Legal Transplant in Indian Corporate Law:  Colonial era to the Companies Act, 2013

This article was written by Jennifer Philip, a student of School of Law, Bennett University. 

Introduction

Every country has its own story to speak when it comes to the introduction of a particular piece of legislation. It may have derived it from its past, some came into effect because of the societal necessity, and some to keep up with the changing world.

Trade in India did not commence after the arrival of East India Company. India’s pre- colonial trading with the rest of the world was mainly carried on by certain minority groups like the Gujaratis and Marwaris. It was only after India was colonized that the requirement of law to govern the trade relations actually started bothering the traders.

Evolution of Company Law in India

Indian Company law has evolved over the years from the English, of whose empire the former were colonies. The Indian version has adopted various doctrines from jurisdictions, has undergone evolution from its previous enactments and has also incorporated elements local to its conditions to enact the legislative piece that we have now. But it would be wrong to say that the present law, i.e., Companies Act of 2013 has any sort of resemblance to its UK counterpart.

 India’s adoption of the English doctrines and principles could be termed as a form of legal transplant. Legal transplant could be defined “as a body of law or individual legal rule that was copied from a law or rule already in force, in another country, rather than developed by the local legal community”[1]. This trend is usually seen in countries which were colonies of some others previously. India also followed the same trend or pattern of taking from its commonwealth, England. But over time, it realized that the English laws did not suit the local environment of the country. “If a law that has been transplanted into a host country during the colonial period does not fit with local conditions, then the post-colonial free state may start the process of radically departing from the transplanted law”[2]. For India, it took quite a lot of years to actually divert from its colonial history, till around 1991, when India’s economy got liberalized.

 Corporate law first came to India when the East India Company started trading with India. “It was in India that the British were compelled to face the problem of large non-European communities with their own system of law”[3]. For them, implementing their own laws meant the applicability of the same set of laws both in their home country and the host country. This gave them an edge over traders from other countries, even Indians to an extent, as they were not aware about these news laws which the foreigners were applying. “European settlers would arrive, they created institutions that promoted economic development; but that where they could not survive, they created institutions that facilitated the fastest possible extraction of valuable resources, condemning the latter countries to centuries of poverty and exploitation by colonial and then local elites”[4]. The British did not look into the local adaptability issue of these laws and continued with their implementation. Soon they became the law of the land for Indians too. This continued for a long time till the colonizers left the Indian soil. In 1936, was for the first time that a hesitation to continue with just the same law came up for the Indian Legislature. “The Statement of Objects and Reasons of the 1936 Act suggests that India decided not to adopt the wholesale English legislation due to some unfavorable criticism it attracted and also because of India’s recognition of dealing with problems peculiar to India, especially those relating to managing the agency problem”[5]. But traces of English corporate law could be seen even in the Indian Companies Act of 1956 which was enacted years after its independence in 1947.

Evolution of Corporate Law in U.S

The history concerning the corporate laws of both the countries was entirely different. In India, where corporate were considered to be a common set of ground rules of trade for the East India Company, “corporate power was perceived as being opposed to the ideal of individual liberty”[6] in US. One similarity could be that both of them had a common legal origin, even though US started having its own legislation. “The United States transplanted its law from England, but since the late eighteenth century its legal development has been sufficiently independent as to justify classifying it as an origin jurisdiction”[7].  Even as in the 18^th century, US was reformative and “a vision of equality that gave everyone the right to incorporate. Incorporation must no longer be a discretionary privilege that the legislatures could dispense to a select few who had special access and resources.”[8] At the same time, “a large percentage of the corporations, more than three quarters, were meant for infrastructure – an activity in which an element of public interest was prominent”[9].  This approach has high resemblance to the post colonial era of the Indian corporate world. The first five year plan of the Planning Commission was of the collective opinion that “in a planned economy, private enterprise has to visualize for itself a new role and accept, in the large interest of the country, a new code of discipline. Private enterprise, like any other institution, will enjoy and justify itself only to the extent to which it proves to be an agent for promoting the public good”[10]. This showcased the socialistic approach of the government then, which was very similar to the one which US government had in the 18^th century. The irony is that years later US is one among the countries with the most successful corporate capitalist society in the world.

