Indian Practicing Business Law - Essay Example

Name Course Instructor Date Introduction It is evident that India as a country has emerged to be a very powerful driving force in today global economy revitalization. Further, a lot of opportunities abound despite the emerging complex web of ever changing regulation and laws on business operation within the country. It is evident that increasing complicated strategies for Indian practicing business law seem impenetrable to even most domestic and hardened foreign investors. According to Phillips (2008), India business law can either make or break business deal especially in today India fast changing business environment. In India, business law encompasses consumer transaction, commerce and business management. It is important that business law plays a vital role towards long term development of a nation. It is due to such business laws that India is been classified as the most attractive investment destination across the globe. It is for this reason that this paper focuses on analyzing Indian political system, the influence of Indian federal constitution on business environment focusing on foreign investor expectations and environmental law, importance of various business laws and finally, it will widely focus on describing various protections offered by Indian federal competition laws to a foreign investor. 1) The politics of India are known to take place within the structure of a federal constitutional republic. Here, a president is the head of state whereas his prime minister is the head of government. Further, the president exercises executive power and he is sovereign to the legislature. According to Phillips (2008), Legislative supremacy is vested in the two chambers of parliament namely Rajya Sabha and Lok Sabha and the government in general. In India, both states and federal elections usually take place in a multi-party system though this is not entrenched in the law. According to Phillips (2008), Indian judiciary is independent of both the legislature and executive with the highest court being the Supreme Court of India. India is characterized to be an independent communist secular democratic republic. During the period of inception, Indian constitution chose to be a federal form of government. Nevertheless, central government within India has great power in connection to its states. Phillips (2008) asserts that, after independent, the Indian federal government has been ruled by the Indian National Congress (INC). Today, the most renowned political parties within India are Bharatiya Janata Party (BJP) and Indian National Congress (INC). The two parties are continuing to dominate this country although there are other small parties regionally. It is through this argument that India political system displays a system of multi-parties. A majority win in Indian elections dictates on who formulates a democratic government (Subrata, 1999). Here, elections are highly contented on party lines which are perceived to have different public statement. Today, it is notable that today Indian elections have become a matter of coalition as opposed to majority within single parties. This is evident since from the past few terms, Indians single parties have not won any election with an indication of majority making alliances to head the government. This has resulted to the fact that nowadays, parties are forming pre-poll alliances as a way of getting the majority required to form a government. Subrata (1999) asserts that, political parties that participate in various elections within India and are widely recognized in five or more states are known to be a national party. On the other hand, those parties that participate in elections within particular states are known as regional or state parties. Subrata (1999) asserts that, prominent regional parties are Telugu Desam in Andhra Pradesh, Buhujan Samaj party in West Bengal and finally, national conference in Jammu. Further, Indians have various small communist parties that usually participate in one state. Indians political parties are represented in various sections among its religion and society and their principal values play critical values within the country politics. Subrata (1999) asserts that, through an electoral process, Indians are made to choose a majority within the lower house where later a government is formed by a coalition or that specific party. It is quite evident that more about Indian political system revolves around the 90s. It is notable that in 63 years of India independence, the 51 years of those years have been under the rule of Indian National Congress. INC enjoyed a parliamentary majority with the exception of two short periods in the 70s and late 80s. The party rule was interrupted BJP party won election due to people discontent with contentious state of emergency declared by the prime minister (Subrata, 1999) . During 1991elections, no political party was given the majority rather, INC created a minority government which was under a prime minister who was able to complete his five year term. The following term Indian experienced a period full of turmoil within the federal government where short lived alliances took power. In 1996, BJP formed the government which was followed by United Front coalition that saw the exclusion of both INC and BJP. In 1998, BJP party created a National Democratic Alliance (NDA) that saw it become the first ever non congress government to successfully complete its five term in power. Further, it is quite evident that the formation of coalition governments within India widely reflects the country transition politics away from known national parties to those that are regionally based. Subrata (1999) asserts that, it is quite evident most regional parties especially those in the south are widely associated with ideologies of Hinduism unlike ones perceived to be national. As a result of this, the relationship that exists between state and central government in different states has not been free of acrimony. Today, disparities existing between ideologies of India political parties governing the states and centre have resulted to skewed allotment of resources between states. In addition to this, religious violence, terrorism, caste-related violence and Naxalism are other factors that are currently affecting Indian political environment. Subrata (1999) asserts that, legislations aligned to stringent anti terror for instance POTA, TADA and MCOCA receive a lot of political attention either by criticism and favor. It is evident these and other legislations are known to affect outcome of this country elections. Many legislators are constantly faced with charges of embezzlement of funds and other criminal charges such as human trafficking and murder. 