Monday, December 31, 2012

Companies Bill: From the Rule of Law to the Law of Rules


[The following guest post is contributed by Vinod Kothari and Vrinda Bagaria of Vinod Kothari & Company. These can be reached at vinod@vinodkothari.com and vrinda@vinodkothari.com respectively.

In this post, the authors critically analyze the extensive nature of rule making powers conferred upon the Central Government under the Companies Bill, 2011]

Introduction

Parliament makes legislation, and the executive, that is, the Central government or any other statutory authority, is primarily concerned with the implementation of the law, but is quite often given powers to make rules. The power of rule-making commonly comes by words such as “as may be prescribed” in the law.
The Companies Bill 2012 goes a little overboard in liberally setting aside matters which may be prescribed by the Central Government.  The word “prescribed” occurs 416 times in the Bill. Though at lots of instances where the said word is used, the idea may be the prescription of the form/e-form whereby filing is to be done, there is an enormous extent of law that is reserved for prescription by the executive in form of rules. This would mean, besides the law with 470 sections and 5 schedules, subjects will have to keep in mind the massive body of rules to be framed under the law.
Rule-making has its own advantage – rules are flexible, and may be amended from time to time without going to the Parliament. Rules may contain matters of details, for example, the procedural rules, which may be parked into rules to keep the body of the law light.
However, there is a curious balance between what needs to be in the law and what may be parked into the rules. There are certain matters which relate to the very core, the vey policy of the regulation. For instance, whether a particular regulation will apply to a private limited company or not cannot be left for the executive to decide. Given the nature of the curb being imposed, it may be wholly inappropriate for the Parliament to apply the law in general, and then give a scope for the executive to relax it for a class of companies.

Liberties of Private companies, small companies and one person companies

One may notice that exemptions in case of private companies, unlike the existing Act, are not a part of the law in the Bill – these are to be notified by the Central Government.  However, the liberties enjoyed by private companies are not a matter of magnanimity on the part of the executive. Given the nature of a private company, it is a closed group of persons with strictly private fund raising, and hence, there is no question of certain regulatory concerns for such companies. It is not sufficient in such cases to say, the executive may exempt such companies from certain provisions. One good example is the provisions applicable to private placements. Every issue of securities, in case of a private company, is a private placement. If the placement is a private affair, there is no reason for the intervention of the law. There is large restrictive set of rules applying to private placements under the Bill[1]. There is no good reason for such rules to be applicable to private companies. This is something which is an integrated part of the philosophy of the law, and cannot be left for the rules to lay down.

Principles of excessive delegation: Balancing between subordinate law and Parliamentary law:

