Labour Reforms

Labour Reforms

Need for Holistic Strategy

The Classical theorist of Economics classified the factor – Wage, sequentially after Rent. The rent reflected the cost of usage of land capital in the production of goods and articles as against the labour for usage of human capital in the economic value of such goods or articles produced. With passage of time, the reliance on labour as the most important factor of production came to fore, which now is abundantly evident in the present day scenario. The human capital by no means is mean to the economic capital.

Coming to the spiritual existence of humanity, the purpose of human life is to work towards salvation to experience God, if not achieve it. Therefore, while we lead our respective life by carrying out our assigned or destined vocations, we as humans have divine responsibility in ‘developing’ humans or helping them grow. Labour Reforms therefore must lead to Human Development. From exploitation to empowerment, from deprivation to abundance and from an ordinary human to a realized soul – the reform process, to be really thriving must make humans grow to realize their spiritual existence.

The Lost Opportunity

The nation initiated the liberalization process in 1990s and started with fiscal reforms. These reforms paid much dividends as we see today in the growth data available to us. The GDP growth, Industrial production, higher savings and investment rate leave no doubt about the success of liberalization process. These were the result first generation reforms. However, what the planners could not perceive was, that mere fiscal reforms at the first place, will result in skewed development. The development – that will be harbinger to further disparities. Disparities -  between haves and have not’s, increased urban and rural divide, enhanced division - between employers and employees. These disparities in the longer run will do no good to the nation or its nationals. Any reforms to be really successful must be in tandem with the societal perception. Did we perceive a society with disparities. Probably, no.

The complete exercise of the reforms should have been planned in a comprehensive manner, where capital and labour must have been the part of same first generation reforms. Capital and Labour, both were to be in the same berth of reforms’ cycle. Had that been done, the kind of economic growth we see today would have been qualitatively different. It would have been explosive and beneficial to each class and segment of the economy. Still nothing is lost.

The Need

Traditionally we did not give labour the due it was entitled to. With the huge population, where labour was in abundance and the capital in short supply, it ought to be obvious. The labour laws were made to leash the employers thinking that the liberal labour laws will give an authority to the employers to further exploit the  already over-exploit class. Therefore, the legislations were enacted that were unidirectional to check the exploitation of labour class. How far these legislations could achieve the desired objectives may be a different arena of study. Little did we realize that the laws legislated may transgress into the economic deprivation of the businesses and entrepreneurs. In the bid to protect labour, the leaders of the unions and the political class ensured sickness and death of certain industries which were flourishing at one point in time. Textile as an industry is one such classical example.

The Labour Facts

Let us examine certain startling facts about our ‘labour’.  We are a strong country of over 1112 million (4^th advance estimates 2005-06). The quantum of labour force stood at 428.37 million. There were 13.10 number of unemployed in 2004-05.

·       Of these 43 crores in the work force, only minuscule 7% of the workers are employed in organized sector. The major chunk 93% of our work force therefore, comprises the unorganized workers employed in construction sector, farm sector or such other tertiary sector. Only 8 to 9% of the total work force is covered under social security as being part of the organized sector.

·       Educational levels of labour force are very low. Around 44% of all workers are illiterate and another 22% have education upto primary level. The scenario is worst on the rural side, where just 25% of the workforce is literate. The educational situation of females in the workforce is too grim, around 69% are illiterate while another 16% have education only upto primary level. Thus only 15% of the total female workforce is educated upto middle level or beyond.

·       Amongst the workforce, the percentage of the skilled are abysmally low. As per the 50^th round survey on Employment by NSSO, over 90% males and 94% females did not posses any marketable skills on the rural side. In urban areas, around 80% males and 89% females had no marketable skills.

·       Internationally too, even amongst developing countries, our labour force ranked too poorly in terms of proportion of vocationally trained youth (20-24) forming its part. While we have just around 5%, countries like Botswana and Mexico logged over 22% of its youth in the labour force as vocationally trained. Comparing this with  Australia and Canada who have over 65% and 78% of its vocationally youth forming part of the labour force, we have a log a way to go.

The Employment Realities

As per the Approach Paper of the Planning Commission on XIth Plan, the number of workers is growing and its direction is towards non-agricultural employment. However, the quality of employment and increasing differentials in productivity and wages are the areas of concern. Working age population is growing faster than the total population and labour force participation rates have increased. If the participation from amongst the women is on the rise, the phenomenon of under-employment is also escalating. Let us juggle with some certain data here,

·       During 1999-2000 to 2004-05, workforce or employment grew faster at an annual 2.48% as against 1.57% during 1993-94 to 1999-2000. Signifying higher employment generation during NDA regime.

·       The share of agriculture in total employment has come down from 62% in 1993-94 to 59% in 1999-2000 to even further down to 54% in 2004-05.

·       During the period 1994-2004, in the organized sector there was negative growth (-0.80%) in public sector employment. However there was a positive growth of 0.61% in private sector employment.

