Sucheta Dalal :No handle yet on serious financial fraud
Sucheta Dalal

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No handle yet on serious financial fraud  

Sep 12, 2005

If the Securities and Exchange Board of India (Sebi) got its statutory teeth in a hurry after the scam of 1992, the Serious Fraud Investigation Office (SFIO) came into existence in 2003 after the Joint Parliamentary Committee’s (JPC) investigation of the Ketan Parekh scam. It is loosely based on the UK’s Serious Fraud Office, but SFIO’s powers and independence were weakened by forcing it to operate under the Companies Act.


In the past two years, SFIO has conducted largely ineffectual investigations against DSQ Software, the Vatsa Group, the Ispat Group, Daewoo Motors and issues like Design Auto and Bonanza Biotech. It was created following recommendations by the Naresh Chandra committee on corporate audit and governance, the LN Mitra one on legal aspects of bank frauds and the Justice Malimath committee on reforms of the criminal justice system. Ensuring its independence through separate legislation was recommended in a Cabinet Note, but this move may now be diluted.


SFIO has already drafted a Bill to expand its domain and give it more teeth. But it also highlights the potential for conflict with Sebi, RBI and other regulators, police and investigation agencies. For instance, SFIO defines financial fraud as acts committed by a body corporate in dealings with any bank, financial institution, the general public or any entity holding public funds, thereby causing or likely to cause loss of money or property. When these losses are over Rs 50 crore or affect more than 5,000 people, it will be considered a serious financial fraud and enter the SFIO’s domain.This is well beyond the Companies Act’s scope and the regulatory turf of the ministry of company affairs (MCA). Naturally, SFIO’s attempt has not gone down well with MCA. It has also been told there could be conflict with the powers of the RBI and the economic affairs division of the finance ministry.


RBI’s department of supervision (DOS) was originally envisaged as the independent entity the SFIO hopes to be. But RBI simply refused to relinquish control. The subsequent collapse of Nedun-gadi Bank, Global Trust Bank and overseas corporate bodies showed the system’s ineffectiveness. Even Sebi has done well only in its developmental role. Its investigation and supervision remain below par. For instance, the fact that a broker with “admitted liability” of Rs 225.63 crore (JPC report) remains under investigation four years after Scam 2000 is odd. Sebi’s record of major orders being set aside by the Securities Appellate Tribunal is now embarrassing enough to warrant some probe or systemic overhaul.


Is a separate SFIO law the answer? Will it guarantee better action? Or, only create another big bureaucracy and administrative structure funded by taxpayer money, ultimately leading to more corruption? SFIO has argued, “perpetrators of frauds are not limited to corporates and companies, but have blossomed into sectors like cooperatives, banks, NBFCs, financial institutions, groups of individuals, etc. Hence a “comprehensive enactment to deal with all types of financial frauds are needed.” It further says even the Central Bureau of Investigation has no original jurisdiction and expertise for investigating serious and complex frauds.


It is, indeed, true that separate legislation can work only if SFIO is not only independent of MCA, but the supervisory functions of Sebi and RBI are transferred to it, to make it powerful enough to cut through existing structures. Ideally, the SFIO must be kept out of the clutches of all ministries and politicians and made directly accountable to Parliament.


It is difficult to envisage such an idea ever getting the concurrence of various ministers, regulators or even Parliament. In fact, the Malimath committee said, “in spite of well over 70 laws, apart from earlier laws in the Penal Code, the magnitude and variety of economic crimes is growing at a fast rate. The number of agencies for regulation and investigation has also increased. Yet, the need for rigorous laws and strong regulatory enforcement and investigation agencies cannot be more obvious. The attempts made in the last few decades to legislate have not been quite successful. Our judicial processes have not been helpful either. It is essential that these crimes are tackled urgently through legislative and other measures...” Adding, the current system “is ineffective in handling major economic crimes” and mentions the “need to put in place better legislation, improved Criminal Justice System and a strong Regulatory enforcement system to prevent, investigate and prosecute major economic crimes.”


Does this need separate over-riding legislation or the strengthening of all investigation agencies? There is clearly merit in some of the SFIO’s demand for more power and independence. But one needs to look at its demands more closely. The SFIO wants powers to initiate action without going to court for a warrant. It hopes to get this by promising not to treat a person as a criminal till charges are framed. Ironically, the finance ministry had shot down a similar demand by Sebi during the last amendment to its legislation, though it was granted search and seizure powers.


At present, cases are referred to SFIO by the government and investigation can be ordered only on a report from the Registrar of Companies (ROC) concerned. It needs further authorisation to proceed with prosecution. Clearly, there is a case for more SFIO independence, but this does not necessarily need separate legislation. SFIO’s record of action and investigation over the past two years has also done nothing to inspire confidence in its ability to handle a quantum jump in power and responsibility for tackling financial crime.


-- Sucheta Dalal