Chopter Nine

Regulation of the Stock Exchanges

From scattered and haphazard beginnings in the late lgth century India's
stock exchanges have today developed into a respectable-sized multi-
centred stock exchange system through spells of total non-regulation, self-
regulation, half hearted government control, and in the recent past close
goYernment supervision. capital market has trvo branches, the primary or
the new issues market, and the secondary or the stock market. The second
provides to selling of existing securities,
viz. equity s or bonus. Both the primary
and the se n1 and indivisible, and one
cannot exist without the other. Indeed the capacit), of a nation to channel
savings into long-term equig, financing is central to the maintenance of a
free enterprise market economy q'stem. Stock narkets and stock exchanges
are the mechanisms for such financing. The effectiveness of these mecha-
nisms depends upon the degree to rvhich certain conditions exist : a stable
political environment; reasonable and successful
cies; reliable accounting and financial reporting
the ready availability of timely and accurate fi
tence of short and long-term financial instruments that attract household and
corporate sarrings and meet the risvreward requirements of savers and bor-
rowers: a secondary market for such instruments; and a legislative and
regulatory infrastructure that includes the means to administer in through
regulatory agencies. The last of these conditions is a major factor in deter-
mining the amount of confidence it is a major factor in determining the
extent to which investors will channel their savings into long-term equity
financing. Investor conJldence is thus the key to smooth and successful
operation of the market system.
stock exchange is an essential pillar of the private sector corporate
economy. It discharges three essential functions in the process of capital
formation and in raising resources for the corporate sector. First and most
important, the stock exchange provides a market place for purchase and sale
Regulation of the Stock Exchanges 2'71

of securities viz. shares, bonds and debentures etc. It therefore ensures the
free transferabilig'of securitics rvhich is an essential basis for thejoint stock
enterprises S'stem, Private sector economy cannot function *'ithout the as-
surance provided by the stock exchange to the otvners of shares and bonds
that thcy can be sold in the market at an1 time. At the same time those lvho
wish to inl'est their surplus funds in securities for long-term capital appre-
ciation or for speculative gain can also buv scrips of their choice in'the
market. Secondll', the stock exchange provides the linkage betl'een the
savings in the household sector and the investment in the corporate econ-
om1,. It nobilises savings and channelises them as securities into those
enterprises uirich are favoured b1'the investors on the basis ofsuch criteria
as future grou'th prospects, good returns and appreciation of capital. The
in-rportance of this function has renained undiminished in spite of the
prevalence in the Indian scene of Slrch inten'entionist factors as industrial
licensing. provision of credit to pri't'ate sector b1' public sector development
banks. price controls and foreign exchange regulations. The stock exchange
discharges this function b1' lafing dou'n a nunrber of listing regulations
u'hich have to be complied rvith uhile making public issues e.g. offering at
least the prescribed percentage of capital to the public keeping the subscrip-
tion list open for a niinimum period of three da1's, making provision for
receiving applications at least at the centres rvhere there are recognised
stock exchanges. allotting the shares against applications on a fair and
unconditional basis rvith due rveightage being given to the applicants in
lolver categories, particularl'r' those appl-""ing for shares rvorth Rs 500 or
Rs 1,0()0, etc. Members of stock exchanges also assist in the floatation of
new issues by acting as managing brokers/official brokers of nerv issues in
rvhich capacig'they, inter alia, try to sell these issues to investors spread all
over the country. Thel' also act as under-writers to new issues. In this rvay
the broker community provide an organic linkage betvveen the printary and
the secondary markets. Thirdly, by providing a market quotation of the
prices of shares and bonds a sort of collective judgement simultaneously
reached by manl'buyers and sellers in the market the stock exchange
sen'es the role of a sort of barometer not only of the state of health of
individual companies, but also of the nation's economy as a rvhole. It is
often not realised that changes in share prices are brought about by a con-
plex set of factors, all operating on the market simultaneously. Share values
as a whole are subject to sebular trends set by the economic progress of the
nation, and governed b1' lut,ott like general economic situation, hnancial
and monetary policies, tax change, political environment, international eco-
nomic and financial developments, etc. These trends are inlluenced to some
erlent by the periodical cycles of booms and depressions in the free market
As against these long-term trends, the day-to-day prices arei inJluenced
272 Government and Business

Another important function that the stock exchanges in India discharge
is in providing a market for giltedged securities i.e. securities issued by
Regulation ofthe Stock Exchanges 273

Central Gorrernment, State Governnents, Municipalities, Improvement
Trusts and other public bodies. These securities are automatically Iisted on
the stock exchanges lvhen they are issued and transactions in these take
place regularly on the stock exchanges. Also the Resen'e Bank of India
conducts market operation in governmental securities.
Thc beginning of trading in securi'.ies started in India towards the close
of the l8th century u'hen buying and selling of secLrrities of the East India
Company rvere going on in both Bombal' and Calcutta. In Bombat, the
brokers used to gathcr under a banyan tree and in calcutta under a neem
tree. Hou'ever. real beginning of stock exchange could onry come after the
introduction ofjoint stock conrpanies and liniited liabiliq'during the lg50s.
The 1860s rvitnessed feverish dealings in share business on scrips like those
of Port canning in calcutta and Back Ba1' Reclamation in Bombay (being
quoted rvith premiunr of Rs I 100() and Rs 50000 or,'er their paid up value of
Rs 1000 and Rs 500O() respectively) Reckless speculations invariabl), led to
a disaster. It rvas in the rvake of it that thc Bombal' share brokers came
together in Jull' 1875 to form the first forrnalll'organised stock exchange in
the countrl'r'iz. The Bombay Stock Exchange. This u'as follorved by' Ahme-
dabad and calcutta where stock exchanges rvere set up in lg94 and l90g
respectively. Stock exclranges also come up subsequentll'at Indore in 1930,
Madras in 1931, Hyderabad in 1943. Delhi in 1947, and Bangalore in 1957.
The corporate forms u,ere different at different places. At some places the
exchange took the form of a joint stock companr'. In othcr places it took the
form of an Association. For a ven' long time. there rvas no regulatiorr
u'haterrer by the Government and the stock exchanges were entirely guided
bl,their own rules, regulations and b1,e-laws.
The beginning of the First world war brought activit]' and lvealth to
members of the Bonrbay and calcutta Exchanges. The value of a card or
seat on the Native stock and Share Brokers' Association exchange went
from Rs 2,900 in l9l4 to Rs 48,000 in 1921. During this period there were
no established trading rules. The public rvas not prohibited from entering
the trading floor, rvhere clients often transacted business among themselves.
In l9l8-19 some brokers manipulated the price of trvo highly traded stocks,
Standard Mill and Madhavji Mill resulting in a crash. Fourteen brokers
defaulted, forcing the exchanges to sell offtheir cards. The public criticism
that followed the manipulative practices and the market slump of the early
1920s moved the Bombay Legislative council to create a committee to look
into the activities of the Bombay Exchange. Sir Wilfred Atlay, previous
chairman of the London stock Exchange, u'as chosen to head the commit-
tee. In its report the Committee stated'.

The most sinister manifestation of speculalion in Bombay is the frequent
274 Goventmenl and Business

occurrence of corners in the market, and the poliry and practice of the
Association rvith regard to corners appears to us to constitute the head
and front oftheir offending.

Even before the government of Bornbay could consider action on the
basis of the Atla-v conrmittee report, the exchange experienced another
crash in 1925. Later that t,ear the Securities contracts control Act of 1925
rvas passed by the government of Bombay. It annulled all trades unless
made in accordance u'ith rules approlcd bi' thc Bonrbay Government. The
exchange submi and reguiations utich gave
itself the potver nipulation and cornering the
market. Althoug bi, the Government in 1927.
the1, u'ere never
The Second World War u'itnessed . As
usual this also meant a sharp increase tric_
tions imposed on fonvard and option the
exchange and to transactions in the adjacent streets. Nine out often deals in
calcutta in 19-15 rvere rumoured to have taken place in the ..Katai" market.
just outside thc calcutta Stock Exchange. During the uar years companies
mushroomed and public issues multiplied. Maq' gullible investors rvere
duped by the false promises offered, and came to ruins lvhen man1, of these
companies u'ent into liquidation. or stock market prices crashed. After inde-
pendence the central Gor.ernment at long last l'oke up to the gravity of thc
situation and appointed a committee headed by A.D. Goruala. The reporr.
the comnittee submitted in 1951, led to the passage of the first central
Law, viz. its Securities contracts (Regulation) Act of 1956 and the Securi-
ties contracts @egulation) Ruies of 1957. This act gires the central Gor,-
ernment power to recogni ws ctc.
to issue directives tothe to ap-
prove the appointment of r stock
exchanges. initially, the Subse_
quently, following some promotional work done at the initiative of the
government, 5 new stock exchanges were incorporated, viz. Cochin,
Kanpur, Poona, Ludhiana and Gauhati making in total number of 13 stock
Several other legislations also deal with the regulation of securities in
India in a major way. The companies Act of 1956 regulates the incorpora-
tion of companies and their periodic hnancial and other reporting require-
ments. until recently the capital Issues (control) Act of 1947 strictly con-
trolled the issue of securities. Now the S.E.B.I. Act l9g2 has assumed an
important role. To a lesser extent, several other laws also a-ffect'the regula-
tion of securities viz the Foreign Exchange Regulation Act of 1973; the
Regulation of the Stock Exchanges

The Securities Regulation Act granted the Central Government power
suspend business and to supersede thc governing body of a
276 Governnrenl and Business

or group ofpersons to exercise and perform all the powers and duties ofthe
governing bodl'. The securities Regulation Rules specifically for member-

a member may not engage either as principal or as an emplolee in an1,
business other than that ofsecurities, except as a broker or agent not involv-
ing any personal financial liabilig'.
The Rules require a compan)', as a condition precedent to listing its
securities. to fonrard to the stock exchange copies of statutory annual re-
ports, annual returns and audited accounts as soon as issued, and to noti$'
the exchange of a number of important events including a change in the
general character or nature ofthe company's business. or anl'alternation of
A stock exchange has the porver to suspend or permanentlS, revoke
listing privileges based on breach or noncompliance rvith any of the condi-
tions of admission. or an)' othcr reason to bc recording in writing. A com-
pan)' may appeal against such action to the central Government. on the
whole the Indian experience has been an auralgum of the U.K. practice of
self-regulation b}' the securities industS, and the U.S. model of legislative
regulations. But neither rvas the industry prepared or enthusiastic about self-
regulation, nor was the central Government fully, equipped for effective
implementation of u'hatever controls rvere available. Thus desired results
rvere seldom achieved. There rvas onll' an appearance of Government con-
trol. The offices of the controller of capilal Issues lacked the necessan'
staff to do very nuch lvith then ations b1, the
various exchanges and issuing r+,as largelt,
ineffcctive in controllingreckless e and similar
trading practices.
central Government devoted rery little manpo\.\,er to implementation of '
the Act. The office of the controller of capital Issues rvithin the Minislry of
Finance rvas delegated the authority to administer and enforce the Act. The .
stock Exchange Division was one of the three dh.isions in the office of the
comptroller of capital Issues. Members of ,the Stock Exchangg Division as '
well as a representative of the company Law Board sit as government
representatives on the governing body of each of the eight recognised ex-
Regulaliort of the Stock Exchanges 271

changes. In practice, actual administration of the provision of the Securities
Regulation Act and of its rules is thus left to the exchanges themselves.
The exchanges act through their governing bodies which generally con-
sist of elected members, government representatives and an administrator.
The 650 members of the Calcutta Stock Exchange, for example, choose
frfteen members to serve on the board of directors, known as the Commit-
tee. The Central Government appoints three representatives, and the execu-
tive director rounds out the twenty-man Committee. The seventeen man
board of directors of the Delhi Stock Exchange consists of trvelre members,
three Government representatives, one representative of the public, and the
executive director. It is, hou'ever, the leadership of individual personalities
which, more lhan any other factor, deternines the extent to which the larvs,
rules and regulations are adhered to b1'the members of the exchanges.
All the exchanges hare bye-larvs and regulations rvhich govern the ac-
tivities of the exchanges and their menrbers. The misconduct described in
the b1e-larvs for which a penalty may be imposed on a member include,
inter alia: the conviction or commission of a fraudulent offense; conduct
which is dishonourable, disgraceful disorderly, improper or which willfully
obstructs the business of the exchange; failure to submit books or records or
to give testimonj' to the board of the exchange or other authorised person;
conducting business through nominees or creating ficticious transactions,
failure to carry out business rvith customers; offering to trade or actually
trading in the streets; advertising to other than a broker's orvn customers;
and failing to provide the proper margin deposits. Penalties which may be
imposed b1' the board of directors of an exchange for such misconduct are
expulsion, suspension, withdrawal of all or any member rights, inrposition
of a fine, censure, reprimand or rvarning.
The f,rrst major intervention by the Central Government after 1956 Act
was the complete ban imposed in 1969 on trading in shares for clearing, or
fonvard trading in popular language, b1' a notification dated June 27, 1969.
this was at a time when prices of essential commodities had registered
appreciable rise and forward trading in commodities was suspected to be the
major factor behind it. There was also reckless speculation going on in the
share market and Government came out rvith a heavy hand along with the
number of other measures to make fonvard trading in shares illegal. Under
the Stock Exchange Rules, there can be three types oftransactions:
(i) Spot delivery.
(ii) Hand delivery i.e. delivery of the script within 14 days.
(iii) Trading in "cleared" securities through the Clearing Houses under
which it is possible to carry forward contract indefinitely on payment
of only the difference between the contract price and the prwai.ling
278 Government and Business

It was the third tlpe of transaction which was completely banned by the
1969 Notihcation. This had a very adverse effect on the stock market.
Prices of shares in the stock Exchanges nosedived, and there was a crisis.
Surely after that the central Government appointed a committee headetl by
shri Anjiah to review the situation and recommend appropriate remedial
measures. The committee recommended the revival of fonvard trading sub-
ject to cerlain safeguards. Holever, the central Government could not take
any decision on this report, and forward trading remained ever since. This
situation u'as further aggravated by the l9?4 restriction put on paynrenl. of
dividend by companies as part of the package of anti-inflation measures.
The stock market generally remained depressed until after 1976 n,hen manl'
of the foreign companies were forced under the FERA to issue fresh capital
to the public. But it u'as eventually the boom witness from 1980 onwards
which revived the share and put it on a glorious surge-forward fron which it
has not looked back.
However, reckless speculation also revived its head and created consid-
erable problems. The diffrculty rvas that along rvith the ban on fonvard
trading. the regulatory powers rvhich the Exchange authorities had under the
Rules for checking excessile speculation and fonvard trading also remained
suspended. Initialll', under the directions of the Government, the Stock
Exchange Authorities did try to control the situation by ad-hoc measures,
such as the imposition of margins on share brokers, rvho had been reporting
unusually large volumes of activiw. But this $'as not able to control the
situation. ln 1982. the Bombal' Stock Exchange passed through three suc-
cessive payment crises the first one over Reliance shares, the second over
century and the third over TISCO. Now, a certain amount of speculative
is essential for the operation of the share market. However, the
volume of speculation and of the informal foru'ard trading rvhich had al-
rvays been going on must bear a relationship with the volume of actual
transfer of securities. \\'hen speculation runs riot and the actual physical
transfer ofsecurities lags far behind, there is inevitably payments crisis.
From 1974 onlards, under a scheme first evolred by Bombay Stock
Exchange and thereafter accepted bl, Calcutta, Delhi and Ahmedabad, a
certain informal g'pe of fom'ard trading had been revived. This rvas done b1'
carrying fonvard the delivery contrad beyond 14 days in an informal man-
ner by concluding the earlier contract and entering into a new contract
rvithout any actual deliverr, but merely the payment of the balance betrveen
the contracted price and market price. betrveen the buyer and the seller.
This system was being continued in an extra-legal manner without anyone -
questioning its legality. obviously, this slstemcould not stand the strain of
the excessive '.reculative activity that came about around 1982 and started -
escalating leading to payment crises one after another. The Central Govern-
Regttlation of the Stock Exchanges 279

ment had to intervene repeatedlv by forcing the Stock Exchanges to declare
some lcading members as defaulters or expelling them from menrbership,
by incrcasing the number of Government nominees on the Boards of the
leading Stock Exchanges and by forcing the imposition of stringent margin
none-y and rigorous inspection. Also, on several occasions the hnancial
institutions particularll' the Unit Trust of India inten'ened by buying or
sclling therebv arresting market trends tou'ards steep rise or steep fall of the
price level. But this could not realll' deal with the basic cnrx of the problem.
In 1983. Golcrnment at long last proceeded to face the real problem by
pcrmitting the revival of a limited volume of fonvard trading. This was
done not b1, reviving the previous practice of trading in cleared securities as
in the past, but by permitting carrl'fonvard of contracts be1'ond 14 days
upto a total period of 3 rnonths. This was coupled u'ith several other meas-
ures. such as providing for compulsory audit of the books of accounts of
stock broking firms. This u,as rdsisted very much bl' the broking conmu-
ni$'. But Governnrent struck to the ground. At the same time. Government
also made enabling provision for nembership of Stock Exchanges bt' pri-
vatey'imited companies. and not merell' b1, partnership firms of brokers
which had hitherto been the practice. Steps u'ere also taken to increase the
nunrber of non-broker Government representative in the Boards of Stock
Exchanges on the ground that Stock Exchanges l\'ere no longer to be vierved
as prirate chccks of the brokers. but as public bodies in lvhich Government,
industn'and the public at largc uere keenlv interested There u'ere also
other serious problems.
The phenomenal expansion of the market from 1980 brought out in
sharp focus the infrastructural and lcgal inadequacies in dealing rvith large
volume of business. There are compan)' la*' restrictions on transfer of
shares and transferabilitl' of shares u'hich had been alright when Indian
share market largell' meant the Metropolitan Lou'ns and a feu,other centres.
Thel' are hopelessl'r, inadcquate to deal u'ith the vastly enlarged number of
shares and strareholdcrs corering the length and breadth of the countrl.
According to one estimate. thc total numbcr of shareholders in India in 1983
was about 15 million (Stock Exchange Foundation Bombat, Present
Position of thc Stock Market in India, Pagc l4). These shareholdcrs are nou'
scattered all over the country. Surcly. in such a spread-out market. the
lirnitation of 2 months or so for the validity of the transfer deeds is totally
unsuitable. Similarly, tire existing Stock E.xchanges Regulations, the Bank-
ing Regulations, the conditions of postal delivery, and the F.E.R.A. Regula-
tions relating to non-resident Indian shareholders are totall,v inadequate to
deal rvith the tasks and responsibilities lhich have been imposed on the
Stock Exchanges bi' the vastly increased market size. It has, therefore.
become urgentll' necessan/ to exarnine the entire infrastructure, legal and
280 Goverwnent and

physical and to introduce necessary changes wherever necessary.
It is also
essential to rons as soon as possible'
rhe working
ever be the
gency of the reforms does not make any
delay. It is Lould think in terms of establishing a
regular sccurity and exchange commission on the lines of
the S.E.C. in
. The recent upsurge of pri'rary 'rarket has created serious problerns of
interfacing n,ith the secondary marker, viz., the stock exchang"r'*hi.l, ,titt
by and large, continue to the same old infrastructure and ways of
s'hich suited the very.narrorv base of the capital market in tile yesteryears
but are totalll' out of time rvith the vastly grorvn size of the market and
desired tempo of u'ork. It u,as this imbalanie which facilitated .scam,
the of
1992 caused b1, reckless speculation, rampant dishonesW and fraudulent
manipulation of the banking s],stem. Unless the secondiry market
is re-
oriented so as to discharge the new responsibilities cast on it b1,the
developments and the means ramifications, this rvill act as a irag
on the
future growth of the primarl, market itself. Investors who are anxious
to buy
nerv securities are bound to get disenclranted if they face serious problems
while trying to buy or sell scrips.
The existing Stock Exchange Regulations were essentially meant for
times when buyer's and sellers as also the stockers were small in number
and mostlr, located in the same cit\. or at most of the few stock exchange
centres. Thev have little relevance in toda),'s context when the number
shareholders has gone up to around l5 million and they are dispersed
the lenglh and breadth of the countrl'. Restrictions impoied on share transfer
under Section 108 (l)(b) requiring transfer forms to be stamped by a pre-
scribed go\.ernnent official. irrnd the validig' of such transfei deed
only for about tu'o months have outlived their utility. A shareholder located
say at Jabalpur is first required to obtain the transfer deed from a
exchange centre and thereafter send it to the stock broker, say at Delhi
Bombal', for arranging the sale. More often not, by the time the transfer
deed is presented to the company, its validity period would have expired.
Normally, all correspondence between the company and the shareholders,
including the despatch of share certificates is required to be done by regis-
tered post. This coupled u,ith an inefficient postal system, lead to delays
often loss of the share scrips in transit causing immense harassment to both
the buyer and the seller. The dilatory and ineffrcient working of the banking
s)'stem under which outstation cheques take very long to be encashed, and -
also becomes diffrcult to make necessary pa}'rnent in repay to calls or in
connection with the subscription for issues also affects the system. Also the '
F.E.R.A. restrictions on inflorv and outgo of foreign exchange and the time-
Regulation of the Stock F)xchanges 279

ment had to intervene repeatedlv by forcing the Stock Exchanges to declare
son-re leading members as defaulters or expelling them from menrbership,
by increasing the number of Government nominees on the Boards of the
leading Stock Exchanges and by forcing the imposition of stringcnt margin
monc-v and rigorous inspection. Also, on several occasions the hnancial
institutions particularly the Unit Trust of India inten'ened by buying or
sclling therebv arresting market trends tou'ards steep rise or steep fall of the
price level. But this could not realll' deai rvith the basic crux of the problem.
In 1983. Govcrnment at long last proceeded to face the real problem by
pcrmitting the revival of a limited volume of fonvard trading. This was
done not b1, reviving the previous practice of trading in cleared securiLies as
in the past, but by permitting car4-fonvard of contracts bel'ond 14 days
upto a total period of 3 rnonths. This u'as coupled u'ith several other meas-
ures. such as providing for compulsory audit of the books of accounts of
stock broking firms. This u'as rdsisted ve4' mucl-t by the broking commu-
niq'. But Golernnrent struck to the ground. At the same tine. Government
also made cnabling provision for nembership of Stock Exchanges b1' pri-
vatey'imited companies. and not merell' by partnership hrms of brokers
which had hitherto been the practice. Steps u'ere also taken to increase the
nurnber of non-broker Governrnent representative in the Boards of Stock
Exchanges on the ground that Stock Exchanges \\'ere no longer to be vierved
as pri\?te chccks of the brokers. but as public bodies in r.vhich Gorcrnment,
industn'and the public at largc uere keenlv interested There rvere also
other serious problenrs.
The phenonrenal expansion of the market from 1980 brought out in
sharp focus the infrastnrctural and legal inadequacies in dealing rvith large
volume of business. There are compan)' lan' restrictions on transfer of
shares and transferabilih' of shares u'hich had been alright when Indian
share market largeli' meant the Metropolitan tou'ns and a feu,other centres.
They are hopelesslv inadcquate to deal r:r,ith the vastly enlarged number of
shares and shareholders covering the length and breadth of the countn'.
According to one estimate. thc total nunrber of shareholders in India in 1983
vvas about 15 million (Stock Exchange Foundation Bombal' Present
- are nol'
Position of thc Stock Market in India, Pagc l4). These shareholdcrs
scattered all over the country'. Surcly, in such a spread-out market. the
lirnitation of 2 months or so for the validitv of the transfer deeds is totally
unsuitable. Similarll,, the existing Stock E.xchanges Regulations, the Bank-
ing Regulations, the conditions of postal delivery, and the F.E.R.A. Regula-
tions relating to non-resident Indian shareholders are totalh, inadequate to
deal with the tasks and responsibilities n'hiclr have been imposed on the
Stock Exchanges bl' the vastly increased market size. It has, therefore.
become urgentll' necessarv to exarnine the entire infrastructure, legal and
280 Government and

physical and to introduce necessary changes wherever necessary. It is also
essential to computerise Stock Exchanges operations as soon as possible.
The Central Government in 1984 appointed an Experl Committee to study
the working of the Stock Exchanges and to make recommendations. What-
ever be the recommendations, the urgency of the reforms does not make any
delay. It is also time that India should think in terms of establishing a
regular security and exchange commission on the lines of the S.E.C. in
The recent upsurge of prirnary market has created serious problems of
interfacing rvith the secondary market, viz., the stock exchanges which still
by and large, continue to the same old infrastructure and ways of working
which suited the very narrow base of the capital market in the yesteryears
but are totall)' out of time rvith the vastly grorvn size of the market and the
desired tempo of rvork. It was this imbalance which facilitated the 'scam' of
1992 caused b1, reckless speculation, rampant dishonesty and fraudulent
manipulation of the banking s)'stem. Unless the secondary market is re-
oriented so as to discharge the neu' responsibilities cast on it by the recent
developments and the means ramifications, this rvill act as a drag on the
future growth of the primary market itself. Investors who are anxious to buy
nerv securities are bound to get disenchanted if they face serious problens
while trl,ing to buy or sell scrips.
The existing Stock Exchange Regulations lvere essentially meant for
times lvhen bu1'er's and sellers as also the stockers were small in nunrber
and mostll located in the same citl' or at most of the few stock exchange
centres. Thev have little relevance in todal"s context when the number of
shareholders has gone up to around 15 million and they are dispersed over
tlie length and breadth of the country'. Restrictions imposed on share transfer
under Section 108 (lXb) requiring transfer forms to be stamped by a pre-
scribed government official. Jrnd the validiq, of such transfer deed lasting
only for about tlro months ha'r'e outlived their utility. A shareholder located
say at Jabalpur is first required to obtain the transfer deed from a stock
exchange centre and thereafter send it to the stock broker, say at Delhi or
Bombal', for arranging the sale. More often not, by the time the transfer
deed is presented to the company, its validity period would have expired.
Normally, all correspondence between the company and the shareholders,
including the despatch of share certificates is required to be done by regis-
tered post. This coupled u,ith an inefficient postal system, lead to delays and
often loss of the share scrips in transit causing immense harassment to both -
the buyer and the seller. The dilatory and ineffrcient working of the banking
s]'stem under which outstation cheques take very long to be encashed, and it.
also becomes difficult to make necessary payment in repay to calls or in
connection with the subscription for issues also a-ffects the.system. Also the '
F.E.R.A. restrictions on inllorv and outgo of foreign exchange and the time-
Regulalion oJ'the Stock Exchanges 281

consuming procedure are irritants not only to foreign but also to non-resi-
dent Indian inrrestors who have grown substantially in recenl 1'ears. Al1 this
militates against thc efficient functioning of the secondarl' rnarket. The
situation is very much like thq problems faced b1' a small airstrip rvhich is
accustomed to handling onll' Dakota planes being suddenly called upon to
handle Jumbo Jets *'ithout an)' necessary change in the infrastructure.
Majoriw of the stock exchange members are old-fashioned lacking in
both n-rodern edpcation and spirit of sen'ice to tlre clients. Manl' of them
need to graduate front their role as pLrre stock brokers into a ncq,er role as
inrrestment counsels or investment brokers. Thel' are reluctant to pentlit
nel nembers and $'ant to retain all conlrol. There needs to be substantial
enlargement of the number of brokers in major stock exchanges, such as
Bonrbay, Calcutta and Delhi. Further, some of the cxisting brokers are
engaged in reckless speculation. For over a decade. fom'ard trading lvas not
recognised b1' law and yet permitted in the major e.\changes through extra-
legal means u,hich our lau's and regulations had no control. In the last few
years, the Bonrbal' Stock Exchange passed through several severe pa)'ment
crises large\'because of reckless speculation and overtrading rvhen deals
\t'ere entered into u'ithout even a minimum volume of scrips bring ayail-
able. Since 1983, a limited volume of fon+'ard trading upto three months has
been pcrmitted and this should partialll' solve the problems caused b1' the
absence of de jure fogard trading. But the basic question remains one of
having a hard look at the existing rules and regulations. lvhether under
Company Law or Stock Exchange Regulations or F.E.R.A., to hnd out horv
many of them have outlined their utility and are, by and large, anachronic in
the context ofthe sea changes that has taken place in the capital narket.
Time has conte u'hen Stock Exchange Boards should no longer be just
private clubs of the stock brokers but must be viewed as guardians of public
interest. Essentially the stock exchange is a public institution in which
Government, the industry and the public are vitally interested. Thus, there
should be representatives from all these interests on the Boards. Indeed,
such representatives should constitute a majority rvhich at present consists
of the elected representatives of the stock brokers who very often find it
difficult to distinguish betrveen their own private interests and the larger
public interest. There should be uniformity of working hours amongst the
stock Exchanges in India. They should be linked up with one another
through computer terminals. In fact, there is a strong case for greater com-
puterisation in our Stock Exchanges. Another consideration is that our sec-
ondary market still has very narrow base where two or three government
institutions, viz., U.T.I., L.I.C. or G.LC. have a commanding influence'
When they start buying, prices automatically go up. When they.start selling,
prices immediately go dorvn. A market can be said to exist only when there
Gov e rru t t e n I an d Bus i ue s"^

Considering thc tremendous diflicult-r, faced br. investors in buving
selling lheir shares on tinrc. it is necessan that nc could think in
t.rnrs ora
Regulatiott o.f the Stock Exchanges 283

speculators in the markel are kept under strict control and discipline. In fact,
much of the so-called currcnt continuing boom in the market is due to the
activities of the speculators and do not necessarilv reflect the true rvorth of
sonre of the scrips. We should continue to bc vigilant to see that Lhere is
adequate disclosure b1' cornpardes, that there is no 'insidel' trading, that
thcre is free and hassleless transferabilitt, of shares by ordinary share-hold-
ers. and that genuine invcstors are not duped and in that process their
confidence in the market is not shaken.

Futurc Prospects
The series of mega issues in recent vears is a good indicator of the
possible contributions that the capital market can make in mobilising addi-
tional public savings to nreet the resourcc crunch for priorig, investrnents in
the Ninth Plan. Until the 1970s prir.ate sector companies u,ere pathcticallv
dependent on financial institutions for project fltnancing. Norv they can go to
the market for financing an1'projcct on thc strength oftheir track record and
the attractiveness of the project from the investor's point of vieu'. The srvift
grouth of the Public Sector Unils (PSUs), the bond market and the mutual
funds in recent years, have added nerv dimensions to the capital markct.
There are enormous funds available in the s.vstem. All ue need are attrac-
tive projects that promise good returns, good marketing and sound manage-
ment to implement thcse projects u'ithout anv time and cost overruns and
ensure profitabilitl'.
But, unfortunatcl)'. the secondarl' market is still to respond to the needs
of the vastl), overgrown market. It still remains primitive g'ith serious in-
frastructural bottlenecks and anachronistic lau's and procedures. The secu-
rity holders have grorvn during the 1980s from about one million to about
l5 million covering non-traditional iruestors such as farnlers, rvhite-collar
employees and non-resident lndians. Those rvishing to sell their shares have
enormous problems. Buyers are not readili' available. Brokers, after taking
delive4' of scrips, do not pay thenr for months. This cuts at the verJ, root of
the cult of the eas_v transferabiliq' of shares. Transfer documents are ver1'
complicated. The companies take an inordinatel'1, long time to register share
transfers. On the other hand, there is a serious sho(age of floating scrips in
the market. It is common experience that rvhen a buyer wants to buy some
specified shares, he has to wait indefinitell'before he can ge( the preferred
scrips in the market. And the primary objective of an investor or a seller in
growth shares is not served. For several years now, the secondary'market
has been in a state of high speculation often reaching the level of ganrbling.
A superfrcial obsewer r.r,ill notice a plethora of activities in the market, But
on closer scrutiny it is seen that the ovenvhelming majoriq' of the'so-callcd
transactions are purely speculative, just paper transactions r''ilhoul any se';-
284 Governmenl ancl Business

ous intention on the part of the so-called buyer and the so-called seller to
physically buy or sell shares. It will surprise many to learn that on an
average not more than fir,e to seven per cent of all the transactions recorded
in the Bonrbay, calcutta or Delhi stock exchanges lead to actual transfer of
scrips from the seller to the buyer. Very often, genuine investors suffer
because thev are guided by the so-called market quotations and, having
handed over their hard-earned mone)'to stock brokers, do not get the scrips
even after many months or do not get them at all.
When institutions like the UTI float an enquin for buying particular
scrips. the price of the scrip inevitably goes up b1, leaps and bounds. When
the institutions w'ant to sell a particular scrip, the market price rvill straight
arval' tumble dol'n. In the last ferv years, there has been a running battle of
rvits betl'een the institutions on the one hand and a group of spcculators on
the other. When the former enter into the market seriousb', the latter just
uithdrarr,. When the institutions adopt a passi.r,e posture, the speculators
enter into the arena in full cr1'. Needless to sa)', a genuine investor would
lose in both situations.
In recent ),ears- computerisation has made signihcant progress in our
stock markel.. Many rationalisation measures have been introduced such as
the introduction of uniform working hours in all stock exchanges. A number
of nerv institutions are also in the held, such as mutual funds. venture
capital hrms, credit rating corporations, the stockholders corporation, a cor-
poration for over-the-counter trading. offshore growth funds like the India
Fund. and hnally,, the Securig, & Exchange Board of India (SEBI) in 1987.
For the first four I'ears, SEBI l'as onh' an ad hoc body rvithout anv legisla-
tive or executive pou,er and comprised onl1, a Chairman appointed b1' a
government notification. Il r.vas therefore a non-starter during the first four
)'ears of its operation primarill' because of its insistence on having a com-
prchensive larv first before it could start ftinctioning. Nothing prevented the
government from doing the most sensible thing of transferring to this Board
all its pou,ers under the Securit5' Contracts Act and under the by-larvs of the
stock exchanges. That would at least have enabled this body to start its
policing role in a vigorous manner. It is not ilear rvhy a separate law was
necessary when there was already a law specihcally dealing rvith stock
exchanges rvhich could have been easill' amended, delegating authorit_v to
the SEBI and laying dorvn its functions. Much valuable time was lost in
infructuous exercises about passing a nerv law which would take away even
some of the functions of such bodies as the Company Larv Board and the
Reserve Bank, to which they u'ould in no circumstances readily agree. The
long-awaited legislation came in January, 1992 when the Central Govern-
ment passed the Securities and Exchange Board of India Ordinance (1992)
constituting the SEBI (see Annexure to this Chapter). The recent decision
to permit overseas institutional investors to make portfolio investnent in
Indian companies subject to registration with the S.E.B.I. is a welco- :
Regulaion ofthe Stock Exchanges 285

move. There is great interest among institutional investors in thc West to
invest in portfolio-holdings in Indian conrpanies with a good track record of
dividend declaration, bodies u,hich have increasingly come to dominate the
investment scene in the West. Thet' do not necessarily want to control
companies or indulge in unhealthy prohteering at the expense of the host
inr.estee country. We had earlier pernitted them lo invest indirectly in
special nrutual funds such as India Fund. But there is no good reason rvhy
u,e should not let them inrest directly in Indian companies. In fact ever
since the opening of our stock escanges to the foreign financial investors
(FIIs) there has been excellent response. The FIIs bringing together around
3 billion dollars for portfolio investment in Indian stock market. Intcresting-
1r', this has proved a larger source of foreign funds flolv than direct forcign
inr,estment in recent years.
Thailand, u,hich till recently excluded foreigners from hcr stock e.r-
change. opened it up several years ago, rvith consequences n'hich are there
for everyone to see. The stock exchangc has e-xpanded and prospered bv
leaps and bounds and along rvith that has taken Thailand's econom]'gror\L
ingbl'about ll per cent per annum to greater heights. Also, it is time rve
accept partial prirzatisation of the share-holding of public enterprises as a
pen'asive philosophl' of action. The encouragement of mutual funds and
venture capital funds in recent years has been a step in the right direction.
We should carry this process fonvard by permitting both t,enture capital and
mutual funds in the private sector or at least in the joint sector.
Another u'elcome nrove is the partial prilatisation of the gor,'ernment's
development banking institutions u'hich did plal' an invaluable role in the
recent decades. but har.e somervhat outlirred their utiliq' on account of
sl'eeping changes in the economy. IFCI. ICICI and IDBI have substantial
private shareholding today turning them into joint sector companies. These
development institutions together u'ith the three in'r,estment institutions of
LIC, GIC and UTI today hold a large percentage of equity in the private
corporate sector. At times thel' even have majority of controlling
shareholding in some of the major private sector companies. The question is
u'hether they should continue to block their funds in shareholding in compa-
nies indefinitell' or whether thc1, sltould follou' a systematic policl' of sell-
ing some of these shares at the market price or at negotiated prices unlock-
ing their funds and using them for assisting nerv rvorthrvhile projects. It
should be borne in mind that the object of development banks is not to
control privatc sector conpanies or run them but to assist new I'entures just
as the object of investment institutions like LIC, GIC and UTI is to give
their clients a good return and provide other special seryices. The high-level
Narasimhan Committee (1984) made some very useful recommendations
for portfolio management by institutions. Unfortunately, the then govern-
ment preferred to keep the report a secret. These recommendations should
be carefully studied and implemented. Wherever public sector enterprises or
286 Go.r,ernment and Business

institutions hold
object should be
negotiated prices
res0urces elsetvhc

Some Rcccnt Institutional Devices

, In recent 'r'ears, the Indian capital market has shown signs of consider-
able sophistication. Some ofthe sophistications introduced aie:
i) the inter-market service (prl's, stock scan) rvhich covers fir,e ma-
jor stock exchanges and provides a minute-b1-minute account of
prices in these elxchanges. This constitutes a major step towards a
national stock market;
ii) the setting up of GRISIL, ICRA and cARE public sector profes-
sional bodies for debt instruments: b1'the ICICI, the IFc and
the IDBI respectively.
iii) the advent oforc (over-the-counter buying and selling) Exchange
Ltd i'troduced b1, the ICICI, along with ser,eral otherlnstitutioni,
an important step to market segregation;
i\) the gro*lh of a mutual fund industn demonstratin E grear
success in attracting huge funds;
\') the gro*th of'enture capital funds folrorving the verture capital
fund guidelines announced in 1989:
\i) the sctting up of the Stock Holding Corporation by, the Unit Trust
of India (url): in ordcr to pro..ide custodial se.vices to the share
portfolio held b-v the public financial institutions:
vii) the phenomenal grouth of merchant banking, both public sector
and private sector during the decade of the I 9g0s; and t llOs;
viii) some sure steps touards lhe opening up of the Indian market to
international investors, namely, the setting up of the India Growth
Fund in the UK and India Fund in USA by UTI and Merill Lynch
and selting up of sevcral offshore funds b,v other banks and invest-
ntent institutions;
ix) the setting up of the Securities Exchange Board of India (SEBI)
through an ordcr in 1989, and b1' law in 1992;
x) in the stock exchanges b1,-laws
n the lines of the city take over
ened by the take-over guidelines

xi) Stock Exchange of India as a fully
xchange to promote screen-based
made a beginning with debt instru_
ments and has recently commenced limited volume of screen-based
trading in shares. This is reported to have achieved much success,
Regtlation of the Stock Exchanges 2g.7

prompting the Bombay stock Exchange to stafi its orvn screen-
based trading linked to a few other Stock Exchanges.
All these changes should be viewed against several other prospecti.r,e
developments like sweeping changes in the investor's profile covering both
resident and non-resident investors, a remarkable increase in the variety of
instruments and an immense growth in market liquidity, a tremendous im-
provement in the information provided to the investors to help them in
making investment decisions, introduction of many modern trading tech-
niques, emergence of bodies of trained professionals and the groith of
adrrisory services and the ongoing and irreversible processes of de-regula-
tion of the hitherto government controlled economy and growing exposure
to- international capital market through current policies such as permitting
off-shore ftinds to make portfolio investment in Indian companies, permit-
ting Indian companies to raise capital outside, and the new joint venture
guidelines permitting repatriation of capital for setting up ioint ventures
Notrvithstanding the current depression and glodm prevailing in the mar-
kel there is no doubt that the capital market which played a very signihcant
role during the decade of the 1980s will play an even greater roG in the
coming decades. Many companies in recent times have financed their proj-
ects very largely through funds raised from the rnarket indicating the mar-
ket's enormous potential. But market capitalisation is still only lb per cent
of GNP as against 23 per cenr for the USA. 65 per cent for the LIK and l3a
per cent for Japan. The average profit earning ratios are still lower than in
the UK, the USA and Japan. capital market instrurnents constituted onry 7.2
per cent ofthe total household financial savings as against 40.4 per cent for
bank deposits. All these would indicate that there is tremendous scope for
making use of household financial savings through the capital market for
lhe purposes of the Eighth Five-Year plan. But in facing the challenges of
the 90s, serious and immediate attention must be given to the persisting
problems of interfacing between the primary and secondary markeis and the
prevalence of rampant speculation. Finally. SEBI must start functioning
effectively as an effective watch dog policing agarnst the on-going recklesi
speculative and attendant evils like insider trading, gambling on ihe kerbs,
manipulations with the unoffrcial premia. These tasks must be given utrnost
prioriff if the Indian stock market is to continue to be a barometer of
economic progress. To turn to Keynes again, "speculations may do no harm
as bubbles on a steadv stream ofenterprise. But the position is serious when
cnterprise becomes the bubble on a whirlpool of speculation',.
The recommendations made by the report of the high porvered sludy
group under the chairmanship of M.J. Pherwani (1991) appointed by ttre
Ministry of Finance, are of a sweeping nature and should go a long wav in
establishing a national stock exchange and abolishing the presenl itrangle-
hold of some vested interests in the stock exchanges.
288 Governrnent and Business