With the declining share of agriculture in GDP, there is limited scope of absorption of additional labour force there. Construction and services, particularly transport, storage and communication have contributed in maintaining employment growth. Employment growth in manufacturing sector is not encouraging.

The Productivity

The productivity of labour is the outcome of the quality of labour force and the industrial relations. Over the years industrial relations though seem to be improving all across, poor industrial relations have brought death to once flourishing industries also. Apart from the Trade Union Leaders, a large (dis) credit goes to the archaic laws which instead of promoting cordial relations amongst workers and industrialists perpetuated strikes or lockouts. Man days lost are the most odious kind of a loss any nation could afford.

23.87 million  of man days were lost in 2004 in 477 numbers of lockouts and strikes taken together. In 2005 man days lost were higher at 29.66 million despite number of lockouts and strike falling marginally at 456, signifying substantially higher man days lost and indicating poor industrial relations. Note that the Left having dominating position in UPA. In 2006 till September, West Bengal experienced the maximum instances of strikes and lockouts followed by Tamil Nadu.

The Laws

Constitution of India has made, Labour a subject in the concurrent list, hence  both the Central and State Governments are competent to enact legislations. This has resulted in the enactment of a large number of labour laws catering to different aspects of labour, viz. occupational health, safety, employment, training of apprentices, minimum wages, payment of wages, payment of compensation to workmen, bonded labour, contract labour, women labour and child labour, industrial disputes, social security like provident fund, employees’ state insurance, gratuity, payment of bonus, regulating the working conditions of certain specific categories of workmen such as plantation labour, beedi workers etc. This is how we have a large number of labour legislations. There are 154 legislations some of which have outlived its relevance and utility in the altered business environment.

The Expectations

The labour reforms probably have become synonym of giving the industrialist, an unbridled power to hire and fire the labour. An industrialist or entrepreneur should have flexibility and discretion to run his venture with his wisdom in the most efficient way. It is he who takes a lead to set up, administer and make economic value addition to the resources of the society, therefore the right to deploy or withdraw the resources must lie with him; and labour is one such resource. However, the businesses nowadays are so modeled that it is not the industrialist individual who is the lone stakeholder, but whole lot of societal elements responsible to the success of the venture, the labour being the most important one. In the market economy, it the most efficient that shall survive. The regulatory framework must be conducive to maintain a fine balance between labour and capital. If the industrialist should have a right to bid farewell to a worker or a class of them which he considers no longer necessary for his business, the labour must also be secured enough to bear the vagaries of changed market scenario. Proper compensation and security on severance need to be adequately addressed. Let the contacted employment be the order of the day.

The labour reforms must be directed to improve the quality of employment by addressing the need of training and skill up-gradation as a continuous process, which in the longer run will be a building block for self-employment of the workers if laid off.

Labour reforms need not mean reduction in employment opportunities. Way back in 2003 the then Union Commerce Minister, Mr. Arun Jaitley while addressing India Economic Summit said that ``Labour reforms would be labour-friendly in the long run. They are aimed at making Indian industries competitive globally which will create more jobs though not in the short run,'' He had then allayed the fears of the trade unions that the labour reforms will shrink the job market. The successful labour reforms can only be said when we have large employment opportunities coming our way.

Compliance to the regulatory framework must be based on mutual trust between the state and the industry. Still the industrialist shudders on a visit by an inspector from the labour department, unless the visitor is friendly. Higher reliance must be placed on third party certificate. By their sheer education and training, a chartered accountant is the best bet which comes at a cost effective value to the entrepreneur. Compliance Certificate issued by them submitted with the concerned department be accepted on its face value.

Each policy initiative and program, whether at the Centre, State or even at Municipal level be tested and reviewed in the light of contemporary business environment. Bajaj Auto closed its Arkudi Plant as octroi levied by the local body was proving detrimental to its market. Despite that the company continued to pay all its 2700 workers the wages each one was entitled to. However, political bigwig Mr. Sharad Pawar intervened and the management reopened the plant’s door just to make workers come to the site spend the time playing cards and carom and go back in the evening. How long it can continue or what shall be happening to the human resource, is anybody’s guess.

Fiscal incentives in the form of weighted deduction of expenses from income under the Income Tax Act be considered for expenditure incurred by the businesses on training, education and skill up-gradation of the employees. The retrograde step of UPA government by introducing Fringe Benefit Tax on expenses incurred on travel, board and lodging in relation to training of employee be done away with. This is the time to develop humans.

Physically challenged need to be brought in to the main stream of the labour force. Exceptional creative abilities are common to be seen in this segment of the society. What is needed is to provide them with the opportunities. Enterprises be encouraged to hire by incentivising by way of tax relief and priority in land allotment for expansions if such enterprises already have employed more than 10% of their total workforce from amongst the physically challenged in their existing ventures.

