We have run Financial Services businesses outside India and now in India, we have the good fortune of managing Marcellus. We find that the contrast between how the law treats entrepreneurs in the developed world and in India remains stark (even after 30 years of liberalisation). As a result, Marcellus has a large and growing Compliance team helping the firm not only comply with the SEBI Act, the Companies Act and accounting rules but also labour laws, direct & indirect tax laws, labour laws, insurance and Provident Fund laws, the shops and establishments act, foreign exchange rules, prevention of money laundering rules, etc. Leaving aside the direct financial cost of compliance – which we believe is a necessary cost of doing business in India’s rapidly expanding economy – is the amount of time we as the management spend understanding the finer points in these myriad legal codes which often contradict each other and thus create grey areas for us to grapple with. Highlighting the broader challenge faced by people like us, the erudite and opinionated commentator, Shankkar Aiyar, has written a powerful piece. If you are reading this and are in a position of power & influence, we would request you to take heed of Shankkar’s piece:

“Useless laws weaken the necessary laws’. The maxim conceptualised by French historian and philosopher Baron de Montesquieu illuminates the legal landscape in India’s political economy. The distinction between what is necessary and what is useless is trapped in a fog of perceived intent and perpetuation of fear. The result is: criminalisation of entrepreneurship and of business entities.
Three decades after the dismantling of Licence Raj, the fear of Inspector Raj persists. To appreciate, consider this factoid from the Factories Act of 1948. The law requires factories to be kept clean — ergo there are specifications detailing the minutae of how and when. Spittoons must be provided for, dirt shall be removed every day, floor of the workroom cleaned once a week, walls-partitions-ceilings-passages shall be painted or varnished every 14 months. Failure to do so can result in imprisonment.
The threat is live in the clauses of central and state laws across domains. For instance, the Factories Act of 1948 has 485 clauses which threaten imprisonment — or 485 opportunities to bring an enterprise to halt and criminalise the entrepreneur.”

Shankkar cites a new study which highlights hundreds of laws which can be used to throw an entrepreneur into jail. If these laws were actually effective, one could at least mount and argument in their defence. The reality is that these laws seldom work – they simply create a legal framework which makes life difficult for small businesses: “A new study authored by Rishi Agrawal and Gautam Chikermane has drilled deep into the legal landscape governing businesses. Published by the Observer Research Foundation, the study reveals the shocking state of archaic laws governing livelihoods — the ecosystem of economic growth and well-being. The study shows that there are 843 laws (599 of them State laws) with clauses criminalising violation — with 26,134 compliances which host the threat of imprisonment. The width of the threat is stark — 11,042 clauses could lead to imprisonment of between one and three years, 1,481 specify jail term of three to five years, 1,821 list a prison sentence of five to 10 years and 207 carry a sentence of over 10 years.

Arguably, the need for deterrence and enforcement of outcomes forms the basis for the laws. So how effective have the laws been? The gap between intent and deterrence is represented by the rot afflicting the finances of Discoms across India. The production, transmission and distribution of electricity is governed by the Electricity Act of 2003. The Act, scaffolded by 35 rules, has 558 clauses specifying imprisonment for violations by users, generators and distributors. Yet, state Discoms are unable to recover revenues for a fifth of the electricity generated despite clear clauses for prevention of theft — the accumulated losses of Discoms currently is Rs 5.6 lakh crore.”

Offences which appear to be ‘civil’ are often deemed to be ‘criminal’ and the sentences associated with this appear to be disproportionate relative to the gravity of the offence: “The failure to audit accounts of the factory canteen or use of regional language for indication on weights and measures carries the same sentence of one to three years as those found guilty of unlawful assembly or rioting with deadly weapon under IPC. The punishment for “not displaying working hours prominently at place of business including place of storage on conspicuous place,” is a prison term of five to ten years — the same as that for threat of extortion or for mutiny or kidnapping.”

It is in this context that Shankkar says that we should view the reluctance of a Samsung to manufacture semiconductors and Tesla to make EVs in the India.

If you want to read our other published material, please visit https://marcellus.in/blog/

Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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