Can India be the pied piper that entices foreign companies out of China?

For nearly a decade and half, India has been the China-in-waiting. The world’s back-up or the next manufacturing center. There have been many discussions and writings through this period that have urged India to get its act together and provide that alternative to China. Not for the lack of will but its implementation, this move just did not happen and China continued to flourish and gain global supremacy in manufacturing. However, recent events including the disruption caused by the Covid-19 pandemic have once again opened an opportunity for India.

In a recent public address to the nation, the Prime Minister, while announcing a stimulus package of Rs.20 trillion, emphasized that the Covid-19 pandemic has given India a chance to turn the crisis into an opportunity. In subsequent announcements that were to follow with the details of the stimulus package, the Government’s clear emphasis has been on land, labour, liquidity and laws. India’s land and labour laws, stable governance and other policies have also been the subject of global scrutiny over the years including by the World Bank in its assessment of India’s ranking in the “Ease of Doing Business”.

Easing business

While recent Government efforts and reforms (including in areas of starting a business, dealing with construction permits, trading across borders and resolving insolvency) have been acknowledged by the World Bank and have resulted in India’s ranking rising to 63 in 2019, up 79 places from a few years back, that hasn’t in itself convinced companies to leave China in any rush. For India to then entice foreign companies to exit China and set-up manufacturing operations in India requires a comprehensive review of certain legal and policy issues that are perhaps holding India back and what India is doing or can do about it.

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Easing incorporating companies

India has done well in encouraging foreign companies to invest in India with a strong “Make in India” campaign and permitting 100% foreign direct investment under the automatic route (i.e., without any Government approval) in the manufacturing sector (including contract manufacturing), other than from a neighboring country. India has also made a lot of progress towards starting a business in India, considerably reducing the time for incorporating a company by introducing a simplified common online form for name reservation, incorporation as well as certain other approvals. Once the completed form is submitted, a company can be incorporated within a few days. However, the process remains cumbersome for foreign companies because a lot of information and documents is required for completion of the form, many of which need notarization and apostille from the Indian embassy in the foreign country. Further, the requirement of identifying a registered office within 15 days of incorporation and requiring a resident director to be identified and appointed at the time of incorporation may be something routine for companies already operating in India but for companies establishing a presence for the first time, these issues could lead to delay in the incorporation process. The Government should consider permitting extended timelines after incorporation and setting-up of operations for new foreign companies entering India to comply with such requirements.

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Know Your Customer norms

After incorporation, the almost immediate next challenge faced by foreign companies is the process to open multiple accounts with banks in India (to receive investment funds, for operations, to hold shares in electronic form, etc.). Pursuant to the Prevention of Money-Laundering Act, 2002, the Reserve Bank of India (RBI) has prescribed stringent Know Your Customer (KYC) directions for risk assessment and customer identification. The KYC requirements of banks are at most times reparative but not always standard. Use of digital banking through the use of Aadhaar linked information, digital signature for KYC and video KYC, while permitted as per the RBI directions for domestic companies and individuals, the KYC requirements for foreign companies and individuals are more onerous with the RBI mandating physical verification of documents and thereby requiring KYC documents from foreign companies and individuals to be notarized and apostilled. While the importance of KYC to prevent fraud and money laundering cannot be undermined, the RBI and the Government could do well by perhaps considering a central depositary of records and information which may be utilized by more than one bank and even other Government agencies. Of course, concerns of data privacy and due authorization will need to be managed, but this could simplify the process of opening bank accounts and undertaking regular banking operations. This is also an area where technology needs to play an even bigger role (than current usage) and banks must streamline their systems to provide better and more efficient service to their clients.

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Easing land availability

Another area where the use of technology needs improvement is in the recording of land records. The Government has recently announced its intention (see below) to use a geographic information system (GIS) based platform to create a digital network of land bank at the national level to assist foreign investors in a transparent and competitive digital search for land parcels. However, given the size of India and non-standard records across different States, matching land records with geographic systems is a big challenge for any administration. As per the World Bank report, India is ranked 154th for registering property and it takes 58 days and costs on average 7.8% of a property’s value, which is longer and at a greater cost than among OECD high-income economies. The absence of clear and digital title records and acquiring farm land in key strategic locations for industrial and infrastructure purposes has long been a problem for corporates (both domestic and foreign) in India. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (LARR Act), was introduced with an intent to balance the interests of landowners with India’s desire to make more land available for industrial and infrastructure projects but land acquired pursuant to this enactment has often been subject to judicial challenge by farmers or land owners, leading to delay in project timelines and costs.

