The RBI recently levied penalties on Axis Bank (₹90.92 lakh), Manappuram Finance (₹42.78 lakh) and Anand Rathi Global Finance (₹20 lakh) for various types of transgressions. This brings to spotlight the efficacy and impact of penalties in improving the overall compliance ecosystem.

Back in 1986, in my first job, I was witness to a chief accountant being shunted out for the sole reason that he had slipped in estimating the correct advance tax to be paid and saddled the company with an interest burden of ₹46,876. Much water has flowed under the bridge from 1986 to 2023, and it is time for an objective evaluation of the cause and effect of penalties and the message that it conveys to the world at large.

Corporate India, particularly in the financial services sector, is now besieged by a plethora of regulations to be complied with. An army of people is deployed to understand the various laws, regulations and circulars and brief the audit committees and the Board on a regular basis. Despite multiple level checks and balances there have been breaches in regulatory compliance, both in letter and spirit. And this despite robust technology backed compliance tracking systems in place. Are too many regulations making it virtually impossible for total and accurate compliance? The answer would a bit of “Yes” and more of “No”.

Three categories

There appears to be lack of full awareness of the implications of the regulations and circulars. In the process, house-keeping niceties are sacrificed. Corporate India can be bucketed into three categories. The top 10 per cent will be obsessed with compliance and invest heavily in this area with a zero tolerance to breaches. In this category, for every ₹1 penalty there will be an agenda item with a one hour discussion at the Board meeting. There is another 10 per cent category which will evaluate the cost-benefit of every regulatory compliance and take aggressive positions on the basis that breaches will be dealt with on the “we will cross the bridge when we come to it” approach.

The rest 80 per cent are the so-called “cautious compliers”. They will keep lamenting that they are overburdened with too many regulations, but have no choice but to fall in line. Breaches if any would be analysed but not at the expense of foregoing a night’s sleep. The biggest challenge faced by regulators and corporates is to embrace regulations not with an adversarial approach but more in the spirit of a business necessity and a key adjunct to foster growth with necessary speed breakers.

In tax matters the issue is further complicated since interpretation of the law lends itself to use and abuse and the time factor involved results in huge interest payments. Penalties are levied for concealment and wilful defaults, which are a parallel track of litigation. These penalties are again subject to the main issue being litigated getting resolved by the highest court. While penalties levied by the RBI can hurt the financials as also cause some damage to reputation, tax penalties are generally parked in contingent liabilities not provided for.

There is also the view that too frequent levy of penalties will take the sting out of “reputation damage” and reduce it to another normal occurrence. Is there a case for tweaking the nomenclature of penalties into two parts? Any breaches that are minor can be termed “non-compliance levies” and serious defaults can be termed “penalties”. This will at least separate the chalk and the cheese and enhance the stature of the term “penalty” rather than undermine it.

The last thing that we should reconcile with is to accept penalties imposed as mere line items. It cannot be reduced to yet another element of cost of doing business. What we should collectively aspire is to have optimum regulations that are clear and understandable and to be complied as a matter of course. It is important to set a target of zero penalty for Corporate India.

The writer is a chartered accountant

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