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Global Captive Centers in India: Can Add Value if Set Up Differently

Major forces of change, such as the emergence of new technologies, maturing of platform-based business models and other competitive threats are forcing businesses to transform themselves. Another driver of large-scale change is the pandemic, which has led to new ways of working. Hybrid models, where a large chunk of employees work remotely and not from a designated office space, are now becoming the norm. Although some companies have begun to announce plans for their employees to return to workplaces, the consensus opinion is that a hybrid model is going to become the new norm because it significantly reduces operating costs; also, employees are finding it more convenient.

One area where the above changes are clearly visible relates to how large and medium enterprises across industries are looking at outsourcing to countries such as India. In recent years, the contours of both IT outsourcing and BPO have evolved rapidly; the above-mentioned forces of change are only accelerating the velocity of change.

A survey by NASSCOM recently found that by 2025, MNCs are likely to set up 500 new Global Captive Centers (GCCs) in India. Until two years ago, the number of such units established annually was around 50. This demonstrates that India’s large talent pool continues to be attractive. But it’s a different world we live in than even five years ago.

Earlier, most MNCs viewed their GCCs in India as low-cost delivery centers and design, architecture, prioritization of projects etc. were all the exclusive domain of Business/Technology leaders in the parent company. Cost arbitrage opportunities still exist in India vis-à-vis western countries, and thus, cost savings will remain an important objective for evaluating GCC performance. However, the ongoing shifts are raising the bar on how GCCs are expected to contribute to their parent organizations. Along with cost-efficient service delivery, enhancing automation, driving process innovation and enabling adoption of new technologies and architecture paradigms will all become important performance criteria. In some cases, there may even be expectations of new product innovations coming out of the Indian GCC.

MNCs will need appropriate operating models and talent to deliver on the potential. Employee contracts need to be suitably structured. IPR must be appropriately protected. Compliance with data privacy and other regulations must be ensured. As MNCs plan and implement their GCCs in India, they must keep in mind that India too is changing rapidly. They must formulate their strategies keeping in mind four specific factors:

  • Quality infrastructure (including reliable electricity and broadband connectivity) is now available across the country, and not limited to Tier 1 cities. This gives companies a wider choice of locating their GCCs.
  • As a result of reverse-migration triggered by the pandemic, talent too is available in smaller cities across the country. Given the possibility of remote working, the proximity to families and lower cost of living have become significant incentives; in fact, many employees prefer to live and work from such locations.
  • Many state governments are offering incentives to companies establishing operations in less-developed parts of their states and creating employment opportunities.
  • The country’s FDI, income tax and GST regimes are also frequently being tweaked to make India more competitive and business-friendly.

All this means that making choices and decisions around business objectives, investment routing, structuring and locations based on criteria and checklists that were relevant even a couple of years ago may lead to sub-optimal outcomes. Your GCC in India has the potential to be a global Centre of Excellence- so make sure that you make the right decisions so that your investments deliver ROI in ways that go far beyond cost arbitrage.

Mr. Sandip Sen, former Global CEO of Aegis and a well-known veteran of the BPO industry, put it thus: “These are exciting times for the Business Process Management industry for many reasons. Use of Artificial Intelligence (AI), analytics and higher levels of automation mean that players at the lower end of the value chain will need to raise their capabilities. In the next phase, GCCs will focus more on innovation as well as technology enablement aimed at enterprises to embrace ecosystem-based business models and higher levels of customer-centricity. But to achieve all this, companies have to take an approach that is very different from what they might have taken some years ago”.

 

Image Credits: Photo by Alex Kotliarskyi on Unsplash

MNCs will need appropriate operating models and talent to deliver on the potential. Employee contracts need to be suitably structured. IPR must be appropriately protected. Compliance with data privacy and other regulations must be ensured. 

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Project Cost in Infrastructure Projects: Concept, Challenges and Way Forward

The IMF and Central Statistic Organization had dubbed the Indian economy as the fastest growing economy back in 2019. Moving forward, in 2021 despite the havoc wrecked by the pandemic on advanced economies across the globe, the IMF has kept India’s growth forecast unchanged at 9.5%. In order to sustain India’s growth momentum, the development of country’s infrastructure sector is cogent. The National Infrastructure Pipeline has been the focus of current policies, with an unprecedented increase in capital expenditure allocation for FY 2021-22 by 34.5% to INR 5.5 lakh crore to propel infrastructure creation. However, the April-June 2021 report of The Ministry of Statistics states that 470 projects sanctioned by the centre suffered from a cost overrun of 61.5 percent, that is Rs 4,46,169.37 crore[1].

Project cost remains the central concern for any seminal discussion on infrastructural projects in India or around the world. This is the nebulous point where a host of stakeholders would converge to dispute, disagree, or litigate. This article aims to discuss the concept of project cost and its various implications for the different stakeholders involved.

Introduction to Infrastructure and Projects

 

Costs that are reasonably incurred for the acquisition and construction of infrastructure are referred to as infrastructure costs. Hence, Project cost could mean the total cost of an infrastructure project.  In India, there is no clear definition of the term infrastructure. However, on 1st March 2012, the Cabinet Committee on Infrastructure approved the framework to include a harmonised master list of sub-sectors to guide all the agencies responsible for supporting infrastructure in India. These sub-sectors include transports and logistics, energy, water and sanitation, communication, and social infrastructure. Out of the plethora of these sub-sectors, during the fiscals of 2020-2025, it is expected that sub-sectors such as Energy (24%), Roads (19%), Railways (13%) and Urban (16%) shall constitute 70%of the projected capital expenditure in infrastructure in India[2]. The total capital expenditure as per the report is expected to be 102 lakh crore Indian rupees. Furthermore, in India, the current investment in infrastructure is USD 3.9 Trillion, and the required investment is USD 4.5 Trillion, leaving a gap of USD 526 Billion[3]. Therefore, the energy and infrastructure sector are instrumental in generating tremendous employment opportunities and drive a substantial increase in GDP per annum in India as well as countries all over the world.

 

Structure of Project Finance Transactions

 

The main parties involved in a project finance transaction structure are (i) The Authority or the Government (ii) The Private Party Investors/Developers, Sponsors or Promotors and (iii) the Lenders. These three parties are key players responsible for the determination of project costs in infrastructure and construction projects. The principal point of convergence for these three players is the project company (i.e., also known as special purpose vehicle) set up by the private party investors under which the infrastructure project is formed and under which the project exists in the concession agreement. The project cost is mainly estimated by the private party and the lenders who would finance in the form of equity and debt. The typical financial structure for infrastructure projects has a debt-to-equity ratio of 75:25. However, the ratio may vary depending upon the risks involved.

                Illustration I: Key parties that influence the project cost of an infrastructure project

                                                                                                                     

 

Risks that affect the Determination of Project Cost

 

Every project has certain risks attached to its completion. These risks influence the determination of project costs by the authority, the private parties and the lenders. The risks, in turn, then affect the total cost of the project. The risks affecting the three parties are explained below:

 

                                Illustration II: Risks that affect the determination of project cost

    

 Risk for Authority

Risk for Private Party
Investors

Risk for Lender

Technical or physical risks

Economic or market risks

Economic or market risks

Risk relating to land acquisition

Construction and completion risk – cost overrun/time
overrun/delays

Financing risks

For eg. Technical or physical risks may include risks
associated with
technology during
construction and operation as well as social and environmental risks.

For eg. Economic or
market risks may include input and output price variations, variation in
demand, debt/equity financing as well as counterparty risks.

For eg. Economic or
market risks may include input and output price variations, variation in
demand, debt/equity financing as well as counterparty risks.

The other risks that affect the cost of the project are contractual and legal risks, resource and raw material availability risks, demand risks, design risks, force majeure, property damage, permits, licenses, authorization, supply risk, social and environmental risks.

 

The Major Risks affecting Project Cost in India: Cost Overrun and Time Overrun

 

Out of the myriad of risks affecting project cost, the major risks in India are the risks associated with cost and time overruns. As many as 525 infrastructure projects were hit by time overruns, and as many as 470 infrastructure projects, each worth Rs 150 crore or more, were hit by cost overruns of over Rs 4.38 Trillion owing to delays, according to a report by the Ministry of Statistics, cited previously[4] The main causes for time overruns are delay in obtaining forest and environmental clearances, delay in land acquisition,  and lack of infrastructure support.  As per the report, there are other reasons like delay in project financing, delay in finalisation of detailed engineering, alteration in scope, delay in ordering and equipment supply, law, geological issues, contractual complications and delay in tendering.

