Financial Frauds in the Indian Corporate Sector

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Financial Frauds

Written by: Ms Gogula Madhavi Lakshmi


White Collar Crimes are the type of crimes that are committed by respectable persons, holding enviable positions, either in public or private entities. It is practically very difficult for the bureaucratic agencies to track and detect such frauds probably because such activities are carried out in much secrecy and go un-notified. Such crimes are defined by the Federal Bureau of Investigation as, “Illegal acts characterized by deceit, concealment or violation of trust, which are not dependent upon the application or threat of physical force or violence”. 

The FBI says that in cases of white-collar crime, “Individuals and organizations commit these acts to obtain money, property or services; to avoid the payment or loss of money or services, or to secure personal or business advantage”. Today, the focus of white-collar crimes has moved from the individuals to the organization, where individuals alone or in collaboration with others commit criminal acts. One such white-collar crime is Corporate Fraud.

In the broadest sense, fraud is an intentional deception made for personal gain or to damage another person/ entity. ‘Fraus Omnia Vitiate’  Fraud vitiates everything. Corporate fraud takes place when a corporation purposefully provides dishonest information with the purpose of obscuring the truth and deceiving the recipient of the data with the intent to gain an advantage.


Corporate fraud occurs when a company or an entity deliberately changes and conceals sensitive information which then apparently makes it look healthier. Companies adopt various modus-operandi to commit such corporate frauds, which may include miss-information in the prospectus, manipulation of accounting records, debt hiding, etc. The aspect of falsification of financial information includes false accounting entries, false trades for inflation of profits, disclosure of price-sensitive information which comes under the ambit of insider trading, and showing false transactions which result in attracting more investors and lenders for funding.

There can be several reasons cited for which companies commit such frauds like making more falsified money, creating a false image of the company for the market scenario, and misguiding Governmental authorities for tax evasion. In India, the Commission prevention of Corruption’, in its report, observed, “The advancement of technological and scientific development is contributing to the emergence of mass society with a large rank in the file and a small controlling elite, encouraging the growth of monopolies, the rise of a managerial class and intricate institutional mechanisms.

There is a necessity for strict adherence to high standards of ethical behaviour for even the honest functioning of the new social, political, and economic processes. The report of the Vivian Bose Commission inquiring into the affairs of the Dalmia Jain group of companies in 1963, highlighted how the big industries indulge in frauds, falsification of accounts and record tampering for personal gains and tax evasion, etc.


There are many types of frauds like Fraudulent Financial Statements, Employee Fraud, Vendor Fraud, Customer Fraud, Investment Scams, Bankruptcy fraud, and miscellaneous. Some of the common types of frauds are:

  1. Financial frauds – Manipulation, falsification, alteration of accounting records, misrepresentation or intentional omission of amounts, misapplication of accounting principles, intentionally false, misleading or omitted disclosures.
  2. Misappropriation of Assets – Theft of tangible assets by internal or external parties, sale of proprietary information, causing improper payments.
  3. Corruption – making or receiving improper payments, offering bribes to public or private officials, receiving bribes, kickbacks or other payments, aiding and abetting fraud by others.

The financial and corporate frauds or scams like the Harshad Mehta case, Satyam fiasco, Sahara case required the attention of lawmakers. Such frauds made it imperative to evaluate the standards set in corporate governance and stringent methods were needed to be implemented to tackle corporate frauds.

Financial Statement Frauds

  • East India Company Fraud
  • Mudhra Scam
  • Enron Fiasco
  • Satyam – Enron of India
  • Harshad Mehta Scam

East India Company Fraud

Fraudulent Financial reporting and corrupt business practices having its existence since the era of footprints of Public corporations. It was the first multinational corporation in the world and the first company to issue stock. In the late 1700s Edmund Burke had Robert Clive, “the founder of the empire” and Warren Hastings, India’s Governor-General, brought up on impeachment charges laden with corruption issues. Though the trials failed to convict anybody.  The Company was subsequently wound up under the East India Company Stock-Redemption Act, 1874.

Mundhra Scam- First Scam of Independent India First successful trial of a financial scandal in Independent India. Haridas Mundhra, an industrialist & stock speculator sold fictitious shares to LIC and thereby defrauding LIC by Rs. 125 crores. Mr Jawahar Lal Nehru, set up a one-man commission headed by Justice Chagla to investigate. Justice Chagla concluded the matter; Haridas was found guilty and was sentenced to imprisonment for 22 years. T.T. Krishnamachari, the then Finance Minister, resigned from his position.

