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Doing business is tough for small firms in India. For these face a plethora of hindrances even if it wants to exit the business. At least, the World Bank says so.
In its recently released report, the World Bank said several criminal statues in India apply to events that typically occur during period of financial stress faced by small and medium enterprises. These particularly relate to insolvency laws in India like--- Provisional Insolvency Act, 1920, Presidency Towns Insolvency Act, 1908 and Sick Industrial Companies Act, 1965.
"As a result, entrepreneurs do not hae access to adequate stay, discharge and rehabilitation mechanisms, and liquidation proceedings can take two to ten years," the World Bank said in its India Development Update.
The Bank came down heavily on a plethora of laws and regulations like those relating to bankruptcy and labour for hindering growth of medium and small enterprises in India.
The Bank said Indian firms operate within a complex web of laws, rules and inspections that interact with a vast array of incentives.
"These may hold back firms from operating on a level playing field and at appropriate scales in unified domestic markets and abroad," the report said.
In particular, it cited laws and rules in areas of insolvency, inspections and compliance, labour and land acquisition for not abetting growth in small and medium firms.
It said smaller enterprises in India are overwhelmingly single proprietorships or partnerships, subject to largely outdated personal bankruptcy laws. The three laws, cited above, make it virtually impossible for entrepreneurs to restructure and work towards insolvency.
Besides, operational compliance are required individually for almost all the steps in running firms, with the central government providing the overall legal framework and state government formulating and implementing the specific regulations.
A basic set of compliance for a small manufacturing firm would consist of 8-10 central and an additional 15-20 state and municipal clearances.
"As a result, compliance costs are high, delays are endemic and prolonged and there is high level of inspections which requires management time that could be used productively in running the firm."
Multiple regulations, the Bank said have separate inspection regimes, creating incentives for firms to remain small or risk becoming subject to repeated and unpredictable visits.
The report finds the environment tough for small and medium sized firms for labour and land laws. This was despite the fact tat a few firms are subject to the provisions of the Industrial Disputes Act. "The interaction of the compliance and reporting requirements of the Factories Act with the penalties to growing past size limits defined in the benefits packages under the MSME Act, create a powerful impetus for firms to stay small to avoid highly burdensome hiring and firing rules."
So far as land is concerned, the report said as the issue falls under the concurrent responsibility of the central and state governments in India's federal structure, there is a mass of complex derivative and subordinate regulation in this area. "For many small firms, the two key stress points regarding land relate to very significant procedural delays due to substantial variations among localities in the interpretation of existing laws and the chronic shortage and high price of industrial land, especially in urban areas."
Time-consuming procedures for the registration of real property, transfer of titles, disputes related to base relates for property valuation and taxation and obtaining construction permits add to time and money compliance costs for small firms, the Bank said.
