Inspection, Inquiry and Investigation

Inspection and inquiry by the Registrar: section 206

Section 206(1) and (2): the question. Where, on scrutiny of a document filed or on information received, the Registrar is of opinion that further information, explanation or documents are necessary, he may by written notice require the company to furnish it in writing or produce the documents within a reasonable time. It is the duty of the company and its officers to comply to the best of their knowledge and power; and by the proviso, where the matter relates to a past period, the officers who were then in employment must also furnish it if called upon by written notice.

Section 206(3): the inspection. If no information is furnished, or the Registrar thinks what was furnished inadequate, or is satisfied that an unsatisfactory state of affairs exists and the documents do not disclose a full and fair statement, he may by another written notice call for further books of account, books, papers and explanations for his inspection at such place and time as he specifies. Proviso: he shall record his reasons in writing before serving that notice.

Section 206(4): the inquiry. If the Registrar is satisfied, on information available or furnished or on a representation made by any person, that the business is being carried on for a fraudulent or unlawful purpose or not in compliance with this Act, or that the grievances of investors are not being addressed, he may, after informing the company of the allegations, call for information by written order and carry out such inquiry as he deems fit after giving the company a reasonable opportunity of being heard.

First proviso: the Central Government may direct the Registrar or an inspector it appoints to carry out the inquiry. Second proviso: where the business has been or is being carried on for a fraudulent or unlawful purpose, every officer in default shall be punishable for fraud under section 447.

Section 206(5) and (6). The Central Government may direct inspection of a company's books and papers by an inspector it appoints; and it may, by general or special order, authorise any statutory authority to carry out the inspection of the books of a company or class of companies.

Section 206(7): failure. The company and every officer in default is punishable with fine up to one lakh rupees, and for a continuing failure an additional fine up to five hundred rupees for every day after the first.

Conducting it: sections 207 and 208

Section 207(1) and (2). Every director, officer or other employee must produce all such documents and furnish statements, information or explanations in the required form, and render all assistance. The Registrar or inspector may make copies and place marks of identification on the books.

Section 207(3): the powers. Notwithstanding any other law or any contract to the contrary, he has the powers of a civil court under the Code of Civil Procedure, 1908 in respect of (a) discovery and production of books and documents at a specified place and time, (b) summoning and enforcing attendance and examining persons on oath, and (c) inspection of any books, registers and documents at any place.

Section 207(4): disobedience, and its second consequence. A director or officer who disobeys a direction is punishable with imprisonment up to one year and fine of twenty-five thousand to one lakh rupees; and on conviction he is deemed to have vacated his office and is disqualified from holding office in any company.

That second limb is the one students miss, and it is heavier than the sentence.

Section 208: the report. The Registrar or inspector shall, after the inspection or inquiry, submit a written report to the Central Government with the documents, and the report may include a recommendation, with reasons, that further investigation is necessary.

Search and seizure by the Registrar: section 209

Section 209(1). Where, on information in his possession or otherwise, the Registrar or inspector has reasonable ground to believe that the books and papers of a company, or those relating to the key managerial personnel or any director or auditor or company secretary in practice where the company has appointed no company secretary, are likely to be destroyed, mutilated, altered, falsified or secreted, he may, after obtaining an order from the Special Court for the seizure of those books and papers, (a) enter and search, with such assistance as may be required, the place or places where they are kept, and (b) seize such of them as he considers necessary, after allowing the company to take copies or extracts at its cost.

Note the safeguard. Unlike an inspector's seizure under section 220, which needs no outside order, a Registrar's search and seizure under section 209 requires an order of the Special Court.

Section 209(2). The books and papers shall be returned as soon as may be, and in any case not later than the one hundred and eightieth day after the seizure; proviso, they may be called for again for a further one hundred and eighty days by an order in writing; and before returning them he may take copies or extracts, place identification marks or otherwise deal with them as he considers necessary.

Section 209(3). The provisions of the Code of Criminal Procedure, 1973 relating to searches and seizures apply mutatis mutandis.

Investigation by the Central Government: section 210

The Central Government may order an investigation into the affairs of a company where it is of opinion that it is necessary:

• (a) on receipt of a report of the Registrar or inspector under section 208;
• (b) on intimation of a special resolution passed by the company that its affairs ought to be investigated; or
• (c) in the public interest.