Accordingly, the Government, which along with its various ministries and departments is the biggest land-owner in India, should consider monetizing its existing land holdings to help set-up manufacturing facilities by foreign companies. In the recent announcements made by the Finance Minister of India while giving details of the above-mentioned stimulus package, it was mentioned that India is making available industrial land/land bank for promoting new investments in 3,376 industrial parks/estates/special economic zones (collectively, industrial clusters) comprising 500,000 hectares through the GIS based platform. While the availability of such land bank is encouraging, it requires further scrutiny and clarity from the Government on the kind of land offered and the opportunities around it. Foreign companies looking to set-up manufacturing facilities in India would not want to get strangled with long litigation over title disputes on the land after incurring high capital expenditure to set-up such manufacturing facilities. Through industrial clusters that offer State-owned land, the Government can safeguard foreign companies against any title issues. Other related issues arising from the LARR Act, such as compensation to land owners, rehabilitation and resettlement of affected persons, etc. should also be resolved and managed by the Government rather than the incoming foreign companies.

Making available land in industrial clusters will not in itself suffice and large foreign companies are unlikely to move their operations to India only because the land is made available. Such land must be strategically located and be accompanied by necessary infrastructure including power, water and availability of suitable labour. Access to roads and ports to enable connectivity with the domestic and international supply chain is equally important. It would also make sense for each industrial cluster to have its own customs clearance office to reduce clearance time and increase operational efficiencies. While India has done well in reducing its corporate income-tax rate, the Government must re-look at India’s relatively high tariffs on imports, particularly for components and semi-finished products being imported only for re-export. Any tax benefits (especially for exports) that India offers will be a welcome reform addressing a long-standing demand from foreign companies. A trade deal (free trade agreements) with certain preferred partner countries and tariff relaxations for companies from those countries is not something India can afford to push for too long.

Speeding up common industrial approvals

Additionally, these industrial clusters should also offer one stop approval for manufacturing operations. Of course, certain approvals like a fire license can only be obtained after the manufacturing facility has been set-up. However, to the extent possible the Government should consider a combined application for certain common industrial approvals, such as under the factories act, getting a power connection and environmental approvals, with all manufacturing facilities in such industrial clusters being pre-approved and the common form only requiring minimum relevant information. This would significantly reduce the time and cost of setting-up operations.

Labour laws

The existing labour laws in India have often been described as myriad and archaic with both Center and State having the power to enact legislations. The Unified Shram Suvidha Portal launched by the Government to facilitate reporting of inspections and submission of labour returns, has been envisaged as a single point of contact between employer, employee and enforcement agencies bringing in transparency in day-to-day interactions. However, the Covid-19 pandemic has thrown a new challenge and is resulting in a reverse migration of labourers in large numbers, and whether it is temporary or permanent will depend upon the opportunities State Governments can create for such labour in their respective States. The States need to act and act fast to provide meaningful employment and opportunities to the returning migrant labourers or face large scale unemployment. They have to work on establishing self-contained towns and cities with earmarked spaces for manufacturing, commercial, educational, residential and social infrastructure.

Perhaps for this and other reasons, we recently saw certain States (such as Uttar Pradesh and Madhya Pradesh) suspending most existing labour laws within their States through emergency ordinances with intent to attract foreign investment into the State and promote such activities. However, such ordinances have been strongly opposed by trade unions that see these as a way to curtail labour welfare and safety standards and have been challenged before the Supreme Court of India. While States compete to make their laws employer-friendly to promote industrial clusters, social infrastructure for employees around such industrial clusters should also be encouraged. Further, the Government has initiated the process of consolidating 44 existing labour legislations into four codes, i.e., code on wages, the social security code, the code on industrial relations and the occupational safety, health and working conditions code. While the code on wages has already received Presidential assent a while back but its effective date is yet to be announced, the remaining three codes are still under consideration by Parliamentary standing committees.

