Unshackling Indian Industry

Report of the Special Subject Group

Members :

Shri Nusli N. Wadia ( Convenor )
Shri Ratan N. Tata

Preface

Broad Objectives

Investment-promoting policy framework : Industrial policy must be well thought out, unambiguous, and stable, so that entrepreneurs can clearly assess the business risk and make investments with confidence.

Improve the Efficiency of Resource Use : The overriding aim of industrial policy and legislative reforms should be to sharply raise the efficiency levels of resource utilisation.

Sustained High Industrial Growth : The Government should aim at creating an environment to achieve 9-10% industrial growth over the next two decades.

Higher Share in Global Exports : Manufacturing exports’ share in world trade must increase to 1%, and Indian products and services should capture 5% of global software exports within the next 5 years.

Adoption of Global Best Practices : In all areas of business – accounting, environment, labour, taxation, etc. – Government should adopt and encourage enterprises to adopt global best practices.

Global Competitiveness : Hurdles in the way of industrial competitiveness should be removed, and the aim must be to match global competitiveness levels within the next 5 years.

Elimination of Corruption : By making regulations and procedures simple and transparent, the scope for corruption can be considerably reduced.

Also, the Report has drawn considerably from earlier ones, particularly the Report of the Task Force on Administrative and Legal Simplifications (Kumarmangalam Birla Report) and the Report of the Task Force on Administrative Reforms (CII).

The Report is organised into three parts :

Pre-operational Stage,

Operations Stage, and

Business Restructuring / Exit

Pre-Operational Stage

The administrative set-up continues to be large (about 16 ministries dealing with industries) even after deregulation and marked by poor inter-Ministerial co-ordination.

As a logical fallout of deregulation, the number of Ministries still regulating various industries can be rationalised. An independent Committee / Commission could be set up to suggest the necessary changes.

The administration should be oriented to act as a change agent for facilitating the growth of investment and enterprise.

Better inter-Ministerial as well as Centre-State co-ordination should be ensured for effective policy implementation.

Administrative mind-set still largely control and power oriented.

In the changed administrative set up, emphasis should be to change the mind-set of officials oriented towards facilitating the growth of investment and enterprise.

The scope for discretion in rules and procedures should be minimised. Officials should be made accountable for delays in processing beyond a declared response period.

Increased self-regulation by enterprises based on compliance audits by professional accredited agencies should be facilitated.

Low penetration of information technology adding to delays in processing of applications and compliances.

The process of computerising government records and inter-connecting administration at all levels should be expedited.

Efforts should be made to move over to electronic communication and less paper-based administration.

Efficiency in public administration should be promoted by periodic appraisals based on a set of criteria measuring promotion of industry, investment, industrial growth, etc.

Numerous clearances, and the lack of well-defined compliance requirements for obtaining approvals, become a source of delays and additional 'transaction costs' for new projects.

Illustratively, for setting up a typical medium to large-size manufacturing unit, over 30 approvals from different authorities are required, involving significant, time consuming paper-work (See Appendix I)

Procedures for obtaining various clearances can impose considerable time-costs on projects.

Government should have a clear cut compliance policy defining in unambiguous terms the list of compliances which an investor has to meet. If the investor has met all the requirements as embodied in the policy sanction should be forthcoming automatically.

It is understood that the P. C. Jain Committee has reviewed this matter and made suitable recommendations, which should be implemented within a time-bound schedule.

Network the Central Government Departments with each other as also the State Government Departments. Also network the Central and State Government. This would result in better Centre - State exchange of information leading to faster response by the Government.

Introduce a "Paperwork Reduction Act", which would result in reducing paperwork through use of information technology, thus, enhancing efficiency of the government. Computerised processing of applications should be used throughout the administration, including at the level of States and local authorities.

It should be made mandatory on Government officials to indicate any deficiency in an application within one week of submission.

Where several Ministries / Departments are involved, there should be a single authority to deal with issues and dispose them off within a given time-frame.

Issue : Land Acquisition Process

Complex and time consuming land acquisition process, leading to slow pace of projects implementation at the State and local levels.

Set in motion the process of computerisation and updating of land records with names of owners, area, exact location etc. (as done in Andhra Pradesh). The Centre may give some incentives to the States to accelerate this process.

States could help by simplifying laws governing land acquisition and its usage. For large projects, State Governments should give a single-window clearance, after which the local authorities must facilitate speedy implementation.

For providing supportive infrastructure for developing industries, States should spell out the terms for private development of infrastructure (access road, water, telephones, electricity etc.).

Many projects, especially in the infrastructure area, are often stalled because of environmental objections, even after the necessary environmental clearance has been obtained.

All objections to a project on environmental grounds should be invited within a specified timeframe prior to granting the clearance. Once the concerned authority gives the environmental clearance, no objections should be allowed.