The balance between Parliamentary law and subordinate law has been one of the key features of our Constitution and our legislative set up. Unlike England, the principle of subordinate legislation in India is inspired by the US constitution.
A leading US case on the point is Panama Refining Co v. Ryans[2] wherein it was held that the Congress can delegate legislative powers to the Executive subject to the condition that it lays down the policies and establishes standards while leaving to the administrative authorities the making of subordinate rules within the prescribed limits.
In India, courts have taken a more liberal attitude on the principle of excessive delegation. The Constitution of India does not contain specific provisions for delegated legislations. It imposes restrictions based on general theories and principles of constitutional law and judicial precedents. The purpose for introducing the principle for delegated legislation is that the legislature being over burdened and the needs of the modern day society being complex it cannot possibly foresee every administrative difficulty that may arise after the Statute has begun to operate[3]. Delegated legislation fills those needs and comes to aid during situations of emergency. However, this does not imply that the doctrine of delegated legislation can be used arbitrarily or unreasonably. The Parliament can only delegate to the executive the power to make ancillary or sub-ordinate legislations to the principal legislation and not the principal legislation itself.
Where the vires of section 6(2) of the Bombay Tenancy and Agricultural Lands Act, 1948 was challenged on the ground of excessive delegation[4], the Hon’ble Supreme Court held that a statute challenged on the ground of excessive delegation should be subjected to two tests i.e.:
a.     whether it delegates essential legislative function or power; and
b.     whether the legislature has enunciated its policy and principle for the guidance of the delegate.
In the same case[5], Subba Rao J. observing that there is a danger inherent in the process of delegation, also opined that:
It may not lay down any policy at all; it may declare its policy in vague and general terms; it may not set down any standard for the guidance of the executive, it may confer an arbitrary power on the executive to change or modify the policy laid down by it without reserving for itself any control over subordinate legislation. This self effacement of legislative power in favour of another agency either in whole or in part is beyond the permissible limits of delegation. It is for a Court to hold on a fair, generous and liberal construction of an impugned statute whether the legislature exceeded such limits. But the said liberal construction should not be carried by the courts to the extent of always trying to discover a dormant or latent legislative policy to sustain an arbitrary power conferred on executive authorities.”
The proposed Companies Bill, 2012 confers wide powers to the Central Government to prescribe the applicability or non-applicability of some provisions to a certain class of companies’ which might in the long run lead to arbitrary exercise of powers and hence excessive. Earlier also, there have been many statutes where the provisions were made applicable to a certain class or certain area and simultaneously, the government was authorized to make those provisions applicable to the excluded classes or areas as well, as the case may be.
In the landmark case of In re Delhi Laws Act[6](“Delhi Laws Act case”), Fazl Ali J. rightly quoted what was laid down by the American Judges as an exception to the general rule of delegated legislation, that
The legislature cannot delegate its power to make a law; but it can make a law to delegate a power to determine some fact or state of things upon which the law makes, or intends to make, its own action depend - To deny this would be to stop the wheels of government.”
In the same case, Justice Fazl Ali, also observed that:
“No legislative body can delegate to another department of the government, or to any other authority, the power, either generally or specially, to enact laws. The reason is found in the very existence of its own powers. This high prerogative has been entrusted to its own wisdom, judgment, and patriotism, and not to those of other persons, and it will act ultra vires if it undertakes to delegate the trust, instead of executing it.”
Despite the above observations, the Hon’ble Supreme Court admitted the necessity of a delegated legislation and formulated the general limit of delegation on the broad formula that “what cannot be delegated is its essential functions.”
Further, the case of Raj Narain v. Chairman, Patna Administration[7] subtly summed up the limitations laid down in Delhi Laws Act case as:
a.     Parliament may not destroy its legislative power by delegation;
b.     It may not abandon its control over the delegate; and
c.     It may not create a new legislative power not contemplated in the Constitution.
It is noteworthy, that along with the power of delegated legislation, also comes hand to hand the power of discretion conferred on the administration. ‘Rule-making power’ and ‘discretionary power’ can be said to constitute two sides of the same coin i.e. delegated legislation. It implies that subordinate legislation is a medium for administrative authorities to further confer discretionary powers upon themselves by formulating rules to that effect. In spite conferral of such arbitrary powers of rule-making and exercise of discretion by the administrative authorities, the courts have taken a backseat and hardly rendered any statute or legislation invalid on grounds of excessive delegation unless the same appears widely to be so, on the face of the provision. Even when the courts have found the delegated legislation to confer wide powers on the administration, availability of safeguards have been held to be sufficient against the abuse of power. This only shows that the standard accepted as sufficient has been so general and vague that it raises a doubt on whether it solves the purpose of controlling administrative discretion[8].
Nevertheless, in the present epoch, both the legislative as well as the judicial authorities have very conveniently overlooked the restrictions applicable in case of delegated legislation and adopted a more lenient approach towards the doctrine of delegated legislation such that the legislature lays down the general provisions of law leaving the specification to be filled in by the executives. Sometimes, the executive authority is also conferred with the power of modifying the existing statute before its application which is in essence a drastic power resulting in an amendment to the statute itself, essentially the same being a function of the legislature.
The Companies Bill, 2012, is also an example of excessive delegation as major arenas have been left open for the government to make rules on the same, as is evident from a bare reading of the provisions. Moreover essential provisions required to be incorporated in the Bill, for instance, in the case of a private company, small company or a one person company, the legislature has completely failed to provide that the law will be applicable to companies involving public interest.
The doctrine of delegated legislation has become an integral part in the legislative process. Nevertheless, it should not be used excessively so as to defeat the purpose which legislation seeks to achieve and to render it ineffective. It is the primary and most essential duty of the legislature to frame the laws of a country and it should not try to escape from its duty under the garb of subordinate legislation. Proper checks and balances should be imposed to ensure that the doctrine of delegated legislation is adopted reasonably. The legislature alone cannot be held responsible for the arbitrary exercise of authority under delegated legislation and the judiciary has an equally important role to play in ensuring the same.