After a review of the operations of the existing stock exchanges, the
study group arrived at the conclusion that the setting up of additional stock
exchanges would not in itself serve the purpose of spreading the equity cult
or enhancing the liquidity in the secondary market. In line with international
trends, the committee lvas of the view that a systematic improvement can
only be achieved by establishing closer links between the exchanges. The
committee felt that there is a need for the creation of an integrated national
stock market systen with each stock exchange in the system adequately
streamlined and possessing the necessary telecommunication and related
infrastructure. The national stock market system will ensure a streamlined
and co-ordinated transaction processing system which could benefit the
investor through improved sewices. However, for such a nation-wide sys-
tem to be effective, several support agencies would be required to provide
uniform and high quality trading, settlement, clearing and depository servic-
es. The study group has made the following specific recommendations for a
phased, development of the national market system:
a) categorisation of all stock exchanges as principal, regional and
additional trading floors,
b) development of the functions of the Central Depository Trust and
Stock Holding Corporation of India Ltd., with the additional man-
tlate of Stock Holding Corporation of India Ltd., to promote elec-
tronically interlinked regional depositories,
c) establishment of a national clearing and settlement qystem under
the aegis of Stock Holding Corporation of India'
d) establishment of the Securities Facilities Support Corporation to
implement tasks relating to networking of all stock exchanges and
additional trading floors. The net-working would cover the installa-
tion and maintenance of hardware and software of all exchanges,
additional trading floors and the settleinent and depository func-
tions entrusted to the Stock Holding Corporation.
e) Establishing a fully computerised and screen-based National Stock
Exchange to provide an alternative to the existing Stock Exchange
system dominated by the brokers.
Most of these measures have now been put into effect. The National
Stock Exchange promoted by the LD.B.L as a company has started func-
tioning. It is yet another stock exchange in addition to the existing stock
exchanges, 22 in number. But it operates on the basis of screen based
trading with terminals all over the country. It started with debt instruments
and has now made significant progress with trading in equities.
With the SEBI Ordinance of 1992 followed by an Act of Parliament the
SEBI, has been set up on a statutory basis not only as the main watchdog for
the secondary market, but with substantial regulatory powers over the pri-
mary market. A copy of this law is in the annexure to this chapter.
The Eighth Five-Year Plan documenr (1992-97) approved by the Na-
Regulation of the Stock Exchanges 289

tional Development Council and the Union Bridgets from 1992 onwards
envisaged substantial reliance on the capital market for raising resouroes
originating from the household sector. The former document assumes a Rs
1,48,000 crore investment by the private corporate sector of which Rs
63,'720 crore is to come from savilgs of households during the period 1992-
98 for achieving the planned objectives. The fact that during the year 1993-
94 companies raised around Rs 30000 crores from the market indicates that
the market is able to match these expectations. But the problem of serious
mismatch between the primary and secondary market remains. Unless this is
removed and the availability of enough scrips in the market and their easy
transferability assured globilisation of Indian security market will remain a
distant dream. The capital market is to be geared up to meet this expecta-
tion. The recent Union Budgets have given a tremendous boost to the capi-
tal market by a variety of measutes, important among which are the follow-
ing: excluding investment in shares/debentures from computation of assets
for wealth tax purposes: the favourable tax treatment to mutual funds in-
cluding private sector mutual funds and offshore investment funds, permit-
ting overseas pension funds and trusts to invest in Indian companies, permit-
ting selected Indian companies to raise capital from abroad, introducing
current account convertibility of rupee, abolition of the offrce of Controller
of Capital Issues (CCD and giving the authority to fix premia, etc., for fresh
issues to companies subject to announced guidelines, the general lowering
of income tax: continuing and accelerating the policy of disinvestment of
Government stocks in public sector enterprises to mutual funds and the
public. A11 these have been reflected in a phenomenal rise of the share price
index in the stock market. But the continuing problem of inadequacy of
floating stocks vis-a-vis the huge funds being attracted to the stock market
still remains. Concerted effort must be made to increase the floating stock.
Finally there is the issue of revival of legitimate forward trading, and the
related issue of whether or not to permit what is popularly called badla
trading. Badla trading, which evolved as an extra-legal substitute for forward
trading after the l969ban, and which is capable of serious abuse was banned
by the SEBI in 1993 following serious allegations of malpractices and
excessive speculation. This led to severe depression in the market which has
not yet recovered in spite of excellent corporate results. The SEBI set up a
working group (1995) to report on this. This group recommended the rwival
of carry-forward deals subject to safeguards while ruling out the revival of
'badla' ds such. This has now been accepted by the SEBI on principle.
Permitting some kind of legitimate forward trading with proper checks seems
unavoidable if we were to remove the current spell of depression which
should hurt long-term investment if it is allowed to persist. Also, we need to
take quick action in improving share transfer, custodial services and ensuring
liquidity or easy transferability of shares in the market. The recent legislation
enabling the setting up ofdepositories for carryrng on shares'custodial work
has been a timely step in the right direction.
Chapter Ten

Government Control Over
Distribution and Price

Government Control over the price and the distribution of essential com-
modilies lus cmcrged as a ver,' intportant sector of India's econonry, and
the performance of tlre public agencies rvill be a critical factor in the future
overall industrial grouth. Production, horvever efficient becomes purpose-
less if the goods produced are not dclit,ered to the final user at the right
time. in right quantitl', and at the right price b1' an equally eflicienL distribu-
tion net-rvork. Unfo(unatelv. thc existing private sector trade channels in
India, although claiming to operate. on a very lorv margin. one of the most
cconomical distribution S'stems in the u'orld, have also acquired in public
estimation a cenain notorieg' on account of their rvell-krtou'n malpractices
and a gcneral proneness to take advantagc of scarciq' situatious Adultera-
tion, short-u'eiglrt of goods, hoarding, nranipulated scarcitt, prohteering.
black-marketing. undull' excessive rates of credit and other anti-social and
unethical practices not only create public disaffection. but also saddle the
econom)r rvith verl' high costs. It is said that consuners in India pay set'eral
hundred crores of rupees every ,\'ear on account, of short-rveighted goods
alone. While public dislribution system is an anslver, it has its littftations
and cannot in an1' case hll the vacuum caused by the dismantling of the
traditional retail and rvholesale trading slstem or,er the lcngth and the
breadth of our last countrJ,. Thus there is need on the one hand for greater
vigilance over the existing distribution net-*'ork, and on the other hand for
organising public distribution agencies in the more wlnerable sectors. and
nore encouragement to consumers' cooperatires in other areas to provide
growing competition and the effcct of demonstration to private business.
Apart from its relevance to the society as a whole, distribution also acquires
a great importance in a developing economy like India on account of its
employmen\ potential, and also for the fact that a substantial number of
industrial raw materials are in short supply and need to be distributed fairly
and equitably among competing users.
Government Control Over Distribution and price 305


exercise man)' of these controls, there was some hesitation about giving
them a permanent statutory base. It was only in 1954 that Entry 33 in List
III of the constitution was amplified into its present shape by the Third
Amendment bringing within the purvierv of central legislation, in addition
to Lhe products of 'scheduled' industries a's defined in the Industrial @ev.
and Reg.) Act, such other commodities Uke imported goods, foodstuffs,
cattle fodder, raw cotton and raw jute etc. as rvould be necessary. Thus
Parliament rlas enporvered to make larvs controlling production supply or
distribution of any or all of these conunodities. The basic legal frame for
commodities control is provided by:
(i) the Essential Commodities Act, 1955, and
(ii) Section l8(g) of the Ind. (Dev and Reg.) Act, t95l relaring to rhe
products of 'scheduled' industries.

There are also a number of other specific laws cor.ering specific industries
in the field of commodifi'control, e.g. rhe Coffee Act, 1952. the Tea AcL
l9-53: the Rubber Act,l94'l'. the Coir Industries Act, 1953.
The Essential commodities Act provides in the interest of the general
public for Government control over the production. supply and distribution
of or trade and commerce in certain essential commodities which are listed.
These commodities fall jnto three broad categories:

(i) Food items;
(ii) Ralv materials for industries;
(iii) Products of the centrally-controlled industries.

This list of commoditips is not exhaustive and Central Government has the
power to declare any commodig' as an essential commodity for purposes of
the Act, if it is a commodity with respect to rvhich parliament has power to
make lav' under Entry 33 of List III. Hence the list is changed from time to
time according to the exigencies of the situation.
section 3 of this Act confers wide powers on the central Government to
issue orders regulating or prohibiting the production, suppl.v or distribution
of any essential commodiq' if it is of the opinion that it is necessary or
expedient to do so for maintaining or increasing supply of an essential
306 Gove n unen I and B u sin ess

contrnodit-t' or for securing its equitable distribution aud arailability at fair
prices Ilrere can also be dclegation of this authorib'to the State Govern-
merll c r to i-ln]' authority under a State Govcrnnrcnt. Under this considerable
authoriti' is dcleg.rtcd to authoriLies such as the District Collector in matters
like cc'nrpulson- procuremcrit of foodgrains or the enforcement of ler,1' on
farmcrs. T'his section gil'cs the central Govenrnrcnt practicallv an unlimitcd
authoritl' u'ith regard to the policies ol control it nra1, follorv lrom time to
timc in respect of various comnroditir:s. To nrake this authoritv even more
courplcte. it has becn provided that an ordcr nrade undcr Section 3 is to be
effectirc cveu it it is inconsistent l'ith an-l slatutc or auv slltutory instru-
mcnt. Thus. thc authoritl' of the Golcmnrcut agcncies under the Essential
commodities Act is nearly absolute. Distribution control uuder this can
include things such as speci$'ing distribution margins. allocating products
on the basis of State-rvisc or area-u'isc consunrption or class of consunrcrs
and restricting intcr-state. inter-zonc or even inter-ciistrict nlovements.
It should be noted that under tlris Act, all porvers cmanate lrom the
central Golernrncnt. and the Statc Government or the auLhoritics subordi-
nate to it acts as a dclegate of the Centre rvithin thc scope of the authority
assigned to it and subject to anv conditions inrposed or directions given bY
the central Goverulnent regarding the exercisc of the delegated pouers.
This enables the Ccntral Governnrcnt to keep an overall control orer vari-
ous State GoYcrnments and also create some sort of uniformit]' of practices
all orcr the country'. From the \er)'nature of things. thcre has to bc regular
consultations betu'een thc Centre and the States, and thc Ccntrc shapes its
policies in the light ofthcse consultations.
Undcr the Essential Contmodities Act. a large number of orders have
been issued covering a l'ide variety of commodities. Large discretionan'
po\\'ers have been conferred on administrative officers in many cases and a
very large bod-v of administratir,e procedures and rules hale also come into
existence. Apa( fronr their rvrit jurisdiction, courts harre for practical pur-
poses, \,erl, little to do in this held of bewilderirrg complexi6, parliamen-
tary control through the Cornmittee is Subordinate Legislation. is also rnar-
ginal. Rules and Regulatiotrs not only multipll, al a ver5' fast pace. but are
also often subjected to atnendments rvithout adcquate notice to the public
leading to confusion and uncertainty. The entire field has become highly
Section l8 (g) of the Industries (Developnrent and Regulation) Act,
empo\\'ers the Ccntral Government to regul;rtc supply and distribution of
and trade and conrmerce in any article rcllrtable 1o a scheduled industry
which means both finishcd products and also intported articles of the samg
nature and description as the articles rnanul,rctured. A number of orders
have becn promulgated under this Act. e.g. Ccmenl Control Ordcr, 1961,
Governntent Control Over Distribution and Price 30'7

Commercial Vehicles @istribution and Sale) Conlrol Order, 1963, Motor
Cars (Distribution and Sale) Control Order, 1963, Motor ears @istribution
and Sale) Control Order, 1960 etc. There seems to be a good deal of
overlappingbetrveen Section 18 (g) ofthe I @ and R) Act anrl the essential
Commodities Act, 1955. This tends to create some confusion and it should
be considered whether, after the passing of the Essential Commodities Act,
1955 u'hich covers a much broader area, there is any more necessity for
Section 18 (g) of the I (D and R) Act, rvhich rvas added to the act in 1953 to
Of considerable signilicance for price and distribution control are the
provisions in the Monopolies and Restrictive Trade Practices Act, l99l
relating to restrictive trade practices and those introduced in 1984 relating
to unfair trade practices. Undcr these provisions the M.R.T.P. Commission
has l'ide po\r'ers to enquire into and adjudicate on restrictive and unfair
trade practiccs and to pass orders on them. The Consumer Protection Act
1986 also offers some safeguards to the consumers through some quasi-
judicial tribunals. This comprehensive law lvhich came into force on April
15, 1987 also seeks to give due recognition to consumer organisations and
consumer movement and to provide speedl' redressal and compensation to
the consumers. The Annexure to this chapter gives a summary of the provi-
sions of this Act.


The Government of India inherited from the colonial gotrernment a structurc
of public dislribution slstem hurriedly organised during the war years co\L
ering veq' largell. the urban centres. Although this was dismantled in 1954
follorving Mr. Rafi Ahmed Kidwai's polic-v of decontrol, the Government
remained all along alive to the significance of distribution of essential com-
modities. As early as 1950-51 the Planning Commission obsewed that "our
kno*'lcdge of the present distribution mechanism, its composition and dis-
tribution and the ways various links in the system are related is at present
inadequate... before decision can be taken, there is need for clearing up
factual position regarding the amount of capital involved, profit margins,
costs of operation, number of people employed and related aspects of thc
question. .The subsequent plan document have always reflected a growing
awarcness of the importance of and the need for equitable distribution of
essential commodities, especially to more vulnerable sections of the popula-
tioh. With the developing shortage of foodgrains from the Second Plan
onrvards there started a process of abandonment of de-control and.rebuild-
ing of the public distribution system. This reached its climax in 1965-66
when formal statutory rationing covering all the big urban centres was
308 Governtnent and Business

reinforced and a system of ought to reach out to the
rural areas. The Ministry o nisirative ministry at the
centre for foodgrains procu
The distribution of foodgrains in urban areas represent one of the best
examples of the complementary nature of private trade and Government
agencies. The
and rose to 2.
450 millions.
ous zones among which movement of foodgrains except on Government
account or with Government approval was not alloued. For the next few
years the strategJ was to treat each State as a single rice zone or wheat

The prices at which Government agencies will purchase rice and wheat
respectively are announced every year by the central Government on the
basis of the recommendations made by the Agricultural prices commission,
a quasi-government but autonomous bod1, appointed by the central Govern-
ment. There are always heated controversies on this issue on account of the
powerful farmers lobby from states like punjab and Haryana seeking to get
enhanced prices, and the deficit states seeking to push down the pirrchase
price to protect consumers' interests. The Central Government hai to bat-
ance these two conJlicting interests in announcing the price.
rn 1972 the central Government took a decision to nationalise u'holesale
trading in foodgrains all over the country. But this policy was abandoned
after a rvhile in 1973 largely on the ground of the administrative constraints
and financial strains and also partly under severe pressure from private
business. The wheat policy of lg77-'78 sought to place considerable .elionce
on the private trade to
The Government agen
sure of a huge buffer
of a sizeable quantity
inllexible giant sized Food corporation is also likely to be rvelcomed by tle
Government Control Over Distribution and Price 309

small and middle farmers. As the new single-zone wheat poliry for the first
time makes a distinction between average and superior quallty wheat, pri-
vate trade can also play a role by supplying high income urban consumers
with superior quality wheat rvhere the margin of proht is higher, and rvhich
is not usually offered b),the public distribution system.


'The Food Corporation of lndia set up in 1965 under a Parliamentary legisla-
tion has nolv emerged as the Government's chief agency for internal pro-
curement of foodgrains. handling imports, storage and distribution of food-
grains and for implementing the national food poliry. It is also to act as a
counterr,'ailing force to contain the speculative activities of certain sections
of private trade and safeguard the interests of the producer and the con-
suner. It has among its other objectiles the primary objective of ensuring
reasonable prices to the producer protecting the interests of the consumers,
and attaining the commanding position in the foodgrains trade. The Corpo-
ration may also rvith the previous approval of Central Government,
(a) promote by such means as it thinks fit production of foodgrains and
other food stuffs'
O) set up or assist in the setting up of rice mills, flour mills and other
undertakings for the processing of foodgrains and other food stuffs,
(c) discharge such other functions as may be prescribed or as are supple-
mental. incidental or consequential to anl' of the functions conferred
on it under the Food Corporations Act 1964.
After the teething troubles of the initial years the Food Corporation of India
became the main procurement agency in surplus States. Thanks to the
bunper crop in the last few years. The F.C.I. has norv built up an impressive
inventory of foodgrains. This national buffer stock has acted as the major
anti-inJlationary force in the economy of the country. But it has also im-
posed tremendous strain on the Corporation for its storage and maintqnance.
This forced the Corporation to adopt various unconventional methods of
storage apart from utilising the available godown space to the maximunr
extent, e.g., obtaining unused and abandoned airstrips and strong grains in
pollthene covers; encouraging private partios to construct godowns on guar-
antee of occupation by Food Corpori iion of India. The Government assists
the Food Corporation to maintain price stability by reimbursing the differ-
ence betrveen the Central issue prices and the economic cost including the
cost of storage. Every year the Central budget makes handsome provision
tor this subsidy. The food subsidy steadily increased over the years. In the
post-1991 budget exercises serious efforts were made to reduce the huge
fiscal deficit by among other things substantial reduction in the food subsi-
dy. But there has been littte sucesi in the face of strong political opposition
.to such structural adjustment at the cost of the beneficieries of the Public
310 Govenrment and Business

Distribution System. Incidentally, the final GATT treaty contains specific
footnotes to remove fears that this treatl' may be used to abolish food
subsidies and exempts developing countries from the disciplines involved in
"Public stock-holding" and foodaid operation. Thus our PDS, including
procurement and distribution is not in any way affected by the GATT. In
any case it is a subsidy for the consumer, not for the farmer. The question is
r+'hether we cannot avoid such huge subsidl, and the strain on the budget by
cost reductioll, ecollony and rationalisation at various levels of handling b1.
the Food Corporation. The Food Corporation has also been taking a series
of measures to speed up procurement and streamline distribution of
foodgrains and essential commodities. It acts in coordination u'ith and oflen
as agents of State Government food and supply agencies.
Along with foodgrains. it is also handling from time to time other essen-
tial items like sugar and imported edible oil. The Central Government
makes monthly allocation to the State Government. Where the State Gor'-
ernment handles rationing through its own departmental agencies as in Ma-
harashtra, it transfers the stock from Food Corporation godorvns to its ou'n
godorvns and repacks them into standard rveight bags. Ration shops indent
their rveekly or fortnightly requirements through the wholesalers, usuallv
rvholesale cooperative, to rvhom they send along l'ith the indent the
cheques for the cost ofthe foodgrains. To take one example, there are about
2,100 licensed ration shops in Greater Bombal'covering a population of 8.4
millions and providing against about 2 million ration cards specified quanti-
ties of rvheat, rice, jau'ar and *hcat products (suji. maida) at uniform prices
fixed b1.'the Government. Ration cards are issued b.v the Ciril Supplies
Dcpaftment of the State Golernment through rationing oflices. All such
cards are registered u'ith one of the licensed ration shops. Thus there is an
interesting admixture of the Central Government agcncies (Food Corpora-
tion of India), the State Government Food and Civil supply agencies. pri-
vate traders and cooperatives. In most of the States the Food Corporation
has now taken over the role of handling and storing agents on behalf of the
State Governments with the result that it handlcs thc foodgrains from the
stage of procurement on to the point u'here these are handcd over to the
ration shops, usually'privately olned, but sometimes ;ootr'':ralives for actual
disbursemcnts to consuners.

The 1992 Scheme for Food Securitv
The public distribution system has come in for considerable attention since_
the nerv Congress government came to porver at the Centre in 1991. The
contradictory pulls exercised by the growing financial burden of food sub-
sidy on the one hand and on the other hand the need for a food securiq,
s_vstem to mitigate the hardship of the poor in a situation of spiralling
in-flation led to the adoption of a re\,amped P.D.S. aimed at both rcducing
rhe subsidy and simultaneously targeting the available subsidy to the real
Governnrcnl Conlrol Ovt:r Distrihution and Price 31r

poor in rural and remote areas of the countr1,. This nerv scheme was inaugu-
rated b1' Prime Minisler Rao on ls( Januar1,. 1992.lts main features are :-
* Launched on lst January 1992. Centrc and lhe State Governments
jointll' move to implement the revamped public distribution system
as an effective food security system to reach food at allordable prices
to Lhe poor in rural and remote areas.
+ Target bencficiaries are sixteen crore people living in 1700 blocks of
tribal. deser(. drought prone and hillv areas. Urban poor are also to be
* 11.000 more Fair Price Shops in the selected blocks to be added to
the more than 7tl.([X) existing shops.
* Issue of over 23 Lakh nrore ration cards taking the total to 280 lakh
ration cards holders in these blocks.
* Additional storage capaciq, of 3.2 lakh rnetnc tonnes of foodgrains to
be created making a total of 40 lakh metric tonnes and also bringing
godou'ns nearer to the shops.
* Tea. iodised salt- pulses and soaps also to be sold through FpS ac-
cording to the needs. This is in addition to six most essential food
items like grains (l'heat & rice), sugar, edible oil, kerosene, soft coke
that are alreadl' being supplicd at lou' prices through Fair price
* While the onus of supply is on ollicial agencies, vigilance commit-
tees to be formed of ration card holciers. local MPs. MLAs, consumer
organisations and lvomen's groups to oversee rvorking,of Fair price
Shops, suppll' of essential cornmodities to the benefiiiaries and to
detect bogus ration cards.
* Aimed to control prices, reduce supply uncertainty and to ensure
equitable distribution of essential items.
* This PDS rvill be linked up l,ith various income generating program-
nes (DPAP. ITDP, etc). This will be complemented by nutritional
inputs by providing lorv priced essential items. This pDS will be
essentially poor-oriented.
* Intensit,e interaction rvith CMs of States from August. l99l onwards
to ensure fail-safe arrangements at grass root levels.
* PDS in othcr areas being streamlined to make it more effective.

This issue of subsidising the suppll, of food grains and several other
essential commodities has been gaining more and more prominence in re-
cent )'ears. Politicians of nearly all shades are lrying with one another in
promising this as election issues oblivious of the severe constraints on the
budgetary resources of the Central and State Governments. A full-fledged
Ministry of Civil Supplies & Consumers' Affairs has been set up in the
central Government. It is important that in all such promised schenres there
is proper targetting of the truly poor, and that resources are not given away
to those who do not strictly need such subsidised support.
312 Governmenl and Business


Some of the State Governments have also been handling through their Civil
Supplies Departments commodities like cernent. kerosene, edible oil and
sugar. From the 60's there was much public clamour to which Governmenl
could not be unresponsive that it should organise an efFrcient public distri-
bution system to ensure that the common man, the vulnerable one, was able
to get minimum of goods of everyday need at reasonable prices. The Mohan
Dharia Committee on Essential Commodities and Articlcs, 1973 recom-
mended that the follou'ing l0 mass consumption items should be brought
under public distribution system:
Coarse, cereals. pulses, sugar, \/anaspati and processed edible oil, milk.
common clothing, standard footwear, kerosene and comnrercial domestic
fuel, standard rvashing materials, and school te.xt-books.
It is certain that during the coning vears the Government rvill pa1, more
and more attention to extending the coverage of public distribution in these
essential items, and to subjecting private trade u'here it is allowed to erist to
disciplining and regulation.
In considering the options for distribution ofessential articles lve have to
bear in mind a few very important factors, viz.,
(i) The malpractices and deficiencies which were found in the past in the
distribution of essential articles were a result of shortages in supplies and
are not inherent features of the existing distribution q'stem. In fact this has
been rvell proven b1, the fact that u'ith the restoration of supplies the mal-
practices have disappeared. Soap. r'anaspati, cars, tYres, battery cells and a
host of other products have all become competitivell' available and the trade
is not only unable to charge an1'premium but has to rvork hard to get sales.
Therefore, the real remedy is to improve supplies so that distribution be-
comes a competitive activify.
(ii) In designing a Distribution System for essential articles rve should be
clear about the group it is aimed for. It is no use producing Janata cloth for
the masses rvithout finding out l'hat the masses need or uhether the masses
can afford it. Therefore, rve should realise that the Distribution Sl,stem
everyone is so concerned about it at present meant for the urban population
(i.e., people living in torvns rvith population over 5,000) rvhich constitutes
about 20 per cent ofour total population.
(iii) The existing Indian trade channels provide one of the most effrcient
and economical Distribution Systems in the lvorld because it is able to
operate on very lolv margins (provided the product is adequately supplied
and temptations are not placed in its way). If it is to be displaced by.a
bureaucracy the steep increase in cost to the consumer has to be reckoned
Against this background let us examine the options open for distribution
of essential con:modities to the urban population.
Government Conlrol Over Distribution and price 3t3
1. State Owned Stores

a utilise in urban areas public finance
tax payers lvith the primary objective of
d benefit the less aflIuent majoriq, of
Therefore. u,hile a feu' such State emporia may exist in metropolitan
cities they do not present a suitable model for d'istribution of essential
articles even to the urban consumers.

2. Consumer Co-operativcs

The apex Federarion n1aily provides part of the capital through equrty
participation in the central wholesale soiieties. These wholesaleiocieties
act as procurement agencies for the consumer co-operatives which are
nanced through loans from district co-operative banki.
3t4 Governrnent and Bu,si ness

The co-operative distribution system has sereral strengths and weak-
nesses which ma1, fs sumnarised as follorvs.


(v) a measure of political patronage which secures
them allocation of scarce commodities and special
treatnl turers.
In spite of all
these substantial strengths. consumer co-operati'es
'e4'significant manner in times
have not succecded in any of nornul supplies
and trade.

(i) High or,crheads perhaps constitute the biggest burden on co-opera-
tives rvhen they haye to competc with the normal trade in a situation of
(il) Deficienq' in financial management is a common lleakness of con-
Government Control Over Distribution and price 315

be dcalt u,il-h as firmlt' as commercial lending institutions rvould treat their
custoruers, sonte of tlte deficiencies rvould not have crept in.
Having lllus seen the strenglhs and rveaknesses of consumer co-opera-
tives. one could anticipate that they have a definite place in the urban
market, if onlv as contingent channels of distribution of essential articles in
short suppl.v. when products are in plenlv. co-operatives u'ill find it difficult
to compete nith the normal retail trade and can sun'ir.e only u'ith hearl,
Government subsidl' rvhich is a costly diversion of public finance. that is
The Kendril'a Bhandar. launihed as a governmert
has achieved moderate success. but it is heavilt,
nt's financial and managerial support.
3. Retail and Wholesale Tradc
The third option is to make use of the traditidnal channels of trade and
attempt to correct their deficiencies. Companies like Hindustan Lever has
used these trade channcls over (he decades lith great success and satisfac-
Hindustan Lever have several thousand Redistribtrrion Stockists. They
generallv dcal in the full range of Lever's products. Thcir function is to
stock and redistribute Lever products to the retail trade. whilst the prinary
functions of meeting the retailcrs. ascertaining consumer and trade reactions
to our products, checking on trade practices etc. remain rvith the company's
orvn conrpany salesmen lvho visit retailers at fixed intervals. the Redistribu-
tion Stockist employs his orvn salesmen to distribute the product in the
interim periods betu'een companl' salesmen's visits and also to follou, up
on the credit which the Redistributron Stockists extend tc retail trade.
Through these Redistribution Stockists thc compaq.s products reach the
retailers rvho are the ultimate point of contact u'ith the actual consumer. The
traditional channels oftrade also have their weaknesses.
Perhaps the single biggest deficiency is its behaviour in relation to sale
of products in short supply. This can be corrected by a more formal under-
standing among the three parties concerned, viz., rhe manufacturer, the
Civil supplies authorities and the trade.
Manufacturers could nominate and declare selected outlets for sale of
the productin shon supply and also provide data to the civil supplies
316 Government and Business

authorities for necessary checking and regulation. This will be far simpler
and less expensive than attempting to set up parallel and alternative chan-
ncls for distribution rvhich will have their ovyn deficiencies as outlined
already in any case the real remedy in such a situation of shortages is to
increase supplies and not to concentrate on distribution alone.
At the same time all efforts should be made to modernise the traditional
channels oflrade by providing managerial inputs and training.
The general expcriencc in our couutrv is that the trading communitics
indulge in nralpractices and that their behaviour during sho(ages terd to be
manipulatir,e. Having regard to the vast size of the Indian market and its
manl' complexities an ideal distribution s)'steln rvill have to be a combina-
tion of all three options, viz. government stores, co-operatives, and private
stores operating under government supen'ision.
Under the present public distribution s1'stem, the essential goods of daily
use are distributed through fair price shops. consumer cooperatives and
private retailers lvho are issued licences for the purpose. There are at pres-
ent about 2,33,000 fair price shops carrying a load of I I crore cards. The
Ministry of Agriculture apart from handling foodgrains procurement and
distribution. also deals with allied items like sugar and edible oil. The
Centre has set up its ou'n Civil Supplies Ministrl' and the State Govern-
ments have their orvn cit'il supplies departments to look after the distribu-
tion of essential commodities in their respective jurisdictions. The Ministrl'
of Civil Supplies has nou' been entrusted rvith the overall responsibilig' for
distribution ofessential goods other than foodgrains.


Other pieces of legislation concerned are the Monopolies and Restrictive
Trade Practices Acq 1969. the Companies (Amendment) Act, 1974 and
larvs such as the Weight and Measures Act, etc. The MRTP Act, 1969
provides for registration of agreemerfts of the nature of restrictive trade
practices, such as those relating to the classes of pcrsons fiom rvhom or to
rvhom goods are to be purchased or sold, reciprocal purchases, re-sale price
maintenance, etc., u'ith a Registrar appointed for the purpc,se, and for adju-
dication by the MRTP Commission.
Another important provision of this Act relates to investigation into
restrictive trade practices and unfair trade practices by the Monopolies and
Restrictive Trade Practices Commission.
The Companies (Amendment) Act, 1974 which came into force from
January l, 1975 introduced a new Section 294 AA. According to this, the
Centre can prohibit sole selling agents in certain cases and prior sanction of
the Government is necessary for the appointment of sole selling agents of
Government Control Over Distribution and Price 317

any individual, firm or company which has a substantial interest in the
emplof ing company. Furthermore, a special resolution and Government's
sanction have been made necessary conditions for appointment of sole sell-
ing agents in a company having paid-up capital of Rs 50 lakhs or more.
Some recent changes made by the Government in its poliry regarding
distribution of several essential commodities may also be noted. Both ce-
ment and aluminium rvere decontrolled in 1989. Gold control has also been
done all'ay with. with improved availability of steel, the Government an-
nounced a new policy for decontrol of distribution and price of steel in
1992. under this thc nain steel producers like SAIL. TISCO and IISCo rvill
be free to fix their selling prices and sell them through their orvn distribu-
tion channels. But rvhile the Government has in recent times liberalised its
policies for nearly all industries, drugs and pharmaceuticals still constitute
one visible area of licensing and price controls. This has resulted in a steady
decline of profitabilig, (from a lorv level of 4o/o of profit afler tax as a
percentage of the gross capital emploved in 1982-83 Io 2.8yo in 1990-91).
This has driven the indust[' tou'ards sickness and has seriously obstructed
grorvth and exports and introduction of nerv drugs by MNCs in the Indian
market. Price control in this industry also illustrates thc unsustainability of
controlling prices of end products u'ithout controlling the prices of inputs.
The manufacturers are to appoint their representatives at different points,
n'ho will call on consumers and book their orders. Thus, easy availabilit)
and simplihed distribution u'ill help reduce stockpiling by both consumers
and producers.
Another Government measure which has considerable significance for
comnrodity trading is the Packaged Commodities (Regulation) Order, 1915.
This order applies to all pre-packed commodities ultimarely sold or in-
tended to be sold at the retail counter as a package unit in pre-packed
condition. Under this order ever]'package must indicate the following par-
(i) Identity of the commodity in the package.
(ii) The quanti[' in terms of standard units of weight or measures of
the commodit_v in the package or, when the commodity is packed
or sold by number the accurate nunrber of the commodity con-
tained in the package.
(iii) The month and year in rvhich the comnrodity is pre-packed_
(iv) The price ofthe package.
The price indicated is the maximum price at rvhich the commodity in
packaged form may be sold to the ultinate consumers inclusive of all taxes
and charges and other dues. The order does not apply to packages of com-
modities which are sold in loose form at the retail counter, gift packages,
meant for inspection or sampling of the contents.
Government an d Busi ne,ss

Thus the order lvas intended to protect thc interest of the consumers.
prevent malpractices and abuses by trade, and also to ensure qualitl,control.
But its enforcement nay be diffrcult in of the le'er of iiteraq, in our
country, and the large humber of retail points.