In the abolition of child labour, co-workers have a major role to play. Workers be made aware of their persuasive role towards the abolition of child labour and deterrent role for such hiring towards the employer. Empower them with awareness, without being afraid of losing their jobs if they report such malpractice by the employer. Civil Society Organizations may be roped in to this end.

The Unorganized

          

When we talk of reforms, probably we ignore the fact that it is the labour force in the unorganized sector which really necessitate a first look. Construction workers, weavers, domestic workers, fisheries workers, petrol pump workers, beedi workers, transportation workers and casual workers in making a livelihood across sectors including agriculture farm labour comprises over 90% of our labour force as a class that has been at the receiving end than their organized counterparts. We haven’t cared for them nor have the trade unions or political class taken sight of their welfare ever since we gained independence. Largely those working in the mills were the backbone of the leaders, who thrived on the (un)welfare of the mill mazdoors.  All labour reforms therefore must target to the development of unorganized workers to the fore. They must be provided training, marketable skills, health and social security at no or minimum cost.

The labour department hitherto takes care of just 7% of the labour force. These offices must be redefined as counseling points for taking care of the needs of the unorganized labour. Members of such labour force be certified with a Unique Identification Number valid in whole of the country. The way, the organized workers are granted benefits under ESI, modalities must be worked out whereby such workers may suo moto make contributions to avail to the benefits under ESI or any other similar scheme.

The Road Map

The laws no doubt must ensure prevention of a cause and protection of the targeted group but at the same time, laws must ensure that it do not become a stumbling block in the development. This is true for any law, be it economic, political or social. The laws are legislated to help the society grow and the humans are its most dynamic element. It is the time now to review each individual piece of legislation in the labour domain and assess it in the touchstone of Human Development and Economic Growth at the same time. We need to test each legislation to assure that it does not lead to labour exploitation, it makes an employee realize his or her true potential and simultaneously it enables the entrepreneur grow economically but ethically. No piece meal or lopsided review will do.

Given the political and social compulsions we should not have radical reforms. Reforms must be incremental. To begin with areas and industries be identified where we need immediate intervention. For example, construction and farm, both these segments employ large number of workers. It is pathetic that despite The Building and Other Construction Workers Welfare Cess Act having been legislated in 1996, a lot of states haven’t given the effect to by passing necessary local regulations.

All societal stakeholders need to be involved in the reform process. The Government, Trade unions and industry though predominantly be the partners in the process, media must act as opinion builder by helping disseminating factual position to the masses. The role of the professionals like us, be the catalysts to enable achieve the desired. Economists, social scientists, industry associations and lawyers each one has to play a proactive role to make it happen. Involve institutions like Urban Local Bodies and Panchyaats in the service delivery mechanism.

Politicians have a much bigger obligation in the direction of reform process. At the Centre, they must legislate at the first possible opportunity after elaborately debating each bill threadbare to the advantage of the disadvantaged. It is disheartening to observe lot of bills for the welfare of workers in unorganized sector either lapsing over the period of time or pending with the legislature. States must also ensure speedy enabling legislation. Keeping aside narrow political gains by providing the reform process a boost by cutting across party lines will be the great service our politicians will do the nation.

The UPA government came to the power riding on the wave of the sacrosanct National Common Minimum Program, which enlisted labour reforms as one of the priorities. However, not much headway could be seen on this front except referring a few pieces of intended legislations for examining, e.g., the Unorganized Sector Workers (Conditions of Work & Livelihood Promotion) Bill, 2005 and the Unorganized Sector Workers Social Security Bill, 2005. The government must ensure that these bills be debated upon thoroughly and ensure that they see the light of the day sooner than later.

Dr Charles W. Baird, the director of the Smith Centre for Private Enterprise Studies at California State University, remarked a few years ago: "India will have to opt for labour reforms and brave the pangs of change in the short-term in the interest of long-term economic sustainability." Therefore, we do not have two options but one, expedite the labour reforms, faster the better.

- This article by the author Avineesh Matta was published in the document "Economic Development Roadmap Ahead" by BJP CA Cell in 2007 and factually valid today also to a larger extent.

Opening up of Retail in India is not a Panacea to solve Unemployment

Much hype has been created over the higher employment potential in the economy once the FDI is allowed in retail, whether, single brand or multibrand. Any policy issues are supposed to be taken up and implemented only after detailed analysis of facts and encapsulating situations on economic as well as on social fronts. Presumably so, in context of FDI in Retail the same approach must have been taken up by the government. Similar detailed studies must have been carried out on the Employment Scenario post implementation of FDI in Retail. Whether, Retailing per se, leave aside, the Foreign Investment in Retailing, resulting into more number of retail superstores being opened up in the country, shall be harbinger of higher employment growth, is a question, we could not find logical answers from any of for the government information available in public domain.

Ground realities as analysed in this piece brings forth the fact that in country like India with substantial population belonging to below poverty line, employment generation through Retailing is just a delusion and piped dream.

