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Redundancy in fraud investigation
January, 11th 2007
The Government is looking to revamp the Serious Frauds Investigation Office. But what needs to be debated is the need for such a body at all.

When economic offences are major, they are termed as frauds and scams. India has had its share of such offences, but the big ones related to the stock market. The corporate scene has witnessed a rush of companies vanishing after initial public offerings leaving investors with worthless pieces of paper. However, the mother of all offences, Enron, woke up regulators globally and alerted those in India to take steps to prevent recurrence of such offences. While the US passed the titanic Sarbanes Oxley Act, other regulators tightened their corporate governance norms. India amended Clause 49 of the Listing Agreement exhorting listed companies to reveal all and hide nothing.

The Government also decided to set up a Serious Frauds Investigation Office (SFIO) to crack down on economic offences. But three years hence, the Government is looking to revamp the SFIO. But what needs to be debated is the need for the SFIO itself.

Tracking scams

The first assignment given to the SFIO was the KP scam. Reports suggest that the role of 16 companies was investigated and the SFIO ruled 13 of them to be suspect. The report hit the press before it was made official and all the 13 responded stating that the SFIO was too late in its decision as the Securities Appellate Tribunal (SAT) had already given them a clean chit. It was also stated that they could not comply with SFIO's orders as they were serving the orders of SEBI and the CBI.

This brings us to the first reason to question the existence of the SFIO: Why reinvent the wheel when there are already empowered institutions to tackle such offences. SEBI and SAT have had major differences in some of their respective rulings, but there is an escalation mechanism. Apart from its first assignment, the SFIO has also investigated 12 out of the 23 cases that has been referred to it under the Companies Act, 1956, which gives us the second reason to question SFIO's existence: A rather lethargic performance of investigating an average of four companies a year.

The Companies Act is a pretty complicated piece of legislation, but it does provide dispute redressal mechanisms all through, culminating in the Supreme Court. Some say there is no specific clause under the Companies Act to tackle frauds. However, if one looks at the cases decided under Sections 397 and 398 of the Companies Act dealing with oppression and mismanagement it becomes clear that this Section could have been used to file cases in case one smells an offence.

Measures contemplated

Amongst the measures being contemplated to revive the SFIO are to bar agencies such as the CBI, Excise, Customs and SEBI from investigating cases referred to the SFIO. One wonders if these bodies would take this lying down, as they can lay claim to having busted many an offence by their sheer presence over the years and their experience in dealing with offenders.

The SFIO was modelled on the lines of the SFO in the UK. But there is a world of difference between the two the SFO, an independent government department, is a part of the UK Criminal justice system and is accountable to the Attorney-General. The Attorney-General reports to the Prime Minister and is responsible to Parliament too.

Why create regulatory bodies that are only paper tigers. Regulation is laudable but meek legislation for regulation is counter-productive.

Mohan R. Lavi
(The author is a Hyderbad-based chartered accountant.)

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