 

The Key Elements of Project Cost

 

The elements of ‘costing’ include variables such as raw materials, labour, and expenses. Thus, for infrastructure projects as well, at the time of estimation of cost, these variables would come into play. The factors affecting cost for a public-private partnership project could be the following:

 

                        Illustration III: Factors affecting Cost of Projects: PPP model projects

FACTORS AFFECTING COST OF PROJECTS : PPP MODEL PROJECTS

Materials

Labour

Consultants

Contractor

Client

External
Factors

Dispute
Resolution

Costs and delays
associated with procurement and delivery of materials, import costs

Availability or non –
availability of skilled labour.

Recurring changes in
design

Poor site management
and supervision

Change orders

Force Majeure events
and weather changes.

International dispute
resolution in outside jurisdictions[1]

Unavailability of raw
materials

Poor management of
labour

Delay in approvals and
inspections

Inept subcontractors

Political and policy
changes such as MII[2]

Approvals from
authorities

Costly and time-consuming
domestic litigation

Wastage and theft of
materials – 13 to 14 million construction waste (FY 2000-2001)[3]

Increasing cost of
labour

Inaccuracy in design,
costs associated with knowledge transfer

Poor planning,
scheduling and cash flow management by Contractors

Poor communication for
quality and cost

Accidents

High legal costs and high
arbitrators fees[4].
Non-realisation of arbitral awards and court decree amounts.

 

 

Case Study: The Mumbai Monorail – An EPC Contract Model

 

Time and cost overruns in projects lead to disputes and arbitrations. A suitable example is the  Mumbai Monorail which has entered disputes and arbitration between the Contractor and the Authority over its project cost[9]. The development authority MMRDA entered into a contract with L&T Scomi Engineering for the construction of the Mumbai Monorail project. The original project cost between the Private Party Investors and the Authority was estimated to be Rs 2,700 crore, after which disputes arose. The Authority had claims against the Contractor for not completing the project task on time. The arguments of the Contractor pertained to the cost escalations caused by delays due to the fault of the Authority.  In 2019, the Bombay High Court appointed an arbitrator to settle the dispute. Currently, the dispute is still in the arbitration stage. Furthermore, post-December 2018, the MMRDA had taken over the Operation and Maintenance of the Mumbai Monorail project from L&T Scomi Engineering. Due to the Make in India policy, the tenders for manufacturing of the Mumbai Monorail were altered to encourage manufacturers and Indian technology partners to participate and fulfil the demands of manufacturing the additional monorail rakes[10]. Among other issues currently plaguing the Mumbai Monorail project, such as unavailability of a sufficient number of rakes to keep the services running and an inadequate number of spare parts, the widening deficit between revenue and O&M costs, remains primary.   

   

Way Forward

 

As per the report by the Ministry of Statistics cited above, the reason for cost and time overruns can be largely attributed to the state-wise lockdown due to the COVID-19 pandemic, which has been causing great hindrance to the implementation of infrastructure projects. Time and cost overruns in projects lead to disputes and arbitrations. Furthermore, in the procurement stage of projects, biddings in India happen with the project sponsor underbidding for the project so as to survive the competitive market. However, the underbidding combined with lack of margin included in the overall costs by contractors or sponsors often overlook inevitable hidden and unforeseeable costs which in turn enhance the final costs of the project. For instance, the Mumbai-Monorail project is a classic example of cost overrun. The solution would be to have a clear understanding of the project agreements, risks involved in the project particularly the conditions of force majeure, an objective evaluation of project cost while bidding taking into account uncertainties relating to raw material procurement, labour laws, land acquisition and risks related to cost and time overruns due to decisions of the awarding authority or public policy or any of the factors described above. The compensation clauses should be coherent and unambiguous, and in line with actual project cost incurred in the project leaving less scope for future disputes and arbitrations. Furthermore, it would be useful for the contractors / concessionaires , while making claims in an infrastructure project, to do it in a timely manner while maintaining clear and systematic evidentiary documentation, to substantiate the claims that may have arisen during the course of the project.

References: 

[1] http://www.cspm.gov.in/english/flr/FR_Mar_2021.pdf

[2] Finance Minister Smt. Nirmala Sitharaman releases Report of the Task Force on National Infrastructure Pipeline for 2019-2025, dated 31 December 2019, Press Information Bureau, pib.gov.in (2019), https://pib.gov.in/Pressreleaseshare.aspx?PRID=1598055 (last visited Sep 17, 2021).

[3] Forecasting Infrastructure Investment Needs and gaps, Global Infrastructure Outlook – A G20 INITIATIVE, https://outlook.gihub.org/ (last visited Sep 17, 2021).

[4] 422nd Flash Report on Central Sector Projects (Rs.150 Crore and Above), March 2021, Ministry of Statistics and Programme Implementation Infrastructure and Project Monitoring Division (2021), Available at: http://www.cspm.gov.in/english/flr/FR_Mar_2021.pdf (last visited Sep 17, 2021)

[5] Joseph Mante, Issaka Ndekugri & Nii Ankrah, Resolution of Disputes Arising From Major Infrastructure Projects In Developing Countries Fraunhofer, https://www.irbnet.de/daten/iconda/CIB_DC24504.pdf (last visited Sep 17, 2021).

[6] Make in India Initiative, Government of India.

[7] Sandeep Shrivastava and Abdol Chini M.E. Rinker Sr., Construction Materials and C&D Waste in India, School of Building Construction University of Florida, USA, https://www.irbnet.de/daten/iconda/CIB14286.pdf (last visited Sep 17, 2021).

[8] Amendments to the Arbitration and Conciliation Act, 1996, August 2014, Law Commission of India, Report No.246.

[9] Larsen and Toubro Limited Scomi Engineering BHD vs. Mumbai Metropolitan Region Development Authority MANU 2018 SC 1151, Arbitration Petition (C) No. 28 OF 2017.

[10]Adimulam, S. (2021, March 2). Mumbai: Monorail rakes will be made in India. Mumbai. Retrieved September 17, 2021, from https://www.freepressjournal.in/mumbai/mumbai-monorail-rakes-will-be-made-in-india.

 

 

Image Credits: Photo by Wade Austin Ellis on Unsplash

The solution would be to have a clear understanding of the project agreements, risks involved in the project particularly the conditions of force majeure, an objective evaluation of project cost while bidding taking into account uncertainties relating to raw material procurement, labour laws, land acquisition and risks related to cost and time overruns due to decisions of the awarding authority or public policy or any of the factors described above.

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Education in India: Time to Connect the Dots and Look at the Big Picture

In the last few days, I read news reports that are seemingly unrelated on the surface. However, I think there exists a deeper connection for those willing to think outside the box. I thought I would use this article to articulate my thoughts on the connections and their possible implications for India. 

India’s New Education Policy expected to gain traction

The first item was about various initiatives announced by the Union government on the first anniversary of India’s National Education Policy (NEP). While internationalization, multiple entry/exit options, and digital education will be key pillars, one other important component is to enable students to pursue first-year Engineering courses in Indian languages.

In the context of the broad-brush changes envisioned to India’s education system, it is time to rethink the role of the UGC as a body that enables the nation’s higher education system in ways beyond disbursing funds to be recognized universities. There also ought to be more harmony between the various Boards that govern school education. The roles of bodies responsible for governing professional education in India- e.g., AICTE, NMC (which replaced the MCI), ICAI, ICSI, ICWAI, Bar Council of India etc. should also be redefined to ensure that India’s professionals remain in tune with the needs of a fast-changing world.

English will play an important role in our continued growth

The second report that caught my attention was on two main points made by Mr. Narayana Murthy (the Founder of Infosys), in a recent media interaction. He stated that it is high time that English be formally acknowledged and designated as India’s official link language, and greater emphasis is given to its teaching and learning in Indian schools. He said that his opinion is based on his first-hand knowledge of many technically qualified students in Bangalore/Karnataka who lose out in the job market largely because they lack a certain expected level of proficiency in English.

In the same interview, Mr. Murthy went on to say that on a priority basis, India needs overseas universities and vocational educational institutions to set up facilities in India to train students and teachers in key areas like nursing. This too makes sense because our healthcare infrastructure needs massive upgrades- and human resources will be critical.

