Decriminalization - Quo Vadis?

The COVID-19 pandemic has forced the hands of industry bodies and government authorities to push for a lot of unconventional changes to the existing business environment. The Insolvency and Bankruptcy Code (IBC) has been temporarily suspended, giving legal cover to companies against initiation of resolution proceedings. Although it was an encouraging step aimed at preventing downturns and insolvencies arising on account of the slowing economy, it raises questions of increased stress on the already ailing Non-Banking Financial Corporations (NBFCs) and banks, which form the backbone of the credit cycle in the economy. An indication of a rising culture of deregulation that is being gradually ushered into the Indian economy and is being silently affected in tranches. Moreover, the difficulties brought by COVID-19 are catalyzing the process of deregulation, with the hope of helping ailing industries to recover.

The Finance Minister announced as part of the economic stimulus package that the government has decided to decriminalize some provisions of the Companies Act to enhance the ease of doing business in India. This was followed by the Union Government decriminalizing 19 different minor offences, to provide relief to the MSMEs.

On March 4, 2020, the government approved amendments to as many as 65 provisions in the Companies Act. These include reducing the remedial measures against corporate offences from awarding jail sentencing to levying penalties or fines or removing them altogether. The lower thresholds for Corporate Social Responsibility (CSR) spending have been done away with in some cases and reduced in others. About 23 offences have been opened up to adjudication through alternate mechanisms, and seven different offences have been omitted altogether.

Furthermore, in June 2020, amendments were made through central ordinances to 19 legislations including NABARD Act, SEBI Act, SARFAESI Act, PFRDA Act, Negotiable Instruments Act, etc. These amendments have made changes in the liability for minor offences such as cheque-bounce and repayment of loans, to lubricate creditability, especially for small businesses which have been crippled due to the lockdown.

Although the intention is to contain the ongoing global economic crisis and attract investments into the country, one must remember that an environment of unfettered access can only go so far to overcome the current financial crises. Economic liberalization is one thing; allowing unrestricted economic activity sans regulation is another. In spite of the legitimacy of the goal, easing norms by compromising the criminal justice ingrained into company law provisions is a risky undertaking. This overhaul holds the potential to rupture the belief systems of the public that keeps these commercial institutions functioning.

First, easing of norms, especially criminal regulation, always tends to bring down public accountability of companies. In the absence of accountability, there is no telling how far the productivity index may dive and how grossly public money may be pillaged by the vested interests in these companies whose goal is to plunder public resources and fulfil their agenda. Lack of imprisonment as a punishment takes away the guarantee of deterrence that forms the cornerstone of any criminal justice delivery system.

Secondly, relaxed regulations against offences like loan repayment and cheque bounces heighten the risk of depletion of capital from lending institutions. Banks and NBFCs, which act as primary creditors to the companies, are inundated with Non-Performing Assets (NPAs) and defunct loans, placing immense pressure on the public lending structure. While one may empathize with the fact that a relaxed view of accountability towards credit facilities will ensure the release of more liquidity into the economy, it is pertinent to remember that fear of significant jail terms and criminal action is what induces debtors to ensure accountable utilization of capital and curbs the motivation to default on loans. In the interest of sound judgment, it is impossible to overstate the importance of maintaining cash flows in the market and preserving the financial health of our creditors. A systematic dependence of debtors on deferrals or default on loan payments can cripple the first line of defence in our economy, which is symbolized by the credit-reliability of banking institutions.

Thirdly, a more favourable attitude to economic offences through reduced or absent criminal liability poses a severe threat to government revenues. Besides waiving criminality for tax avoidance under the current amendments, there are provisions for reduced accountability via auxiliary offences, e.g. maintenance of corporate books. This gives ample opportunity to companies to hide revenue streams and assets, thereby denuding the public exchequer of a major chunk of monies that could have been mopped through taxation.

Fourthly, the Finance Minister emphasized the necessity to reduce the burden of cases going into the National Company Law Tribunal (NCLT), the premier adjudicating body for disputes in matters involving companies. This is perhaps the most undesirable methodology to relieving courts from discharging their statutorily mandated functions. One must rather aim at. establish more courts, rather than reducing the index of offences that can be processed towards their gates! There has been a concerted effort by industry bodies as well as government functionaries, demanding the setting up of a greater number of tribunals feeders to ease the pressure of ever mounting loads of cases pending before the NCLT and its appellate body, NCLAT. Reducing the list of prosecutable offences would be an ostrich like approach to tackling crime, It would be like saying that there are not enough police men to catch the thieves, so theft should no longer be a crime in the Indian Penal Code.

The Mini Small and Medium Enterprises (MSMEs) are the building blocks laying down the industrial foundations of a country. Their growth is integral to ensuring overall development of the economy. However, it cannot be at the cost of bringing to a naught the deterrence of law vis s vis criminal behaviour.

The 21st century has emerged as a golden age for free market access and liberalization in trade and commerce. This has great potential to lead India onto newer horizons of emerging as an economic force to be reckoned with. Several measures have been taken of late in this regard. Many treaties have been executed. However, growth can only be lasting if built on a disciplined platform.

Therefore, deregulation must stem either from undeniably compelling circumstances or an atmosphere of gradual compliance attainability as seen in jurisdictions elsewhere. In either case, the extent of deregulating measures must be carefully administered without endangering the existing framework of deterrence and their adaptability to absorb and enforce the new rules of the watchdog machinery.

Let us not allow our MSMEs and other budding industries to develop a feeling that they can prosper best in an environment of scant regulation and decriminalized compliances, lest we risk the stabilility and sustainability of the economic system.