The Anti-Bribery and Anti-Corruption Review: India
India has a federal form of government together with a strong emphasis on local self-government. At all levels, the government and government-owned enterprises play a key role in the Indian economy – in addition to performing sovereign functions, the government has a large commercial footprint in several sectors, including defence, education, civil aviation, railways (a near monopoly), infrastructure and healthcare. Consequently, conducting business in India necessarily requires interactions with the government in its various forms. Further, a number of Indian laws that impact businesses often provide for government functionaries having considerable discretion. A single business entity may be subject to a number of central, state and local regulations, requiring approvals to operate its business, compliance, periodic reporting and inspections, and the exercise of individual discretion by government officials at various levels. All these factors may make government interaction time-consuming and uncertain.
Although India has fairly stringent anti-corruption laws, there was a belief in some quarters (particularly outside India) that corruption is a widely accepted practice in India; however, this notion has no legal or cultural basis, and corruption, although not uncommon, is not considered socially acceptable. In fact, the political and social climate in India in recent years has been pervaded by a strong public sentiment against corruption in government, with growing awareness among Indians of the cost of corruption.
This has resulted in the adoption of several additional measures aimed at tackling corruption in India, including the creation an independent ombudsman (the Lokpal) to investigate and prosecute cases of corruption by public officials (including ministers), strengthening laws relating to prosecution of bribe-givers, facilitators and influence peddlers, strengthening laws against intermediaries with fiduciary duties like auditors and the enactment of laws to expand the scope of existing laws governing money laundering and benami (i.e., proxy) transactions and to target those in possession of undisclosed income (whether in India or abroad) and accused persons absconding from prosecution. Most importantly, Indian authorities have become more aggressive in enforcing anti-corruption laws in India, aided by close scrutiny by Indian courts. Government agencies have also shown a willingness to take the assistance of specialists such as private forensic auditors or investigators to provide expertise that they may lack themselves, and there are several examples of this in ongoing proceedings.
Domestic bribery: legal framework
i Regulation of public bribery
The primary anti-corruption legislation in India is the Prevention of Corruption Act, 1988 (PCA), which criminalises, among other things, the taking and giving of 'undue advantage' to 'public servants'. Both individuals and companies are liable to be punished for an offence under the PCA.
The PCA states that an undue advantage is any gratification (not limited to being pecuniary in nature or estimable in money) other than the legal remuneration that a public servant is permitted to receive either from the government or any other organisation served by the public servant. Further, the term 'public servant' has been defined broadly and includes any person in the service or pay of any government, local authority, statutory corporation, government company or other body owned or controlled or aided by the government, as well as judges, arbitrators and employees of institutions receiving state financial assistance. In CBI v. Ramesh Gelli & Ors,2 the Supreme Court of India held that pursuant to certain provisions of Indian banking law, employees of banks (whether public or private) are also considered public servants under the PCA.
The offences under the PCA include: (1) public servants obtaining any undue advantage with the intention of, or as a reward for, improperly or dishonestly performing or causing performance of a public duty; (2) public servants obtaining any undue advantage without (or for inadequate) consideration from a person concerned in proceedings or business transacted either by the public servant or by any of the public servant's superiors; (3) criminal misconduct by a public servant (which included possession of disproportionate assets); and (4) commission of any subsequent offence after being convicted previously under the PCA.
The PCA also targets the conduct of influence peddlers or intermediaries by criminalising the act of taking any undue advantage to cause the improper or dishonest performance of a public duty. Until recently, bribe-givers were brought within the ambit of the PCA through the offence of 'abetment' of the offences mentioned above (in addition to liability for 'criminal conspiracy' under the Indian Penal Code, 1860). However, legislative changes to the PCA in 2018 have (in addition to liability for 'abetment' and 'criminal conspiracy') expressly targeted bribe-givers (including commercial organisations and their identified person in charge) by criminalising the act of providing or promising to provide a bribe to any person (regardless of whether that person is a public servant) to induce or reward a public servant to improperly or dishonestly perform public duty.
The penalties for various offences under the PCA include imprisonment ranging from six months to 10 years and a fine (with one instance where it is imprisonment, a fine or both). Further, recent legislative changes to the PCA have also introduced provisions pertaining to attachment and confiscation of property procured by way of an offence under the PCA. It is not inconceivable for investigating authorities to allege that any advantage received by a bribe-giver through the bribery (which is an offence under the PCA) could also be subject to attachment and confiscation, and not just the property of the public servants in question. The PCA also provides for a time frame of two years within which courts must endeavour to complete the trial, subject to an extension of a maximum of four years.
