Copyright 2016, Forbesindia.com

Ease of doing business, still work in progress

Narendra Modi's intent of making India rise up the ranks in the 'ease of doing business' list has translated into some action but the regulatory undergrowth is so dense that cleaning it up will not be easy


"I am here to assure German companies that India is now a changed country.” That was Prime Minister Narendra Modi, speaking at the inauguration of the Hannover Messe in April this year. Given that Hannover Messe is the world’s largest industrial fair, the message—that India will no longer be a difficult place to do business in—was directed not just at German industry but also the world at large.

Modi wants to take India to within the top 50 in the World Bank’s Ease of Doing Business ranking in three years (it currently ranks 142 out of 189 countries), and the government is pulling out all the stops to ensure that this happens.

“Over the years, we have added more and more paperwork, regulations, laws and red tape. We need to simplify all this, for our own sake,” says Amitabh Kant, secretary, Department of Industrial Policy and Promotion (DIPP), which is helming the Ease of Doing Business exercise.

It’s a three-point theme. One, cutting down as many points of human interface as possible. Two, putting processes online. Three, converging and integrating the processes and procedures of different departments. This is what underpins all the initiatives in the past year such as e-auctions, online submission and processing of applications for environment and forest clearances, online payment of monthly provident funds and employees’ state insurance contributions and the eBiz platform (a G2B portal which is a one stop shop for services relating to starting a business or setting up a new unit).

Forms are being simplified or have been done away with. For instance, the Directorate General of Foreign Trade (DGFT) has hacked the number of forms required for exports and imports from nine and 11 respectively, to just three each; compliances under eight labour-related laws can be filed in just one form and through a portal. “We have done three years’ work in eight months. This has never happened before,” says Kant.

Indeed, work on the eBiz portal started close to a decade ago and then a 2009 plan targeted putting around 200 G2B (government to business) services, offered by the central and state governments, online in ten years. But the portal was launched in January 2014 with just two services (industrial licences and industrial entrepreneur memorandum) provided by DIPP. Between July 2014 and February 2015, nine more services were added. The count now stands at 14.

There are mindset issues hampering progress, Kant admits, but he says the bureaucracy has no choice but to change; the message from the top political leadership is very clear. In addition, DIPP is persuading all departments to switch from routine inspections to risk-based inspections. Departments will need to undertake a risk-profiling of companies within their inspection jurisdiction and use this to decide on whether, and how often, they should be inspected. There will be no dilution in the welfare obligations of companies, says Kant. “We are only saying let’s use technology to make compliance faster, easier and free of human interface.”

There have been brainstorming sessions between DIPP and other central government departments and state governments on the action plan for the second year of this government. DIPP has listed out the problematic regulatory issues in each of the 25 sectors targeted under the Make in India programme. “It’s almost like handling a business plan,” says Deepak Bagla, MD & CEO of Invest India, a joint venture between DIPP and the Federation of Indian Chambers of Commerce and Industry (Ficci), set up in 2008 as a first point of interface for foreign investors.

Action is not confined to the centre. States account for nearly half the regulatory landscape that companies have to navigate and governments there are falling over each other to become business-friendly. Hence, procedures and paperwork are being simplified or put online, e-procurements, e-tendering and deemed approvals (automatic approvals if a department does not revert within a specified timeline) are being facilitated and self-certifications and third-party certifications are being encouraged.  

Fifteen states are being very pro-active, says Kant. There are, of course, the usual suspects—Maharashtra, Punjab, Gujarat, Haryana, undivided Andhra Pradesh, Tamil Nadu and Karnataka—which have been undertaking such reforms since the late 1990s. Rajasthan and Madhya Pradesh are making headlines, but they were never industry-unfriendly states. What’s interesting is that the charge is being led by industrially backward states like West Bengal, Uttar Pradesh and Odisha. West Bengal is emerging as an enthusiastic reformer. In a state where the Left is a dominant political force, even compliance with labour regulations is being eased. Odisha has set up a land bank and put in place a Geographic Information System (GIS) for identification of land meant for industrial purposes.

__PAGEBREAK__The cut-throat competition between Andhra Pradesh and Telangana has seen the latter setting up a chasing cell in the chief minister’s office to track progress of investment proposals and institutionalising a self-certification system through legislation. Andhra Pradesh will penalise officials who delay permissions even if all documents are in order. Punjab, Jharkhand and Odisha have hired consulting firms to help them re-engineer their systems. Chhattisgarh, which has put practically all clearances and applications online, has tied up with the Confederation of Indian Industry (CII) and Singapore’s Lee Kuan Yew School for Public Policy to help it draw up a master plan for Ease of Doing Business.

The centre is prodding them to move faster. DIPP has started an exercise to rank states based on the ease of doing business, partnering with the World Bank and consulting firm KPMG. The ranking will be based on the implementation of 98 action points, grouped under nine parameters, that cover the entire life cycle of a business. Kant has publicly said he will not hesitate to name and shame laggard states. He holds video conferences every week with state government officials and joint secretary Shailendra Singh frequently travels to states to take stock. “Steps are being taken to institutionalise the process of change, so that Ease of Doing Business does not end up being a one-time activity, but a dynamic process,” says Jaijit Bhattacharya, partner, infrastructure and government services, KPMG India.

Despite all this action, why is Bharat Anand, partner at law firm Khaitan & Co, saying, “India was and is still clamouring for change”?

Anand was euphoric when he heard that registering a new company would not take more than ten days and the filling up of just one form. But he got a stiff dose of the reality when trying to incorporate a company for a foreign client—even reserving a name took longer. All names in an initial list of six were rejected by the Registrar of Companies (RoC); another list of 12 names had to be sent across, he says. “Do I tell a foreign client that it takes two weeks just to debate a name?”

