The International Investigations Review: India

Introduction

In India, there are several authorities and agencies empowered to investigate and prosecute illegal corporate actions. All law enforcement agencies, including the local police, the Central Bureau of Investigation (CBI), the Enforcement Directorate (ED) and the Serious Fraud Investigation Office (SFIO) are empowered to investigate and prosecute companies.

The SFIO is the primary agency investigating and prosecuting corporate fraud. The ED investigates and prosecutes cases related to violations of foreign exchange laws and money laundering. The CBI investigates and prosecutes cases related to corruption, financial frauds, bribery and the like. The Income Tax Department investigates and prosecutes cases related to income tax violations. The local police investigate and prosecute companies for offences under the Indian Penal Code 1860 (IPC) and other industry-specific statues.

The powers of the investigating agencies are regulated by the Code of Criminal Procedure 1973 as well as specific statutes from which they may derive their powers. Moreover, practice guidelines published by investigative agencies also seek to regulate their powers. The powers of these agencies are wide-ranging in nature and pertain to collection of information, investigation, search and seizure, and detention. Investigative agencies, such as the CBI can conduct dawn raids. However, these dawn raids require a valid search warrant.

All agencies have similar (if not identical) powers to investigate; namely, the power to collect information, conduct search and seizure operations, detain suspected individuals and conduct dawn raids. Some specialised law enforcement agencies enjoy certain enhanced powers. The ED has much wider powers to attach assets during the course of an investigation, if it has reason to believe that any asset has been acquired from proceeds of crime. Additionally, the National Investigation Agency when investigating offences affecting national security, sovereignty and interests of India, has the power to directly make arrests in different states, without the assistance of or without informing the state agencies concerned.

It is advisable for any corporate entity subject to investigation to extend its cooperation to the investigating agencies and provide all information, documents and evidence as may be sought. While the company may want to resist requests for information or documents on grounds of relevance and reasonableness, this may result in the company appearing uncooperative. Prosecutors and Indian courts appreciate cooperation during an investigation and an adversarial stance may result in tougher actions from both investigators and courts, resulting in business disruptions. Having said that, Indian courts are sympathetic to genuine challenges on the jurisdiction of an investigation agency, and challenges to fishing expeditions and roving inquiries. The threshold for judicial intervention at an early stage of an investigation may be lower.

Conduct

i Self-reporting

Following a recent amendment, Section 8 of the Prevention of Corruption Act 1988 (POCA) provides that if a person who has been compelled to give an undue advantage to another to induce or reward a public servant to improperly perform a public duty reports this to a law enforcement authority or investigating agency within seven days of the date of providing the undue advantage, that person shall not be prosecuted.

Moreover, the Ministry of Corporate Affairs has mandated additional fraud reporting requirements by companies in their auditor's report by way of the Companies (Auditor's Report) Order 2020 (CARO 2020) after consultation with the National Financial Reporting Authority. This order prescribes the following insertions into auditors' reports:

  1. whether any fraud by or against the company has been noticed or reported during the year; if yes, the nature and the amount involved is to be indicated;
  2. whether any report under Section 143(12) of the Companies Act 2013 (on auditors' obligation to report incidents of fraud to central government) has been filed by the auditors in the prescribed form; and
  3. whether the auditor has considered whistle-blower complaints, if any, received during the year by the company.

The Securities and Exchange Board of India (SEBI) has introduced changes to the listing regulations wherein listed companies are required to make certain disclosures to the stock exchanges in the event of initiation of a forensic audit (or analyses and reviews of financial records, also known by other terms). Specifically, the following information is to be disclosed to the stock exchanges:

  1. the fact of initiation of the forensic audit, along with the name of the entity initiating the audit and the reasons for doing so, if available; and
  2. the final forensic audit report (other than those for forensic audits initiated by regulatory or enforcement agencies) upon its receipt by the listed entity, along with the management's comments, if any.

Sanctions for violation of competition law are governed under the Competition Act 2002 (Competition Act). Section 3 of the Competition Act prohibits anticompetitive agreements that cause or are likely to cause an appreciable adverse effect on competition (AAEC) in India and treats these as void. Such agreements include cartels, which are presumed under the Competition Act to have an AAEC.

