Presentation on Inspection and Investigation under the Companies Act 2013

Jaladhi Shukla, FCS, AhmedabadJaladhi Shukla, FCS, Ahmedabad

Inspections & Investigations Inspections & Investigations as per the provisions of the as per the provisions of the

Companies Act Companies Act

Presented to Presented to MSOP Participants, MSOP Participants,

AHMEDABAD CHAPTER OF ICSI AHMEDABAD CHAPTER OF ICSI 99thth September, 2014September, 2014

bybyJaladhi Shukla, FCS Jaladhi Shukla, FCS

AhmedabadAhmedabad

Outline Outline SectionSection II IntroductionIntroduction

SectionSection IIII TheThe NeedNeed forfor ““InspectionInspection”” &&““InvestigationsInvestigations””

SectionSection IIIIII ProvisionsProvisions ofof thethe CompaniesCompanies atat aa glanceglance

SectionSection IVIV PracticalPractical aspectsaspects ofof thethe InspectionsInspections..

SectionSection VV ConsequencesConsequences && RemediesRemedies

SectionSection VIVI CaseCase StudiesStudies && DiscussionDiscussion

SectionSection VIIVII ConclusionConclusion


SECTION ISECTION I

Introduction Introduction


SECTION IISECTION II

Need for Need for InspectionInspection

& & InvestigationInvestigation


Need for inspections & InvestigationsNeed for inspections & Investigations

1.1. SeparationSeparation ofof ownershipownership andand managementmanagement inin casecase ofofpublicpublic limitedlimited listedlisted companiescompanies maymay leadlead toto misusemisuse ofofpowerspowers byby fewfew whowho areare inin controlcontrol..

2.2. CorporateCorporate ScamsScams –– Sahara,Sahara, Satyam,Satyam, Xerox,Xerox, 22G,G, PurtiPurtiGroupGroup ofof CompaniesCompanies andand NSELNSEL caughtcaught redred handedhanded inin thethepastpast..

3.3. AccountingAccounting windowwindow dressingdressing && malpracticesmalpractices (Satyam(Satyam &&Xerox)Xerox)..

4.4. ToTo safeguardsafeguard thethe interestsinterests ofof allall stakeholdersstakeholders ofof thetheCompanyCompany..


Company

Board of Directors

Banks Suppliers Customers

Society / CSR

Company Agent & Services providers

Promoters & Shareholders

Govt. Agencies

Employees

Key Stakeholders Key Stakeholders --


SECTION IIISECTION III

Provisions of the Provisions of the Companies Act, 2013Companies Act, 2013

at a glance at a glance


ContentsContents

I.I. PowerPower ofof thethe RegistrarRegistrar toto callcall forfor informationinformation ororexplanationexplanation {Section{Section 206206 ofof CA,CA, 20132013}}

II.II. IInspectionnspection ofof booksbooks ofof accountsaccounts etcetc ofof CompaniesCompanies{Section{Section 207207 ofof CA,CA, 20132013}}

III.III.SeizureSeizure ofof documentsdocuments byby thethe RegistrarRegistrar{Section{Section 209209 ofof CA,CA, 20132013}}

IV.IV. InvestigationInvestigation {Section{Section 210210 ofof thethe CA,CA, 20132013}}


Power to call for

information(RoC)

Inspection of Books of Accounts

Investigation


InspectionInspection underunder SectionSection 207207 ofof CA,CA, 20132013

InspectionInspection cancan bebe carriedcarried outout byby --

1.1. TheThe RegistrarRegistrar ofof CompaniesCompanies..

2.2. InspectorInspector appointedappointed byby thethe CentralCentral GovernmentGovernment

3.3. OfficersOfficers ofof SEBISEBI asas maymay bebe authorizedauthorized --

–– ForFor ListedListed CompaniesCompanies–– MandatoryMandatory inin respectrespect ofof mattersmatters relatingrelating toto

ProspectusProspectus andand PublicPublic IssuesIssues..


HierarchyHierarchy --Ministry of Corporate Affairs

(MCA)., New Delhi

Regional Director(s)

Registrar of Companies

Serious Fraud Investigation Office

(statutory status under CA, 2013)

Satyam, Reebok India etc


PowersPowers // DutiesDuties ofof thethe InspectingInspecting AuthoritiesAuthorities

11.. CanCan exerciseexercise powerspowers vestedvested inin thethe CivilCivil CourtCourtduringduring thethe coursecourse ofof inspectioninspection (Section(Section 207207))..

