POLITICAL AND LEGAL ENVIRONMENT OF INDIA THE Changing dimension AND ITS IMPACT ON BUSINESS

PRESENTED BY: SIMRAT HUNDAL SMITA SHARMA SONAM CHAWLA SUDHIR

POLITICAL LEGAL ENVIRONMENT

It refers to the influence exerted by the three political institutions The Legislature The Executive The Judiciary

in shaping, directing, developing and controlling business activities.

 There is today no country with a stable and honest Government that does not have or has not had a reasonably satisfactory state of economic progress. - John Kenneth Galbraith

TAXES VOLUNTARY PROGRAMMES INFORMATION CONTRACTS GOVT. SERVICE

LAW AND ORDER INSPECTION AND LICENCES MONEY AND CREDIT COMPETITION GROWTH

TARIFFS AND QUOTAS INFRASTRUCTURE INFORMATION SMALL INDUSTRIES

TECHNOLOGY

POLITICAL ACTIVITY

POLITICAL ENVIRONMENT IN INDIA

With a population over 1 billion, India is the largest democracy in the world. It is a federal republic, consisting of 28 states and 7 union territories. The Indian Parliament consists of two houses: Upper House or Rajya Sabha and Lower House or Lok Sabha. 250 members are elected to the Rajya Sabha. Of the 250, 238 members represent states and union territories.The President nominates the remaining 12 members. On the whole, 545 members are elected to the Lok Sabha. The usual term of the Lok Sabha is five years. Major power centers in India are: Congress (I) party, Bharatiya Janata Party, Communist parties, Labor, and Military.

COALITION GOVERNMENTS AND ECONOMIC REFORMS

CONGRESS (June 1991-May 1996)

Unleashed economic liberalization Abolition of license quota raj Rationalization of import duties and tariffs Streamlining procedures for FDI approvals Encouraging foreign direct investment Opening up of Indias equity markets to investment by foreign institutional investors

GDP(CAGR%) :- 6.4%

UNITED FRONT (June 1996-March 1998) Tax reforms Voluntary Disclosure of Income Schemes

GDP(CAGR%) :- 5.1%

NDA (March 1998-May 2004)

Telecom Reforms Financial Sector reforms Power Sector reforms National Highway Development Program (NHDP) PPP for infrastructure development Disinvestment in select PSUs

GDP(CAGR%) :- 6.2%

UPA (May 2004-April 2009)

Administrative Reform Implementation of VAT The move to implement Goods and Services Tax (GST) from March 2010 Power Sector Reforms NREGA SEZ notification to boost export intensive industries Turnaround in the financial health of Indian Railways

GDP(CAGR%) :- 8.2%

UPA (May 2009-present)

Tax reforms Financial reforms Peoples ownership of PSUs FDI regime simplified Introduction of Companies Bill,2009 Poverty eradication goal by 2014-15 Strengthening transparency and public accountability

GDP(CAGR%) :- 7.2%

TOP 5 STATES IN TERMS OF SHARE IN INDIAS GDP

1. 2. 3. 4. 5. Maharashtra Uttar Pradesh Andhra Pradesh West Bengal Gujarat

40% of Indias GDP

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INDUSTRIAL POLICY OF INDIA

 The term Industrial Policy refers to the governments policy towards industries-their establishment, functioning, growth and management. The policy indicates the respective areas of the large, medium and small-scale sectors. The industrial development of a country is shaped, guided, fostered, regulated and controlled by its industrial policy. No legal sanction

RATIONALE
Correct the imbalances in the development of industries Direct the flow of scarce resources Prevent the wasteful use of scarce resources Empower the government Demarcate areas among the public, private and joint sectors of the economy. Prevent the formation of monopolies Give guidelines for importing foreign capital

INDUSTRIAL POLICIES
Industrial policy resolution of 1948 Industrial policy resolution of1956 Industrial policy statement of 1973 Industrial policy statement of 1977 Industrial policy statement of 1980 The New Industrial policy of 1991

INDUSTRIAL POLICY 1948

Issued by government of India on April 6, 1948 Laid stress on role of state in development of industry Main features Acceptance of the dual sectors : public and private Division of industries
1. 2. 3. 4. Industries where state had a monopoly Mixed sector Field of government control Field of private enterprise

