Report of the Committee for Reforming the Regulatory Environment ...

Finally, I wish to place on record my sincereappreciation to all the members of the Committee forsharing their comments on an earlier draft of thisreport. It is a matter of regret that some suggestionsarising out of the draft report came in after the reportwas finalised. I also wish to thank the Indian Instituteof Corporate Affairs (IICA) for providing the Committeethe required support in conducting the business of theCommittee. This preface would be incomplete if I donot acknowledge the significant contribution of Prof.Navneet Sharma of IICA.New DelhiSeptember 2, 2013M. DamodaranChairpersonCommittee for Reformingthe Regulatory Environmentfor Doing Business in India5

the dispute resolution, architecture of the regulatoryspace, measures to boost efficacy of regulatoryprocess, improving business environment for micro,small and medium enterprises, addressing issues at thestate level and revisiting the report of the World BankReview Panel on Doing Business Report.RecommendationsThe Section presents the recommendations made bythe Committee. The Recommendations are classified invarious headings, namely, (a) legal reforms (b)regulatory architecture (c) boosting efficacy ofregulatory process (d) enabling MSMEs, and (e)addressing state level issues.Legal Reforms1) Review of laws and regulations: It isrecommended that the Government of India asalso the State Governments examine the contentof all laws and rules which impact on the ease of7

doing business, and cause appropriate changestherein to reflect the requirements of modern daytrade and commerce.2) Encouraging arbitration to resolvecontractual disputes: It is important that thejudicial authorities are appreciative of the need forquick resolution of disputes that are brought upbefore them. Therefore, it is recommended thatthere should be a mechanism to dis-incentiviseuse of civil courts for resolving contractualdisputes, so as to encourage arbitration as apreferred manner of resolution. Further, it is alsorecommended that appropriate measure may betaken up to create a large pool of persons trainedin the process of arbitration who could beapproached by contending parties to take up theirmatter.Regulatory Architecture3) Carving out clear mandate for a newregulatory authority: Before setting up a new8

egulatory organisation, adequate thought shouldgo into the need for such an organisation, theability to man that organisation appropriately andto invest it with functional autonomy. Setting up anew regulatory organisation should not be a kneejerkresponse to a specific situation or context, buta well thought-out disengagement plan of theMinistry or Department concerned to move awayfrom writing out and implementing regulations.4) Appointments in and supervision ofregulatory authorities: The appointment ofpersons to head regulatory organisations shouldbe attempted in a far more transparent manner. Itis recommended that there should be atransparent system in which the Head of theregulatory organisation and his Board levelcolleagues appear before an appropriateParliamentary Committee once in six months toreport on the developments of the previous sixmonths and the broad plan of action for the nextsix months.9

5) Autonomy of regulatory authorities: Genuinefunctional autonomy would also have to bereinforced with financial autonomy by putting inplace a system where regulatory organisations arenot dependent on government departments forfinancial support by way of handouts.6) Self evaluation by regulatory organizations:The Committee recommends that each regulatoryorganization should undertake a self-evaluation ofitself once in three years, and put-out theconclusions in the public domain for informeddiscussion and debate.Boosting Efficacy of Regulatory Process7) Ensuring effective consultation through atwo-stage process: It is recommended that eachgovernment organisation/ department which hasthe responsibility of writing regulations shouldundertake a two-stage process of consultation,wherein a revised draft is put up for consultationafter the first round of stakeholder consultation.10

This would ensure that the avoidable situations ofmisinterpretation of the regulations do not exist.8) Allocating priority to systemic issues: Toboost the effectiveness of regulatory apparatus, itis recommended that enforcement bandwidth of aregulatory body need to be optimally used to dealwith cases of systemic importance on a prioritybasis.9) Putting in place consent mechanism formatters of low significance: It is recommendedthat regulatory authority may put in place asettlement or consent mechanism, with adequatesafeguards, where cases which have no systemicimpact are dealt in a summary manner. This wouldhelp in dealing with large volume of matters ofsystemically unimportant matters.10) Drafting regulation: It is necessary toensure that simplicity and clarity should inform thecontent of regulation, leaving no part of it open todifferent interpretations by different persons.11

11) System of advance ruling: It has beennoticed that in a number of cases differentauthorities have written different, often conflicting,rules and Regulations governing identicalactivities, thus creating avoidable confusion in theregulated space. Therefore, it is recommendedthat every organisation tasked with the writing ofregulations should have a provision for an advanceauthority for rulings.12) Setting up regulatory review authority:It is necessary to address the existing body ofregulations (the stock) in terms of contemporaryrelevance, clarity and continuity. This task is bestaccomplished by creating a Regulation ReviewAuthority in each organisation that is empoweredto write rules and regulations. Every organisation,which writes regulations or other forms ofsupporting legislation, should have a RegulationReview Authority to continuously examine thestock of existing regulations and to weed out thosethat do not have any continuing use. The12

Regulation Review Authority should be within theorganisation that writes regulations in order tohave a better sense of understanding the context.13) Reviewing the proposed regulations: Theinternal Regulation Review Authority can also begiven the task of reviewing draft regulations thatare in the pipeline in order to ensure thatunnecessary regulations are not given effect to.Every regulatory authority, ministry or departmentof the Central or State Government involved in thewriting of regulations should have within it aRegulation Review Authority also tasked with thepreview of intended regulations. Such a body isbest equipped to undertake the regulatory impactassessment, which should be a conditionprecedent to the writing of regulations.14) Regulatory Impact Assessment (RIA): Aregulatory impact assessment of every proposedregulation should precede the public consultationprocess.13

Enabling MSMEs15) Setting up a overarching body to enablepolicy and process coordination for MSMEs:To address the problem of lack of coordination interms of policy formulation and statutoryenforcements among various Central and StateGovernments, an overarching body can be set upat the highest level to identify and address keyissues impeding business facilitation and tointerface with relevant Ministries and Departmentsin order to address identified key impediments in atime-bound manner.16) Single window mechanism: It is necessaryto have single window channels of compliance tohelp small business entities and also a hassle freetax payment regime. As regards the new entrantsto the business environment, there should befacilitation centres to help deal with thecomplexities of filling cumbersome forms anddealing with other procedural issues.14

17) Time bound decision making: Thegranting of permissions or the decision not togrant permissions should be taken within aprescribed time period failing which there shouldbe a provision for deemed permission. It isnecessary that for every approval to be accordedthere should be an outside time limit, withstipulation that if an approval is not accorded or afinal decision of rejection is not communicatedduring that time period, there will be apresumption of approval.Addressing State Level Issues18) Information facilitation through nodalpoint: It is recommended that each StateGovernment appoints a nodal person and a nodaloffice, which can be the single point contact forpersons intending to obtain information on theprocedural and substantive conditions to befulfilled for setting up a business.15

19) Incentivising regulatory reformsamongst states: With an urgent need being feltto accelerate the process of simplification ofregulations and consequently expediting thenecessary approvals, the Committee recommendsthat State Governments that make significantprogress in this matter should be appropriatelyincentivised.20) Building in appellate process by design:There should be built into the system an appellateprocess where a person aggrieved by an order ofrejection may, as a matter of right, approach asuperior authority for reconsideration of thematter on merits.16

