Disproportionate penal provisions will hurt Indian corporates

The penal provisions, especially those involving imprisonment, in the Companies Act, 2013 are disproportionate retributive measures compared to the acts of omission by companies or their officers

Disproportionate penal provisions will hurt Indian corporates
The government must direct efforts towards bringing more people into the formal job sector where they can get benefits of social security, health benefits, among others.

By Siddarth M pai
& Shankar Jaganath

John Locke, in his seminal work Two Treatises on Government, highlighted that punishments should be governed by three legitimate motives: reparation, restraint and deterrence. The legitimacy of punishment is upheld when “laws of nature”, the inveterate body of moral principles that forms the basis for all human conduct, is violated and not for the violation of an arbitrary rule. Of the motives stated above, reparation is the first preference since it is restorative, often taking the form of a pecuniary punishment or a restoration of property.

Restraint is advocated only to secure mankind “from injury and violence, being slighted and broken by him”. With this, Locke honours the liberal principle of honouring freedom as paramount necessitating its restriction only in cases most egregious.

Thus, incarceration and criminalisation, which strip the perpetrator of the bare basics of citizenship and freedom, is considered the “ultima ratio”—the last resort. However, in India, especially in our corporate laws, the last resort of imprisonment seems to be, in many cases, the first response.

The insertion of a three-year imprisonment term for violating Corporate Social Responsibility (CSR) norms in India is the latest in a litany of 50-odd criminal measures instituted against officers in default, which could include directors, in the Company’s Act 2013—the primary statute governing corporate law in India. This Act, instituted by the previous UPA government, arbitrarily mandates, for seemingly civil offences, imprisonment sentences that are harsher than those in the Indian Penal Code. For instance, the sentence for violating CSR is longer than the sentence for causing death by negligence (Section 304A, IPC—2 years).

This criminalisation of civil offences that has seeped into corporate statutes belies a virulent distrust of businesses and businessmen. Criminal law deals with offences against the public, society, or the state, and acts of moral opprobrium or acts of violence against individuals; civil offences in contrast, involve damage to property of an individual or group of individuals—and each should follow the legitimate purposes of punishment that is restorative and act as a deterrent. Yet, the Companies Act disregards this and affords criminal sentences to civil offences by companies, some examples of which are listed below:

> Violation of share buyback norms (Sec 68)—up to 3 years
> Failure to repay deposits or interests (Sec 74)—up to 7 years
> Declaration of dividend without paying it (Sec 127)—up to 2 years
> Violating CSR norms (Sec 135)—up to 3 years
> Default in constituting committees (Sec 178)—up to 1 year
> Contravention of inter-corporate loans and investments (Sec 186)—up to 2 years
> Failure to provide the government statistical information (Sec 405)—up to 6 months

A key question to ask here is Cui Plagalis—who loses, and is this loss permanent? For default in constituting committees of the board or failure to provide statistical information to the government, a criminal sentence is a disproportionate measure of retribution, compared to the act of omission by the company or its officers. In such matters, what is the purpose of imprisonment? Reparation?—it doesn’t resituate any property to the shareholders or government; restraint?—these acts don’t pose the threat of violence to anyone; deterrence?—unless these are wilful acts of fraud, these penal clauses demonise rather than deter directors.

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A law is only as effective as its enforcement. Enforcement of penal provisions in corporate India is not only erratic but also cyclic and comes into focus only in the aftermath of prominent scandals. In other periods, non-compliance is either not systematically pursued and punished, or consciously ignored for reasons of being impractical, like what is being advocated in the case of imprisonment for CSR lapses, without amending the law by revoking the impractical provision. Further, lenient treatment accorded to non-compliances by public sector companies, by not enforcing penalties, puts to question the deterrence value of the example being set for Indian corporates.

In UK, from where we can trace Indian corporate law, penal provisions with imprisonment as punishment are preceded by the words like “knowingly”, “recklessly”, “misleading”, “false or deceptive”. Further, they provide an exit clause where the officer in default is exempt from this harsh punishment if he/she can show that they acted honestly.

In a civil society, acts that deprive a person of their freedom should be reserved for the most egregious of crimes. Instead, in India it looks like criminal sentences are a signal to show how seriously lawmakers take an issue. Further, this renders these punitive measures prone to misuse. The Shri Injeti Srinivas committee to review offences under the Company’s Act also echoed the same in its report submitted on August 14th, 2018, and made numerous suggestions to decriminalise our corporate laws. Full translation of their recommendation to law is still awaited.

In a July 2018 speech, the honourable Prime Minister said, “…the efforts of industrialists too have a role in nation building. Should we insult them, call them thieves and robbers? Is this the way?” If this thought is to be translated into action, it is time that India reviews the penal provisions, especially the one related to imprisonments, in the Companies Act, 2013, and make laws that honour the efforts of industrialists and entrepreneurs in nation-building.

Pai is Founding Partner, 3one4 Capital & Jaganath is Founder, Cimplyfive . Views are personal.

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