Handle Adolescent Pain with Care

As the Republic turns 70, it is apt to contemplate on what it has meant for the rule of law for doing business. It is time to reflect on where we have come, where we could have been and what we ought to do next.

Company Law:

Let’s begin with company law. In 1956, we gave ourselves a new law shedding the 1913 law inherited from the British. Ferocious law-making and issuance of circulars and clarifications came about in the years that followed. Many of these circulars and clarifications hold good even today – which is not necessarily bad or good.

A chance to reform, restate and codify the law presented itself with the Companies Act, 2013. In some facets, the opportunity to explicitly codify old clarifications into the law to bring in greater predictability and assurance of continuity has been lost – for example, for clarity on what constitutes remuneration for directors, one may still have to go back to circulars issued decades ago. In other facets, the opportunity to explicitly state the law expects a marked departure from old thinking, has been lost – for example, the expectations of accountability from the corporate governance process. This leaves a heavy burden on the judiciary, without adequate supporting literature from Parliamentary debate to infer from and interpret the law.

Case law cited in corporate disputes even today can be really old and applied in appropriately. For instance, LIC vs. Escorts (AIR 1980 SC 1370), a ruling in the culmination of a writ petition challenging the actions of state-owned financial institutions, with the dispute primarily involving exchange controls, is still a mantra routinely cited even in cases involving oppression of the minority and mismanagement, a unique equity jurisdiction created by Parliament to put an end to oppressive conduct, if found existent. The same principle that informs the wider social perception today informs public perception of “corporate democracy” too – that a majority-seat enjoying government (read, majority shareholder) should not be questioned in exercise of sovereign power (read, run the company the way the majority desires). The perception on both counts needs adjustment – case law has evolved in constitutional law for challenge to sovereign power, but case law on challenge to power over a corporate is slowly meandering in its path.

Exchange Controls:

We inherited exchange controls from the British too from war time measures, but wrote our own draconian version of it in the Foreign Exchange Regulation Act, 1973 (FERA). Literally anyone who has had any touch point with matters overseas India would have violated FERA – and I do not risk overstatement. The law regulated when, how and what foreign currency and how much of it any Indian resident could access. The limits on foreign exchange one could buy and hold would mean that no Indian could afford respectable accommodation when travelling abroad, if truly compliant with the law. Worse, the law entailed a “presumption of culpable mental state”. Coupled with “sister” legislation – like COFEPOSA and customs law, it was a potent mix, that held Indian enterprise down with a vice-like grip. The Enforcement Directorate cut its teeth under this legislative framework.

The effect of the legislation was inversely proportional – akin to the effect of the toughest anti-corruption law we have in the Republic. Monies continued to be stashed abroad; FERA cases were merely a part of the portfolio of tools that could be used against individual businessmen. Unsurprisingly, literally every newspaper owner had FERA cases to contend with – the need to deal in foreign exchange to import newsprint or printing technology, providing fertile soil to harvest them.

FERA, like the demolition of statutes of Lenin and Stalin, was thrown in the bin (or so we thought) at the end of the 1990s, replaced by the Foreign Exchange Management Act, 1999 (FEMA), decriminalising exchange controls. A “liberalised remittance scheme” permits any Indian resident to wire substantial money abroad to buy foreign exchange. Yet, other features have brought the old era back. In 2015, criminal sanctions have crept back into FEMA through a Money Bill. Having made an entry, it is only a matter of time for more criminalising provisions to creep in, transforming FEMA into FERA.

The Prevention of Money Laundering Act, 2002 (PMLA) to combat and chase the money trail with offences like drug-running and human trafficking listed as “scheduled offences” was passed. Over the years, to these were added, a long list of inconceivable offences (for example, violation of Takeover Regulations) and it has become a potent weapon for the State. Today, arguments are still being entertained about how despite honourable exoneration of the charge of the scheduled offence, a charge of PMLA violation can continue. In a nutshell just how provisions in TADA, survived in POTA, and thrive in UAPA, exchange controls rule the lives of Indians.

Securities Markets and Financial Sector:

Capital formation was seriously impeded for a large part of the Republic’s life. The Controller of Capital Issues ran a nanny-state to decide who could raise capital from the equity markets, at what price, and of what size, with a judgement call on quality of the securities issuer. Since 1991, this was replaced with a disclosure regime – where anyone could raise money so long as truthful and complete disclosures were made, leaving it to the markets to judge if the securities being issued were worthy of investment.

Yet, over time, the line with “regulation” and “control” by the State has totally blurred – reduced too jargon without precise legal definition. Serious inroads into judging quality of the issuer and finding means to trip up securities offerings on the ground of quality of the issuer have been made, this time with the title “market regulation” and not “capital control”.

For every sub-sector in the financial sector, a separate regulator came to be created – for example, the insurance and pension sectors. The provider of financial services could be owned by the same institution – say, ICICI or Kotak Bank through its stock broking, insurance and pension arms and you could be be availing of all the services – but the regulators are different. This leads to market practices being found faulty in one sector still being deployed in another until the other regulator plays catch up. The Financial Sector Legislative Reform Commission under Justice B.N. Srikrishna proposed serious reform and consolidation but for now the report seems to have been moth-balled.

In a nutshell, as with the wider polity, at the age of 70, the business and industry segment of the Republic too is living through the age of adolescence. How the growth pain of an adolescent is handled is a matter of great care. Mis-diagnosis and wrong prescription could lead to the treatment being more painful than the ailment. It is time to tread with mindfulness and care.

The author is an advocate with a focus on corporate and regulatory matters