Chapter OneIntroduction1. Introduction1.1 It has often been said, not without reason, thatdoing business in India is like taking part in an obstaclerace, with one material difference. In an obstacle race,the number of obstacles, the nature of obstacles andthe location of the obstacles are known in advance.1.2 This uncomfortable realisation has not led to aconcerted effort to identify the difficulties that areencountered by persons attempting to do business inIndia. The fact that setting up a business enterprise inIndia necessitates successfully overcoming severalsubstantive and procedural hurdles is not a secret. Inthe recent past, there have been attempts, too few andfar between, to make a worthwhile impact on improvingthe ease of doing business in India. At the same time,several other countries, faced with similar problems17

and keen to attract both domestic and foreigninvestments, have dismantled cumbersome regulatorystructures and eliminated, from the Statute Books, theActs, Rules and Regulations which have outlived theirutility. The result is that India’s ranking for the ease ofdoing business is at a dismally low level which does notreflect the enormous potential that India has as aninvestment destination. The annual ranking of nationswith regard to the ease of doing business is an exercisethat the World Bank has been attempting for sometime. India’s very low ranking in the recent reports hasbeen the proximate cause for setting up this Committeeto review the regulatory environment to improve thebusiness climate in India. A copy of the Notificationconstituting the Committee is at Annexe-I to thisreport.1.3 The present Committee was initially constitutedwith a preponderance of representatives from theprivate sector. Recognizing that a comprehensive viewof the issues arising from the terms of reference could18

e had only with the State Governments and the PublicSector Undertaking being represented in theCommittee, the Ministry of Corporate Affairs wasrequested to enlarge the composition of the Committee.The members subsequently added to the Committeeare listed in Annexure-II of this report.1.4 Substantive and procedural matters whichadversely impact the growing of business in India canbe attributed to a number of factors. Chief among themare the multiplicity of authorities, the plethora ofregulations, the lack of clarity and the absence ofcontinuity. The problem is further compounded bycompeting and often conflicting postures adopted bythose tasked with the ensuring of orderly and nondiscriminativeconduct in the matter of enforcement. AJudicial system that has not crowned itself with glory inthe matter of speed of disposals, and an alternatedispute resolution mechanism which does not seem tohave delivered, have only added to the complexity ofthe problem. This Committee has been tasked to19

unravel the regulatory maze and to address issues thatare sector-neutral but have a significant bearing on theease of doing business.1.5 When the Committee set out on its task it was feltthat if the views of all stakeholders were to be obtainedin a participative environment, it would be necessary tohold a number of meetings in different locations andwith representative associations of different categoriesof persons.1.6 Given the time constraint of the members of theCommittee, this approach and the alternative ofconstituting sub-groups of the committee to addressspecific aspects of the Terms of Reference could not bepursued. The Committee held two meetings subsequentto which the Members of the Committee wererequested to send their considered views in writing tothe Committee. This was felt to be a better alternativeto having a large number of meetings which, given thesize and the composition of the Committee, was leading20

to suboptimal attendance. It was felt that the writtenviews of the Members could capture the essentialconcerns relatable to the doing of business in India andappropriate solutions thereto. The near-total absence ofresponses from the Committee Members has given riseto the inconvenient conclusion that the regulatoryenvironment either does not cause the kind of problemsthat it is believed to cause or, the more uncomfortableconclusion, that the prescriptive arrangements in theregulatory environment, while being adverselycommented on, are being got round by the corporatesconcerned.1.7 It is recognized that there have been someattempts in the past to look at sector specific issuesthat impact on the doing of business. Whilerecommendations arising from such efforts might havebeen accepted in whole or in part, the rolling out of therecommendations has not been to the desired extentand at the desired pace. In this report, we have takennote of some of the work already done while revisiting21

those recommendations in the context of their currentrelevance. This report is founded on the belief thatrecommendations informed by pragmatism andgrounded in contextual reality have the best chance offinding acceptance and being implemented.22

Chapter TwoLegal Reforms2.1 One of the areas of concern identified by theWorld Bank Report on doing Business in India is theundue delay in the enforcement of contracts. While theReport focuses on the delayed enforcement of contractsas a specific area of concern, it is consideredappropriate to view this as one symptom of a largerproblem. It is widely acknowledged that the reformprocess which got underway in the early 1990s did notembrace legal reforms. It does no credit to a country ofIndia’s size and standing that she is ranked 183 out of184 countries in the area of contract enforcement. It isno secret that Courts in India suffer from a hugebacklog and a seemingly limitless inflow of new cases.That, combined with somewhat dated processesinvolving multiple levels of appeal, results in anextraordinary long time being taken for resolution ofsimple commercial disputes. A major part of theproblem is the fact that legal enactments which areseveral decades old do not address the requirements of23

modern day trade and commerce. The setting up ofspecial courts or exclusive courts is a necessary but nota sufficient condition for improvement. It will benecessary for the Government of India as also the StateGovernments to examine the content of all laws andrules which impact on the ease of doing business, andcause appropriate changes thereinto reflect the requirements ofmodern day trade and commerce.2.2 Equally important is the needfor Judicial authorities to beappreciative of the need for quickresolution of disputes that areIt will be necessary forthe Government of Indiaas also the StateGovernments to examinethe content of all lawsand rules which impacton the ease of doingbusiness, and causeappropriate changestherein to reflect therequirements of modernday trade and commerce.brought up before them. A case inpoint is the large number of pending cases underSection 138 of the Negotiable Instruments Act. Thesheer volume of such pendency ensures that cases takeyears to be decided when the fact in issue is relativelysimple. A large number of these cases arise from thedishonouring of post-dated cheques as and when they24

are presented for payment. A post-dated cheque is animportant instrument in business and the seeminglycasual manner in which such cheques are not honouredafter they become due tends to reduce the legitimacyof the instrument. As it is, an offence under theNegotiable Instruments Act is complete only when thedrawer of the cheque after being put on noticeregarding the dishonouring of the cheque, refuses tomake good the amount during a period of 15 days. Inmost other countries the offence is complete if acheque is issued without adequate funds to enable itsbeing honoured. It is easy to appreciate that disputes,even after a notice period of a fortnight, will seriouslyobstruct the smooth flow of trade and commerce. It isvery heartening to note that the present Chief Justiceof India in his first week in office has identified thependency of such cases as a major contributor to theoverall backlog of cases in the Indian judicial systemand has resolved to address it expeditiously.25

2.3 It is imperative that persons involved incommercial disputes should be encouraged to look atalternate dispute resolution as the preferred instrumentfor settlement of such disputes. Notwithstanding therelatively simpler processes of arbitration andconciliation, parties to commercial disputes are evennow prone to approach civil courts for disputeresolution. Since a contract between parties is anagreed commercial relationship, itmight not be appropriate tomandate that all disputes shouldbe settled by way of alternatedispute resolution. However,there should be a mechanism todis-incentivise such persons fromThere should be amechanism to disincentiviseuse ofcivil courts forresolving contractualdisputes, so as toencourage arbitrationas a preferredmanner of resolution.approaching courts so that they are persuaded overtime to include arbitration as an element of theircontract.2.4 It is relevant to note that while, in theory,arbitration is expected to result in quicker resolution,26

the reality is often different. Arbitrators, onceappointed, seem to believe that arbitration is a timelessnever ending process and as a result it has beennoticed, in some cases, that arbitration proceedingstake longer than the determination of identical issuesby a Civil Court. There ought to be a large pool ofpersons trained in the processof arbitration who could beapproached by contendingparties to take up theirmatter. The present crop ofarbitrators comprising largelyThere ought to be alarge pool of personstrained in the processof arbitration whocould be approachedby contending partiesto take up theirmatter.of retired Judges andsuperannuated CEOs is hardly an adequate instrumentfor speedier arbitration.2.5 Another welcome development in recent times isthe effort being made by the higher Judiciary and theapex Judicial training academy to promote theunderstanding of recent commercial enactments by thePresiding Officers of the lower courts. There is27

increasing evidence that the lower courts are betterequipped today to deal with contentious commercialdisputes than they were in the past. It is important tobuild on this aspect.28

Chapter ThreeRegulatory Architecture3.1 No discussion on the improvement of theregulatory climate in India can afford to ignore thecontent and structure of regulatory organisations.Unfortunately, much of the debate and discussion onregulatory organisations has tended to focus on thebackground and personality of the head of theregulatory organisation. Such a sterile debate does notenable the understanding of the organisation’sregulatory philosophy which significantly influences thecontent and scope of regulations. India’s regulatoryarchitecture is getting increasingly complex with thesetting up of new regulatory bodies which areinadequately empowered, and insufficiently manned interms of both numbers and skills. While it is beyond theprovince of this report to address the specifics ofmanning regulatory organizations, the committee isstrongly of the view that before setting up a newregulatory organisation, adequate thought should go29

into the need for such an organisation, the ability toman that organisation appropriately and to invest itwith functional autonomy. The experience of someregulatory authorities has been that in the guise ofadministrative accountability, functional autonomytends to get impeded and consequently regulatoryorganisations sometimes began to resemblesubordinate offices of the Government Ministries andDepartments.3.2 Setting up a new regulatory organisation shouldnot be a knee-jerk response to a specific situation orcontext, but a well thought-out disengagement plan ofthe Ministry or Department concerned to move awayfrom writing out and implementing regulations.3.3 In order to reinforce the confidence of theregulated universe and other stakeholders, regulatoryorganisations should undertake a self-evaluation ofthemselves once in three years, and put out the30

