Setting 2. Business 3. Licensing: Public Control Historical

Contents
Preface
1. Public Control of Business : The Historical Setting l-32

World Perqpective; Indian Perspective
2. Constitutional Framework of Government

Control of Business 3344
Centre-State Division of Legislative Powers; Fundamental Rights
3. Industrial Policy and Industrial Licensing 45-109

Indushial Policy Resolution, 1956; Industries (Development and
Regulation) Act, I 95 I ; Review of Government's Indrutrial Licens-
ing Policy; Industrial Licensing Policy of 1970,1973; Towards
Structural Adjustments and Liberalisation; The Industrial Policy
Statement of23 July 1980; Annexure
4. Control of Monopolies : Experience and Implications ll0-122

5. Company Law in India 123-t4Z
'Company' Defined; Partnership and Companies; Tlpes of Com-
panies; Some Main Features ofthe Act; Amendments of 1974; An
Overview
6. Trends in Corporate Management Since Independence 143-156

First Phase: 7947 to 1956; Second Phase: 1956 to 1969; Third
Phase (1969 to Date)
7. Government Control over Foreign Direct Investment

. and Collaboration lS7-253
Arguments Against and for Foreign Investment; Policy till 1968;
Procedural and Policy Changes of 1 968; Industial Licensing Poli-
cies 1970 and 1973; Remittances and Capital Repatriation; The
Foreign Exchange Regulation (Amendment) Act, 1973; Impact of
Foreign Capital; Recent Liberalisations; Annexue
Contents
Capital Issues Control 254-268

Rights Issue; Bonus Issue, I 98 I ; Application for Debentures Issue;
Annerure
9. Regulation ofthe Stock Exchanges 269-302

Future Prospects; Some Recent Institutional Devices; Arurexure
10. Government Control Over Distribution and Price 303-343

Legal Frame of Commodity Control; Distribution of Foodgrains;
Food Corporation of India; Other Essential Commodities; Other
Relevant Government Measures; Price Control; Amexure
11. ImpofiControl 344-367

Legal Framework; Annexure
12. Exports and Government Policy, Promotion and

Performance 368-441
Basic Constraints; Incentives System; Export Obligations; Export
Servicing; Role ofthe Public Sector; Consultancy Services; Joint
Ventures Abroad; Export-Import Bank of India; Abid Hussain
Committee; Some Recent Policy Liberalisations; Highlights of
New Export Iniport Policy; Prospects; Annexrue
13. Government's Promotional Role in Industrial

Development 442-148
Fiscal, Budgetary and Monetar,v Policies; Finance for Industry;
Infrastructure Facilities; ExtensionActivities; Role of Public Sec-
tor; Govemment's Purchase Policy; Providing Raw Materials
14. Public Sector Development Banking 449-491

Scope and Signihcance of Development Banking; Establishment
of Development Banks in India; Industrial Finance Corporation of
India; Industrial Development Bank of India (IDBI); Industrial
Credit and Investment Corporation of India (ICICI); State Finan-
cial Corporations (SFCs); Life Inswance Corporation (LIC); Unit
Trust of India (Un); Industrial Reconskuction Bank of India
(IRBI); Export-Import Bank of India; Crrowth of Large Indushial
Houses; Lending Policy of the Development Banks; The Converti-
bility
Guidelines; Reconstitution of the IDBI as an Indqrendent
Apex Holding Company; Future Prospects; Safeguarding the Pub-
lic
15. Government Policy and Small-Scale Industry 492-5ll

Organisational Setting; Reservation; Registration; Entrepreneurial
Assistance; Industrial Estates and Areas; Marketing; Export Pio-
motion; Aacillary Industries; Modernisation; Diskict Industries
Contenls ix
Centres: Ercise Concessions; Khadi, Village and Cottage Industries;

Recommendation of the Bhatt Committee on Small and Medium
lintrqlreneurs; New Small Industries Policy l99l: Small and Tiny
Enterprises; Village Industries
16. Government and Planning 512-544

Historical Backgroun@ Nahre of Indian Planning Process; First Five-
Year PIan (1 950-5 I to I 955-56); Second Five-Year Plan (1 955-56 to
I 960-61 ); Third Five-Year Plan ( I 960-6 1 to I 965-66); Three Annual
Plans(l966-67to1968.69):Fourt1rFive-YearPlan;FiflhFive-Year
Plan (197 4 -7 9); Sixth Five-Year Plan (19 80- 85 ); Seventh Plan (198 5-
90); India's 8th Plan -- A Bold Exercise in Giving Direction in
Condition of Uncertainty; Five-Year Plans vr's-a-vrs Private Indusky;
AnOverview
17. India's Eighth X'ive Year Plan and Structural Refoms 545-562
18. Interface Between Government and Public Sector 563-609

Problems of Relationship between Ministries and Enterprises; Ad-
ministrative Ministry; Board of Directors; Conlusion about the Objec-
tives; Complicated Procedure of Projects Approval; Company Law;
Departmenl of Public Enterprises; Coordination of Holding Company
Concept; RecentMeasures and MOUs; Joint Sector
I
19. Privatisation A Global Revolution of the 1980s 610417 i
- !
20. New Economic Policy Environnent in India and I

Early Experiments withPrivatisation 618{35
\
Index 636 f
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Chapter One
Public Gontrol of Business :

The Historical Setting
WORLD PERSPECTIVE
In the present-day world no one will seriously dispute Government's power

of regulation and intervention in economic life. This is so even in the few
countries like the U.S.A. or Japan which are formally wedded to free enter-
prise or capitalism. In these countries, too, the State has been performing an
ever-expanding role, and regulation of the private sector in some form or
other by the public authorities in the larger public interest has been accepted
as a part of national policy. In todal"s context one need not be a socialist in
order to advocate, or accept greater Government regulation of private busi-
ness. In the developing countries nearly all ofwhich have ernbarked upon a
declared policy of planned economic growth and most of u'hich allow some
private enterprise in varying degree, the role of Government is all the more
important. Thus the question today is not whether there should be Govern-
ment regulation of private business, but only to what exlent it should be
there.
The following description of a free enterprise economy from a text-book
on the subject is only a theoretical description which does not really fit in
with the economic realities of any country: "In the free enterprise capitalist
world, industries are not coordinated one rvith another by any human plan-
ning and command, nor is any industry governed as a unit. Instead there is a
market mechanism of demand and suppll' actuated by the incentives and
deterrents of prices and profits and losses upon a number of firms ovming
one or more factories within the same or sometimes different industries.
Decisions including plans for integrated new activities are made and com-
nands are issued within the constituent firms or conrbine of firms and not al
higher levels. These decisions mainly about what to make. how much, at
rvhat price and rvith what capital investment involves risks, or more specifi-
call-v- uncertainties. There is the hnancial possibilit-v of a loss rather than a
proht to the firms. since the cbnsumer, particularll'when he has a choice of
2 6otternment and Business
competing firms, may not demand all the products of the firm. at a price
suffrcient to cover fixed overhead costs. There is also the hazard to the
worker of unemployment through redundancy when his employer has to cut
production."r It will appear that broadly there are four basit features which
characterize a free market or laissez faire economy as distinct from a cen-
trally planned economy:
l. our, capital) are privately owned,
tiative of private enterprise.
2. gard to consumption, occupation.
3. Income is received in monetary terms through the sale of goods

produced or services rendered by factors of production or from pro-
fits of private enterprise.
4. The free is not planned. controlled or regulated by
the gove ly satisfies collcclive rvants thro;gh public
services. po\\ers of liec market econor'y ire profit
motive a
al model. In actual practice the private enter-

pri r from it in manv respects, the most important
uf of go,,,ernment in economic acti.r,ities. Some
governments have gone much further than others in controlling lhe private
sector, or in expanding the public sector. Nearly all of them have substan-
economl'. Thel
vernment-regu_
existing private
very general
system and
which by the
ic conditions
under which business and industry can flourish, the various policies fol-
lowed by governments invariably cast decisive influence on the latter. Thus
business and industry have always flourished in conditions of political sta-
bility in an area created by a strong Emperor or King, and nevei in stages of
political anarchy, or disintegration of a country into small principalities. In
Europe the beginnings of modern capitalism were associated with the crea-
tion of strong monarchical governnents u,hich abolished all artificial eco-
nomic barriers and established public order r,vhich made it possible for the
mercantile classes to prosper. In our olvn country it rvas the political unih-
cation of the country in the earl1. lgth century and the establishment of the
strong British Raj r.vhich led to the grolrth of business and industry on
modern lines.
Public Control of Business : The lli,storical Setting
However. it was only after the growth of industrial capitalism and the
factory system in the eiglrteenth century that political science took serious
notice ofthe ideal relationship between the State and private business. The
periodic economic crisis through which the western rvorld had passed, the
trvo World Wars and th': felt need for government intervention in the inter-
est of planning and regu!:'tion have focused attention on this problem. Vari-
ous theories have been advanced advocating State intewention in varying
fbrms to correct the imbaiance created by utter planlessness. and to do awal'
with such recurrent phenomena as oler-production, violent fluctuations in
prices, needless duplication. unemployment and poverty. All these theories
are in reality variations or manifestations of various schools of political
philosophy about the functions of the State as applied to the economic
milieu. They can be grouped under five broad schools of thought: anar-
chism, individualism. collectivism, socialism and communism. It is impor-
tant to note that this classification is by no means $'atertight and that very
often each group shades off so imperceptibly into another that it is almost
impossible to draw a sharp distinction. Of them anarchism standing at one
extreme advocated the total abolition of the State. Communism is at the
other extrerne. and seeks to place all property and all means of production
and distribution under State orvnership, and to subject the lives ofindividu-
als to very rigorous control and supen'ision. Between these two extremes lie
individualism, collectivism and socialism. We can dismiss anarchism as just
a matter of theoretical interest. Communism. on the other hand, is a form of
socialism. the most extreme and complete one. in rvhich private enterprise
has no role. For our purposes tve shall take brief notice of only individual-
ism. collectivism and socialism lvhich have a direct relevance for the sub-
ject of our study.
Individualism
The prevailing climate of public opinion in western Europe during the
greater part ofthe lgth century has been characterised by the famous consti-
tutional expert, Dicey. as 'individualism'. Briefly, it stood for gol'ernment
non-interference in business and the fullest possible scope for individual
initiative unhindered b1' restrictions of the State. It proceeded from the
simple assumption that eyery individual was the best judge of his interest,
and therefore Legislation should aim at the removal of all these restrictions
on the free action of an individual except those which are necessary for
securing the like freedom on the part of his neighbour.' This freedom of
enterprise and contract, it was held by individualists, would result in the
greatest wealth and happiness ofthe greatest number. since, each individual
i,ould, unhampered by government regulation, act through the .market
mechanism in the consumers' or producers' interest whose sum total would
be national interest. Normal laq,s of demand and suppl-v lvould themselves
4 6overntnenl and Bu.tiness
ma\imum of liberty. The only limitation on it should arise from the fact that
there rvere also other human beings in the society thus each person could
claim only that much libery' to exercise his faculties which wai compatible
with the possession of like libes, bv others. The state was a necessan, evil
whose sole ftinction should be to protect the individual against the wiongs
of his neighbour or the violence of some foreign state, and thus to inten,ene
Public Control of Business : The Historical Setting 5
only in the interest of a more equitable distribution of liberty. All other

functions should be left to indir/iduals or organisations. If the State went out
of its way in these spheres it could not properly perform its true functions.
"To each organ one function and only one" was his motto.
During the greater part of the 19th century, under the influence of these
philosophers, the State's industrial poliry in Western Europe and North
America was reduced literally to laissez faire. The basic faith was that
business should be left completely unfettered by governmental regulation.
Such regulation or legislation interfered with the normal healthy growth of
commerce and industry. Under the 'benevolent' inJluence of individualism.
the industrial revolution grew and the factory system developed with all its
undesirable unhindered by any government control in the beginning. In the
U.S.A. giant corporations acquire red monopolistic control with all its atten-
dant evils.
It was the public outcry against these evils of unregulated industrial
growth in England which frrst initiated the process of change in public
opinion towards the acceptance ofthe need for State intervention, and even-
tually led to a reconsideration of these issues by the philosophers and the
emergence of newer value judgments. First came an emotional reaction in
Britain to the horrors disclosed by a series of offtcial papers about trade and
industry wluch the State had 'let alone'. "The first revolf'. wrote Sidney
Webb in his contribution to the Fabian Essays, ''came from the artistic side.
The first man, who really made a denl in the individualist shield was Car-
lyle, who knerv how to compel men to listen to him". As early as 1843
Carlyle declared that "a government of the under classes by the upper
classes on a principle of let alone is no longer possible in England in these
days". This had its impact on the individualism of the age, and as we have
seen, under Bentham's inlluence there was much talk of positive action by
the State in several directions.
This line of thought culminated in John Stuart Mill who in his book of
Principles of Economy came to the conclusion that while laissez faire was
to be general rule, it was subject to "large exceptions". On the whole Mill
had a conscientious objection to government intervention on several
grounds: (i) "The compulsory character of the intervention itself, or of the
lely of funds to support it"; (ii) the possibility of suppression of minority or
individual rights; (iii) over-burdening of the State machinery which was
inadequate to discharge even the existing duties; (iv) superior efficiency of
a private agency owing to the stronger interest in the work; (v) "importance
of cultivating habits of collective action in the people". As Mill emphati-
cally states:
People anong whom there is no habit of spontaneous action for a collec-

