#36: The fear of doing business in India
Criminal prosecution in labour laws may lead to a chilling effect on entrepreneurship
Introduction
At the end of 2022, five Indian states (Gujarat, Haryana, Tamil Nadu, Telangana, and Maharashtra) had 46,283 criminal cases pending under the Factories Act, 1948. Of these, 7,840 cases had been initiated in 2022 alone. For context, the total number of operational factories in these states stood at 1,38,080 (The Directorate General Factory Advice Service and Labour Institutes, 2022). This corresponds to about one criminal case for every three factories in these states. These criminal cases represent the risk that anyone setting up or operating a factory faces In India. In addition to criminal sanctions, factory operators also face substantial legal restrictions before and after criminal prosecution.
India’s transition to an industrialised society may be harmed by laws creating unwarranted criminal penalties. There were around 26,134 provisions resulting in imprisonment in India’s business laws, according to the Jailed for Doing Business Report (Chikermane & Agrawal, 2022).The country has acknowledged this problem by passing The Jan Vishwas (Amendment of Provisions) Act, 2023, which removes or rationalises criminal penalties from 42 central laws to facilitate trust-based governance. Most of these criminal penalties were being imposed on businesses for minor violations, which should only invite civil penalties. However, the Jan Vishwas Act decriminalised only 113 out of the 26,134 employer compliance clauses that could result in imprisonment. 26,021 reasons for unease in doing business in India still exist (Chikermane, Gautam, 2023).
One law yet to be reformed is the Factories Act, 1948. This law contains an omnibus criminal penalty provision (S.92) that imposes fines and imprisonment on factory operators for violating any provision or rules made under the law. As Table 1 below shows, the law is not just on the statute books but is also being implemented regularly.
Some of these problems will be alleviated by The Occupational Safety, Health and Working Conditions Case, 2020 (OSHWC), which proposes to replace the Factories Act, 1948. However, even after the OSHWC comes into force, many violations which carry only a fine may still lead to criminal trials, due to a curious drafting decision.
Who gets prosecuted?
The 45,623 criminal cases pending in 5 states are against factory occupiers, managers or owners as required by the Factories Act, 1948. Under the law, three groups of people are at risk of being prosecuted for violations. The first group consists of factory ‘occupiers’, who have ultimate control over the day-to-day functioning of the factory. Prosecution may also be against the second group, factory ‘managers’, who may be hired to run the factories. Lastly, the ‘owners’ of the land or buildings where factories operate may also face prosecution. While these owners neither own nor operate the factories, they are mandated to provide common facilities to workers in some instances. Non-provision of such facilities could lead to their prosecution.
What gets prosecuted?
Several cases demonstrate that minor violations under the Factories Act, 1948 can have severe consequences for individuals operating factories in India. For instance, a factory owner in Jharkhand failed to provide a partition for women workers in the factory canteen as mandated under The Act (S. 46). The Supreme Court required the occupier and manager to pay a hefty fine for the violation.
“Having given our thoughtful consideration... we are satisfied, that in terms of the mandate of Section 92 of The Act, ends of justice would be met, if a penalty of Rs. 50,000/- each is imposed on the Appellants.”
(Hemant Madhusudan Nerurkar v State of Jharkhand, Criminal Appeal No. 442 of 2016, Supreme Court of India)
In another case, a factory occupier in Gujarat was convicted for failing to notify the factory inspector regarding a shift in working time (S.63). The Supreme Court sentenced the occupier to a minor fine or imprisonment for fifteen days.
“It is not necessary that mens rea must always be established... The responsibility exists without a guilty mind.”
(State of Gujarat v. Kansara Manilal Bhikhalal, 1964 AIR 1893, Supreme Court)
Typically, criminal conviction requires that the criminal act have mens rea, i.e. the accused must have intended to cause harm and not caused harm by mistake. However, in J.K. Industries Limited Etc. v The Chief Inspector Of Factories, the Supreme Court removed this essential protection afforded to the accused in criminal law — the necessity to prove malafide intention. The Apex Court ruled that as the Factories Act, 1948 is a beneficial legislation which protects factory workers' welfare, any breach must result in strict liability. Post this judgment, the prosecution does not have to prove intention, and even innocent mistakes can now land factory operators in jail.
“The offences under the Act... are strict statutory offences for which establishment of mens rea is not an essential ingredient. The omission or commission of the statutory breach is itself the offence”.
(J.K. Industries Limited v. The Chief Inspector Of Factories, 1996 AIR ONLINE 1129, Supreme Court)
What does prosecution entail?
India’s prosecutorial process is long and involves several steps. It includes filing of the First Information Reports (FIR), exhaustive police investigations, court summons, cross-examinations and lengthy trials. For India’s factory owners and managers, the process also becomes a punishment.
