1. Column: Clarification raj

Column: Clarification raj

The regulators’ wide discretionary powers and ambiguous legislation are hurdles for a stable legal framework.

By: | Published: July 2, 2015 12:27 AM

Economist and author Adam Smith famously observed, “If a society provides a stable and sensible legal framework, the innate genius of human energy and imagination will allow growth to take care of itself.” This apt quote assumes significance in the light of objectives set out by the current administration to make India a global business destination and make doing business in the country easier to attract foreign investment.

Business or industry at large don’t doubt the intent to create “a stable and sensible legal framework”, and in order to achieve its intent, one of the foremost objective is to arrest and remedy the multitude of ambiguities that have proliferated, largely unchecked, over the past decade, in the context of corporate, tax and commercial laws.

Despite a spate of clarifications, the Companies Act, 2013, and the Rules made thereunder, are rife with ambiguities and what can only be understood to be unintended proscriptions, impacting the day-to-day functioning. While some changes have been implemented via administrative clarifications, there is a great deal left to repair possibly by a legislative amendment. A case in point is exceptions to the provisions pertaining to related party transactions, that are in the ‘ordinary course of business’ and transacted on an arms-length basis. There is no authoritative guidance on what transactions qualify as being in the ‘ordinary course of business’, or on an ‘arms-length basis’, resulting in boards being forced to jerry-build their understanding from Standards of Auditing and tax transfer-pricing precedents.

Perhaps the most prominent instance of regulatory ambiguity relates to the interpretation of the term ‘control’ under various corporate and commercial laws. The term, while of crucial importance in a wide variety of transactional contexts, firmly remains behind veils of intended and unintended obfuscation. The Shubkam case was a perplexing instance, where an opportunity to circumscribe certain aspects of the term was left begging. One would have expected the controversy to be put to rest after debate on the Jet-Etihad deal.

Of course, no discussion on intended or unintended obfuscation would be complete without a reference to foreign investment norms. The quality of legislation in this area has created a situation where businesses have repeatedly sought clarifications from regulators on the same set of issues. This is largely since clarifications, when provided, are often caveated in a manner that renders them practically meaningless for application as precedents.

The recent division of labour between RBI and the Centre in the context of exchange controls has been cautiously welcomed by industry, and has been widely perceived as the harbinger of substantial changes in India’s approach to exchange controls. However, the devil lies in the details, and the Centre must ensure precision in transition of authority, the manner in which “debt instruments” is defined, the treatment of hybrid instruments, and the way transitional / sunset clauses are introduced and implemented.

The problem of regulatory ambiguity extends to sector-specific laws as well. Businesses from taxi aggregator services to online pharmacies to payment intermediaries are never certain of the applicability of sectoral laws to their businesses. The situation of foreign direct investment in the e-commerce sector continues to be equally ambiguous with several investors awaiting clarity. Requests for clarifications to regulators and other statutory authorities are the only effective remedy available to businesses, although the benefits of these case-specific clarifications are seldom made available for the benefit of the wider industry group.

India’s journey from licence raj has been a long and an eventful one. However, we must be cautious that it is not replaced with a “clarification raj”. Wide powers of discretion reposed with the regulators, coupled with opacity and ambiguity in legislation, are not conducive to a stable legal framework.

With inputs from Siddharth Nair

The author is managing partner, BMR Legal

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