The PCA clarifies that any attempt by a public servant to obtain or accept any undue advantage is enough to constitute an offence under the PCA, irrespective of whether the public servant carried out his or her official duty improperly or dishonestly. An attempt to give or receive a bribe is sufficient to attract liability under the PCA, and actual payment or receipt of bribes is not necessary. It is immaterial whether the bribe has been obtained for a public servant's own benefit or the benefit of any other person, either directly or through any other person. Offences under the PCA are investigated either by the Central Bureau of Investigation (CBI) (in the case of offences involving allegations against functionaries of the central government) or by anti-corruption branches of the state police. Trials of PCA matters are conducted before special courts. Note that the prior sanction of the government is required for the initiation of prosecution of public servants under the PCA. However, this safe harbour applies only to proceedings against serving and retired public servants, and not against persons accused of giving bribes.
The PCA provides for immunity for a person accused of providing undue advantage if that person has been compelled to give the undue advantage and is willing to report the matter to the law enforcement authority or investigation agency within seven days of the date of giving the undue advantage.
ii Regulation of foreign contributions
The Foreign Contribution Regulation Act, 2010 (FCRA) prohibits the acceptance of foreign hospitality or contributions from foreign sources by persons including government servants, employees of any other body owned or controlled by the government, judges, legislators, political parties or their office-bearers, except with the permission of the central government. The term 'foreign source' is defined widely and includes foreign companies, other foreign entities, a foreign trust or foundation, or a foreign citizen.
Non-governmental organisations (including charities) receiving contributions from a foreign source are required to be registered under the FCRA and to report contributions. In addition to the requirement of obtaining the central government's consent or registration for the purpose of receiving contributions from a foreign source, the FCRA also provides for suspension and cancellation of a registration granted by the central government in the event of a contravention of the terms of the registration, the FCRA, or in the larger public interest.
The FCRA also mandates that persons such as member of a legislature or an office bearer of a political party or judge or government servant or employee of any corporation or any other body owned or controlled by the government shall not accept any foreign hospitality while visiting any country outside India without the prior permission of the central government. The provisions of FCRA have been amended recently (in 2020) to further tighten certain provisions. These enhanced provisions restrict any contribution received by public servants, transfer of any contribution received from a foreign source, a reduction in administrative expenses that form part of the foreign contribution and enhanced conditions for the grant and renewal of a registration certificate.
Violation of the FCRA is punishable with imprisonment of up to five years or a fine, or both.
iii Regulation of public servants
Public servants are regulated by the terms of the service rules applicable to them. For instance, persons in the service of the central government are governed by the Civil Services (Conduct) Rules, 1964 and the All India Services (Conduct) Rules, 1968 (the Service Rules). The Service Rules restrict a public servant from receiving gifts (including travel, accommodation, meals, entertainment or other pecuniary advantage) exceeding specified thresholds (which depends on the grade and seniority of the public servant); however, a casual meal, a casual lift or other social hospitality is permitted. The Service Rules also state that public servants may not accept lavish or frequent hospitality from commercial organisations or persons having official dealings with them. However, unlike the Service Rules, the PCA does not provide for any de minimis thresholds for gifts, meals, entertainment or hospitality, and therefore organisations need to be extremely cautious when dealing with Indian public servants.
The Service Rules also prohibit public servants from engaging in any trade, business, or other employment; holding an elective office; canvassing for a candidate for an elective office or in support of any business; participating, except in the discharge of official duties, in the registration, promotion or management of any bank, company or cooperative society for commercial purposes; and participating in any sponsored private media programme. Further, speculation by public servants in any stocks, shares or other investments is prohibited, except occasional investments in securities made through registered brokers and this being undertaken with prior government approval. However, participation in honorary social or charitable work, work of literary, artistic or scientific character, amateur sports or in the formation of associations for these purposes are outside the scope of 'commercial activities' in the Service Rules. Under Section 168 of the Indian Penal Code, 1860, it is an offence for a public servant to engage in any kind of trade, business, profession or occupation if prohibited from doing so and is punishable with simple imprisonment of up to a year, a fine or both. Therefore, a public servant may also be criminally liable for engaging in prohibited commercial activities. However, persons employed by the government on a contract or temporary basis are generally permitted to engage in other activities; for example, senior doctors consulting at government hospitals and lawyers engaged by the state.
iv Regulation of private bribery
There are no specific laws like the PCA that specifically prohibit private commercial bribery in India, although it could well be a criminal act under general criminal statutes (such as the Indian Penal Code, 1860) and be covered under specific laws governing certain commercial organisations (such as the Companies Act, 2013 (the Companies Act) – as stated below), and organisations may have internal codes of conduct that prohibit it.
