REGULATORY

ENVIRONMENT
 Regulation
Purpose of the regulation is to ensure equality and justice in
society by framing laws, acts, and regulations. Regulation
refers to “controlling human or societal behaviour by rules or
regulations or order issued by an executive authority or
regulatory agency of a government and having the force of
law”. legal environment of a business indicates a twofold
purpose i) helps business to flourish which benefits citizens
either by generation of employment or by any service. ii)In
negative connotation, legal environment, specially in socialist
economy may hinder growth of business.
Regulation covers all activities of private or public
behaviour that may be detrimental to societal
or governmental interest . From Business
Environment Point of view It can be operationally
defined as “taxes and subsidies of all sorts as well as
explicit legislative and administrative controls over all
aspects of economic activity”. Rules laid down by
regulation are supported by penalties or incentives
designed to ensure compliance.
Regulations and institutions governing the entry,
growth and exit of firms—including registration,
licensing, inspections, property rights etc. play an
important role for creating markets and thus
supporting productivity gains and growth. When
done right, these regulatory reforms can reduce the
costs and risks of doing business in a country while
also ensuring a level playing field and protecting
consumers, public health and safety.
The regulatory environment influences the choices
investors and entrepreneurs make in locating,
operating and expanding their businesses.
Businesses’ ability to access credit, enforce contracts,
buy property, process goods through customs, pay
taxes and conduct other everyday activities efficiently
depends on a business environment that promotes
business without unnecessarily burdensome or
inappropriate regulations. Poor economic policies
and onerous regulations can hinder economic growth.
Regulatory environment can be very influential insofar
as the way you carry out business activities.
Organizations need to comply with country’s laws and
regulations in which they do business. Rules and
regulations can change frequently; they also depend on
the political culture in a country. Many industries are
heavily regulated around the world, such as banking and
finance, utility, transportation, oil and gas, and mining.
The regulations will have a major influence on business
model.
Rationale for Regulation :
In its most common context, regulation is an attempt to control
or influence private behaviour in desired direction by imposing
costs on or proscribing undesirable behaviour. Since regulation
can have important consequences for economic efficiency, it is
usually justified only under special conditions. Broadly, there
are three sets of justifications for regulatory interventions:
i)
Prevention of market failures, ii)
Restriction or removal of anti-competitive practices iii)
1.To Prevent Market Failure :
Market failure is a condition in which the market mechanism
fails to allocate resources efficiently to maximize social welfare.
Market failures occur in the provision of public goods.

In India, because of the adoption of regulatory reforms,

telecom is no longer a natural monopoly. The electricity sector
was originally a monopoly but unbundling has led to the
introduction of competition in certain segments. Two segments,
transmission and distribution, are still natural monopolies. The
water sector is still a natural monopoly and completely
2.To check anti competitive practices:
Firms may resort to anti competitive practices such as
price fixing, market sharing or abuse of dominant or
monopoly power. Laws that empower officials to take
action can help deter such practices. Regulation through a
set of transparent, and non-discriminatory rules can create
a competitive and dynamic environment in which market
players can thrive. In its absence, anticompetitive practices
and regulatory failures may not allow the market process
to yield socially optimal outcomes.
3.To promote the public interest :
A third set of justification arise from
concerns about the promotion of public interest
which is an important policy objective for
governments. Ensuring fair access, non-
discrimination or any other matter of public
importance can provide an important reason for
regulation. Regulations regarding pollution control
are also public interest regulations.
Consumer protection laws in India
Government protects rights of consumers from any
exploitations through implementation of consumer
protection laws. Consumer Protection Act, 2019 is one of the
major acts to protect interests of consumers and to establish
Consumer Forums in district, state and national levels to
address consumers’ disputes. Apart from that,
The Standards of Weights and Measures Act, 1976 ,
The Essential Commodities Act, 1955 and
Prevention of Blackmarketing and Maintenance of Supplies o
f Essential Commodities Act, 1980
Some Regulations in this regard in India are:
i)Support pricing : government offering to buy wheat
or rice from farmers at a price which is higher than the
market price
ii)Public distribution system: supply of food grains at
a price which is lower than the market price
iii)Free distribution of piped water and free
power to agriculture – these are Regulatory decisions
to levy zero tariffs on supply of water & power to
Agriculture.
Typology of Regulations in India:
Post independence, India experimented with a socialist mixed
economy model with state retaining control over the economy ,
heavy industries and utilities etc. While private sector activity was
allowed, government tried to control it through a web of controls
such as licensing and to intermediate good imports etc. Such
controls were complemented by high tariff walls. Thus, the
government was not only a producer and regulator of strategic and
important goods and services, it also exerted direct control over
the output, and sometimes even associated prices, of private
sector activity.