Role of small and cottage industries Role of foreign capital was recognized

INDUSTRIAL POLICY 1956

Issued on April 30, 1956 Objectives To accelerate the rate of economic growth and to speed up industrialization To expand the public sector To prevent creation of monopolies To reduce existing disparities of income and wealth To build up a large and growing private sector To expand the village, cottage and small scale industries To achieve balanced industrial development

 The Industrial Policy Resolution of 1956 gave the broad policy framework of industrial development in India. Classification of industries under 3 heads
1. Schedule A exclusive responsibility of the state (17 industries) 2. Schedule B progressively state owned (12 industries) 3. Schedule C private sector

INDUSTRIAL POLICY 1991

Issued by the government of India headed by Mr. P.V.Narasimha Rao on July 24, 1991. Objectives Encouragement to Indian entrepreneurship promotion of productivity and employment generation Development of indigenous technology Incentives for industrialization of backward areas Enhanced support to small-scale sector Protect the interests of workers To link Indian economy to global market

Dimensions
Abolition of Industrial Licensing Foreign Investment Foreign Technology Agreements Public Sector Policy MRTP Act Exclusive small sector policy

INDUSTRIAL POLICY 2009

Main features
Objectives of the Industrial Policy of the Government are to maintain a sustained growth in productivity; to enhance gainful employment; to achieve optimal utilisation of human resources; to attain international competitiveness and to transform India into a major partner and player in the global arena. Policy focus is on Deregulating Indian industry; Allowing the industry freedom and flexibility in responding to market forces and Providing a policy regime that facilitates and fosters growth of Indian industry.

Policy measures
Liberalisation of Industrial Licensing Policy
Six industries under compulsory licensing Three industries reserved for public sector

Introduction of Industrial Entrepreneurs Memorandum(IEM)

Industries not requiring compulsory licensing are to file an Industrial Entrepreneurs Memorandum (IEM) to the Secretariat for Industrial Assistance (SIA)

Contd Liberalisation of the Locational Policy

No industrial approval required from the Government for locations not falling within 25 kms of the periphery of cities having a population of more than one million Non-polluting industries such as electronics, computer software and printing can be located within 25 kms of the periphery of cities with more than one million population. industrial undertakings with an investment upto rupees one crore are within the small scale and ancillary sector 21 items reserved for manufacture in the small scale sector

Policy for Small Scale Industries

 Non-Resident Indians Scheme

The general policy and facilities for Foreign Direct Investment as available to foreign investors/company are fully applicable to NRIs as well

Electronic Hardware Technology Park (EHTP)/Software Technology Park (STP) scheme

For building up strong electronics industry and with a view to enhancing export the inputs are allowed to be procured free of duties
liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership

Policy for Foreign Direct Investment (FDI)

Monetary Policy

Monetary policy determines the supply of currency in the economy. Through it the RBI targets a key set of indicators to ensure price stability in the economy. Through the supply of money, monetary policy regulates: Interest rates Inflation.

 The monetary policy stance for 2009-10 has been to maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process. Cash reserve ratio: 5.75 % Reverse Repo rate: 3.25 % Repo rate: 4.75 % Statutory Liquidity ratio: 25 %

Fiscal Policy

 Fiscal policy is the statement of governments source of income and its expenditure. It is concerned with raising revenues and deciding on the level and pattern of expenditure. Fiscal policy influences the decisive forces of economics- demand, supply, disposable income of the people, savings rate etc. Fiscal policy operates through budget. Budget is an estimate of government expenditure and revenue for the ensuing financial year. It is presented to Parliament on the last working day of February by the Finance Minister in the name of the President of India. Ocassionally, in times of financial crisis, an interim budget may be introduced later in the year to increase taxation and expenditure.

Budget 2010-2011
The tax break for IT industry has not been extended.(expires in Mar 2011) Rise in MAT( minimum alternative tax) to 18% will increase tax liability for leading infra ,IT and telecom companies including Bharti Airtel, TCS, Idea Cellular. Corporate surcharge cut to 7.5%. Tax holiday to new hotels till they start making profits. Increased weighted deduction of upto 200% for R&D companies will shift focus from generic business to high end drug discovery and innovation.

