Although the roots of banking in India can be traced to Ancient Mauriyan age, banks as one understands today originated in India in the early parts of eighteenth century, and in the course of time several banks came up and got closed down. There are, however, still few banks that bear the footprints of pre independence days and the most significant among them are Reserve Bank of India formed in 1935 and the State Bank of India, successor to the Imperial Bank of India established in 1921.

Regulating the banks is important because banks are a keystone in the edifice of financial stability of the economy. A well regulated banking system also “enhances the allocative capacity of the financial system” and thereby adds to the growth of the economy. The banking regulative regime in India underwent various changes and crystallized in 1949 with Banking Regulation Act, 1949 (passed initially as Banking Companies Act, 1949 and changed subsequently to Banking Regulation Act, 1949.). Banking Regulation Act, 1949 in conjunction with Reserve Bank of India Act, 1934 empower the Reserve Bank of India (RBI) to superintendent the banking system of the country and to act its guardian.

The Indian banking or financial system constitutes of Commercial banks, Cooperative banks, financial institution, and non-banking financial companies. The Commercial banks involves public sector banks, private sector banks and foreign banks. .While the public sector banks are the creation of the enactments of parliament, private banks under the Banking Regulation Act 1949 are deemed as banking companies. Foreign banks are a recent addition to Indian banking system and their existence and operation are determined by RBI guidelines of February 2005.

Till recently, the banking scenario in the country has been dominated by Public sector banks. However, the adoption of LPG (Liberalization, Privatization, Globalization) model of development by the Congress government in the early 1990s has been a watershed for the entire Indian economy. Under this model, foreign capital has been invited to the country to aid its growth and development. Foreign capital in the form of foreign direct investment and foreign institutional investments are permitted in almost all the sectors of the economy.

Commensurate with this new development, FDI to the extent of 74% (raised from 49% to 74% in March 2004) in private banks and 20% in Public sector banks have been allowed. Besides, in keeping with India’s obligation World Trade Organization, foreign banks have also been granted licence to operate India.

Thus, post-liberalization, private banks and foreign banks, hitherto rather obscure terms increasingly gained acceptability in popular parlance and imagination. RBI issued its regulation regime for both private banks and foreign banks. Initially the guidelines for licensing of new banks in the private sector were issued by the RBI in January 1993 but the revised guidelines effective till date were issued in January 2001. As per these guidelines, initial paid up capital in private banks is to ` 200 crores which is to be increased to ` 300 crores within three years of the commencement of business. The apex bank also issued comprehensive guidelines on ownership and governance in private sector banks. They aim at ensuring diversity in the ultimate ownership and control of banks in the private sector.

Foreign investment, in keeping with the increased cap of March 2004, from all sources including FDI, FII, NRI is increased from 49% to 74%. However, voting right of the foreign investor is capped at 10%, thereby ensuring that local banks are not taken over by foreign banks.

For the foreign banks, the RBI issued in February 2005 “Roadmap for the presence of Foreign Banks in India”. The Roadmap is divided into two phases- the first phase spanning the period March 2005-March 2009 and the second phase beginning after a review of the experience gained in first phase.

In the first phase foreign banks wishing to establish presence in India for the first time can either choose to operate through branch presence or set up a 100% wholly owned subsidiary(WOS).

Foreign banks already operating in India are also allowed to convert their existing branches to WOS while following the one mode presence criterion. The WOS is to be treated on par with the existing branch of foreign banks for branch expansion in India.

Before granting licence to foreign branch under the provisions of Section 22 of the Banking Regulation Act, 1949, RBI may satisfy itself that the government or the law of the country in which it is incorporated does not in any way discriminate against banks from India. Foreign banks’ track record of compliance and functioning in the global market may also be considered. Further, bilateral and diplomatic relations between India and the country in which the bank is incorporated may also be taken into consideration.

RBI issues a single class of banking licence to all banks and thereby does not place any limitation in the operation of foreign banks. In other words, foreign banks can conduct both retail and wholesale banking. In addition, the norms for foreign banks’ capital adequacy, in come recognition and asset classification vis-à-vis Indian banks are by and large same.

