DOING BUSINESS-2
New corporate rules on the anvil signal the government's intent to stay the course in the battle of attrition with red tape. EPISODE #77
Dear Reader,
A very Happy Monday to you.
As promised this is the concluding part of the series I initiated last week.
In the first episode one very candidly laid out how India has a long way to go before it creates an environment that both respects business and inspires it.
The second episode puts the spotlight on some fresh changes in corporate rules on the anvil and their implications.
The amendments, likely to be put up for approval in the next session of Parliament, are important for two reasons. First, the new rules bring India on par with global practices and improves ease of doing business. Second, it reflects the fact that the government, despite resistance from entrenched sections, is not willing to throw in the towel in its battle of attrition with red tape. Do read and share your valuable feedback.
This week’s cover picture is taken by Pradeep Padmanabhan. I found this picture compelling for two reasons. One, it showcased India’s biggest success story: digital payments. Second, the cobbler’s workspace included the picture of Dr Ambedkar, one of the founding fathers of India and among the most inspiring champions against caste atrocities. As the cliche goes, a picture is worth a thousand words. Thank you Pradeep.
A big shoutout to Kartik, Niranjan, Atul, Hemant, Gautam, Vandana, Premasundaran, Rahul and Rohit for your informed responses, kind appreciation and amplification of last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
REWRITING RULES
Last week the Business Line newspaper reported that the Ministry of Corporate Affairs (MCA) has commenced work on drafting fresh legislative changes—Company Law Committee (CLC) in its third report—in the Companies Act 2013, which among other things will improve ease of doing business and bring Indian laws in line with global practices.
These changes, likely to be moved in the next session of Parliament, are based on the recommendations of the third report of the Company Law Committee (CLC) and published on 13 April. If you wish to read the entire report please click this link.
No doubt the changes on the anvil are significant. However, leading up from the reality check of last week on the ease of doing business, there is greater significance in the fact that this government, despite the odds, is not willing to throw in the towel. Some would say (and rightly so) that this is clutching at straws.
But then when you assess India with its legacy of staggering deficits—wherein 800 million people still need to be extended state support, including free food grains for the last 18 months—and heightened external threats, one should be grateful the cup is half-full and not half-empty.
New Rules
The committee report states up front that the primary intent was “to promote greater ease of doing business for law-abiding corporates in the country”. Implicit is the subtle hint that a non-negotiable precondition to avail the benefits of a more relaxed regulatory regime is that companies need to be law-abiding.
Listed below are some of the key recommendations:
Permitting issuing and holding of fractional shares, Restricted Stock Units and Stock Appreciation Rights;
Allowing incorporation of Producer Organisations under the Limited Liability Partnership Act, 2008 to ease incorporation and compliance requirements;
Allowing Special Purpose Acquisition Companies (SPACs) incorporated in India, to list on permitted exchanges
Easing the requirement of raising capital in distressed companies;
Allowing self-certification/declaration;
Allowing companies to hold general meetings in virtual, physical or hybrid modes;
Creating an electronic platform for maintenance of statutory registers by companies;
Strengthening the National Financial Reporting Authority;
Strengthening the audit framework and ensuring the independence of auditors;
Standardising the manner for auditors to provide qualifications;
Recognising and providing an enabling framework for the constitution of Risk Management Committees;
Clarifying the tenure of independent directors;
Clarifying the procedure for the resignation of key managerial personnel;
Strengthening the provisions relating to mergers and amalgamations;
A few aspects stand out.
One, the government has been quick to acknowledge the post-covid reality. The lockdown and subsequent social distance norms forced companies and their personnel to adopt tough norms like #WFH and virtual meetings with stakeholders. This exception is going to become a rule, allowing for immense flexibility and greater democratisation of corporate culture.
Second, there is a recognition that existing rules do not permit the adoption of new innovations in raising funds. The decision to allow the creation of India-based SPACs and their listings is one such example—it will also allow domestic investors to own a stake in these new corporate ventures, especially in emerging sectors like commercial applications for the space programme.
Third, like the government did for individuals in 2014, it has permitted companies to file self-certified documents. A substantive ease of doing business norm.