Enron Fiasco February 2000 Fortune magazine chooses Enron as its “Best Managed and Most Innovative company” August 2000: Stock at $73 billion March 2001: FY2000 revenues at $100 billion  Sep 16, 2001: “Buy more shares”  October 2001: Enron pays its regular dividend

Reasons behind Enron Fiasco Enron Senior Management used complex and murky accounting schemes

  • to reduce Enron’s tax payments;
  • to inflate Enron’s income and profits;
  • to inflate Enron’s stock price and credit rating;
  • to hide losses in off-balance-sheet subsidiaries;
  • to engineer off-balance-sheet schemes to funnel money to themselves, friends, and family;
  • to fraudulently misrepresent Enron’s financial condition in public reports.

Satyam Computer (Satyam)

Satyam was the first major fraud of its kind, which shocked the country and led to the tightening of regulations, reporting, and governance mechanisms. The fraud had the same shock and awe effect as what Enron and Lehman Brothers had in the USA. The enactment of the strictest ever regulation, namely, Sarbanes and Oxley, was the outcome of these frauds and many countries followed with the enactment of similar regulations. Promoters of the company had devised ingenious methods to commit frauds with large-scale dummy billings for services rendered to foreign clients. As a logical step forward, fake proceeds were shown to have been received in multiple bank accounts, opened in various countries. Many of these accounts were later found to be non-existing.

The company was consistently showing large bank balances in its financial statements, which were not consistent with other IT companies considering the size of its business. The whole of these operations was overseen by the promoter with the assistance of a separate staff working on this, what I would call a fraud factory. At the closure of financials and to satisfy auditors, fake bank confirmations and statements were generated and produced as evidence of balances to auditors. The amount involved in the fraud was around USD 1 billion.

Surprisingly, Satyam received awards for excellence in corporate governance, conferred by some reputed organizations. Its promoter had over a period acquired the respect of the industry and an overwhelming persona. In this background, sudden admission of fraud by the promoter came as a rude shock to the country,

All said and done, Satyam had a sound business model and portfolio of large international clients. The government had to initiate an unprecedented rescue mission to save the company, by first dismissing the board members of the company, followed by the appointment of professionals as board members led by Deepak Parikh. Ultimately, the company was sold to the Mahindra group and is now a major part of the successful technology business of the Group. 

Kingfisher Airlines (KLA)

KLA was another corporate fraud, which was the first of its kind in the airline industry, which ultimately led to the falling of the empire of King of good times. The airline was launched by flamboyant Vijay Mallya, well known as King of good times. Over a short period of time, KLA established a reputation as the finest private airline in the country, with high-quality service standards and was enjoying the second highest market share after Jet Airways.

The company resorted to borrowing funds by all possible means, including related parties and pledges of the Kingfisher brand by over-valuation of brand value. Good times did not last long, and Vijay Malia had to sell its family jewel liquor and beer business to liquidate part of its debts.

Currently, Vijay Malia is in the UK and fighting a battle in the courts to stop his repatriation into India. A consortium of banks led by SBI has an exposure of around Rs, 9000 crores to now a virtually bankrupt airline. Most employees lost or quit jobs as salaries were not paid for months together. The company went to the extent of defaulting in depositing statutory dues like PF, TDS deducted from salaries to government authorities.

Kingfisher seems to be more of a case of business failures rather than corporate frauds. There were a lot of red flags which could have been picked by lenders and regulators, which were ignored and could have saved airlines that had good potential. Lending against a brand that had never been practised is a glaring example. A Satyam-type quick rescue operation could have parachuted the airline into safety and saved lenders money and employees’ jobs.


The airline, which was once India’s pride, landed in IBC for rescue. After multiple bidding over 18 months, Jet finally had a bidder (with an investor), who is non-experienced in the airline business. Jet had acquired an unassailable position in the industry and was a preferred airline for the business community, top industrialists, and CEOs of the country. Its service standards were its USP. Lenders’ exposure to the airlines, amounts to around Rs 8500 crores and total liabilities of around Rs.25000 crores including dues to vendors, employees, AAI, lessors of aircraft.    

The company indulged in multiple fraudulent practices of

  • Overstating commission paid to a Dubai related party based in Dubai for years. This resulted in significant overstatement of expenses and underreporting of profits.
  • Diversion of funds by giving loans of around Rs.3353 Crores
  • Accounting of invoices of fake  on Jet miles
  • Other similar transactions

Employees lost jobs with huge arrears of salaries. Further, the acquisition of low-cost service airline, Sahara Airlines – in hindsight, the acquisition proved to be its nemesis and accelerated the downfall of Jet Airways.


