In India, when a business collapses, it is not just seen as a commercial setback — it is often treated as a criminal act. The tendency to equate business failure with fraud has become a common narrative, reinforced by media scrutiny, political rhetoric, and institutional pressure. This conflation, however, poses a serious threat to entrepreneurship, investor confidence, and the ease of doing business in India.
Failure is Not Fraud:
Entrepreneurship is inherently risky. Globally, 80–90% of startups fail. Failure can be due to various legitimate reasons: economic downturns, flawed business models, regulatory shifts, or even misjudged market demands. However, in India, when a venture fails — especially when public or bank money is involved — suspicion of fraudulent intent arises almost immediately.
Unlike developed economies where failure is seen as a learning experience, in India, failed entrepreneurs often face criminal charges, social stigma, and financial ruin. This is not just unjust — it’s also counterproductive for a nation that aspires to be a global hub for innovation and investment.
“In India, business failure means fraud.” These powerful words, spoken by controversial businessman Vijay Mallya during a recent podcast with Raj Shamani, have ignited a national conversation around how Indian society perceives entrepreneurial failure.
Mallya’s core argument is straightforward but provocative: failure is an inherent risk in entrepreneurship, but in India, it’s often misunderstood as a moral or legal failing. He stated that in many cases, when a venture collapses due to market conditions, mismanagement, or external forces, founders are labeled as “frauds,” regardless of intent or legal wrongdoing.
Legal Confusion: Commercial Dispute vs Criminal Offence
The core of the issue lies in India’s tendency to use criminal law to resolve commercial disputes. Sections like:
- Section 420 IPC (cheating),
- Section 406 IPC (criminal breach of trust),
- Section 120B IPC (criminal conspiracy),
- and Section 447 of Companies Act, 2013 (fraud),
are increasingly being invoked even in cases that stem from genuine business failure rather than deception.
This approach:
- Ignores the distinction between wilful defaulters and honest defaulters,
- Delays genuine insolvency resolution under IBC,
- Overburdens courts with criminal complaints in what should be civil matters.
Even the Supreme Court of India has cautioned against this, noting that criminal prosecution should not be used as an arm-twisting mechanism in business disputes unless there is clear evidence of fraudulent intent from the start.
Wilful Default vs Fraud: A Critical Difference
The Reserve Bank of India defines a wilful defaulter as someone who has the ability to repay but chooses not to, or diverts/siphons funds for unrelated purposes.Fraud, on the other hand, involves deliberate deception for personal gain. It requires proof of intent, false representation, and dishonest conduct — not just inability to repay.
Unfortunately, in public perception, the two are often viewed the same.
This misplaced perception has several negative consequences:
- Fear of criminalisation discourages genuine risk-taking.
- Investors and promoters are more likely to adopt ultra-conservative approaches.
- Public sector banks become risk-averse, impacting lending and innovation.
- Insolvency professionals and resolution applicants face hostile scrutiny, even when acting in compliance with law.
Need for Reform and Clarity
To build a business-friendly India, we must:
- Decriminalise commercial failure, unless backed by clear evidence of fraud.
- Train investigative agencies and judiciary to distinguish between fraud and failed business ventures.
- Encourage restructuring and resolution over prosecution.
- Strengthen corporate governance so that early signs of distress can be addressed transparently.
- Improve public financial literacy, so that taxpayers understand the difference between a failed venture and a scam.
Conclusion
India must learn to treat business failure as part of the economic process, not a default indicator of criminality. The current approach risks turning entrepreneurship into a dangerous gamble where failure means jail — not just financial loss.
Only when we respect the line between intentional wrongdoing and honest failure, can India truly become a global startup capital and attract responsible, bold business leadership.
Disclaimer: The above article is meant for informational and educational purposes only. Article Oasis is not provided any views particularly on any business failure and its fraud. Article Oasis shall not be responsible for any views provided in above Article and shall not be substantiated failure of any business.