Price control, usualll, under the Essential commodities Act but at tirues
even under infornral arrangemcnt urade b1, the Governrnent, pla_t,s
an inrpor-
tant rolein the regulation, of the entire spectrun of cconomic acti'itics
including production. distribution and consunlption. price controls fall into
two categories: statuton' and informal. Statutory price control exists in

concerned to maintain existing prices to the extent possible, and effeit
revisions only afler obtaining the prior approval of the Go'ernment. These
pnces are not notified in an1, stalute. alrd to thal
e I

controls do not invoh,e anl,penaltv clause. In actual e
tenn "informal" is a bit of a nrisnomer. because gov s
vested u'ith such tremendous controlling pouers. that in the of the
indlstry its mosl infonnal measures u.quir. all the solemniB, of formal

ations in the form of control, each more conrplex and sophisticated than
othcr' requiring at every step an elaborate administrative structure to imple-
ment them.
Prices are also determined b1'the changes announced from time to time
Government Conlrol Over l)i,stribution and ]'rice 319

by administered prices of products controlled by the Government, the most
important being P.O.L. prices, e.g., petrol, kerosene, diesel, cooking gas.
fuses in these prices announced periodically, both for raising resources and
to keep pace wilh the risc internaLionally in crude prices have a cascadiug
effect on general price level. Similarly with the administered pricc of coal
and until recentl)' steel. Raiscs or reduction in the ratcs of central excise,
custom and State sales ta.xes also have a direct effect on the price level of
man\, conrnrodities.
Rigid adherencc 1o price conlrol rvithout propcr attcution to the supplv
side can oflen lead to shortagcs, quality deterioration, black-urone1,. spuri-
ous products and black markct. Honest finns can be driven out of business.
and a negative inrage is promoted anong intcrnational investors. It can at
best be a short-term remedy in a situation of ernergenct' like u'ar, and can
never be a long-term panacea.
The rationale for price control in the minds of manl' people is t*'o fold:
(a) to contain inflation (b) to.enable the rulnerablc scctions of our popula-
tion to be able to afford essential supplics. Both these objectives are better
met through mcasures other than price control u'hich rvill never be able to
achieve either ofthe trvo objectives.
The only effective means of dealing rvith or countering inflation is not
price control. but a combination of fiscal and monetary policies that reduces
money suppll'and deficits and at the santc time stimulatcs economic frce-
dom and greater conrpetilion to increasc suppll' of products. The econonries
of USA, Japan and Europe do not an\' more resort to price controls Lo
contain inflation. Thel' have adopted l.rscal and monetary policies rvhich
have successfully brought dorvn inllation. This can be b1' raising interest
rates as the UK & USA hat'e done for quite sonte time and Germany has
done in the more recent past. Thc1, also reducc governnent deficits e\/eu at
the risk of lorver economic grouth.
But no one resorts to price control anvnlore The last time price restraint
was tried in any leading econom\' $'as in the earl1, seventies bl,Nixon and it
had to be discardcd afler a short uhilc. Even der.'eloping countries in Latin
America l'ith high inllation have discarded price control as an instruncnt of
economic poli$, as thc,r' lound it to be extrentcl-\ disruptive of production
and suppll' of goods and sen,ices and created stop-go economies.
When it comes to assisting wlnerable sections'of societl, on a cousistent
basis. the onll rva)' is for governnent to subsidise directll' the supply of
essential conimodities like food grains, edible oils, keroscne- sugar etc.
through a public distribution system as is successfully practised in our coun-
t4' already. It is not by controlling the price given to the producer.
If India had practised price control of foodgrains, lve lvould never have
enabled the Indian farnrer/producer to produce increasing quantities to meet
320 Goventmen t ancl Busines.s

the food requirements of our population. Price control would have discour-
aged the producers. There would have been no Green Revolution and rve
would have had to import foodgrains rvhich in turn lvould have made it even
nrore expensive. It rvas through a lvell conceived Price Support system (the
opposite of price control) that India became self suffrcient in foodgrains.
Having thus assured adequate availability through incentives to the pro-
ducer, Lhe best rvat' to ensure supplies at affordable prices to r,ulnerable
sectjons is through a subsidised public distribution programme based on
incourc of thc rccipient.
In trying to appreciate the background behind some of the recent price
control measures u,e should note that the recent past has been characterized
bt, (l) rapid international price rises: (ll) domestic price inflation and (ilt)
stagnation of investment. All the threc phenonrena have had an impact on
the formulation and revision of price controls. Whereas price controls tend
to perpetuate thernselves and be forgotten like spidenvebs in dirty corners
u'hen the overall price level is reasonably stable, this is no longer so under
conditions of rapidlf increasing prices. When inJlation sets in, price revi-
sions have to be undertaken more and more frequently, espcciallf in a
system like India uhere onh' a fairll, limitcd number of products have
regulated prices. Under these conditions prices of imported or domestic rarv
materials and inputs increase, invcstment costs go up. profitabiliq goes
dorvn. production stagnates or is dir.erted into non-controlled generally less
essential lines of product (such as the more expensivc r.arieties of products
luxury soaps. \'anaspati, art paper. etc ) and investmen( levels fall off.
- Spurred b1'these circumstances the price control system has come under
severe attacks in recent times. First of all, the level of controlled prices has
had to be relised upl'ards for most products from time to time, in particular
for those items lhose prices have fluctuated u'idely in the international
markets. No complete list of these revisions is available. But on a rough
estinrate it appears that price adjustments have ranged from 3 per cent to
over 100 per cent, and were justified either by the increase in domestic
inputs or by the rise in international rarv materials (oil, fcrtilizer. steel, and
non-ferrous metals). In the case of fertilizer, the increase in the domestic
sales price u,as only in part passed on to the domestic producers: the re-
mainder was mopped up to compensate for the even larger price increases,
and the losses suffered on the imported fertilizer.
But the recent changes went further than a simple raising of price levels.
Because of the widespread and rapid rise in prices, and probably because of
the stagnant investment levels as well, the process of rethinking on the price
control systen rvhich had already set in before, was accelerated and carried
further. Having had to adjust the price levels more and more frequently
because of inJlation, in manl' cases in the face of a shrunken level of
Governntent Control Over Distribution and Price 321

domestic dernand and consequent$ with a largely reduced, and often elimi-
nated, gap between supply and demand, the responsible authorities were
forced into wondering whether the game was still worth the candle, and
whether it rvould not be better to get rid of some of the controls altogether.
In fact that is what they decided to do. In some ofthese cases the decontrol
was brought about after some previous price rises had been granted. In
others the decontrol was effected right away.
In fact "decontrol" is often the rvrong rvord for what happened. Al-
though in some cases there has been pure and simple decontrol and produc-
ers are now authorized to set prices as they please (although the Damocles'
ss'ord of renewed control is alwal's hanging about their head), in some
cases the decontrol is accompanied by a number of (often unpublished)
riders and guidelines partly circumscribing the freedom of action of the
producers. These riders may include the obligation to produce a certain
percentage of cheaper varieties (e.9. the "Janath" soap) or to use only a
certain percentage of raw materials input (e.g. groundnut in the case of
Vanaspati), in which cases we are really dealing with a kind of production
control. In a number of other instances a dual pricing system has been set
up, forcing the producer to sell a certain quantity or percentage of his
production to Gorernment procurement agencies ( as for the steel, paper,
sugar and foodgrains) in which case u'e are in effect dealing with a form of
distribution control. In other instances still, the product has been decon-
trolled, but only afler obtaining a promise from the producers that they will
distribute their production over the country according to a predetermined
demand pattern (as in the case of truck-tyres). Finally, in some other in-
stances (kept very hush-hush) the Government has let the producers free to
set their own prices provided (a) capacity utilization lwels are satisfactory,
and (D) profit levels remain rvithin certain specified limits.
An efficient and trust$'orthy distribution system is essential in an econ-
omy like ours where marginal shortages can sometimes lead to very dispro-
portionate distortion in prices thereby benefiting only the more privileged
sections of the population. In recent years the public distribution system in
India has gone on expanding fast and it will, according to all indications,
continue to grow. However, in view of the country's vast size and com-
plexities it may not be possible to rely completely on Government agencies
and dispense with retail private sector channels altogether. The problem of
distribution of essential goods is going to receive an enonnous amount of
attention from both the Government and the consumers. Distribution em-
ploys and has the potentiality of employing a very significant percentage of
our population with comparatively much less investment. In view of this,
the chronic shortages of essential goods of mass consumption.and their
rising prices the Government should come forward with a long term distri-
322 Governntenl and Bu.siness

bution policy frame and a c
to a crisis as it appears and
that poliry and plan of ac
must necessarily hold the c
ctor specially at the retail level. For
retail and r,vholesale trading system
tr)' can be totally dismantled only at

In recent years in quite a number of items government have been follorv-
ing a po , charging one price for priority users, and
allorving I other users. The most notable example is
cement. d by the public sector agencies for certain
essential products like petroleum, steel. rvhere they have monopoly or near-
monopoll' have assumed a very important position. price rise in these items
from time to time in order to avoid go\/ernment's budgetary support to such
undertakings in the fhce of their mounting losses have a cascading effect
leading to general price rise.


This is the latest piece of legislation in an area where there are already
several overlapping larvs, and yet there is no significant impact on the life
of the ordinary people lvho continue to be exploited b1, unscruplous traders.
The justification for this legislation is that the earlier legislative mea-
sures have been successful to some exlent in creating and maintaining com-
petition and protecting the consumers against false or misleading adi,ertise-
ments, bargain sales, bait and switch selling, and other similar unfair trade
practices but consumers need to be protected not only from the effects of
restrictive and defective goods or defi_.
cient services. ulous exploitation. Fur_
ther, ignorance of consumer movement
and lack of due recognition to the consumer organisations have also been
some important factors rvhich led to the enactment of the consumer protec-
tion AcL 1986,' (hereinafter referred to as the Act). The Act is a compre-
hensive legislation with its main thrust on giving speedy redressal and
compensation to the consumers. The Act (except chapter III) came into
force on April 15, 1987.2 However, the provisions of chapter III of the Act
came in operation from l, 1987.
This Act, extends to the whole of India except the State of Jammu and =

Kashmir.3 The provisions of the Act are in addition to and not in derogation
of the provisions of any other law for the time being in force.j The Act
applies to all goods and services unless specihcally exempted by the central
Government Control Over Distribution and Price 323

Government by notification.s For the first time in the history of the socio-
economic legislation of our country, the role of the consumer organisations
has been recognised in this AcL and other Acts6 like the Stindards of
weights and l{easures Act, the Drugs and cosmetics Act, tlrc prevention of
Adulteration Act, the Essential commodities Act, the Agricultural produce
(Grading and Marking) Act, etc. The Act provides for setting up of Con-
sumer Protection councils at the central and state levelsT to promote and
protect the rights of the consumers and a three-tier quasi-judicial machinery
for redressal of consumer grievances.E State includes union territories also.e
Though the union territories may have their own state council, District
Forum and State commission. The administrators of the union territories of
Andaman arid Nicobar Islands, Chandigarh, Delhi, Goa, Daman and Diu,
Lakshadweep and Pondicherry, and Dadar and Nagar Haveli have been
authorised to exercise powers and discharge functions of State Government.


The Act, has envisaged the setting up of the consumer protection coun-
cils at the central and state levels, namely, the central consumer protec-
tion Council and the State Consumer Protection Councils.

A. Central Consumers Protection Council
The Central Government is emporvered to constitute the central con-
sumer Protection council (hereinafter referred to as the central council)
which may consist of the follorving 150 members,ro namely :-
(a) the Minister in-charge of Department of Civil Supplies who shall
be the Chairman of the Central Council;
(b) the Minister of State (where he is not holding independent charge)
or Deputy Minister in the Department of Civil Supplies who shall
be the Vice-Chairman of the Central Council;
(c) the Ministers of Food and Civil Supplies or Minister in-charge of
Consumer Affairs in States;
(d) eight Members of Parliament-five from the Lok Sabha and three
from the Rajya Sabha;
(e) the Commissioner for'Scheduled Castes and Scheduled Tribes;
(f) representatives of the Central Government Departments, autono-
mous organisations concerned with consumer interests-not ex-
ceeding twenty;
(g) representatives of the Consumer Organisations or consumers-not
less than thirty-five;
@) representatives of women-not less than ten;
(i) representatives of farmers, trade and industry-not exceeding
324 Governntenl and Business

O persons capable of representing consumer interests not specified
above-not exceeding fifteen:
(k) the Secretary in the Department of Civil Supplies shall be the
member-secretary of the Central Council.
The Central Government has notified the Constitution of the Council
rvith ll5 menrbers. The Council has held three meetings so far. The first
rneeting rvas held in Septernber. 1987 in which the emphasis was on pro-
moting a strong and responsible consumer novenlelrt in thc country. The
second nreeting u'as held in April. 1988 in *hich the focal point of discus-
sion was the impleinentation of the Consumer Protection Act. In the third
meeting rvhich rvas held in September. 1988. again there rvas an emphasis
on speedy and effective implen-rentalion of the Act by the State Gol'ern-
ments and Union Territories Administrations.
The term of the Council shall be three years.rt The Council may meet as
and when necessarJ', but not less than three meetings of the Council shall be
held every year.12 Each mceting of the Council shall be called by giving not
less than l0 days notice in rvriting to eveD' member.rr specifying the time.
place and agenda of meeting.rr However, no proceedings of the Council
shall be invalid merely b.v reasons of existence of any vacanc,v in or anv
defect in the constitution ofthe Council.r5

Power to Constitute Working Grottp

The Council is empouered to constitute fron amongst its members,
such working groups as it ma1' deen necessary.16 Ererl' rvorking group so
constituted shall perform such functions as are assigned to it by the Central
Council. It seems that such working groups may prove to be more useful
and effective in dealing rvith the specific problems allocated to them. The
findings of such u'orking groups are required to be placed before the Coun-
cil for its consideration.'7 The resolutions by the Council shall be recom-
mendatory in nature.

Objects of the Central Council

Section 6 of the Consumer Protection Act proYides that the objects of
the Central Council shall be to promote and protect the rights of the con-
sumers, such as
- to be protected
(a) the right against marketing of goods which are
hazardous to life and ProPertY;
(b) the right to'be infbrmed about the quality, quantig', potency, pu-
rity, standard and prices of goods so as to protect the.consumer
against unfair trade Practices;
(c) the right to be assured, wherwer, possible access to a variety of
Governntent Control Ot,er Distribution and Price 325

goods at competitive prices,
(d) the right to be heard and to be assured that consumers' interests
will rcceive due consideration at appropriate forums;
(e) the right to seek redressal against unfair trade practices or unscru-
pulous exploitation of consumers: and
(0 the right to consumer education.
The Central Council may har,'e a significant role in the formulation of
the Central Government economic policy. In addition it may respond to
request for inforrnation and advice on particular issues relating to the pro-
tection of consumers. Although the decisions of the Councils are recom-
mendatorv but they may ha'r'e a significant impact on the several authorities
concerned rvith the matters of consumer protection.

B. State Consumer Protection Councils
The State Governments are also emporvered to establish Consumer Pro-
tection Councils for their respective States.r* The State Council shall consist
of such mernbers as ma)' be notified by the State Government by notifica-
tion from time to The objects of eveS' State Council20 like Central
Council shall be to promote and protect rvithin the State the rights of the
consuner as laid down in the clauses (a) to (f) of section 6.2r So far 22
States and Union Territories have set up the Consumer Protection Councils
under the Act. But, horv far these Councils have been successful in protect-
ing the consumers interest, is not free from doubt.


The Consumer Protection Act, 1986 proviles for the establishment of a
three-tier quasi-judicial machinery for redressing consumer grievances as
A. District Forum
. B. State Commissiolr
C. National Commission

A. District Forum
A consumer Disputes Redressal Forum to be known as the "District
Forum" is required to be established by the State Government with the prior
approval of the Central Government in each district of the State.22

(i) Compo,sition of the District Forum
The Act provides that each District Forum shall consist of a president
and trvo members, to be appointed by the State Government.2r The President
326 Government and Business

of the Forum is required to be a person who is, or has been, or is qualified to
be a District Judge.2a Out of the two members of the Forum one musl be a
person of eminence in the field of education, ttade or commerce, and the
other must be a lady social worker.25 The intention for having the members
from other than the legal profession seems to be that the District Forum
should be able to understand and appreciate the over-all technical and social
impact, while deciding the issues under the Act. The inclusion of a lady
social rvorker in District Forum is of considerable importance keeping in
r"iew the nature and functioning of the Forum.
Every member of the District Forum shall hold the office for a term of
five 1'ears or upto the age of 65 years, rvhichever is earlier, and shall not be
eligible for reappointment.26 However, a menrber may resign his offrce in
writing under his hand addressed to the State Government and on such
resignation being accepted, his offrce shall become vacant.27 The vacancy so
caused may be filled by the appointment of a person possessing any of the
qualifications mentioned above in relation to the category of the member
who has resigned.2E

(ii) Jurisdiction of the District Forunt
The District Forum shall have a jurisdiction to entertain complaints
n'here the value of the goods or seryices and the compensation, if any,
claimed is less than rupees one lakh.2e A complaint shall be instituted in a
District Forum within the local limits of whose jurisdictionso-

(a) the opposite party or each of the opposite parties, where there are
more than one, at the time of the institution of the complaint,
actually and voluntarily resides or carries on business, or personal-
ly works for gain, or
(b) any of the opposite pades, where there are more than one at the
time of the institution of the complaint, actually and voluntarily
resides, or carries on business, or personally works for gain, pro-
vided that in such case either the permission of the District Forum
is given, or the opposite parties who do not reside, or carry on
business, or personally work for gain, as the case may be, acqui-
esce in such institution, or
(c) the cause ofaction, wholly or in part, arises.

A complaint in relation to any goods sold or delivered or any sewice
provided, may be filed with the Forum by't-

(a) the consumer to whom such goods are sold or delivered or such
services provided;
Government Control Over Distribution and Price 32i
(b) any recognised consumer association, whether the consumer to
whom the goods sold or delivered or service provided is a member
ofsuch association or not; or
(c) the Central or the State Government.
It is evident from the aforesaid provisions that the complaint may be
filed by the affected consumer himself or by any recognised consumer
association even if that consumer is not the menrber of such association.
The recognised consumei association means any voluntary consumer asso-
ciation registered under the cornpanies Act, 1956, or any other law for the
time being in force.32
Further, the central and State Governments have also been vested with
wide powers to file complaint in relation to any goods sold or delivered or
any sen,ices provided. The Governments may file the complaint of their
own, lvhenevef they find that the goods sold are defective, or services
provided are deficient; or prices are over-charged.

(iii) Contplainant
clause (b) of section 2(l) of the consumer protection Act dehnes the
term complainant which means
(i) a consumer; or -
(ii) any voluntary consumer association registered under the Compa-
nies Act, 1956 (lof 1956) or under any other law for the time being
in force: or
(iii) the Central Governmenl or any State Government, who or which
makes a complaint.
For the first time, the registered consumers' associations hale been
recognised and have been assigned important role of protecting the consum-
ers. clause (n) of section 2 of the Monopolies and Restrictive Trade prac-
tices Act also defines "registered consumers' association".33 It means a
voluntary association of persons registered under the Companies Act, 1956
(l of 1956) or any other law for the time being in force which is formed for
the purpose ofprotecting the interests of consumers generally and is recog-
nised by the central Government as such association on an application
made in this behalf in such form and such manner as may be prescribed.
The Central Government has made the rules namely, the M.R.T.p. (Recog-
nition of Consumer Associadon) Rules, l987ra for the purpose. According
to these rules, every consumer association which is desirous of being recog-
nised as a registered consumer's association, must have not less than ten
consumers as its members and shall make an application on the prescribed
form with a requisite fee of Rs.. 500/- to the central Government in the
Department of Company Affairs. The Department of Company Affairs may
after scrutiny, issue a certificate of recognition or may refuse to issue such
328 Government and Business

certificate. The applicant shall be informed of the reasons for such refusal.
Howevet, applicant may be
required t e called for. Every
registered copy ofthe certifi_
cate of recognition to the concerned consumer Disputes Redressal commis-
sion established under the Consumer Protection Act.

(iv) Consumer
The term 'consumer' has been defined in clause (d) of section 2(l) of
the consumer Protection Act, 1986. 'consumer' means any person lvho,
(i) buys any goods for a consideration which has been paid or prom_
ised or partly paid and partly promised or under any system of
deferred payment and includes an)/ user of such goods other than
the person rvho buys such goods for consideration paid or promised
or partly paid or partly promised or under any system of deferred
payment when such use is made with the approval of such person.
but does not include a person who obtains such goods for resale or
for any commercial purpose, or
(iD hires any seryices for a consideration which has been paid or prom-
ised or partly paid and partly promised, or under an1, system of
deferred payment and includes any beneficiary of such services
other than the person rvho hires the sen,ices for consideration paid
or promised, or partll' paid and partly promised, or under any
system of deferred payment, when such services are availed of with
the approval ofthe first mentioned person.

The aforesaid definition of 'consumer' is wide enough to include not
only ion but also includes any
user it covers any person u,ho
hires ludes any benefrciary of
Horvever, it does not include a person who obtains any goods for resale
or for any commercial purpose.

(v) Complaint
clause (c) of section 2(l) of the consumer protection Act defines 'com-
plaint' which means any allegation in writing made by a complaint that _
(i) as a result of any unfair trade practice adopted by any trader, the =
complainant has suffered loss or damage;
(ii) the goods mentioned in the complaint suffer from one or more
Government Control Over Distribution and Price 329

(iii) the services mentioned in the complaint suffer from deficiency in
any respect;
(rg a trader has charged for the goods mentioned in the complaint a
price in excess of the price fixed by or under any law for the time
being in force or displayed on the goods or any package containing
such goods,
with a view to obtaining any relief provided by or under this Act.
It ma1'be noted that the provisions relating to unfair trade practices harre
already been incorporated in the Monopolies and Restrictive Trade prac-
tices Act in 1984.15 Under the M.R.T.P. Act, the unfair trade practices, like
misleading advertisements and false representations, bargain sales, bait and
switch selling, offering of gifts and prizes rvith the intention of not provid-
ing them conducting promotional contests; and hoarding and destruction of
goods have been prohibited.r6 The meaning of the expression 'unfair trade
practice' for the purposes of the consumer Protection Act, 19g6. is the same
as in section 364 of the M.R.T.P. Act.r7 But for a complaint under sub-
clause (l) of clause (c) of section 2(l) of the consumer protection Act, it is
necessaDr that the complainant must have suffered loss or damage as a
result of any unfair trade practice. There is no such limitation under the
M.R.T.P. Act. Under that Act, the M.R.T.p. Commission may,inquire into
any unfair trade practice irrespective whether any loss or damage has been
suffered or not as a result of such practice. Holl'ever, the reliefs available
against the unfair trade practice under the M.R.T.p. Act are by u.a1, of
temporary injunction under section l2A: 'consent order' or 'cease and desisl
order' under section 36D: and compensation under section l2B. under the
Consumer Protection Act, the relief may be granted by directing the oppo-
site party to remo\€ the defect: to replace the goods; to return the price; dnd
to pay compensation for loss or injury suffered by the consumer.3s Since the
provisions of the consumer Protection Act are in addition to and not in
derogation of the provisions of any other larv for the time being in force, it
is left to the choice of the consumer to decide his cause of action.

(vi) Comploint against Defective Goods
The complaint may be in respect of the goods which suffer from one or
more defects. The term 'goods' has the same meaning as defined in the Sale
of Goods Act, 1930. According to section 2(7) of the Sale of Goods Act.
'goods' means every kind of moveable property other than actionable
claims and money, and includes stock and shares, growing crops, grass and
things attached to or forming part of the land rvhich are agreed to be served
before sale or under the contract of sale. The definition is comprehensive
one. It includes grass, crops and standing timber which are alreed to be cut
before sale or under the contract of sale. It also includes stocks and shares.
330 Government and Business

In the united Kingdom, section 43(1) of the Restrictive Trade practices
Act, 1976 defines 'goods' to include ships and aircrafts, mineral substances
and animals including fish, and reference to the production ofgoods include
reference to the getting of minerals and taking of such animils. The Fair
Trading Act, 19'73 further extends the scope of the term 'goods, by includ-
ing buildings and other structures.3e
The term 'defect' has been defined in clause (f) of section 2(l) of the
consumer Protection Act. 'Defecl' means anY fault, imperfection or short-
coming in the qualiq'. quantity, potency, purity of standard which is re-
quired to be maintained by or under any law for time being in force or as is
claimed by the trader on to any goods.
The definition is wide or shortcomings
in the qualig', quantity s. The

means a person whoao-
makes or manufactures any goods or parts thereof; or
(ii) does not make or manufacture any goods but assembles parts there-
of, made or manufactured by others and claims the end-product to
be goods manufactured by himself; or
(iii) puts or causes to be put his own mark on any goodj made or
manufactured by an1'other manufacturer and claims such goods to
be goods made or manufactured by himself.
where a manufacturer despatches any goods or part thereof to any
branch office maintained by him, such branch offrce shall not be deemed to
be the manufacturer even though the parts so despatched to it are assenrbled
at such branch offrce and are sold or distributed from such branch

(vii) Conrplaint against Deficient Service
The cornplaint may relate to any services which suffer from deficiency
in any respect. The term 'service' has been defined in clause (o) of section
2(l) of the Consumer Protection Act as under :

'seryice' means service of any description which is made available to
potential users and includes the provision offacilities in connection with
banking, financing, insurance, transport, processing, supply of electrical
or other energy, board or lodging or both, entertainment, amusement or
the purveying of news or other information, but does not include the
rendering of any senice free of charge or under a contracl of personal
Government Control Over Distribution qnd Price 33I

The aforesaid definition is similar to the definition of 'sewice' given in
clause (r) of section 2 of the M.R.T.P. Act. The definition is very wide and
inclusive. It includes amenities and facilities like provisions of finance,
transport, enerry, etc. which satis8/ the various desire and needs of the
society. The services rendered by Hotels, Cinemas, Laundries, etc. are also
covered by the above definition.
However, the definition excludes two types of services, namely-(i)
rendering of any service free of charge, or (ii) under a contract of personal
sen'ice. It may be noted that the sewices like medicine, law, accountancy,
engineering, etc. have not been specifically enumerated. But it seems that
these services are also covered within the scope of the above definition
since these are available to potential users.
The literal meaning of the rvord 'service' is work done to meet some
general need, an act of helpful activity, the supplying of utilities as water,
electricity, gas, required by the public; supplying of repair service; supply-
ing of public communications or public transport. The use of the expression
'made available to potential users' in the above definition reveals that the
service must be made available to potential users who are willing to pay for
the sewice. Further, the expression, 'but does not include rendering of any
service free ofcharge' indicates that the service must be rendered for remu-
The. complaint can be made in respect of only those services which
suffer from any dehciency. 'Deficiency' means an1, fault, imperfection,
shortcoming or inadequaq' in the quality, nature and manner of perform-
ance which is required to be maintained by or under any law for the time
being in force or has been undertaken to be performed by a person in
pursuance of a contract or othenvise in relation to any seryice.a3 The defini-
tion is suffrciently wide to cover any fault, shortcoming, etc. in the quality,
nature and manner of performance of any service.

(viii) Complaint against Excess-Price'
A complaint may be made against a trader who has charged for the
goods a price in excess of the price fixed by or under any law for the time
being in force or displayed on the goods or any package containing such
goods. This is a very important provision under which a relief may be
claimed against over-charging of prices. Now a days, it is a common prac-
tice to display maximum price with local taxes extra on the package of
containing goods. Many times it has been noticed that the retailers charge
I5-2Ooh more than maximum price on the pretext of local taxes and they do
not issue any bill, cash-memo, etc. indicating such taxes. It is submitted that
such cases should also be covered within the scope of the aforesaid provi-
sions and the sellers and retailers shouldbe held liable accordingly.
332 Govemmenl and Business

(ix) Procedure to be followed bv the District Forun
Section 13 of the consumer Protection Act lays down the procedure to
be followed for the seltlement of consumer dispute by District Forum. Ac-
cording to these provisions the Forum shall on receipt of a complaint relat-
ing to any goods or seryices refer rvith a copy of the complaint to the
opposite party directing him to give his version of the case within a period
of thirty days. Howe.r,er, the period may be extended upto fifteen days b1,
the District Forunr. Thus, in no case the opposite party be allou'ed to give
his version after the expiry of fort-v five
where the opposite part-v denies or disputes the allegations contained in
the complaint, or omits or fails to take an' action to represent his case
rvithin the above stipulated time, the District Forum shall proceed to settle
the consumer dispute on the basis of the evidence brought to its notice.45
Holl'ever, where the defects alleged in the goods are such that they
cannot be determined rvithout proper analysis or test of the goods, the
District Forum is required to obtain a sample of the goods fron the com-
plainant.a6 The District Forum must seal the sample so obtained and authen-
ticate it and refer it to the appropriate laboratory. But, before sending an1,
sample to an1, l66o.utory, the District Forum may require the complainant to
deposit to the credit of the Forum such fees as may be specified. for pay-
ment to the laboratory for carq'ing out the necessary analYsis or test in
relation to the goods in question.aT The Forum shall remit the anount so
deposited to the laboratorv to enable it to carry out the analysis or
The Forum shall direct the laboratory to make an analysis or test rvith a
vierv to hnding out rvhether such goods suffer from any defect alleged in the
complaint or suffer from any other The laboratory is required to
submit its report to the Forum rvithin a period of forty-hve dat,s of the
receipt of reference or within such extended period as may be granted by
The Forum shall fonvard a copy of the report along rvith such renrarks as
it may feel appropriate to the opposite party.t, If any of the parties disputes
the correctness of the findings of the appropriate laboratory, or clispute the
correctness of the methods of analysis or test adopted b1' the appropriate
laboratorl', the Forum shall require the opposite pafty or the coniplainant to
submit in rvriting his objections in regard to the report made by the labora-
tory.52 The Forum thereafter give a reasonable opportunity to the complain-
ant as rvell as the opposite part), of being heard as to the correctness or
othelrvise of the report made by the laboratory and also as to the objection
made in relation thereto and issue an appropriate order under section 14 of'
the Consumer Protection Act.i3
However, section l3(3) of the Act provides that no proceedings conrply-
ing with the aforesaid procedure shall be called in question in any court on
Governnent Control Over Distribution and Price 333

the ground that the principles of natural justice have not been complied
with. It may be noted that the requirements of natural justice do not remain
fixed nor they remain the same in every case and in all The
applicability of the principles of natural justice depends on55-(i) the
scheme and policy ofthe statute; (ii) nature ofjurisdiction conferred on the
authorit]'; (iii) character of rights of the persons affected; and (ir) relevant
circumstances disclosed in a particular case. Under the Consumer Protection
Act, the procedure to be follorved requires-rcferring of complaint to the
opposite part)': providing him an opportunity to give his version of the case;
analysis or testing of the goods b1, appropriate laboratory: and considering
the el'idence produced by the complainant and the opposite partl'. This
procedure seems to be on the lines of the principles of natural justice.

(x) Power of Dislrict Forunt
For the purpose of the settlement of the consumer dispute under the Act,
the District Forum has been vested r.r,ith the same po\\'ers as vested in a civil
court under the Code of Civil Procedure, 1908, rvhile trying a suit in respect
of the following matters, namelys6-
(i) the summoning and enforcing attendance of an1, defendant or wit-
ness and eramining the u'itness on oath:
(ii) the discover), and production of an1, document or other material
object producible as evidence:
(iii) the reception of evidence on affldavits:
(ir') the requisitioning of the report of the concerned analysis or test
from the appropriate laboratoq'or from any other relevant source:
(v) issuing any commission for the examination of anl'lvitness: and
(vi) any other matter which mav be prescribed.
Further, section l3(5) of the Act expressly provides that every proceed-
ing before the District Forum shall be deemed to be judicial proceeding
within the meaning of sections 193 and 228 of the Indian Penal Codes? and
the Forum shall bc deemed to be a civil court for the purposes of section
195, and Chapter XXVI of the Code of Criminal Procedure, 1973.53 Thus,
the proceedings before the Forum will be judicial proceeding for certain
purposes like contempt of court, giving of false evidence, etc. and the
Forum shall be treated as a civil court for these purposes.

(xi) Production of Documents, etc.
The District Forum has the power to require any person to furnish such
books, accounts, documents, or commodities, the examination of which
may be required for the purpose of the Act.5e The Forum may also require a
person to furnish such information as may be required for the purpose of the
334 Government and Business

Act.6o of the Act, is quite signifi_
cant t for the purpose ofproceed_
ings. oduce a document, etc. can
raise an objection,on the ground of irrelevancy of the document etc. ? It
appears that he has a right to object on the ground irrelevancy of the
document, etc. at a proceeding, but such irrelevancy must be demon-

(xii) Potlers of Entry, Search and Seizure
where during an1'proceedings under the Act, the District Forum has any
ground to believe that book, paper, commodity or document which may be
required to be produced in such proceeding are being, or may be destroyed,
mutilated, altered, falsified or secreted, it may, by written order authorise
a$' officer to exercise the power of entry and search of any premises. such
authorised offrcer may also seize such books, papers, documents or com-
modities as are required for the purpose of the Act.62 The seizure must be
commu soon as it is made or within a period not
exceedi making such seizure, after specifying the
reasons The Fomm on examination of such seized
documents or commodities, may order the retention thereof or may return it
to the party concerned.6'
It is yet to be seen how far the Forum will make use of this provision,
but il is hoped that the effective use of the provision rvill certainly strength-
en the hands of the Forum for the redressal of the consumer dispute.

(xiii) Di.strict Forun+whether a quasi-judicial body
The provisions of the Act reveals that the District Forum is not a court
and is not bound to follow the procedure prescribed for trial of action in
courts nor by strict rule of widence. For the settlement of the consumer
dispute the Forum has to follorv the procedure laid in section 13 of the Act
which is quite parallel to the principles of natural justice. Thus, it seems to
be a quasi-judicial body.

(xit) Orders of the District Forum
where the District Forum is satisfred that the goods complained against
suffer from any of the defects specified in the complaint or that any of the
allegations contained in the complaint about the sen'ices are proved, it shall
issue an order to the opposite party directing him to take one or more of the
following things, namely6a-

(a) to renove the defect pointed out by the appropriate ldboratory from
the goods in question;
Governrhent Control Over Distribution and Price 335

O) to replace the goods with new goods of similar description which
shall be free from any defect;
(c) to return to the complainant the price, or, as the case may be, the
charges paid by the complainant;
(d) to pay such amount as ma)' be arvarded by it as compensation to
the consumer for any loss or injury suffered by the consumer due to
the negligence ofthe opposite party.

Eve4, order made by the Forum shall be signed by all the mernbers
constituting it, and, if there is any difference of opinion, the order of the
rnajority of the members constituting it shall be the order of the Forum.65

(xv) Appeal Againsl the Orders of the District Forunt
Any person aggrieved b1, an order made by the District Forum ma1,
prefer an appeal against such order to the State Commission rvithin a period
of thirty days from the date of the Horvever. the Commission may
entertain an appeal even after the expiry ofthirq'days, ifit is satished that
there rvas suffrcient cause for not filing it within that period.67 The expres-
sion 'suffrcient cause' requires liberal construction so as to advance substan-
tial justice rvhere no negligence or any inaction or want of bonafide is
imputable to the party.68 The deternrination of 'suffrcient cause' will depend
on facts and circumstances of each case. It is a discretion to be exercised by
the Commission in a judicial manner and in the interest ofjustice.

