Corporate investigation powers exist to address genuine fraud, not to serve as leverage in commercial disputes.

Introduction

Allegations of corporate fraud often carry a rhetorical force that far exceeds the evidence on which they rest. In recent years, Indian company law has witnessed a steady rise in attempts by disgruntled counterparties or commercially aggrieved third parties to invoke the investigative machinery of the Companies Act, 2013 (“Act”) as a strategic lever in private disputes. The decision of the National Company Law Tribunal, Ahmedabad Bench in Parth Merchant v. Detox India Private Limited & Ors. (CP-39 (AHM) of 2022, decided on 8 December 2025) is a timely course correction. It reaffirms that the investigation provisions under the Act are extraordinary in nature, regulator-centric in design, and emphatically not a substitute for ordinary civil or commercial remedies.

Rather than treating Sections 212 and 213 as interchangeable gateways to an investigation, the judgment underscores the doctrinal boundaries between them, particularly on locus standi, evidentiary thresholds, and institutional competence.

The Architecture of Investigation under the Act 

“Section 212 does not empower the National Company Law Tribunal or the Adjudicating Authority to refer the matter to the Central Government for investigation by the ‘Serious Fraud Investigation Office even if it notices the affairs of the Company of defrauding the creditors and others.” – National Company Law Appellate Tribunal, Principal Bench, New Delhi (Company Appeal (AT) (Insolvency) No. 574 of 2019)

The investigative framework under the Act is deliberately stratified.

 Section 212, which deals with investigation by the Serious Fraud Investigation Office (“SFIO”), is unmistakably executive-driven. The statutory triggers are narrowly defined: a report of the Registrar of Companies or an inspector under Section 208, a special resolution of the company, a request from another governmental authority, or the Central Government’s own satisfaction that an SFIO probe is warranted in public interest. The provision does not contemplate, even indirectly, a private right of audience to demand an SFIO investigation.

Section 213, by contrast, vests the National Company Law Tribunal (“Tribunal”) with the power to order an investigation into a company’s affairs where circumstances suggest fraud, misfeasance, oppression, or unlawful conduct. While clause (b) permits an application by “any other person”, judicial interpretation has read this phrase as descriptive, not permissive. The applicant must still demonstrate a tangible nexus with the company’s affairs and place credible material before the Tribunal, sufficient to justify invoking an extraordinary jurisdiction.

This bifurcation reflects a conscious legislative choice, being that investigative escalation is meant to proceed from regulatory scrutiny to judicial intervention, and only thereafter if statutory thresholds are crossed, to specialized investigation by the SFIO.

The Dispute Behind the Doctrine

Against this statutory backdrop, Parth Merchant v. Detox India arose from a fundamentally commercial disagreement. The petitioner was a shareholder of a supplier entity whose performance bank guarantee had been encashed by Detox India following alleged defects in supplied boilers.

It was in this context that the petitioner invoked Sections 212 and 213, levelling expansive allegations of fraudulent share issuances, fabricated statutory filings, falsified financial statements, and professional misconduct by directors and auditors. Notably, the petitioner was neither a shareholder nor a creditor of Detox India, and his asserted “business interest” remained undefined.

The petition sought, in substance, a judicially mandated investigation effectively deputizing the Tribunal to compel regulatory action without first engaging the statutory regulator.

Locus Standi Is Not a Technicality

“A ‘Tribunal’ cannot exercise its power under the Companies Act just for the asking of an Alien/Stranger, simply on the basis of allegations made by a ‘Non-shareholder’ – NCLAT, Chennai Bench (Company Appeal (AT) (CH) No. 17 of 2022)

Following remand by the NCLAT, the Tribunal addressed the issue that lies at the heart of most Section 213 disputes: who may legitimately invoke the Tribunal’s investigative jurisdiction.

The Tribunal rejected the notion that the phrase “any other person” creates an open invitation for third-party scrutiny. It held that absent shareholding, creditor status, or a demonstrable legal injury arising from the company’s affairs, an applicant lacks standing. Generalised allegations, however detailed, do not compensate for the absence of nexus. This reasoning is significant as it situates locus standi not as a procedural hurdle, but as a substantive safeguard against the misuse of investigative powers. The judgment reinforces that Section 213 is neither a forum for corporate whistle-blowing untethered from legal interest, nor a platform for collateral attacks arising out of failed commercial relationships.

Reasserting the Regulatory Monopoly over SFIO Investigations

Equally important is the Tribunal’s reiteration that Section 212 cannot be privately activated. The attempt to cloak a Section 212 prayer within a Section 213 petition was firmly rejected. Without a report under Section 208 or another statutorily recognized trigger, the Tribunal held that no direction could be issued to set the SFIO process in motion.

This aspect of the ruling aligns with consistent appellate authority recognition that the SFIO’s mandate is not merely investigative but also prosecutorial in consequence. Allowing private parties to trigger such investigations would collapse the distinction between regulatory oversight and adversarial litigation, with serious implications for corporate governance and enforcement coherence.

Evidence, Not Enumeration

A striking feature of the case was the sheer volume of allegations spanning several years of corporate conduct. Yet the NCLT was clear that quantity does not substitute quality. The NCLT characterized the petition as an attempt at a fishing and roving inquiry, unsupported by material capable of satisfying the statutory threshold for an investigation. Such insistence on evidentiary discipline is important as investigations under Sections 212 and 213 are not discovery tools. They are consequences of demonstrated prima facie illegality.

Boardroom Takeaways

Corporate investigations under the Act or any other law may appear procedural, but their impact is immediate and often disruptive. An investigation can stall decision-making, expose directors and professionals to liability, unsettle financing and transactions and cause lasting reputational harm, frequently before any wrongdoing is established. Recent decisions provide welcome clarity on how and when these powers will be exercised. For boards and promoters, the message is balanced:

One, there is reassurance. Governance will not be destabilised merely because a disgruntled counterparty invokes the language of fraud. Threshold scrutiny is becoming more robust.

Two, where concerns originate from regulators, statutory inspectors, auditors, or formal regulatory processes, scrutiny is likely to be serious, structured, and capable of escalation, including to SFIO involvement.

This places a premium on governance hygiene. Clean statutory filings, defensible valuations, well-recorded board deliberations, and timely regulatory engagement materially reduce the risk of allegations gaining traction.

Boards should also recognise that commercial disputes and governance lapses operate on different legal tracks. Attempting to resolve the former by provoking investigative action can backfire. Also, assuming that courts will always defer in the face of weak processes can be equally risky.

In effect, the emerging jurisprudence rewards transparency and proportionality. It shields companies and officers from investigative overreach, while preserving the law’s sharpest tools for cases that genuinely warrant them.

Therefore, early focus on documentation, regulatory engagement, and principled threshold challenges becomes decisive. Companies that respond constructively, and not reflexively, are better placed to contain escalation and preserve strategic flexibility.