Section 210(2) makes it mandatory in one case: where a court or the Tribunal orders in any proceedings that the affairs ought to be investigated, the Central Government shall order it.

Section 210(3). It may appoint one or more persons as inspectors to investigate and report in such manner as it may direct.

The Serious Fraud Investigation Office: sections 211 and 212

Section 211: establishment. The Central Government shall by notification establish the Serious Fraud Investigation Office to investigate frauds relating to a company, headed by a Director not below the rank of a Joint Secretary to the Government of India, and consisting of experts in banking, corporate affairs, taxation, forensic audit, capital market, information technology, law and such other fields as may be prescribed.

Section 212(1): when a case goes to it. Where the Central Government is of opinion that it is necessary to investigate a company's affairs by the Office:

• (a) on a report under section 208;
• (b) on intimation of a special resolution of the company;
• (c) in the public interest; or
• (d) on request from any Department of the Central Government or a State Government,

it may assign the investigation to the Office, whose Director may designate as many inspectors as he considers necessary.

Section 212(2): exclusivity. Once a case is so assigned, no other investigating agency of the Central Government or any State Government shall proceed with an investigation in respect of any offence under this Act; any investigation already initiated shall not be proceeded with, and the agency shall transfer the relevant documents and records to the Office.

And note section 439(1), which makes every offence under the Act non-cognizable except those referred to in section 212(6), so the Office's cases are the exception to the ordinary rule.

Investigation ordered by the Tribunal: section 213

The Tribunal may order that the affairs be investigated by inspectors appointed by the Central Government:

• (a) on the application of not less than one hundred members, or members holding not less than one-tenth of the total voting power, in a company having a share capital; or not less than one-fifth of the persons on the register of members in a company having no share capital; supported by evidence showing that the applicants have good reasons for seeking the order; or
• (b) on the application of any other person or otherwise, if satisfied that there are circumstances suggesting that (i) the business is being conducted with intent to defraud creditors, members or any other person, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members, or that the company was formed for a fraudulent or unlawful purpose; (ii) persons concerned in its formation or management have been guilty of fraud, misfeasance or other misconduct towards the company or its members; or (iii) the members have not been given all the information about its affairs which they might reasonably expect, including information about the calculation of the commission payable to a managing or other director or the manager.

The order is made after giving a reasonable opportunity of being heard to the parties concerned, and on it the Central Government shall appoint one or more competent persons as inspectors.

The proviso: the consequence of proof. If after investigation it is proved that the business was conducted with intent to defraud or for a fraudulent or unlawful purpose, or that a person concerned in the formation or management has been guilty of fraud, then every officer in default and the persons concerned shall be punishable for fraud under section 447.

Compare section 244. For an oppression petition the thresholds are one hundred members or one-tenth of the members, whichever is less, or one-tenth of the issued share capital. Here they are one hundred members or one-tenth of the total voting power, and there is no power of waiver.

Two conditions on an investigation: sections 214 and 215

Section 214: security for costs. Where an investigation is ordered by the Central Government under section 210(1)(b), that is on the company's own special resolution, or in pursuance of an order of the Tribunal under section 213, the Central Government may, before appointing an inspector, require the applicant to give such security, not exceeding twenty-five thousand rupees, as may be prescribed, for the costs and expenses of the investigation; and that security shall be refunded to the applicant if the investigation results in prosecution.

Note the two conditions on the refund. It is refunded on a prosecution, not on a finding of wrongdoing short of one, and the ceiling is twenty-five thousand rupees.

Section 215: who may be an inspector. No firm, body corporate or other association shall be appointed as an inspector. The office is personal, so a person is appointed and answers for the investigation himself.

The inspector at work: sections 216 to 220

Section 216: ownership. The Central Government may appoint inspectors to determine the true persons who are or have been financially interested in the success or failure of the company, who are or have been able to control or materially influence its policy, or who have or had a beneficial interest in its shares or are or have been beneficial owners or significant beneficial owners. It shall do so if the Tribunal so directs. It may define the scope, including limiting it to particular shares or debentures; and the inspector's powers extend to arrangements or understandings which, though not legally binding, are or were observed in practice.

