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Ease of doing business

CS Suhita Mukhopadhyay 
on 28 May 2016

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INTRODUCTION

We are the citizens of a truly networked and interdependent world, united by global economy. In the past, business and economies were like plays (maybe by the same author) performed in separate theaters to discrete audiences. Their actors and actresses were distinct and their manner of performance was often influenced by the individual theater’s tradition. Now the drama takes place on one enormous global stage. The players on this stage are sometimes in competition for the audience’s attention but movements across the stage are free flowing, no longer obstructed by obsolete stage furniture. The global stage is in a state of perpetual motion and the economies in this global platform are ranked on their ease of doing business.

Ease of doing business is an index published by the World Bank. It is an aggregate figure that includes different parameters which define the ease of doing business in a country. Ease of doing business is assessed by a group of domestic and international experts every year, and is reported by way of a “Doing Business” report which is issued every year. The Doing Business Report carries out a survey evaluating and comparing quantitative indicators on business regulations and the property protection rights across 190 odd countries. The interconnected, interactive global economy is indeed a reality now. Though it is at times confusing and disorienting, it challenges both the way we see business and the way we do business.

Prime Minister Narendra Modi's aspiration to turn the country into a top investment destination has got off to a positive start, with India now ranked by the World Bank at 130 of 189 countries on "Ease of Doing Business." That is up 12 places from its original ranking last year and four places from its rank on a revised list.
China is now ranked 84, moving up six spots. Singapore, New Zealand and Denmark occupied the first three spots in the list while South Sudan, Libya and Eritrea were ranked at the bottom three. Terming the improvement in India's ranking a "remarkable achievement", World Bank Chief Economist Kaushik Basu said, "Going from 142 in the world to 130, as India has done, is very good sign. It gives a good signal about the way things are moving in India." Mr Basu added that India can be in the top 100 countries next year if it continues with the set of planned economic reforms, including the crucial goods and services tax (GST). The biggest improvement was seen in the area of providing power to businesses, where India's ranking improved from 99 in 2015 to 70 in 2016, the World Bank said. "Now companies can get connected to the grid, and get on with their business, 14 days sooner than before," the report said.

In May 2015, the government eliminated the minimum capital requirement to start a business and also ended the requirement to obtain a certificate to commence business operations, which helped it improve its rankings, the World Bank said.

 India is ranked 8th in terms of protecting minority investors, 42nd in getting credit, 70th in getting electricity, but scores poorly in dealing with construction permit with a rank of 183 out of 189 countries. Enforcing contract (rank 178), paying taxes (rank 157), resolving insolvency (rank 136) are other areas where India ranks poorly.The rankings are based on 10 indicators such as how easy it is to start a business and sometimes form the basis of foreign investments in a country. According to the new report, it takes 29 days to start a business in India now; it took 127 days in 2004.

Relaxation of FDI Policy

The FDI Policy framework is one of the key factors driving investment flows to a country. Apart from underlying macro fundamentals, ability of a nation to attract foreign investment essentially depends upon its policy regime- whether it promotes or restrains the foreign investment flows and consequently has an impact on ease of doing business. Ease of doing business has been a priority for the government. The government in the month of November 2015 eased foreign direct investment norms in 15 major sectors, including mining, defence, civil aviation and broadcasting in a bid to attract more investment and speed up growth. As a result, the India's ratings have improved in global rankings for ease of doing business. Easing of FDI norms in construction development sector is an important reform which is expected to provide a substantial boost to the sector in terms of greater foreign capital inflows. Some outdated conditionality that existed along with the sectoral caps have either been done away with or eased.Earlier foreign developers were not allowed to take out the invested amount before three years from completion of minimum capitalisation. However, now the foreign firm can take its money out or transfer its stake to another non-resident company before completing the project on approval from the government.

The relaxation of the lock-in period comes as a major relief for the industry. The new rules allow FDI in smaller projects, which is a big relief. Besides, by doing away with the lock-in period, the government has now made the norms much simpler. In a significant step, the government also allowed foreign investors to invest in completed project for "operation and management." In other words, 100 per cent FDI under the automatic route can now come in projects that have been completed by way of townships, malls and shopping complexes, and business centres. This was not allowed earlier. Thus the notification eases foreign investment rules in India's construction sector, which has been troubled by problems such as paucity of funds and regulatory bottlenecks,

The New Companies Amendment Act 2015- A step forward for ease of doing business
With the ushering of the India’s Companies Amendment Act of 2015, effective May 26 new provisions have been  designed to improve ease of doing business. Issues such as incorporation, corporate governance and management of subsidiaries have been provided under the new Amendment so also various provisions that would affect foreign companies doing business in the country.

Incorporation and Business Commencement

The Amendment entails much easier Incorporation processes.  The minimum paid-up share capital requirement of INR 100,000 (in case of a private company) and INR 500,000 (in case of a public company) under Companies Act 2013 has been done away with. Accordingly, no minimum paid-up capital requirements will now apply for incorporating private as well as public companies in India.

