Make a critical assessment of New Economic Policy keeping in view the long term objectives of economic development.

The main characteristics of new Economic Policy 1991 are:

1. Delicencing. Only six industries were kept under Licensing scheme.

2. Entry to Private Sector. The role of public sector was limited only to four industries; rest all the industries were opened for private sector also.

3.Disinvestment. Disinvestment was carried out in many public sector enterprises.

4. Liberalisation of Foreign Policy. The limit of foreign equity was raised to 100% in many activities, i.e., NRI and foreign investors were permitted to invest in Indian companies.

5. Liberalisation in Technical Area. Automatic permission was given to Indian companies for signing technology agreements with foreign companies.

6. Setting up of Foreign Investment Promotion Board (FIPB). This board was set up to promote and bring foreign investment in India.

7. Setting up of Small Scale Industries. Various benefits were offered to small scale industries.

Three Major Components or Elements of New Economic Policy:

There are three major components or elements of new economic policy- Liberalisation, Privatisation, Globalisation.

1. Liberalisation:

Liberalisation refers to end of licence, quota and many more restrictions and controls which were put on industries before 1991. Indian companies got liberalisation in the following way:

(a) Abolition of licence except in few.

(b) No restriction on expansion or contraction of business activities.

(c) Freedom in fixing prices.

(d) Liberalisation in import and export.

(e) Easy and simplifying the procedure to attract foreign capital in India.

(f) Freedom in movement of goods and services

(g) Freedom in fixing the prices of goods and services.

2. Privatisation:

Privatisation refers to giving greater role to private sector and reducing the role of public sector. To execute policy of privatisation government took the following steps:

(a) Disinvestment of public sector, i.e., transfer of public sector enterprise to private sector

(b) Setting up of Board of Industrial and Financial Reconstruction (BIFR). This board was set up to revive sick units in public sector enterprises suffering loss.

(c) Dilution of Stake of the Government. If in the process of disinvestments private sector acquires more than 51% shares then it results in transfer of ownership and management to the private sector.

3. Globalisation:

It refers to integration of various economies of world. Till 1991 Indian government was following strict policy in regard to import and foreign investment in regard to licensing of imports, tariff, restrictions, etc. but after new policy government adopted policy of globalisation by taking following measures:

(i) Import Liberalisation. Government removed many restrictions from import of capital goods.

(ii) Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act (FEMA)

(iii) Rationalisation of Tariff structure

(iv) Abolition of Export duty.

(v) Reduction of Import duty.

As a result of globalisation physical boundaries and political boundaries remained no barriers for business enterprise. Whole world becomes a global village.

Globalisation involves greater interaction and interdependence among the various nations of global economy.

Impact of Changes in Economic Policy on the Business or Effects ofLiberalisation and Globalisation:

The factors and forces of business environment have lot of influence over the business. The common influence and impact of such changes in business and industry are explained below:

1. Increasing Competition:

After the new policy, Indian companies had to face all round competition which means competition from the internal market and the competition from the MNCs. The companies which could adopt latest technology and which were having large number of resources could only survive and face the competition. Many companies could not face the competition and had to leave the market.

For example, Weston Company which was a leader in Т. V. market with more than 38% share in T.V. market lost its control over the market because of all round competition from MNCs. By 1995-96, the company almost became unknown in the T.V market.

2. More Demanding Customers:

Prior to new economic policy there were very few industries or production units. As a result there was shortage of product in every sector. Because of this shortage the market was producer-oriented, i.e., producers became key persons in the market. But after new economic policy many more businessmen joined the production line and various foreign companies also established their production units in India.

As a result there was surplus of products in every sector. This shift from shortage to surplus brought another shift in the market, i.e., producer market to buyer market. The market became customer- oriented and many new schemes were made by companies to attract the customer. Nowadays products are produced/manufactured keeping in mind the demands of the customer.

3. Rapidly Changing Technological Environment:

Before or prior to new economic policy there was a small internal competition only. But after the new economic policy the world class competition started and to stand this global competition the companies need to adopt the world class technology.

To adopt and implement the world class technology the investment in R & D department has to increase. Many pharmaceutical companies increased their investment in R and D department from 2% to 12% and companies started spending a large amount for training the employees.

4. Necessity for Change:

Prior to 1991 business enterprises could follow stable policies for a long period of time but after 1991 the business enterprises have to modify their policies and operations from time to time.