The Labour Scene

Report to People of Labour Ministry - 2010 issued by Ministry of Labour, Government of India makes certain interesting revelations, and these are presented here, verbatim, in italics.

Although the overall economic growth achieved by the Indian economy, particularly during the current decade, has been impressive, employment growth has not kept pace. This has significantly limited the “trickle-down effect‟ and widespread distribution of the benefits of the high economic growth.

Government is wary of the realization that employment growth has not kept pace with the economic growth in the country and the thus the benefit of growth has not reached the lower segments of economy due to low employment generation.

The ongoing demographic changes are likely to contribute to an ever increasing size of labour force in the country. The Census projection report shows that the proportion of population in the working age group (15-59 years) is likely to increase from approximately 58% in 2001 to more than 64% by 2021.

In absolute numbers, there will be approximately 63.5 million new entrants to the working age group of 15-59 years between 2011 and 2016. Further, it is important to note that the bulk of this increase in the population is likely to take place in relatively younger age group of 20-35 years.

In 2004-05, the estimates of total labour force in the country varied from nearly 420 million (as per Current Daily Status-CDS) to nearly 470 million (as per Usual Principal and Subsidiary Status-UPSS).

By 2014-15 an estimated 574 million countrymen shall be there as part of labour force. It is clear that we need rapid growth in employment generation to match these numbers. Substantially higher numbers of young men and women shall aspire to get sufficiently, adequately and gainfully employed. If adequate employment generation does not happen at the warranted pace, we must be ready to face frustrated youth with discord resulting in likely social disharmony.

UNEMPLOYMENT SITUATION

Unemployment in India is not a straightforward issue that can be either estimated directly with a single measuring rod or addressed with a single policy initiative. Even if a person is not reported to be unemployed on a particular point of time, he/she may be actually unemployed/under employed. Poor and weaker sections of society, particularly those who are engaged in subsistence agriculture and low income earning self-employment activities frequently face this situation as they do not get employment round the year. Hence, various approaches are used to measure different dimensions of unemployment in the country. The estimates for 2004-05 varied from 10.8 million (as per usual status - widely referred to as “open unemployment‟) to 35 million (as per daily status which includes both open unemployment and underemployment). Hence, addressing underemployment along with open unemployment is important for policy initiatives, particularly, from the point of view of “inclusive growth‟.

Almost 3.5 crores willing workers could not be provided with jobs resulting in their questioned sustenance. Among these, more than 1 crores were totally unemployed.  And mind you these are Government numbers, which the Report itself is not very sure of. In reality the number of unemployed may be much more.

Some of the high employment potential sectors include information technology, information technology enabled services, engineering goods, gems and jewellery, ready made garments, other textiles and handicrafts. Increased international trade has also provided the impetus for the introduction of new and modern technologies and thus have direct bearing on skill enhancement of Indian workforce.

Ministry of Labour did not consider Retailing as an important and potentially high employment generator.

The employment elasticity with respect to GDP growth, however, can be enhanced by promoting labour intensive technology and sectors of employment with high labour capital ratio. In the recent past, different studies have identified such sectors of employment at least at broad level. These studies highlight that manufacturing sectors such as “sugar‟, “food processing‟, “industrial machinery‟, “leather and leather products‟, “jewellery‟, “footwear‟, “jute and mesta textiles‟, “readymade garments‟, “coir‟, “furniture‟, etc. are labour intensive sectors with an employment elasticity of more than 0.30. It is important to promote these industries in addition to enhancing investment in road infrastructure and power. In addition to these manufacturing sector industries, service sectors such as rail and road transport, tourism, retail trade, etc. are highly labour intensive. It is important to note that Public Private Partnership (PPP) is critical for attracting the necessary investment, especially in developing infrastructure.

Retail is just one small sector that can give some employment but it cannot be a strong ground for promoting retail in a greater magnitude. Under Indian conditions major employment generators are manufacturing and infrastructure development sectors.

EMPLOYMENT STATUS OF WORKERS

Employment status, mainly categorised as self-employed, regular and casual, is usually used as a broad indicator of assessing quality of employment of employed persons. In India, bulk of the employment (approximately 57%) falls in the category of self employed. Approximately 60% of the rural labour force and 45% of the urban labour force is self-employed. After a long period of declining trends during the 1980s and 1990s, the proportion of the self-employed has shown significant increase during the early 2000s. The proportion of regular employed has remained stagnant at around as low as 7% in rural and approximately 40% in the urban areas. The recent increase in self-employment has taken place mainly at the cost of casual employment, with the proportion of the latter declining from 37% to 33% in rural and from 18% to 15% in urban areas between 1999-2000 and 2004-05 respectively.

Self employed do not operate in the labour market for wages or earnings, but earn profits out of their own enterprises. A small proportion of these is exclusively employers, while a large section of them works as owners/employers cum workers. Further, an overwhelming proportion of these self-employed workers are small and petty traders and small and marginal farmers, and many a times, their earning levels are as low as those of casual workers.