Private banks and in particular foreign banks are generating enormous return from their operations in India. The net profit per branch for the foreign banks in India 2005-06 was Rs. 11.99 crore as against the corresponding figure of Rs. 0.33 crore for the public sector banks. Further for the year 2006-07 the Return on Asset of the foreign banks was 1.65% while the Return on Equity 14.02% as against the corresponding figure of 0.82% and 13.62%for the Public sector banks. The success and recognition that these banks enjoy can be attributed to the fact that they adopt international best practices in order to stay competitive. Such practices include risk management technique, technology upgrades, more efficient capital allocation tools, strong branding, product innovation, better customer service etc. The main result of such improved atmosphere of operation in banking system is higher efficiency levels in the banking system in terms of more optimal capital allocation, better profitability, prudent risk management and a greater competition which ultimately benefits the end-customer through new products and services at affordable prices. It needs a mention here that one of the main aims of inviting foreign enterprises in India was to infuse the zeal of competition in our traditionally laggard Public sectors. And it has been seen that the presence of the multinational companies in the same segment has indeed made our Public sectors companies competitive. Presence of these foreign banks is already inspiring the banks in the public sector to compete with the former and if the protective shield is removed a little further, it will instill even more contestability among the public sector banks.

However, in recent times, the RBI has been giving dubious signals as regard its intention about the prospects of the proliferation of foreign banks and the admissibility of foreign capital in the banking sector. As per the roadmap for the presence of foreign banks in India, the revision of presence of foreign banks in India was due in April 2009. However, global financial market at that time was in turmoil and uncertainty plagued the financial strength of the banks around the world.

Accordingly, RBI’s Annual Policy Statement of April 2009 indicated the intention to continue with the current policy and procedure governing the presence of foreign banks in India and to review its roadmap after due consultation with the stakeholders, once there was greater clarity regarding the stability and recovery of the global financial system. Accordingly the Annual Monetary Policy 2010 directed to prepare a discussion paper on the mode of presence of foreign banks through branch or WOS by September 2010.

During the first phase of their operation, foreign banks have been given the option by the RBI to convert their branch operation into wholly owned subsidiaries without the branch licensing available to their domestic counterpart. No bank, however, came forward to avail this option and according to reports, the discussion paper to be released this month again favours the subsidiary route for fresh entry of foreign banks into the country. One RBI official is said to have said “If u adopt the subsidiary route then you will have better control on foreign banks in terms of capital and liquidity management” However, Experts believe that most foreign banks desirous of extending their business to India may not prefer the subsidiary route which requires them to shell out more capital for the entry, with no commensurate benefit. Unless they are given national treatment, branch expansion in India would remain circumscribed, regardless of whether the branch –only or the WOS route is employed. A compulsory listing in Indian stock exchange in case of the adoption of the subsidiary route also worries the foreign banks.

It is a strange Indian tendency to distrust anything foreign. After all what are the factors that inhibit the RBI to allow foreign banks to expand in India? Is it a fear that these banks with their humungous capital and global expertise will push the Indian banks to oblivion? Is it that these banks with their emphasis in exclusive banking rather than on inclusive banking will choke the flow of credit to agricultural and small and medium enterprise sector?

India’s public banking sector and the regulatory regime with which the RBI guardian it is hailed as one of the best in the world. During the recession of last few years Indian public sector banks’ sturdy fundamentals have come in for hefty praise from the international circles. Thus it is a little absurd to expect that the public sector banks will crumble in the face o stiff competition form the foreign banks. On the other hand, often what few of these banks crave for in order to compete with the foreign banks is a liberty to adopt the foreign banks’ modus operandi. Tarashankar Bhattacharya, managing director of India’s largest bank, the state bank of India laments that the public sector banks are constantly reined in from competing effectively with the foreign banks because they cannot pay market-linked salaries. Expect in rare cases they are unable to create or hold on to the best talent. They cannot acquire other banks without lengthy and often unsuccessful bureaucratic wrangling. And along with the rest of the Indian Industry they cannot downsize at will. Thus what these government owned banks privately desire for is to transform themselves into a commercial institution in the real sense of the term and not just be an instrument of social policy.

However, the social goals of the country can also not be soft peddled. But every time anything novel is sought to be introduced in the economy, they should not be projected as an impediment to that. The Indian public sector banks are strong enough to compete with the foreign banks. But what they might be deficient in is scale, volume of capital, technological and human resources. Thus what is required to empower these public sector banks to take the foreign banks head on is merger and acquisition. The Ministry of Finance is also in favour of merger and acquisitions. Speaking at the centennial celebrations of the Bank of India the finance minister said,”A country as large as India cannot be content with the one large bank (referring to state bank of India). India, perhaps, do not need 27 PSBs with numerous branches all over the country. A number of them can be merged to craft banks that can take the international giants.