China’s tightening regulations threaten its US$100 Billion EdTechc industry

The third report was on China’s recent decision to tightly regulate its online tutoring companies. The new rules bar online tutoring ventures from going public or raising foreign capital. There are also restrictions on the number of hours for which tutors can teach during weekends and vacations. In fact, the rules go so far as to make online tutorial businesses “not for profit”.

Different views have been expressed on why Chinese authorities have taken this step. Some see it as a means to reduce the cost of children’s education- and thus encourage couples to have more children. They point to this as a logical enabler of the recent relaxations in China’s two-child policy. Others view it as a step designed to clip the wings of Chinese tech companies that are deeply entrenched in many consumer segments, and have, over the past decade, acquired significant financial muscle.

To put into perspective the size of Chinese EdTech companies, consider this data point: Byju’s, arguably India’s largest EdTech company, was valued at over US$16.5 Billion as of mid-June 2021. Despite this high valuation, Byju’s would have been smaller than the top 5 Chinese EdTech players (on the basis of valuations that existed before the recent draconian rules came into effect).

Implications for India

The majority of China’s EdTech ventures are financed through significant venture capital investments from the west. Analysts expect that China’s sudden actions will, at least in the short run, divert capital to other locations. India could be a potential beneficiary because it already fosters a large EdTech ecosystem.

Given our demographics, we have a significant domestic market for education across all levels- primary, secondary, and college. Since digital education will likely become the norm, this space is ripe for newfangled innovations in the days ahead. If online education can bridge the gaps that employers currently perceive in our fresh graduates, unemployability rates shall notably decline. . This will not only contribute directly to our GDP but also indirectly stimulate innovation and entrepreneurship.

India has a large technical skill base. Some of these resources can easily be harnessed to develop next-gen education solutions using cutting-edge technologies such as AI, ML, Language Processing, Augmented Reality, etc. To begin with, Indian start-ups can build, test, and scale EdTech platforms and solutions for our domestic market. Over time, these can be refined and repurposed for global markets. Similarly, features built for the global market can be adapted to Indian markets, thus creating a virtual cycle. Such a trend will not only proffer legs to implementing India’s NEP but will also enable us as a society to improve access to education to underprivileged sections of the society. This is critical to sustaining our growth on the path of socio-economic development.

By taking the right decisions now, we can attract capital, talent, and world-famous institutional brands to this critical sector. EdTech in India has the potential to become a powerful engine of growth for our services sector. Done right, I have no doubt that in a few years, India can become a “Vishwaguru” not just in the spiritual sense, but also literally.

PS: As with many other sectors in India, the legal framework that governs education too needs to be made more contemporary and relevant, but that’s for another time.

Image Credits: Photo by Nikhita S on Unsplash

By taking the right decisions now, we can attract capital, talent and world-famous institutional brands to this critical sector. EdTech in India has the potential to become a powerful engine of growth for our services sector. Done right, I have no doubt that in a few years, India can become a “Vishwaguru” not just in the spiritual sense, but also literally.

 

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India Needs New Regulations - But Simplification of Compliance is Just as Critical

In earlier posts, I have touched upon the need for Indian laws to be updated to better reflect the current environment and foreseeable changes to it brought about by various forces, primarily technology-led innovation. This is not just because of the need to plug legal loopholes that are exploited to the nation’s detriment but also with the objectives of streamlining compliance and better enforcement.

 

Recently, the union government did exactly this when it announced a new set of rules to govern the operations of drones in India. A new draft of the Drone Rules, 2021, now out for public consultation, will, when approved and notified, replace the UAS Rules, 2021, which were announced in March 2021. The fact that the government has come out with a new set of rules within 4 months of issuing the earlier version is a welcome sign of change, as it signals recognition of a rapidly-changing environment as well as the importance of timely and appropriate responses.

Changes are aimed at simplification and less regulatory control

The new rules are remarkable for other reasons as well. At about 15 pages in length, the new rules are only a tenth of the earlier rules. The changes are not limited to the form; there are substantive changes too. The new rules seek to do away with a large number of approvals (e.g., Unique Authorization Number, Unique Prototype Identification Number etc.).  Licensing for micro drones for non-commercial use has been done away with. Recognizing the immense potential for drones to revolutionize our society and economy, the government proposes to develop “drone corridors” for cargo delivery. Prior authorization of drone-related R&D organizations is being removed. A drone promotion council is to be set up, in order to create a business-friendly regulatory regime that spurs innovation and use of drones. All this augurs well for the development of a robust drone ecosystem in India.

Implementing the “spirit” of underlying regulations is vital

The change to the drone rules is a welcome step- just as the consolidation of 29 of the country’s labour laws into four Codes during 2019 and 2020 was. But rationalization becomes futile if there is no element of reform- e.g., doing away with requirements that have outlived their utility or need significant changes to remain relevant in the current environment? There were many expectations around the Labour Codes, but in the months that followed, it is fair to say that there was also much disillusionment amongst industry stakeholders because sticky issues, such as the distinction between “employees” and “workers”, payment of overtime, role of facilitator-cum-inspector etc., remained.

Simplifying compliance is necessary to improve “ease of doing business” further

The World Bank’s 2020 “ease of doing business” report ranks India 63rd; we were ranked 130 in 2016. The 2020 report considered three areas: business regulatory reforms (starting a business, paying taxes, resolving insolvency etc.); contracting with the government, and employing workers. 

But there are miles to go before we sleep. To ensure that India’s entrepreneurial energies and creative intelligence are directed to areas that will be critical in the years to come- e.g., space, AI, robotics, electric vehicles, clean energy etc. all need new regulations or revamp of existing legislations and rules. But this alone will not suffice. Implementing the spirit, and not just the letter of the law and rules and the simplification of regulatory compliance are important angles that government must pay attention to. These are going to be key determinants in improving our “ease of doing business”.

 

Technology is a necessary enabler but it is not sufficient

All regulatory filings- whether for approvals or compliance- should ideally be enabled in digital format. Digital dashboards in the government and other regulatory bodies should facilitate real-time monitoring. Only exceptions or violations should need further actions. To be sure, the government has initiated some steps in this direction- e,g., “faceless” interactions between business and the Income Tax authorities with the intention to reduce human interventions and thus, the possibility of corruption. But if the underlying income tax portal itself is not working properly, as was widely reported soon after it was launched, the desired outcomes will not be achieved.

Moreover, it is not just about having the right technology platforms in place. It is equally critical to bring about a mindset change in the administrative machinery that helps political leadership formulate policy and thereafter, enable implementation and performance monitoring.

Given India’s large domestic market and attractiveness as a base for exports, we as a nation stand on the threshold of a phase of significant economic growth. Many Indian entrepreneurs are establishing businesses overseas; this means that the benefits of jobs, tax revenues and IPR creation all move to other jurisdictions. The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

Image Credits: Photo by Medienstürmer on Unsplash

The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

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Toy Manufacturing - BIS Compliances, Schemes, and Incentives

One of the key flourishing industries in the world, India’s toy market is currently valued at $500 million out of a booming $90 billion global market. Statistics reveal that 80% of Indian toys are Chinese imports, while non-branded Chinese toys account for 90% of India’s market. Even though exports by the toy manufacturing industry from India amounted to $130 million during 2019-2020 with the USA and UK [1]being the lead exporters, the disparity and unutilized potential do not escape one’s attention.

As the second-most populated country in the world with almost 26% of its population below 15 years old, India has one of the largest consumer bases in the world. In fact, when the global average for demand growth is 4.6% [2]it is forecasted to have a growth of 13.3% CAGR [3]within 2026 i.e. almost thrice the global average. Adding on to this the toy industry of the country is also expected to reach $3.3 billion dollars by 2024!

India’s economic growth has also increased the disposable income of its citizens, thus driving up demand in a market with a whopping consumer base of roughly 338 million. Moreover, there has been a major shift from traditional, medium- to low-end battery-operated toys, towards innovative electronic toys, intelligent toys as well as upmarket plush toys.[4] The boom of e-commerce in India has also had a role to play, with customers turning to shop for toys within the comfort of their own homes.

Associations and Committees Representing the Toy Industries in India:

 

1.Toy Association of India

  • Headquartered in New Delhi, the toy Association of India was established in 1995 with a view to bringing together toy manufacturers, traders and end-users to promote higher business relations.
  • It has a presence all over the country and has 600 registered members, out of which 275 are toy manufacturers.
  • Assists the toy industry in up-gradation of the industry’s units with modern machinery to maintain quality standards.
  • Attempts at creating a more conducive relationship between the government and the industry by offering policy recommendations, communicating the industry’s problems in the interest and growth of the toy industry.