The impetus on the Self Employment is high and that is rightly so. Instead of job seeker a self employed person becomes a job provider. In country like ours, this trait is of paramount importance. Entry barriers in self employment are far too low. Low level of capital needs for a majority of self employed, makes flexibility to exit is also relatively easy, in case he or she wishes to move ahead in value chain in an alternate job or enterprise. Another startling fact is that increase in self employment has taken place mainly at the cost of casual employment, indicating, more stability of livelihood and better economic conditions for such persons.

Unorganized Sector

Self employed do not operate in the labour market for wages or earnings, but earn profits out of their own enterprises. A small proportion of these is exclusively employers, while a large section of them works as owners/employers cum workers. Further, an overwhelming proportion of these self-employed workers are small and petty traders and small and marginal farmers, and many a times, their earning levels are as low as those of casual workers. In urban areas, the percentage of unorganised sector workers is close to 65-70%.

The past trends and all the available evidence suggest that the bulk of the growth in employment in future will come from the unorganised sector.

Livelihood of small and petty traders which form a substantial chunk of our economic work force needs to be protected at all cost. Even the medium term strategy lined up by the Ministry predominantly gives focus on self-employed and casual workers for improving livelihood.

ACCESS TO REGULAR EMPLOYMENT

Access to regular employment is mainly limited to better educated workforce. Only 4% of illiterate workforce has access to regular employment. In contrast, approximately 40% of them are casual labourers. Only 9% workers with primary education have access to regular employment while overwhelmingly 35% of them are casual labourers.

56% of illiterate labour work force are self employed, while around 40% are casual workers. With such large numbers of illiterate labour force, how many can be accommodated in so called supermarkets? Has somebody given a serious thought to it?

IMPACT OF RETAIL OPENING UP

Nineteenth Report of the Committee on Foreign and Domestic Investment in Retail Sector

As per the Nineteenth Report of the Committee on Foreign and Domestic Investment in Retail Sector as was laid in the Parliament on 8^th June 2009, the Secretary, Department of Industrial Policy and Promotion informed that the retail industry is roughly growing at five to six per cent per year. The total retail business is considered to be of the order of Rs. 12,00,000 crore which comes to be about one-third of the country’s GDP. Out of this, about 95% is in the unorganized sector and only five per cent is in the organised sector. This sector provides employment to 20 to 22 million people, which is the second largest manpower employer in the country, after agriculture. In the last four to five years the space for shopping malls has increased ten folds.

The Committee observes that another issue which merits attention is unemployment created by corporate retail. At present, unorganized retail provides employment to more than 40 million people, which accounts for 8% of the total employment. Many of them are not well educated. Projection of corporate retail to create two million jobs is highly exaggerated, ignoring the 200 million people, depending on the retail sector likely to be rendered jobless. Once displaced, there is no in-built policy to relocate or re-employ the dislocated persons.

The Committee also felt that in a country with huge numbers of people and high level of poverty, the existing model of retailing is most appropriate in terms of economic viability. Unorganized retail is a self-organized industry, having low capital input and high levels of decentralization. The Committee, therefore, recommend that the Government should ensure that some in-built policy must be established to relocate or re-employ the people who are dislocated due to opening up of big malls in the vicinity of their shops.

The entry of big domestic and foreign retailers will not merely destroy the economic foundation of the small retail supply chain, but will have social underpinning, in view of the fact that the small retailer is mostly illiterate or semi-literate and would not be able to find gainful employment elsewhere. The Committee, therefore, recommend that in view of the adverse effects of corporate retail (foreign as well as domestic) on the small retailer, there is a compelling need to prepare a legal and regulatory framework and enforcement mechanism for the same, that would ensure that the large retailers are not able to displace the small retailers, by unfair means.

Displacement of Jobs

Shri Arun Jaitley, MP and the noted lawyer opined that the latest NSSO survey shows a loss in employment. Self-employment continues to be the largest single source of bread earning. Agriculture and retail are the largest job providers in India. Is International retail going to give additional jobs, or is it only going to displace existing jobs? If purchasing power increases with the expansion of Indian economy, it will reflect in the co-existence of structured organized domestic retail and small retail. International retailers with deeper pockets will displace existing jobs in the retail sector, rather than creating additional jobs.

The first consequence will be an adverse impact on domestic manufacturing. Domestic retailers source domestically. International retailers operate on the principle of buying internationally at the cheapest cost. Majority items to be sold by international retailers are going to be sourced from cheaper manufacturing economies like China. Clothes, shoes, toiletries and other items of daily use are not likely to bear Indian signature. The fall in manufacturing sector jobs is likely. India needs manufacturing sector reforms in the first instance, so as to enable us develop into low-cost manufacturing economy.