In cases where a firm is found to be participating in a cartel, a penalty of up to three times the profit of the participating firm for each year of the continuance of the cartel or 10 per cent of its relevant turnover for each year of continuance of the cartel, whichever is higher, can be imposed on the company as well as on every person who, at the time the contravention was committed, is in charge of and responsible to the company. In addition, the Competition Commission of India (CCI) can direct the participating firm to cease and desist from engaging in anticompetitive conduct.

Voluntary disclosure by companies engaging in AAEC conduct attracts leniency from the CCI in the amount of penalties imposed.2 The CCI is empowered to grant an enterprise a reduction in penalty of up to 100 per cent in cases where the CCI, without the disclosure by the enterprise, would not have had sufficient evidence to establish the contravention. Also, the CCI is empowered to grant a reduction in penalty of up to 50 per cent and 30 per cent respectively to the second and third enterprises to make a disclosure while being a part of the cartel, by submitting evidence that provides significant added value to the evidence already available to the CCI or its Director General for establishing the existence of the cartel.

That being said, the CCI has no jurisdiction to impose criminal sanctions on companies for cartel violations under the Competition Act. The only situation where the Competition Act allows for criminal sanctions is on contravening the orders of the CCI or on failure to pay the penalties imposed. Such non-payment is punishable by imprisonment for a maximum term of three years, a maximum fine of 250 million rupees, or both. Additionally, the National Company Law Appellate Tribunal has the power, similar to that of the High Court, to punish conduct in contempt of its orders, and can specifically impose criminal sanctions, in the nature of both fines and imprisonment, for contempt of its orders.

ii Internal investigations

A company is at liberty to decide whether or not to conduct an internal investigation and this is neither mandatory nor is it specifically regulated under Indian law. However, a corporate entity, to fulfil its statutory or regulatory obligations under the Sexual Harassment of Women (Prevention, Prohibition and Redressal) Act 2013, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (the SEBI Listing Regulations) and the provisions relating to internal controls and audits in the Companies Act 2013, may choose to conduct an internal investigation.

Under the amendment brought in by SEBI, listed companies are required to make certain disclosures to the stock exchanges in the event of initiation of a forensic audit (see Section II.i). Additionally, the SEBI Listing Regulations require listed companies to make disclosures to the stock exchanges of any events or information such as fraud, etc. that, in the opinion of the board of directors, is material.

There is no legal framework regulating the conduct of internal investigations. As such, the companies and external counsel engaged to conduct the internal investigation are at liberty to determine the procedure used. Such investigations may involve either document reviews or witness interviews or both. Further, there is no prescribed procedure for conducting the witness interview of an employee and there is no legal requirement that mandates an employee to have legal representation at the interview. On rare occasions, employees (especially senior management) or other key managerial personnel do insist on the presence of their own lawyer. That being said, companies usually engage external counsel to conduct investigations with the protection of attorney–client privilege.

Companies generally engage external counsels to conduct internal investigations, to ensure that privilege over the work product generated during the investigation is preserved. Even though attorney–client or work product privileges can be asserted in internal investigations, this privilege can be waived by the company in cases where it may disclose the findings and supporting material to law enforcement agencies. While this remains judicially untested, disclosure of investigation findings or material to law enforcement is likely to be considered to be a waiver of privilege.

iii Whistle-blowers

There has been a steady increase in whistle-blower complaints to government authorities and corporates in India in recent years. However, despite this increase, no incentives to come forward and 'red-flag' issues are provided to whistle-blowers under the legislative framework.

The Whistle Blowers Protection Act 2014 (the WPA 2014) is a statute seeking to regulate receipt, disclosure and protection of whistle-blowers. While the WPA 2014 has indeed been passed by the parliament, it is yet to be notified and therefore has not been implemented or rendered operational in law in India.

Under the Companies Act 2013, every listed company is required to establish a vigil mechanism for its directors and employees to report genuine concerns and penalties are imposed on companies that fail to comply with this requirement. The existence of such a mechanism is also required to be disclosed in the report of the board of directors. Additionally, the Companies Act 2013 requires independent directors to ascertain whether the company has an adequate and functional vigil mechanism as well as ensuring that the interests of persons who use such mechanisms (whistle-blowers) are protected. Also, the SEBI corporate governance rules require listed and certain other companies to establish a functional whistle-blowing mechanism and ensure adequate protection for whistle-blowers.

