Sucheta Dalal :Lessons For Drafting Legislation (27 Oct 2003)
Sucheta Dalal

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Lessons For Drafting Legislation (27 Oct 2003)  



Now that the government has caved in to industry pressure and ordered the withdrawal the Companies Act (Amendment) Bill 2003, maybe we should move on to examine the implication of this decision to the policy making process. Sure, the Bill was a badly drafted document, which was introduced in the Parliament with unnecessary haste; but the withdrawal has less to do with its drafting blunders. Industrialists were upset that the Bill would have blocked the free movement of money from companies through a pyramid of investment subsidiaries, by restricting their number to just one.

They also objected to a forced retirement age of 75 for company directors; and this was probably unfair, when much of India’s political leadership is part of the geriatric club. But such clauses were merely additional ammunition that helped kill the Bill. A business daily reports that government plans to replace the withdrawn bill very soon. But unless it plans to ask the industry associations themselves to draft the new bill, it is not clear how the government plans to make it more acceptable to Indian business. If the government wants to ensure that its policies are fair to all stakeholders, it must change the decision making process by bringing some discipline into it. Otherwise, India Inc will simply steam-roller any regulation that it finds unpalatable.

Industry has already turned its attention to recent changes in clause 49, of the Listing Agreement of stock exchanges, covering disclosures by companies. These changes were based on the Naresh Chandra Committee and the NR Narayana Murthy Committee. Some provisions of clause 49 have become infructuous now that the Bill has been withdrawn, but corporate India wants more. In fact, SEBI has requested Mr Murthy himself to look at whether clause 49 captures the essence of the Murthy Committee recommendations. But it is unlikely that India Inc will be satisfied with more clarity or minor changes. Having scented the government’s weakness, industry is baying for blood and may press for a complete roll-back.

The drafting flaws in the Bill were by no means unique. Most regulation emanating from regulatory agencies these days is flawed. And it is often unclear whether the errors are deliberate, inadvertent or a sign of complete incompetence. Remember how SEBI’s takeover regulations had to be re-worked within two months after being issued? The regulations were based on the recommendations of a committee headed by a retired Supreme Court judge and packed with legal experts, investment bankers and accountants. Despite its severe shortcomings, the same committee was asked to re-draft the regulation and it sat on the job for five years.

This leads to some important conclusions. First, that the drafting of regulation should not be left to the mercy of law ministry mandarins, who have no interest in drafting flawless legislation, nor can they be held accountable for the flaws or the resultant damage. At the same time, legislation and rule making cannot be based entirely on the recommendation of committees, as they function today, because this process too is flawed. For starters, regulators such as SEBI and the government start out by setting up representative committees where industry associations are always co-opted. The remaining members comprise lawyers, accountants, other intermediaries and public representatives.

FICCI and CII are fixtures on most committees set up by the government and regulatory bodies. Most often, industry also has additional representation in the form of independent members or through the presence of other industry associations. But all industry bodies are notorious for not attending meetings. For instance, the Secretary Generals of FICCI and CII did not attend a single meeting of the Narayana Murthy Committee. Of course, they have led the battle to withdraw the Companies Amendment Bill and are fighting clause 49! More pertinently, all industry representatives supported the recommendations of the committee without any dissent.

Does this mean that the representatives were so busy playing pious do-gooders that they failed to represent corporate interests? Or is it, as is more likely, that corporate India’s temper tantrums are hugely exaggerated and cannot be taken too seriously? After all, one must remember that India Inc and its lobby groups do not even react adequately to committee reports when they are put up on the regulators’ websites for garnering public views and comments. These views are given serious consideration by the regulator and co-opted into the final regulation when fit.

Having ignored multiple opportunities to participate in framing regulation, FICCI chief AC Muthiah was quoted by a paper as saying: “SEBI should act as a sensitive regulator and before making any changes in the Listing Agreement, it is important that consultations take place with chambers of commerce, trade associations and professional bodies.”

If industry felt that the government and its regulators are encroaching on its independence, it must take the trouble to express its views at the proper forum. By lobbying to roll-back regulation that has passed through an elaborate consultative process, industry is making a mockery of the very process of framing regulation/legislation. In the process, it is also exposing the powerlessness of government to stand up to the money power of India Inc especially when four states are going to election.

What is more distressing is that minority groups such as investors are worst hit by the roll-back of regulation/legislation. Despite their meagre means and expertise, investor NGOs spend a lot of time and effort in having their voice heard by policy makers, only to watch their effort thrown out of the window. Before re-drafting the withdrawn Companies Amendment Bill, the government must ensure that such an ignominious roll-back is never repeated by refining the process of framing regulation.

It must force industry associations to participate in the policy-making through appropriate committees or forfeit their right to be heard later. Also, the drafting of regulation, based on committee recommendations must be outsourced to legal experts who must be paid for their services and held accountable for errors. The regulations or legislation must then be open for public debate for a short period and cleared by the regulator or introduced in Parliament for conversion into statute. This process would go a long way in eliminating the breast beating, crossed wires and drama that follows every effort to make industry more accountable to investors and stakeholders.


-- Sucheta Dalal