Decriminalisation Of Company Law And Other U-Turns

Amit: I think the decriminalisation of commercial legislation in this country is helpful for the ease of doing business. And let me take you back to the liberalisation of 1991, the process in many ways began at that point in time.

If you remember we had the Import and Export Control Act, which entailed a lot of criminal offences and virtually every import and export was the subject matter of some criminal proceeding or the other in the ‘60s and ‘70s. In other cases, Acts such as the Customs Act, 1962, were linked to import licenses and export obligations, etc. Post liberalisation, the Import-Export Act was repealed, and we had the Foreign Trade (Development and Regulation) Act, 1992. It was actually the first attempt in the realm of business law to decriminalise the process. It took away all criminal offences and left it with only civil law implications.

The second, which is far more important, is the repeal of the Foreign Exchange Regulation Act, 1973. It was a dreaded legislation. We brought in the Foreign Exchange Management Act, 1999. It was an attempt to decriminalise again another business law.

So, the Companies Act is also a business law which needed some limitations on the evocation of criminal proceedings and criminal laws, because otherwise, there is a sense of fear in doing business.

Bharat: Well, I entirely agree with Amit with the fact that directionally this should be the right approach and FERA, FEMA are the classic examples where now there are no more than three penalties.

I have one larger philosophical issue with regard to the Companies Act. One of the principal criticisms of the earlier Act, ‘56 Act, was that it was a toothless legislation. There was no fear and people could get away with not filing balance sheets and annual accounts. Monetary penalties were only Rs 5,000 and Rs 10,000, which companies thought were part of the cost of doing business and paid for it. So, this new Act was drafted on the basis of recommendations of the Irani Committee. Two parliamentary standing committees had minutely examined it. It was also the result of a couple of corporate scandals which happened at that time, including 2G scam, Satyam, and Sahara and many others. So, undoubtedly, it was a knee-jerk reaction to some of the corporate scandals and in certain areas, perhaps the needle moved a bit too much and we need to bring it back.

But I don’t agree that most of the provisions should have only been civil penalties. This is because if people treated it as a part of doing business in India, then some of the deterrents will go away undermined. So, I think it is very critical to maintain a healthy balance between civil penalties and criminal prosecution and there are certain offences where I don’t think any leniency could be shown.

I must emphasise that even today this committee has recommended the decriminalisation of only compoundable offences because section 441 of the Companies Act and all the non-compoundable offences will be dealt with as per the current law of imprisonment.

Bharat: They have used a principle-based approach. The offences involving a substantial violation of the law and concerning deep public interest will remain untouched. They have said they would rather have criminal prosecution continuing with regards to this.

With regards to procedural, incorporation, or governance-related violations or things such as a delay in filing of forms, they felt that there is no need to have any criminal prosecution.

If you see the burdening of our criminal justice system, in most of the cases, these cases were languishing in the courts for years and years. So, it wasn’t that any advantage was achieved by keeping them in criminal offence. But we need to maintain a balance, that is what I would like to say.

Bharat: I would like to answer only one part. I think the 2013 Act, which came in April 2014 was a result of a reaction to some of the corporate scandals. So perhaps in some cases the needle has moved too far and we need to bring it back.

Yes, I completely agree that three years of imprisonment has no correlation with Rs 3 lakh fine and that is precisely the reason that this committee was appointed. But you know my concern is, was the committee given adequate time to decide on a proper basis? Because the committee was constituted in late September and somewhere within two months they wrote a report where those earlier acts were examined from over four-five years ago? So, the issue one needs to debate is whether the committee has enough time to look at each and every offence very carefully and arrive at a balance which is right.

Amit: Broadly, we are all on the same theme. What I would like to highlight here is an interesting sort of change between the 1956 Act and the 2013 Act. What they have done in the 2013 Act is they used an old time-tested method of introducing the adjudicatory function. So, if you look at the legislation of 1960s or 1970s, most revenue legislation - be it the Customs Act, Excise Act, Income Tax Act, Foreign Exchange Act - all these kind of legislations typically had a process by which we had a prosecution and you had an adjudicatory process where you can impose penalties or you can recover your duties or taxes.

This was not there in the Companies Act. FERA, for example, had a prosecution and an adjudicatory mechanism. So, for the same contravention, you had two remedies: the prosecution (criminal punishment) and the adjudicatory (civil punishment) function.