2) It is quite notable the Indian federal constitution has influence on various issues within its business environment. Business environment can be influence in terms of environmental law, tax and expectation of foreign investors. Subrata (1999) asserts that, the main duty of the Indian federal constitution is to ensure that there is cohesiveness in building of a government that will act as a powerful engine towards development and economical growth. As a way of preventing intergovernmental jurisdiction dispute within the business environment, the federal constitution divided tax powers between state and center without any form of overlap. This influenced the business environment in that it has increased the opportunity of increasing responsibilities on social and infrastructure spending. Based on negative influence, this mode of taxation undermines both tax harmonization initiatives and co-operation like in other federal countries. Further, based on tax the fact that most of government revenue is raised from its own resources, this creates a business environment that attracts market liberalization across India. As a result, Indian private sector which mainly comprises of business act as the engine of growth for this country. Further, there is business environment where both public and private sector are fighting for India economic growth. Subrata (1999) asserts that, the competition within the business environment between the public and private sectors has made economic liberalization process suffer from fundamental imbalance that arises for tax distribution within the two sectors. Division of tax powers between state and center has resulted to slowness in the implementation of banking and pension reforms and capital market. The Indian constitution states that it is the responsibility of the state to improve and protect the environment to safeguard the wildlife and forests of the country. The constitution further imposes a duty on all the citizens to protect, preserve and improve the natural environment which includes wildlife, lake, forests and rivers. In 1980, the Department of Environment in India was and its main duty was to ensure maintenance of a healthy environment. In addition to constitutional provisions on environmental issues, there are many other notifications, rules and acts relating to the environment. The Environment Protection Act (EPA) came into play in 1986 following the Bhopal Gas Tragedy and actually serves as legislation covering gaps on existing laws. Other rules have come up to curb recurrent environmental problems for instance the Handling and Management of Hazardous Waste Rules implemented in 1989. Environmental rules serve various functions in maintenance, control and protection of the environment. The hazardous Waste rule for instance controls treatment, import, generation, handling and storage of harmful and toxic substances. The constitution provides specific laws on specific components of the environment. For the wildlife, the Wildlife Protection Act provides protection for wildlife animals and all other components related to them such as their habitat. The Forest Act safeguards forests conservation and protection. Rules concerned with water bodies regulate use of water resources; controls use of water bodies by industries in terms of pollution and determine how human activities should affect water resources. The Indian constitution also has numerous Acts which protect and prevent the air against industrial pollution and pollution for radioactive waste. In 1991, the government of India initiated the process of reforming its financial and economic laws following recognition of the need to have Foreign Direct Investment (FDI. Over the past few years India has registered raising trend on the number of foreign investors. As a result of this there has been urgent need to generate new reforms with the aim of incorporating India into the growing global economy. The government has liberalized its economic reforms for instance reduced requirements needed for industrial licensing and eliminated restrictions on expansion and investment. In order to attract investors in India, returns and investments on them have been made freely repatriable. The constitution allows investors to venture into all sectors including the service sector. On top of this, the Government of India has permitted foreign direct investors access through automatic routes. Foreign investors have automatic entry into services such as hotels, resorts, business services and consultancies among others. According the Indian constitution, a foreign company can establish a registered firm in India and operate it under the same rules, laws and regulations controlling any other Indian owned company (Kumar 2005). 