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Invoking Investigative Powers of SFIO : “formation of Opinion” & “Public Interest”


FIRST PUBLISHED ON TAXMANN - https://www.taxmann.com/preview-document?categoryName=company-and-sebi&fileId=105010000000021269&subCategory=experts-opinion&searchText=Akshita%20Goyal


The Legislature, in the form of SFIO, has handed a potent instrument in the hands of central government to combat complex interdepartmental and multiple disciplinary investigations involving falsification of financial documents, fraudulent transactions, manipulation through related parties amounting to siphoning off and diversion of funds. From the language of Section 211 and 212, it seems that the legislature intended to create omniscient and omnipotent investigation machinery equipped with all the faculties to root out the cases of serious corporate frauds. In fact, in furtherance of its pursuit, the office of the SFIO has even been conferred with the powers to curtail life and liberty with stringent bail conditions. The gravity perhaps is made clear from the fact that this organization was created in the backdrop of stock market scams as also the failure of non-banking companies resulting in huge financial loss to the public[1], to restore confidence in the market[2]. It is thus understandable as to why the legislature has appointed gatekeepers in terms of subsection (1) of section 212 to disallow unchecked, arbitrary and malafide use this machinery against individuals and companies and why it is of utmost importance that the checks and balances placed by the legislature are comprehended and implemented in letter and spirit.


That reading of section 212 makes it clear that for SFIO to enter into or be assigned an investigation through one of the four gates i.e. form clause (a) to (d). This article thus aims to shed light on third crossing, which is manned by “public interest”. The contents of Section 212(1), which are subject of analysis of this article are highlighted below:


“212. Investigation into affairs of Company by Serious Fraud Investigation Office.— (1) Without prejudice to the provisions of section 210, where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office—


(a) on receipt of a report of the Registrar or inspector under section 208;


(b) on intimation of a special resolution passed by a company that its affairs are required to be investigated;


(c) in the public interest; or


(d) on request from any Department of the Central Government or a State Government,

the Central Government may, by order, assign the investigation into the affairs of the said company to the Serious Fraud Investigation Office and its Director, may designate such number of inspectors, as he may consider necessary for the purpose of such investigation.”





FORMATION OF OPINION


The section clearly mandates that for SFIO to be assigned any investigation, the Central Government must pass an order and the order must be based on one of the four gates as mentioned above. Infact mere reliance on the “report of the Registrar”, “intimation of a special resolution”, “request from any department of central government or state government” will not suffice the mandate of the section. More than mere reliance on aforementioned reports or requests, the order of the Central Government must reflect an opinion that it is necessary to investigate into the affairs of the company. The Hon’ble Supreme Court in the case of Bhikhubhai Vithalabhai Patel v. State of Gujarat[3] has held that the expression "is of opinion", does not confer any unlimited discretion on the Government and the construction placed on the expression "reason to believe" will equally be applicable to the expression "is of opinion". The phrase “is of opinion”, gains utmost importance when clause (c) is invoked as in that case, the Central Government may not have the assistance of reports and requests and thus is it is then bound to adduce materials to show that it is in public interest to assign the investigation into the powerful hands of SFIO as no opinion can be formed without underlying material. The Hon’ble Supreme Court in the case of Tandon Bro v State Of West Bengal[4] has clearly held that


formation of opinion obviously is dependent upon available materials and cannot be a mere ipse-dixit of the administrative authority: Existence of justifiable reasons in the matter of formation of opinion is the principal condition and any contra action would have the effect of the same being ascribed as arbitrary exercise of power which is admittedly an antithesis of law."


Further the duty to express and record opinion even where the legislature has not clearly expressed in so many words is clearly implied as held by the Hon’ble Supreme Court T.R. Thakur v. Union of India[5]


"every state action must satisfy the rule of non-arbitrariness, the duty to record reasons may be impliedly imposed"


The law in regards with the necessity of formation of the opinion in terms of subsection (1) of the Company’s Act and the quality of such opinion was visited by the Hon’ble Tamil Nadu High Court in the case of Karvy Stock Broking Limited vs. The Union of India[6]


“The quintessence of the above judgments is that under Section 212(1) of the Act, the Central Government, on the sources referred to under clauses (a) to (d) of the said sub-section, is required to form an opinion that it is necessary to investigate into the affairs of the company by SFIO. It goes without saying that for formation of an opinion with regard to necessity for ordering investigation into the affairs of the company by SFIO, the necessary concomitant is existence of prima facie circumstances, which should be demonstrable before the court when questioned. As the investigation will have serious impact on the functioning of the company and its prospects, it is vital that before ordering investigation, the authority shall appraise itself all the relevant facts. Further, forming an opinion and ordering investigation, is an administrative act of the Central Government, and, therefore, it shall be on satisfactory grounds, and if the same are found to be defective, the action contemplated, is justiciable.”