-- TheThe discoverydiscovery andand productionproduction ofof booksbooks ofof accountaccountandand otherother documents,documents, atat suchsuch placeplace andand timetime..

-- SummoningSummoning andand enforcingenforcing thethe attendanceattendance ofofpersonspersons andand examiningexamining themthem onon oathoath..

-- InspectingInspecting ofof books,books, registersregisters andand otherotherdocumentsdocuments ofof thethe companycompany atat anyany placeplace..

-- SearchSearch andand seizureseizure afterafter orderorder fromfrom SpecialSpecial CourtCourt(Section(Section 209209))

22.. AA copycopy ofof inspectors’inspectors’ reportreport maymay bebe obtainedobtained bybymakingmaking anan applicationapplication toto thethe CentralCentral GovernmentGovernment(Section(Section 223223))..


PenaltiesPenalties

1.1. CompanyCompany andand everyevery officerofficer ofof thethe CompanyCompany whowho isisinin defaultdefault whowho failsfails toto produceproduce anyany documentdocument ororinformationinformation u/su/s.. 206206 –– FineFine uptoupto RsRs.. 11 LacLac andandRsRs.. 500500//-- perper dayday forfor continuationcontinuation ofof offenceoffence..

2.2. AnyAny personperson whowho doesdoes notnot complycomply withwith thetherequirementsrequirements ofof SectionSection 207207 shallshall bebe liableliable forfor finefineandand imprisonmentimprisonment.. {One{One YearYear ++ uptoupto RsRs.. 11 Lac)Lac)

3.3. AA DirectorDirector whowho isis convictedconvicted ofof anan offenceoffence underunder thetheaboveabove SectionsSections shallshall bebe deemeddeemed toto havehave vacatedvacatedhishis officeoffice forthwithforthwith andand shallshall bebe disqualifieddisqualified fromfromholdingholding suchsuch officeoffice inin anyany companycompany..


TypesTypes ofof InvestigationInvestigation :: --

A.A. AnAn investigationinvestigation intointo thethe affairsaffairs ofof thethe CompaniesCompanies{Section{Section 210210 ofof thethe CA,CA, 20132013}}..

B.B. AnAn investigationinvestigation intointo affairsaffairs ofof CompanyCompany byby SFIOSFIO(Section(Section 212212 ofof thethe CA,CA, 20132013))

C.C. AnAn InvestigationInvestigation intointo thethe affairsaffairs ofof thethe relatedrelatedCompaniesCompanies {Section{Section 219219 ofof CA,CA, 20132013 }}

D.D. AnAn InvestigationInvestigation intointo thethe ownershipownership ofof thethe CompaniesCompanies{Section{Section 216216 ofof CA,CA, 20132013}}..


I.I. InvestigationInvestigation intointo thethe affairsaffairs ofofthethe CompanyCompany (Section(Section 210210 // 237237*)*)

Central Government

Discretionary Powers Mandatory Powers

i. Report by ROC or inspector u/s. 208.

ii. Company by Special Resolution.

iii. In public interestiv. Tribunal may order*

i. Where an order is passed by court or tribunal* -- alleging misconduct - fraud- Information not given

to members.

* Not notified


II.II. InvestigationInvestigation intointo thethe affairsaffairs ofofthethe RelatedRelated PersonsPersons (Section(Section 219219))..

Company under investigation

Company under investigation

Holding Company

Subsidiary Company

Fellow Subsidiary Company

Common M.D.or

Directors

MD or Manager or ‘yee#

# New


PowersPowers ofof thethe InvestigatingInvestigating OfficersOfficers

1.1. CanCan investigateinvestigate affairsaffairs andand callcall forfor thethe books,books, documentsdocumentsetcetc ofof thethe CompanyCompany underunder investigationinvestigation asas wellwell asasrelatedrelated companiescompanies andand anyany otherother bodybody corporatecorporate ..

2.2. CanCan exerciseexercise powerspowers vestedvested onon criminalcriminal courtscourts.. ExamineExamineanyany otherother personperson onon oathoath..

