread out through the

country. This makes the administration of justice a difficult job as the

corporate hierarchy is yet another factor that adds to the complexity of

prosecuting corporations.272

3. How to Put Companies in Jail?

In the case of M.C. Javali v. Mahajan Borewell273, a company was held to be

found as guilty in accordance with the provisions of the IT Act. The said

provision provided for imposition of imprisonment and fine as the devised

method of punishment. Since the company was found guilty and owing to

its incapability of being punished with imprisonment, the court held that

in situations where it is physically and logically impossible to imprison the

corporation, then the imposition of fine would act as the devised method

of punishment. Further, the position was altered in the case of The Assistant

Commissioner v. Velliappa Textiles Ltd.274 where the court ruled that in

circumstances where the provision of a given statute prescribes the

imposition of both fine and imprisonment, only fine cannot be imposed as

an alternative. The court stressed that the imposition of fine viz-a-viz

corporate criminal liability mandates for corresponding legislative changes

(judicis est jus dicere, non dare). Accordingly, the court concluded that in

absence of designated provisions, the rule of law cannot be tweaked to

accommodate an alternative interpretation of the statutes. While deciding

272
Michael G. Faure, Günter Heine, Criminal Enforcement of Environmental Law in the
European Union (Kluwer Law International 2005) 7.
273
M.C. Javali v. Mahajan Borewell AIR 1997 SC 3964.
274
The Assistant Commissioner v. Velliappa Textiles Ltd. AIR 2004 SC 86.
 60

the above-mentioned case, the court made references to common law cases

like Tesco Supermarkets, New York Central, Director of Public Prosecutions, etc.

The stance taken in Velliappa was overruled in the case of Standard Chartered

Bank v. Directorate of Enforcement275 where the court opined that the

corporations are subjected to any sort of immunity in absence of provisions

that can penalize their wrongdoings. The court clarified that in cases where

the punishment prescribes for both imprisonment and fine, The penalty of

fine can be imposed in place of imprisonment. However, the position of the

courts is still unclear in circumstances where the offence provides for

imposition of only imprisonment as the form of punishment.

3.9. Case Studies

3.9.1. The Bhopal Gas Tragedy Case276

Premising on the centralized location and the comprehensive

transport network available in Bhopal, Union Carbide Corporation, an

American enterprise instituted its pesticide plant in Bhopal in 1970. The

particular location within the city was meant for non-hazardous

commercial work. With the decrease in the demand for pesticides the

production of Selvin was reduced to a quarter. Due to the losses,

dismantling the plant was on the table and safety was the lowest priority.

Fearing the big banner of the employer, the local government stepped back

from intervening despite the knowledge of the safety problems.

On December 3, 1984 a thick layer of Methyl Isocyanide covered

Bhopal, resulting in the immediate death of approximately 3787 people.

Animals were also not spared. While the doctors were clueless and the city

275
Standard Chartered Bank v. Directorate of Enforcement, Velliappa AIR 2005 SC 2622.
276
Union of India v. Union Carbide Corporation (1986) 2 Comp L.J. 169.
 61

was panic stricken, the range of deaths went from 10,000 to 20,000 in the

decade. The survivors suffered from its after effects, with most of the

infections contained to their eyes and lungs, for over 25 years. An estimate

of 62.58%, suffered from the toxicity. The situation could have been

stabilized, had there been more information about the problem. Till date

no antidote has been formulated for the same. The constituent of the gas

was not revealed citing trade secrecy, which made the treatment tougher.

The aftermath of the gas leak was huge. Animals and humans

suffered alike. The after effects were felt about till their next generations.

Owing to the said devastation, UCC maintained a distance from its Indian

branch to escape liability. The number of victims were huge. Pregnant

ladies faced early terminations, had unexpected labor and brought forth

babies with fetal anomalies. The environment was not spared as well. The

corporations did not correct their abnormalities. Prior to the devastation, a

huge amount of factory waste was also dumped into the open. Now, the

waste that lies in the factory still poses to be a danger.