Common Seal Optional:

CA 2013 required common seal to be affixed on certain documents (such as bill of exchange, share certificates, etc.) Now, the use of common seal has been made optional. The amendment accepts a company director’s signature as a substitute for a common seal.

Board Resolution Confidentiality

Under the 2013 law, Board resolutions were public and could be accessed from the Registrar of Companies (RoC). The CA Amendment 2015 has limited public access of such resolutions relating mainly to strategic business matters. Such documents will no longer be available for public review or permitted to take copies of. This addresses the concerns raised by several corporates in India, specifically private companies, in terms of exposure of critical business matters in public

No declarations for commencement of business

Under the 2013 law, businesses needed to apply for a certificate to commence business in India after incorporation. The CA Amendment 2015 has removed the above requirements and deleted Section 11 of CA 2013. This reduces the filings to be made by companies in India.

Loans to Wholly Owned Subsidiaries (WoS)

The amendment clarifies that holding companies can lend to their wholly-owned-subsidiaries (WoS). They can provide guarantees on a loan made by a bank or financial institution to the subsidiary. However, holding companies can only lend to their WoS under the condition that the funds will be utilized by the subsidiary for its principal business activities.

Divided declarations by a company having losses

The amendment adds an additional provision to Section 123(1) under which companies will not be allowed to declare dividends unless carried over past losses and depreciation in previous years are set off against profit of the company for the current year. There have been major cases of companies paying dividends despite making losses in order to satisfy shareholders and lenders. The amendment has already had some effect. On July 2, Eveready Industries canceled declared dividends, citing the new amendment because it had  carried forward losses.

Relaxations vis-a-vis Related Party Transactions:

The CA Amendment 2015 has relaxed the approval requirement from a special resolution (i.e. requiring approval of three-fourth majority of shareholders) to an ordinary resolution (i.e. requiring approval of simple majority of shareholders) in case of related party transactions which require shareholders' approval

Loans to Wholly Owned Subsidiaries (WoS)

The amendment clarifies that holding companies can lend to their wholly-owned-subsidiaries (WoS). They can provide guarantees on a loan made by a bank or financial institution to the subsidiary. However, holding companies can only lend to their WoS under the condition that the funds will be utilized by the subsidiary for its principal business activities.

Violation of Acceptance of Deposits, etc.: 

The amendments provide specific punishments to deal with failure to pay back depositors under Section 73 and Section 76 of the 2013 law. A company, in addition to paying the amount of deposit or interest due, will be punishable with a fine which shall not be less than INR 10 million (US$ 158,000) but which may extend to INR 100 million (US$1.6 million). Also, every officer of a company who is in default shall be punishable with imprisonment, which may extend to seven years, or with a fine which shall not be less than INR 250,000 (US$3,900) but which may extend to INR 20 million (US$315,000), or both.

To derive greater benefits of outcomes of CSR initiatives, relevant rules have been amended enabling wider spread of CSR funding; new items eligible for funding have also been added to provide impetus to sanitation and environment-related concerns.

While the amendments clarify certain legal provisions and loopholes, other barriers to doing business remain. Foreign exchange controls, ceilings that restrict foreign ownership of Indian companies, and regulations that complicate transactions make incorporation and acquisition extremely difficult. For example, under the 2015 Companies Amendment Act, companies may lend to their subsidiaries but restrictions from the Reserve Bank of India will still apply.

However the amendments to the Companies Act, 2013 demonstrates that the government is committed to making the law more responsive to the domestic business and foreign investment community. The amendments show that the government is willing to amend aspects of the law that are not working for businesses in India. Although many in the private sector had hoped that the government would enact a more comprehensive Companies Act reform, the Companies Amendment Act, 2015 will improve the ease of doing business and will prove to be a step in the right direction.

Major Initiatives on Improving ‘Ease of Doing Business’ in India.

India as a Nation has woken up to the global economy. The Government of India has taken up a series of measures to improve Ease of Doing Business. The emphasis has been on simplification and rationalization of the existing rules and introduction of information technology to make governance more efficient and effective. The measures taken are:

a. The department of industrial policy and promotion has already taken number of initiatives to improve the environment for doing businesses. They included simplifying the application form for industrial licences and making the process online through the eBiz website. Following 14 services are integrated with eBiz portal which will function as a single window portal for obtaining clearances from various governments and government agencies:

  1. Industrial Licence (DIPP)
  2. Industrial Entrepreneurs Memorandum (DIPP)
  3. Employer Registration with ESIC
  4. Employer Registration with EPFO
  5. Company name availability (MCA)
  6. Allotment of Directors' Identification Number (DIN)
  7. Certificate of company's incorporation
  8. RBI's Foreign Collaboration General Permission Route
  9. Advance Foreign Remittance (RBI)
  10. Permanent Account Number (PAN)
  11. Tax deduction Account Number (TAN)
  12. Issue of Explosive licence (PESO)
  13. Importer exporter code (IECDGFT)

b. Conduct of coal auction and spectrum auction in a transparent manner has fetched government revenue over Rs 3 lakh crore.