B. State Commission

A Consumer Disputes Redressal Commission to be known as the 'State
Commission' is required to be established by the State Government rvith the
prior approval of the Central Government in the State.6e

(i) Composition of the State Commission
Each State Commission shall consist of a President and two other mem-
bers, to be appointed by the State Government. The President should be a
person rvho is.or has been a judge of a High Court, appointed b1' ths 51r,.
Gorernment.To The two other members should be persons of ability, integ-
rity and standing and should have adequate knowledge or experience of, or
have shown capacity in dealing with problems relating to economics, law,
commerce, accountancy, industry, public affairs or administration, one of
whom should be a woman.Tr However, the appointment of a sitting judge of
a High Court to the Commission can be made only after consultation with
the Chief Justice of that High Court.72 The salary or honorarium and other
allowances payable to, and other terms and conditions of service (including
tenure of office) of, the members of the State Commission shall be such as
may be prescribed by the State Government.T3
336 Government and Busi ness

(ii) .Iurisdiction of the State Comntission
The State Commission shall have jurisdictionTa-
(i) to entertain complaints where the value of the goods or servicers
and compensation. if an1', claimed exceeds rupees one lakh but
does not exceed rupees ten lakhs; and
(ii) to entertain appeals against the orders of any District Forum rvithin
the State; and
(iii) to call for the records and pass appropriate orders in any consumer
dispute rvhich is pending before or has been decided by any Dis-
trict Forum rvithin the Statc. where it appears to the State Commis-
sion that such District Forum has exercised a jurisdiction not vested
in it by larv, or has failed to exercise a jurisdiction so vested or has
acted in exercise of its jurisdiction illegally or with material irregu-
Thus, the jurisdiction of the State Commission is original as well as
appellate. The original jurisdiction is vested in the Conmission only in
respect of complaints where the value of goods or services and compensa-
tion claimed exceeds rupees one lakh'but not more than rupees ten lakhs.
The appellate jurisdiction is confined to appeals from the orders of any
District Forunr u,ithin the State. Further, the State Commission mal'call for
records and pass orders in an)'consumer dispute rvhere it appears that a
District Forurn has acted illegalll, or tvith material irregularity. or has ex-
ceeded itsjurisdiction or has failed to exercise itsjurisdiction.

(iii) Procedure,4pplicable to State Comnission
The procedure for the disposal disputes to be adopted by the State
Commission shall be the same as is to be followed b1' the District Forum.
Thus, the procedure specified in sections 12, 13 and 14 and the rules made
thereunder for the disposal of complaints by the District Forum shall, with
such modifications as may be necessary, be applicable to the State Commis-
sion.75 Further, rule l0 of the Consumer Protection Rules confers the same
additional porvers to the Commission as are vested to the District Forum
regarding the production ofdocuments, search and seizure.T6
It ma1', holer,er, be noted that the State Governments have yet to make
their orvn rules in exercise of their powers under section 30(2) of the Acr. It
is submitted that the State Governments may adopt the similar rules as laid
dorvn b1' the Central Government. namely, the Consumer Protection Rules,
1987. It rvill help in maintaining the uniform law in all over the country.

(iv) Appeal against the Orders of the State Conrmission
Section 19 of the Act provides that pcrson aggrieved by an order made
by the State Commission on a complaint (where the value of goods or
Government Control Over Distribution and Price 33',l

sen'ices and compensation claimed exceeds rupees one lakh but not more
than rupees ten lakhs) may prefer an appeal against such order to the Na-
tional commission within a period of thirty days from the date of the order.
However, the National commission may entertain an appeal after the expiry
of the said period of thirty days if it is satisfied thal there was suffrcient
cause for not filing it within that period.T?
It ma1, be noted that an order rnade by' the State Commission on an
appeal against the orders of the District Forun, is not appealable to 1he
National comnission. Thus, the provision exists only for a single appeal to
the State commission fronr the orders of the District Forum and no further
appcal will lie from the orders of the State commission to the National
An appeal under section l9 ofthe Act can be preferred only b1, a .person
aggrieved'. The expression 'person aggrieved' does not mean a person u,ho
is disappointed or annol'ed at a decision. The lvord 'aggrieved' connotes
some legal grievance. e.g., deprivation of something an adverse effect on
the title of something and so on.73 He must show that the order affects his
orvn right or is not in accordance u'ith lavy or confers a right on a person to
n'hich he is not entitled.Te The expression 'aggrieved person' does not in-
clude a nere busybodl 'w'ho is interfering in things rvhich does not concern
him.80 Since the Consumer Protection Act deals rvith the matters of great
public importance. it is subnritted that the u'ord 'aggrieved person' should
be given a rvider neaning and not a narro\\, construction.

C. National Commission

The highest authorit]'to settle the consumer disputes under the Act is an
independent statutory bod1,- the National Commission.

(i) Composition of the National Commission
The Act provides that National commission shall consist of a president
and four other members to be appointed by the central The
President should be a person rvho is or has been a Judge of the Supreme
Court.E2 The person to be appointed as a menrber should be a person of
ability, intqgritv and standing rvith adequate knowledge or experience, or
capacity' in dealing with problems relating to economics, law, conmerce,
accountancy, industry, public affairs or administration. One of the member
should be a Holever, no sitting Judge of the Supreme court shall
be appointed under the aforesaid provisions except after consultation with
the chief Justice of Bcfore appointment, the president and menrbers
are required to take an undertaking that they do no( and will not have any
338 Govenrment and Busines.s

zuch financial or other interests as is likely to effect prejudicially functions
as such member.85
It may be noted that no act or proceedings of the National Commission
shall be invalid by reasons only of the existence of any vacancy among its
President or members or any defect in the constitution thereof.t6

(ii) Casual Vacancics
The President or a mcmber of the National Commission may. b1' u'riting
under his hand, resign his office at any tinle; or ma), be removed fron the
officesT in accordance with the prot isions of the Consumer Protection Rules.
A casual vacancy so caused by resignation or remo\/al is required to be
hlled by fresh appointment.sS Where any such casual vacancy occurs in the
ofhce of the President of the National Commission. the senior-most member
of the Commission holding offrce for the time being. shall discharge the
functions of the President until a person appointed to fill such vacancy
assumes the office of the President.Ee Similarly when the President is unable
to discharge the functions ou'ing the absence. illness or any other cause, the
senior most membcr of the Commission shall discharge the functions of the
President until the da1, on which the President resulnes the charge of his

(iii) Removal of the Prcsident and Membcrs
The Central Government ma!' renrove the President or any member from
office on any of the follolving grounds. namelyer-
(a) he has been adjudged an insolvent: or
(b) he has been convicted of an offence rvhich, in the opinion of the
Central Government. involves moral turpitude; or
(c) he has become physically or mentally incapable of acting as the
President or the member; or
(d) he has acquired such financial or other interest as is likely to affect
prejudicially his functions as the President or a member; or
(e) he has so abused his position as to render his continuance in offrce
prejudicial to the public interest. .
But, the Government's power of removal on the grounds specified in
clauses (d) and (e) above, is subject to an inquiry to be held by the Central
Government in accordance with such procedure as it may speciS in this
behalf and finds the President or a member to be guilty of such ground.e2
rlowever, it seems that the procedure for such an inquiry and removal is yet
to be prescribed by the Central Government. It is submitted that the proce-
dure for such an inquiry to be adopted by the Central Government must be
fair and reasonable. In this regard, it is suggested that the Central Govern-
Government Control Over Distribution and Price 339

ment should refer such an inquiry to the supreme court and then it should
proceed for the removal on the basis of the report of that inquiry. It is hoped
that this procedure, if follor,ved, will help to secure the independence of the
It may be noted that the State Governments have yet to make rules in
this regard, under the consumer Protection Act.e3 It is submitted that the
state Governments may adopt the aforesaid rules with necessary modifica-
tions for the removal of the President and members of their respective State
Commissions and District Forums.
(iv) Tcrm of Office and Remuneration
The salary, honorarium and other allowances payable to and the other
terms and conditions of sen'ice of the menrbers of the National commission
shall be such as may be prescribed by the Central Governnent.ea In this
connection the central Government has laid down the relevant provisions in
the consumer Protection Rules, 1987. According to rule l2(2),the president
and the menrbers shall hold office for such period, not exceeding five years
as may be specified by the central Government in the notihcation, but shall
be eligible for re-appointment. Horvever, no President or a member shall
hold office as such for a total period exceeding ten years or after he has
attained the age of 65 years, whichever is earlier.e5
The terms and conditions of sen,ice of the President and the members
shall not be varied to their disadvantage during their terms of ofIice.e6
Rule I I of the Consumer Protection Rules, lays dorvn the salaries- hono-
rarium and other allowances payable to the President and Members of the
National commission. According to these rules, rvhere the president of the
National Commission is a sitting judge of the Supreme Court, he shall enjoy
all the benefits which he should have enjoyed as sitting judge of the Su-
preme Court. Where the President is not a sitting judge of the Supreme
Court, he shall receive a consolidated honorarium of Rs. 8000 per month.
other members, if sitting on rvhole-time basis shall receive a consolidated
honorarium of Rs. 6000 per month or if sitting on part-time basis a consoli-
dated honorarium of Rs. 300 per day for sitting.e? The president and other
members shall also be entitled to travelling and daily allorvance on offrcial
tours at the same rates as are admissible to Group 'A' oflicer of the central The salary, honorarium and other allowances shall be de-
frayed out ofthe Consolidated Fund oflndia.

(v) Independence of the National Commission
The consumer Protection Act and the consumer protection Rules have
laid down many provisions to secure the independence of .the National
Commission. The terms and conditions of service of the president and the
members shall not be varied to their They are also required
340 Government and Business

to take an undertaking that they do not and will not have any such financial
or other interests as is likell' to effect prejudicially their functions as such
members.roo Further, the procedure for the removal of the President and
members as laid down under rule 13 of the Consumer Protection Rules is
such that it prevents the Central Government from acting on any extraneous
ground or arbitrarily. In order to ensure the impartial rvorking of the Presi-
dent and members, they are prohibited from taking any appointment in or
being connected rvith the mattagement or administration of anl organisatior
rvhich have been the subjcct of anl proceeding under the Act during their
tenure.ror The prohibition is for a period of ltve vears from tlte date on
l,hich they, ceases to hold such oflice. It ma1'be noicd that the contrat'en-
tion of these provisions has not becn made an A person ulto
contravenes can. at the 1'orst. be onll' prevented b-'1' an injunction b1' a civil
To secure a similar independence of the State Comn-rission and the
District Forums. it is srrbnritted that the State Governnents (*'hich haye I'et
to frame the rules under the Act) mav also adopt the similar rules for the
sake of convenience and uniformiq' in all over the country.

(vi) Sittings and Sccrctariat of the National Commission
The office of the National Commission shall be located in the Union
Territory of Delhi.'0r The oflicial scal and emblenl of the Commission shall
be such as the Central Governnrent ntay specif'.r01
The sitting of the Comntission as and u'hen ncccssary shall be convened
by the Prcsident.ros The l,orking days and office hours of thc Commission
shall be thc same as thaL of the Central Govcrument.rou The Cenlral Golern-
ment shall appoint such stafl as may be neccssaq to assisl the Commission
in its day-16-da1'rvork and to pcrfornt such other functions as are providcd
under the Act and the rules or assigned to it bv the President.r0? Thc salan'
payable to such staff shall be defral'ed of the Consolidated Fund of lndia.r0s

(vii) Jurisdiction of the National Commission
Section 2l of the Act provides that the National Commission shall have
(a) to entertain-
(i) complaints rvhere the value of the goods or sen'ices and compcu-
sation, if any, claimed exceeds rupces ten lakhs; and
(ii) appeals against thc orders of any State Comnission,
(b) to call for the records and pass appropriate orders in any consumer.
dispute which is pending before or has been decided by any State
Commission rvhere it appears to the National Commission that
such State Commission has exercised a jurisdiction not vested in it
by law, or has failed to exercise a jurisdiction so vested or has
(]oternnrcnt Control Over Distribution and Price 341

acted in exercise of the jurisdiction illegally or with material irreg-
It is evident from the aforesaid provisions that the jurisdiction of the
National Commission is original as well as appellate. The original jurisdic-
tion is limited to the complaints where the value of the goods or services
and compensation exceeds rupees ten lakhs. The appellate jurisdiction is
confined to appeals against the orders of any State Commission. Thus, no
appeal can lie to National Comrnission against the orders of the District
Forum. It is the State Corumission of each State rvhich can entertaiu an
appeal from the District Forums of the State.
Further. the National Commission is eurpowered to call for records*and
pass appropriate orders in any consuntcr dispute l'here it appears that the
State Commission has acted illegalll' or n'ith material irregularit'z or ex-
ceeded itsjurisdiction or has failed to exercise itsjurisdiction.

(r,iii) Procedurc to be folltnved by- the National Commission
Section 22 of the Act provides that the National Commission shall in the
disposal of an1' conplaints or of any proceedings, have the same powers as
are vested in a civil court under the Code of Civil Procedure, 1908, while
trying a suit, in the matter of (i) summoning and enforcing the atten-
dance of any w'itness and examining him on oath; (ii) discoverl' and produc-
tion of any document or other material object producible as evidence; (iii)
reception of evidence on affrdavits; (ir) requisitioning of the report of the
concerned analvsis or test from the appropriate laboratory or from anl' other
relevant source: (v) issuing of anl' commission for the cxamination of any'
l'itness, and (r'i) any other matter u'hich nu1' be prescribed. Funher. every
proceeding before the Commission shall be deemed to be judicial proceed-
ing n'ithin the meaning of sections 193 and 228 of the Indian Penal Code,
and the Commission shall be deemed to be a civil court for thc purposes of
section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973.
Thus. the proceedings before the Commission rvill be judicial proceedings
for certain purposes like contempt ofcourt, giving offalse evidence etc. and
the Commission shall bc treated as a civil court for these purposes.
In addition to the aforesaid provisions, the Commission has also to
follow the procedure as ma)'be prescribed by the Central Government.roe
Accordingly the procedure has been laid dou'n in rule 14 of the Con-
sumer Protection Rules. These rules provide that a complaint containing the
follorving particulars shall be presented b1,the complainant in person or by
his agent to the National Commission or be sent by registered post ad-
dressed to the Commissionrto-

(a) the name, description and the address of the complainant; .
O) the name, description and address of the opposite party or parties,
as the case may be. so far as they can be ascertained,
342 Government and Business

(c) the facts relating to complaint and when and where it
(d) documenls in support of the allegations contained in
the complaint;
(e) the relief which complaint claims.

on receipt of a complaint the National commissipn has to follow the
same procedure as is to be followed by the District Forum under
(l) and (2) of section 13 of the Act..r The commission is required to refer a
copy of the complaint to the opposite palty directing him to give his
of the case rvithin a period of thirw days or ruin .x.nird period not
exceeding fifteen days as rnay be granted by the commission. where
opp$it. party.denies.or disputes the allegations contained in the complaint,
or oiirits or fails to take any action to represent his case within the stipulated
time, the commission shall proceed to settle the consumer dispute on the
wever, if the defects alleged
mined without proper analy-
vmple of the goods to the
Anv objections in regard to the reporr fflxt{:'-h:T*,ffiT:l
should give a reasonable opportunity
sue an appropriate order.

commission on the date of hearing Llrjl;';;;5,'"T
- frljffiffi,J:'"ll;
be adjourned.rr2 where the complainant or his agent fails to appeaibefore
the commission on such days, the commission may in its discretion either
default or decide it on merits.ili Where the oppo-
to appear on tlte date of hearing, the Commission
ex. parte.tta
The Commission may adjourn the 'hearing of complaint at any stage of
the proceedings and on such term as it deems fit.r,s But the conpiaint shall
be decided, as far as possible, within a period of three months from the dare
of notice received by opposite party where complaint does not require
analysis or testing of commodities and within five months if it requires
alalysis or testing of commodities.rt6 The time limit has been prescribed
with the intention to avoid delay in the redressal of the consu*.i dirput.r.
This will provide the consumers not only a timely relief but will also create
a confidence in them.
where the commission, after the proceedings conducted, in the afore-
said manner, is satisfied with the allegations contained in the complaint, it
shall issue orders to the opposite party directing him to take one oimore of
the things, namely,-to remove the defect; to replace the goods with nerv
goods; to return the price; to pay the compensation as iwarded.rt? Th6
commission also has the power to direct that any order passed by it, where
no appeal has been preferred under section 23 or wheie the oider of the
commission has been affrrmed by the supreme court under that section, be
Government Control Over Distribution and Price 343

published in the Offrcial Gazette or through any other media and no legal
proceedings shall lie'against the Commission or any media for such publica-

(ix) Procetlure for Hearing the Appeal
The procedure to be followed by the National Commission for hearing
the appeal has been prescribed in rule 15 or the Consumer Protection Rules.
According to these rules, Lhe memorandum shall be presented b1' the appli-
cant or his agent to the National Commission in person or be sent by
registered post addressed to the Commission.rre The memorandun must set
forth the grounds of appeal without any argument or narrativerzo and ntust
be accompanied by a certified copy of the order of the State Commission
appealed against and such of the documents as may be required to support
grounds of objection mentioned in the memorandum.r2r Horvever. under
section 19 of the Act, the appeal is to be preferred rvithin a period of thirty
days from the date of the order of the State Commission. When such an
appeal is presented after the expiry of the period of limitation, the memg-
randum must also be accompanied by an application supported b1' an affrda-
vit setting forth the facts on which the appellant relies to satis$ the l.lation-
al Commission that he has sufhcient cause for not preferring the appeal
within the period of limitation.r22
It shall be obligatorS'for the parties or their agents to appear before the
National Commission on the date of hearing or any other date to which
hearing may be adjourned. If the appellant or his agent fails to appear on
such date, the Commission may in its discretion either dismiss the appeal or
decide ex parte on merits. If the respondent or his agent fails to appear on
such date, the National Commission shall proceed ex parte and shall decide
the appeal on merits of the case.r2l
The appellant shall not urge or be heard in support of any ground of
objection not set forth in the memorandum, except by the'leave of the
Commission.rza But the Commission, in deciding the appeal, may not con-
fine to the grounds of objection set forth in the memorandum.r25 However,
the Commission shall not rest its decision on any other ground other than
those specified in the menorandum unless the party rvho may be affected
thereby, has been given an opportunity of being heard by the Commis-
The Commission, on such terms as it may think fit and at any stage,
adjourn the hearing ofthe appeal, but not more than one adjournment shall
ordinarily be given and the appeal should be decided, so far as possible
within ninety days from the first date of hearing.t2T The order of the Na-
tional Commission on appeal shall be signed and dated by the nembers of
the Commission and shall be communicated to the parties free of charge.r28

(x) Appeat Against the Order of the National Commission
Section 23 of the Act provides that any person aggrieved by an order
344 Gor',ernmenl and Business

made b1' the National Commission on a complaint (where the value of
goods or services and compensation claimed exceeds rupees ten lakhs) may
prefer an appeal against such order to the Supreme Court within a period of
thirty days from the date of the order. However, the Supreme Court may
entertain an appeal after the expiry of the said period of thirty days if it is
satisfied that there rvas suffrcient cause for not filing it within that period.t2e
It may be noted that an order made by the National Commission on an
appeal preferred from the orders of the State Commission shall be final and
no furlher appeal against such orders shall be preferred to the Supreme


Every Order of a District Forum, State Commission or the National
Commission shall. if no appeal has been preferred against such order under
the provisions of the AcL be final.r3o Every such order may be enforced by
the District Forum. the State Commission or the National Commission. as
the case may be, in the same manner as if it were a decree or order made by
a court in a suit pending therein.rrrHowever, in the event of its inability to
execute it, it shall be lalfirl for the District Forum. the State CommisSion or
the National Commission to send such order to the court rvithin the local
lirnits of whose jurisdiction,-(a) in the case of an order against a company
is situated, or (b) in the case of an order against any other person the place
u'here the person concerncd voluntarill' resides or carries on business or
personally lvorks for gain, is situated.rr2 The court to u'hich the order is so
sent shall execute the order as if it u'ere a decree or order sent to it for
Where a trader or a person against whom a complaint is made fails or
omits to comply lvith an1' order made by the District Forum, the State
Commission or the National Commission, as the case may be, such trader or
person shall be punishable with imprisonment for a term which shall not be
less than one montl'r but which may extend to three years, or with fine which
shall not be less than trvo thousand rupees but rvhich may extend to ten
thousand rupees, or with both.r3a However, a term lesser than the ninimum
term and the amount lesser than the minimum amount may be imposed, if
the circumstances so require.rss
The Act provides protection to the members of the Forum and the Com-
missions for action taken in good faith. According to section 38 of the Act,
no suit, prosecution or other legal proceedings shall lie against the members
of the District Forum, the State Commission or the National Commission or
any offrcer or person acting under their direction for executing any order
made by them or in respect of anlthing rvhich is in good faith done or
intended to be done by such menrber, offtcer or person under the Act or
under any rule or order made thereunder.
Chapter Eleven

lmport Control

Import control has now lost some of its relevance after the massive
liberalisation from l99l onwards, but still continues to be an important tool
in the government's armoury of economic controls. Import tariffs in some
form or other constituted an essential feature of mer-cantilist economic
policy during the greater part of the l6th and lTth centudes. From about
1860 this policy was discouraged with the spread of the free trade move-
ment, sponsored largely by Britain which had an industrial monopoly in the
world. However towards the end of the century, tlere was once again a
growing move away from free trade spearheaded by Frederick List in Ger-
many who sought to establish protected zones Zollvereins to shelter
- -
and stimulate nascent domestic industry. This took the form of a general
movement in most countries towards protection of the country's own indus-
trial and agricultural interests from foreign competition and this tendency
has prevailed ever since, assisted by special circumstances from time to
time, e.g. the two world wars which intemrpted international trade and led
to new crops ofrestrictions. The great depressions ofthe 1930s also acceler-
ated this movement, and many countries took to a policy of ..export of
unemployment" by obliging the citizens to buy home-produced goods in-
stead of imported ones.
It has also been seen that development and rising national income al-
ri'ays produce a strong tendency for imports to rise rap=idly in tlre absence of
special measures to the contrary. A higher income in any corintry calls for
an increased supply of the goods and services which are traditionally im-
ported. In India this rise has been more than proportional to the rise in
national income on account of the consumer's preference for spending a
bigger proportion of his income on manufactures of more advanced type
(automobiles and electrical goods, etc.) and the higher proportion of im-
ported machinery in the overall ratio of imports to income. The resultant
strain on foreign exchange also makes import and exchange control a neces-
sary tool for a country's economic development. The old controversy be-
tween free trade and protection hhs bec-ome largely unreal today. protection
and import control are everywheie regfoded as essential parti of national
346 Government and Business

economlc management and nationar planning everywhere.
while tariff con_
stitutes the traditional-method of import contror, a reliance
o' qrrantitative
restrictions on import has increasingly been found necessary
in ricent times
specially by the developing countries

To. sum up, import control can be said to have the following
_. general

1. To apportion the available foreign exchange among the various users
to meet the industrial input requirements of the iapital goods and
priority industries.
2. To achieve a poriry of progressive import substitution so that the
pressure built up by adverse balance of payments is reduced over a
few years.
3. There is also an element of industrial protection, viz. enabling
industries to grow to the exclusion ofcompetition from foreign

In the Indian situation there are several special factors as well
which have
influenced the Government's import poliry since independence.
rirst, in ttre
initial years after independence, an object behind Government control
rmport was to moderate price fluctuations on account of the
shortages of the
aggregare supply of certain commodities in the home market.
was further complicated by India's obligation to the Sterling
Area which
prevented the free conversion of her sterling reserves into
hard currencies.
Hence, for several years in the early 1950s, unre_
stricted import of consumers, goods througtr Open
General Licence, and this had the effect oi d serves
considerably. secondly, import control in India has
also assumed a new
dimension because some of the imports are said to be
vital to the very
operation of industrial economy, e.g. raw materiars for
cunent op.r"tro' ir,
some important industries like non-ferrous metals, oil,
raw jute, rong-sta-
pled cotton, machinery for replacement or new development. "so;
oi trr"r"
were in acute shortage, because the partition had taken
u*"y tt.iruaitiorrrt
source of supply.
Thirdly, another new dimension was added by the recurrence
of food
crises from the mid-fifties increasing India's dependence o"
average food worth Rs 120 crores was imported every year
ffioa.-b" *
from 1g56
onwards till the end of the r960s. This, coupled with tie emptrasis
industrialisation in the Second plan and an unfortunate clamour
import licences both in the public and private sectors to complete their
licensed import quota for the entire plan piriod, immediately
exhlusted our
sterling balance (over f, 124 cro;es) by 1957-5g. This created a nuje
Import Control 347

in India's balance of payments which remained more or less a standing
backdrop of India's economy until the year 1974-15. The failure of mon-
soon in 1966 and 1967 further aggravated the problem and import of food
on a massive scale was unavoidable. Even after the foodgrains availability
substarrtially improved in the 1970s Government still found it necessary to
have massive imports in the interest of building a buffer stock. Fourthly, the
need for importing defence equipment on a massive scale from 1962 on-
wards during the Third Plan Period made the balance of payments position
further acute. Finally, the crude price hike by the petroleum exporting coun-
tries from 1973 onwards put a severe strain on India's balance of payments.
Overnight India's annual oil import bill was quadnrpled from Rs 300 crores
to Rs 1,200 crores and has since then been rising periodically in a galloping
manner as in 1979-80 or in 1990 after the Kuwait crisis. This has made
continuance of import control necessary despite the recent improvements
brought about by an impressive rise in exports and remittances from abroad.
Petroleum products, foodgrains and fertilizers together account at present
for nearly three-fourths of the total increase in India's overall imports in
recent years. If they are excluded the level of imports otherwise would seem
to be somewhat lower than it was, say five or six years ago.
The following obsewation on the rationale for import control made in
the Administrative Reforms Commission's Report on Economic Admini-
stration (1969) is relevant:
"The objective under$ing import control is not simply one of achieving
a balance between thu demand and supply of foreign exchange. It is also
intended to be used as a tool for promoting economic development along
lines set out in the National Plan. The working of the market forces carmot
be relied upon to discourage the demands of sectors which are considered
less essential from the point of view of the Plan or to automatically meet the
needs of those sectors which are essential to plarmed development. Low
priority activities could be quite capable ofyielding high profits and the free
play of market forces could render essential activities commercially less
attractive than the low priority ones. It will therefore be necessary to take
positive action for channelising the resources towards high priority activities
by means of phyqical controls. The import control mechanism is also ren-
dered necessary by the heterogeneous nature and inconvertibility of the
large portion of India's foreign resources. Having committed the country's
capital to industries considered to be of'high priority, we can afford neither
to starve them of their imported input requirements nor leave them to the
mercy of price mechanism. We, therefore, consider that the present system
of import control should be retained and enforced in a manner whereby the
priorities set out for different sectors of industry are reflected ih its opera-
348 Governntent and Business


The Inrpo( and Export (contror) Act is a shofi enactment of eight
sections. Thc kcy section is Section 3 u,hich empolvers the central
nrent to make pror.isions by ordcr published in the Government Gazette '.for
prohibiting. restricting or import into, and export
of goods out of India". T thi absolute power not
onh'over the export and but also ovei the ordi_
Inport Control 349

Import Licensing Policy
Earlier the Red Book published every year outlined the Government's
import licensing policv for individual industries and for diflerent categories
of importers. The basic instrument of control ever since the exchange crisis
of 1856-57 has been quantitative restriction or blankel ban. For some unex-
plained reasons the use of tari{fs to nlop up irnport premia, or the use of
price rnechauism to regulate intports has not found uruch favour in India.
Thcrc u'as conplete reliatrce on administrativc dccisions to be made over
thc allocation of forcign exchange for practicallt,all uses in the econom\,.
Pernrissible imports have first of all to bc allocated to tu,o broad catego-
ries of users: Prilate sector and Public Sector. Imports have also to be
categoriscd betvvcen the import of rau' materials. spares and components on
the one hand and the import of capital goods and equipment on the other.
There has to be an elaborate administrative rationing of different permissi-
ble imports bv these categories among industries, and further still, by firms
and plants. For every half year. Aprit to Septembcr and October to March,
the Foreign E.xchange Budget branch of the Dcpartment of Economic Af-
fairs in the Ministn, of Finance prepares an estimate of the Foreign Ex-
change available for the half-r'ear period. Alter n.recting the first charge
expenditurcs such as dcbt repavments and Embassl, expenditures the resi-
dual amount of available foreign exchange is allocated among different
users. Here again food. fertiliscrs. petrolcum. and its products and defence
are pre-empted first At the ncxt stage the adnrinistratir.e allocation pro-
cceds on the basis of (y' allocation for both rau, naterials and equiprnent for
the different public sector undertakings under different ministries, and (ii) a
bulk allocation for the private sector's imports of raw materials, spares and
conponents. There is considerable proliferation of agcncies in the malter of
industn' and unit-u'ise allocation under each of these heads. Thus a single
unit nray rcceivc its iron and steel through the Iron and Steel Controller,
non-fcrrous metals from the Department of Mines and other imports from
the bulk quota of DGTD.
Prior to lhe phenornenal import liberalisation during the 7th plan (1985-
9()) tlicre was a strict import procedure. For each catcgoD' of licence there
rvere tuo overriding principles to be considered:

(a) Essenliality: Somc designated agency of thc Government has to cer-
tif)' that the imports asked for are essential. The import of goods
which are non-essential is severell, restricted or completely banned.
(b) Indigenotr.t non-availabillfy. Some agenc), has to clear the import
from the indigenous angles, i.e. a declaration that there is'no domes-
tic production. The import of goods which can be made locally at
350 Goverrunent ancl liu.siness

whatever cost is normally restricted or banned. This would make it
appear that it is worthwhile using any amount of local resources in
order to save any amount offoreign exchange.

Thus in addition to the licensing authority there was a sponsoring agency
certirying essentially and a clearinE agency for indigenous clearance.
The Red Book along with the Handbook prescribed the following three
broad categories of inrporters: (a) established importers, (b) actual users,
and (c) registered exporters. The intense importance of these categories has
varied from time to tinre depending on the needs of the country and the
availability of foreign exchange. In the beginning the established importers
constituted the major category and the category of registered exporters rvas
not there. At present this category of established importers' has dwindled
into insignificance, rvhile the categories of'registered exporters' and 'actual
users' have gained prominence. There rvere two simple criteria for deter-
nining entitlement of individual inrporters, viz. "historical shares', and
"registered capaciq"'. In the case of established importers the licence were
usually given on the basis of fixed percentage of the past import. Similarly a
registered e\porter was entitled to an import licence for a specified com-
modity to be used in the licensee's factory for the nanufacture of an export-
able commodig'. while other factors like anticipated changes in production
were usually taken into account. the prime consideration \vas to regulate the
current allocation of import to that made in the past Years. In the case of
'actual users' the import authorities enjol'ed a u'ide discretion. The actual
users \vere divided into three broad sub-categories, viz. small scale indus-
tries; scheduled industries registered rvith thi Director General rechnical
Development (DGTD); and scheduled industries like textiles and juie not
registered with the DGTD and also non-scheduled industries. Depending on
the broad sub-category the DGTD, the Textile commissioner, Jute commis-
sioner etc. had a key role in the sense that without their recommendation the
licensing authority could not issue the licences.

Import Licensing Procedure
under Section 3 of the Import and Expo( control Act the power to
regulate import and export is conferred on the central Government. But the
central Government by the Import control order has delegated the power
to issue licences to the Chief Controller of Imports and Exports now
redesignated as Director-General of International rrade. The chief control-
ler's powers have been further subdelegated to his subordinate offrcials like
Joint chief controller, Deputy chief controller, etc. constituting the re-
gional offrces. As the Import and Export (control) Act does not specifically
permit sub-delegation of powers of the Government, and as, under the
Import Control 351

general principles of lalv, a delegated power in the absence of express
provision cannot be further sub-delegated, the sub-delegation of imports
licensing lvas questioned in the case of CTA Pillai vs. Lohia. The Calcutta
High Court held that the Central Government had the power of conferring
on the prescribed officer the porver of issuing a licence and therefore this
had the force of lau'. It mal' be mentioned that the Handbook also mentions
the Heads of the Regional Offrccs as the licensing authority. Apart from the
Red Book indicating the polic,v and the Handbook indicating the procedure
there ars also directions on various matters pertaining 1o import licensing
issued b1' the Cliicf Controller of Imports and Exports to regional licensing
authorities in order to control their discretion so that a uniform licensing
policy is followed throughout the country.
It may be mentioned that one striking feature in the administration of
inrport control is the separation as a rule betrveen the statutory authority for
issuing import licences and the actual authority on rvhose recommendations
the licences are issued. In the case of the import of capital equipment for
scheduled industries registered with the DGTD the licensing authorities in
actual practice were nlore or less bound by the recommendations made by
the Capital Goods Committee. an inter-ministerial body for scrutinising
applications for importing capital goods. These applications were required
to be made to the Secretariat for Industrial Approval in the Ministry of
Industry rvhich after due processing places them before the Capital Goods
Committee. The detailed procedure for obtaining an import licence for
capital goods or for raw materials b1' actual industrial users is given every
.Import Trade Control Handbook of
year in the Government publication,
Rules and Procedure". Whatever the C.G. Committee
recommends is nor-
mally binding on the Chief Controller. There is no provision for such assis-
tance, recommendatory on paper but obligatory in fact, in the Import (Con-
trol) Order. Only the Handbook and the Red Book contain the necessary
provisions in this respect. This separation between the statutory and the real
authority, apart from it doubtirl legality, must be considered a lacuna in the
administration of the impon control. It can cause endless confilsion to the
applicants who may go on troubling the offrce of the Chief Controller which
is the nominal statutory authority but is in actual practice only a signing
agency following mechanically the recommendations made by the Capital
Goods Committee or other sponsoring authorities.

Impact of Import Control on Import Substitution
Clearly, one major test of the success or failure of inrport control is the
degree of import substitution which has been achieved. It has been pointed
out by Desai that there are many alternative measures of import substihrtion
all of which need not necessarily give consistent results.4 It is also diffrcult
3s2 Governntent and Busine ss

to make a value judgment as to whether import substitution in a given field
is desirable. We can only make a rough and ready assessment of the degree
to which import substitution has taken place and in what fields.
On the vyhole it can be confidently asserted that, except during the First
Plan period, the share of basic and intermediate goods has ren'rained stable.
Import substitution in respect of consumer goods was particularly rapid
during thc Second Plan period and after on account of increased domestic
production as a rcsulL of tight import control and accelerated investnrent.
Thc share of capital goods in the total inrport substitution has continued to
rise all along, although import substitution has been more pronounced since
the Second Plan reflecting thc emphasis on the production of capital goods
from lhe Second Plan onu,ards. Horvever. the importance of import substitu-
tion has not been uniform in this sector. In some industries e.g. raill,al'
wagons, pou'er transfonners, diesel engines. sugar nill machine4,, import
substitution proceeded very rapidll'. In some other areas lvhile domestic
production has increased, imports ha'r,e also remained high, e.g. machine
tools. electric notors- porver transformers. In some capital goods like ball
bearings and tractors the proportion of inrported components actually in-
During the 1950s the contribution of import substitution to the demand
for domestic production \t'as most important for capital goods. and least
important for consunrcr goods.5 Thus. import substitution has all along con-
tinued to be an inrportaut source of demand for donestic production in
capital goods industries. 11 uas onlt for a short period i.e. l9(15-66 to 1970-
7l that, in responsc to the countn's economic situation follou'ing del'alu-
ation of the rupce in 1966 and tu,o bad han'ests, the share of non-food
consumer items and of basic goods in total non-food imports rose at the
expcnse ofcapital goods. During the period l97l-72 to 1975-i6 the share of
basic irnports iu total non-food imports in terms of value has continued to
rise at the expense of capital goods. Horvever the price escalation from the
oil crisis of 1973 onrvards distorted these trends completely.