Though criminal prosecutions should entail jail terms, in the recent past, courts have declined to send factory operators to prison for violating the Factories Act, 1948. Under the law, factory owners and operators could face imprisonment of up to two years or a fine of up to one lakh or both (S.92). However, an analysis of 20 recent judgments from Howrah and Gurugram labour courts showed that the courts did not order compulsory imprisonment in any of the cases. In all cases, the convicts were fined (Rs. 10,000 – 2,40,000 each) and would face jail terms only if they failed to pay the fine. This lack of jail term might lead one to assume that the criminal prosecution under the Factories Act, 1948 results solely in monetary harm in most cases. However, such a conclusion ignores the other harms that criminal prosecution brings in India.
What are the additional consequences of criminal prosecutions?
Beyond immediate legal penalties, criminal prosecutions also trigger a cascade of collateral consequences. Industrialists are also forced to face additional civil penalties as a consequence of being criminally prosecuted or convicted. These harms are in addition to the mental stress and expenses that the accused faces due to criminal prosecution. These civil penalties are often unrelated to the crime the individual has been charged with (Baynard, 2021). They often result in legal disabilities and social, economic and reputational harms (Chin, 2012). These consequences from criminal prosecution arise in two phases: during the criminal trial and after conviction.
Even before a person is convicted, the mere existence of a criminal case significantly restricts their ability to carry on with their day-to-day life. These include travel restrictions (passports and visas), being barred from public employment, and limits on financial transactions. In many cases, the court trying the person does not have to order these restrictions as they are automatically applied through the operation of other laws.
Factory owners and operators with pending criminal cases (under the Factories Act, 1948) may be denied passports or have their passports impounded. Under the law, the government may refuse to issue/reissue passports to undertrials:
“Refusal of passports, travel documents. Etc.
(2) Subject to the other provisions of this Act, the passport authority shall refuse to issue a passport or travel document for visiting any foreign country... on any one or more of the following grounds... namely: -
(f) that proceedings in respect of an offence alleged to have been committed by the applicant are pending before a criminal court in India;”
S.6(2)(f), The Passport Act, 1967
Obtaining a passport is not the end of the challenges that factory operators will face when trying to travel internationally. Those facing criminal prosecution also risk visa rejections or protracted delays in obtaining visas during the trial. Many countries, like the U.K., are hesitant to issue visas to persons who have criminal cases pending against them. The U.K. visa form asks:
“Have you ever been charged in any country with a criminal offence for which you have not yet been tried in court (including traffic offences)?”
(Visit and Short-term stay visa application, United Kingdom, 2018)
Travel restrictions are not the only disadvantage of facing criminal trials. Factory owners and operators who are under prosecution or have been convicted also face restrictions when seeking public-sector employment. Aspiring candidates are required by law to provide complete details regarding any pending cases and convictions, and the employer has the right to reject applicants with criminal backgrounds. As the job application forms require:
“The candidate... will also submit the self-declaration certifying that no criminal cases are pending against him or her, no penal action has been taken in any court of law etc. In case a criminal case is pending against him or her or some punishment has been given, then the details will be provided.
2016 Attestation form for verification of character and antecedents prior to appointment in Government service, (Department of Personnel and Training, 2016)
Factory operators may try to start a different business since they are no longer eligible for public-sector jobs. However, that route may be closed to them, as banks classify persons with ‘criminal backgrounds’ as high risk. Therefore, banks may deny such applicants’ loan applications (Bank of India, 2012). The banks do not clarify whether criminal background means pending criminal prosecution or post-prosecution. The regulations governing the collection of information states:
“Customer Acceptance Policy ( CAP )
2. The Customer Acceptance Policy must ensure that explicit guidelines are in place on the following aspects of customer relationship in the bank...
vi) Necessary checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background…”
Master Circular – Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002
(Reserve Bank of India, 2014)
The banking regulator is not the only financial sector regulator that places conditions on a person charged with a criminal offence. Industrialists and factory managers may face restrictions in the equity market too. The securities regulator requires companies to report:
“...arrest of senior management and directors of the listed entity.”
(SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Schedule III, paragraph 6)
This disclosure will adversely affect the company’s stock price. Therefore, companies may choose to remove the industrialists or factory managers embroiled in criminal prosecutions from senior management.
These are only a subset of the restrictions that apply to a person facing criminal prosecution before they are convicted. Even if a person is acquitted after the case, the restrictions would have applied to the person during the trial, which could last years. After the criminal trial, more restrictions are placed if the factory operator is found guilty. This includes debarment from acting as a director of a company:
“Section 164. Disqualifications for appointment of director.
(1) A person shall not be eligible for appointment as a director of a company, if –
(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:
S. 164(1)(d), The Companies Act, 2013
Factory owners and operators facing criminal proceedings or convictions also risk losing access to the securities markets. Obtaining an intermediary licence provides industrialists a vital avenue to raise funds from India’s capital markets. Factory operators who fail to meet SEBI’s ‘fit and proper’ criteria risk having their licence suspended or cancelled. Industrialists who have been convicted could face restrictions on accessing funds for business operations and expansion. This highlights the impact of criminal penalties on a factory’s financial health.
Schedule II - Fit and Proper Criteria
(3)For the purpose of determining... whether any person is a ‘fit and proper person’, the Board may take into account any criteria... including:
(b)... following disqualifications:
(v)an order of conviction has been passed against such person by a court for any offence involving moral turpitude.”