The Companies Act includes stringent provisions pertaining to fraud, which has been defined to include 'any act, omission, concealment of any fact or abuse of position committed by any person 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' – and does not require there to be a wrongful gain or a wrongful loss. Acts of private bribery (and concealment thereof) could be considered to constitute a fraud on (or by) the company, which is punishable with imprisonment ranging from six months to 10 years and a fine (depending on the amount involved in the fraud) – however, for fraud that is below a de minimis limit (1 million rupees or 1 per cent of the turnover of the company, whichever is lower and not involving public interest), the punishment is imprisonment for up to five years, a fine of up to 5 million rupees or both.
Directors (in their directors' responsibility statement under the Companies Act) are also required to provide certain confirmations that are relevant in this context,3 and also provide details of any fraud reported by auditors (other than those which are mandatorily reportable to the central government). The Companies Act also obligates auditors (in the course of performance of their duties as an auditor), cost accountants in practice (in the course of conducting cost audit) and company secretaries in practice (in the course of conducting secretarial audit) to report any suspected fraud to the central government (as is detailed in Section V.i).
Listed companies and certain types of unlisted companies are mandated to establish a vigilance mechanism for reporting concerns and to provide safeguards for whistle-blowers. There is a disclosure mechanism for disclosure of fraud in the auditor's report (for all companies), and (in certain instances) to the stock exchanges (for listed companies).
Recently, a committee has been constituted by the central government for the purposes of amending the Indian Penal Code, 1860. A set of questionnaires have been issued by this committee to gauge public opinion on various offences. One of these issues is private bribery, which could possibly be criminalised by way of amendment.
Enforcement: domestic bribery
India has witnessed a sharp rise in prosecutions for corruption-related offences in recent years, with law enforcement agencies and the judiciary aggressively enforcing the PCA. Particulars of some high-profile corruption-related proceedings in India are set out below. Since India does not publish public updates with regard to matters under investigation or pending trial, most publishable information is available from media sources and a few publicly reported judicial decisions concerning certain ancillary proceedings. There have been several high-profile cases involving domestic bribery where prosecution was sought over the past few years, with a mixed track record. A high-profile example of an ongoing matter is in the Punjab National Bank scam, which is summarised below.
A diamond business has recently been accused of defrauding the Punjab National Bank of 114,000 million rupees through the family members, companies and partnership firms of the persons operating the business. The complaint by the Punjab National Bank to the CBI reveals that the fraud had been perpetrated for years through collusion between bank officials and the accused persons along with their affiliates, and involved the issuance of bank guarantees to overseas branches of other Indian lenders, on behalf of the accused and their affiliates. These guarantees were allegedly used to raise buyer's credit for the accused persons' firms to pay for imports and various other purposes. The CBI has filed two charge sheets against the accused, who include bank officials, alleging various offences under the Indian Penal Code 1860, the PCA and the Prevention of Money Laundering Act, 2002 (PMLA). The two main accused are reported to have fled the country, and as per various media reports, extradition proceedings are ongoing against both of the main accused.
Action against shell companies
The government is also tightening the noose around sham or shell companies used as a veil to conduct various illicit tax evasion and money laundering activities, potentially including bribery and corruption. In 2017–2018, the Ministry of Corporate Affairs (MCA) struck off as many as 226,166 shell companies and partnership firms. The government has also made efforts to ensure that neither directors nor any other authorised signatories can access the accounts of such a deregistered company other than for specified purposes until the company is restored. The drive to identify and deregister shell companies has continued in 2018–2019, with a total of 225,910 notices being issued to suspected shell companies. In the period between April 2018 and December 2018, 100,150 shell companies were struck off. Additionally, as per news articles, the Central Board of Direct Taxes has issued directions to the income tax offices across India to probe financial transactions of around 300,000 (shell) companies that had been struck off by the MCA.
Foreign bribery: legal framework
India does not currently have a law prohibiting bribery of foreign public officials (although it is arguable that this may constitute fraud under the Companies Act). The Prevention of Bribery of Foreign Public Officials and Officials of Public Interest Organisations Bill 2011 was introduced in Parliament, but it did not receive parliamentary assent and consequently lapsed.
Associated offences: financial record-keeping and money laundering
The PCA does not impose record-keeping obligations. However, the Companies Act, the PMLA and Indian tax laws impose certain record-keeping obligations.
i Obligations under company law
The Companies Act requires that companies maintain books and financial statements in accordance with prescribed accounting standards and that give a true and fair view of the state of the company's affairs. The financial statements of a company must be signed on behalf of its board of directors and presented to the shareholders along with the report of the external auditors. These must be accompanied by a directors' report, which must include a 'directors' responsibility statement', stating, inter alia, that the directors have selected and applied accounting policies and made prudent judgements to give a true and fair view of the company's affairs, and that they have taken proper and sufficient care in maintaining adequate accounting records. Where any person knowingly makes a materially false statement in, or knowingly omits a material fact from, a return, report, certificate, financial statement, prospectus, statement or other document, that person is liable for the same punishment as prescribed for fraud (i.e., imprisonment ranging from six months to 10 years and a fine).
