The Union Cabinet today cleared the setting up of a Serious Frauds Investigation Office in the department of company affairs.

The office will have to use the services of other agencies to undertake search and seizure operations and will not be authorised to initiate investigations suo motu but will initiate investigation after the matter is referred to it by the DCA.

The Cabinet also decided to authorise the finance minister to negotiate with state governments the compensation to the states over possible revenue loss due to the introduction of value-added tax from April this year, Information and Broadcasting Minister Sushma Swaraj said after the Cabinet meeting.

Finance ministry officials said the step was necessary to ensure nationwide VAT was imposed because the states had opposed the Centre's compensation formula.

While the Centre had proposed that it would compensate states 50 per cent of the notional losses suffered by them during the first three years following the switch to VAT, the states had sought a graded system involving 100 per cent compensation in the first year, 75 per cent in the second and 50 per cent in the third.

In addition, the Cabinet also decided to recommend the promulgation of an Ordinance for adoption of a common eight-digit harmonised system of nomenclature for commodities to be used by the Customs department, Directorate General of Foreign Trade and Directorate General Commercial and Intelligence Statistics, which use three different nomenclatures at present.

While the Customs department adopts a six-digit classification, DGCIS and DGFT use 8- and 10-digit classifications, respectively.

The Serious Frauds Investigation Office has been conceived as a multi-disciplinary body to investigate corporate fraud.

It will investigate fraud characterised by complexity and having inter-departmental and multi-disciplinary ramifications, fraud involving significant public interest in terms of monetary misappropriation or in terms of persons affected and also when there is a possibility of investigations leading to improvement in systems, laws or procedures.

The Serious Frauds Investigation Office will submit its investigation report to the DCA and the department will carry out prosecution for violations of the provisions of the Companies Act, 1956, while it will forward the report on violations of other provisions to the agencies concerned for appropriate action.

The Serious Frauds Investigation Office can draw upon the services of experts for investigating multi-disciplinary fraud and can also outsource investigations from outside agencies. Initially, it will have two regional offices for the northern and western regions.

A committee of secretaries headed by the Cabinet secretary will also be set up to give general directions to the Serious Frauds Investigation Office and also screen appointments at emoluments outside government payscales to attract manpower.

The committee will have secretaries from the departments of company affairs, revenue, expenditure and personnel as its members.

The Cabinet also approved the continuation of the Rs 10,391 crore (Rs 103.91 billion) Integrated Child Development Services Scheme during the Tenth Plan period.