The foreign banks have been clamoring for the expansion of their branches. One of the reasons as to whey their requests are not acceded to is because these banks tend to concentrate their operation in cities. The RBI has recently decided to allow the public sector banks to start new branches in tier III –tier VI cities without its prior approval. This scheme can in a limited way also be extended to the Foreign Banks. This will leave them with few options but to expand in small cities and at the same time will bring out their actual intention as to where they want to invest their money.

One also does not need to be so calamitous in his reaction to the idea of allowing an iota of level playing ground to the foreign banks. After all it is not going to sweep away the entire economy. On the other hand the possible changes that such a development will ensue will only be in the benefit of the entire country. If one can recollect when the mobile phone came to India, it used to be the exclusive privilege of the rich and wealthy, a status symbol. At that time both the incoming and the outgoing calls were charged. No one in those days could ever think that the mobile communication would one day become so affordable that persons from all sections of the society would treat it as a necessity. This happened because the communication network companies realized that an enduring and profitable business in India is not possible unless its villages where bulk of its population lives are also targeted. Similarly when KFC (Kentucky Fried Chicken) came to India it was feared that it will eliminate small businessmen dealing with chicken. But nothing of that sort, however, happened. What has happened on the other hand is that KFC in order to attract Indian customers has started selling its product at economic price. It would thus not be too wide off the mark to say that given some time and space the foreign banks would also discern this fundamental fact about Indian market and lose their penchant for big and the rich.

RBI has recently in “Discussion paper on the entry of new banks in the private sector” suggested that the foreign investment in private banks be capped at below 50%. It says that the Press Notes 2,3,and 4 issued by the government of India in February 2009 indicate that banks with foreign shareholding of more than 50% would be treated as non-resident –owned –banks.” Thus an Indian bank that receives foreign investment of more than 50% would become non Indian in ownership. In this sense both ICICI and HDFC are no longer Indian owned bank because the change in the way in which foreign investment is calculated has made foreign investment in these entities in excess of 50%. RBI claims that this move will “create strong domestic banking entities and a diversified banking sector” It needs to be emphasized here that there will not any change in the character of the bank because the voting right for any entity in the private banks has been restricted to 10%. So all that RBI is seeking to foreground by diversity of banking system is banks with different nomenclature.

By Hemant Batra

Lead Partner, Kaden Boriss Legal LLP, India

Vice President, SAARCLAW

Chairperson, IICLAM, Singapore

Advisory Board Member, OIC, USA

By Hemant Batra Lead Partner, Kaden Boriss Legal LLP, India Vice President, SAARCLAW Chairperson, IICLAM, Singapore Advisory Board Member, OIC, USA

 

Most Countries of the World which embarked on the road to economic development had to depend on foreign capital to some extent. But until the early 1990s India’s approach towards foreign capital as an instrument of growth and development in an overall sense was rigid, restrictive and selective. Things, howeve … Read More

via Hemant K Batra's Blog

Hemant Batra, Lead Partner, Kaden Boriss Legal LLP, India

Most Countries of the World which embarked on the road to economic development had to depend on foreign capital to some extent. But until the early 1990s India’s approach towards foreign capital as an instrument of growth and development in an overall sense was rigid, restrictive and selective. Things, however, changed with the Industrial Policy 1991.Coming on the heels of the macro –economic and balance of payment crisis of late 1980s, it ushered in a paradigm shift in the Indian economy and over bent to cajole foreign capital to come to India. The beginning made by the Industrial Policy 1991 in the direction of inviting foreign capital has increasingly been gaining momentum with new sectors being made eligible, with almost each subsequent year, for foreign capital.

The most important channel through which foreign capital flows into the country is Foreign Direct Investment (FDI). FDI as defined in Dictionary of Economics (Graham Bannock et.al) is “investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site.  International Monetary Organization (IMF) and Organization for Economic Cooperation and Development (OECD) define FDI as  a category of cross border investment made by a resident in one economy (the direct investor) with the objective of establishing a ‘lasting interest’ in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor. The motive of the direct investor is a strategic long term relationship with the direct investment enterprise to ensure significant degree of influence in the management of the direct investment enterprise .Besides, International Bank for Reconstruction and Development (IBRD) and United Nations Conference on Trade and Development (UNCTAD) also provide definition of Foreign Direct Investment. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy. It is preferred over other source of foreign capital because it is non-volatile, non-debt creating and results in economic development, modernization and employment generation in the economy.

