The high cost of legal services is one of the main reasons why small business owners evade hiring legal representation until it is almost too late. However, there are other ways to prevent costly and lengthy legal disputes.

 

Common Legal Issues Businesses Face And How To Avoid Them

Starting a business in India

It can take between one and four months to complete all the required procedures, with fees and add-on costs dependent on the size and type of business being registered.

With the introduction of the Companies Act 2013, which was enacted in the year 2014, the 58-year old Companies Act, 1956 was repealed and replaced by the new law. While the law makers had intended to introduce a modular law to the Indian economy, the stringent provisions imposed a setback to implementation.

Post implementation, dozens of amendments, circulars, and notifications were issued by the Ministry to mend loopholes in the provisions of the Act 2013. The increase in the compliance burden has, to a great extent, curbed the incorporation of companies in India. Not only has the Companies Act 2013 disheartened the market participants from floating new companies, it has also influenced a trend of de-corporatisation in the country.

A registered company, whether private or public, is bound to comply with statutory requirements, including maintenance of registers, meetings, several filings requirements and disclosure requirements, coupled with rigorous penal provisions, including high fee penalties and imprisonment up to seven years in some cases.  

Due to the complexity caused by the various amendments since the Companies Act 2013 was implemented, the need for clarifying the situation, through the Companies (Amendment) Act, 2017, was keenly felt.

Depending on the nature of business to be performed, there are various entry options for a foreign investor to enter India, such as a Representative Office, Branch Office, liaison office, Private Limited Company, Limited Liability Company, etc.

The law allows foreign citizens to become full-time directors or partners in the entity; however at least one of the Directors/Partners should be a resident of India. Shareholders and directors of the proposed new company need to get Permanent Identification Numbers (PAN) from the Income Tax Department; the directors have to apply for Director Identification Number (DIN) for which documents executed outside India are required to be notarised and apostilled or consularised in the country of execution, which is one of the most stringent parts of the entire set up process.

A Digital Signature Certificate (DSC) is needed from a government certified agency, and a choice of up to six possible names for the company, in order of preference, must be given to the local Registrar of Companies.

Land acquisition in India

Land acquisition remains complex, because of the difficulties in establishing legal ownership and a 'clean' holding for purchase. There may be litigations due to inheritance, fragmented holdings, and demands by sellers to be paid in cash. Establishing true land ownership is fraught with issue.

Construction permits

India was ranked 185 among 190 nations surveyed by the World Bank in 2017 over the time it takes to receive a construction permit after filing an application. Previously, it took 164 days and 42 processes to get a construction permit in Mumbai, and 213 days and 29 processes in Delhi.  Now it takes only 60 days following eight online procedures to get a construction permit in both cities, but thorough guidance is needed to navigate the complex process in other parts of the country.

Electricity

The Indian government's rural electrification programme saw the country move up to the 26th spot in the World Bank's electricity accessibility ranking in 2017, from 99th spot in 2014.

The time to obtain an electricity connection in Delhi has dropped from 138 days four years ago to 45 days, involving five procedures. But demand is currently outstripping supply, as the economy booms, and there is a potential for power outages.

Infrastructure

There is much focus on infrastructural development, boosting road transport, creating dependable power generation, and modernising state-owned railways. Roads, ports, railways, and solar energy are vibrant investment opportunities. But whilst the investment is much needed, it will be several years until it comes to fruition. In the meantime, an infrastructure straining at the seams poses a challenge to distribution and logistics.

Registering property

Registering a property can be a time-consuming process, with a bewildering range of charges. The registration fee for property documents is 1% of the value of the property, subject to a maximum of Rs 30,000. Stamp duty is compulsory but different rates of stamp duty are payable in different states, depending on the legislation prevalent in that state. Professional guidance is recommended.

Investor protection and enforcing contracts

In order to afford adequate protection to the investors, provisions have been incorporated in different legislations such as the Companies Act, Securities Contracts (Regulation) Act, Consumer Protection Act, Depositories Act, and Listing Agreement of the Stock Exchanges supplemented by many guidelines, circulars and press notes issued by the Ministry of Finance, Ministry of Company Affairs and SEBI from time to time.

The initiatives taken by SEBI in the area of "ease of doing" business include rationalisation of knowing your customer (KYC) norms, increasing the number of arbitration centres and simplifying FPI (foreign portfolio investor) norms for investing in the debt market. Likewise, the Indian government is tackling the country's poor track-record in enforcing contracts.

Some of them include new insolvency norms, increased rights for minority investors, and designating a few district courts in Delhi and Mumbai as commercial courts, able to hear cases involving disputes of under Rs 1 crore. The government and the regulators are pro-actively learning from global best practices.

However, there are still a few areas that need improvement, for instance fixing the accountability of auditors, and improving regulatory oversight and enforcement, but it will be a take time before new measures come into force.

India ranks still ranks a low 164th among 190 countries on enforcing contracts, according to the World Bank. On average, it takes 1,445 days (almost four years) for a dispute to be resolved, compared to 165 days in Singapore, which topped the list, or 1,102 days (three years) in South Asian countries, which include India's neighbours. And it takes, on average, 31% of the value of the claim to settle a dispute.

 

Taxation systems in India

India's tax structure is complex, taking – on average – 214 hours (in 2017) a year to prepare and pay taxes World Bank Laws, rules, and practices can be confusing, and foreign companies who don't seek specialised help may overpay some taxes and underpay others. India has among the highest corporate tax rates in the world, but the effective tax liability differs across industry and sector. The Corporate Tax Rate in India stands at 35.88%.

The Goods and Services Tax (GST), which came into effect on 1 July 2017, is a destination-based tax on the consumption of goods and services with the aim of achieving a "one nation, one tax regime" in India. It is a comprehensive indirect tax on the manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the central and state governments. The GST implemented is one of the most complex with the second highest tax rate in the world among a sample of 115 countries which have a similar indirect tax system, the World Bank said in a report.

In keeping with India's commitment to implement the recommendations of 2015 Final Report on Action 13, titled "Transfer Pricing Documentation and Country-by-Country Reporting", identified under the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Project, India has made necessary changes in tax regulation for furnishing of a Country-by-Country report in respect of an international group by its constituent or parent entity.

Credit and funding availability in India

India performs well on the ease of getting credit (29th on the World Bank list). The government has strengthened access to credit by amending the rules on the priority of secured creditors outside reorganisation proceedings as well as the adoption of a new insolvency and bankruptcy code that introduced a reorganisation procedure for corporate debtors. Secured creditors, such as banks and financial institutions, are given powers to enforce securities without the intervention of courts.

Risk of bribery and corruption

Companies operating or planning to invest in India face high corruption risks. India slipped from 79th to 81st position in the most recent Transparency International's Global Corruption Perception Index.

Although the government has increased efforts to counter corruption, it is still a serious issue, particularly prevalent in the judiciary, police, public services, and public procurement sectors. The Prevention of Corruption Act is the minimum legal framework within India, with private sector corruption covered by the Companies Act.

Price sensitivity

A keen price is rated above the qualities of a product, and Indian consumers are price-sensitive, seeking the cheapest rather than the product with the most attributes. You will be expected to negotiate on the price for your goods, and to give a discount.