Administrative and Economic Cost of Import Control6
The comrnon points of criticism against the import control systenr in
India are not with reference to its philosophical base or its rationale, but
u'ith reference to the cumbrous and time consuming administrative proce-
dure. the absence of a t'ell-defined set of principles and criteria based on a
correct s)'stcm of priorities, and therefore, the arbitrariness and adhocism
rvhich appear to characterise it.
The follorving adverse economic effects may be identified: procedural
delays, 2. multiplicity of authorities and lack of co-ordination, 3. discrimi-
nation against small men, 4. corruption, 5. administrative and other ex-
Import Control 353

penses. 6. inflexibility, 7. absence of competition, 8. an inherent bias in
favour of industries based on imported rather than domestic inputs. 9. an-
ticipatory and automatic protection given to some industries regardless of
costs, 10. a discrimination against exports vis-a-vis domestic sales. ll. gov-
ernment's loss of revenue, 12. distributional effects of administrative alloca-
tion, 13. encouragement of indiscriminate growth of non-essential industries
on the basis of import substitution.
As regards delays, we have alreadl,discussed this subject at some length
in the chapter on industrial licensing. Administrative delays are inherent in
the u'orking of India's secretariat q,stem with its multiplicity of authorities,
the long rertical movement of files from the bottom to the top and the
general methods of rvork. The import or the exchange control system or for
that matter an1' administrative conlrol system inevitably becomes time-con-
suming in this process.
A large number of authorities are involved in the licensing procedure:
sponsoring bodies, indigenous clearance authorities, and actual licensing
authorities. Very oflen these authorities do not appear to follorv any com-
mon set of priorities. Besides the quality of information on u'hich their
decisions are presumabll'based leaves very much to be desired. The Direc-
torate of Industries of State Governments which are supposed to process the
import applications for the small scale sector in the first instance and to
attach the essentiality certificate do not have adequate information. Simi-
larlf in respect of units n'hich must seek indigenous clearance from the
DGTD, the DGTD Directorate concerned does not usualll' maintain ade-
quate information on indigenous suppliers, their capacity, capacity utilisa-
tion and the qualig, of their products and general plant conditions. To be
called upon to give indigenous clearance prior to permitting imports and
even to determine the quantitative mix of permissible imports in many cases
on the basis of inadequate or doubtful information is naturally fraught with
the possibilig' of wrong decisions or miscalculations by the DGTD.
It is true that in allocating import to the industrial sector, the needs of
priority industries, exports and small-scale are supposed to be met first, but
in point offact "there is reason to conclude that the control system discrimi
nated against the small-scale sector, as rvhen import cuts in face of a sudden
accentual,ion of the foreign exchange shortage fell relatively more acutely
on the small-scale sector and much less on the well-connected large firms. It
does not follow, of course, that the small-scale sector would have either
secured greater allocations or been more competitive if it had to purchase
imports in a free market. On the other hand, it does cast doubt on the usual
claim that the import control system made the small-scale sector better off
than under the alternative import regimes."T Also, in actual practice the
large business houses and organised companies inevitably get a somewhat
354 Government and Business

favoured treatment largely on account of the complex administrative proce-
dwe which inevitably militates against the small men. Further, in spite of
the publication of the Red Book, etc., there is always some kind of commu-
nication gap between the administrative authority and the business commu-
nity, and amongst Government agencies themselves such as the Chief Con-
troller and the customs authorities. common people do not understand the
administrative language of policy documents such as the Red Book or the
complex procedure. They also get confused as a result of the separation
between the statutory authority and the actual effective authority lying
somewhere in the sprawling Govenrment structural. Quick changes in the
import policy from time to time also confuse them.
As regards administrative and other costs we may also note what Bhaga-
wati and Srinivasan write: "The elaborate bureaucratic machinery for oper-
ating the licensing mechanisms undoubtedly involved direct costs as also
the costs resulting from the necessity for actual and potential entrepreneurs
to maintain elaborate and frequent 'contacts' with the licensing authorities.
Admittedly, alternative allocation mechanism also must necessitate 'admin-
istrative' and infonnation-gathering costs. But the specific type of .com-
mand' mechanisms involved in the lndia QR and industrial licensing re-
girnes added to these costs by making necessary expenditures to ensure
'file-pushing' by bribe-seeking bureaucrats at lower levels. It is highly dubi-
ous, for example, that the considerable growth of Indian Airlines traffrc into
Delhi from the major industrial cities such as calcutta and Bombay and the
growth of the licence-allocating bureaucrary in Delhi and elsewhere are
anything but a net cost attdbutable to the regime. And if we could only
disentangle (as we cannot) the job expansion in the bureaucracy which has
resulted from the licensing machinery, much of the enormous expansion of
current governmental expenditures during 1956-71may turn to be a net cost
of the regime."s
As iegards inflexibility, it is easy to see how the rigid enforcement of
the principles of essentiality and indigenous non-availability coupled with
the virnrally non-transferability of import licences bring about considerablb
inflexibility to the pattern of utilisation of imports. The rigid pattern of
peimissible imports, their strict itemization often by specified value for
different items and the considerable uncertainty about getting modifications
approved or even the timely availability of foreign exchange inevilably
create inflexibility leading to economic ineffrciency. This sometime led to
an excessive holding of inventories by Indian firms in the absence of flexi-
bility in the matter of inputs-mix and the transfer of inputs from one set of
users to another.
As regards absence of competition, it is very obvious that the import
allocation system virtually eliminated the possibility of competition, either
Import Control 355

foreign or domestic. Foreign competition was ruled out because of the
principle of indigenous availability. The combination of capital goods li-
censing and actual users' licensing on a fair share basis among rival firms in
any industry and industrial licensing also eliminated the possibility of entry
by new firms as well as effrciently managed expansion by the existing
firms. The fact that each firm was entitled to its share of actual users'
licences, and no more, ensured that the effrcient firms could not even legal-
ly increase their productions from the existing capacity by competing away
the scarce imports from less effrcient firms. The absence of effective com-
petition resulted in the absence of incentive to reduce cost per unit of output
and in preventing the growth of competitive effrcienry in the most efficient
units and industries. It is easy to see how a bias was created in favour ofthe
industries using imported inputs; they could get relatively greater alloca-
tions for imports under actual users' licences and hence obtain these inputs
at import-premium-exclusive prices whereas the other industries would have
to buy import-substitute, indigenous items at premium-inclusive prices (be-
cause these items fetch a price equal to c.i.f. price plus the import premia).
The former industries using relatively more imported inputs automatically
operated under a bias in their favour.
Another significant impact of the import control policy in India was that
as people were forced to buy domestic import substitutes, protebtion was
automatically extended to industries producing these substitutes regardless
of costs, effrciency and comparative advantage. So long as they made their
capacity and product known to the relevant agencies e.g. the DGTD, in
charge of indigenous clearance this protection was assured. This policy of
automatic and anticipatory protection served to divorce market-oriented in-
vestment decisions from any guidelines that international opporhrnity costs
might have otherwise provided. As regards discrimination against exports, it
is quite obvious that as the average effective export exchange rate is gener-
ally less than the effective import rate and as domestic prices of many
finished goods tend to be higher than the eq)ort prices, industries which
depended on export found themselves handicapped in the absence ofsignifi-
cant export subsidization schemes. Also, they weie handicapped by the
compulsion to use costly and sometimes below standard domestic raw mate-
rials and components while they could import cheaper and better quality
stuff and produce export competitive products. Thus frorn the beginning of
the Second Plan until the late 1960s the industrial ficdrsing policy and
imporl policy were unfavourable towards export-based manufactures, large-
ly because they had to contend with a substantial inwald-looking bias.
Another noteworthy effect of the import control system was the loss of
Government revenue that it involved in passing the profits on scarce imports
to the private sector. Wherever the import of such scarcity items was
356 Government and Business

through traders e.g. established imports' licences, Government lost revenue.
If the Government had channelled these through its own agencies or auc-
tioned them off or levied suitable tariffs, the scarcity pt"*io. would har,r
accrued to it as revenue.
Finally, since the fifties the import of manufactured consumers' goods
of a non-eslential nature was banned or severely restricted. paradoxically
the same principle of non-essentiality was not been extended to the domes-
tic production of the same or similar goods. on the other hand domestic
often encouraged at considerable foreign
ing considerations of scale. Thus the ques-
has been ignored. The question has to be
considered whether from a long-range point of view the country does not
stand to gain by allowing very limited quantities of such consumers'

exports and efficient production.

Recent Liberalisations

the position to forge a long-term import poliry
to the temptation of resorting to indiscrinrinate
sumers' goods and frittering away the valuable

This process was helped by the devastating effect of the second oil price
hike (1979-80) over India's oil import bills ind led to adverse balance of

imports regime. This had
hand, it shook Indian indu
tion on the other hand by
Import Confrol 357

products for which suf,hcient capacity had already been established in tho
country. This policy served to hurt Indian industry in a manner which could
have been avoided.
But it must be said to the credit of the I.M.F. loan that it provided India
a cushion to carry into effect certain necessary structural adjustment meas-
ures in her economy which showed their import in several years. These
measures rvhich formed part of the Sixth Plan included massive investment
in key import-saving sectors such as petroleum, vigorous export efforts,
strengthening the industrial base through import oftechnology and capital
goods, and efforts to mobilise iruvard remittance by non-resident Indians.
These measures bore fruit. As a result of increase in the domestic produc-
tion of crude oil (11.8 million.tonnes in 1977-80 to 27 million tonnes in
1984-85), import of oil as per cent of consumption declined from over 70
per cent in 1980-81 to about 34 per cent in 1984-85. (Rs 5,239 crores in
1980-81 to Rs 3,237 crores in 1983-84). During the earl-y 1981, there was a
declining trend in trade deficit despite the continued imports of foodgrains,
iron and steel and edible oil. On the whole, there was also a favourable
balance of trends and increase in foreign exchange resewes. The rate of
growth of imports which had touched 31 .3 per cent in 1980-8 I slowed down
to 8.4 per cent in l98l-82, 5.5 per cent in 1982-83 and 9.8 per cent in
1983-84. In fact a comfortable balance of payments position enabled India
to decide not to draw the last tranche of the IMF loan. But by 1985-86 with
exports growth slowing down and imports showing a sign of coming down
(an increase of 25 per cent in imports against a 0.? per cent decline in
exports). Indian trade deficit was once again become a matter of serious
concern. The balance of payment diffrculty reached a crisis by 1990-91
forcing India to once again approach the IMF for massive loan. This once
w govemment (June,
import control regime
on Trade Policy was

starting with a reasonably comfortable foreign ex-
al import regime set in. This was strengthened after
in 1981, and more so after India embarked on a
'goliry of liberal import of raw materials, capital goods and technology
during the 7th Plan. A whole range of import intensive industries grew up,
notably in the freld of consumer electronics. As the export expectations
failed to materialise simultaneously, this led to a depletion of foreign ex-
change reserves by 1989-90 bringing back once agun a serious balance of
payment crisis, and necessitating another spell of swere import compres-
sionfrom 1990 onwards.
It is a happy augury that there are indications that goveminent will no
longer tinker with the import policy announced by it biarurually but will
formulate a long-term import plan in order to meet tlte needs of the situ-
358 Government and Business

ation. Obviously crude and fertilizers must have the pride of place in any
such long-term scheme of imports. Similarly, it should be necessary to plan
in advarce the import of sensitive items like edible oils and cotton whose
scarcity, depending on crop conditions does not create price rise and general
irstability from time to time. These should, therefore, have a prior claim on
the foreign exchange resources of the country. But as regards import re-
quirements of industries, Government must review the concept of essential
and non-essential imports. The main scope for import substitution may be in
agriculture and related products, edible oils, sugar and fertilizers. There is
need for a long-term plan of importing components, spres, balancing
equipments and capital goods and machinery for replacing and modernizing
many of the units in textile, sugar, jute and engineering industries. We
cannot afford to hurt the interests of Indian manufacturels of plants and
machinery in these areas, nor harm the development of labour-intensive
technology relevant to Indian conditions. But from a long-term view-point
the weight of advantage may be in speedy modernization, and technology
replacement and upgradation in these industries which have suffered from
obsolescence rather than in waiting indefinitely to have the process com-
pleted entirely by means of plant and equipment manufactured indi-
genously. Before allowing import of foreign industrial machinery the Gov-
ernment should make an assessment of the tlpe and the strength of the
technology available in the industry in question and make sure that such
imports will not hurt the growth of indigenous technology when it is capa-
ble of seH-sustained growth. The thrust should be towards achieving some
long-term gains for our economy with a view to building up export capabili-
ty and export oriented production, agricultural self-sufficienry, and long-
term import-substitution in capital and essential consumer's goods. Above
all the import policy should be based on a reasonably long-time horizon
rather than just one year. Happily there are some indications to this effect in
the tmde policy announcements of 1991 and 1.992.
A copy of this statement is this chapter. There were several
other key liberalisations such as the partial convertibility of nrpee on trade
account (replacing the short-lived export-import script experiment) and
wentually firll convertibility on trade account in 1994. The copy of the
Export and Import Policy (1992-97) annexed to Chapter 12 is also signifr-


The Janata Govemment changed the colour of this book for 1977-78 from
ttre usual red to green with a red band But this was shortlived.
Aithough the qiestion whether the Red Book and the Handbook have
statutory force is not clearly settled, it can be safely asserted in the light
Import Control 359

of over two decades of experience that they have oome to acquire some
kind of near-stafutory foroe, There is a conflict of opinion among the
High Courts on this point. The Calcutta and the Punjab High Coruts have
held that these two documents do not have statutory force. The Madras
High Court, on the other hand, has consistently held otherwise. The Su-
preme Court has not pronounced directly on this point, but held in its
landmark decisions in Union of India vs. Indo-Afghan Agencies Ltd. that
in exceptional cases the courts may enlbrce the provisions ofthese books
even ifthey are not regarded as having statutory force.
3. AIR 1957 Cal83.
4. P. Desai Substitution in the Indian Economy I95I-62, Chapter
2. AIso see B.J. Ahmed Import Substitution and Structural Changes
Indian Manufacturing Industry 1950-1966, Journal of Developmental
Studies, Vol. 4, 1968.
5l See Desai op. cit.
6. For a good discussion on the economic impact of quantitative import
controls in India see Bhagawati and Srinivasa4 Foreign Trade Regimes
and Economic Development in India, Macmillan, Chapters lZ, 13,lS,16
and Part V.
7. Bhagauratr and Srinivasaq ,op. cit.,p. 40.
8. Bhagawati and Srinivasarl op.cit.,pp. 42-43.
9. J.Bhagawati, "Indian Balqtce of Payment Policy md Exchwrge Auc-
lions'. Oxford Economic Papers, F'ebruary, 1962.
10. Bhagawati and Srinivasary op. cit.,p. 51.
Chapter Twelve

Exports and Government policy:
Promotion and performance

The Legal frame of export control as in the case
of import control, is
qrwifa by the Import_and Export (control) Act, 1947.
u"ao s..,ion 3 0f
this Act the central Government has promulgated
the g*pofts (-controrl
order, 1962. The executiv_e authority in respect of
export control is vested
in the chief controller of lmports utta e*poir. He
responsibility of taking all follow_
is arso
iil tn
categories of
export obrigation cases, i.e. cases
import liceice ana ioretg' investm Tfl:ll,:f$:
lect to an obligation to^ expgrt a specifred percentage of the product.
export obligation is enforced through a tegit agreement
between the chief
controller and the undertaking ruppo.t.o .ittrei
uy ur"r. g"--t ., to, un
amount equivalent in value to the
lieu ofa bank guarantee (option
ties and charges including handi
agency nominated by the Governme
tion). The CCI & E also initiates pen
terms of the agreement. Apart from the
authority given by this law, Govern-
ment also uses fiscal measures for controfling
exports as and when neces-
sary' either to discourage_ export of any particular
producr of io, ono
reasons, e.9., the export duty on jute
after 1966 devaluatlorr, ttJr.""rrt
export duty on tea, etc.
But while export control has always been an
accepted toor in a country,s
economic poliry, what has been much more important
in the Indian context
in the last four decades is export promotion rather than
export control.
India's exports constitute only about 6yo of her
GNp. rnis irates'ner a
co'ntry with very rnodest export growth record. The
change shortage from the mid-frftiis onwards
chronic;;;L" .*_
and theneeds for i_plortirrg
large quantities of foodgrains, defence equipment
and other capital goods
370 Government and Busine,ss

sity. The aim of
to import. The
it all the more

procedural constraints.
The growth of India's exports in spite of the spectacular increases in
recent yearsr has been siow over a period of three decades. our exports
constitute only about 60/, of our GNp. A comparison of the volume indices
of world's and India's exports as shown in the following table reveals the
continuous decline of India's share in the world trade.

Taels 12.l
India's Share in World Trade
(US dollars in millions)

1948 1958 1967 1968 t970 1972 1973 t974
Exports 1,387 t,222 I,613 1,761 2.026 2,415 2,946 3,906
Exports 57.500 108,600 215,700 239,j00 313,400 417,t00 577,300 842,s00
% of I to 2 2.4 l.t 0.8 0.7 0.6 0.6 0.5 0 5

source : u-N. Yearbook of Inrernationar rrade staristics, 1974, speciat
ble A.
Currenfly India's percentage share has gone down to 0.4yo.
It may also be highlighted that India's exports grew at the rate of only 2
per cent per annum between 1950-51 and 196g-69 and 6 per
cent per annum
between 1968-69 and rgil-i2. The galloping increases itrereatei (22.3 per
cent in 1972-73,28 per,cent in 1973-74,32 per cent in rg74-i5,18.4 per
cent in 19'75-76) to a large extent reflects inflation or special windfall
opportunities such as sugar and silver.2 During the period l9g0-g9 India,s
exports rose by only 4.7%o. It is dismal performance as compared
to the
export growth of several countries during this period e.g. china (ll.gyo),
Kore-a (14.7%), Pakistan (8.4yo), Sri Lanka (5.8%). goth china
and India€ exporting at roughly the same level around lgil-i2 (worth
$ 2.2
billionand. $ 2.2 billion respective$). In the last two decades India,s
ports have risen barely to the lwel of $ 25 billion while china's
Exports and Government Policy, Promotion and performance 371

manufactured jute, tea, cotton textiles, manufactured tobacco, groundnut
and groundnut oil and linseed and linseed oil amounted to Rs 5,74b millions
rvhich n'as 16.5 per cent ofthe aggregate earnings generated bv these com-
modities. In the sixties there rvere further declines for jute, tea and colton
textiles. Taking the case of cotton textiles Mellor and Lelea calculated that
India's share in all the exports oftexliles to less developed countries u,hich
stood at 58 per cent in 1953 fell to mere 8 per cent in 1969. The combined
share of major traditional exports, viz, jute manufacturers, tea. coffee, cot-
ton piece goods and semi-processed leather in India's total exports declined
from 53.5 per cent in 1955-56 to 2g per cent in lgil-75j ihe combined
share of se'en products (ute goods. tea, cotton textiles, leather and leather
products, iron ore. oil cakes and casheu,kernels) which accounted for

rs. Thus by the 70s
of clothing, machin-
res, and her clothing
had started at zeto
several years back. Similarly, in textiles, Korea forged ahead of India,
Japan's textiles export already 75 per cent larger than India in 1953
trebled by 1969.
The so-called boom in garment export in recent years should not make
372 Governrnent and Business

and that growth has not been as impressive as it could have been except
rvhen the base is markedly lorver than that of those competitors. Thus there
is no ground for complacenry, and we should seriously examine the poliry
system, the variable which are rvithin India's control as distinct from those
rvhich are no1, and the effectiveness of the incentives and promotional
Expanding exports depend both on factors rvhich are rvi(hin India's
control (e.g. r'olume of exports) and those u'hich are outsidc (e.g. market
access, e.rport prices, import prices). We are onlv concerned with the for-
mer. The volume of expo( is the most important factor u'hich India can
influence lith least difficulty. A I per cent per annum rate of grolth of the
volume of export can have the same effect on the actual capacity to import
as an equivalent rate of improvement in the term of trade which is much
more difficult to achieve. The volume of exports is determined by several
key factors, viz. demand, price, qualitv and availability. These u'ill vary
from product to product.


A nunrber of serious domestic constraints handicap India's exports. On the
basis of Manmohan Singh's detailed commoditv-u'ise analy'sis of India's
declining performance throughout the 1954s.6 Bhagarvati and Desai' con-
cluded that except for a ferv items, such as iron ore, the stagnation of e.rport
earnings rvas largely' due to domestic policies l'hich frequently led to falling
of shares in the traditional exports and inadequate expansion of nerv exports
on account ofthe absence ofadequate export promotion measures.
lndia's export strategy'is necessarily conditioned by her general policy
of industrial grorvth and the basic inadequacies and ineffrcienry of the
industrial policy system. Her industrial policies have traditionally been
characterized by an excessive reliance on quantitative restrictions on in-
crease of production by hrms and on the impo( of essential inputs, an
emphasis on across-the-board import substitution as an overriding aim, a
non-recognition ofthe value ofthe economies of scale and the resultant low
scale production and inadequate emphasis on the cost aspect. These policies
are administered by a highly bureaucratized economic administration which
is more often than not remote from the scene of action and which is not
knorvn for quick or timely decisions. The pathetic fact remains that Indian
industry is not organised effrciently enough to respond to needs and de-
mands of international business.
By any recognised international standard India's industries,are frag-
mented into a large number of small firms. Just to take a few examples,
seven firms shared a total production of 32,000 tractors in 1972-'..3, and ten
Exports and Government Policy, Pronrction and Perfonnance 3'73

manufacturers shared a total installed capacity of 81,000 units of commer-
cial vehicles. Such fragmentation, apart from making high price inevitable,
also creates problems in marketing, services, product derrelopment, research
and development, and obsolescence, the last trvo factors preventing Indian
hrms from keeping up u'ith rvorld der.'elopments. The quality of production
in a rather uncompetitive environnent is often poor. Manf industries estab-
lished under a policl' of import substitution lvith the sole object of meeting
the limitcd domestic markct find it diffrcult to thrivc in the conrpctitive
international cuvirorurrcnt. ln the prevailing sellers' market thc)' are not
accustomed 1o product development, product improvement, cost control or
cost benefit studies bascd on the economies of scale and good marketing
including prompt deli'r'ery and afler sales sen'ice qualities rvhich are pre-
conditions for successful intcrnational marketing.- Also there are rigid curbs
on collaboration agreenrent, import of technolog and capital cquipment.
and import of cheaper ratv materials and components. These nol only make
India's exportable products costll and unsatisfacton', but also saddle the
econonu rvith high cost industry'. This is further compounded in man1, cascs
by high levels of excise and import duties rvhich tend to push up the cost of
both rau' materials and hnished goods above their rvorld prices and thus
make our exports non-competitive. Experience has shorvn that it is not
alrvavs possible to combine import substitution u'ith e.rport promotion. The
strong bias in favour of import substitution encourage firms to produce a
large number of products rather than concentrating on a fel u,hich can
compete in the international market. Here again, formal or informal restric-
tions on the expansion of the large business houses and foreign companies
sometimes stand in the l'ay of building up an e\portable surplus. The rising
domestic market, combined with the uncertaing and lower profitability of
export discourages these firms from the export market and encourages them
to concentrate rather on the sheltered domestic market rvhere high prices
and near-monopolistic conditions prevail. There is no incentive for either
efficient production or modernization, both of which are essential condi-
tions for good export performance. These constraints tend to impair produc-
tion even when it is planned for export.
Apart liom the basic economic ineffrcienry of India's industrial struc-
ture and the high cost of inputs, there are also many other problems created
by the policy environment, e.g., restrictions on multiple shift specially af-
fecting industries like electronic and garment: price control on some indus-
tries; canalizing ofimports through state trading agencies creating delay and
raising cost; the uncertainty, delay and ad hocism characterizing the system,
etc. Other important factors for India's lacklustre export performance are:
(1) undue dependence on traditional exports (2) the absence ofinternational
competitive efficiency in terms of price, quality and availabld quantity (3) a
374 Government and Business

more attractive domestic market (4) infrastructural inadequacies e.g. power
suppll', telecommunication, transport, port capacity (5) unsatisfactory
labour relations, productivity and aggressive trade unionism (6) inadequate
and more costly export credit (7) external constraints such as recessionary
conditions in several regions, the strict quota system followed by some
countries and groupings and'the collapse of the former USSR and mpee
trade agreement u'ith East European countries (8) the recent import com-
prcssion u'hich allected the import intensirre export units.
The donresLic prices of nan1, commodiLies are generallv rlcll above
international prices. Hence exports on a full cost basis do not become
profitable rvithout the export incentives. Even with the incentives export
profftbility appears to be roughly of the same level as that of domestic sale.
As the export prices are rvell below the domestic prices, there is no particu-
lar compulsion from the angle of business prof,itability to concentrate on
e\port. Naturally thc highest ratio of exports to sale is observed in those
industries rvhere exports appear to be most prohtable, e.g., textile machin-
erl'. A long-term export policy for India must therefore depend on the
elimination of some of the clearly identified constraints, viz., (1) discour-
agement ofthe economies of scale, quality production and product develop-
ment. (2) severe restrictions on imports of inputs and capital goods required
for export, (3) an exchange rate and export duty subsidies which do not
make export really attractive. The immediate and main thrust in policy
should be to create an enlironment u'here exports are made profitable in
comparison rvith domestic sales and u'here Indian industry can easily create
exportable surplus production u'ithout being hampered by polio' or physical
constraints or bt'.shortage of the required imports. A poliry for continuous
long-term grou'th uill also require a \/er)' significant reorientation of the
business strategv of India's major firms rvith a lot of attention to better
marketing and afler sales service, better quali! control and improved deliv-
er1', and also corresponding changes in Governnent's industrial and trade

This brings us to the incentives given by the Government till recently for
encouraging export. The export incentives which were adopted in the past
took three broad forms: (l) fiscal measures such as outright cash subsidy,
exemption from sales tax on final sales, refund of indirect taxes, direct tax
concessions through duty drawbacks, rail freight concessions for offsetting
the transport disadvantage; (2) import entitlement schemes; and (3) conces-
sional credit. These also include other miscellaneous things such as assis-
tance in market research, award for outstanding export performance, release
of foreign exchange for export promotion, blanket permits fcir export pro-
Export.s and Government Policy, Pronrotion and Perfonnance 375

motion tours abroad, and priority treatment in the allotment of scarcity raw
materials used in export production at concessional prices. But the system
of incentives and subsidies apart from being very costly tended to be admin-
istration-ridden and introduced much distortions and for exemption.

Export Credit
In the field of export ltnauce on l'hich cxport promotion dcpends con'
siderabll'. the Reserv'e Bank of India plal'ed a cmcial role. It controlled and
co-ordinated the banking facilities to make export fittauce at,ailable at the
riglrt time and in right quantum. It maintained concessional interest rate that
varied from time to time. For several y'ears the RBI's funcdons were mostly
taken over by'I.D.B.I. rvhich established its o$n export credit division. This
continued till 1982 u'hen the nell'I1' 5s1 up Export Import Bank took over
from the LD.B.I. the export hnancing and reltnancing schemes rvhich the
latter uas discharging till then.
The Central Government has also set up the Export Credit and Guaran-
tee Corporation for providing investment risk insurance to exporters. The
risk value representing to total value of the export cot'ered by the ECGC's
insurance policies reached Rs 2,121 crores in 1975. It has extended its
operation to cover joint ventures and turnkev projects in third countries and
to blanket credit coverage to banks in respect of all pre-shipment advances.

Export Houscs
Among the promotional measures rve should also note the Expo( House
Scheme undcr u'hich an organisation on obtaining a Recognition Certihcate
as Export House from the Ministrl' of Commerce (Chief Controller of Im-
ports and Exports) could get a number of incentives and facilities which
van'from time to time.
In the past the impact of these incentives rvas affected by their uncer-
tainty and by the delays in payment of monel' and granting of licences.
Since these incentives are r.ital for long-term planning of profitability of
export, it is necessary that the conception of the time horizon should be
implemented. From the analt'sis of all the major export incentives made
above it is quite clear that the entire s)'stem rvas very complex and admini-
stration-ridden. Also, the effectiveness of these incentives was very often
reduced by the physical distance betrveen the centre of decision-making and
the manufacture-exporters at the grass-root levels, specially the smaller
ones, the absence of delegation to the field offrces, and the immense discre-
tionary authority vested in the agencies rvhich is capable of being used
arbitrarily. Not only is the range of commodities large and the policies
overlapping, but they tend to be very detailed and spec'fic, involvirig alarge
,.376 ---
Government and Business

Exporls and Governrtent Policy, Promotion and Performance 377

becomes an essential condition for long-term export growth. Further, a very
necessar)'condition for export expansion is the freedom for over-all indus-
trial expansion something that the Industrial policy does not normally


Sen icing b1' export pronrotion bodies is recognised bv the Government of
lndia as one of the irnportant inputs for the grorth of exports. Various
export promotion institutions like the Trade Derelopment Authority (norv
merged u'ith the Indian Trade Fair Organisation), Export Promolion Coun-
cils, Commodity Boards (e.g. Tea Board, Coffee Board, Tobacco Board),
Federation of Indian Export Organization and a few other organizations are
activel)' engaged in providing export sen'ices. The roles played in recent
1'ears b1' the Conference of Indian lndustries (formerly Confederation of
Engineering Industries) and the Engineering Exports Pronotion Council in
spectacularll' stepping up the expofl of Indian engineering goods have been
commendable. But the services provided b1' the Export-Promotion Councils
and Commodity Boards cover only exporters in the product group assigned
to the respective bodr'. The Trade Development AuLhority established by
thc Central Government in pursuance of the E.rport Policv Resolution of the
Parliament. 1970 rvas expected to provide all-round export assistance Its
assistance las product-spccific, unit-specific and market-specific.
The infornation needs of the business communitv have grorvn consid-
crabll in vierv of the recent diversification of India's export trade in terms
of products and markets. To meet these requirements. a nnmber of organiza-
tions, in the public and private sector. have been set up. These organisa-
tions. inter alia, prolide a *'ide spectrum of information on different aspects
of export marketing. Some of the organizations engaged in the task of
providing export information serv'ices are mentioned belou,:

1. Department of Commercial Intelligence and Statistics (DCI&S)
2. Directorate of Exhibitions and Commercial Publicitl' (DECP),
Ministry of Comnerce
3. Der,'elopment Commissioner for Small Scale Industries (DCSSI)
4. Export Promotion Councils for various industries
5. Indian Institute of Foreign Trade (IIFT)
6. Federation of Indian Export Organization (FIEO)
7. Indian Investment Centre (IIC)
8. Association of Indian Engineering Industries
9. Export Credit and Guarantee Corporation (ECGC)
10. Commodig'Boards, e.g. Tea Board, Coffee Board. Tobacco Board
378 Government and Business

I L Marine Products Development Authority
12 Trade Development Authority (TDA), now merged
with the Indian
Trade Fair Authoritl,.

tives abroad, and the export r.l"ings of
and Trade and Industry Associations


we should also note two other areas, somewhal inter-related in nature.
otrer exciting potentialiry in relation to India's total export
comlng years:
(i) consultancy services and
(ii) joint velltures, abroad.
Exports and Government Policy, Promotion and PerJbrmance 379


During the 70s Indian consultancy organizations, both in the public and
private sectors, have established themselves in the developing countries
because of the conrparative attractiveness for them of the intermediate tech-
nologies developed in India and also because of their lower costs compared
to the cost of Western consultants.
There rvere a numbcr of lndian consultancl'organizations rvhiclr have
been able to give efficient technical sen,ices to developing countries. These
sen,ices have resulted not onl1, in direct earnings offoreign exchange- but in
a number ofcases in increased exports oflndian manufacturers.
Some of the consultancy organizalions established in the public sectors,
u'hich have contributed in exports of Indian technological skills. Indian
knor,v-horv and the technical services in developing countries are mentioned
1. National Industrial Development Corporation.
It has handled 30 projects in African and Asian countries mainlS' in the
line of Chemicals, Mining. Metallurgy, Blectronics, Civil Engineering, Con-
structions and Techno-Economic Sen'ices for setting up of projects on turn-
key basis.
2. National Research Development Corporation.
It has sold Suri Transmissions to West Germanl', a high draught Kiln to
Nepal and technologies for manufacture of Hectivated Carbon to Philip-
pines. This firm has also sold technologies to LIK for the manufacture of
Dry Ready-to-rvet Sausage Castings and also to USA, a technology for Wet-
Heat-Resistant Leather.
3. Hindustan Machine Tools Ltd.
This firm has signed a technical collaboration agreement with Messers
Wickman lt{achine Tool Sales Ltd., UK for manufacture of Short piece
Turning Machines (mini-chucker) which have been entirely developed and
designed by HMT, and also agreements to provide knorv-horv to Ceylon
Steel Corporation, Sri Lanka and machine tool manufacturing company of
Philippines for manufacture of simple tlpe of machines tools.
4. Engineering Projects (India) Ltd.
This is a consortium of 7 leading public sector enterprises who are
manufacturing various plants and machinery in India. This firm has pro-
vided consultancy services to Yugoslavia, Kurvait, Iran and other countries.
Recently EPI have silned an agreement for conducting a feasibility study
for setting up a steel plant in Ghana.
5. Engineers India Limited.
- This firm is setting up trvo refineries in Iran and fertiliser and refinory
project in Iraq.
380 Government and Business

6. Metallurgical and Engineering Consultants India Limited.
This hrm is at present car4 mg oul pre-investment feasibility study for
an integrated steel plant in Singapore.
7. Water and Pou'er Development Consultanry Services (India) Limited.
This firm is providing techniCal services for the establishment of a hy-
dro-electric project in Nepal and a few hydel schemes in Afghanistan, Cam-
bodia. and in Indonesia and Iraq and water resources for flood control'
8. Bharat Hearl' Elcctricals.
This hrm has exported equipnrent like Transformers, Boilers and taken
up erection of u'orks of the same on turn-key basis in several countries.
9. Rail India Technical and Economic Sen'ices Ltd.
This firm has been doing useful work in executing contracts for sun'ey-
ing and conducting feasibililv studies in foreign countries e.g. Syria and
But as the deqade of the 80s wore on, the ol'erall performance declined.
Mosl of them garre \\ay to superior competitors from countries such as
South Korea. Clearly the prevailirlg work ethos in a protected economy, the
productivitl' norns. infrastructural inadcquacies for drawal of inputs from
home trade ard lack of concern for timely completion and cost and time
overruns do rrot help the grolth of international competitiveness


Joint ventures abroad bi' tndian firms have become significant in recent
years. Sometimes they take the form of joint entelprises uith firms from the
major trading partners of India in third countries. The changing pattern of
India's trade has also brought out the need for inr,'estment abroad by Indian
exporters of capital goods and turnkey projects. Recent trade agreements
be(ween India and several countries have dmphasized such joint projects.
The Ministry of Commerce is the focal agenry which approves joint ven-
tures abroad, on the basis of scrutiny by an inter-Ministerial Committee.
Initially, the contribution by the Indian party could only be in the form of
capital goods exports. Under the policy announced in 1976 the Government
also decided to permit cash participation in equilv in special cases. From
around 1980 for about tlvo ),ears a scheme for permitting 100 per cent
overseas subsidiaries by Indian companies on a very selective ventures. The
Indian joint ventures numbering around 300 by 1985 have become signifi-
cant in a number of countries. There are some leading success stories.
Unfortunatell' the mortality rate of these joint ventures has been very
high and about 50 per cent ofthem till now seem to have fallen by the way
side. Then again. their impaa by way of net inflorv of resources has been
Exports and Government Policy, Prornotion and Performance 381

insignificant. There is prima facie suspicion that induslrialists often use
these joint ventures abroad as a device to spend money or build up hidden
reserves abroad. There is therefore considerable room for introducing cor-
rect projcct appraisal, cost benefit analysis and better administrative super-
vision along rvith required commercial flexibilitl'. Joint ventures abroad are
important not because of u'hat thel' have achieved. but because of rvhat thev
are capable of achieving.
In 1992 thc goyernrnent announced a liberalised policv for permitting
joint vcntures outside. Under this polic1,. capital rcpatrialion ovcrscas is
once again permissible for forrning joint r enturcs. An automatic clearance
route is available for the first time and nou' all cases invoh'ing an equiq,
investment of up to $ 2 million in joint ventures abroad and having a cash
remittance component of up to $ 500,000 are eligible for automatic ap-
proval within 30 da1's.
It is estimated that this u'ill take care of up to 90 per cent of the
proposals to invest in ventures abroad. The remaining ferv cases rvill be
considcred on a case-to-case basis, by the inter-ministerial committee as
was being done earlier. But norv a time limit of 90 days has been imposed
for clearance of proposals rvhich ma1. require spccific approval by the com-
No obligation. under the ne*' policl'. no specific obligation on the
Indian paft)' in the mattcr of remittances on account of dividends, fees,
royalties etc. uill be imposed. All entitlements to the Indian partl'from the
joint venture abroad are, however, required to be remitted to India rvithin 60
days of their becoming due.
The policy permits joint ventures in u'hich there is an Indian nrinoritv
shareholding to diversi$ its activities, participatc in thc equig' of anorhcr
concern or proruote a second-generation foreign concern or alter its sharc
capital rvithout prior approval of the Government of India.
A u'holly-orvned subsidiary or a joint venture *,ith an Indian nrajority
shareholding rvill also be similarly permitted to providc autonratic obliga-
tion-frec approral to make clnngcs subject to {ulfilling ccrtain criteria of
Reinvestment b1 Tndian promoters in eristing joint r,entures for sub-
scribing to rights issue or issue of additional share capital by the foreign
concern u'ill also noll'be available under the automatic route.
Performance Report. The policl' requires the Indian party in a joint
venture abroad to submit to thc ministry of commerce and the Resen'e Bank
of India (RBI) an annual performance report in respect of the foreign con-
cern, together with a certihed copy' of the audited annual accounts, within
30 dals of the expiry of the statuary period for hnalisation of the audited
annual accounts applicable in the host country. Together vyith the annual
382 Government and Business

performance report, the Indian party shau furnish a detailed statement
of all
the entitlements due to it from the foreign concern and the status of their
remittance to India.


In 1982 the Central Governrirent established a specialized institution viz..

fully floated several bonds in the overseas capital market.


