11 January 2022
Background
Over the last few decades, there has been a trend where only a small fraction of law stems directly from ‘legislations’ passed by the Parliament. In the sphere of corporate law, the tendency of the law makers is to enact ‘bare-bone’ statutes such as the SEBI Act, 1992 (“SEBI Act”) and the Foreign Exchange Management Act, 1999 (“FEMA”), and a bulk of the law is enacted by the designated regulators, such as the MCA, SEBI and RBI.
As the Supreme Court of India (“SC”) noted in its celebrated judgment in the Kesavananda Bharati case[1], the separation of powers among the three organs of the State (the legislature, executive and the judiciary) is an integral element of the “basic structure” of our Constitution.
While the Indian constitutional framework provides for the separation of powers among the three organs of the State, it does permit the executive to make the rules and regulations by a specific provision in the Act, subject to certain well-established limits and parameters including the requirement of laying those rules and regulations before the Parliament.
However, the frequency with which the rules and regulations are notified and amended by the various regulators present a worrying picture for the stability of our legal system.
Readers would be alarmed to note that since the enforcement of the Companies Act, 2013 (“2013 Act”), the MCA has notified 56 Rules under the Act, and issued 181 Circulars. Further, around 225 amendments have been made to the Rules framed by the MCA, and 24 such amendments were made in 2021 itself.
However, SEBI seems to be way ahead in the race, notifying nearly 80 amendments to its Regulations in 2021. In the same year, the market regulator had also issued around 170 Circulars, which indicates that the law is altered almost every alternate day!
While the data highlights the all-pervasive nature of delegated legislation in the corporate law paradigm, one must not lose sight of the numerous examples of delegated legislations that deal with substantive policy aspects, and are not restricted solely to ancillary matters of procedure. For instance, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) cover aspects ranging from related party transactions to foreign direct investment, which are substantive policy issues, and not ancillary procedural matters where the executive or the regulator merely has to “fill in the details”.
The frequency with which delegated legislation is notified and amended also highlights that such legislation serves as a ‘mechanism of convenience’ for the executive branch, as far-reaching amendments can be made simply by issuing a Gazette Notification without going through the grind of passing a Bill in both Houses of Parliament.
While the rise and rise of delegated legislation in the corporate law sphere may not be a recent phenomenon, it is important for policymakers and legislators to scrutinise whether the rules/regulations framed under the parent statute conforms to the constitutional limits of delegated legislation that have been well-established by various landmark decisions of the SC.
Constitutional limits for delegated legislation
Various landmark decisions of the SC have enshrined the ‘constitutional limits’ of delegated legislation along with the tests for determining whether there is an ‘excessive delegation’ of legislative power. The SC has specified the following circumstances where a delegated legislation would be invalid:
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The delegated legislation violates any of the fundamental rights or violates any other provision of the Indian Constitution.
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The Rules / Regulations are ultra vires the provisions of the parent Act and fail to conform to the substantive provisions of the statute.
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The Executive did not have the legislative competence to frame the said rule or regulation.
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The delegated legislation exceeds the limits of the authority conferred by the enabling statute.
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A delegated legislation can also be struck down on the ground of manifest arbitrariness, and unreasonableness.
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The delegated legislation cannot provide for a retrospective operation unless expressly authorised by the parent statute.
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A delegated legislation cannot address substantive policy aspects. The SC has held that the Legislature cannot delegate its ‘essential legislative functions’ to the executive branch. Further, the determination of the ‘legislative policy’ and its formulation as a rule of conduct is an essential legislative function, which cannot be delegated to the executive.[2]
Along with enunciating the legislative policy and the guiding principles, the parent statute should also provide the sphere within which a subordinate legislation can operate and cannot confer an unchecked power on the executive.[3]
Keeping in mind the constitutional safeguards – the 2013 Act, the SEBI Act and the FEMA provide for a limited ‘supervisory’ mechanism for the framing and enforcement of delegated legislation.
Parliamentary supervision over delegated legislation
Under Section 469(1) of the 2013 Act, the MCA has the power to frame rules for carrying out the provisions of the said Act. Section 469(4) provides that every rule made under Section 469 and every regulation made by SEBI under the 2013 Act shall be presented before each House of Parliament, while it is in session, for a total period of 30 days.
If both Houses agree either to make any modification to the rule or regulation or agree to completely omit the same, the rule or regulation shall thereafter have effect only in such modified form, or be of no effect. The rules and regulations under examination can either be modified (and thereafter effected) or expunged only when both Houses of Parliament are in agreement.
Similar provisions relating to parliamentary supervision are contained in Section 31 of the SEBI Act, and Section 48 of the FEMA, which inter alia provide that both Houses of Parliament can agree to make modifications to the said rules/regulations or decide they are not needed at all. A limited supervision of this form is wholly insufficient, as many delegated legislations cover technical aspects and cannot be reviewed without sufficient debate and deliberation.
