A U.S. citizen representing foreign investors of an Aurangabad-based medical equipment company as non-executive nominee director was shocked when Indian Food and Drugs Administration dragged him into a criminal case. The administration had accused the company of tampering with labels on some packs. The sections of the Drugs and Cosmetics Act under which it filed the police complaint against company directors provided for a jail term. The director approached the high court at Aurangabad for quashing the FIR. The court dismissed the case stating that he was a shareholder and his name was mentioned on the licence. However, in August 2022, on Supreme Court's intervention, it accepted that the director had no role in day-to-day operations and could not be held liable criminally. The complaint against him was quashed. "He had to bear the brunt as the company gave his name as one of the directors while applying for a licence. What impression will he take back to foreign investors?" asks Mumbai-based Amit Jajoo, a partner at legal firm Induslaw, which handled the case.
The U.S. citizen was perhaps luckier than many others. It took Raghav Gupta 10 years to get a Delhi government case quashed in Patiala House Court, New Delhi. The state food department had accused Gupta, director of a company that imported Snapple Juice Drink from Schweppes International Rye Brook, of violating labelling requirements as the drink pack bought by the food inspector did not have lot and batch numbers. It did not consider Gupta's plea that the pack had a barcode with all relevant information. In September 2020, Supreme Court quashed the case saying the information was available in the barcode and "no useful purpose is going to be served by allowing the present prosecution to continue."
Aman Avinav, partner, Phoenix Legal, says similar cases are continuing in spite of Supreme Court clarifying on barcode. "Recently, one of my clients got a notice from food safety department and another from legal metrology department for non-compliance with labelling requirements. The pin code on the label was just the last two digits. The fact that the barcode had all the details did not dissuade them. Misbranding is a criminal offence with a fine of up to ₹5 lakh. They missed the spirit of regulation, which was aimed at ensuring that the manufacturer or importer gives its complete address for communication," says Avinav. That someone had to go to Supreme Court for this shows how bad the situation is, he adds.
But why do businesses and entrepreneurs face criminal offences or jail terms even for not-so-grave offences? Experts blame surfeit of laws and regulatory requirements, frequent changes in compliance rules, poor understanding of spirit of these laws and negligence or irresponsible actions of enforcement agencies. To top it up, too many business laws have criminal clauses for offences that are not grave, they say.
A February 2022 report by Observer Research Foundation (ORF) says business laws enacted by Union and state governments have 26,134 imprisonment clauses. It's time to revisit these to help businesses as well as free courts from cases that can be dealt by fiscal sanctions? Everybody concerned, right from panels on labour laws and Companies Act and government think-tanks such as Niti Aayog and Economic Advisory Council of the Prime Minister (EAC-PM), has recommended that jail terms should be awarded only for grave offences. Even the apex industry chamber, the Confederation of Indian Industry (CII), submitted three volumes of recommendations, in 2020, 2021 and 2022, pointing out provisions requiring changes. To be fair, though, governments have changed, even removed, a host of laws to make it easier for companies to do business. Repeated pleas from companies suggest the task is far from over.
The Problem
A weekly update from Pune-based TeamLease RegTech, which helps companies in compliance, says there were 96 changes in compliance requirements under state and Central laws between August 28 and September 3 this year. There were 100 changes in the week before this, it says. These were notified by states and dozens of Central ministries and authorities. Not all changes involved imprisonment clauses or targeted company directors. Still, these are changes that businesses have to understand and follow. "There are 1,536 laws that govern businesses in India, of which 678 are implemented at the Union level. These laws have a web of 69,233 compliances, of which 25,537 are at the Union level. These compliances need to be communicated to governments through 6,618 annual filings, 2,282 (34.5%) at the Union level and 4,336 at the level of states," says an ORF TeamLease RegTech study, Jailed for Doing Business. It says frequent changes in compliance requirements add to uncertainty for businesses. "The 12 months up to December 31, 2021, saw 3,577 regulatory changes. The three years, from January 1, 2019, to December 31, 2021, saw 11,043 compliance changes." The study reveals that out of 1,536 laws that govern businesses, more than half have imprisonment clauses. "Out of 69,233 compliances, 37.8% (almost two out of five) can lead to imprisonment. More than half the clauses requiring imprisonment carry a sentence of at least a year. Several of these criminalise process violations while some punish inadvertent or minor lapses rather than wilful actions to cause harm, defraud or evade. Under some laws, late or incorrect filing of a compliance report can invite punishment on a par with sedition under Indian Penal Code, 1860," it says.
The CII representation two years ago listed 37 provisions related to Companies Act, Insolvency and Bankruptcy Code, and environment, consumer protection and labour laws. The second set, prepared in 2021, covered laws such as Competition Act, Consumer Protection Act, Patents Act, Trademarks Act and Legal Metrology Act. The most recent document, submitted early this year, made a case for a broader 'limitation' for criminal offences and covered changes in Civil Procedure Code, Code of Criminal Procedure and IPC. Limitation involves setting the maximum time from the alleged violation during which parties have to initiate legal proceedings.
While the ORF study found the largest number of imprisonment clauses in labour laws (50 such clauses per law), CII observations went much beyond labour laws. "The topic of decriminalisation needs to be approached with a wider agenda of de-clogging the judicial system and making courts more efficient. There is also a need for reducing pendency and burden at courts to expedite redressal process and ensure that only the guilty are punished," says Chandrajit Banerjee, director general, CII.
