What is the process for the inspection, inquiry, and investigation of companies under The Companies Act, 2013?

Introduction 

To prevent fraudulent activities, regulations are essential for the smooth functioning of the company. The individuals committing fraud are punished by the authorities, depending on the type of fraud or offense. While drafting laws to address fraud is a complex and time-consuming task, enforcing these laws is a real challenge. Without enforcement, there will be less compliance. A law without penalties or regulatory powers is ineffective. Enforcement ensures that laws are followed. To check on the performance and compliance of various applicable laws are generally exercised by the scrutiny of any document filed by a company with the Registrar of Companies or any other regulatory authority. These authorities can ask for explanations or information about any matter related to these documents. The purpose of the inspection is not just to monitor company performance but also to assess how efficiently companies operate. Sections 206 to 229 of the Companies Act, 2013, lay down the provisions related to inspection, inquiry, and investigation into the affairs of a company. The Act gives the power to the Registrar of Companies to call for information, conduct inquiries and even inspect the places where the company keeps its records. The Central Government can appoint inspectors to carry out inquires, and investigations. The Act also establishes the Serious Fraud Investigation Office (SFIO), which investigates certain serious fraud offenses and has the power to arrest individuals for certain specified crimes.

Meaning of Inquiry, Inspection, and Investigation 

Inspection, inquiry, and investigation are three connected but different regulatory actions. These regulatory actions start with some information. Inspection and inquiry are the preliminary stages, while investigation is a later stage. In the Companies Act, the Registrar got some information about a company in which fraud is going on, and the Registrar issues an order to inspect the books of accounts and other statutory records of the company. The registrar may carry out the inquiry if circumstances so warrant. Further, if the registrar is not satisfied with the inspection and inquiry, the registrar will file its report with the Central Government, and the Central Government may issue the order to conduct the investigation. Therefore, inquiry and inspection are processes, through which one can collect information, and investigation is a process of revealing the concealed and hidden facts and the truth about the matter.

Conduct of Inspection and Inquiry 

Three authorities may order inspection under Section 206 of the Companies Act, 2013, the registrar of companies under Section 206(3), the regional director under Section 206(5), and the Central Government under Section 206(6) of this Act. Under Section 206(4) of this Act, if the registrar is satisfied that the business of the company is being carried on for a fraudulent purpose, unlawful activities, or not complying with the provisions of the Act, or investors’ grievances are not being addressed, then the registrar may initiate the inquiry under Section 206(4) of this Act. Under Section 207 of the Act, the registrar or inspector calls for books of accounts and records. It shall be the duty of every director, officer, or other employee of the company to produce these documents to the registrar or inspector and also furnish statements, information or explanations as the registrar and inspector may require.

Search and Seizure of the Documents 

According to Section 209 of the Act, the registrar and inspector may make an application to Special Court for entering places and seizing documents if he has reasonable ground to believe that the books of accounts and papers of the company, or relating to the key managerial personnel, or any director, auditor, or company secretary, are likely to be destroyed, mutilated, altered, or falsified then he may obtain an order from Special Court. The registrar and inspector shall return the seized books and papers within 180 days from the date of such custody. The registrar or inspector may take copies of, or extracts from them, or place identification marks on them or any part thereof before returning them.

Investigation 

The investigation procedures are provided under Sections 210 to 229 of the Companies Act, 2013. The affairs of the company are managed by the board of directors, so there is a chance of abuse of power by persons in control of the affairs of a company. The Companies Act, 2013 provides for carrying out the following kinds of investigation:

1. Investigation into the Affairs of a Company in Public Interest: According to Section 210 of this Act, the Court or tribunal in any proceedings, or the Central Government may order an investigation into the affairs of the company if it is necessary to investigate into the affairs of a company, on the receipt of a report of the Registrar or inspector, or on intimation of a special resolution passed by a company or in public interest. In Rohtas Industries Ltd. vs. S. D. Agarwal and Others[1] the Court held that in cases of allegations of fraud on the part of the directors of a company, an investigation must be carried out if there is prima facie evidence of any intent of defrauding fraudulent or unlawful activities or instances of misconduct.
2. Investigation by the Serious Fraud Investigation Office (SFIO): According to Section 212 of this Act, the Central Government, by an order, assigns the investigation into the affairs of the company to the Serious Fraud Investigation Office (SFIO), and its directors may designate such number of inspectors as he may consider necessary for such an investigation. The officer not below the rank of assistant director of the SFIO authorised by the Central Government that any person has been guilty of any offense punishable under this section may arrest such person and inform the grounds of arrest.
3. Investigation on Order of Court or Tribunal: According to Section 213 of the Act, the Tribunal may order, after giving a reasonable opportunity of being heard to the parties concerned, that affairs of the company ought to be investigated. The order can be made if at least 100 members or shareholders holding 10% of the voting power in a company with share capital request it and provide a valid reason for the investigation. The tribunal may also initiate an investigation if it believes that the business of the company is being conducted to defraud creditors or members or if there is evidence of fraud or misconduct. In Re: Bhadreshwar Vidyut Pvt. Ltd. vs. Turbo Aviation Pvt. Ltd[2] it was held that “without circumstances suggesting that the business of the company was being conducted fraudulently with the intent to defraud creditors, the investigation into the affairs of the company only based on irregularities in financial statements could not have been ordered.”
4. Investigation About the Ownership of the Company: According to Section 216 of the Act, the Central Government can appoint one or more inspectors to investigate and report on matters related to a company’s membership. The purpose of this investigation is to identify the real person who has had a financial interest in the success and failure of the company. Those who had control or significant influence over the policy of the company and had a beneficial interest in the shares of the company held significant beneficial ownership in the company.
5. Investigation into the Affairs of the Related Companies: According to Section 219 of the Act, the investigator shall, prior approval of the Central Government, investigate the affairs of any company that has been a subsidiary or holding company of the company being investigated or any company managed by the same person who is the manager or managing director of the company being investigated.
6. Investigation of Foreign Companies: According to Section 228 of the Act, the provisions of inspection, inquiry and investigation are also applied to foreign companies.

Conclusion 

The provisions of the Companies Act, 2013 provide a comprehensive framework for the inspection, inquiry, and investigation of the affairs of the company to ensure transparency, protect the shareholders, and prevent fraudulent activities. The Act empowers authorities like the Registrar of Companies, the Central Government, and the SFIO to inspect companies and their management and also related companies if there are concerns about fraud, mismanagement, or non-compliance. The process begins with inspection and inquiry and can escalate to the investigation if necessary in cases relating to public interest, fraudulent practices, or misconduct. This Act also allows investigation into the ownership and control of companies, including foreign companies.  

[1]  AIR 1969 SC 781.

[2]  [2020] NCLT, Hyd 116.

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