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Provisions of Arrests in Section 212 of the Companies Act, 2017, tweaked by recently notified, the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 (the Rules).

The Ministry of Corporate Affairs which is headed by Shri Arun Jaitley, has on 24th August, 2017, notified the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017(the rules).  On mere reading of headings of the rules the corporate world be frightened as till now, there was no rule under the Companies Act(the Act) which empowered any authority under the Act to arrest companies’ directors or any other officers. But the rules above gives the power of arrests to Director, Additional Director or Assistant Director of Serious Fraud Investigation Office (SFIO). Though the rules sound indeed frightening and deterrent on analysis,  the rules are appearing to be meaningless, ineffective and therefore make no sense. Hence there is no need to get frightened. 

To understand, let us take note of Rule 2(1) of the rules which are heart, soul and mind of the rules. The Rule 2(1) is reproduced hereunder:-

"Where the Director, Additional Director or Assistant Director of the Serious Fraud Investigation  Office (hereinafter referred to as SFIO) investigating into affairs of a company other than a Government company or foreign company has, on the basis of the material in his possession, reason to believe( the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under section 212 of the Act, he may arrest such person;"

In view of rule 2(1) of the rules, a person may be arrested if he is guilty of any offence which is punishable under section 212 of the Act. Therefore, the crux of the matter is an offence which is punishable under section 212 of the Companies Act,2013. Thus it is absolutely essential to find out whether there is any offence which is punishable under section 212 of the Act. The Section 212 does not have any offence which is punishable under section 212 itself but section 212 has two sub-sections, namely, sub-section(8) and sub-section(6), which deal with some offences. For the sake of brevity entire section 212 is not reproduced but sub-section (8) and (6) need reproduction. First sub-section (8) is reproduced, wordings of which is similar to rule 2(1) of the rules, but with twist in its tail.  Sub-section(8) reads as under:

"If the Director, Additional Director or Assistant Director of the Serious Fraud Investigation  Office authorized in this behalf by the Central Government by general or special order, has on the basis of the material in his possession reason to believe( the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred to in sub-section(6) , he may arrest such person."

1. In view of the wordings "any offence punishable under sections referred to in sub-section(6)" it is amply clear that sub-section(8) of section 212 is talking of offences punishable under other sections but section 212.

2. Now, let us consider sub-section(6), which makes the matter more clear. Sub-section(6) reads as under:

"Notwithstanding anything contained in the Code of Criminal Procedure,1973 (2 of 1974), offences covered under section 447 of this Act shall be cognizable and no person accused of any offence under those sections shall be released on bail."

1. From the combined reading of sub-sections(8)&(6) it is apparent that arrest can be made only and only in case of offences covered under section 447 not under section 212 as under section 212 no offence is punishable. But the newly notified rules says that arrests be made for offences which is punishable under section 212.  It goes without saying that offences covered under section 447 is punishable under section 447 only and not under section 212. The impact of the rules is that the arresting officers are strictly bound by the rules  which is a procedure for arrest and in criminal matter any procedural lapse on the arresting officers makes the arrest illegal. Here, as per the procedure provided which is the newly notified rules the power of arrests has been given to the officers only for offences punishable under section 212 of the Act whereas there is no offence prescribed as punishable under section 212 of the Act.

2. To conclude, it can be said that the recently notified rule has made the provisions of section 212(8) &212(6), which empowered the officers to arrest, meaningless and ineffective and the rules have diluted the provisions of section 212 and made it less stringent than originally intended.

Source: The Companies Act,2013 and the (Companies Arrests in connection with Investigation by SFIO) Rules, 2017

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Category Corporate Law, Other Articles by - ANMOL JHA 



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