A leather goods exporter cites the example of the recently-announced incentives for exports to three groups of countries. The incentives can be claimed on submission of any one of seven documents as proof of goods landing in those countries. Five of these must be issued by the importer, who just cannot be bothered with such formalities, and the other two are issued by the shipping company, which charges a fee. When exporters raised the matter with the commerce ministry, they were told this was to check diversion. “What I earn from diverting will be less than the cost of diversion. Why would I do that?” asks the exporter.  

Kant admits issues like this will keep coming up. “This is work in progress. We have to be at it constantly for four to five years,” he says.

To be fair, the regulatory undergrowth is so dense that cleaning it up will not be easy. “The government is certainly trying to change things, but it is a five- to ten-year effort. There are just so many issues and regulations that need to be fixed,” says Ketan Dalal, senior partner, tax and regulatory services, PwC. “The recognition of the problem is the first big step to resolving it and this government is doing that,” adds Bagla.

The benefits of some of the initiatives have not percolated down the bureaucratic chain. Despite the paperwork being axed, consignments at ports still take three days to be cleared against the promised 24 hours and harassment by inspectors continues. “If the excise inspector says the classification code of a product is fine, the customs inspector disagrees,” complains an engineering goods exporter. Dalal pleads for giving the government some time on this issue, “This requires a DNA change and will take a lot of time.”

Bhattacharya agrees: “The actions being taken and their repercussions, in terms of process changes and responsibilities, have to settle down before businesses can feel tangible changes.” West Bengal has been proactive on this front and is conducting training sessions for the bureaucracy.

Industry applauds the efforts taken to scythe red tape, but is concerned about there being less frenetic action on a host of other issues that make day-to-day functioning of companies stressful. “Why should the government sit in judgement over the name of a company? Why not just have a negative list of terms that can’t be used and guidelines on copyright violations?” asks Anand.

This divergent approach is similar to that of the UPA, which took initial steps to ease doing business even as it legislated the Companies Act, 2013, with its onerous compliance burdens, and brought in retrospective changes to tax laws.

__PAGEBREAK__The problems with the new Companies Act are numerous—compulsory filing of board resolutions; imposing regulations meant for public limited companies on private companies and restrictions on private companies raising money, to name just a few. Jyoti Vij, deputy secretary general of Ficci, points out that the size of the balance sheet of even mid-sized companies is three times what it used to be. “All this is time-consuming and just not adding value to corporate governance,” says Subodh Bhargava, non-executive director, Tata Communications. Guidelines by the market regulator Securities and Exchange Board of India (Sebi) on everything from listing, takeovers, insider trading and disclosures, says Vij, are making boards of companies focus more on disclosures and compliances than core business issues.

This appears to be a global trend with the Sarbanes-Oxley Act of the United States imposing far tougher disclosure norms. Bhargava agrees, but points out that systems in the US are far more mature. There’s the added complication, he says, of the one-upmanship between the Ministry of Corporate Affairs (which administers the Companies Act) and Sebi. More confusion is added when the guidelines issued by the Institute of Chartered Accountants of India or the Institute of Company Secretaries of India cause apparent contradictions, making compliance even more complicated.

Though this problem is inherited from the UPA, the government moved to make 15 amendments to the Companies Act in December 2014. It has set up a committee to look into other provisions of the Act. Another committee is working on framing a bankruptcy law—a huge pain point for industry—to make closing businesses easier.

There is, however, little action on, say, the tax regime which continues to befuddle. Expecting an end to the tax terrorism of the UPA, corporate India has been disappointed with the continuation of problems relating to minimum alternate tax (MAT) and transfer pricing as well as the flip-flop on income-tax return forms.

Action on many of the larger issues is difficult, some require legislative action, which is problematic, others need states to come on board. Cutting red tape is low hanging fruit and it is natural for the government to start on that. But India Inc would like to see action on both fronts. “There needs to be a comprehensive plan on Ease of Doing Business and every arm of the government needs to work towards that,” says RV Kanoria, past president, Ficci. He would like to see a move towards a system of self regulation based on trust in businesses.

So, does Ease of Doing Business mean we are turning to a more laissez faire structure, where the government doesn’t interfere with someone making money, as long as he pays his taxes and does not pay bribes? “That is what it should be,” says Anand. Without this cornerstone, any legislation will leave scope for harassment by the lower bureaucracy. He cites the example of a notice, under the Companies Act, served on a private company for not appointing a woman director on its board even though it is exempted from the rule.

Kant talks about a regulatory regime where no Act is more than three pages, no rule more than two pages and no form is more than one page. That would be regulatory heaven for everyone. But is it an attainable dream?

FRENETIC ACTION
• Fourteen services are now on the eBiz platform. These cover company registration, labour-related registrations, tax and sundry licences.
• Documents required for export and import have been reduced to three each.
• Application forms for industrial licences and industrial entrepreneur memoranda have been simplified.
• Validity period of industrial licences has been increased from two years to three years.
• Partial commencement of production is now treated as commencement of production, making it easier to get industrial licences extended.
• A security manual for
 Licensed Defence Industry does away with the need for an affidavit signed before a judicial magistrate about
complying with safety and security guidelines.
• Environment and forest clearances can now be made online. Threshold for Environment Assessment Report has been raised for some
constructions.
• There is now a unified portal to register and report compliance under labour regulations.
• The new integrated process for the incorporation of a company cuts down time required to start a new business.
• Home ministry will give security clearances on
industrial licence applications within 12 weeks.
• The Companies (Amendment) Act, 2015, removes some onerous rules of the Companies Act, 2013. A committee to look into other compliance burdens in the Act.