BACKGROUND
The Ministry of Corporate Affairs (“MCA”) plays a key role in administering the Companies Act, 2013 (“2013 Act“). Over the years, the MCA has issued more than 210 clarificatory circulars to facilitate compliance and interpretation of various provisions of the 2013 Act. Circulars from the MCA have become an integral part of corporate governance, covering critical issues such as Corporate Social Responsibility(CSR), among others.
Several legislations have incorporated provisions that empower the relevant ministry or statutory authority to issue circulars for the effective administration of the said statute. For example, Section 119(1) of the Income Tax Act 1961 empowers the Central Board of Direct Taxes to issue orders, instructions and circulars. However, it is pertinent to note that there exists no such express provision in the 2013 Act that empowers the MCA to issue clarificatory circulars. Further there is no mention of any specific provision in the circulars issued by the MCA that establishes its statutory power/ enabling provision to issue such circulars. It is also pertinent to note that no such specific provision existed even under the Companies Act, 1956 (“1956 Act”) which established the statutory power of the MCA for issuing circulars.
ANALYSING CONSTITUTIONAL PROVISIONS
Executive Power of the Union under the Constitution
The constitutional framework dealing with the executive power of the Union has been laid down under Article 53 of the Constitution. Article 53(1) of the Constitution provides that “the executive power of the Union shall be vested in the President and shall be exercised by him either directly or through officers subordinate to him, in accordance with this Constitution”. This implies that while exercising the executive powers for and on behalf of the President under Article 53(1), the subordinate officials are strictly bound by the limits imposed by the Constitution. Hence a view maybe taken that MCA officials are subordinate to the President and would be regarded as performing their functions for and on behalf of the President, within the meaning of Article 53(1) of the Constitution. Therefore, implying that any executive action taken by ministries such as the MCA is essentially done in the name of the President and must conform to constitutional boundaries.
Article 73(1)(a) of the Constitution lays down that the Union government’s executive powers are coextensive with the Parliament’s legislative powers. This means that the Union’s executive powers extend and cover all matters on which Parliament is empowered to make laws. The Union Government’s exclusive executive power accordingly extends to the fields of legislation provided in List I of the Seventh Schedule (“Union List”) of the Constitution, enacted pursuant to Articles 245 and 246 of the Constitution, providing for the scheme for distribution of legislative powers between the Union and the State Governments.
In the case of Ram Jawaya Kapur v. State of Punjab[1], the Supreme Court of India held that “Ordinarily the executive power connotes the residue of governmental functions that remain after legislative and judicial functions are taken away… The executive Government, however, can never go against the provisions of the Constitution or of any law…The executive function comprises both the determination of the policy as well as carrying it into execution.”
Further in the case of J&K Public Service Commission v. Narinder Mohan[2]., the Supreme Court observed that executive power could be exercised only to “fill in the gaps”, and executive instructions “cannot and should not supplant the law but would only supplement the law”.
Therefore, it can be understood that the exercise of executive power cannot be in contravention of the Constitution or any other law. Although the executive power is bound by limits as imposed by the Constitution, this does not imply that the executive power can be exercised only when there is a law already in existence. The executive’s powers extend beyond simply implementing laws passed by Parliament but also includes responsibilities such as overseeing general administration, formulating policies, and executing them.
It can also be seen in a plethora of judicial decisions wherein the Supreme Court has held that such clarificatory circulars cannot amend of substitute principal legislation however if the principal legislation made thereunder is silent then the government can issue clarifications to supplement the principal legislation by issuing instructions.
MCA’s power to issue Circulars: Constitutional Implications
Under Entries 43 and 44 of the Union List, Parliament has exclusive authority to legislate on the following matters:
- Entry 43 – “incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations but not including cooperative societies.
- Entry 44 – “incorporation, regulation and winding up of trading corporations, whether trading or not, with objects not confined to one State, but not including universities”.
Since Article 73(1)(a) provides that the Union’s executive powers extend as far as Parliament’s legislative powers, the Union government has exclusive executive authority over the regulation of both trading and non-trading corporations. Additionally, Article 77(3) of the Constitution grants the President the power to make rules for the efficient transaction of government business and to allocate specific responsibilities among Ministers.
Based on powers conferred under Article 77(3), the Government of India has issued the GoI (Allocation of Business) Rules, 1961 (“Allocation of Business Rules”), which detail how government business is to be handled by various Ministries and Departments. According to Paragraph 8B of the Second Schedule of the Allocation of Business Rules, business matters related to the “Administration of the Companies Act, 1956” and the “Administration of the Companies Act, 2013” are assigned to them MCA.
Further, the GoI (Transaction of Business) Rules, 1961 stipulate that all business allocated to a department under the Allocation of Business Rules must be carried out by or under the directives of the relevant Minister.
Together, Articles 53(1), 73(1), 77(3), 245, and 246 of the Constitution, read with Entries 43 and 44 of the Union List and the Allocation of Business Rules, establish that the MCA is responsible for carrying out the executive functions related to the administration of the Companies Acts of 1956 and 2013.
In Jamal Uddin Ahmad v. Abu Saleh Najmuddin[3], the Supreme Court held that the “conferment of power implies the authority to do everything reasonably necessary or incidental to exercising that power.”
Similarly, in ITO Cannanore v. M.K. Mohammed Kunhi[4], the Court observed that an express grant of statutory power includes the implied authority to take necessary actions to make that power effective.
