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India strives to streamline business environment
December 2018
Andrew Kemp
Successive governments have pushed to reform and streamline a byzantine web of rules and regulations that has prevented the country from realising its full potential
 
Saying that India’s business environment is convoluted is nothing short of a gross understatement that fails to the do country’s complex web of rules and regulations justice.
 
But times are changing and India is in the throes of economic reforms that are designed to reinvent its image on the global stage. India has jumped 23 places to 77 out of 190 economies in the World Bank’s Ease of Doing Business Index 2019. This inevitably will have a positive effect for foreign investor perceptions of the country.
 
Underscoring India’s potential, the country surpassed France earlier this year to become the world’s sixth largest economy and Indian Finance Minister Arun Jaitley has said it could ease past the UK to enter the top five in 2019.
 
While India enjoys fundamental advantages – such as having one of the world’s lowest median ages – creating a business environment guided by free market values has proven challenging. Public sector undertakings (PSUs) still enjoy a commanding presence in the economy and efforts to cut red tape have been slow to gain traction.
 
The slow pace of change helped Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) sweep to victory in 2014 on a pro-business platform. During his years as Gujarat’s chief minister, Modi made a name for himself as a politician willing to make hard choices to improve the state’s economy. While Modi has made strides in revamping the national economy since entering office, there is still much work left to be done.

"India has jumped 23 places to 77 out of 190 economies in the World Bank’s Ease of Doing Business Index 2019"

For example, more than 90% of the population is estimated to be informally employed, making the task of producing reliable employment data a troublesome one. And while the country’s IT and services sectors have boomed, key parts of the industrial base have failed to keep pace.
 
Economic liberalisation
 
India’s earliest economic reforms focused on liberalising the economy by lessening the state’s role in providing goods and services. New Delhi streamlined the legal framework governing the creation of businesses and launched the Securities and Exchange Board of India (SEBI) in 1992. This was followed by the Competition Act, 2002, which made it easier for the private sector to compete with PSUs.
 
But even as the economy was opened to private and foreign investors, regulatory loopholes emerged that were quickly exploited in a series of high-profile financial scandals. Some of these include the Harshad Mehta securities scam in 1992, the collapse of the Unit Trust of India (UTI) managed mutual fund in 2001 and the Satyam Computer Services scam from 2009.
 
To tackle the problem, Parliament passed the Companies Act, 2013, which consolidated and amended company laws. The act defined fraudulent corporate behaviour and also introduced criminal punishments. The legislation also sought to pierce the corporate veil, demanding all registered companies disclose the identities of stockholders that either own a stake greater than 10% or exercise “significant influence or control” over company affairs.
 
In 2016, the Insolvency and Bankruptcy Code (IBC) was introduced, which consolidated multiple laws that covered corporate and individual insolvency. Its introduction provided failed enterprises with clear means to exit the market, while also allowing lenders to recover debts.
 
With a full regulatory lifecycle for companies implemented, India’s next challenge was to move corporate governance standards closer to those seen in more developed economies.
 
Corporate governance
 
In March, SEBI embraced 40 unmodified recommendations that were suggested by the Kotak Committee in October 2017. SEBI also modified and adopted another 15 suggestions. Changes included preventing the top 500 listed companies from having one individual serve as both chairperson and CEO as well as the tightening up of eligibility criteria for independent directors.
 
While these are positive steps, India still has a long way to go. For example, the rights of minority shareholders remain a sore point, with company promotors enjoying several avenues to siphon corporate resources. This problem was on show during the ICICI Bank scandal earlier this year. The bank was accused of approving loans to Videocon, whose chairman had dealings with NuPower, which was founded by ICICI chief Chanda Kochhar’s husband.
 
Swift handling of such concerns will be essential as the state continues to transition from economic driver to regulator. At the same time, this change also requires the government to listen more closely to private and foreign investor concerns; a leading one of which remains the country’s lacklustre performance in terms of safeguarding intellectual property (IP) rights.
 
Respecting rights
 
India is striving to enforce IP rights, with plaintiffs winning several high-profile court cases over patent infringements. Ericsson won an interim order from the Delhi High Court in 2014 restraining Chinese mobile maker Xiaomi from selling handsets that used on the Swedish company’s patented technology. In August this year, Novartis won court orders restraining five pharmaceutical companies from manufacturing its patented drug Vildagliptin. Courts have also in recent years ordered that access to several illegal file sharing sites including the Pirate Bay be blocked.
 
Despite these efforts, the country repeatedly appears near the bottom of the US Chamber of Commerce Global Innovation Policy Center’s Intellectual Property Index (IPI). The sixth edition, which was published in February, ranked the South Asian country 44 out of a group of just 50 economies. This was the first time the country had appeared outside of the bottom 10%.
 
Aware of national shortcomings, Parliament passed the Commercial Courts Act, 2015, which came into force in 2017 and established Commercial Courts at the district level as well as Commercial Divisions in High Courts. The government amended the act in May this year to expand the courts’ scope, and noted that it expected the move would help improve India’s standing on the WB’s Ease of Doing Business Index.

