Legal reforms needed for ease of business

NL Rajah/Aparna Raman | Updated on August 25, 2020

Bold decisions are needed to spur the nation’s entrepreneurial spirit   -  Warchi

Regulatory issues with regard to land acquisition, contract enforcement and IPRs should be addressed in order to spur growth

The coronavirus pandemic is well on its way to changing not only the way we work but also how we live and, possibly, alter the future world order, paving the way for new and different systems and processes.

India has, for several decades now, been seen as an economy with immense potential for faster and better growth and development. We believe that if the present crisis can reform the Indian administration, make government regulators get their act together, and enable Indian businesses to profit by following the law, every Indian can indeed make the most of this opportunity. For this, , the state will have to create as well as sustain certain policies, while simultaneously addressing structural deficiencies and regulatory gaps with the new mindset that is being called “atmanirbhar”.

The seven factors for a favourable environment for business and investment are (i) enforcement of contracts; (ii) land acquisition; (iii) protection of IP and personal data; (iv) access to credit and equity capital; (v) availability of electricity and labour; (vi) timely resolution of bankruptcy and insolvency issues; and (vii) elimination of financial corruption.

In our view, each of them is equally significant in the Government’s policy to make India one of the most favoured economies for global investment. Besides, there is a direct and positive correlation between the growth of investment, infrastructure and economic development and the standard of living — achieving the first inexorably leads to achieving the others, and so the need of the hour is a reality check on what has been done and what is to be done.

Better enforcement of contracts: Effective enforcement of contracts and timely resolution of contractual disputes are indispensable preconditions for better business. The ‘Doing Business Report 2019-20’ ranked India at 63 out of 190 countries in terms of ‘Ease of Doing Business’, to a large extent due to amendments to the Arbitration and Conciliation Act, Specific Relief Act and Commercial Courts Act.

Now, each ‘Act’ needs to be transformed from a mere noun to an active verb, for though the legislative framework has been put in place, specialised fast-track courts are yet to be set up. In this context, the alternative dispute resolution system can be institutionalised only if it is allowed to be truly independent, for so long as mediation and arbitration processes continue to be controlled and interfered with by the judiciary, they will just be a weak proxy for the existing process of litigation.

Fast-tracking land acquisition: Land acquisition has been a never-ending concern for every entity looking to invest in India. The law on land acquisition, rehabilitation and resettlement was a landmark law introduced to eliminate restrictions for projects in defence production, industrial corridors, rural infrastructure, etc., in the form of public-private partnerships. But the implementation of the law has been anything but smooth owing to controversial features such as the consent clause, fair compensation and social impact assessment, which have added to investor woes without being able to effectively balance the interests of landowners and buyers.

Given the complexity of the process today, we estimate that one case of land acquisition takes, on an average, about 60 months to be completed. As a result of implementational delays, several State governments have created their own alternative policies and though land acquisition continues to be a daunting challenge in every State, it would be prudent for prospective investors to know the specific rules and procedures.

Implementing IP and data protection laws: India has shown consistent improvement in its score in the International Intellectual Property Index, based on the strength of its patent and copyright laws. This year it was placed at 40 out of 53 countries, which shows that it has a fast-developing and evolving IP protection regime, unlike a jurisdiction like China, which has barely any recognition or regulation for IP rights.

For data protection, the PDP Bill introduced in December 2019 to regulate the processing and sharing of individual citizens' personal data on the lines of EU's GDPR, once passed, will enable and enforce more secure usage of data and databases by the private sector as well as the government.

Increasing access to finance: The past few years have seen the explosion of NPAs in banks, mostly rooted in a slew of scams and serious mismanagement. In response, the Government enacted the IBC and amended the SARFAESI Act to protect the interest of lenders and facilitate the recovery of debt. Similarly, reforms for the equity market under the SEBI Act have witnessed the rationalisation of KYC norms and simplifying FPI rules. At the same time, the consistent and rapid growth of small finance banks in the last 10 years has had a multiplier effect on the availability or network of banking facilities, supported by the PMJDY, which has now established last-mile financial connectivity with almost the entire population.

Electricity and labour reforms: A whole range of reforms to energise the power sector, including financial restructuring of discoms, reducing fuel supply constraints, ramping up power production and transmission capacity, enhancing power consumption efficiency, enabling transition to renewable energy, and so on, have been initiated while the remaining challenges of power procurement and transmission-cum-distribution losses are addressed through the draft Electricity Act (Amendment) Bill 2020.

Labour as a subject in the Concurrent List under the Seventh Schedule of the Constitution has more than 40 central laws and about 100 state laws which is why the ongoing consolidation into labour codes is being done to streamline them (although the Factories Act 1948 and Industrial Disputes Act 1947 still need major amendments to replace their draconian and outdated rules).

Timely resolution of insolvency cases: The introduction of the IBC in 2016 raised hopes for both operational and financial creditors for the recovery of long-pending dues. Now, in order to revive business entities which file for bankruptcy or have insolvency proceedings initiated against them during this crisis, the government should consider one national board to facilitate restructuring of their debt over and above a certain threshold of size and risk. So far, the IBC has been a pragmatic law, at par with international standards, for unlocking or unfreezing assets that are dormant and stuck in dysfunctional businesses. Comparing it with the insolvency laws of other Asian countries, we find that the Indian version, based on the administrative law of common law jurisdictions, is more advanced and less rigid.

Elimination of corruption: The statutory law dealing with corruption in India, the Prevention of Corruption Act, is limited to only “criminal misconduct” by a public servant and has had no impact at all on corruption in the private sector or even in government-to-citizen transactions. Recent legislative and administrative measures to tackle corruption such as the agreements on automatic exchange of information between India and Switzerland, updated versions of double tax avoidance agreements, the introduction of the CPGRMS, amendments to the Prevention of Money Laundering Act and Benami Transactions Act, have all sought to prevent and penalise financial crimes and corruption.

Nevertheless, the major stumbling block in handling corruption remains the criminal justice system, since all offences relating to corruption are criminal in nature and reforms continue to be overdue.

At the end of the day, it is such bold decisions that are necessary and expedient, though by no means sufficient, to spur the nation’s entrepreneurial spirit in a post-coronavirus global economy.

Rajah is Senior Advocate, Madras High Court, and Aparna is a former banker and CA turned lawyer

Published on August 25, 2020

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