Ease of Doing Business In India - Article Published in Chartered Secretary December, 2015 Issue

(Published in Chartered Secretary December 2015 Issue)
Ease of doing business in India has many important areas starting from the stage of setting up of the business enterprise by incorporation of companies to the stages of commencement of production, exit policies and the most significant aspect of expeditious resolution of business/commercial disputes.  For the purpose of this article, only some very significant changes which have been introduced in India with regard to expeditious incorporation of companies without the necessity to complete and comply with some formalities which were prevalent before these changes took place, and another important area, namely, the expeditious settlement of commercial disputes within a specified time-frame are being highlighted here. 
 
The recent changes have been introduced with a view to attract foreign investments in India since the predominant grievance of foreign investors has been concerned with the protracted and long-drawn litigation process in the Indian Courts which takes a number of years to get settled. In the backdrop of litigations that have been hurtful to the foreign investor, be it in the acquisition of natural resources in the country for operating/harnessing or the aspect of international taxation, the resultant situation had been fairly grim, with foreign investors exiting the Indian economy. That said, the sheer number of years it takes for any complex commercial or industrial dispute to get resolved in India has been adversely affecting our country’s prospects of attracting foreign investors.
 
In order to transform India from a ‘least favoured’ to a ‘most favoured’ seat of international arbitration after Singapore and London, suitable amendments to the existing Arbitration Act were contemplated. Subsequently, in a significant move, the Government of India, has, as recently as on October 23rd, 2015, promulgated an Ordinance known as “The Arbitration and Conciliation (Amendment) Ordinance, 2015” (“the Ordinance, 2015”) thus making many significant changes in the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”), which address the problems being faced by commercial litigants.  Some of these changes introduced by the Ordinance, 2015 are as follows:-
 
1. A fixed timeline has been fixed for the Arbitrators to resolve cases within 18 months and towards this end, a clause has been incorporated where-under, after the completion of 12 months, certain restrictions have been put in place to ensure that the arbitration case does not linger on. 

2. The Ordinance, 2015 has also amended the Arbitration Act and has introduced a cap on the fees payable to an arbitrator in the proceedings. 

3. Conflicts of interest, if any, shall henceforth be required to be spelled out by the arbitrator, as per the amendment, in respect of the case being taken up for arbitration. 

4. In order to ensure neutrality of arbitrators, it is proposed to amend Section 12 of the Arbitration Act to the effect that when a person is approached in connection with prospect of being appointed as an arbitrator, he/she shall disclose in writing about the existence of any relationship or interest of any kind, which is likely to give rise to justifiable doubts. Further, if a person is having specified relationship, he/she shall be ineligible to be appointed as an arbitrator. 

5. Insertion of a new provision that the Arbitral Tribunal shall make its award within a period of 12 months. Parties may extend such period up to six months. Thereafter, it can only be extended by the Court, on sufficient cause. The Court while extending the period may also order reduction of fees of arbitrator(s) not exceeding five percent for each month of delay, if the court finds that the proceedings have been delayed for reasons attributable to the arbitral tribunal. If the award is made within a period of six months, arbitrator may get additional fees, if the parties may agree. 

6. A provision for fast-track procedure for conducting arbitration has been proposed for insertion. Parties to the dispute may agree that their dispute be resolved through fast track procedure. Award in such cases shall be given within a period of six months. 

7. Amendment has been made to Section 34 of the Arbitration Act relating to grounds for challenge of an arbitral award, and to restrict the term ‘Public Policy of India” (as a ground for challenging the award) by explaining that only where making of award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian Law or is in conflict with the most basic notions of morality or justice, the award shall be treated as being ‘against the Public Policy of India’. 

8. A new provision has been added to provide that application to challenge the award is to be disposed of by the Court within one year. 

9. Amendment has been made to Section 36 of the Arbitration Act to the effect that mere filing of an application for challenging the award would not automatically stay execution of the award. Award can only be stayed where the Court passed any specific order on an application filed by the party. 

10. A new sub-section in Section 11 of the Arbitration Act to be added to the effect that an application for appointment of an Arbitrator shall be disposed of by the High Court or Supreme Court as expeditiously as possible and an endeavour should be made to dispose of the matter within sixty days. 

11. A new Section 31A is to be added for providing comprehensive provisions for costs regime. It is applicable both to arbitrators, as well as related litigation in Court. It will avoid frivolous and meritless litigation/arbitration. 

12. Section 17 is to be amended for empowering the Arbitral tribunal to grant all kinds of interim measures which the Court is empowered to grant, under Section 9 and such order shall be ‘enforceable in the same manner as if it is an order of Court. 

