As the Modi government comes back to power, Lawyers tell Gautam Kagalwala about their expectations for the new term
The ruling Bharatiya Janata Party led by Prime Minister Narendra Modi has won the elections resolutely and secured a comfortable majority in parliament. The Modi government, during its previous term, was willing to challenge the status quo in areas where change was needed, though implementation was sometimes a problem.
The introduction of the Insolvency and Bankruptcy Code (IBC) and the goods and service tax (GST) were two of the most significant reforms. The government also showed a willingness to tackle problem areas identified by the World Bank in its Doing Business Report. At the beginning of the government’s new term, India Business Law Journal asks Indian legal community members and international legal counsel who focus on the country what legal and regulatory reforms they would like to see implemented.
Many in the legal community have been eagerly anticipating the simplification of the many central labour laws after the Union Cabinet recently approved the introduction of The Code on Wages Bill, 2019, in parliament.
“Presently, there is an interplay of various labour laws such as the Factories Act, 1948, The Contract Labour (Regulation And Abolition) Act, 1970, and the Minimum Wages Act, 1948, with cascading provisions in these legislations,” says Monali Dutta, a principal at Advaita Legal. Companies face difficulties in navigating this area, understanding their compliance requirements and the applicability of the laws.
“The government has taken upon itself the herculean task of simplifying numerous archaic labour laws, many predating Indian independence,” says Vatsal Gaur, an associate partner at HSA Advocates. “However, the proof of the pudding will lie in its eating. Some of the themes we hope to see include simplification and standardization of labour inspection and documentation along with decentralization and granting of power to states to fix the level of minimum wage.”
The Code on Wages Bill is the first of the four labour codes that will subsume various labour laws dealing with wages, social security, welfare, industrial safety and industrial relations. The bill was first introduced in the 16th Lok Sabha but lapsed upon its dissolution.
“We have 37 central laws and six amendments.” says Manoj Kumar, the managing partner of Hammurabi & Solomon. “There are six laws that relate to wages alone, separate laws for disparate sectors such as beedi and cigar workers, newspaper employees, etc. For a growing country like ours we need to conduct a deeper study of these laws and compress them for less complication and more labour benefits, such as financial and social security.”
Another development that is being followed closely by observers is the progress of the Personal Data Protection Bill, 2018. Telecom and IT minister Ravi Shankar Prasad, who formally took over the role in early June, said he would seek to get the bill “quickly” to parliament. A committee of experts set up under Justice BN Srikrishna had submitted the bill to the government in July 2018 after studying it for a year.
“The Personal Data Protection Bill is a step in the right direction,” says Vineetha MG, a partner at Samvad Partners. “India is trying to align its data privacy and customer protection legislations with international regulatory developments such as the recent European General Data Protection Regulation 2016. This will obviously have a huge economic impact on Fintech companies in India, which collect, store and retain data, especially sensitive personal data and that would be bound under this law to take additional IT security precautions.”
The bill has raised concerns among global technology companies over its data localization rules that require sensitive personal data as classified by the government to be stored only in India.
Esha Chakravarty, the general manager for legal affairs at Datamatics Business Solutions, says it is “imperative” for parliament to legislate a comprehensive data protection law. “In light of the paucity of the data protection regime, India is not considered safe for cross-border data transfers. This poses business challenges to offshoring industries while processing the data of the EU region. Having a comprehensive data protection regime would certainly be a step in the right direction to address global concerns.”
Members of the legal community also suggested that the government could get to work on strengthening the enforcement of contracts where India was ranked poorly in World Bank’s 2019 Doing Business report. “[The country] ranks 163 owing largely due to India’s legal regime for contract enforcement being nebulous, sub-optimal and time consuming,” added Gaur.
But on the World Bank report, Sumeet Kachwaha, the founding partner of Kachwaha & Partners, says “there could be no ease of doing business” in the country due to the burdened courts. “We need far better infrastructure especially for the lower courts backed by trained judges, prosecutors and government lawyers. We need better case management with restricted oral arguments.”
Entangled in court
According to the government’s 2019 Economic Survey, India had 35 million pending cases with many of them in the district and subordinate courts. The survey identified the burdened judicial system as the biggest constraint to doing business in India, with knock-on effects to reforms in areas such as property rights, taxes and insolvency as disputes become entangled in the legal system.
“It is a matter of concern that there has been no major judicial reform initiative for the past many years to tackle the mounting court backlog and indeed none are on the anvil,” says Kachwaha.
Vineetha shares this concern. “The backlog of cases pending before Indian courts and tribunals has been steadily increasing over the years despite our best efforts to establish additional tribunals for handling specific types of matters and to decrease procedural bottlenecks. There is a huge need for revising procedural rules to accommodate more timely resolution of such cases … since justice delayed is essentially justice denied,” she says.
