The COVID-19 pandemic has forced the hands of industry bodies
and government authorities to push for a lot of unconventional
changes to the existing business environment. The Insolvency and
Bankruptcy Code (IBC) has been temporarily suspended, giving legal
cover to companies against initiation of resolution proceedings.
Although it was an encouraging step aimed at preventing downturns
and insolvencies arising on account of the slowing economy, it
raises questions of increased stress on the already ailing
Non-Banking Financial Corporations (NBFCs) and banks, which form
the backbone of the credit cycle in the economy. An indication of a
rising culture of deregulation that is being gradually ushered into
the Indian economy and is being silently affected in tranches.
Moreover, the difficulties brought by COVID-19 are catalyzing the
process of deregulation, with the hope of helping ailing industries
to recover.

The Finance Minister announced as part of the economic stimulus
package that the government has decided to decriminalize some
provisions of the Companies Act to enhance the ease of doing
business in India. This was followed by the Union Government
decriminalizing 19 different minor offences, to provide relief to
the MSMEs.

On March 4, 2020, the government approved amendments to as many
as 65 provisions in the Companies Act. These include reducing the
remedial measures against corporate offences from awarding jail
sentencing to levying penalties or fines or removing them
altogether. The lower thresholds for Corporate Social
Responsibility (CSR) spending have been done away with in some
cases and reduced in others. About 23 offences have been opened up
to adjudication through alternate mechanisms, and seven different
offences have been omitted altogether.

Furthermore, in June 2020, amendments were made through central
ordinances to 19 legislations including NABARD Act, SEBI Act,
SARFAESI Act, PFRDA Act, Negotiable Instruments Act, etc. These
amendments have made changes in the liability for minor offences
such as cheque-bounce and repayment of loans, to lubricate
creditability, especially for small businesses which have been
crippled due to the lockdown.

Although the intention is to contain the ongoing global economic
crisis and attract investments into the country, one must remember
that an environment of unfettered access can only go so far to
overcome the current financial crises. Economic liberalization is
one thing; allowing unrestricted economic activity sans regulation
is another. In spite of the legitimacy of the goal, easing norms by
compromising the criminal justice ingrained into company law
provisions is a risky undertaking. This overhaul holds the
potential to rupture the belief systems of the public that keeps
these commercial institutions functioning.

First, easing of norms, especially criminal regulation, always
tends to bring down public accountability of companies. In the
absence of accountability, there is no telling how far the
productivity index may dive and how grossly public money may be
pillaged by the vested interests in these companies whose goal is
to plunder public resources and fulfil their agenda. Lack of
imprisonment as a punishment takes away the guarantee of deterrence
that forms the cornerstone of any criminal justice delivery
system.

Secondly, relaxed regulations against offences like loan
repayment and cheque bounces heighten the risk of depletion of
capital from lending institutions. Banks and NBFCs, which act as
primary creditors to the companies, are inundated with
Non-Performing Assets (NPAs) and defunct loans, placing immense
pressure on the public lending structure. While one may empathize
with the fact that a relaxed view of accountability towards credit
facilities will ensure the release of more liquidity into the
economy, it is pertinent to remember that fear of significant jail
terms and criminal action is what induces debtors to ensure
accountable utilization of capital and curbs the motivation to
default on loans. In the interest of sound judgment, it is
impossible to overstate the importance of maintaining cash flows in
the market and preserving the financial health of our creditors. A
systematic dependence of debtors on deferrals or default on loan
payments can cripple the first line of defence in our economy,
which is symbolized by the credit-reliability of banking
institutions.

Thirdly, a more favourable attitude to economic offences through
reduced or absent criminal liability poses a severe threat to
government revenues. Besides waiving criminality for tax avoidance
under the current amendments, there are provisions for reduced
accountability via auxiliary offences, e.g. maintenance of
corporate books. This gives ample opportunity to companies to hide
revenue streams and assets, thereby denuding the public exchequer
of a major chunk of monies that could have been mopped through
taxation.

Fourthly, the Finance Minister emphasized the necessity to
reduce the burden of cases going into the National Company Law
Tribunal (NCLT), the premier adjudicating body for disputes in
matters involving companies. This is perhaps the most undesirable
methodology to relieving courts from discharging their statutorily
mandated functions. One must rather aim at. establish more courts,
rather than reducing the index of offences that can be processed
towards their gates! There has been a concerted effort by industry
bodies as well as government functionaries, demanding the setting
up of a greater number of tribunals feeders to ease the pressure of
ever mounting loads of cases pending before the NCLT and its
appellate body, NCLAT. Reducing the list of prosecutable offences
would be an ostrich like approach to tackling crime, It would be
like saying that there are not enough police men to catch the
thieves, so theft should no longer be a crime in the Indian Penal
Code.

The Mini Small and Medium Enterprises (MSMEs) are the building
blocks laying down the industrial foundations of a country. Their
growth is integral to ensuring overall development of the economy.
However, it cannot be at the cost of bringing to a naught the
deterrence of law vis s vis criminal behaviour.

The 21st century has emerged as a golden age for free market
access and liberalization in trade and commerce. This has great
potential to lead India onto newer horizons of emerging as an
economic force to be reckoned with. Several measures have been
taken of late in this regard. Many treaties have been executed.
However, growth can only be lasting if built on a disciplined
platform.

Therefore, deregulation must stem either from undeniably
compelling circumstances or an atmosphere of gradual compliance
attainability as seen in jurisdictions elsewhere. In either case,
the extent of deregulating measures must be carefully administered
without endangering the existing framework of deterrence and their
adaptability to absorb and enforce the new rules of the watchdog
machinery.

Let us not allow our MSMEs and other budding industries to
develop a feeling that they can prosper best in an environment of
scant regulation and decriminalized compliances, lest we risk the
stabilility and sustainability of the economic system.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.