Reimagining India’s business compliances
India’s legacy framework has viewed entrepreneurs with distrust and used criminality as a tool for control. This needs urgent repeal. Here is a way
For over seven decades, the Indian entrepreneur has been a victim of over-regulation. One indicator is the sheer size of the employer-compliance universe. A subset of that are imprisonment clauses in the rules that oversee doing business in India. For the first time, a new report studies this phenomenon and makes recommendations for reform.
Titled Jailed For Doing Business, this report that Gautam Chikermane and I authored for Observer Research Foundation dissects criminality in India’s business laws. The report discovers that among the universe of 1,536 legislations, 54% (843) have clauses of imprisonment. Of these, 29% are at the Union and 71% at the state levels.
Unfortunately, jail-term as a tool of control has survived decades of economic reform. In the 26,134 compliances, two out of every five carry imprisonment clauses going, up to 10 years. A jail term of up to three years can be meted out under 86% of the clauses. Five states — Gujarat, Punjab, Maharashtra, Karnataka, and Tamil Nadu — have over 1,000 clauses of imprisonment in their business laws.
While labour laws comprise half the compliance universe, they contribute more than 65% of imprisonment clauses. Within these laws, the Factories Act, 1948, is the largest contributor, accounting for 31% of all criminal clauses. The prescription of the law is general and universal, and provides for imprisonment of up to two years for any violation or contravention.
The data points to a bigger malaise — the inherent hostility the State has towards India’s business community. This slows down entrepreneurs and raises barriers to job and wealth creation. The question is: In the 21st-century, do Indian entrepreneurs need microscopic oversight on the provision of spittoons, gender-segregated washrooms, places for storage of clothing and painting the inner walls of canteens? Can we afford to send job creators to jail for failing to display the abstract of an act or the whitewashing of walls? If one compares the quantum of punishment prescribed for such “misdemeanours”, with provisions prescribed in the Indian Penal Code, 1860, many of them are on par with homicide and death due to negligence. Unfortunately, a sizeable number of provisions are asynchronous with contemporary times and puts inordinate power in the hands of the bureaucracy, serving rent-seeking behaviour and sustaining inspector raj.
The Interstate Migrant Workmen Act, 1979, and the Payment of Gratuity Act, 1972, among others, are replete with minute rules and view contraventions through the lens of criminality. Another pillar of social security, the Minimum Wages Act, 1948, is similarly excessive. There is provision for imprisonment for failing to meet procedural or logistical requirements, such as providing notices showing the date of payment of wages, maintenance of registers and records, and the disbursal of identity cards and service certificates. Likewise, the Maternity Benefits Act, 1961, critical to establishing gender diversity and inclusion, is laden with bureaucratic obstacles, including obligations to display the abstract of the legislation in workplaces with infractions carrying a jail term. In the fast-emerging digital age, there are more sophisticated tools for distributing information electronically.
Other legislation including, but not limited to, the Drugs and Cosmetic Act, 1940, the Electricity Act, 2003, the Legal Metrology Act, 2009, the Essential Commodities Act, 1955, and the Petroleum Act, 1934 among others, have jail terms prescribed for failing to comply with procedural obligations.
The primary purpose of criminal law is to check behaviours that threaten the larger public interest. Necessity and proportionality are the guiding principles to ensure that the quantum of punishment is in line with the gravity of the infraction. However, a sizeable number of examples fail the test of the basic principles of the criminal justice system. Our report makes a case for the next generation of reforms to reduce hostility in employer compliance. The report makes 10 major and 31 minor recommendations. Some of these include: One, constitute a regulatory impact assessment committee within the Law Commission of India. The Commission should review the quantum of penalties in the current business laws and rationalise them as per the nature and gravity of the default. This may help reduce criminality by at least 30-40%.
Two, end the criminalisation of all procedural lapses. Imprisonment as a tool of punishment should be used with extreme restraint, given its socioeconomic costs. Technical or procedural lapses typically arising from a lack of awareness need different treatment as compared to wilful actions meant to default and steal. Missed dates, inaccuracies in register formats, inaccurate calculations are better dealt with by financial penalties rather than imprisonment.
Three, define standards of legal drafting. India needs to adopt an indicative set of standards of legal regulations to guide lawmakers. These standards need to include principles of necessity, proportionality and coherence. The standards should be followed by Parliament and assemblies while proposing amending regulations.
Four, introduce sunset clauses. Existing laws should not become a liability for our future. Our business climate is changing rapidly and our regulatory environment needs to keep pace. Sunset clauses should be introduced in our law-making process as a tool to terminate certain clauses and rules at a predetermined time. Every imprisonment clause should go through periodic scrutiny to review its need and relevance.
Policymaking in India needs to be reimagined. The legacy framework has shunned entrepreneurs, viewed them with distrust and used criminality as a tool for control.
Over decades, excessive criminalisation has bred corruption, blunted formal employment and created a large number of economic dwarfs. India’s entrepreneurs need greater dignity and freedom to make investments, create wealth and jobs.
Rishi Agrawal is co-founder and CEO, Teamlease Regtech
The views expressed are personal