Dutta says ensuring full bench strength at courts and tribunals is important for speedy disposal of cases. “For example, the NCLT [National Company Law Tribunal] not only has to look into matters relating to issues arising out of the Companies Act, 2013, but also the recently introduced IBC. Early dispensation of matters can only happen if more benches are added and judicial officers are increased so as to ensure speedy dispensation of matters.”
Vineetha says the increase in the volume of cases at the NCLT has also affected M&As.
“The consequent delay in resolving merger or amalgamation requests has become a cause for derailing many business plans. One way to simplify this would be to institute a central merger authority as the single forum with pecuniary jurisdiction to approve or reject M&A schemes in a time-bound manner.”
Offering a view from outside, David Cameron, a Hong Kong-based partner at Dorsey & Whitney, says speedy resolution of disputes and enforcement of judgments should be a priority. He offers some optimism to the otherwise gloomy picture. “The recent amendments to the IBC are good examples and hugely popular. Instead of talking in terms of years people are now talking in terms of months. Here at Dorsey, we have clients in India who have finally been able to clean up their balance sheets, some of which dated back to the global financial crisis, and are now ready to access the international capital markets.”
The NCLT and the National Company Law Appellate Tribunal (NCLAT) have played a positive role in developing jurisprudence for the IBC and guiding its evolution. The Supreme Court upheld the code’s constitutional validity in the case of Swiss Ribbons Pvt Ltd v Union of India. While in K Sashidhar v Indian Overseas Bank, it recognized the committee of creditors as the primary custodian of the corporate insolvency resolution process and refused to intervene in its commercial decisions.
“IBC played a major role in improving India’s place in the global ease of doing business rankings,” says Sherina Petit, a London-based partner and head of the India practice at Norton Rose Fulbright. “A robust insolvency resolution process allows investors to recover their capital more easily thereby increasing investor confidence. In my view, the IBC should now be strengthened to improve India’s cross-border insolvency norms. Cross-border insolvency proceedings enable foreign creditors to recover money lent to [insolvent] Indian companies. I anticipate that the government will implement these norms soon.”
Lawyers propose steps to improve business-to-government communication
On starting businesses: The government has been taking steps to improve the business environment in India and it should continue to simplify the procedures in starting a venture, reduce the costs of doing business, remove multiple prior permissions which at times cause delay in the approval process and promote single window clearances. – Vineet Aneja, managing partner at Clasis Law.
On better communication: While the Indian government has undertaken a number of very commendable measures (including providing increasing opportunities to e-file etc.), more ministries should adopt a streamlined consultation process for foreign investors. There are still situations where foreign investors may benefit from an opportunity to have discussions with relevant ministries in case there are some potential ambiguities in interpretation of statutory provisions or their regulatory implementation. – Amit Kataria, partner at Morrison & Foerster.
On licensing: Licensing and permitting can be a confusing, non-transparent, and unpredictable experience. Uncertainty caused by lack of transparency may sabotage investment projects. If the government agencies can make this process convenient and faster, the businesses can start planning their projects, investments and other financial decisions much more efficiently. – KPS Kohli, partner at Dhir & Dhir Associates.
On single-window approach: There still remains an array of legal, procedural, administrative and regulatory [challenges]. For example, simplification of administrative procedures could be achieved by removing the overdone administrative requirements for entrepreneurs with a turnover of less than `50 million (US$727,000) and adopting a single-window in which the government is responsible for ensuring the distribution of relevant corporate information to the various appropriate regulatory agencies to substantially reduce the burden of compliance. – Rajesh Begur, founder and managing partner of ARA Law
On consolidation of regulations: The government should consolidate regulations to the extent possible. For instance, the environmental clearance system is a maze of national and state regulations requiring investors to procure several permissions/permits. These should be integrated into a single permit. If possible, a third-party certification mechanism should be put in place in order to reduce the burden on government resources and expedite the certification process. – Sherina Petit, partner at Norton Rose Fulbright.
GST: Work in progress
The legal community has many expectations from the GST, which was one of the biggest reforms introduced during the government’s previous term. Arun Jaitley, who served as finance minister during the previous term, recently posted on social media that the introduction of the GST was a “monumental restructuring of one of the world’s clumsiest indirect tax systems”. In the two years since its introduction, Jaitley said “India had one of the smoothest transformations,” while governments in other countries lost elections because of indirect tax.
But some lawyers believe that GST is still a work in progress. “Apparently, none of the concerned quarters (government, tax officials, taxpayers, consumers) are happy with the current state of affairs,” says Bhumesh Verma, the managing partner of CorpComm Legal.
“Ever since [GST’s] inception, the government seems to be in an apologetic and corrective mode. Simplification and streamlining of processes would benefit all. Too many compliances and ambiguities are killing small businesses, increasing costs and bringing inefficiencies in the system.” He went onto say that the situation for working Indians also needed improvement. “An honest taxpayer pays up to 30% income tax and then pays around 15% GST on her purchases with different slabs on different items be it goods or services. What is then left to save and invest?”