13. Apart from above, amendments in Sections 2(1)(e) , 2(1)(f)(iii), 7(4)(b), 8(1) and (2), 9, 11, 14(1), 23, 24, 25, 28(3), 31(7)(b), 34 (2A) 37, 48, 56 and in Section 57 are also proposed for making the arbitration process more effective. 
It becomes important to bear in mind that the reasoning behind legislating the said changes to the Arbitration Act stems from the need for ring-fencing arbitration proceedings from judicial intervention. Foreign investors exiting Indian business have not favourably looked at the powers of the Court to interfere and even overturn an arbitral award. The new law changes the situation dramatically. The Ordinance, 2015, says that the ‘Court’ will deal with the Arbitration rather than the ‘Chief Justice or his delegate’, which had previously been the position.
 
Further, in the presence of an arbitration clause in the agreement under dispute, the matter will now directly go to the Arbitration Tribunal, independent of the involvement of the Supreme Court, unlike the previous position. However, the limitations on the role of the Court can only gain further clarity by pronouncements by the Supreme Court on the issue.
 
As regards the aspect of the power to hear an application of arbitration, while previously only the Court could wield this power, henceforth, the Tribunal has been vested with the power to hear arbitration applications also, as the words “person or an institution” has been introduced in the Ordinance, 2015. Therefore, suitable Rules shall be required to be framed to ensure smooth enforcement of the provisions.  
 
While the parties of an arbitration proceeding were entitled to approach the Court to seek interim relief under Section 9 of the Arbitration Act previously, the Ordinance, 2015, gives the Arbitration Tribunal the same powers as that of a ‘Court’ for awarding interim awards in an arbitration proceeding. However, the Ordinance, 2015, also makes it abundantly clear that barring few exceptional circumstances, once an arbitration proceeding commences, the Tribunal or the Arbitrators shall not award any interim reliefs to the parties.
 
Another significant change introduced in the Ordinance, 2015, is that while previously, the Tribunal was bound by the arbitration agreement and could give an award only limited to the allowances made in the agreement. Henceforth, the Tribunal is required only to take note of the existing arbitration agreement in a dispute, but if the merits of the matter require so, it can, while giving the arbitral award, break free from the bondage of the arbitration agreement.
 
While the Ordinance, 2015, in the Seventh Schedule lays down the circumstances under which a person shall not be appointed as an arbitrator, the parties have under the new law, been allowed the latitude to seek waiver of the Seventh Schedule in their Arbitration agreement.
 
Importantly, with a view to address the issue relating to protracted arbitration proceedings spanning several years, under the new law if the Arbitral Award has not been made within the statutory period of time, then the mandate of the arbitrators shall automatically stand terminated.
 
Companies (Amendment) Act, 2015
 
On May 25, 2015, the Companies Amendment Bill, 2014 which had been passed by both the houses of the Parliament, received the assent of the President of India, and was notified in the Official Gazette on May 26, 2015. This is the first amendment to the relatively new enactment, i.e., the Companies Act, 2013 (“the Act, 2013”) that had replaced the erstwhile Companies Act, 1956.
 
With the issuance of the Companies (Amendment) Act, 2015 (‘Amended Companies Act’), by the Ministry of Corporate Affairs, certain sections of the Companies Act, 2013 stand amended and the key changes, inter-alia, have been explained as below:- 
 
1. The definitions of Private Companies and Public Companies have been amended. The requirement of minimum paid-up share capital (as per Section 2(68) of the Companies Act, 2013 - one lakh rupees in the case of a private company and as per Section 2(71) of the Act - ten lakh rupees in the case of a public company) has been discarded and henceforth, any company, be it private or public, can be incorporated without the requirement of having the minimum paid-up share capital. 

2. Previously a director of a company having share capital was required to file a declaration with the Registrar of Companies, declaring that the share capital of the company is not less than the amount prescribed for subscription and that each subscriber to the Company’s Memorandum has paid the value of the shares committed by him/her. This requirement of filing the declaration before commencement of the business or exercising its borrowing powers, have been done away with under of the Amended Companies Act, 2015.  Section 11 of the  Act, 2013 has been amended and consequential changes have been made in Section 248 of the Act, 2013.   

3. Under the Amendment Companies Act, the use of the common seal has been made optional and in the event a company does not have a common seal, any authorization can be done by either two directors of the company or by a director and a company secretary in case of a company that has appointed a company secretary. Thus, inter alia, Section 22(2) and Section 46 of the Act, 2013 have been amended. 