Therefore, it can be argued that the MCA’s executive authority to regulate trading and non-trading corporations also includes the power to issue circulars. These circulars, intended to administer the relevant statutory provisions and give directions to subordinate authorities such as the Registrar of Companies (RoC), are incidental to the MCA’s broader executive function. This authority arises from Articles 53, 73, 77(3), 245, and 246 of the Constitution, when read in conjunction with Entries 43 and 44 of the Union List.
JUDICIAL VIEWS ON CIRCULARS AND THEIR BINDING NATURE
Indian courts have deliberated on the binding nature of circulars issued by executive authorities, including the MCA. While some High Courts, such as the Gujarat High Court in Neeraj Kumarpal Shah v. C2R Projects LLP[5], have held that MCA circulars are binding on authorities like the RoC and have to be mandatorily followed, the Supreme Court has taken a more cautious view.
In the case of Bhagwati Developers v. Peerless General Finance and Investment Company[6], the Supreme Court with reference to a circular issued by the erstwhile Department of Company Affairs on September 6, 1994, held that the said circular does not have any mandatory effect, and observed that “these circulars are merely advisory in character”.
As the decision in the Bhagwati Developers case was rendered in a specific context to a particular MCA circular, it does not lay down any general rule relating to the nature and scope of circulars issued by the MCA.
VALIDITY OF CIRCULARS ISSUED UNDER THE 1956 ACT
Circulars issued under the 1956 Act can still provide useful interpretative guidance in certain situations where the 2013 Act has drafting lacunas. The key question is whether these circulars remain valid under the 2013 Act.
The legal position is governed by Section 465 of the 2013 Act, which contains the “repeal and savings” clause. Section 465 of the Act provides for the “repeal of certain enactments and savings” and was notified by the MCA on January 30, 2019. Section 465(1), inter alia, provides that the 1956 Act shall stand repealed.
Section 465(2)(a) states that actions, including circulars issued under the 1956 Act, will continue to be effective as long as they are not inconsistent with the provisions of the 2013 Act. Similarly, Section 465(2)(b) confirms that any order, notification, or direction under the 1956 Act remains valid if it does not conflict with the 2013 Act.
Pursuant to Sections 465(2)(a) and 465(2)(b) of the 2013 Act, any directions issued under the 1956 Act, if they do not conflict with the provisions of the 2013 Act, will be considered to have been made or carried out under the corresponding provisions of the 2013 Act and will take effect as if issued under the 2013 Act. These provisions should be read in conjunction with Sections 6 and 24 of the General Clauses Act.
Section 6 of the General Clauses Act provides that where any Central Act or regulation repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not:
a. revives anything not in force or existing at the time at which the repeal takes effect; or
b. affects the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or
c. affects any right, privilege, obligation, or liability acquired, accrued, or incurred under any enactment so repealed; or
d. affects any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or
e. affects any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid.
and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed.”
Section 24 of the General Clauses Act provides that where any Central Act or Regulation is, after the commencement of this Act, repealed and re-enacted with or without modification, then, unless it is otherwise expressly provided, any appointment, notification, order, scheme, rule, form or bye-law, made or issued under the repealed Act or Regulation, shall, so far as it is not inconsistent with the provisions re-enacted, continue in force, and be deemed to have been made or issued under the provisions so re-enacted, unless and until it is superseded by any appointment, notification, order, scheme, rule, form or bye-law made or issued under the provisions so re-enacted.
The elements of the ‘repeal and savings clause’ contained in Sections 465(2)(a) and 465(2)(b) of the 2013 Act incorporate the principles prescribed under Sections 6 and 24 of the General Clauses Act and provide that any “directions” given under the 1956 Act shall, insofar as they are not inconsistent with the provisions of the 2013 Act, continue to have effect under the 2013 Act.
Thus, circulars issued under the 1956 Act, which serve as instructions or directions to the RoC and other authorities, are considered “directions” under Section 465 of the 2013 Act. They remain valid unless they contradict any specific provision of the 2013 Act. The test to determine a circular’s validity is whether it is inconsistent with the 2013 Act. If no such inconsistency exists, these circulars continue to hold legal force and can be relied upon for interpreting the law.
CONCLUSION
It is pertinent to note that the Government’s authority to issue circulars is limited by the provisions of the 2013 Act and the rules established under it. MCA circulars must not contradict the 2013 Act or its rules, and in the event of a conflict, the provisions of the 2013 Act and its rules will take precedence over any executive circular. Consequently, MCA circulars can only “supplement” the provisions of the 2013 Act and its rules but cannot “replace” the main statute. These circulars may address gaps in legislation passed by Parliament but must not contradict the 2013 Act.
In the case of Palaru Ramkrishnaiah v. Union of India[7], the court held that such circulars and clarifications cannot be contradictory with the principal legislation. If an MCA circular conflicts with any provision of the 2013 Act or its rules, it will not be enforceable to the extent of that inconsistency.
In India, where the rule of law prevails, administrative actions must be assessed against the standard of legality, and the interpretation of a statutory provision cannot be overridden by any circular. The courts are responsible for interpreting the law, meaning no judicial authority is bound by executive circulars. Courts are free to interpret the provisions of the 2013 Act and its rules based on established principles of statutory interpretation.
Additionally, given the volume of circulars issued by the MCA and the uncertainty regarding their binding nature, it is advisable for companies to exercise caution when relying solely on these clarifications for significant decision-making, especially when they do not align with the provisions of the 2013 Act or its rules.
[1] AIR 1955 SC 549
[2] AIR 1994 SC 1808
[3] (2003) 4 SCC 257
[4] (1969) 71 ITR 815
[5] AIR 2018 Guj 80
[6] (2005) 6 SCC 718
[7] AIR 1990 SC 166