The Companies Act also grants the Registrar of Companies and the central government broad powers to call for further documents and information, or order inspections and enquiries into companies' affairs (with the ability to conduct searches and carry out seizures if authorised by a court). Further, the Companies Act imposes stringent obligations on auditors, cost auditors and company secretaries in practice with regard to performance of their respective duties (statutory audit, cost and secretarial audit) and reporting of suspected frauds (including to the central government, if they cross the relevant threshold). In this regard, the Institute of Chartered Accountants of India has issued a guidance note that clarifies certain aspects on fraud reporting by (statutory) auditors.
The reporting requirements under Section 143 of the Companies Act have been recently updated by the Companies (Auditor's Report) Order, 2020 (CARO 2020). The CARO 2020 is applicable on and from the financial year commencing 1 April 2019 and includes enhanced disclosure requirements and qualitative judgements to be made by statutory auditors. Disclosures relating to assets of the company must now include: (1) details (provided in a specified format) of immovable properties (disclosed in the financial statements) whose title deeds are not held in the name of the company; (2) details of revaluation of a company's assets including right of use assets and intangible assets, and if the revaluation is based on a valuation by a registered valuer; (3) any change of 10 per cent or more in the aggregate of the net carrying value of each class of assets; and (4) details of any proceedings that have been initiated or are pending against the company, for holding any benami property and if the company has appropriately disclosed these details in its financial statements.
ii Money laundering laws
The PMLA criminalises money laundering, which is defined to mean directly or indirectly attempting to indulge in, or knowingly assist, or be involved in, a process or activity connected with the proceeds of crime (including their concealment, possession, acquisition or use) and in projecting or claiming that tainted property is untainted. The term 'proceeds of crime' refers to any property derived or obtained, directly or indirectly, by a person as a result of certain identified crimes that are considered predicate offences for the application of the PMLA. Money laundering is punishable with imprisonment ranging from three to seven years and a fine.
Legislative changes to the PMLA in 2018 have included 'fraud' under the Companies Act as one of the identified crimes that will attract the application of the PMLA. As a result, any property derived or obtained through fraud will be considered proceeds of crime under the PMLA. Unlike the PCA, under the Companies Act fraud is not linked only to bribery of public servants but covers a much wider ambit.
The PMLA imposes obligations upon banking companies, financial institutions and intermediaries (such as brokers, money changers and casino operators) to maintain records of transactions and of their clients' identities, to furnish these records to the central government and to report suspicious transactions and transactions exceeding a specified value. No civil or criminal proceedings may be initiated against the reporting entity for divulging records of transactions in accordance with the PMLA. Failure to comply with these obligations is punishable with steep fines. Further, banks, financial institutions and other intermediaries may become liable to prosecution if they were aware of the commission of a predicate offence, knowingly became recipients of the proceeds of crime and projected that those proceeds were untainted property. Therefore, while the exercise of diligence is not a complete defence under the PMLA, it may help demonstrate that an entity had no knowledge of the commission of a predicate offence.
Separately, the Reserve Bank of India and the Securities Exchange Board of India have also issued guidelines to entities regulated by them (such as banks, financial institutions and market intermediaries), specifying 'know-your-customer' requirements and other anti-money laundering measures. These guidelines include norms governing the establishing of customers' identities, risk-based categorisation of customers, client due diligence (including enhanced measures for high-risk customers), procedures for conducting various types of transactions (including cross-border transactions) and reporting of transactions to India's Financial Intelligence Unit.
The PMLA was amended by the Finance Act, 2018 with effect from 19 April 2018 to allow enforcement agencies to proceed against property equivalent in value to tainted property held outside India. The amendment has also included an extension of the period of attachment of property when the attachment proceedings have been stayed on court orders, a period of 90 days for investigation by the enforcement directorate before initiation of prosecution, and mandatory guidelines on the disclosure of information on violations of other laws. A crucial amendment to the extant law is that courts can, during the pendency of the trial and in a prescribed manner, restore the whole or part of a property to a legitimate claimant who may have suffered a quantifiable loss as a consequence of the offence of money laundering, instead of doing so only at the conclusion of the trial.