Dislocating Jobs

CPAS Report of 2004 as quoted in Corporate Hijack

According to the report, if you assume that 40 million adults in the retail sector, it would translate into around 160 million dependents using a 1:4 dependency ratio. Opening the retail sector to FDI would mean dislocating millions from their occupation and pushing a lot of families under the poverty line. The western model of maximizing utility by minimizing labour will not work in India, as millions in the country are still seeking on gainful employment.

Here, given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store, depending on his or her means or capital. And thus a retailer is born, seemingly out of circumstance rather than choice.” Commenting on the likely impact of foreign competition, the CPAS report stated: “India has 35 towns each with a population over 1 million. If Wal-Mart were to open an average Wal-Mart store in each of these cities and they reached the average Wal-Mart performance per store—we are looking at a turnover of over 80,330 million rupees [$1.82 billion] with only 10,195 employees. Extrapolating this with the average trend in India, it would mean displacing about 432,000

persons.”

The International Scene

Former MP and president, Rashtriya Vyapar Mandal, Banwari Lal Kanchal says various studies have shown that the advent of organized retail chains in foreign countries also has led to closure of small retailers. “Studies have shown that almost 52% of small retailers closed down within years of organized retail spreading in England. There is a strong opposition to Walmart even in the US, where the company was founded, as small businesses have been forced to shut down,”

In Thailand, over 30% of independent small retailers were taken out in 10 years! If this happens in India, the loss of employment will be enormous:

Contrary to myths being spread, Big Foreign Retail will not create net additional employment. For every one job created by Big Foreign Retail, at least two to three jobs will be lost in India (and that is a conservative estimate).

Perturbed with the disturbing equilibrium in the native community and local economy, the Senate of the State of California has promulgated a Law with the intent to legislate to promote

economic development in all communities of the state and to address the impact on the state’s small businesses from the superstore retail model. Therefore, the Legislature declared apart from the other issues,

a.       That  the transformations in the big box retail industry have altered retail business nationwide. The engine of this change is the retail format known as the superstore—a big box retail store that also contains the equivalent of a full-size grocery store, with the total floor space often three to four times as large as that of a conventional supermarket.

b.       As a result of the restructuring of retail business, particularly the grocery sector in California, the following effects may be seen: local grocers, who yield a greater community return on investment, are driven out of business; less community access to viable superstore alternatives; lower wages and benefits paid to grocery workers by superstore retailers;

     

         The legislation seeks to mandate that prior to approving or disapproving a permit for the construction or conversion of a superstore retailer, a city, county, or city and county shall cause to be prepared an economic impact report. Such Report shall inter alia include an analysis of whether the proposed superstore will result in a net increase or decrease in employment in the market area, apart from other issues involving the livelihood of other retailers. Therefore, the land of Retailing now is feeling the brunt of opening up large superstores and the impact these have made in disturbing the local economic equations within the community.

In conclusion

Therefore our learned Parliamentarian and former Finance Minister of the Country, Shri Yashwant Sinha has rightly commented that, “We should not confuse the agenda of economic reforms with FDI…100% FDI has been permitted in the food-processing industry. The government itself says that we need $25 b of FDI in food processing in the next three years. But the total investment in this industry is just $ 330 million. Obviously, the food-processing sector is not attractive for the investor.”

Therefore the large format stores are primarily here for making money and they do not have any love lost for India or Indians. Are they here to help our simple and poor countrymen grow by providing them with more and better employment opportunities, it is seriously doubted. Let’s live up to the reality.

Note: This article was conceived in January 2012 by the author (Avineesh Matta) . Nothing much has changed since then!

Foreign Contribution (Regulation) Act, 2010

and

CSR spend

Section 135 mandates all companies that are warranted under its subsection (1) to have Corporate Social Responsibility Policy and spend funds at least 2% of its average net profit in accordance therewith.  The CSR policy as recommended by the company’s  CSR committee be laid out in line with Companies (CSR Policy) Rules, 2014 and need to be approved by the Company’s Board of Directors.

Rule 3 of Companies (Corporate Social Responsibility Policy) Rules, 2014 it its sub rule (1) unambiguously requires even foreign companies to comply with CSR regulations and it reads as under:

(1) Every company including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India which fulfills the criteria specified in sub-section (l) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules:

Provided that net worth, turnover or net profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Act.

 Therefore, foreign companies which have a branch office or a project office within India shall also need to make CSR spend and follow all the rules and related regulations in compliance. Howsoever, such foreign company’s CSR spend shall be of such magnitude as it relates to the profits germane to its Indian part only.

Foreign Company is defined in section 2 of the Companies Act, 2013 as under:

2 (42) “foreign company” means any company or body corporate incorporated outside India which—

(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.

