Criminal proceedings for economic offences sets a bad precedent: Experts

Companies Act amendment to include penal provisions for CSR violations is seen as part of a larger trend of criminalising economic offences rather than going for civil proceedings

Late last month, while speaking in the Rajya Sabha, Finance Minister Nirmala Sitharaman defended the amendments to the Companies Act, saying legitimate profit earning could not be devoid of social responsibility, and that companies could not get away with not meeting their corporate social responsibility (CSR).

According to the amendments to the Companies Act, violation of CSR norms will now attract fines ranging from Rs 50,000 to Rs 25 lakh, from both defaulting companies and officers, and officers will also be liable for an imprisonment of up to three years.

“It was easy for people to interpret that either we comply or we give an explanation and get away with it. Now, that is not happening, because Section 135 of the Companies Act is being amended to provide specific penal provision in case of non-compliance,” Sitharaman had said.

This caused quite a lot of furor among corporate people, with many labelling the move charity at gunpoint.

What has happened with CSR laws is just part of a larger trend of economic offences increasingly coming under criminal proceedings rather than civil proceedings. A number of economic laws, such as the Insolvency and Bankruptcy Code, Fugitive Economic Offenders Act, and even GST laws, provide for a jail term. While imprisonment and criminal proceedings are justified in some cases, experts say things might perhaps have been taken rather too far in others.

“The recent developments piqued the interest of industrialists over the rising trend of criminalising economic offences by stringent measures rather that alternative civil remedies under the law. Starting from recent enactments to amendments to various laws, the consistent criminalisation of economic offences only seems to be aggravating, especially during these testing times for the economy,” says Amit Jajoo, partner at IndusLaw.

“The central government has recently begun cracking down on economic offences by criminalising what can be deemed minor infractions or non-compliances,” Jajoo adds.

He points out not only the recent Companies Act Amendment but also the Fugitive Economic Offenders Act, 2018, under which overriding powers have been given to authorities with respect to search and seizure, and they have been empowered to submit applications for Look Out Circulars (LOCs) to detain as well as prevent any person, including a wilful defaulter, from leaving India against whom LOC has been issued.

Apart from these, there is also an imprisonment provision in IBC, which provides for a jail time of up to five years and fines of up to Rs 1 crore on individuals who engage in transactions to defraud creditors, falsify accounts of corporate debtors or make false representations to creditors.

“Typically, in any advanced economy, enforceability of law and contracts are very quick. We rank 163rd in enforceability according to the World Bank. The government is somehow realising that there is no fear of civil offence as our courts are inefficient. Hence, criminalising of civil offences is being used as a short-cut to bring a fear of law,” says Mohit Saraf, senior partner at Luthra and Luthra.

Saraf says some civil breaches with global and societal ramifications across jurisdictions, such as securities trading, intellectual property issues and anti-trust issues sometimes get qualified as criminal breaches, but in India even minor offences are being criminalised.

“This is a very wrong way where the government is picking up a shortcut because courts cannot enforce law, and it is not a very well-thought-out one, especially when you talk about improving ease of doing business,” Saraf says and adds that while the judiciary should be held more accountable and stiff, exorbitant penalties should be imposed wherever required, civil breaches should not be criminalised.

In fact, legal experts across the board believe that by criminalising economic offences, the government seems to be sweeping under the carpet what is really required: Better enforcement.

“The law should clearly define the rights of stakeholders and the means of their redress. The law should provide for a quick redress of the wrong committed and give deterrent signals to others, clearly demonstrating consequences of non-compliance. In this regard, the steps being taken by the central government seem to be in the positive direction. However, the government shall have to discharge an important responsibility not only in framing the laws to curb such economic offences, but also in effective implementation and administration,” Jajoo explains.