Opportunity lost, but embrace what’s in
The recommendations of a committee reviewing provisions of the Companies Act, 2013, present the low-hanging fruit for reform
Acommittee to review the provisions of the Companies Act, 2013, has stopped short of incisive reform crying to be effected to the “new” company law, which is already five years old. However, the recommendations actually made by committee present the low-hanging fruit for reform, and must be embraced immediately.
The single biggest contribution by the committee is to provide a detailed analysis of various types of offences under the law that are amenable to settlement by way of “compounding” — paying a monetary sum as a settlement to avoid prosecution. From these compoundable offences, recommendations to move these offences from criminal prosecution to a regime of imposition of monetary penalties under civil proceedings, have been made.
The committee could have recommended moving many more violations into the category of punishment with financial penalties, but has fought shy of doing so. Evidently, the fear of critique was not misplaced, since there are already murmurs about alleged “dilution” of the law — the critique is misplaced. The committee has classified compoundable offences into eight categories and has recommended shifting of only three categories into a regime of civil monetary penalties, and those too, with a few exceptions. The product of such conservative and defensive approach to reform must be accepted, but it is important to remember that far more could have been done, and needs to be done. Three facets stand out in this context.
First, it is a fallacy to think that criminal prosecution would lead to a greater fear of the law and that civil monetary penalties would lead to a lax view. Conviction under criminal prosecution requires an element of proof beyond reasonable doubt while for civil penalties the standard is of “preponderance of probabilities” — in simple English, the test is what a reasonable man would conclude about whether an offence took place. Ask the capital market regulator, and you will find out the severity with which this difference in standard can be used to instill fear of the law. Besides, the pain that can be inflicted for violating the law is easily measurable in terms of the size of the penalty imposed, and can signal the gravity of the situation well to others in society.
Second, the argument that monetary penalties are a licence fee for continued violative conduct, while a potentially true proposition, is not incapable of being addressed. The law can always provide for a seriously sizeable penalty and graded consequences for repetitive violations, and could inflict far greater pain than the pain caused by appearances in a criminal court once in a few months, with the overburdened and creaking criminal justice delivery system being burdened with avoidable work. In fact, unburdening the justice system from trying offences that can be punished with money would lead to that system being freed to do better.
Third, enforcement under company law does require serious reform. The bail provisions in our company law (Section 212) replicates the bail provisions in law governing narcotics and psychotropic substances — when an allegation of fraud is involved and the accused seeks bail, the court has to be satisfied that there are reasonable grounds for believing that the accused is not guilty of the offence alleged, and that he would not commit any offence when on bail. A similar provision in the Prevention of Money Laundering Act, 2002 (PMLA), was struck down last year by the Supreme Court on the ground that such a provision is unconstitutional. About that provision (Section 45 of the PMLA, which involves offences where the potential imprisonment could be of more than three years), the Supreme Court had said: We must not forget that Section 45 is a drastic provision which turns on its head the presumption of innocence which is fundamental to a person accused of any offence. Before application of a section which makes drastic inroads into the fundamental right of personal liberty guaranteed by Article 21 of the Constitution of India, we must be doubly sure that such provision furthers a compelling State interest for tackling serious crime. Absent any such compelling State interest, the indiscriminate application of the provisions of Section 45 will certainly violate Article 21 of the Constitution. Provisions akin to Section 45 have only been upheld on the ground that there is a compelling State interest in tackling crimes of an extremely heinous nature.”
The Committee ought to have noticed this judgement and considered whether it should have reformed company law, drafted in identical terms, and made it more meaningful. Instead, the Committee has stated, defensively, that: “For the sake of clarity it may be emphasized that there is no intent to dilute the rigour or scope of the enforcement action relating to serious corporate offences, including fraud.”
The reference to the potential imprisonment being of more than three years in the PMLA is relevant for company law too. Section 447 of the Companies Act, 2013, contains another constitutionally problematic provision –- the imposition of a minimum term of imprisonment of six months and a maximum term of ten years for fraud. In other words, if there is a fraud of even ~100 on a company (say, a travel voucher being fudged for ~1,000), one may be placed in prison for at least six months, which could potentially be the same period of jail for one committing a fraud of a few tens of lakhs of rupees. Besides, a proviso imposes a minimum imprisonment term of three years where the “fraud in question involves public interest”.
One would argue that every matter of fraud would involve public interest. Would even a tiny fraud on a public limited company, or say, a listed company, be a fraud involving public interest, or would the magnitude of a fraud make it a fraud involving public interest even when inflicted on a private company? If all fraud involves public interest, there would be no difference between the minimum term of six months and the minimum term of three years — the provision would be entirely arbitrary. This will need to be dealt with — perhaps some future committee would need to shoulder that burden.