After 1985 Indian economy embarked on a process of domestic
reform which involved following elements – delicensing of
industries and abolition of output quotas or bounds on outputs
of firms, permission for private entry into sectors which were
hitherto the monopoly of the government, and liberalisation of
quotas and tariffs on capital good imports. From 1991 onwards,
liberalisation of the external sector meant that tariff reductions
were extended to almost the entire spectrum of merchandise
trade and conditions for foreign investment were simplified and
liberalised. The process of domestic reform and external
liberalisation is still ongoing.
Producer profile in various sectors has undergone a
significant change with private firms co-existing with
government firms in many sectors which were previously
government monopolies (e.g. electricity,
telecommunications). Consensus among decision makers
has been that independent regulation is required in such
sectors to guarantee a level playing field. As a result,
independent regulators have been constituted in various
sectors, starting with electricity and telecommunications,
Regulation in India can be mapped
under following broad categories:
1.Economic
regulation
2.Regulation in the public interest
3.Environmental regulation
1.Economic regulation:
Aims at preventing or tackling market failure. This is
achieved with rules that punish market distorting
behaviour. Examples in the Indian context include The
Foreign Trade Act, 1992 for facilitating imports into and
augmenting exports from India and the Electricity Act of
2003, which allows State regulators to fix tariffs for power
consumption.The Securities and Exchange Board of India
Act, 1992 (15 of 1992),The Public Provident Fund Act 1968 ,
Securities Laws (Amendment) Act 2014 etc.
2.Regulation in the public interest:
This covers areas where industries are failing
to meet a standard or uphold something of public
importance . A classic case is of quality of products for
consumer health and safety, where firms can fall short in
protecting employees or the general public . Although market
competition can make firms more willing to address such
issues, the standards adopted may not be adequate or
uniform across the industry. The Bureau of Indian Standards
(BIS) created by the Bureau of Indian Standards Act, 1986
3 Environmental regulation
Environmental regulation protects the environment from harm.
environmental degradation imposes costs on land, labour and
resources that have consequences for economic development.
Unsafe water, unhealthy air, species and habitat loss and
degradation of soil are some concerns addressed through
environmental regulation. India has six major laws related to the
protection of environment. These include:
The Environment (Protection) Act, 1986;
The Forest (Conservation) Act, 1980;
The Wildlife Protection Act, 1972;
Water (Prevention and Control of Pollution) Act, 1974;
The Green Tribunal formed under the
National Green Tribunal Act, 2010 supervises the cases
relating to the environment in India.
India is the very first country to make environmental auditing
in industrial units compulsory. Concept of environmental
auditing in India was first formally introduced in 1992. The
Supreme Audit Institution (SAI) in India is headed by the
Comptroller and Auditor General (CAG) of India . Who has
responsibility for performing environmental auditing in India.
4.Business regulations
1.Business Registration
Complexity of business registration varies widely across
countries, but three core functions are common to all:
(1)
Checking for uniqueness of a business name,
(2) Inscription in a public commercial registry
(3) Registration with tax authorities.
Richer countries tend to regulate less and instead rely
on a firmly established legal system to govern business
2.Licensing:
Licensing is defined as a business arrangement, wherein a
company authorizes another company to temporarily
access its intellectual property rights, i.e. manufacturing
process, brand name, copyright, trademark, patent,
technology, trade secret, etc. for adequate consideration and
under specified conditions.
Licensing under State Acts implies authorization to a
company to carry out its approved business plan. Business
licensing by State is seen as a barrier to doing business.
Evidence is clear that Over-regulation and Red tape are
associated with lower levels of Income and Productivity,
and higher levels of Corruption.
As licensing is a key potential bottleneck in the business
start-up process, gains from licensing reform stand to be
significant. In good business licensing regimes, licensing is
a means to fulfill legitimate regulatory purposes. These
include protection of public health , safety, environmental
protection, national security and allocation of scarce
resources. Licenses should not be used to manage
competition in the economy or to generate revenue.
3.Labor Regulations:
Every country has established a complex system of laws and institutions
intended to protect interests of workers and ensure a minimum
standard of living . In most countries this system encompasses three
bodies of law: Employment law, Collective relations law, and Social
security law. Employment laws govern individual employment
contract. Industrial relations laws regulate the bargaining, adoption
and enforcement of collective agreements, Organization of trade unions
and the Industrial action by workers and employers. Social security
laws govern the social response to needs and conditions that have a
significant impact on the quality of life, such as old age, disability,
death, sickness and unemployment.