So, the principle for both at that point of time was that depending upon the gravity of the act, there is always a prosecutorial discretion as to whether the same act will launch a prosecution or you will only leave it at the level of the adjudicatory process. Now, you have the officers in the department making that call depending upon the nature of the action that was taking place.

Interestingly, in the 2013 Act, they brought in the principle of adjudication, which was not there in the ‘56 Act. They brought in a time-tested process here. What they now seem to have done is that they said that some of the offences will be taken out entirely from the criminal court and left in the adjudicatory function. Then, I have another set of offences, which we are going to make punishable by fine and the others will be left as it is with punishment or imprisonment.

But when they did that that’s where I have some reservations about the minutiae of which offences should fall in which category. I think there are areas where there needs to be a relook. There are some kinds of offences which can go into fine or adjudicatory that should have certainly remained as criminal prosecution.

So, while this Act is in the backdrop of the Satyam case and it’s important to bear that in mind. I think it’s important to also realise that the Companies Act is one of the most important legislation which drives businesses.

Sometimes, I feel like the presumption of dishonesty when you draft in legislation rather than presumption of honesty. So that is where we have to find the balance. Where you have to recognise the issues from the Satyam and provide for them but you don’t change the entire legislation to make it so imbalanced.

Bharat: By and large, it’s in the right direction. There are one or two areas where they felt the penalties were high and perhaps that should be rationalised. There, perhaps, I may not agree. In one of the cases, they said the delayed filing of annual accounts or financial statements with the registrar, they are wanting to bring in a provision similar to the CGST Act which states that if one files within 30 days of issue of a notice, then there will be no penalty. That would lead to people taking it for granted till we receive a show-cause notice, we don’t need to worry because there is no penalty. So, there perhaps the needle has moved to the other side extremely - too lax in this case. That is a serious offence in my view that if you don’t file your financial statements within the six months of closure of the financial year, then there is a problem.

Apart from it if you look at it very dispassionately and very objectively, the committee’s recommendations are in the right direction. They needed to declog our criminal justice system and that is the best way that they could have done it under the current situation. Mr. Desai, I want to point out that even in the ‘56 Act, there was a section that was never imposed for adjudicatory penalty. But unfortunately, they never administered it and brought it under section 454 in the current Act.

Amit: I think in this environment in which we are living today one of the very fundamental issues is about related-party transactions. I think it is absolutely essential to ensure that all related-party transactions are properly documented and disclosed. What I find is in sections 184 and 188, which all deal with disclosure in related-party transactions, they are moving them away from offences to just penalties. In the context of what’s happening in the companies today, it is important and essential that you should maintain the fear of the criminal law in relation to these kinds of disclosures. It’s exceptional.

The other thing I find strange and interesting is take for example a company which is a Section 8 company - for charitable objectives. They have proposed that if the conduct of the company is in a fraudulent manner, then it will deemed to be a fraud under section 447. They have dropped the specific offence. That is something very fundamental to charitable objectives. Why would you decriminalise it and take it out? You are dealing with public money which has to go to the public at large. Charity is the beneficiary and if you say that if the affairs of that company is not treated properly, then you will treat it as a civil offence.

Amit: I mean you can bring it under fraud (447). Fraud is an omnibus provision. But then what is the message that you are sending? When you make an omission of an offence, then courts might say the intention was not to cover it under the general provision of 447 because when there was a special provision, they took it out. Then you are leaving it for matter of interpretation.

Amit: The scheme that was adopted here is in relation to several offences, thereby, it is fiction if they have said that this will be treated under 447. As a fraud they don’t do that for Section 8. If they have introduced that ( a specific reference to 447) then I could have understood that they have linked with Section 447.

Bharat: Could they have not invoked it under the IPC?

Amit: They can, but my point is you have created because it is special legislation, you have decided to create special offences here. For example fraud, fraud is a facet of the offence of cheating under the IPC. Under the IPC, an aggravated form of cheating is punishable for seven years. Here (company law), because it is a special legislation and it is largely dealing with public funds what the legislation has done is make fraud a special offence punishable up to 10 years. So, you are here attempting to bring in a higher regimentation decision in relation to companies, because here you are dealing with a lot of public funds and public interest. While in a simple case of cheating, it is only a bipartite arrangement, where the public at large may not be considered.