According to Joginder Singh, Associate Partner at India based Intellectual Property Law Firm Lex Orbis.

"The government has taken number of steps to create a favourable environment for promoting IPRs, e.g., National IPR Policy endeavours to facilitate ease of access to IPR system for all stakeholders, IPR administration is being reinforced with augmentation of manpower and examination guidelines amongst other improvements. Timely disposal of the IPR disputes still needs some attention."
Separately, the Controller General of Patents, Designs and Trade Marks’ (CGPDTM) moved in 2017 to revamp the Trade Mark Rules to allow individuals and companies to apply for their marks to be officially recognised as “well-known”. CGPDTM had started compiling a list in 2003, but had only listed around 100 marks.
 
The agency also reduced trademark application waiting times to one month and slashed the number of associated forms each application required from 74 to 8.
 
CGPDTM followed this move by revising the Guidelines on the Examination of Computer-Related Inventions, significantly improving software patentability by removing a requirement that had limited the guidelines’ application to hardware innovations.
 
Improving IP safeguards is a step in the right direction and is in line with efforts seen in both developed and developing economies around the world. Enshrining the rights of IP holders removes another barrier to entry for local and foreign investors. But the government is not focused simply on tightening the regulatory environment, it is also striving to remove one of the biggest drags on corporate growth – outdated labour laws.

Joginder Singh, Associate Partner, Lex Orbis

"The government has taken number of steps to create a favourable environment for promoting IPRs, for example, National IPR Policy endeavours to facilitate ease of access to IPR system for all stakeholders, IPR administration is being reinforced with augmentation of manpower and examination guidelines amongst other improvements. Timely disposal of the IPR disputes still needs some attention."

Heavy labour
The first major push to overhaul labour laws dates back to 2001, when then Finance Minister Yashwant Sinha proposed a regulatory review. Opposition was swift and widespread, however, and the resulting backlash forced the then government to backdown. While perhaps unfairly, given other social issues at the time, the proposed reforms have also been cited as the reason incumbent Prime Minister Atal Bihari Vajpayee lost the national elections in 2004.
 
More than a decade after those initial efforts and Modi’s government once more embraced the challenge of labour reforms. By this time, however, the country had already lost a lot of ground to regional rival China, which had successfully turned itself into the world’s manufacturing hub in the 1990s and 2000s. India’s industrial sector, meanwhile, was languishing under draconian rules that even forced larger factories to seek government permission to fire a single worker.
 
This scenario has left India struggling to convert informal employment into officially recognised jobs. For example, 28 million applications were submitted for the 90,000 vacancies state-run Indian Railways posted in March.
 
Aware of the constraints that outdated laws have placed on economic growth, the Modi government has embarked on replacing 38 existing laws with the Industrial Relations Code, the Code on Wages, the Code on Social Security and the Code on Occupational Safety and Health and Working Conditions.
 
Though the aim is to make the country more employer friendly, the reforms do face opposition from trade unions and opposition parties, which have expressed concern that they leave workers at an unfair disadvantage. The codes have been criticised as weakening workers’ recourse to collective bargaining and industrial action.
 
New Delhi does intend to raise the worker threshold to 300 before a factory owner needs to seek out government permission to begin laying off staff. Such reforms also build upon an initiative the central government launched in 2016, under which start-ups receive a three-year exemption from nine labour laws.
 
Increasing the ease of starting up a business and then running it competitively should help draw increased levels of foreign direct investment (FDI) in all sectors of the economy.
 
Homemade
 
Making it easier to invest in the country is an absolute must if Modi’s Make in India initiative is to achieve its ambitious goals. The programme aims to spur FDI in manufacturing sectors such as electronics, textiles and apparel, and automobiles, thereby driving employment and economic growth. The creation of domestic manufacturing hubs will allow the country to become more connected to the global market.
Gaurav Wahie, partner at India based law firm Clasis Law commented.
"For the last decade or so foreign investment has been an important contributor to the economic development of India. The Government’s emphasis on ease of doing business in India along with liberalization of the foreign investment regulations has resulted in a favourable investment environment. The rise in disposable income along with strong domestic consumption have also contributed towards making India a favoured investment destination."
FDI will also be key to driving the second phase of the government’s economic development plan – Industry 4.0. On October 11, Modi inaugurated the Centre for the Fourth Industrial Revolution, saying technologies such as AI, machine learning, IoT, blockchain and big data could spur economic growth to new highs. Industry 4.0 focuses on sectors such as robotics, petrochemicals, genomics and electrical storage, and aims to move the country up the manufacturing value-add chain.
 
Moreover, the government has relaxed FDI rules in areas such as retail, state-run refineries, telecommunications, power grids and stock exchanges. In January, the government announced that foreign retailers interested in establishing a single-brand enterprise could delay having to meet a 30% local sourcing requirement for five years. The approval process for start-ups has also be automated. The government is also understood to be considering an increase in the automatic approval ceiling for defence-related FDI from 49% to 51%.

