There are not many global indices in which India holds a decent ranking but ease of doing business is different. The country has made steady improvement in it in the last couple of years.
India jumped 50 points in just two years to notch 77th position in World Bank’s Ease of Doing Business (EOBD) ranking. WB ranks economies on definite parameters such as procedures to be followed for starting a new business, formalities for construction permits, timelines for electricity connection for an industrial unit, hassles in getting immovable property registered, delay and requirements in availing of credit facility, modalities in protecting the interest of minority shareholders, tax regime, government policies in doing cross-border business, ease of enforcing a contract and procedures to recover debts through insolvency laws.
Ease of starting a new business: India’s ranking in starting a new business as a stand-alone parameter is still 137. The rank given is based on the cost of starting of a new business, minimum paid-up capital requirement, procedures to obtain necessary approvals, notifications, verifications, inspections for the company and employees from various authorities.
If we see the practical side of starting a new company, it starts with the formation of a business entity, such as limited liability company, limited liability partnership, partnership firm and sole proprietorship. The widely accepted and commonly used business platform in the country is private limited company.
To start a new company, all directors have to obtain digital signature certificate, director’s identification number, obtain the approval of the desired name for the company and file forms with the registrar of companies. At macro level, the picture is now very rosy and effective. Obtaining the approval for the name is still under bureaucratic clutches and the delay in most of the cases is on frivolous grounds.
The ministry of corporate affairs is clueless on many matters. The new ordinance brings back formalities for starting a business, once taken out due to the delay factor. Furthermore, most of these stringent provisions like maintenance of registered office and certification are getting attached to the law to satisfy the lobbying of professional bodies.
The ministry could simplify corporate laws and reduce dependency on certification requirements by professionals at least for companies with lower turnover and lesser capital base. Companies and promoters spend time and money on compliance and audit-related matters. Improving this will help the country scale up the overall ranking up to 50.
Ease of dealing with construction permits: On this parameter, India ranks 52, comparatively a better position. Procedures for a business in the construction industry to build a warehouse along with the time and cost to complete each step have been taken into account. In addition, doing business measures the building quality control index, evaluating the quality of building regulations, the strength of quality control and safety mechanisms, liability and insurance regimes, and professional certification requirements. Information is collected through a questionnaire. Doing Business records procedures for obtaining connections for water and sewerage. Procedures to register the warehouse so that it can be used as collateral or transferred to another entity are also counted.
Ease of getting electricity connection: The ranking in this category is 24. Parameters include procedures for a business to obtain a permanent electricity connection and supply for a standardized warehouse. This involves applications and contracts with electricity utilities, inspections and clearances from the distribution utility as well as other agencies and the external and final connection work. The reliability of supply, transparency of tariffs and price of electricity was also considered to gauge the performance. The government’s steps towards making electricity available to all villages had contributed to higher ranking.
Ease of registering property: A business unit or an entrepreneur is concerned about formalities and risks attached to the registration of property, formalities for the disposal of property and possibilities of availing of loan against such property. The growth of a business / industrial unit depends on the availability of the land to expand its operations and making it available will help a nation improve its business-friendly image among investor communities. The ranking 166 exposes systemic fault lines. Dealing in land is a matter within the purview of states. States have to relook at overhauling the registration system of land, a matter of grave concern among investors.
Ease of getting credit: Finance is the lifeblood of commerce. The availability of the loan funds largely depends on government and central bank policies. Rights of borrowers and lenders have to be protected with adequate laws. The credit worthiness of a borrower is arrived at based on the information given by credit rating agencies. The ranking of 22 reflects the positive steps taken by the Government to streamline this segment.
Protecting minority investors: The ranking at 7 has been the result of Government reforms at macro and micro levels, especially disclosure requirements for related party transactions, shareholder’s role and rights in major corporate decisions, minority shareholder’s ability to sue and hold the interested directors liable for prejudicial related party transactions, access to internal corporate documents, governance safeguards protecting shareholders from undue board control and entrenchment, corporate transparency on significant owners, executive compensation, annual meetings and audits.
Ease of paying taxes: The ranking of 121 in this category was based on the taxes and mandatory contributions that a medium- size company must pay in a given year as well as measures of the administrative burden of paying taxes and contributions and complying with post-filing procedures. Other factors such as number of hours per year to prepare and file returns and pay taxes and the number of tax payments per year were also determinants. Even with the introduction of GST, we are among backbenchers. The higher slab fixed for the GST for many items, requirement of filing of numerous returns, complexity in tax compliance, tax audits and checks may have adversely affected the performance of the country in this area.
Cross border trading
Growth of an economy is directly linked to the foreign trade relationship it is having with other countries or regions. Exporting and importing of goods and services play a vital role in international trade and commerce and the procedural and other related formalities to carry out the trade are one of the parameter to assess the ease of doing business ranking. Rank of India is cross border trading is 80. The time and cost for domestic transport is not covered under the scope of ranking as that can be affected due to several external factors. The reforms made in trade policies is one of the major reason for getting a better ranking in this parameter and further refinement and fine tuning will help us to improve the ranking it that segment.
Ease of enforcing contracts: Business and contracts are intertwined with each other. The time and energy spend on the enforcement of terms of contracts in case of a dispute is enormous. Furthermore it is quite expensive. The ranking in this segment is 163, quite disappointing. Moving the jurisdiction of the company cases from high courts to National Company Law Tribunal is a welcome move. The introduction of commercial courts may further improve the ranking of the country in this category.
Ease of resolving debt: This is one of the major concerns of any new entrant to Indian market. Recovering the debt was nothing but endless running from pillar to post up to the advent of Insolvency and Bankruptcy code 2016. It is an adaptation of the UK Law and the judicial and professional ecosystem in India is yet to cross the infancy stage. Under the law, companies and LLPs can face insolvency proceedings if they default in repaying their debt, which is more than Rs 1 lakh. With the notification of Part III of the Act, individuals and partnerships will also be covered. In days to come the Insolvency profession will become mature and will lead the journey of India to higher rank, from its current 180.
(The author Bijoy P Pulipra is a practising company secretary and insolvency professional. He can be contacted on bijoy@artismc.com)
