By Somasekhar Sundaresan
The Presidential Ordinance on fugitive economic offenders is highly likely to be celebrated by the masses. Yet, its constitutional validity is suspect. It is yet another law that have the best intentions as its premise but can end up wreaking havoc on the innocent, who may well be victims of fugitives, but would pay the price for unintended consequences.
Here is how this law can cause grievous injury to the innocent. The most serious inroad into the rights of a person who may not be the fugitive but could well be the victim of the fugitive, is contained in the provisions on “disentitlement”. Under this provision, once an individual is declared to be a “fugitive economic offender”, any court in India may, at its discretion, disentitle any company from putting forward or defending any civil claim, if the individual authorised by the company to sue in its behalf, or any promoter of the company, or even any key managerial personnel or the company, or indeed any majority shareholder of the company has been declared a fugitive economic offender.
In other words, the company which would be injured because its promoter ran away, or indeed because its key managerial person ran away, could be the one facing the disentitlement from being able to pursue any civil claims. An example would make it good. Let’s say the managing director, or indeed, a promoter of a company is alleged to have committed a “scheduled offence” — these are offences listed in a schedule to this law — for which the person is issued a warrant and refuses to come back to India, civil courts could rule that no litigation for recovery of even legitimate dues owed to such a company cannot be pursued.
The principle underlying the concept of disentitlement is that one who does not subscribe to the rule of law in India may be denied the protections afforded by Indian law. However, this provision goes beyond the person rejecting the rule of law in India. It has the potential to cause serious injury to persons who may themselves be injured by the rejection of Indian law by the fugitive who has left the country. This would translate into a perverse incentive for law enforcers — grab the headlines and show stringency of action by hurting a company that is operating in India. This approach loses sight of the fact that those within reach are those who subscribe to Indian law and are seeking protection of the rule of law by filing legitimate claims. Likewise, it has no regard to the fact that the ransom of ill-treating those who are in India could have no coercive impact on the fugitive — her decision to turn fugitive would have already factored in the possibility of atrocities being heaped on the company she left behind.
The other perverse incentive endorsed by this law is that commercial counter-parties who have scant regard for the rule of law could start defaulting on their dues to a company whose promoter or key managerial personnel is declared a fugitive. Despite being a solvent company, the company the fugitive leaves behind would face a potential prohibition on the sovereign assurance that validly contracted promises given to the company must be enforced. Open doors, it is said, tempt even saints — once a company’s promoter or key managerial personnel is declared a fugitive, every person who has a contract with the company would be entitled to move applications before courts trying claims for enforcement by the company, asking for the discretion in the new law to be used to debar claims by the company.
To have any individual declared as a fugitive economic offender, an application has to be moved by the authorities asking the competent court to make the declaration that the person named in it is a fugitive. However, even while moving the application, the authority has the power to attach any property listed in the application, for 180 days. In other words, way before successfully getting a declaration that the person named is a fugitive, properties that may not even belong to the individual named, can be attached without any need for the attachment to be blessed by a court of law, so long as the property is identified in the application and the authorities have “reason to believe” that the property represents “proceeds of crime”.
Interestingly, the attachment would automatically run for 180 days without even a warrant. The non-fugitive person who owns the property would get just one week to file his say in the matter, which too would start after the attachment. Another provision in the law explicitly provides that the person other than the fugitive, whose property is so attached, would have to shoulder the burden of proving that the property was acquired without knowledge of it being proceeds of crime.
The term “proceeds of crime” is not just the fruits of criminal activity listed in the schedule to the law. It also includes “the value of such property” (meaning despite it being evident that the proceeds of crime were deployed elsewhere, anything equivalent in value may be chased and attached). Besides, “where such property is outside the country”, any other property “equivalent in value held within the country” would constitute “proceeds of crime”. Therefore, all one has to show is that the value of the benefits from “crime” is represented as part of the value of the property being attached regardless of whose hands the property resides in — it would be attached for 180 days, and it is for the owner of that property to show within a week that she did not have knowledge of such property being proceeds of crime.
Finally, what are the crimes listed in the schedule? Apart from the economic offences found in the Indian Penal Code, the provisions that would lead to a “scheduled offence” are generic provisions from company law where fraud is alleged, and inexplicably (following the footsteps of ill-advised amendments to the anti-money laundering law) even violations of takeover regulations. While offences such as insider trading and market manipulation are understandable members of the list of scheduled offences, listing violations of takeover regulations could simply mean that the state just gave itself a tool to come after businesses with a heavy hand if it so chooses.
This is not at all a comment about the colour of any political party in power. The listing of the takeover regulations as a scheduled offence in the law on money-laundering was done by the UPA government. The NDA government has now made it a scheduled offence under this law. In short, regardless of the party in power, you would do well to be careful and beware the long arm of the state.
This column was published under the title Without Contempt in the Business Standard editions dated May 10, 2018