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  • 7/31/2019 Presentation IICA


    Dr. Tabrez Ahmad

    Professor of Law

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    The Biggest Fraud is to cheat oneself

    Rather fail with honor than succeed by Fraud. For the most part Fraud in the end secures for its

    companions repentance and shame

    3Dr. Tabez Ahmad,

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    In the broadest sense, a fraud is an intentional

    deception made for personal gain or to damageanother person/entity

    Wrongful or criminal deception intended to result infinancial or personal gain

    Fraud ( Civil Law violations- Criminal law)

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    Indian Law

    Indian Contract Act, 1872 Section 17 of the Act defines Fraudas "Fraud" means and include any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to

    deceive another party thereto his agent, or to induce him to enter into a contract. the suggestion as a fact, of that which is not true, by one who does not

    believe it to be true; the active concealment of a fact by one having knowledge or belief of the

    fact; a promise made without any intention of performing it; any other act fitted to deceive; any such act or omission as the law specially declares to be fraudulent.

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    Indian Law .. Contd.

    Indian Penal Code, 1860 Section 25 of IPC defines

    "Fraudulently "as:A person is said to do a thing fraudulently if he does that

    thing with intent to defraud but not otherwise

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    Regulatory Legislations INDIA Anti Fraud

    Legislations/Regulations/Guidance ExamplesIndia USA/Europe

    Indian Contract Act 1872

    Indian Penal Code

    Prevention ofCorruption Act

    Prevention of MoneyLaundering Act

    The Companies Act 1956

    Clause 49 of ListingAgreement

    CARO 2003

    Sarbanes Oxley Act

    Foreign CorruptPractices Act

    Patriot Act

    OECD Guidelines

    IIA Guidance

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    Increase in regulators/stakeholders expectationfrom Management & Auditors towardsPrevention, Detection, Investigation & Reportingof Fraud

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    Types of Fraud

    Fraudulent Financial

    Statements Employee Fraud

    Vendor Fraud

    Customer Fraud

    Investment Scams

    Bankruptcy Frauds


    The common element

    is deceit or trickery!

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    Financial Statement Fraud

    East India Company Fraud

    Mudhra Scam Harshad Mehta Scam

    Enron Fiasco

    Lehman Brothers

    Satyam Enron of India

    Sharas Case

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    East India Company Fraud

    Fraudulent Financial reporting and corrupt businesspractices having its existence since the era of footprints ofPublic corporation.

    It was the first multinational corporation in the world andthe first company to issue stock.

    In the late 1700s Edmund Burke had Robert Clive, thefounder of the empireandWarren Hastings, IndiasGovernor-General, brought up on impeachment charges

    laden with corruption issues. Though the trials failed toconvict anybody.

    The Company was subsequently wound up under the EastIndia Company Stock Redemption Act, 1874.

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    Mundhra Scam-First Scam of

    Independent India First successful trial of a financial scandal in Independent


    Haridas Mundhra,a industrialist & stock speculatorsold fictitious shares to LIC and thereby defraudingLIC by Rs. 125 crores.

    Mr. Jawahar Lal Nehru, set up a one-man commissionheaded by Justice Chagla to investigate.

    Justice Chagla concluded the matter; Haridas was foundguilty and was sentenced to imprisonment for 22 years. T.T. Krishnamachari, the then Finance Minister, resigned

    from his position.

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    Enron Fiasco February 2000 Fortune magazine chooses Enron

    as its Best Managed andMost Innovativecompany

    August 2000: Stock at $73 billion

    March 2001: FY2000 revenues at $100 billion

    Sep16, 2001: Buy more shares

    October 2001: Enron pays its regular dividend

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    Enron October 16, 2001$618 million 3rdQtr Loss$1.2

    billion reduction in shareholder equity

    October 31, 2001SEC upgrades inquiry into aformal investigation

    December 2, 2001Enron files for bankruptcy4,000employees fired

    20,000 workers lose their jobs $73 billion in stock value -gone

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    Enron -ReactionsEnron WasntJust Enron

    Enron Corporation

    Arthur Andersen Enrons Law firm

    Investment bankers

    Countries with Enron operations Argentina,

    Mozambique, India, Poland

    Companies in other countries Shell, BP, Mobil

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    SatyamEnron of India

    The biggest corporate scam in India has come fromone of the respected business family.