The PMLA was amended by the Finance Act, 2019 with effect from 1 August 2019. Pursuant to this, for the Enforcement Directorate (i.e., the relevant authority under the PMLA) to investigate a matter, the prerequisite of a first information report (FIR) or charge sheet being filed by the other relevant agencies that are authorised to probe the relevant scheduled offence (the identified offences that would attract the application of PMLA) has been removed. Additionally, all offences under the PMLA have been made cognisable (which would empower the Enforcement Directorate to arrest an accused on its own motion without warrant) and non-bailable (that is, where grant of bail is a matter of discretionary power in the hands of the court).
iii Tax laws
Corruption has led to the growth of a parallel economy consisting of the undisclosed income of politicians, public servants and private individuals. Wilfully attempting to evade any tax payable under the Income Tax Act, 1961 is a criminal offence carrying a penalty of imprisonment ranging from three months to seven years and a fine.
Notably, expenses incurred in respect of any activity that is prohibited by law or that constitutes an offence are not deductible under Indian tax laws. Accordingly, bribe-giving entities may be in breach of tax laws if they claim deductions against illicit payments (or if these payments are disguised as legitimate deductions).
Although Indian authorities have historically not relied on record-keeping provisions to prosecute corruption-related conduct, the introduction of stringent provisions relating to fraud, tax evasion and money laundering in recent years is indicative of a growing trend towards the use of financial sanctions to address corruption. In our view, these provisions will become increasingly important elements of India's fight against corruption.
Enforcement: foreign bribery and associated offences
As mentioned above, India does not have a law prohibiting bribery of foreign public officials at present.
International organisations and agreements
India has ratified the United Nations Convention against Corruption (UNCAC) and the United Nations Convention on Transnational Organized Crime, both of which mandate the criminalisation of corruption and bribery of public officials. Under Indian law, obligations under treaties become binding domestically only upon the enactment of a law to this effect by the legislature. Therefore in 2018 legislative changes were introduced to the PCA to align it with India's international obligations under UNCAC.
India is also a member of the Financial Action Task Force, which aims to develop national and international policies to prevent money laundering and terrorism financing arising out of, inter alia, bribery.
India is also a signatory to the Convention on Mutual Administrative Assistance in Tax Matters and has agreed to implement the Common Reporting Standard for automatic exchange of tax and financial information. This is expected to aid the government in its efforts to target undisclosed income and assets of Indian citizens (whether in India or abroad).
i Amendments to the PCA
While key provisions of the PCA have already been mentioned above, significant amendments to the PCA in 2018 include the requirement to seek prior approval of the central government, state government or the relevant government authority in whose employment an offending public servant is alleged to have committed an offence under the PCA. The relevant government or authority is required to convey its decision within three months. This does not apply to public servants who are caught in the act of committing an offence under the PCA. The intent of this amendment is to protect bona fide acts carried out by public servants discharging their public functions.
Further, any form of facilitation payment has now been expressly prohibited, and the implementation of 'adequate procedures' in the form of a prescriptive anti-corruption compliance programme in the private sector has now been permitted as a valid defence for commercial organisations. Guidelines for such anti-corruption compliance programmes are yet to be notified by the central government.
ii Black Money Act
Given that a substantial part of India's undisclosed wealth is kept in tax havens abroad, recent legislative changes have addressed this. Indian residents are now required to disclose their foreign assets to the Indian tax authorities under the new Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (the Black Money Act). Further, penal taxes have been imposed on undisclosed foreign income and assets, and additional criminal liabilities have been introduced for non-disclosure of foreign assets and wilful attempts to evade taxes. The Black Money Act also provided for a short period of leniency before it came into force, during which citizens could declare their undisclosed foreign assets by paying tax and any related penalties, thereby avoiding the more stringent liabilities (including imprisonment) prescribed under the Black Money Act.
iii Amendments to the Companies Act
The Companies (Amendment) Act, 2020 received presidential assent and was notified on 28 September 2020. Provisions of the amendment will come in to force, when specifically notified by the central government. The amendment seeks to decriminalise offences and defaults that lack an element of fraud or do not involve larger public interest. The objective of the amendment is to reclassify minor procedural or technical lapses into civil wrongs. This amendment has not brought about any changes in relation to non-compoundable offences that are considered the more serious offences. The amendment only focuses on defaults that can be objectively proven such as, inter alia, defaults in purchasing its own securities, registration of charges and maintaining registers or filings returns, and has amended the Companies Act to remove imprisonment sentences for these defaults and only retain the monetary penalty. Aside from the removal of imprisonment as a penalty, the amendment also reduces monetary penalties for certain defaults such as failure in filing annual returns or resolutions and agreements in compliance with the Companies Act, 2013.
iv Fugitive Economic Offenders Act
India had witnessed a meteoric rise in the amount owed to banks over the past few years before the enactment of the Fugitive Economic Offenders Act, 2018 (FEOA). This included persons absconding to countries outside India, mostly where India did not have extradition arrangements, or where extradition was otherwise legally challenging. In this context, the FEOA was introduced to allow for attachment of properties of these defaulters situated in India. The FEOA comes in the light of increasing procedural and legal difficulties under the existing civil and criminal framework in deterring economic offenders from fleeing the country to avoid trial.
