Courting competitiveness

Don't worry about India’s competitiveness

rohit

Rohit Bansal | March 8, 2010



The commercial division of high courts bill, 2009, already cleared by the Lok Sabha, has finally been posed before the Rajya Sabha select committee. The buzz is that the MPs found merit in arguments posed by Sunil Munjal of Hero and Manoj Kumar of Hammurabi & Solomon. The argument that our courts should take much less time to adjudicate commercial disputes is crucial to our competitiveness. If there is indeed a commercial division within our high courts, not only would our learned judges specialise on finer points of global business, our lawyers will be posed more searching questions. For clients, this would mean faster decisions though not necessarily at lower costs. But clarity per se would more than compensate for higher billings by more disciplined lawyers.

As pointed by Munjal and the CII delegation accompanying him, the MPs should take note that India is ranked 182 out of 183 countries examined by the World Bank for “efficiency of judicial system to enforce a commercial contract.”

Even when our MPs give their assent, it will be for the government to start allocating adequate physical infrastructure and competent manpower so that Business Inc. secures speedy resolution to their commercial disputes. More than resolution of actual disputes—indeed existing ones that will, in fact, be designated to the commercial divisions—the other implication will be that our high courts will have more time to adjudicate on other cases.

Critics have argued that after the establishment of commercial courts, the number of judges available to hear ordinary items of litigation, commercial, labour and land disputes that involve jurisdictional value of less that Rs.5 crore will be reduced. They forget that specialised benches already exist, for example, company courts. Indeed, quick disposal would free more inflow into the government’s kitty. CII has estimated that Rs.1.35 trillion of income tax dues are caught in pending cases in Mumbai alone! The 2009-10 estimate of taxation revenue locked in court cases is a staggering Rs.45,152 crore for direct taxes and Rs.16,957 crore for indirect taxes.

Unlimited Opportunity

The other initiative that can potentially electrify capital inflow and entreprenurship into India Inc. lies in Limited Liability Partnership (LLP) companies. Most of us travelling overseas have seen visiting cards that have “LLP” written after the organisation’s name. I confess I hadn’t paid much attention to why India doesn’t have LLPs. Now we do, 784 of them have come up as we’re going to print.

That’s a good beginning though a very small one. The department of company affairs and our parliamentarians deserve a pat for piloting the Limited Liability Partnership Act, 2008, our entry into the modern era of global business. Such freedom of business exists in the US, the UK, Singapore, Canada and China. There’s no mystery why the world loves LLP. The documentation is so short that it can be compressed into one page. The partners have flexibility to decide what activity they will indulge in without depending on statute. Compliances are easy and there’s surprisingly lower harassment the taxman can engineer. There’s no limit on size. So, on the one hand India’s micro, small and medium companies can benefit from converting into LLPs. The partners won’t have personal liability, directly or indirectly, for an obligation of the LLP solely for reason of being a partner, thereby no unsuspecting housewives will go to jail for the follies of their partners. On the other hand, a $1 billion LLP will have just as much flexibility. You go to jail only on account of your own wrongdoings. Liabilities incurred by the LLP are to be satisfied solely out of the property of the LLP. Banks will find LLPs easier to lend to without collaterals. The buzz is that large venture funds are keenly eyeing this opportunity as a reprieve from rigidities of our company law.

But true to form, the finance ministry still has to clarify on the basic issue of LLP taxation. This week India Inc. is meeting Commerce and Industry Minister Anand Sharma to help clarify that no sectors are excluded from forming LLPs. The Act is clear that there are no such limitations, but industry knows that it’s better to ask just one more time. Similar fuzziness exists on whether LLPs can attract foreign investment. The department of company affairs claims that there is potential of billions of dollars of LLP investment. But no one knows what the FIPB will decide when rubber hits the road. There is a fit case here to test the government’s seriousness on LLPs.

PM Versus PC

Finance Minister Pranab Mukherjee (I know that an observer once told him that Mukherjee is the only “PM”  in town, and the minister jumped and shook this man’s hand!) has a way with differing with P. Chidambaram, his predecessor. First, Mukherjee retained Revenue Secretary S.V. Bhide even though they didn’t get along well. He then defied convention and allowed the revenue secretary to retire just a few weeks before the Union Budget. A little bird tells us that Mukherjee now has issued a detailed transfer policy overturning key postulates painstakingly created by Chidambaram. The move has affected thousands of efficient Indian Revenue Service officers who were consigned to serving in non-metro stations because of  Chidambaram’s policy. n

 

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