    Satyam -Fourth largest Indian IT Company listed inIndia & US.

    Over US $ 2 billion annual revenue size co. Established in mid 1980s, grown to 53,000 employees

    600 plus customers including 185 fortune 500 Cos

    Operations in 66 countries across the globe

    Financial advisor: Merrill Lynch (now Bank ofAmerica)

    Auditors: Price Water House Coopers

    Bankers: Citi bank; BNP Paribas, HSBC & HDFC

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    ConfessionJanuary 7th, 2009

    2009 Mr. Ramalinga Raju resigned as Chairmanfrom Satyam after admitting to cooking up theaccount books.

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    Cause behind Satyam

    Fudging of Accounts.

    Over stated Assets of Rs. 490 crore.

    Fake cash balances over Rs. 5,000 crore in the BalanceSheet.

    Interest component of Rs. 376 crore which neverflowed into the companys coffers.

    Understated Liabilities of Rs. 1,230 crore.

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    Aftermath Effect

    Investors-Panicked as Stock plummeted.

    Employees -stranded in many ways-morally, financially,legally and socially.

    The incident resulted in immeasurable and unjustifiabledamage to Brand India and Brand IT in particular.

    Chairman, MD and CEO, CFO, Key associates arrested.

    Partners of Audit Firm were also arrested.

    People lost a staggering Rs 100 billion in Satyam in marketcapitalisation as investors reacted sharply and dumpedshares, pushing down the scrip by 78 per cent to Rs. 39.95on BSE.

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    Harshad MehtaWhat happened

    Mehta obtained fake Bank Receipts from small banks.

    The said Bank Receipts were further passed on to otherbanks as security to obtain cash.

    This money was used to drive up the prices of stocks in thestock market.

    Bubble of stock market manipulation and fake BRs busted.

    Drastically impacted the Stock Market, Economy and

    progress of the Country. Banking system was swindled of a whopping of Rs. 4,000


    Even, the Chairman of one of the Bank committed suicide

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    Sahara India Real Estate Corp. Ltd & Others

    V.SEBI and Another

    31st August, 2012, Supreme Court of India

    Confirmed the jurisdiction and power of SEBI to enquireinto hybrid securities issued by unlisted public Ltd.Companies in the name of private placement whenoffered to more than 50 persons.

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    Brief Facts of Sahara Case On January 4, 2010, Roshan Lal, a resident of Indore, sent a

    note, written in Hindi, to the National Housing Bank,requesting it to look into housing bonds issued by twocompanies of the Lucknow-headquartered Sahara group,Sahara India Real Estate Corporation and Sahara HousingInvestment Corporation. Being a chartered accountant, Lal

    wrote in the small note, he found that the bonds, bought by alarge number of investors, were not issued according to therules. The National Housing Bank did not have the

    wherewithal to investigate the allegation, so it forwarded theletter to the Securities and Exchange Board of India, or Sebi,

    the capital markets regulator. That note set in motion a chainof events that resulted in the Supreme Court ordering the twocompanies on August 31 to return the money they had raisedthrough the bonds Rs 24,029 crore to the 29.6 millioninvestors, along with interest (15 per cent per annum).

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    Sahara India Real Estate Corporation Ltd. ( SIRECL) andSahara Housing Investment Corporation Ltd. (SHICL) filedan appeal before Supreme Court being aggrieved by theorder of Securities Appellate Tribunal (SAT) .

    In this appeal SC was required to decide the following legalissues.

    Whether OGCD ( Optionally Fully convertibleDebentures) issued by the Appellant are securities withinthe meaning of Sec 2(h) of SEBI Act?

    Whether SEBI has jurisdiction u/s 55A(b) of theCompanies Act 1956 to call for information and investigatematters relating issue and transfer of OFCSs offered by

    Appellant to more than 50 persons ? Whether the Appellant has committed any violations of

    sections of companies Act relating to issue of prospects ,misstatement in prospectus and criminal liability andpenalties for violations ?

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    SEBIs Stand

    SEBI on the basis of complaint, issued a notice to SAHARAand called for information on OFCDs issued by SAHARA.SAHARA refused to give information on the grand that

    SEBI had no locus standi to call for such information. SEBI had to issue summonscalling for information as

    interest of investors was involved.