One of the basic as well as significant differences is that India and Britain follow common law system whereas U.S follows civil law system. Unlike the jurisdictions in the Commonwealth which preferred the usage of the term ‘company’, Americans used ‘corporation’ instead. The financial markets of US and UK are better developed than that of India giving more space for innovation. When we draw parallel between the evolution history of the corporate law in US and India, it is evident that many of the pathways which was chosen by US legislatures at its very inception is being still followed in our country or the principles remain more or less the same. This also highlights the fact that the country is lacking behind in many aspects and has a long way to go before we actually think of implementing the present day laws. While talking about transplants in corporate law, one should not forget about the Soviet influence during the post colonial era. The “shoddy Soviet transplants also corroded India’s British institutions after independence, though less completely”[11]. India also took up any elements of the US Companies Act subsequently, sometimes along with the English elements. The Indian version of the Companies Act therefore would be a blend of its colonizer’s act, its own elements and those taken from jurisdictions like the US.

View of the Courts with regard to the Legal transplant

Indian Court in Hind Overseas Private Limited v Ragunath Prasad Jhunjhunwalla and Ors opined that “the Indian Companies Act is modeled on the English Companies Act; the Indian law is developing in its own lines. Our law is also making significant progress of its own as and when necessary. Where the words used in both the Acts are identical, the English decisions may throw good light and reasons may be persuasive”[12]. The court admitted that even though the Indian company law has taken a lot of elements from its colonizers but it is undergoing changes and the courts will have to look into developing a culture of its own instead of always depending on the Privy Council decisions or the precedents of the English courts.

In another case Ramanandi Kuer v Kalawati Kuer, the Privy Council stated “where there is a positive enactment of the Indian legislature, the proper course is to examine the language of the statute and to ascertain its proper meaning uninfluenced by any considerations derived from the previous state of the law or of the English law upon which it may have been founded”[13]. The Privy Council in this case in a way asked the Indian courts to rely on Indian laws and said that there is no necessity to approach it with the cases when legislature has already made laws on it. It also in a way asked the Indian courts to become independent while deciding the cases which come before it.

Corporate Governance

Let us take the example of the concept of corporate governance. Corporate governance is defined as “the rights and responsibilities of a company’s management, its board, shareholders and various stakeholders”[14] . India has adopted the corporate governance policies from UK and US jurisdictions. In both these countries, this has been there for quite a long time and when we compare it to the Indian scenario, it is a recent phenomenon in the country. “The corporate governance movement in the UK can be said to have begun with the report of Cadbury Committee in 1992”[15] from which India had also taken broad ideas and principles.  India is even the first country among the Asian nations to have adopted the policy of corporate governance. “The governance issue afflicting Indian companies that were managed during the colonial period by the managing agents was somewhat similar to those faced by the classic Berle & Means Corporation in the US. Although there was initial hesitation to confront this agency problem directly towards the end of the colonial period ad immediately upon independence, sufficient political will was mustered in the late 1960s to eliminate the institution of managing agencies together”[16].  Both these jurisdictions, the UK and the US follow ‘outsider model’ whereas India follows the ‘insider model’. Outsider model is” a market based system with less reliance on mandatory rules and greater emphasis on default rules that provides a significant role to the market players as opposed to regulators and State”[17]. In a country with most of the existing businesses groups run by families (for example the concept of Hindu Undivided Family) ,“a glance at India’s 500 most valuable companies, that together account for over 90% of the market capitalization of the Bombay Stock Exchange, reveals that about two-thirds of them are part of conglomerates or business groups”[18]   or most of the shares held by a single family, this kind of system would do no good. In a country like ours “marked with concentrated stock ownership and preponderance of family controlled businesses while State controlled businesses form an important segment”[19], the Insider model which is also called the family/State model would be better apt, and therefore suitable than just mimicking the other developed countries. Also in our country, the State plays a crucial role when it comes to business activities. During the license raj led by Jawaharlal Nehru, the country’s first prime minister in the 1960s, many family owned businesses emerged, as only rich and affluent people could afford getting licenses for their business ventures. This continues even today but things are changing with the government supporting entrepreneurship. Tata Group, Birla family and Reliance Industries were among the first few business families in the country who still rule the market. “Nehru’s original motive seems to have been a desire to curb India down a distinctly socialist path, building a dense thicket of regulation and bureaucratic oversight”[20].These regulations relating to licenses have relaxed post the liberalization era in 1991. After 1991, the scope of private sector industries had enlarged. This also opened for Foreign Direct Investment. But still the country could not sustain on its own without governmental regulation as its economy is still struggling to attain stablility. Also the government would show its share of reluctance to completely leave it to the market to decide on its own.