With the piling of litigations, the Government passed the Bhopal

Gas Leak Disaster (Processing of Claims) Act, 1985. The statute conferred

the right on the Central Government to represent the victims as parens

patriae. The shares of the government in the parent company brought it

under the cloak of liability as well Thus, the act was challenged on the

ground that it put blocks before the claims of the victims. However, the act

sustained.

The liability of UCC was brought into question by the Indian

government in the district of New York, U.S.A. To evade higher liability

the company tried to restrict the jurisdiction of the subject to Indian Courts,

while the Indian government cited the reason of lack of competency of

Indian Courts. However, the matter got dismissed for forum non-

conveniens.
 62

Pursuant to a compensation claim in the District Court of Madhya

Pradesh of 3.5 billion rupees, the High Court reduced the claim to 2.5

Billion rupees. Nevertheless, the Hon’ble Apex court set 470 million rupees

as a full- time settlement compensation. As a result, all civil and criminal

proceedings were quashed. In comparison to the claimed 3 billion dollars

the compensation amount awarded was inadequate. The backlash caused

by the compensation awarded forced the Apex court to re-institute a few

criminal proceedings and directed the state to make up for the gap in

compensation, if any. The entire sentencing approach of the judiciary has

been compensation oriented even though the corporate criminal liability in

the present case is quite pronounced. Even the sentences awarded to some

of the key personnel is very low having ineffective deterrent effect. In 2010,

fine to the tune of 2000 USD was imposed on seven former employees and

the former chairman of UCIL for causing negligence. They were also

sentenced to 2 years of imprisonment. The government prepared a

sanction of 258 crores for the interest of rehabilitation of the victims of the

tragedy.

The Constitution of India enshrines to ‘protect and improve the

environment and to safeguard the forests and wildlife of the country’. The

DPSPs also lay emphasis on the protection of the environment. This

indicates that although a major chunk of the responsibility of the tragedy

was on the company, yet the state was at fault too. The foundation behind

establishing the Department of Environment went to ruins because of the

gross negligence. The state was wrong in licensing such activity amidst a

dense population. Neither had the state prepared an emergency map nor

had it ensured safety compliance on part of the company. While non-

compliance could have been charged with heavy sanctions, the role of

playing the safety-awareness campaigner vested with the state alongside of

keeping in account a clear record of all the hazardous substances involved

 63

in the factory. These responsibilities can be attributed to the fact that a gas

leak situation could have been easily foreseen.

The criminal proceedings saw their fate after 26 years of the disaster,

on June 7, 2010. The proceedings involved charges under the heads of

Section 304 A, 336, 337, and 338 read with Section 35 of the Indian Penal

Code. The prosecution case was framed around the defects in design of the

plant. The claims of the prosecution were aided by the corroborations of

the Council of Scientific and Industrial Research (CSIR). The findings

revealed that MIC was stored in tanks instead of drums made up of

stainless steel; five months prior to the disaster the flare tower and the vent

gas scrubber had been out of service. Had it been working, the gas would

have been treated with sodium hydroxide (caustic soda) and the

concentration could have been diluted. The volatilization of MIC was

dependent upon refrigeration, which was left idle to reduce energy costs.

Slip blind plates were not installed. They could have blocked the gas from

escaping. Carbon steel valves, which are vulnerable to erosion on exposure

to acid were used. The night prior to the disaster witnessed a leaking

carbon steel valve which was not mended. The pipe was not mended as

well to curb the costs. These defects and negligence in design resulted in

the gas disaster, which could have been easily avoided.

These evidences of negligence indicate the incautious attitude of the

business towards the interest of the public, despite the knowledge

regarding the hazardous nature of the gas. The criminal liability sets tone

with the unheeding mode of running the business. UCC having the

dealership of a dangerous substances, had an unsaid duty of care towards

the public. However, bare minimum standards of care were not met by the

company making them liable for negligence. Nevertheless, the proceedings

were not efficacious enough since all the accused did not present

themselves before
 64

the court nor did the former chairman of UCC, despite sanctions of

extradition.

The tragedy marked a shift in the attitude of the government

towards environment. A plethora of legislations came into being to tackle

the issues of environmental concerns. A few are enumerated below.