4. For protection of the depositors in a company, a new section, i.e., Section 76A has been inserted by the Amendment Act, which introduces penal provisions for contravention of Section 73 and Section 76 of the Act, 2013 pertaining to acceptance and return of deposits by companies. For such contravention, the company in addition to returning the amount of deposits accepted along with applicable interest rate, shall also be liable to pay a fine not below Rupees 1 Crore which may be increased up to Rupees 10 Crore. Further, every contravening Officer of the Company shall face imprisonment which may extend to 7 years or with fine of at least Rupees 25 lakhs or with both.  If such officer in default has been found to have wilfully committed the contravention, then he shall, in addition to the foregoing penal provisions, be liable for action under Section 447 of the Act (which deals with punishment for ‘Fraud’). 

5. To provide confidentiality of business information and commercial details discussed and approved by the Board of Directors of a company and decided by means of a Resolution, the new Amendment Act stipulates that no person shall be entitled under Section 399 of the Act, 2013, to inspect or obtain the copies of the Board Resolutions of a company that have been filed with the Registrar of Companies under Section 117(3) of the Act, 2013. 

6. A new proviso has been inserted in Section 123 of the Act, 2013, after the first two provisos, to the effect that no company shall declare dividend unless carried over past losses or depreciation in the previous year or years are set off against the profit of the company for the current year. 

7. For ease in doing business, especially with regard to related party transactions, a new proviso has been inserted in Section 177(4) of the Act, 2013 and as per the new proviso, the Audit Committee of the Company has been empowered  to give omnibus approvals for related party transactions on an annual basis. 

8. Another change which the Amendment Act, 2015 has incorporated in the Act, 2013 relates to Section 185 on “Loans to Directors”.  The change eases the provisions relating to loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries and its utilisation by the subsidiary company for its principal business activities.  

9. To allow flexibility to the companies in ease of doing business in respect of genuine commercial decisions, another  significant change  which has been made through the Amendment Act, 2015 relates to “related party transactions” and now Section 188(1) of the Act, 2013 has been amended and the requirement of approval by the non-related shareholders to the “related party transactions” have been allowed to be done through ordinary resolution, instead of  ‘special resolution’, which was mandated earlier.    

10. Further, another significant change has been made by amendment to Section 188(1) of the Act, 2013 and now “related party transactions” between holding companies and wholly owned subsidiaries are  exempt  from the requirement of approval of non-related shareholders. 

11. A new Section 435 was introduced in the Act, 2013 for setting up of Special Courts to try offences committed under the Act.  To avoid clogging the Special Courts with both minor and major offences, now the Amendment Act, 2015 changes Section 435 and 436 of the Act, 2013 and makes it clear that the Special Courts will try only those offences carrying imprisonment of two years or more.  This will hopefully speed up disposal of cases.  

12. The Act, 2013 inserted a new section 447 for trial of offences of “fraud” and very stringent provisions have been made thereto.  However, by the Amendment Act, 2015, changes have been made in Section 212(6) of the Act, 2013 which deals with investigation into affairs of a company by the Serious Fraud Investigation Office (SFIO) and obtaining “bail” was rather difficult.  By virtue of the Amendment Act, 2015, bail restrictions have been eased and now bail restrictions would apply only for offences relating to fraud u/s 447 of the Act, 2013. 

13. To speed up disposal of cases by the National Company Law Tribunal (NCLT), section 419 of the Act, 2013 has been amended and now it enables that  the winding up cases will be heard by a 2 member Bench of the NCLT, instead of 3-member Bench, which was mandated under the Act, 2013. 

14. Section 134(3) read with Section 143(12) of the Act, 2013 prescribed reporting of corporate frauds by the Auditors and the report of the Directors thereon in the company’s Board of Directors Report.  Perhaps not to scare away investors with unduly hyped corporate misdoings/frauds, necessary changes have been made, and now amended Section 143(12) provides that “notwithstanding anything contained in this section, if an Auditor of a company in the course of the performance of his duties as Auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the Auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed.  Provided that in case of a fraud involving lesser than the specified amount, the Auditor shall report the matter to the Audit Committee constituted under Section 177 or to the Board in other cases, within such time and in such manner as may be prescribed.  Provided further that the companies, whose auditors have reported frauds under this sub-section to the Audit Committee, or the Board, but not reported to the Central Government, shall disclose the details about such frauds in the Board’s Report in such manner as may be prescribed.”  

​15. Section 462 of the Act, 2013 empowers the Central Government, in the public interest, by notification to direct that any of the provisions of the Act shall not apply to such class or classes of companies or shall apply to the class of classes of companies with such exemptions, modifications and adaptations as may be specified in the notification.  The Amendment Act, 2015 has substituted sub-section (2) of Section 462 with a new sub-section, which enables faster process of giving exemptions to a class of companies and also rationalises the procedure for laying draft notifications granting exemptions, in the Parliament.   