Foreign Direct Investment under the Industrial Policy 1991 and thereafter under different Foreign Trade Policies is being allowed in different sectors of the economy in different proportion under either the Government route or Automatic Route.  In Retailing, presently 51 per cent FDI is allowed in single brand retail through the Government Approval route while 100 per cent FDI is allowed in the cash-and-carry (wholesale) formats under the Automatic route. Under the Government Approval route, proposal for FDI in ‘Single Brand Product Retailing’ are received in the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry. Automatic route dispenses with the need of multiple approvals from Government and/or regulatory agencies (Government of India or the RBI). Investors are required only to notify the concerned Regional offices of RBI within 30 days of receipt of inward remittances and file required documents with that office within 30 days of the issue of shares to foreign investors

The legal regimes that controls FDI in India and to that extent FDI in retailing includes Press Notes by Department of Industrial Policy and Promotion, Foreign Exchange Management Act 1999, Guidelines  of Reserve Bank of India(RBI) and Security and Exchange Board of India, besides, of course, the Constitution of India.

India’s large and ever growing population coupled with a paucity of profitable economic opportunities make “labor intensive” activities like Agriculture and Retailing a major source of subsistence for the teeming millions especially the poor unskilled labor, superfluous labor and the educated unemployed. Therefore, any change that tend to disturb the existing configuration of these two sectors have a bearing on the lives of millions of these people and raises sharp public outcry and to that extent FDI in Agriculture and Retailing has always been a contentious issue. Of late, the Government of India has expressed its desire to bring the Multi-Brand retailing within the ambit of FDI, and in the process has put in train a debate on its possible outcome. This short paper proposes to examine the conflicting view points of this debate so as to arrive at a balanced conclusion.

Retailing in India as also elsewhere in the world is divided into organized and unorganized retailing. Organized retailing refers to trade activities undertaken by the licensed retailers i,e,  those who are registered for sales tax, income tax etc. These include the corporate backed hypermarket, retail chains and also the privately owned large retail business. Unorganized retailing, on the other hand, refers to traditional format of low cost retailing, for example the corner store (kirana i.e. grocery shops),owner manned general stores, Cigarette shops, convenience store, hand cart, pavement vendor etc. Unorganized retailing is the most prolific and visible form of retailing in India while the organized retailing constitutes only a very small percentage (3-4%). The reasons as to why Indian retailing is so fragmented or unorganized in nature lies in her entrenched poverty and the fact that a large number of educated unemployed and superfluous labor takes refuge in retailing in the face of joblessness and glaring poverty. Retailing in unorganized sector is thus not a profit oriented vocation but a mere source of livelihood. Naturally, the capital investment is very low and the infrastructure is rudimentary. It is estimated that less than 4% of Indian retailers have shops larger than 500 square feet. Given this rickety state of Indian unorganized retailing, there are serious apprehensions that the flow of organized foreign capital with its associated baggage of humungous infrastructure, bulging financial power professional managerial staffs etc, would sound the death knell for the Indian retailing industry. As against most Indian retailers’ less than 500 square feet premises, the average size of a store of Wall-mart (American Retailing Giant)   is 85000 square feet and has an average annual turnover of $51 million as opposed to an average Indian retailer’s paltry turnover of Rs.186, 000. Further, it is feared that the international retailing giants will resort to predatory pricing to acquire monopolies. These retailing giants with their sprawling business cutting across different continents and deep pockets will be able to sustain loss till their competitors are wiped out.

As has been mentioned earlier retailing “disguises” the abysmal nature of unemployment in the country. Indian agriculture has long been a source of livelihood for the teeming millions of the country (provides employment to more than 50% of India’s labor force)   so much so that it is massively over-crowded now. Besides, during the lean season even the productive farmer find themselves unemployed. Although the manufacturing is a labor absorbing sector, its true potential has not been harnessed as yet and it has been stagnating since the tenth five year plan. Retailing helps in absorbing these shocks providing safety-net and opportunities to the superfluous labor to eke out a living where all other sectors have not been able to. Critics fear that the inflow of FDI in retailing will restrict the labor absorbing capacity of the retailing sector since the international retailing giants employ labor saving machinery and knowhow both to add value to their service as well as to enhance their profit. And given the fact that the manufacturing is not in a vibrating state to absorb those who are displaced from the retailing by the advent of FDI, the poor and the unemployed will find the going very difficult for them. There will be a hike in the rate of both unemployment and underemployment.