The Fiscal Responsibility and Budget Management (FRBM) Bill

The Committee on Fiscal Responsibility Legislation was constituted on January 17, 2000 to recommend a draft legislation on fiscal responsibility of the government. The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in Lok Sabha in December 2000 . The FRBM bill was passed by the UPA government in July 2004. Objective : To legally bind the government with the responsibility to adopt a prudent fiscal policy and pave the way for accomplishing macro economic stability.

The original bill aimed at: Reducing revenue deficit by an amount equivalent to 0.5% of GDP at end of each financial year and Reduction in fiscal deficit by an amount equivalent to 0.5% of GDP at end of each financial year. Central government shall not borrow from the RBI.

Bill seen as undemocratic. Denied freedom to future governments in terms of fiscal management. Modified version of the bill was passed in 2004.

The FRBM legislation provides for : Quarterly review of fiscal situation. Regulating borrowing from the RBI in a bid to check borrowing and control expenditure for fiscal discipline.

Foreign Trade Policy

The Foreign trade/Export Import Policy is announced after every five years by Ministry of Commerce and Industry. EXIM policy aims at developing export potential, improving export performance, encouraging foreign trade and creating favorable balance of payments position.

Current status
Exports turned positive in Nov. 2009 after 13 months of continuous fall, Registered a growth of 9.4 % in Dec. 2009 owing to strong growth in pharmaceuticals, auto components, chemicals, engineering . SEZs registered a growth of 50% with total exports of Rs.1,51,785 crores.

Foreign trade Development and Regulation Act

In India, the main legislation concerning foreign trade is the Foreign Trade Development and Regulation Act, 1992. The Act provides for the development and regulation of foreign trade by facilitating imports into, and augmenting exports from India . As per the provisions of the Act, the Government : may make provisions for facilitating and controlling foreign trade; may prohibit, restrict and regulate exports and imports, in all or specified cases as well as subject them to exemptions;

Cntd.

is authorised to formulate and announce an export and import policy and also amend the same from time to time, by notification in the Official Gazette; is also authorised to appoint a 'Director General of Foreign Trade' for the purpose of the Act, including formulation and implementation of the export-import policy.

Objectives of current FTP 2009-14 (27 AUG 2009) released by Ministry of Commerce and Industry are : to arrest and reverse the declining trend of exports and to provide additional support especially to those sectors which have been hit badly by recession to achieve an annual export growth of 15% with an annual export target of US$ 200 billion by March 2011. The long term policy objective for the Government is to double Indias share in global trade by 2020.

 POLICY MEASURES Promote Brand India through six or more Made in India shows to be organized across the world every year. Comprehensive Economic Partnership Agreement with South Korea which will give enhanced market access to Indian exports. 26 new markets have been added under Focus Market Scheme. These include 16 new markets in Latin America and 10 in Asia-Oceania. The incentives available under Focus Market Scheme (FMS) has been raised from 2.5% to 3%. Continuation of the DEPB Scheme upto December 2010. Continuation of income tax benefits for IT industry and 100% export oriented units for one additional year till 31st March 2011.

 The incentive available under Focus Product Scheme (FPS) has been raised from 1.25% to 2%. Products added to this scheme include agricultural machinery, parts of trailers, sewing machines, hand tools, garden tools, musical instruments, clocks and watches. Introduction of a common simplified application form to take benefits under FPS, FMS, MLFPS . Jaipur, Srinagar and Anantnag have been recognised as Towns of Export Excellence for handicrafts; Kanpur, Dewas and Ambur have been recognised as Towns of Export Excellence for leather products; and Malihabad for horticultural products.

Review of the FTP on Jan 29, 2010: 112 new products eligible for benefit under FPS including rubber, plastic, chemicals. 113 new products eligible for benefit of 5 % under special FPS , include pumps, nuts and bolts, agricultural tools etc. Timor Leste added as new FMS country and 2 new markets , China and Japan added under Market Linked Focus Product Scheme. Sesame seeds and coconut products added under Vishesh Krishi and Gram Udyog Yojana.
EXIM TIMES, JAN 16-31

FOREIGN EXCHANGE MANAGEMENT ACT.