6 Governmenl and Business
tive interest. who look habitually to their Government to commend or

promote them in all members of joint concern-lvho e.xpect to have
everltlung done for them. have their faculties only half doeloped: their
education is defective in one of its important branches... There cannot be
a combination of circumstances more dangerous to human welfare than
that in which intelligence and talent are maintained at a high standard
within a governing corporation, but starved and discouraged outside the
pale... It is therefore of supreme importance that all classes of the com-
munity. down to the lowest, should have much to do for themselves...
that the government should not only leave as much as possible to their
own faculties the conduct of whatever concerns themselves alone, but
should suffer them or encourage them to manage as many as possible of
their joint concerns by voluntary co-operati on.
Against these objections to State interference, Mill also put forward

several exceptions favouring State action, e.g., (i) The incapacity of some
people, notably children and the "uncultivated" to judge their own interest
made it necessary for the State to inten'ene to protect their interests; (ii)
Where individuals can judge their interest, but are 'unable to give effect to
it except by concert which concert again cannot be effectual unless it re-
ceives validity and sanctions from the law': (iii) "Arything which it is
desirable should be done for the general interests of mankind or of future
generations, or for the present interests of those members of the communifi'
who require aid. but rvhich is not of a nature to remunerate individuals or
associations for undertaking it. is in itself a suitable thing to be undertaken
by government." In many respects J.S. Mill was the bridge from the early
l9th century absolute individualism to the full acceptance in the 20th cen-
tury of the need for State action in all helds of economic life. Many of
Mill's objections have lost force now. His exceptions, on the other hand,
have become larger and larger under pressure of newer economic, social,
industrial and political developments.
Laksi in his Granunar of Politics (1925) declared that laissez faire as a
systematic principle ended with the outbreak of war in 1914. Lord Keynes
in1926 published his lectures entitled The End of Laissez Faire.Butaswe
have seen, the decline of laissez faire doctrine was not an event, but a long
process which started even in the mid-l9th century with the reaction against
the horrors of unregulated industrialism. Even before the First World War
absolute individualism had been discarded as a seriously argued philosophy,
and the need for State action in a very wide economic area recognised.
Among the intellectual inJluence shaping public opinion in Britain we can
mention Charles Booth's Surtey of the Life and Labour of the People in
Landon (1891), The Rowntree Survey at York (1899), The Fabian Essays
I'uhhr. Control of Business : 'l'he Historical Setting -l
(1889). and the activities of Fabian socialists like Sidney and Beatrico
Webb and Bernard Sharv lvho systematicallv preached not only the need fol
State interference in defence of the rveaker sections and the labourers, but
also for State participation in industry. State sen'ice for industry, and State
insurance .against risks of industry. The rise of trade unionism and the
growth of the Labour Paftf in Britain and also cast decisive influence on the
shaping of the public attitude.
The war of l9l4-18 rvhich inevitabll'led to near total governmental
regulation and control of every aspect of economic life in nearly all Western
countries accelerated this process. After the War there was no going back.
but only progressive enlargement of the sphere of State action. The rise of
totalitarian States----of the Communist variety in Soviet Union and of the
Fascist varietv in Germany and Italy which stood for everything opposed to
laissez faire-had also its significance. The irnpact in particular of the
e.rperience of planned economic development in the Soviet Union was un-
mistakable. Not only the left-wing leaders and intellectuals in the West, but
also leaders of freedom movements in colonial countries, notably
Jawaharlal Nehru of India, drew their lessons from this.
Of equally wide implications were the lessons of the great world depres-
sion starting in 1929 which brought about unemployment and economic
misery on an unprecedented scale in a large nurnber ofcountries and led tc
vigorous political demands for State inten,ention. Close on its heels, rrith
the publication in 1936 of J.M. Keynes' General Theory of Employmeni,
Interest and ll,Ioney began a general move for economic planning by gov-
ernment in countries like U.S.A. and Britain, although this planning unlike
the Russian Five-Year Plans rvas confined to the prevention of unemploy-
ment and providing incentives and facilities for location of industries in
backward areas. "The outstanding faults of the economic society in which
rve live," said Lord Keynes, "are its failure to provide for full employmenf.
and its arbitrary and inequitable distribution of wealth and income." His
recommendation was for "establishing certain central controls in matters
which are nolv left in the main to individual initiative" in order to "exercisc
a guiding influence on the propensiq' 1o consume partly through its scherne
of taxation, partly by fixing the rate of interest, and partly in other ways,'
and also in order to ensure "a somewhat comprehensive socialisation of
investment" u,hich. according to him, r.r'ill prove "the only means of secur,"
ing an approximation to full enrplol'ment." The central controls necessary tr)
ensure full employment wil[, of course involve a large extension of the
traditional functions of government" His conclusion rvas "whilst, therefore,
the enlargement of the function of government, involved in the task of
adjusting to one another the propensity to consume and the inducement tc
invest, would seem to a l9th century publicist or to a contempmary Ameri-
can financer to be a terrific encroachment on individualism, I defend it, on
t Government and Business
the contrary. both as the only practicable means of avoiding

the destruction
of the existing economic forms in their entirety and as the
condition of the
ndividual initiative". The importance of Keynes,
lies not only in its economic analysis of the self_
ntraction, the relationship between national in_
come and investment-savings parit_y, between full ernployment
equilibrium
and arresting the deflationary process by increasing rp"naing
on
or producers goods. It also lies in his finding thai the unr."golut.d "^onro*..,
market
economy may often lack reliable automatic powers to extricate
itself from
stagnation. "we should therefore substitute government
action for the so-
called automatic forces, for otherwise the economy having hit
the rock
trottom of the depression may stay there for an indednite pertd
waiting for
profitable investment opportunities to arise naturally. Artiiicial
inducements
fbr saving and investmeni and for credit expansion so as to induce invest-
ment are therefore policies that government must apply." Keynes
also com-
mended these measures as a lasting solution to ttre probte-
of *rrr. for ..if
nations can learn to provide themselves with full employment
uy ttreir
domestic policl' (and we must add if they can also attain eq;ilibriuni
in the
trend of their population) there need be no rmportant economic
forces calcu-
lated to set the interest of one country against ihat of its neighbour. "
The Second world war further accelerated these trends towards greater
state control over economy. After the war even in the western democracies
State control over industry and o'er distribution of its products,
and plan-
ning in some form persisted. on the other hand the multiplication of
the
number of communist countries, the attainment of freedom by the Asian
and
African countries and their acceptance of the policy of centralised planning
and managenrent of their economies in order to attain higher rate
of eco-
nomic growth and income, changed the entire perspective in which indi-
vidualism or laissez faire became purely a matter of academic interest. It is
universally acknowledged that while individualism might have been valid in
bygone age of simple agricultural communities, it has no place in
the indus-
trial society of modern times. But it would not be correct to assume that
irrdividualism is altogether dead. It still survives in a ver1,very rehned
and
limited form in the utterances made or attitudes taken sometimes by some
industrialists, jurists, legislators and politicians on isolated issues on
which
government action is sought to be curtailed. But this surviving
brand of
individualism is not concerned with the freedom of the indiiidual, but
rather with the need for groups or corporate bodies to be free from undue
governmental interference. Individualism survives today only in
the slogans
about free enterprise which are occasionally heard, or in the isolated activi-
ties of such groups as the Forum ofFree Enterprise in our country or in
the
plea for self-regulation by industries to avoid the evils of taissez jaire
rather
tlun accepting gwernmental regulation at every step.
Public Control of Business : The Historical Setting
Collectivism
Collectivism arose as an inevitable reaction to the absolute play of
individualism of the early lgth century. In the second half of the century it
became quite clear both in the U.S.A. and Western Europe that whatever
merits individualism might have had for a primrtive society, it did not meet
the needs of a complex highly industrialised society. There was conse-
quently a change in public attitude and also philosophical thinking. This
was the background of the rise of collectivism which treated the State, not
as an evil, but as a desirable institution which rvas justihed in interfering
with the rights of the individual in the interest of the welfare of the society
as a whole. Above all, collectivism stood for the author$ and larger role of
voluntary institutions (Trade Union etc.) and representative bodies rather
than strengthening the direct coercive powers of the State.
The philosophical base for collectivism was provided by writers like
Henry Sidgwick (The Principles of Political Economy) and Leon Duguit
(Law in the Modern State). The latter believed that correlative with the
power of the State to govern was a duty to provide public sewices. A public
service is defined by Duguit as any activity rvhich requires in the interest of
social solidarity to be governmentally regulated and controlled. In a pioneer
or non-industrial society a family was almost self-sustaining and had to
depend on the State for almost nothing except securit_v and public order.
With the coming in of the, industrial society people must depend on organ-
isations to provide for such essential things as food, light, water and trans-
port. Whatever is essential to the smooth running of the society is a public
service which it is the dulv of the government to ensure.
Collectivism found expression both in U.S.A. and Western Europe in (i)
various measures for governmental regulation of private business and (il)
various aids to private business and (ili) the creation ofvarious institutions
like cooperatives for providing public utility sen'ices. It is widely held in
the U.S.A. That collectivism as represented bv government aid and regula-
tion of business (e.g. Sherman Antitrust Larv, food laws drug laws etc.)
backed by a competent and impeccable government agency and active pub-
lic cooperation can prevent many of the undesirable features of an unregu-
lated industrial society, although it is also sometimes doubted if a political
system with its doctrine of fundamental rights, judicial review, and separa-
tion of powers is well-suited to effective regulation. In recent times collec-
tivism in the West has increasingly tended to come closer and closer to
socialism, and the very name has also fallen into disuse.
Socialism
Despite the recent collapse of Marxism-led Socialism in Easiern Europe
and Asia and the euphoric charade of private-sector led development nearly
l0 (]overnment and Bttsiness
of a social philosophy that

the interests of the working
force.
ss the interest of the socieg rather
than the rights of the individuar. But whereas colectivism
luri."rif"u.ri.u",
in a system ofprivate ownership and private enterprise
under over-all gov-
ernnent regulation, socialism bcricves that all the mea.s
of production and
distribution should be controlled a'd managed by the
society, unJ rn"t tt.
rvhole cannot be secured so long as the capital_
s on the sanctig, of private property remains.
greater role in socialism than in collectivism.
ry and a quarter ofi
forrns. Utopian soc
. Simons in France
wanted to do away with the evils of unregulated
welfare activities of model employers. Fabian socialism
centring on a group
of British intellectuals like Bernard Sha*. Graham wallas,
frarold Laski
and Sidney and Beatrice webb sought to eradicate poverty
by educating
public opinion about the need for socialist reforms
ano uringing about a
series ofreform measures not by any revolution.
but through ,tf,e ine'itabil_
ity of gradualness.' Guild sociaiism'or syndicalism. as
known on the conti-
nent. viewed society as a combination of so man). guilds
or trade union
bodies with the state or the "commune", as ttrey
cattJa it. as ontr.ine apex
body. State socialism favours an extension ofihe state
uuttorif lnto tt.
economic field through public o*nership and operation
of certain indus-
tries. Finally, communism,.or'Marxian socialism, or scientific
socialism as
the Marxists themseh'es prefer to call it to distinguish
it from other varieties
of socialism, advocates the overthrow of the capitalist system
by revorution-
ary working classes. the State take-over of alr ihe means
of proorrctron arra
of all classes and
phase of dictator-
an literature about
sentialll', Marx and his companion theoreticianr ron".otrii.tat:lt

f capital
ffi,lrt;
ws feudalism and
in unde its disintegration
on out o emerge bY neces-
siq,.
. From the publication of Marx's
nism
Cornmunist Manifesto in lg4g commu-
became a recognisable movement in the Wesi side b1, side with the
rchools of thought and political parties generally cailed socialists.
Despite
their overlappings there is a conventionilly u"..pted broad distinction
be-
tween the two. The socialists like the comn nisis believe
in State control
Public Control of Business : The Historical Seiling
ll
countries from East Germanl' and Albania in the west to Vietnam and
North Korea in the East with isolated pockets like cuba outside this block.
The doctrines of Karl Marx remained the central point of all Marxist social-
ists.
ism. In e lgth century

rosophl'
Gernran
or socia
:llT1l;i"tll,
or clashes be_
ter. Marx transplanted it from this 'idealist' matix to the environment

t-.\
12 Goventment and Business
created by the pervasir,e materiali

primacy of matter/the physical natu
ral force or phenomenon. Dialecti
based on the nerlz discoveries in n
were the laws of transformation
D-arwin's 'Theory of the Origin
of social development consistent
verse, which believes in man's abili
effor1 in hccordance with cerlain n
aided by any supernalural force. Just
"T:'J::;J#:,,T[:J*1.*:,1ff m"T,*.:"1'.:.'i;
by economic factors which Maix catts tre uttimate
change which constitute the economic

structure of the societ_v are the real
base on -vrhich the political. legal, moral
Those who control this economic structure
;;-;ril";;i il;il:ile
resr.
necessarilv control au other
superstructu
between the
relations of
political superstructure do not change
in the material forces of production'.
trveen the two which is resorved only
when the former structure is changed
in keeping with the changes in the latter.
The third important principle is the doctrine
of class struggre. society
throughout history has been rpiit into
classes depending on the control
the means of production and distribution, o'er
and history, in.r.io.., ir-itre nis_
tory of the struggre between these classes.
Just as the slave society of
lTi.i
rsm, and liTes.u.ls
replaced
thrgush
feudalisnr bv capitalism,
the struggle between .il;;;l#;:
so the iluggle o[ the present age is
betu'een capitarisi ctais on the one ha.ra and the proletariat
_the
industrial rvorking class on the other. or the
unrike the classical economists who
argued in terms of the harmony of interest
between various sections of the
communitv- Marx sarv economic life in
terms of a conflict of interest be_
trveen ou'ners of properh, who do not
u,ork and workers who bwn no
property.
Pubtic Control of Business : The Historical Setting 13
Fourthll', there is the doctrinc of surplus value of labour which empha-

