Supreme Court Upholds Investigation Powers of SFIO Under Companies Act: Serious Fraud Investigation Office vs. Sahara Housing Investment Corporation Limited (26 May 2022)

Can the Serious Fraud Investigation Office (SFIO) continue an investigation even after the initially stipulated time has passed? The Supreme Court of India recently addressed this crucial question regarding the powers of the SFIO under the Companies Act, 2013. The Court’s decision clarifies the scope of investigation powers and the interpretation of timelines. This case arose from a challenge to orders authorizing investigation into several companies of the Sahara group.

Introduction

Date of the Judgment: 26 May 2022
Citation: Civil Appeal No 4299 of 2022 (Arising out of SLP (C) No 531 of 2022)
Judges: Dr. Dhananjaya Y Chandrachud, J and Bela M. Trivedi, J. The judgment was authored by Dr. Dhananjaya Y Chandrachud, J.

The Supreme Court of India, in this case, examined the legality of orders passed by the Union Ministry of Corporate Affairs, authorizing investigations by the Serious Fraud Investigation Office (SFIO) against several Sahara group companies. The core issue revolves around the interpretation of Sections 212 and 219 of the Companies Act, 2013, specifically concerning the timeline for investigations and the scope of entities that can be investigated.

Case Background

The case began with the Ministry of Corporate Affairs ordering an investigation into three Sahara group companies on 31 October 2018, based on a report from the Registrar of Companies, Mumbai. Subsequently, on 27 October 2020, the SFIO sought and received permission to investigate six additional companies, citing their interconnectedness with the initial three. The Sahara group challenged these orders in the Delhi High Court, which granted an interim stay on the investigations.

The High Court’s stay was based on three primary reasons: (i) the initial investigation period had expired; (ii) the six additional companies were not directly related to the first three; and (iii) the orders lacked sufficient reasons. The Union Government then appealed to the Supreme Court against this stay order.

Timeline

Course of Proceedings

The Delhi High Court, in response to writ petitions filed by the Sahara group, stayed the operation of the investigation orders dated 31 October 2018 and 27 October 2020. The High Court reasoned that the initial investigation period had lapsed, the additional companies were not directly linked to the original three, and the orders lacked sufficient reasoning. The Union Government, dissatisfied with the High Court’s interim stay, appealed to the Supreme Court.

Legal Framework

The Supreme Court analyzed the provisions of the Companies Act, 2013, specifically:

• Section 212: This section deals with the investigation into the affairs of a company by the SFIO. Sub-section (1) specifies the circumstances under which the Central Government can order an investigation. Sub-section (3) mentions a stipulated period for the investigation.
• Section 219: This section empowers an inspector to investigate the affairs of related companies if it is necessary for the investigation. It includes subsidiaries, holding companies, and companies managed by the same individuals or whose board of directors is controlled by the company under investigation.

The relevant portions of the sections are:

• Section 212(1) of the Companies Act 2013:
  
  “Where the Central Government is of the opinion that it is necessary to investigate into the affairs of a company,— (a) on the receipt of a report of the Registrar or inspector under section 208; (b) on intimation of a special resolution passed by a company that its affairs ought to be investigated; or (c) in the public interest, it may, by order, direct the Serious Fraud Investigation Office to investigate its affairs.”
• Section 212(3) of the Companies Act 2013:
  
  “Where the investigation into the affairs of a company has been assigned by the Central Government to the Serious Fraud Investigation Office, it shall conduct the investigation in the manner and within the period as may be prescribed.”
• Section 219 of the Companies Act 2013:
  
  “Power of inspector to conduct investigation into affairs of related companies, etc. —If an inspector appointed under Section 210 or Section 212 or Section 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, to investigate also the affairs of— (a) any other body corporate which is, or has at any relevant time been the company’s subsidiary company or holding company, or a subsidiary company of its holding company; (b) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company; (c) any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or (d) any person who is or has at any relevant time been the company’s managing director or manager or employee, he shall, subject to the prior approval of the Central Government, investigate into and report on the affairs of the other body corporate or of the managing director or manager, insofar as he considers that the results of his investigation are relevant to the investigation of the affairs of the company for which he is appointed.”

