The Narendra Modi-government has trained its guns on Hero MotoCorp, the country’s largest two-wheeler maker.

Reports indicate that the Centre has ordered an investigation into the affairs of the Rs 33,805.65 crore corporate giant “in public interest” under section 210 (1) (c) of the Companies Act 2013 and a separate probe into the ownership structure of Hero MotoCorp under section 216 of the same Act.

The two provisions in the Companies Act provide sweeping powers of investigation to the Centre but are rarely used – and it wasn’t immediately clear why the probes had been ordered.

“In most of the statutes dealing with governance and compliance, the authorities have the powers to prosecute suo motu but they are not routinely exercised,” said an expert on corporate law who did not wish to be named due to the sensitive nature of the case.

Hero MotoCorp itself seemed to be in the dark about the probe. In a regulatory filing with the stock exchanges, the company said it had “not received any communication from the ministry of corporate affairs (MCA) with regard to the media reports”. It went on to add: “We will provide all information, if and when it is sought from the company by any regulatory authority. “

“Hero MotoCorp, the world’s largest manufacturer of motorcycles and scooters, is a responsible, law abiding and much-admired Indian multinational, and known for following global best governance practices,” the company said in its filing.

Hero MotoCorp shares sank almost 3 per cent to close at Rs 2,842.70 on the BSE. Market mavens said the stock would come under fresh selling pressure over the next few days.

Section 216 in focus

Section 216 of the Companies Act says that the Centre may appoint inspectors to investigate a company to determine the “true persons”:

(a) who are or have been financially interested in the success or failure, whether real or apparent, of the company; or

(b) who are or have been able to control or to materially influence the policy of the company.

The sweeping investigation by the MCA against the two-wheeler maker comes more than a year after the Income Tax department had conducted searches at two of its offices and the residence of its chairman, Dr Pawan Munjal.

After the tax authorities had conducted searches in 2022, media reports had said that they had allegedly uncovered illegal business expenses of over Rs 800 crore, unaccounted cash used to purchase land in the national capital, and had stumbled on to some shell companies.

The tax authorities have raided several business houses and companies in the past but legal eagles say that the MCA has never ordered an investigation “in public interest” against any of them. In one sense, the probe against Hero MotoCorp sets a precedent and will certainly raise alarm in corporate boardrooms and investor groups.

While there was no statement from the MCA on the reasons behind the probe, a Reuters report said that it comes after an enquiry by the Registrar of Companies (RoC) which determined that the case was seen as fit for further formal investigation in public interest.

“The investigation ordered under Section 210 (1) (c) of the Companies Act, which allows a probe into the affairs of a company in “public interest”, would require information to be furnished by the management of Hero Motocorp in order to conduct an inquiry. At this stage, the allegations levelled against the company are not clear. However, such an inquiry may have a serious impact on the confidence of shareholders,” Ashutosh K. Srivastava, Counsel, SKV Law Offices told The Telegraph.

Related party deals

Reports say that the probe has been ordered because of suspicions over transactions involving a third-party vendor which sparked concerns about diversion of funds from Hero MotoCorp. These transactions — which were not quantified — are being seen as related party transactions that the company had failed to report.

Companies are required to report all related party transactions. Hero MotoCorp had reported as many as 70 related party transactions in the quarter ended March 2023.

The report filed with the stock exchanges reveals that the audit committee had approved related party transactions valued at Rs 5,404.55 crore during the year ended March 31.

Protocols bypassed?

One aspect that is not clear is whether the Modi government had followed all the procedures and protocols before ordering the investigation under section 210 (1) (c). The Companies Act 2013 lays down an elaborate procedure before an investigation under this section can be activated.

The procedure and protocols are laid down under sections 206 to 209 which requires the authorities to send written notices to the company seeking information and the submission of documents.

If the Registrar of Companies believes that the business of the company is being “carried out for a fraudulent or unlawful purpose”, it must inform the company about these allegations in a written order and give it a reasonable opportunity to be heard.

The Munjals have also chosen to be extremely guarded in their statement to the bourses – and have not revealed whether due process was followed.