5. Need for Developing Human Resources:

Before 1991 Indian enterprises were managed by inadequately trained personnel’s. New market conditions require people with higher competence skill and training. Hence Indian companies felt the need to develop their human skills.

6. Market Orientation:

Earlier firms were following selling concept, i.e., produce first and then go to market but now companies follow marketing concept, i.e., planning production on the basis of market research, need and want of customer.

7. Loss of Budgetary Support to Public Sector:

Prior to 1991 all the losses of Public sector were used to be made good by government by sanctioning special funds from budgets. But today the public sectors have to survive and grow by utilising their resources efficiently otherwise these enterprises have to face disinvestment. On the whole the policies of Liberalisation, Globalisation and Privatisation have brought positive impacts on Indian business and industry. They have become more customer focus and have started giving importance to customer satisfaction.

8.Export a Matter of Survival:

The Indian businessman was facing global competition and the new trade policy made the external trade very liberal. As a result to earn more foreign exchange many Indian companies joined the export business and got lot of success in that. Many companies increased their turnover more than double by starting export division. For example, the Reliance Company, Videocon, MRF, Ceat Tires, etc. got a great hold in the export market.

By: Sateesh Peetha On 02:12

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Describe the important amendments proposed under the Companies (Amendment) Bill, 2003 and the additions proposed thereto by Irani Panel.

Important amendments proposed under the Companies ( Amendment) Bill.

Curtailment of board of directors' power

To safeguard the investors, the Bill seeks to curb the powers of the board of directors through amendments to the Act. Section 292(d) of the Act, which confers on the board the power to invest the company's funds, has been qualified to state that such investment shall not exceed 20 per cent of the paid-up capital and free reserves in a financial year. The amended clause further provides that the resolution to invest the company's funds should be passed with the consent of all the directors present at the meeting.

An amendment to Section 293 provides that the board of a public company, or its subsidiary which was previously empowered to sell, lease or dispose the company's undertaking up to any extent with the shareholders' consent cannot do so now in excess of the higher of 20 per cent of the total assets of the undertaking or 10 per cent of the company's total assets in any financial year. It is unclear as to what is to be achieved with this amendment, as it appears that the board cannot now transfer or dispose off the company's assets beyond the prescribed limit even if it is in consonance with all the shareholders. The power of the board to declare dividends and interim dividends under Section 205 is also subject to restrictions. One, if in any financial year the board proposes to declare dividend out of the reserves, as per the Bill, such declaration shall be made only in accordance with a special resolution of the board with the consent of all the directors present at the meeting, and in accordance with a special resolution passed by the shareholders at the annual general meeting. The approval of the financial institutions that have made term loans to the company is also required.

The Bill provides that the amount of declared interim dividends should be deposited in a separate bank account within five days, and that these cannot be revoked or modified once declared. These hurdles can be a hindrance to the declaration of dividends, and may, in fact, affect investors.

Enhancing investor protection

The Bill has introduced several provisions to protect investors. Sub-clause (6), which has been added to Section 72 of the Act, prevents the revocation of applications made by promoters, directors and their relatives to subscribe to the securities of the company in pursuance of a prospectus issued to the public. The Bill also prescribes for attachment of the bank account or accounts of any intermediary or any person associated with the securities involved in violation of any of the provisions of this Act, rules or regulations by the Centre in the interest of investors and the security market.

The penalty for various offences under the Act has been enhanced, and more persons connected with the company, including the chief accounts officer, debenture trustees, share transfer agents, bankers, and merchant bankers — in respect of the issue or transfer of any securities of the company — have been brought within the definition of "officers in default". The Bill also imposes several restrictions on remuneration and loans to the directors.

The Bill has further introduced provisions to deter fly-by-night operators and prevent companies from vanishing suddenly. The Bill stipulates that two recent photographs of all subscribers to the Memorandum and Articles of Association as well as those of the witnesses should be affixed to the same and signed, and submitted along with the subscriber's proof of identity. These clauses are positive amendments and seem to be well thought out. However, others appear unreasonably restrictive and may need a re-think.

For instance, a proviso to Section 3 (5), which makes the liability of every director, manager and shareholder of companies that are not carrying on business or in operation even after its name is struck off in accordance with Section 560, seems to be too harsh. Further, the inclusion of shareholders among persons held liable goes against the very grain of the protection that the Bill proposes to provide the investors.