sises that labour is the source ofall value and should thcrefore be entitled to
the profits of production in proporLion to the valuc it contributes. But in the
capitalist s)'stem the rvorkers are getting muoh less than g'hat thcl' contrib-
ute in terms of their productive power. All the bcnefits of production accme
to the capitalists. for the effrciency of large scale enterprise breaks dorvn the
competition of the peasants attd craftsmen and reduces all u{ro haye no
properb' to joining the ranks of rvorkers $,ho sell their labour for existence.
Karl Marx sal' the capitalisl system as fulhlling a historic tnission to
dra$ out the productive power of labour. Fron its birthplace in Europe it
stretched out all over the rvorld. accumulated capital and developed new
production techniques and b1'these means it raised the rvealth of rnankind to
heights not attained under the peasant, fcudal or slave economies. But in
revolutionising the relations of production capitalism also started a develop-
ment u'hich uill eventuall,v bring about its o$'n downfall. Marx sau'the
present age as a stmggle bet$'een the capitalist class (or the bourgeoisie)
and the proletariat u'hosc ittterests are fundamentally antagonistic to each
other. Again. thc capitalist q'stenr, according to Marx. contains lvithin itself
contradictions uhiclr rvill evidentll' lcad to its end. We sal the periodic
crises of the trade c1'cles faced bY the capitalist economl' as symptoms of a
deep-seated and progressive maladf in the s\ stem
In this treatment of the crisis there uere thrce olher distinct concepts.
There is the theon' of the rcsen'e arml of uncmplol'ed labour trtich shol's
hou' unemployment tends to fluctuate sith the relationship betu'een the
stock of capital offering emplol'ment to labours and the suppll' of labour
ayailablc to be enrplol'ed. This rescn'e army goes on increasil'lg further
q'ith
the det'elopment of industry. Not only does the proletariat increase iu num-
ber but it becomes better organised and to that extent also stronger. Sec-
ondl1,, there is the theon' of the falling rate of proht lvhich shorvs that the
capitalists' greed for accumulation negates itself bi' reducing the average
rate of return on capital. ArId thirdl). there is the theory of the relationship
of capitat goods indlstries to consumer goods industries g'hich shorvs the
eyer-grou,ing productive pou'er of socieh' knocking against thc limitations
upon the po$'er to consune u'hich are set b) the povertJ' of the rvorkers.
Through these contradictions, the re-appearance of economic crises each
tinre nrore threateninglr', and through the struggle of thc proletarian class,
ca overlhrown. Marx vieu's societl' as essentially
ey of vrhich capitalism will disappear. According
to remains divided iuto classes, class conJlicts are
inevitable. The ultinrate remedy lies in utilising the growing proletarian
moycntent as a \.anguard for bringing about a classless socielv through a
short-liYed phase of dictatorship of the proletariat. ln other words Marx
-.-, \
14 Governmenl and Busine.ts
roletarian movement in its struggle
l'.il lXTTll ; -ff ruHn"Hi"ill:

stase ar rhe end of rvhich the state,"flift,'i,lit;:;.\l'"1;l,i"tlil#'f,::i
extension of government orvnership in the bourgeois
state r.vithoul changing
the class. relationship can only ,,lein
-o.e oppression for the rvorking class_
es. For the Srate is irself a' instrument of op'pressio'
increase its po*'er *'i.hout changing its crasi
Ji";;. ;i;s'ses ana to
chara.,.ii, ;" ,."riiy.'
Bul cracks appeared in the solid Marxian edifice from
.
became larger and larger as thc gOs wore on.
late 1970s and
with snorv-briling nor,-p..-
formancc in the cco'onries. rising dissatisfaction
among, ta.g. i..iion, or
population clamouring for higher standard of li'ing.
se't and consumeris'r and increasing burden or mi'iitin,
gr"il;;;";;al dis-
.*p".riaitur.. n,ort
of the countries took slorv steps torvards pri'atisi.g ana
niart.t
starting rvith china. So'iet union undcr presideniGorbach.u ".o',on,.,
Glassnost (ope.ness) and /perestroika (rcstnrct'ring)
i"troa,i..i
*.hich led to decentra_
lised decisio'-.raki.g i'
cconomies and politics, nulti-partr- democracl.
and
aspccts of market-econonl' and pri'ate entrepreneurship.
The trickles that
started_in the earlv l9tt0s led on to a gigantic tidal
trai.e br tggq_SO rhat
s*'epl communism off.Eastern Europc and er.entuarh,
Soriet Union
b'the e^d of l99r disintcgrated rvith the l5 republics decraring '.hich
inJ.p.no-
ence. Nine of them formed a loose tjnion cailed
the commJr,r,.*ttt, or
litan'set up. but l'ith scparate
rships of thc U.N. The spccrre
rvorld political and econontic
d as dead. China. Vietnam and Cuba
tX';.'J:il:';1.i;""''il:
a nd a re openry encoura ging r.". .n,.$l?:::':',:T:,
export oriented developments and in general ttre iieei'!
'estment, or tnc
econor.)'from pen'asi'e bureaucratic control. But socialism
in a"broader
sense still dominatcs politicar and econouric thinking
ana g;,e;*r.r,tat
practices in nranl' countrics todav. This has been
the inevitable outcomc of
our expcrience $ith the r'orking of u'regulated capitalism
- oYcr-produc_
tion and necdless dupricution. trrc manifJst i.equalig,
of u,calth una .on_
all over thc uorld sincc thc S

and more governnrent rcgula
out. Nearly all countries irrclrr
to market economy. The fact
Public Control oJ'Busines's : The Hi,storical Setting 15
to old style capitalism or laissez faire. Government control will have to

remain in the areas of macro-economic management. infrastructure and
special ameliorative measures for deprirzed and poorer sections of the popu-
lation. But even in the U.S.A. and'Canada goYernment regulations are
playing an increasin to speak of the
valuable promotional been playing' In
the last two decades large number of
regulatory agencies such as the Occupational Safetl' and Health Adninistra-
ti;, the Eniironmental Protection Agenq', the Consumer Product Safety
Commission and the Equal Emplol'nent Opportuniq' Commission. There
are also the traditional anti-trust or anti-monopoly state machinery and the
numerous interventions in the form of regulation for advertising, food and
e of recession-hit
oft loans. Also of
e State's growing
Clearly tve nust
accept the crucial rolc government must plaf in relation to business free
from the usual political prejudices. As W.A. Leuis obsen'es:
On the one side are those who distrust individual initiatiYe. and are
e of government. On the other side are those
and are anxious to magniff the role of indi-
s can appeal to history. No country has made
proper contribution of each.

The overu,helming weight of public opinion in to-day's world is clearly
in favour of the welfare state. macro-cconomic management by the govern-
ment, a grolving role for the markel forces with got,ernment's power of
intewention l,henever necessan/ in larger national interest and egalitarian
pattern of societ1,. As John Maurice Clark has said, 'Whether one believcs
_-_.j
16 Government and Business

Public Control of Business : The Historical Setting t7
INDIAN PERSPECTIVE
During the whole of British rule except for the last three decades or so,
government policy towards industry and business was, on the whole, indi-
fferent, at times hostile. The first century of British rule, viz. the period of
the East lndia Company, sarv the decline of nearly all the indigenous indus-
tries. There are many reasons. technological. economic and political. By far
the most important reason rvas the conscious policy followed b1 the impe-
rial authorities of shutting out the British and latter also the European
market from the Indian cotton and silk goods by direct prohibition or by
creating veq' high tariff barrier and thereby destroying India's existing
export market. On the other hand, offrcial policy allowed an open door in
India vis-a-vrs goods produced in Britain. To take an example. British silk
goods imported into India during the lgth century paid a duty of only 3 %%,
while a duty of 20 per cent was charged on Indian silk goods impo(ed into
Britain. In the case of woollen goods the disparity was even greater, the
duties in l83l being 2 per cent and 30 per cent respectively. Another kel'
factor lvas the release of nelv technological forces in Britain by the Indus-
trial Revolution and the competitive effltciency they gave to the industry
there. The effects of this policy were compounded by the opening of the
Suez Canal, intprovements in the mode of ocean transport, construction of
raihvays in India and the introduction of uniform currency. With the politi-
cal unification of India, and abolition of internal transit duties by 1856, the
foundation of a national market was laid, and the sub-continent lvas opened
up to unrestricted florv of goods of all variety made in Britain.
Until 1833 rvhen the East India Company lost its monopoly trade, the
Company had some sort of a vested interest in maintaining some of the
existing industries in India in which it had a slake. To that extent the
company's interests sometimes clashed with the interests of British industri-
al capitalism. But with the abolition of this monopoly there lvas nolv a new
class of British traders who, unlike their predecessors in the Company's
days, did not come to this country to exchange British-made goods for
Indian-made goods. They cane essentially to secure market for goods
manufactured in Britain. By the middle of the nineteenth century, therefore,
India acquired the classic look of a colonial economy which was not
thought suitable for manufacture, but only for production of raw materials
rvhich were to be exchanged for goods manufactured in England. Thus a
doctrinaire adoption of the philosophy of laissez faire or free trade and
practical selfish considerations of British industrial capitalism combined to
lay down a governnent poliry under which the efforts of the State were
concentrated on the improvement of communications and on facilitating the
flow of trade which consisted mainly of export of Indian raw materials and
inrport of foreign manufactured goods.
This might not have happened if India had also been simultaneously
affected by the Industrial Revolution. But in the prevailing situation, with
British industry rapidly gaining unassailable competitive efficienry and the
l8 Government and Busine,ss
l80l to 258 bales in 1829: Dennark which took 1457 bales in lg00 never
took more than 150 bales after lg20: portugal rvhich took 9714 bales in
1799, never took over a thousand bales after lg25: and the exports to
the
Arabian and Persian Gulfs, which rose to between four and seven thousand
bales betweenI8l0 and 1820, never exceeded two thousand after 1g25.
no means the worst consequence. British steam and

the rvhole surface of Hindustan, the union betr,veen
cturing industry."a
machinery produced an adverse effect in India. The
ned in 1834-35: 'The miserv hardly finds a parallel
erce. The bones of the cotton weavers are bleaching
Talking of Surat. an important textile manufacturing centre of yester_

years, Bishop Heber in his Indian Journal says, 'The trade of surat is now
of
v€ry trifling consequence consisting of little but raw cotton. lvhich is
shipped in boats for Bombay. All the manufactured goods of the country are
understood by the English except kinkobs and shawls for which there is
a dismal decay has consequently taken place in the
e native merchants ... There is a small congregation of
ncipal merchants of the East) in a state of decay and
Equally forceful in his statement regarding Dacca which was once des-
cribed as the Manchester of the East 'Its trade is reduced to the sixteenth
- buildings
part of what it was, and all its splendid ... are sunk into ruin, and
o\€rgrolvn with jungle!' All this was a direct consequ€nce of Britain's
refusal to lely protective duties on imports into India, and her deliberate
policy on the other hand, ofdiscouraging the flow oflndian goods to Britain
and the west.
''The petitioners and more especially the labouring and manufacturing

classes of native are aiready suffering grievous hard-ships in conse-
quences of these principles in trade and commerce rvhich the petitioners
are told are now actuating the English Councils, not being extended to
the produce of that country, while every encouragement is held out to
the exportation frorn England to that country ofthe growth and produce
of foreign as well as English industry, while many thousands of the
native of that country, who a short time ago derived a livelihood from
the growth of cotton and the manufacture of cotton goods, are lvithout
bread in consequence of the facilities afforded to the produce of Amer-
ica, and the manufacturing industry of England; and the article of sugar,
to the production of which the lands of the Petitioners might be turned is
loaded with such heary duties in England as effectively to shut the
market against the industry of the East Indians when turned to his par-
ticular commodity."
The way in which Lancashire had been allowed to meddle frequently in
British lndian Government's fiscal policy and industrial policy strengthened
this attitude of suspicion. The memories of bygone days when India was
famous for the products of her industry added a touch of piquanry to the
natural regret felt by patriotic Indians who demanded protection for Indian
industry. It was pointed out that countries like United States. Gernrany and
Japan appeared to have proposed industrially onll'after adopting the policy
of protecting their infant industries and that Britain herself had discarded
protection and gone all-out for free trade onll' after her pre-eminence in
industry was established. But all these murnurs failed to create an)' impact
on offrcial policy until well after the trventieth century had begun. Industri-
ally and commercially backward India was made to compete with the vast
resources of technical skill imperial Britain which had also become the most
advanced industrial country in the world.
The only area rvhere organised industry can be said to have made sig-
nihcant strides was plantation industry, e.g. jute, tea and coffee, where
Europeans became interested very early, as these provided eaqy and high
return on the investment. But this was due to private initiative rather than
governmental action.
Modern industrial enterprise in India developed only after 1850. Its
earliest manifestations came in the wake of the construction of railways
which made it essential to have modern workshops for repair and mainte-
nance of the rolling stock. The effects of the introduction of railways
vis-a-vis industry are described by Marx in the following words :
I know that the English millocracy intend to endow India rvith railways
with the exclusive view of extracting at diminished expenses the cotton
and other raw materials for their manufactures. But when you have once
introduced machinery into the locomotion of a country, which possesses

iron and coal, you are unable to withhold it from its fabricaiion. you
cannot maintain a net of railways over an immense country without
introducing all those industrial processes necessary to meet the immed!
ate and current wants of railway locomotion, and out of which there
must grow the application of machinery to those branches of industry
not immediately connected with the railways. The railway system will,
therefore, beconre in India truly the forerunner of modern industry ...
Modern industry resulting from the railway system, will dissolve the
hereditary divisions of labour, upon which rest the Indian castes, those
decisive impediments of Indian progress and Indian power. (Marx, The
Future Results of British Rule in India).
The development of railways broke down the isoration of the village.