conclusions in the public domain for informeddiscussion and debate.3.4 Genuine functional autonomy would also have tobe reinforced with financial autonomy by putting inplace a system where regulatory organisations are notdependent on government departments for financialsupport by way of handouts. Astrong and sustainable regulatoryorganisation should generate itsown funds in the form of fees andpenalties, subject to suchsafeguards as may be prescribed toensure that there is no unjustenrichment of the regulatoryorganisation.3.5 Functional autonomy withoutcorresponding accountability is aThere should be atransparent systemin which the Head ofthe regulatoryorganisation and hisBoard levelcolleagues appearbefore an appropriateParliamentaryCommittee once insix months to reporton the developmentsof the previous sixmonths and thebroad plan of actionfor the next sixmonths.sure recipe for chaos. Suchaccountability should not be on a continuing basis to31

the administrative Ministry because of the perception,often matched by reality, that the regulatoryorganisation is articulating the viewpoint of theconcerned Ministry or Department. Instead, thereshould be a transparent system in which the Head ofthe regulatory organisation and his Board levelcolleagues appear before an appropriate ParliamentaryCommittee once in six months to report on thedevelopments of the previous sixmonths and the broad plan ofaction for the next six months.Such evidence as would be givenby the senior functionaries of theregulatory organisation should beThe appointment ofpersons to headregulatoryorganisations shouldbe attempted in a farmore transparentmanner.in the public domain, unless special circumstancesrequire any part of such evidence to be kept outsidethe public domain.3.6 Functional autonomy ensures the availability of alevel playing field for all entities, irrespective ofownership. This will ensure that Public Sector32

Organisations which compete for business with privatesector organisations do not have the advantage of amore liberal prescriptive regime.3.7 The appointment of persons to head regulatoryorganisations should be attempted in a far moretransparent manner than is the case at present. Thepractice of inviting applications, from interestedcandidates and subjecting them to a process ofinterviews by a panel comprising persons with nofamiliarity with the regulatory organisation, is thesurest way to cause loss of public confidence not only inthe process but also in the organisation. Theresponsibility attached to such positions would seem tonecessitate that persons considered suitable by anappropriately empowered high level committee shouldbe invited to head the organisations. The entire processshould be transparent and should over time replicatethe process followed in some developed countrieswhere the suitability of the candidate concerned is thesubject matter of informed public discussions before the33

appointment is finalised. To appoint an applicant or asupplicant to head a regulatory organisation is toensure the suboptimal performance of the organisationand its resultant loss of credibility.34

Chapter FourBoosting Efficacy of Regulatory Process4.1 For a long time, the belief had prevailed thatregulators alone should decide the scope and content ofregulation. Over the years, experience had shown thata non-consultative process adopted by regulatorybodies led to regulations which were eitherimpracticable of implementation or had no relevance tothe rapidly changing environment of the regulateduniverse. As inadequacies on this account began tosurface, it was felt that the writing of regulations shouldbe preceded by a process of effective consultation withall stakeholders. As a consequence, barring a fewexceptions, the practice of prior consultation throughapproach papers or the putting out of draft regulationshas become the universal practice. Notwithstanding theprocess of consultation as presently practised, it hasbeen found that regulations often fall short of thedesired objective or are misdirected and give rise tounintended consequences with negative implications.35

The present practice invariably is to put out aconsultation paper setting out, in considerable detail,the new regulatory ground proposed to be covered orthe changes proposed to be made in the existing bodyof regulations. During the time available for theconsultative process, the stakeholders are expected torespond with their observations on any inadequaciesthat they might perceive or any overreach that theymight apprehend. After the comments and objectionsare received and considered, the regulatory bodyproceeds to finalize the new set of regulations and tobring them into effect.4.2 The consultation process, as described in thepreceding paragraph, often falls short of the intendedobjective of ascertaining the views of the stakeholdersand appropriately incorporating in the regulations suchviews as are consistent with the stated objective of theproposed regulation. More often than not, it is noticedthat different sets of stakeholders with differentinterests in mind respond in diametrically opposite36

fashion to the proposed regulations. In such an event,it is not possible for the regulatory body to incorporateall the suggestions received and in the process, it maybe appropriate to attempt some harmoniousconstruction of seemingly conflicting view points,without losing sight of the objective of the regulationconcerned.4.3 In order to make consultation more meaningful, itis necessary that after the firstround of consultations takesplace, the regulatory body shouldattempt a revised approach paperaccompanied, wherever possible,by a revised draft of the proposedA two-stage processof consultation wouldensure that theavoidable situationsof misinterpretationof the regulations donot exist.regulations and then put out the revised proposal forpublic comment. While such a two-stage proposal mighttake time and might be counter-productive in anemergent situation, it allows those that havecommented on the first proposal to take note of howmany, if any, of their suggestions are likely to find37

place in the revised regulations. In the absence of atwo-stage process, the stakeholders that send in theirsuggestions are often not aware whether theirsuggestions have been taken into consideration, thoughnot necessarily accepted. A two-stage process ofconsultation would ensure that the avoidable situationsof misinterpretation of the regulations do not exist. Inemergent cases, nothing would prevent the regulatorybody from giving effect to regulations to address theproblem on hand and simultaneously seekingcomments by way of a post-decisional consultationprocess. Feedback obtained from regulators wouldseem to indicate that there is at best lukewarmresponse to the draft proposals put out in the publicdomain for consultation. It would be incumbent on thestakeholders to respond to the draft regulations whilethe process of consultation is on rather than tocomplain about the inadequacies or the overreach ofthe regulations once they are given effect to.38

4.4 The effectiveness of a regulatory process dependsto a large extent on the enforcement of regulations.With the economy growing at a reasonable rate andwith newer and newer activities and instruments havingto be dealt with by regulatory organisations, it isentirely likely that the number of enforcement actionswould be far too many for any organisation to handleexpeditiously. It is also well-known that thedisincentivisation of inappropriate conduct byregulatory entities should involve both timely andeffective action. It is beyond the capability of mostorganisations to dispense quick and effective justice,having regard to the large number of cases that theyare obliged to deal with. This is compounded by the factthat in an atmosphere of distrust and lack ofconfidence, regulatory organisations often take upmatters in a chronological order with the result thatsmaller transgressions often get precedence overinstances of larger misconduct. This is furthercompounded by the fact that whenever an investigationis commenced, regulatory authorities are somewhat39

hesitant to drop the investigation for fear that someexternal agency, often with the benefit of hindsight,would decide that the bona fide error of judgment is amala fide decision. This can be partially addressed bythe existence of a settlement or consent mechanism,with adequate safeguards where cases which have nosystemic impact are dealt with in a summary manner.The experience already availablein regard to the consent schemewith one of the sectoralregulations in the area of financeshould be studied so that similarschemes with adequatesafeguards can be introduced toIt is necessary toensure thatenforcementbandwidth of aregulatory body isoptimally used todeal with cases ofsystemic importanceon a priority basisdeal with the large volume of systemically unimportantmatters. This in turn would lead to the possibility ofquick, and hopefully deterrent, punishment in provencases that are of systemic importance, with thesignalling effect that is needed for the regulateduniverse.40

4.5 Experience has shown that on a number ofoccasions and across sectors, there has beendisconnect between the intent of a proposed legislationand the manner in which it is understood by theregulated entity. This often happens because of theinelegant manner in which regulations are drafted.Unless this is addressed, there would be a plethora ofunproductive litigation leadingto loss to both the protagonistsin the dispute. A plain readingof some of the regulationsdrafted in recent times wouldreinforce the view that"language was given to man toIt is necessary toensure that simplicityand clarity shouldinform the content ofregulation, leaving nopart of it open todifferentinterpretations bydifferent persons.conceal his thought and not toexpress it." Notwithstanding every attempt to bringabout simplicity and clarity in the content of regulation,it is still necessary to provide for a mechanism throughwhich potential disputes in interpretations can beaddressed. There are ministries and departments whichhave set up authorities for advance rulings which can41

e approached by persons who are not clear about theapplicability of a particular regulation, or a set ofregulations to an activity, which they intend toundertake. In order to infuse confidence in theregulated universe, it is necessarythat every organisation taskedwith the writing of regulationsshould have a provision for anadvance authority for rulings sothat potential transgressions canIt is necessary thatevery organisationtasked with thewriting of regulationsshould have aprovision for anadvance authority forrulingsbe avoided and business ventures can be undertakenwithout a lingering doubt about the legality of anyaspect of the proposed venture. The system ofinformed guidance, being not of a binding nature is apoor substitute and should be done away with. Thesetting up of an Advance Authority for Rulings is byitself not a complete solution. It should be incumbenton the Authority to give an opinion on the issue raisedbefore it within a prescribed time. It should also beincumbent on the authority to give a clear indication ofits view on the issue in question without prevarication42