The FEOA was enacted on 31 July 2018 to target fugitive economic offenders against whom an arrest warrant has been issued for certain predicate economic offences involving 1,000 million rupees or more and who have left the country to avoid criminal prosecution, or are abroad and refuse to return to the country to face criminal prosecution. In line with legislative intent to consolidate the country's anti-corruption and anti-money laundering legal framework, the key predicate economic offences under the FEOA cover cheating and counterfeiting under the Indian Penal Code, 1860, offences under the PCA, offences under the PMLA, corporate fraud under the Companies Act, benami transactions and tax evasion.
Other laws affecting the response to corruption
In addition to the laws discussed above, the following bodies and laws form part of the Indian anti-corruption regime.
The CAG is an office created under the Constitution of India that is responsible for auditing all income and expenses of the central and state governments of India, all bodies or authorities substantially financed by the government and all government companies and corporations. Observations, inconsistencies and irregularities noted by the CAG have led to the discovery of several instances of suspected corruption and, although the CAG has no investigative or prosecutorial powers, it acts as a watchdog against corruption. Reports by the CAG have been used by citizens to approach the judiciary in 'public interest litigation', seeking the courts to direct law enforcement agencies to investigate and probe suspected instances of corruption.
ii Central Vigilance Commission Act, 2003
This Act establishes the Central Vigilance Commission, which is the primary agency to enquire into or cause enquiries to be conducted into offences alleged to have been committed under the PCA, and which is responsible for advising, planning, executing, reviewing and reforming vigilance operations in central government organisations. It exercises supervision over the CBI in relation to PCA-related investigations and reviews the progress made in such cases.
iii Lokpal and Lokayuktas Act, 2013
This law was enacted against the background of concerns that India's investigatory authorities were not sufficiently independent of government influence to police corruption within the government. It creates the offices of independent ombudsmen at the central and state levels to investigate and prosecute cases of corruption by public officials (including ministers). The legislation also obligates public servants to furnish information annually in relation to their and their families' assets. The office of the Lokpal (the ombudsman at the federal level) is currently headed by Justice Pinaki Chandra Ghose, who is a retired judge of the Supreme Court of India.
iv Whistle-Blowers Protection Act, 2011
This legislation aims to establish a mechanism to safeguard persons who report an act of corruption or wilful misuse of power by a public authority. The identity of the complainant must be mandatorily protected (subject to certain exceptions) and any disclosure to the contrary is punishable with imprisonment and a fine. This law is not currently in effect.
v Serious Fraud Investigation Office
The Serious Fraud Investigation Office (SFIO) has been set up under the Companies Act to detect, investigate and prosecute white-collar crime and fraud. The Companies Act provides that the central government may, in certain circumstances, order the SFIO to investigate the affairs of a company. The SFIO has been given wide powers to conduct inspections, discover documents, search and seize evidence, etc., in the course of investigations. The government has also recently notified certain additional sections of the Companies Act, which give the SFIO powers to arrest a person who the SFIO has reason to believe has been guilty of specified offences under the Companies Act (including offences relating to fraud).
vi Liability of corporations and their officers
India recognises the principle of corporate criminal liability, and the Supreme Court has, in Iridium India Telecom Ltd v. Motorola Incorporated & Ors,4 held that mens rea may be attributed to companies on the principle of the 'alter ego' of the company (i.e., that the state of mind of directors and managers who represent the 'directing mind and will' of the company, and control its affairs, would be attributable to the company). The Court stated that to attribute the mens rea of a person or body of persons to a company, it would be necessary to ascertain whether 'the degree and control of the person or body of persons is so intense that a corporation may be said to think and act through the person or the body of persons'. Accordingly, for the authorities to succeed in holding a company criminally liable (including under the PCA), they would have to demonstrate that the element of mens rea of the relevant employees or agents of the corporation can be attributed to the company in accordance with the test set out above. This test may allow companies to defend themselves against potential liabilities resulting from the actions of a rogue employee on the grounds that the employee does not represent the directing mind and will of the company and hence the mens rea of the employee cannot be imputed to the company. In practice, however, Indian authorities typically always charge an employer company with the offence, along with the individual employee.
