BUSINESS LAW

Assignment – 3

Topic: Write a report on The Indian Legal System - Whether it aids business
or hinders business. Give examples of laws, judicial procedure etc. in support
of your argument.

According to me Indian Legal System hinders business.

India’s business regulation framework needs a 21st-century rethink. This paper

provides the basis for it. It seeks to deepen the debate around economic reforms
in the world’s fifth-largest economy, which is headed towards becoming the
world’s third largest before 2030. Using newly isolated data, it collects,
compiles and analyses 26,134 specific clauses in the country’s business
legislations, rules and regulations that impose prison terms for violations. As it
explores the discourse around what this report calls “regulatory cholesterol”
(defined below) that places hurdles before India’s entrepreneurs, it situates itself
within the ongoing policy discussions around reducing imprisonment clauses in
India’s business laws. In March 2020, for instance, the Union Cabinet made
clear its legislative intent to rationalise such clauses by approving related
amendments in the Companies Act, 2013.

This planned rationalisation is a crucial policy correction. Seven months earlier,

in July 2019, the government had tabled, and Parliament had enacted, the
Companies (Amendment) Act, 2013 in which it had amended Section 135 of the
law and criminalised violations on corporate social responsibility (CSR) with
imprisonment. “Every officer of such company who is in default shall be
punishable with imprisonment for a term which may extend to three years,”
Subsection 7 of Section 135 of the amended law states. Following resistance
from the corporate sector, the government announced it will not operationalise
this clause, less than two weeks after enactment of the law. While the clause has
not been notified so far, it remains etched in law, and could still be executed.

Less than three months after the amendment was enacted, on 7 August 2019, a
committee on CSR submitted a report titled, ‘Report of the High-Level
Committee on Corporate Social Responsibility – 2018’. Set up 11 months
earlier and chaired by the Secretary of the Ministry of Corporate Affairs, Injeti
Srinivas, the committee recommended that unspent CSR funds be spent within
three to five years. In case a company fails to spend, the money should be
transferred to a fund to be specified by the government. Further, a penalty of
two to three times the default amount should be imposed subject to a maximum
of Rs 1 crore. However, there will be no imprisonment.

There are 176 imprisonment clauses in the Companies Act, 2013 read with 14
related Rules. The jail terms range from less than three months to as high as 10
years. The Ministry of Corporate Affairs says the offences may be classified
into two broad categories: those calling for imposition of monetary penalties;
and those calling for imposition of imprisonment, with or without fine. Only
after a new amendment Bill has been drafted and tabled in Parliament would it
become clear whether the government is keen on removing or reducing criminal
clauses in this law. This will be an important change—a crucial marker in the
rationalisation or the removal of criminality in business laws.
Further, labour laws are currently being reformed. The 29 central labour laws
are being subsumed into four labour codes—Code on Wages, 2019;
Occupational Safety, Health, and Working Conditions Code, 2020; Code on
Social Security, 2020; and Industrial Relations Code, 2020. Once notified, the
four codes are expected to reduce the number of sections from 1,232 to 480, or
a 61-percent reduction. On initial assessment, imprisonment provisions will
reduce by half.

If the amendments to the Companies Act, 2013 are enacted, it could be the
starting point for deeper economic reforms. India’s entrepreneurial landscape is
full of laws, rules, and regulations that have raised barriers to doing business.
The Factories Act, 1948, for instance, read with 58 rules, contain 8,682
imprisonment clauses. This is an important law as it provides core protections to
workers. Even simpler laws similarly have multiple imprisonment clauses: the
Legal Metrology Act, 2009 read with 29 rules, has 391 imprisonment clauses;
the Electricity Act, 2003 read with 35 rules, has 558; and the Motor Vehicles
Act, 1988 read with nine rules has 134.

This report creates the foundations of new information around the unexplored
area of imprisonment clauses in business laws. It informs the ongoing debate
around simplifying laws, making them less coercive and more investment-
friendly to attract capital and entrepreneurs into India as they exit China, and
make Indian businesses more comfortable to be able to do what they do best:
create value for society, jobs for India’s young demographic, taxes for the
government, and wealth for investors.

Economic growth today is a political imperative, private sector enterprises the

drivers, capital the catalyst, and entrepreneurs the executors. All have to work
together and function in unison. Seventy-five years after independence, these
four seem to be converging, but the weight of past excesses has now grown into
a labyrinth of policy complexities that need to be rationalised. Good economics,
or ‘good business’, is becoming good politics.