Specific absence of a linkage to 447 might give rise to interpretation that this was not intended. Now, there were several like this one. I found this one regarding public offer prospectus - section 40. Now, it deals with public funds which are to be dealt in an escrow, subject to the conditionalities there. They have again taken it (criminal punishment) out.

Amit: I think, some of this, this particular provision deals with the concept of entrustment of public funds. When you deal with entrustment, like you have in the penal court, you have a criminal breach of trust where you are holding monies of the public and entrust it for a particular purpose. There is a need for as many disincentives as possible for something like that because that is the misuse of public funds, which was otherwise to be kept in an escrow for particular purposes. Today, you find it every day, you read about people using funds which are not meant to be theirs for all kind of purposes and earlier it was an offence under the ‘56 Act.

Amit: So, when you deal with special situations and special legislation, undoubtedly yes. Otherwise, as I have given you the example of fraud under 447 is covered under the penal code. But you brought it in a special situation, you created a special legislation. That is legislative policy.

Otherwise you will say that all that you need is one criminal law which covers all kinds of things from customs, FEMA etc. It can just go into one penal law of the country. Because they deal with special situations, there are special offences which are created to deal with those.

Bharat: And this is precisely the reason. This was the criticism of the ‘56 Act that Rs 5,000 and Rs 25,000 (are not high penalties), but they (2013 Act) have not gone much higher. So, while they are trying to decriminalise, and I am opposed to the concept of criminal offences except for some of the offences as mentioned by Mr. Desai. (The issue) is that in the criminal justice system, nothing happens in the trial court. I have seen the cases making progress for years, you put it in criminal justice system and for 10 years nothing happens. So better do something faster.

The ideal thing to is to have steep monetary policy which act as deterrents and FEMA has done it by imposing five times the amount. FEMA had virtually taken out every case of imprisonment provision and FERA had every section in imprisonment provision. So, the classic example of a success of decriminalisation is FERA and FEMA. So, why not try it here but with stiff penalties, five and ten times the amount.

Amit: One other area that bothers me is I think is what Bharat just touched upon. You have to decriminalise a lot of these offences which are in the nature of procedural or technical violations. When you keep repeating them, as he says, it becomes part of the cost of doing business. There must be a provision where at some stage what has been taken out into the adjudicatory mechanism must come back into the criminal law. You might say that after the second contravention or the third contravention, you may have resolved them at the level of the adjudication, but at some point, if you don’t bring it back within the realm of criminal law, there is no deterrence. Then it’s a cost to doing business - minimal cost as you’ve seen. So, somewhere you need to bring in a provision, which will then say that if you are habitual, then sorry, you will now face prosecutions and fines or imprisonment or whatever it is.

Bharat: Currently, it only says that within three years to repeat the same offense: twice the amount, but it’s only the in the adjudicatory mechanism.

Amit: There is a conceptual issue because the adjudication is not a conviction. It is not a conviction. The other thing you need to bring in the company law is that, after a point you need to bring about certain disqualifications. Second time, third time, fourth time. All that you have is disqualifications—Sections 164 and 166—which make the second offense punishable only with fine. You should see what happens in the trial courts. They go there, the company will plead guilty. Pay Rs 5,000 fine and that’s the end of it. So, you need a further deterrent that needs to be brought in at some level.

Amit: Have you compared this with the SEBI provisions? Up to Rs 25 crore is the fine. There is a discretion there too, but here the maximum is up to Rs 3 lakh or up to Rs 1 lakh. So either you give the discretion to the authority, which could go up to Rs 25 crore from zero so that the authority judges the gravity of the action and decides whether it should be Rs 1,000 , Rs 1 lakh, or it could be in a given case, Rs 25 crore.

Bharat: I completely agree. In fact, I pointed out that for delayed filing of a financial statement. They felt that, well, Rs 1 lakh is too high a penalty and so we need to bring it down. That I think is completely unacceptable.

Amit: One interesting thing, which I think worries me, is the Corporate Social Responsibility provision that was brought under criminal prosecution. Then of course, they pulled back on it and are taking it into the adjudicatory mechanism. In the adjudicatory mechanism, you should see the penalties that they recommended for CSR violations. They go up to crores.

