The Prevention of Corruption Act Can Hunt Private Corps. too. Are you safe?

Transparency, honesty, and integrity in the governance of its business are crucial for any organization that wants to make a name for itself. However, a common denominator hindering the achievement of these is corruption. Therefore, a holistic approach that encompasses punishing wrongdoers, enforcing rules strictly, and instilling a culture of ethical behavior is paramount. A legislative cure for this is the Prevention of Corruption Act, 1988 (PCA). Previously thought to be only applicable to public sector employees, the Act has been amended to encompass situations where private organizations and individuals can also be held accountable for indulging in corrupt practices. Let us discuss its evolution and understand how it applies to the private sector as well.

The Changing Face of PCA:

PCA was primarily enacted to curb corruption engaged in by public servants themselves. However, with the increasing intertwining of public and private sectors, particularly with public-private partnerships and outsourcing, it became apparent that corruption was not confined to the government quarters only. Corporates, often major stakeholders in these initiatives, were both, at times, victims and perpetrators of corrupt activities.

Keeping this aspect in mind, in a sweeping and reforming move, the Indian Parliament ushered in the Prevention of Corruption (Amendment) Act, 2018. It significantly bolstered the provisions of PCA and gave it the required edge to tackle bribery involving commercial entities.

One of the pivotal amendments to the Act was to Section 9. Which states, that commercial organization can be held liable “if any person associated with such commercial organization gives or promises to give any undue advantage to a public servant” with an intent to obtain or retain business or any advantage for that commercial organization. This provision covers all types of entities (including domestic companies, foreign companies, and partnerships) doing business in India.

The Gelli Affair:

The amendment to the Act was most probably triggered by the Supreme Court’s interpretation of the law in Central Bureau of Investigation v Ramesh Gelli [(2016) 3 SCC 788)]. In 2004, Global Trust Bank, a private Indian bank, merged with Oriental Bank of Commerce, a public sector bank. Allegations arose against Ramesh Gelli, Chairman & Managing Director, and Sridhar Subasri, Executive Director, of Global Trust Bank that they had approved loans in violation of banking norms, resulting in substantial non-performing assets and jeopardizing depositors’ interests. These pre-merger allegations came to light during a post-merger audit. The Central Bureau of Investigation (CBI), investigated and filed charges against the accused under the Indian Penal Code and the Prevention of Corruption Act (PCA) – Section 13 (Criminal misconduct by a public servant).

Despite both the Special Judge (CBI) and the Bombay High Court declining to take up the cases against Gelli and Subasri, citing their status as private bank officials at the time of the alleged offenses, the Supreme Court of India overturned these decisions.

The Supreme Court had to determine whether the Chairman, Directors, and Officers of Global Trust Bank (a private bank before its merger with Oriental Bank of Commerce) could be considered public servants for the purposes of prosecution under the PCA.

The court reasoned that the PCA’s objectives were to strengthen and broaden the scope of anti-corruption laws. It concluded that officers of a private banking company fall under the PCA’s definition of a public servant. Therefore, the case was remanded back to the trial court to proceed with the PCA charges.

A Recent Judicial Interpretation:

In its landmark ruling, the High Court of J&K and Ladakh has recently declared that PCA is not exclusively applicable to public servants. The judgment proclaimed that any individual discharging “public duty”, regardless of their official title, can be tried under the Act. Justice Wasim Sadiq Nargal, in his verdict, emphasized the Act’s intention by stating that not only public servants but also persons from institutions financially assisted by the government fall under its purview. This significant ruling resulted from an appeal filed against an FIR against Sheikh Abdul Majeed and Tajamul Hassan Shah, who were accused of requesting a bribe linked to the Food Corporation of India (FCI). The main issue was whether the accused, who were connected to a private organization, should be categorized as “public servants.” The court upheld this classification, demonstrating the broad application of the PCA. It emphasized that even though a person does not occupy an official public position, they are nonetheless subject to the Act’s provisions by performing public duties, such as those carried out by the petitioners on behalf of FCI. The ruling underscores the Act’s versatility and its commitment to eradicating corruption from all spheres of public duty.

Extraterritorial Laws:

Companies in India must navigate a complex landscape of extraterritorial anti-corruption laws. Both the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act (UKBA) can apply to Indian entities, even if their operations primarily take place outside of the US or UK. This means that Indian companies with connections to either country, such as subsidiaries of US companies or those doing business with UK-based entities, need to be aware of and comply with these laws to avoid legal consequences.

Furthermore, authorities in India can initiate their own investigations and legal actions based on enforcement actions taken by the US Securities and Exchange Commission or the Department of Justice in FCPA cases. This creates the possibility for companies to face multiple sets of penalties for the same offense, adding further complexity to their compliance efforts.

Implications for Corporates:

Businesses operating in India must recognize that law enforcement and public scrutiny have intensified significantly over the past two decades. Companies that continue to engage in unethical practices under the guise of “Chalta hai culture” are increasingly vulnerable to legal repercussions.

Although limitations persist regarding enforcement efficiency, lengthy investigations, and legal intricacies, organizations operating within India need to be on their toes to avoid being on the wrong side of the law. To adapt to these changing times, organizations must take proactive ownership of their compliance functions and prioritize ethical conduct. Moving away from a mere “annual training” approach, compliance functions should foster a dynamic and unwavering culture of integrity.