Bhushan Steel was an unprecedented case of defrauding major banks of India. The company was acquired by Tata Steel, though the matter is still under litigation. Promoters of the otherwise profitable company, with modern large-scale plants, indulged in multiple fraudulent practices of: 

  • Transfer of   funds borrowed by the company to various related parties by way of loans or advances 
  • Accounting of bills for capital and other purchases, which were never incurred and funds so generated were misappropriated by promoters for their benefits
  • Amount involved was around Rs. 50000 crores.

Bhushan Power and Steel (BPSL), another group company is currently under IBC. JSW Steel is expected to acquire BPSL. According to the CBI, BPSL diverted around Rs 2,348 crore through its directors and staff from the loan accounts of various banks, into the accounts of more than 200 shell companies without any obvious purpose.


CCD was the first company to set up a large chain of coffee shops across India and a trendsetter. Over leveraging to find the expansion of the chain and diversion of funds to non-core business led to the downfall of the Company, which had a sound business model from growing coffee in its own fields to serving a wide variety of coffee to customers. 

The debacle of the company resulted in unfortunate suicide by its promoter. Amounts due to banks are around Rs. 2500 crores to Rs. 3000 crores. Currently, Tata group is in talks with CCD for acquiring its coffee outlets, which if materializes, will rescue the company, and put it back on the recovery path.

Corporate Frauds Under Companies Act, 2013

The Companies Act, 2013, is the legislation that focuses on issues related to corporate fraud. Fraud in relation to affairs of a company or any corporate body as defined in S.447 of the Companies Act 2013, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

In order to amount to Fraud, an act must be confined to acts committed by a party to contract with an intention to deceive another party or his agent or to induce him to enter into a contract. Fraud, which vitiates the contract, must have a nexus with the acts of the parties entering into the contract. This definition highlights the precondition to prove the intention of the person who has committed fraud. If that person has willingly committed fraud, then he will be punished. Here the person means himself or his agent. The acts which include fraud are wrong suggestions or concealment of facts or false promises or any fraudulent act to deceive others.

Punishment For Fraud (S.447)

Any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten (10) years and shall also be liable to a fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.


If in any return, report, certificate, financial statement, prospectus, statement, or other document required by, or for the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement

  • which is false in any material particulars, knowing it to be false; or
  • which omits any material fact, knowing it to be material


If any person intentionally gives false evidence

  • Upon any examination on oath or solemn affirmation; or
  • In any affidavit, deposition or solemn affirmation in or about winding up of any company under this act, or otherwise in or about any matter arising under this act,
  • He shall be punishable with imprisonment for a term which shall not be less than three  years but which may extend to seven years and with fine which may extend to ten Lakh rupees .

Punishment Where No Specific Penalty Or Punishment Is Provided (Section 450)

If a company or any officer of a company or any other person contravenes any of the provisions of this Act, or the rules made thereunder and for which no penalty or punishment is provided elsewhere in the Act, they shall be punishable with fine which may extend to ten thousand rupees (Rs. 10,000) and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

Punishment In Case Of Repeated Default (Section 451)

If a company or an officer of a company commits an offence punishable either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three (03) years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence. This section is not applicable to the offence repeated after a period of three years from the commitment of the first offence.


There are certain mechanisms that have been cited by the Government by which the frauds can be prevented under the Companies Act 2013.

Section 211 empowers the Central Government to establish an office called Serious Fraud Investigation Office (SFIO) to investigate frauds relating to companies. No other investigating agency shall proceed with the investigation in a case in respect of any offence under the Act, once the case has been assigned to SFIO. The SFIO has the power to arrest individuals if it has reason to believe that he is guilty based on the material in possession. SFIO shall submit a report to the Central Government on the conclusion of the investigation. Central Government may direct SFIO to initiate prosecution against the company. SFIO shall share information they possess regarding a case being investigated by the latter and vice versa.

Auditors shall report material fraud to the Central Government within 30 days. Immaterial fraud shall be reported to the board or the auditor of the company. The audit committee is required to monitor that every listed company shall establish a vigilance mechanism for directors and employees to report genuine concerns. The vigilance mechanism shall provide for adequate safeguards against the victimization of persons who use such a mechanism. It shall make provision for direct access to the Chairperson of the Audit Committee in appropriate cases.

Independent directors shall report concerns about actual or suspected fraud. They must also ascertain and ensure that the company has an adequate and functional vigilance mechanism and to ensure that the interests of a person who uses such a mechanism are not prejudicially affected on account of such use.

Central Government can order an investigation into the affairs of a company on the receipt of a report of the Registrar or inspector; on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated, or in the public interest.


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