Bharat: Again, there’s a consistency issue in that. Just about few months back it was criminalised. It was earlier not an offense at all under the Companies Act. It was criminalised by the 2019 amendment and now we are talking in terms of decriminalising that.

Amit: Criminalising a CSR obligation I think in my own view, was inappropriate.

Amit: Amit: I would say in many of the other legislations which have been tried, tested for the last 50 years, it has been a very effective method. They have good officers sitting there.

Bharat: They have said it’s been tried out and it’s working wonderfully well in SEBI.

Bharat: In my opinion, clearly no, and I want to give the context. Today the laws are not made so much by parliament as by the regulators. Today I want to talk about three regulators— MCA, SEBI and RBI.

This Companies Act came into force on April 1, 2014 and I want to use some statistics. There are 44 rules framed under this act and they have been amended 173 times since 2014. There are 114 notifications issued, 115 departmental circulars issued, and 17 orders passed. The principle act itself has been amended three times by the parliament- 2015, 2017, which was almost a hundred sections out of 470 sections were amended and now 2019 proposals.

Now we have a third company law committee which is recommending another slew of amendments. There is not a week passed when some rules, some odd notification, some circular is not issued by MCA.

Now let’s go to SEBI. I will not call it one week, but there has not passed a day in this year where SEBI has not amended any of its regulations. The RBI is also now in the process of amending so many of the FEMA regulations.

Even for practicing lawyers and professional corporate lawyers, it’s so difficult to keep a track of how the laws are changing. Now, what the foreign investor wants is the stability in the system and predictability and that predictability is missing. I think in the government, there seems to be some disconnect between what the Prime Minister is thinking in terms of bringing is of doing business and between the regulators who are in the process of changing law. Certainly, nobody would say that if you amend the rules 173 times, you are facilitating ease of doing business in India and that is a very fundamental issue. I think that needs for a national introspection on this issue.

Amit: Fundamental to the very process of law making and the intent of law is predictability. Every citizen looks for predictability in every legislation. Therefore the numbers that Bharat has mentioned are obviously staggering and particularly for a business law like the Companies Act, where you could be as I would say- every time you change the regulation, the notification, you change the circular, you change the order, you would be probably committing a criminal act based upon the number offenses that have been put in here because every day, it’s changing, and you don’t know whether your act was under the old notification or your act was under the new notification. So, inadvertently you’re probably committing crimes all the time. Obviously, there’s a need to bring in some kind of balance to ensure that these kinds of actions then don’t keep coming back to bite the people who are taking these actions in the realm of criminal law because that’s the other part of the problem.

You bring in all these changes, you then have this criminal law and then you have the authorities pushing the criminal law down and saying, now, we’re going to take action. That’s the reason why there’s a sense of fear in the business community. So, every time this change occurs, everybody is always looking around the shoulder. So maybe that’s the reason why decriminalisation is necessary because they’re not able to deal with the other part of the legislation.

On a more serious note, I think that’s important to have conceptual ideas. Maybe people like Bharat Vasani should be spending more time in the ministry. I’m not joking about this, because it can’t be that these kinds of amendments keep happening in the law. Let me give you a small example even in the realm of criminal law. You have a special mechanism here- you can have a special investigating agency. You have a special power of arrest; you have a special procedure for bail, you have a special court; you have a special procedure. Now that is what we have is the criminal procedure code, which deals with all these aspects which covers all investigating agencies across the country. Why was there a need to confer such special powers and provisions for this particular authority? You could’ve just borrowed the CRPC, incorporated into this legislation and the time-tested principles which have come about for the last 70 years of interpretation of the CRPC would have applied to this. Now you’ll again have fresh interpretations. What is the extent of the power? What is the nature of the power?

Amit: You don’t need some of these things in this kind of a legislation.

Bharat: There’s a full degree of sincerity I think at the top of the government to bring about ease of doing business so that our index improves in the world map. The problem is, in reality there’s a serious disconnect because the laws are no longer made only by the parliament but by the various regulators under different legislation. SEBI volume of the Taxmann book used to come in one volume. Now four volumes are not enough to accommodate all the regulations framed by SEBI and they’re getting amended every single day. So, is it facilitating ease of doing business? That’s a simple question I think somebody needs to ask and introspect and that’s where the problem is. So, I think there is a need for a serious introspection on this issue.