Therefore this is a fine example of India, considering its local culture and needs before blindly transplanting a theory from other jurisdictions. The purpose of these models is to prevent corporate crimes or frauds from happening and to have transparency in the system. But the success of these models is a moot question in itself. Even after US having it as part of its legislation for all these years, it couldn’t prevent the happening of frauds like Enron scam. This in a way points to the failure of the governance models. But one cannot decide on how its implementation in India would be like by just looking at the scams that happened in US. It may have better application in India or may be better suited for the kind of companies India has. It cannot be fully said that the corporate governance regulations in the country is a success. This is because of events like Satyam crisis. No hard and fast rule can therefore be said as to suit the conditions. What one needs to see is the whether the legislation suits the conditions in the country in terms of legal implementations or not.

The outsider model would have never been acceptable to the government also. If India would have adopted this model then the economy of the country would have doomed. “Corporate governance regimes in emerging markets like India which are likely to witness transition from insider to outsider regimes through constant dilution of controlling shareholding need to provide mechanisms to tackle undue control by promoters within limited shareholding”[21]. A fact to be highlighted is that Indian legislation has instead of being rigid has adjusted to the indigenous requirements and has brought in changes in its newly brought in Companies Act, 2013. It has given importance to the needs of Indian companies to the extent that it can be termed as the Indian version of corporate governance concept. This should be seen as a great step towards progress by the legislative wing of the State.

The credit for the introduction of corporate governance in 1998 to the Indian legal system should be given to the National Task Force, which was constituted by the Confederation of Indian Industry. It suggested a code which was adopted by few Indian Companies. The code was termed Desirable Corporate Governance. “To promote and raise the standard of corporate governance in respect of listed companies”, a committee under the guidance of Mr. Birla submitted a report to the Securities and Exchange Board of India. This report also warned from adopting the system of corporate governance prevalent in other jurisdictions, ignoring which many concepts of governance were introduced from the US and UK. It was only after the corporate mishaps in these jurisdictions that India thought of having its own strong corporate governance model.

Conclusion

The legal evolution in the original country and the legal transplant may or may not be similar. One of the reasons why India showed a shift from UK to US or to any other jurisdiction while adopting policies would be because of similar history of being the colony of an empire like the British. One tends to connect more with those who had similar kind of experiences like theirs. One another reason would be that it felt that the English Companies Act could not provide a solution suitable for the problem it was facing back then, which the parallel provision of the other jurisdiction was catering to. There have also been situations where in Britain as well as others in the Commonwealth have turned from a particular law but Indian law still wishes to continue with the age old tradition and does not want to adapt further. The US example also pinpoints towards the fact that there is not even a requirement of similar kind of legal system to be followed for legal transplant. “Countries that adopt foreign law are frequently unprepared for it or for the changes it brings in. It is therefore not surprising that the new law does not become well incorporated into the institutional landscape or contributes to an ongoing process of institutional change and legal transplants cannot function in the host countries as in they do in their home countries”[22].

Some jurisdictions take it from jurisdictions which have themselves borrowed from other countries but their legislation acts as an illusion as if it is an original piece. Since India is intending to have more of foreign investments and, most of it coming come from US, having strong corporate governance is essential as it will be more convenient as well as attractive option for even other countries who plan to invest in the near future.