Another mechanism for parliamentary supervision is through the Committee on Subordinate Legislation – which has been constituted by the Lok Sabha and the Rajya Sabha. Each House of Parliament has a separate Committee on Subordinate Legislation, which functions in accordance with the Business Rules of the Lok Sabha and the Rajya Sabha.
While the Business Rules cast an obligation on the Committee to examine whether the delegated legislations meet constitutional parameters, it may not be feasible for the Committee to examine every delegated legislation along with its frequent amendments. The Committee on Subordinate Legislation may also not have the domain expertise necessary for reviewing the technical aspects delved into by some delegated legislations – such as the Takeover Code, Insider Trading, FEMA Regulations on in-bound and out-bound investments etc.
There is an urgent need to reform this process, and devise a mechanism for ensuring that such Parliamentary Committees undertake a periodic review of the delegated legislations framed by MCA, SEBI and RBI, and examine whether the delegated legislations conform to the standards provided in the parent statute, and the constitutional limits enshrined by the SC.
The curious case of Section 462 of the 2013 Act
In the context of the 2013 Act, it is pertinent to note that almost 50% of the law is derived from the rules and exemption notifications framed by MCA, many of which directly touch upon substantive aspects. For instance, the Companies (Auditor’s Report) Order, 2020 (CARO 2020) assigns a wide array of responsibilities on the statutory auditor of a company, far exceeding those cast under the 2013 Act. This was not the case under the regime of the 1956 Act, where only a small fraction of the law was based on delegated legislation.
The 2013 Act has also introduced Section 462, which did not have any corresponding provision in the 1956 Act. Section 462 confers the MCA with a wide-ranging power to ‘exempt, modify and adapt’ the applicability of any provision of the 2013 Act in relation to one or more classes of companies.
Unlike the 1956 Act, which itself specified the provisions that will not be applicable to private companies, the scheme of the 2013 Act provides the MCA with broad powers to exempt private companies. There have been instances where the exemption notifications issued by the MCA under Section 462 have altered the substantive provisions of the parent statute, leading to lack of clarity on vital issues.
Concluding thoughts
As the SC has observed – delegated legislation can be considered as a “necessary evil”, and an unfortunate but inevitable infringement of the doctrine of separation of powers[4] – which postulates that ‘law-making’ is the sole prerogative of the legislature.
The SC has also highlighted the inherent danger in the process of delegation, where an over-burdened legislature may unduly overstep the permissible limits of delegation and may not rightly articulate the guiding principles within which the delegated legislations must operate.[5]
This note of caution is most relevant in the corporate law realm, where a large number of delegated legislations (such as the Takeover Code or the NDI Rules) directly touch upon substantive policy issues, which should ideally be covered by a law passed by Parliament – keeping in mind the cardinal rule that the formulation and declaration of ‘legislative policy’ is the sole prerogative of the legislature and cannot be delegated to the executive.
However, given the complexities and the practical considerations involved, delegated legislation in the realm of corporate law is here to stay. Regulators are likely to continue using the subordinate legislation route, as rules and regulations can be easily amended to address practical difficulties, or to plug loopholes.
While delegated legislation in the corporate law realm may have its merits, it also results in frequent changes to the law and many such overnight changes have significant implications on structuring and execution of corporate transactions. Besides resulting in uncertainty, such frequent changes also profoundly impact the stability of our legal system. The stability and consistency of the legal system is an integral component of the rule of law, which forms part of the “basic structure” of our Constitution.
Further, keeping in mind the doctrine of separation of powers, it is imperative to ensure the functioning of the Parliamentary Committees on Subordinate Legislation is made more robust along with a periodic review of the delegated legislations framed by the MCA, SEBI and RBI. In addition to ensuring meaningful parliamentary supervision, such a periodic review is necessary for evaluating whether the delegated legislations are in conformity with the policy enunciated by the parent statute.
While we await the implementation of suitable parliamentary safeguards, keeping track of an unending list of rules, regulations, notifications, and circulars has long become the ‘new normal’ for corporate law practitioners!!
For further information, please contact:
Bharat Vasani, Partner, Cyril Amarchand Mangaldas
bharat.vasani@cyrilshroff.com
[1] (1973) 4 SCC 225.
[2] See In Re: The Delhi Laws Act, 1912, AIR 1951 SC 332; Rajnarain Singh v. Chairman, Patna Administration Committee, AIR 1954 SC 569; Registrar, Cooperative Societies v. K Kunjabmu, AIR 1980 SC 351.
[3] M.P. Jain and S.N. Jain, Principles of Administrative Law, Volume I, 8th Edition (2017), at Pg. 96.
[4] See St Johns Teachers Training Institute v. Regional Director, NCTE, (2003) 3 SCC 321.
[5] See Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd v. CST, (1974) 4 SCC 98; Devi Das Gopal Krishnan v. State of Punjab, AIR 1967 SC 1895.