It has also been said that the domestic organized retailing is underdeveloped and in a nascent stage. Therefore, it is important that the domestic retailing sector is allowed to grow and consolidate first before the sector is opened to FDI. FDI in retailing may also widen the rural -urban divide in the sense that most of the retailing centers would be set up in the cities where both the density of population and level of income of the people are high. These retail centers would also attract cheap labor from the rural areas and thereby deplete the hinterland of its workforce. In addition, organized retailing with FDI would result in bevy of buildings and multiplexes. Unless their constructions are regulated, they will also add to the chaotic muddle of urbanscape.

After having expatiated on the possible pitfalls of allowing FDI in retailing, it is also necessary to understand the distinction between appearance and reality. Much of the prognostication of gloom is based on a theoretical understanding of the situation. In reality, the research conducted by the Indian Council for Research on International Economic Relations (ICRIER) has revealed that there is no evidence of overall decline in the employment of the Unorganized retailing sector as a result of the advent of FDI in organized retailing and that the rate of closure of small shops for the same reason is very minimal.

One needs to be holistic in his assessment of the outcome of introducing FDI in Retailing. One of the reasons as to why a vast swath of India’s population is suffering poverty and depravation is that Agricultural sector of the country has not developed appropriately, and the main stumbling block in this regard has been that of inadequate logistics and direct access for farmers to vast markets. FDI in retailing can to a large extent ameliorate these deficiencies. If FDI in front end retailing is allowed, the international retailing giants will be motivated to invest capital, bring in  knowhow and global capacity on a colossal scale and as a result a world class back end infrastructure would be built the like of which may take the government years to make (Though FDI is permitted in backend infrastructure to the extent of 100% through the automatic route, in the absence of FDI in retailing, investment in backend infrastructure has not been so forthcoming) . The foremost beneficiary of such a development would be the farmers, especially those engaged in Horticulture. Though India is the second largest producer of fruits and vegetables, lack of storage facilities cause heavy losses to farmers. Availability of adequate post harvest and cold chain infrastructure would enable the farmers to avoid wastage and distress sales. The retailers would engage the farmers directly through the contract farming programmes as also resort to direct buying from the farmers which will dilute the role of profit siphoning intermediaries, enhance the income of the farmers and give them direct access to markets. The resultant rural prosperity may open up market for other industrial goods and help bring about a more balanced regional development. 

The Medium and Small Enterprise that plays a critical role in country’s overall manufacturing scenario has lagged and suffered due to lack of branding and avenues to reach out to the vast world market. The international retailers can buy from them not only for the domestic market but for their stores outside the country also and in the process provide the small and medium enterprises of the country a brand name and a window to the international market. In fact, it is estimated that FDI in retailing can significantly increase export from the country. If the domestic organized retailers are allowed to grow to the exclusion of FDI, it may bring about other above mentioned developments but not increase the exports.FDI can, in fact, spur competition among the organized retailers. The ultimate beneficiary of these competitions would be the consumers. An example of how the consumer benefit from the competition is the automobile industry in India. The intense competition among the automobile industries has resulted in a situation where the consumer has been able to purchase cars for as low a price as rupees one lakh. CRIER in its research has found that all income groups save through organized retail purchase, but the lower income groups save more. Thus, organized retail is relatively more beneficial to the less well-off consumers.

A growing and mushrooming retail sector means that its contribution to GDP would grow. It would thus help in expanding the economy, generate employment and result in more tax income.      

In the light of all that have been discussed above it can be said without any dispute that the time for allowing FDI in Multi –Brand Retailing has come and as Victor Hugo has said “Nothing can stop an idea whose time has come”. FDI in Retailing started with FDI in cash and carry wholesale trading first permitted in 1997 to the extent of 100% under the Government approval route and thereafter in 2006 brought under the automatic route. In 2006 again FDI in Single Brand Retailing was permitted to the extent of 51%. From here it is but natural and logical that FDI would now proliferate to multi-brand retailing. But the progression to FDI in multi-brand retailing cannot take place at the cost of vital concerns raised in connection with this possible change by different groups; viz, the question of adaptability of the retailers in the unorganized sector, the question as to how the FDI in retailing can be harnessed for the benefits of Indian agriculture and Medium and Small Enterprise and above all how to impart into the economy a degree of resilience to withstand the changes that would be ushered  in the wake of introduction of FDI in retailing. All these concerns have to be addressed not because the Left wing political parties and the media through their campaign have necessitated such attention but because we are constitutionally bound to do so .The Preamble of the Constitution resolves to constitute India into a Sovereign, Socialist, Secular, Democratic, Republic and to secure to all its citizens JUSTICE, social, economic and political …..EQUALITY of status and opportunity. Directive Principles of State Policy similarly exhorts the state to establish just, equitable and fair order. Article 39(c) states that the state should ensure that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. Though both these features are not enforceable, the Executive and the Apex Court in particular have time and again reiterated the sacrosanct nature of these features [ Kesavananda Bharti v.State of Kerala AIR 1973 SC1461,1973(4) SCC225; Minerva Mills v. Union  of India 1980 AIR 1789,1981 SCR(1) 2061]