Liaison offices

Therefore, the companies which are incorporated outside India and has a business presence by whatever mode and modality enumerated in its definition shall fall within the definition of a foreign company.  Though prima facie a liaison office of a foreign company also gets covered within the definition of a foreign company, a doubt may arise if the business conducted by a liaison office shall give rise to obligation of CSR spending. Despite of the fact that liaison offices as established within the purview of the Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 shall fall within the definition of a foreign company,  these may not get obligated to spend under CSR regulations of Companies Act, 2013. The regulations under FEMA supra define a ‘Liaison Office’  as follows:

2 (e) 'Liaison Office' means a place of business to act as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but

which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and

maintains itself out of inward remittances received from abroad through normal banking

channel;

Therefore, when the liaison offices are supposedly to act as a channel of communication between principal place of business overseas vis-à-vis its Indian operations; and, are not permitted to carry out any business activity, it is unlikely that they shall generate net profit as envisaged by the Companies Act, 2013 so far as application of CSR provisions are concerned. Primarily also in view of the fact, that these outfits are obligated to maintain their Indian activities through inward remittances from overseas.

However, other forms of outfits of a foreign company may get to comply with CSR regulations , if these are operating as a ‘branch’ or a ‘project office’ or a ‘site office’  within the ambit of FEM (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 since these are permitted to carryout businesses that may germinate turnover, net worth or net profit as necessitated by sub section (1) of section 135 of the companies act, 2013.

Determination of Net worth, turnover and net profit of a foreign company

The proviso to sub rule (1) of rule 3 of Companies (CSR Policy) Rules, 2014 requires that net worth, turnover and net profit of a foreign company are to be computed in accordance with the accounts prepared by such foreign company in accordance with clause (a) of sub-section (1) of section 381 and section 198 of the Act. 

The foreign companies are required to prepare its financial statements as per rule 4 sub rule (1) of the Companies (Registration of Foreign Companies) Rules, 2014 as promulgated under subsection (1) of section 381 of the Companies Act, 2013.  These companies must prepare financial statements of its Indian business operations in accordance with Schedule III or as near thereto as may be possible for each financial year. Thus, these accounts shall be made as if such Indian operations are carried out by any other Indian company. Rule 5 also stipulates that these accounts shall be audited by a practicing chartered accountant or a firm of practicing chartered accountants.

Thus once the financial statements are prepared and audited as prescribed under rule 4 and rule 5 supra, the determination of net worth, turnover or net profit shall be done in accordance therewith.

Complying with FCRA

The law permits a company that is covered under CSR provisions to undertake CSR activities in accordance with approved CSR Policy either directly or through a trust or society etc. Rule 4 of Companies (CSR Policy) Rules, 2014 in its sub rule (2) permits so. Use of phrase ‘or otherwise’ as the part of sub section (2) in its culmination very clearly gives a leeway to the companies to either undertake CSR activities directly under its own corporate umbrella or entrust the same to a trust or society or section 8 company (section 25 company in previous dispensation). 

4. CSR Activities.-

(l)…

(2) The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise:

Provided that-

(i) if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of three years in undertaking similar programs or projects;

(ii) the company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

It is when the activities are undertaken through a trust or society etc. in pursuance to rule 4 sub rule (2), the issue of compliance with Foreign Contribution (Regulation) Act, 2010 (FCRA) shall crop up. When the foreign company delivers or transfers anything either as money or as other article, the recipient entity shall need to test its admissibility or otherwise under FCRA. 

Compliance with the Foreign Contribution (Regulation) Act, 2010 (FCRA) and the Foreign Contribution (Regulation) Rules, 2011 (FCRA Rules) primarily is the responsibility of the recipient entity. However, as a matter of good corporate governance practice, it is expected from a foreign company that comes within the fold of CSR regulations, to ensure that nothing is faltered when it comes to spending funds under the Corporate Social Responsibility endeavours. Needless to add that Corporate Social Responsibility in its very root presupposes complying with all the laws of the land responsibly by the company at its own end; as well as, it takes adequate safeguards to assure the same level of compliance at the recipient’s end when undertaking CSR activities in pursuance of the regulatory framework prescribed. Monitoring of the CSR Policy and CSR spend also are the obligations cast upon the CSR committee by the statute. 

FCRA and Rules framed there under regulates certain foreign contributions either by prohibiting or through the medium of permission these contributions subject to the prescribed regulations and procedures. Foreign contribution has been defined in section 2 clause (h) as under:

(h) “foreign contribution” means the donation, delivery or transfer made by any foreign source,—

(i) of any article, not being an article given to a person as a gift for his personal use, if the market value, in India, of such article, on the date of such gift, is not more than such sum as may be specified from time to time, by the Central Government by the rules made by it in this behalf;

(ii) of any currency, whether Indian or foreign;

(iii) of any security as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 and includes any foreign security as defined in clause (o) of section 2 of` the Foreign Exchange Management Act, 1999.

Explanation 1.— A donation, delivery or transfer of any article, currency or foreign security referred to in this clause by any person who has received it from any foreign source, either directly or through one or more persons, shall also be deemed to be foreign contribution within the meaning of this clause.