FEMA
Passed by the Lok Sabha in 1999 and came into force with effect from June 2000. FEMA, which has replaced FERA, had become the need of the hour since FERA had become incompatible with the proliberalisation policies of the government.

Preamble An Act to simplify, consolidate and amend the law relating to foreign exchange with the objective of : 1. Facilitating external trade and payments and , 2. For promoting the orderly development and maintenance of foreign exchange markets in India.

PROVISIONS.
Current account transaction. Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawl is a current account transaction. Capital account transaction. Any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction. Exports of goods and services. Every exporters of goods or services shall furnish to the Reserve Bank details regarding the export value of such goods or services. Contravention Penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lac rupees where the amount is not quantifiable.

* LAND ACQUISITION * ENVIRONMENT PROTECTION ACT * MRTP ACT and COMPETITION ACT,2002

* Also there is a considerable difference between the market value of the property and the value that the land acquisition company pays the land owners.

* The left parties would raise a demand to scrap the archaic land acquisition act,1894, as it facilitated land acquisition by big Corporates, who took advantage of the acute distress of farmers, communist party of India (Marxist) Polit bureau member Brinda Karat said. (22 Feb, 2010.) * She said the demand to scrap the law and allot land to the landless and homeless would be raised at a rally called by left parties in New Delhi on march 12.

* Indias total known reserves are 18 billion tonnes, of which 4.5 billion Tonnes are in Orissa and the state government plans to give 1 billion Tonnes to POSCO of which 400 MT will be exported to Korea. * A community led struggle emerged in the Orissa almost three years ago (June 2005). The agitation, which continues till today is against the forcible take over of lands and resources.

* About 50% of the families are also involved in pisciculture (mostly prawns), for which the daily earnings per family can range between Rs. 100-5000 ($2.50-$125). * In addition, there are many landless families that depend on ancillary employment like making baskets for packaging paan leaves grown in the area.

* Water extraction in these quantities will also lay additional stress on an already overloaded water system, imposing a threat on water security for the locals, in addition to concerns about water pollution.

* The people of Orissa are not against industry but they want the company should address the demands of the local people. Betel vine farmers should be properly compensated.

* The law has provisions for state taking over privately held land for public purposes but not for developing private businesses. The illegality of the acquisition has been substantially conceded by the Kolkata high court.

* This lead to the protest of the peasants backed by the political parties of opposition, who thought it would be a good opportunity to end the communist rule of Bengal.

* A housing and industrial boom is gathering momentum on the outskirts of Ahmedabad city. * Among the industries coming up in Sanand are Avtec Ltd., Durr India Pvt. Ltd., Rajkot- based Amul Industries and Bosch India.

Land acquisition process, in the recent times, has emerged as a major bottleneck resulting in time lags, cost over runs, business uncertainties and even shelving of projects by companies. 1. Firstly, the buyer of property is required to establish the chain of title in respect of the property for the preceding 30 years in order to obtain a clear and marketable title in respect of property. Typically, a title search exercise, for a mid-sized project takes at least 2-3 months. Thus, establishing the chain of title, obviously, is time consuming, expensive and complex resulting in huge project delays.

2. Secondly , under the seventh schedule of the Constitution of India, all matters relating to land are a subject matter of the State Government. Accordingly, each state has enacted its own legislation in relation to land, registration, stamping and development thereon. Further, there are often disconnects between the state laws and the central laws.

compensation package to farmers, rehabilitation of farmers, fertility of land. Infact, most often companies prefer to interact with the farmers through the Government as intermediary or other middlemen and avoid direct interaction with the locals.

* In this Act, Environment includes water , air and land and the interrelationship which exists among and between water, air and land, and human beings, other living creatures, plants, micro-organism and property. * Environmental pollutant means any solid, liquid or gaseous substance present in such concentrations as may be, or tend to be injurious to environment.

offence was committed, was directly in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

* Also there are two cement plants owned by M/s. Jay Pee At Rewa In Madhya Pradesh M/s. Jay Pee Bela Cement Plant were found to be marginally exceeding the emission standards for which Madhya Pradesh State Pollution Control Board was asked to take corrective action.