3.3. CanCan taketake assistanceassistance fromfrom otherother GovtGovt.. OfficersOfficers..

4.4. CanCan InvestigateInvestigate evidenceevidence inin thethe ForeignForeign CountryCountry..

5.5. SeizureSeizure ofof documentsdocuments // FreezingFreezing ofof assetsassets // restrictrestrictseruritiesserurities..


InvestigationInvestigation byby SFIOSFIO (Section(Section 212212##))

Central Government Central Government maymay order order investigation by SFIO if investigation by SFIO if ––

-- OnOn receiptreceipt ofof reportreport byby ROCROC oror inspectorinspector u/su/s.. 208208

-- OnOn intimationintimation ofof aa specialspecial resolutionresolution passedpassed byby aaCompanyCompany..

-- InIn thethe publicpublic interestinterest

-- OnOn requestrequest fromfrom anyany DepartmentDepartment ofof CGCG oror SGSG

# New


InvestigationInvestigation byby SFIOSFIO (Section(Section 212212))

PointsPoints

-- AfterAfter referencereference toto SFIOSFIO NoNo otherother agencyagency toto probeprobe..

-- PowersPowers inin additionaddition toto CRPCCRPC (special(special court,court, oath,oath, arrest,arrest,bailbail etc)etc)

-- ShallShall submitsubmit investigationinvestigation reportreport toto CGCG // MCAMCA

-- ReportReport deemeddeemed toto bebe aa reportreport byby policepolice officerofficer

-- SFIOSFIO shallshall shareshare anyany informationinformation withwith anyanyinvestigatinginvestigating agency,agency, StateState Government,Government, PolicePolice ororIncomeIncome TaxTax AuthoritiesAuthorities


SECTION IVSECTION IV

Practical AspectsPractical Aspects


1.1. ComplaintsComplaints filedfiled againstagainst thethe CompanyCompany..

2.2. AdverseAdverse qualificationsqualifications ofof StatutoryStatutory AuditorsAuditors..

3.3. ReferencesReferences receivedreceived fromfrom otherother GovernmentGovernmentDepartmentsDepartments namely,namely, IncomeIncome Tax,Tax, RBI,RBI, SEBISEBI etcetc..

4.4. CompaniesCompanies whowho havehave comecome outout withwith thethe PublicPublicIssueIssue ofof SharesShares andand DebenturesDebentures..

5.5. CompaniesCompanies incurringincurring continuouscontinuous losseslosses..

6.6. RoutineRoutine InspectionInspection –– likelike balancebalance sheetsheet scrutinyscrutiny bybyROCROC etcetc u/su/s.. 206206..

Criterias for selection of companiesCriterias for selection of companies


WhatWhat cancan bebe inspectedinspected ??

•• StudyStudy ofof ROCROC // RDRD recordsrecords (before(before approachingapproaching thethe CoCo..))

•• RecordRecord maintainedmaintained byby thethe CompanyCompany ::

DetailedDetailed scrutinyscrutiny ofof ––

a.a. MinutesMinutes andand StatutoryStatutory RegistersRegisters..b.b. DirectorsDirectors Reports,Reports, BalanceBalance Sheets,Sheets, ProfitProfit && LossLoss

Accounts,Accounts, TrialTrial BalanceBalance andand relatedrelated ledgerledger accountsaccountsc.c. HighHigh valuevalue transactiontransaction inin whichwhich DirectorsDirectors areare interestedinterestedd.d. ManagerialManagerial RemunerationRemuneratione.e. RelatedRelated partyparty transactionstransactionsf.f. VariousVarious securedsecured andand unsecuredunsecured loansloans grantedgranted andand

availedavailed byby thethe CompanyCompany..g.g. FixedFixed Deposit,Deposit, SundrySundry debtors,debtors, creditors,creditors, stocksstocks etcetc..


1.1. EnsureEnsure thatthat statutorystatutory booksbooks areare keptkept uptoupto datedate..

2.2. PrePre--scrutinyscrutiny ofof statutorystatutory booksbooks andand accountsaccounts..

3.3. BooksBooks ofof Accounts,Accounts, CostCost RecordsRecords (if(if applicable)applicable) andandthethe copiescopies ofof thethe BalanceBalance SheetSheet andand thethe ProfitProfit andandLossLoss AccountAccount forfor thethe lastlast fivefive yearsyears mustmust bebe readyready..