Battle of Attrition
This battle against red tape is actually against an unfortunate colonial inheritance. Recently Open magazine published a story which rather candidly summed up this challenge.
“One bureaucrat of 1980s vintage posted as district magistrate in a Hindi-belt state recalled how he moved into a bungalow sitting in the middle of a three-acre verdant campus designed more to distance and alienate him from ordinary people and accentuate his ‘status’ than facilitate the ease of efficient administration and services delivery to the public.
When his family of two moved in with a few suitcases and many books, they were presented with a support staff of 15 employees meant to embellish that status, including a cook, batman, gardener, house help, cleaner, and so on. He described it as “obscenely decadent and slothful”.”
And then went on to add that a reset in the work culture has been effected since 2014:
“That leisurely and imperious work culture of the IAS, however, changed substantially with the arrival of Narendra Modi on the scene in 2014.
Ministers were directed to be present in office well on time and, when circumstances demanded, till late, setting an example for the bureaucrats and the entire platoon of administrative staff.
Suddenly, bureaucrats of all ranks were being made accountable for their work time and forced to clock in at both the entry and exit points while the dog tag ID card became a tell-tale gauge of work ethic and efficiency rather than a mere status showpiece.
Secretaries, ditching their lazy morning schedules and evening entertainment timetables, were forced to set an example that even ministers followed.”
The big difference today is that a good bureaucrat—trust me there are many of them—has been provided a better work environment. It may be far from the best, but then the inheritance of red tape is daunting to say the least. If you wish to read the full story please click here.
The big takeaway then is that fixing red tape is a battle of attrition, where the idea of status quo has to be worn down. At present change is top down. The big shift will come when the rank and file fall in line. Yes it will take time.
But till then the government and its leadership will have to continually chip away at the old edifice to make change a way of life for the bureaucracy.
Recommended Reading
Last week I wrote about how India has acquired a new soft power capability: Digital Public Goods.
It was published as the cover story in Open Magazine.
As a regular reader you will find these arguments familiar. But it is the first time that I looked at India’s newly acquired digital prowess as a source of soft power.
“ON JUNE 1, a group of government leaders, international development organisations and philanthropic funders converged in Oslo to pledge support to technology sharing and funding to forge a global digital public infrastructure—inclusive digital systems that, among other things, enable frictionless cash transfers, identification of beneficiaries and data exchange to achieve social good.
It was the soft launch of an ambitious plan to foster the use of Digital Public Goods (DPGs) to promote inclusive growth. The group banded together under the aegis of the Digital Public Goods Alliance (DPGA), a multi-stakeholder initiative seeking to accelerate the use of DPGs to achieve sustainable development goals (SDGs) in low and medium-income countries.”
“Given the growing global scrutiny of big tech and their platforms, India’s offer to share its phenomenal success with the Unified Payments Interface (UPI) is gaining attention.
And, unlike its previous offerings of soft power focused on niche cultural slices of India, DPGs are already part of an ongoing mainstream conversation. Effectively, India just acquired its most potent calling card in its growing arsenal of soft power.
The Oslo validation of India’s growing contribution to the emerging global conversation on DPGs is not a one-off.”
Please click this link if you wish to read the entire story.
Till we meet again next week. Stay safe.
Dear Anil,
A very appropriate conclusion to last week's article. Our country is ridden with so many problems, conflicts and controversies that I wonder if anything will ever be achieved in spite of the good intentions and steps taken by the government!!
The picture by Pradeep Padmanabhan is very unique. Photo of Ambedkar in a poor self employed person is very unusual!!
I do wonder about SPACS and how those matter to india. Neither target company quality nor sufficient protections exist in india as I see. I found the CB Insight report useful.
https://www.cbinsights.com/reports/CB-Insights_What-Is-A-SPAC.pdf?utm_campaign=marketing_campaign_q3-2020_finserv&utm_medium=email&_hsmi=97393355&_hsenc=p2ANqtz-9IiLp0EpIMLUBM7X1R2mr02fqieojd2dzNF-_KJ19OYfEsdjt17ZI9ETLqOPTH3K00gluU7bn0fzSPoYvKhe45KPPIQQ&utm_content=97393355&utm_source=hs_automation