c. The insurance reform bill, has raised the FDI cap in the sector to 49 per cent. The government has also raised FDI cap for defence to 49 per cent and in hi-tech areas, it could consider up to 100 per cent on a case-by-case basis. It has raised FDI cap on pension funds to 49 per cent in line with insurance.

d. The long awaited mines Act too has been amended.

e. The government has also taken initiatives to reform labour laws. The union government too is moving towards allowing unviable companies up to 300 employees to close down without permission. The government freed several PPP highway projects by providing exit route for some of the stuck projects. This has freed Rs 40,000 crore of stuck investments in highways for deployment in other highway projects.

f. The government has taken several steps to put the creaking railway back on track by adopting innovative funding and signing MOU with LIC for lending up to Rs 1.5 lakh crore for railway projects in the next five years. Also FDI up to 100 per cent is allowed in some areas of railways. The government has taken the bold, though unpopular, measure of raising passenger and freight fares, with the plan to deploy the additional revenue to significantly upgrade safety, electronic signals and coach quality. Government has improved ease of doing business by clearing Rs 3.3 lakh of stuck infrastructure projects apart from Rs 6.6 lakh crore of projects cleared earlier.

g. The central government has decided to rank states on the basis of ‘ease of doing business.’ The system is expected to generate competition among the states and also help investors to choose the place to invest. The Department of Industrial Policy and Promotion (DIPP) has circulated 98 ‘action points’ to state governments on ‘creating an enabling framework for stimulating investments in manufacturing with specific timelines for each action.’

h. To facilitate investors and to reply to their queries, Frequently Asked Questions (FAQs) by applicants for grant of industrial license have been developed and uploaded on DIPP website.

i. NIC 2008 has been adopted, which is the advanced version of industrial classification. This code will allow Indian businesses to be part of globally recognized and accepted classification that facilitate smooth approvals/registration.

j. A checklist with specific time-lines has been developed for processing all applications filed by foreign investors in cases relating to Retail/NRI/EoU foreign investments. This has been placed on the DIPP website.

k. DIPP has requested all Secretaries of Government of India and Chief Secretaries of the States/UT to simplify and rationalize the regulatory environment. In order to improve the regulatory business environment they have been requested to take the following measures on priority: a. All returns should be filed on-line through a unified form; b. A check-list of required compliances should be placed on Department’s web portal; c. All registers required to be maintained by the business should be replaced with a single electronic register; d. No inspection should be undertaken without the approval of the Head of the Department; and e. For all non-risk, non-hazardous businesses a system of self-certification should be introduced.

l. The Union Budget 2015 too announced steps towards ease of doing business in India. The budget proposed to introduce a regulatory reform law that will bring about a cogency of approach across various sectors of infrastructure. This will help infrastructure companies that have multiple businesses like ports, power, roads and airports.

m. Among the states, the Andhra Pradesh government has inked an MoU with the National University of Singapore (NUS) and Confederation of Indian Industry (CII) to work on ‘Ease of Doing Business’ in the state. Under the Make-in-Maharashtra campaign, Maharashtra Chief minister, has also tabled a bill to amend the Maharashtra Municipal Corporation (MMC) Act to this effect. This means industries seeking expansion or new initiative in the Maharashtra Industries Development Corporation (MIDC) areas will not have to take permission from the local body or municipality in that district or town.

n. Initially the documents required for export and import of goods was ranging upto eleven documents. Now the number of documents required for export and import of goods are limited to three or four documents.

o. The Labour Ministry has set up a unified portal for registration of Units for Labour Identification Number, reporting of Inspection, submission of returns and grievance redressal. The registration with Employees Provident Fund Organization and Employees State Insurance Corporation ("ESIC") has been automated. The ESIC registration number is being provided on a real-time basis.

The initiatives aforesaid are based on four pillars - new processes, new infrastructure, new sectors and new mindset - which have been identified to give boost to entrepreneurship in India.

Conclusion

Ideas do not emerge perfectly formed. They are awkward amalgams of experience, insight, hopes and inspiration. They arrive on stage blinking under the bright lights, hesitant, unsure as to the audience’s likely reaction. They evolve and develop, alert to changing reactions and circumstances. “Ease of Doing Business” is an idea which our nation has adopted .This idea entails that Rules, laws and processes in the nation will be simplified to boost industry and business, while unnecessary permissions will be abolished. We, as a Nation, can innovate, excel and grow   through adopting the ‘ease of doing business’ approach. Technology cannot be seen as an add-on to corporate structures, thinking and decision making. It must be at the corporation’s heart. Similarly, to climb up in the global stage and perform, the ËASE of doing Business” strategy is needed to be adopted by the Nation. Twenty years ago, globalization was a term, a theoretical concept. Now it is realty. The Next Global Stage is a part of a process of understanding the new rules that apply in this new world-The Rule of doing business easily. It is not an endpoint, nor is it a beginning, but we hope it is an important step forward for Companies and individuals as well as for the nation.


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