By Sujit Bhar
As India’s business atmosphere gets murkier by the day, as manufacturing-related productivity is set to virtually collapse in a heap, and as foreign investment turns into a trickle, the government may have finally woken up to at least one major contributor to this disaster. This is the choking effect of corporate laws which still view wealth creation as a criminal activity and try to cut down every entrepreneur with laws that not only inhibit growth, but kill any innovative zeal that may have been left in the country.
This is a major contributor to India wallowing in the middle-income rut, quite like the frog in the well, believing the world to be tagging onto India’s coattails, instead of it being the other way around. As South Asian countries such as China, Vietnam and South Korea gallop far ahead in innovation, social engineering and skills, the quirky and obtuse legal system in this country has helped in eroding to the bone the general trust factor that had traditionally driven businesses in India.
A lack of liquidity in the system has hit wallets. The liquidity crisis stems from a combination of factors, including sluggish deposit growth, government borrowing, foreign investor withdrawals, the Reserve Bank of India’s actions to stabilize the rupee and even huge tax and GST outflows. It is not a matter of pride that India’s remittances from workers abroad (in 2024 this stood at $129 billion) were much larger than Foreign Direct Investment (FDI) inflows, which stood at $55.6 billion. And we aren’t even looking at the recent nightmare of tariffs imposed by the Donald Trump administration, set to have kicked in on April 2, and what a mess that could create.
The other contributing factors include debilitating, anti-business laws, including the recent income tax order in which the IT department may gain enough teeth to look into even an assessee’s social media accounts.
Union Finance Minister Nirmala Sitharaman has, so far, stood by her order on the IT front, but at least the government has now focused on easing corporate laws to boost business and investment. Nobody knows if this can stem the massive ebb that has sucked billions in foreign funds out of the country’s system, or if it can regenerate the trust that Indian businessmen have lost, but it is a start. The government wishes to decriminalise minor offenses, empower regional directors for faster merger approvals, and streamline procedures for applications and records.
Of the ideas in the pipeline, the following do stand out.
Decriminalisation of minor offences: This is a major baggage from India’s socialist days, when business houses lived in fear of criminal cases in civil case garb. In its effort, the government has decriminalised minor offenses under the Companies Act, eliminating imprisonment as a consequence for over 46 offences. Business compliance would henceforth be within civil law frameworks and unless crime is outrageous, no jail time would ensue.
Shareholder empowerment: This is a major move, in which the retail or small time investor in a company has been empowered by the Companies Act, 2013, to even start a class action suit, as is prevalent in developed economies. Of course, the details would emerge when an attempt at such is made, because a class action suit, even in the US, is difficult, needing large amounts of money and a panel of lawyers with the right credentials.
Private bankruptcy: While the Insolvency and Bankruptcy Code (IBC) has brought about a great deal of ease in companies declaring bankruptcy, to allow authorities to restructure and even save the company, individual insolvency remains a mirage. The rules for individual bankruptcy, though alive in principle, have not been fully notified yet. Individuals can initiate the Insolvency Resolution Process (IRP) if they are unable to repay debts exceeding a certain threshold (currently Rs 1,000). In an economy where private debt has shot through the roof, where people are taking in more debt to repay old debt, thereby creating an inescapable cycle, a better clarification on this would have been extremely helpful.
Streamlining procedures, enhancing ease of doing business: While this purportedly allows for faster merger approvals through amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, reading through this may create a sense of déjà vu and not excitement. Indians have been told for years about the ease of doing business, and the babus get even more into your hair. The number of points of adherence for a business owner has grown to obscene levels, leaving little time for the actual business activity. Whatever the government says, this has remained a mess.
Enforcing Contracts: The new idea is to have dedicated commercial courts, specifically designed to resolve commercial disputes faster. In India, enforcing a contract is a nightmare, especially for international organisations that come from lands where order is a given. While the idea is new and welcome, whether it can actually provide relief is not sure.
Business Reform Action Plan (BRAP): The Department for Promotion of Industry and Internal Trade has launched BRAP 2020, which includes 301 reform points across 15 areas. Hoppe this does not end in dusty files.
If anything, the government’s effort at trust-building attracts eyeballs. And that is being tried through the easing of corporate laws by bringing back to life older initiatives, such as the Jan Vishwas Act of 2023, which decriminalised 183 provisions, and is seemingly working towards further simplification and digitalization of processes.
The primary objective is to decriminalise minor offences, making it easier for businesses and citizens to operate without the fear of imprisonment for technical or procedural lapses.
The Act amends 42 Central Acts administered by 19 Ministries/ Departments, decriminalizing 183 provisions.
The following are some key features:
More civility: Instead of imprisonment, the Act introduces civil penalties and administrative actions for minor infractions.
Rationalisation of penalties: The Act ensures that penalties are proportionate to the severity of the offense, with stringent punishments retained for serious violations.
Compounding of offences: The Act proposes introducing compounding of offenses in some provisions, allowing for resolution through payment of a fine instead of prosecution.
In the implementation stage, pragmatic revision of fines and penalties, establishment of adjudicating officers and appellate authorities, periodic increase in the quantum of fines and penalties and some more minor issues. The idea of this Act is to “foster a more conducive environment for businesses and entrepreneurs by reducing unnecessary legal hurdles, promoting trust in businesses and citizens, and aligning India’s regulatory framework with global business standards,” as the government puts it.
Here are some instances where jail time was a possibility earlier:
False information and breach of licence conditions: The Act decriminalises the furnishing of false information, making it punishable with a penalty instead of imprisonment. This has been decriminalised, and applies in the case of proprietors of pharmacies, converting it into a compoundable offence. How this would be effective is not clear, because any false information in a food product/medicine that leads to serious injury or death, should have a special clause that takes it out of this Act’s ambit and places it in a criminal court.
Overall, it is a start in the right direction, but there is immense scope for improvement and it has to be seen how the babus are kept at bay.
The business ecosystem at this point in time is in a major flux. It is not sure how much the world will adjust to the Trump’s administration’s wild acts and how the EU and China retaliate. India has already started reducing tariffs, but while historically India has managed a trade surplus with the US, the system could slip badly if the Rupee depreciates further.
If the US manages to force India to import more, the weak rupee will hurt Indian businesses more. With little clarity on any level tech transfer soon to upgrade Indian products, this is a scary thought.
However, if these law changes do manage to invite more international firms to invest in India, the country would benefit immensely, even within this turbulence.