Some Apolitical Questions on Fight against Corruption, Arising from Gadkari’s Purti Group Saga

I do not think there is any need here to repeat the allegations being raised against Purti Group of companies, allegedly controlled by BJP’s National President, Mr Nitin Gadkari.  A high decibel investigation and trial by the Media is on, from which there is no easy way to keep aloof.  Since the facts that are being disclosed by the Media are already part of public domain, through records of Ministry of Corporate Affairs (MCA) and Mr Gadkari has chosen not to contest these facts (unlike the previous allegations by Indian Against Corruption (IAC) on certain land deals), no one is left with any choice but to believe these allegations, prima facie.

However, here I am not rushing to pass any judgement on Gadkari’s culpability or otherwise. I continue to maintain my stand that criminal liability of any person is to be decided by courts alone, after hearing both sides of the story.  However, without any prejudice towards Gadkari or his companies, for the purpose of this post I would consider these allegations are true, because I am aware that such alleged activities are not completely alien to the Indian corporate world.  May be not to the scale of being alleged against Gadkari and Purti Group, but many of those alleged actions are only too common to corporate bodies in India.

Having said that, let us come to the subject of this post.  I happened to read a tweet from an IAC activist (who, incidentally, is supposed to be facing an internal Lokpal on certain allegations of wrongdoings against himself) claiming credit for the head of Gadkari, as a victory for their ‘fight against corruption’. What is this victory; Gadkari losing his second term as President of BJP? Or even being forced to resign before his first term ends?  Will that resolve all the alleged crimes of forgery, benami transactions, misrepresentations etc? Or is the ‘fight against corruption’ limited to getting established leaders resigned from their respective posts and scoring political victory?

I have been maintaining that corruption is not a political, but a social and systemic issue.  If at all, Gadkari incident only proves that corruption is not something that one gets afflicted with, while acquiring a membership to Congress Party as some people would like us to believe! Corruption is spread across the political spectrum, often people from different parties forming a nexus to pursue their activities, irrespective of political changes!  So, the real fight against corruption has to address, not just the individual leaders (that only makes political class to go on the defensive and weaken our democracy) but also the systemic reforms and propagation of positive social values!

Now look at the expose itself. How is it that a bunch of journalists are able to unearth so easily, such details that were supposedly created by the so called financial and legal brains so as to never come out in the open? Well, answer is simple.  It is made possible by a technological reform that MCA undertook some years back, when they established their e-portal for all the regulatory filings and information sharing.  Today, any concerned citizen can log in into the MCA website (www.mca.gov.in) and down load enough information about any company. 

Same was the case with e-filing of Income Tax returns.  It has reduced a huge amount of corruption in the IT department, at least for the ordinary tax payers.  While corruption continues unabated to a large extent where individual cases are taken up for assessment, some hope has certainly been generated from the changes that occurred since the introduction of benefits of IT (Information technology) to the IT (Income Tax) department.  

Role of Right to Information Act (RTI) is another case in point. We all know what role RTI is playing in exposing the alleged corruptions and how bureaucrats and politicians are becoming more careful about their acts and deeds.  Right to Service Act and Citizens’ Charter etc being introduced in various states now are also expected to take these reforms further and enable empowering of citizens against corruption.

After observing these developments, I can only say that corruption can be eliminated by such systemic reforms that bring in transparency and accountability.  

No Lokpal or Police can prevent corruption that takes place between two willing parties.  At best, they can act when extortion happens.  But if the person is willingly giving a bribe for an undue benefit (true in most cases) Lokpal or Police will never get to play a role.  If third parties are allowed to complain, then we run the risk of every unsuccessful person alleging corruption and challenging each and every decision.

That brings us back to the Purti Group issue.  How so many companies could be incorporated at fraudulent or fictitious addresses and how so much funds could flow between these companies with no apparent economic activities?  Therein lies the real problem that needs to be tackled to prevent corruption, black money and Benami transactions.

More often than not, novo rich entrepreneurs would not even know the basics of corporate strategy.  It is the hired professionals like Advocates, Chartered Accountants, and Company Secretaries who advise them with such exotic structures for money laundering and tax evasion.  So long as our focus remains on political leaders alone, these professionals will continue to flourish unnoticed.