Prior to the ruling in MC Mehta v. Union of India 277, the principle

enshrined under Ryland v. Fletcher278 was in use by the courts. After MC

Mehta case, the court increased the scope of tortious liability. It held that

any enterprise that engages in the dealing of any harmful substances,

attaches to itself absolute and non-negotiable liability. The enterprise

becomes liable to pay compensation for any kind of damage. The Hon’ble

Apex court did not accept the exceptions enumerated under the concept of

“strict liability” in English law. Bhagwati. J states in the case that, “We

have to develop our own law and if we find that it is necessary to construct

a new principle of liability to deal with an unusual situation which has

arisen and which is likely to arise in future on account of hazardous or

inherently dangerous industries which are concomitant to an industrial

economy, there is no reason why we should hesitate to evolve such

principle of liability merely because it has not been so done in England.”.

The ruling was pertinent since it paved way for regulations

wherein industrial growth was brought under the realms of legal reform.

In 1986, the Indian government enacted The Environment Protection Act.

The government under the said Act is authorized and vested with the

power to curb all means of pollution to the environment. The act defines

the concept of environment. The act also beholds the power to close,

prohibit, regulate any industry, operation or to stop or regulate the supply

of electricity, water

277
M.C Mehta vs Union of India 1987 SCR (1) 819
278
Ryland vs Fletcher [1868] UKHL 1
 65

or any other service. The act is in furtherance of Stockholm Declaration,

1972.

Another legislation, The Public Liability Insurance Act, 1991 was

enacted with the premise of vending emergency care to victims of factory

accidents involved in the dealing of hazardous substances. The act makes it

compulsory on part of the enterprises involved in hazardous substances to

ensure insurance plans for all of its employees. The act recognizes “the

absolute liability or no-fault liability doctrine”. It also facilitates a faster

channel of compensation. Here the Sentencing scenario reveals to be quite

weak and the said company was let off with only compensation and the

punishment in any other form was virtually negligible.

3.9.2. SAHARA v. SEBI279

Securities Exchange Board of India v. Sahara India Real Estate Ltd.,

poses to be a watershed in the postulation of the powers and jurisdiction of

SEBI regarding the subject of corporate fundraising. It was the claim of

SEBI that Sahara India Real Estate Corporation Limited (SIRECL) and

Sahara Housing Investment Corporation Limited raised investments from

the general public in the form of Optionally Fully Convertible Debentures.

An approx amount to the tune of 24,000 crores rupees was raised from 23

Million people. The concept of Optionally Fully Convertible Debentures

needs to be understood before proceeding to the case.

Optionally Fully Convertible Debentures:

Debentures are tools to generate investment in an enterprise. For

instance, to raise capital an enterprise can seek loan from a bank. /But bank

Sahara India Real Estate Corporation Ltd & Ors v. Securities & Exchange Board of India (SEBI)
279

& Anr. (2013) 1 SCC 1.

 66

loans entail a high rate of interest to themselves which make them a lesser

taken choice. The other way round is taking in investments from the public

in the form of debentures. The capital invested becomes the capital of the

enterprise but does not turn into share holding. The money has to be

returned to the debenture holder with interest. Secured and Unsecured

debentures are the two forms in which debentures are issued. Debenture

can be partially or wholly convertible in nature. However, it depends on

the special resolution passed by the shareholders. Optionally Fully

Convertible Debentures lay at the mercy of the investor. It is left to the

election of the investor to choose if he wants to convert his debentures into

shares or no. The decision of conversions runs good for the company if it is

predicted to make huge amounts of profit in the futures tenures. Thus,

OFCDs required careful consideration and knowledge of the market.

SAHARA’S Contentions

Most of the investment of Sahara was raised from the lower strata of

the society who do not have much knowledge pertaining to market and its

functioning. Nor do they have the means of going over the performance of

a company. Sahara put forth that it was a private company with specific

investors and thus, did not fall under the purview of the jurisdiction of

SEBI since it only had the power to regulate listed companies. Further, they

contended that OFCDs are not covered under the meaning of securities

under the SEBI Act.