or fence-sitting. Such rulings given by the Authoritycould be on a 'no name' basis so that when it is put outin the public domain for the information of allconcerned, no confidential business information relatingto the entity that sought a ruling will be made public.Regulatory Review Authority4.6 In an ideal world with unlimited resources andwith all individuals and institutions behaving in amanner consistent with public interest, Acts, Rules andRegulations would be avoidable irritants. However,since the real world is as different from the ideal worldas chalk is from cheese, it is necessary to have a bodyof statutory enactments and supporting legislation toregulate human and institutional conduct. In theabsence of such determination of conduct, there will bea tendency to take avoidable shortcuts that serveprivate good at the expense of public interest andnational goals and objectives. The number andcomplexity of regulations and the frequency with whichnewer and newer regulations are being sprung on an43

unsuspecting public often leads to such a frameworkwhich is a part of the problem and not a part of thesolution. The Indian experience clearly has been thatthere are more laws, rules and regulations than thecountry needs and the problem often lies in inadequateimplementation, compounded by interpretationalconfusion. The experience of the last few decades hasbeen that when confronted with a problem, theresponse of the Government or the regulator has beento either create a new institution or to write newregulations. Often these are knee jerk responses tosome isolated occurrence that could have been solvedwithin the existing framework of laws and regulations.4.7 The facts of the Satyam Computers case illustratethe point. When the founder Chairman of the Companydisclosed to the regulators and to the exchanges thatthe numbers that were put out in the public domain,quarter after quarter, did not reflect the correct state ofaffairs of the Company, the response of otherwisenormally well-informed persons was that new44

egulations should be written to address the issue thathad surfaced. The demand for new regulations aroseeven from sections of corporate India normally averseto any additional regulations. The fact that the case inquestion manifested dishonesty and that there was noregulatory gap was lost sight of, as was the truth of thestatement that no system can legislate for honesty.4.8 At the other end of the spectrum is the interestingcase of a large US Company which questioned the needfor a new accounting treatment that the Securities andExchange Commission (SEC) had sought to introducethrough a consultative process. The Companycontended that given its several strengths such as goodlawyers, accountants, systems, processes and the like,it did not need a new regulation to determine itsconduct. A few months later, the Company exploded,with poor governance identified as the single biggestcontributor to its demise. This more than most othercases demonstrates the need for some regulations toguide human and institutional conduct.45

4.9 Having regard to India's federal setup, there are anumber of powers and functions vested with the StateGovernment apart from those that reside with theUnion Government. The exercise of these powers andfunctions necessitates the writing of Rules andRegulations as well as theenactment of laws. In addition,there are regulatory andadministrative bodies empoweredto write regulations, the right forwhich is derived from thelegislature. It has been noticedthat in a number of cases differentauthorities have written different,It has been noticedthat in a number ofcases differentauthorities havewritten different,often conflicting,rules and Regulationsgoverning identicalactivities, thuscreating avoidableconfusion in theregulated space.often conflicting, Rules andRegulations governing identical activities, thus creatingavoidable confusion in the regulated space. Given thisconfusion and uncertainty, it becomes extremelydifficult for individuals or institutions to take investmentdecisions. The fact that these regulations are revisited46

and revised frequently creates a climate of uncertaintyin which the investors and even advisors do not knowwhat laws are in vogue. Added to this is the problem ofclumsy drafting that creates doubts and difficultiesleading to the establishment of an interpretationindustry.4.10 The problem of regulation isa problem of both stock and flow.It is necessary to address theexisting body of regulations (thestock) in terms of contemporaryrelevance, clarity and continuity.This task is best accomplished byIt is necessary toaddress the existingbody of regulations(the stock) in termsof contemporaryrelevance, clarity andcontinuity. This taskis best accomplishedby creating aRegulation ReviewAuthority in eachorganisation that isempowered to writerules and regulations.creating a Regulation ReviewAuthority in each organisation that is empowered towrite rules and regulations. It would be the primaryresponsibility of such an Authority to examine, inconsultation with all stakeholders, whether an existingrule or regulation has outlived its utility. In the process,regulations re-written at different points of time, on47

different aspects of the same subject, can be collatedwith all previous regulations on the subject. Thisexercise would address the issue of multiplicity ofregulations as well as contemporary irrelevance ofsome regulations.4.11 It has been brought out earlier in this report thatthe explosive growth in the number of regulations isone of the major constraints to doing business in India.Rarely, if ever, do institutionsand regulatory bodies taskedwith the responsibility andendowed with the power to writeregulations, revisit anyregulations of the past to assesstheir continuing relevance. Theexperiment with the setting up ofa Regulation Review Authority bythe Reserve Bank of India inIndia and authorities elsewhereThe Committee is ofthe firm opinion thatevery organisationwhich writesregulations or otherforms of supportinglegislation shouldhave a RegulationReview Authority tocontinuously examinethe stock of existingregulations and toweed out those thatdo not have anycontinuing use.have yielded considerable benefits, both in terms of48

weeding out regulations that are past their shelf-lifeand in refining regulations that continue to be relevant.The Committee is of the firm opinion that everyorganisation which writes regulations or other forms ofsupporting legislation should have a Regulation ReviewAuthority to continuously examine the stock of existingregulations and to weed out those that do not have anycontinuing use. There have oftenbeen opinions expressed thatsuch an Authority should beestablished outside of theinstitution that writesregulations in order to ensureobjectivity. The Committee is,The RegulationReview Authorityshould be within theorganisation thatwrites regulations inorder to have a bettersense ofunderstanding thecontext.however, persuaded that the Regulation ReviewAuthority should be within each organisation that writesregulations in order to have a better sense ofunderstanding the context in which the regulationswere written and to contextually assess their continuingrelevance. Locating such a body outside regulatoryorganisations could result in a cavalier approach arising49

from a lack of ownership in regard to the regulations.An internal Regulation Review Authority can also begiven the task of reviewing draft regulations that are inthe pipeline in order to ensure that unnecessaryregulations are not given effectto. Making the RegulationsReview Authority also performthe function of reviewingprospective Regulations couldensure that unnecessaryregulations do not come intobeing in order to crowd theAn internalRegulation ReviewAuthority can also begiven the task ofreviewing draftregulations that arein the pipeline inorder to ensure thatunnecessaryregulations are notgiven effect to.already crowded regulatory landscape.4.12 The frequency with which regulations areamended and new regulations brought into effect hasan unsettling effect on the conduct of business. It islegitimate to presume that persons who invest inbusiness ventures would like to have a clear idea of theregulatory environment in which their businesses existand function. As in the case of legislation, it is50

important to ensure that there is continuity and clarityin the content of regulation. It has been noticed thatvery often regulations are brought into effect in orderto address a single instance of transgression ormisdemeanour, or even non-compliance, intentionallyor otherwise, with the content or form of existingregulations. In some cases, it is entirely possible that aconstructive interpretation of existing regulations couldaddress the problem on hand. Yet, regulatoryauthorities worldwide have been known to write newregulations as a kneejerk reaction to some solitaryinstance of non-conformist behaviour.Sunset Provisions in Regulation4.13 A ‘Sunset Provision’ refers to statutory orregulatory or policy provision providing that a particularagency, benefit, or law will expire on a particular date,unless it is reauthorized by the appropriate authority.51

4.14 Sunset provisions have been used in varyingcontexts and therefore differ greatly in their details,however, they share the common belief that it is usefulto compel the legislature or the regulator to periodicallyre-examine its delegations of authority and to assessthe utility of those delegations in the light ofexperience. There are two types ofsunset provisions which have beenobserved in practice in differentjurisdictions. In some instances thestatute creating a particularAdministrative/ Regulatory Agencycontains a sunset provisionThe Central and Stategovernments andRegulatory Bodiesshould consider asunset provisionwhile enacting a newlaw or creating a newagency or prescribinga new regulation.applicable only to that agency. In other instances astate may enact a general sunset law that mayeliminate any agency that is unable to demonstrate itseffectiveness. In this light the Committee is of the viewthat the Central and State governments and RegulatoryBodies should consider a sunset provision whileenacting a new law or creating a new agency orprescribing a new regulation.52