made the world market available to the Indian producer. facilitated both
foreign and domestic trade and created the necessary condition for the
growth of large-scale factory industry. It was no coinciclence that this was
followed in the later decades of the century by the establishment and quick
growth of jute, cotton textile and coal-mining industries, and also of new
forms of business organisation in the shape of joint-stock companies and
managing agency. Jute industry started, after the crimean war had inter-
rupted the supply of hemp and flax from Russia, at first in competition with
the Dundee mill-owners who protected vigorously against allowing the
growth of manufacturing industry in a colony suitable only for commercial
exploitation. But the natural advantage offered by India were immense, and
from the opening of the first jute mill6 at Rishra near calcutta in lg55 the
industry rapidly grew until it became the most important export industry of
undivided India. while jute industry was started by British businessmen
with the aid of British capital, the growth of cotton textile industry was very
largely the result of Indian entrepreneurship with Indian capital. The first
modern mill was set up in Bombay in 1851.? After the American civil war
t
created no going back, and the
industry inning mills and eight
weaving mills were established.
Although considerable technical expertise flowed from Britain this industry
was exclusively the result of private eflorts and-initiative and the govern-
ment was a silent spectator. Similar$ the government had little or no role to
play in the spectacular growth of coal mining in the 1960s and lg70s after
the introduction of railways and steamers and increased used of iron had
All early efforts at establishing an jron and
created a market for Indian coal.
steel plant
in the late lgth century failed, thanks largely to governmental
apathy and lack of support. The efforts of Jamshedji Tata, that prince
Public Control of Business : The Historical Setting Zl
among Indian entrepreneurs. after much initial failures, succeeded only

when under curzon there was a brief change in the attitude of the Govern-
ment of India towards industry, and Tata could revive his old dream of a
great Indian Steel Works with Indian capital.
The first open emphasis on the need for a conscious industrial policy to
be pursued by the Government was made by the report of the Famine
Commission in 1880. It took the view that in order to ward off famine
which lifted its head from time to time government should foster the incep-
tion of new industries and introduce scientific methods of production in
existing industries. Government rvas also urged to carry out experiments to
guide and educate private trade and to assist persons desiring to develop
new industry by obtaining for them technical advice and information. Fi-
nally, the Commission also advised the government to buy its own require-
ments from India rather than from Europe wherever possible. But beyond
these points the Commission's report once again swung back to the laissez
faire doctrine. 'otherwise than as indicated above. we do not think it desir-
able that the government should directly involve in any manufacture or
industry in an experimental way. Such experiments to be really successful
or valuable must be carried out on commercial basis. The conditions of any
government undertaking are rarely such as to give it this character, and the
fear of incurring an undue expenditure on what is regarded as only experi-
ment will often lead to failure, lvhich uill be nonetheless mischievous,
because it is thus caused.' .
Even this fear was not justified. For in the prevailing all-pervasive
laissez faire culture even the modest recommendations of the commission
were not taken note of. As Vera Anstey sums up:
After the assumption of direct rule by the Crorvn in 1858, the doctrine
laissez faire policy of the Home Government was extended to India, and
even when it became apparent that certain exceptions must be made (for
instance, as regards famine relief and public works), the policy was not
retained in the industrial sphere. It was thought inevitable that India
should remain predominantly agricultural, whilst the Government
rvished to avoid both the active encouragement of industries that (like
the cotton mill industry) competed with powerful English interests, and
increased State Expenditure. Hence, even at the end ofthe lgth century
all that the Government did to assist industry was to provide a certain
amount of technical and industrial education, and to attempt to collect
and disseminate commercial and industrial information.E
To quote the assessment of another British scholar:
The true charge against the British Government is that the policy of
laissez faire was carried too far and too long in a country to which it was
not suited. Such a policy may produce excellent results in a land where
capitalists are venture-some and technical skill abundant. In 19th cen-
tury India, moneyed rrr€r of the country-with the excepion of a small
Bombay Group-seemed to lack initiative, and technicians were almost
entirely non-existent. under such conditions the policy of laissez
faire
meant stagnation and continued poverty.e
On
which.
ofthe s
Lytton,
raie was levied on all Indian mill-woven clothes, coarse or fine. At the same
time, the import duties on cotton yarn lvere removed.
The first isolated attempt at officially encouraging the grouth of large-
scale industry took place around 1900. The Madras Government under the
guidanceof ,arema
of surveying s, assisti
technical ed pioneer
Steps were taken for the improvement of handloom weaving, well boring.
the introduction of oil-engines and centrifugal pumps for lift irrigation, the
establishment of s water pow-
er ofthe Periyar d encourage_
ment from Lord Industry De_
success was secured.

During these years industrial development was also stimulated b), chang-
es in the Rules for the purchase of Government stores which had from lgg3
onrvards encouraged purchase of goods made in India whenever such goods
of a suitable quality and at not 'unduly burden-some' price were available.
This poliry with the declared object of promoting the development of Indi-
an industries was enlarged in 1904, 1909 and again very drastically during
the First world war. other promotional steps taken lvere the patents and
Designs Act ( I 9 I I ) protecting both the inventors and the publib on the lines
Public Control of Business : The l-Iistorical Setting 23
of the English Patents Act (1909); rhe Tea cess Act of 1903 providing for a
cess on sale or export for assisting the industry: the Mines Act (1901): the
Government report on the prospects of iron and steel industry (1g99) and
the guarantee of purchasing 20000 tons of still rails per annum for ten years
from the Tata Steel works: encouraging the setting up of cooperative soci-
eties with industrial objects: and the extension offacilities for industrial and
technical education. we may have a few lvords on the last-mentioned step.
After the Educational conference at Simla in l90l at which Lord
curzon presided attempts were made to grapple with the defects of the
existing educational system, which (it was recognized) suffered in particular
from being predominantly literary, rather than scientific or practical rhus
in 1903. a system of state technical scholarships, tenable abroad, was insti-
tuted. and the number of institutions giving education of this t'?e was
increased. Progress remained disappointing, as it was difficult to gain the
confidence of employers, the cost of training was too great for artisans, the
right gpes of students were not easily attracted, and those that came ex-
pected responsible posts rvith high pay as soon as they completed their
courses. However, several first-class institutions giving advanced technical
training (such as the Indian Institute of Science at Bangalore. the carvnpore
Technical Institute and the victoria Jubilee Technical Institute, Bombay), a
large number of both State-aided and voluntan' institutions for training
mechanical and raihr,ay engineers. and a still larger number of technical and
industrial schools came into being directly in consequence of the move
tolvards technical education initiated by curzon. As vera Anstey obsen,es:
'We can say that although the constructive work of the Government was
still extremely limited the way had been prepared for the more drastic
measures that were adopted when the events of the Great war demonstrated
the urgent necessity for a more progressive policy'.10
But the general policv tor,vards industrialisation came up against deep
prejudices and hostility entrenched in European business circles and the
establishment at home where this was viewed as 'a serious menace to
private enterprise and an unwarrantable intervention on the part of the State
in matters beyond the sphere of Government.'rr Lord Morley, the Secretary
of State for India. threw his rveight behind this school and negatived the
establishment of a separate Department of Industries and of setting up pio-
neer industries on commercial lines by the Madras Government and merely
allowed educational work and the dissemination of infonnation. Thus the
provincial department rvas abolished. most of the industrial units closed,
and chatterton. after his transfer to the Education Departmenl. resigned and
took service with the Mysore State. Although, after 1910, faced with oppo-
sition. the governmenl appointed Directors of Industries in the provinces
(not departments), their working was confined to collecting

and disseminat_
ing training and advising government on technical matters.
Thus Morley's poliry frustrated any real deveropment until
the First
world war. Meanwhile Indian political leaders *"."ila*ouring for action
by the Government to develop industry. The swadeshi movemeni (r905-ll)
in which political and economic motives were combined led to the estab-
lishment of many small and medium factories in consumers'
afiicles many
of rvhich failed. As a result of these failures the public opinion became
more vocal in pressing for state assistance, and for tariff Larrier
against
foreign imports.
A significant area where government's reguratory poliry operated rvas
company law by which goverrunent sought to regulati the iniorporation.
management and operation of joint-stock companies. Beginning
with an
embryonic legislation as far back as 1g50, the Indian companies-ect,
r9l3
sought to extend the provisions of the English companies Act
of 1909 to the
Indian corporate scene. By l9l3-14 there werejoint-stock companies
regis-
tered in India. A legislative attempt was made during the passage
of the
companies Act in l9l3-14 to extend the scope of the Act to the
franaging
Agents and bring the activities of these controversial elements under
some
kind of go\€rnment control and regulation. But this was foiled br, strong
opposition from British business interests in the Bengal chamber
Lr corn_
merce, and the government lvas forced to rvithdraw the proposed
restrictions
from the central Assembry.r2 The institution of ManaginjAg"nry was left
unregulated until the Companies Act of 1956.
Industrial Policy After 1914

The outbreak of the First world war brought about the end of
the policy
of hostility' and forced on the government a more progressive policy that
included selective encouragement of some industries anJ protective
tariff in
order to meet the war demands, and also to fill the vacuum caused
b1, the
complete elimination of a whole range of imported goods from the
Indian
market. A Munitions Board was set up to control the purchase and
manufac-
ture of stores and munition of, war. But this also brought out in
bold relief
some very major bottlenecks in the way of India industrialising herself
fast,
e.g., India's dangerous dependence on imports for some fundamental
neces-
sities of industrial life including fuel and skilled man-power, the
absence of
necessary infrastructure including internal and external transport
facilities,
uncertainty of the likely duration of the offrcial policy of encouraging
local
manufacture after the war. -Hence there was urgent need for u n"*
.on-
structi'r'e economic policy in the forefront of which should be industrial
stimulation, and in particular the establishment of industries to produce
machinery and other necessities of industrial production in general'.13
This
Public Control of Busine.ss : The Historical Setting 25
led to the appointment of the famous Indian Industrial Commission in 1916,

its terms of reference being to examine and report upon the possibilities of
further industrial development in India and submit recommendations for a
permanent poliry of industrial stimulation.
In l9l8 the Commission presented its report. Its proposals were based
upon the fundamental principles that 'in future Government must play an
active part in the industrial development of the country, with the aim of
making India more self-contained in respect of men and material: and that it
is impossible for Government to undertake that part, unless provided with
adequate administrative equipment and fore-armed with reliable scientific
and technical advice'. The report showed how little the march of modern
industry had affected the great bulk of the Indian population, which re-
mained rooted in agriculture, winning a bare subsistence from the soil by
antiquated methods of cultivation, and concluded that the changes which
had already taken place in rural areas were due to 'economic' rather than to
'industrial' developments; that is, to changes in prices and marketing condi-
tions, rather than to any marked tendency towards industrialization.
In discussing India's industrial deficiencies, the Commission suggested
special emphasis to be given to India's dependence on outside sources for
many articles necessary for industrial community, e.g., steel. machinery,
capital, and on the bulk export of foodstuffs and raw materials in payment
for imports.
Lack of education. the low standard of comfort ofthe workers (reacting
on effrcienq') and the effects of preventible diseases were singled out as the
chief causes of the comparative ineffrciency of Indian labour, but it was
concluded that the admitted ineffrciency of labour was not an inemovable
factor. The Commission summarized the industrial situation by saying that
India was a country rich in raw materials and industrial possibilities, but
poor in manufacturing accomplishment. The main recommendations of the
Commission fell under four headings.
First, it proposed improved departmental organization for the encourage-
ment and control of industries. This was to take the form of the creation of
Imperial and Provincial Departments of Industries and of an Imperial Indus-
trial Service. Most of the actual administrative work lvas to be decentralized
and placed in the hands of the Provincial Department of Industries under a
Director of Industries aided b1' a Provincial Board of Industries. This was in
consonance with the political reforrns of 1919 which classed 'industries' as
a transferred subject. In addition, it was proposed that an Imperial Depart-
ment of Stores should be established at Calcutta, with a branch in each
province, to control the placing ofall Government orders and contracts.
Secondly, suggestions were made with regard to the improvement of
technical training and education (including a scheme of apprenticeship fore-
26 Governntent and Business
man) and the improvement of conditions in factories and industrial

centres
@y improved housing, welfare work. sanitation, and other public health
work).
Thirdly, there were proposals for the reorganization ofthe scientific
staff
of the industrial Departments.
,
t
ffT"ffi$:,f'.::lLfi',3T"1Tilifl,:f
facilities.
:?
Second World War
rveapons by the government not only after the war, but even
after independ-
ence to meet the needs of planned development.
nlanganese; non-ferrous metals and metal fabricating industries

like cables:
nerv items of textile. tea and oil processing machinery.
Public Control of Business : The Historical Setting 2'7
Government's pragmatism was shown in the fact that Walchand Hira-

chand u,as encouraged to pioneer ship-building, aircraft building, and auto-
mobile manufacture. Also, during this period, the production of a whole
range of consumer goods like hydrogenated oil, electrical goods, plastics
and resin started proper$ for the first time. Sir A. Ramaswami Mudaliar
gave an assurance on behalf of the Government of India: 'In case we in any
form encourage the development of industries for our war needs, those
entrepreneurs who had come to the assistance of the State would not be left
high and dry to take care of themselves.' The following table indicates the
steady growth of industrial output:
Gnrvnnql llunx or lNrusrnr,ql, PnooucrroN

(Base 1937: 100)
r939 102.7 1943 117.0

1940 109.9 t944 117.0
l94l I17.8 t945 120.0
t942 trt.2
Thirdly, the industrial upsurge found expression in a burgeoning of cor-
porate activity. The number of joint stock companies rose up from ll,l14
(paid up capital Rs. 290 crores) in 1939 to 14.859 (paid up capital Rs. 390
crores) in 1945. Fourthly, thanks to the rvar-time boom. many industries like
cotton textile, paper. jute, cement arid sugar generated fabulous prohts,
helped by inllationary conditions. Fifthly, on account of the inllationary
conditions helped by large scale currency expansion, prices u'ent on rising
continuously leading to the imposition of price and distribution controls by
the government in a number of items. These controls were destined lo
become permanent features of the Indian scene. Lastly, along with corpo-
rate expansion and rise in profits, many unhealthy and undesirable trends in
Company formation and management crept in. Interlocking of funds and
diversion of profits, defrauding of share-holders and other malpractices took
place on a large scale. Also, there was wide-spread hoarding, black market-
ing and price manipulations. It was largely during these years that Indian
business came to acquire the prevailing unsavoury image in public eyes
from which it has not recovered ever since. From time to time the public
including shareholders urged for greater government control over the forma-
tion and management of companies in public interest. The general situation
was further aggravaled by the widely held belief which is not r.vholly true
that throughout this period of mounting prohts rvas denied its rightful share
and thus the capitalist rvere gaining at the cost of the workers. This perva-
sive anti-business mood rvas to form the back-drop for the'post-rvar and
post-independence era of government control over business.
28 Government and Busines.t
During the two brief years that intervened between the end of the war
(1945) and independence (1947) government cfforts were mostly directed
at
dealing with the shortages that developed in a large number oi items both
consumer' goods and essential raw materials. In almost all the industries,
e.g., cotton textile, cement, steel sugar and paper, production showed a
steep downward trend caused by the fall in demands, overworking of the
plants during the war, non-availability of capital equipment, shortagi of
any
materials, general unrest in the country and transport ind distributio-n bottle-
necks. Reconstruction programmes were talked ol uut not pursued owing
to
the prevailing unceftainty, and the diffrculty in importing capital goods.
Government efforts were mainly directed at price ana airtiibution controls
through emergency power in respect of a whole range of articles like cotton
textile, woollens, paper, coal. steel, mica, petroleum and petroleum prod-
ucts.
Independence, Pardtion and After