The Hon’ble Supreme Court in the case of Rohtas vs S.D. Agarwal & Ors[7], while examining section 237(b) of the Companies Act, 1956 where the section says that where “in its (Central Government) opinion or in the opinion of the Tribunal], there are circumstances suggesting” the Central Government may appoint competent affairs to investigate the affairs of the company, relied on the judgment of Barium Chemicals (supra) to held that it existence of circumstances as referred in the Section is condition precedent for the government to form opinion and it is open to the Court to examine the existence of circumstances when the order was made. The relevant extract of the judgment is reproduced herewith:


“In interpreting Section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally, we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of the general public. In fact the vires of that provisions was upheld by a majority of the judges constituting the Bench in Barium Chemicals' case principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in 'Barium Chemicals' case that the existence of the circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) or the persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and, if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the courts.”


In the case of Parmeshwar Das & Ors. Vs The Additional Director (Investigation) Serious Fraud Investigation Office & Ors, the Hon’ble Bombay High Court deciding whether the opinion formed by the Central Government in terms of section 212 of the Act is formed on sufficient material has held that the court in its discretion can interfere, once it is established that there are lack of requisite material to reach an opinion. The Hon’ble Court in the facts of the case, set aside the order the Central Government on the grounds that the order was based on the report of registrar, which did nor furnished any details. The relevant extract of the opinion is reproduced herewith


“Once we reach the conclusion that there is lack of requisite material to arrive at the requisite opinion or record the necessary satisfaction, then, in exercise of our powers of judicial review, we can safely quash and set aside the impugned order. We find that the opinion recorded or the satisfaction reached is vitiated by total non application of mind. None of the factors which are germane and relevant for forming the opinion have been referred. The opinion or satisfaction is based only on the complaint of the Member of Parliament to the CVC and with regard to which report was called for from the Registrar. Even the contents of that report have been, as held above, misread and totally misinterpreted. Based on that no opinion could have been recorded that it is necessary to investigate the affairs of the company in public interest.”


In the case of Medak Diocese of Church of South India Trust Association vs. Union of India & Ors[8], the Hon’ble High Court of Andhra Pradesh & Telangana, has held that mere reference to the report of the Registrar does not conform to the requirements of section 212 and the order of the Central Government must reveal the opinion that the investigation by SFIO is necessitated. The relevant extract of the judgement is reproduced herewith.


“Therefore, the 1st respondent is required to form an opinion i.e., something more than mere re- telling of gossip or hearsay and reflects judgment or belief resulting from what one thinks on a particular question. Such belief or conviction is manifested by 1st respondent in ordering investigation by SFIO. The words "is of the opinion" "that it is necessary to investigate" impose a jurisdictional duty on Central Government to form opinion on the necessity of investigation by SFIO. The material before Central Government is considered from the view point of necessity of such investigation by SFIO. Without again juxtaposing the operative portion of the order impugned in the writ petition, it can be held that the order impugned in the writ petition by itself does not show the existence of opinion, much less necessity for ordering investigation by SFIO. This Court hastens to add that no particular expression is suggested and it is accepted that the opinion depends upon case to case basis. But the subjective opinion, if is available in the order passed for investigation by SFIO, then the Central Government is satisfying the requirement for ordering investigation by SFIO. The section is interpreted as the section stands by following the settled principles of interpretation. In the case on hand, this Court is of the view that the order dated 10.6.2016 of 1st respondent does not reflect forming opinion on the necessity for investigation by SFIO.”


In consequence thereof, it is clear that the an order invoking clause (c) of sub section (1) of Section 212 assigning the investigation to SFIO must reflect that an opinion has been form based on requisite material that an investigation is necessitated by SFIO. Further, the order is open to judicial review on grounds that the order lacks any relevant material or application of mind to show that there exists any material to show prima facie that Public Interest is effected to an extent that an investigation by SFIO is necessitated.


PUBLIC INTEREST


At this stage what is left to be answered is that what is Public Interest and what material would warrant an opinion that public interest is affected. Black law dictionary gives a restrictive definition to public interest by contrasting it with interest of particular societies. Public Interest by the Black law dictionary is defined as


“Something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular localities, which may be affected by the matters in question”


In the case of Sri Ramdas Motor Transport Ltd. & Ors. v. Tadi Adhinarayana Reddy & Ors.[9] wherein a dispute in a public but closely held company consisting of 61 shareholders including 11 employees and ex-employees, a group filed a writ petition before the High Court of Andhra Pradesh seeking a writ of mandamus directing the Union of India to forthwith prosecute the appellant Nos. 2 and 3 in accordance with law. The Court while observing though the company had borrowed moneys from public institutions, the dispute is between the management and the minority shareholders and the company though Public is a closely held company, held that


“13. ... ... ... ... The only ground for intervention appears to be "public interest". We fail to see what public interest is involved in disputes of the kind referred to in the writ petition. They basically deal with mismanagement of the affairs of the company and oppression of the minority shareholders. The company is only a deemed public limited company. Its shareholding is very closely held. The only other factor referred to in the writ petition to invoke the doctrine of so called public interest, is the fact that the company had borrowed moneys from public institutions. This is no ground for not availing of the statutory remedies provided under the Companies Act before the appropriate statutory forums which are designed for this very purpose. We are distressed to find that the well-reasoned judgment of the Single Judge was interfered with in a casual manner. The impugned judgment rests on fragile foundations and reads more like an ipse dixit.”