Analysis

While thinking to adopt the Anglo-American corporate law in India, we need to consider a lot of parameters. India is still a developing country contrary to the other two jurisdictions which are already among the developed nations. The needs of a developing nation as one would call India to be are entirely different from the developed. What India wants is a legal system which would provide protection to the corporate world and at the same time is flexible to the needs of the shareholders as well as other stakeholders. India has kept intact few of the provisions that it had borrowed from British, with the view of “if it ain’t broke, don’t fix it”[23]. It may have stood the test of time. In that regards, merely mimicking the legislation of a particular jurisdiction wouldn’t suffice. Local needs have to be considered and the lawmakers have to give regards to the needs of the Indian market. But on the pretext of being indigenous the legislatures should not ignore the advancements happening across the world, less the country will remain behind always. By referring to the other jurisdictions, the country could ensure that they are on par with the global developments to an extent.

One cannot say the legal transplant is a bad option always. Referring to the parallel legislation in other jurisdictions for adopting their policies would also give in many new ideas and principles which could be tried and adopted in the country. Its success could be then evaluated by the progress which the particular rule has brought in or the reduction in the legal scrutiny of the legislation. Another perk of adopting a piece from another parallel provision is that you are already prepared of the kind of litigation matters that may arise, the loopholes in it and could even incorporate solutions, thereby coming up with a better legislation. A certain set of standard is also set up once a legislation on a particular matter exists so then the only goal should be to wait for its outcome. It is one of the least costly and quickest methods of implementation and therefore the most preferred too. One can always use the original one as reference while enacting a entirely new one also.

Bibliography

Articles

1. Hideki Kanda and Curtis J.,Milhaupt, Re-Examining Legal Transplants: The Director’s Fiduciary Duty in Japanese Corporate Law
2. Umakanth Varottil, The Evolution of Corporate Law in post Colonial India: from Transplant to Autochtony
3. [1]N.Matson, The Common law Abroad : English and Indigenous Laws in the British Commonwealth,42 INT’L & COMP. L.Q. 753(1993)

4. Randall K. Morck, Lloyd Steir, The Global History of Corporate Governance – An Introduction, National bureau of Economic Research
5. M.Vasudev, Corporate law and its Efficiency: A Review of History, American Law and Economics Association
6. Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp, Mark.D.West, Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries , The World Bank Research Observer 18, No. 1 (Spring, 2003), 100

Cases

1. Hind Overseas Private Limited v Raghunath Prasad Jhunjhunwala and Ors AIR 1976 SC 565
2. Ramanandi Kuer v Kalawati Kuer AIR 1928 PC 2

[1] Hideki Kanda and Curtis J.,Milhaupt,  Re-Examining Legal Transplants: The Director’s Fiduciary Duty in Japanese Corporate Law, Vol. 51, No. 4 (Autumn, 2003), American Journal of Comparative Law pp. 889

[2] Umakanth Varottil, The Evolution of Corporate Law in post Colonial India: from Transplant to Autochtony

[3] J.N.Matson, The Common law Abroad : English and Indigenous Laws in the British Commonwealth,42 INT’L & COMP. L.Q. 753(1993)

[4] Randall K. Morck, Lloyd Steir, The Global History of Corporate Governance – An Introduction, National bureau of Economic Research

[5] Supra 2

[6] P.M.Vasudev, Corporate law and its Efficiency: A Review of History, American Law and Economics Association

[7] Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp, Mark.D.West, Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries , The World Bank Research Observer Vol. 18, No. 1 (Spring, 2003), 94

[8]Supra 6

[9] Ibid

[10] Bhabha Committee report on Company law, 1952

[11] Supra 4

[12] Hind Overseas Private Limited v Raghunath Prasad Jhunjhunwala and Ors AIR 1976 SC 565

[13]Ramanandi Kuer v Kalawati Kuer AIR 1928 PC 2

[14] definition as per the report of Organisation for Economic Co-operation and Development

[15] Report of the Committee on the Financial Aspects of Corporate Governance, 1992

[16] Supra 2

[17] Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian Corporate Governance, 21 NAT’L L. SCH. INDIA REV. 1, 50 (2009)

[18] Ibid

[19] Ibid

[20] Supra 4

[21] Supra 17

[22] Supra 7,pg 100

[23] Proverb