‘Manufacturing potential facing legal hurdles: Compliance to criminal clauses’

INDIAN BUSINESSES face the challenges of a large number of compliances and criminal provisions, which have played a key role in preventing India from becoming a global manufacturing hub, according to a report by TeamLease RegTech and the Observer Research Foundation.

The report, titled ‘Jailed for Doing Business’, documents 1,536 laws and 69,233 compliances that are applicable to Indian businesses, with about 55 per cent (843) of such laws and 38 per cent (26,134) of compliances carrying criminal clauses. Labour-related regulations are the largest component of the regulatory burden, accounting for 30 per cent of all laws and 47 per cent of all compliances.

The Factories Act,1948 and related rules alone account for about 48 per cent of provisions applicable to businesses that contain criminal clauses. The report noted that the Act contains a blanket provision that prescribes imprisonment of up to 2 years for an “occupier or manager” for violations of any provisions of the Act or any rules notified by state governments. Criminal clauses embedded in laws and regulations applicable to Indian business often “criminalise process violations” with some of these punishing “inadvertent or minor lapses rather than wilful actions to cause harm, defraud, or evade,” the report said.

Rishi Agrawal, CEO of TeamLease RegTech and co-author of the report, said India’s legal system had a lot of hostility and distrust of entrepreneurs and that this had held the country back from becoming a global manufacturing hub.”Why we have not become the equivalent of China, as far as becoming the factory of the world is concerned is because our factories act and our labour acts are extremely, extremely tough, microscopic, and have a lot of hostility built into them,” Agrawal said.

‘Manufacturing potential facing legal hurdles: Compliance to criminal clauses’ Source: TeamLease RegTech

Agrawal cited the example of the requirement of having urinals whitewashed once every four months as an outdated compliance that carried imprisonment of one to three years as a penalty under the Factories Act, 1948. He said while practically no one is sent to jail over these provisions the key issue was the power with inspectors to send someone to jail which promotes nepotism, rent seeking and corruption.

The report noted that the planned simplification of labour laws into four labour codes as proposed by the Centre could reduce the number of clauses with imprisonment applicable to businesses by about half. Parliament had, in 2020, passed four labour codes to replace 44 existing laws. However, states are still in the process of drafting rules to implement the new codes.

The report also noted that besides the large number of compliances Indian businesses were also faced with an ever changing regulatory framework, with 3,577 regulatory changes in calendar year 2021.

The report recommended reform in the way regulations are designed, including introducing sunset provisions for criminal clauses that would require lawmakers to re-affirm their need after a certain period, and the introduction of legal drafting standards to ensure that regulations meet the standards of necessity and proportionality under the law.

The report recommended that the government remove criminal provisions for technical or procedural lapses in compliance, like missed deadlines and filing or maintenance of records in incorrect format, keeping criminal provisions only for more serious offences.