LawZ Magazine

Capital Punishment — In a New Avtar, Part II

By Ranjit Kapoor

“Encouraged by the season of sequels in Bollywood, I am buoyed to bring out my thoughts with possible solutions in continuation to my last article bearing the same title.”

RECAP of Part I: For an entrepreneur of today, the SARFAESI Act is nothing but a “Capital Punishment in a New Avatar”. Why? Because people consigned to the gallows can still find solace in mercy petitions, but the victim of the SARFAESI Act faces a certain premature demise.

The hanging of Yakub Memon, despite numerous mercy petitions, yet again brought into focus the debate on the continuation of capital punishment. In order to hog the limelight, there was no dearth of people jumping on the bandwagon from all walks of life. What is pertinent to note is that innumerable entrepreneurs are being consigned to virtual gallows through the SARFAESI Act, and such victims do not find even a single soul to take up their cause for the redemption of their lives. On the contrary, the current trend is to add fuel to the fire rather than coming out with a solution to benefit the country besides keeping entrepreneurs afloat. To an entrepreneur, is the denial of the right to live not crucifixion? Is it not an effective violation of human rights? Should this not come under the ambit of the NHRC? Where are the NGOs? Where are the HROs? Perhaps an entrepreneur is not considered ‘human’!

Reports published—and in many cases such publications are cited in various forums as examples for bringing authenticity to discussions or certain actions—derive their reliance and opinion from the belief that such work is published after extensive research. Any slip on this account can sometimes be devastating for a certain section of society, and I am pretty confident that this is also not the aim of any writer. But inadvertently this is happening when no antidotes are published in support of entrepreneurs. This is leading to a brain drain in the SME sector, as the well-educated second generation of current entrepreneurs is reluctant to enter the fray.

In 1839, Edward Bulwer-Lytton coined the phrase “The Pen is Mightier than the Sword”. This phrase in all probability was an improvisation of the original quote “The word is mightier than the sword” coined by Sage Ahikar around 500 BC. The essence of the quote seems to have lost its luster and color when, on a daily basis, articles are being published holding entrepreneurs squarely responsible for the current melee on NPAs.

It is an established fact that the media these days is doing a yeoman’s service—it has also been an effective communication channel creating public reliance on reports published. If chopping was the only solution, then humongous developments in the field of oral medicine would not have seen the light of day. The recent meeting of banks and ARCs called by the RBI is perhaps a step in the right direction, but the non-availability of details of the meeting in the public domain will lead to the perception that a sharper sword has been handed over to the participants. As is believed, it takes two to tango; therefore, it would have been better if a meeting of entrepreneurs, particularly the affected ones, was also called to understand their plight for a correct long-term solution and to justify the principle that ‘Prevention is better than Cure’.

The catastrophic event of the economic meltdown was not a creation of industry, but originated in the financial sector. Governments worldwide need to seriously brainstorm whether to allow the financial sector to indulge in metal hedging, as it creates frivolous demand and causes the state-of-the-art technology industry across the field to bleed. Virtually, foreign presence in the Indian business platform is growing by the day, and state-of-the-art technology from any corner of the world is available for one’s asking; exports and imports are no more Herculean tasks.

The Indian Government’s present stance of commitment to the reforms regime, easing of controls, tax incentives, and many related business-centric initiatives have made the entrepreneur-businessman of today a far different entity than the one of the eighties and even the nineties. The Government of the day is largely proactive toward India’s business concerns. Having said that, do all pockets of businesses get the same common platform to operate from, and do the Government’s policies percolate down in an effective, responsible manner? That is the moot question…

Let us now delve into the various impediments plaguing the industry:

Sectoral Overview

The Public Sector

  • The ‘Nav-Ratnas’ are ‘special gems’ of the Government and they are ‘nurtured’ as great assets, indeed, as they ought to be.
  • The ‘other than above’ group enjoys high patronage from the Government, and why not? Is not the Government a major stakeholder for this group?

The Private Sector

  • The Large Scale Industries:
    • They have high financial muscle.
    • They have an attentive ear at the corridors of government power.
    • They are asked for pre-budget and post-budget suggestions and comments.
    • They are a high source of tax income to the Government.
    • Usually, they get what they want.
  • The Small Scale Industries:
    • They have a National Small Scale Industries Corporation looking after their every need.
    • They get, as a group, special treatment at every forum.
    • In many areas of operation, they get ‘protection’.
    • Many items of manufacture are reserved for this sector.
  • The Medium Scale Industry:
    • This is the ‘Trishanku’ sector. This reminds me of the short story “The Home-Coming” by Rabindranath Tagore, wherein the main character Phatik, an adolescent, is considered neither ornamental nor useful, and hence not accepted as a child, considered impertinent as an adult, and ultimately pays for his agony with his life.
    • The dice is always loaded against them.
    • Their contribution to the exchequer in terms of sales tax, excise duty, and income tax is an enormous chunk.
    • The Government’s response to the NEEDS of this sector is pitiably un-tuned to the revenue that they get from it.