2.The All-India Toy Manufacturer’s Association

  • Headquartered in Mumbai, All India Toy Manufacturer’s Association has nearly 150 registered members, out of which 100 are toy manufacturers.
  • It seeks financial assistance and subsidies from the government for the growth of the toy industry, educates and encourages suppliers to conform to the BIS regulations. 
  • Encourages the organization of toy fairs and exhibitions for the promotion of the toy industry.

 

Compliances Requirements for Toy Manufacturing Industry under the Bureau of Indian Standards (BIS) 

Apart from the general compliances which amount to over 700 ranging from the Companies Act, SEBI Act, FEMA Act to Income Tax and Foreign Trade Act for factories and MSME’s, regulations were required to be specifically made to ensure that the toy industries are safeguarded from unfair and excessive exploitation as well as products meet the international quality requirements.

According to a study, about 67% of toys sold in India had failed all safety and standard tests, while about 30 per cent of plastic toys failed to meet the safety standards of admissible levels of heavy metals and phthalates. Phthalates are a group of chemicals.

A lack of regulation in the past had resulted in degradation of the quality of our products and failed endeavours to keep up with the international standards. However, this is no longer the case as the government has not only strengthened the existing key factors but has also set up new compliances to steer clear of the past policy miscalculations and lapses. The said compliances are as follows:

The Toys (Quality Control) Order, 2020[5]

Issued by the DPIIT, Ministry of Commerce and Industry, vide order 25 February 2020, the safety of toys has been brought under compulsory BIS certification, which is granted after the successful assessment of the manufacturing infrastructure, production process, quality control, and testing capabilities. The toys shall bear the standard mark under a licence from BIS as per Scheme-I of Schedule II, of BIS (Conformity Assessment Regulations), 2018. The said QCO was initially slated to come into effect from 1st September 2020 but was later extended to 1 January 2021[6].

Exceptions:

  • The order is not applicable to goods and articles manufactured and sold by artisans registered with the Office of Development Commissioner (Handicrafts), under the Ministry of Textiles.
  • The order is not applicable to goods and articles manufactured and sold by registered proprietor and authorized user of geographical indication, by the registrar of geographical indications, Ministry of Commerce and Industry.[7]
  •  Goods or articles manufactured/meant for export purposes.

BIS Licence and Certification

For the purpose of BIS certification, toys have been classified into the following two categories. While applying for a licence, the manufacturer can apply under any one of the classifications:

 

If a licence is required for more than one type of toy (i.e., non-electric and electric), separate applications shall be made for each type. (However, samples shall be tested by BIS for conformity to the primary standard and the secondary standards which are applicable i.e., IS 9873 parts 1,2,3,4,7, and 9 etc.)[1]

While applying for a license the manufacturers must also specify the type of toy in order to choose the applicable standard it would be subjected to. The specifications of toys and their corresponding standards are as follows:

 

For Entities Manufacturing hundreds of toy models/SKU’s
  • Since testing hundreds of toy samples individually shall prove to be practically difficult for the purpose of BIS certification. The issue has been addressed in the Product Manual for the safety of toys[1].
  • The product manual is a guidance document containing product-specific guidelines for certification. It incorporates “Grouping Guidelines” which allows certification to be granted for a group of toy models based on the testing of certain representative models.
  • These grouping guidelines have been framed based on the Indian Standard IS 9873 (Part 8):2019 which is identical with the International Standard ISO/TR 8124-8:2016 (Safety of Toys Part 8 Age Determination Guidelines) which classifies toys into 7 Categories and 146 Sub-Categories based on the appropriate starting age and the specific purpose or function of the toy.
  • For the purpose of certification, all the models of toys of similar design, made from the same materials and covered under a single sub-category, shall be considered as a series. A sample of any one model from each series shall be drawn and tested to cover all the models in that particular series.

Schemes Floated for the Toy Manufacturing Industry in India

Along with the set of existing and new compliances, the government has also introduced various schemes and incentives with the aim of promoting the industry.

Micro, Small, Medium Enterprises (MSME)

Approximately four thousand[2] enterprises in India, engaged in toy manufacturing fall under the category of micro and small-scale sectors. The MSMEs in the toy manufacturing sector is an unorganized sector, accounting for a whopping 60% of the national market share. These MSME’s are spread all across the country with a large chunk operating in the Northern and Western regions.

The Indian toy market is 70% larger thanks to the existence of MSMEs and the support they received from our government. In pursuance of the same, the government has amended the classification of MSMEs in the Aatmanirbhar Bharat Abhiyan to ensure that they receive the aid and recognition required to keep up with the changing times. The amended classification is as follows:

 

With the advent of Aatmanirbhar Bharat Abhiyan various schemes have been introduced to promote MSMEs:

•       Technology and Quality Upgradation Scheme

Enrolling in this scheme will help the micro, small and medium enterprises to use energy-efficient technologies (EETs) in manufacturing units to diminish the expense of production and adopt a clean development mechanism. The scheme guarantees to cover up to 75% of the expenditure.[1]

•       Grievance Monitoring System:

Enrolling in this scheme is advantageous when it comes to addressing complaints of business owners. Additionally, the owners may also check the status of their complaints and file an appeal if they are not satisfied with the result.

•       Incubation: 

It assists innovators in implementing their new design or product ideas. It provides financial assistance for “Business Incubators”. Financial assistance of 75 % to 85 % of the project cost, up to a maximum of 8.00 Lakh is extended to the innovators.[2]

•       Credit Linked Capital Subsidy Scheme:

Under this scheme, new technology is provided to the business owners to replace their old and obsolete technology. A capital subsidy is given to the business to upgrade and have better means to do their business. These small, micro and medium enterprises can directly approach the banks for these subsidies. The ceiling on subsidy would be Rs. 15 lakh or 15 per cent of the investment in eligible plant and machinery, whichever is lower[3]

•       Scheme of Fund for Regeneration of Traditional Industries: 

The government aims at establishing a total of 35 toy clusters in various states under this scheme. Once set up, these will boost the manufacturing of toys made of wood, lilac, palm leaves, bamboo and fabric. This scheme offers incentives such as skill development, capacity building, e-commerce assistance to local industries.

•       Product Specific Industrial Cluster Development Programme: 

The programme aims to establish dedicated SEZ’s and customize them into self-sustaining ecosystems catering to export markets.

 

Incentives Provided to the Toy Manufacturing Industry in India

The Centre and State governments have implemented various incentives to promote the toy industry.

A. For Toy Manufacturing Entities

 

1.Hiked import duty:

The import duty on toys was raised from 20% to 60% [4]making it difficult for foreign companies to compete in our market as well as making Indian companies’ entry into the market easier.

2.Handicraft and GI Toys exempted from Quality Control Order[5]:

This allows any traditionally made toys by artisans registered with Development Commissioner (Handicrafts) to be exempted from the quality compliances newly introduced.

3.Custom Bonded Warehouse Scheme:

Central Board of Indirect Taxes and Customs (CBIC) has launched a new scheme expected to play a critical role in promoting investments in India and in enhancing the ease of doing business. According to this, the unit can import goods (both inputs and capital goods) under a customs duty deferment program.[6]

4.Export Promotion Capital Goods (EPCG) Scheme: 

Enables the import of capital goods (toys/ spare parts thereof) in the pre-production, production and post-production stage without the payment of customs duty.

5.Increase in BCD for Electronic Toys (under HSN 9503) from 5% to 15%[7]:

This will increase the expenditure incurred for foreign companies to sell products in India and thus help relax the competition for Indian manufacturers. An example of how these steps have been implemented and made into a reality is the Product-Specific Industrial Cluster Development Program. An initiative taken up by the Karnataka government in partnership with Aequs Infra, is a first-of-its-kind project aimed at promoting toy industries by dedicating 400 acres of self-sustained ecosystem including an SEZ to serve export markets and Domestic Tariff Area (DTA) through state-of-the-art industrial infrastructure and facilities. It has the potential to create 40,000 jobs in five years and attract over INR 5,000 crore in investments. [8]The toy cluster aims to capitalize on the presence of key elements essential for the sector’s growth like manpower, R&D and raw material.  It is also in a strategic position to cater to 50% of the domestic toy market needs, and has an efficient connectivity network with access to highways, ports, airports, and major cities.[9] This program was touted as a one-stop-shop solution catering to the needs of both large MNCs and small and medium enterprises.