In the case of public infrastructure projects, the Government should invite bids from private parties only after the environmental impact analysis is conducted and approved by the concerned agencies, and environmental compliance requirements clearly stated.

Issue : Discretionary Powers

Present rules and regulations contain substantial element of discretion which is a source of harassment to industry.

System of inspectorates should be gradually replaced by moving to professional audits for all compliances carried out by accredited certifying agencies.

Government should address rules and procedures that require multiple permissions for the same activity. For example, for captive generation, a unit has to obtain separate clearances / permissions / licenses for fuel storage from local Gram Panchayat, Police, PWD, District Collector, Controller of explosives, etc. These permissions should be automatic once the captive generation is allowed.

The possibility of outsourcing some regulatory functions of the Government should be considered.

Filing a multitude of forms to conform to statutory regulations is time-consuming and a waste of Corporate manpower. In many cases, the information sought is no longer relevant. Hence, compliance forms need modifications and changes. (On an average an undertaking has to file about 40 Reports annually. See Appendix II).

Companies should be allowed to file returns annually in a suitable format, based on self-declaration and a compliance status certified by independent accrediting agency. This procedure should be deemed to be compliance.

No reports or returns to be filed during the year, except in the case of certain events. (like, accidents, deaths, fire, etc.). Otherwise, returns during the year to be filed only in the event of exceptions like fire, deaths, accidents, etc.

A compliance statement signed by the Managing Director of the company should be appended to the company’s audited annual statement of accounts, certifying that the company has complied in filing all statutory returns.

Issue : Excessive Time Spent in Processing Returns

Processing of excise, sales tax and customs returns by the government takes an inordinately long time.

Government should move to adopting IT more intensively in all its departments.

Target a time frame for computerising various forms, say at a rate of 10% every month.

Rapidly move to electronic filing of returns through the Net.

Government’s response time to various returns / forms to be capped at about 4-6 weeks.

No response by this time to be taken as a deemed approval.

Issue : Judiciary

It is common knowledge that the wheels of justice grind slowly. Courts are thoroughly over-burdened with a huge backlog of cases which has resulted in cases taking an extremely long time to be dispensed with.

Recent amendments to the Civil Procedure Code (CPC) seek to limit the incidence of appeals to higher courts. This approach, along with measures facilitating arbitration, needs to be pursued so as to reduce the burden of cases on the judicial machinery and thereby accelerate the dispensation of justice.

In order to reduce the over-load on the judiciary, it is also suggested that the Government should :

The Government should set up a Task Force to study in detail the various problems hampering the judiciary and recommend changes for faster dispensation of justice.

Issue : Contract Labour

Industry needs Government’s help in the law relating to contract labour. The Contract Labour (Abolition and Regulation) Act 1970, (CLARA) is a Central enactment, but State Governments have rights to abolish contract labour in any industry in any part of their State.

Contract labour employed for casual work through independent contractors have often been made permanent employees of that company by the law courts; thereby burdening the company with additional wage costs, since the workers were engaged in casual labour on the Company's premises.

Regulate contract labour in various industries to non-core activities of a company and not abolish it. This should be made explicit in CLARA by amending the relevant portions of the Act. The clause should clearly define that contract labour cannot be utilised in the concerned company’s continuous manufacturing process and should be relegated only to a company's non-core areas.

Some important issues at the operations level faced by most companies have been highlighted: -

Income Tax

The first stage of appeal after assessment is with the Commissioner (Appeals). He is a department man and is only a transitory holder of the post. He is sourced from the department. By and large, the stage of the Commissioner (Appeals) lacks objectivity and it is not independent and is subject to department influences and pressures.

Abolish the Appellate Commissioner stage. The first stage of appeal should be to the Tribunal, which is independent, and a Quasi-Judicial Body.

The courts, which are already overburdened with litigation also, handle thousands, of tax cases, which lie pending for a long period of time. Differing and varying judgements are handed down by the different high courts which ultimately only get settled at the level of the Supreme Court

Establish Central tax Courts, which will deal with all income tax cases and will be the appellate authority for appeals from the tribunal level. Findings of these courts will be final and appeal to the Supreme Court will be only for Special Leave and on matters relating to the interpretation of law.

Demands made by the Income Tax Department, even though disputed, become immediately due.

Officers’ demands should be enforceable only after the appeal is confirmed by the Tribunal.

Issue : Review of Incentive and Exemption Provisions:

Direct tax laws contain a number of incentives and exemptions. While some of these provisions are intended to serve valid economic, social and charitable objectives, these simultaneously complicate the law, leading to a number of audit objections and litigations; and create needless distortions across different classes of assesses. Further, there have been no empirical studies to ascertain whether such benefits by tax give-aways have produced the intended benefits.