Section 217: duties and powers. All officers, employees and agents, including former ones, of the company and, where section 219 applies, of the other body corporate or person, must preserve and produce all books and papers in their custody or power and give all assistance. The inspector may require any other body corporate to furnish information or produce books relevant to the investigation. He shall not keep books for more than one hundred and eighty days, but may call for them again for a further one hundred and eighty days by order in writing.

He may examine on oath any of those persons, and, with the prior approval of the Central Government, any other person; in a section 212 investigation the prior approval of the Director, Serious Fraud Investigation Office is sufficient. He has the civil court's powers in the same three matters as under section 207(3). The notes of examination are taken down, read over to and signed by the person examined, and may be used in evidence against him. And disobedience carries imprisonment up to one year and fine of twenty-five thousand to one lakh rupees, with the same deemed vacation of office and disqualification from any company on conviction.

Section 218: protection of employees. Where, during an investigation under section 210, 212, 213, 216 or 219, or during proceedings under Chapter XVI against a person concerned in management, the company proposes to discharge or suspend an employee, to punish him by dismissal, removal, reduction in rank or otherwise, or to change the terms of his employment to his disadvantage, it must obtain the Tribunal's approval. If it does not receive approval within thirty days of applying, it may proceed; if the Tribunal objects, the company may appeal to the Appellate Tribunal within thirty days, whose decision is final and binding.

That section exists for an obvious reason. The employees are the witnesses.

Section 219: related companies. An inspector appointed under section 210, 212 or 213 may, with the prior approval of the Central Government, also investigate (a) a body corporate which is or has been the company's subsidiary or holding company or a subsidiary of its holding company; (b) a body corporate managed by a person who is or was the company's managing director or manager; (c) a body corporate whose Board comprises nominees of the company or is accustomed to act on its or its directors' directions; or (d) any person who is or has been the company's managing director, manager or employee, so far as the results are relevant to his investigation.

Section 220: seizure. Where the inspector has reasonable grounds to believe that books and papers are likely to be destroyed, mutilated, altered, falsified or secreted, he may enter the place where they are kept, with such assistance as may be required, and seize them, after allowing the company to take copies or extracts at its own cost. He keeps them no later than the conclusion of the investigation, and may before returning them take copies, place identification marks or otherwise deal with them. The Code of Criminal Procedure, 1973 provisions on searches and seizures apply mutatis mutandis.

The Tribunal's protective orders: sections 221 and 222

Section 221: freezing assets. Where it appears to the Tribunal, on a reference by the Central Government, in connection with an inquiry or investigation, or on a complaint by the number of members specified in section 244(1), a creditor having one lakh rupees outstanding, or any other person having reasonable ground to believe, that the removal, transfer or disposal of funds, assets or properties is likely to take place prejudicially to the interests of the company, its shareholders or creditors, or in the public interest, it may direct that no such transfer, removal or disposal take place for a period not exceeding three years, or that it take place subject to conditions.

Contravention: the company is punishable with fine of one lakh to twenty-five lakh rupees, and every officer in default with imprisonment up to three years or fine of fifty thousand to five lakh rupees, or both.

Section 222: restrictions on securities. In connection with a section 216 investigation, or on a complaint, where the Tribunal is of opinion that the relevant facts about securities cannot be found out unless restrictions are imposed, it may direct that the securities be subject to such restrictions as it deems fit for a period not exceeding three years. Contravention carries the same fine on the company and imprisonment up to six months or fine of twenty-five thousand to five lakh rupees, or both, on every officer in default.

The report and what follows: sections 223 to 229

Section 223: the report. The inspector may, and if directed by the Central Government shall, submit interim reports, and on the conclusion of the investigation shall submit a final report. A copy may be obtained by members, creditors or any other person whose interest is likely to be affected, on application to the Central Government. The report is authenticated by the seal, if any, of the company or by a certificate of a public officer having its custody under section 76 of the Indian Evidence Act, 1872.

Section 224: action on the report.