(S.7, S.23, Schedule II, SEBI Intermediary Regulations, 2008)
India’s factory owners and operators who are involved in ongoing criminal trials or have been convicted face many collateral consequences. These include passport denials, visa rejections, loss of company directorships, and a reduced ability to raise funds. Such restrictions complicate business operations and make raising funds more challenging. These barriers create an environment that discourages entrepreneurship in India.
What changes for industrialists under the new labour codes?
The problem with existing labour laws, such as (S.92) of the Factories Act, 1948, is well known. The government has passed OSHWC, which is set to replace the Factories Act, 1948. At first glance, factory owners and operators could infer that the new Code reduces their criminal liability. This is due to a change in the language in S.94, where the term ‘imprisonment’ has been removed. In the same section, the term ‘fine’ has also been replaced by the term ‘penalty’. In (Director Of Enforcement vs M/S. Mctm. Corporation Pvt. Ltd, 1996 (1) SCR 215 ), the Supreme Court clarified that a ‘penalty’ is imposed for civil wrongs. Despite this change in terminology, S.94 retains the term ‘conviction’, continuing the legacy of the Factories Act, 1948 and potentially resulting in significant legal and reputational risks to India’s job-givers.
This continuation of criminal liability may be a drafting error. If this is the case, the Government of India could exercise its power to remove difficulties under S.132(1) and harmonise the language of the section with its legislative intent. The inclusion of the term ‘conviction’ could also be an indication of the mindset of India’s legislative drafters, who seem trapped in India’s legacy of overcriminalisation.
Industrialists can also opt to settle some types of infractions by paying monetary penalties under OSHWC, also known as ‘compounding’(S.114). This relief does not currently exist under the Factories Act, 1948. Some states like Goa, Maharashtra, Punjab and Uttar Pradesh have amended the Act to include this relief. Compounding can seem like a relief, allowing industrialists to circumvent court proceedings by agreeing to pay penalties for minor non-compliances. However, compounding of offences is not a complete protection against criminalisation. By default, industrialists who choose this route will be foregoing the right to prove their innocence. Additionally, factory owners and operators will still need to endure pre-conviction collateral consequences such as travel and banking restrictions until compounding is permitted.
Conclusion
The criminal sanctions in the Factories Act, 1948 and other labour laws could have a chilling effect on entrepreneurship and innovation in the country. India’s job creators face imprisonment and fines for minor infractions. Further, the collateral consequences of such criminal prosecutions result in significant personal, entrepreneurial, and financial disadvantages. These additional and often invisible costs of doing business in India could impact the entrepreneurial drive among India’s business class. India needs to strike the right balance between facilitating a more conducive business environment and ensuring worker welfare and safety. The Government’s announcement of ‘Jan Vishwas 2.0’, which seeks to decriminalise and rationalise over 100 business rules and laws, could be a welcome respite for India’s factory operators.
References
Bank of India. (2012). Customer Acceptance, Customer Care and Customer Severance Policy.
Baynard, M. (2021). Overcriminalization of Low-Level Offenses: Perpetuating Poverty and Racial Disparities in the Misdemeanor Criminal Justice System. Master's project, Duke University.
Chikermane, G., & Agrawal, R. (2022). Jailed for doing business. Observer Research Foundation.
Chikermane, Gautam. (2023). Jan Vishwas Bill provides a framework for future reforms (Expert Speak). Observer Research Foundation.
Chin, G. J. (2012). The New Civil Death: Rethinking Punishment in the Era of Mass Conviction. University of Pennsylvania Law Review, 160(6), 1789–1833.
Department of Personnel and Training. (2016). Attestation form for verification of character and antecedents prior to appointment in government service. Government of India.
Director Of Enforcement v M/S. Mctm. Corporation Pvt. Ltd,1996 IAD (SC) 646 (The Supreme Court of India 1996).
Directorate General Factory Advice Service & Labour Institutes. (2023). Standard Reference Note—2022. Ministry of Labour & Employment, Government of India.
Hemant Madhusudan Nerurkar v. State of Jharkhand, AIR 2016 2219 (The Supreme Court of India 2016).
J.K. Industries Limited Etc. v The Chief Inspector Of Factories, AIR ONLINE 1996 SC 1129 (The Supreme Court of India 1996).
Reserve Bank of India. (2014). Master Circular – Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002 (RBI/ 2014-15/70).
Securities and Exchange Board of India. (2008). Securities and Exchange Board of India (Intermediaries) Regulations.
State of Gujarat v. Kansara Manilal Bhikhalal, 1964 AIR 1893 (The Supreme Court of India 1964).
The Factories Act (1948).
The Jan Vishwas (Amendment of Provisions) Act (2023).
The Passports Act (1967).
UK Visas and Immigration. (2018). Visit and Short Term Stay Application—General Visitor (VAF1A November 2018). Government of the United Kingdom.
Akhileshwari Reddy and Shubho Roy are researchers at Prosperiti.
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