The International Investigations Review: India
In India, there are several authorities and agencies that have been empowered to investigate and prosecute illegal corporate actions. All law enforcement agencies, such as 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 to investigate and prosecute corporate frauds. The ED investigates and prosecutes cases related to foreign exchange regulation violations 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 (IPC) and other industry specific statues, such as the Food Safety and Standards Act 2006.
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 investigation, if it has reason to believe that any asset has been acquired from proceeds of crime. Additionally, the National Investigation Agency (NIA) 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 concerned state agencies.
Though the investigations and prosecutions conducted by these agencies are required to be impartial and uninfluenced by extraneous considerations, there have been instances when these investigations have been motivated by political agendas.
Therefore, it is advisable for any corporate entity being the subject of any 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 a request for information or documents on grounds of relevance and reasonableness, it may result in the company appearing as non-cooperative. Both 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 jurisdiction of an investigation agency, challenges to a fishing and roving enquiry. The thresholds of judicial intervention at early stages of an investigation may be less.
In India, the law in general does not mandate any corporate entity to self-report any internal wrongdoing and the option of whether or not to report the same to the investigating agencies completely vests with the corporate entity. Also, self-reporting of internal wrongdoing is neither considered a mitigating factor in determining liability, nor does it entitle the corporate entity to any immunity or leniency in prosecution.
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 attracts leniency from the CCI in the amount of penalties.2 The CCI is empowered to grant to 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 to the second or third enterprises, respectively, who make a disclosure while being a part of the cartel, by submitting evidence that provides a significant added value to the evidence already available with the CCI or 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 the same is neither mandatory under Indian law nor is it regulated by any legislation. However, a corporate entity, in order to fulfil its statutory or regulatory obligation under the Sexual Harassment of Women (Prevention, Prohibition and Redressal) Act 2013, Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 and the provisions relating to internal controls and audits in Companies Act 2013, may choose to conduct an internal investigation in compliance with its legal and regulatory requirements.
There is no obligation on any corporate entity to share the reports or result of the internal investigations with the investigating agencies and, even if submitted, the results of the internal investigation are not binding on the investigating agencies. Submission of these reports is at best a gesture of good faith and cooperation by companies. That being said, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015, requires listed companies to make disclosures to the stock exchanges of any events or information such as fraud, etc., which, in the opinion of its board of directors, is material.
There is no legal framework to regulate the conduct of internal investigations. As such, the companies and external counsel engaged for conducting the internal investigation are at liberty to determine the procedure for the same. Such investigations may involve either document review 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, keeping in mind the aspect of preserving privilege over the work product generated during the investigation. 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.
Whistle-blower complaints to government authorities and corporates in India have been on the rise in recent years. However, despite the increase in instances of whistle-blower complaints in recent times, no incentives are provided to the whistle-blowers under the legislative framework to come forward and 'red flag' issues.
The Whistle Blowers Protection Act 2014 (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 operationalised into 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 Securities and Exchange Board of India (SEBI) corporate governance rules require companies to establish a functional whistle-blowing mechanism and ensure adequate protection to 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.
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 that corporations and individuals retain separate counsel.
The range of sanctions available against businesses includes:
- Fines – the amount of fine levied depends on the specific nature of the offence and the facts of the case. Whether the fines in nature are administrative or criminal 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 a trial under the Prevention of Corruption Act 1988 (POCA) would be criminal in nature.
- 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.
- Regulatory or civil sanctions – regulatory sanctions in the nature of cancellation of industry sector-specific licences (electricity, telecom, 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.
The 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 such 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 such organisation or (2) obtain or retain an advantage in the conduct of business of such organisation, then such 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 practices.
Moreover, this defence is specific to offences under the POCA and does not extend to offences under other legislations, including offences under the Indian Penal Code 1860 (IPC).
iv Prosecution of individuals
There are no legal rules that seek to regulate the relationship between the company and individuals, when the government seeks to hold the individuals liable. However, this is a sensitive issue that has to be appropriately navigated by the company, keeping in mind the nature of allegations, the investigative agency involved, as well as 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 individual's counsel or legal fees. There is no obligation for the company to either terminate or discipline the employees who are subject to the investigation. The company retains its liberty to terminate or discipline the individuals in question according to their existing policies, the nature of allegations and the reputational risk involved.
i Extraterritorial jurisdiction
The IPC grants extra-territorial jurisdiction to Indian courts in the following circumstances:
- offences committed by Indian citizens, persons, ships or aircrafts can be prosecuted under Indian courts even if the offence is committed outside of India, provided the offence would be punishable in India had it been committed there;4
- 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
- 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 (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 (MLAT), 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, Ministry of External Affairs:
- extradition applies only with respect to offences clearly stipulated in the respective treaties;
- the offence for which extradition is sought is an offence under the laws of both the requesting country and India;
- India must be satisfied there is a prima facie case against the accused;
- the extradited person must be proceeded against only in respect of the offence for which extradition is requested; and
- 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 such 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 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 Fugitive Act was introduced in 2018. It is India's newest criminal statute. However, active prosecution under the Fugitive Act is already underway. Diamantaires Nirav Modi and Mehul Choski, who are allegedly involved in a bank fraud involving 3 billion rupees and have since absconded from India, are being prosecuted under the Fugitive Act. Nirav Modi was declared as a Fugitive Economic Offender under the provisions of the Fugitive Act in November 2019. An application for release of confiscated assets was moved by the aggrieved. The decision on this is awaited from the court. This will be the first decision on issues of confiscation under the Fugitive Act. There are several important questions of law involved and the decision in this matter will lay the foundation for the interpretation of this criminal statute.
The Indian government is adopting a tougher position against corporate frauds. New amendments to the Companies Act 2013 were recently notified. These amendments enable the SFIO to identify the beneficiaries of a corporate fraud and initiate legal action for disgorgement of these benefits. Prosecution of corporate fraud cases by the SFIO, including the production of the arrested and accused persons will now take place in special courts. Following the amendments, there has been a significant uptick in investigations, arrests, searches, etc. by the SFIO. The SFIO is actively investigating various high-profile corporate fraud cases in India, despite the lockdown as a result of the covid-19 pandemic in India, such as the alleged fraud involving the ILFS Group and an alleged bank fraud involving 7.5 billion rupees by the promoters of the Rotomac Group.
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) after consultation with the National Financial Reporting Authority. This order prescribes the following insertions into the Auditor's Report:
- whether any fraud by or on the company has been noticed or reported during the year; if yes, the nature and the amount involved is to be indicated;
- whether any report under Section 143(12) of the Companies Act 2013 (Auditor's obligation to report incidents of fraud to the central government) has been filed by the auditors in the prescribed form;8 and
- whether the auditor has considered whistle-blower complaints, if any, received during the year by the company.
Conclusions and outlook
It appears that the Indian government is adopting a tougher stance against corporate frauds and corruption. This is evident from the ramping up of investigations by the SFIO and other law enforcement agencies, and from regulatory changes such as the CARO. This tougher approach is also evident from the amendments to the POCA seeking to criminalise bribe-giving by individuals and corporations.
Additionally, India has been in a covid-19-related lockdown for two months as at time of writing. This situation carries 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 a result, it is likely there will be an increase in the number of investigations surrounding corruption and fraud in the aftermath of the covid-19 lockdowns. This will result in a challenging climate both for law enforcement agencies as well as the companies involved, in the short term.
1 Anuj Berry is an equity partner, Nishant Joshi is a partner, Sourabh Rath is a senior associate and Kunal Singh is an associate at Shardul Amarchand Mangladas & 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.
8 Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules 2014