The emergence of India as an independent nation on August 15, 194'7
coupled with the partition of the country was the beginning oi a new glori-
ous era in the hislory of our country. on the one hand the independent
Government embarked on a vigorous policy of industrialisation and incour-
agement of industry. on the other hand there was a temporary dislocation
on account of the breaking of the economic and political unity of the
country as a result of partition and the wide-spread communal disturbances
in parts ofthe subcontinent that accompanied it. India got 9l per cent ofthe
total number of industrial units, 93 per cent of the total nu*ber of workers
employed and about 97 per cent of the total value of mineral production.
Horvever, she also lost a very significant market in general and almost the
entire supply of raw materials in two of her major industries, jute and
cotton. About 8l per cent of total production of rarv jute went orrt of Itrdia,
lvhereas all the mills stayed in India. similarly, although of the 394 cotton
mills in undivided India only 14 went to pakistan, nearty att the supply of
long and medium staple cotton which used to come from west punjab and
Sind was now lost to India.
Governmental efforts in the earlier years had necessarily to be concen-
trated on extending the area ofjute cultivation in Eastern India which very
often meant loss of food crops, and on importing long and medium stapll
cotton from abroad which imposed severe strain on the country's foreign
exchange resources. The dislocation of railway and roadways traffrc anc of
inland river navigation in Eastern India also produced some disturbing ef-
fects_on the smooth growth of industrial activity. Industries like hosiery,
woollen, glass and metal rvorks suffered from the migration of skilled work-
ers, mostly Muslims, to Pakistan, although this was perhaps more than made
up by the injlow of fresh managerial and entrepreneuriil skill from those
who migrated from Pakistan to India.
Governmental efforts were directed to improving the climate of indus-
trial relations. e.g., the u'ell-knou'n tri-partite Industrial conference (lg4'7)
which among other things called for a three year truce between capital and
labour and granting comprehensive measures for determination of wages
and conditions of |abour, granting of tax concessions to industry in the
budget of 1948-49, the continuance of cheap money poliry, the settinS-up
of t[e Industrial Corporation in 1948, and various welfare measures like the
Factories Act, 1949. On April 7,1948 the Parliament adopted an Industrial
Policy Resolution laying down the broad objectives of Government Policy
in the field of industrial development and demarcating the respective
spheres for public and private sectors. This Resolution stressed the need for
a policv of rnixed economy' and thus struck a middle course between those
wio stbod for nationalisation of private business, and those who advocated
free enterprise. The Government also took steps to clanry its poliry towards
foreign capital in a policy statement made by the Prime Minister on April 6.
1949. Ii^ this the Government categorically declared its intenlion not to
discriminate between foreign capital and Indian capital. welcomed foreign
investment in prioriq' areas and proposed not to impose on foreign compa-
nies any restliations which were not applicable to similar Indian enterprises.
Rtt th.i. appeared to have had a market effect, and from 1949 onwards
industrial pioduction recovered from the slump since 1945. This rising trend
was maintiined during 1949 and 1950 except in jute and cotton. This was
also facilitated by Government assistance to industrial units for replace-
ment, modernisaiion and import of capital goods wherever required, liber-
alisation in the depreciation allowance and exemption of duties in the case
of industries like sugar. From 1950 r,r'hen the Constitution came into effect
and the Planning Commission was set up, lve entered into a new era of
ch the Government had necessarily to
ndustrial development, not only from
ant public sector but also for encour-
ndustry in the same breath in accor-
the Constitution and the Plans. The
Industrial Policy Resolution of 1956 massively enlarged the areas of indus-
trial activities resewed for the public sector and correspondingly reduced
the role of the private sectol. But the broad principle of mixed economy
remained.
Since 1950-51, India has passed through seven Five Year Plans and
several Annual Plans and is now through the 8th Five-Year Plan. The role of
the private sector industry was fdirly significant in the plan frame upto the
3rd Five-Year Plan, but became someu'hat eclipsed during the sixties and
the seventies as a result of the increasing dominance of populist and social-
ist postures. The Sixth Plan was marked by the return of the private sector
into the plan frame on a lott key. This trend continued in the 7th Plan. This
Plan registered an unprecedented high growth rate of 5.6% of the GDP, and
much of it was accounted for by the private sector's strides in manufactur-
ing and sen'ices. The financial and the balance of payments crises that the
nuiion faced from the onset of the 1990s compelled the acceptance of
derezulation. a reduced role for public sector. making the public sector
30 Government ancl Bttsines,c
Aspects of Government's Role

(i) Government as regulator of business:
(ii) Government as promoter of business;
(iii) Government as entrepreneur:
(iv) Government as planner;
(v)Government as consumer.
Under the hrst head we can legisla-
tion and policies. On the one area of
Government control over the fu through
budgetary, f,rscal or monetary macro_
economic management of the ec
sarilv to assume even in marke
there is also a fast expanding
controls, legislative and nonJegi
over the working of private business we can broadly identiff the following
major areas:
(i) Industrial policy and licensing:
(ii) Monopolies and Restrictive Trade practices Act. 1969,
(iii) Companl'Larv:
Public Control of Business : The Historical Setting 3l
(iD Capital issue control:

(v) Control over Stock Exchanges:
(vi) Import control including control over capital goods imports,
(vii) Foreign exchange control;
(viii) Export control;
(ix) Regulation of foreign investment and foreign collaboration:
(x) Commodity control including informal control over the price and
the distribution of commodities.
But we need to highlight that since the starting of the economic reforms
since July l99l there is a general movement towards general deregulation
and progressively diluting oI even removing these controls thereby allowing
industry freedom and flexibility. Many of the old administrative controls
have been removed, although some of the old procedural hang-overs still
persist. There are many crucial aspects of dergulation which still remain
unattempted, because they are politically diffrcult. One such areh is insur-
ance where despite a lot of international pressure for deregulation and
privatisation and despite the clear recommendations of a government-ap-
pointed committee (the R.N. Malhotra committee) for partial privatisation
of the State-owned insurance companies and for permitting private sector
companies including foreign enterprises government under trade union pres-
sure has not taken any step except announcing a regulatory authority for
insurance industry. The promotional role of the Government in relation to
industries becomes more pronounced. It can be seen in providing finance
for industry, in granting various fiscal incentives and in creating infrastruc-
ture facilities for industrial grouth and investment. The State Governments
also get directly and intimately involved in the promotional process. A
study of the Government's entrepreneurial role takes into account the im-
pressive growth of the public sector in India from a small beginning to its
present dominant position towering over the industrial landscape. In its role
as planner the Central Government indicates the various priorities in the
Five-Year Plans and also the sectoral allocation ofresources.
It is, horvever, to be noted that this analysis of Government's role into
several aspects is purely for the facility of understanding. These are not
really separate compartments but integratedly connected with one another.
Thus in pursuing its regulatory role Government has often found necessary
to take over management or even ownership of private sector undertakings
or even of an entire ildustry in larger national interest. In these instances
Government's regulatory role shades off imperceptibly into an entrepre-
neurial role. Sometimes in a reverse order Government having set up units
agencies. on the one hand, they promote industry by providing finance. on

the other hand, after the almost total sation-of induirial finance,
or denying long-term credit
g finance from
the Government. Governm.n,,, proilot tt}nt"ilhJ:

into Government's purchase poliry. Government is
goods in the economy, and many industries such as jute, textile, engineer-
ing, automobile and railway wagon-building are heavilv iependent on
Go.n-
ernment purchases. Budgetary cut-backs on purchase lead to severe reces-
sion. The role of DGS&D, the principal purihasing agency, is crucial for
many industries. An area where the regulatory, p.o*otio.tii purchase
and
the entrepreneurial rules of the Government have .onu..g.d together in
recent times is the revival of sick industrial units. centrat and state-Govern_
ments together with financial institutions and nationalised banks often get
involved injoint operations aimed at rescuing units from industrial sickness
which has become a pervasive trend toda1, and nursing them back to health
and viability. Finally, Government's pervasive roli as planner of the
economy embraces all the other roles. planning for future eionomic devel_
opment inevitably means regulatory, promotional, consumer and entrepre-
neurial action. Despite the declining role of centralised planning in recent
years and the advent of incentiYe planning, the role of planning
riill remain
important on account of the State's undiminished role in malro-economic
management, in the development of the infrastructure in laying down the
rules of the game for the private sector and finally in amelioritin"g the living
conditions ofthe poor.
References
l. P. SargentFlorence, Industry and the State.
2. James o'Toole in 'changing Business Gor,'ernment Rerationship,, pub-
lished in llarvard Business Review, 197 9
J R'c. Dutt, Economic History of India under early Brirish Rule; Econontic
History of India in the Victorian Age.
Karl Marx, "The British Rule in India',, Nev, york Daily Tribune of June
10,1853.
5 Karl Marx, Capital, Vol. I, Chapter XV, Section 5.
6 George Aukland and Bysumber Sen.
Ihe 99mbry Spinning and Weaving Co set up by a parsee, Cawasji

7
Nanabhoy Daver.
8. Vera Anstey, The Economic Development in India, p 221.
9. Sir Percival Griffrths, The British Ittpact on [nclia, p. +eA.
10. Vera Anstey, op.cit., pp Z2l-225.
ll. Report of the Indnstrial Commission.p 107.
12. For details see N.K Sengupta, Corporare lvlanagement in India, ylkas
Q.{ew Delhi).
l3 Vera Anstey, op. cit, p 216.
Chapter Two
Constitutional Framework of
Government Control of Business
In any discussion on the control of private business by Gol'ernment, the

provisions in the constitutions of India rvhich support or restrict. Govern-
ment activities in economic life occupy a prominent place. In the u.s
constitution there is an in-built prejudice in favour of laissez-faire and, tF=
Federal Government had to exlend its regulation to prirate business on
many occasions by liberal interpretation of the 'Commcrce clause' and the
'Taxing clause' backed by the decisions of tire Supreme court. In contrast
the Indian constitution is based on the concepl of the 'welfare State' as
distinguished from a 'Police State'. The preamble itself declares that the
aim of the.State among other things is to secure to all citizens social and.
economic justice. with this end in lierv the constitution contains nunero; .l
provisions vyhich assert the right of the State not only to intenene in
private business, but also to commence and conduct business under its
ownership as counten ive principles of State policy
relating to social and cle 3g. 39, 1t-43 and 43A)r
discarded the old doct established the right of Gor-
ernment to regulate and control private business in a drastic manner.
Contrary to a popular irnpression, the directive principle are not to be
taken lightll' merely because these are not justifiable. But they represent the
broad sign posts which State Policl. must follow. Also, it is not correct ro
sai' that thcl' have no binding force. Thcy are in the nature of moral pre-
cepts for thc State authorities. The Government rnaJ/ not have to answer fcr
an5'breach of a directive in a court of lalv, but it rvill certainly be account-
able before the public ar large for their observance. As pointed out by
Nlatherr. J. in the Kesavananda Bharati case, although these provisions are
expressl.v made uncnforceable, that does not affect their fundamental char-
acter. They still very much form part of the constitutional law of the land_
Thev are as important as the fundamcntal rights of the individual. They arc
fundamental in the governance of the country (Kesavananda Bharati vs.

State of Kerala, (1973) 4 im.pose an
obligation on the state to economic
condilions in which there social and
Mathew, J. in the -judgement whether
of the nation. A particular fundamen_
e moral claims embodied in part IV
them is a matter which must be de_
cided by each generatioh in the light ofits experience and values.
of special significance are Articles 3g, and 39. The former declares that
the state shall strive to promote the rvelfare of the people by securing and
protecting as effectively as it may a social order in which
lustice, social,
cconomic and political, shall inform all the institutions of national life.
Article 38 (2) inserted by the 44th amendment Ac1 197g further enjoins that
the State shall in particular strive to minimise the inequalities in inlome and
endeavour to e status, facilities and opportunities not
only amongst mongst groups of people residing in
different areas vocations.
Article 39 directs that the state shall in particular direct its policy to-
wards securing:
(a) that the citizens, men and rl'omen equally, have the right to an ade-
quate means of livelihood;
o) that the ownership and control of the natural resources of tlre commu-
nity are so distributed as best to subserve the common good;
(c) tha( the operation of the economic system does not result in the
concentration of wealth and means of production to the common
detriment;
(d) that there is equal pay for equal work for both men and women;
(e) that the health and strength of workers, men and women, and the
tender age of children are not abused and that citizens are not forced
by economic necessity to enter avocations unsuited to their age or
stength;
(f) that children are given opportunities and facilities to develop in a
healthy rnanner and in conditions of freedom and dignity and that
childhood and youth are protected against exploitation and against :
moral and material abandonment.
The subsections (b) and (c) are particularly relevant in so far as they
have been declared to be the driving force behind a number of specific laws
or poliry measures affecting business. In pursuance of these provisions our
Government has, on the one hand, introduced remedial legislation and re-
Constitutional Framework of Government Control of Business 35
form on a large scale. On the other hand, it has effected nationalisation of

existing private business concerns, or vested their business and assets in
statutory public corporations, e.g., life insurance, road transport, civil avia-
tion, commercial banking- or set up a large number of public sector proj-
ects. In fact the adoption by Parliament ofthe socialist pattern of society as
the objective of our social and economic poliry in December 1954 followed
directly from these directive principles of our Constitution. Of considerable
importance for business, also, is the recently inserted article 43A which
states: "The State shall take steps, by suitable legislation or any other way,
to secure the participation of workers in the management of undertakings'
establishments or other organisations engaged in any industry."
The two most important limitations on the powers of the Central Gov-
ernment in tlte m:rtter of regulation of business comes from (f the division
of powers between the States and the Central Government and (ii) the
Fundamental Rights (Chapter III) of the Constitution.
CENTRE.STATE DIVISION OF LEGISLATIVE POWERS
List I in schedule MI contains the subjects which are within the exclu-
sive legislative powers of Parliament, and to that extent.within the executive
powers of the Central Government. In it the following entries relate to
economic matters :
7. Industries declared by Parliament by law to be necessary for the