Arguments

The Solicitor General, Mr. Tushar Mehta, argued that:

• The High Court erred in interpreting Section 212(3) of the Companies Act, 2013, as the Supreme Court had already held in Serious Fraud Investigation Office vs. Rahul Modi [(2019) 5 SCC 256] that the stipulated time period for investigation was directory, not mandatory.
• The High Court incorrectly applied Section 219 by focusing on clauses (a) and (b) and ignoring clause (c), which was specifically invoked in the order dated 27 October 2020.
• The Union Government was not required to provide detailed reasons for ordering an investigation; the purpose of the investigation is to uncover facts and details.

Mr. Kapil Sibal, representing the respondents, conceded that the time period under Section 212(3) was directory. However, he raised the following substantive issues:

• Sahara Housing Investment Corporation Limited had deposited Rs 24,000 crores with SEBI following a 2012 Supreme Court judgment.
• The transactions under scrutiny occurred during 2010-2011, and the applicability of the Companies Act, 2013, to those transactions needed consideration.
• Extensions were granted only for the investigation of Sahara Q Shop Unique Products Range Limited.
• There was no material to suggest that the six additional companies fell under Section 219(c).

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was whether the High Court was justified in staying the investigation orders and interdicting all subsequent actions, including look-out circulars, at the interlocutory stage.

The Court also dealt with the following sub-issues:

• Whether the time period stipulated in Section 212(3) of the Companies Act, 2013, is mandatory or directory.
• Whether the High Court correctly interpreted Section 219 of the Companies Act, 2013, in the context of the additional six companies.
• Whether the Union Government is required to provide detailed reasons for ordering an investigation under Section 212 and Section 219 of the Companies Act, 2013.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Serious Fraud Investigation Office vs. Rahul Modi [(2019) 5 SCC 256] – Supreme Court of India: This case established that the time period for investigation under Section 212(3) of the Companies Act, 2013 is directory, not mandatory.
• Neeharika Infrastructure Pvt. Ltd. vs State of Maharashtra and Others [2021 SCC OnLine SC 315] – Supreme Court of India: This case cautioned High Courts against passing blanket interim orders that could hamper investigations.

The Court also considered the following legal provisions:

• Section 212 of the Companies Act, 2013: This section outlines the powers of the Central Government to order investigations by the SFIO.
• Section 219 of the Companies Act, 2013: This section details the powers of an inspector to investigate related companies.

Judgment

The court viewed the authorities as follows:

• Serious Fraud Investigation Office vs. Rahul Modi [(2019) 5 SCC 256]*: The Supreme Court followed this authority to hold that the time period stipulated in Section 212(3) of the Companies Act, 2013 is directory and not mandatory.
• Neeharika Infrastructure Pvt. Ltd. vs State of Maharashtra and Others [2021 SCC OnLine SC 315]*: The Supreme Court followed this authority to caution the High Courts against passing blanket interim orders that could hamper investigations.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure that investigations into corporate fraud are not hampered by technical interpretations of the law. The Court emphasized that the purpose of an investigation is to uncover the truth and that procedural technicalities should not impede this process. The Court also considered its previous rulings on the directory nature of the time period in Section 212(3) and the need to avoid blanket stays on investigations.

The Court’s reasoning was based on the following points:

• The Court reiterated that the time period for submitting an investigation report under Section 212(3) is directory, not mandatory, as established in Serious Fraud Investigation Office vs. Rahul Modi [(2019) 5 SCC 256].
• The High Court had erred by not considering clause (c) of Section 219, which was specifically invoked in the order dated 27 October 2020. The Court noted that the order clearly stated that the additional companies were being investigated because their boards of directors were nominees of the companies already under investigation.
• The Court found that the Union Government was not required to provide detailed reasons for ordering an investigation. The purpose of the investigation is to determine the facts, and the government is not expected to know all the details before ordering an investigation.

The Supreme Court emphasized the importance of allowing investigating agencies to carry out their functions without unnecessary interference, particularly at the initial stages of an investigation. The Court also highlighted the need for High Courts to avoid passing blanket interim orders that could impede the investigative process, as cautioned in Neeharika Infrastructure Pvt. Ltd. vs State of Maharashtra and Others [2021 SCC OnLine SC 315].

The court stated:

“Section 212(3) of the 2013 Act by itself does not lay down any fixed period within which the report has to be submitted…There is no stipulation of any fixed period for completion of investigation which is consistent with normal principles under the general law.”