4.4. CopiesCopies ofof thethe AnnualAnnual Returns,Returns, BalanceBalance SheetsSheets mustmustbebe properlyproperly filedfiled andand keptkept..

5.5. MinutesMinutes ofof thethe GeneralGeneral BodyBody MeetingMeeting asas wellwell asas thethemeetingsmeetings ofof thethe BoardBoard ofof DirectorsDirectors shouldshould bebeproperlyproperly maintainedmaintained..

6.6. IfIf anyany directordirector oror officerofficer waswas convictedconvicted underunder thisthissectionsection ensureensure thatthat hehe vacatedvacated hishis officeoffice..

Secretarial Action Points Secretarial Action Points --


BalanceBalance SheetSheet scrutinyscrutiny commoncommonobservationsobservations

oo ComplianceCompliance ofof RelatedRelated PartyParty TransactionsTransactions..

oo MaintenanceMaintenance ofof StatutoryStatutory RegistersRegisters

oo ComplianceCompliance ofof variousvarious AccountingAccounting StandardsStandards

oo StatusStatus ofof BalanceBalance confirmationsconfirmations ofof debtors,debtors, creditors,creditors,loansloans andand advances,advances, unsecuredunsecured loansloans etcetc..


BalanceBalance SheetSheet scrutinyscrutiny commoncommonobservationsobservations –– XBRLXBRL ReportingReporting

oo QualificationQualification // adverseadverse remarkremark inin thethe AuditorsAuditors ReportReport

oo ShareShare ApplicationApplication MoneyMoney pendingpending allotmentallotment forfor moremorethanthan 11 CroreCrore..

oo ManagerialManagerial remunerationremuneration exceedingexceeding limitslimits

oo AppointmentAppointment ofof CSCS andand MDMD


SECTION VSECTION V

Consequences Consequences & &

RemediesRemedies


Follow-Up Actions

Report of Regulatory authorities on replies filed by the Company and its officers in default.

Replies by the Company and its Officers in default.

Issue of Show Cause Notices to the Company and its Directors in default.

Follow up for closure of files with the authorities

Submission of Inspection reports to respective authorities by Inspectors.


ConsequencesConsequences ––

Informations are used for considering actions underthe provisions of the Companies Act.

Prosecution for criminal liability under Section 224.

Application for winding up the Company on just andequitable grounds as envisaged under Section 224.

Consequences of fraud / undue advantage (New)

Information of interest to other GovernmentDepartments and agencies are communicated tothem for suitable actions.


RemediesRemedies ––

Officers in Default as per Section 2(60) of the CompaniesAct, 2013 any of the following officers of the Company -

• whole-time director;• key managerial personnel• where no KMP such director as specified by board and

who has given his consent in writing or all directors.• any person or KMP who is charged by BoD.• any person who’s directions board is accustomed to

act other than professional capacity.• every director who is aware of the contravention• Issue or transfer – RTA, Merchant Bankers (New)


Remedies Remedies ––

RDCLB / Tribunal*

High Court

Supreme Court

ROC

Compounding Application

* Not notified

Jaladhi Shukla, FCS, AhmedabadJaladhi Shukla, FCS, Ahmedabad 3131

SECTION VISECTION VI

CASE STUDIES CASE STUDIES & &

DISCUSSIONSDISCUSSIONS


Case StudyCase StudyDLF InspectionDLF Inspection

Reebok IndiaReebok India

NSELNSEL

Sahara caseSahara case

KCLKCL

EILEIL SatyamSatyam


Technical Scrutiny of Technical Scrutiny of Related Party Transactions of ABC Ltd. Related Party Transactions of ABC Ltd. ––

Particulars Subsidiary Companies / WOS

Associate / Joint Control Companies

Directors Relatives of Directors

Funds Given / Received

XYZ LTD.XYZ P. LTD.

PQR LTD.PQR P. LTD.

MR. AMR. B

MRS. AMRS. B


SECTION VIISECTION VII

CONCLUSIONCONCLUSION


Book Closure….Book Closure…. Gone are the days where these provisions were sparingly

used.

From the recent press releases, it is clear that theGovernment is taking lessons from the series ofaccounting malpractices.

This is a tough time for all the Indian Corporates toprove that they are honest, and that, they will abide bythe legal requirements and the accounting principles.


THANK YOU

Law

Presentation on Inspection and Investigation under the Companies Act 2013