pwpose of defence or for the prosecution of war.
41. Trade and commerce with foreign countries; import and export
across customs frontiers; dehnition of customs frontiers.
42 Inter-State trade and commerce.
43. Incorporation, regulation and winding up of trading corporations,
including banking, insurance and financial corporations but not including
co-operative societies.
45. Banking.
47. Insurance.
48. Stock exchanges and future markets.
51. Establishment of standards of quality for goods to be exported out
oflndia or transported from one State to another.
52. Industries, the control of which by the Union is declared by Parlia-
ment by law to be expedient in the public interest.
53. Regulation and development of oilfields and mineral oil resources;
petroleum and petroleum products; other liquids and substances declared by
Parliament by law to be dangerously inflammable.
54. Regulation of mines and mineral development to the extent to
which such regulation a1d development under the control of the Union is
declared by Parliament by law to be expedient in the public interest.
36 Governnrcnt and Busines.s
List lI contains the following entries rvhich are within the exclusive
sphere ofthe States:
23. Regulation of mines and mineral development subject to the pro'i-
sions of List I with respect to regulation and der,.clopment under the control
of the Union.
24. Industries subject to the provisions ofentries 7 and 52 ofList L
25. Gas and gas-tvorks.
26. Trade and comnerce within the State subject to the provisions of
entry 33 ofList III.
27. Production. supply and distribution of goods subject to the provi-
sions ofentry 33 ofList III.
32. Incorporation. regulation and winding up ofcorporations. other than
Lhose specihed in List I. and universities, unincorporated trading, literary.
scientific. religious and other societies and associations: co-operative socie-
ties.
List III, lvhich contains the concurrent subjects, also has a number of
entries impinging upon the freedom of private enterprise. e.g.
20. Economic and social planning.
2l , Commercial and industrial monopolies, combines and trusts.
32. Shipping and navigation on inland watenvays as regards mechani-
callv propelled vessels, and the rule of the road on such vyatenvays, and the
carriage of passengers and goods on inland watenval's subject to the provi-
sions of List I rvith respect to national watenva)'s.
33. Trade and commerce in, and the production, supply and distribution
of-
(a) the products of any industry where the control of such industry by
the Union is declared by Parliament by law to be expedient in the
public interest. and irnported goods of the same kind as such pro_
ducts,
(b) foodstuffs. including edible oilseeds and oils:
(c) cattle fodder including oilcakes and other concentrates:
(d) raw cotton. rvhether ginned or unginned. and cotton seed: and
(e) rawjute.
34. Price control.
35. Mechanicalll'propelled including the principle on r.r.hich
ta.xes 'ehicles
on such vehicles are to be levied.
38. Electricitv.
Lisl II enumerates the State subjects and List III the concurrent subjects.
It must be admitted that a nunrber of entries interspersed in the three
matters seem to overlap and this has led to many
controversies. One interesting controversy lyas
in which entry 52, in List I, entries 24 arrd 27 in
List II and entry 33 in List III got involved in connection rvith the regulation
Constilutional lirarnework o.f (iovernnrent Control of Buo-ine's 3i
of sugar industry. The judgement of the Supreme court to some extenl
diluted the porver of the central Government to regulate all aspects and
stages of an industry like sugar in so far as raw materials like iugarcane
were excluded from its purview. The position today is that parliament can
regulate only the process of manufacture and the products of industry but it
cannot regulate the suppll'ofrarv materials to the controlled industry except
to the extent the rarv materials fall under entry in List III.
But on the whole in the matter of economic and industrial regulation,
under the constitution the centre has very wide powers, and its suprenacy
vis-a-vis the State has been established. under entry 52 of List it .un I
control industry. under entry 33 in List III it can control the products of
controlled industry, imported goods, and important raw materials like cotton
and jute. Under entry 42 in List I it can regulate inter-state commerce. and
under entry 34 in List III it can control price. It is also significant that
despite Tihramji case the centre passed an order in 1955 under lvhich
power has been taken to control movement of sugarcane.
FUNDAMENTAL RIGHTS
This chapter obviously constitutes the major constitutional limitation on
Government's power to regulate the econom-y of our country and the activi-
ties of the private sector. The main limitations are found in the follor.ving
Articles:
l. Article 14 guaranteeing equalig'before the lau,and equal protection
of the laws.
2. Article 19 lvhich contains the so-called 'seven freedoms' under our
Constitution runs as follows:
"19. (1) All citizens shall have the right:
(a) to freedom of speech and expressron:
(b) to assemble peacefully and without arms:
(c) to form associations or unionst
(d) to move freely throughout the territory of India:
(e) to reside and settle in an1' part ofthe territory oflndia;
*(l) to acquire, hold and dispose ofproperty, and
(g) to practise any profession, or to carry on any occupation, trade or
business.
(2) Nothing in sub-clause (a) of clause (l) shall affect the operation of
any existing lalv or prevent the State from making any lar.v in so far as such
larv imposes reasonable restrictions on the exercise ofthe right conferred by
the said sub-clause in the interests of the sovereignty and integrity of India,
the securiq' of thc State. friendly relations rvith foreign States, public order,
*Debaled bv the 44th Amendment Act 1978

decency or morality, or in relation to contempt of court, defamation or

incitement to an offence.
(3) Nothing in sub-clause (b) of the said clause shall affect the operation
of any existing law in so far as it imposes, or prevent the state for making
any law impbsing, in the interests of the sovereignty and integrity of India
or public order, reasonable restrictions on the exercise ofthe right conferred
by the said sub-clause.
(4) Nothing in sub-clause (c) ofthe said clause shall affect the operation
of any existing law in so far as it imposes or prevents the state from making
any law imposing, in the interests ofthe sovereignty or integrity of India or
public order of morality, reasonable restrictions on the exercise of the right
conferred by the sub-clause.
(5) Nothing in sub-clause (d) and (e) of the said clause shall affect the
operation of any existing law in so far as it imposes, or prevent the State
from making any law imposing, reasonable restrictions on the exercise of
any of the rights conferred by the said sub-clauses either in the interests of
the general public or for the protection of the interests of any Schedule
Tribe.
(6) Nothing in sub-clause (g) ofthe said clause shall affect the operation
of any existing law in so far as it imposes, or prevents the State from
making any law imposing, in the interests of the general public, reasonable
restrictions on the exercise of the rights confened by the said sub-clause.
and in pafticular, nothing in the said sub-clause, shall affect the operation of
any existing law in so far as it relates to or prevents the State from making
any law relating to :
(i) the professional or technical qualifrcations necessary for practising
any profession or carrying on any occupation, trade or business, or
(ii) the carryihg on by the State, or by a corporation owned or controlled
by the State, of any trade, business, industry or sewice, whether to
the exclusion, complete or partial, of citizens or otherwise."
Of the seven freedoms, those in Article 19 (I) (D and (g), the former
conferring on the citizens the right to acquire, hold and dispose of property
and the latter containing the right to practise any profession, or to carry on
any occupation, trade or business, are of direct relevance to business. Sub-
clause (5) abridges sub-clarrse (t) (0 bV stating that this right is subject to
any law made by ti.e state imposing reasonable restrictions in the interests
of the general public. Similarly sub-clause (6) subjects the right conferred
by sub-clause (1) (g) to the right to any law made by State imposing
reasonable restrictions in the interests ofthe general public, and also to the
right of the State to provide by law for carrying on by it or by a corporation
owned or controlled by it of any trade, business, industry or seryice whether
to the exclusio:r, complete or partial, of citizens or otherwise. It should
therefore be noted that Article 19 itself limits uncontrolled exercise of these

rights by empowering the state to impose by law reasonable rcstrictions irr
the larger interests of the public. Thus the constitution strives "to strike a
balance between individual liberty and social controf'.7 It does not leave to
the Court, as the American Constitution does, to decide on the extent of
permissible State intervention.
3, Article 3l as it originally stood contained the right of property and the
right to enjoy and dispose of property subject only to reasonable restric-
tions, but also providing for the right ofthe State to compulsorily acquire or
requisition property for a public purpose by law, and the right of compensa-
tion to the owner in such cases ofacquisition or requisitioning of property, a
right common to all persons including those in private business. Article 3l
was omitted by the 44th Amendment Act, 1978. 3l A, 3l B and 3l C are as
follows:
Of them the most signifrcmt provisions are Article l9(lx0 and Article
19 (6XiD. The former can be said to constitute the safeguard of ,.due process
of law" for property and business rights of the American pattem. By virtue
of it the supreme court can decide whether the restrictions imposed by thc
State are reasonable or not. Thus although our constitution acknowledges
that there cannot be any such thing as absolute or uncontrolled liberty and
that the State can under l9(l) and (6) restrict the exercise of freedom cf
property, trade, prof'ession and business guaranteed under Article 19 (f) and
(g), these restrictions must be reasonable ones, and cannot be imposed by
the executive without legislative authority. The power of judicial review is
derived from the word "reasonable" which qualifies tlte word "restrictions"
in each of these clauses. In determining reasonableness fgr courts can take
into account not only public interest, but also whether the restrictions sought
to be imposed by the legislature has a reasonable relation to the authorisecl
purpose, or is an arbitrary abridgement of the freedom guaranteed by the
Article. Thus we have judicial supervision of the constitutionality of legisla-
tive and executive action.
Prior to the supreme court's award on bank nationalisation in 1969 one
view held among jurists in the light of two decades of the court's decisiorr
rvas that the Court had virtually abandoned its role in relation to Article lg
(l) (0 and (g) and had followed a poliry of deferences to the legislative
verdict in determining the reasonableness of a restriction, and that as a
result "private economic interests do not enjoy much of a substantive pro-
tection under the Constitution".j But this view seems to be based on a
somewhat unrealistic comparison between the attitude of the u.s. Suprerne
Court towards this question and that of our Supreme Court. 11 ignores the
fact that whereas the attitude of the former was all along conditioned by the
prevailing laissez faire economic philosophy, in India the long tradiiion of
close government control ofbusiness specially during the war years, and the
40 Governrttent and Bu.riues.t
Constittttional Fraruework of Government control of Busincs,s 4l
(l)the taking over of the management of any propertybythe State for
a
limited period in the public interest or for propir management
(2) the amalgamation of trvo or more corporations in the public interest
or for proper management
(3) the exting'ishment or modification of any right of managing agents,
managing directors, directors etc. or of any voting righis or snare-
holders. or
(4) the extinguishment or modification of an1' rights arising out of any
agreement, lease or licence in respect of any mineral or mineral oil
shall be void on the ground that it is inconsistent with any rights
conferred by article 14, 19 or 31.
It is also laid down that when a law provided for the acquisition of a
person's property for a public purpose and also provided some compensa-
tion. the adequacy of the compensation shall not be questioned in a court.
As the Supreme court, in spite of this amendment, continued to hold that
the expression 'compensation' meant full monetary equivalent of the prop-
ert)'or the market value,5 the 25th Amendment (1971) substituted the word
'compensation' by the word 'amount'.
But again, the Supreme court by a
majority judgement in the famous Kesavananda Bharathi case in 19736
held
that the amount which has to be fixed b1, the legislature cannot be arbitrar;,
or illusory, but must be determined by a principle rvhich is relevant to the
acquisition of propertv. Thus it revived an area for judicial intervention.
The 25th Amendment Act, l97l also introduced a nerv article, 3l-c which
provides that any larv which seeks to implement the directive principles
in
Article 39 (b) or (c) shall not be void on ground of being inconsistent rvith
Article 14, 19 or 31. and no larv rvhich declares that it is for giving effect to
these principles shall be challenged in any court on the ground thlat
it does
not give effect to this policy. The immediate background to this was the
Supreme court's judgement striking down the banks' nationalisation, and
Parliament's desire to settle the issue by appropriate amendment of
the
constitution. But the Supreme court's decision in the Kesavananda case
holding judicial review as an essential feature of our constitution has some_
u'hat toned down the effectiveness of Article 3l-C. However. the 42nd
Anrendment (1976) proceeded to assert parliament's sovereign right to
amend the constitution and to place all amendrnents beyond the scope
of
judicial revierv. Further, the insertion of the adjective isocialism,
by the
42nd Amendment in the preamble to describe the Indian Republic appears
to underline the constitution's distinct preference for a soiialisr. t),pe of
economy arval' from lais.sez-faire and unrestricted private orvnership. This,
together vvith Article 3l-c as amended by the same Amending Acl made it
unambiguousll' clear that the Directive principles u.ould prer.ail en bloc
42 G overnment and Busittess
over the Fundamental Rights contained in Article 14, 19 and 31. That the
or State socialism but only equal opporrunity of socio-economic reform.
one interesting point to remember is that the freedom under Article

l9(1) is available only to citizens. Another is thar it is available only to
natural persons who are citizens, not to corporations.
of some relevance to us, also, is part XIII of the constitution containing
Articles 301-307. Article 301 declares that trade, commerce and intercourse
throughout the territory of India shall be free. This freedom is however
different from the freedom guaranteed under Article 19. The former can be
invoked by citizens and foreigners, r,vhile the latter is available only to
citizens. secondly, the right under Article 301 is only a constitutional right
which is not justifiable while the right under Article 19 is a fundamental
right which is justifiable. Article 302 c.-.ables parliament to impose restric-
tions on this freedom in the public interest. Unlike in Article 19 the word
'restrictions' is not qualified by the word 'reasonable.' This seems to make
reasonableness not-justifiable and thus gives Parliament a much larger au-
thority. [n contrast the restrictions to be imposed by the State Legislation
under Article 304(b) on the freedom of trade are required to be reasonable'.
The object of the 'freedom'guaranteed by Article 301 as supportedby the
case law, is to ensure that the economic unity of India is not broken up by
internal barrier and that the flow of trade runs smooth throughout the terri-
tory unhampered by restrictions at various points. It has however been
settled that tax laws, or purely regulatory measures, like licensing of ve-
hicles, marketing, and health regulations cannot be challenged as offending
Article 301 unless they can be shown as colourable measures to restrict the
flow of trade, commerce and intercourse.
In conclusion we should note that our Constitution envisages a 'mixed'
economy in which nationalised undertakings co-exist with private enter-
prise, and the constitutional guarantees for freedom and equality of private
enterprise are tempered by the recognition of the need for drastic regulation
by Government in many respects. The freedom enjoyed by private enter-
prise is not absolute, but subject to serious limitations under Articles 19, 31.
302, 303 and 304. Expressions, such as "in the interest of the general
public" in Article l9(5), give the State very rvide authority to impose by the
law reasonable restrictions on the ground of the general social and eco-
nomic policies of the State. It is important to note that even when the
government is rvanting to make major policy changes in several directions
such as permiting the private sector including foreign companies to enter
into the insurance sector, or partially privatising the monopoly public sector
insurance companies, the existing law for full government monopoly in
insurance in pursuance of the constitution's provisions is being held as a
serious obstacle. The Supreme Court has repeatedly held (e.g. Dwarka
Prasad vs. State of U.P., 1954) that a restriction is reasonable only when
there is a proper balance between the rights of the individual and those of
the society, between his fundamental right to freedom and the overriding
need for social control in public interest. Indeed there is a balance in our
Constitution between private enterprise and Government control with the
balance titled in favour ofthe latter.
Before we leave this subject, it is important to remember that much of
the power that the Central Government in India exercises in the economic
field is not derived from the Constitution of India, but from'the system of
planning that has been in vogue since 1951. The Planning Commission that
rvas created in 1950 as an executive organ of the Central Government is
charged rvith the responsibility of determining the size of the Five Year
Plans and the Annual Plans ofthe States including the pattern of'hnancing
and allocating Central Plan assistance to the States. To the extent that many
44 Gotternment and Business
References
l. Irserted by the Constihrtion@orty-Second) Amendment Act, 19j6.