Objections Raised by SEBI

According to Section 55A of the Companies Act, 2013, the regulation

control of SEBI extends to listed companies only. However, SEBI

contended that had Sahara made the scheme of OFCD open for specific

members then the cap of members should have been limited to 50 and the

process should
 67

have been wrapped up by 10 days as per the guidelines. Yet, the company

raised capital from 23 Million people and went on with the process of

OFCD for 2 years. This act resulted in the compulsory listing of the

company under Section-73 of the Companies Act, 2013. This listing debars

them from raising money from the public. Consequently, Sahara comes

under the purview of SEBI’s jurisdiction. Thereby, Sahara is liable to return

the 24000 crores, that it had raised back to its investors.

SUPREME COURT REMARKS

The Supreme court observed that the claims of Sahara were not

established. Furthermore, the investment of 23 million people do array the

jurisdiction of SEBI. In cases of private placements, the personal

relationship of the investors with the company needed to be established

but none of the records seemed to prove the same.

Keeping in view the acts of Sahara, which ran in direct

contravention with the provisions of SEBI Act, 1992 and Companies Act,

2013 and jeopardized the financial conditions of many people belonging to

the lower strata of the society, the Hon’ble Supreme court directed Sahara

to refund its investors with the total capital collected through the Red

Herring prospectus with an interest of 15% till the date of return. The

decision of the Supreme court will serve as a deterrent to further such

financial crimes which would indulge in taking advantage of the financial

illiteracy of the underprivileged.

Thus, it can be construed from the above-mentioned factual matrix

that sentencing policies in so far as financial crimes are concerned, needs to

be strengthened and modelled in a such a manner that it takes into

consideration all the possible ways through which a corporation can

commit
 68

financial crime and dupe millions of innocents and seemingly-unaware

people of their hard-earned investments.

3.9.3. ENRON Case280

After the merger of two natural gas transmission companies namely

Houston Natural Gas Corporation and InterNorth, Inc, the company of

Enron was founded in the year of 1985 by Kenneth Lay. After the

deregulation of the sale of natural gas, Enron under the guidance of Jeffrey

Skilling, converted itself to a trader of energy derivative contracts. It acted

as the middle man between customers of natural gas and its producers.

This helped the producers ensure a fixed selling price via Enron to deal

with market fluctuations. Under the aegis of Skilling, Enron became the

dominator of natural gas contracts and earned heavy profits.

Skilling hired MBA graduates from all over the world and built an

aggressive and competitive environment in Enron. The sole motive of the

functioning was increasing the cash generating trades by leaps and

bounds. Andre Fastow was a recruit who made his way to be the CFO of

Enron, while Skilling was the man behind all trading operations.

In 1990s the bull traders opened the market for Enron. The company

witnessed fast paced growth and made contracts for any kind of trade. It

traded commodities like electricity, coal, steel, paper etc. With the bloom in

the dot-com culture, Enron started an online venture called Enron Online

which made a business of 2.5 Billion USD a day. Enron was involved in

establishing a broadband telecommunications network to establish high

speed trading.

Downfall and bankruptcy

280
Skilling v. United States US Supreme Court (No. 08-1394) 2010.
 69

With the increase in competition and the shrink in profits, the

company resorted to creating illusions. They started practicing the concept

of mark-to-market accounting, which postulated higher future gains of the

company. The problematic functions of the company were shifted to

Special purpose entities which pose to be limited partnerships with third

parties. The practice of SPEs was rampant but was abused by Enron. This

is because Enron trashed all its problematic functionaries under the head of

SPEs. This covered the losses of the company on pen and paper. Fastow

was responsible for running a few of the SPEs as well. All this while

Arthur Andersen performed the duties of the auditor of the company

alongside of being its consultant.

In 2001, Skilling took over the role of the CEO of Enron, only to

resign in August. Lay donned the hat of CEO after Skilling’s resignation.

During this time Lay had received information, warning him of the Fastow

partnership and possible accounting frauds. The gravity of the situation

increased after the public release of the financial statements of Enron.