• (1) Prosecution. Where it appears that a person has been guilty of an offence for which he is criminally liable, the Central Government may prosecute, and all officers and employees must give the necessary assistance.
• (2) Winding up or oppression. Where the company is liable to be wound up under this Act or under the Insolvency and Bankruptcy Code, 2016, and it appears expedient by reason of the circumstances in section 213, the Central Government may cause a person authorised by it to present (a) a petition for winding up on the just and equitable ground, (b) an application under section 241, or (c) both.
• (3) and (4) Civil proceedings. Where proceedings ought in the public interest to be brought by the company for recovery of damages for fraud, misfeasance or other misconduct in the promotion, formation or management, or for recovery of property misapplied or wrongfully retained, the Central Government may bring them in the company's name, and shall be indemnified by the company against costs.
• (5) Disgorgement. Where the report states that fraud has taken place and any director, key managerial personnel, other officer or any other person or entity has taken undue advantage or benefit, in any form, the Central Government may apply to the Tribunal for disgorgement and for holding them personally liable without any limitation of liability.

Section 225: expenses. Borne in the first instance by the Central Government, but reimbursed by a person convicted or ordered to pay damages or restore property to the extent the court specifies; by a company in whose name proceedings are brought, to the extent of what it recovers, which is a first charge on those sums; and, unless a prosecution is instituted, by the company, body corporate, managing director or manager dealt with in the report and by the applicants where the inspector was appointed under section 213, to such extent as the Central Government directs.

Section 226: nothing stops it. An investigation may be initiated notwithstanding, and shall not be stopped or suspended by reason only of, an application under section 241, a special resolution for voluntary winding up, or a pending winding up proceeding. Where a winding up order is passed, the inspector shall inform the Tribunal and it shall pass such order as it thinks fit; and nothing in the winding up order absolves any director or employee from participating before the inspector or from liability on his findings.

Section 227: privilege. Nothing in the Chapter requires a legal adviser to disclose a privileged communication made to him in that capacity, except the name and address of his client, or a banker to disclose information about the affairs of customers other than the company or body corporate under investigation.

Sections 228 and 229. The Chapter applies mutatis mutandis to a foreign company; and a person who, in an investigation, inquiry or inspection, destroys, mutilates or falsifies documents, makes false entries, provides false information or does not provide information is punishable for fraud under section 447.

A worked example

Kalwa Textiles Limited files accounts showing a large unexplained advance to an unknown party.

The Registrar's question. On scrutiny he asks, by written notice, for an explanation. The company and its officers must furnish it to the best of their knowledge and power, and the officer who was finance head in the earlier year must also do so if noticed, though he has since left: proviso to section 206(2).

The inspection. The explanation is inadequate. The Registrar, recording his reasons in writing, calls for the books, papers and explanations at a place and time he specifies: section 206(3). His officer may make copies and place identification marks on the books, and has a civil court's powers of discovery, of summoning and examining on oath, and of inspecting books anywhere: section 207.

A director refuses to produce the ledger. He is punishable with imprisonment up to one year and fine of twenty-five thousand to one lakh rupees, and on conviction is deemed to have vacated his office and is disqualified from holding office in any company: section 207(4).

The inquiry. A supplier represents that the company is trading fraudulently. The Registrar, informing the company of the allegations, calls for information by written order and inquires after giving it a reasonable opportunity of being heard: section 206(4). If the business is being carried on for a fraudulent purpose, every officer in default is punishable for fraud under section 447.

The report. He reports in writing to the Central Government and recommends further investigation with reasons: section 208.

The investigation. On that report the Central Government orders an investigation and appoints inspectors: section 210(1)(a). Had the company itself passed a special resolution, or had the matter been one of public interest, either would have sufficed; and had a court or the Tribunal ordered it, the Central Government would have been bound to.

Or the Serious Fraud Investigation Office. Considering the size of the fraud, the Central Government instead assigns the case to the Serious Fraud Investigation Office. From that moment no other agency of the Centre or a State may proceed with an investigation into offences under this Act, and the State police, who had begun one, must stop and transfer their records: section 212(2).

A minority's route. Independently, one hundred and ten members of Kalwa Textiles, or members holding one-tenth of the total voting power, apply to the Tribunal with evidence showing good reasons; or any person may apply on evidence that the business is conducted with intent to defraud or oppressively, that those who formed or manage it have been guilty of fraud, misfeasance or other misconduct, or that the members have not been given the information they might reasonably expect, including how the managing director's commission is calculated: section 213.