The PCA and the FCRA recognise the principle of corporate criminal liability. The PCA expressly states that if an offence is committed by a commercial organisation, the organisation shall be liable to a fine if any person 'associated with the commercial organisation' provides any illegal gratification intended at obtaining or retaining business, or advantage in the conduct of business, for the organisation. A person is considered to be associated with a commercial organisation if the person provides services on behalf of the organisation. This is a question of fact and not just the relationship between the person and the organisation – and the person could be acting as an employee, agent or subsidiary of the organisation. Hence, an employee of the commercial organisation is deemed to have performed services for the organisation.
Another issue of concern is liability of senior management or company directors for offences committed by the company. In Sunil Bharti Mittal v. Central Bureau of Investigation,5 the Supreme Court held that there is no vicarious criminal liability unless a statute specifically provides so and that, accordingly, the acts of a company cannot be attributed and imputed to persons (including directors) merely on the premise that those persons represent the directing mind and will of the company. The Court also stated that vicarious liability of the directors for criminal acts of a company cannot be imputed automatically, and an individual can be accused (along with the company) only if there is sufficient evidence of his or her active role coupled with criminal intent.
Recent legislative changes to the PCA have now incorporated vicarious criminal liability. These provisions state that if any offence is committed by a commercial organisation, the directors, managers, secretaries and any other officers with whose consent and connivance the offence has been proved to have been committed shall be liable to penalties.
The Companies Act further explicitly deals with the liability of non-executive and independent directors – they can be held liable only for acts of omission or commission by a company that have occurred with the director's knowledge, attributable through board processes, and with his or her consent or connivance or where he or she had not acted diligently. The Ministry of Corporate Affairs has also issued a circular in March 2020 to provide for procedural safeguards before initiating proceedings under the Companies Act for non-executive and independent directors. Practically speaking, investigating authorities and courts often summon all directors, regardless of independent or executive, who may subsequently be arraigned as accused in a criminal prosecution, especially in high-profile scams where there is public money involved. Additionally, the procedural safeguards are only for alleged offences under the Companies Act, and not other laws. Therefore, while there exist provisions protecting the rights of non-executive and independent directors, the real area of concern (which is the prosecution process itself) still remains.
vii Reporting obligations
There is no express obligation under Indian law to self-report offences under the PCA. However a reporting obligation imposed upon statutory functionaries of bodies corporate, such as auditors, may be triggered if the act also qualifies for reporting under the Companies Act. Further, Indian courts have taken an expansive view of provisions relating to the PCA and recently extended certain provisions under Indian banking laws to PCA offences, such that employees of banks (whether public or private) are now considered public servants.6 Although the Code of Criminal Procedure, 1973 contains provisions relating to reporting obligations, it remains to be seen whether Indian courts will extend these obligations to offences under the PCA. Listed companies would, in certain instances, have obligations to make public disclosures under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
The Evidence Act, 1872 recognises that certain communications between an attorney and a client are privileged as a rule of evidence and privileged communications cannot be used as evidence against the client in a trial. It is, however, important that in specific situations, Indian legal advice be sought when evaluating the availability of privilege. Further, it is advisable that any experts, investigators or auditors be appointed at the request of and through Indian lawyers, to be able to claim privilege in relation to any work product prepared by the experts, investigators or auditors. The position in India on several matters relating to attorney–client privilege (including in relation to its applicability to in house counsel) remains unclear.
ix Data privacy concerns
Under Indian law, a company is generally permitted to collect and review electronic data stored on its servers or electronic equipment. Nevertheless, it is preferable that this be expressly provided in an organisation's policy manuals. The Information Technology Act, 2000 and the rules issued thereunder regulate the collection, storage, use and disclosure of sensitive personal information (SPI), which is defined to include information such as passwords, financial information, medical records and biometric information, and, accordingly, employees should be cautioned against storing any SPI on official servers or devices and informed that any stored SPI may be reviewed by the organisation. Further, data from an employee's personal electronic devices should only be obtained with the employee's prior written consent, and BYOD (bring your own device) or other similar policy allowing personal electronic devices to have work-related data should be carefully worded. Although generally restricted, disclosure of SPI to government authorities for the purpose of verification of identity, or for prevention, detection, investigation, prosecution and punishment of offences, is permitted. Therefore, if authorities request an organisation to provide specified information (stating the purpose of seeking the information), the organisation may be required to share the information, even if the data constitute SPI.