6. Duty Drawback Scheme: 

The scheme was introduced to rebate duty chargeable on any imported materials or excisable materials used in the manufacture or processing of goods, manufactured in India and exported.

B. For MSME’s

Apart from extending financial aid as discussed above, the government initiatives for MSME’s are largely based on undertaking initiatives to promote homegrown toy manufacturers and boost domestic demand for indigenous and locally produced toys. Some of these initiatives are:

Phased Manufacturing Programme (PMP): 

The programme will make the assembly of toys cheaper than imports, offering benefits similar to the PMP for mobile phones introduced back in 2015. The government has offered tax reliefs and differential tariffs among other incentives for components and accessories to push local manufacturing.

Toy Labs: 

In a bid to promote traditional toys, the government has chalked out a plan to create toy labs – a national toy fair for innovative Indian themed toys. The Atal Tinkering Lab is one such toy lab to provide support for physical toys promoting learning and innovation. Additionally, due to literacy programmes like Sarv Siksha Abhiyan and the new education policy, toys nurturing innovation and creativity are in focus.

Involving various sectors:

The education ministry has been asked to include indigenous toys as a part of learning resource, under the new education policy. The IIT’s are set to be roped in to look into the technological aspect of toys, while the NIFT’s shall study the concept of toys and national values, by using non-hazardous materials. The Ministry of Science and Technology has been directed to explore how India’s indigenous games can be featured in the digital space. While the Ministry of culture will work on ‘Indian Toy Museum’.

Labour law reforms:

The Indian toy industry is labour intensive, the new labour law reforms have a significant impact on the ease of doing business, thereby providing a competitive advantage to the Indian toy industries.

The toy industry is one sector that contains a lot of untapped potentials. The compulsory BIS certification as per the Toys (Quality Control) Order, 2020, will ensure that the quality of toys is at par with international standards along with the strengthening of existing conditions of the market. These are significant steps in the right direction to ensure that the domestic markets pick up once the pandemic wanes. The domestic production and sales could catch up with exports and thus make sure that the future of this sector will not be as grim as in the past and will light up, once again.

References 

1 https://www.investindia.gov.in/sector/consumer-goods/toys-manufacturing

2 Koppal Toy Manufacturing Cluster; https://static.investindia.gov.in/s3fs-public/2021- 01/Koppal%20Toy%20Manufacturing%20Cluster%20-%20For%20International%20Investors.pdf

3 Ibid

4 Indian Toys Market: Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021-2026, https://www.imarcgroup.com/indian-toys-market

5 https://bis.gov.in/wp-content/uploads/2020/03/Toy_QC_order.pdf

6 https://dipp.gov.in/sites/default/files/orderToy-26February2021_0.pdf

7 https://dipp.gov.in/sites/default/files/QC-AmendmentOrder-Toys-21December2020.pdf

8 https://bis.gov.in/wp-content/uploads/2020/09/toys-faqs-bilingual.pdf

9 https://bis.gov.in/wp-content/uploads/2020/08/safety-of-toy.pdf

10 Toy industries in India; https://www.ibef.org/indian-toys

11 Impact of Aatmanirbhar Bharat Abhiyan on MSMEs; https://cleartax.in/s/impact-aatmanirbhar-bharat- abhiyan-msmes/

12 https://msme.gov.in/3-technology-upgradation-and-quality- certification#:~:text=Technology%20and%20Quality%20Upgradation%20Support%20to%20MSMEs&text=50%

13 https://msme.gov.in/incubation25%20of%20actual%20expenditure%20subject,licenses%20from%20National%20%2F%20International%20bodies.

14 http://laghu-udyog.gov.in/schemes/sccredit.htm

15 Budget 2020: Govt hikes customs duty on toys, furniture, footwear products; https://www.financialexpress.com/budget/budget-2020-govt-hikes-customs-duty-on-toys-furniture-footwear- products/1848123/

16 Handicraft and GI Toys exempted from Quality Control Order; https://pib.gov.in/Pressreleaseshare.aspx?PRID=1680181

17CBIC and Customs launch scheme to attract investment and support Make in India programme; https://knnindia.co.in/news/newsdetails/sectors/cbic-and-customs-launch-scheme-to-attract-investment-and- support-make-in-india-programme

18 Union budget 2021; https://www.indiabudget.gov.in/doc/budget_speech.pdf

19 https://www.investindia.gov.in/sector/consumer-goods/toys-manufacturing

20 Koppal Toy Manufacturing Cluster; https://static.investindia.gov.in/s3fs-public/2021- 01/Koppal%20Toy%20Manufacturing%20Cluster%20-%20For%20International%20Investors.pdf

 

 

Image Credits: Photo by Nguyen Bui on Unsplash

The toy manufacturing industry is one sector that contains a lot of untapped potentials. The compulsory BIS certification as per the Toys (Quality Control) Order, 2020, will ensure that the quality of toys is at par with international standards along with the strengthening of existing conditions of the market.

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Food Safety Compliance System (FOSCOS) - A game-changer for Food laws Compliance and Enforcement Mechanism

With increased awareness, globalization and technological advancement, people are becoming more and more conscious of their eating choices. In fact, COVID-19 has changed the food habits of many individuals eager to fight against the pandemic by adopting a more balanced and nutritious diet to improve immunity.

Accordingly, Indian Food laws are changing in line with global food laws/standards through the amendment of various regulations based on the changing scenario. Food Safety Standard Act, 2006 (“the Act”) is also evolving and transforming in consonance with the “One Nation One Food Law” initiative.

 

The Food Safety and Standards Authority of India (FSSAI) established under the Act is now not only responsible for monitoring food safety standards but is also governing the entire food supply chain. With this mandate, the FSSAI has taken various steps towards easing the process of registration and licensing.

 

A new step in that direction is the replacement of the present online application system i.e. Food Licensing and Registration System (FLRS) to provide licensing and registration with an upgraded, advanced, controlled, improved, and developed open-source platform called Food Safety Compliance System (FoSCoS).

 

It was initially launched in the States/UTs of Tamil Nadu, Puducherry, Gujarat, Goa, Odisha, Manipur, Delhi, Chandigarh, and Ladakh in June 2020. FSSAI is now launching the second phase of FoSCoS in the remaining 27 States/UTs on 01st November 2020. Consequently, the FLRS portal has been closed w.e.f. 21st October 2020. FoSCoS is a more user-friendly and effective IT platform that seeks to connect Food Business Operators (FBOs), Designated Officers (DOs), and Food Safety Officer (FSOs).

 

FoSCoS is an upgraded and comprehensive solution that also connects with FSSAI’s other existing IT platforms such as Food Safety Compliance through Regular Inspection and Sampling (FoSCoRIS), Food Safety Connect-Complaints Management System, Online Annual Return Platform, Food Import Clearing System (FICS), Indian Food Laboratory Network (InFoLNet), Audit Management System (AMS), Food Safety Training and Certification (FoSTaC), Food Safety Mitra (FSM), etc.

 

FoSCoS has been rolled out to achieve the following objectives:  

 

  • Transform from the present FLRS which is only a licensing platform to a central food safety compliance regulatory platform.
  • Facilitate a hassle-free and user-friendly IT platform to connect Food Business Operators and Food authorities.
  • Build a technically advanced integrated application to achieve interoperability with other applications, capable of higher user traffic, and has potential for future upgrades and functionalities.
  • Enhance user performance of the application and make the application process simpler and efficient to promote ease of doing business amongst FBOs.
  • Achieve minimal physical documentation and streamline business process flows for FBOs for online applications.
  • Achieve and enable the application to have a standardized product approach rather than a text box approach for manufacturers.
  • Enable the application to seed business-specific details such as CIN No., PAN No. and GST No. to ensure effective profiling and validation of FBOs.

 

The FSSAI expects FoSCoS to be a game-changer for the implementation and enforcement of food laws in India. It is necessary to create awareness among Food Business Operators and the general public to achieve the goal of the Swastha Bharath Mission.

 

 

 

 

Fox Mandal is planning to publish a series of articles/blogs to create awareness on the food laws in India and related compliance under the FoSCoS Platform.

