Section 36 of Companies Act. Punishment for fraudulently inducing persons to invest money

“Section 36 prescribed Punishment for fraudulently inducing persons to invest money.- Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into,-

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or

(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or

(c) any agreement for, or with a view to obtaining credit facilities from any bank or financial institution, shall be liable for action under section 447”.

Key Elements of Section 36 of Companies Act 2013

The provision of Section 36 provides the punishment for fraudulently inducing persons to invest money. Following circumstances any person can held responsible for the punishment.

If Knowingly or recklessly making false, deceptive, or misleading statements or promises or forecasts;
If Deliberately concealing material information;
Inducing another person to invest money in stocks, debentures, deposits, etc.
Also, offer another person to the specific acts constituting fraudulent inducement.

Penalties and its enforcement

If anyone engaged in fraudulently inducing persons to invest money shall be liable for Imprisonment up to 5 years or a fine up to ₹50,000, or both.

If fraud involves public Interest penalty shall be a minimum of 3 years imprisonment.

Anyone involved in obtaining credit facilities from bank or financial Institution fraudulently shall be punished under section 447 of the said Act.

Briefly mention the enforcement mechanism – complaints to relevant authorities, investigation, and prosecution.

There are certain other provisions of Companies Act and Criminal Procedure Code which comes into action along with the applicability of Section 36 of Companies Act.

Relevant Provisions and Enforcement Mechanism for Section 36 of Companies Act

Section 447 and explain the complaint, investigation, and prosecution process.

“Section 447 of the Companies Act, says Punishment for fraud:

“The criminal Liability held under “Section 447, says Punishment for fraud.— Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may 222 extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. Explanation.—For the purposes of this section—

(i) ―fraud‖ in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

(ii) ―wrongful gain‖ means the gain by unlawful means of property to which the person gaining is not legally entitled;

(iii) ―wrongful loss‖ means the loss by unlawful means of property to which the person losing is legally entitled.”

Section 447 provides the punishment for fraud and the offence committed under this can be non-compoundable in case of companies intersecting with Section 420 of IPC, 1860 and it is applicable for all persons involved in fraudulently inducing persons to invest money. Punishment for the offence may extend from 7 to 10 years and penalty up to 3 times the amount due.

The Companies Act, 2013 has classified certain offences as similar to criminal offences under the Code of Criminal Procedure (Cr. PC) which are covered under cognizable and non-bailable and thus under Cr PC underneath to promoters, directors, managers, officers, and other key managerial employees. It is important to understand the various definitions and their subsequent consequences so that these issues can be used carefully and cautiously if they are in control.

Exercise of the rights under the Cr. Pc in case of the arrest made for committing offense:

(a) An arrested person has the right to know the grounds of arrest. Provisions prescribed in Article 22 of the Constitution of India provide the right to know the reasons for arrest.

(b) Every arrested person has the right to bail depending on the intensity of the offence committed.

(c) Arrested person has the right to be produced before the Magistrate of Court

(d) An arrested person can inform a relative or friend.

(e) An arrested person has the right to consult a lawyer to defend his side.

(f) Arrested person has the right to be examined by a Doctor.

Different Courts and its Jurisdiction under Section 36 of the Companies Act:

National Company Law Tribunal (NCLT): NCLT has been established under the Companies Act which empowers to deal with various matters related to it with the help of benches across India.
National Company Law Appellate Tribunal (NCLAT): NCLAT is act as an appellate tribunal.The appeal can be filed against the order passed by NCLT in NCLAT.
District Courts: In certain cases, the district court may exercise jurisdiction for the offenses committed and it depends on the discretion if they come under their jurisdiction it depends on what kind of offenses have been committed.

Precedent pertaining to Section 36 of Companies Act

A case like “ Satyam” leads to the violation of Section 36 by fraudulently inducing persons to invest money which also leads to ‘wrongful gain’ under Section 447 of the Companies Act which means gain by unlawful means. The Satyam case, also known as the Satyam Computer Services scandal, involves a massive Rs 7,800 crore fraud in 2009 by company founder and chairman Ramalinga Raju

Facts: The chairman of the company had inflated Satyam’s profits, income, and balances for years and prepared false financial pictures He inflated the company’s finances including Sale, Total earnings, Cash balances, Personal Number (Currency). He used forged bank statements and documents to maintain the fraud. The fraud was disclosed after Raju confessed in January 2009, causing the company’s share price to the highest level and delivering a major push to investor confidence in India

Legal issues and Judgement: The chairman of Satyam and nine others were charged with various offenses including falsifying accounts, fraudulent deposits, and criminal conspiracy under the IPC. The trial was going on several years till 2015 and the Chairman of the Satyam and six others were convicted and sentenced to seven years imprisonment by the court. Some of the defendants received limited sentences or were acquitted.

The case has impact and relevance as a reminder of the importance of ethics, good corporate governance, and effective accounting mechanisms.

Conclusion

Section 36 of Companies Act highlights the importance of proving deliberate intent over negligence and emphasises the section’s impact on financial stability. The relevance of section 447 of the said ACT also provides the procedure and punishment which subject to Cr. Pc. Act. Precedent discussed in the article about Satyam, the scam teaches the significance of moral, ethical, and social principles in the corporate world. The scope of the section is beyond the penalties which are still subject to due diligence and ethical conduct.

FAQs

1. Has a company or person is liable to false or misleading statements negliegently but without the actual intent to defraud under Section 36? What evidence shall be proved ?

Yes, negligence might be sufficient if it shows due diligence has not been taken before acting for untrue or misleading information at issuance of the securities. Negligence shall prove the evidence of failing to take reasonable steps to verify information.

2. What is “material fact” that must be disclosed under Section 36?

Facts or Information influences Investers decisions are called “material fact” which must be disclosed under Section 36. The definition may vary based on its context.

3. Does Section 36 only apply to agreements involving listed companies, or can it cover private companies and other financial instruments? Are there any specific variation depending on the agreement type?

Yes Section 36 applies covering listed and private companies, and financial instruments depending on interpretation. Variation exist can be based on agreement type and require legal evaluation for it.

4. What are the liabilities prescribed for violating Section 36 in the Companies Act? Which authority has the right to enforce the section, and what challenges exist in bringing successful prosecutions?

Penalties for violations are imprisonment and fines as per the intensity of the fraud involved in it. The Ministry of Corporate Affairs(MCA) and courts enforce the provisions under Section 36. While executing the provisions of the said Act there are challenges including complex investigations process and burden of proof to prove intent.

5. How effective is Section 36 in protecting investors from fraudulent inducement? Are there any loopholes or limitations that need to be addressed?

The effectiveness of Section 33 is still debatable. There are loopholes which include difficulty in proving intent and limited scope. To improve protections there should be provisions for addressing information asymmetry and strengthening enforcement. It focuses the significance of responsible business practices and investor education to prevent fraudulent activities.

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