Enron announced in the month of October that it was facing a loss of $638

million for the third quarter and took a $1.2 billion reduction in

shareholder equity owing in part to Fastow’s partnerships. SEC began

investigating into the accounts for Fastow’s SPEs. Thereafter shredding of

documents pertaining to Enron audits happened by officials at Arthur

Anderson.

With the emergence in the details of accounting frauds, Euron’s fate

lapsed. Fastow was fired and the company’s stock price took a dip to $12

from $90 per share. To evade bankruptcy they agreed to be acquired by

Dynegy. But the later backed out. This dropped the stock to $1. By

December, 2001 Euron was filling for bankruptcy.

Lawsuits and legislation

 70

Executives of Enron were convicted of various charges including

Skilling and Lay. Both of them were convicted in 2006 under the charges of

fraud and conspiracy. While Skilling was awarded a sentence of 24 years

but served for only 12, Lay was convicted for 45 years but died before the

sentence. However, Fastow was sentenced to 6 years in prison on 2006

after he pleaded guilty, but got acquitted in 2011.

Anderson was abandoned by its clients in order to meet the

demands of the investors, after it was brought under scrutiny by the U.S.

Department of Justice. Anderson jobs were renounced by employees and

other offices, the company also laid off a number of employees. Further, in

2002, Arthur Anderson was convicted of shredding evidence and lost its

license. However, 2 years later its attorneys were successful in overturning

the obstruction by convincing the U.S Supreme court. Yet, the company

had lost its vigor in the 2 years.

There was a chain of litigations against both the companies, wherein

even though a few were successful, the money of the investors and the

shareholders were lost and could not be recovered. A plethora of

legislations were introduced to keep in check the financial accounting.

Sarbanes-Oxley Act (2002) was one amongst them and it imposed heavy

penalties for altering financial accounts.

Due to lack of uniform sentencing policies for crimes conducted by

corporates, the illegal conduct of the companies often goes unnoticed.

These illegal activities shape into a huge financial fraud because in most

countries, the corporations are allowed to manage their own affairs at

various levels. Due to the existing infirmities or lack of sentencing policy,

the corporations are granted leeway to commit financial crimes where

every person starting from agents to directors act in a common concert to

commit frauds and enriched by illegal gains.

 71

3.9.4. TESCO v. NATTRASS281

Tesco had a poster of sale for Radiant washing powder. When the

stock of the radiant washing powder which was at sale got over, an

employee of the shop without informing the company, removed the poster

and put in the shelf of the regular priced washing powders of Radiant.

When a customer was charged the normal amount for the washing

powder, he put up a complaint against the shop for indicating false prices

under Section-11 of Trade Descriptions Act 1968 (the TDA). Taking the pea

of relief under Section-24 of Trade Descriptions Act 1968 (the TDA), Tesco

contended that it was the fault of the store manager and that the company

had conducted due diligence to ensure no enticing prices. The court held

that the store manager cannot be considered independent of the company

and “took all reasonable precautions”. A corporation not only includes the

parent company but also all its employees, thus the store manager fell

under the ambit of the company. Tesco placed an appeal before the House

of lords, which held that apart from the directing mind of the corporate, all

other employees can be excluded from the purview of the company. Lord

Morris said of the store manager:

“His duties as the manager of one store did not involve managing

the company. He was one who was being directed. He was one who was

employed but he was not a delegate to whom the company passed on its

responsibilities. He had certain duties which were the result of the taking

by the company of all reasonable precautions and of the exercising by the

company of all due diligence. He was a person under the control of the

company and on the assumption that there could be proceedings against

him, the company would by s 24(1)(b) be absolved if the company had

taken all proper steps to avoid the commission of an offence by him. To

make the

281
Tesco Supermarkets Ltd., v. Nattrass [1972] AC 153.
 72

company automatically liable for an offence committed by him would be to

ignore the subsection. He was, so to speak, a cog in the machine which was

devised: it was not left to him to devise it. Nor was he within what has

been called the 'brain area' of the company. If the company had taken all

reasonable precautions and exercised all due diligence to ensure that the

machine could and should run effectively then some breakdown due to

some action or failure on the part of 'another person' ought not to be

attributed to the company or to be regarded as the action or failure of the

company itself for which the company was to be criminally responsible.