Insolvency and Bankruptcy Code
 
In November, 2015, the Bankruptcy Law Reforms Committee (BLRC) submitted its report to the Government and recommended a single code of resolving the insolvency of all corporate entities, be they companies, limited liability partnership firms or individuals. The BLRC, in a radical move has recommended the removal of all laws dealing with insolvency of registered entities and replacing it with this uniform Insolvency and Bankruptcy Code. Towards this, the BLRC has submitted a draft of the Insolvency and Bankruptcy Bill, 2015 (‘Draft Bankruptcy Code’) to the Government for its views and further action. The Draft Bankruptcy Code, however, does not seek to replace all the existing laws relating to the subject, contrary to popular belief and it states under Section 234 of the Draft Bankruptcy Code that the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, both of which deal with individual insolvency, would be repealed.  
 
Significantly, the Draft Bankruptcy Code seeks to amend certain provisions of the Companies Act, 2013 which deal with insolvency and winding-up of companies. Owing to limitation of space, this article does not go into the details of such provisions. Other laws that have also been sought to be replaced by respective provisions of the Draft Bankruptcy Code include provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, the Limited Liability Partnerships Act, 2008, Recovery of Debts Due to Banks and Financial Institutions Act, and the Indian Partnership Act, 1932.  It is reported that the new Bankruptcy Code proposed by the BLRC seeks to make borrowers more accountable to their loan agreements with banks and financial institutions. This new law also gives banks more power in dealing with business/borrower companies that have failed owing to the default on loans by promoters. The Draft Bankruptcy Code also recommends and considers the NCLT  (which is yet to be made functional) to be the only forum where issues relating to insolvency of companies will be adjudicated.  Given the different statutes that lay down the powers and liabilities of both the borrower and creditor, having a uniform code for bankruptcy will aid in bringing transparency and interpretation of the laws and help in furthering the ease of doing business in India.  However, the Government has to clearly state the applicability of the Draft Bankruptcy Code, once it decides to enact the law, and whether the same will be prospective or retrospective and what will be the fate of the pending disputes.
 
CONCLUSION
 
The ‘Ease of Doing Business Index’ is an index that has been created by the World Bank. This index reveals how the world economies are ranked according to the ease of doing business within their geographical boundaries. While every country, including India, aspires a higher rating to indicate better regulations, easier clearance windows for business permits and a healthy enforcement mechanism, India has shown positive movement recently. India’s ranking has gained a 12 point jump on the ‘Ease of Doing Business’ Index. It has been reported that although many laws, including the corporate laws, namely the Companies Act, 2013 and the Arbitration Act, 1996 have been amended recently with a view to ease the conduct of business in India, the Union Finance Minister, Shri Arun Jaitley, has reportedly admitted the need for cutting down the number of permissions required for a business to function, so that the time lag between the decision to invest and the actual investment being made is shortened significantly. This calls for co-operation from the State Governments as well since the basic permissions such as availability of land, environmental permissions and sanction of building plans are all aspects that are currently the problem areas consuming a lot of time. The laws related to the aforesaid aspects need to be made simpler and the mechanism to provide permissions and approvals by the respective Central Government as well as the State Government bodies needs to be overhauled.
 
Apart from the World Bank ranking India at 130 out of 180 nations in the Ease of Doing Business Index, the World Economic Forum, too, has reported a similar improvement for India.
 
While it is a welcome move on the part of the Indian Government to have introduced significant and far-reaching changes to some of the key corporate laws in the country, including, as those highlighted in this article, the amendments made to the Act, 2013 and the Arbitration Act, the issues that have come up during litigation post the amendments, are yet to be pondered over by the Supreme Court and the Court’s interpretation of such pressing issues, as have been highlighted above in this article, is much anticipated to ensure smooth transition from unease to ease of doing business in India.
 
The important thing, however, is to note, with due appreciation, that the adverse trend on which India was up until now, treading, has been reversed and this is a reflection of the intention and the general temperament of the Government, which is to do away with outmoded and unproductive procedural laws and regulations and to bring, in their place, a revised and more promising framework regulations and legislations which will reinforce the confidence in the foreign investor and give a fillip to the Indian economy.  The proposed changes, as well as the changes already introduced in the business-related laws have opened up newer work avenues for the corporate professionals and adequate preparedness is required to tap the opportunities now being thrown open to the corporate professionals.    


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