The changes are under way. "A crime is a crime. When people talk about decriminalising, what they have in mind is replacing imprisonment with monetary penalties. Also, you will realise that most of these clauses are from labour laws, which have already been revised and unified under four Labour Codes," says Bibek Debroy, chairman of EAC-PM. This is not enough. A recent EAC-PM study found that as labour law reforms have been largely aimed at the manufacturing sector, they are not going to impact the new urban economy, largely based on services. It noted that besides labour laws, infrastructure, education and law and order significantly affect employment and industrial growth. According to Debroy, any meaningful discussion about criminal provisions in business laws should also cover state laws such as Shops and Establishments Act, Excise Act, land laws, etc. "You need to look at all of them," he says, adding there are systemic troubles, too. "One has to wait two years for bail. If you replace this with a civil suit, the court system being what it is, the case will drag on for 30 years. So, there is no credibility of the civil justice system. Until we solve that, I don't see how we are going to handle this. Secondly, if you look at U.S., civil compensation is punitive, it's huge, not the small sums of money, as has been our approach towards compensation."
Another issue is inability of enforcement agencies to understand the spirit of the laws. "Most laws stipulate penal consequences, including imprisonment, to have a deterrent effect on corporate bodies and individuals. However, often people not directly concerned with business such as independent and non-executive directors get entangled," says Induslaw's Jajoo. So, what is the government doing?
The Progress
Minister of Law and Justice Ravi Shankar Prasad said in Lok Sabha in March 2021 that government had appointed a two-member committee to identify obsolete laws right after Narendra Modi became prime minister in 2014. The committee, he said, had identified 1,824 obsolete Acts (including 229 state Acts) for repeal. The details of these state laws were forwarded to state governments, while the legislative department asked Central ministries and departments to review Acts administered by them. Prasad said 1,486 laws have been repealed since 2014.
In September 2021, Commerce Minister Piyush Goyal said central ministries & states/UTs are carrying out a huge exercise to repeal, simplify and decriminalise laws. His ministry says more than 22,000 compliances have been reduced, about 13,000 simplified and more than 1,200 processes digitised. The commerce ministry says 103 offences have been decriminalised and 327 redundant provisions/laws removed over the last few years. The Department of Promotion of Industry and Internal Trade (DPIIT) under commerce ministry is working on a single Bill for 'decriminalising' minor offences in over two dozen laws.
The changes already in place include decriminalisation of 46 penal provisions of Companies Act, 2013, and 12 offences under Limited Liability Partnership Act, 2008. The Department of Telecommunications has removed the distinction between domestic and international OSP (other service provider) and allowed domestic and international centres to share EPABX and PSTN lines to provide thrust to BPO, BPM and ITeS players providing voice-based services. Department of Science and Technology has allowed private/public entities and research institutes to collect, process, store, publish and share geospatial data and services, including maps, enabling Indian firms to offer world-class geospatial services such as Google Maps. Ministry of Micro, Small and Medium Enterprises says its Samadhaan portal will empower MSMEs to register and track grievances related to late payment and dispute settlement.
"To reinforce confidence, government has, over the last few years, decriminalised business and economic laws. Efforts are being made to identify all criminal provisions for minor or non-serious offences. The underlying principle is to replace criminal provisions with penalty unless there is intent of fraud or misdoing. The initiative is making rapid progress," says CII's Banerjee. He says the new labour code is a step in that direction though "it needs states to be fully on board for practical implementation."
Ministry of Information and Broadcasting says results of decriminalisation of offences under Companies Act, 2013, are already visible. The number of prosecutions being filed in special courts has started falling significantly, it says. This is reflecting in growing number of defaults being handled through the in-house adjudication mechanism. It quotes data from Registrar of Companies to say that more than 1,400 company law default cases have been decided by adjudicating officers (Registrars of Companies) from FY19 to FY22 in a summary manner. "Companies Fresh Start Scheme, 2020, allowed companies to correct previous defaults in filing of documents without any additional fee. More than 4,00,000 companies rectified their filing defaults under Companies Act," it says. The ministry claims decriminalisation has reduced the burden of various benches of National Company Law Tribunal (NCLT). Now, companies and its officers would not be required to file applications for compounding before NCLT/Regional Director to escape criminal prosecution. "The fruits of reforms are evident. More than 1,67,000 new companies registered themselves in India in FY22, almost three times the number six years ago," says the ministry.
The Way Ahead
India is not known for putting directors behind bars. Most directors in prison are there for valid reasons. But anecdotal evidence suggests many cases where directors are fighting legal battles to keep themselves out of prison for no fault of theirs. There is no single data that tells you the number of litigations involving board members on a pan-India basis but National Judicial Grid Data shows pendency of 3,04,77,784 criminal matters before district and high courts, which is reason enough to review business and economic laws to cancel avoidable imprisonment clauses.
Right from the report of the Company Law Committee 2021 to suggestions by other stakeholders and independent think-tanks, government has enough recommendations. Logical suggestions can be approved at central level. Even states can be taken on board. "It is important to resolve commercial disputes and economic offences expeditiously to ensure that India becomes a more business-friendly nation," says CII's Banerjee. CII has put forward a five-point agenda for judicial reforms which includes decriminalisation of economic/business laws, legal/procedural safeguards related to personal liability of directors, introduction of limitation clauses for taking cognisance of an offence and introduction of plea bargaining.
The authors of the ORF report have given 10 recommendations that go much beyond restraint in use of criminal penalties in business laws. It wants to reform the way policies are designed and wants a regulatory impact assessment committee within the Law Commission of India. The report calls for involvement of independent economic regulators in compliance reforms, end to criminalisation of compliance procedures and creation of alternative mechanisms and frameworks. It has also suggested defining of standards for legal drafting and introduction of sunset clauses. One suggestion — to introduce all reforms through a single legislation — sounds similar to what DPIIT is attempting. A new legislation will not be the end of reforms. It will be part of a process that should continue. But it will be a big step forward.
Originally Published by Fortune INDIA
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