The existing incentive, exemption and deduction provisions should be thoroughly reviewed critically to find out which of these deserve to be continued in the Act on the ground that they are achieving the desired objectives. Those that are not serving any valid objective should be removed.

Equally, those that encourage savings should be examined further to broaden their coverage and make these more attractive to the tax payers.

In future, whenever an incentive or exemption provision is introduced, there should be a proviso that its working would be reviewed after five years, and would be continued only if it is found to have served the necessary purpose.

A Task Force consisting of independent professionals and members of CBDT should be formed to rationalise and clearly spell out various permissible deductions and exemptions.

Recommendations made earlier with regard to the appellate procedure for income tax should be followed in the case of excise customs duty. In other words, the first level of appeal before the Commissioner should be dispensed with. The first level of appeal should be with CEGAT and the final appeal will be only under Special Leave with the Supreme Court.

Under Section 14, GATT Valuation Cell Industries Act, Rule 1988 - "Determination of price of imported products", the collaborating company has to prove to the customs that it has sold a product to its Indian counter part at a price not below the prevailing market price. If not, the Bill of Entry is only "provisionally" cleared.

Often, Indian Companies import products from their collaborators as part of a collaboration agreement and not for sale in the open market. Hence a market valuation of the product is not possible. In such cases the government should appoint chartered valuers to certify the intended usage of the product and its value.

During the Jan-March quarter the customs (& Excise) authorities in their zeal to optimise their revenues "direct" companies to "contribute" to their efforts through advance payments.

The government should be more IT oriented. Applications to the revenue Department by the companies should be through the electronic media. Payments should be made over the net and receipts obtained accordingly. This should have the effect of saving manpower, costs and time and at the same time lessen direct contact with the concerned officials.

The Government should change the performance evaluation system of its employees so that it is de-linked from the amount of revenues garnered and should be based more on a system of compliance/collection.

Lack of co-ordination between the Ministry of Finance (MoF) and Ministry of Commerce (MoC) - has led to multiple interpretations of duties leviable on products.

There should be one single agreed upon uniform classification of goods between the MoF & MoC. (When the importer is in doubt he should go in for an advance ruling within 30 days). In matters of foreign trade and import policy, MoC's notifications should be binding on the MoF. If need be, MoC could consult MoF prior to notification issue. But once notification is issued, it should be binding on all the Govt. Departments.

 

Business Restructuring / Exit

Some analysts present the issue of restructuring and possible exist in terms of a conflict between two objectives - overall employment generation in the economy vs. protecting organised labour (accounting for just about 8% of the employed labour force). The fact is that current policies have mainly worked to further the latter objective at the cost of the former. This bias needs to be redressed.

As per the Industrial Disputes Act, 1947, [sections 25(M), 25(N), 25(O)] a factory establishment employing 100 or more workmen needs to obtain prior permission of the appropriate government (generally the State Government for private enterprises) for closure or retrenchment / layoff. Usually, State Governments turn down such applications. The employer, then, has to plead the case through the High Court and Tribunals.

Tribunals are overburdened with cases, as the judicial infrastructure has not kept pace with the growing number of cases. Typically, closure through this route takes anything between 3-15 years, during which substantial erosion of the value of assets takes place.

The above factors effectively imply a virtual lack of an exit route.

Amend the Industrial Disputes Act to allow an industrial unit to close down / retrench / layoff employees without seeking permission from any Government, provided mutually agreed compensation is paid to the employees.

In order to ensure that a small group of workers does not veto the discovery of a mutually agreed compensation package, the consent of 75% of the workers to the agreement should be deemed sufficient. Such an agreement should be made binding on all the workers.

In order to ensure that this freedom is not misused by employers, there should be a provision for employees (or their representatives) to appeal against the retrenchment or layoff in a tribunal on a post-facto basis. If it is found that the action is unjustified / vindictive, then the employer should be made to pay a substantially high punitive compensation to the employees in addition to the normal compensation.

[ A retrenchment or layoff may be defined as unjustified if employees are retrenched without any valid (economic) grounds to do so. Typically, an unjustified retrenchment would be accompanied neither by reduction of activity nor by the use of better technology. For instance, such a situation may arise where the employer fires a so-called ‘problematic’ group of employees and replaces it by hiring new employees or burdening further the remaining employees. The tribunal may be empowered to determine the ‘justifiability’ of retrenchment / layoff. ]

Set up and encourage training centres for facilitating rehabilitation of retrenched employees. At the time of retrenchment, a ‘re-skilling’ facility should be offered to the workers. For those workers who opt for such training, payment should be made directly to the training centre. The required resources can be raised through contribution of a small proportion of the entire compensation amount.