    Ministry of Corporate Affairs ( MCA) had also called for

    information and informed SEBI that it fond compliance inrespect of certain queries but advised SAHARAs to fileprospectus as per Sec 60B(9) of the Companies Act 1956

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    SEBI issued a show case notice alleging that instancesof OFCD was public issue as it involved more than 50persons and , therefore , securities were liable to be

    listed on a recognized stock exchange under Sec. 73 ofthe Companies Act, 1956.

    It is also required to comply with various clauses ofDIP guidelines and violated regulations 4(2), 5(1), 6, 7,

    16(1), 20(1), 25, 26, 36, 37, 46 and 57, of SecuritiesExchange Board of India ( Issue of Capital andDisclosure requirements) Regulations, 2009( ICDR2009)

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    Supreme Courts Judgment

    1. Saharas ( SIRECL & SHICL ) would refund the amountscollected through RHPs dated 13.3.2008 and 16.10. 2009along with interest @ 15 % per annum to SEBI from thedate of receipt of the subscription amount till the date ofrepayment , within a period of 3 months from the date of

    judgment , which shall be deposited in a nationalized bankbearing maximum rate f interest.

    2. Saharas are also directed to furnish the details withsupporting documents to establish whether they hadrefunded any amount to the persons who had subscribedthrough RHPs

    dated 13.3.2008 and 16.10.2009 within a period of 10 (ten)days from the pronouncement of this order and it is for theSEBI (WTM) to examine the correctness of the detailsfurnished.

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    3. The court made it clear that if the documents producedby Saharas are not found genuine or acceptable, then theSEBI (WTM) would proceed as if the Saharas had notrefunded any amount to the real and genuine subscribers

    who had invested money through RHPs dated 13.3.2008and 16.10.2009.

    4. Saharas are directed to furnish all documents in theircustody, particularly, the application forms submitted bysubscribers, the approval and allotment of bonds and all

    other documents to SEBI so as to enable it to ascertain thegenuineness of the subscribers as well as the amountsdeposited, within a period of 10 (ten) days from the date ofpronouncement of this order.

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    5. SEBI (WTM) shall have the liberty to engageInvestigating Officers, experts in Finance and Accountsand other supporting staff to carry out directions and the

    expenses for the same will be borne by Saharas and be paidto SEBI.

    6. SEBI (WTM) shall take steps with the aid and assistanceof Investigating Authorities/Experts in Finance and

    Accounts and other supporting staff to examine the

    documents produced by Saharas so as to ascertain theirgenuineness and after having

    ascertained the same, they shall identify subscribers whohad invested the money on the basis of RHPs dated13.3.2008 and 16.10.2009 and refund the amount to them

    with interest on their production of relevant documentsevidencing payments and after counter checking therecords produced by Saharas.

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    7. SEBI (WTM), in the event of finding that thegenuineness of the subscribers is doubtful, an opportunityshall be afforded to Saharas to satisfactorily establish thesame as being legitimate and valid. It shall be open to the

    Saharas, in such an eventuality to associate the concernedsubscribers to establish their claims. The decision of SEBI(WTM) in this behalf will be final and binding on Saharasas well as the subscribers.

    8. SEBI (WTM) if, after the verification of the details

    furnished, is unable to find out the whereabouts of all orany of the subscribers, then the amount collected fromsuch subscribers will be appropriated to the Government ofIndia.

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    10. We also make it clear that if Saharas fail to comply

    with these directions and do not effect refund ofmoney as directed, SEBI can take recourse to all legalremedies, including attachment and sale of properties,freezing of bank accounts etc. for realizations of theamounts.

    11. The court also directed SEBI(WTM) to submit astatus report, duly approved by Mr. Justice B.N.Agrawal, as expeditiously as possible, and also permit

    SEBI (WTM) to seek further directions from the Court,as and when, found necessary. Appeals are accordinglydismissed subject to the above directions.