The Companies Act 2013 and its allied rules, without being specific as to the nature and extent of the safeguards required, mandates that the vigil mechanism put in place by the company shall ensure adequate safeguards against victimisation of the whistle-blower.

Enforcement

i Corporate liability

Generally, under Indian criminal law, corporate criminal liability is established through the principle of attribution of intent. The criminal intent of the individuals (directors, agents or employees) representing the directing mind or alter ego of the company is attributable to the company to hold the company liable along with the individuals. Therefore, criminal liability is imputed to the company when the directors, agents, etc. of the company act with criminal intent in the course of the business of the company. As a matter of law, this principle cannot be applied in reverse in the absence of a specific statutory provision imposing vicarious liability (as discussed above). Therefore, directors and agents of a company cannot be subject to criminal liability, in the absence of any involvement or intent on their part, merely because criminal liability attaches to the company. Certain statutes, through specific provisions, hold individuals liable for offences committed by a company (vicarious liability); for example, the Negotiable Instruments Act 1881, provides that the directors of a company can be held liable along with the company in cases where a cheque issued by a company is not honoured.

Civil liability of corporations for conduct of their employees flow through well-established common law principles of vicarious liability (i.e., companies are vicariously liable for the actions of their employees conducted in the course and for the purposes of their employment).

Joint representation of the corporation and individuals is not expressly forbidden under Indian law. It is permissible for corporations and individuals to be represented and advised by the same counsel so long as their positions are not adversarial. Such joint representation may also be permissible when statutory vicarious criminal liability is imputed to the individuals in question. However, it is advisable for the corporation and the individuals to retain different counsel. This acts to mitigate potential issues of conflict of interest and attorney client privilege. Moreover, the course of a criminal trial and investigation is unpredictable and may result in the corporation and the individual becoming adversarial, even if they were not initially so. Therefore, it is recommended that corporations and individuals retain separate counsel.

ii Penalties

The range of sanctions available against businesses includes:

  1. Fines – the amount of the fine levied depends on the specific nature of the offence and the facts of the case. Whether the fines are administrative or criminal in nature will depend on the specific statute or provisions under which the fines are levied. For instance, fines for non-compliance of filing requirements under the Companies Act 2013 would be administrative in nature. However, fines levied post trial under the POCA would be criminal in nature.
  2. Imprisonment of concerned company officials – the duration of the imprisonment depends on the nature of the offences, as well as the specific conduct of the individuals involved as well as other facts of the case.
  3. Regulatory or civil sanctions – regulatory sanctions in the nature of cancellation of industry sector-specific licences (electricity, telecoms, etc.) can be imposed by various regulatory bodies for violations of regulatory norms, including terms requiring compliance with applicable law and anti-bribery obligations.

Civil sanctions in the nature of blacklisting from public tenders can also be levied by government bodies if a bidder has engaged in fraudulent or corrupt practices generally during the bidding process or in past experiences with the same government entity.

SEBI has powers to punish persons and corporations engaging in fraudulent and unfair trade practices in relation to the securities market by levying restrictions on their operations in the market.3

iii Compliance programmes

The existence of a compliance programme can serve as a defence to specific criminal charges brought under India's anti-bribery legislation – the POCA.

Specifically, under Section 9 of the POCA, a new offence of 'bribing of a public servant by a commercial organisation' was introduced, providing that if any person 'associated with a commercial organisation' (defined to mean any person performing services for or on behalf of the organisation, including an employee, agent or subsidiary) gives or promises to give any undue advantage to a public servant intending to (1) obtain or retain business for the organisation or (2) obtain or retain an advantage in the conduct of business of the organisation, then the commercial organisation (including a company incorporated within India, or outside India and carrying on business in India) shall be punishable with a fine. The officers and directors of the company involved in the offence can also be punished with imprisonment and a fine.

While commercial organisations are allowed to raise a defence that they had adequate procedures (in compliance of prescribed guidelines by the government) in place to prevent acts of bribery punishable under the POCA by their 'associated person or persons', the government is yet to notify these 'prescribed guidelines'.