) GopalmYs. State of Madras (1950) S.C.R. 88 (253-54).
J. Alice Jacob, "Public control of Private Enterprise : Judicial process and
Policy Perspectives", 1967,Journal oflndian Law Institute,p l7l.
R.B. Tewari, "Private Enterprise and Govt. Regulations,, in Indian Law
Iastitute
5 CooperYs. - Government Regulation of Private Enterprise, p 53.
Union of India,A.I.R. 1970 S.C. 564 (608,614)
6 Kesavananda tr/s. State of Kerala, A.I. R. 1973 S.C. 1641.
This judgment is more famous because it uphelcl parliament's power to
amend even firndamental rights (without destroying the essentiai features
or basic structure of the constitution) and thus over-ruled Golaknath's
case which had held otherwise.
Chapter Three
lndustrial Policy and

lndustrial Licensing
From 1951 on to tre massive economic reforms of l99l-92, industrial

licensing constituted the key element in the Indian Government's industrial
ety, equality ofwealth and opportunities and egalitarianism in general.

until 1991 the inner core of policy and legal instruments consisted of (i)
the Industrial Poliry Resolution, 1956, the basic poliry document (ii) the
Industries @evelopment and Regulation) Act, 1951, the central legal instru-
menl, and (iii) the Government's industrial licensing policy (1973) within
the overall frame of the Industrial Policy Resolution. Since 197g it has
become the practice to supplement the two poliry documents mentioned
above with yet another document entitled Industrial policy Statement (e.g.
those of 1978, 1980 and 1982). Apart from this inner core of three direct
controls, there was
controls, the most i
Capital Goods Impo
foreign investment
covered by the provisions of the M.R.T.P. Act dealing with concentration of
economic power were required to obtain central Government's special ap-
proval under that Act to pay new project over and above the industrial
licence. If any project involved the import of capital equipment or machin-
ery, a capital Goods clearance for which there i's a separate procedure
becomes necessary. For getting foreign equity investment or technical col-
laboration a company needed yet another separate approval of its project
from an offrcial body, viz. the Foreign Investment Board. yet another clear-
ance called the FERA clearance (approval under section 29 ofthe Foreign
Exchange Regulation Act to the continuance ofexisting business by foreign
controlled companies) affected a substantial segment of Indian industry for
several years from 1974 onwards. These policies and procedures had an
important bearing on the formulation and implementation of new projects
in
our country's industrial system. In this chapter we shall examrne the three
direct instruments of control, viz. Industrial poliry Resolution, the Indus-
tries (D&R) Act and rhe Industrial Licensing policy (1973) which, taken
together, constitute the industrial licensing system. and which still remain
the major policy instruments despite the number of poliry announcement
made subsequently.
Government of India's first lndustrial policy Resolution (194g) called
for a dynamic natibnal policy directed "to a continuous increase in produc-
tion by all possible means, side by side with the measures to secure its
equitable distribution." For implementing that policy, the Resolution
stressed the need for the state to play "a progressively active role in the
development of industries." The resolution made it clear that ,for some time
to come, the state could contribute more quickly to the increase of national
wealth by expanding its present activities where it is already operating and
by concentrating on new units of production in other fields, rather than on
acquiring and running existing units'. It was indicated that ..meanwhile,
private enterprise properly directed and regulated, has a valuable role to
play." The public and private sectors were thus given complimentary roles
in promoting industrial development. The manufacture of arms and irn-u-
nition, the production and control of atomic energy, and the ownership and
management of railways were to be the exclusive monopoly of the central
Government. The responsibility for setting up new undertaking was re-
served to the state in the following six basic industries, except whire, in the
national interest, the State itself found it necessary to secure the co-opera-
tion of private enterprise:
(l) Coal.
(2) Ironand Steel.
(3) Aircraft manufacture.
(4) Ship-building.
(5) Mineral oils.
(6) Manufacture of telephone, telegraph and wireless apparatus (exclud-
ing radio receiving sets).
INDUSTRJAL pOLICy RESOLUTION, 1956
The need for further amplihcation of this poliry and for extending.the scope
and coverage of the public sector arose due to subsequent developments in
Industrial Policy and Industrial Licen-sing 4'7
the political and economic spheres. The Directive Principles of State Policy
enshrined in the Constitution adopted in January 1950 indicated the socio-
economic goals towards which the efforts of the State were to be oriented.
In the light of these principles, planning for economic development as-
sumed special importance. A National Planning commission was accord-
ingly set up in March 1950 and the nation's First Five-Year Plan was
hnalised by the end of 1952. While the First Five Year Plan was under
implementation the pursuit of a socialist patteln of society was accepted by
Parliament in 1954 as the principal objective of social and economic policy.
with the completion of the First Five-Year Plan, it became clear that there
was urgent need for accelerating the pace of economic development through
the expansion, among other things of heavy industries. Taking these chang-
es and needs into account, Governmenl reformulated their industrial poliry
in April. 1956.
The Resolution of 1956 declared:
The adoption ofthe socialist pattern of society as a national objective, as

well as the need for planned and rapid development, requires that all
industries of basic and strategic importance, or in the nature of public
utility service, should be in the public sector. other industries which are
essential and require investment on a scale which only the State in the
present circumstances could provide, have also to be in the public sec-
tor. The State has- therefore, to assume direct responsibility for the
future development of industries over a wider area."
This revised Industrial Policy Resolution classified industries into three

categories having regard to the part which the State would play in each of
them. In the first category r,r'ere placed the industries the future development
of which was to be exclusive responsibility of the state (Schedule-A). The
second category consisted of industries which would be progressively State-
orvned and in which the State would therefore generally take the initiative
in establishing new undertakings but in which private enterprise would also
be expected to supplement the effort of the State (Schedule-B). The third
category included all the remaining industries where future development
would generally be left to the initiative and enterprise in the private sector.
The following industries were placed in the first and second categories
respectively.
Schedule'A'
(1) Arms and ammunition and allied items of defence equipment.
(2) Atomic energy.
(3) Iron and steel.
4tt Governnrent and Business
(4) Hearl castings and forgins ofiron and steel.

(5) Heavy plan and machinery required for iron and steel production,
for mining, for machine tool manufacture and for such other basii industries
as may be specified by the Central Government.
(6) Heavy Electrical plant including large hydraulic and steam rur-
bines.
(7) Coal and lignite.
(8) Mineral oils
(9) Mining and iron ore.
manganese ore, chrome ore, gypsum, sulphur,
gold and diamond.
(10) Mining and processing of copper, lead,, zinc, tin molybdenum and
wolfram,
(ll) Minerals specihed in the schedule to the Atomic Enerry (control
ofProduclion and Use) Order, 1953.
(12) Aircraft.
(13) Railway transport.
(la) Air transport.
(15) Ship building.
(16) Telephones and telephone cable, telegraph and wireless apparatus
(excluding radio receiving sets).
(17) Generation and distribution of Electricitl,.
Schedule 68'
(l) All other minerals except ''minor minerals" as dehned in Section 3
of the Minerals Concession Rules, 1949.
(2) Aluminium and other non-ferrous metals not included in sche-
dule'A'.
(3) Machine Tools.
(4) Feno-alloys and tool steels.
(5) Basic and intermediate products required by chemical industries
such as the manufacture of drugs, dyestuffs and plastics.
(6) Antibiotics and other essential drugs.
(7) Fertilizers.
(8) Synthetic rubber.
(9) Carborrisation oI coal.
(10) Chenrical putp.
(11) Road 'i'ransport.
(12) Sea Trmsport.
The Resolr(ion made it clear that "the divisiou of irrdustries into sepa-
rate categorir's does nor imply that they are being placed in watertight
compartmel'rls. htevitabll,. therc will not only bc an area of overlapping
but
Industrial Policy and Industrial Licensing 49
also a great deal of dwetailing between industries in the private and the
public sectors. It \Mill be open to the state to start any industry not included
ofplanning so require or
r declares that the expan-
is not nrled out. There is
also the possibility of the State securing the cooperation of private enter-
prise in establishing new units when the national interest so requires. In
such cases "the state will ensure either through majority participation in the
capital of otherwise that it has the requisite powers to guide the policy and
control the operations ofthe undertakings". The growth ofprivate enterprise
in Schedule 'B' industries "with State participation" is also envisage.d. Thus
the genesis of Joint sestor' or even of what shri r.A. pai has called 'na-
tional sector' can be said to lie in the 1956 Industrial policy Resolution.
stressing further the complementary role of both the sectors, the Resolu-
tion declared "fufiher, heavy industries in the public sector may obtain
some of their requirements of light components from the private sector,
while the private sector, in turn, would rely for many of its needs on the
public sector. The same principle would apply with enen greater force to the
relationship between large scale industries."
Other principles qhasized in the Resolution were:
(i) Reduction of disparities in income and wealth and to prevent mo'

nopolies and the concentration of economic power in different
fields in the hand of a small number of individuals;
(ii) fair and non-discriminatory treatment to public and private sector
units where they co-exist;
(iii) encouragement to cottage and village and small scale industries and
modernising them so as to improve their competitive efficiency;
(w) progressive reduction of disparities in levels of development be-
tween different regions;
(v) the maintenance of inCustrial peace;
(vi) improvement of living and working conditions of workers and rais-
ing the standard of their efficiency;
(vii) developing the country's resource of technical and managerial per-
sonnel;
(viii) participation of workers, technicians and professionar in nvrnage-
ment;
(ix) responsibility of public enterprises to augment the revenue of the
State and provide resources for further dwelopment in fresh fields.
To zurn up, the Industrial Policy Resolution of 1956 gives the broad
poliry framework of industrial development in India. In spite of consider-
able changes in emphasis amonfT various sectors which took place from time
to time, this Resolution remained the Magna carta for Indian Industry till its
replacement b)' the July 1991 Industrial Policy which in many respects
sought to return to the spirit of 1956.
INDUSTRTES (DEVELOPMENT AND REGULATION) ACT, 19s1
unlike most of the administrative controls over business in our country,

irulustrial licensing did not originate during the Second world war, but only
in 1951 when the First Five-Year Plan began. Its iegal frame is provided by
the industries (Dwelopment and Regulation) Act. 195'7 which, as the name
implies, is concerned with the regulation and del'elopment of industry in
accordance with the principles indicated by the Industrial poiiry Resolution
(l 948, I 956) and also the priorities indicated by each Five-year plan.
This Act has been described as "the single most important piece of
economic development legislation" in our legal structure. Along with the
companies Act, 1956, and the Monopolies and Restrictive Trade practices
Act, 1969, it can be said to confer on Government powers of almost total
regulation and control over the working of the private industry and corpo-
rate sector in a manner almost unique in the world. In recent years this Act
has also become a subject of severe controversies, as various policies and
assumptions iirplied in it have been questioned by sections of businessmen,
politicians both of the rightist and the leftist varieties, and also by econo-
mists of various schools.
Objectives
The objectives behind regulation and licensing of industries can be
summed up as follows:
l. Regulation of private industrial development in accordance with the

planned priorities.
2. Channelisation of investment into priority industries.
3. Avoidance of the concentration of ownership and control over large
segments in industrial fields by large industrial houses.
4. Prevention of locational concentration so as to encourage dispersal of
industries to under-developed regions and ensure balanced growth.
5. Promotion of small scale and cottage industries and reducing undue
competition between them and large scale industries.
6. Optimum utilization ofthe scarce foreign exchange resources.
7. Enabling government to take over management of undertakings which'
are being conducted in a manner detrimental to the industry or public inter-
est.
Industrial Policy and Industrial Licensing 5l
Main Provisions
The idrpo(ant provisions of the Act may be summed up in the following
mannet:/
1. All existing industrial undertakings in the scheduled industries, i.e.
industries which are listed in the First Schedule of this Act should be
registered with the Government within the prescribed period and issued with
certificates of registration (Section l0);
2. No new industrial undertaking of a major size can be started in the
scheduled industry (Section l1), no new article can be manufactured (Sec-
tion ll-A) and no substantial expansion of an existing undertaking can be
effected (Section 13) without a licence to be issued by the Central Govern-
ment.
3. No change of location of an industrial unit can take place without the
express permission of Central Government.
4. Central Government has also power to revoke registration of licence
in case of any misrepresentation, etc. by the party concerned, or failure on
the part oflicences to take effective steps (Section l2).
5. Under Section t5 of the Government has powers to order investiga-
tion into the n'orking of industrial undertakings. Urtder Section 16 if this
investigation reveals that the undertaking to the particular industry or to the
country's economic development, the Government has powers to issue di-
rections to the management, in respect of prices, production, quality, the
management of the undertaking and other areas of its performance. In the
event of the undertaking not carrying out these directions, Government can
take over its management for a specific period and appoint an authorisd
controller to manage the company (Section 18). It is important to note that
this power to take over management and control of an undertaking embod-
ied in sub-section A to F of Section 18 has been made non-justifiable.
6. Section l8-G gives the Central Government comprehensive powers
to control and regulate the supply, distribution and prices of any of the
articles produced by an industry listed in Schedule-A, and no order made for
this purpose can be called in question in a court oflaw.
7. For the purpose of advising the Central Government on matters con-
cerning the dwelopment and regulation of scheduled industries Section 5 of
the Act authorises the establishment of a Central Advisory Council for
Industry with necessary sub-committees and standing committees. This
Council consists of representatives from the Central Government and from
owners or employers, consumers, labour and certain otler sections includ-
ing primary producers, Central Government is required to consult this
Council with regard to the making of any rules and improvement under the
Act and may consult it 'with regard to any other mafter connected'with the
administration of this Act.'
8. Developmental councils are to be constituted in respect of each