4.15 The basic philosophy in the regulatoryenvironment ought to be not more regulations butbetter regulation. In other words, instead of writing outnew regulations at every conceivable opportunity andcreating confusion, there ought to be betterenforcement of existing regulations.4.16 In order to ensure that adequate thought goesinto new regulations, it is reiterated that every ministryof the Central Government, every department of theState Government and every regulatory authority haswithin it a Regulation Review Authority. The task of theRegulation Review Authority would also extend to thescrutinizing of prospective regulations before they aregiven effect to. In doing so, the Regulation ReviewAuthority would also function as a regulation previewauthority. It would be for the authority to examinewhether any existing regulation either in its presentform, or with some modification, can address theobjective sought to be attained through the proposed53

new regulation. It is only when the authority is satisfiedthat the proposed objective cannot be met by anyexisting regulation that it should accord clearance tothe bringing into effect of any new regulation. Such anarrangement will ensure that new regulations do notbecome a frequent feature of the regulatoryenvironment.REGULATORY IMPACT ASSESSMENT4.17 The seemingly mindless explosion of regulations,impacting seriously on management time and cost hascreated a negative perception of the regulatoryenvironment in which business is conducted. Mostdeveloped countries have put in place a formal systemof regulatory impact assessment (RIA) in order todetermine whether the effort involved and the costsrequired to be incurred are commensurate with theresults sought to be achieved. The regulated universe iscontinuously changing in regard to participants,products/ instruments and processes, with theattendant attributes of size and the complexity that54

they engender. This challenge is being addressed moreoften than not by increased frequency of regulationsoften resulting in regulatory overreach. Ambitious inscope and expansionist in effect, many regulations area clear case of biting of more than one can chew. Insuch a situation it becomes imperative to put in place aformal system of regulatory impact assessment.4.18 Elsewhere in this report, the Committee hasrecommended that every regulatory authority, ministryor department of the Central or State Governmentinvolved in the writing of regulations should have withinit a Regulation Review Authority also tasked with thepreview of intended regulations. Such a body is bestequipped to undertake the regulatory impactassessment, which should be a condition precedent tothe writing of regulations. Such an assessment willinclude inter alia a clearly articulated statement of theneed for the action being proposed and theshortcomings in the system in the absence of suchaction. It will be required to address alternatives ratherthan to adopt a binary approach to a specific regulatory55

proposal. One of the alternatives could also be that noaction is required by way of fresh regulations.4.19 It is useful to remember that regulations aresought to be justified in thename of the protection of theconsumer whether she is aninvestor, policy holder,depositor or recipient of anyservice or product.Compliance with regulations isnever cost-free. It would befutile to expect the providersof products or services toabsorb the costs of regulation.Resultantly, such costs aremet by the recipients of theproduct or service in whoseEvery regulatoryauthority, ministry ordepartment of theCentral or StateGovernment involvedin the writing ofregulations shouldhave within it aRegulation ReviewAuthority also taskedwith the preview ofintended regulations.Such a body is bestequipped toundertake theregulatory impactassessment (RIA),which should be acondition precedentto the writing ofregulations.name regulations are soughtto be written. The fact that the person whose interest issought to be protected is the one who, in the ultimate56

analysis meets the cost is a sufficiently persuasivereason for undertaking a rigorous regulatory impactassessment.4.20 It is sometimes argued that all benefits are notnecessarily quantifiable and, therefore, regulatoryimpact assessment is an incomplete exercise. Whilerecognizing that every benefit cannot be quantified, it isnecessary to take the view that a proper appreciation ofthe non-quantitative benefit sought to be conferred onthe protected class should leadto a sufficiently satisfactoryregulatory impact assessment.4.21 It must also be recognizedthat the writing of regulationsimposes an additionalIt must be recognizedthat self-regulation inthe hands of anindustry body or aprofessionalmembership bodyoften results in noregulation beingenforced.responsibility, and aconsequent burden, on regulatory organisations.Writing out regulations is the easier part. Properlyenforcing an increasing number of complex regulations57

would necessitate capacity-building of a high orderwithin regulatory organisations, such capacity-buildingbeing both in terms of more persons and better andmore relevant skill-sets. The plethora of regulationsthat regulated entities have to contend with, oftenprompts the response that it is better to be free of allexternal regulations. The proponents of self-regulationoften argue that it would be based on a betterunderstanding of ground realities and would be bettertargeted to meet the needs of the concerned sector. Itmust be recognized that selfregulationin the hands of anindustry body or a professionalmembership body often resultsin no regulation being enforced.A regulatory impactassessment of everyproposed regulationshould precede thepublic consultationprocessThe premise that regulationsexist to protect the weaker party in a contractualrelationship should not be lost sight of while making acase for self-regulation with attendant conflicts that aredifficult to manage.58

4.22 A regulatory impact assessment of every proposedregulation should precede the public consultationprocess which has been dealt with elsewhere in thisreport. This would lead to fewer regulations with moreof them being more productive and purposeful than atpresent.59

Chapter FiveEnabling MSMEs5.1 MSMEs play a very significant role in the Indianeconomy. Unless their concerns are addressed, many ofthem would become uneconomic units and there wouldbe very few persons willing to venture into this area ofbusiness.5.2 The first problem that MSMEs face is a lack ofcoordination in terms of policy formulation andstatutory enforcements among various CentralMinistries and State Governments. This could beaddressed by setting up an overarching body at thehighest level to identify and address key issuesimpeding business facilitation and to interface withrelevant Ministries and Departments in order to addressidentified key impediments in a time-bound manner.The State Governments and concerned CentralMinistries as well as representatives of MSMEs could bethe members of this over-arching body.60

5.3 For a relatively small business unit the multiplechannels of compliance impose not only a hugefinancial cost but also strain the managementbandwidth available to such entities. It is necessary tohave single window channels of compliance to helpsuch small entities and also a hassle free tax paymentregime.5.4 Insolvency is yet another matter which needs tobe addressed expeditiously. 97% of MSMEs areproprietorship firms or partnerships and do not have anadequate recourse for winding up the business underthe Companies Act. Similarly, there are no bankruptcylaws akin to those prevailing in developed countries tofacilitate the winding up of uneconomic units in anorderly fashion.5.5 As far as a new entrant to the businessenvironment is concerned, he or she would be bestserved if the websites of the appropriate nodaldepartments of the various Governments contain61

detailed information regarding the number ofclearances/approvals required, the authority whichaccords such clearances, the documentation and otherprocedural requirements necessary for obtaining theapprovals the time likely to be taken for obtaining suchapprovals and the authorities who may be approachedin the event of any grievance. There should also befacilitation Centres to help suchapplicants to deal with thecomplexities of fillingcumbersome forms and dealingwith other procedural issues. Itwould also be extremely helpfulif every authority vested withThere should also befacilitation Centres tohelp such applicantsto deal with thecomplexities of fillingcumbersome formsand dealing withother proceduralissues.the powers of granting approval puts on its website acomprehensive list of the reasons for which approvalsare likely to be withheld. This would ensure that anapplicant for setting up a business can address allidentified procedural and substantive shortcomings inhis or her proposal before submitting the application forapproval. The granting of permissions or the decision62

not to grant permissions should be taken within aprescribed time period failing which there should be aprovision for deemed permission. In some states‘Deemed Approval’ provisions have been included inrelevant rules and notified, while many others are yetto do so. Elsewhere in this report the Committee hasremarked that there should be a nodal point to captureand share the state-level best practices with regard toimproving business environment. Such a mechanismwould facilitate swift adoption of best practices such as‘deemed approval’ amongst the State Governments. Ona related note, the e-biz portals already established tofacilitate the doing of business in India could be theideal platform for dissemination of information topersons seeking to undertake business.63

