Corporate Frauds in India: Perceptions and Emerging Issues

Oct 10, 2020

The term “fraud” has been used to describe several acts such as the dishonest behaviour of an individual for their gains or through an advantage over the other person by way of causing them losses through both direct and indirect means. While no section or definition of fraud directly exists in the Indian Penal Code, Section 17 of the Indian Contract Act, 1872 is the clause that describes the meaning of “fraud” in contract law. It states that fraud is the intention to deceive another party or to induce such party into entering into a contract by the acts of anybody who is a party to a contract or through connivance or their agents.

Over the last two decades, with the rise of technological advancements and the shift to a cashless economy, India has witnessed a significant rise in both corporate and banking frauds around the country, from small scale to multi-billion-dollar deals gone astray This essay seeks to explore corporate frauds in India by way of examining the most significant sources of fraud and emerging issues in the corporate and banking industry. 

The Indian economy has been a witness to numerous corporate frauds since the liberalization of the economy in 1991. More than 70 lakh crore rupees have been lost due to corporate frauds taking place in various financial institutions around the country since the liberalization of the economy. The loss of lakhs of crores of rupees in the frauds discovered by the authorities and the countless corporate frauds taking place around the country that go undiscovered is a major concern for the government of the country due to its major implications on the Indian economy. To regulate the market and keep a check on the plausibility of corporate frauds, the government of India established the Securities and Exchange Board of India (SEBI) in 1992. This organization aims to ensure that investor interests are secure through constant regulation of the markets. The corporate frauds are yet to cease completely and continue to affect the economy of the country in an increasingly negative manner in terms of systematic risk assessment. 

Corporate frauds take place in multiple different forms around the country. Through the engagement of massive corporations in illegal practices, the Indian economy has witnessed the loss of lakhs of crores by way of corporate scandals. One of the most effective forms of corporate fraud present in the country is that of primary market frauds, wherein funds are raised as part of initial public offerings of corporations. As has been seen in India, raising and collecting funds as part of primary capital market fund collection through initial public offerings has become a huge source of fund diversion as the companies and people involved in such frauds completely vanish post the collection of funds, dooming the public of all the money invested and significant losses to the economy. Secondary market frauds are also increasingly common and have seen a significant rise in the illegal operation of subjects such as insider trading wherein traders within an organization use sensitive unpublished information to fraud and cash in lakhs of crores of investor money. It has been observed that often share prices are set at a certain price to benefit the trader performing insider trading and therefore leads to massive losses to the investor while supplying incredible monetary benefits to the traders. 

It becomes intrinsically hard to investigate and punish the perpetrators of corporate frauds because of the nature of such crimes. This occurs due to multiple reasons. The various types of crime that occurs in corporate frauds such as initial public offering scams and insider trading are cybercrimes and the rapidly changing nature of the information technology industry make it intrinsically thought for the perpetrators to be caught. There is a need for special investigative teams, specially designed for the specific purpose of tackling frauds being conducted in cyberspace. Another reason for the rise of corporate frauds is that this form of criminal activity is essentially one where the criminal has no identifiable face and therefore acts as the criminal’s biggest advantage. Evidence such as written documents with signatures or circumstantial evidence such as fingerprints is completely evaded by this class of criminal. 

As has been witnessed, the rise of corporate frauds has seen an increasingly negative mark on the economy of the country. Due to the intrinsically weak set of laws set forth for the deterrence of such crimes, a rapid rise has occurred in such illegal affairs post the liberalization of the economy in 1991. Yet, the government, as well as the invested parties of large corporates, have a vested interest in stopping such frauds as it causes massive damages to them. An increasingly strict set of rules needs to be implemented for the end of corporate frauds to steadily grow the economy and provide returns to investors for a friendly investing environment.