Regulation of labor markets aiming to protect
workers from employers takes four forms.
First, governments forbid
discrimination in the labor market and endow
workers with some “basic rights” in on-going
employment relationships.
4.Property Registration
Land and buildings account for between half and three-quarters of
a country's wealth in most economies. With formal property titles,
entrepreneurs can obtain mortgages on their homes or land to start
or expand businesses. Banks prefer land and buildings as collateral
since they are difficult to move or hide. However, a large proportion
of property in developing countries is not formally registered.
Property markets will not function effectively if regulations restrict
investment from being channeled to its most productive use, and
titles will not increase the availability of credit if collateral laws
make it expensive to mortgage property and inefficient courts
prevent banks from seizing collateral when a debtor defaults
5.Credit Regulations
In most countries, banks do not extend credit without assurances that borrowers
are creditworthy and that it will be possible to recover the debt if there is a
default. As a consequence, entrepreneurs with promising business opportunities
cannot obtain loans if the bank does not have enough information on the value
of the property and the credit history of the borrower. Two types of institutions
expand access to credit and improve its allocation: Credit information bureaus,
and Creditor rights in the country’s laws. Information sharing allows creditors to
distinguish good clients from bad, while legal rights to enforce claims help in the
event of default. Good credit institutions define property rights for both
creditors and debtors. Collateral and insolvency regulations define the rights of
creditors to recover their loans. In addition, collateral regulation helps debtors
by extending the right of property title to the right to use property as security for
finance. Governments can help creditors by establishing appropriate regulations.
6.Tax Administration
A cumbersome tax system, both in terms of policy and
administration, is considered to be one of the main reasons
businesses operate in the informal economy. Tax compliance costs are
often regressive and put a disproportionate burden on small
businesses. Nevertheless non-compliance is not a free option for
MSEs. It entails substantial costs, which result from expenditures due
to penalties or bribes required to avoid penalties etc.lack of business
development opportunities such as access to credit, public-sector
contracts and publicity programs to promote the small business.
Impact of non-compliance on the overall tax seriously affects the
equity of the tax system and increases the tax burden of compliant,
registered businesses.
7.Trade Facilitation
"Trade facilitation" is used by institutions which seek to improve
regulatory interface between government bodies and traders at national
borders.Customs reform and trade facilitation programs are critically
important to reduce trade transaction costs and enhance international
competitiveness. With total trade transaction costs estimated in the range
of 10-15 percent of the total world trade, and customs compliance costs
likely to be 5-7 percent of that sum, programs that reduce such costs by
even 1-2 percent can have a huge positive impact on world trade and
economic growth. When reforming customs and trade facilitation
measures, it is essential to minimize incidence of customs interventions;
simplify the complexity of documentary requirements, paper flows,
procedures and controls; and reforms are in full compliance with
international customs practices, and agreed standards.
8.Alternative Dispute Resolution
Idea behind mediation is not only to provide alternatives to litigation but to
modify dispute resolution system, including litigation, to make it more
suitable for parties in commercial disputes. Introducing mediation or
arbitration is one way of making system more appropriate for end-users.
Mediation and other alternative dispute resolution methods are not
alternatives to formal justice system . Their goal is to complement scope of
court procedures so that parties can choose between these processes. In many
cases, parties may choose mediation along with litigation or arbitration and
conduct them in parallel, until they settle, withdraw or obtain a court
decision or arbitration award. litigation is and must remain a crucial part of
dispute resolution system in any country. Litigation is particularly vital for
existence of mediation and other non-binding processes because one of the
incentives to mediate is often to avoid adjudication.
9.Bankruptcy
Fundamental goal of bankruptcy law is : first, to allow for both fair and
efficient dissolution of businesses that are not viable and, second, for those
businesses that have a chance at achieving viability, provide opportunity to
reduce or wipe out debt and protect themselves from pursuit by creditors. A
modern, credit - based economy requires predictable, transparent and
affordable methods of enforcing debt collection. Although bankruptcy law
tends to attract interest mainly when enterprises face difficult times or even
certain failure, the very existence of a clear and enforceable bankruptcy law
plays an important role in fostering economic growth. In theory, this allows
for efficient reallocation of the debtor’s resources. In absence of such a
scheme, large, insolvent companies may persist in draining public resources
or insiders may unfairly drain the assets of the company while other
legitimate creditors are denied access to the payments they are owed.
10.Competition Policy
Fundamental goal of competition law is to foster a culture of competition
that ultimately benefits consumers through better quality, service and
pricing for good and services. Competition law provides a regulatory
framework to maintain and improve efficiency in markets, promote
competitive pricing practices and restrain price rises in markets.