In the lack of clarity from the government on the contents of these prescribed guidelines, companies would be best served to adopt compliance programmes in line with international best practice.

Moreover, this defence is specific to offences under the POCA and does not extend to offences under other legislations, including offences under the IPC.

iv Prosecution of individuals

There is no law regulating the relationship between the company and individuals in cases where the government seeks to hold the individuals liable. However, this is a sensitive issue that has to be navigated appropriately by the company, keeping in mind the nature of allegations, the investigative agency involved and the potential reputational risk. The company will have to ensure that the cooperation and assistance provided to the individual does not give an impression of collusion to the investigating agency. Additionally, the company must keep in mind issues of conflict of interest and the potential for the company's and individual's position to become adversarial during the course of the investigation or trial.

Keeping in mind the foregoing, the company's counsel can coordinate with the individual's counsel and there is no specific bar on the company paying the legal fees for the individual's counsel. There is no obligation for the company to either terminate or discipline employees who are subject to an investigation. The company remains at liberty to terminate or discipline the individuals in question according to its existing policies, the nature of any allegations and the reputational risk involved.

International

i Extraterritorial jurisdiction

The IPC grants extra-territorial jurisdiction to Indian courts in the following circumstances:

  1. offences committed by Indian citizens, persons, ships or aircrafts can be prosecuted under Indian courts even if the offence is committed outside India, provided the offence would be punishable in India had it been committed there;4
  2. offences by non-citizens (including foreign companies) can be prosecuted and punished in India provided that these extra-territorial criminal acts are made expressly punishable by Indian laws;5 and
  3. any person (including foreign companies) in any place outside India can be prosecuted and tried before Indian courts for the offence of targeting a computer resource located in India.6

Additionally, under the Prevention of Money Laundering Act 2002 (PMLA), the ED has the power to attach property located in foreign states that is derived from or obtained directly or indirectly as a result of criminal activity set out in the schedules of the PMLA. Moreover, such properties can also be attached under the Fugitive Economic Offenders Act 2018 (the Fugitive Act) provided the total value of the offence is more than 1 billion rupees.

ii International cooperation

The Indian government cooperates with other countries' law enforcement. This cooperation is primarily treaty based, but cooperation can also be sought through diplomatic channels. India has entered into mutual legal assistance treaties with 39 foreign nations for the purpose of ensuring service of summons, warrants and judicial processes to individuals or entities believed to be involved in the commission of crimes. India is also a party to the Financial Action Task Force to cooperate and coordinate global and international anti-money laundering efforts.

India extradites its own nationals, as well as foreign nationals, but the frequency is not certain. The government of India has also entered into bilateral extradition treaties with 42 countries and has entered into extradition arrangements with 11 more, pursuant to the provisions of the Indian Extradition Act 1962. The circumstances in which extradition is possible differs from case to case, as well as treaty to treaty. Broadly, extradition is possible when the following conditions are met, and a request is made to the Consular, Passport and Visa Division of the Ministry of External Affairs:

  1. extradition applies only with respect to offences clearly stipulated in the applicable treaties;
  2. the offence for which extradition is sought is an offence under the laws of both the requesting country and India;
  3. India must be satisfied there is a prima facie case against the accused;
  4. the extradited person must be proceeded against only in respect of the offence for which extradition is requested; and
  5. the extradited person must be accorded a fair trial.

Provisional arrest requests from any foreign state may be made to India, irrespective of any treaty requirements.

iii Local law considerations

While banks have a duty of secrecy to customers in India, it is not an absolute duty. Courts have the power to direct disclosure of details of accounts under the Bankers' Books Evidence Act 1881. Investigative agencies also have the power to ask for production of statement of accounts from banks during the course of the investigation. Therefore, it is likely that bank secrecy laws would not be a significant obstacle to obtaining information in the course of a multi-jurisdiction investigation.

Indian data privacy laws are nascent and are in the process of being developed. Disclosure of sensitive personal information (which includes data such as passwords, bank account or credit card details, physical, physiological and mental health data, biometric information) requires consent of individuals prior to sharing such information by organisations in possession of the information. However, this information can be provided to law enforcement agencies without prior consent, upon the receipt of a written request. Therefore, it is likely that data privacy laws will not be a significant hurdle to obtaining information during multi-jurisdiction investigations.7

While attorney–client privilege may be recognised in the case of communication with external local counsel, the benefit of this protection does not extend to in-house attorneys or foreign counsel.