Chapter SixAddressing State Level Issues6.1 In attempting to improve the regulatoryenvironment in India, it is necessary to focus on theimportant role of the State Governments. A largenumber of regulations that impact the doing of businessin India pertain to subjects or functional areas whichare within the province of the State Governments asper the separation of powers provided for in theConstitution of India. Available information points tothe fact that while some State Governments havedevoted adequate attention to reducing the complexityof regulation and are moving in the direction of singlewindow clearance mechanism, some others continue tohave multiple authorities with overlapping functionsleading to a large number of approvals being requiredfor setting up a business. As is clearly the case in sucha situation, the appropriate administrative authoritythat takes the longest time to accord approval or64

clearance determines the ease, or the lack thereof, ofdoing business with thatState.6.2 Further, there is nosingle source of informationfrom which a personintending to set up businessThe appropriateadministrativeauthority that takesthe longest time toaccord approval orclearance determinesthe ease, or the lackthereof, of doingbusiness with thatState.can ascertain the number andnature of approvals required. The limited sources ofinformation that are available often do not reflect thecurrent position. Outdated information causes as muchdifficulty as the absence of the information. Websitesare often not updated and as a consequence,sometimes tend to mislead rather than inform. Whilethe Committee is strongly of the view that a tendencyto set up new organisations and institutions should beavoided, it is necessary for each State Government tohave a nodal person and a nodal office which can bethe single point contact for persons intending to obtain65

information on the procedural and substantiveconditions to be fulfilled forsetting up a business.6.3 During the Committee'sdeliberations, the question arosewhether State Governmentsshould be incentivised forsimplifying the regulatorystructure, reducing the number ofregulations and rewriting them inIt is necessary foreach StateGovernment to havea nodal person and anodal office whichcan be the singlepoint contact forpersons intending toobtain information onthe procedural andsubstantiveconditions to befulfilled for setting upa business.simpler language than at present. One view, which isnot without merit, is that the additional business that aState Government would attract by revamping theregulatory environment should itself incentivise theState Government to move in that direction. However,with an urgent need being felt to accelerate the processof simplification of regulations and consequentlyexpediting the necessary approvals, the Committee isof the view that State Governments that makesignificant progress in this matter should be66

appropriately incentivised. The Committee would leaveit to the Union Government to determine the mannerand the instrumentality ofsuch incentivisation.6.4 It is also necessary forthe Union Government todesignate an appropriateCentral Ministry orDepartment as a clearinghouse for information on thepractices being adopted bydifferent State Governments.This would enable all StateWith an urgent needbeing felt toaccelerate theprocess ofsimplifications ofregulations andconsequentlyexpediting thenecessary approvals,the Committee is ofthe view that StateGovernments thatmake significantprogress in thismatter should beappropriatelyincentivised.Governments to ascertain the best practices beingfollowed in Governments in respect of the regulationsrelating to each sector within the sphere ofresponsibility of the State Governments and to adoptor, where necessary, adapt the best practices that arein vogue elsewhere. It is not necessary to reinvent the67

wheel in regard to practices and procedures thatalready exist in some other States.6.5 One area which needs to be addressed is the delaycaused by approving authorities by resorting to a timetested method of sequential querying. This involves thephenomenon of raising one query at a time so as todelay the process of grantingapproval, and in the processincrease the chances of speedmoney changing hands. In orderto address this perniciouspractice, it is necessary that forevery approval to be accordedthere should be an outside timelimit, with stipulation that if anapproval is not accorded or a finalIt is necessary thatfor every approval tobe accorded thereshould be an outsidetime limit, withstipulation that if anapproval is notaccorded or a finaldecision of rejectionis not communicatedduring that timeperiod, there will be apresumption ofapproval.decision of rejection is not communicated during thattime period, there will be a presumption of approval.The example of building plans can be cited to illustratethe point. If a local authority does not accord approval68

for a building plan within a reasonable period, as maybe prescribed by the State Government concerned, itwould be presumed on the expiry of that period thatapproval has been accorded. At the same time, itshould be incumbent on all authorities vested with thepowers of granting approvals to record in writing as towhy the proposal is notaccepted and cannot beapproved. There should bebuilt into the system anappellate process where aperson aggrieved by an orderof rejection may, as a matterof right, approach a superiorThere should be builtinto the system anappellate processwhere a personaggrieved by anorder of rejectionmay, as a matter ofright, approach asuperior authority forreconsideration ofthe matter on merits.authority for reconsideration ofthe matter on merits. Such a system would strike atthe root of enormous powers vested in individuals andwould create a climate of confidence, and the personsseeking to do business would be encouraged to do so.69

Chapter SevenAction on the World Bank Report7.1 The Central theme of this Committee’s report hasbeen to take a sector-neutral view of the approach toregulation in order to attempt a long overduesimplification of the regulatory regime. However, itwould be useful not to lose sight of the specifics of theWorld Bank Report which over the last ten years hasbecome a reference point for persons seeking to dobusiness.7.2 Before addressing the specific parameters on thebasis of which the World Bank report attempts theranking of various countries it is significant to take noteof the fact that the World Bank had appointed anindependent review panel in October 2012 to review abroad range of issues surrounding the “doing businessreport”. After a process of extensive consultations withall stakeholders, the independent review panel made aseries of recommendations, the chief of which is that70

while the doing business report should be retained, theaggregate rankings should be removed. A number ofother correctives were suggested in order to make thereport more useful to those interested in the subject.7.3 Taking advantage of the shortcomings highlightedand the concerns expressed by the panel it is perhapstempting to ignore the report in its entirety and tocontinue doing “business as usual”. This would be aretrograde step. It is possible to address the issuesraised in the report, while factoring in the limitations ofthe report and to improve the content and process ofthe regulatory environment in India. Therefore, while,as already stated, the focus of this report is on thegeneral issues that need to be addressed acrosssectors, some attention needs to be given to the someof the ten indicators on the basis of which the countrieshave been ranked by the World Bank.7.4 The first indicator is a measure of the procedures,time, cost and minimum capital required to start a new71

usiness. This is a parameter in respect of which Indiahas received a very poor ranking. The large number ofapprovals, the difficulty in getting land, the time takenin getting electricity and water connections and anumber of other factors make it a daunting task for anyperson contemplating to set up a business in India. Thefact that some of these approval processes runsequentially and not parallely also adds to the totaltime taken for a person to set up a new enterprise.While single window mechanisms have often beentalked about, the implementation of this instrumentalityhas not kept pace. Further, wherever single windowauthorities have been set up inadequate empowermentof such authorities has turned out to be a majorstumbling block in granting expeditious approvals.7.5 The second parameter is the delay in obtainingconstruction permits. Here again, time takingprocedures and multiplicity of approvals, not to mentionthe difficulties in regard to land add up to adiscouragingly long period of delay. While there are72

state wise variations in the time taken for constructionpermits it is necessary to put in place, as a first step, acompilation of the best practices in different states sothat some of the delay can be eliminated.Simultaneously the necessity for and the relevance ofsome of the permissions needs to be revisited with aview to removing them from the complex proceduralframework.7.6 A peculiar point to highlight the limited usefulnessof the ‘Doing Business Report’ is access to credit. Thereport suggests that on this parameter India isperforming well. However, the truth on the groundsuggests a contrary picture, particularly for the smalland medium enterprises. This flaw in the report arisesprimarily because of its methodology. The ‘DoingBusiness Report’ measures the legal rights of borrowersand lenders with respect to secured transaction throughone set of indicators and sharing credit informationthrough another. The first set of indicators measureswhether certain features that facilitate landing, exists73

within the applicable collateral and bankruptcy laws.The second set measure the coverage, scope andaccessibility of credit information available throughpublic credit registries and private credit bureaus. Thisclearly fails to capture the actual difficulty on theground which is experienced by Indian SMEs despiteschemes such as priority landing. There are numerousmethodological infirmities which either limit or presentan unintended picture of the country vis-à-vis the DBRparameters.7.7 Accessing credit is particularly significant in thecase of small and medium enterprises. Notwithstandingthe nationalisation of banks and the resultant shiftexpected from the creditworthiness of the person to thecreditworthiness of the purpose, the Indian bankingsystem still fights shy of extending credit to personswho are unable to provide adequate collateral. Yetanother credit-related problem which business is facedis that credit is sometimes not available to the desiredextent and at the right time. Inadequate and delayed74

credit often leads to credit for productive purposesbeing applied to consumption purposes resulting indeteriorating asset quality. The absence of a Lender’sLiability Act further compounds the problem of existingand potential borrowers.7.8 Yet another important parameter is the ease withwhich, and the timing which tax returns can beprepared and taxes paid. Indian authorities have oftenclaimed that payment of taxes is far simpler thanbefore especially with the introduction of the electronicfiling system. While there is no doubt that the filing ofreturns and the payment of taxes has been significantlysimplified, the same cannot be said about the post filingissues that the average tax payer often has to contendwith. Despite protestations of an improvement inmindset, the needless adversary relationship betweenassessing authorities and the taxpayers continues to bea fact of life. This is further compounded by a perverseincentivisation system in which gross tax collections aretreated as a major indicator of good performance. It75