Conclusion

The Companies Bill, 2012 is a significant step taken by the legislature to effectively regulate corporate affairs in India and to improvise the present Companies Act, 1956 according to the current requisitions of the corporate world.  However, leaving such major areas in the Bill open to the discretion of the administration shall prove to be a hindrance in meeting the true intent and purpose of the statute in the future. It is necessary to bear in mind that the statute should not be drafted to fulfil the short-term goals of the society but be sufficient to meet the requirements of the present as well as the future. The true intention to a statute can be accorded only by the law-makers of the society i.e. the legislature and not the executive. The executive can only be delegated enough powers to ‘fill in the gaps’ where necessary and nothing in excess of the same. In the backdrop of such considerations, there is a need to review the statute and eliminate any possibility of excessive delegation.
- Vinod Kothari & Vrinda Bagaria


[1] See Vinod Kothari and Nidhi Ladha: http://www.moneylife.in/article/fallout-of-the-sahara-case-companies-bill-2012-too-strict-on-private-placement-provisions/30344.html
[2] (1935) 79 L. Ed- 446. 438
[3] St. Johns Teachers Training Institute v. Regional Director, National Council for Teacher Education & Anr.,  http://indiankanoon.org/doc/633712/
[5] Ibid.
[7] AIR 1954 SC 569
[8] http://upendrabaxi.net/documents%5CDevelopments%20in%20indian%20administrative%20law.pdf, Public Law in India, Developments in Indian Administrative Law, Page 141-142.

4 comments:

vswami said...

Impromptu
This is a write-up in which the subject matter, riddled with irresolute controversies, has been discussed having particular regard to the corporate law, and hence is confined thereto . Be that as it should, anyone having had any field exposure to the law on income-tax and its administration and enforcement can readily think of several instances in the past, wherein the executive’s rule making power has come in sharp conflict with the law making power of the Legislative body, in varying ways.
To recall:
1. In the matter of admissible “Deduction in respect of Profits and Gains from Newly Established Industrial Undertakings, Ships and Hotels” – ref. section 84/80J and Rules framed there under.
For a detailed study, the commentary in text books and case law cited should be of guidance.
2. Section 14A and the Rule framed for its purposes
It is to be specially noted that these gave rise to differing types of disputes; one of the reasons has been that the Rule came to be prescribed long after the coming into effect of the section (bearing on its sleeves the glaring lack of wisdom in ‘putting the cart before the horse’ OR still worse, ‘ putting the cart before checking out whether the horse is still there in the stable, not already bolted away’) .
While it is recommended to look up the series of itat and courts’ decisions, for a Critique (a somewhat detailed analysis) , refer the published article , - (2009) 14 CPT 819.

KEY NOTE: It may not be out of context to pinpoint that, ostensibly, it is for identical reasons /in like circumstances, that the DTC (new direct tax law), has remained to take off as yet, deplorably for years now.

vswami said...

For an elaboration of above Key Note:

Ref. http://taxworry.com/direct-tax-code-likely-to-miss-its-april-2012-implementation-deadline/

vswami said...

An Add-on :

Concern has been voiced against ‘discretionary powers’ vested in the administrative authorities, in the garb of rule making powers.

< The 'discretionary powers' of any authority - whether he be a statutory or quasi-statutory authority; not to mention others, such as quasi judicial, - is undoubtedly a cause for the ever increasingly felt evil of corruption.

It has for long been a common conviction, that cannot be regarded or concluded to be the only cause ; much less as the root cause, for the noted evil.

Going to the very root of the matter, one cannot fail to realize that it is every ‘power’- executive, administrative, or even quasi judicial - which an authority is vested with under any statute or rules or regulations having a statutory force, - is in its own way responsible for the evil perpetrated or being perpetuated all along.

Further, the other factor or cause for the ever dreaded, rather increasingly threatening evil of corruption – is the ignorance of law – be it genuine or feigned or otherwise.

The individual viewpoints nay be found summed up in the article -
Ignorance of law - is no excuse, or is it bliss? @http://www.ourkarnataka.com/articles/law/ignlaw09.htm
The matter irrefutably entails public interest in its profound sense,and as such , warrants serious deliberations among the right minded people, to the end of at least bringing about, in co-ordination with the connected ministries, a desirable change for the betterment and well being of the society.>

What has been summed-up above, are the comments mailed wrt an article published @

vswami said...

-@http://taxguru.in/finance/discretion-root-cause-of-corruption.html