Reducing the legal burden

Decriminalisation eases compliances for companies

In the coming winter session of Parliament, the government plans to introduce a mega Bill aimed at enhancing the ease of doing business in India. The Bill, being drafted by the Ministry of Commerce and Industry in consultation with the states, will focus on reducing the punitive measures for a range of minor offences from imprisonment to fines. For instance, imprisoning company officials for such minor offences as not whitewashing a canteen or washroom will be reduced to a fine. This Bill is of a piece with the government’s step to remove and rationalise over 30,000 compliances over the past few years. 

Company law has been a major beneficiary of this exercise. Since last year, such laws as failure to maintain the company’s books of accounts at its registered office, a company’s failure to spend the mandated amount on corporate social responsibility (CSR), provisions related to foreign companies and non-compliance by auditors to report fraud have reduced from a prison sentence to monetary fines only. In the case of non-compliance with CSR, for instance, failure to spend the required amounts attracted a maximum sentence of three years in prison. This has been replaced by a high fine, which is, however, steep enough to ensure compliance. Altogether some 31 Sections of the Companies Act have eased the punitive burden on companies to fines. The change in the nature of some provisions from criminal to civil has been accompanied by the creation of an “in-house adjudication” framework with adjudicating officers.

The major upside to this exercise is that it creates a positive impact on the business environment and expands the pace at which companies — especially from foreign direct investors — are set up within the country by reducing or lowering the compliance burden. From the Ministry of Corporate Affairs’ point of view, these moves will enable it to track major transgressions rather than focus its attention on every minor infraction. No less important, it also relieves the hugely overburdened Benches of the National Company Law Tribunal from having to expend their energies on a host of minor offences. In terms of lowering the punitive threat-levels for businesses for minor contraventions, the move towards decriminalisation, therefore, has much to commend itself even if a few of these changes would have figured in the parameters set out in the World Bank’s now discontinued global Ease of Doing Business ranking.

One major downside is that it does not reduce the frequency of encounters between corporations and the state, since adjudicating officers are government employees. As such, then, the risks of corruption and political influence remain high. Second, companies may well view penalties, whatever their severity, as an acceptable cost of doing business rather than a deterrence to compliance. Third, though decriminalisation is the right direction in principle, its indiscriminate application to all laws governing corporate activities may occasionally be misplaced. A case in point is the move to decriminalise certain provisions of green laws — such as the water and air pollution laws and, most significantly, the Public Liability Insurance (PLI) Act, which provides relief to victims of industrial accidents. Given the rapid pace of environmental degradation in India, a policy of no-tolerance for pollution and transgressions is critical. As for the PLI Act, the Bhopal gas tragedy remains an enduring reminder of why this law should never be diluted.