The defence provided by s 24(1) would otherwise be illusory.”

“For a defendant to establish that the commission of the offence was

due to the act or default of another person, however, was not the end of the

matter; he still had to prove that he took all reasonable precautions and

exercised all due diligence to avoid the commission of such an offence. In

order to prove this, it was necessary for the defendant to have set up an

efficient system and ensured that it was carried out.” As Lord Morris of

Borth-y-Gest put it:

“The company had its responsibilities in regard to taking all

reasonable precautions and exercising all due diligence. The careful and

effective discharge of those responsibilities required the directing will and

mind of the company. A system had to be created which could rationally

be said to be so designed that the commission of the offences would be

avoided.”

And, per Lord Diplock:

“If the principal has taken all reasonable precautions in the selection and

training of servants to perform supervisory duties and has laid down an effective

system of supervision and used due diligence to see that it is observed, he is

entitled
 73

to rely on a default by a superior servant in his supervisory duties as a defence

under s 24(1), as well as, or instead of, on an act or default of an inferior servant

who has no supervisory duties under his contract of employment. Hence the

setting up an effective system could be the taking of all reasonable precautions and

seeing that it was observed could amount to the exercise of all due diligence.”

The lack of sentencing guidelines and policies often results in a

corporation absolving its lability even in acts where its culpability was

clear and imminent. In the above case, the corporation took the defence of

s. 24(1) of the TDA solely because regulatory practices like due diligence

cannot be monitored or examined by the prosecutors. So, even though the

company had not undertaken due diligence, it could merely plead that it

had complied through the same due to absence of any objective criteria to

ascertain whether due diligence was exercised or not.

3.9.5. SATYAM Case282

In 1987 in Hyderabad, with less than 20 workers ,B. Ramalingam Raju and

DVS Raju laid the foundation of Satyam Computers, the name indicates the

virtue of “truth”. The company was involved in business administrations,

PC programming and was a driving re-appropriating organization in

India. It also held certain expertise in data innovation. After delivering its

first stock in Bombay Stock Exchange in 1991, it placed its first leg of

accomplishment. In 1991, it received its first fortune 500 customer, Deere

and Co and got consolidated to Satyam Computers Services Limited. It

turned to a worldwide consulting firm and IT administrator for over 55

countries.

It was one amongst the IT organisations that got listed in the New

York Stock Exchange. It was placed in line with TCS, Infosys and Wipro as

282
CBI v. B. Ramaraju and Ors. (2011) 5 SCC 340.
 74

a programming exporter. The 1990s saw the emergence of subsidiaries of

the company in the form of Satyam Renaissance, Satyam Info way, Satyam

Spark Solutions and Satyam Enterprise Arrangements; Satyam Info way

(SIFY). Sify turned into a web organization having a primary nature and

recorded on NASDAQ. It traversed its business worldwide and signed for

MOUs with various organization in the global forum.

It was first of its kind to start a Customer Oriented Global

Organization and marked contracts with global organizations like

Microsoft, Emirates, Advancements and For, claiming the first mover

advantage credited by BVQI. It spread its name by putting up work places

at Singapore, Dubai and Sydney and by acquiring stakes in big banner

companies of Singapore and London. It had carved a niche for itself in the

realm of IT administration and consultation.

Corporate administration and responsibility had a new name in the

form of Satyam. It had acquired a global dominance with working

environment in 67 nations and a huge family of 50,000 representatives. Mr.

Raju was awarded by the Entrepreneur of the Year grant by Ernst and

Young. For the wonders in corporate responsibility, Satyam was conferred

with “Worldwide Peacock Grant” by the World Council for Corporate

Governance. However, tragedy fell upon the company after 5 months of

the grant of the said award in the form of bookkeeping extortion scam.

PROBLEM

The foundation for problems at the company was laid by its founder

when he announced for a $1.6 billion offer to two Maytas organizations.