So many companies have been incorporated, apparently with wrong facts.  How could this be possible? What does the law says?  Section 32 (2) of the Companies Act, 1956 provides the law as follows:

A declaration by an advocate of the Supreme Court or of a High Court, an attorney or a pleader entitled to appear before a High Court, or a Secretary or a chartered accountant in whole-time practice in India who is engaged in the formation of a company, or by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules thereunder have been complied with in respect of registration and matters precedent and incidental thereto, shall be filed with the Registrar; and the Registrar may accept such a declaration as sufficient evidence of such compliance.

Why is that the Media and investigations not focusing on the person who has certified (in prescribed Form 1) that all the requirements of the Act have been complied with? RoC will merely wash his hands by pointing out that the Act permits him to accept such declaration as sufficient evidence of compliance!

            Now how can we improve the situation better? Just amend the Section by deleting the words “or by a person named in the articles as a director, manager or secretary of the company” and make it compulsory for an independent professional to certify the compliance of all laws. We know in Gadkari like cases, an illiterate driver or a cook can be forced to become a director and sign such declaration which serves no purpose at all in ensuring compliance.  But for an Advocate or a CA or CS, certain due diligence will be necessary before signing and therefore, they can be made accountable for the veracity of facts therein.   

            Even in the present case, I wish the Media don’t give up with Gadkari’s head alone but go further in unearthing the role of any professionals in these activities, whether in making the declaration or in filing of the documents. They must also be held responsible for taking part in fraudulent activities.  Individuals do not have any higher duty to be accountable to society; but Professionals do have such a duty! Their respective regulatory bodies must ensure that the professionals comply with such duties towards the public and State.

Now look at the role of statutory auditors.  I am surprised that The Institute of Chartered Accountants have not responded to these allegations! I wish they have taken suo moto notice of the allegations and called for an inquiry into the role of their own brethren in the whole matter. After all, the Institute in mandated to ‘regulate’ the profession of Chartered Accountants.

As per the Second Schedule to the Chartered Accountants Act, 1949, inter alia the following acts and omissions amount to a professional misconduct:

(4)       Expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest;

(5)       Fails to disclose a material fact known to him which is not disclosed in a financial  statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity;

(6)       Fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity;

(7)       Does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;

(8)      Fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion;

There is no doubt, if we go by the alleged facts about these companies their auditors are likely to be guilty of one or more of the above misconducts. 

           Further, the Standard on Auditing (SA) 700 (AAS 28) issued by the Institute itself demands from the statutory auditors while issued audit certificate that, the “report should include a statement that the audit was planned and performed to obtain reasonable assurance whether the financial statements are free of material misstatement” and that the “report should describe the audit as including “examining, on a test basis, evidence to support the amounts and disclosures in financial statements”.  Therefore, it is the duty of the Institute to ensure that its Members are adhering to the basic needs of the profession while issuing audit reports to shell companies with no apparent business other than routing of money, to and fro!

            It is pertinent to note what the Report of the Expert Committee on Company Law has to say about the Duties and Liabilities of the statutory auditors of a company:

29. Auditors have the general duty of discharging their statutory functions with care and diligence. Many stakeholders would rely on the auditor’s reports for accessing the financial picture of the company. However, there cannot be any specific prescription of negligence keeping in view the expectations of all the stakeholders. However, auditors are required to carry out their work within the discipline of the legal provisions and the standards of accounting/Accounting Standards (where notified). There is a necessity that the work of the auditors should uphold the highest standards of excellence and independence. Non-compliance with such standards should invite stringent penalties. The Committee was of the view that the basic duties of the Auditors and their liability need to be laid down in the law itself instead of in the Rules. Quantification of penalty for Auditors may be prescribed in the Rules (http://www.mca.gov.in/Ministry/chapter9.html). 

Same is the case for all Income Tax Officers who have subjected any of these companies to assessment.  They must be made accountable for incompetency, if not collusion for failing to identify the nature of fund flows in these companies.

            If we have to prevent corruption (please note, I am talking of preventing corruption and not about punishing corrupt) we have to ensure that there is accountability and transparency across the regulatory environment.  Our policy of externalising entire responsibility for corruption on to political leadership alone is surely back firing and proving ineffective.  Let us also demand higher standards (or at least reasonable standards) from those professionals who enjoy statutorily protected monopoly in their respective practices!