Decriminalisation of Corporate Offences in India: Should it be Permitted?
[Pranshu and Roopam are students at NALSAR University of Law.]
The Ministry of Corporate Affairs (MCA) through the Companies (Amendment) Act 2019 (CAA 2019) decriminalised 16 out of 81 offences under the Companies Act 2013 (Act), categorizing these compoundable offences as civil offences. To further decriminalise various provisions of the Act, the Company Law Committee (CLC) set up by the MCA recommended decriminalisation of 46 out of the remaining 66 penal provisions. Based on these recommendations, the Companies (Amendment) Bill 2020 (CAB 2020) was tabled in the Lok Sabha on 23 March 2020. However, its implementation has been delayed owing to the onset of COVID-19 pandemic.
This article will analyse the CAB 2020 in terms of the advantages it brings forth, arguments against it, and possible counters/suggestions to such arguments.
Changes proposed under CAB 2020
Instead of being treated as criminal offences, 23 offences that relate to minor or less serious compliance issues should be shifted to an In-house Adjudication Mechanism (IAM).
7 offences which would be better dealt by other laws should be omitted from the Act.
Alternative means of imposing sanctions have been proposed for 5 offences which do not fit in either of the above two descriptions.
11 other offences which involve subjective determination but are not very serious violations will be punishable with a mere fine.
Rationalization of fines with respect to 22 provisions under the Act.
It should be noted that offences involving serious fraud, public interest and non-compoundable offences still attract criminal sanctions.
Decriminalising corporate offences: The right step?
The Indian Government has taken steps to decriminalise corporate and commercial laws earlier as well, including offence under the Imports and Exports (Control) Act 1947, Foreign Trade (Development and Regulation) Act and most significantly, the Foreign Exchange Management Act 1999. Recently, the Central Board of Direct Taxes (CBDT) released a circular wherein norms would be eased with respect to the initiation of prosecution for the delay in depositing tax deducted at source (TDS) and filing of income tax returns by doing away with criminal prosecutions subject to certain conditions.
The major reasons and advantages of decriminalising corporate offences are as follows:
De-clogging the justice system
The criminal justice system in India is overburdened with a plethora of cases. A number of corporate offences which can otherwise be adjudicated by an adjudicator appointed by the government are rendered to the special courts under the Act which does not serve any fruitful purpose. For instance, Section 88(5) of the Act relates to the maintenance of registers. The determination of its violation does not involve any subjective evaluation and can, therefore, be administered under the IAM system rather than burdening the special courts. This not only leads to delay in the administration of justice but also invests the courts’ time in deciding upon cases which could otherwise be decided by other courts and authorities. Therefore, referring specific offences under the Act to an adjudicator would lead to fast disposal of cases and help to unburden the judiciary.
Non-fulfilment of the elements of criminal liability
One of the pre-conditions under a criminal trial is proving mens rea, i.e., the presence of a guilty mind and actus reus, i.e., the wrongful act. The Supreme Court in Director of Enforcement v. MCTM Corporation held that in case of imposition of civil liability, blameworthy conduct is a must. A guilty mind is not a necessary precondition. Moreover, in case of civil wrongs, the standard of proof is much lower (i.e. balance/preponderance of probabilities) whereas, in criminal offences, the crime should be proved against the accused beyond a reasonable doubt. Therefore, in cases of corporate misconduct, the efficacy of criminal law is questionable, since employing the standard of ‘preponderance of probabilities’ involves lesser regulatory burden and costs as compared to the ‘beyond reasonable doubt’ standard.
Improving the ease of doing business
Another motive behind decriminalising corporate offences is to encourage the inflow of foreign investments. It is also necessary to promote home-grown start-ups to set up businesses in India rather than approaching the foreign markets. This is because a lot of entrepreneurs in India prefer overseas jurisdictions over India due to the Indian regulatory framework and laws being onerous and stringent. The move of the MCA is justified especially at a time when the economy of the country is in a deplorable condition with the lowest ever GDP (owing to the COVID-19 pandemic) and private sector investment being at a 15-year low due to the harassment by tax authorities etc. Therefore, the goal of retaining businesses in India and encouraging foreign capital would become difficult to achieve if criminal provisions in corporate law are not decriminalised and laws are made less stringent in their application.