The move was intended at assisting financial specialists. A stern denial by

financial specialists lead him to retract the offer within 12 hours. The

scrutiny around Satyam’s corporate administration reduced the offer cost

to
 75

55%. Subsequently, in 2008, the World Bank announced banishing of the

company from business due to the awarding of frowned upon benefits to

its staff in exchange of information burglary. This lead to the dip in offer

costs to 14% and then to the lowest minimum in the next 4 years.

The company was abandoned by Mangalm Srinivasan ( an

autonomous executive since 1991), Vinod K Dham (broadly known as dad

of the Pentium and an ex Intel worker), M Rammohan Rao (Dean of the

eminent Indian School of Business) and Krishna Palepu (educator at

Harvard Business School).

In 2009, Mr. Raju surrendered his post of administrator and

conceded to have made a budgetary extortion of 7800 crores. He also

admitted to the fact that he had put up the offer for Maytas organization to

replace invented resources with genuine ones. His two brothers were

apprehended by the police of Andhra Pradesh and the government took

over the responsibility of the organization. The brothers were charged

under heads of criminal rupture, conning, criminal connivance and

imitation under the Indian Penal Code.

The board of the company was formed by HDFC Executive, Deepak

Parekh, Ex Nasscom director and IT master, Kiran Karnik and previous

SEBI part C Achuthan, CII boss tutor Tarun Das, previous leader of the

Institute for Chartered Bookkeepers (ICAI) TN Manoharan and LIC’s S

Balakrishnan. Value waterhouse who posed to be the evaluators of the

company admitted to have submitted erroneous reports due to the erred

budget reports provided to them by the company. The aid and admission

of the CFO, Srinivas Vadlamani revealed that the company had expanded

its representatives by 20,000 for drawing 20 crores each month from

imaginary pay accounts.

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Andhra Pradesh State CB-CID ransacked the place of

Suryanarayana Raju, the most youthful kin of Ramalinga Raju who

possessed 4.3 per cent in Maytas Infra, and recouped 112 deal deeds of

distinctive land buys and improvement understandings. Senior

accomplices S Gopalakrishnan and Srinivas Talluri of the examining firm

PricewaterhouseCoopers (PwC) were captured for their claimed job in the

Satyam embarrassment. The State’s CID police booked them, on charges of

extortion (Section 420 of the IPC) and criminal connivance (120B).

VICTIMS OF FRAUD

The employees of the company were stripped off their economic

benefits. They spent restless days in running after their rights. With the

calling back of contracts from Cisco, Telstra and World Bank, the investors

and customers of the company were left with no remedy.

The national IT sector, the brand of Indian IT was at stake. Investors

were at a loss from their pertinent ventures and other brokers were in

worry about their budgetary and non-financial introduction and reviewed

offices. The scam had left the entire nation with a sigh of worry.

ANALYSIS

Mr. Raju tried cloaking the actual adversities of his company to

ensure a smooth business. He needed to obtain more assets and construct a

domain for which he gathered those assets in different regions like land

possessions assessed around 7 crores held in Matyas firm. He tried filling

up for the imaginary assets of Satyam with the real assets of Matyas.

The management at the senior level allowed the presentation of fake

bills which fabricated to a 5-crore fake scenario. The false invoices garnered

false bank statements. The fake invoices were managed in Excel, Satyam

Project Repository was used to create project ids, Project Bill Management
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System for generating Bills, Operational Real-time Management for

creating and managing fake receipts, Invoice Management System for

creating fake invoices.

Satyam’s case is the proof that the veil of corporation can be abused

for the sake of personal gains and to commit illegal activities. The

sentencing policies and guidelines in the Companies Act, 1956 did not

focus on periodic inspection of books of accounts of the company and had

little to no scrutiny over the conduct of the auditor. Since, Satyam had

created a goodwill of its own through success and innovation, the

government and prosecuting agencies were unaware of the fraud that was

being committed underneath the veil of corporation. The sentencing policy

in the existing statutes need to be modified and tweaked in such a manner

that the financial activities of the corporations at various stages of their

business is monitored periodically. These corporations should be made

accountable to ensure compliance to the regulatory measures.