* Even India's second largest cement company ACC ltd's two plants have been issued environment violation directions. The company has several awards to its credit for its achievement in environment awareness and protection including the Golden Peacock Environment Management special award and Subh Karan Sarawagi Environment Award to name a few.

THE OBJECTIVE OF THE ACT BEFORE 1991: * Regulation of monopolies and prevention of concentration of economic power. * Prohibit monopolistic, restrictive and unfair trade practices.

THE OBJECTIVE OF THE ACT AFTER 1991: * Controlling monopolistic trade practices * Regulating restrictive and unfair trade practices.

* From the beginning of 1990 there was a shift in the focus from
regulating monopolies to promoting competition. Competition , if encouraged , would improve productivity and increase quality benefitting consumers. The Competition Act precisely seeks to achieve this.

* The MRTP Act had become redundant post July 1991 when the new economic policy was announced * Hence in October 1999 Government Of India appointed a high level committee known as RAGHVAN COMMITTEE Committee presented its report in May 2000 & based on this report draft was presented to government in November, 2000. This act was enacted by Parliament in 53rd year of Republic of India & was passed in December, 2002 namely called as COMPETTITION ACT 2002. * The Ministry Of Corporate Affairs, Government Of India issued a notification dated 28th August 2009, whereby the Monopolies And Restrictive Trade Practices Act, 1969 (The MRTP Act) stands replaced by the Competition Act, 2002, with effect from September 1, 2009.

OBJECTIVE OF COMPETITION ACT:

* The Competition Act seeks to provide, keeping in view of the economic development of the country, for the establishment of a commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade. * This Act seeks to establish Competition Commission of India(CCI). Any person, consumer, consumers association, trade association, a state government or Central government may lodge a complaint with the Commission.

* Transfer Of Pending Cases Upon the expiry of two years from 1 September 2009, cases pending before the MRTP commission will be transferred as follows:-

Sections 5 and 6 that deal with combinations, mergers and acquisitions are yet to be notified. This has resulted in ambiguity and confusion as there were effectively two independent statutes, the MRTP act and the competition act having concurrent jurisdiction. This has led to the uneasy coexistence of two regulators without reconciled powers and functions, the MRTP commission and Competition Commission Of India (CCI). * Advisable to put a clause that closing of the transaction would be subject to any clearance of CCI.

Functions

Societies Registration Act 1860 Partnership Act 1932 Companies ( Donation to National ) Fund Act 1951 Companies Act, 1956 The Companies Amendment Act, 2006 The Monopolies and Restrictive Trade Practices Act, 1969 The Competition Act, 2002 The Chartered Accountants Act, 1949 Cost and Works Accountants Act, 1959 The Company Secretaries Act, 1980 Limited Liability Partnership Act, 2008

Recent initiatives
Introduction of the Companies Bill, 2009
Limited Liability Partnership Act, 2008 Indian Institute of Corporate Affairs, May 2008,

Gurgaon Amendments (2006) in the Chartered Accountants Acts, 1949, the Cost and Work Accountants Acts, 1959 and the Company Secretaries Acts, 1980

Most important piece of legislation governing Corporate India It covers almost everything from, birth to Grave of a Company 658 Sections, 13 schedules, 32 rules, 107 forms Several guidelines & hundreds of clarifications given time to time Objectives Promotes Sec. 38-39 of the VI of the Constitution of India.

1. 2.

What is Its Purpose Salient Features

New Companies Act will be the thematic law for this decade Insider trading becomes a criminal offence Consolidated financial statements of subsidiaries made mandatory recognition of cross-border mergers Provision for single forum for approval of mergers and acquisitions minimum number of independent directors to be appointed in listed companies should be one-third of the total number of directors

Appointment of valuers is proposed to be made by an audit committee or in its absence by the board of directors. Shareholders associations or group of shareholders are to be enabled to take legal action in case of any fraudulent action on the part of a company Clause that disallows claims over unclaimed dividend after seven years removed The Investor Education and Protection Fund (IEPF) is to be administered by a statutory authority. Role of independent directors clearly defined Process for formation of companies simplified

3.

