16 October 2013

Investigation & whistle-blowing provisions under Companies Act, 2013 – An overview

by Anup Koushik Karavadi

The Companies Act, 2013 (“new Act”) contains stringent provisions to contain corporate frauds. A new “investigation” procedure has been provided under Sections 210 to 229, as against Sections 235 to 251 of the Companies Act, 1956, (“old Act”). The new Act also provides whistle blowing provisions and ensures anonymity of the whistle blower. This article seeks to articulate the major differences between the old Act and the new Act, with regard to the provisions for investigation of the affairs of a company and discusses the vigil mechanism provided in the new Act and the draft rules framed thereunder.

Inspection and investigation

The new Act has brought together, in detail, all the provisions dealing with inspection, inquiry and investigation into a single chapter from Sections 206 to 229. As per Section 234 of the old Act, the Registrar of Companies (“Registrar”) is the sole authority empowered to demand production of books, information and papers of a company for inspection whereas, Section 208 of the new Act allows and empowers an Inspector, apart from the Registrar, to inspect the records. Further, the Inspector/Registrar may give recommendations to conduct investigation in such report.

As per the provisions of the old Act the Central Government was obliged to order an investigation into the affairs of a company on receipt of a special resolution of a company. Whereas, as per Section 210 of the new Act, the Central Government may, at its discretion, decide as to whether or not an order to inquire and investigate into the affairs of the company in the following three circumstances (1) as per the report and the reasons stated therein as submitted by the Inspector/Registrar or (2) on receipt of an intimation of special resolution of the company or (3) in public interest. It may be inferred from above referred provision that the Central Government is vested with a suo moto power to order for an investigation to protect public interest. Further, it is obligated to order an investigation into affairs of a company if a court or a tribunal passes such order. It is pertinent to note that once the Central Government decides to investigate the matters of a company, the new Act allows it to either appoint one or more persons as Inspectors or the Serious Fraud Investigation Office (SFIO) for such investigation.

Serious Fraud Investigation Office (SFIO)

The new Act provides statutory backing to the SFIO under Section 211 for the purpose of investigating the affairs/frauds relating to a company. Further, Section 212(2) contemplates that once a case is assigned to SFIO, it shall be the sole authority to investigate such case and all the papers, documents and the information shall be transferred to SFIO.

By virtue of Section 212(15) of the new Act, the report submitted by an IO for  framing of charges at the time of prosecution, is deemed as a report submitted by a police officer under Section 173 of the Code of Criminal Procedure, 1973. Section 212(6) lists out the cognizable offences and as per Section 212(8) the IO is empowered to arrest a person who is guilty of any of the offences listed therein. Section 217 of the new Act vests the IO with various powers like power to take assistance of any other officer or employees including the former officers, employees and agents (the former employees were not included in the old Act) to check all the books and papers of a company whose affairs are being investigated, or any other relevant material belonging to any other company, department or individual. He can examine a person on oath besides imposing fine if his orders are not complied with. This may also enable better coordination in respect of prosecution of offences under the Indian Penal Code.        

Upon receipt of orders of the Central Government, the IO will have to submit an interim report and after the completion of the investigation, a final report is submitted. After the submission of the final investigation report, the Central Government decides whether to proceed with prosecution and in which case the SFIO would represent the case on behalf of the Central Government.

Few other notable changes

One of the major variations between both Acts is that through Section 221 of the new Act, the Tribunal is empowered to freeze assets of a company under inquiry/investigation for a period not exceeding 3 years. Such a power was not provided for under the old Act. The new Act, through Section 228, makes the procedure prescribed for inspection, inquiry and investigation of a company applicable mutatis mutandis to a foreign company while the old Act does not deal with such a situation.

Yet another change brought in by the new Act is that the Inspector is made more independent. Section 240A of the old Act mandates the Inspector to approach the Magistrate of First Class or Presidency Magistrate and seek an order permitting him to seize the books and papers of a company. However, Section 220 of the new Act contemplates that if the Inspector has reasonable grounds, he may seize the books and papers without obtaining any permission from any authority. Moreover, the Inspector has been granted freedom, to make copies of such books and papers, or take extracts from them or place identification marks thereon, as he deems fit before returning the same.

The new Act under Section 229 specifically enlists the situations under which a person shall be punished for fraud for a period extending between 6 months to 10 years (Section 447). The same does not find place in the old Act.

Vigil Mechanism

The new Act under Draft Rule No. 12.5 read with Section 177(9) makes it mandatory for the following types of companies 1) listed companies, 2) companies that accept deposits from public and 3) companies that borrowed more than INR 50 crores from banks or public financial institutions, to establish a vigil mechanism for directors and employees to report their genuine concerns. As per the said provisions, the companies which are required to constitute a vigil committee shall operate the vigil mechanism through its audit committee and in case of the other companies, the Board of Directors are obligated to nominate a director to play the role of an audit committee.

The Draft Rule 12.5(3) read with 177(10) mandates the vigil mechanism of any company to provide for adequate safeguards against victimisation of the persons reporting their concerns. Further, the vigil mechanism provides direct access to the chairperson of the Audit Committee or to the director, as the case may be. It may be noted that, in order to prevent the abuse of the mechanism, a penal clause has been adopted in Draft Rule 12.5(4) wherein it enables the audit committee or the director may initiate a suitable action against the directors or employees indulging in filing repeated frivolous complaints.

It may be noted that under the new Act, the fact that the vigil mechanism is related to the audit committee we may assume  that the said mechanism is to deal with the financial aspects, disclosures, valuation of assets, independence of auditors, financial controls implemented by a company, or even issues related to breach of the code of conduct of a company, sexual harassment complaints  etc., though such issues have not been categorically mentioned in the new Act.


Though the fundamental concept/ principles in relation to the investigation provisions are the same in both the Acts, the new Act has brought in few important changes to ensure better administration and to a certain extent pre-empt fraud and misconduct by providing for an effective complaint mechanism. Considering the number of corporate frauds that are surfacing in the country today, the old Act was evidently inadequate. Hence, it is anticipated that the new provisions of the new Act would bridge the gulf between increasing corporate frauds and the statutory regime. The new Act is a welcome improvement if the same is implemented appropriately.

[The author is a Senior Associate, Corporate Practice, Lakshmikumaran & Sridharan, Hyderabad]

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