The malfeasance at ABG Shipyard went undetected for years | Photo Credit: –
Too many laws criminalise business activity — but does that deter fraud?
One look at “Jailed for doing business” — a research report by think tank ORF and temp staffing major Teamlease’s compliance advisory arm Teamlease Regtech, and any potential investor aiming to start a business in India is likely to take to the hills.
The report identifies a staggering 26,134 imprisonment clauses in the thousands of laws which govern business in this country. According to the report, “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 per cent (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.”
That’s not all. In many cases, simply failing to comply with India’s legendary bureaucratic requirements is enough to get you thrown in jail. The report found that of the 26,000-odd clauses mandating imprisonment, many were for simple process violations, such as failing to either properly fill out a compliance report or file it on time.
Others “punish inadvertent or minor lapses rather than wilful actions to cause harm, defraud, or evade,” the report notes, adding, “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.”
While the Modi government has been narrow-focused on improving India’s ease of doing business rankings, and has made commendable progress in cutting away red tape when it comes to permits and licences to start a business in India, and offers speedy “single window” clearance in many areas for foreign direct investments, that express ride tends to dry up once you are past the national border. While an inbound foreign investor looks at India as an aggregated market before setting up shop, the fact remains that all such businesses have to actually land on the ground somewhere in India.
And that immediately subjects them to the tender mercies of State laws and regulators. While it is a fact that “competitive federalism” has induced some healthy competition among States when it comes to attracting investments — which is also reflected in the NITI Aayog’s State-wise ease of doing business rankings — that again, trickles down very slowly to the field formations actually tasked with ensuring compliance.
And of course, these officials have a plethora of rules and requirements to fall back upon. As per the ORF-Teamlease report, five States, all of which are top rankers in State GDP numbers, and four of which account for a bulk of India’s organised sector businesses and significant chunk of manufacturing and services output, each 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).
The report goes on to argue 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.” Calling for restoring “dignity to entrepreneurship in India”, the authors call for a drastic overhaul of the way policies are designed, drafted and implemented, and makes the case for ending the criminalisation of all compliance procedures.
Which, on the surface, is a perfectly reasonable ask. In fact, most of the regulatory and compliance requirements date back to colonial days and, in the case of labour in particular, largely irrelevant to the modern business environment. These onerous and cumbersome rules and regulations have increased the burden on legitimate businesses, while singularly failing to protect the interest of labour.
What they have done is to create a huge rent industry where those in charge of enforcing compliance use the very impossibility of complying with these almost impossible demands in order to extract rent.
A friend running an electronics manufacturing facility in the NCR, for instance, was actually prosecuted for failing to comply with some provisions of the Factories Act, after refusing to give in to demands for bribes. The alleged violation? Failure to provide spittoons in the factory premises. Pleas that the factory was actually a “clean manufacturing” set-up with strict controls on cleanliness (chewing tobacco and smoking were banned in the premises for all) fell on deaf ears!
I, however, would like to look at these laws and rules through a different lens. Have these 26,000-odd prison clauses actually helped to deter fraud in India? And further, how effectively have these been used to mete out punishment to those guilty of violating the laws — in other words, how effective is the fear of prison as a deterrent to rule-breaking?
A cursory glance at the headlines gives you the answer. An ABG Shipyard is able to bilk a consortium of as many as 28 banks, led by India’s largest private and public sector lenders, ICICI Bank and State Bank of India, of as much as ₹23,000 crore. What’s more, despite having turned NPA as far back as 2013, it took more than seven years for a fraud case to be registered! Neither the company’s internal or external audits, nor the same in the lending banks nor the RBI’s inspections and audits raised a red flag in all these years!
In other words, the system is broken. From Mallya to Mehul Choksi, high-profile offenders have simply cocked a snook at these rules and regulations without repercussions. Clearly, fear of prison was no deterrent. In fact, according to RBI data, 2020-21 saw 7,363 cases of financial fraud reported, involving a sum of ₹1,38,422 crore!
And how many are in prison? I couldn’t find current statistics, but according to the India Prison Statistics database, in 2016, of the nearly half a million prisoners in the Indian jail system, a mere 399 had been convicted for financial offences! Given the high-profile failure of enforcement agencies and regulators to bring offenders to book, I doubt whether this ratio has changed much.
So, while we do certainly need a drastic overhaul of our rules and regulations, and decriminalisation of compliance failures or errors, we also need to ensure that genuine fraud is treated harshly and deterrent punishment is meted out quickly. Otherwise, genuine businessmen will be given the runaround, while fraudsters will be laughing all the way to their privacy-protected banks in tax havens!
The writer is a senior journalist
Published on February 16, 2022