The policies recommended by the committee on Trade policies (19g5)
of much significance. The terns of reference of Commiite. ,urr.,
(i) to revierv the present structure of export and import policies:
(ii) to exanrine the effecti'eness of export promotion measures in
terms of their impact on actual export perforrnance:
(iii) to suggest rationalisation and improvements, wherever necessan.
in export policies: and

Strongly endorsing the liberalisation philosophy, the committee broadlv

(i) activ'e promotion of exports:
(ii) emphasis of ''growth-led exports', rather than on '.export-led
(iii) effrcient import substitution rather than import substitution per se:
(iv) more liberal access to imports of technology in most sectois of the
economy; and
(v) an integrated view of trade, industrial licensing and fiscal policies
in order to attain optimality in the development efforts. It also
recommends a number of fiscal reforms covering the scheme of
Exports and Governnrcnt Policy, Promotion and Performance 3E3

incentives, concessions and facilities to exporters, protection to
import substitutes and streamlining of the administrative delivery

The con-rmittee by and large avoided ideological issues and concentra-
tion on a series of practical measures rvith emphasis on export promotion
and reemphasis on import substitution. The repoft contains:

(i) a cornprehensive revierv of the entire gamut of trade policies:
(ii) a consistenl set of reconrrnendatioru in lavour of outrvard looking
policies r.l,ith emphasis on export promotions and deemphasis on
import substitution;
(iii) an objective evaluation of the present scheme of incentives. con-
cessions ald facilities in the trade sector u,ith suggestions for modi-
fications in their design and operation.
Gro*thJed export: The main thrust of the report is that our accent
should be on growth-led exports rather than on export-led grou'th. contrary
to first impressions. this is not an exercise in semantics for the implicatiors
of the tuo approaches are indeed non-trivial. The shifl in emphasis implies
that given the size and its present stage of development, lndia should not
contemplate economic grouth through exports as did raiu'an and Korea and
also that production for export, at least in the long run. musl constitute an
integral part of domestic production.
By emphasizing gronth-led exports the committee have chosen the
modest option of e\port grorlth mainly as a means of financing increasing
impo(s and mlcd oul the other ambitious option advocated by. many of an
export-led grolvth slrateg)'. Indian exports suffer from several structural
rveaknesses. There has been a consistent fall in India's share ofrvorld trade
from 2 per cent in 1950 to 0.42 per cent in 19g0. Further, this decline is
pewasive in all sectors and across all markct segments. This is, of course, at
least partly due to the enonnous increase in the q,eightage of oil in u,orld
trade since the early seventies. Much of the absolute grouth in India's
exports has been orving to the grou'th of 1he markets rather than anf in-
creased market share. There has been a vew marginal accent in our econ-
omy on specialisation and production for export. our external sector re-
sponds slowly to nerv opportunities in the u,orld market whereas recessions
hit us quickly and forcefully. This shou's an underlying absence of resil-
ience in our export production sector. Also our export sector suffers from
lolv levels of productivity relative to international standards. outdated tech-
nology, high cost ofinputs, inadequate infrastructural support and uncertain
policy environment.
The committee recogniscs these constrainls and rveaknesses and empha-
384 Governmen t and Busittess

sizes that India's failure on the export front, "... remains very much a
problem of production and in a macro-econontic sense, it is unrealistic to
expect that exports rvould grow significantly faster than real national in-
come." This diagnosis of the conrtnittee that out problem of exports has
been a problem of production, althouglt debatable is largely true.
While there is no objection to the Committee's fundamental assumption
of the close correlation betu,een domestic production and expotls and bc-
twecn grouth irr GNP and groulh in exports. the Contnrittec secnrs lo ltavc
failcd to appreciate that slol' grorth of erports nta\ r'lol necessarih' bc llrc
effect oflorv production level, but can also be the causc, and lhat ellcourag-
ing specialisation in export sector can some timcs yield good results, We
should therefore identi$ and specialise in secLors t't'ltere u'e ltave contpara-
tive advantage not only' in the short-run but also in the long-ntu. and should
not vierv exports only as a problem ofproduction.
In revieu'ing the schcmes for incentilcs and concessions frlr exports. tlte
Committee strongly pleads that the export promotion policics tnusl graduate
from an emphasis on compensation to an enrphasis on incentive and relvard.
Horv this should be attained is not clearly spel( out although some of its
recommendations, especialll' those relating to inconrc tax cottcessions are in
the nature of express incentirres rather than simple compensation.
The improvements in the policl'and procedure goverrting the dun drau-
back scheme suggested b1'the committee merit immediate consideration.
On the general issue of export promotion vs. impon substitution the
committee enphasises:
"... export promotion and import substitution are neither mutualll exclu-
sive nor alternatirre strategies of development. They reprcscnt tu,o sides of
the same coin ... In principle. therefore, export pronrotion and intporl
substitution should receive equal attention. At the margin, horvever. thcre is
a case for preference in favour ofthe export sector." It should be recognised
holel'er, that expo( promotion and import substitution are not totallf inde-
pendent of each other. In our trade policy, there has been a tradition of
penalising exports for the sake of prontoting import substitutiott Not on[1'
rvas the degree of protection for exports verv often negative but evcn thc
effective e.rchange rate for e.\ports rvas significantly lotter than thal for
producing imporlables. Analrtical studics shorv that even the 1966 devalu-
ation. instead of being neutral in its effcct on exports vis-a-r'is import sub-
stitution, carried a bias in favour ofthe latter


In recent years there havc been some significant shifts in enrphasis in the
export promotion poliry of the Government in tune with the nerv trends
Exports and Government Policy, Promotion and Performance 385

towards pragmatism seen in the overall industrial licensing poliry and pro-
cedure. These are important not only because they are likely to have a
favourable impact on the export performance. In 1989, profits earned on
exports were made exempt from Corporation Income-Tax (Section 80 HI{C
of the Income-tax Act). In a way, this is a much more valuable incentive
than providing artificial crutches like cash compensatory support or duty
draw back. The downward adjustment of the Rupee in terms of the US
dollar by 18 per cent in July, 1991 was also intended among other tbings to
make exports more aftractive. This comprehensive package of stabilisation
measures were followed by the new 5-year Exim Policy announced on 31st
March, 1992 which has brought about massive deregulation of govern-
ment's functions and has made trade free subject to a small negative list. A
summary of this short document, is given in the Annexure to this chapter.
The renaming of the offrce of Chief Controller of Imports and Exports as
Development Commission of Exports symbolises the change.


For long-term export growth the removal of tlte known constraints on effr-
cient production must form an important part of the export strategJi. Some
of the basic points that need emphasis in the overall poliry system are: (l)
Incentives are required over a longer time-horizon given the general penali-
sation of exports implicit in the trade policy system. (2) The incentive
system should be simple and easily understood. (3) The cash incentive
system being prone to abuses, incentives through tax reliefs and concessions
as an alternative system should be considered. The pgssibility and compara-
tive merits of differenlial rates of taxation on prohts earned on exports
should be seriously examined. (4) Exporters must have easy access to what-
ever imported inputs are required. (5) The creation of exportable surpluses
in an environment of rising demands will have to be given some attention.
Some of the recent improvements have been pady due to conscious depri-
vation of the, home market. A balance has to be struck between home
consumption and exports. It is necessary to emphasize the need to link
exports rvith specially sponsored export-oriented projects designed to pro-
duce exportable surplus. (6) Emphasis should be on the most effrcient use of
India's own resources on the basis of better utilization of the unit value
rather than the export of any and all goods manufactured in India. To take
one example, the present system offers parallel incentive to all export com-
modilies irrespective of their relative competitive ability and economic
strength. But we should also consider having a more discriminatory ap-
propch where some commodities may need greatil incentive than others.
Similarly, since export prices differ according to destination the destina-
tional aspects of exports must also receive special consideration. (7) Be-
386 Government and Businiss

sides, export incentives can also be linked to performance of individual
firms or units based on the ratio of export to net sale. The concept of
incentives should also have some relationship with the econornic use of
national resources. (8) India has a natural advantage ofproximity in relation
to the expanding west Asian and East and south-East Asian Markets. A
vigorous marketing strategy should enable her to gain their markets and also
the market of developing countries for those goods in which she has an
export potential, all the more so when a world-wide inflation has made her
goods relatively competitive. Traditionally, India has relied heavily on the
western world for her exports. In 1983-84, 44.2 per cent of her exports went
to the industrialised countries including Japan.
Eastern Europe and oPEC accounted for 16.3 per cent and g.9 per cent
respectively. Developing countries excluding opEC form the destination for
15.8 per cent of India's exports in l9g3-94. Thus, it will be seen that
although the percentage of oECD countries as destinations of India's ex-

a developing country like South Kore
ways in these regions. Her share in the
Asia is only 0.9 per cent. A vigorous
regions can have infinite potential. (9) The export thrust given in the gth
Plan on utilising the export potential of Indian agriculture is a welcome

a misfortune, but as a
source of supplies for
light machinery and a
need considerable vol-

tional export items, and on restrictive barriers imposed by a few countries
Expoyts and Government Policy, Promotion and Perforrnance 381

on few items (e.g. quota on textiles). This engrossment has overlooked
important shifts in export products, patterns of trade and the emergence of
new markets. To take one example, Hong Kong, Korea and lately China are
exporting toys worth billions of dollars to North America. There are no
quotas in these products. What has prevented India rvith her tradition of
craftsman from taking adrantage of these growing markets ? (12) Expor
efforts in India are considerably handicapped b1'the inadequate infrastruc-
ture, particularly in the fields of telecommunication. roads, air senices, port
and shipping facilities, railrvays and power supply. Inadequate and irregular
power supply, uncertain telex on telephone facilities and difficulties com-
munication pattern make it unconpetitive for Indian exporters vis-a-vis
exporters in e.xportoriented economies. (13) We have to make a determined
effort to involve the State governments in the export efforts. While in China
the provinces can export on their orvn, in our country the state authoritie:
have an indifferent and at times even hostile attitude to exports rvhich, i,
their perception, benef,rt only the Central Government. This attitudinal bar
rier needs to be broken by devising lvays and rneans through which Stat
governments can be given some incentives in all incremerrtal eryort gains
e.g. a share in the use of the foreign exchange earned through additional
export efforts. (14) Export credit must be delinked fron the general credit
and monetarl, policies. and made cheaper. Othenvise, our exporters borrorv-
ings funds at ll/o or so, just cannot compete with exporters elsewhere with
access to funds at 4%o or 5o/o. (15) A direct nexus can be established between
the open foreign direct investment being follorved by some countries in
recent decades and their impressive export performance e.g. China, Malay-
sia, Singapore, Thailand, Indonesia. India's notorious negative poliry since
the late 1960s in relation to foreign direct investment has also been a
contributory factor. (16) India'a ports constitute a serous bottleneck. In con-
junction with inadequate railway capacity and congested road traffrc they
lvould hamper any serious effort to spectacularly step,up our export perfor-
mance. They need priority attention on an emergenry basis.
Ifthese constraints are eliminated and ifthe trends in the recent past are
any indication, around 13 to 15 per cent gronth ofexports per annum seems
maintainable. Even the 8th Plan target of 13.6 per cent in value terms is not
inrpossible. India's export growth during the period 1992-96 has been irn-
pressive. In 1993-94 exports grerv at a rate of over 2l%o in doilar terms and
iver 33Yo in rupees. The least that India can do is to try to continjue this rate
or atleast keep pace with the ilverage rate of increase in world exports which
had grown at an annual compound rate of 15 to 20 per cent during the last
two decades.
In the long run India's export growth will depend both on continued
vigil rvith regard to traditional exports and determined stride forward in
388 Government and Business

certain non-traditional items. we have to recognise the downward trends of
our traditional items like jute, cotton textiles and oil cakes and try to teverse
them by taking special steps such as investments in incrgased production of
high potential textile items like denim, canvas, etc., and in finding newer
uses of jute. On the other hand, continued emphasis is necessary on some
non-traditional items like engineering goods, machine products, apparels,
handicrafts, electronic goods, and hnished leather and leather goods, all of
rvhich ha've the potential to gro\,\, at 15 per cent per annurn. A leading
example is soflrvare export which had grorvn in the last fir,c )'ears at a
fantastic pace from 0 to over Rs 1000 crores. It should not be difficult to
increase the export ratio of leading companies to say, 20 per cent of the
production and that alone should boost up the total export figures very
appreciably. But for achieving that, along rvith Governmental help and
incentive, simplification of policies and procedure and a reorientation of
export marketing is essential. Marketing has all along been a rveak point
with Indian industry. Indian exporters must diversif in respect of both
ner!'er commodities and nerver countries in West Asia, Africa, and South-
East Asia which offer vast opportunities. They must draw up long-range
marketing plans based on actual market surveys and implement them \4,ith
sincerity, dive and imagination. Other defrciencies u,hich must be remedied
are poor and uncertain qualit1,, delayed delirerl,. absence of after-sales
services and lack of team spirit or consortium approach among Indian
manufacturer-exporters. Some of the recent policl, changes such as freeing
industry from shackles of licensed capacity constraint for exportable pro-
duction, excluding production meant for exports from the turn-over of
MRTP conrpanies for determining a dominant undertaking under the MRTP
Act, the setting up of the Export-Import Bank and allorving industrial units
exporting 100 per cent of their products all the facilities of an export proc-
essing zone selectir,e reduction of custom/import duties on man)' input for
exportoriented production: the amendment in Section 80 HI{C of the In-
come Tax Act to enlarge the relief in tax on income from exports are steps
in the right direction. Indeed, pragmatism should be the guiding motive at a
time when despite the increase in her exports India. is facing a yawning
adverse trade balance of over six thousand crores of rupees. Her technologi-
cal capability, larger and diversified industrial base and skill make a high
export grorth rate possible. A comparison of the export performance of
India with those of China and South Korea during the last two decades is
rwealing. China by pursuing a bold export vision and highly pragmatic and
non-doctrinnaire fiscal and industrial promotional policies, have dramatical-
ly pushed up the value of her exports from around U.S. $ 2.3 billion to U.S.
$ 75 billion, while the value of India's exports during the saine period has
grown from US $ 2.2 billion to around U.S. $ 25 biliion. China's real break-
through came only from 1980 when she started her determined pursuit of
Exports ancl Government Policyl,' Pronrotion and Performance 389

modernisation, efftciency and productivity. South Kotea, with a size of
some of India's smallest states exports much more than India in value
terms, although stre imports nearly all the inputs, including cnrde and iron
ore. From this point of vierv the recent de-regulatory steps are in the right
direction. tf these are follorved without slackening and are backed up by
good overseas promotional efforts to change India's image as a diffrcult,
highly bureaucratic country, it may not b export
perfornrance. But thcre has to be a gover backed
b1, polir-ical rvill and determined eflo(s. efforts
provide more opportunity than constraints for
pily. there are signs of impressive export gro
tlre 8th Plan target of 13.60/o annual growth


l. According to a Govemment arnouncement of l8th May 1977 for the first
tirne in more than a decade lndia achieved a trade surplus ol'Rs 72 crores
during 1976-77 (as against a trade deficit ofRs 1,200 crores in 1975-76).
Her exports totalled Rs 4,980 crores during the year, and her imports
rvere of the level of Rs 4,908 crores.
Econonric Tines, dated.Iuly 13, 1976, p 5.
J Bhagarvati and Srinivasan, op.cil.
Mellor and Lele, The Interaction of Grouth Strategy
- Agrioulture and
Foreign Trade: The Case of India, Occasional Paper 74 Cornell lJniter-
sih,, I'ne 1938, p. 20.
5. Ministry of Commerce, Annual Report, 1975-76
6. A,Ianntohan Singh, hdia's Exporl Trends, Oxtord 1964.
7. Bhagarvati and Desai, India, Planning for Industrialisation. Oxford Uni-
versity Press.
See .F^rurual Report of the Ministry of International Trade, Governrnent of
India, 196364. p. 14.
Op. cit.,pp73-74.
Government and Business




Actual User 23. Capital goods, raw materials, intermediates. compolcnts,
Condition consumables, spares, parts, accessories, instruments and
goods, w'hich are irnportable rvithout any restriction,
may bc
imported by an1'person u,hether hb is an Actual User or
However. if such imports require a licence, the Actual User
condition is specitically dispensed with by the licensing author_

onents. parts, spares
sted in the Negative
a Iicence subject to

Second hand 24 s 22 and 23_
d hand goods
Policy or in

Import of
second hand
capital gorrds
without licence

26 Deleted.

27. Deleted.
Exports and Govefrunent Policy, Prornotion and Performance 393

28. Deleted.

Other 29 All second hand goods, other than capital goods, may be import-
second hand ed in accordance with a Public Notice or a licence issued in this
goods behalf.

Import on 30. The follou"ing capital goods, including second-hand capital
rc-er p 0 rt goods, ma1, be importcd on re-export basis rvithout a liceucc on
basis execul.ion ol'bond/biurli guarantee to the satislaction of'the
Customs authorities:

(a) Capital goods for repairs or reconditioning:

(b) Jigs, lixtures, dies (including contourroller dies), moulds
(including moulds for die casting), patterns, press tools
and lasts; and

(c) Construction machinery and other equiFment.

The condition ret'erred to in Paragraph 25 above. namelv, that the
second hand capital goods being importecl should have a mini-
mum residual lil'e of 5 years rvill not, however, be applicable to
the import of such capital goods on re-export basis under this

Repairs 3l lmported capital goods or parts thereofmay be sent abroad for
abroad repairs and re-imported without a licence but subject to the
and re-impon satisfaction of the Customs authorities that the rl-imported
n'ithout Licence goods are the same as the goods that rvere e exported. Export of
aircraft, its engines and spares for overhauling or repaiis ancl
their re-import may be made without a licence under this

Under licence 32 Indigenous capital goods having imported components may be
sent abroad for repairs atter obtaining a licence liom the Director
General ofForeign Trade for such export on re-irnport basis

lndigenous capital goods or parts or components thereofmay be
sent abroad lbr testing, qualitV improvement or upgradation of
technology after obtaining a licence tiom the Director General
ofForeign Trade for such export on re-import basis.

Inport of 33. After completion of the projects abroad, project contractors may
used machinery import, u"ithout a licence, used construction equipment, machin-
and equipment ery, related spares upto 15% ofthe CIF value of such machinery,
tools and accessories on the basis ofproduc{ion ofevidence of
394 Government and Business

purchase for and use in the overseas project. Used office equip-
ment and vehicles may also be imported after completion of the
projects abroad, without a licence, but subject to the condition
that they have been used for at least one year.

Import of 34 Import of gitts shall be permitted according to the Baggage
Gifts Rules. 1976. In any other case, a Customs Clearance Permit
(CCP) shall be required for import of gifu by such institutions
and establislunents as may be specified in this behalf. A Custorns
Clearance Pennit (CCP) may be issued, on application, by the
licensing authority after considering the merits of the case. Such
imports will, however, be subject to the Foreign Contribution
(Regulation) Act, 1976.

Sale on 35 Sale of goods on high seas for importation into.krdia may be
high seas made subiect to this Policy or any other law for the time being
in fbrce.

Trade rvith In the case of trade with neighbouring countries, the Director
neighbouring General of Foreign Trade may issue from time to time such
countries instructions as may be required.



Scheme 37 Capital goods may be imported with a licence rmder the Export
Promotion Capital Goods (EPCG) Scheme.

Import on Capital goods (including spares upto 10% ofthe CIF value ofthe
conccssional capital goods) may be imported at a concessional rate of customs
dutv duty of I 5% subject to an erport obligation offour times the CIF
value of the imports. The export obligation shall be fulhlled
within a period of five years from the date of issue of the import

Eligibility 39 Under the Scheme, a manufacturer exporter is eligible to import
capital goods as dehned in paragraph 7 (7) of this Policy.
However, in the case of the services sector, the provisions of
Chapter VI-A shall apply.

Conditions 40 Import of capital goods under the scheme shall be subject to
for import of actual user condition till the export obligation is completed. Both
capital goods new and second hand capital goods may be imported under the
scheme. In the case of import of second hand capital goods, the
Exports and Government Policy, Promotion and Performance 395

general conditions contained in Chapter V shall apply. The
licensing authority may also speciff, in individual cases, such
terms and conditions as considered appropriate.

Export 41. The follorrving conditions shall apply to the fulhlment of the
obligation export obligation under the scheme:

(i) The erport obligation shall be lhlfillbd by the erport of
goods manutbctured orprocluced by the use ofthe capital
goods imported under the scheme;
(ii) The exports shall be direct exports in the name of the
importer. However in case of third party exports, the
name ofthe licence holder shall also be indicated in the
Shipping Bill;
(iii) Exports shall be in freely convertible currencies;
(iv) Exports shall be phvsical exports; deemed exports shall
not be talien into consideration,
(v) The export obligation shall be in addition to any other
export obligation undertaken by the importer and shall be
over and above the average level ofexports ofthe same
product achieved bv him in the preceding tluee licensing
years provided, however, that ifthe exporter achieves an
expotlofTS%o ofthe annual value ofthe production ofthe
export product, the export obligation under this scheme
uould be subsumed under that export;
(vi) Where the manulacturer exporter has obtained licences
lbr the manufacture of the same export product both
under this Scheme and the DuW Exemption Scheme, the
exports made under Dutv Exemption Scheme shall also
be counted towards the discharge of export obligation
under this scheme:
(vii) In the case of export of computer soltwue, the export
obligation shall be limited to four times the CIF value of
imports to be firlfrlled within a period of hve years and
the past average need not be maintained;
(viii) The licensing authority may, on merits, relax in any case
the condition relating to the maintenance ofthe past level
of exports by the importer and may limit the export
obligation to four times the CIF value of the imports to be
fulfilled within a period of five years: and
(ix) Third party exports may also be taken into account
towards discharge of export obligation imposed under
this scheme such third party exports shall be over and
above the average level of exports achieved by the third
party in the preceding three licensing years,

42. Deleted.
396 Government an d B us i n e ss

Procedure 43 An application for grant of a licence rurder the scheme may be
for appli- made to the licensing authority in accordance with the procedure
cation specified in this behalf.

43A The licence issued under this scheme shall be deemed to be valid
for the goods already shipped./arrived provided customs duty has
not been paid and the goods have not been cleared.

Import of 44 lmport of cornputer systems for the erport of sottuare shall also
Computer be govenred by paragraphs 37 to 43 above.

LUT and/or 45 The importer shall be required to execute with the licensing
Bank Guar- authority a Legal Undertaking supported by a bank guarantee
antee u'herever necessary for the fullilment of the export obligation.
The details in this regard are specified in the Handbook of

Import of 46. A person may apply for a licence under the EPCG scheme to
Components import the capital goods in SKD/CKD condition or components
and goods in of such capital goods and may assemble or manufacture, as the
SKD/CKD case may be, the capital goods. This facility shall not be available
condition for replacement ofparts. The export obligation under paragraph
38 shall be lixed with reference to the CIF value of such imports
and all other provisions of this Chapter shall applv to such

A person holding a licence rurder the EPCG scheme for irnport
of capital goods may source the capital goods from a domestic
manufacturer instead of importing it. kr the event of a t-rrm
contract betueen the parties for such sourcing the domestic
manufacturer mal'apply for the import of requisite coraponents
under this scheme at a consessional rate of customs duty of 15%
required for the manufacture ofthe said capital good in accor-
dance with the procedure. The export obiigation shall be re,ck-
oned with reference to the CIF value ofthe relevant capital goods
indicated on the EPCG licence and shall continue to be dis-
charged by the EPCG licence holder in accordance with the
provisions contained in paragraph 38 and 41 ofthe policy.


Scheme Underthe Exportpromotion Capital Goods Scheme for Services
Sector, Capital equipment may be imported for rendering of
services for which the payments are received in a freely convert-
Exports and Government Policy, Promotiou and perfonnance 39',7

ible currency. Under the scheme, capital equipment (inclucling
spares up to l0%o of the CIF value of,the capital equipment) may
be imported at a concessional rate of customs duty of 15%
subject to an export obligation ol four tirnes the CIF value ofthe
imports. Tltc expcrt obligation shall be tlllillecl rvithin a period
of hve years from the date of issue of the irnport liceuce.

Eligibility 468. The categories of service proviclcrs arc eligiblc ro
irnport capital cquiprnerrt undcr lhc schernc:

(i) Architects;
(ii) Artists:
(iii) Chartered Accountants;
(iv) Consultdnts:
(v) Diagnostic Centres,
(vi) Doctors,
(vii) Economists:
(viii) Engineers:
(ix) Hotels and Restaurants;
(x) Journalists:
(xi) Larwers;
(xii) Scientists:
(xiii) Travel Agents and Tour Operators:
(xiv) An1, other service as may be specihed b1, the EpCG
Committee headed bv the Commerce Secrctan..

Itemsof 46c. The items of capital equipment tlat may be permitteJ to be
irnp'rt imported under the schen e will be as specified in a public Notice
issued in this behalt.

The iterns of capital equipment that may be importecl uncler the
scherne shall have a direct nexus with the services rentlered lbr
u'hich payment is received irr freely convertible currencv.

Minimum 46D. An application for grant ofa licence under the scheme shall be
value of for a minimum CIF value of imports of US $ 10,000.

Export 46E. The export obligation to be fulfilled under the scheme shall be
obligation the pavments received in a freelv convertible currencv for the
services renderecl by the licence holder, regardless ol"*trether
the sen-ices are rendered in lndia or abroad. The export obliga_
tion shall be over and above the average level of hard ..o."n"y
398 Government and Business

earnings of the licence holder, if any, in the preceding three
licensing years.

Other 46F. The provisions ofParagraph43 (Procedure for application) and
Provisions 45 GUT and banli guarantee) of this Policy shall apply to this
scheme also.


Duty 47. llnder the Duty Exemption Scheme, import of rarv tnaterials,
Exemp tion intermediates, components, consumables, parts, accessories,
Schemc packirig materials and computer softv-rare (hereinafter referred to
as "inputs'') required for direct use in the product to be exported
may be permitted duty free lbr processing and esport by the
competent authority,' under the categories of licences mentioned
in this chapter.

Advance 48 An Advance Licence is granted lbr the dulv tree iinport ofinputs.
Licence Such licence shall be issued in accordance u'ith the policl, 2n6
procedure in force on the date ofissue ofthe licence and shall be
subiect to the fulhlment of a time-bound export obligation and
value addition as mav be specified. Advance Licences may be
either value based or quantity based

I-icences issued under the Duty Exemption Scheme shall be
regulated in treelv convertible currency. The FOB value of
erports and Ctr value of imports in the licences shall be
specitied in lieely convertible currency. The CII value shall also
be specified in bracket in Indian Rupees at the exchange rate on
the date ofissue ofthe licence.

However, in the case of Advarrce Intermediate Licence and
Special Imprest Licence rvhere the payment for the goods
supplied is to be received in Indiai Rupees, the FOB value shall
be specihed in Indian Rupees and the CIF value of imports shall
be specihed in freely convertible currency on these licences

Value based 49 Under a value based Advance Licence. any ofthe inputs speci-
Advance fied in the licence mav be imported w'ithin the total CIF value
Licence indicated lbr those inputs, except inputs specified as sensitive
itelns. The sensitive items may be imported only to the extent of
the quantitl, or value specified in the licence. However, flexiblity
shall be available tbr the import of a sensitive item in excess to
the extent of 20o/o of its quantity indicated in the licence, within
the overall CIF value ofa value based licence. This flexiblity
shall also be admissible where the import restriction for a
sensitive item is only in terms of value.
Exports and Government Policy, Promotion and performance 399

Under a the quartity and
FOB val il be specified. It
shall be holdeito achieve
both the quarrtity and FOB value ofthe exports specified in the

A value based Advance Licence shall specify:

(a) the narnes and description of items to be irnportecl ard

(b) the CIF value of imports;

(c) the FOB value and quantitl, ofexports;

(d) For sensitive items, or rvhere the cornpctent authority
considers it necessary to do so, quantity or CIF value or both of
each sensitive item shall also be specilied in the licence

Quantit_v 50. A quantity based Advance Licence slull specily:
(a) thc names and description of jtems to be imported and

(b) the quatrtity ol'each itern to be imported or iftlie quantity
cannot be indicated, the value of the item:

(c) the CIF value of imports; and

(d) the FOB value and qruntitv of exports

Input-Output 5l
and Value addi-
tion norms

utrich such standard input-output norms have not been pub_
lished, the quantitative norms will be as specilied b1.the compe_
tent authority.
52 The Director Gcrreral of Foreign T'rade ma1,, on the recomnren_
dation of the Special Advance Licensing Committee modif.y the
norms or prescribe no[ns for additional items.

Special 53. means of
Schemes ue based
s in order
terms of
broadbanding, value addition or imports, with such conclitions as
may be considered necessary.

400 Government and Busi ness

Self-declared 54 A scheme of self+ertihcation and self-declaration under the
P:rss Book Advance Licence scheme will be available for some categories
Schcme of erporters.
Super Star Trading Houses, Star Trading Houses, Trading Hous-
es and Export Houses will be eligible to avail themselves ofthe
scheme Exportr:rs of other products, as may be specified in this
behalf b-v" the Director General of Foreign Trade, may also avail
themselves ol'the scheme, Such Pass Books shall be qtrantity

Under the scheme an exporter will be issued a Pass Book
indicating the names and description of the items to bc imported
and exported bt' hirn and the value addition to be achieved
through sucir exports The exporter will be permitted to enter on
the irnport side ofthe Pass Book the nanres and description ofthe
items to be imported b1-. hiur and the CIF value ofthe imports. He
shall certif\'and declare the contents to be tnre. On the basis of
such sell'-certitication and selldeclaration, the Custorns author-
ities shall permit tlre import of inputs. Alter the export is made,
the exporter shall- on the export side ofthe Pass Book, enter the
names and de.^cription of the items exported and the value
addition achieved. lle shall certit\,and declare the contents to be
tnre. On the basis ofthe self-certitication and self<leclaration the
licensing authoritv rnar', alter due verification, discharge his
erport obligation.
The Pass Book shall be valid lbr a period oftuo years and may
be rcneued liom time to time.

Advancc 55 An Advance Intermediate Licence is granted for the duty tiee
lntcrmcdiate irnporl of inputs h1' the intermediate manufacturer tbr supplv to
Liccnce the ultimalc erptrter or eligible deemed exporter holding a
licence under the Dr.rtv exemption Scheme. The Intermediate
Liccnce holdcr shall make srrpplies to a licence holder under the
Duty Eremption Scherne rvitltin a specified period. An Advance
hrtennediate Licence shall be quantity based only.

Spccial 56 A Special ln'rprest Licence is granted tbr the duty free import of
lmprcst irrputs to main/sub contractors for the manufactwe and supplv of
Licence produr:ts in the following cases:

(i) Supplies matie to lJnited Nations Organisations or under
the aid programme of the United Nations or other multi-
lateral agencies and paid for in lbreign exchange,
(ii) Supplies made to projects financed by multilateral or
bilateral agcncies/Funds as notilied by the Department of
Economic Atlbirs, Ministrv' o1'Finance under interna-
Export,s and Government Policy, Promotion and Performance 401

tional competitive bidding or under limited tender sys_
tem in accordance with the procedures ofthose agencieV
Funds where the legal agreernents provide for tender
evaluation without including the customs duty.
(iii) Supplies made to units in the Export processing Zones
(EPZs); Export Oriented Units (EOUs) (excluding EpZ
Units/EOUs engaged inDiamond, Gem& Jewellery) and
Electronic Hardvrare Teclurology parks (EHTps); and
(iv) Deleted
(v) Supply ofcapital goods fot fertiliser plants ifthe supply
is made under the procedure of international competitive
(vi) Deleted.
(vii) Supplv ofgoods to any project or purpose in respect of
which the Ministry of Finance by a notihcation, permits
the import ofsuch goods at zero customs duty coupled
with the extension of benelits under his Chapter tbr
domestic supplies.

57. Special imprest licences shall be quantity based.

Adr.ance 58. A quantity based Advance Custorns Clearance permit (Advance

instruments as are directly related to the export order and are
supplied free ofcost by the foreign buyer. But these shall be re_
erported along w'ith the export product. Requests for retention.of
importedmoulds, patterns etc., maybe made afierthe fultilment
of the export obligation and may be permitted by the Advance
Licensing Committee, subject to the payment of customs duty
leviable on flre date of import and such other conditionu u, *uy
be specified bv the competent authority. The value addition to bL
achieved shall not be less than l0%.

Eligibility 59. Any merchant exporter or manufacturer exporter who holds an
Importer-Exporter Code number, an RCMC and a specific
export order/Letter ofCredit and he is in a position to realise the
export proceeds in his own nirme may apply for duty liee
licences. The responsibility to fulhl the export obligation ruder_
taken will solely lie on the applicant exporter.

Third 59A. Duty free licences shall also be granted to a manufacturer for
Party Exports making exports on behalfofother export order holders. In such
402 Government an d Busine ss

casesall the documents relating to exports should also show the
names ofboth the manufacturer and order holder concerned and
the applicant manufacturer gives in uriting that the exports so
effected shall be treated as the exports of the order holder
concerned, and the manufacturer gives a declaration that he shall
not claim such export performance under any circumstances as
his own.

60 Value addition norrns, as specihed in the standard input-output
norms referred to in paragraph 5 1 shall apply to the value based
duty free licences. Quantity based licences and products not
listed in the standard input-output norms shall have a minimum
value addition of f3%o. The ALC may, however consider re-
quests for grant of quantity based Licences on a lower value
addition on technical grounds upto 25%, but in exceptional cases
even below 2502.

Exports 6l Exports for which pa),rnents are not received in fieely convert-
not covered by ible currenc-v shall be subject to value addition as specified in
free convertible Appendix XIII of Handbook of Procedures (Vol. I).

Licences 62 Exporters may apply for duty tiee licences against specitic
under Export export orders. Exporters mav also applv for duty tree licences,
Production exeept Special Lnprest Licences, u'ithout an export order. TheV
Programme may be granted the licence subject to the lbllorving conditions:-
(a) For exporters having regular export performance, the
value oflicence shall not exceed25o/o ofthe average FOB
value of their exports in the preceding tluee licensing
(b) For exporters who are not covered by sub-paragraph (a)
above, the value oflicence shall not exceed 10% oftheir
average turn-over in the preceding three licensing years,
provided their average turn-over is not less than Rs. 5
(c) Such licences shall be quantity based only; and

(d) The above mentioned facility is in addition to the duty
free licences granted against specihc export order(s)
624. Exporters having regular export performance rnay apply, in lieu
oftheir entitlements against specific export orders, for a quantity
based licence under production programme for a value equiva-
lent to 150%o ofthe average FOB value oftheir exports in the
preceding three licensing years. An exporter applying for a
licence under this paragraph shall not be eligible for a licence
under Paragraph 62 above.
ExportS qnd Government Policy, Promotion and Performance 403

628. The Licensing authority may also grant further licence under
production Programme to the extent the exports have been
completed on a written request from the exporter.

Export 63. The period for fulfilment ofthe export obligation under a duty
Obligation tiee licence shall commence from the date ofissue ofthe licence.
The export obligation imposed shall be fultilled r:r,ithin a period
ol' I 2 months except in the case of supplies made under special
Imprest Licence for projects rvhere the export obligation must be
fitltilled during the contracted duration of the execution of a

Adyance 64. A holder of a duty free licence (including a transferee) has the
Release option either to import items allowed under the licence directly
Orders or to obtain them from indigenous sourceVcanalising agencieV
EOU/EPZJEHTP units against Advance Release Orders denom-
inated in foreign exchnnge/Indian nrpees. An Advance Release
Order may be granted, on application, by the licensing authority
u'hich issued the duty liee licence.

An Advance Release Order shall be granted only againsl cuantity
based licences and also for sensitive items upto the quantity
indicated in a value based licence. The facility on Advance
Release Order shall also be admissible where the irnport restric-
tion for a sensitive item is only in terms of value. The beneht of
flexibilit_v" to import a sensitive item in excess by 20Yo provided
in paragraph 49 of this Policy shall also be admissible against the
Advance Release Order.

Clearance of 65. The goods already imported/shipped/arrived in advance but not
good from cleared liom Customs may also be cleared against the duty free
Customs licence issued subsequently.

Exports 66. Exports/supplies made from the date ofreceipt ofan application
in anticipation under this scheme by the licensing authority mav be accepted
of Iicence towards discharge of expod obligation. If the application is
approved, the licence shall be issued based on the input output
and value addition norms in force on the date of receipt of
application by licensing authority in proportion to the provision-
al exports already made till any amendment in the norm is
notihed. For rest ofthe exports the Policy/Procedures in force on
the date ofissue ofthe licence shall be applicable. The conver-
sion of duty free shipping bills to drawback shipping billd may
also be permitted by the Customs authorities in case the applica-
tion is rejected or modified by the licensing authority. The
exports/supplies made in anticipation ofthe grant ofa duty free
404 Government and Business

licence shall be entirely on the risk and responsibility of the
exporter and such exports/supplies shall also be subject to the
conditions laid downin paragraph6T ofthe Policy and Paragraph
126 ofthe Handbook ofProcedure (Vol.l).

Transferability 67. A Value Based Advance Licence or the materials imported
of Advance against it may be tieely transferable after the export obligation
Licence has been fulhlled, export proceeds realised and the Bank Guar-
antee/LUT redeemed. The export obligation should have been
discharged by exporting goods in respect of which benelit of
Rule l91A or l91B ofthe Central Excise Rules, 1944 or input
stage credit under nrle 56,4. or rule 57A of the Central Excise
Rules has not been availed ofinrespect ofany ofthe inputs used
in the manufacture of export products.
A Quantily Based Advance Licence (except Advance lnterme-
diate Licence and Special Imprest Licence) or the material
imported against it mav be freely transferable after the export
obligation has been fullilled, export proceeds realised, and the
Banli Guarantee/ LUT redeemed. This facilitv shall not be
available in respect of inputs for which inptrt stage credit
wrder rule 56,4 or rule 57A of the Central Excise Rules, 1944
has been availed of. Export obligation should have been dis-
charged by exporting goods in respect of u,hich benelit of rule
1914' or l91B ofthe Central Excise Rules, 194,1 has not been
availed in respect ofinputs permitted under the said licence.