The analysis and recommendations this report makes will contribute to a new
and original theory that links India’s legal system, economic growth, and
prosperity with the most important and equally condemned factor of production
—the entrepreneur. To that extent, this report takes a macroeconomic and legal
look at the microeconomics of manufacturing, in particular and business, in
general. The report seeks to start new streams of research within which to
examine economic growth, and through it sow the seeds of a new 21 st-century
model of development that turns the current model on its head by focusing on
and according dignity to value creators.

The report proceeds as follows. Section I introduces the paper. Section II frames
the problem and provides a historical context from which to envision the future.
Section III defines this problem as part of what this report expresses as
“regulatory cholesterol”, which illustrates how India’s policymaking has slowed
the country’s entrepreneurs, and thereby the country’s growth. Section IV
places the data sources used. This data is an entirely new addition to India’s
economic literature. It also explains how the report has classified the data into
seven parts: labour; finance and taxation; environment, health, and safety;
secretarial; commercial; industry specific; and general. Section V analyses the
imprisonment clauses within smaller intervals. It will help the country debate
and policymakers focus on a large number of clauses from which to study those
that can be easily eliminated. Section VI disaggregates the data and analyses the
imprisonment clauses across the seven categories defined above. Section VII
disaggregates the data and analyses the imprisonment clauses across the Union
and state governments, and explores the extent of excesses across these
geographies. Section VIII delves into the philosophy of punishment frameworks
in India, and compares India’s business laws with the Indian Penal Code, 1860.
The results are instructive. Section IX argues for change and offers 11 streams
of recommendations to policymakers and lawmakers on how to deliver this
change. Section X concludes the paper and offers a new context of India’s
economic discourse that leans towards compliance reforms in general, and
imprisonment clauses within them, in particular.

India suffers from ‘regulatory cholesterol’ that is getting in the way of doing
business. The legislations, rules and regulations enacted by the Union and State
governments have over time created barriers to the smooth flow of ideas,
organisation, money, entrepreneurship and through them the creation of jobs,
wealth, and GDP.

The presence of hostile clauses in these laws, rules and regulations has grown
since Independence, surviving three decades of economic reforms initiated in
1991. The biggest challenges come from the continuance of imprisonment as a
tool of control. As automation increases in the coming years, the pre-
Independence 1940s-style administrative controls meant to protect labour will
prove counter-productive in 21st-century India.

There are 1,536 laws that govern doing business in India, of which 678 are
implemented at the Union level. Within these laws is a web of 69,233
compliances, of which 25,537 are at the Union level. These compliances need to
be communicated to the governments through 6,618 annual filings, 2,282 (34.5
percent) at the Union level and at the states, 4,336.

These changes in compliance requirements occur constantly and add to business

uncertainty. In the 12 months up to 31 December 2021, there have been 3,577
regulatory changes; over the three years from 1 January 2019 to 31 December
2021, there were 11,043 changes in compliance requirements. This translates to
an average of 10 regulatory changes every single day.
Of the 1,536 laws that govern doing business in India, more than half carry
imprisonment clauses. Of the 69,233 compliances that businesses have to
follow, 37.8 percent (or almost two out of every five) carry imprisonment
clauses. More than half the clauses requiring imprisonment carry a sentence of
at least one year.

Several of these clauses criminalise process violations, while some of them

punish inadvertent or minor lapses rather than wilful actions to cause harm,
defraud, or evade. For some laws, delayed or incorrect filing of a compliance
report is an offence whose punishment stands on par with sedition under the
Indian Penal Code, 1860.

The largest number of imprisonment clauses are found in labour laws, with
more than 50 such clauses per law. Five states have more than 1,000
imprisonment clauses in their business laws: Gujarat (1,469 imprisonment
clauses); Punjab (1,273); Maharashtra (1,210); Karnataka (1,175); and Tamil
Nadu (1,043).

This report argues that the criminalisation of business laws violates Indian
business traditions: from the Mahabharata to the Arthashastra, criminality was
never a part of punitive action against businesses in ancient India — only
financial penalties were. Reforming these clauses is necessary to restore dignity
to entrepreneurship in India. There are 10 major recommendations:

1: Reform the way policies are designed.

2: Use criminal penalties in business laws with extreme restraint.

3: Constitute a regulatory impact assessment committee within the Law

Commission of India.

4: Involve all independent economic regulators in compliance reforms.

5: End the criminalisation of all compliance procedures.

6: Create alternative mechanisms and frameworks.

7: Define standards for legal drafting.

8: Introduce sunset clauses.

9: Reform with one legislation.

10: Infuse dignity to entrepreneurs, businesspersons, and wealth creators.

This situation in India cannot be changed overnight. It will take decades of

constant hard work and legal work to bring in the much-needed changes in the
system.

THANK YOU.