3) For a new company to invest in India, it is vital to note that the economic reforms and liberalization for the industrial policy in India witnessed a tremendous initiation in 1991 under the industrial policy resolution. These reforms have since witnessed the reduction of requirements in licensing, removed expansion restrictions and have since facilitated the cheap and easy access to direct foreign investment and technology. The country allows automatic access to direct foreign investments in sectors with an exception of proposals that need industrial licenses and cases in which the direct foreign investment has an equity capital of more than 24% of the amount of manufacturing unit items which are mainly reserved for the SMI (India Juris). In addition, automatic access is not awarded to proposals where the foreign collaborator is having a previous venture in India as well as those foreign investors that want to acquire shares from an existing Indian company in his favor. This is in accordance to chapter III A (Section 30-A all through to 30-G of the company’s Act. Proposals that are outside the sectoral caps which have not been permitted by the FDI are also not given the direct investment nod. In respect to Chapter III and sections 27, 27A and 27B, it is also important to note that the limit for a company or firm to invest in a small scale undertaking is Rs. 6 lakhs. The ancillary undertakings have a limit of Rs. 7.5 lakhs for any investment to be given automatic access. The country also puts a restriction of a 26% equity holding on large houses for small scale industries. Establishment of small scale industries is only permitted on condition that they are not controlled or owned by any other undertaking (India Juris). The industrial licensing is made compulsory for the specified 18 industrial categories. This is in exemption based on the location of the industry as guided in paragraph 4(a) of the Press note No. 9 (1991 series). The industries are not to be located within 25 km of the standard urban periphery the restrictions only fail to apply if the industries are set up in the areas that have been specifically set in the urban district as industrial areas. The companies are either to be private or public limited. The registrations for the companies are to be submitted to the registrar of companies for verification before being accepted to operate. All the investments have to comply with the competition Act 2002 which in many respects with the MRTP Act of 1969. It purposes to replace the MRTP Act of the year 1991 in as much as it is in the transition phase (Manual on Foreign Direct Investment in India - Policy and Procedures MAY- 2003). However, there are certain industries that have to comply with the Development and Regulations Act 195. These include brewing and distillation industries, tobacco and cigarettes or cigar industries, Aerospace electronics and defense equipment industries in addition to other chemical industries (Ready Reckoner on Investing in India). It is clear to the regulations that foreign collaborations and investments that are direct in nature are of two types. These include financial collaborations where the only involvement is the foreign equity and the technical collaboration which involves the transfer of technology, its licensing and collaboration. For these types of foreign investments to exist they have to be approved either by the Reserve Bank of India or the industrial development ministry of industry and development. The foreign investments that do not come under the direct investment route have to be recommended by the FDI (India Juris). Upon arrival, the foreign investors are to have with them valid passports, documents of travel a visa that is valid. Business visas are issued for up to 5 years with a provision of multiple entries. There is also need for the foreigners who want to reside and work in the country to have a residential permit which is provided at the foreign registration office (Ready Reckoner on Investing in India). The entry route of foreign investment companies into the state is by registering the name of the company at the Liaison office, project office, and at the branch office. This has to be done within 30 days upon their arrival. The firms are then required to acquire approvals of operation from the board that is responsible for pollution control, factory chief inspector and the municipal corporations. The laws relating to foreign exchange are to be amended and consolidated through the parliamentary Foreign Exchange Management Act of the year 1999. This Act purposes to promote the orderly and the maintenance of an effective Indian foreign exchange market (Manual on Foreign Direct Investment in India - Policy and Procedures MAY- 2003). The foreigners working in the country are only to be charged on the Indian income. Income received from other sources apart from India is exempt from taxation. The foreign companies attract a taxation of up to 40% of their net profits. The foreign companies that are in corporation with Indian nationals are considered to be domestic and thus attract a net tax of 36.75% (Ready Reckoner on Investing in Indi)a. The companies are to observe the labor laws that apply in the state. these include; “Employees’ Provident Fund and Miscellaneous Provisions Act, 1952; Employees’ State Insurance Act, 1948; Workmen’s Compensation Act, 1923; Maternity Benefit Act, 1961; Factories Act, 1948; 1Minimum Wages Act; Payment of Wages Act, 1936.” the companies are also to observe and protect the Intellectual property Act which the state is a signatory to (Ready Reckoner on Investing in India). This include; Trade Marks Act; Geographical Indications of Goods (Registration and the Protection) Act, 1999; Designs Act, 2000; Patents Act, 1970 have been passed by Parliament2. 