ORF
Home Research
Jailed for Doing Business: The 26,134 Imprisonment Clauses in India’s Business Laws
10 February 2022
GAUTAM CHIKERMANE
RISHI AGRAWAL
Business, Laws, GDP, legislations, rules and regulations, ideas, organisation, money, entrepreneurship, jobs, wealth, economic, protect labour, criminal penalties
This report distils the risks of imprisonment faced by Indian entrepreneurs. Using newly isolated data on 26,134 imprisonment clauses embedded in laws enacted by the Union and state governments, it provides the risks faced by entrepreneurs and corporations in doing business in the country. The data is analysed along seven categories—labour; secretarial; environment, health and safety; industry-specific; finance and taxation; commercial; and general—followed by a sub-national scrutiny. Finally, the report offers 10 policy recommendations and 31 sub-recommendations that could help lawmakers reimagine India’s compliance universe. The aim is to serve as the basis of future research into India’s business climate, while providing a vital context within which policymakers can initiate and deliver compliance reforms.
Attribution:
Gautam Chikermane and Rishi Agrawal, Jailed for Doing Business: The 26,134 Imprisonment Clauses in India’s Business Laws, February 2022, Observer Research Foundation.
Executive Summary
India suffers from ‘regulatory cholesterol’ that is getting in the way of doing business. The legislations, rules and regulations enacted by the Union and State governments has over time created barriers to the smooth flow of ideas, organisation, money, entrepreneurship and through them the creation of jobs, wealth and GDP.
The presence of hostile clauses in these laws, rules and regulations has grown since Independence, surviving three decades of economic reforms initiated in 1991. The biggest challenges come from the continuance of imprisonment as a tool of control. As automation increases in the coming years, the pre-Independence 1940s-style administrative controls meant to protect labour will prove counter-productive in 21st-century India.
There are 1,536 laws that govern doing business in India, of which 678 are implemented at the Union level. Within these laws is a web of 69,233 compliances, of which 25,537 are at the Union level. These compliances need to be communicated to the governments through 6,618 annual filings, 2,282 (34.5 percent) at the Union level and at the states, 4,336.
These changes in compliance requirements occur constantly and add to business uncertainty. In the 12 months up to 31 December 2021, there have been 3,577 regulatory changes; over the three years from 1 January 2019 to 31 December 2021, there were 11,043 changes in compliance requirements. This translates to an average of 10 regulatory changes every single day.
Of the 1,536 laws that govern doing business in India, more than half carry imprisonment clauses. Of the 69,233 compliances that businesses have to follow, 37.8 percent (or almost two out of every five) carry imprisonment clauses. More than half the clauses requiring imprisonment carry a sentence of at least one year.
Several of these clauses criminalise process violations, while some of them punish inadvertent or minor lapses rather than wilful actions to cause harm, defraud, or evade. For some laws, delayed or incorrect filing of a compliance report is an offence whose punishment stands on par with sedition under the Indian Penal Code, 1860.
The largest number of imprisonment clauses are found in labour laws, with more than 50 such clauses per law. Five states have more than 1,000 imprisonment clauses in their business laws: Gujarat (1,469 imprisonment clauses); Punjab (1,273); Maharashtra (1,210); Karnataka (1,175); and Tamil Nadu (1,043).
This report argues that the criminalisation of business laws violates Indian business traditions: from the Mahabharata to the Arthashastra, criminality was never a part of punitive action against businesses in ancient India — only financial penalties were. Reforming these clauses is necessary to restore dignity to entrepreneurship in India. The authors make 10 major, and 31 minor recommendations:
1: Reform the way policies are designed.
2: Use criminal penalties in business laws with extreme restraint.
3: Constitute a regulatory impact assessment committee within the Law Commission of India.
4: Involve all independent economic regulators in compliance reforms.
5: End the criminalisation of all compliance procedures.
6: Create alternative mechanisms and frameworks.
7: Define standards for legal drafting.
8: Introduce sunset clauses.
9: Reform with one legislation.
10: Infuse dignity to entrepreneurs, businesspersons and wealth creators.
Introduction
India’s business regulation framework needs a 21st-century rethink. This paper provides the basis for it. It seeks to deepen the debate around economic reforms in the world’s fifth-largest economy, which is headed towards becoming the world’s third largest before 2030. Using newly isolated data, it collects, compiles and analyses 26,134 specific clauses in the country’s business legislations, rules and regulations that impose prison terms for violations. As it explores the discourse around what this report calls “regulatory cholesterol” (defined below) that places hurdles before India’s entrepreneurs, it situates itself within the ongoing policy discussions around reducing imprisonment clauses in India’s business laws. In March 2020, for instance, the Union Cabinet made clear its legislative intent to rationalise such clauses by approving related amendments in the Companies Act, 2013.[1]
This planned rationalisation is a crucial policy correction. Seven months earlier, in July 2019, the government had tabled, and Parliament had enacted, the Companies (Amendment) Act, 2013 in which it had amended Section 135 of the law and criminalised violations on corporate social responsibility (CSR) with imprisonment.[2] “Every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years,” Subsection 7 of Section 135 of the amended law states.[3] Following resistance from the corporate sector, the government announced it will not operationalise this clause, less than two weeks after enactment of the law.[4] While the clause has not been notified so far, it remains etched in law, and could still be executed.
Less than three months after the amendment was enacted, on 7 August 2019, a committee on CSR submitted a report titled, ‘Report of the High Level Committee on Corporate Social Responsibility – 2018’.[5] Set up 11 months earlier and chaired by the Secretary of the Ministry of Corporate Affairs, Injeti Srinivas, the committee recommended that unspent CSR funds be spent within three to five years. In case a company fails to spend, the money should be transferred to a fund to be specified by the government. Further, a penalty of two to three times the default amount should be imposed subject to a maximum of Rs 1 crore. However, there will be no imprisonment.[6]
You must be logged in to post a comment.