CORPORATE GOVERNANCE AND EASE OF DOING BUSINESS: STRIKING THE RIGHT BALANCE

Khushwant Nimbark, Rajiv Gandhi National University of Law

PROLOGUE

Discerning the interface between Corporate Governance and Ease of Doing Business unveils the fact that there has been a dearth of research insights on the correlation between the two. Nevertheless, the very fact that good corporate governance is a desideratum for economic growth and apart from providing a more congenial environment for investment, it also creates opportunities for promoting free-market practices, fairness and rule of law; underscores the mutuality between the two. A sound corporate governance system provides for a set of rules that not only offers a congenial legal framework but also facilitates the simplification of procedures and pacing up the decision-making process for the ease of doing business, thus ushering in, a healthy environment for investment and growth of the corporate sector. In fact, the notion that good governance is essential for a propitious business environment emanates from the proposition that an economy that undergoes a moderate level of bureaucratic controls, witnesses greater compliance to the legislative framework and provides for an effective mechanism to curb evils like corruption, always proffers a sound business environment. All such regulations that define corporate governance must essentially be efficient, transparent and easy to implement so that they help the businesses to flourish.

On the other hand, the very idea of the concept of Ease of Doing Business subsumes in itself the dimension of the regulatory framework that governs the corporate sector. Perhaps this is why the principle of doing business is founded on the premise that business activity always benefits from the rules and ordinances that can potentially generate an environment that further stimulates new entrants and also creates prospects for greater innovation, expansion and productive growth.

EASE OF DOING BUSINESS – THE CONTEXT IN THE CONCEPT OF CORPORATE GOVERNANCE

Since 2006, the World Bank has been publishing data of various countries across the globe, ranked on the Ease of Doing Business index. In fact, the surveys conducted by the World Bank, while publishing the data, have also revealed that the economies with higher ranks in ease of doing business are not the ones with absolutely no regulatory framework, but those where the governments have created rules to facilitate market interactions, without unduly hampering the private capitalist regime. The growing interest of the policymakers and academicians across the world, in the issue of corporate governance, has contributed to the burgeoning of various dimensions of the concept of corporate governance. However, amongst the key components to the term, the ‘regulatory burden’ indicator which is identified as one of the parameters defining corporate governance, is conceived to examine the effect of the policies like price control measures, the inadequacy of banking regulations or intemperate regulatory control, which may otherwise be construed as being market-unfriendly and non-conducive to the growth of business in an economy. Thus, the interplay of the concept of ease of doing business with corporate governance is palpable even at the genesis of the idea of corporate governance.

It can be conveniently surmised that of all the components used for defining corporate governance, the most influential factors that exercise their effect on the ease of doing business are the ones that relate to the capacity of the government for contriving policy framework and ensuring its implementation. Some research findings have even been built upon the premise that the indicators of corporate governance are positively correlated to the business environment, even if the extent of the correlation differs between the low income and high-income countries[i]. Factors like ‘government effectiveness’ which are indicative of the ability of the government to formulate and implement an effectual policy framework and productively deliver public goods and services are one of the most potent governance factors influencing the ease of doing business in an economy. Furthermore, even the ‘quality of the regulatory framework’ goes a long way in implicating the extent of competition infused into the business environment and potentially strengthening the financial institutions so as to aid them in contributing towards prosperous businesses in the country[ii]. Another aspect included in the parameters defining corporate governance is the extent to which a state can effectively exercise ‘control over corruption’ and research findings substantiate that abuse of the public sector for private benefit can potentially harm the prospects of business development[iii].

