Ease of Doing Business ranking: India needs to exhibit more regulatory, governance and financial reforms to investors
In a major boost to the government, India jumped 23 spots in the new World Bank’s Ease of Doing Business 2019 (EODB) rankings to take up the 77th spot, with a score of 67.23. But despite the progress, there are still challenges along the way:
Setting up a business in India
As per the EODB rankings, India has jumped 19 spots to take up the 137th spot with respect to setting up business in India. However, it takes approximately a month to start a business in India while the average provided by the Organisation for Economic Co-operation and Development (OECD) is 12 days. Though some states like Telangana have eased up the procedures for starting a business, this is yet to be achieved on a pan India basis.
The Insolvency and Bankruptcy Code, 2016 (Code) is ever evolving and adapting to the challenges being faced since the date of implementation. While the creditors including banks and financial institutions are still grappling with the framework and waiting for a string of successful resolutions, the Code still remains a work in progress.
The Code has been interpreted several times by the Supreme Court of India. In these cases, the apex court dealt with the legality of the Code, showing that there are gaps which have to be addressed through amendments in the Code. One such amendment was to incorporate homebuyers as operational creditors. Earlier, homebuyers as a category were not recognized as financial or operational creditors. This issue pertaining to the homebuyers in the Code was recognised by the apex court in the insolvency case against Jaypee Infratech Ltd.
The Code is being regarded as a path-breaking legislation in India since it prescribes tight timelines for resolution of sick companies. The Code provides that a resolution process must be completed within 180 days, which is extendable, in certain cases, up to 90 days. In spite of the fact that the 270 days looks satisfactory on paper, the issues are not resolved within that timeframe.
In certain cases, the process has extended beyond the 270 days deadline which is contrary to one of the key objectives of the insolvency reform. Further, financial services fall outside the ambit of the Code and accordingly, a separate mechanism remains to be created for insolvency procedures involving banks and financial institutions. The absence of lucidity in law and procedure makes the 270 days target a challenge.
Robust corporate governance mechanism
On paper, India has one of the toughest corporate governance norms in the world. However, we are still toiling in effective implementation of such corporate governance norms. The recent developments have presented a reformative approach in the corporate governance norms with renewed focus on better structures, more rigorous checks and balances and greater independence of the management. However, at the same time, the government will also be required to ensure that in lieu of promoting corporate governance, it does not hamper its motive of ease of doing business in India
Commercial disputes and resolution
In cases of commercial disputes among the parties, a speedy and efficacious corporate dispute and redressal mechanism are always desired. Effective enforcement of commercial contracts, recovery of monetary claims and entitlement of just compensation for the damages suffered by the parties are a necessary requirement for an efficacious corporate dispute and redressal mechanism.
In 2015, Commercial Courts, Commercial Division and Commercial Appellate Division of the High Courts Act, 2015 was enacted which attempted to facilitate the corporate disputes in a regulated and systematic manner. However, the judicial system of India is still very slow, and this is one of the reasons why investors don’t want to start a business in India because the hearing of disputes related to labour laws, patent violation is a long-drawn process.
Further, enforcement of the commercial contract is another major concern for the investors. As per the EODB report, it would take around almost 4 years (1445 days) to enforce a contract in India, which is very long and time-consuming.
Complex regulatory framework
Apart from the procedural compliances in respect of incorporation of a company or setting up a business in India, a number of complexities are prevalent in other regulatory procedures such as obtaining construction permits, getting electricity, acquiring the land and registering the property, cross-border trade, transaction involving the foreign exchange, taxation etc.
As per the EODB report, obtaining a construction permit in India have to be gone through 17 procedures and takes around 94 days on an average. Further, acquiring land and registering a property in India involves a number of procedures. Such procedures cause undue delay in acquiring land and necessary permissions to use it.
One of the major issues in acquiring the land is the absence of clarity in respect of land titles which is caused by poor administration of land records, leading to delay in obtaining necessary approvals form the authorities. In rural areas, it becomes even more difficult to register the property.
On the tax front, it is to be noted that foreign investors often take their signal from the mood of domestic businesses and accordingly, the challenges faced by domestic traders under the Goods and Services Tax regime are also required to be addressed.
A high positioning in one year isn’t simply the end. To achieve the objective of the best 50 in the EODB rankings, India should be more watchful in its methodology. The need of the hour is to exhibit more regulatory, governance and financial reforms to investors. To summarise, while it is clear that India still has a far way to go with respect to providing ease of doing business, the country is and will keep on being an attractive destination for investment and doing business.
(Sudish Sharma is Executive Partner and Tanya Sharma, Joint Partner at Lakshmikumaran & Sridharan Attorneys)