 

 

Image Credits: Photo by Mat Brown from Pexels

The FSSAI expects FoSCoS to be a game-changer for the implementation and enforcement of food laws in India. It is necessary to create awareness among Food Business Operators and the general public to achieve the goal of the Swastha Bharath Mission.

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Protection of Family Assets in the Trying Times of COVID

When death hits closer to home, it is accompanied by an ancillary ramification apart from emotional and psychological distress – finances. Many families have had to confront this reality as the pandemic left a trail of deaths across the country. Apart from grappling with insurmountable pain, one is often saddled with time-bound financial formalities, asset management and planning.Family businesses have been gravely impacted due to the COVID situation and it has acted for a wake-up call for planning the protection of valuable assets. 

Financial planning is a step-by-step process that is designed to meet fiscal requirements at every milestone of one’s life. For instance, creating a fund for children’s education, investing in retirement planning etc. The aim is to build a corpus of sufficient funds over a period of 15-30 years of continued investment and planning, which enables one to sustain financial responsibilities in these events. Another aspect of asset planning is setting up a contingency fund, which is most relevant and crucial in the present scenario of sudden deaths and unanticipated health emergencies. 

Lack of a structured plan can lead the family into chaos which may further result in litigation, a scenario not alien to many unsuspecting families today. This article aims to assist you through this dilemma by constituting an exhaustive list of tasks and legal measures one can undertake to ease the workload and formalities in such circumstances.

Documents and Immediate Actions for Families

The first step should be the collection of all documents, essential for dealing with various government and financial institutions. If the deceased had conducted a majority of transactions online, it is essential to secure access to their online accounts, with account numbers and login passwords.

The second step is securing the death certificate. In India, all deaths have to be mandatorily registered within 21 days of demise. If the same is done within 21-30 days, a penalty of INR 25 is charged. The certificate has to be certified by the medical officer. After 30 days and up to a year, the joint director of statistics is authorized to issue the certificate. The application has to be filed with a fine of INR 50 and an affidavit. After a year, the certificate is only issued by an order of a first-class magistrate, an application form which has to be accompanied by a “cause of death” certificate, cremation certificate, and an affidavit. The death certificate is vital for every financial task that has to be conducted in pursuance of the asset and financial management of the deceased.

Once all the above-mentioned documents and details are organized and collected, one can move forwards with the following tasks;

  1. Try to find out if the deceased person made a Will while they were living. A Will exponentially eases the process of transfer of assets, since most of the confusion is put to rest.
  1. Next, the efforts must be directed towards assessing the deceased’s liabilities and loans (secured/unsecured). This includes home, vehicles, personal loans or credit card dues. In such cases, the first step should be informing the creditor about the demise. In case the borrower had a co-signor/joint debtor the latter shall repay the loans. In the case of a single borrower; if a Will is in place, the executor shall be responsible for settling the debts, in the absence of a Will, an administrator (typically the   is appointed by the court to repay the liabilities.
  1. The heirs or children of the deceased (if adults) can undertake a mature discussion about the distribution of assets. The family must try to unite to avoid litigation. If possible, appoint a trustworthy person to carry out the necessary legal obligations.
  1. Take stock of all the assets in the name of the deceased and make a list with the valuation. Even if the deceased made a Will but left out a property that they later acquired, the property will be distributed according to intestate laws. i.e., the personal law of the individual.
  1. When it comes to insurance, deposits in banks, and shares of the deceased, in most cases, nominees are appointed. Notify the financial institutions of the death of the person and make inquires for the procedure to be followed by the nominee.
  1. In the event of the demise of both parents, where are minor children involved, it is essential that a guardian be appointed for them. If not appointed by a Will, in the case of Hindus, a guardian may be appointed by the court.
  1. Hire a local attorney to advise you. Keep in mind that laws in India relating to succession are not uniform. Moreover, legal procedures to get the appropriate documentation differ from state to state. Hence, it is recommended to hire someone who is well-versed with the local laws of the state in which the deceased resided or where they owned property.

Future Planning for Protection of Assets of a Family Business

People usually start thinking about protecting their assets only once they reach their late 40’s and 50’s. The ongoing pandemic has been a much-needed reality check which has triggered the families and individuals to structure their assets and finances for unforeseeable circumstances, even young adults.

What can you do to protect your estate in your life so that your assets are distributed according to your wishes?

 

  1. Will: Having a Will in place would make your life as well as the life of your loved ones quite simple. There is no fixed format for a Will under the law. The only requirements for a valid Will according to the Indian Succession Act, 1925 are; it should be made by a sound adult, signed by them, and attested by two witnesses. It is recommended that an Executor be appointed in the Will to reduce hassles. It is not compulsory to register a Will. Probate is also required only if the Will is made in Bengal, Bihar, Orissa, and Assam and within the local limits of the ordinary original civil jurisdiction of the High Courts of Madras and Bombay or where the property of the deceased is situated in these areas.
  1. Trusts: A trust may be created during the lifetime of a person who is called the author/s It may be created with a written legal document through which the assets of the settlor are placed into a trust and trustees are appointed therein who manage these assets for the benefit of the settlor and the beneficiaries named in the Trust Deed. The settlor can also be one of the trustees or the managing trustee of the trust during their lifetime. This gives them control over their assets while they are still living. The biggest advantage of Trust is that it operates both during and after a person’s life.
  • A provision can also be made in the Trust Deed for the appointment of a guardian for minor children in case both the parents die. The Trust Deed may provide instructions regarding the administration of the property to take care of one’s children.
  • A written Trust Deed is signed by the Settlor, requires a minimum of two trustees and two witnesses. The trust may or not be registered; registration is required only if an immovable property is transferred to the trust.
  • When a settlor dies, the trustee pays the debts, files the tax returns, and distributes the assets of a deceased. Trusts are an effective estate planning tool if one wants to avoid the costs and hassles involved in obtaining probate. It is a quick and quiet procedure, preserving one’s privacy and done without any court interference.
  1. Guardianship: Where minor children are involved, it is very important to make provisions either in a Will or by Trust, for appointing a guardian for minor children in the event of a death. If one parent dies, then the other living parent becomes the guardian. If both parents die, then it is needed to mention who will be accorded guardianship. Failure to do so will involve the intervention of courts and various applicable laws given India’s pluralistic society. The need for an appropriate guardian is to provide for personal needs but to also ensure that any future assets to be inherited are protected during the period of minority.

How does Ownership of Assets Transfer after the Death of a Person?

 

There are two scenarios that are to be considered while determining the ownership of the assets after the death of a person:

  1. In case a person dies leaving a Will; or
  2. In case a person dies without leaving a Will

Where there is a Will

Leaving behind a validly executed Will is the most uncomplicated mode through which a property can pass to the next owner. If an Executor is appointed in the Will, they should apply for the probate of the Will where Probate is mandatory. Once a Probate is obtained, the Executor is responsible for paying off all the debts of the deceased, managing the expenses for all the properties, and distributing the assets to all the beneficiaries according to the Will of the Testator.

Where there is No Will

The ownership of the property will be determined by intestate succession i.e succession according to the personal law applicable to the deceased individual. The heirs will be determined in accordance with the religion of the intestate for example Hindus, Buddhists, Sikhs and Jains will be governed by the Hindu Succession Act, 1956, Muslims will be governed by the Mohammedan Law and all others will be determined by the Indian Succession Act, 1925.

What are the legal options available to the heirs of the deceased?