The Bill defines independent directors as a separate category. The newly-added Section 252A lays down that an independent director has to be someone who inter alia did not have any previous transaction with the company, and does not hold 2 per cent or more of the company's securities having voting rights. Further, an independent director cannot be a person who has been a director or independent director for nine years or more. This requirement will disqualify many persons with considerable corporate experience from being appointed as independent directors thereby preventing them from providing valuable input to a company's growth, especially public companies having a paid-up capital and free reserves of Rs 5 crore or more, or a turnover of Rs 50 crore or more, as the Bill makes it mandatory for a majority of directors that constitute the board of such companies to be independent.

Transfer of shares

Restrictions imposed on the acquisition and transfer of shares, including those held in a foreign company by certain body corporates, individuals and firms appearing in Sections 108A through Section 108H, have been removed.

However, by the addition of a new sub-clause to Section 111, the Bill makes an absolute stipulation that a private company shall not approve the transfer of any shares unless it is approved by all the shareholders at its meeting.

This Mclause could effectively prevent the smooth transfer of shares in a private company by empowering even a single shareholder to stall the proceedings relating to the transfer of a single share. The endeavour to reform company law by laying emphasis on enhancement of investor confidence and strengthening of corporate governance practices are commendable.

However, in order to encourage the growth of a progressive economy and boost market activity, the framers must keep in mind that investor protection must not be at the cost of the smooth functioning of companies.

Additions proposed by Irani panel

1. Many views were expressed, including the view that administration of the legal framework in respect of certain specified companies, such as listed companies, should be de-linked from the Companies Act and entrusted to specialised regulating agencies, e.g., the capital market regulator. Views were also expressed that it was not feasible for an enactment containing general governance principles to address the specialised requirements of operation of entities in the new environment. After considering these views at length, we are of the view that such opinions do not take into account the nature and scope of corporate governance, which goes far beyond actions limited to any specialised activity, say, for instance, access to capital. Comparisons of the Indian situation with the practice in some other jurisdictions, taken out of context, would also not be well-merited. For instance, in some jurisdictions, the federating entities enact their own independent Company Law. The wide mandate provided to the capital market regulator in such a situation, enables access to capital by corporate entities across the length and breadth of the country on the basis of common norms. Similarly, recent enactments in many countries cannot be seen in isolation to the judicial system and its associated processes in such countries. The impact of such legislation in terms of compliance costs imposed on corporates is yet another issue that would need to be addressed keeping in view the relevant environment.
2. Indian corporates do not face a similar situation as prevailing in some other countries since the Indian Companies Act is a central legislation. It should appropriately remain so. The “sovereign vacuum” created by withdrawal of the Central Government from any area of corporate operation and entrustment of the same entirely to a
regulator may generate demands in the Indian Federal system for State legislations on the subject, which we feel could lead to duplication and confusion. Further, regulatory urge to control corporate governance often becomes intrusive, posing serious regulatory risks in addition to inhibiting the freedom for decision making necessary for corporate functioning.
3. The extent to which models in operation in various other countries are relevant to the Indian situation needs to be carefully examined before any aspect is incorporated in the Indian framework. While emphasising the need for incorporating international best practices, we feel that there is a need to develop an Indian model, suitable to the Indian situation, that provides an adequate solution to the pressing concerns of corporate operation, without affecting the efficiency or competitiveness of business in India.
4. Corporate entities should be able to refer to a compact, easily understood, comprehensive compilation of legal requirements before they start operation. It would not be appropriate to develop different frame works for corporate entities on the basis of their size, nature of operations, manner of raising capital etc. Business entities keep on changing their form and structure from time to time as they grow and also need to adapt to the changing business environment in response to competition, technological change and requirements of operation in the international arena. Presence of differently administered frameworks would be an obstruction to change. This would also result in inter-agency overlaps and conflicts of jurisdiction. Besides, each framework would have its own compliance structure, leading to duplication of effort on the one hand and uncertainties and regulating risk for the corporates on the other. Eventually it would make adaptation to change slow and compliance costly.
5. it is important that the basic principles guiding the operation of corporate entities from registration to winding up or liquidation should be available in a single, comprehensive, centrally administered frame work.
6. single corporate law framework for application to all companies. The requirements of special companies e.g. small companies, could be recognised through a scheme of exemptions.

By: Sateesh Peetha On 02:12

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