ABSTRACT
This paper critically looks at how significant and big corporate frauds in India have influenced the development of the Company Law. The primary focus is on the evolution and limitations of the Companies Act, 2013. Although, the 2013 Act introduced many changes such as corporate governance, strict measures of disclosure requirements, auditor responsibility and shareholder privileges etc but the question remains: Are these actions enough to prevent future frauds? In this paper we will analyse what led to the creation of 2013 Act, why it was the need of the hour and then we will analyse how it went wrong. Post 2013 Act, corporate scams have showed that frequent regulation change is not helping the cause but overburdening the small and medium-sized businesses (SMEs). Hence, this paper concludes by suggesting for a more flexible and dynamic Act which could deter future frauds and is compatible with each scale of businesses.
INTRODUCTION
Pre-independence corporate frauds were not that common, or one can argue that they were never much highlighted. One of the reasons was the Indian economy, which was a closed and slow growing economy, having no interaction with the international market. Due to which there was less competition, simpler transactions and less complexities, etc which left negligible scope for frauds and scams. Due to the economic crisis going on in 1991 P.V. Rao’s government took a bold step of opening the Indian markets to the outside world and brought in what is called as the LPG scheme. This shift of the Indian economy to a liberal and privatised market in global world surely brought huge opportunities to grow but also exposed the inadequacies and inefficacy of India’s corporate governance framework. This period of extensive economic growth and poorly developed governance provided a breeding spot for corporate frauds.
With liberalisation, there was rapid growth of the industrial and corporate sector in India. Corporate governance emerged as a requirement in this phase of neo liberal economic change which aimed at increasing profits, and obviously this often came at the expense of fair and proper reporting by the industrialists to the shareholders and other members. Hence, there were huge number of corporate fraud due to lack of regulation. The Companies Act of 1956, no more turned out to be sufficient or appropriate for the business environment in India. This was followed by the biggest scam of the 90s- the Harshad Mehta in 1992 which added to the need of robust form of corporate governance to protect investor’s money.
HARSHAD MEHTA SCAM (1992)
The concept of incorporation of a company is the birth process of the company, providing them with rights and liabilities. This gives them a unique and separate legal personality, so that after incorporation the company is regarded as an individual in its own right who has distinct rights, duties and liabilities from those of its members or employees. This principle gained recognition from the Salomon v. Salomon & Co. Ltd. (1897) case and was inculcated into the Companies Act, 1956.[1] In this case the court said that the natural person is separate from the artificial legal entity that is company. Though this principle was first used in India way back in 1886 in the case of Kondoli Tea Co. Ltd but did not gain much acknowledgement. The Companies Act 1956 provided that companies could carry on businesses on their own, sue and be sued and hold property. Section 291 of the 1956 Act provided a general power to the board of directors to carry on the business of the company.[2] This Act provides that the Board of Directors of a company shall have the power to do all such things as the company itself has power to do. But under this law the power of the Boards of Directors become somewhat sovereign, there was no regulatory oversight provided. It was misused a lot but one of the biggest setbacks was faced in the case of Harshad Mehta in 1992.[3]
[1]Salomon v A. Salomon, [1897] AC 22.
[2]Companies Act 1956, S 219.
[3]Avantika Banerjee, ‘Corporate Frauds in India from 1992- 2019’ (ISLR, 14 November 2021) <Corporate Frauds in India from 1992-2019 – Indian Society for Legal Research> accessed 5 October 2024.