Need to change approach to legislation

Enhancing powers without investment in capacity building to administer the powers leads to fall of the majesty of law

Ask any sane and reasonable person how she thinks undesirable conduct should be prevented. Most likely she would say: “Pass strong laws and give powers to the enforcers to put the wrongdoer in prison.” Ask when a provocative development is making news, and the certainty of this response would go even higher. When the subject is proposed law to govern conduct of business, the certainty of the desire for criminalisation would almost be assured.

Yet, no matter how sane the person, such a reaction is purely intuitive and the outcomes from such policy can prove to be quite counter-productive. History teaches us that merely criminalising undesirable conduct does not lead to such conduct coming to an end. Despite murder leading to potential death penalty and although that is the most well-known reality across the country, someone is getting murdered somewhere even as you are reading this piece. The gruesome in Delhi led to the then existing criminal laws being amended to bring in the death penalty, but crimes like the assault in Shakti Mills in Mumbai continued.

Securities law provides a classic example of the story playing out in India’s financial sector. Every time a scam takes place, the law is amended to give the capital market regulator more powers. The Harshad Mehta scam led to the Securities and Exchange Board of India (Sebi) being given statutory status in 1992. Since 1988 when it was set up, was just a government agency without statutory backing. The vanishing companies scam in the mid-1990s led to powers to issue directions “in the interests of the market” under Section 11B, by far the most controversially used provision in India. The led to another round of power enhancement in the early 2000s. Sahara and the slew of collective schemes found to be active led to even more sweeping provisions – now, any scheme entailing a size of Rs 100 crore would be regarded as a collective scheme.

The clamour for making laws more stringent is quite a routine demand from those manning regulatory agencies. When scams occur, they are hard-pressed to explain why it occurred rather than be given an environment to study the root causes and address them. A pre-build-up of a narrative of not having enough powers always comes in handy on such occasions.

However, such an approach also leads to the society coming to expect from the regulator anything and everything that is not due from the regulator. The regulator’s own approach of being expansive in overreach contributes to this. For example, the battle against money laundering has an entire legal framework with a distinct enforcement system, check and balance in a tribunal and a full-fledged apparatus to actually seize assets, auction them and expropriate proceeds of crime. The legal framework requires financial regulators such as and the Reserve Bank of India (RBI) to only assist this apparatus. Yet, because the capital market regulator often uses securities laws to meet enforcement objectives of anti-money laundering law, public expectations get built up accordingly.

For example, has in the past used its powers to enforce circulars issued under the anti-money laundering law. Likewise, it has used its powers under Section 11B to allege disruption of securities market integrity on the grounds of suspected money laundering. It is but natural that the regulator then gets pulled up, unfairly, by agencies such as the Supreme Court-appointed special investigation team comprising retired judges for not addressing money laundering issues properly – it was never Sebi’s task to begin with.

Misdiagnosed problems leading to wrongly prescribed medicine is another outcome. More recently, despite those with deep experience in the space of women’s and children’s rights expressing serious concerns, our Parliament passed laws to treat children like adults in delivery of criminal justice. The objective was not so much a desire to placate the relatives of crime victims but to address the widespread belief in society that the lacuna in existing law was the hurdle in achieving crime-free society. In the process, any one pointing out flaws in the medicine being prescribed is painted as a perpetrator of the virus being protected against. Yet another law then gets passed, with challenges to enforcement, and the inevitable consequence of stronger belief that we are a nation that does not care for law. What we need is care for how we create law and how we think about issues with administering it before writing it.

Corresponding to the power enhancement, there is hardly any in capacity building for administering the powers and enforcement of the provisions that grant new powers. When cheque-bouncing was made illegal, no one gave thought to whether the nation has enough prisons to house those whose cheques may bounce, much less if we have enough magistrates to try the increased volume of cases. When the scale of non-performing assets has ballooned inviting judicial comment, yet another law on insolvency has been thrown at the problem, but for that law to be effective, the still-being-physically-established national company law tribunals and the near-broken debt recovery tribunals would need to function phenomenally well, way above current capacity. Yet another regulatory agency would need to be set up registering insolvency professionals under this law even while we struggle to find resources to man and head existing regulatory agencies.

The easy presumption that every problem would get solved by providing even greater enforcement powers has to be addressed to stop the vicious cycle of more laws being thrown at society without any corresponding capacity building or contemplation on the root causes of misconduct. Continuously redefining what the “wrong” is, to make it easier to prove that someone did wrong, risks treating rights as wrongs. With that comes the fall in the majesty of the law and an even greater clamour to address the disrespect for the law.

This column titled Without Contempt was published in the Business Standard on September 20, 2016

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