“The order dated 27 October 2020 contains a specific invocation of the above provision, when it states thus: ‘AND whereas SFIO vide letter dated 24th Sept. 2020 sought permission under section 219 of the Companies Act, 2013 for investigation into the affairs of the following six companies that intertwined the activities of the companies under investigation: […] Now, therefore, in exercise of powers conferred under Section 219 read with section 212 (1) (c) of the Act, the Central Government has formed an opinion that the affairs of the above referred companies/ entities needs to be investigated..’”

“At this stage, the Union Government was only ordering an investigation and it would be inappropriate to place a burden of recording elaborate reasons when the purpose of the investigation is to ensure that a full enquiry into the affairs of the companies is carried out.”

There were no minority opinions in this case.

Key Takeaways

• The time period stipulated for investigation under Section 212(3) of the Companies Act, 2013, is directory and not mandatory.
• The SFIO can investigate related companies under Section 219(c) if their board of directors are nominees of the company under investigation or act under its directions.
• The Union Government is not required to provide detailed reasons when ordering an investigation under Section 212 and Section 219 of the Companies Act, 2013.
• High Courts should avoid passing blanket interim orders that could hamper investigations.

Directions

The Supreme Court directed the High Court to expedite the hearing of the writ petitions and endeavor to dispose of them within two months after the reopening of the High Court following the summer vacation.

Development of Law

The ratio decidendi of this case is that the time period for investigation under Section 212(3) of the Companies Act, 2013 is directory and not mandatory. This decision reinforces the principle established in Serious Fraud Investigation Office vs. Rahul Modi [(2019) 5 SCC 256], ensuring that investigations are not terminated due to the expiry of the initially stipulated time. The Court also clarified the scope of Section 219, particularly clause (c), which allows for the investigation of related companies based on their board composition and control. This case does not change the previous positions of law, but rather reaffirms and clarifies existing legal principles.

Conclusion

The Supreme Court’s judgment in Serious Fraud Investigation Office vs. Sahara Housing Investment Corporation Limited sets aside the Delhi High Court’s interim stay on the investigation orders, reaffirming the powers of the SFIO under the Companies Act, 2013. The Court clarified that the time period for investigation is directory and that the SFIO can investigate related companies under Section 219(c). The judgment emphasizes the importance of allowing investigations to proceed without undue interference and underscores the need for High Courts to exercise caution when granting interim stays in such matters.

Category

Parent Category: Corporate Law
Child Categories:

• Serious Fraud Investigation Office (SFIO)
• Companies Act, 2013
• Section 212, Companies Act, 2013
• Section 219, Companies Act, 2013
• Corporate Investigations

Parent Category: Companies Act, 2013
Child Categories:

• Section 212, Companies Act, 2013
• Section 219, Companies Act, 2013

FAQ

Q: What is the Serious Fraud Investigation Office (SFIO)?

A: The SFIO is a specialized agency in India that investigates complex corporate frauds. It operates under the Ministry of Corporate Affairs.

Q: What is Section 212 of the Companies Act, 2013?

A: Section 212 of the Companies Act, 2013, empowers the Central Government to order investigations into the affairs of a company by the SFIO.

Q: What is Section 219 of the Companies Act, 2013?

A: Section 219 of the Companies Act, 2013, allows an inspector to investigate the affairs of related companies if it is necessary for the investigation of the primary company.

Q: Does the SFIO have a fixed time period to complete an investigation?

A: No, the Supreme Court has clarified that the time period mentioned in Section 212(3) of the Companies Act, 2013, is directory and not mandatory. This means the SFIO can continue the investigation even after the initially stipulated time has passed.

Q: Can the SFIO investigate companies related to the primary company under investigation?

A: Yes, under Section 219 of the Companies Act, 2013, the SFIO can investigate related companies, including subsidiaries, holding companies, and companies whose board of directors are nominees of the primary company.

Q: What does it mean for a provision to be “directory”?

A: A directory provision is one that is not strictly mandatory; it indicates a general guideline or procedure, but non-compliance does not invalidate actions taken.

Q: What was the main issue in this case?

A: The main issue was whether the Delhi High Court was correct in staying the investigation orders issued by the Ministry of Corporate Affairs against several Sahara group companies.

Q: What was the Supreme Court’s decision in this case?

A: The Supreme Court set aside the Delhi High Court’s stay order, allowing the SFIO to proceed with its investigation. The Court clarified that the time period for investigation is directory and that the SFIO can investigate related companies under Section 219(c).