 
  • Letters of AdministrationSection 273 of the Indian Succession Act, 1925 provides for Letters of Administration which are granted by the court to the individual who volunteers to be the administrator with the consent of the legal heirs for the lawful distribution of assets of the deceased. The purpose of grant of Letters of Administration is only to enable the administrator so appointed by the court to collect/assimilate the properties of the deceased and to deal with the various authorities with whom the properties of the deceased may be vested or recorded and thereafter the same be transferred in the names of the successors in accordance with the law of succession applicable to the deceased. The administrator during the proceedings is required from time to time to file the accounts in the court with respect to the administration of the estate of the deceased.[1]
  • Succession Certificate: Succession certificate entitles the holder to inherit the moveable assets of the deceased and to make payment of a debt or transfer securities to the holder of certificate without having to ascertain the legal heir entitled to it. A Succession Certificate is not granted where Probate or Letters of Administration are mandatory to be obtained. The purpose of a succession certificate is limited in respect of debts and securities such as provident fund, insurance, deposits in banks, shares, or any other security of the central government or the state government to which the deceased was entitled.
  • Family Arrangement: Family arrangement resolves present or possible future disputes among family members ensuring equitable distribution of property among the family members.[2] In a Family arrangement, a member gives up all claims in respect of all the properties in dispute other than the ones falling to their share. The rights of all the others are recognised. Therefore, under a Family arrangement, members of a family may decide amongst themselves about the distribution of the property of the deceased. A Family arrangement would have to be appropriately stamped and registered. However, even oral arrangements are valid in the eyes of law.
  • Administration Suit: Order 20, Rule 13 of the Civil Procedure Code, 1908 deals with an administration suit that is filed by a person seeking administration of the estate of the deceased. It is resorted to when there is no amicable settlement of disputes amongst the family members of the deceased. Under the decree, distribution of the assets of the deceased amongst the heirs can be sought along with the administration. In an administration suit, the court takes upon itself the function of an executor or administrator and administers the estate of the deceased. The suit in its essence is one for an account and for application of the estate of the deceased for the satisfaction of the debts of all the creditors and for the benefit of all others who are entitled.
  • Partition: In the case of Hindus under the Hindu Succession Act, the co-parceners may claim for a partition of the property. Under the Mitakshara law, the partition of a joint estate consists of defining the shares of the coparceners in the joint property. Once the shares are defined there is a severance of the joint status. Therefore, all that is required for a partition to take place is a definite and unequivocal intention by a member of a joint family to separate himself from the family. An actual division of the property by metes and bounds is not necessary. It may be declared orally or by an agreement in writing or by instituting a suit for partition of the property in the court. The difference between family arrangement and partition is that any member of the family can enter a family arrangement, but partition can only take place between co-parceners.

 

Not only have the consequences of the pandemic made protection of assets a top priority for most individuals but it has also encouraged people to ensure the protection of their assets through a Will or a Trust. The primary reason for this change in approach can be owed to India’s pluralistic society which sets limitations on estate and succession rights and adopts the regime of forced heirship in some cases of intestate succession. Additionally, the time-consuming and tedious process for completing the transfer of assets when the courts get involved has also facilitated this shift in individual priorities.

References

[1] Ramesh Chand Sharma V/s State & Ors  (High Court of Delhi, Test. Cas. 66/2011, Date of Decision: 20.01.2015, Coram: Indermeet Kaur, J.)

[2] Kale & Others vs Deputy Director of Consolidation 1976 AIR 807

Image Credits: Photo by Matthias Zomer from Pexels

Not only have the consequences of the pandemic made protection of assets a top priority for most individuals but it has also encouraged people to ensure the protection of their assets through a Will or a Trust. The primary reason for this change in approach can be owed to India’s pluralistic society which sets limitations on estate and succession rights and adopts the regime of forced heirship in some cases of intestate succession.

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Recent Relaxations On Debenture Issuance Related Compliances Under The Companies Act, 2013

The provisions of the Companies Act, 2013 (the “Act”) relating to the issuance of debentures, stipulate various requirements which the issuing company has to comply with, which includes maintaining a Debenture Redemption Reserve (DRR) account and in case of a secured debenture, filing of charge-related documents.

The outbreak of COVID-19 and the related regulatory lockdowns have affected business inflows and administrative functioning of many organizations. On one hand, some of the companies are facing financial difficulties in meeting their repayment obligations under the debentures issued, while on the other hand, these companies are unable to meet the statutory requirements stipulated under the Act. Considering the request of various stakeholders, the Ministry of Corporate Affairs, India (“the MCA”) has brought out several relaxations relating to the compliance requirements for debenture issuance under the Act.

 

Debenture Redemption Reserve:

In order to protect the interest of the debenture holders, as per section 71 (4) of the Act, the companies, which have issued debentures, are mandatorily required to create a DRR account and transfer the stipulated sum of money to such account, every year, out of the profits of the company. The amount credited to such account shall be out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilized by the company except for the redemption of debentures.

Pursuant to the Companies (Share Capital and Debentures) Amendment Rules[1], 2019 dated 16th August 2019 (“the Amendment Rules”), the requirements of maintaining DRR account was further relaxed and only certain class of companies are required to comply with the provision to create a DRR account and to transfer money to the said account. In furtherance to the said Amendment Rules, the requirement of the DRR was modified as follows:

  • The requirement of DRR was removed for both privately placed debentures and public issue of debentures both by Non-Banking Finance Companies (NBFCs) (registered with Reserve Bank of India under section 45- IA of the RBI Act, 1934) and Housing Finance Companies (HFCs) (registered with National Housing Bank);
  • The requirement for other listed companies (other than NBFCs and HFCs) to create DRR, both in case of private issuance and public issuance of debentures, has been done away with; and
  • The requirement for DRR was reduced from 25% to 10% of the value of the outstanding Debentures in case of unlisted companies (other than NBFC and HFCs).

Pursuant to the above changes, only unlisted Companies (other than unlisted NBFCs and HFCs) are required to comply with the DRR requirement.

It may be noted that, in addition to the requirement of maintaining the DRR account, every listed company (including NBFCs and HFCs) issuing debentures under public issue and private placement basis and other unlisted companies (excluding NBFCs and HFCs) issuing debentures under private placement basis was required to invest in specified Government securities or deposit with a scheduled bank (as the case may be) a sum of not less than 15%, of the amount of its debentures maturing during the year, ending on the 31st day of March of the next year. Further, the amount so invested shall remain invested or deposited and shall not fall below fifteen percent of the amount of the debentures maturing during the year ending on the 31st day of March of that year. Though there were relaxations provided with respect to maintaining the DRR being brought into effect through the said Amendment Rules, however, the requirement of making such investment was retained to protect the investor sentiment. 

However, in consonance with the above relaxations, the MCA vide its notification dated 5th June 2020 (“Notification of 2020”) has now amended the clause (v) of the sub-rule (7) of Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. As per the Notification of 2020, the requirement of maintaining a deposit or investment to a tune of 15% of the total amount of debentures (maturing as of 31st March of the next year) has been relaxed for listed NBFCs, HFCs and other listed companies undertaking debenture issuance on private placement basis.

 

Compliances towards charge filings:

As per the existing provision of the Act, the company creating a charge over its assets or properties is required to file Form CHG-1[2] and CHG-9[3] with the MCA within 30 days from the date of creation or modification of charges (as the case may be). With the recent changes[4] in the provisions relating to charge filing, a company which fails to file the e-form within the said timeline has the ability to make an application to the Registrar for filing by making payment of additional fees[5] and the additional time period is as follows:

  • in case of charges created before the commencement of the Companies (Amendment) Ordinance, 2019 (“Ordinance”) viz. 2nd November 2018, within a period of 300 days of such creation; or six months from 2nd November 2018 by making payment of additional fees, which is an exposure of a maximum of 12 times of the normal fees; and
  • in case of charges created on or after the commencement of the Ordinance, within a period of a maximum 120 days of such creation (application has to be preferred after the initial 60 days), on payment of ad-valorem fees as may be prescribed subject to the maximum of Rs. 5,00,000/- (Rupees Five Lakhs)[6].

However, considering the request from the various stakeholders towards relaxation in the filing of these charges forms within the stipulated time frame as given under section 71, 77, 78 and Rule 3(1) of the Companies (Registration of Charges) Rules, 2014, the Government vide circular no. 23/2020 dated 17th June, 2020 (“Scheme for relaxation of time for filing forms related to creation or modification of charges under the Companies Act, 2013”, referred to as “the Charge Scheme” hereinafter), has further relaxed timeline for filing of forms related to the creation and modification of charges under the Act.

 

Provisions of the Scheme:

With the introduction of the Charge Scheme, the MCA has given relaxation in the filing of the Forms towards charge creation and modification and for this, the applicability of the scheme is considered on two-levels, as provided below:

  1. Where the date of creation and modification of charge is of a date prior to 1st March 2020, but the timeline for filing such form had not expired under section 77 of the Act as on 1st March 2020:

In such cases, it has been clarified that the period beginning from 1stMarch 2020 and ending on 30th September 2020 (“exempted period”) shall not be reckoned for the purpose of counting the number of days under section 77 and 78 of the Act. In case, the form is not filed within such period, the first day after 29thFebruary 2020 shall be reckoned as 1st October 2020 for the purpose of counting the number of days within which the form is required to be filed under the relevant provisions of the Act.