Data privacy laws in India are in the process of being amended with a new data privacy bill having been drafted. However, it has not been enacted as yet, and hence the primary law governing data privacy currently remains the Information Technology Act, 2000 and rules made thereunder.
x National Financial Reporting Authority
The MCA, through a notification dated 21 March 2018, approved the establishment and functioning of the National Financial Reporting Authority under Section 132 of the Companies Act. The NFRA has been constituted to enhance institutional oversight over auditors and to improve market integrity, transparency and protection of the interests of investors and other stakeholders. The NFRA has been investigating the auditors in some recent matters, and questions have been raised about parties having to face multiplicity of proceedings from various regulatory authorities including the NFRA.
Although guidelines by the central government with respect to implementation of adequate procedures in the form of a robust anti-corruption compliance programme are yet to be notified, an effective compliance programme would generally consist of: (1) comprehensive compliance policies, which prescribe clear rules regarding provision of gifts, meals, entertainment and hospitality, and conduct with counterparties; (2) periodic compliance training for all employees (and particularly at the lower levels of the organisational pyramid) to reinforce and reiterate the compliance policies and practices of the organisations; (3) conducting due diligence of vendors and counterparties prior to transacting; (4) strong financial controls, with effective restrictions on cash payments, reimbursements and payments to parties other than the contractual counterparty; and (5) a robust monitoring and reporting mechanism that seeks to identify and mitigate compliance risks, and encourages whistle-blowers to come forward with disclosures.
Further, as discussed in the section on private commercial bribery, Indian law imposes a fiduciary duty on statutory functionaries of bodies corporate, such as directors and auditors, to monitor and report fraudulent transactions.
Outlook and conclusions
Law enforcement agencies have over the past years continued to pursue aggressively bribery and corruption investigations. Aggressive law enforcement, however, is required to stand the test of constitutionality in India. Although the recent trend in courts has tended to favour enforcement agencies rather than accused persons, it is quite likely that courts will be called upon to strike a balance between empowering law enforcement agencies and protecting the constitutional rights of accused persons.
The aggressive attitude of law enforcers is reflected in (among other instances) the willingness of the agencies to engage private specialists such as forensic auditors to provide input on specific aspects of the investigation; and in the increasing use of technology by agencies. Both the use of private specialists and the use of technology often raise questions regarding the legality of the investigation. We expect these trends in investigations to continue and Indian courts to be confronted with questions on the legality of the techniques involved.
In India, multiple agencies with similar powers are often competent to investigate a single set of facts from different angles, but all in relation to a single underlying act. For example, the use of company funds to bribe an official of the central government and consequent mis-statements in the financial statements and in the tax returns may constitute related but distinct offences under the PCA, the PMLA, the Companies Act and the Income Tax Act. This would mean that agencies, including the CBI, the Directorate of Enforcement (which investigates PMLA offences), the SFIO, tax authorities and most recently, the NFRA could all exercise their powers simultaneously. Although the Companies Act provides for precedence to be given to the investigation conducted by the SFIO,7 this position remains untested. In practice, a person subject to an investigation is often required to comply with identical demands from multiple agencies.
As regards the PMLA, the offence of fraud under the Companies Act was introduced as a scheduled offence on 18 April 2018. Pursuant to Article 20 of the Constitution of India, any finding of fraud prior to this should not trigger the provisions of the PMLA, since Article 20 of the Constitution of India expressly states that no person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. However, this principle in relation to PMLA proceedings is in the process of being tested at the level of the Supreme Court of India. While the High Court of Karnataka has upheld this principle in light of Article 20 of the Constitution of India in Directorate of Enforcement v. Obulapuram Mining Company Private Limited, the order passed by the High Court of Karnataka was appealed before the Supreme Court of India, which passed an interim order stating that the High Court's order will not operate as a precedent, pending the conclusion of proceedings before the Supreme Court.
The anti-bribery and anti-corruption landscape in India has seen rapid changes in the recent past and we expect this trend to continue. Compliance professionals, including defence and prosecution lawyers, will need to keep abreast of a number of legislative, judicial, commercial and technological developments to stay competitive.
1 Aditya Vikram Bhat and Prerak Ved are partners and Shantanu Singh is an associate at AZB & Partners.
2 CBI v. Ramesh Gelli & Ors, 2016 (3) SCC 788.
3 Sub-sections (c) and (e) of Section 134(5) of the Companies Act (which contains matters to be stated in the director's responsibility statement) read as follows:
(c) the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities
(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.
4 Iridium India Telecom Ltd v. Motorola Incorporated & Ors, AIR 2011 SC 20.
5 Sunil Bharti Mittal v. Central Bureau of Investigation, 2015 (4) SCC 60.
6 CBI v. Ramesh Gelli & Ors, 2016 (3) SCC 788.
7 Section 212(2) of the Companies Act.