Friday, April 4, 2014

Guest Post: MCA Takes Lawmaking Into Its Own Hands

[The following is a guest post from Vinod Kothari of Vinod Kothari & Co. He can be contacted at]

If the Ministry of Corporate Affairs’ (MCA) recent rules, that came a bit too many over a day too less, to replace  the nearly 60-year old Companies Act 1956 by the Companies Act, 2013, ultimately survive challenge on constitutional grounds, then we may permanently forget age-old principles of limitations of subordinate law and excessive delegation. For not only do the rules over-write, side-step, gap-fill or extend the law, at several places they actually create a completely new law all by themselves, without any enabling provision in the statute. Not content with laying new substantive law, the rule-makers even went ahead to extend the penal provisions of the Act to a section which did not have a penal provision, and to create a new penal provision in the Rules itself. The 700+ page bunch of Rules leave a new watermark in the rule-maker’s adventurism.

Or, it may just be a case of ad-hocism. As there were too many gaps in the text of the law as was passed by the Parliament, the rule-maker was just making a stop-gap, ad-hoc law, thinking of moving in amendments once the Parliament gets reconstituted.

One may also take a completely different tone and laud the MCA for trying to be helpful, by trying to iron out the creases and fill in the crevices of the law. After all, the MCA has only tried be benevolent. But that is precisely where the danger lies. If someone tries to play a Samaritan by taking upon oneself the powers of law-making, what is the guarantee that tomorrow, the same rule-maker will not play a Satan? Why do we need the Parliament at all, if law-making can be done by the executive? After all, it is such a costly process to put the Parliamentarians over there – they are quite ineffective if the Parliament left gaping holes for the MCA to fill up.

On the contrary, it is a settled principle that law-making cannot be left to the executive. The very essence of democracy is that elected representatives of people make the law, so that it is self-regulation, and not imposition that governs us. Towards this principle, the limits of delegated legislation have always been very clear.

Deposit Rules –example of rules trying to set right a flawed law

Section 74 of the Companies Act 2013 is a perfect example of a flawed law. This section states that if in respect of deposits accepted before the commencement of the law, there is breach of the provisions, there is a huge fine of upto Rs 10 crores, and imprisonment going upto 7 years. The law is completely silent about breach of provisions that occurs with respect to deposits accepted after the commencement of the new Act, that is, after 1 April 2014. Where there is no specific penalty for an offence, the general penalty section – viz., sec 450 will apply. This imposes a paltry amount of Rs 10,000, as against Rs 10 crores for not paying off deposits accepted prior to the commencement of the Act.

Could this have been intended? Unless we try to search for justifications where there are none, there is absolutely no case to argue that this situation was intended. Deposit-taking is seen as a very serious offence in India – affecting livelihoods of people of most ordinary means who are lured into attractive-looking deposit schemes. Therefore, a deterrent penalty of Rs 10 crores, with 7 years in jail, was necessary to scare fraudsters. But surely enough, there is no case that there is no likelihood of a fraud after the commencement of the Act.

This glaring flaw was pointed out, of course, after the Act had been enacted. “Can something be done by way of rules?”, it was asked. Sure enough, traditional wisdom would say that a flaw in the law can be corrected only by amending the law.

However, the Acceptance of Deposit Rules have gone ahead and done that already. Rule  19 extends the provisions of section 74 to acceptance of deposits by eligible companies under the new Act as well.

Not only this, Rule 21 even enacts a prosecution provision, providing for a fine for not complying with the requirement of the rules. Obviously, the rule-makers have not paused to ponder over whether a fine, amount to criminal prosecution and deprivation of property of a person, can be imposed other than as authorised by due process of law.

There is a definition of “deemed deposit” inserted under Rule 2 (c) – while this is a very laudable provision, providing a definition of de facto deposits, but once again, this is a substantive provision and ought to have come by law rather than by rules.

Similarly, there is a Rule 18 which allows the Central Government a power to decide whether the provisions of deposit-taking are applicable to the company or not – there is no enabling power in the  Act for the executive to make such a rule.

Other rules

Deposit Rules are only one example. There are plenty of other instances where the Rules have enacted a brand new, original law. For example, on the very sensitive issue of mandatory rotation of auditors, the Rules have (a) provided for computing existing term of auditors too, which is actually contrary to the clear language of the law; and (b) provided a graded number of years for which an existing auditor may be appointed.

Also in the matter of vacation of office and resignation of directors, the Rules provide a power to registrar to not register a form filed for resignation/vacation, and instead, refer the matter to Regional Director. There is a complete process of hearing the Regional Director – all this does not have any support provision in the parent law.

The instances of such orphan rules, with no parental provision in the law, are numerous

Borderline of distinction between law-making and law-execution

While it is well understood that there are matter of technical details which are best left to the executive, it is a settled principle in most countries that the power of legislative policy-making cannot be left to the rule-maker. This breeds a paternalistic attitude – the executive assumes powers that overgrow the Parliament. Such a tendency must be curbed necessarily. It is well accepted that redrafting a comprehensive law such as the Companies Act was a major exercise. It is also appreciated that the text of the Rules is almost twice the text of the law – but that is the case with UK Companies Act of 2006 as well. The issue is not magnitude – the issue is excessiveness and self-standing law-making by the rule-maker.

- Vinod Kothari

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