Decriminalising corporate law

Good move, but a more holistic approach needed

Taking forward the idea of reducing government interference and improving the ease of doing business, as reiterated by Prime Minister Narendra Modi in his Independence Day speech last week, the government is planning to decriminalise 65 Sections of the Companies Act where the offence is not of a serious nature. As reported by this newspaper, the corporate affairs ministry’s committee on decriminalisation will work in two phases. In the next phase, it will study the Sections involving frauds, and possibly reduce punishment for offences that are not serious and do not affect the public interest. The government is also reportedly creating provisions for a compromise settlement in cases where the public interest is not affected.

The idea to review the Companies Act and decriminalise it to the extent possible was long overdue and should be welcomed. This will not only improve the operating legal environment for firms but will also reduce litigation. It is important to keep reviewing outdated laws to address the problems. But the government should take a holistic approach in this context so that it doesn’t end up having an effect opposite to what it intended to achieve. The Section regarding corporate social responsibility (CSR) in the Companies Act is a case in point. The law was recently amended to introduce provisions that could send company executives to jail for not implementing CSR rules as mandated. Now a committee chaired by Corporate Affairs Secretary Injeti Srinivas has recommended making non-compliance a civil offence. This will save executives from going to jail. It is not clear why the government was in a hurry to amend the law and introduce harsh provisions even before the high-level committee set up to study the issue submitted its report.

However, the committee has also made recommendations that will complicate matters further. For instance, it has suggested that CSR expenditure should be made tax-deductible. The idea is to incentivise companies. But, in reality, it will result in disputes and litigation. Further, the committee has recommended that companies spending above a certain level undertake impact assessment studies of their CSR programme. There are several other recommendations that will only make life difficult for firms and should be avoided.

It is important to recognise that the idea of mandatory CSR is fundamentally flawed. The recent amendment has made it even more damaging. It is wrong to assume that companies not spending on CSR do not contribute to society. They produce goods and services, generate employment, and pay taxes. Spending on CSR should be voluntary and not mandated by law. Making it mandatory increases the burden on both the corporate sector and the government. Firms have to divert managerial resources and the state has to monitor every minute compliance detail, leading to possibilities of harassment. Further, in terms of impact, CSR spending is biased in favour of areas that are comparatively developed. This will add to regional disparities.

Overall, it is heartening to see that the government is open to the idea of reviewing parts of the Companies Act. But it would be better advised to take a more comprehensive view if it intends to improve the business environment and attract investment.