Fraud under the Companies Act, 2013

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The two ways to get something from someone illegally are: (1) to physically force someone by using a gun, or any other weapon, or a brute force, and (2) to trick someone out of his belongings. While the first way can be called robbery and second one can be termed as a fraud. Arobbery is often more violent and traumatic than a fraud, and attracts morepublic attention, but the total losses from frauds far exceeds the losses from robbery.

Fraud is an intentional deception or a willful misrepresentation of a material fact and can be described as lying, cheating, and stealing. Fraud consists of coercing people to act against their own best interest. The intentional act meant to induce another person to part with something of value or to surrender a legal right. It is a deliberate misrepresentation or concealment of information in order to deceive or mislead. Fraud can range from a minor employee theft to large scale misappropriation of assets and manipulation of a financial statement.

Who Commits Fraud?

The definition, taxonomy and ingredients conclude that fraud is caused mainly by factors external to the individual: economic, competitive, social, and political factors, and poor control mechanism. As we know some people are more prone to commit fraud than others. Therefore, besides the external and internal environmental factors, the nature of people is more important for consideration of committing fraud.

CORPORATE FRAUD DEFINED

Fraud committed by a company, is often referred to as corporate fraud, or a white-collar crime. A company is an ‘artificial juridical person’, invisible, and intangible, created by law, with a discrete legal entity, perpetual succession and a common seal. It is an association of various stakeholders, namely, shareholders, investors, customers, employees, vendor-partners, the governments and society. The major stakeholders of a company can be expressed in one word, ‘SPICE’, where S stands for shareholders, P for public at large, I for investors, C for customers, and E for employees. A corporation must be fair and transparent to its stakeholders in all its transactions.

In a globalised scenario, corporations need to access global resources, attract and retain the best human capital from various parts of the world, partner with vendors on collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it cannot grow and prosper for long. Based on the principle, ‘As the ruler, so the rule’, it is observed that people who come to know of the wrongdoings of management or those who have themselves assisted the management in committing the fraud also tend to resort to fraud.

Concept of Corporate Fraud under the Companies Act, 2013

The corporate sector is mainly regulated by the Companies Act, since different provisions have been provided in the Act for regulating the affairs of a company and the first time the concept of fraud has been inserted in the Companies Act, 2013. Regardless of the definition used, certain characteristics are common to all types of frauds. These include:

(1) Misrepresentation of a material fact;

(2) Which is made knowingly and deliberately;

(3)With the intent to deceive;

(4) with reliance on the misrepresentation by the victim; and

(5) injury or damage resulting from such reliance.

An initiative has been taken for preventing and curbing corporate frauds by including the concept of fraud and penalty provisions under section 447 of the Companies Act, 2013,