The facilifi of transferability shall not be the
duty free licence on which import of "Acetic Anhydride" is
allowed. Similarly the facility of sale/transferability of Acetic
Anhydride imported against a duty free licence shall also be

68. Deleted.

Prohibited 69. Prohibited items in the Negative List of imports shall not be
Items imported under the scheme.

Admissibility 70. No duty drarvback shall be admissible in respect of Value-based
ofDrawback Advance Licence.

70 A In the case of Quantity based Advance Licence the drawback
shall be available in resirect of any ofthe duty paid materials,
whether imported or iridigeneous, used in the product export-
ed, as per the brand rate fixed by Ministry of Finance (Direc-
torate Drawback). The drawback shall however, be restricted
to the quantity and value of the duty paid materials as indicat-
ed in the application for the licence and endorsed as such on
the DEEC.
Exports and Geverwnent Policy, Promotion and performance 405

Penalty 7t Ifa order of
condition of
he shall be
Trade (Deve
made wrder the said Act, Export & Import policy, Handbook
ofProcedures and other laws in force.

Scheme for 72 A quantitv based Advance Licence for Gold and Silver
Advancc jeu,ellery and articles is granted lbr the duW free import of
Licence for
Gold and
(i) Gold, mountings, sockets, fiames and findings of lg
carats and below; and
Jewellery (ii) Silver, mountings, sockets, frames and findings.
and Articles 73 The scheme shall, however, be limited to exports which are
supported. by an irrevocable letter of credit, documents
against acceptance, and/or payment of cash-on-delivery basis.
Imports may be made only through specified ports as notified
by the Customs authorities.
74 only against prior imports. The export
from the date of import of the first
be required to be fulhlled within 120
days from the said date.
75 The value ad
at urrich the 9tt"
e<1. rhe cIF ffi:"f;
taken into account and their imporVexport shall be on net_to_
net basis. The minimum value addition for plain and studded
gold jewellery shall be l0% and 15% respectivell, and fbr
silver jeuellery articles shall be 25%.

Value 77 The value addition for the purposes ofthis Chapter, other than
Addition the Scheme referred to in Para 72, shall be:

x 100. rvhere
VA is Value addition
A is the FOB value realised by the export ofthe product
covered by the licence; and
B is the CIF value of the imported inputs covered by the
licence plus any other imported materials used.
.406 -____
Got,ernment and Business


Scherne 78. Exporters
forGems obtaining
and Jervellery Licences
the procedure specihed in this behalf.

Replenishment 79. The exporters of Gems and Jewellery products listed in Appen_
Licences dix shall be eligible for grant of Replenishment Licences at
thc rate and for the items mentioned in sai<I Appendix to
import and replenish their inputs. Such licences will be trans_
ferable. The exports made in fulhlment of export obhgation
against Diamon<VDTC Imprest Licences shall not qualifv for
this benefit.

export obligation tired in the inverse ratio of 65% of replen_
ishment i.e., if ttre licence is issued for a CIF value of US
$65, the FOB value ofexport obligation shall be US $100. At
the time of redemption, the actual entitlement of the licensee
may be recalculated with reference to replenishment rates
admissible for the corresponding export products in the said
Appendix. Due to such re_calculation, ifthe licensee,s entitle_
ment comes to more than US $65 (as in the above mentioned
, example) the licensing authority shall issue a Replenishment
Licence for a value equivalent to whatever is in eicess ofUS
$65 for import of rough diamonds.

81. An exporter may applv for a hcence

(a) against a valid export contract in his own name if he
has less than 3 years past export performance in cut
and polished diamonds, or

(b) against the best year's export performance during the
preceding 3 licensing lears plus 25o/o thereof, if he has
a minimum of 3 years export performance.
Erport 82 The export obligation shall be fulfilled'*,ithin seven months
Obligation from the date of clearance of the first consignment through

DTC 83 A regular DTC sight holder may be allowed annual DTC
Imprest Licence equal to one and one-halftime the consolidated value
Licence of all the DTC sights received by him (exclocling the sights
Exports and Government Policy, promotion and performance 407

o one and
sponding increase in the export obligation. Th"
holders may also apply for licences on monthly basis on all-ot_
ment of sight from DTC, London. These licences will be valid
for import from DTC, L
shall be completed within
the lirst consignrnent and
lbr each sight made on the licence.

ln case the sights allocated to a regular sight holder are not
ication for
year shall
xpected in

Bulk 84. Bulk licences fbr rough diamonds may be issued to lWs.
for Rough

such other conditions as may be specified by the Director
General of Foreign Trade in this behalf


Schemes 8(r. Exporters ofgold an ir essen_
for Gold, tial inputs such as s, rough
Silver and gems, precious and and un-
Platinum processed pearls etc., tlrough import licences granted by the
Jewellery licensing authorities in accordance with the procedure speci_
hed in this behalf.
Similarly exporters of platinum jewellery under Schernes .C,
and 'E' may import platinum and the aforesaid items in ac_
cordance with the procedure specified in this behalt.
408 Government and Business

Gold/Silver/ 87 The following items, if exported, would be eligible for the
Platinum facilities rurder th'ese schemes:
(a) Gold jewellery and articles (other than coins), whether
plain or studded, containing gold of 8 carats and

(b) Silver jewellery and articles (excluding coins and any
engineering goods) containing more than 50olo silver
by weight; and

(c) Platinum jewellery and articles (excluding coins and
any' engineering goods) containing more than 50oZ
platinum by weight.

Schemes 88 GolcVSilver jewellery and articles may be exported under the
lbllowing schemes:
Scheme for export of Gold/Silver jewellery and articles
against Gold/Silrrr supplied b1'the foreign buyer:
Under this scheme, the foreign buyer may supply, in advance,
gold or silver, free of charge, for manufacture and ultimate
export of gold or silver jewellery and articles thereof. He may
also similarly supply alloys, lindings and mountings of silver
and gold of 18 carats and belorv. The export order should
provide for
.(i) supply o1 gold and silver free of charge to the extent of quan-
tity ofgold and silver required after allowing wastages; and
(ii) payrnent ofmanufacturing and other costs by means ofirrevo-
cable letter of credit or payment of cash on delivery or ad-
vance payment in foreign exchange. Gold jeuellery may also
be exported on collection basis (documents against accep-
tance). The export order should relate to a single buyer over-
seas. This scheme tbr export of gold/silver jevellery and arti-
cles will apply to export orders received by the Handicrafts &
Handlooms Export Corporation (HFIEC)/I4inerals and Metals
Trading Corporation (MMTC) or any other public sector
agency nominated by the Ministrv of Commerce, Government
of krdia. The exports may be made by the nominated agency
directly or through its associates. Exports will be allowed
only by air fieight and through Custom Houses at Bombay,
Calcutta, Madras, New Delhi, Jaipur, Bangalore and Kochi.

The value addition may be calculated with reference to the
value of gold/silver content (including wastages) at the price
of gold and silver announced by HHEC at the beginning of
each month. For mountings, hndings etc., the value addition
shall be based on the CIF price of imports as determined hy
Exports and Governnrent Policy, Promotion and Performance 409

the nominated agency. The minimum value addition for plain
and studded gold jewellery is l0% andl5o/o respectively and
for silver jewellery/articles is 25%. The import and export of
mountings and hndings etc., shall be on net to net basis

B. Scheme for export of Gold/Silver jen'ellery and articles for
sale at approved exhibitions.

Exports made b1' Handicralls & Handlooms Export Corpora-
tion (HHEC)/Statc Trading Corporatiou (STC)/India Trade
Prornotion Organisation (ITPO)Minerals and Metals Trading
Corporation (MMTC) and their associates are covered under
this scheme. These organisations shall function as nominated
agencies. Any other person may also be allowed to export
under this scheme, if approved by the Ministry of Commerce.
Erports shall be made on consignment basis lbr holding exhi-
bitions and shall be subject to the condition that

(i) the items *'hich are not sold abroad shall be imported
rvithin 45 davs ofthe close ofthe exhibition: and

(ii) lbr items sold abroad, the gold and silver content shall
be imported as replenishment not later than 60 days ol
the close of the exhibition. The nominated agencv
shall execute a bond to this etlect rvith the Customs
before export is alloued In respect of exhibitions
organised bl'others. bonds or banlt guarantees shall be
executed bv thc organisers as required under the rules
of the RBI or the Customs authorities. Alter the close
of the exhibition, for the purpose of replenishment,
booking shall be made bv the exporter with the assis-
tance of the State Banlt of India (SBI) or their agents
at the place rvhere the exhibition is held betbre the
close of the exhibition or with the authorised SBI
branches iu lndia within 50 davs of the close of the

The value addition shall be calculated on the basis ofprice of
gold/silver content (including wastages) at utrich replenish-
ment may be allowed or at the price on which the export
invoice was made, whichever is higher. The exporter while
preparing the export invoice may use the monthly national
price of gokVsilver notihed by HIIEC. The minimum value
addition for plain and studded gold iewellery is 10o/o and 15%o
respectively and for silver jewellery/articles is 25Yo On pre-
sentation of required documents, appropriate Release Order
and Gem Replenishment Licence may be issued'by the licens-
ing authority.
410 Government and Business

c. Gold/Silver and Platinum jewellery and articles Export
Promotion and Replenishment Scheme.
Against export of goldVsilver jewellery and articles, the
scheme provides for replenishment of gold./silver through the
designated branches of SBI or any other agency nominatecl by
the Ministry of Commerce at a price indicated in the certiti-
cate issued by the SBVagency after purchase of gold./silver.
The scheme shall be limited to exports u,hich are supported
by incvocable letter o1 credit, payrnent of cash on delivery
basis or advance payment in foreign exchange. Export ofgold
jewellery and silver jewellery may also be allowed on collec-
tion basis (documents against acceptance). The exporter has
the option to obtain gol<Vsilver from SBI in advance On pre-
sentation of required documents, appropriate Release Order
and Gem Replenishment Licence may be issued by the licens-
ing authority.
The value addition rvill be calculated with reference to the
value of gold/silver content (including uastages) at the price
at u'hich the gold and silver is booked by SBI. 'lhe minimum
value addition for plain and studded gold jewellery is l0%
and 15Yo respectively and for silver jewellery/articles is 25%o.

of export and replenishment of gold
shall appll,mutatis - mutandis to export
and articles except that MMTC shall
import and supply platinum to the exporters. The MMTC
shall import platinum of upto 0.9999 fineness.

D. Scheme for advance licence for gold and silver jewellery
and articles:

The provisions of the Advance Licence Scheme contained in
paragraph 72 ofChapter VII shall apply to export ofgold and
silver jewellery and articles thereof.

Scheme for export of gold/silrer and platinum jewellery
and articles from Export Processing Zones @pZs) and
from Export Oriented Unit @Ot) complexes:
The Export the general provi-
sions of th set up in Export
Processing eral pr-ovisions of
theEPZ Scherne except that
(i) nothing including rejects shall be permitted to be sold
in the Domestic TariffArea (DTA); and
(ii) in the event of an unit ceasing its operation, gold and
other precious metals, alloys, gems and other materials
Exports and Government Policy, promotion and performance 4ll
available for manufacture ofjewellery, shall be handed
over to an agency nominated by the Ministrv of Com-
merce at the price to be determined by that agency

These units may import raw materials, alloys- carat gold,
coloured gold, precious metals including silver, platiuum of
upto 0.90 hneness, palladium, hndings, mountings. sockets
and frames made of gold and other precioirs metals. These
units ma1, also import diamonds- colourecl gems and stones,
semi-precious stones, synthetic stones. pearls etc. hr addition.
gold of 0.999 or 0.995 f-rneness may also be mgde available to
ominated by the
through the De-
sponsoring au-
0.999 or 0.995

spectiveh'. For silver plain/studcled
minimum value addition shall be 25
be required to achieve an additional
the value of cut and polished diamonds, precious and semi_
precious stones, pearls and synthetic stones used as studdings.
CIF value of mountings, frndings, etc. may also be talien into
account for value addition ard their imporVerport shall be on
net to net basis.

In case of units exporting loose cut and polished diamonds
and preciouVsemi-precious stones the minimum value addi_
tion required to be achieved shall be calculated on the basis of

by the Director General of Foreign Trade.

Jewellery samples allolled to be importecl niay be re_exported
after proper identihcation.
412 Government and Bu sine ss

Scrap/dusVsweepings of gold may be sent to the Government
of India Mint from the units in the EPZ and retumed to the
EPZ in standard gold bars in accordance with the procedure
prescribed by the Customs authorities.

Re-export of rough diamonds may be allowed by the Devel-
opment Commissioner of the EPZIEOU Complex concerned
upto 5% of the value of imported rough diamonds in accor-
dance with Paragraph 85 ofthis Chapter.

Units in the EPZ/EOU Complex may participate in Govern-
ment approved exhibitions. No sale shall be permitted in exhi-
bitions held in the country. The procedure for movement of
the jewellery tiom these zoneVcomplexes and back shall be
prescribed by the Customs authorities.

Partll' processed jervellw may also be exported subiect to
realisation of the prescribed minimum value addition.
The MMTC may also supply gold, gold intermediates and
components including gold alloys, carat gold, hndings to the
approved gold jewellery manufacturing exporting units set up
under this scheme in accordance with the procedure specihed
from time to time.
The MMTC/SBI may also supply silver of 0.999 hneness or
0.995 tineness to the approved silver jewellery manufacturing
exporting units set up under this scheme in accordance with
the procedure as mav be specifred from time to time.
The atbresaid policy of export and replenishment of gold
jeuellery and articles shall apply mutatis-mutandis to export
of platinum jewellery and articles. The MMTC may also irn-
port platinum of upto 0.9999 fineness to service the require-
ments of exporters under Scheme E.

F. Scheme for import of gold of above 18 carats directly by
units situated in DTA under replenishment:
Against exports ofplain goldjewellery where export proceeds
have been fully realised in foreign exchange, the licensing
authority mav issue a non-transferable Replenishment Licence
@ 87% of the FOB value of exports for direct import of:
(i) gold of0.995 lineness;
(ii) gold hndings/mountings/solders upto 0.920 fineness
upto 10% of the value of the licence which shall, how-
ever, be within the overall value ofthe licence; and
(iii) rough diamonds, rough coloured gem-stones and real
or cultured pearls undrilled/unset for the residual val-
Exports and Government Policy, Promotion and Performance 4I3

Against exports of studded gold jewellery where export pro-
ceeds have been fully realised in foreign exchange, the licens-
ing authority may issue a non-transferable Replenishment Li-
cence @80%o of the FOB value of exports for the direct im-
port of:
(i) gold of 0.995 fineness, the value of u,hich shall be
determined by taking into account the quantity ofpure
gold (0.999 fineness) used in the gold studded
jervellery exported. as certified by the Customs author-
ities, multiplied by the international price ofpure gold
(0.999 hneness) on the date df export, as certified by
the designated branches ofSBI, plus 20% ofthe resid-
ual replenishment value of studdings,

(ii) gold findings/mountings/sclders upto 0.920 hneness
upto l0% of the value of the licence eurd within the
overall value ofthe licence: and
(iii) rough diarnonds, rough coloured gem-stones and real
or cultured pearls undrilled"/unset for the residual val-

Notwithstanding the above provisions, after exports of plain
gold jervellery and uithout waiting lbr realisation of sale pro-
ceeds in tree foreign exchange, the licensing authority mav
issue a non-transferable Replenishment licence fbr a value
equivalent to 87y' of the notional FOB value of exports de-
clared by the erporter. For this purpose the exporter shall
submit application for issue of the licence alongwith flre fol-
lowing documents:
(i) customs attested invoice;
(ii) custorns authenticated shipping bill; and
(iii) a declaration about the notional FOB ofexports.

After full realisation of sale proceeds in free foreign ex-
change, the exporter shall appl1, tbr issue of, residual non-
trursferable Replenishment Licence, if any, along rvith the
Banli certihcate of realisation. If due, a licence for the excess
entitlement shall be issued. Otherwise, the value of the li-
cence already issued shall be adjusted against the exports in
question. ln case the adjustment is not complete, the balance
value shall be adjusted from his future entitlement.
The Replenishment Licence shall be valid for a period of 8
months from the date of its issue.

G. Scheme f<rr import of gold of above 18' carats on pre-ex-
port basis for export production by units situated in DTA
under Gold Imprest Licence:
114 Government and Business

An exporter with an annual average elport performance of
plain and studded gold jewellery of Rs. 3 crores and above
during the preceding three licensing years will be eligible for
Gold Imprest Licence against valid export contract in his own
name. The licence may be issued for a Value equivalent to his
best year's perlbrmance during the said three years plus 25%
thereon. Within his overall entitlement an exporter may apply
for a Gold Imprest Licence separately for export of plain and
for export of studded god jelvellery. The licence shall be sub-
iect to the following conditions.
(i) Export obligation in the marmer indicated below;
(ii) The licence shall be in terms of value and shall be
valid for import of gold of 0.995 fineness;
(iii) The licence shall be non-transferable;

(iv) Erports shall be made after importing gold against the
licence; and
(v) The licence shall be valid for six months liom the date
of its issue.

The Gold lmprest Licence issued for erport of plain gold
jervellery shall carry an export obligation irt inverse ratio of
87Yo i.e., if the Gold Imprest Licence is issued for a CIF value
ofUS $87, the export obligation shall be US $100. The export
obligation on studded gold jewellery shall be l'ixed in the
inverse ratio of 80%, i.e., if the Gold Imprest Licence is
issued lbr a CIF value of US $80, the export obligation shall
be US $100. The export obligation shall be completed within
120 days from the date of clearance of each consignment of
gold and the exporter shall not claim any benelit ofreplenish-
ment on these exports under any other scheme, except to the
extent that he has exceeded the export obligation.

Other 89 An exporter may pay agency commission upto 3% of the FOB
Provisions value of exports except in Schemes 88(F) and 88(G) above.
Wherever agency conrmission is paid, the minimum value
addition shall be correspondingly increased by the percentage
of the agency commission.
IJnder the schemes mentioned in Paragraph 88(A) to (E)
above, Gold wastages or manufacturing loss shall be admissi-
ble as specified in the Handbook ofProcedures.
9l Gem Replenishment Licences may be issued under the
schemes mentioned in Paragraphs 88(A) to (C) above on ex-
port of plain gold/silver jewellery in cases whdre an exporter
achieves the minimum prescribed value addition. The value of
Exporl,s and Governtnent Policy, Promotion and Perfonnance 415

such licence shall be determined with reference to the
realisation in excess of the minimum value addition. Export-
ers of studded gold/silver jewellery and articles may be enti-
tled to Gem Replenishment Licence taking into account the
value of studdings used in the items exported, after account-
ing for the value addition on gold including wastages. For the
purpose of licensing, the studdings rvill be divided into four
categories, namely,

(a) diamonds,
(b) precious stones,
(c) semi-precious and synthetic stones and cubic zirconia,
(d) pearls.

The scale of replenishment lvill be as contained in the Hand-
book of Procedures. These licences shall be valid fbr import
of rough diamonds. precious stones, semi-precious and s1n-
thetic stones and pearls. Besides, the licence shall also be
valid fbr import of ernpty jeuellery boses upto l% of the
value of the licence. These licences shall be freely transfer-

The exporters mav also be allowed to import cut and polished
precious and semi-precious stones other than emeralds, upto
l0% of the CIF value of Gem Replenishment licence with
actual user corrdition.

9lA. Under the schemes mentioned in paragraph 88-F and 88-G,
the licence holder may also proctre gold of 0.995 fineness on
outriglrt purchase basis from SBIA4MTC. Consequently, both
Exchange Control and Customs copies of the relevant import
licence shall be made invalid by the SBVMMTC for direct
import of gold.

Invoice 92. Under all the schemes, imports and exports shall be invoiced
in US dollars.

Eligibility 93. Units undertaking to export their entire production of goods
(except in sales in the Domestic Tarrif Area (DTA) as mav be
permissible under the Policv) may be set up under the Export
Oriented Unit (EOU) Scheme or Export Processing Zone
(EPZ) Scheme. Such units may be engaged in manufacture,
production of software, agriculture, aquaculture, animal hus-
bandry, floriculture, horticulture, pisciculture, viticulture,
poultry and sericulture. Units engaged in seirtice activities
may also be considered on merits.
4t6 Government and Business

Importability 94. AnEOU/EPZ unit may import fee of duty all types of goods,
of goods including capital goods, required by it for manufacture, pro-
duction or processing provided they are not prohibited items
in the Negative List of Imports. However import of Basmati
paddy/brou'n rice shall be prohibited.

Second hand 95 Second-hand capital goods may also be imported in accor-
Capital goods dancewith the provisions contained in Chapter V.
l,c'asing of 96 A:t EOU/EPZ unit may, on t-he basis of a linn contract be-
Capital goods trveen the parties, source flre capital goods tiom a domestic
leasing company. ln such a case, the domestic leasing compa-
nv \\"ill be eligible to import the capital goods liee of duty and
supply it to the EOU/EPZ units on such terms and conditions
as may be mutually agreed upon between the two parties. The
capital goods shall, hovvever, remain as a part of the capital
assets of the EOU/EPZ unit till the export obligation is dis-
charged bJ,the unit and they shall not be diverted lbr anv
other use.

Value Addition 97. The unit shall achieve a minimum Value Addition (VA) of
and Export ZlYo bul units engaged in the manufacture or production of
Obligation items specified in Appendix II shall achieve the Value Addi-
tion (VA) norms indicated therein Items of manufacture lbr
erport specified in the letter of permission/letter of ilttent
alone shall be taken into account for salculation of value
addition and discharge ol' export obligation. Not*'ithstanding
0re above, projects shall be allou.ed to be set up s'ithout
minimum value addition stipulation in sectors such as elec-
tronic hardn'are.
Legal 98 The unit shall execute a bond./legal undertaking u'ith the De-
Undertaking velopment Commissioner concerncd and in the event of tail-
ure to fultjl the obligations stipulated in the lettei ofapproval/
intent, it would be liable to penalty in terms of the boncVlegal
undertaliing or under any other law lbr the time being in

Minimum 99. Ifthe export of any good from the Domestic Tariff Area
Export Price (DTA) is subject to Minimunr Export Price (MEP) under the
(MEP) Policv, the export of that good by a EOU/EPZ unit also will
be subject to the same MEP.

Automatic 100 Project applications satisfying the conditions mentioned in
Approvals para 3 of Ministry of Industry Press Note No. l3 (1991 series)
may be given automatic approval within 15 days by thc De-
velopment Commissioner of the EPZ concerned in the case of
EOUs, such approval shall be granted by'the Secretariat of
Industrial Approvals (S[A).
Exports and Government Policy, Promotion and Performance 4I7

Othercases 101. h other cases, approval may be granted by the Board(s) of
Approval (BOA) set up for this purpose or Secretariat of In-
dustrial Approvals, as the case may be.
DTA Sales 102. The entire production of EOU/EPZ Units shall be exported

(a) Rejects upto 5% or such percentage as may be fixed
bv the Board of Approval. Rejects may be sold in the
Domestic Tarilf Area (DTA), subject to pavment of
the applicable duties; and

(b) 25o/o of the production in value terms may-be sold in
the DTA. DTA sale shall be subject to fulfilment ot
minimum value addition. No DTA sale shall be per-
missible in respect of jewellery, diamonds, precious
and semiprecious stoneVgems, motor cars, alcoholic
liquors, silver bullion and such other items as may be
stipulated by Director General of Foreign Trade by a
Public Notice issued in this behalf.

(c) However, an EOU/EPZ unit in agricultrue, aquacul-
ture, animal husbandry, lloriculture. horticulture. pi-
sciculture- poultry and sericulture, may in accordancc
with the DTA sale guidelines notifled in this behalf
sell upto 50%o of the production in value terms in the
DTA subject to fullilment of minimum value addition.
(d) The electronics hardware products may be sold in the
DTA on the following basis.
Value addition achieved Permissible sale in the
(a) Less than 15% Nil
(b) ts-zs% Uplo 25% of the produc-
tion in value terms of the
electronic items, includ-
lng components, manu-
factured in the rurits.
(c) More than25Yo Upto 35% of the produc-
tion in value terms of the
electronic items, includ-
ing components manufac-
tured in the unit.
DTA sale facility for software items shall be 25Vo.

Note:- ln the case of units manufacturing electronics hard-
ware and software, value addition and DTA sald entitlement
shall be reckoned seperately for hardware and software.
4lt Government an d Bu siness

Erport 103. The following supplies shall be counted towards firlfrlment of
Obligation the export obligation:
(a) Supplies effected in DTA under global tender condi-
(b) Supplies effected in DTA against payment in foreign
(c) Supplies against Advance Licences and other import
(d) Supplies, with the pennission of the Development
Commissioner, to the EOUs/EPZ units.

Erports 104. An EOU/EPZ unit may export goods manufactured by it
through through an Export House/Trading House/Star Trading House/
Erport House/ Super Star Trading House recognised under this Policy or
Trading House/ other EOU/EPZ units. This permission extends only to the
Star Trading marketing of the goods by the Export House/Trading House/
IIouse./Super Star Trading House/Super Star Trading House or other EOU/
Star Trading EPZ rmits. The manufacture of the goods shall be done in the
House EOUIEPZ rurits. The value addition and export obligations as
well as anv other obligation relating to the imports and ex-
ports shall continue to be discharged by the EOU/EPZ unit.

105 The Development Commissioner mav also permit

(a) Suppiies or sale, in reasonable quantities, of samples
of goods produced by EOUIEPZ units for display or
canvassing orders on pal,rnent of duties leviable. Such
samples may also be allorved to be removed liom the
unit on turnishing a suitable undertaking for return of
such goods.

(b) Bringing back for repair/replacement goods sold in
DTA but found defective. Such goods may be removed
from the unit subject to the satisfaction of the Customs
authorities as to the identity ofthe goods.

(c) Transfer ofgoods to DTA for repair, testing or calibra-
tion, provided that in the case of an EOU unit this
permission may be granted by the Customs authorities.

Bcnelits for 106. (i) Supplies from the DTA to EOU/T*'Z trnits will be re-
supplies garded as "deemed exports" and,'besides being eligi-
firm the ble for the relevant benefits under paragraph 122 of
DTA this Policy, will be eligible for the following benehts:
(a) Refund ofCentral Sales Tax;
(b) Exemption from payment of Cenrii Excise Duty
on capital goods, comportents and raw materials;
Exports and Government Policy, Promotion and Performance 4r9

(c) Discharge of export obligation, if any, on the sup

(11) EOUIEPZ units shall on production of a suitable dis-
claimer from the DTA suppliers, be eligible for obtain-
ing the benehts specifred in paras 122 (b) and 122(c)
of the Policy. For this pulpose, they shall get Brand
Rates hxed by the DGFT. Such supplies would. how-
ever, be eligible for benefits specihed in para l()6(i)

Conditions to7 The benehts stated under paragraph 106 shall be available
provided the goods supplied are manulhctured in the country.

Benefits 108 Concessional Rent: The units set up in the EPZs will be eligi-
forEPA ble for concessional rent for lease ofindustrial plots and stan-
EOU Units dard design tactory (SDF) buildings/sheds allotted lbr the lirst
three years at the fbllowing rates:

For Plots: The concession w-ill be 75Vo for the tirst year' 50o/t
for the second vear and 25Vo fot the third vear if production
had commenced in the ltrst year or the second year. The
concession will not be available for the third year if produc-
tion had not commenced bv the end ofthe second year;
For SDF buildingVsheds: The concession will be 50% for the
Irrst year and 40Vo for the second year if production had
commencecl in the hrst year. The concession will be 25Vo for
the third year if production had commenced in the tirst year.
The concession lr"ill not be available if production had not
commenced by the end of the first year;

Tax Holiday: EOUs and EPZ units will be exempted from
paynent of corporate income tax for a block of five years in
the first eight years ofoPeration;

FOB value of export of an EOU/EPZ unit can be clubbed with
FOB value of export of its parent company in the DTA for the
pulpose of according Export House, Trading House, Star
Trading House or Super Star Trading House status for the

100% Foreign Equity: Foreign equity upto 100% is permissi-
ble in the case of EOUs and EPZ units.

The EOU/EPZ units will also be entitled for the same bene-
frts, including grant of special import licence, as are available
to the manufacturers who have acquired ISO 9000 (series) or
BIA 14000 (series) or any other equivalent internationally
recognised certihcate of quality.
420 Government and Business

Inter-Unit 109. Transfer of manufactured goods may be permitted from one
EOUIEPZ unit to another EOU/EPZ unit subject to the condi-
tion that the unit will periodically report such transaction to
the Development Commissioner of EPZ concemed

110. Goods imported by an EOU/EPZ writ may be transferred or
given on loan to another EOUIEPZ unit with the pennission
of the Development Commissioner.
suhcontractingl I 1, The EoulEPZ units may be permitted to sub-contract part of
theirproduction process lorjob u'ork to units in the DTA on a
case to case basis Requests in this regard will be considered
by the concer4ed Customs authorities on the basis of factors
such as fixation of input and output norms, and furnishing of
undertakings/bonds by the concerned units.

Sele of I12. In case an EOUIEPZ units is unable, for valid reasons, to
Inported utilise the imported goods, it may re-export or dispose them
Materials oll in the DTA subject to clearance from Customs.
I13. Imported machinery/capital goods that have become obsolete
may be disposed of, subject to payment of customs duties on
the depreciated value thereof.

Disposal I14. The Development Commissioner may, subject to guidelines
of scrap laid down by the BOA in this behall, permit sale or their
disposal in any other manner in the DTA of scrap/.waste/rem-
nants arising out of production proc-ess on pagnent of appli-
cable duties and taxes. Percentage of such scrap/waste/rem-
nants shall be tixed by the Board keeping in vieu'the norms
specified by a Public Notice issued in this behalf by the Di-
rector General ofForeign Trade.

Private ll5(i)Private bonded warehouses may be set up in EpZs for the
bonded purposes enumerated hereinalter. Such warehouses need not
warehouses conform to the requirements of para 97 above but shall be
subject to such conditions as mav be stipulated by the BOA.
The provisions ofparas 100, 102, 103, 104, 109, I I I and I 12
ofthis Chapter shall not apply in such cases.
A. Import and sale of goods
Imports may be permitted to meet the requirements ol con-
suming EOUIEPZ units. Iterns importable without licence in
accordance with the Exim Policy may also be imported and
sold in the DTA subject to payment of applicable duties at the
time of effecting such s4es.

B. Trading, including re-export after re-packingnabelling
Imports may be permitted for re-export in freely convertible
Exports and Government Policy, promotion and performance 4Zl
foreign exchange for activities such as re_packing and label_
(ii) Imports for activities such as reconditioning, repair and re-
engineering may also be permitted in such warehouses
exports in lreely convertible foreign exchange.
Period of I 16 The bonding period for writs under the EOU Scheme shall be


Conversion I18. Existing DTA units may also apply for conversion into
EOU but no concession in duties and taxes would be available
undel the scheme for plant, machinery and equipment already
Value addition I l9 Valu this chapter shall be ex_
Pres calculated for a periocl of
of Commercial production
VA= 4--B x 100, where
VA is Value additio4
A is the FOB value of exports realised by the EOU/EpZ
unit; and

during the hrst live years peri_
. ..Inputs" mean raw materials,
ents, consumables, parts and

Note: l. If any input is obtained from another EOU/EpZ unit,
the value ofsuch inputs shall be included under B.
2. If any capital goods imported duty free is le4sed from
a domestic leasing company, the CIF value of the capi_
tal goods shall be included under B.
422 Government and Business

3. In tJre case of projects where the investment in land,
building, plant and machinery exceeds Rs. 200 Crores,
the value of capital goods shall be amortised over a
period of seven years; i.e. in such cases, only 5l7th of
the CIF value of the imported'capital goods shall be
included under B.


Definition 120. "Deerned Erports" tneans those transactions in whicil the goods
suppliecl do not leave the country and the payment lbr the
goods is received by the supplier in hdia'

Categories l2l. The tbllorving categories of supply of goods by the main/sub-
contractors shall be regarded as "Deemed Exports" wrder this
Policy, provided the goods are manutactured in India:

(a) Supply ofgoods against licences issued under the Duty
ExemPtion Scheme;

(b) Deleted

(c) Supply of goods to units located in Export Processing
Zones (EPZs) or Export Oriented Units (EOUs) or
Electronic Hardware Technology Parks (EHTPs);

(d) Deleted.

(e) Supply of goods to projects hnanced by multilateral or
bilateral agencieVFunds as notified bv the Department
of Economic Atlairs, Ministry of Finance under inter-
national competitive bidding or under limited tender
system in accordance with the procedures of those
agencies/ Funds, u'here the legal agreements provide
for tender evaluation without including the customs

(f) Supply of capital goods to fertiliser plants if the sup
ply is made rurder the procedure of international com-
petitive bidding;

(g) Deleted

(h) Supply ofgoods to anv project or purpose in respect of
which the Ministry of Finance, by a notification, Per-
mits the import of such goods at zero customs duty
coupled with the extension of benehts under this
ChaPter for domestic suPPlies'

Benefits 122. Deemed exports shall be eligible for tlie following benefits in
for deemed respect of hanufactrue and supply of goods qualifoing as

exports deemed exPorts.
Exports and Government Policy, Promotion and Performance 423

(a) Duty Exemption Scheme only in respect of the deemed
exports catagories as covered rurder paragraph 56(ii),
(iii), (v) & (viD ofthe Policy; or
(b) Duty Drawback Schemel
(c) Refund the terminal Excise duty;
(d) Special Import Licence at the rate of 5% of the FOR
value (excluding all taxes and levels) of supplies,
made with ef]'ebt from lst April, 1994.

Free Exports 123. All goods may be exported rvithout anv restriction except to
the extent such exports are regu-lated by the Negative List of
Exports or any other provision ofthis Policv or any other law
for the time being in force.
The Director General of Foreign Trade may, however, speci!'
through a Public Notice the terms and conditions according to
which any goods not included in the Negative List of exports
may be exported \r,ithout a licence. Such terms and cbnditions
may include Minimum Export price (lvIE'P), regishrition with
specified authorities, quantitative ceilings and compliancb
with other [au's, rules, regulations.
Registration 124. Any person applying for (i) a licence to export or (ii) any
Cum Member- othpr benefit or (iii) concession under this Policy shall be
ship reqrtired to furnish his Registration cum Membership Certifi-
(RCMC) cate (RCMC) number granted to him by authorities issuing
RCMC as indicated in Chapter KII para 219 of the Handbook
of Procedures Volume l.
125. Deleted.
Denomination 126. All export contracts and invoices shall be denominated in
of Contracts freely convertible currency. Contracts for which payments are
received through the Asian Clearing Union (ACU) may be
denominated in the currency of the country of the exporter or
the importer or in any freely convertible crurency. The Cen-
tral Government may relax the provisions of this paragraph in
appropriate cases.

127. Deleted.
Re-exports 128 Goods imported in accordance with this Policy may be re-
exported in the same or substantially the same form, without a.
licence provided that the item to be exported is not in the
Negative List of Imports and Exports.
Export of t29 Bonafide personal baggage may be exported either alongwith
Personal the passenger or, if unaccompanied, within one year before or
Baggage after the passenger's aeearture from India. Iterns included ia
424 Government and Busin ess

the Negative List ofExports shall require a licence, except in
the case of edible items.

130. Deleted.
Erport l3l. Goods including edible items of value not exceeding Rs.
of Gifts 15,000/- in a licensing year may be exported as a gift. Items
in the Negative List ofExports shall not be exported as a gilt,
without a licence, except in the case of edible items.

Export of 132. Warrantly spares, indigenous or imported, of plant. equip-
Spares rnent, machinery, automobiles or umy other goods may be
exported upto 5% of the FOB value of the exports of such
goods alongu'ith the main equipment or subsequently. Export
of spares exceeding 5% of the FOB value may be permitted
against a licence.

Erport of l32A Goods or parts thereofon being exported and tbund defectivei
Replacement damaged or othervvise unht for use may be replaced free of
Goods charge by the exporter and such goods shall be allowed clear-
ance by the Customs Authorities provided that

(a) The replacement goods are not in the Negative List of

(b) The replacement shall be approximately equal in quan-
tity and value to the extent of the goods found defec-
tive/damaged or otherwise unht for use; and

(c) The shipment of replacement goods is ellected u"ithin
12 months from the date of clearance of the previously
exported goods, or within the guarantee period in the
case ofmachines or parts thereofwhere such period is
more than 12 months.

Cases not covered by the above provisions will be considered
on merits by the DGFT.

Transit 133. Transit of goods through India from or to countries adjacent
Facility to India shall be regulated in accordance with the treaty be-
tween Indian and those countries.