If ongoing and running businesses are not looked after, where is the incentive for budding and new entrepreneurs to jump on the wagon of ‘Make in India’? These need an urgent injection of entrepreneur-friendly ‘Policy Initiatives’ from the Government. The Prime Minister’s “Make in India” wave has indeed rejuvenated the aspirations of Indian industry at large—further reinforced during the deliberations at the follow-up Workshop at Vigyan Bhavan in Dec. 2014, with key emphasis on ‘Ease of Doing Business’ stressed during the workshop. But alas! There seems to be only a regime of ‘Impediments to Doing Business’, resulting in hindrance to growth and efficiency.

Impediments and Constraints

  • General: We project ourselves as a divided country with material entry barriers from state to state and requirements of permits. ‘Inspector Raj’ is still a thorn. Higher interest rates, incompatible import duties, person-oriented interpretation of acts and laws leading to litigation, and poor infrastructure increase the cost of operations. Service deficiencies of banks in operations, issuance of certificates against service tax, and issuance of BRCs also add to the burden. Legal proceedings are initiated against the entrepreneur in case of default for no fault of his. The Chinese factor is a big contributory factor in the lackluster performance of domestic units. And the list goes on.
  • Financial Constraints (NPAs): From the media to the executive to the judiciary, all seem to carry a preconception that the entrepreneur is always the sole culprit behind an account becoming an NPA, without going into the merits of the issue on a case-by-case basis. Indeed, a case study of certain accounts would be highly revealing regarding the role of banks, which has been highly ineffective, sub-optimum, and one-sided. Serious thought needs to be given to removing the banks’ powers of unilateral declaration of NPAs.
  • Duty Constraints (Aluminium Industry Considered): Import duty restructuring is needed to create a rate difference between raw material and downstream activity. Any change in raw material duty should automatically change the duties of downstream products. Suggestions in proper format under Chapter 76 are enclosed. Anti-dumping duty on Chinese imports is required; for example, the current rate of import duty on aluminium extrusions in the USA from China is 47%. Suggested duties linked to the base metal for aluminium are as follows:
    • Chapter Heading 7601: Raw Material Duty 5%
    • Chapter Heading 7602: Finished Product Duty 5%
    • Chapter Heading 7604: Duty From China 15% (Suggested 35%)
    • Chapter Heading 7608: Duty From China 20% (Suggested 40%)

Policy Initiatives and Solutions

  • Database Creation: Currently, our country lacks an authentic database for various industries, which introduces an element of weakness in project appraisals that sometimes culminate in bad assets. Therefore, there is a requirement to create an effective database for banks to rely on.
  • SME Reservation: A percentage of business should be reserved and defined for SMEs in defense and aerospace, with government investment participation being key to success.
  • Recycling Industry: Impetus should be given to the recycling industry of aluminium through cheap, easy, and long-term finance. It consumes 5% of the power compared to a smelter—a vital point to address the energy woes of the country.
  • Labor Reforms: A workman can desert a company at any time with impunity while being given all the benefits of the so-called “Down-Trodden” under “Laws of Natural Justice”. Does the entrepreneur not require any laws of natural justice? This erodes competitiveness. Investment limits for the medium scale also require revision.
  • SARFAESI Act Reforms:
    • Revisit the SARFAESI Act to prevent current misuse by according sweeping powers to banks. For a genuine entrepreneur, the Act currently is nothing but a “CAPITAL PUNISHMENT IN A NEW AVATAR”.
    • To avoid misuse, the power to declare any account an NPA may be withdrawn from banks.
    • There is a dire need to differentiate trading and industrial NPAs and frame policies accordingly.
    • There is no clarity on the declaration of NPAs vis-à-vis asset category definitions of substandard, doubtful, and loss assets.
    • Immediate stoppage of operations of an account post-declaration of an NPA is tantamount to consigning the unit to the gallows.
    • There is a dire need to introduce a system to monitor the conduct and procedure followed by banks for declaring any account an NPA. There should be a sacrosanct format carrying details and scientifically proving how the account has become an NPA. Today, a single-line letter declaring the account as an NPA is sent to the entrepreneur, thereby obfuscating not only his future but the future of hundreds of others attached to him directly or indirectly.
    • An NPA account becomes ineligible for bank borrowing and also gets choked due to restrictions under Section 186(8) of the Companies Act. Where will the entrepreneur bring money from?
    • The advent of foreign players with deep pockets and virtually zero cost of finance is creating immense pressure on the domestic SME sector working under exorbitantly higher rates of interest.

Judiciary

Despite the various systemic lacunae enumerated above, the entrepreneur continues to have faith in the judiciary as a court of last resort for equitable redressal and to pave the way to address the draconian SARFAESI Act, which currently is being used as—“Suppression And Regression of Financial Assets And Engulfing of Security Interest.”

Conclusion

It has therefore become a dire, immediate, and urgent necessity for the whole gamut of the powers that be—the Government, industry associations and chambers, financial institutions and banks, and the judiciary—to address the escalating woes of the MSME sector in the best interest of the nation.