CORPORATE WORLD AND FRAUDS By Shubham Mishra from VIT Law School
Fraud can be defined as, an act of decieving or misrepresenting intentionally in order to obtain benefits in an illicit or unwanted manner. According to association of certified fraud examiners(ACFE) fraud is, deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefits to the individual or to the entity or some other party. Corporate frauds have much more significance from the investor’s point of view in the corporate world. Now a days, Corporate frauds have become a matter of serious concern, since it affects, entity’s reputation and investor’s faith on the organization. Fraud consists of many unscrupoulous activities by individual or company for making large amount of personal benefits. Fraud is an indirect way of obtaining a huge sum of money, however, the problem is that in order to augment the position and standing of company in the corporate world, it indulges itself into unwanted and illegal activities, which affects the organization to a larger extent. Further, the investors lose trust over the comapny.
The investors are the backbone of the securities market. They actively take part in the securities market and become condusive in the enhancement of the economy of the nation. Gradually, the number of investors are rising in India.
Every organization needs money for carrying out their operations in a secured and well established manner. Therefore, the investors are taking initiative to indulge themselves in the money market for fulfillment of their needs and become prosperous by buying the shares of a company. Companies borrow money from banks, individuals, and many financial institutions through issue of their financial securities like debentures, shares and bonds. Therefore for the betterment of the corporate world and in order to increase their capital, the faith of investors over comapnies need to be strong.
TYPES OF FRAUDS
Currently, there are a plethora of Corporate Frauds existing in the Corporate World, and a feasible solution needs to be found for avoiding these inevitable and fradulent activities. Some of the frauds are listed below-
(1)Payment Fraud: This type of fraud involves falsely creating or diverting payments. For example, creating fake records and bank accounts which enable fradulent payments to be made, generating false payments, making fradulent payments to oneself, intercepting and altering payee details.
(2)Pyramid or Ponzi Schemes Fraud: In this category of fraud, money of the subsequent investors are used to pay earlier investors. It often takes place at the time of recession when investors want to withdraw their money from the impugned scheme. The purpose is to give an impression that the investments of the initial participants have increased in value in a short period of time.
(3)Long and Short Fraud: This type of fraud occurs when legitimate business is established with the intention to fool its customers, creditors and suppliers. This type of fraud may take place after attaining a good reputation or when the business is operative only for a few months and when a huge amount of money is acquired through various investments. Thereafter, business is shut down and a huge profit is earned.[i]
(4)Insolvency and Bankruptcy related fraud: Insolvency related fraud occurs when company is aware of its fradulent conduct and it majorly takes place prior to the anticipated insolvency of the company. In order to avoid debts and liabilities, directors establish companies just prior or after the insolvency of the company and they transfer all the assets of the first company to the newly established company, so that they are exempted from paying its debts.
Every organization needs capital for operation of their daily activities in a smooth and perfect manner since finance is the lifeline of all corporate sectors. The Investors Contribution comes into play for the establishment of an admiring and confident image in the eyes of the potemtial investors. Investors are considered as backbone of the securities market because they contribute heavily in the market as well as in enhancement of an Indian economy. Therefore their invested money needs to be safeguarded through effetive rules and regulations. A number of invetors are taking part in security market, but due to several fradulent scams which have taken place recently, it has diminished the confidence of investors in the capital market. Therefore, this confidence needs to be regained for sustaining the capital market or else the consequences will be outrageous.
The concept of investor protection need to be looked from different angles by looking into aspirations and requirements of different category of investors.
(I)Investors in Equity
(II)Large institutional investors
(III)Investors in Debentures
(IV)Foreign investors and small investors and depositors.
The number of Corporate scandals related to primary and secondary market affect the corporate entity in many ways such as, financial, psychological and reputation of the company gets hampered. The people involved in campnay’s various operational activities become preys of ones negligent and greedy decision which drowns the entire firm. In order to avoid criminal liability, an entity should carefully indulge into proper decision making process, because obtaining money by following wrong direction leads to devastation and collapse of the entire community and affets economy as a whole.
It is highly recommended that the investors do a background check to be aware of the operations of the company. There are numerous categories of investors and their knowledge differs with respect to various fields of the security market. Therfore, those investors who don’t possess the knowledge about the working procedure of the capital market, should consult with qualified financial brokers appointed by SEBI. Every organization should have properly establsihed fraud depatments which keep an eye on the day to day transactional activities. The security market system thus needs to be transparent and trustworthy since the confidence of investors should always be given priority as the capital market cannot sustain without the contribution and full support of investors.
India has enacted various legislations to safeguard the investors’s money because they can’t predict the intention of utilizers of that money and it can be used in many illegal ways, but proper implementation of these laws are necessary for resisting scams in corporate world. Investors have certain objectives from these investments which must be fulfilled and if all goes well, the relationship between investors and conglomerates will improve and it will be conducive for the Indian security market.
[i]“Different Types of Corporate Fraud Explained - Solicitors - London.” 2006. Accessed October 29, 2016. http://www.franciswilksandjones.co.uk/site/fwjsays/faq_booklets/tips_different_types_of_corporate_fraud_uf.html. Different Types of Corporate Fraud Explained - Solicitors - London,” 2006, accessed October 29, 2016, http://www.franciswilksandjones.co.uk/site/fwjsays/faq_booklets/tips_different_types_of_corporate_fraud_uf.html.
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