India’s Business Laws Need To Shed ‘Regulatory Cholesterol’: Observer Research Foundation

The ORF report bats for rationalising punishment in business law in proportion to the violation.

A corrections officer removes handcuff from an inmate in his cell at San Quentin State Prison in San Quentin, California. (Photographer: David Paul Morris/Bloomberg)
A corrections officer removes handcuff from an inmate in his cell at San Quentin State Prison in San Quentin, California. (Photographer: David Paul Morris/Bloomberg)

Currently, there are 843 economic legislations, rules and regulations that oversee and influence businesses in India and in total contain up to 26,134 imprisonment clauses. Effectively, 37.7% clauses pertaining to doing business in India carry imprisonment as penalties, according to Observer Research Foundation.

More than half the laws (or 54.9%) carry imprisonment clauses, the ORF said in its ‘Jailed for Doing Business’ report. Almost four out of every five (79.9%) compliances with imprisonment terms reside with state governments, the report notes, making a case for shedding the ‘regulatory cholesterol’ that governs businesses in India.

It’s not that penalty clauses including imprisonment should not be in business laws but 26,134 imprisonment clauses are surely a regulatory excess whose biggest contribution would only be to create a rent-seeking climate, the report authored by Gautam Chikermane and Rishi Agrawal says.

Labour Laws Stand Out For The Number Of Imprisonment Clauses

The report points out that the Companies Act, 2013 and its 14 accompanying rules themselves contain 176 imprisonment clauses and the jail terms range from three months to 10 years.

The other laws which the authors have pointed out for their distinct number of imprisonment clauses include:

  • The Factories Act, 1948 along with its 58 rules contains 8,682 imprisonment clauses.

  • The Legal Metrology Act, 2009 with its 29 rules has 391 imprisonment clauses.

  • The Electricity Act, 2003 and its 35 rules contains 558 imprisonment clauses.

  • The Motor Vehicles Act, 1988 with its nine rules has 134.

Excessive regulation has made compliance a full-time department of firms, and placed an unnecessary burden on micro, small and medium enterprises. A typical MSME with more than 150 employees faces 500 to 900 compliances that cost Rs 12 lakh to Rs 18 lakh a year.
Jailed For Doing Business: Observer Research Foundation Report

Dirty Washrooms = Death By Negligence

The report argues that in a lot of instances imprisonment is included for offences which are more in the nature of process violation and may not necessarily have any willful intention to harm or fraud.

For instance, the Factories Act, 1943 carries an imprisonment of up to two years for the manager for violation of any of the provisions of the act or the related rules drafted by the state governments.

The quantum of punishment is similar to the offence of death due to negligence under the Indian Penal Code, 1860.

Thus, the law effectively makes the non-provision of spittoons or some irregularity in the cleaning and painting of wall partitions a legal equivalent of a homicide, the report says.

The report also gives the example of the Maternity Benefits Act, 1961, which carries a jail term for failing to display the abstract of the legislation and its rules for workplaces employing female workers.

Penal provisions of this kind can be counterproductive when it comes to boosting female labour force in establishments. The act and its relevant state rules are also saddled with all kinds of paperwork, split across various designated forms, making the process of obtaining (and providing) maternity benefits only more bureaucratic.
'Jailed For Doing Business' Report

Imprisonment Clauses Must Pass Test Of Proportionality

The report argues that punishments under India’s business laws must be in proportion to the violation. There is a need for lawmakers to seriously examine punishment in context of the gravity of the act in question across several regulations, the report says.

The acts of sedition, rioting with a deadly weapon, stalking, extortion, and criminal intimidation attracts an imprisonment of between one and three years under the Indian Penal Code, 1860. A similar imprisonment stands for not whitewashing latrines and urinals once in four months under the Factories Act, 1948 and related rules; not using regional language for indicating weights and measures under the Legal Metrology Act, 2009; and not publishing the name of the grievance officer and their contact details on the website under the Information Technology Act and related rules.
'Jailed for Doing Business' Report

The authors argue that there is a legislative bias in India’s lawmaking process which sees the entrepreneur worse than a hardened criminal and such an approach needs to be reformed.

Some of the measures suggested in the report include:

  • Using criminal penalties in business laws with extreme restraint.

  • Other than for a handful of willful crimes, all business punishments must be financial.

  • State capacity to enforce the law, including penalties for officials misusing their office, must also increase.

  • End the criminalisation of all compliance procedures.

  • Every imprisonment clause should go through legislative scrutiny at least once every five years.