4) The AML was started after the impact of Money Laundering (ML) was almost going overboard. There are several regulatory bodies that were put in place in order to oversee unto money laundering. The Prevention of Money Laundering Act-2002 (PMLA)was started and its full operation began in 2005. An overall body Financial Intelligence Unit- India (FIUInd) was also started in order to coordinate other bodies. This particular body is supposed to receive any case of suspected money laundering from companies, banks and any other financial institutions. FIUInd works together with the other enforcement agents in order to get the suspect. According to PMLA regulation all the transaction that is carried out by any individual involving ML have to be published on weekly basis and stated whether is a single transaction or a series of transaction, their identification obtained and send to FIUInd inclusive of the fine one has to repay in accordance to the PMLA 2002 act section 12. This act saves Indian billions of money that used to go untamed through ML. The Indian tax department keeps this vital information for reference in a period of not less than ten years (Tannan, 1996). In the financial sector, ML weakens and kills the roots of financial nature of a country as well as eroding its social unit by implanting undesirable seeds of anti-social activities to a country. AML acts to restore financial sector in its role, to revive the distorted economic growth and revive the financial status of a country and its social beauty. A country with strong social unit acts as a base for more investments and builds trust to the investors (Reuters, 2004). In the real sector, AML works to revive the depressed productivity of a country and realignment of distorted investment that occurred following ML. With AML in place in India, it has worked towards reduction of crime and corruption, drilling development and increased the stability of macroeconomics. AML therefore brings back the lost beauty of macro business by taming more investors as they feel more secure to invest. AML has not gone and will not go through easy processes to achieve this, in other words to create a lost fame is not easy there is much that need to be invested including monies, education and sensitization of the community/ citizens and marketing of their new approach to ML (Reuters, 2004). In the external sector AML oversees the money going outside the country to be legalized. AML has curbed illicit capital flight and enhanced more investment. This measure helps the country grow and as well keep the track of its investors and tame the tax there in accrued. Following ML many traders flee to carry their trade in other countries following distorted content and prices but with the effect of AML it has seen unto that prices and content are standardized. AML has improved the growth and development along the shipping zones in Indian shores and created security for its clients (Reuters, 2004). AML using the regulation of KYC- “Know Your Customer” has created an easy way to detect and monitor money launders. The KYC procedures are aimed at ensuring the true identification of the client and a monitory procedure of suspect followed to the latter for a reliable evidence. The suspect is then ranked as high, medium or low risk. This procedure hastens the customer handling once he or she is brought before the law and saves time. Nationally, AML helps the government to have control of its economy by building strong government revenue tax foundation, controls unmonitored inflation and foreign exchange as well as curbing terrorist from investing in the country illegally (Salinger, 2005). Indian Mutual Finance Scheme allows all kinds of investors in India through the collaboration of the Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI). For one to qualify as a finance investor (Reuters, 2004): i. Should not be registered with the SEBI FII or any of its sub account ii. The investing company should be from a country or a residents of a country that recognizes and agrees with the standards of Financial Action Task Forces (FATF) and undersigned to the Memorandum of understanding (MOU) that is multilateral and recognized by the International Organization of Securities commission’s (IOSCO’s). The investing company has to understand the terms and their meaning as it is in the Indian Income Tax act 1961.The Mutual Fund Scheme in India receives investors and evaluates them to make sure they comply with the regulation laid here in by the AML and the KYC. The Qualified Finance Investor (QFI) through the Indian taxation authority obtains a pin number and applies for a bank account outside India. The bank account where the company will be investing its Indian Mutual Fund should be in agreement with FATF and IOSCO’s signatory and then a custody account is opened in India (Tannan, 1996) 5) The first government of India had worked tirelessly to ensure rapid industrial growth and development and distribution of wealth equitably throughout the nation. Another key objective of the government was to promote social justice and to establish self-reliance. It was keen to protect its industries by coming up with entry and exit barriers for both foreign and internal companies. These policies were mainly enjoyed by state owned industries such as the finance, trade, and labor sectors. This implied exclusion of competition policies since majority of the laws and policies that were passed only favored government –owned enterprises. Although this economic strategy was assisting in establishing a firm foundation for industrial growth in India, it was inhibiting entrepreneurial growth in the nation. This led to reformation of the policies in the early 90’s hence loosening of the public sector policies. It led to liberalization of foreign investment rules, trade and industrial laws, capital controls and exchange rates. The role of government in business was greatly reduced with emergence of these new economic policies. It was recognized that the Monopolies and Restrictive Trade Practice Act, 1969 (MRTP Act) was rather obsolete since it did not create space for competition hence there was need to have a competition law (Mehta, 2005). A high level expertise committee was appointed to oversee enactment and implementation of the competition law that was in line with international laws and met conditions facing Indian businesses. The main objectives of the committee were to ensure competition in India was fair, promoted and sustained healthy competition, protected consumer interests and provided freedom of trade with other markets. The aspects covered in the competition act are; Prohibition of abuse of dominant position Prohibition of anticompetitive agreement Regulation of combination Competition advocacy Competition Commission of India (CCI) establishment Penalties for non-compliance and contravention Competition Fund constitution In order to protect consumers from exploitation and to prevent substandard and adulterated goods from reaching them, Consumer Protection Act (COPRA) was established in 1987. Besides providing consumer protection, COPRA provides for establishment of consumer associations and authorities to deal with matters of consumer disputes and related issues. The Act has resulted to setting up of a state and central level consumer protection council known as the Central Consumer Protection Council (CCPC) and the Central Consumer Protection Council (SCPC). Area covered by COPRA include ensuring that goods and services are easily accessible to consumers at competitive prices, protection against distribution of commodities that are life threatening and hazardous to properties. COPRA also provides an award system for compensating consumers who present grievances of dissatisfaction. Besides protecting the rights of businesses the Indian Competition law protects foreign investors in several ways. The Act provides individual enterprises, industries, government owned businesses and outsider investors with protection of confidentiality. Section 57 of this Act states that there shall be no disclosure of information about any enterprise without prior notice and permission from the owners except if the information is with regard to purposes of the Act. In this case the Act will protect investors from destruction as a result of leaking of crucial information (Mehta, 2005). In addition to this, the Act jurisdiction covers all kinds sectors of the economy in spite of their ownership. Therefore, foreign investors, private and international enterprises are well covered under the Act the same way it does to government-owned enterprises and departments. Investors in India are guaranteed of security from the state with respect to their investments. They can freely present dissatisfaction and disputes to the boards involved and have unbiased justice done in their favor. Section 5 of the competition Act incorporates provisions for combinations of enterprises such as amalgamations and acquisitions. This implies that foreign investors have a right to combine with local investors in India as long as they meet the set out standards. For instance the investor must have a given level of assets or turnover in order to acquire another company or merge with it. The size of the mergers and other considerations such as international investments determine if the commission will grant permission for a combination. Although it is not mandatory for the parties involved to notify the commission of the combination, the commission has a right to monitor it regularly so as to determine if it is a serious venture. The Act allows achievement of a dominant position but highly condemns abuse of such position. According to the Act, definition of a dominant position is enjoyment of a strong position in the relevant market in India. This position allows an enterprise to operate the market independent of competition and to influence its rivals and competitors in its favor. Foreign investors can therefore acquire market dominance under a given geographic region specified by the Act. This part of the Act is especially relevant to investors with specialized production of goods or services unique to Indian industries. However, there are various considerations made by the commission to determine dominance. These considerations include the size of the industry, resources available, importance of competitors, its market share and its contribution to the Indian economy (Ramappa, 2006). Finally, the Act protects investors against cartels which occur when organizations either collude to control production, fix unreasonable prices, engage in collusive binding or share customers and the market. Under the Act, this practice is considered as an anticompetitive act with adverse implications on healthy and vigorous competition. Cartelization is prevalent in many nations of the world and India is not an exception and it has been evident in certain industries such as cement, airline and trucking industries. The competition Act includes stringent penalties for culprits of cartels like heavy penalties being a third of the organization’s turnover among other penalties. The Act gives the commission the right to conduct search operations on industries with the aim of revealing acts of cartels (Ramappa, 2006). Work Cited: India Juris - International Law Firm, Accessed on the 19th of August 2011, from; www.indiajuris.com Kumar, N. 2005. Liberalization, Foreign Direct Investment Flows and Development: Indian Experience in the 1990s.Economic and Political Weekly. Vol. 40, No. 14, pp. 1459-1469 Manual on Foreign Direct Investment in India - Policy and Procedures MAY- 2003, Accessed on the 20th of August 2011, from; http://dipp.nic.in/manual/manual_0403.pdf Mehta, P.2005. Towards a functional competition policy for India: an overview. New Delhi: Academic Foundation in association with Consumer Unity and Trust Society Phillips, Shively. 2008. Power and Choice: An Introduction to Political Science—Chapter 14 Example: Parliamentary Government in India" McGraw Hill Higher Education. Ramappa, T. 2006. Competition in India: policy, issues and development. New York: Oxford University Press. Ready Reckoner on Investing in India, Accessed on the 20th of August 2011, from: http://dipp.nic.in/invindia/invind.htm Reuters P. 2004.Chasing Dirty Money. Peterson publishers. ISBN 978-0-88132-370-2. Sahay, A. (2004), Environmental reporting by Indian corporations. Corporate Social Responsibility and Environmental Management, 11: 12–22. Salinger L.M. 2005.Encyclopedia of white-collar and corporate crime: A-I, vol1, pg. 78, ISBN 0761930043. Subrata, Mitra. 1999. Democracy and Social Change in India: A Cross-Sectional Analysis of the National Electorate. New Delhi: Sage Publications. Tannan M.L. 1996. Tannan’s Banking Law and Practice in India. New Delhi: Law House. Read More