Through the looking glass: The power of economic reforms in shaping businesses

The Central government recently announced its plan to implement stricter rules regarding the scrutiny of interactions between companies. While this is coming on the back of many high-value deals escaping scrutiny because of loopholes, government regulations on a larger scale have always kept businesses and enterprises on their toes.

Bringing the balance
The word reforms and the advent of the liberalisation of industrial and trade policies are synonymous in my mind for India. During the 1980s, these reforms were accompanied by an increasingly receptive attitude toward regulatory reforms. The Industrial Policy Resolution of 1956 and the Statement of Industrial Policy of 1991 provide the basic framework for the overall industrial policy of India to this date.  

However, most sectors in the business world have been aggrieved by government regulation. Corporations and their spokespersons often denounce statutory mandates as irrational impediments to economic growth and job creation.

Today, there are three prominent challenges that I can foresee plaguing the economic landscape from a regulatory standpoint. There is uncertainty about the future regulations and laws, especially in the social media industry, tedious processes for tax for budding start-ups and an insufficient amount of financial incentives for the same.  

The big two
India has one of the world’s largest start-up ecosystems, with the number of start-ups in the country above 70,000, according to the Department for Promotion of Industry and Internal Trade (DPIIT).

However, one of the key challenges that start-ups face in India is the country’s volatile regulatory environment. Even though India has a long history of intercompany transactions which have been in line with the latest trends, gone are the days of “survival of the fittest”. Mergers and acquisitions are currently one of the most useful methods to overcome barriers to entry and improve the development of companies.

Sceptics cannot deny that corporate regulation provides a stimulus in making our economic position secure and sustainable. But on the other hand, the entry of foreign companies through M&A seems to have raised competitive pressure in the domestic market forcing Indian companies to boost their competitiveness.

In this light, continuous and abrupt regulatory changes can create a negative impact on the growth of Indian start-ups. Constant changes in the regulatory atmosphere can be a red-flag to investors, who may end up feeling unsure in their investment decisions due to a fear of unexpected surprises.

Similarly, the social media space has also seen amendments in regulations. The government recently withdrew the controversial Personal Data Protection Bill from the Parliament after the proposed data localisation provision drew severe criticism from various proponents of tech and privacy.

While a comprehensive legal framework to regulate the online space, including bringing separate laws on data privacy, the overall online ecosystem, cybersecurity, telecom regulations, and harnessing non-personal data to boost innovation in the country is being created, we need a bill to fill the lacunae. Privacy experts and tech giants are concerned that the legislation could restrict how they manage sensitive information but give the government broad powers to access it, including exemptions to its probe agencies amongst other things.

Industry stakeholders in the social media space have also expressed concerns over the infeasibility of originator traceability mandated in the IT Rules 2021. In the latest draft, the IT Ministry reiterated that the resident grievance officers of a social media intermediary should redress grievances and thereafter dispose of them within a statutorily stipulated timeline.  

These ramifications, which impose personal liability on chief compliance officers, may impact due diligence requirements and erect entry barriers and ease of doing business. Over 85 per cent of social media and internet intermediaries currently feel that the harsh compliance rules in the new IT Rules 2021 can negatively impact the ease of doing business in India.

Deep foundations, deeper impact
It is prudent for businesses to safeguard themselves in a tide of changes. Unpredictable regulatory measures can affect inner workings and unnecessarily hamper time and resources for a company with true potential.

A few practices like investing in a small but efficient team incentivised based on their output, not hiring immediately after funding but rather restructuring and assessing your needs and ensuring that various compliances are in place from day one can help. They can provide a firm grounding for start-ups to secure themselves even in a changing landscape.

The government can be a friend to businesses and the public alike - but what we are lacking is balance. And without balance, it is very easy to fall into the trap of long-term decline brought on by over-regulation.

The need of the hour is future-proof rules and regulations in line with accepted international standards for enforcement of Data Protection & Data Privacy laws, especially when it comes to personal data, and higher transparency to encourage Foreign Investors including FIIs to gain their trust.

Clear, comprehensive, and well-laid framework and regulations for the emerging sectors of the economy will not only help businesses by creating a helpful operating environment but also give investors confidence in the long run.

The author is an a_dvocate & counsel at the Bombay High Court, working in litigation as well as non-litigation, skilled in negotiation, arbitration, and corporate documentation. Views expressed are personal._