Year in review

The extradition from the United Kingdom of Vijay Mallya and Nirav Modi, who were declared fugitive economic offenders under the Fugitive Act, is at a very advanced stage with the governments of both countries attempting to complete the process and ensure that the extradition is expedited.

One of the major changes in the legal regime in 2020 was the amendment of the Companies Act. These amendments were part of the government's drive to decriminalise minor violations of the Companies Act 2013. Following this amendment, more than 40 minor offences related to disclosure of interest by directors, financial statements and other such things were decriminalised, whereby any penalties of imprisonment for contravention of these provisions were removed. In addition to this, the amendments also reduced, modified or eliminated fines and penalties associated with these violations.

Apart from the decriminalisation of the Companies Act 2013, the government is also considering decriminalisation of Section 38 of the Negotiable Instrument Act, which deals with dishonoured cheques.

As discussed earlier, SEBI introduced changes to the listing regulations requiring listed companies to make certain disclosures to the stock exchanges in cases of initiation of a forensic audit (see Section II.i). These changes were not well received by the industry as it is believed they may lead to premature disclosures and unforeseen adverse financial effects for the companies concerned. SEBI clarified that the forensic audits referred to here are limited to audits initiated with the objective of detecting any misstatements in financials, misappropriation, siphoning off or diversion of funds, and would not apply to any audits initiated in relation to quality control, recruitment practices, etc.

Given the rise in cases of fraud committed by promoters of companies (Cox & Kings and DHFL, to name a few), SEBI set up a new specialised organisation to tackle such cases. This new organisation is to be named the Corporation Finance Investigation Department.

Further, to reduce the burden of compliance on companies during the pandemic, the enforcement of CARO 2020 was moved forward to the financial year beginning April 2021 instead of the financial year beginning April 2020.

Conclusions and outlook

Most of the past year was spent under government-imposed lockdowns due to the coronavirus pandemic. Following the second wave of the pandemic, most states have gone into complete or partial lockdowns again to control the spread of the virus.

It was predicted that there would be an increase in corporate fraud because of the extended lockdown across the country and the Reserve Bank of India has reported a significant number of corporate banking frauds in the past year. The CBI's prosecution of these frauds also appears to have kept pace with the reporting of them.

The lockdowns did not stymie the investigative agencies' prosecution of suspected frauds. The CBI, ED and the SFIO have remained vigilant and appear to have ramped up their investigations. Further, a parliamentary committee has also called for the SFIO to be given more powers to investigate frauds.

The second wave of covid-19 has been more severe and the new set of lockdown restrictions continue to present an increased risk of bribery within India. Government-mandated lockdowns seek to regulate which businesses can remain operational and the limitations of their functioning. Moreover, policies regulating the functioning of specific industry sectors may require further government interaction. This, naturally, becomes a risk factor for anti-corruption compliance. Third parties and intermediaries used by companies may seek to sidestep some regulations through bribery of government officials. Further, given that a significant part of the resources and attention of the company will be directed towards addressing business challenges, companies will also face an enhanced risk of financial fraud during this time. As with potential anti-corruption compliance violations, there is a significant risk that internal frauds committed during this time may not be discovered until much later.

As predicted, there have been a significant number of investigations concerned with corruption and fraud after the lockdowns. While these have been disrupted by the new wave of lockdowns, both investigations and frauds are expected to increase in the aftermath of the second wave and will be a huge challenge to law enforcement, as well as to the companies involved in the short term.

Footnotes

1 Alina Arora is a partner and Noaman Mujahed is an associate at Shardul Amarchand Mangaldas and Co.

2 Competition Commission of India (Lesser Penalty) Regulations 2009.

3 See SEBI (Prohibition of Unfair Trade Practices relating to Securities Markets) Regulations 2003.

4 Section 4(1) and (2) of the IPC.

5 Section 3 of the IPC.

6 Section 4(3) of the IPC.

7 See the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011.

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