The inspector's work. He requires the former officers and agents to produce the books; he keeps them for not more than one hundred and eighty days, extendable by another one hundred and eighty by order in writing; he examines the managing director on oath, and, with the Central Government's prior approval, an outside consultant as well; the notes are read to and signed by each of them and may be used in evidence against him. Believing the ledgers are about to be destroyed, he enters the premises and seizes them, after allowing the company to take copies at its own cost, the Code of Criminal Procedure, 1973 applying to the seizure: sections 217 and 220.

Related companies. Finding that the advance went to a company whose Board is accustomed to act on the directions of Kalwa's directors, he may, with the Central Government's prior approval, investigate that company too: section 219(c).

The employees. The company proposes to dismiss the accountant who gave a statement. It must obtain the Tribunal's approval; if it hears nothing for thirty days it may proceed; if the Tribunal objects it may appeal to the Appellate Tribunal within thirty days, whose decision is final: section 218.

Protective orders. On a reference by the Central Government the Tribunal freezes the disposal of the company's assets for two years under section 221; and, in connection with an ownership investigation, restricts the securities for a like period under section 222.

What cannot be asked. The company's advocate need not disclose privileged communications, except his client's name and address, and its banker need not disclose the affairs of customers other than the company under investigation: section 227.

The winding up petition already filed does not stop any of this: section 226, and no winding up order absolves a director from participating before the inspector or from liability on his findings.

On the report. The Central Government may prosecute those criminally liable; may cause a petition for winding up on the just and equitable ground, an application under section 241, or both; may bring proceedings in the company's name to recover damages for fraud or misfeasance or property misapplied, being indemnified for costs; and, the report stating that fraud has taken place and that the managing director took undue advantage, may apply to the Tribunal for disgorgement and for holding him personally liable without any limitation of liability: section 224.

And the cost. The expenses are borne by the Central Government in the first instance, and reimbursed by the persons in section 225, a company's liability being a first charge on what it recovers.

Distinctions that carry marks

What this does NOT mean

It does not mean the Registrar may inspect at will. Before a section 206(3) notice he must record his reasons in writing, and before an inquiry under section 206(4) the company must be informed of the allegations and given a reasonable opportunity of being heard.

It does not mean disobedience costs only a fine. On conviction the director or officer is deemed to have vacated his office and is disqualified from holding office in any company.

It does not mean several agencies may investigate together. Once a case is assigned to the Serious Fraud Investigation Office, no other agency of the Centre or a State may proceed, and one already begun must stop and hand over its records.

It does not mean the section 244 thresholds apply to section 213. Section 213 requires one hundred members or one-tenth of the total voting power, and the Tribunal has no power to waive it.

It does not mean an investigation can be stopped by winding up. Section 226 says it may be initiated and shall not be stopped or suspended by an application under section 241, a special resolution for voluntary winding up, or a pending winding up proceeding.

It does not mean everything must be disclosed. A legal adviser's privileged communications, save his client's name and address, and a banker's information about other customers, are protected.

