Home >Opinion >Columns >Opinion | A bounced cheque should remain a criminal offence
Photo: iStock
Photo: iStock

Opinion | A bounced cheque should remain a criminal offence

India needs to empower creditors and easing penalties on payment failures could prove a setback

The finance ministry has proposed to decriminalize 39 different offences across 19 separate Acts. This is a step in the direction for improving the ease of doing business. If even minor non-compliance of rules or procedural lapses result in criminal charges, then business is unfairly burdened. The threat of imprisonment even for minor offences can impact business sentiment negatively and may hinder investment, both domestic and foreign.

Proving innocence in an Indian court of law may take ages. The judicial system is already clogged, with rising case pendency. In a criminal case, the offence has to be proved beyond reasonable doubt to secure the conviction of the accused, whereas in a civil case, the plaintiff has to prove a wrongdoing only on the basis of preponderance of probability. Imposing a civil penalty is easier.

Besides, numerous commercial courts have been set up to fast-track commercial civil cases. Many acts of non-compliance in business may not arise from mala fide intent, or may not endanger national security or public interest. A stiff penalty could serve as a sufficient deterrent against law violations.

That is why many such wrongdoings or breaches of law can be compoundable, and need not be classified as criminal offences. Hence, it is broadly welcome that the government has taken the initiative to decriminalize several violations. A prominent example last year was when non-compliance with corporate social responsibility obligations was relieved of criminal proceedings. That was a needlessly draconian measure. If a company did not spend 2% of its post-tax profits on a social cause, it had to pay a big fine; otherwise, as per the original 2013 version of the Company Law, a director on its board faced prison time for a minor lapse.

The most famous such reform, of course, was the decriminalization of offences under the erstwhile Foreign Exchange Regulation Act (FERA), which became the Foreign Exchange Management Act (FEMA) in 1999. Breaches under FEMA are compoundable now and the consequences no longer harsh.

So far, so good. But one of the ministry’s proposals is to decriminalize offences under Section 138 of the Negotiable Instruments Act, 1881. In common parlance, this is called cheque bouncing. Doing this is not going to help further the ease of doing business.

Real estate developers who sell flats often also arrange for housing loans. Such a transaction is facilitated by the lender getting a set of post-dated cheques from the home buyer (and borrower). Of course, the lender has the flat as collateral, but the post-dated cheques offer comfort too, because if they bounce, the issuer can go to jail. Taking possession of the flat in case of a default is not as easy as initiating a criminal case for a dishonoured cheque. The current procedure to lodge a bounced-cheque case is too cumbersome, though. A separate case has to be initiated for each and every cheque. A mere police complaint or first information report is not sufficient to get the party arrested, unlike in some other countries. No wonder the court system is overburdened with cheque-bouncing cases. There are more than 3.5 million pending cases of this law violation alone. The solution is surely not to decriminalize it, since that would be tantamount to throwing the baby with the bathwater. Instead, it lies in simplifying the enforcement and prosecution process. A bounced cheque is equivalent to paying in fake currency, a much more serious crime. It also amounts to cheating, since the receiver is under the false impression that there are sufficient funds in the issuer’s bank. Hence, cheque bouncing cannot be equated with a minor non-compliance or a procedural lapse. It should remain a criminal offence.

Its decriminalization will harm business. The crime of bouncing a cheque is applicable even in the paperless world. This is when an instrument is presented that is backed by an insufficient balance. Sure, a grace period can be given for the payer in case of legitimate delays in clearing and settlement. But this offence should not be let off as civil.

India has seen slow and hard-fought progress on strengthening the rights of lenders. The landmark Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was passed in 2003, but has not been very successful in resolving debt defaults faster. Even with collateral, the banks are unable to liquidate it quickly. Too many stay orders or other delaying tactics seem to succeed. Here too, it would be wise not to decriminalize the offences (i.e. Section 29) under the SARFAESI Act.

The Insolvency and Bankruptcy Code (IBC) was an even bolder reform, expected to instill discipline among borrowers and empower creditors. Alas, it stands suspended in covid times, probably for a year. Lenders cannot initiate insolvency proceedings against their debtors. The government may have done it to prevent courts from being overwhelmed by bankruptcy cases, but it may inadvertently make the creditors themselves much worse off. Not having recourse to the IBC might push some creditors to the brink of bankruptcy themselves. Its suspension has meant that even companies that would voluntarily restructure their debt are disallowed.

The ministry should note that we have an insolvency crisis on our hands, not an illiquidity one. So pouring liquidity and guaranteed loans will not solve it. In the meantime, it would help not to decriminalize SARFAESI offences and bounced cheques.

Ajit Ranade is an economist and a senior fellow at The Takshashila Institution, an independent centre for research and education in public policy.

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