The plethora of rule violations that have jail time as punishment is an ever-present threat for business managers. The passage of the Jan Vishwas Bill will be a step towards decriminalising them, but lawyers say much more must be done. Indrajit Basu reports

India’s business laws are distinctive for the severe penalties of imprisonment and public disgrace that they impose for rule violations. It’s no wonder that for years these laws have raised concerns not just among the country’s entrepreneurs, company directors and investors, but among foreign investors as well.

For instance, a factory manager’s inability to immediately provide a sample from a factory dealing with hazardous substances on an inspector’s visit can result in three to five years in prison.

Consider this: of the 69,233 specific rules that regulate business in India, 26,134 have jail as a penalty for non-compliance. In other words, nearly two out of every five offences might land a business owner in jail, according to the Observer Research Foundation (ORF), a New Delhi-based think tank.

In addition, according to lawyers, a small business, particularly a micro, small or medium-sized enterprise, may confront an overwhelming 500 to 900 compliances or more per year. These include labour laws, taxes, factory laws and other regulatory measures.

“Entrepreneurs, especially in the early stages, face similar pressure, stifling innovation and risk-taking,” says Manoj Kumar, founder and managing partner at New Delhi-based Hammurabi & Solomon Partners.

“The fear of inadvertently committing non-compliances or technical violations and therefore the constant need to ensure strict compliance with complex regulations creates a burden that can result in legal investigations, reputational harm, personal financial loss and a conservative approach to business operations.”

Manoj KumarConsequently, to ensure compliance, businesses often find themselves dependent on professionals like chartered accountants, company secretaries and lawyers, resulting in substantial financial costs.

However, while penal rules with monetary fines are costly, they deal a double blow when they take the form of a criminal procedure that impacts the business’s founders, directors and key management staff in their personal capacity. The consequences are serious, and can even be disastrous. A corporate director, for instance can be summoned, arrested and imprisoned in an instant, and this is frequently reported in the media.

Subduing growth

“[Although the] Indian regulatory landscape is tough to navigate for domestic stakeholders, it is even tougher for foreign stakeholders looking to invest in or set up business in India,” says New Delhi-based Uday Singh Ahlawat, managing partner at Ahlawat & Associates.

Foreign investors often cite the stringency of regulation (and its compliance difficulties) as a disincentive to engaging in the Indian economy, causing India to lose critical foreign investment.

Uday Singh AhlawatThe Indian Computer Emergency Response Team (CERT-In) directions on the Information Technology Act covering “information security practices, procedure, prevention, response and reporting of cyber incidents for safe and trusted internet” illustrate the compliance demands foreign investors face. CERT-In mandated last year that foreign virtual private network (VPN) providers must synchronise their system clocks directly with India’s National Informatics Centre (NIC) or network time protocol (NTP) servers, or with NTP servers traceable to them. Global entities or multinational firms, however, can utilise a different time source if it matches with the National Physical Laboratory and the NIC.

Given that these requirements were practically impossible to apply for many multinational providers (or even domestic providers) due to the limited number of such servers maintained by the NIC, foreign VPN service providers such as ExpressVPN and Surfshark were compelled to shut shop.

But the good news is India is attempting to decriminalise business laws, and with a good deal of seriousness.

The government is nearing completion of a new law to support the “ease of doing business and ease of living” via an act of parliament. Called the Jan Vishwas (Amendment of Provisions) Bill, 2022, the new proposals aim to decriminalise imprisonment provisions for minor economic offences, minor procedural violations, and non-compliance with more than 30 business-related laws administered by various union ministries ranging from commerce to the environment, telecoms, and road transport and highways.

What’s more, India has taken several other initiatives to decriminalise business regulations and make doing business easier.

According to the government’s agency for industrial growth, the Department for Promotion of Industry and Internal Trade (DPIIT), 22,000 compliances were reduced, approximately 13,000 compliances were simplified and more than 1,200 processes were digitised by September 2021.

In addition, the DPIIT says that by 2021, 103 offences were decriminalised and 327 redundant provisions or laws were repealed. Such measures to lessen the compliance burden by simplifying and decriminalising some policies can have a multiplier effect on the ease of doing business, noted Commerce and Industry Minister Piyush Goyal when announcing the reforms.

Providing breathing space

To ease constraints, the DPIIT asked each ministry, department and state to review the relevance and logic of compliances within their purview, as well as conduct a thorough process re-engineering to eliminate burdensome rules.

Additionally, India has decriminalised 46 penal provisions in the Companies Act, 2013, and 12 offences under the Limited Liability Partnership (LLP) Act, 2008, as a result of which states and union territories have reduced the time for granting approvals or licences, eliminated physical touchpoints, and increased transparency for citizens and businesses through business process re-engineering. Single-window clearance procedures for new investors have also been simplified, reducing the lead time it takes for enterprises to begin operations.

Nonetheless, perspectives differ on the rate of decriminalisation.

Some say that most commercial disputes and civil violations in business and economic legislation, particularly technical offences, should be decriminalised in India, unless they entail fraud or malfeasance.

“The bill might prove to be a ground-breaking moment for India when it comes to providing relief for business operating and looking to set up in India,” says Ahlawat. Undoubtedly, the bill does a commendable job of decriminalising a broad range of provisions in various legislations like drastically softening the controversial penalties of the CERT-In directions.

