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SFIO’s Authority and Role Upheld by Karnataka High Court in Corporate Affairs Investigation

Introduction

In the matter of Exalogic Solutions Private Limited v. The Director, Serious Fraud Investigation Office and Anr.[i], the Karnataka High Court (‘KHC’) upheld the legality of the Serious Fraud Investigation Office’s (‘SFIO’) inquiry into the operations of Exalogic Solutions Private Limited (‘Petitioner’). This ruling further clarifies the Government’s authority under the Companies Act, 2013 (‘Act’) to initiate inquiries into the operations of companies. It was clarified that the provisions of the Act empowered the Government to assign investigations to the SFIO, once investigation starts under s. 210 of the Act, thereby rejecting the petition.

Brief Facts

  • The Petitioner, a one-person company, received a communication from the Ministry of Corporate Affairs regarding a complaint about an incorrect address mentioned in a filed form. Despite explanations regarding shifting the registered office due to the COVID-19 pandemic, the Registrar initiated adjudication proceedings against the Petitioner for non-maintenance of the office. A penalty was imposed on the Petitioner and its Director for the alleged violation under s. 12 of the Act.

  • Subsequently, on 29.01.2021, the Registrar initiated an inquiry under s. 206 of the Act into the dealings between the Petitioner and one Cochin Minerals and Rutile Limited (‘CMRL’). This inquiry demanded various documents, including annual reports for the years 2014-15 to 2019-20.

  • Despite the Petitioner’s written submissions and documentation, the Registrar called for a personal hearing on 24.06.2022. This hearing resulted in further document requests, necessitating another appearance on 14.07.2022. Subsequently, a show-cause notice was issued on 11.08.2023, highlighting concerns such as undisclosed related-party transactions with the Kerala State Industrial Development Corporation (‘KSIDC’).

  • Concurrently, the Petitioner’s Director received a notice demanding details on specific transactions with CMRL, with a warning of potential prosecution under ss. 447 and 448 of the Act. The Petitioner maintained KSIDC’s operational independence, distinguishing it from the Director’s familial ties.

  • The Petitioner further claimed that a separate writ petition (‘WP’) has been filed before the Kerala High Court requesting the central government to investigate the affairs of the Petitioner, CMRL, and KSIDC. This WP was contended to be pending adjudication. Additionally, the Petitioner learned from media reports that the 2nd Respondent (Union of India) ordered an investigation under s. 210 of the Act vide order dated 31.01.2024 based on the reports from the Registrars in Bengaluru and Ernakulum. Notably, the Petitioner had not been served with a copy of this order.

  • Furthermore, the Petitioner claimed that they later discovered through media reports that the central government assigned the investigation to the SFIO under s. 212 of the Act. Consequently, the SFIO issued notices to the Petitioner on 02.02.2024 and 06.02.2024, demanding various documents and details. The Petitioner therefore requested an extension until 15.02.2024 and promptly filed the current WP under as. 226 and 227 of the Constitution of India, 1949 (‘Constitution’) seeking disclosure of all records related to the order dated 31.01.2024 and quashing of the same, claiming it to be arbitrary, illegal, and invalid in the eyes of the law.

Held

  • The KHC dismissed the petition, confirming the government's authority to assign an investigation to the SFIO under s. 212 of the Act, even if an investigation under s. 210 is already in progress. It was affirmed that this action does not create unnecessary duplication of investigation or violate any rights of the Petitioner.

  • The KHC further observed that s. 212(2) of the Act specifically states that any ongoing investigation must stop once the SFIO takes over. All relevant documents and records are then transferred to the SFIO and s. 212(3)(7) of the Act defines the SFIO’s powers and outlines the detailed procedures for their investigations. Therefore, the Government’s authority to assign investigations to the SFIO under s. 212 of the Act remains independent of and does not conflict with the ongoing investigations under s. 210 of the Act.

  • The KHC held that s. 210 of the Act allows for both interim and final reports, and if new information suggesting serious wrongdoing emerges during the investigation under s. 210 of the Act, assigning the case to the SFIO, is justified. Arguments challenging the timing and reasons for assigning the investigation to the SFIO were deemed untenable. It was observed that such reports under s. 210 of the Act serves to facilitate investigation rather than to penalize, aiming to uncover potential unethical activities, like those suspected in the Petitioner’s case.

  • Consequently, the KHC rationalized that entrusting the SFIO, given its multi-disciplinary expertise, for the investigation is prudent. The SFIO’s capability to liaise across various departments ensures a thorough investigation and precise outcomes. The KHC emphasized its stance that governmental discretion to allocate the case to the SFIO, especially based on findings from the initial probe and in the interest of public welfare, should not be overturned unless it manifestly breaches legal standards or exhibits arbitrary conduct. As these conditions were not met, the KHC declined to intervene.

  • The KHC rejected comparisons to other cases, stating that the actions of the government were within the scope of the law and no arbitrary, Judgments cited by the Petitioner were deemed inapplicable to the present case, as they did not address the specific circumstances involved. The KHC emphasized the importance of allowing investigative agencies such as the SFIO to conduct thorough inquiries into economic offences, considering the complexity of modern financial transactions.

Analysis

This ruling greenlights the SFIO investigation, removing any legal hurdles and making it clear that the probe cannot be stopped or quashed. This decision confirms that the SFIO’s actions are legitimate and serve the public’s best interests. This decision further ensures several key things such as:

  • A thorough investigation: The SFIO’s expertise will allow for a deeper dive into potential financial wrongdoing.

  • No wasted effort: The KHC’s ruling prevents unnecessary duplication of work by other agencies.

  • Specialized skills when needed: The KHC recognizes the value of specialized agencies like the SFIO for tackling complex financial crimes.

This judgment facilitates a meticulous exploration of alleged financial irregularities, emphasizing the indispensability of specialized entities like the SFIO in the realm of complex financial probes. It resonates with the Hon'ble Supreme Court’s observations on the evolving nature of economic offences, which increasingly demand specialized, multidisciplinary approaches due to their complexity and the technological savvy often involved.

By setting a precedent that discourages unnecessary interference in ongoing investigations, this ruling underscores the judiciary’s commitment to enable thorough and effective inquiries. It reaffirms the judiciary’s stance on upholding rigorous investigations conducted by entities endowed with the requisite expertise, thereby significantly contributing to the fight against sophisticated financial crimes.


End Note

[i] [2024] 159 taxmann.com 556 (Karnataka) [16.02.2024]


Authored by Aishwarya Pawar, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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