Explanation 2.— The interest accrued on the foreign contribution deposited in any bank referred to in sub-section (1) of section 17 or any other income derived from the foreign contribution or interest thereon shall also be deemed to be foreign contribution within the meaning of this clause.

Explanation 3.— Any amount received, by any person from any foreign source in India, by way of fee (including fees charged by an educational institution in India from foreign student) or towards cost in lieu of goods or services rendered by such person in the ordinary course of his business, trade or commerce whether within India or outside India or any contribution received from an agent of a foreign source towards such fee or cost shall be excluded from the definition of foreign contribution within the meaning of this clause;

Therefore, if any delivery or transfer of an article, foreign currency or foreign security is made by a ‘foreign source’ except as a personal gift not exceeding monetary limit of Rs. 1000, then such transfers must comply with the requirements of FCRA and Rules thereof. Transactions done on commercial terms for goods and services with a foreign source shall not attract provisions of FCRA. However this excludes earnings from a foreign source by an  NGO/ association in lieu of goods sold or services rendered by it as this shall be a transaction of commercial nature. [Explanation 3 to clause (h)]

Further, indirect transfers from one recipient to another recipient shall also get covered under the definition of Foreign Contribution by virtue of explanation 1 to clause (g) of section 2, which reads as under:

             Explanation 1.— A donation, delivery or transfer of any article, currency or

foreign security referred to in this clause by any person who has received it from any foreign source, either directly or through one or more persons, shall also be deemed to be foreign contribution within the meaning of this clause.

Foreign Source

A look at the definition of ‘foreign source’ demonstrates that foreign companies as well as Indian companies that have more than 51% of its shareholding held by any  other foreign source shall also get covered under its ambit. The definition reads as,

2 (j) “foreign source” includes,—

(i) the Government of any foreign country or territory and any agency of such Government;

(ii) any international agency, not being the United Nations or any of its specialised agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification, specify in this behalf;

(iii) a foreign company;

(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory;

(v) a multi-national corporation referred to in sub-clause (iv) of clause (g);

(vi) a company within the meaning of the Companies Act, 1956, and more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely:—

(A) the Government of a foreign country or territory;

(B) the citizens of a foreign country or territory;

(C) corporations incorporated in a foreign country or territory;

(D) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory;

(E) foreign company;

(vii) a trade union in any foreign country or territory, whether or not registered in such foreign country or territory;

(viii) a foreign trust or a foreign foundation, by whatever name called, or such trust or foundation mainly financed by a foreign country or territory;

(ix) a society, club or other association of individuals formed or registered outside India;

(x) a citizen of a foreign country;

Foreign Company under FCRA

FCRA also has its own definition of a foreign company, which reads as under:

2 (g) “foreign company” means any company or association or body of individuals incorporated outside India and includes—

(i) a foreign company within the meaning of section 591 of the Companies Act, 1956;

(ii) a company which is a subsidiary of a foreign company;

(iii) the registered office or principal place of business of a foreign company referred to in sub-clause (i) or company referred to in sub-clause (ii);

(iv) a multi-national corporation.

Explanation.— For the purposes of this sub-clause, a corporation incorporated

in a foreign country or territory shall be deemed to be a multi-national corporation of

such corporation,—

(a) has a subsidiary or a branch or a place of business in two or more countries or territories; or

(b) carries on business, or otherwise operates, in two or more countries or territories;

Therefore, the non-commercial entities such as trusts, societies or not-for-profit companies  receiving foreign funds from a foreign company that have been incorporated outside India and fall within the meaning of erstwhile section 591 (1) of the Companies Act, 1956 corresponding to section 2(42) of the Companies Act, 2013 as well as those that are subsidiary of such foreign company even if incorporated in India shall be covered under the ambit of a foreign company within its definition under FCRA. Therefore the non commercial entities receiving CSR funds even from an Indian company may be advised to check the composition of its shareholding and ensure that such company incorporated as Indian company is not a subsidiary of a foreign company. 

CSR spend

It is pertinent to note that the provisions of Foreign Contribution (Regulation) Act, 2010 shall not be subservient to but assertive to section 135 of the Companies Act, 2013. Section 52 of FCRA makes it abundantly clear that the provisions of FCRA shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force.

In conclusion, whenever the trusts, society or a not-for-profit company is contemplating to undertake any initiative and considering a proposal from any company that falls within the parameters of the provisions overlaying the Corporate Social Responsibility, it must act diligently and professionally. Since foreign contributions received directly from a corporate as well as those received indirectly from another not-for-profit entity are regulated under FCRA, the level of due diligence to determine the nature of these funds, going forward now shall need to be higher. It must be ensured that the monies or other non-monetary contribution these entities receive from any source be tested appropriately to avoid committing the breach of FCRA provisions that are very stringent. 

-           Views expressed in this work are personal to the author CA Avineesh Matta. Professional counsel may be solicited before relying completely on the work