The bill also decriminalises similar thorny provisions in the Environment Protection Act and the Factories Act, 46 penal provisions in the Companies Act and 12 offences under the LLP Act.

“These provide breathing space to directors of listed companies who are under constant pressure to reveal any criminal proceedings against them. It also reduces the burden of the tribunals and courts,” says Daizy Chawla, the managing partner at S&A Law Offices in New Delhi.

Others argue that much more must be done.

“While I believe that the bill is a step in the right direction towards achieving better ease of doing business, with regards to some provisions, it is certainly not enough to improve the current state of affairs,” says Mumbai-based Bhushan Shah, partner at Mansukhlal Hiralal & Company.

Bhushan ShahHe adds that some of the amendments proposed don’t even pertain to the objective the bill set out to achieve – namely improving the ease of doing business and the ease of living – like decriminalisation under the Indian Post Office Act.

Besides, the bill barely touches the surface of the reform that is required to improve India’s business environment in terms of alleviating business-related offences, particularly those relating to compliances. Decriminalising just 113 clauses of the more than 26,000 imprisonment clauses in India’s corporate code “cannot be enough”, adds Shah.

Centre-state collaboration

Business compliance matters involve complex business transactions, cross-border operations or international trade, most of which fall under the jurisdiction of both federal and state governments, and such issues require a more collaborative approach that strikes a balance between the federal and state governments’ responsibilities.

Hence, “the federal central government and respective state governments should work together to decriminalise business compliances”, says New Delhi-based Harvinder Singh, a partner at DSK Legal. He adds that while the Indian government can take the lead by providing guidelines, best practices and technical assistance to states and union territories, the respective state governments, in collaboration with other stakeholders, should engage in public-private partnerships to ensure that the decriminalisation process is effective and meets the needs of businesses and society.

The rolling out of straight-through processing (STP) by the Ministry of Corporate Affairs to replace the Registrar of Companies approvals is a good example of this collaboration.

STP minimises delays and administrative inefficiencies by permitting online submission of statutory filings and quick acknowledgements. Additionally, it makes the process of gaining approval for statutory filings more transparent to businesses and eliminates unnecessary errors that could potentially put them in violation of the law and lead to criminal prosecutions.

“The adoption of this process eliminates the possibility of flagging non-compliances and accumulating fines, allowing entrepreneurs to concentrate on key business responsibilities and thereby making doing business easier in general,” says Nitin Wadhwa, managing partner at Wadhwa Law Offices in Gurugram.

But times are changing and so should the nature of legal reforms in India.

Nitin Wadhwa

According to ORF, the first-generation changes happened through the 1991 industrial policy, while the second-generation reforms occurred throughout the next 30 years across multiple governments. These reforms liberalised the Indian economy, increased trade, established new regulators, instituted a new system of indirect taxes, and employed technology to promote growth, prosperity and direct benefit transfers.

Many believe that the next phase of reforms in India should focus on reducing the compliance burden for businesses and assuring the availability of capital, both international and domestic, for them.

“Many compliance requirements have become irrelevant, and unnecessary with changing times and technological development,” says DSK Legal’s Singh.

He suggests that a time-bound systematic exercise across federal and state ministries should be initiated and should be implemented and monitored by the commerce ministry.

Boosting corporate support

This exercise, adds Singh, should aim to simplify and rationalise compliances, decriminalise minor civil violations, and eliminate duplicate rules to give entrepreneurs a chance to enter the market and compete with market giants. The goal should be to make the entrepreneur’s interface a pleasant experience. That aside, the federal government should also take deliberate steps to convert its goals and objectives for the ease of doing business for entrepreneurs, he says.

After all, despite the recent efforts, there are several legislations imposing criminal liability on companies and directors that are rarely enforced but are used by corrupt officials to harass and intimidate directors and companies – hampering business.

“In India, failure of business is looked upon as criminal,” says Wadhwa.

Indeed, lawyers say that India, compared to many Western countries, has a long way to go in terms of corporate support. To adopt any changes to the regime, the government should consult with experts and law firms to gain impartial opinions. Consultations with internal teams, investors and stakeholders must also be considered. Steps must be taken to guarantee that commercial matters are not habitually prosecuted as crimes.

Above all, considering the immense socioeconomic costs associated with imprisonment, jail sentences should not be imposed at the drop of a hat. The effort should be on standardising sentencing across all rules in accordance with the nature of the harm caused or projected to be caused.

The objective of the regulatory authorities, add experts, should be to become a useful instrument in decreasing the burden of the 26,000 compliances that entail jail time. This can be accomplished by categorising all non-compliances into two categories: procedural or technical breaches and major violations.

Experts say the need of the day is enhancing intellectual property rights protection to encourage innovation and creativity, promoting skill development and entrepreneurship support to empower aspiring entrepreneurs, and facilitating international trade by simplifying trade procedures and lowering barriers.

“These factors are critical for India’s road to becoming a global power because they contribute to the ease of compliance and conducting business, positioning India as an appealing destination for global investors and supporting long-term economic growth,” says Kumar of Hammurabi & Solomon.