4.

5.
6.

7.

8. 9.

Company Bill for more powers to Govt in probing offences Accounting norm changes to be incorporated in new Company Act The National Company Law Tribunal Rules to be made stringent for filing class action suits Company to separate posts of Chairman and CEO Knowledge test soon to assess company directors Two sets of accounting standards under company Act

 Why

LLP Acts, 2008 Salient Features

A hybrid between a limited liability company and a partnership firm Able to form multi-disciplinary partnerships. Flexibility of operations as board/general and extraordinary general meetings are not required to be conducted. Business can be expanded depending upon the increases in the area of operations. Limited procedural formalities.

89

The Liability of an LLP is met out of the property of the LLP; the partner is not liable. A partner is not responsible for the wrongful act or omission of any other partner No collective responsibility for every action of the LLP. The control of the Registrar of Companies on LLPs would be substantial. The Centre would have enormous rule-making power under the Act as there are 33 specific matters under subsection (2) of Section 72 of the Act,

The Bill does not provide for conversion/re-conversion of LLPs into firms/private companies and unlisted companies. Financial disclosures may act as a deterrent for formation of LLPs Lack of ceiling on the maximum number of partners may make LLPs unmanageable Fines/penalties/prosecutions and imprisonment provided for in the Act may prove a major irritant for forming LLPs.

Est. May 2008 Manesar, Gurgaon Purpose A global first in concept and design Re-inventing & repositioning MCA Fill Institutional vacuum Ministrys think-tank Futuristic in vision and approach Global Collaboration- Governance and Economic Growth Powerful global KMS

Income Tax Act 1961 1. Direct Tax e.g. Personal tax, corporate tax, wealth, inheritance tax 2. Indirect Taxes e.g. Excise, custom, sales, VAT
Proposed Tax Reforms GST planned to be implemented from April 2011

What is the justification for GST? What is GST? How does it work? Salient Features of the proposed GST
1. 2. 3. 4. 5.

The Reform entails a dual GST Uniform state GST threshold Rate structure Multiple statutes Tax Administration

How will GST benefit industry, trade and agriculture ?

comprehensive and wider coverage of input tax set-off and service tax set-off subsuming of several Central and State taxes in the GST and phasing out of CST may also lead to lowering of tax burden on an average dealer in industry, trade and agriculture.
reduce the cost of locally manufactured goods and services

How will GST benefit the exporters?

increase the competitiveness of Indian goods and services reducing the compliance cost.

How will GST benefit the small entrepreneurs and small traders?
raising of threshold will protect the interest of small

traders

How will GST benefit the common consumers?

Goods will become cheaper under GST

Mutually agreements-protection and enforcements

an agreement enforceable by law is a contract An agreement not enforceable by law is said to be void

Essentials of Valid Contract

Ministry of corporate Affairs, www.mca.gov.in Business Line, www.thehindubusinessline.com Indian Institute of corporate Affairs, www.primedirectors.com Economic & Political weekly, Dec, 2009 Vol. XLIV No. 51 Economic & Political weekly, Jan 2, 2009 Vol. XLV No.1 The Institute of Company Secretaries of India(ICSI) www.icsi.edu Institute of Chartered Accountants of India, www.icai.org The Companies Act, 1956 The Contract Act, 1872 Limited Liability Partnership Acts, 2008

Contd

stoposco.wordpress.com/posco-project-in-orissa/ - Cached en.wikipedia.org/wiki/Tata_Nano_Singur_controversy - Cached Similar www.pib.nic.in/release/release.asp?relid=57499 envfor.nic.in/legis/legis.html www.deccanchronicle.com Hyderabad - Cached www.legalserviceindia.com/articles/neew.htm - Cached - Similar www.lawyersclubindia.com/.../COMPETITION-ACT-2002.../2501/ Cached Essentials of Business Environment by: K. Aswathappa Business Environment by : Francis Cherunilum The HINDU (22/2/2010) Business Standard (2/2/2010) Business India(February7,2010)