has also been noticed that there are a number ofproceedings pending in respect of matters theprinciples of which have already been decided by ahigher forum such as the Income Tax AppellateTribunal. In an attempt to increase the annualcollection of taxes, assessing authorities do not takecognizance of rulings by higher authorities in matterswhere the facts in issue and the principles of law areidentical. This has the further drawback of crowding thesystem with matters which should have been decided atthe level of the assessing authority. While it isappreciated that the judgement of the assessingauthority cannot be substituted by the directions ofhigher authorities there would be no harm in theissuance of a general circular to the effect thatassessing authorities would be obliged to take note ofrulings of higher authorities in identical matters.7.9 While the World Bank report does not specificallyaddress the problem of retrospective taxation it isconsidered necessary to touch on the subject. It hasoften been said that death and taxes are equally76

undesirable aspects of human life. Yet, it can be said infavour of death that it is never retrospective.Retrospective taxation has the undesirable effect ofcreating major uncertainties in the businessenvironment and constituting a significant disincentivefor persons wishing to do business in India. While thelegal powers of a Government extend to givingretrospective effect to taxation proposals, it might notpass the test of certainty and continuity. This is a majorarea where improvements should be attempted soonerrather than later since business cannot take correctiveaction retrospectively.77

No.11/08/2012-CL.VGovernment of IndiaMinistry of Corporate Affairs’OFFICE MEMORANDUMGeneral Circular no. 26/2012Shastri Bhavan, New DelhiDated: 23 rd August, 2012Subject:-Constitution of a Committee for Reforming the RegulatoryEnvironment for doing Business in India.The undersigned is directed to state as under:-1. The report of The World Bank and the International Finance Corporation,entitled “Doing Business 2012: Doing business in a very TransparentWorld”, India has been ranked at a low of 132 amongst a sample of 183countries. Although, there is a seven – point improvement over 2010ranking of 139. However, India continues to lag behind even the BRICand SAARC countries on most of the parameters.2. Easing of business environment mandates extensive examination ofregulations in different areas of root functioning such as financialreforms, governance reforms, liberalized policy framework, processreforms, etc.,. Thus there is a need to conduct an in-depth study into theentire gamut of regulatory framework and come out with a detailed roadmapfor improving the climate of business in India in a time boundmanner. Such an exercise needs to be undertaken for periodicalimprovement in the ranking, leading to a situation where India graduallymoves towards upward position with almost zero hassles.3. Accordingly, to achieve this, it has been decided to constitute aCommittee to conduct this study and prepare a detailed report within aperiod of six months. The Committee shall consist of following persons:I. Mr. M. Damodaran - ChairmanII. Members:1. Shri Y.C Deveshwar, Chairman, ITC2. Shri Ishaat Hussain, Director, Tata Sons Limited

3. Shri K.V. Kamath, Chairman, Infosys4. Shri Madhu Tandon,5. Shri Anand Mahindra, Chairman, Mahindra Group6. Shri Kumar Mangalam Birla, Chairman, Aditya Birla Group7. Chairman, SEBI or his nominee8. A representative of Reserve Bank of India9. Shri R.K. Pachauri, Vice-Chairman, TERI10. Shri Vijai Sharma, Ex. MoEF Secretary11. Shri Subas Pani, former Secretary, M/o Rural Development12. A representative not below the rank of Joint Secretary from M/oPower13. A representative not below the rank of Joint Secretary from M/oPetroleum14. A representative not below the rank of Joint Secretary from M/oHighways15. A representative not below the rank of Joint Secretary from M/oUrban Development16. A representative not below the rank of Joint Secretary from M/oCommerce & Industry17. A representative not below the rank of Joint Secretary from M/oEconomic Affairs18. Shri Amitabh Choudhary, CEO, HDFC Standard Life19. Shri Anil Bharadwaj, Secretary General, FISME20. Shri P.R. Ramesh, Chairman, Deloitte IndiaThe Indian Institute of Corporate Affairs (IICA) will render the necessarysecretarial assistance and logistic support to the Committee which shallsubmit its report to the Ministry of Corporate Affairs not later than sixmonths from the date of holding of its first meeting. Further, thecommittee is free to hold its meeting at anywhere in India as decided byits chairman. The Chairman of the Committee shall be free to make itsown procedure for conducting the meeting of the Committee.4. In carrying out its task the Committee may,(a) Elicit opinions about the policy action initiatives required and thechanges in the statute required for meeting the objective of conducivebusiness environment.

(b) Hold wide consultations with all the stakeholders in the corporatesector, academics and members of public;(c) Issue questionnaires and invite written comments through publicadvertisements; and(d) Take such other steps as may be considered necessary to suggest acomprehensive policy framework to enable regulatory environment fordoing business in India.This issues with the approval of Hon’ble Corporate Affair Minister.(Sanjay Shorey)Joint Director011-23389622Copy forwarded for information and necessary action to:1. Shri M. Damodaran, Former Chairman, SEBI2. Shri Y.C Deveshwar, Chairman, ITC3. Shri Ishad Hussain, TATA4. Shri K.V. Kamath, Chairman, Infosys5. Shri Madhu Tandon6. Shri Anand Mahindra, Chairman, Mahindra Group7. Shri Kumar Mangalam Birla, Chairman, Aditya Birla Group8. Chairman, SEBI or his nominee9. A representative of Reserve Bank of India10. Shri R.K. Pachauri, Vice-Chairman, TERI11. Shri Vijai Sharma, Ex. MoEF Secretary12. Shri Subas Pani, former Secretary, M/o Rural Development13. A representative not below the rank of Joint Secretary from M/o Power14. A representative not below the rank of Joint Secretary from M/oPetroleum15. A representative not below the rank of Joint Secretary from M/oHighways16. A representative not below the rank of Joint Secretary from M/o UrbanDevelopment17. A representative not below the rank of Joint Secretary from M/oCommerce & Industry18. A representative not below the rank of Joint Secretary from M/oEconomic Affairs19. Shri Amitabh Choudhary, CEO, HDFC Standard Life

20. Shri Anil Bharadwaj, Secretary General, FISME21. Shri P.R. Ramesh, Chairman, Deloitte India22. DG, IICA23. PS to Hon’ble Minister of Corporate Affairs24. PS to Hon’ble Minister of State for Corporate Affairs.25. Sr. PPS to Secretary/ Special Secretary, Ministry of Corporate Affairs.26. PPS to Addl. Secretary & Financial Adviser, MCA.27. PS to Joint Secretary(A),Joint Secretary (R), PS to Joint Secretary (M).28. All Regional Directors of MCA.29. All Registrar of Companies.

Independent Panel Review of the Doing Business reportEXECUTIVE SUMMARYIn October 2012, the President of the World Bank Groupappointed an independent panel of experts (“the Panel”) toreview a broad range of issues surrounding the Doing Businessreport, which is now in its tenth year of publication.The Doing Business report attempts to provide a wide-rangingassessment of the business climate in 185 countries, primarilythrough the lens of formal regulations and procedures. Itfocuses on de jure (according to law) aspects of the businessenvironment as they apply to small and medium-sizedenterprises, with limited attention paid to implementation andcustomary practice.The report ranks economies on 10 areas of regulation, whichthe report calls “topics” – starting a business, dealing withconstruction permits, getting electricity, registering property,getting credit, protecting investors, paying taxes, tradingacross borders, enforcing contracts and resolving insolvency.There is no other comparable project in terms of scale orscope.The Doing Business report is a flagship knowledge product ofthe World Bank (the Bank). As such, it needs to be anauthoritative, scientifically rigorous and well-crafted publicationthat provides meaningful input into policy discussions on howto improve the legal and regulatory climate for business aroundthe world.