Unlike FDI in single brand retailing which pertains to brand loyal and a relatively small high income clientele, FDI in multi-brand retailing would have direct impact on a vast spectrum of population and thus a sensitive issue. Left alone foreign capital will seek ways through which it can only multiply itself, and unthinking application of capital for profit, given our peculiar socio-economic conditions, may spell doom and deepen the hiatus between the rich and the poor. Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored in such a way that it results in a win-win situation for India. This can be done by integrating into the rules and regulations for FDI in multi-brand retailing certain inbuilt safety valves. For example FDI in multi –brand retailing can be allowed in a calibrated manner with social safeguards so that the effect of possible labor dislocation can be analyzed and policy fine tuned accordingly. To ensure that the foreign investors make a genuine contribution to the development of infrastructure and logistics, it can be stipulated that a percentage of FDI should be spent towards building up of back end infrastructure, logistics or agro processing units. One of the justifications for introducing FDI in multi-brand retailing is to transform the poverty stricken and stagnating rural sphere into a forward moving and prosperous rural sphere. To actualize this goal it can be stipulated that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that a certain amount of farm produce be procured from the poor farmers. Similarly to develop our small and medium enterprise, it can also be stipulated that a minimum percentage of manufactured products be sourced from the SME sector in India. Public Distribution System is still in many ways the life line of the people living below the poverty line. To ensure that the system is not weakened the government may reserve the right to procure a certain amount of food grains for replenishing the buffer. The government may also put in place an exclusive regulatory framework to protect the interest of small retailers. It will ensure that the retailing giants do resort to predatory pricing or acquire monopolistic tendencies. Besides, the government and RBI need to evolve suitable policies to enable the retailers in the unorganized sector to expand and improve their efficiencies

The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point of time or the other would be embraced by liberalization, privatization and globalization.FDI in multi-brand retailing is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country.  

By Hemant Batra, Lead Partner, Kaden Boriss Legal LLP, India; Vice President, SAARCLAW; Chairperson, IICLAM, Singapore; Advisory Board Member, OIC, USA

Hemant Batra, Lead Partner, Kaden Boriss Legal - India Office

This piece of information or let us say words of wisdom, which I’m sharing with you through this note of mine are not my original ideas or thoughts; but it was shared with me some time back by a friend indeed and I cannot but stop myself from putting it on public display for I feel that it can benefit one and all. It’s a waste if wisdom isn’t shared.

My friend’s e-mail quoted an Angel saying that one should never ever borrow anything from the future. If you fret or bother about something, which you anticipate or think may happen in the future and which actually does not happen, then you have worried in vain. Assuming that it does happen in the future then you have actually worried for the same thing twice.

My friend also advised me to do certain things regularly in order to improve my quality of life and overall personality; amongst various other things, his advice included-starting the day with a simple prayer as an acknowledgment to the God for having given you a high life condition, starting the day early so as to ensure that the routine does not get hyper and hassled, learn to love one’s own self or in other words physical/mental health, learn to say no to assignments which do not fit in to your time schedule or will adversely affect your health, simplify and un-clutter your surroundings and consequently your life, believe in the Motto-less is more, it’s better to finish work or reach for a meeting before time, live one day at a time, differentiate between worries and concerns, concerns need solution which is inside you and it’s just a question of identifying the same, live within your means, speak minimal and only when the situation requires, don’t let the kid inside you die, eat right, find time to be alone for some time at least every day, try to be kind to all because forgiver is actually the real winner, take your work seriously but not your own self and finally every night before you sleep thank God for one thing for which you have not thanked earlier.

http://legalditto.wordpress.com/2010/06/05/return-of-brotherhood-between-mukesh-and-anil-ambani-by-default-or-compulsion-or-choice/

Hemant K Batra, Lead Partner, Kaden Boriss Legal & Vice President, SAARCLAW

The question is not whether to allow entry of foreign lawyers in India, but the question is until when can entry of foreign lawyers be prevented in India, argues Kaden Boriss Legal LLP founding partner Hemant K Batra.