Srinivas Kotni, the managing partner of LEXport, had in March launched a comic book dedicated to the tax called Adventures of the GST Man. He says, “[We need] single GST in letter and spirit and settlement between states and the centre in the backend without troubling the masses with multiple GSTs like SGST [State Goods & Services Tax], CGST [Central Goods & Services Tax], UTGST [Union Territory Goods and Service Tax], ITGST [Integrated Goods & Services Tax], etc.”
Kumar at Hammurabi & Solomon says that the government’s two big reforms of IBC and GST were meant to leverage the economy but led to a period of economic disruption as businesses had to respond to sudden changes. Referring to World Bank’s Doing Business report, he says “The GST was meant to cut red tape. However, the report found that glitches in GST filing raised the time taken to file taxes – from 214 hours in 2017 to 275.4 in 2018.”
The Confederation of Indian Industry, a prominent industry voice, was more positive in its feedback. The first point in their list of recommendations to the government was to have two or three tax slabs instead of the current four (5%, 12%, 18% and 28%) in the medium term. “With stabilization of revenues, there is need to further rationalize the category of 28% to only cover demerit goods,” the industry group said in a recent statement.
Former finance minister Jaitley said in his social media post the rationalization of tax slabs was needed. “That process is already on. Except on luxury and sin goods, the 28% slab has almost been phased out. As revenue increases further, it will give an opportunity to policy makers to possibly merge the 12% and 18% slabs into one rate, thus, effectively making the GST a two-rate tax.” However, he said the country was not yet ready for a single slab. “Those who argued for a single slab GST must realise that a single slab is possible only in extremely affluent countries where there are no poor people.”
The opening of the legal market continues to be a subject of discussion within the community, as it has been for many years. “This has been a subject of debate for over 20 years,” says Kamal Shah, a partner and head of the India group at Stephenson Harwood. “The new, progressive government should tackle it once and for all. It is essential [if India is] to become a modern economy.”
Hopes for liberalization of the profession were briefly raised in mid-2017 when Prime Minister Narendra Modi expressed a willingness to open the legal market to foreign firms. However, those hopes were dashed some six months later when the Supreme Court ruled that foreign firms could not open offices in India but could continue to visit on a fly-in, fly-out basis.
Norton Rose’s Petit also supported opening up the country to foreign firms. “With appropriate regulation, the entry of foreign law firms into India will create opportunities for domestic practitioners by allowing them to expand their global reach through collaboration and cooperation. As cross-border M&As between Indian and foreign companies continue to grow, this will allow Indian firms to leverage strategic partnerships with international law firms to secure greater work.”
Siddhartha Sivaramakrishnan, a Singapore-based partner at Herbert Smith Freehills, supports putting legal services on the same footing as other professions as the country plays an increasingly important role in the global economy. “If India is able to build a wider transactional system, a complex, interdependent network of financial intermediaries, lawyers, professional advisers and accountants then the net result is a better business outcome. This better business outcome in turn translates into bigger tax receipts and wider socioeconomic prosperity. London, Hong Kong and Singapore are good examples of this.”
There were also Indian lawyers who supported the opening of the legal market as it would lead to the adoption of international best practices and raise the standard of legal practice.
However, Dorsey’s Cameron feels that India does not have to prioritize the opening of its legal market. “If the government is able to execute well on general economic growth initiatives, the higher level of economic activity will lead to growth in the legal industry. I don’t believe that any direct reforms to the legal industry should necessarily be at the forefront of the agenda.”
Macroeconomic reforms needed
Lawyers propose steps to unleash economic growth
On skill development: A focus for the current government will be generating employment. Skill development, although an ambitious project of the government, has not met the desired success in India. It may be important to channel the resources for training partners and Sector Skill Council as well as formulating robust guidelines, so as to augment skill development and employment in India. – Monali Dutta, principal at Advaita Legal.
On removing constraints: If the government successfully removes certain capacity constraints like credit availability, high interest rates, land acquisition, tax complexities, connectivity and logistic support etc., it will help propel economic growth. High real estate rates need to be looked into as they are an important component of development. Controlling the current account deficit and finding the right balance between growth and inflation are some macro-economic reforms which should be introduced by the government. – KPS Kohli, partner at Dhir & Dhir Associates.
On capital allocation: I think India would benefit from taking a close look at its financial sector and deciding whether the universal banking model is still the most appropriate model for the country in particular given the growth trajectory under Modi 2.0 and the very capital-intensive plans ahead. I appreciate the Reserve Bank of India has already started to differentiate the banking sector with licenses for payments banks, small finance banks and wholesale banks. But if there are to be infrastructure projects that rival [China’s] Three Gorges Dam, where does that money come from?
Allocation of capital is going to be key and there needs to be enough of it to go around and from the proper sources whether it be from the bond markets, traditional banks, specialized banks or somewhere in between. – David Cameron, partner at Dorsey & Whitney.