Between April-December 2014, new companies incorporated have dropped by over 40%. By subjecting private companies to restrictions on lending, restrictions on dealing with related parties, the new Companies Act has completely throttled the need to ease doing business in India
The ambitious ‘Make in India’ campaign by Prime Minister Narendra Modi to make India a manufacturing hub will increase investment and employment. One would expect that this will mean an increase in the number of companies being incorporated since foreign investment in India through companies is common and preferred. However, as per data available on the Ministry of Corporate Affairs’ (MCA) website the number of new companies incorporated between April to December 2014 has dropped by over 40% over the corresponding period in the last year (http://mca.gov.in/MinistryV2/CompStat_IFCompLLP.html
). On the contrary, the number of limited liability partnerships (LLPs) incorporated has gone up by 67% during the same period. Companies Act was made onerous by the Congress-led government.
The difficulty of doing business in India affects foreign direct investment or FDI. The provisions of FDI framed by the Reserve Bank of India (RBI) allow investment in India only through a company under the automatic route. Of course, investment through other vehicles such as LLPs is also allowed after seeking necessary approvals from the government, but company is the most preferred vehicle since it involves lesser timeline and lesser pre-conditions. It is also from here that the real problem starts.
Effect of the Companies Act
According to the Annual Census on Foreign Liabilities and Assets of Indian Companies: 2013-14
published by the Reserve Bank, out of the 13,686 companies which filed foreign liabilities and asset (FLA) in 2013-2014 to report inward direct investment, 13,313 companies were unlisted. Out of these unlisted companies, majority companies are usually private companies and for obvious reasons till the Companies Act, 1956 (Act, 1956) was in force. With a number of exemptions under the Act, 1956, private companies were the most preferred route for FDI in India. In fact, most of the renowned foreign companies doing business
have set up private companies in India such as Coca Cola (India) Pvt Ltd, Ebay (India) Pvt Ltd, IBM (India) Pvt Ltd, Yahoo Software Development (India) Pvt Ltd. However with the enactment of Act, 2013, the dynamics of doing business in India have been topsy-turvied since the Act, 2013 treats private companies at par with listed companies!
Where world over it is common to see that private companies are least regulated, India seems to be following a convoluted approach by first subjecting the private companies to very strict regulation and then providing for exemptions.
The Companies Act, 1989 and Companies Act, 2006 in the UK has provided a number of exemptions to small private companies. In fact, the JJ Irani Committee Report, way back in the year 2005, underlined the need to deregulate private companies. However, the Act, 2013 has instead done the opposite.
By subjecting private companies to restrictions on lending, restrictions on dealing with related parties, the need to ease doing business in India to make the ‘Make in India’ campaign a success has been completely throttled. Of course the Government did try to rectify this botch up by introducing certain exemptions to private companies albeit with certain conditions, even that has been pending since July, 2014. It is thus no wonder that the numbers for incorporation of companies in India have shown such a drastic fall.
The only way ahead to savour any chances of making business in India any easier is by making amendment to the Act, 2013 first by providing much needed exemptions to private companies. The Government instead has directed its attention to other legislations such as land acquisition bill, GST Bill which will assume importance only when there are enough companies to do business in India. By subjecting private companies to face similar brunt of regulations as listed companies, it is the Act, 2013, which needs top most attention when it comes to making amendments.
(Nivedita Shankar is a Company Secretary and works as senior associate at Corporate Law Services at Vinod Kothari & Company