In the case of South India Viscose Ltd. vs Union of India[10], the Division Bench of Hon’ble Delhi High Court observed that merely because certain transactions were not conducted wisely or at worst or did not comply with the requirements of the certain sections, it is not sufficient by itself to show that the affairs of the company are conducted in a manner prejudicial to the interest of the company or the public interest. The Hon’ble Court held as under


“That the affairs of the company are being conducted in a manner prejudicial to the interest of the company are being conducted in a manner prejudicial to the interest of the company or the public interest. Here all that the CLB has found is that some transactions were not so wise or that certain transactions were not prudent or at the worst did not comply with the requirement of s. 372 or s. 269 or s. 309 of the Act. The serious misdirection in law that the CLB has committed is in assuming that if it was just shown that there was some contravention of some provisions of the Act (even when no personal gain was being made by the management) it was sufficient by itself to establish that the said actions were prejudicial to the interest of the company. This is not the position in law.”

In the case of Parmeshwar Singh (supra), where the Hon’ble Bombay High Court found that the investigation is directed at the instance of two rival groups and that there are no basis of directing any investigation except for some vague and general references to certain allegations in matters of bank finance and allotment of coal mines and alleged diversion of raw materials, in these circumstances, the court held no basis of direction of investigation on the grounds of public interest are made out. The relevant extract is reproduced herewith


“This is the only basis, namely, the report of the Registrar of Companies, West Bengal, or its contents which has enabled the Central Government to exercise its powers under section 212(1)(c). It is, therefore, apparent that it has not necessarily acted in terms of its power conferred by section 212 to direct investigation into the affairs of the company in public interest. The foundation for reaching the opinion or satisfaction is the report of the Registrar. We have referred to the details in that report and we are of the firm opinion that based on that the Central Government could not have recorded a satisfaction or an opinion that investigation into the affairs of the company are necessary. There is no element of public interest which is projected, save and except some vague and general references to certain allegations in matters of bank finance and allotment of coal mines and alleged diversion of raw materials. There has been absolutely no details furnished nor referred in the report. Rather, the report proceeds on the basis that as far as these issues are concerned nothing can be done by the Ministry of Corporate Affairs or the Registrar of Companies. We fail to understand, therefore, how in the present facts and circumstances and based on allegations and counter allegations between two groups of shareholders can it be even held that it is necessary in public interest to direct an investigation into the affairs of the company. Once we reach the conclusion that there is lack of requisite material to arrive at the requisite opinion or record the necessary satisfaction, then, in exercise of our powers of judicial review, we can safely quash and set aside the impugned order. We find that the opinion recorded or the satisfaction reached is vitiated by total non application of mind. None of the factors which are germane and relevant for forming the opinion have been referred. The opinion or satisfaction is based only on the complaint of the Member of Parliament to the CVC and with regard to which report was called for from the Registrar. Even the contents of that report have been, as held above, misread and totally misinterpreted. Based on that no opinion could have been recorded that it is necessary to investigate the affairs of the company in public interest”.


CONCLUSION


The Hon’ble Gujarat High Court in the case of In Re: Wood Polymer Limited, had an occasion to define the meaning of the term Public Interest. The Court found that the meaning of the word Public Interest has to be interpreted in accordance with the “object behind the legislative intendment within which it is used and the mischief it seeks to suppress”. In this case, the Hon’ble Court found that merger transactions entered into by the companies were entered to arrange the affairs of the company in such a manner to avoid tax liability. In that case the Hon’ble Court held that the public interest must take its colour and content from the context in which it is used. In the context of this case, the court felt necessary to examine whether the affairs of the company were carried on in a manner prejudicial to the members of the company or public interest, it would be necessary to determine the wider philosophical context why the State is permitted to levy tax. Similarly, the meaning of the word “Public Interest” as used in section 212 if the Companies Act, must take its colour from the object of the section and from the mischief that the section aims to surpress. As referred above the object of Section 212 is clearly to prevent siphoning off or diversion of public money, hence the opinion as is required to be formed under section 212 must refer to a some material that reflects that there is prima facie diversion of funds. In this regard, it is submitted that mere losses arising of projects funded from public money or unwise use of money or even use of money against the terms and conditions of lending will not suffice the mandate the requirement of section 212, the opinion and material on which the opinion is based must prima facie establish a nexus between borrowing public money to misuse or any undue advantage thereof.

[1] https://sfio.nic.in/about_history_sfio [2] https://www.finmin.nic.in/sites/default/files/chandra.pdf [3] AIR 2008 SCC 1771 [4] 2001 (2) SCR 960 [5] AIR 1996 SC 1643 [6] [2020] 119 taxmann.com 81 [7] 1969 AIR 707 [8] 2018 (1) ALD 734 [9] (1997) 5 SCC 446 [10] W.P.(C) No. 343/1980, Delhi High Court

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