Executive overreach?

The government assuming more powers under companies law no substitute for beefing up the NCLT network

The Companies Act, 2013, has just been overhauled through an Ordinance. Not much attention has been paid so far to this major exercise, largely because the changes in the law were announced as part of a comprehensive relief package for the micro, small and medium enterprises (MSME) sector and, as a result, their significance was partially lost.

But what was the big hurry in issuing the Ordinance and announcing the MSME package? For quite some time, the government has been keen that the Reserve Bank of India (RBI) should allow easy bank credit access for the MSME sector. But the central bank is of the view that such an easy credit window for MSMEs could compromise credit discipline at a time several banks are already overburdened by their stressed loans. Since, the government is not sure how long it might take for the special bank credit window to be cleared by the RBI, it may have gone ahead with the announcement of other components of the package including the companies law amendment ordinance. 

The other reason for rushing with the ordinance could be that the government has been aware of the current stress in the MSME sector. Demonetisation in November 2016 and the launch of the Goods and Services Tax or GST eight months later in July 2017 have hit the MSMEs hard. Making matters worse for them was a sudden increase in the burden of tax compliance and formalisation, coupled with a none-too-impressive pace of economic growth. Income-tax data for companies also showed that the number of companies reporting income less than Rs 150,000 actually fell in the last three years. 

Not surprisingly, the relief package for the MSME sector included an online facility to sanction loans to MSMEs in 59 minutes, extension of the technology upgrade scheme of over Rs 60 billion, reduced burden of labour law compliance, increased procurement of goods and services by central public sector undertakings from MSMEs and a better bill discounting facility for such companies. 

All these measures will go a long way in helping the troubled MSME sector. Of course, these measures need to be implemented with care and caution, so that prudence, monitoring and regulation do not become a casualty. 

The companies law amendment Ordinance, on the other hand, is likely to face a different kind of governance challenge. The Ordinance shifts the jurisdiction of as many as 16 types of offences under the Companies Act from special courts to in-house adjudication through an online transparent procedure, whose scope will increase from 18 sections at present to 34 sections of the law. This will reduce the work load of special courts by over 60 per cent, allowing them to focus on more serious corporate offences.  

Similarly, the penalty for small and one-person companies has been reduced. More significantly, the pecuniary jurisdiction of regional directors in the offices of the Registrar of Companies (RoC) has been raised from Rs 0.5 million to Rs 2.5 million. In other words, a regional director can now decide cases involving a penalty of up to Rs 2.5 million — an increase of about 400 per cent.

The Ordinance also gives the Union government more powers to perform many functions that earlier came under the domain of the National Company Law Tribunals (NCLT). These functions included alteration in the financial year of a company and approval of conversion of public companies into private companies. 

There is no doubt that the companies law in the process has been further simplified and the work load of the NCLTs has been reduced. The NCLTs were already overburdened with work, thanks to a surge in the insolvency cases under the Insolvency and Bankruptcy Code, as a result of which their ordinary and routine work had begun to suffer. 

However, two questions, arising out of these developments, are troubling. One, the importance of strengthening the NCLT network should not be underestimated. With only about a score of NCLT benches and about 25 judges to manage them, the country’s need for resolving company law cases of a wide range can hardly be met. There is an urgent requirement to have more NCLT benches and to fill them with competent judges with domain expertise. India should not continue to remain an over-regulated and under-governed country. 

Two, entrusting the government or the RoC with more powers and responsibilities can be fraught with governance risks. Executive functioning in India continues to suffer from a great deal of opacity and discretion. The court system, even with its delays, is better because there is a proper redressal and appeals mechanism. Allowing the government to take decisions on many new provisions of the law can result in the executive trying to overreach itself, which can also breed corruption.