 

Put in other words, the exempted period will not be considered for computing the maximum period of 120 days for filing of CHG-9 for creation and modification of charges. Hence, the forms for which the timeline for filing has not expired as on 1st March 2020, can be filed without paying any additional fees towards the exempted period. As such, the companies can benefit from the Scheme by paying only the fees as applicable on 29.02.2020, only if the company manages to file their pending forms within the relaxation period i.e. from 01.03.2020 to 30.09.2020. Otherwise, the benefit to the company is that it will be entitled to make the filing of the form, however, by paying the additional fees for the days beginning from 01.10.2020 till the date of filing of such form. It is to be noted that the filing has to be done still within the maximum permissible time limit of 120 days by paying additional fees or ad valorem fees as the case may be.

 

 

  1. Where the date of creation or modification of charge falls on any date between 1st March 2020 to 30th September 2020 (both days inclusive):

In case the due date of filing the form for creation or modification of charges falls between the relaxation period and the Company fails to file the form within 30.09.2020, the first day after the date of creation or modification of charge shall be reckoned as 01.10.2020 for the purpose of counting the number of days within which the form is required to be filed under section 77 or section 78 of the Act.

 

It is pertinent to note that, if the form is filed before 30.09.2020, normal fees shall be chargeable under the Fees Rules. However, if the form is filed thereafter, the first day after the date of creation or modification of charges shall be reckoned as 01.10.2020 and the company will have to complete the filing within the maximum number of additional days permitted by paying the additional fees or ad valorem fees as the case may be.

 

Conclusion:

The exemptions provided last year towards the requirement of maintaining DRR was a big step to ease the compliance requirements for companies especially for those companies which are facing a financial crisis, however, it had affected the sentiments of investors in the debt market as the protection provided to the investor was being diluted. Now, with further relaxation in the requirement of maintaining the 15% deposit for listed companies undertaking debenture issuance on a private placement basis, the regulator needs to consider providing an adequate safety net to encourage investor protection.

The introduction of the Charge Scheme is yet another move by the authority to help ease India Inc. which could be welcomed by the investors as well. But again, the Charge Scheme also aims favours India Inc. whereby companies are provided extension of the time period to complete the filing of charge creation or modification.

Keeping aside the monetary exposure, wherein the maximum exposure towards the additional fees is the ad-valorem value (that too to an extent of Rs.5,00,000/-), the only benefit in terms of an investor especially in case of debenture issuances, is that the Charge Scheme enables the company to complete the pending filings. Moreover, the Act provides that a liquidator appointed under the Insolvency and Bankruptcy Code, 2016 has to take into account the charge created by a company and such charge has to be registered. This allows the investor to ensure that companies can rectify the filings and adequately reflect the charge with the Registrar.

However, it must be noted that the benefit will not be applicable if the timeline for filing of the form has expired, even after excluding the exempted period. Further, the contractual right of the investor to enforce the repayment of the obligation (which is secured by the charge) would still remain. While these recent changes are a small breather to India Inc., regulators should not forget to protect the interest of investors, especially in these testing times.

 

 

References

[1]  Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014

[2] Refer section 71, 77, 78 and 79 of the Companies Act, 2013 along with Rule 3(1) of the Companies (Registration of Charges) Rules, 2014.

[3] Refer section 77, 78 and 79 of the Companies Act, 2013 along with Rule 3 of the Companies (Registration of Charges) Rules, 2014.

[4] Companies (Amendment) Ordinance,2019

[5] Refer the Companies (Registration of Offices and Fees) Rules, 2014 (“Fees Rules”)

[6] For ease of reference, we have considered fees structure applicable for non-small companies.

 

 

Image Credits: Photo by Austin Distel on Unsplash

The exemptions provided last year towards the requirement of maintaining DRR was a big step to ease the compliance requirements for companies especially for those companies which are facing a financial crisis, however, it had affected the sentiments of investors in the debt market as the protection provided to the investor was being diluted. Now, with further relaxation in the requirement of maintaining the 15% deposit for listed companies undertaking debenture issuance on a private placement basis, the regulator needs to consider providing an adequate safety net to encourage investor protection.

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Highlights of the Changes to the Indian FDI Policy

The Ministry of Commerce and Industry has issued Press Note 4 of 2019 dated 18th September 2019[i] (“Press Note 4”) to bring changes to the Foreign Direct Investment (FDI) Policy pertaining to Coal Mining, Manufacturing, Single Brand Retail Trading and Digital Media to attract foreign investment into India, increase productivity and enhance competitiveness.

 

The Ministry of Commerce and Industry has issued Press Note 4 of 2019 dated 18th September 2019[i] (“Press Note 4”) to bring changes to the Foreign Direct Investment (FDI) Policy pertaining to Coal Mining, Manufacturing, Single Brand Retail Trading and Digital Media to attract foreign investment into India, increase productivity and enhance competitiveness.

 

Following are the amendments in Foreign Direct Investment in India made by Press Note 4:

 

  1. Coal Mining:

 

To draw independent miners and help raise investment and output, 100% FDI is now allowed under the automatic route for coal mining activities including associated processing infrastructure (coal washery, crushing, coal handling, separation) for sale of coal. Earlier, 100% FDI was permitted only in captive coal mining. This would help attract international players to create an efficient and competitive coal market.

 

Further, coal and lignite mining activities for captive consumption and coal mining activities, including associated processing infrastructure, would now be governed by the Coal & Mines (Special Provisions) Act, 2015 and Mines and Minerals (Development and Regulation) Act, 1957 as against the erstwhile Coal Mines (Nationalization) Act, 1973.

 

  1. Contract Manufacturing:

 

The move allows 100% FDI in contract manufacturing. Therefore, manufacturing activities may now be undertaken by the investee entity through self-manufacturing or through contract manufacturing under a tenable contract, whether on Principal to Principal or Principal to Agent basis. This provides much-needed clarity for third-party manufacturers and would boost domestic manufacturing. Earlier there was ambiguity on whether contract manufacturing was to be considered as ‘manufacturing’ or a ‘trading activity’ for FDI purposes because companies only sold products after getting it manufactured from someone else. Further, the revised FDI policy now allows contract manufacturers to sell products manufactured in India through wholesale and retail channels, including through e-commerce, without the government’s approval.

 

Implication on entities trading in Food Product: Now food products manufactured through contract manufacturing and trading by the same manufacturer will fall under Automatic Route and not under the 100% Approval Route. There was no clarity on the same earlier.

 

  • Single Brand Retail Trading (SBRT):

Key changes pertaining to SBRT entities include:

  • SBRT entities can now set off mandatory sourcing requirements with the sourcing of goods from India for global operations. Earlier it was allowed only for the initial 5 years. This would give an impetus to export and result in increased production as well as enhanced competitiveness.
  • SBRT Entity can now operate through e-Commerce without having a brick and mortar store, provided a brick and mortar store is opened within 2 years from the date of the start of the online trade.

 

  1. Digital Media:

 

Now uploading/streaming of news & current affairs through Digital Media has been restricted to 26 % FDI under the government route. Earlier, FDI capping existed only for print media (26%) and TV Channels (49%). In fact, digital media companies had 100% FDI as per section 5.2 (a) of the DIPP guidelines[ii]:

 

“In sectors/activities not listed below, FDI is permitted up to100% on the automatic route, subject to applicable laws/regulations; security and other conditionalities.”

 

Although, in line with the government’s Digital India campaign, the introduced cap creates uncertainty on the status of the already existing digital media entities with investment higher than the said percentage. Further, it is unclear whether the policy would be applicable only to uploading/streaming websites or text-based content websites. Furthermore, clear guidelines need to be issued on applicability on online intermediaries/digital news aggregators, applicability on foreign news websites, separation of digital media business from other businesses, divesting or restructuring, etc. as a result of the change. In fact, Department for Promotion of Industry and Internal Trade (DPIIT) has recently sought the I&B Ministry’s views on these and other issues raised on the 26% FDI in the digital media sector.[iii]

 

It is pertinent to note that the above regulations will come into force from the date of publication of FEMA Notification.

 

The Ministry of Commerce and Industry has issued a Press Note dated 18th September 2019 to bring changes to the Foreign Direct Investment (FDI) Policy pertaining to Coal Mining, Manufacturing, Single Brand Retail Trading, and Digital Media to attract foreign investment into India, increase productivity and enhance competitiveness.

 

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