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    Important observations of Supreme Court

    Sec 60 B (1) casts no obligation to issue informationmemorandum (IM) . However Sahara companieschose to issue IM and invited public demand forOFCSDs . Having filed IM, Sahara ought to have filed

    a final prospectus prior to opening of subscription lists SC noted that although Sahara defended its action

    saying that issue of OFCDs is on a private placementbut its action/facts were contrary to that stand

    When such securities were offered to more than 50persons and it is deemed to be a public offer in termsof section 67(3) . SEBI therefore gets jurisdiction as persec 55 A (c)

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    SC observed from the documents produced before it andbefore the fact finding authorities do not show therelationship Sahara group had with the investors. But they

    has taken a declaration from the bond holders that they areassociated with the company SC arrived at a conclusion from the conduct and action of

    Sahara that the two company wanted to issue securities tothe public in the garb of private placement to bypass the

    various laws and regulations in relation to that Court can insuch circumstances, lift the veil to examine that conductand method adopted by Sahara companies to defeat the

    various provisions of Companies Act and the provisions ofSEBI Act

    SC dismissed the appeal and upheld the orders passed bySEBI and SAT. It ordered Saharas to refund the amountscollected through RHPs dated 13.3.2008 and 16.10.2009along with interest @ 15% per annum till the date ofrepayment.

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    Common Types of Fraud

    Financial Frauds Manipulation, falsification, alteration of accounting records Misrepresentation or intentional omission of amounts Misapplication of accounting principles Intentionally false, misleading or omitted disclosures Misappropriation of Assets Theft of tangible assets by internal or external parties Sales of proprietary information Causing improper payments Corruption Making or receiving improper payments Offering bribes to public or private officials Receiving bribes, kickbacks or other payments Aiding and abetting fraud by others

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    Common Perpetrator

    Male 85%

    Average Tenure < 5 Years 57% College Educated 38%

    Company Manager 52%

    Age 31 to 50 72%

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    Rationale for doing Fraud

    Everyone else was doing it They can afford it I needed the money It was just a loanI would have repaid it I felt used and wanted revenge I meant no harm and did no harm I did it to keep the business afloat Bribery is the norm in this type of business

    What I did was entirely appropriate for someone in myposition

    My employer didnt compensate me well enough, so I tookwhat was due to me

    Dr. Tabez Ahmad, 39

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    Who is Responsible?

    Board of Directors


    CFO Senior Management

    Internal Audit

    IT Department

    Middle Management

    Operational Management

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    How Management Encourages Fraud

    Responsibility, accountability and authority not established ordocumented

    Goals and objectives neither established nor monitored forsuccess

    No written policies or procedures

    -low priority for the establishment of internal controls-no separation of duties-inadequate cash controls -documents

    -inadequate physical security for assets and records-no independent inventory of assets Inconsistent application of policies or procedures -may result in

    unfair treatment of employees -favoritism -low morale

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    What an Organization can do

    Tone at the top; create an ethical environment

    Lead by Example

    Corporate Code of Conduct Call in Services for reporting unethical practices

    Reliable Internal Controls

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    What an Organization can do..


    Training Courses on

    Ethics Training

    Internal Controls

    Fraud Prevention

    Technological and business changes

    Special training for monitors Reference Checks on New Employees

    Code of Sanction for Suppliers/Contractors

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    Adopt Anti Corruption & Anti

    Bribery practices as a process Assessment of specific corruption risks of the business.

    Development of detailed anti corruption and bribery

    policies . Implementation of the policies.

    Self monitoring of the effective implementation of thepolicies.

    Reporting on the policies and related programmes. Independent assurance of the effectiveness of these efforts.

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    Developing Code of Governance

    Working together with civil societies, government andprivate sector to develop and disseminate anticorruption messages

    Regional and international initiatives provide a forumfor private sector, public sector, and civil society tocome together with a common goal of reducingvulnerability to corruption

    Finally, attitudinal change is necessary By changing our thoughts, we can change our attitude

    and thereby change our behavior, which can changeour lives

    The quality of our thoughts equals the quality of ourlives

    Let us all work towards changing our attitude towardscorruption.

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    Lets say No to corruption..

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    Prevent -Fraud

    Strong ethical vale in the organization flowing fromthe top

    Recruitment process- Selection of right people at

    appointment Refence-chek and verification

    Defined policies and guidelines

    Clear role and responsibility

    Internal control system



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    National Voluntary Guidelines on Social ,

    Environmental and Economic Responsibilities ofBusiness July 20122- MCA

    9 point formula

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    1. Businesses should conduct and govern themselveswith ethics, transparency & accountability

    2. Businesses should provide goods and services thatare safe and contribute to sustainability throughouttheir life cycle

    3. Businesses should promote the well being of all theemployees

    4. Businesses should protect the interest of and beresponsive towards all stake holders, especially thosewho are disadvantaged, vulnerable and marginalized

    Dr. Tabez Ahmad, 49

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