The scope of the National Renewal Fund (NRF) should be extended to the private sector also. NRF’s infrastructure may be strengthened so that it facilitates rehabilitation of employees more effectively in the following ways:

The current BIFR mechanism has not served its purpose of expeditious revival or liquidation. Substantial delays are involved in arriving at a decision. This creates a moral hazard problem, where acquiring the ‘sick’ status ensures greater payoffs for those promoters, who have no serious intention of continuing the business, and only desire to make quick money. Also, it leads to more non-performing assets in the financial system.

We recommend a time-bound bankruptcy procedure with BIFR’s role as a facilitator, rather than as a Court. Three options in case of a sick company - viz. rehabilitation, sale of the company and winding up - should be explored in a time-bound manner so that failure in finalising the first option within a specified time automatically leads to exploration of the second option; and then the last one. BIFR may be empowered to enforce a stay on the claims of the creditors only for a specified period (maximum 3 months) while all these options are being explored. The entire procedure should be completed in about 3 months as outlined below -

After the Court issues winding up orders, the Official Liquidator (OL) takes charge of the winding up and asset disposal procedure. There are many stages involved in this: inspection of assets, ascertaining claims of creditors and employees, appointing security agency, valuation of assets, fixing of reserve price, advertising the tenders and the bidding process.

Amidst this process, the OL has to approach the Court for directions at different stages. Delays involved in the process are glaring. In a typical case, the winding up procedure takes between 3-10 years. Delay has twin effects:

The winding up procedure requires crucial information from ex-directors of the company. In many cases, such co-operation is not forthcoming. It seems that ex-directors often create difficulties in the winding up process, for instance, by creating bad titles of assets. In a few cases, ex-directors are accused of being involved in the pilferage of assets.

The official liquidator machinery is not well equipped with modern communication technology and computers. Their staff strength has also not kept pace with the increasing number of winding up cases.

It is recommended that a ‘Liquidation Authority’ be formed by the Court for administering the process of liquidation of the concerned company. The committee would include: apart from the OL, representatives of the concerned parties, viz. lenders and employees. Thus, lenders and employees, who are the potential beneficiaries of an early completion of the liquidation process, would be involved in the liquidation process.

Because of consideration of their own potential benefits, these representatives would:

The ‘Liquidation Committee’ proposed above would largely eliminate the possibility of wrongful deeds in the liquidation process. Also, the process would have the sanction of the major concerned parties, which would eliminate largely the possibility of objections at various stages. Hence, there would be no need to approach the Court for directions at various stages. The Court may, then, be approached for clearance only after the entire process is completed - at the point of final sale of assets.

Enhance Infrastructure of the official liquidator.

Business Restructuring

The Industrial Disputes Act is not explicitly clear on the redeployment of employees by the employer. In a dynamic business environment, such redeployment often becomes necessary. There have been instances where employees have refused to be transferred to a different area of activity, hampering the restructuring of the business.

It should be explicitly clarified through amendment of the Industrial Disputes Act that employers have a right to redeploy their employees, provided the working conditions of the employees do not deteriorate and the employer arranges the required retraining facilities for them. The employer should have the right to terminate those employees who refuse redeployment.

Transfer of an undertaking attracts a very heavy burden of stamp duty on an ad-valorem basis. Also, there is a wide divergence in the stamp duty rates imposed in different States reaching as high as over 20 per cent in a few States. Thus, in most cases, stamp duty burden at the time of transfer runs into crores of rupees.

In order to encourage the process of corporate restructuring, it is essential to bring uniformity in the duty structure in different States; and also reduce the duty burden. We, therefore, recommend that there should be a cap on the ad-valorem percentage of duty as also on the absolute upper limit. These rates should also be uniform across States. Although this is an issue at the State level, having a bearing on State revenues, the Centre may take some initiative - following the welcome initiative taken recently for bringing uniformity in the sales tax structure.

If the registered offices of the transferor and transferee companies are located in different States, then two different petitions are required to be filed before two different High Courts. High Courts are already burdened with a huge backlog of cases. Thus, a lot of time and expense is spent in the process.

Establish judicial benches of experts under the Company Law Board (CLB) and transfer to them the powers currently vested with the High Courts in matters of restructuring, mergers, acquisitions, demergers, etc.

Even after an order for transfer of an undertaking is passed, endorsing numerous permits (relating to pollution, electricity, water, mining lease, etc.) in favour of the transferee company requires a tedious process of approaching various governmental agencies at different layers, often resulting in a delay of 6-12 months.

Order of the CLB regarding transfer of the undertaking should also cover aspects related to transfer of property, permits and approvals, so that the transferee company automatically acquires the permits and approvals obtained by the transferor company.

Executive Summary