Arguments against decriminalisation of corporate offences
On the other side of the coin, certain shortcomings of the move have been highlighted. Firstly, it has been argued that in a country like India, there are a huge number of companies with varying sizes and sets of practices. Monetary fines imposed on these firms would impact each of these firms differently, depending upon their scale and financial status. Secondly, taking away the power to punish or impose fines would now be transferred from courts to civil servants or those belonging to the political community. Thirdly, there is also a possibility that firms would deliberately violate the law as the loss incurred due to the imposition of penalties may be much lesser than the advantages gained through such violations.
With respect to the first argument, it should be emphasized that looking at the diversity of different firms across the country, the goal of coming up with an infallible formula for the determination of fines for firms of all types/sizes is not only impractical but also unrealistic. It is, therefore, suggested that the MCA can adopt a proportionality test by either setting up varying limits of fines depending upon the size of the company or charging fines based on a certain percentage of the turnover. This could be provided for specifically in the Act, or guidance can be provided by the courts. In this manner, if not fool-proof, an efficient method could be devised to make different companies liable to different amounts of fine depending upon their size and scale of operations. The focus should, therefore, be on imposing fines rather than convicting the wrongdoers. Also, the social costs of imposing criminal punishment are far higher than imposing fines on corporates, as the amount received through fines could be utilised towards social and economic development whereas the amount spent on imprisoning the offenders will impose a heavy cost on the public exchequer.
The second argument holds ground in the sense that adjudication of penalties is a quasi-judicial function which will now be entrusted to the Adjudicating Authority (AO), a non-judicial body. An AO can be the Registrar of Companies (RoC) or the Regional Director (RD), the offices of which are directly under the control of the Central Government. This function can better be handled by persons from the judicial background (for instance, retired judges of High Courts and the Supreme Court). An independent authority with adjudicators from the judicial background can be constituted to serve the purpose. This would ensure neutrality in the proceedings up to a considerable extent.
With respect to the third argument, while it is agreed that opportunistic behaviour in a country like India is quite rampant, the determination of penalties is something that needs to be looked into. In a case where a determinable advantage accrues out of a particular violation, the penalty imposed should be more than the benefits received. In this regard, the Securities and Exchange Board of India (SEBI) under Section 11B of the SEBI Act 1992 is empowered to direct such violator to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. Likewise, Sections 38, 212 and 224 of the Act also deal with the disgorgement of such ill-gotten profits. Additionally, instead of the stipulated penalties, ‘proportional’ or ‘discretionary’ penalties as envisaged above can be levied by the AO. Interestingly, the Supreme Court recently in SEBI v. Bhavesh Pabari held that the AO shall have discretionary powers to determine the quantum of penalties under Section 15J of the SEBI Act, taking into account the mitigating and aggravating circumstances. Hence, such a discretion granted to the AO can ensure unjust benefits do not exceed penalties and the disgorged amount. In this manner, opportunistic behaviour can be curbed and undue benefits restricted.
As far as the move of decriminalisation is concerned, MCA has taken a step in the right direction to ensure better corporate governance and promote the growth of the economy.
Also, indiscriminate decriminalisation of all the offences in the Act will let companies look at its provisions lightly which might promote opportunistic behaviour. Hence, it should be ensured that the Act does not eventually become “toothless” legislation, and elements of fraud, deceit, willful and repeated offending etc. are always subject to criminal sanctions. Analysing CAB 2020 and CAA 2019, it can be said that a perfect balance has been struck between decriminalising certain offences and maintaining status-quo on others. However, its implementation could lead to problems as stated in the preceding section, where the suggestions mentioned thereafter can help address these problems.