Model FIRs to check frauds

The government wants to step up its act against vanishing companies. The department of company affairs (DCA) has firmed up a plan on model first information reports (FIR) for penalising these companies. DCA has inserted some specific measures to strengthen the regulatory mechanism through the Companies Amendment Act 2003. These include checks on inter-corporate loans to brokers, role of the auditor, and presentation of a company’s accounts.

A plan to have a serious frauds investigation office (SFIO) has made progress. Uttaranchal IAS officer OP Arya, presently joint secretary (police) in the ministry of home affairs, has been selected to head the SFIO with 8-10 director-level officials placed under him. “The Finance Minister’s focus in company law reform is to liberalise business but at the same time—through the overhaul of regulatory procedures and penal provisions—come down on the violators,” DCA secretary Vinod Dhall said. The model FIR proposal has been sent to the securities and exchange board of India (Sebi) for legal vetting. The FIR idea is a follow-up of the action taken report (ATR) presented by the joint parliamentary committee (JPC) on the stock market scam of 2001.

As per the model, FIRs will be lodged by the state police. Section 63, 68, and 628, which include penalities for non-compoundable offences, can be invoked against the promoters of the vanishing companies. In this regard, DCA will soon notify stricter norms for identification (documentation) of promoters. On the issue of recovery from such companies, DCA will invoke provisions under Sections 397 and 398 of the Companies Act and file petitions with the company law board (CLB). “We hope this will improve recoveries,” Dhall said.

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In the case of inter-corporate loans, a new provision Section 77A has been inserted. This places the onus of proof for fund utilisation on the promoter. So far, some Indian companies, which had tried to rig their own, managed to wriggle out of their instructions given to brokers, saying they did not know what the broker was doing with the money.

With the new provision, the government expects to address this widely prevalent promoter-broker nexus, typified in the stock market scam in 2001, to rig the market.