Competition law by itself does not create competition, but when effectively
applied, can counteract dangers of private anticompetitive behavior. For
example, cartels may deliberately create artificial shortages, with the
result that some consumers pay an inflated, or monopoly, price. Dominant
firms may abuse their market power through such means as mandating
the purchase of additional products. Entry of new participants may be
blocked by firms with market power that erect protectionist barriers.
11.Inspections
Good inspection practices and reforms in quality inspection
systems help to:
i)Maximize compliance with clear and legitimate government
regulations by detecting and deterring non-compliance consistently
and fairly;
ii)Minimize uncertainty and regulatory risks for businesses by
operating transparently and under the rule of law;
iii)Fight corruption by reducing the opportunity for abuse of
discretionary powers; and
iv)Minimize costs to businesses and optimize costs to governments
by using resources efficiently to target the highest risks.
Regulatory Compliance:
A company that does not live up to regulatory compliance ,
expectations of its investors, customers, consumers or market
analysts undermines stakeholders’ perception on the value of
products and services and their reliability. Thereby increasing
their risks towards Investment and faith in the company.
Market considers regulatory risks, and companies devote
considerable resources to legislative monitoring and compliance
activities, in order to maximize their understanding of the policy
environment and minimize the impact of legislation and
associated risks.
Compliance has become a significant cost, in terms of
dedicated compliance teams, internal audit, reporting
mechanisms and impact assessments. Possibility of fines
may prove to be costly both for financial losses and brand
reputation damage. Overregulation or complex compliance
requirements may constitute a reason for companies to
relocate or establish a new business elsewhere, in order to
limit regulatory risk. Putting in place organizational
compliance measures may require solid management and
legal expertise; it might constitute a real challenge for start-
ups or for smaller companies.
Deployment of innovative technologies depends on the
success of technology commercialization, and this, in turn,
is connected to the regulatory environments. Sound
awareness of technology and its ramifications is crucial for
policymakers to keep regulation and to elaborate
requirements based on objective. If regulators and
policymakers aim to regulate new technologies, they need
to develop a certain level of expertise on them, otherwise
further risks for operational environments could arise.
Reasons for Failure in Compliance
1. No expertise
In India, medium and large enterprises have to deal with more than a
hundred acts, licences and registrations. Moreover, they also have to adhere
to hundreds of compliances and innumerable filings in a given year. These
are not just limited to the respective state where the industry is located. They
even need to follow the compliance standards bestowed by the central
government as well as local government regulators.Following such a complex
web of compliance in India requires right expertise, technology and good
knowledge of processes. This is where things go completely haywire. A
typical medium or even large enterprise can hardly manage to sustain itself
in this competitive and intricate business market, let alone seek services of
2. No resources
Most companies do not have required or dedicated resources to look into
compliance issues. Many large companies have only two or three people
forming compliance management team. This number dwindles further for
a medium/small sized enterprises. To add to this intricacy, company
secretary is usually also tasked with the role of compliance management.
This distracts their attention from their core task of handling company
law, resulting in inefficiency and lack of productivity in compliance
aspects.
Such a small and disorganised team is simply not enough to successfully
navigate this Bermuda triangle of compliance, Companies need dedicated
resources and a focused approach to overcome this issue.
3. Management unawareness
Most of the time, management is not aware of the different
compliances related to their industry. It observed that in more
than 81% of the cases, Key Management Personnel such as
CXOs, directors and board members have limited understanding
of compliance requirements and their significance.
Consequently, top management is neither able to establish right
guidelines in upper echelons, nor can they provide right
direction to their workforce.
This unawareness within management affects production cycle
which impacts overall efficiency and productivity of organisation
4. Absence of digitisation of compliance
management and tracking
Most companies in India operate on an ad-hoc, people-
dependent and paper based model, wherein they manage their
compliance obligation status on spreadsheets and utilise
phone calls or emails for follow up. This causes a loss in
timeliness, accountability and transparency, which results in
missing out on compliance obligations , eventually leading to
penalties and notices from the authorities.
Most of the time, crucial compliance documents get misplaced
or cannot be tracked
5. No access to legal updates
And finally, one of many compliance-related challenges that
companies face is no access to any kind of legal updates or any
changes in the compliance obligations.
India has a highly dynamic compliant and regulatory ecosystem.
Here, laws change frequently and quickly resulting in innumerable
changes in the given year. Most of the time, these updates result in
a change in interest computation, duty structures, dates, penalties,
forms and many other such aspects which require appropriate and
timely changes to ensure accurate filings, registers and returns.
These updates are generally published in innumerable government
websites and other official releases.