Enforcing contracts key to ‘ease of business’

One of Prime Minister Narendra Modi’s key initiatives after taking charge in 2014 was to rapidly boost India’s global ranking in the World Bank’s Ease of Doing Business (EoDB).

The war-like mission was taken up with efficient coordination by the Prime Minister’s Office, driven energetically by the then Secretary DIPP Amitabh Kant with concerned Ministries and State governments who also vied with one another in expediting reforms.

Consequently, India’s world ranking, from 142 in 2014 among 190 countries, went up to 130 in 2015, 100 in 2017, 77 in 2018 and 63rd in 2019. India was lauded by the World Bank for being among 10 top world reformers, especially for a large country.

This EoDB ranking is calculated on 10 parameters — ‘starting a business’, ‘construction permits’, ‘getting electricity’, ‘getting credit’, ‘paying taxes’, ‘trade across borders’, ‘enforcing contracts’, and ‘resolving insolvency’.

India’s progress has been steered by dramatic improvement in a few parameters, mainly in ‘resolving insolvency’ (from 108 in 2018 to 52 in 2019). But it has remained stagnant at 163 in ‘enforcement of contracts’. For investors this is one of the most essential indicators for measuring time and cost to resolve a commercial dispute and evaluating a country’s risk.

On this front, the Department of Justice has been monitoring an array of legislative and policy reforms in coordination with e-Committee of Supreme Court and the High Courts of Delhi, Bombay, Calcutta and Karnataka. A new portal for Enforcement of Contracts has been set up — https://doj.gov.in/eodb/. The idea is to ensure fair, well laid out rules, clear laws, reduce litigation involving the government and strengthen commercial dispute resolution mechanism and enforcement of contracts.

The government has also set up two high level task forces in NITI Aayog, to give recommendations for a policy framework for enforcement of contracts and an effective conciliation mechanism. This is expected to accelerate investments in infrastructure and provide comfort to investors.

Repeal of retro laws

The most significant and decisive step, however, has been to bring legislation repealing the contentious ‘retrospective tax’. To recapitulate, the government had in March 2012 brought in ‘retro amendment’ to the tax laws after an adverse judgement by Supreme Court in a Vodafone tax assessment case. This resulted in vexatious litigation with 17 companies, including Vodafone and Cairn Energy, where the government lost International Arbitration.

Now the government has decided to scrap this ‘retro amendment’ of 2012 and the amount paid in litigation and back taxes by the companies will be refunded, without interest, subject to their withdrawing cases.

Addressing an industry meet recently, Prime Minister Modi gave an unequivocal commitment and called for strengthening of trust between government and industry.

The government’s latest decision has been widely hailed, as it removes an irksome uncertainty, strengthening confidence in tax computation on prevailing tax architecture, removing fears about any retrospective changes.

Dispute Resolution Mechanism

With India becoming a hub of foreign investments, policy stability and access to a fair, speedy and effective dispute settlement mechanism is imperative. In a recent ‘India-Singapore Mediation Summit’ Chief Justice of India Justice NV Ramana spoke about encouraging the use of Alternate Dispute Resolution (ADR) to de-clog India’s legal case pendency. Most foreign investors choose arbitration as their dispute settlement mechanism in their contracts, with the seat of arbitration being in a neutral country.

Being able to enforce such awards in India is vital to strengthening investor confidence. With India being a signatory to the New York Convention since 1960, enforcement of foreign arbitral awards is stipulated with a fleshed-out procedure. Sometimes, however, enforcing them has its challenges. One can look at the Tata-Docomo dispute whereby an arbitral award by London Court of International Arbitration (LCIA) went through extensive legal proceedings. However, this year, the Supreme Court upheld the arbitral award of an Emergency Arbitrator in proceedings at the Singapore International Arbitration Centre. With one party being a global e-commerce giant and the other being one of India’s largest retail companies. a speedy decision and judgment, could go a long way in further strengthening EoDB.

Reduction of compliances

Early this year, the Centre and State governments decided to review and systematically phase out over 6,000 tedious compliances both at State and Central levels. This will greatly help both domestic and foreign backed companies and promote EoDB. Phase 1 and Phase 2 of such reductions have already started and will help attract investment.

While India has consistently improved its score in EoDB, there is a still a long way to go. India today is the first choice for global investors in the on-going geo-political situation, as evidenced by a record 23 ‘unicorns’ in the country in 2021 alone since this January. While one can expect record-breaking foreign investments coming into India in the near future, this boom can now happen on the back of capital flows where investors find welcoming stance, stability and growth, supportive and stable government policies both at Centre and States, and favourable EoDB matrices.

The writer is former Executive Director for India at World Bank, Secretary GOI and Chairman CCI

COMMENT NOW