The Ministry of Corporate Affairs (MCA) has been entrusted with the responsibility of administering the Companies Act, 2013 (Act). The MCA, from time to time, issues circulars and clarifications to clarify the provisions of the Act and the rules made thereunder (Rules). For example, in the first year of operation of the Act, the MCA issued 89 clarificatory circulars. In 2015 and 2016 the number was 22 and 21 respectively. In this article, we assess whether such circulars and clarifications are legally enforceable and how far companies may rely on them.
Here, it is pertinent to note that unlike Section 119(1) of the Income Tax Act, 1961, which empowers the Central Board of Direct Taxes to issue orders, instructions and circulars, there is no corresponding provision in the Act that empowers the MCA to issue such circulars and clarifications. As explained in our earlier post, executive action reflects steps taken by the Government in its sovereign authority. Article 73 of the Indian Constitution states that, subject to the provisions of the Constitution, the executive power of the Union extends to matters on which the Parliament’s legislative power extends. However, this power cannot operate in matters of an ‘occupied field’ i.e., where prior legislation over the subject matter exists.
Therefore, unlike Press Notes issued by the Department of Industrial Policy and Promotion (DIPP) to regulate foreign direct investment (FDI), circulars issued by the MCA stand on a different footing, since the Parliament has enacted the Act and the MCA has framed the Rules making company law an occupied field. Hence the Government’s power to issue such circulates is circumscribed by the Act and the Rules. The logical question that arises then is whether the MCA is empowered to interpret the Act or the Rules by issuing such circulars and clarifications.
This question was answered by the Supreme Court (SC) in the case of Bhuwalka Steel Industries Ltd v. Bombay Iron and Steel Ltd. wherein it categorically stated that,
“It is not the task of the government to interpret the law; that is the task of the courts and even if the government understood the law in a particular manner, that cannot be a true and correct interpretation unless it is so held by the court. […] these circulars are merely advisory in nature.”
In this context, it would be appropriate to quote the former Secretary to the Government of India and Chairman, Company Law Board Mr. K.K. Ray, who had said in the preface to the Government publication ‘Circulars & Clarifications on Company Law’ that,
“A perusal of these [clarificatory circulars] […] will show that the Department has tried to take a broad and balanced view of the various issues in the light of the intention underlying the statute and the accepted administrative policies of the government […] It should, however, be noted that these clarifications, etc., only reflect the thinking of the Department at the time when they were issued and do not bind it to that line of thinking. The Department has always an open mind and will be perfectly willing to change its thinking on any particular aspect of the matter, if a better view is shown to be possible.
These clarifications should not, therefore, be cited as an authority of a binding character as is usually done in courts.” (emphasis added)
While these views were expressed by the former MCA Secretary in the context of the Companies Act, 1956, the same holds valid for 2013 Act also as there is no provision in the new Act for issue of such circulars.
At times, these circulars are withdrawn by the Government or are modified by subsequent circulars. Moreover, there have been instances wherein the views expressed in two circulars on the same subject have been found to be contradictory.
Enforceability of Interpretative Circulars
At times, Government departments take recourse to interpretative circulars, i.e., circulars seeking to lay down the administration’s interpretation of a law. Naturally, such a circular cannot be binding on the judiciary, which is free to interpret the law by itself. The SC considered this question in Chief Settlement Commissioner, Punjab v. Om Prakash wherein the SC clearly laid stress on the salient principle that a circular in conflict with a statutory provision cannot prevail over the statute.
The SC emphasised that in India, the executive has no inherent law-making power; and whatever law-making power it has is derived through delegation by the legislature. In India, where the rule of law prevails, an administrative action has to be judged by the standard of legality. Therefore, the meaning of a statutory provision can never be overridden by any circular. In effect, it is the function of the courts to interpret the law.
In Bengal Iron Corporation v. Commercial Tax Officer, the SC has explained the nature of interpretative circulars as,
“So far as clarifications/circulars issued by the [Government] are concerned, they represent merely their understanding of the statutory provisions. They are not binding upon the Courts. […] It is doubtful whether such clarifications and circulars bind the quasi-judicial functioning of the authorities under the Act. While acting in quasi-judicial capacity, they are bound by law and not by any administrative instructions, opinions, clarifications or circulars. Law is what is declared by this Court and the High Court – to wit, it is for this Court and the High Court to declare what does a particular provision of statute say, and not for the executive.”
Furthermore, in a series of judicial decisions, the SC has consistently held that such clarificatory circulars cannot amend or substitute statutory rules. But if the Act or the Rules are silent then the Government can issue clarifications to supplement the Rules by issuing instructions.
It is important to note that such circulars and clarifications cannot be contradictory to the principal legislation, namely the Act and the Rules. A perusal of these circulars and clarifications issued by the MCA under the Act would reveal that many a time, such circulars and clarifications are contrary to the express provisions of the Act or the Rule.
In Bhagwati Developers v. Peerless General Finance & Investment Co. & Ors., the SC had upheld the Calcutta High Court decision that these circulars do not have any mandatory effect and are merely advisory in character. In this case, the MCA had issued a circular on September 6, 1994 advising the unlisted companies against the use of revaluation reserve for issuance of bonus shares. However, both the SC and the High Court held that an unlisted company can issue bonus shares out of revaluation reserve and the MCA circular does not have any mandatory effect.
Additionally, the Delhi High Court has held that the operative and the binding character of these circulars and clarifications, as against the third parties, may be quite doubtful.
Can a company rely upon a circular even if it is inconsistent with the statute?
In relation to whether a company can rely on a circular if it is inconsistent with the statute, the Kerala High Court in the case of Harrisons and Crossfield (India) Ltd. v. Registrar of Companies, in which the company relied on such a circular, held that,
“The directors were entitled to rely on the above advice, as honest and reasonable men, even if the same was not legally correct. They had only chosen to follow the path indicated by the Board, a high authority in the hierarchy of company law administration, and for that, they should not be penalized.” (emphasis added)
Despite the fact that the enforceability of these circulars is doubtful, the MCA keeps issuing them routinely and companies keep relying on them for making corporate decisions.
There is no provision in the Act empowering the MCA to issue such clarificatory circulars. Given the number of judicial decisions on the non-binding nature of such circulars, it would be safe to conclude that companies should be cautious while relying on such clarificatory circulars for any major decision-making, particularly when such circulars are not in conformity with the Act or the Rules.
 (2010) 2 SCC 273.
 AIR 1969 SC 33.
 AIR 1993 SC 2414.
 Dr. Rajinder Singh v. State of Punjab, (201) 5 SCC 482. See also, Subhash Ramkumar Bind alias Vakil v. State of Maharashtra, (2003) 1 SCC 506; and Union of India v. Rakesh Kumar, (2001) 4 SCC 309.
 Union of India v. Rakesh Kumar, (2001) 4 SCC 309.
 Palaru Ramkrishnaiah v. Union of India, AIR 1990 SC 166; Comptroller and Auditor- General of India v. Mohan Lal Mehrotra, (1992) 1 SCC 20.
 2005 AIR SC 3345.
 Bedi (PS) v. Registrar of Companies, (1986) 60 Comp Cas 1061 (Del).
 (1980) 50 Comp Cas 426 (Ker).