Starting trouble

The Annual meetings of the International Monetary Fund (IMF) and the World Bank? have just concluded in Washington, DC. Two topics dominated the agenda—Greece and jobs. Greece’s debt dynamics are an immediate concern. Jobs will remain an on-going concern. Job creation is an imperative for the fast deleveraging advanced economies. It is also a major imperative for India. One could argue it is the most important policy objective for the next decade.

An enduring notion about any dynamic economy is that small firms generate much of its new employment. In a 2010 National Bureau of Economic Research (NBER) working paper entitled “Who Creates Jobs—Small vs Large vs Young” (NBER Working Paper 16300 by John Haltiwanger, Ron S Jarmin and Javier Miranda) the authors conclude that if you properly control for intruding effects, age of the firm is the most important variable. In other words, net job creation in the US economy is a function of how many new companies start up and how many of them weather the initial years.

While one has to be careful about transporting these results across borders, it is logical to postulate that given India’s demographics and rapid economic growth, this is likely to be more true here than in the US. My personal experience with starting a few companies in India this last year has been amusing, if not outright comical. The first thing one has to do while starting up is to apply for a name and basic registration of the company with the Registrar of Companies (RoC) using Form 1A. In a magnificent technological leap, the RoC requires that the form be submitted online using a digital signature process. Here comes the typical Indian catch. The form can only be viewed and signed in a version of Adobe software that is obsolete. I spent a couple of hours figuring out how to go backwards on software releases. The company secretary I used had the good sense to have one of her computers stuck in an earlier version of the release simply to ensure that Form 1A’s could be submitted. But there was more to come with the naming process. Suffice it to say it took me over a month, with one communication from the RoC that read as follows “please redo the name because…the first 3 words of the name suggest the activity, and the last word suggests the nature of entity, whereby, the entire name has no key word in it.” Eventually I asked the RoC for a suggestion. He was very willing based on numerology to volunteer the “best” name for my enterprise. By the time we had our service tax number, TAN and the five different seals that are required, we felt like we had indeed scaled great heights. And I had not even begun business-planning, employee-hiring and fund-raising phases of my new start-up.

According to the RoC during the last financial year, 65,000 new companies were set up and 10,000 companies were liquidated. A total of about 900,000 companies are in operation today. The Union ministry of corporate affairs (MCA) website has a lot of information about structures, regulations, grievance mechanisms and administrative measures. It has no “how to guide for setting up a company” nor does it have information about company creation and liquidating companies.

The International Finance Corporation in its annual report ranks India 134th out of 183 countries in “ease of doing business”. India ranks dismally on various elements of the survey such as enforcing contracts, dealing with permits, paying taxes, and starting businesses. The only elements on which its rank is reasonable is getting credit and investor protection. Singapore, Hong Kong and New Zealand top this ranking and Sri Lanka and Pakistan are well ahead of India.

A good place to start would be for India to focus and streamline the process of starting up, getting a bank account and getting set to pay taxes. Simple step-by-step process maps and FAQs on how to get started would be of great help. With the help of industry bodies such as CII and Ficci, MCA should actively encourage and facilitate new company creation. MCA should invite academics to review the elements of data collected from companies and suggest a data architecture that will facilitate research and analysis. MCA should work in collaboration with the income tax department to integrate and simplify the overall process, not merely that which lies in individual jurisdictions. As Aadhaar becomes more standard, automatic director registrations (DIN numbers) mapped to UID numbers should be made available eliminating another step in the process.

India will likely become a $3 trillion economy in the next five years. There is much talk about its woeful and inadequate infrastructure. Ease of doing business, including company creation, enforcement of contracts and tax payments are a vital part of the plumbing that will be required to facilitate the transition.

PS: Chanakya said, “A man is great by deeds, not birth”. Easing a company’s birth will enable its deeds (my addition).

Narayan Ramachandran

25 Sept 2011

http://www.livemint.com/2011/09/25234110/Starting-trouble.html