Modiji’s Regulatory Overkill

But that was utter hogwash, because most of these laws were simply archaic and outdated, with no relevance in today’s times

Mumbai: One of the most catchy promises of Shri Narendra Modi in the 2014 elections that got him huge votes was minimum government and maximum governance. What is clearly meant was that laws would be lesser in number, simpler and less onerous, thus reducing government red tape and harassment. He made a promising start by striking off hundreds of laws. But that was utter hogwash, because most of these laws were simply archaic and outdated, with no relevance in today’s times. For example, they included a law where you even needed government permission to fly a kite and that a police inspector in AP must have well-brushed teeth. But when it came to simplifying and reducing the laws that govern the daily lives of entrepreneurs, the reverse was done. New rules and regulations were introduced, existing laws were made heavier and more complicated, resulting in a regulatory overkill and an over-regulation, which was clearly anti-business. Together with the additional unwanted regulations came a touch of criminalization of business laws, where the most minor offenses attracted criminal prosecution, apart from the mandatory heavy penalty. The mindset of the government was to use a sledgehammer, to kill an ant.

Take the case of the companies law, which governs the smallest of companies too, apart from the big ones, where the smallest of violation now attracts the biggest of punishment and the numbers of action taken are shocking; 1/94 mn director registrations deactivated simply for not filing KYC forms, 424454 directors disqualified from being appointed as directors because the company did not file its annual return, 338963 companies closed down for not filing annual returns and ironically just one auditor debarred in 2019. The arbitrary high handedness and illegality of this action is evident from the fact that the FM had triumphantly announced in the Parliament that lakhs of fake companies had been closed down, also admitting that what is a fake company is not defined in the law, thus raising doubts over the very legality and propriety of this severe government action.

It is not denied that there have been lots of fraudsters and scamsters in corporate India, who have duped the system. Most of them, particularly the big ones have been a creation of the system, through blatant collusion and corruption. They must be given the most stringent punishment, but that yardstick does not apply to the smaller entities whose violations are unintentional and of less seriousness. Regulatory overkill does not help and laws that are not judicious are counterproductive.

Over-regulation in the company law does not help business and the economy for the following reasons:-

1. Any punishment to a wrongdoer must be proportionate to the violation. Just as a pickpocket is not hanged to death, you cannot also close down a company for mere non-filing of annual returns. Lots of companies that were closed down in this manner never did reopen, resulting in huge loss of jobs and livelihood too.
2. Closure of an entity is no solution for minor lapses, which only deserve the levy of a reasonable penalty.
3. Due to regulation overkill, the cost of compliance by companies shoots up, which often erodes their profitability and viability, causing their closure.
4. Such sudden reckless closure of genuine companies by the government may be a routine thoughtless procedure for a babu, but it is a death knell for the entity, which costs lacs of rupees to undo, apart from the huge uncertainty it entails, due to which business suffers.
5. Sudden corporate closures for such frivolous reasons have been to the detriment of lenders, creditors, investors, and the tax departments too, which have claims and recoveries due to the company.
6. It dissuades both domestic and foreign investors from investing in India.
7. No person worth his salt is willing to be an independent director of a company, fearing punishment such as being debarred, for no fault of his.
8. The corporate structure of functioning which is the most desired has become expensive and onerous and is being shunned.
9. Any action by the government which is not judicious and is arbitrary only erodes respect for the law and makes a mockery of administration.

With such over-regulation, corporates are certainly a scared lot today and that is reflected in India’s receding private investments. The PM and the FM have been reassuring entrepreneurs from various platforms and the law is being decriminalized, but it will take a long time before the confidence of the entrepreneur is restored.