Quick revision

• 206: the Registrar may require information or documents in writing; may, recording his reasons in writing, call for books and papers for inspection; and may, after informing the company of the allegations and hearing it, inquire where the business is carried on for a fraudulent or unlawful purpose or investors' grievances are not addressed, in which case officers in default are punishable for fraud under section 447; the Central Government may direct an inspection or authorise a statutory authority; and failure costs one lakh rupees with five hundred rupees a day thereafter.
• 207 and 208: every director, officer and employee must produce documents and assist; the Registrar or inspector may copy and mark books and has a civil court's powers of discovery, of summoning and examining on oath and of inspection anywhere; disobedience brings imprisonment up to one year and fine of twenty-five thousand to one lakh rupees, with deemed vacation of office and disqualification from any company on conviction; and a written report goes to the Central Government which may recommend further investigation.
• 210 to 213: the Central Government may order an investigation on a section 208 report, on the company's special resolution, or in the public interest, and shall where a court or the Tribunal orders; the Serious Fraud Investigation Office, headed by a Director not below Joint Secretary and staffed with experts in banking, corporate affairs, taxation, forensic audit, capital market, information technology and law, takes cases assigned to it on those grounds or on a Government Department's request, and once assigned no other agency may proceed; and the Tribunal may order an investigation on the application of one hundred members or holders of one-tenth of the voting power with evidence of good reasons, or of any person on circumstances suggesting fraud, oppression, misfeasance or the withholding of information members might reasonably expect, with section 447 consequences if proved.
• 216 to 220: ownership investigations reaching beneficial and significant beneficial owners and non-binding arrangements observed in practice; duties of present and former officers, employees and agents to preserve, produce and assist; books kept not more than one hundred and eighty days, renewable once; examination on oath with the Central Government's approval for outsiders, or the SFIO Director's in a section 212 case; civil court powers; notes read over, signed and usable in evidence; protection of employees requiring the Tribunal's approval, deemed after thirty days, with an appeal in thirty days; investigation of related bodies corporate with prior approval; and seizure on reasonable grounds of destruction, the company being allowed copies, under the Code of Criminal Procedure, 1973.
• 221 and 222: the Tribunal may freeze the removal, transfer or disposal of funds, assets or properties for up to three years, and restrict securities for up to three years, with fines of one lakh to twenty-five lakh rupees on the company and imprisonment or fine on officers in default.
• 223 to 229: interim and final reports, obtainable by members, creditors or any person whose interest is likely to be affected; on the report the Central Government may prosecute, cause a winding up petition or a section 241 application or both, sue in the company's name for damages or property with an indemnity for costs, and seek disgorgement with unlimited personal liability; expenses borne first by the Central Government and reimbursed as specified, being a first charge on a company's recoveries; investigations are not stopped by an oppression application, a voluntary winding up resolution or a pending winding up; legal advisers' privilege and bankers' other customers are protected; the Chapter applies to a foreign company; and destroying, mutilating or falsifying documents or giving false information is punishable under section 447.

Test yourself

1. Distinguish inspection, inquiry and investigation. Inspection is the Registrar's examination of the company's books and papers under section 206(3), for which he must record his reasons in writing. Inquiry is his examination under section 206(4) where he is satisfied that the business is being carried on for a fraudulent or unlawful purpose or that investors' grievances are not being addressed, after informing the company of the allegations and hearing it. Investigation is the examination of the affairs by inspectors appointed by the Central Government under sections 210, 212 or 213.

2. On what grounds may the Central Government order an investigation? On receipt of a report of the Registrar or inspector under section 208; on intimation of a special resolution passed by the company that its affairs ought to be investigated; or in the public interest. And where a court or the Tribunal orders in any proceedings that the affairs ought to be investigated, the Central Government shall order one: section 210.

3. What is the effect of assigning a case to the Serious Fraud Investigation Office? No other investigating agency of the Central Government or any State Government shall proceed with an investigation in respect of any offence under the Act; an investigation already initiated shall not be proceeded with, and the agency shall transfer the relevant documents and records to the Office: section 212(2).

4. Who may apply to the Tribunal for an investigation under section 213? Not less than one hundred members, or members holding not less than one-tenth of the total voting power, in a company having a share capital; or not less than one-fifth of the persons on the register of members in a company having no share capital, supported by evidence showing good reasons; or any other person, on circumstances suggesting fraud, an unlawful purpose, oppression, misfeasance or the withholding from members of information they might reasonably expect.

5. How are employees protected during an investigation? The company must obtain the Tribunal's approval before discharging, suspending, dismissing, removing, reducing in rank or otherwise punishing an employee, or changing the terms of his employment to his disadvantage. If it receives no approval within thirty days of applying it may proceed; if the Tribunal objects, it may appeal to the Appellate Tribunal within thirty days, whose decision is final and binding: section 218.

6. What may the Central Government do on the inspector's report? Prosecute any person criminally liable; cause to be presented a petition for winding up on the just and equitable ground, an application under section 241, or both; bring proceedings in the company's name for the recovery of damages for fraud, misfeasance or other misconduct or of property misapplied or wrongfully retained, being indemnified against costs; and, where the report states that fraud has taken place and a director, key managerial personnel, officer or other person has taken undue advantage or benefit, apply to the Tribunal for disgorgement and for holding him personally liable without any limitation of liability: section 224.