India is a signatory to the General Agreement on Trade in Services (GATS) and is consequently under an obligation to open up the service sector to the Member Nations. “‘Services’ as defined under GATS would include services in any sector including the `legal profession’.

If India fails to provide a level playing field to foreign lawyers, it could run into the risk of facing complaints before the Council for Trade in Services of WTO where after India would be forced to take corrective actions. I am anticipating that it would actually become a political decision because a large section of Indian lawyers who are opposing the entry of foreign lawyers are basically into advocacy or court practice i.e. litigation.

Badly judged: The recent judgment of the Bombay High Court in Lawyers Collective Vs. Bar Council of India & Ors has restarted the debate on the entry of foreign lawyers and the meaning of the legal profession. As per the judgment, `practising the profession of law’ includes litigious as well as non-litigious matters. In other words, if one is not enrolled as an advocate, one cannot draft any legal document.

With due respect, I beg to differ from the judgment for the following reasons:

1. If the judgment is to be applied in its present form then none other than advocates can draft legal documents in India. What will happen to chartered accountants, company secretaries, engineers and non-enrolled law graduates who are already doing legal documentation work. What about deed writers who sit outside Tehsils and Registries to draft conveyance and lease deeds, affidavits, wills etc. These are all legal documents. What about warranties and guarantees drafted by engineers? This judgment is like Pandora ‘s Box which has the potential to open flood gates of chaos.

2. When the Reserve Bank of India (RBI) had stated that liaison office can neither render services nor generate income then where does the question of practise of profession arise? It was a different matter, if the liaison office was found guilty of breaching the terms of the permission letter and found to be rendering services but that was not the case.

3. The Government’s argument was that law practise means practise in the court of law, but in my opinion it would also include drafting of pleadings, rendering legal opinions and assisting clients in regulatory compliances. If we go by the judgment, only advocates can do that. Would the Bar Council now direct millions of non-lawyer professionals to not engage in any kind of legal or para-legal documentation?

4. Perceived in the light of this judgment, what would be the fate of non-lawyer power of attorney holders, who are engaged in para-legal activities on behalf of their clients, friends and colleagues?

5. The judgment not only abrogates the RBI permission letters but has also reinterpreted the term `legal profession’, which will have wide ramifications.

Split the profession: In my view the legal profession in India needs to be bifurcated into two parts – law practice and legal services by bringing in legislative changes unless the Supreme Court of India decides to reinterpret the law laid down recently by the Bombay High Court. Law practice should include practice in a court of law, drafting of pleadings, appearing in courts and issuing legal opinions. While legal services should include work like legal documentation, corporate and commercial advisory, regulatory work etc.

This principle is also embodied in the Advocates Act, 1961 which regulates legal practice in India. Though `legal practice’ is not defined in specific terms under the Act but a constructive analysis of demonstrates that practice is restricted only to appearance before any court or any judicial forum. It does not include legal documentation, arbitration and other legal or paralegal services.

The foreign lawyers and law firms may be allowed to render legal services to begin with and later if there is not much opposition they could even be permitted to practice law.

Reciprocal: As of today the Advocates Act provides that a person shall be qualified to be admitted as an advocate on the state roll if he is a citizen of India. Now, subject to the Act a national of another country may be admitted as an advocate on the state roll if duly qualified citizens of India are permitted to practice law in that country.

Therefore, India may also stipulate prerequisites for foreign professionals intending to either practice or render legal services in India. Such prerequisites could be fulfilment of minimum aptitude tests and reciprocal treatment meted out to Indian lawyers by country of their origin.

Interestingly, the Advocates Act embodies the principle of reciprocity as one of its provisions with the rider that where a country specified by the Indian Government prevents the citizens of India from practicing the profession of law and subjects them to unfair discrimination in that country, no subject of such country shall be entitled to practice that profession of law in India.

Bring them in: I favour the entry of foreign law firms in India for the following reasons:

1. It would generate diverse work and employment opportunities for local lawyers as the foreign law firms will not export foreign lawyers into India. They would rather train and hire Indian lawyers for obvious economic reasons and knowledge of local laws;

2. It would give tremendous exposure to local lawyers in the new areas of practice;

3. It would raise the stature of the legal professionals;

4. It would raise the level of remuneration for the legal professionals;

5. It would introduce a high degree of integrity and efficiency in the profession; and

6. It would make lawyers more accountable to their clients. It is a fact that many foreign firms are thronging with lawyers of Indian origin.

