Power to issue directions just grew

This power can be intoxicating. It can give any regulator a serious high

The power of the government to “issue directions” has made an entry into company law. The first step has been taken in Section 135 — the provision that seeks to change the regime from encouragement of voluntary expenditure on corporate social responsibility (CSR) into a criminal-sanction-based mandatory obligation to spend.  

This column is not about the criminalisation of CSR, on which much ink has been expended. Section 135 has been amended to insert a specific sub-section that stipulates that the “government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance”. It goes on to stipulate that such recipient of directions “shall comply with such directions”. This is a first inroad under company law into how the central government may issue directions specific to a company. Once it comes in and gets used, inexorably, such a provision is bound to take on the role of enabling governmental “directions” to companies in public interest.

The power to “issue directions” is one that has been widely made available across sectoral regulators. The first insertion of this power happened in the form of Section 35A of the Banking Regulation Act, 1949, to enable the Reserve Bank of India (RBI) to issue directions to any bank in particular or to banks in general in “national interest”. This came to be replaced with “public interest” under the watch of Prime Minister Nehru, who was still establishing a government that would occupy the commanding heights of economic activity and thereby, industry. In 1968, the phrase “in the interest of banking policy” got added, giving the RBI even more powers to issue directions to banks. A right to make a representation after the issuance of directions, which could lead to a modification or cancellation of a direction was also contained in the section.

The RBI was abstemious in its use of this power. In fact, the RBI used the term “directions” as a means of drafting subordinate law — directions that apply to an industry as a whole — say, non-banking financial companies, or banks — would be issued from time to time. The weapon was never used as a targeted one aimed at a specific person or market intermediary.  

Similar language took the form of Section 11B of the SEBI Act, 1992, in the mid-1990s, giving the capital market regulator the power to “issue directions” in public interest and in the interests of investors in the securities market.  Interestingly, the provision in the SEBI Act did not specify a post-decisional representation, leaving it to the wisdom of the regulator to provide for it of its own accord. The SEBI started testing the limits of this power. Without superseding the board of a stock exchange, the regulator used this power to remove a specific office-bearer from the governing board of a stock exchange. The power to put the provision to such use got tested in a writ petition. And the rest, to use a cliché, is history.

Not only did this power come to be regarded as a blank cheque, its constitutional validity for its usage without even hearing the party against whom it is used (ex parte orders) was upheld.  The check and balance of a post-decisional hearing was considered reasonable enough to repel a challenge to provision itself. Of course, individual instances of the usage of the power could be challenged on the touchstone of arbitrariness. Further powers to issue directions, explicitly enabled for use without a hearing, were introduced in Section 11(4) of the SEBI Act. Ex parte directions, putting people out of business until further notice, with no timeframe for a final resolution of the matter, abound.

Other regulators of other sectors too have these powers now. The template rolls on. Putting them to use depends on the personality and age of the regulator.  More recently, with the forced use of the mechanism under the Insolvency and Bankruptcy Code, 2016 (IBC), the RBI was given powers to direct banks to adopt proceedings under that law by further sections in the law in similar vein. The usage of that power in a generic manner without regard to the sensitivity attendant with specific industries eventually came in for challenge and the circular of the RBI forcing the adoption of proceedings under the IBC came to be struck down recently by the Supreme Court. 

The “power to issue directions” can be intoxicating. It can give any regulator a serious high. Not everyone at the receiving end of a “direction” has the wherewithal or the courage to challenge an arm of the state, either in a writ petition or in proceedings involving a statutory right to appeal. The European Court of Human Rights held a similar power in the laws of Italy to be violative of human rights when it was used to direct an individual not to be a director of any listed company.

Giving such power, now to the central government (as opposed to a specialized regulator) in the basic law governing companies, is a first achieved by the recent amendment. Given the nature of the beast, one must watch this space keenly.

The author is an advocate and independent counsel. Tweets @SomasekharS