The Government should use its strength in the Parliament to ensure speedy implementation of the four labour codes which will make registration, maintaining records, reporting and compliance easier and labour policies more balanced between employer and employees, rather than allowing ordinances for temporary suspension of labour laws which are in for a long legal battle in the Indian judicial system.

Judicial reforms

Reforms in the Indian judicial system are long overdue for easing governance and enforcement. As per the World Bank report, India still lags in areas such as enforcing contracts where it is ranked 163rd and it takes 1,445 days for a company to resolve a commercial dispute through a local first-instance court, almost three times the average time in OECD high-income economies. The Law Minister of India had recently informed the Parliament that the total pending cases in the Supreme Court are over 60,000, the number of cases awaiting judgment in High Courts is over 4,600,000 and over 30,000,000 cases are pending before district and subordinate courts. Despite the heavy backlog of cases, a high number of vacancies continue to exist at every level of the judiciary.

Recent announcement by the Government to decriminalize offences under the Companies Act is a step in the right direction to reduce the burden on the Indian courts. A similar effort is needed to decriminalize non-compliance under many other business and labour legislations and replace the currently prescribed consequences for certain violations with monetary penalties. In addition to reducing the burden on courts, this will also give comfort to competent persons on taking director and officer positions within companies without worrying about personal liability for routine and procedural violations or offences. Along with increasing the capacity of judiciary to deliver quick resolutions, the role of technology in dispute resolution and e-governance should also be encouraged as much as possible. Most commercial contracts typically include arbitration as the preferred mechanism for dispute resolution and the Arbitration and Conciliation Act, 1996 now provides for a time-bound completion of domestic arbitration proceedings seated in India. However, foreign companies are still unfamiliar with the Indian arbitration process and prefer an international commercial arbitration. Be seated outside India in jurisdictions perceived as more stable. India has previously also expressed its desire to become a center for international commercial arbitration. However, uncertainty around restrictions for foreign lawyers to appear in such arbitrations in India among other reasons has prevented this idea from taking off at all.

In the post-Covid-19 world, the practice of using digital signatures may become more common. E-stamping of contracts already exits as an option in some States and should be promoted more. In fact, the colonization era Indian Stamp Act, 1899 needs to either be done away with completely (and the loss of revenue offset in other innovative ways such as higher enforcement or court registration fee) or at least needs an overhaul, similar to the GST regime. It is time for the Government to think about one nation with one universal set of rates of stamp duty applicable to all States. Of course, the politics around the implementation of GST means that another legislation that requires sharing of revenue between Center and States will not get implemented in any hurry. However, the inconvenience of multiple stamp duty rates across different States, which often leads to forum shopping by parties to choose the most favourable venue to execute contracts, and the fact that executing a contract in one State and carrying it to another State in India may also require payment of extra stamp duty are so archaic as concepts in an era of executing contracts digitally and through counterparts, that I strongly urge the Government to consider this area as the next big reform to ease contractual enforcement and business generally in India.

Speed is of the essence

While all the suggestions above are complex and would require detailed planning and more discussion, unfortunately, India may not have the luxury of time to wait longer as it competes with other southeast Asian countries such as Vietnam, Thailand and Taiwan for any business exiting China. Moreover, China will not roll over easily and will try its best to make it lucrative for foreign companies to stay rather than simply watch while foreign companies leave its shores. In a year of global recession where balance sheets of most foreign companies are fractured, relocating entire operations will require a strong impetus and promise of a flawless implementation upon entry by India. However, geo-political considerations will play a critical role and have on decisions by some foreign companies and I certainly agree with the Indian Prime Minister that it is time for India to convert crisis into an opportunity but it is also time for India to play the musical pipe that foreign companies have been longing for India to play and undertake broad-based structural reforms to establish itself as the new manufacturing center for the world.

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The author, Mohit Gogia, is a corporate lawyer and Partner at S&R Associates

(The views and opinions expressed are the personal opinions of the author. The facts, analysis, assumptions, and perspective appearing do not reflect the views of Republic TV/ Republic World/ ARG Outlier Media Pvt. Ltd.)

Image credit: PTI