They would eventually be relied upon for work related to India legal sector, which in turn shall further benefit us. In today’s technology driven world, one can create physical barriers for entry of individuals. However, those barriers become superficial with foreign lawyers advising clients on Indian matters by means of video conferencing, over telephone and through web mail.

Every year a “Vigilance Awareness Week” is observed by public authorities to make people and stakeholders in general aware of the new anti-corruption measures/systems, which have been put in place within the organization. Independency of civil servants is sought assured by various initiatives, such, among others, the rotation every two/three years of senior officials in sensitive positions; the prohibition for civil servants to accept gift/lavish hospitality by companies with which they are having official dealings unless the government has given its approval. Some of the initiatives taken by government to combat the menace of corruption are:

Positive Impact of E-Governance: A wide range of public services have been digitized, which has considerably increased the speed of government services and removed some of the possibilities for demanding bribes. It has brought about a tremendous amount of transparency in the process of administration. Obtaining licences, permits, official documents, paying taxes, clearing goods and incorporation of companies and dealing with the Registrar of Companies are some of the services that have been digitized. The Government of India has created the National Portal of India which lists all these services and thus serves as an ideal entry point for companies wishing to do business in India. The customs service is increasingly integrated into the e-governance project of the Government of India. Under the e-governance project, many possibilities for extraction of bribes related to trade across borders have been removed. Homepage of the Central Board of Excise and Customs contains information on e-payment, which also contains information on how to complain about corrupt officials. The business section of the National Portal of India is also useful when seeking information on trading across borders.

Hemant K Batra, Lead Partner, Kaden Boriss Legal & Vice President, SAARCLAW

Transparency In Public Procurement

: Corruption in public procurement has been a major challenge for companies entering or operating in the Indian market. Many measures have been taken in order to make the Indian procurement system more transparent and efficient, but companies should be aware that states have their own specific procurement laws and regulations. Information on tenders is available online through the Indian Government Tenders Information System, which is the main source for government and public sector procurement. This comprehensive portal contains links to central and state tenders as well as tenders by public sector units. All major public authorities are also required to publish on their website a monthly update of all their contracts/purchases above a certain value threshold. Some states, such as Andhra Pradesh, have their own online tender information system. Each state has its own financial rules based on the broad principles of the General Financial Rules which govern procurement by all government agencies of the central government. The absence of a central law or state act in public procurement means that each ministry, department, agency, local body, and state enterprise is free to devise its own rules for public procurement and contracting as long as they follow the basic rules of the open tender system. This decentralization also means that any procuring authority may develop its own ‘blacklists’ of companies that have been shown to have violated tender procedures, as long as the established procedures laid down for blacklisting, banning and suspension of companies are followed. Companies should report allegations of corruption or any kind of misuse of office by any employee of the central government to the Central Vigilance Commission. Complaints of corruption by state officials should be directed to the respective anti-corruption bureaus at state level, which can be found by entering the homepages of state governments.

Adoption Of Whistle-Blower Policy: The Government of India has notified a “whistle-blower” policy in respect of corruption or misuse of office by public officials. The Central Vigilance Commission (CVC) is the designated agency to receive complaints for disclosure on any allegation of corruption or misuse of office and is empowered to recommend appropriate action. The CVC has adopted the relevant Bureau of Indian Standards (BIS) standard for its complaint handling policy. The objective of the complaint handling policy of the CVC, as specified in the BIS Manual, is to ensure timely and satisfactory redress of every complaint. In accordance with these standards, the complaint handling process is to be audited each year by an auditor nominated by the CVC. In addition, the standards require that the auditor’s observations be taken into consideration by the management review committee for necessary corrective action. Further, protection has also been accorded to the whistle-blower that in case, he is victimized due to the fact that he had filed a complaint or disclosure, he may file an application before the CVC seeking redress in the matter, wherein the CVC may give suitable directions to the concerned person or the authority after inquiry into the matter. Furthermore, the CVC can now take action against anyone who leaks names of whistleblowers and witnesses and can request police assistance to investigate complaints. Moreover, Central Bureau of Investigation online whistleblower/complaints mechanism guarantees the protection of whistleblowers when they report corruption.

to be continued…………………..