STRIKING THE RIGHT BALANCE

The history of the Indian corporate sector succours the fact that the instances of corporate governance failure like the Satyam Computer Services, DHFL, Jet Airways, etc. exhort for the corporate sector to look into the best global practices of governance and adapt them appropriately to the Indian regime. That is why in line with keeping up with the requirements of corporate governance for promoting the ease of doing business in India, the government of India has been instituting reforms to improve the regulatory environment so as to achieve the twin objective of good governance and also inducing better business environment. Amongst these measures, the pre-eminent measures include reduction of tax burden on the corporate sector, especially aided by the induction of the Goods and Services Tax regime which provides clearance to 72 amendments to the Companies Act, 2013 which paves way for the Companies (Amendment) Act, 2019 and also decriminalises the compoundable and non-compoundable offences under the Companies Act, 2013. Each year, the World Bank publishes data on the Ease of Doing business rank prepared on the basis of a survey of various countries and this ranking is based upon the transparency of the ground rules, promotion of markets and revving up the market enterprises, boosting the development delivery mechanism and subsequently changing the perception and investment sentiments for the economy.  Perceivably, India has been able to perform better on the Ease of Doing Business Index in 2020 and its position improved by 14 places to secure the 63rd rank amongst the 190 countries surveyed this year, yet there is ample room for more improvement. A deeper analysis of the ranking report reveals that India has performed poorly (136th rank in 2020 from 137th in 2019) on the parameter of starting a business and that is where India needs a spur so as to attract more savings and investments from across the globe. Pacing up on the ladder of making business more easily doable in the economy, calls for revamping of the business climate and requires multifarious sets of ameliorations. An era of reforms needs to be initiated which can strengthen the climate for business investment and attract more capital from even across the borders. A major issue that inhibits a congenial economic ethos is the scum of bureaucratic controls and the consequent phenomenon of corruption, which has bred into the Indian system and got integrated with the officialdom for years together. Such a setup of work regime needs to be changed and transparency has to be induced in the air that blows across from the political front to the business environment so that the resourceful section does not grow at the expense of infringing the rights of the weaker. There is also a dire need to abolish the mechanism of complex and irrelevant documentation attached to the initiation of business enterprises. Such excessive control by the government only impedes the business growth prospects and a complete shift from documentation to the online mode of application can help to reduce the undesirable state intervention and also encourage the businesses which are at the verge of a tipping point and can contribute significantly to the economy. Apart from the measures required to reduce the procedural lapses, reforms are needed on the legal aspect as well. The time taken by the Courts in India for deciding matters is usually so long that the delays further culminate into deterrents and circumstances that obturate the business activity. This calls for speedy action on the part of the judiciary which can be achieved with the help of additional manpower and the use of digital technology to expedite the process of pronouncing decisions. If the Courts work at a snail’s pace, business would not grow. With regards to fulfilling the credit needs of the business, the banks too need to take a boost so that the time lag that elapses between sanction of loans and receipt of money be reduced before it adversely reflects upon the zeal or enthusiasm of the business proprietors. The present era is an age of technology and internet, and the quasi-deprived sectors like the MSME sector enterprises can be provided access to resources and also to the policy benefits of the government through the use of the contemporary technology facilities like labour, power, legal guidance, access to infrastructure can be arranged using the powerful tool of internet of things, which can go a long way in not only luring local but foreign investors too. The industrial potential of an economy like ours rests in its labour and to capitalise on the strength of our labour, efforts are required to train, educate and empower the labour and also incentivise them using lucrative wage rates so as to enable them to be able to contribute to various sectors of production.

EPILOGUE

Conclusively, the policymakers and the state authority need to reasonably frame policies in coordination and consultation with the business community. No business environment can flourish under despotism. The ease of doing business can only be enhanced with a pro-active policy approach. Since in the realm of contemporary reforms, the issue of ease of doing business does not confine itself to the private sector alone but also holds equal relevance for the public sector, given the increasing prospects of partnership and growing dichotomy between the two, therefore the present-day governments ought to work out a separate regulatory regime which aims at promoting the ease of doing business and contributes significantly to the development of a better and a healthier business environment.


[i] Cristina Bota-Avram, (2014), Good Governance and Doing Business: Evidence from a Cross Country Survey, Transylvanian Review of Administrative Sciences, No.10, pp. 27 – 45.

[ii] Gani, A. and Duncan R., (2007), Measuring Good Governance Using Time Series Data: Fiji Islands, Journal of the Asia Pacific Economy, Vol. 12, No. 3, pp. 367-385

[iii] Weder B.,(1997) Corruption and the Rate of Temptations: Do Low Wages in the Civil Service Cause Corruption?, IMF Working Paper No. WP/97/73, available at

http://www.imf.org/external/pubs/ft/wp/wp9773.pdf, last accessed on 19.04.21

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