Sunday, March 1, 2015

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.

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