8/8/2019 Law can be good or bad driver of nations Economy (by Hemant K Batra)

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Law can be good or bad driver of nations Economy (by

Hemant K Batra)

A prosperous society may be more concerned about piracy of the intellectual wealth. It may alsoshow greater concern about environmental pollutions that affect the quality of life or aboutadherence to the highest standards of competence, which a professional is expected toobserve. Laws and legal systems, in this manner, codify social values, attitudes andexpectations of behaviour from members of the society. They have their own impact, good aswell as adverse, on the economic activity of the nation, depending on how far they areconsistent with actual conduct, habits and thinking of the majority of members comprising thesociety. Certain laws, like income tax rates, customs duties, prohibition, etc. are known more forcreating certain values in society, which ultimately act as deterrent in the larger interest of thesociety itself. Similarly, laws relating to economic activity can have different impacts, dependingon what their content are. The reason is that ultimately, a law consists of the intent of the law-makers and strategies to achieve this intent. The laws could become coercive, restrictive orhighly facilitatory, depending on what the ideals have been accepted and how the drafting hasbeen done. If the intent of the law and the contents of law are to facilitate growth in anunmistakable manner, law has to be drafted accordingly in an unambiguous manner. Dealingwith foreign direct investment, first, basically it depends on real factors, interest rates, tax lawsand Governments other economic policies as well as their stability. Law and legal system can,at best, be one factor, but certainly not a major one (in determining the climate of investment). Iflaws relating to closure, transfer of management and labour appear to be obstructive, thatobstructive character could be an act of design. If the very intention is to protect labour, then it isan act of design. There could be a wide gap between the intent of the law and the contents andthe interpretation of the law. Larger the ambiguity, larger the scope for litigation. There is a needto ensure that a law must be drafted in an unambiguous manner so that it is identicallyunderstood by legislators (who approve the law), by administrators (who have to administer thelaw), by administrators (who have to administer the law) and society (which lives with it and isaffected by it) and the judiciary (who has to interpret the law). Then only can the intent of the lawbe fully carried out.

Talking about liberalization, we are creating for ourselves new environments where some of ourold laws have been rendered obsolete and many more laws need to be re-written. Liberalizationis intended to serve the purpose of efficiency, namely, that whatever resources, are madeavailable to us must be made most productive. Laws need to be under constant revision so thatthey meet the challenges of todays environments, todays thinking and todays involvement inthe global economy. Foreign investors need to be invited to participate under suchenvironments in the spirit of efficiency-oriented growth that all these countries want to pursue.Such a participation pre-supposes the creation of environments which are more or less identicalwith the best available anywhere in the world. Then only can we attract more resources inquantity and more qualitative resources, to our countries. As to competitiveness, efficiencyflowers best in competitive environment, for it impels all of them to make the best use ofresources. An investor who comes from abroad would like to feel secure that this approach toliberalization and abiding commitment are administered in the form of legal framework in thecountry. He would also like to feel secure that there was an adequate statutorily backedregulatory framework for ensuring fairness and observance of all rules of competition. Aninvestor, domestic or international, basically looks for returns on his investment. The logic ofinvestment is identical across all the countries. Hence domestic as well as foreign investorshave to be provided identical opportunities. A level playing ground is needed for all investors in

8/8/2019 Law can be good or bad driver of nations Economy (by Hemant K Batra)

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the country in order to bring out the best efforts from both of them. Any discriminatory treatmentto anyone can ultimately hurt the overall interest of investment in the economy. An economy,which is largely dependent on domestic savings for investments, cannot afford to discriminate infavour of foreign investors, or (to put it differently), against the interest do domestic investors. Atthe same time, knowing the need for foreign resources and having decided to invite foreigninvestment, the laws just cannot discriminate against foreign investment, in order merely to

reflect patriotic sentiments. However, the legal system is essentially a domestic one, as there isno universally applicable commercial code for various countries. The philosophy of law may beuniversal, at least among similar political systems. But the language of legal systems across thecountries are distinctly not so. This aspect required attention. Concentrating on the approach tobe adopted by the legal system in regard to foreign investment, an environment of mutual trustbetween domestic investor and foreign investor is to be created. The legal system has to besuch as created such a mutual trust among all the investors. An investor needs freedom of bothentry and exits. He needs freedom to decide where to locate the industry, how much to produce,how much and where to purchase, how many persons he should employ, and at what prices tosell. He needs freedom to allocate and appropriate high profits after tax. He needs protectionfrom unfair play and restrictive practices from other competitors, suppliers, utilities and taxcollectors. He needs inexpensive access to a speedy system of justice and arbitration. He

needs laws that reflect a new philosophy, a new business environment, new businessrequirements-laws that encourage initiative, speedy response, clearances and single-mindedpursuit of efficiency, where there cannot be more barriers. Labour laws continue to remainhighly contentious areas in many highly populated developing economies. The issues of exitpolicy transferability of resources to more productive, business and implementation ofproductivity-linked incentive structure have become highly essential issues in order to createinvestors friendliness about labour. Similarly, a free market for corporate control, that is,takeover and mergers, may be perceived by some as investment-friendly and some ashindrance. Corporate laws need to be re-worked to make them more investor friendly. Theultimate aim is to achieve free mobility of managerial resources and financial resources, with aview to the optimization of countrys resources in the long run and making them as productiveas possible. And, all this should be in the interest of shareholders and consumers. Laws can be

made simpler and complemented by transparent regulations, designed to facilitate a competitivemarket for corporate control. These can contribute significantly to the productivity of resources.It is only when a transparent regulatory regime could be established that it would become highlycomfortable and attractive to the foreign investors.

By Hemant Batra, Lead Partner, Kaden Boriss Legal LLP, India; Vice President, SAARCLAW;

Chairperson, IICLAM, Singapore; Advisory Board Member, OIC, USA