Budget 2015: Ease of Doing Business

The Government’s focus on enhancing
the ease of doing business in India is abundantly evident from the Budget. This
involves not only issues of licensing and approvals, but also matters for legal
reform. In this post, I argue that while the proposals in the Budget will
certainly help grow industry and foreign investment, many of these measures
appear to correlate precisely with the need to improve India’s standing in
doing business rankings because the reforms match with various parameters set
out in the rankings. In that sense, care must be taken to ensure that they are
not merely cosmetic or formal in nature but will result in substantive change.
The move towards rationalizing the
licensing and approvals system, especially for foreign investment, began much
before the Budget. On February 17, 2015, the Government announced
a new portal for filing electronic applications for foreign investment (where
government approvals are required). Furthermore, an e-biz portal allows for obtaining
several permissions in an integrated manner. The Budget builds upon these
efforts in streamlining the approvals process. The Finance Minister has
announced his intention to constitute a new committee, including where
necessary to prepare a draft legislation, to create a composite approvals
system to replace the current dispensation. While this is a welcome move from a
business perspective, a lot will depend upon proper coordination among various
governmental agencies, and also cooperate between the Central Government and
the States.
The Budget also shows evidence of
the use of legal reforms to stimulate business activities. Often, the lack of
proper legal mechanisms for enforcement of contracts due to the delays and the
inefficiencies in the legal system have raised concerns for greater investment.
These are now sought to be addressed. The Budget proposes to overhaul the
bankruptcy law in India. It is clear that the Sick Industrial Companies Act and
its oversight body the Board for Industrial and Finance Reconstruction (BIFR)
have not achieved their goals, which have had a chilling effect on industry and
its ability to obtain the requisite funding (particularly from creditors). A
new comprehensive Bankruptcy Code has been proposed in 2015-2016, which is
expected to adhere to global standards in the area. Furthermore, incremental
reforms have been suggested to expand the scope of existing bankruptcy law to
include other types of creditors as well. For example, the Budget confers
benefits under the SARFAESI Act, 2002 to non-banking finance companies (NBFCs)
which are registered with the Reserve Bank of India (RBI) and have an asset
size of at least Rs. 500 crore to be treated as a “financial institution” under
that legislation so as to be able to avail of benefits thereunder.
All of these emerge in the context
of the bankruptcy reform process that has in any case commenced. For example, a
special committee constituted for a review of the bankruptcy laws has already
submitted its interim report, as we have previously
discussed
. These efforts are understandable given that the lack of a
meaningful and efficient bankruptcy process in India has acted as an impediment
to financing efforts of Indian industry. Modernization of the system and
bringing it in line with international standards will address the issues. This
will also help develop the corporate bond market in India, which has been
languishing, particularly in comparison with the expanding equity market.
The broader reforms relate to more
efficient and timelier resolution of commercial disputes. For this purpose, the
Budget reemphasizes the proposal to set up exclusive commercial divisions in
various courts around the country based on the Law Commissions recommendations.
A Bill is expected to be introduced in Parliament. This again is intended to
provide more certainty to the enforcement of contracts and other legal
obligations. Currently, much less reliance is placed on private enforcement
through courts given the state of the Indian legal system, due to which public
enforcement is preferred to the extent available. The idea is that a more
robust legal system for enforcement of contracts and resolution of disputes
would create a more facilitative regime for business and investments.
The Budget proposals attempt to
address another area that has courted a lot of controversy in India lately: public
procurement, a matter that involves the government awarding contract to private
parties for carrying out specific business activities. The Budget proposes a
public procurement law on the lines of the UNCITRAL model. It also recommends a
special dispute resolution procedure for such contracts through a Public
Contracts (Resolution of Disputes) Bill. Another effort in this direction is to
propose a comprehensive regulatory reform that will address measures for
regulatory arrangements in different sectors pertaining to infrastructure.
While this measure will help to some extent, public procurement issues have
also been the subject matter of constitutional challenge before the Supreme
Court. These reforms will largely address the private contractual issues and
disputes in public procurement, but the wider constitutional considerations
would continue to operate where the body of jurisprudence laid down by the
Supreme Court over the years will continue to dominate.
Overall, if one were to take stock
of the Budget proposals on the ease of doing business, the idea is to reinvigorate
domestic industry and also attract greater foreign investment. In doing so, the
Finance Minister appears to have kept a close eye on doing business rankings.
These reforms measure up directly against several parameters considered by the
World Bank for this purpose. The above reforms correlate to parameters such as:
(i) starting a business; (ii) dealing with construction permits; (iii)
resolving insolvency; and (iv) enforcing contracts. It is likely that these
efforts will enhance perceptions, but what is required is a more substantive
implementation of reforms on the ground, which might not be as easy as it
appears.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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