There has been a marked change in the
government's policy and attitude toward regulation of business
since mid-1991, when the liberalization process began. The pre
liberalization philosophy of an interventionist state marked by;
extensive government controls, on the economy as well as on
various aspects of doing business in the country, has been
replaced with a model of market-drived economy, with the state
playing a limited regulatory role. This paradigm shift has
necessitated an extensive overhaul of rules and regulations.
Certain critical regulations relating to foreign investment,
exchange controls, industrial licensing, foreign trade, stock
exchanges, etc., have either been amended extensively or
replaced with new regulations. However, amendments to certain
other regulations relating to the functioning of companies,
patents and trademarks, copyrights. Arbitration, etc., are still
awaiting parliamentary approval.
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A notable feature of the Indian regulatory system
as compared with that in some other Asian countries is the concept of
the rule of law and the feature of judicial review. The Indian judicial
system is quite independent of the executive and of late is perceived
to be playing an extensive activist role to ensure that the executive
functions with the ambit of the law. In addition, there have
historically been numerous instances of Indian businesses, including
foreign-participated firms, successfully petitioning the courts against
the executive. Another notable feature is that, subsequent to
amendments to the Foreign Exchange Regulation Act, a foreign-invested
Indian company whose investment has been cleared by the government is
treated like a fully Indian-owned company for all regulatory purposes
as well as for practical day-to-day aspects of running a business.
However business activities of foreign-invested companies beyond the
charter approved by the foreign-invested companies beyond the charter
approved by the foreign-invested companies beyond the charter approved
by the foreign-investment clearance may require a formal expansion of
the approved charter.
The principal regulatory agencies concerned with
business operations and their areas of responsibility are as shown in
Table VI below.
A variety of local government, state, and other
clearances, registrations and infrastructure-supply arrangements must
also be obtained or made and some states provide a more favorable
environment in this regard than others. Progressive sates are focusing
attention of deregulation and simplification of requirements at the
state level.
Industrial-licensing system
A key feature of the preliberalization economy
was the strict control exercised by the central government over
industry through the industrial- licensing systems required central
government permission to set up a new manufacturing unit or expand an
existing unit and included a specification of the capacity as well as
location. This system has now been greatly curtailed and is applicable
only to investments in 16 specified industries (see below).
Undertakings other than in the 16 specified industries are required to
file only the single-page Industrial Entrepreneurs Memorandum with the
Secretariat of Industrial Approvals in the Ministry of Industry, along
with another prescribed memorandum at the start of commercial
production. The memorandum are intended for information and
statistical purposes only.
There is a long list of products (over 800 at
present) the manufacture of which is reserved for undertakings in the
small-scale sector (SSI unit). I.e., for units with an investment in
plant and machinery up to a specified monetary limit. This has been
raised from time to time; at present it is Rs6 million (Rs 7.5 million
for ancillary units). Non-SSI units can undertake production of items
under the SSI reserved list if they meet an export obligation of 75
percent of their total production. Large industrial undertakings,
including foreign companies, can together hold up to 24 percent of the
total share capital of an SSI unit.
The requirement for progressive indigenization of
production (phased manufacturing program), with was imposed earlier
while licenses in certain sectors were being granted, is no longer
applied except in automobile projects, where manufacturers have been
permitted certain customs-duty concessions for import of automobiles
in a completely knocked down (CKD) or semi-knocked-down (SKD) form.
The government's stated policy is now to
increase the degree of competition between firms in the domestic
market, as well as from abroad, so that there are adequate incentives
for raising productivity, improving efficiency and reducing costs,
making Indian industry internationally competitive. The government,
however, does not play any direct role in this regard, although the
Monopolies and Restrictive Trade Practices (MRTP) Commission is
chartered to inquire into restrictive trade practices. An attempt has
been made to phase in the exposure to international competition,
through gradual rather than sharp reductions in tariff levels, to
allow domestic industry to adjust to changed circumstances. This
policy has also been dictated by revenue considerations.
The closing of an industrial unit requires
state-government permission, which is difficult to obtain. The
National Renewal Fund was set up in February 1992 to provide
assistance to cover the costs of retraining or redeploying labor
arising from modernization and upgraded technology, as well as to
provide a safety net for workers affected by industrial
restructuring. This should facilitate the formulation of an exit
policy allowing the closing of sick units that cannot be economically
rehabilitated. Such a policy, however, is yet to be announced.
Prices of a few specified goods are directly
controlled by the government. Goods subject to such administered
pricing include certain categories of petroleum products,
fertilizers, and drugs and pharmaceutical products. The government's
stated policy is to reduce price controls, and the past two years
have seen substantial relaxation of price controls in the
pharmaceutical and petroleum sectors.
Utility pricing tends to be controlled because
most utilities are either in the public sector or are allowed to
sell only to public-sector utilities, as in the case of private
power generators.
For some essential commodities, such as sugar
and coffee, a part of the production is subject to price and
distribution controls, while the rest of the production can be sold
at market-determined rates.
In determining the administered prices, the
government's declared policy is that a fair return on investment
should be assured. In some recent instances of fixed prices, a fair
return has been taken to be an after-tax profit of 12 to 16 percent
on the equity capital employed. In such cases, costs including
interest are allowed on a normative basis.
For consumer goods, the manufacturer must
indicate the maximum retail price on the package. While the
government does not regulate the specific price that can be
indicated, retailers are expected to sell the goods to the end
consumer at a price not exceeding this amount.
General Section