The Panel has analysed the publication’s contents over timeand suggests that the Bank should continue publishing it, butthat certain key considerations around its reliability and validityshould be revisited.While the Doing Business report has played a role in conveyingnew information relevant to monitoring aspects of the businessclimate on a timely and internationally comparable basis, thereare many challenges associated with it. Key among these arethe relevance of the information gathered, the aspects beingmeasured, the spectrum of businesses being analysed(currently only small and medium-sized enterprises), and thebasis of its comparability across economies with different needsand at differing stages of development.The Panel is concerned about the following:• The Doing Business report has the potential to bemisinterpreted. It should not be viewed as providing a onesize-fits-alltemplate for development. Empirical evidence onthe results of business-regulation reforms captured by thereport is mixed and suggestive at best. Correlations betweenthe report’s topics and developmental outcomes often do pointto a negative association between the regulatory burden andeconomic development and growth. However, such correlationsdo not justify a causal interpretation: it is notoriously difficultto establish a causal relationship between such variables atcountry level. Moreover, any correlation would only point towhat is true “on average”. The evidence in favour of specificcountry reforms is contingent on many auxiliary factors notcaptured by Doing Business report topics.

• The report relies on a narrow information source. While thereis no obvious alternative to the report among existing globaldata-collection exercises and its results are generally in linewith other business-environment studies that survey firms andexperts, it makes far-reaching observations based on datagathered from sources with a relatively narrow perspective onthe business environment. The abiding question is whether theexperts – primarily lawyers – are the best source for therequisite primary data. A related consideration is whether thequestions posed are appropriate given what they are intendedto measure.• The report only measures regulations applicable to categoriesof business that can be captured through its methodology. Therepresentativeness of such businesses, and the relevance ofthese regulations, varies greatly from country to country. Thereport does not indicate how far its conclusions extend to firmsoutside its frame of reference. In addition, the real businessworld is very different to the one “on paper”. Triangulation ofthe investment/climate survey may provide a better startingpoint for measurement and comparison.• The report’s data-collection methodology can be improved.Some of these improvements require additional resources,while others – like revisiting the Independent EvaluationGroup’s recommendation to focus the measure of taxes on theadministrative burden of paying taxes rather than the tax rates– can be implemented at little cost. This review identifies theseimprovements without making detailed recommendations,because this would require a governance process that draws onlessons learnt and considers feedback and criticism fromvarious sources.

• The report’s ability to enable countries to respondappropriately. For example, India’s government has focused onthe small and medium-sized enterprises sector to stimulateindustrial growth and employment. Several grassroots studiesin India have revealed that companies of this size struggle withthe availability and cost of credit. However, the Doing Businessreport ranks India 23rd on the Getting Credit indicator (but132nd in the world overall). This provides an obscure picture ofthe real constraints faced by small and medium-sizedenterprises in India. If the Indian government were to beguided by Doing Business rankings, it would focus onconstraints that pull down the country’s overall ranking and noton the availability of credit. The report is therefore not anaccurate instrument for broader policy considerations.• The perspectives offered by the Paying Taxes and EmployingWorkers topics. The latter has already been excluded from thereport’s rankings. While there is a persuasive case for payingattention to these aspects of doing business, the Bank will needto carefully consider the correct way to assess the regulationand legal environment of these areas if these indicators are tobe retained.• The governance of the project. There is no regular formalexternal review of the Doing Business report and internalcommunication between the Bank’s different units could bestrengthened.• The use of aggregate rankings. The aggregation of indicatorsto produce the “Ease of Doing Business” rankings table hasbeen a contentious issue since the Doing Business reportstarted carrying them in 2006. Rankings are challenging

ecause they involve aggregating across indicators (topics) – aprocess that explicitly or implicitly involves a value judgment ofwhat is “better” for doing business and how much better it is –and because small revisions or inaccuracies in primary data cansignificantly change a country’s rankings.The report’s role and reputationThe World Bank’s views on the objectives of economic growthand development, and the best way to attain these objectives,are continuously evolving. For example, in its WorldDevelopment Report 2013, the Bank puts forward a nuancedview on labour regulations, suggesting that governmentsshould strive for a balanced combination of labour regulationand management practice that is unique to their country’sstage of development. This message differs markedly from theperspective associated with the report in its earlier years.Ideally, the Bank’s various knowledge products should alignwith its stated objectives and each other. The Doing Businessreport’s aim should therefore be to provide each country withthe ability to measure itself against its own stated “ease ofdoing business” and economic growth objectives.Doing Business users should fully understand the report’ssphere of relevance and, importantly, its limitations. Thesecaveats, which do appear in the small print on page 17 of the2013 Doing Business report, should be emphasised moreprominently within the first few pages, and throughout thesupporting communication strategy.

Furthermore, the report’s title, Doing Business, implies that itprovides a comprehensive measure of the businessenvironment, rather than just a measure of businessregulations. Changing the report’s name would go some waytowards addressing this problem and signalling a commitmentto transparency. One simple option would be to revert to the2004 title, Doing Business: Understanding Regulations, andbrand it as such.Recommendations1. Retain the Doing Business Report. The Panel recommendsthat the Doing Business report be retained as an annualflagship report.2. Remove the aggregate rankings. The decision to retain ordrop the aggregate rankings table is the most importantdecision the Bank faces with regard to the Doing Businessreport. Removing it would defuse many of the criticismslevelled against the report, but would diminish the report’sinfluence on policy and public discussion in the short term. Inthe long term, however, doing so may improve focus onunderlying substantive issues and enhance the report’s value.It is important to remember that the report is intended to be apure knowledge project. As such, its role is to inform policy,not to prescribe it or outline a normative position, which therankings to some extent do. The Panel recommends that theBank continue to publish the report but without the overallaggregate rankings (the Ease of Doing Business index). Rather,the scores (cardinal values) for each of the indicators should beemphasised. The country rankings (ordinal values) for eachindicator could be maintained, although the Panel regards the

cardinal scores as being more informative. Scores have theadvantage of showing where a country is located in the worlddistribution of an indicator. Ordinal rankings cannot signal suchabsolute performance. Moreover, there is no strong justificationfor the current simple averaging across indicators to producethe Ease of Doing Business index. Even without the aggregateranking, reform-minded countries would still be able to benefitfrom the primary data collected in the report. Parties interestedin the rankings would still be able to use the report’s primarydata to generate their own rankings without exposing thereport to criticism, because such rankings would not implicitlybe endorsed by the Bank.3. Group by topic or shift to categories. The Bank shouldexplore either grouping the “doing business” aspects into coretopical areas, or shifting to categories of business endeavour asan alternative to ranking.4. Change the report’s title. This is one way the report canclarify its limitations and be more clearly understood.5. Implement a peer-review process. This would improve thereport’s quality and provide a much-needed safety net. ThePanel recommends forming a single body with externalrepresentation in this regard.6. Increase the report’s level of transparency. Publishing allrelated information online, including contributors’ submissions,would increase the validity of the data and the credibility of theDoing Business project. It would also allow for possiblycalculating a measure of uncertainty in scoring. Measurement

errors are an enormous concern and the report would benefit ifit was clear about the quality of the data, especially since theDoing Business data has been used for conditional lendingpractices (for example, the Millennium Challenge account) andfor measuring the performance of various ministries.7. Reform the report’s methodology. This review makessuggestions to improve the methodology used in compiling thereport, with the understanding that it is the role of a robustgovernance process to remain responsive to new methods andfeedback.8. Align the report with the World Bank’s mandate and otherflagship publications. Moving the report team to the ResearchDepartment would optimise use of the Bank’s economicanalysis and research capacity, and help ensure that themessage contained in the report synchronises with the Bank’sother flagship products.9. Relocate the Doing Business report in the World Bank. ThePanel recommends transferring the report team to the Bank’sResearch Department and tasking the Development EconomicsVice-Presidency with overseeing the methods and analysis usedin compiling the report. The Panel also recommends improvingthe report’s governance framework, specifically with regard tooperational design. It recommends that a senior Bankmanagement group be tasked with approving the report beforeit is publicly released and ensuring that all necessary riskmitigationsteps have been taken.

10. Improve the report’s communication strategy. The Bankshould consider whether to include a “health warning” about itslimitations at the beginning of the report, rather than later inthe publication, and whether to include a formal definition ofthe Ease of Doing Business index (if it is maintained despite thePanel’s recommendation to drop it).11. Ensure the use of complementary information available inenterprise surveys. Doing Business currently measures only theregulation of the “formal” economy. The gap between thewritten law and the day-to-day practice can be significant,especially in developing countries with large informal sectors.The Doing Business report may benefit from supplementing itsinformation with other sources, such as the enterprise surveys,to better guide readers about the need to strengthen how thelaw is implemented or to signal which regulations in a givencountry are poorly designed.The Bank is urged to consider these points when deciding onthe path ahead.