Gaurav Wahie, Partner, Clasis Law

"The Government’s emphasis on ease of doing business in India along with liberalization of the foreign investment regulations has resulted in a favourable investment environment."

Moreover, the government has relaxed FDI rules in areas such as retail, state-run refineries, telecommunications, power grids and stock exchanges. In January, the government announced that foreign retailers interested in establishing a single-brand enterprise could delay having to meet a 30% local sourcing requirement for five years. The approval process for start-ups has also be automated. The government is also understood to be considering an increase in the automatic approval ceiling for defence-related FDI from 49% to 51%.
 
In 2017, the Ministry of Commerce and Industry removed the need for the Department of Revenue to approve FDI applications while also requiring that all said applications be processed within 10 weeks of receipt. This came just a few months after the Foreign Investment Promotion Board (FIPB), an inter-ministerial body housed that processed FDI proposals, was abolished in the name of efficiency.
 
New Delhi also asked state governments last year to improve the fast-tracking of FDI approvals. Underscoring India’s commitment to wooing foreign investment, the Department of Telecommunications (DoT) this year raised the FDI limit in Idea Cellular from 67.5% to 100%. This paves the way for Vodafone India to merge with the business and create the country’s largest telecom company.
 
Such moves are key to encouraging foreign interest in the Indian economy, more important than ever given that annual growth in overall FDI has slowed in recent years. FDI grew just 3% in fiscal 2017-18, according to Department of Industrial Policy and Promotion (DIPP) data, down from the 25% jump seen in 2014-15.
 
Moreover, the country’s top three sources of total FDI in fiscal 2017-18, which stood at US$61.96 billion, were Mauritius, Singapore and the Netherlands.
 
Still, part of that slowdown could be attributed to economic reforms such as the demonetisation process as well as the introduction of GST that replaced VAT. Both of these initiatives have been blamed for the lull in merger and acquisition (M&A) activity seen throughout 2017.
 
Deal making
 
Investment by foreign players as well as domestic consolidations set a new record in the first half of 2018, with total deal value amounting to US$68 billion. Not only did the first six months eclipse the entirety of investment in 2017, which stood at US$65 billion, but this year’s deal value could surpass the US$92 billion high recorded in 2010.
 
The first half’s big-ticket deals included Walmart’s US$16 billion acquisition of a 77% stake in digital retailer Flipkart in May 2018, the 65:35 Schneider-Temasek consortium’s US$2.5 billion purchase of L&T Electricals and Teleperformance’s US$1 billion acquisition of Blackstone’s business process outsourcing (BPO) unit Intelenet.
 
The second half of the year could see US$20 billion worth of large-scale buyouts, including GSK Consumer’s sale of its health food drinks unit; Kraft Heinz’s divestment of Complan, Glucon-D and Nycil as well as Punjab National Bank and Carlyle’s sale of PNB Housing Finance.
 
ArcelorMittal and Japan’s Nippon Steel & Sumitomo Metal efforts to acquire Essar Steel through a bankruptcy sale took one step closer in September after the Competition Commission approved the deal. However, as the country prepares for next year’s general elections several deals may end up being delayed.
 
Outlook
 
India’s economic reforms are a work in progress. While there have been problems along the way, the ease of doing business in the country has rapidly improved in the almost 30 years since liberalisation efforts first began. The Modi administration is building on decades worth of political endeavours and the government is set to continue its efforts in streamlining regulatory systems – as long as the BJP emerges victorious from next year’s polls. Although opinion polls suggest this is likely, investors cannot count on this outcome with more than six months still to go before elections.
 
Retaining its majority in the Lok Sabha would allow the BJP to pursue its economic goals for another five years and would provide some measure of confidence for investors. The government’s leading economic initiative is the Make in India campaign, which it would be able to slowly transition into Industry 4.0 as IoT and big data grow in importance.
 
India’s ability to narrow the gap between itself and China in the traditional industrial space should be viewed with caution, though Make in India will still offer investors lucrative opportunities. The second phase of New Delhi’s economic development strategy is likely to offer longer term opportunities to those already prepared for the emergence of the digital economy.
 
At a socioeconomic level, affording investors such opportunities is key to allowing Modi achieve key social and economic targets if he wins another five years.
 
India’s enduring struggle to lift millions out of poverty saw the country nearly halve its poverty rate between 2005-06 and 2015-16, according to the 2018 global Multidimensional Poverty Index (MPI) published by the United Nations Development Programme (UNDP) and the Oxford Poverty and Human Development Initiative in September. But perceptions of poverty are relative, with the Ministry of Health and Family Welfare noting that in 2015-16 nearly 40% of children under five were short for their age, which suggests chronic undernutrition.
 
Creating jobs and economic growth are the only long-term and sustainable solutions to this problem.

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