134 Deleted.


Definition 135. Merchant and manufacturer exporters and trading companies
including those having foreign equity, Export Oriented Units
(EOUs) and units located in Export Processing Zones (EPZs)/
Eleptronic Hardware Technology Parks (EHTPs). have been
recognisecl as Export Houses, Trading Houses, Star Trading
Exports ancl Goverrunent Policy, Promotion and Performance 425

Houses or Super Star Houses wrder criteria which were laid
dorvn from time to time. All such Export Houses, Trading
Houses, Star Trading Houses and Super Star Trading Houses
shall continue to enjoy the status accorded to them for the
period for which such status was accorded.

Criterion 136. However, when an Export House, Trading House, Star Trading
for Ifouse or Super Star Trading House applies afresh at the erpi-
ry of the atirresaid period for recognition as Erport House.
Trading House, Star Trading House or Super Star Trading
House, as the case may be, it shall satisfy the criterion laid
doun hereinafter for grant ofsuch recognition.

Criterion 137. The criterion for recognition as Export House, Trading House,
for recognition Star Trading House or Super Star Trading House shall be
either on the basis ofthe FOB value or Net Foreign Exchange
earned on physical exports and export of services as indicated
in Paragraph 1374, during the last three licensing years or
preceding licensing year. whichever is opted by the exporter,
is given below. However, for the purpose of grant of Super
Star Trading House status, exports at least in minimum three
product groups shall be essential.

FOB Criterion NFE Criterion
Category Average FC)B value of FOB value of eligible .{verage net lbreigr Net lbreign ex-
eligible expons made exporLs made during exchmge emed change emed
dmng the prcceding the preceding licem- relating to eligible relating to eligible
tluee licensing yeus, ing yeu, in Rr.pees exports duing the exports dwing the
ln ruP€es preceding three preceding licens-
liceroing yem. in ing ya, in Rr+ccs

Export l0 sores l5 qorcs 6 qorc 12 sors
H ouses

Trading 50 qores 75 aores 30 crorc 60 crors

Star Trading 250'qors 300 crores 125 sores 150 crores

Sup€r Sttr 750 crores 1000 crores 400 qores 600 aores

137A. h addition to the physical exports, the following exports/
sen'ices for which the payment is received in frie foreign
exchange will also qualify for the purpose of the eligibility

(a) (i) Computer software exports including iomputer solt-
426 Governmenl and Bu,siness

ware services rendered at the location of the foreign
client abroad;
(ii) Computer software exports through magnetic tapes,
floppy discs and paper; and
(iii) Computer software exports through data linli satellite.

(b) The professional services rendered abroad which also inclucle
Overseas consultancy service contracts which may include the
preparation of t'casibility sludics, project reports, preparation
of designs and adrice to the project authoriW ori specifica_
tions for plant and equiprnent, preparation of ten..ler docu_

138. Ifthe eligibility is claimed on FOB basis, the physical export
ofthe products covered under Chapter VII ofthe policy shall
be counted at 50Yo ofthe actual FOB value ofexports.

If the eli for the purpose
of calcul dl rhe imports
made bv ds) shall bi de_
ducted from the phvsical exports made by him in his oun

Extra l3 9.
on FOB
140. FOB value of erports made by a subsidiarv company of the
exporter, w'hether in Domestic Tariff Area or situatecl in Ex_
port ProcessingZone or as an Export Oriented UniU Electron_
ic Harduare Tachnology park (EHTp), shall be counted to_
wards export performance of the parent company for the pur_
pose ofeligibility.
Extra 140 A. Double weightage shall be given to the NFE earned by the
rveightage export of products manufactured by Small Scale Industries
on NFE (SSI) and triple weightage shall be given to the NFE earned
criterion by the export ofproducts, including hand-knotted carpets and
silli products, manufactured by the handlooms and hamclicrafts

1408. The holder of the Super Star Trading House status shall be
entitled to membership of Apex Consultative bodies con_
cerned with trade policy and promotion, shall be considered
for preferential treatment for representation .on important
business delegations and shall get the permission for overseas
Export.s and Government Policy, prornotion and perfonnance 421

even based on the provis ed by
a Chartered Accountant annel
facility/exemption from Cus_
toms and other Agencies rbr a period <if six months or tilr the
itY will
by the

Benefits 142 Export Houses/Trading HouseVstar Trading Houses/Super
Star Trading Houses shall. be entitled to benelits as specitiecl
in chapter XII of the Hand Book of proceclures.
EPCs 143. (a) At present- there are 19 Export promotion Councils
(i) Apparel Export promotion Council (AEpC), New
(ii) Basic Chemicals, Pharmaceuticals and Cosmetics Ex_
port Promotion Council (CffiMEXCIL), Bombay.
(iii) Cashew Export promotion Council, Kochi.
(iv) Carpet Export Promotion Council, New Delhi.
(v) Chemicals and Allied products Export promotion
Council (CAPEXCIL), Calcutta.
(vi) Cotton Textiles Export promotion Council
(vii) Electronics and Computer Software Export promotion
Council, New Delhi.
(viii) Engineering Export promotion Council (EEPC),
428 Got,entment and Business

(ix) Gems & Jewellery Export promotion Council
(GJEPC), Bombay.
(x) Expon Promotion Council for Handicrafts, New.Delhi.
(xi) Handloom Export promotion Council (HEpC), Ma_
(xii) krdian Silk Export promotion Council, Bombay.
(xiii) Council for Leather Exports (CLE), Madras.
(xiv) Overseas Construction Council of Inclia (OCCD,
(xv) Plastics & Linoleums Export promotion Council
(PLEXICL), Bombav.
(xvi) Shellac Export promotion Council, Calcutta.
(xvii) Sports Goods Export promotion Council (SGEPC),
Nerv Delhi.
(xviii) Svnthetic and Rayon Tertiles Export promotion Coun_
cil, Bombay.
(xix) Wool & Woollens Export promotion Council, Nerv
(b) For the purpose ofthis 6hapter, the tbllowing agencies
shall be regarded as an Export promotion Council :_
(i) Agricultural & processed Food Export Development
Authority (APEDA).
(ii) CoIIee Board.
(iii) Coir Board.
(iv) Federation of Indian Export Organisation (FIEO).
(v) Marine Products Export Development Authority
(vi) Rubber Board.
(vii) Spices Board.
(viii) Tea Board.
(ix) Tobacco Board.
Non-Profit t44 The EPCs are non-proht organisations registered urder
organisations Companies Act or the Societies Registration Act, as
the case
may be. They are supported by financial assistance from the
Central Governrnent.
Role 145 The main role of the EPCs is to project Inclia,s image abroad
as a reliable supplier of high quality goods and services. In
particular, the EPCs shall encourage and monitor the obser_
vance of international standards and specifications by export_
ers. The EPCs shall keep abreast ofthe trends and opportuni_

Exports and Government Policy, Promotion and perfornnnce 429

ties in international markets for goods and services ancl assist
their members in taking advantage of such opporhrnities in
order to expand and diversify exports.
Functions 146. The major functions of the EpCs are as follows :

(a) To provide commercially useful information and assis_
tance to their members in developing and increasing
their exports:
(b) To oller professional advice to their rnembers in areas
such as technology upgradation, quality and design
improvement, standards and specifications, produit
development, innovation, etc.;

(c) To organise visits of dclegations of its members
abroad to explore overseas market opportunities:

(d) To organise participation in trade fajrs, exhibitions ancl
buver-seller meets in India and abroad;

(e) To promote interaction between the exporting commu-
nity and the Government both at the Central and State
levels; and

(f To build a statistical base and provide data on the
exports and imports of the coturtry, exports and irn_
ports of their members, as well as other relevant inter_
national trade data.
Membership 147. Any exporter may' apply to become a member of an EpC and
such application shall be considered and disposed of expedi-
tiously in accordance with the rules and regulations of the
EPC On being admitted to membership, the applicant shall be
ganted forthwith a Registration-cum-membership Certihcate
Professional 148. In order to play their part in the promotion of exports, it is
bodies important that the EPCs function as professional bodies. For
this purpose, executives u"ith a professional background and
experience in industry, cornmerce and internationai marketing
should be brought into the EpCs.

Autonomy 149. The EPCs would be autonomous and shall regulate their own
all'airs They would not be required to obtain the approval of
the Central Government for sencling sales teams oi a"tega_
tions abroad for participation in fairs/exhibitions etc. The
Central Government would only approve the annual plans and
budget of the EPCs and monitor and evaluate their perfor_
mance. The Ministry of Commerce/Ministry of Textiles
would interact with the Managing Committee of the Council
Goy e rnment a nd Busi n e s.r

concerned, twice a year, once_ for approving
the annual plan
and budget and again for a mid_year r"vi"*."
Conditions 150. The support given to the EpCs by the Government,
for support monetary
or otherwise, would depend upon

(a) effective discharge offunctions assigned to
(b) democratisation of the membership of the
(c) denrocratic elections of otlice bearers of
the EpCs be_
ing held regularly: and
(d) timelv audit of the accounts of the EpCs.



Rewards 153. The Central Gove
and benefits acquirecl the ISO 9
any other internati
of quality. Such ma
indicated in chapter
Test houses 154. The Central
them at par
by such test and laboratories is recognised within
counW and abroad.
Monitoring 154A.
of complaints
from foreign
interest of other persons engaged in exports or imports; or
it or the goods of the
Trade may take penal
or importer in accor.

Ilxporls and Governtnenl Policy, Pronntiort and Performance 431

Objectivcs 154B. Visualising economic relationships well beyond the realm of
physical exports and recognising the close relationship be-
tween international trade and flow of investment, it is impera-
tive to establish a more dyramic policy frarnework for mak-
ing krdia an emerging and active partner in the global trade
and sewices. Some of the important schemes for attaining the
above objectives are as under:

Countcr l54C Consistent with the policy of renioval of quantitative restric-
Trade tions on imports and exports, the counter trade operation will,
henceforth. be gencraily operatir.e on a voluntary basis and
through banking mechanisms. All enterprises including public
enterprises may enter into counter trade arrangements with
the approval of RBI and operate in accordance with the per-
missible imports and exports as per normal Polict,provisions.
Merchanting/154I) Trade betrveen tuo ibreign entities operated by an lndian
Off-Shore tradcr is described as Merchanting Trade transactions. [n such
Trade transactions it is not necessary to physically import the goods
into the country and then re-export the same. RBI will also
consider general permission to Trading Houses to make ad-
vance palments to their overseas suppliers.

Trade involving imports only for export atter repacking. la-
belling, reconditioning or repairing s,ill also be permissible
through EPZs as explained in Chapter D( ofthe policy.

Indian Joint l54E Policy in regard to Indian Joint Ventures abroad is meant to
Ventures enable lndiarr business to gain easy access to global netrvorks
Abroad while at the same time avoiding large capital outflows. Joint
Ventures and Wholly Owned Subsidiaries will be permitted
Ibr trading and services also Fiexibilitt,would be providecl to
the Indian investor in choosing a combination of equity and
loans There rvould be a single window clearance by RBI
through an automatic route in most cases and through special
procedures in regard to others involving sizeable investmeirts.
RBI will separately notify the procedures in this regard.
Project l54F The Policy framework for pro.ject exports encompasses the
Exports twin objectives of (a) encouraging specihc project export
eflbns u,hich are internationally competitive and giving broad
seotoral and regional direction to such etlort; and (b) integrat-
ing and synthesising institutional mechanisms to enhance the
effectiveness of project exports.

The procedural framework envisages differentiation between
Project Exports under Multilateral credit or against cash and
thos'e where substantial credit is involved.
432 Government and Business

Annexure 2

(1991 Series)

SUB.IECT :Rcvised Procedure of Applications under 100% EOIJs and EPZ

Govemment tabled a statement on Industrial Policy in both the Houses of
Parliament on24th July, 1991 which has substantially liberalised the pror"isions
and simplified procedures go','erning industrial approrals, foreign investment
and foreign technology agreements. In addition, Government tabled a statement
on Trade Policy in both the Houses of Parliament on l3th August, 199 l, contain-
ing a new package for l}rJYo Export Oriented Units and Units in thc Export
Processing Zones

Trade Policy Statement
2. The relevant portion of the Statement on Trade Policy is as follorvs:
"14. Under the New Industrial Policy, most industries do not require an
industrial licenco except fbr a defined list Clearances for imports of capital
goods hare also been made automatic u,here capital goods imports are cov-
ered by foreign equiq, or w'here they are 25Yo of the value of plant and
inrestment subject to a limit of Rs. 2 crores. With a view to bringing about
comparable streamlining in the procedure foTEOUIEPZ approvals, a system
of automatic approvals is being established for all proposals which f-all u,ilh-
in certain parameters. Capital goods imports will be allowed under the auto-
matic approval procedure if they are fully covered by foreign equitv or if
they do not exceed 5001, of the value of plant and equipment subject to a
ceiling of Rs 3 crores. All proposals within the automatio approval parame-
ters will be cleared within two weeks All other proposals will be submitted
to the Board of Approvals for consideration and decisions including issue of
licences will be taken within 45 days."
3. Applications rry-hich fulfil the following conditions shall receive automatic
clearance from the Secretariat for lndustrial Approvals (StA) in the case of
100% EOUs and from the respective Development Commissioners @Cs) for
units to be set up in the Export Processing Zones @PZs) and Free Trade Zones
(D the project is not included in Schedule-I or II of Notification No. 477 @)
Exports and Government Policy, Promotion and Performance 433

d^ted 25.7.91 issued under the Industries @evelopment & Regulation)
Act, 1951;
(ii) the project is located eitherwithin anEPZ, for which availability of space
and conformity with the environmental and other standards of the EpZ
has been certified by the Development Commissioner, or in an area other
than EPZs for which the locational conditions stipulated by the Depart-
ment of Industrial Development have been complied r.r,ith;
(iii) the project undertakes to achie'e export and value addition as per the
norns appearing in the Appendix to this Notc, or at least 35%. ilthe item
does not t'eature in that Appendix.
(iv) the CIF rzlue of imported capital goods is financed through foreign eq-
uity, or FE required for 50Y:o of the value of the plant and equipment (net
of taxes) is within ceiling of Rs 3 crores and the capital goods are not
(v) the foreign technology agreernent, if any entered into by the unit, is
restricted to a lumpsum payment of Rs I crore or 8yo royalty (net of
taxes), over a period of 5 years from the commencement of production;
(vr) the exports by the writ are to be physically made to the General currency
(r,ii) the unit meets the requirements of the Customs authorities in so far as:
(a) it in'olves manufacturing activities within the ambit of Section 3 of
the Central Excises and Salt Act, 1944.,
@) it is amenable to bonding by the Customs;
(c) all the manufacturing operations are carried out in the same prernises
and the proposal does not enr,'isage sending out of the bonded area
any raw materials or intermediate products fbr any other manufactur-
ing or processing activity.
(viii) the condition relating to DTA sale enjoined in REp circular No. 35/91 dt.
I1.9.91 and subsequent amendments thereo{ are adhered to.
(ix) the unit has an annual tumover of at least Rs. 50 crores if it is for
manufhcture of gems and jew'ellery and is located outside Epzlolher
"designated areas"

4. complete applications, in l0 copies in the prescribed form, entitled ..Ap-
PLICATION FORM FoR 100% EOUs/EPZ UNITS" are to be submitted to the
SIA for 100% EoUs, or to the DCs of the concemed EpZs. The application will
be accompanied by a crossed Demand Draft for Rs. 1,000 in favourof the pay
and Accounts ofticer, Department of Industrial Development, Ministry of Indus-
try, payable at State Banlc of lndia, Nirman Bhavan Branch, New Delhi. All
imports should be mentioned in FE and rupee terms and the list of imported
capital goods should be enclosed. Ifthe application is forurd to satisfythe condi-
tions mentioned rn para 2 above, a Letter of Approval shall be issued within two
Government and Business


5. All cases not falling within the scope of para 3 above
shail come befbre
the. Board of Approvals, *'hich shall consider and dispose them of within
qeriod of 45 days of submission of the complete application. The proforma
this shall be the same as for automatio approval, i.e.,
the "A''LICATI.N
FORM FoR 100% EotJs/EpzLrNITS". and'are to be
submitted, in l0 copies. to
the SLA for 100% Eous or to the DC of the concem
edEpz.The application will
be accompanied by a crossed Demand Draft of
Rs 2500/- nfavour of the pal,&
stry of Industry.
elhi. The receipr
as the case mat,

c.rrespo'dence Leuers gf r1tent,,. t"i:.l "$t#:;1^"1ffu:,'1,:J
SLA for 100% EOU and by the DCs tbr lpZ

Schedule I, II, III
6. The industries that app
No.477@) dated 25.7.91 of the
be permitted for being set up as
provided no sale of the products shall
India, except in rerms of paras 334 and 345 (3)
PJol -of
Policy (VolumeJ).
of Import-Export


Foreign Technicians etc.
Exports and Government Policy, Promotion and Performance 435

be required and the normal RBI procedure will prevail. In all other cases, the
provisions mentioned in Press Notes No. 10 and 12 (1991 Series) of the Depart-
ment of Industrial Development may be followed.

Import Financing & Value Addition
8. For import of capital goods other than those appearing in Appendix I
@art-A of Restricted I-ist) of the Import-Export Policy, not fully covered by
matching fbreign equity contribution of u,here FE fbr 50% of the value of the
plant and equipment (net of taxes) is beyond the ceiling of Rs 3 crores, import
financing as per the guidelines of the Department of Economics Affairs may be
permitted. Proposals envisaging ECBs @xternal Commercial Borrowings)
should take into account the interest outgo thereof and the value addition should
therefore be logically calculated on this basis. Export Commissions, within the
parameters laid down by RBI, should also be deducted, to arrive at realistic
Value Addition calculations.

C.G. Imports
9. lt is also clarified that no indigenous clearance will be required for import
of capital goods Import of second-hand CG is not permitted if the facility of
sub-para (iv) ofpara 3 above is availed of, for automatic clearance. The approval
of the 'Committee of Secretaries for Second Hand CG' is. hor+,ever, re<pired for
import of CG that is more than 7 vears old.

Customs Requirements

.l0 As 100% EOUs and EPZ units operate under Customs bonding, these
units have to meet the requirements of the Customs authorities in so far as they:

(a) involve manufacturing activities within the ambit of Section 3 of the
Central Excises and Salt Act,1944;
o) dre amenable to bonding by the Customs;
G) all the manufacturing operations are carried out in the same premises and
where ahy rau' materials, intermediate products are required to be sent
out for job work/processing, such activity outside the rurit does not envis-
age any change in the form, nature or character ofthe goods sent out and
it is possible to identi$ and correlate the goods when received back after

Currency Balancing
11. In order to ensure l.he maximum eamings of free foreign exchange, the
Board of Approvals shall eryoin a condition on units that export to the RPAe
stipulating that the outgo of foreign exchange on account of imports is balanced
by exports to the GCA, on an annual basis.
436 Government and Business

ITC Classifrcations
12. Entreprenews may note that the description of artrcle(s) to be manufbc-
hued should be stated according to the Indian Trade Classifrcation system, Cop-
ies of the Indian Trade Classification @ased on Harmonised Commodity De-
scription and Coding System), published by the Ministry of Commerce, Direc-
torate General of Commercial Intelligence and Statistics, Calcutta, can be ob-
tained on palment from the Controller of Publications, l, Cir"rl Lines, Delhi -
110054 or trom any of the agents authorised to sell Goremment of India publi-
Joint Secretary to the Govemment of India

F. No. l0(53)/91-LP New Delhi, the 9th C)ctober, 1991.
Forwarded to hess Information Bureau for wide publicity to the contents of
the above Press Note.

Principal Information Oflicer,
hess Information Bureau,
New Delhi.

a) Computer Softu.are 60%
b) Blank Video Cassettes 25%
c) Consumer Electronics 20%
a) Readymade Garments 40Yo
b) Made-ups 25%
c) Cotton yarn & cotton 3j%o
polyester yam (ring spindles spun).
d) Cotton yarn & cotton 35%
polyester yam (open end spiruring).
e) Piece goods 30%
f) Denim fabrics 30%
g) Terry towels 32%
h) Silk fabrics 20%
a) Leather footwear 25%
b) Leather shoe-uppers 25%
c) Leat[rer garments/goods 3jYo
d) Sports shoes/sports footwear 25%
Exports and Goventntent Policy, Promotion and Performance 431'

a) Plain gold jewellery t0%
b) Studded gold jewellary 15%
c) Silver jewellary 25o/o

a) Latex gioves 40%
b) Crranite 45%
c) Fish and shrimp culture, feed production units 30%
d) Test & Measuring instruments; 20%
Industrial/control values, photocopiers and
medical and scientific instruments.
e) Clocks/Time piecesAMrist Watches 30%
f) Cigarettes 35%
g) Cigarette Lighters 40%
h) Bristles, including brushes 30%
i) Tissue culture plants 60%
j) Telecom equipment 30%
k) Smaller Vessels i.e., Trarvlers, tugs, dredgers etc. 3jYo
l) Large, ocean going vessels 40%

(1991 Series)
SUBJECT :Revamping of Export Promotion Zone @PZ)I 100% Expon Ori-
ented Unit @OU Schemes Delegation of some specitic powers
of Board of Approvals/Administratire Ministries to Development
Commissioners of CPZs for 100% EOUs and EPZ units.
As the entrepreneurs are alvare. Ministry of Commerce issued a press Re-
lease on 30th -lune, 1991 on revamping the Schemes of l00%o EOUs and Export
Processing Zone Units. This Press Note sets out the changes in the existing
system and procedures for indrutrial approvals arising out ofthe aforesaid press
In supersession of the earlier powers delegated to the concemed Develop-
ment conrnissioners of the Export Processing Zones, Government have decided
to delegate the following powers, for being exercised by the Development Com-
missioners of the Export Processing Zones and 100% EoUs under their respeo-
tive charge as annexed, subject to the maintenance ofvalue addition stipulated in
the letter ofapproval and currency balancing conditions:

l. Additional inport of Capital Goods (C.G.):
To allow, for all industries, one-time additional import of capital goods to the
438 Governmen t and Business

extent of l5%o over and above the value ofC.G. already approved.
2. Currency fluctuations
To allow, for all industries, increase in the value of C.G. imports in terms of
Rupees owing to foreign exchange rate fluctuations vis-a-vis foreign currencies.
3. Increased value of imported C.G.
To permit increase in the value of imported capital goods for an amount not
exceeding l5%o ifthere has been any increase in the invoice value.
4. Attention of C.G. import list
To permit attestation of C G. list fbr imports u'ithin the approved value
including additional value permitted in 1 and 6.
5. Capacify enhancement
To permit capacity enhancement of EOUs/EPZ Units in the case of all indus-
tries, on a regular or ad-hoc basis through additional imports of raw materials/
inputs and consumables, provided the following additional conditions are com-
plied with:
a) No additional import of oapital goods is made over and above Ihe l5%o
permitted as per delegation I and 3.
b) The unit gives an undertaking to the concerned Del'elopment Commis-
sioner that the entire additional exports u'ill be to GCA countries.
6. Broad bandings
a) Broad banding facility is available in respect ofindustries, the design and
production fbcilities ofrvhich are corunon for many aggregates, pror"ided
there is similar manufacturing process. The Development Commissioners
will har.'e the power to permit additional balancing equipment upto 15%
of the value of installed machinery for the items covered under broad
banding. This facility can be availed of by the writ provided it does not
avail ofthe benefits covered under (l) above.
b) No specific approval from the Dev€lopment Commissioner to avail of the
broad banding f'acility will be required if no additional investment is
envisaged. The entrepreneurs will keep the Development Commissioner
informed outlining the revised proiections and undertake to maintain
value addition and currency balancing as stipulated in his original
7. Change in name
To authorise the change in name of the company or the implementing agency
provided the change does not amount to trafficking in Industrial Licences or
Letters of Approvals and subiect to the following conditions:-
(i) For change from an individual to a company provided:-
a) the new company is promoted by the applicant;
b) he is a subscriber to the articles of memorandum of association of the
new comPany,
c) he subscribes to the tune of at least lUYo of the issued equity capital
ofthe new company, and
d) the individual is a director of the new company.
Exports and Government Policy, Promotion and Performance 439

(ii) For change from a company to another company provided:
a) the transferred company is a fully-owned subsidiary of thc company
holding the Letter of Intent or Permission Letter or vice versa or
b) a new company has bcen equipped for the purpose of implementing
the scheme after the grant of Ll or Permission with at lease l}Yo of
the issued equity held by the existing company, and
c) cirange of name would be permitted only if the nerv unit, undertakes
to take over the assets and liabilities ofthe existing unit.
8 Change of location
To permit change of location of a 100% EOU from the place mentioned in
the Letter of Approval/Letter of Intent to another, provided:
a) no change in other terms and conditions of the Approval is envisaged;
b) the revised location is within the territorial change of the Development
c) the revised location is at a warehousing station declared by the Customs
authorities: and
d) other locational, zoning, land-use or environmental conditions are also
compiled with.
9. Extension of validif,v
A. To extend- in the case of EPZ units, the validity of Letter of Approval or
Letter of intent upto two years, on an annual basis, beyond the period of initial
validity of one year, provided the Development Conrmissioner is satisfied that
the party has taken bona fide steps to implement the Letter of Approval/Letter of
B. All other cases u'hich are not oovered by (A) abore will be submitted to
the concerned Board of Approlals. In all cases, the Development Commission-
ers shall endorse a copy of each of their orders or communications to the Minis-
try of Commerce, the SIA Department of Industrial Development, the Adminis-
trative Ministry concerned and the CBSE and Collector of Customs/Excise with-
in rvhose jurisdiction the rurit is located.

F.No. 10(63)/91-LP New Dclhi, the 26th September, 1991.

Dy. Secretary to the Govt. of India.

Forwarded to Press Information Bureau t'or wide publicity to the contents of
the above Press Note.

Principal Information Offrcer,
Press lnformation Btreau,
New Delhi.

Chapter Thirteen

Government's Promotional Role in
lndustrial Development

The tempo of industrial activity in any country owes a great deal to the
promotional activities of the Government. Indirectly some of the broad
policies of the Government, e.g., the tariff or the import substitution poli-
cies, the thrusts in the corporate taxation system, or the changes in the bank
rate, can have enormous, although somewhat indirect, effect on the pattern
of industrial development. But equally important is the direct role of the
Govelnment in promoting industrial or business activities, e.g., the direction
and character of'Government subsidies, the facilities for term loans offered
by Government-sponsored institutions, the infrastructure facilities and the
general investment opportunities afforded by Government policy. In Great
Britain from the eighteenth century onwards the power of the State came to
be systematically used to destroy mercantilism, establish the market econ-
omy, provide the necessary commercial-legal infrastructure and lay the
foundations of Britain's industrial power. Even in the USA, the bastion of
free enterprise, Governmental power, both at Federal and State lwels, has
always been used in a large measure rrot only to discourage certain types of
corporate growth, but also to create indlcements and sanctions leading to
the allocation of resources in certain directions. American economic growth
cannot be explained purely as the result of the operation of market forces,
nor simply as the result of the unaided genius of private business men,
although both these had contributed very substantially. In a great measure it
has been due to the State policies and activities, the promotional and exten-
sion support received from both Federal and State Governments. In this
respectllndia lags behind countries like Japan, Singapore, Malaysia, South
Korea, Thailand, Indonesia or BrazTl, each of which in recent years has
registered spectacular progress towards industrialization largely through a
system of incentives and prombti,onal measures. Contrary to popular impres-
sion in the Asia-Pacffic model of development although the private sector is
the engine for growth, the government also has an active and critical role in
Government's Promotional Role in Industrial Development 443

providing sound macro-economic management infrastructural facilities and
coresponding role for private sector entrepreneurs. The exporter industrial
development programmes in these countries are all government-backed
programmes. Japan is a classic example of the omnipresence of Japanese
Government in the economy through measures such as direct support to
particular industries, guidance and encouragement in the matter of techno-
logical agreements and export advice on desirable prices, promotion of
changes in firm sizes and encouragements ofcartelization. There is a gener-
al belief that business incapable of making satisfactory decision by itself,
and that it is essential for Government to provide guidance on virtually
every aspect of operation.I Indeed Japan provides an interesting paradoxical
example of the co-existence of a vigorous private sector economy with a
very close degree of Government supewision and control, but a control that
is exercised through a paternalistic mandarin type of administrative guid-
ance and persuasion where business willingly accepts the guiding role ofthe
Government. Singapore which in the last two decades has recorded the
highest growth rate in South-East Asia provides an example of the Govern-
ment'relying entirely on promotional measures and incenlives and on sim-
plification of the administrative stnrctuIe concerned with business, and not
on any formal planning which was in fact offrcially abandoned by the
Government in 1964. South Korea and Brazil are two other countries which
in the last ten years or so have achieved remarkable industrial progress by
vigorously following a poliry of directing investment through fiscal incen-
tives and infrastructure facilities.
Despite a general impression that in India Government has relied more
on administrative regulation than on promoting industry through incentives,
Government's promotional role has been much more efrective than is com-
monly assumed. The impressive and widely diversified industrial stnrcture
comprising both the public and the private sectors which have been built up
in the three decades after independence would not have been possible with-
out the promotion, direction and active assistance from the Central and
State Governments.
Government's promotional role can be studied with reference to the
following aspects: fiscal policies, ftnance for indDstry, providing infrastruc-
tural facilities, extension activities, Government's purchase poliry; the role
ofthepublic sector; providing essential raw materials for industry. Needless
to say that these seven aspects have been distinguished only for the facility
of understanding. They are not separate compartments and are impercepti-
bly and at times organically connected wilh one another. In the paragraphs
that follow we shall only briefly touch r4ron tlre issues connected with each,
The second category that relates to development banking will be dedt with
at some length in a separate chapter. There are three special areas where
Government's promotional emphasis is specially concentrated ori account of
India's special problems: dwelopment of industrially backward areas; de-
444 Government and Business

velopment of cottage and small-scale industries; encouragement and promo-
tion of export efforts. They have also been given separate treatment.


Every Government has to take a decision on such basic questions as to what
it wishes to encourage- capital goods or consumers or
type of industries

quate and capable administrative agencies can have enonnous inlluence on
the use ofresources, the
direction and pattern of
indigenous industries.

budgets aimed at improving the effrcienry of the economy as a whole and
of the capital structure of enterprises, their debt-equity ratio and liquidity
position. These budgets also had some promotional measures such as the
sfieamlining of the fiscal structure, the removal of bureaucratic controls
over investment and production, introducing partial convertibility of the
rupee, facilitating foreign direct investment and exports; reduction of excise
duties on a wide range of articles; the drastic reduction of the incidence of
personal taxation so as to inclease the purchasing power and this rwive
demand; sizeable reduction in corporate taxation so as to enable companies
to finance their expansion from their own resources.


After independence Government felt that the absence of an institutional

ernment had created a number of development banking institutions at the
all-India and state levels for supplying long-term and medium-term credit
depending on the needs of the industry. These along with the two other
institutions LIC and url and also with the fourteen nationalised commercial
banks can be said to confer a near-monopoly ofterm finance on the Govern-
Government's Promotional Role in Industrial Development 445

ment of India. Some of the financial incentives offered by the State Indus-
trial Development Corporations are : refund of sales tax paid for the first
tluee years, subsidy of power tariffup to 30 per cent for 5 years. The State
of Maharashtra through the State Industrial and Investment Corporation of
Maharashtra has perhaps gone frrrther than any other State in successfully
administering its schemes for financial incentives, e.g., the capital participa-
tion scheme under which if an entrepreneur has 25 per cent of the capital
cost of a project SICOM gives a loan of another 25'per cent thus doubling
the borrowing capacity, provided the rrnits are located outside Bombay
Thana-Kalyan and Poona areas.


The subject of industrial location has in recent years received considerable
attention from economists and management experts.2 While the dominant
consideration of an industrialist or manager in locating a project has always
been to secure the maximum economy and effrcienry of production and
distribution, a complete adherence to this consideration alone may lead to a
number of social and economic ills, such as, unhealthy congestion in some
areas, an equally unhealthy industrial vacuum in other areas and wide dis-
parities in the living and employment standards of different sections of
population in a country. Many Western countries also face these problems
arising out of tlte locational imbalance of industries. The contrasts between
industrialised south-east England and industrially baclcrvard north-west Eng-
land and north Scofland, and between the industrially advanced north of
Italy and the backward south illustrates this. Key factors which influence
the choice of location are availability of raw materials, proximity of mar-
kets, easy availability of power, assurance of labour supply, availability of
the skilled manpower that is required, presence of banking and financial
selices, presence of allied or related industries and sen ice and mainte-
nance facilities, availability of suitable industrial sites and public utility
services and amenities. Sometimes historical and psychological factors also
play a leading part. "When an industry is known to have concentrated in a
particular area it is always easy to discover natural advantages attaching to
the site."3 Government, in the interest of balanced regional growth, seeks to
neutralise some of these hdvantages of particular location by providing
infrastructure facilities in other more backward areas, e.g., developing in-
dustrial sites, constmcting roads, opening railheads, providing power and
water, c-onstructing industrial housing, providing educational and medical
facilities and public utilities. All the State Governments in India usually
through their State Industrial Development Corporations or infrastructure
dwelopment corporations have set up agencies for such infrdstructure de-
velopment, e.g., Andhra Pradesh Infrastructure Corporation, the West Ben-
446 Government and Business

developing industrial sites.
ates of Maharashtr4 Gujar-
form which such activities
usually assume is the building up of industrial estates where industrial sheds
with all facilities are offered on rent to intending entrepreneurs.a Industrial
estates of a wide variety, i.e. urban, semi-urban, rural, cooperative and
private have been set up in the country. Recently, some functional industrial
edi op-
cial \g,
etc. on
Development of small and Medium Entrepreneurs, october 1973 recom-

State governments should occupy the forefront ofattention.


the State Governments as also the Indian Investment centre should extend
entrepreneurial guidance programmes. Further, the committee attached
It als
model of KITCO and NEITCO srarted by the IFC.
Government's Promotional Role in Industrial Development 447

goods and services to the potential resources of the group, community or
country.5 In other words, productivity includes all the ways and means by
which the firllest and most efficient utilization of the available resources of
men, machines, power, finance and land, etc., can be brought about. Fol-
lowing tho report of the Vikram Sarabhai delegation which visited Japan in
1956, the Government of India sponsored the National Productivity Council
(1958) similar to the Japan Productivity Centre as an autonomous apex body
with local Productivity Councils at various industrial centres and regions.
The NPC wilh its regional offices and the LPCs are engaged in programmes
designed to arouse productivity consciousness and to improve management
practices and introduce work study, better production processes, production
control, cost control, material handling, work la)'out, etc.6


Public sector enterprises have established highly capital incentive industries
producing vital raw materials and intermediate materials which would not
otherwise have been available except through inrports. Thus they have
opened up new possibilities and prospects for nerv entrepteneurial activities
in the private sector. These projects can be said to have a multiplier effect
in stimulating new industries in a number of areas.


Whatever industrial dwelopment took place in our country before inde-
pendence was largely due to the purchase policy of the then Government
from the begiruring of the present century, more particularly during the two
World Wars.7 In the planning of the Tata Iron and Steel the then Govern-
ment's guarantee of a minimum purchase of 20,000 tons of steel rails per
annum for ten years played no small part. After independence the import
substitution poliry of the Government and the general policy of Govern-
ment's purchasing agencies like the DGS & D prefer indigenously manufac-
tured products have been key factors in stimulating industrial activity. A
number of industries have grown up largely on the basis of Government
requirements. The impact of any change in the volume of Government order
in an indrstry like wagon building or jute hessian is considerable. The
Directorate General of Supplies and Disposals is the biggest buying agency
in the co'.rntry. Its purchase policies and programmes can have enonnous
influence on the corporate planning and development of units in a number
of industries. Its standard procedure for announcing rate contract prices for
standard products for purchase by semi-goverrunent agencies all over the
country has enormous implications for business.
448 Goyernment and Business


In the interest of balanced industrial growth Government has talien on itself
the duty of allocating essential raw materials or scarce imported raw materi-
als to industry. The equalization of steel price and coal price in the mid-
1950s is an illustration. Similarly, aLarge number of non-ferrous metals and
scarce imported chemicals are distributed through Governmental agencies.
This enables many units scattered all over the country to get a minimum
allocation of these essential inputs which might have been totally denied to
them in a system of allocation through the market mechanism. But this role
should increasingly become less and less relevant in the environrnent cre-
ated by the on-going reforms including convertibility of rupee on trade
account. Distribution and price controls over steel, cement and aluminium
have already been abolished thereby removing considerable distortions, and
making for productivity and efficiency.


I Hadley, Eleanor M., Anti-trust in Japan, Princeton University Press, p.
1 See Sargent Florence, Investment Location and Size of Plml.
J. A. Beecham, Economics of Industrial Organisation, p. 136.
4. For details see P.C. Alexande, Industrial Estales in India.
5. tr-O, Higher Productivity in Moufacturing Industries, p. 30.
6. S.C. Kuchhal, The Industrial Economy of India, pp. 521-35.
Chapter I.