scheduled industry or groups of industries (Section 6). The functions that
may be assigned to these councils are enumerated in the-second Schedule.
The more important of them are : reconmending production targets and co-
ordinating production programmes; suggesting norms of efficiency in order
to eliminate waste, maximise production, and reduce cost; standardising
products; assisting in the distribution ofcontrolled materials; facilitating
the
training oftechnical and skilled personnel; promoting scientific and indus-
trial research; investigating the possibility ofdecentralising stages and proc-
esses of productioq improving business management practiies; advising
Gwernment on matters pertaining to the industry or group of industries.
The Development councils along with the central Advisory council for
Industries represent the more positive side of the act.. tne idea of such
councils was borrowed from the Development councils of uK and also
shows tlre influence of the French technique of indicative planning through
the modernisation councils. They have been set up in about 20 industries
and have been utilised for the formulation of the targets and programmes for
the Five-Year Plans. Through them the planning of industrialisation is
sough! to be made the joint effort of the Government and the private sector.
They have also brought out better undertaking between Goiernment and
industry. Their expenses are met out of a levy on the assets or goods
menufnctured in a particular scheduled industry. contrary to some doubts in
the beginning, these councils have on the whole worked ur t orno!.n ou,
bodies and also brought about suitable dialogue between Governmint and
the private sector. The strains in recent years developed in the relationship
between Government and business could perhaps be eliminated to a large
extent if these councils were again reactivated and utilised in the spirit
envisaged by the Act. unfortunately they have become in recent years
largely non-technical bodies which merely set some vague targets but lack
the effectiveness to implement them.
There has been an important amendment of the IDR Act in August, l9g4
to provide a legal basis for the central Government's right to issue notifica-
tions for reseryation of specific products for small scale industry. In the
past, the Government had been issuing notifications on the strength of gen-
eral provision for product resewation, pegging production of rwised items
by medium and large firms to the average level of production during the
three years prior to the imposition of the reservation. This was challenged
before the supreme court on the ground that an artitrary notification was
contrary to the licensed capacity granted by a licence issued under the IDR
Act. The amended Act asserts the Government's right to issue such notifica-
tion in larger public interest. However, there is a concession to existing
licences, who can increase production upto the level ofbalance line capac-
ity provided 75 per cent ofthe additional production is expected.
Rules and Procedures
referred to this committee which examined them in the light of the policy
and plans of Government and makes recommendations to Government
whether or not licence should be granted. The full Licensing Committee
meets only about once in a quarter and generally
already rejected but brought back for reconsideration
of the State Government. The normal functions of th
and its acceptance by the tlpes of cases

by a cabinet committee), licant speciry-
ing certain conditions to an industrial
licince is issued. After th conditions the
in it.
REVIEW OF GOVERNMENT'S INDUSTRIAL LICENSING POLICY
Government Industrial Policy since 1951 can be analysed into four distinct
periods : the period 1951-66 when the policy was liberal and seldom per-
ceived as a constraint on growth; the years 1966-'76 which were years of
ally a al$ the sweeping reforms

and re cal Pulposes signalled the
end of
perhaps is best under the circumstances" (Speech on the Economic

condi-
tions of India at the Joint Meeting of the East India Association and the
Overseas League, London).
Industrial Policy and Industrial Licensing 55:
the creation of a whole range of specialist ministries, e.g. Steel. Petroleum,

Chemicals and Fertilizers, Electronics. A parallel development was the
creation of a number of regulatory ministries, e.g. Company Affairs, Eco-
nomic Affairs, Science and Technology, each one concerned with specifi.c
aspects of industrial development. Then, there are specialized agencies
like the DGTD. Such proliferation of frnctions necessarily led to in- or-
dinate delay. As many as a dozen or so ministries entered into the licensing
process, specially when a large industnal house was involved or questions
of foreign financial and technical collaboration came. All these Ministries
and agencies as also the State Government had to be consulted, and their
views considered. All this took much time. It may be admitted, however,
that the position somewhat improved after the procedural changes of 1973,
and the introduction of a time-limit, and a common secretariat for industrial
approvals.
2. Licensing is only one among the many controls emanating from Gov-
ernment from which a project has to secure clearance, as for example, the
Capital Goods Committee, the Controller of Capital Issues, approval under
sections 21 and 22 of the Monopolies Act, the Chief Controller of Exports
and Imports, the Resewe Bank of India and where foreign collaboration is
involved, the Foreign Investment Board. In this plethora of controls, the
procuring of the letter of intent very often was not the end, but the begin-
ning of a process of hunting for various approvals and clearance. In such a
situation the letter of intent or even a licence very often does not have much
practical significance and the total package of procuring various licences
and approvals unavoidably leads to delays and frustration.
3. In the 1950s and 1960s industrial licences were given irrespective of
Plan targets. This was specially evident in many industries, among tlem
bearings
oods like
bicycles,
onery far
beyond the capacity targets set for them under the Third Plan. This not only
leads to many of the units operatiug much below their capacity, but also to
'fore-closure' of capacity by powerful groups in advance, so as to prwent
newer entreprenenrs from entering into the field and continue their monql-
oly. As there was no satisfactory follow-up, the licensed capacity often
remained frozen with defaulting parties either by design or by genuine
inability to complete a project. The industrial Licensing Policy Inquiry
Committee severely criticised such deliberate premption or foreclosure of
capacity by some large houses at tlre cost of more enterprising.entrepre-
neurs. Indeed the licensing poliry during the 1950s and 1960s seemed to
have alternated between spell of wholesale approval of applications in a
56 Governmdnt and Business
Industrial Poticy and Industrial Licensing 51
which became such a burning issue in the late sixties and seventies was
never taken into account as a major factor in arriving at licensing discussion
in the fifties or ear$ sixties. It is also quite clear that the more cumbersome
or complex the procedure became, the greater were the chances for only
larger houses to take advantage of it. The Monopolies Inquiry Commission
in 1964 came to the conclusion that the system of control in the shape of
industrial licensing had restricted the freedom of entry for smaller entrepre-
neurs and so helped to produce further concentration, a conclusion which
was also endorsed by the Administrative Reforms Commission (1968) and
subsequently more vocally by the Industrial Licensing Poliry Inquiry Com-
mittee (1969). Clearly, the prevailing procedure in the 1950s and 1960s did
not sewe the object of prwenting concentration of ownership. Even when
an industrial licence was not granted to a large house, it was a mere poliry
ofnot granting new licences. There was little or no control over subsequent
transfer of ownership of the licence to a large house. Some of these houses
knew well how to make full use of this lacuna.
6. The objective of regional dispersion does not seem to have been
achieved. But this is not quite corect, as looking at the licences issued one
can surely notice a poliry trend of decentralising industries, geographically
as far as possible. To take one instance, prior to 1951, the country's engi-
neering industry was more or less concentrated in the eastern region. Since
then new units have been to a large extent set up in the Western, Northern
and Southern regions. This explains why steel tube plants were licensed in
the Western and Northern regions, and wire rope units in the Western and
Southern regions. There is, however, a basic constraint, in the sense that the
negative aspect of preventing the setting up of industries in certain con-
gested areas is always easier to achieve than the positive one of dispersing
industries to less developed regions. For ensuring the latter objective in-
ducernents and facilities in under-developed regionS, €.9., tax-concessions,
road qystem, land, power, transport etc. and economic considerations like
proximity to raw materials and markets or availability of skilled labour
seem more important. Thus, for example, many licences given for Assam
were not implemented largely because of the lack of these facilities.
7. Similarly even for the objective of helping small-scale industries the
positive methods seem more important than the negative instrument of li-
censing. In any case the resewation of certain spheres for the small-scale
sector and the poliry for delicensing units involving investment of less than
a crore except in certain circumstances have considerably reduced the scope
of such protection through a system of general licensing'
8. A poliry of licensing new industrial projects is not in itself a satisfac-
tory means of ensuring proper utilization of foreign exchange. As the grant-
ing of a licence does not automatically entifle the entlepleneur to the allot-
ment of
does not
9.A
trial lice
than as a happy medium of a mixed economy. It is difficult to endorse
thi's
contention except with reference to the period 1967-73 i.e. from R.K. Haz-
process.
The licensing policy came in for sharp criticism frorn s.G. Barve, mem-
ber of the Planning commission in 1966, from R.K. Hazai who submitted
two reports to the Planning commission in 1967, from the shrdy team of
Administrative Reforms commission on Economic Administratitn which
submitted a report in l96i-68, and finally frorn the Industrial Licensing
Policy Enquiry Committee @utt Committee), 1969.
converting
and thus ch
prise to a j
might share both equity-holding and management. In fact the Committee

recommended joint sector as a main poliry instrument against concentration
of economic power in private hands. The report of the Industrial Licensing
Policy Inquiry Committee ushered in a spell of restrictive licensing policy
marked by suspicion of large houses and a generally negative attitude to-
wards proposals coming from tlem. For a few years what mattered more in
a licence application was not the techno-economic merits of the project, but
the source of its sponsorship. If it came from a large house or a foreign
majonty company it had little chance of approval unless there were some
special reasons in its favour.
INDUSTRIAL LICENSING POLICIES OF 1970 AND 1973
Following the Dutt Committee's report and also the enactment of the Mo-
nopolies Act, 1969, the Gdvernment of India in February 1970, announced a
new industrial licensing poliry. It banned the entry of large industrial hous-
es and foreign companies into any freld except core industries, heavy invest-
ment projects and export-oriented projects. Several other restrictive policies
followed.
First, the MRTP Act, 1969 which came into force on lst June, 1970
introduced an additional control over (i) all undertakings or groups ofinter-
connected undertakings with assets of Rs 20 crores and above, and (ii) the
dominant undertakings in respect of cases of substantial erpansion or estab-
lishing new undertakings. For such parties getting a letter of intent or indus-
trial licence is not enough, but separate approval of the project by the
Central Government under the new act was also essential. Secondly, follow-
ing a recommendation made by the Dutt Committee report, Government
accepted the policy of convertibility of term loans granted to industry by
public financial institutions into equity, and it became the standard practice
to insert a convertibility clause as a condition of approval to all such proj-
ects which depended on substantial term loan. Thirdly, in a bid to reduce
the proportion of foreign share-holding in the foreign majority companies
Government announced in 1972 a poliry of 'dilution' of the proportion of
foreign holding by issuing fresh equity to the Indian public whenever such a
company would go in for a new project. The additional fresh capital to be
issued was to bear a proportion ofthe project cost according to a graduated
scale. Companies with foreign holding of 75 per cent and above are to issue
fresh equity equivalent to 40 per cent.
Another Industrial Licensing Poliry announced in February 1973 refined
the 1970 policy.
The definition of larger industrial houses, as recofilmended by the Dutt
Committee and accepted by the 1970 poliry, (viz., assets exceeding Rs 35
crores) was abandoned. In its place the definition adopted by section 20 of
the MRTP Act,viz., the assets of a companyby itself or along with assets of
interconnected undertakings amounting to Rs 20 crores and above, ac-
cepted. This remolrd the contradiction between the definition of a large
industrial house for licensing puposes under the 1970 poliry and the con-
ception of large house on the basis of interconnected undertakings as de-
fined in the MRTP Act.
Also the list of the core industries as under the 1970 poliry was substan-
tially enlarged. A consolidated list of these industries was attached in Ap-
pendix-I to this policy announcement. These core industries of importance
to the national economy, or industries having direct linkage with such core
industries or industries with a long term export potential. Large houses, as
now redefined, and foreign majority companies, will now be eligible to
participate in and contribute to the establishment of industries listed in this
Appendix, provided the item of manufacture is not one reseryed for the
public sector or the small-scale sector. They will ordinarily be excluded
from industries included in this Appendix unless production is predomi-
nantly for export (usually understood to mean 60 per cent or more). The
concept of heavy investment sector (investment of over Rs 5 crores) was
altogether abandoned.
The existing policy of reservation for the small scale sector (involving
investment in machinery and equipment upto Rs l0 lakhs and in case of
ancillary industries upto Rs 15 lakhs) and the policy with regard to joint
sector as a promotional instrument were to continue without allorving joint
sector to be used for the entry of larger houses, dominant undertakings, and
foreigr companies in industries from which they are otherwise preclu(ed on
their own and subject to Govemment's effective role in guiding policies,
management and operations.
There were also, some procedural changes in October, 1973 creating a
Projects Approval Board (PAB) to deal with composite applications seeking
approval under the four major procedural hurdles simultaneously, viz., li-
censing, MRTP, Capital goods and Foreign Investment Board.
It also introduced a common secretariat viz., Secretariat for Industrial
Approval (s.I.A.) to receive and process all types of applications concerning
an industrial project viz. industrial licence appiications, capital goods appli-
cations, applications for foreign investment or foreign collaboration, appli-
cations under Sections 2l-22 of the MRTP Act.
TOWARDS STRUCTURAL ADJUSTMENTS AND

LIBERALISATION
From around 1974-75, in response to the need for greater productivity and
efficiency in the industrial economy in the wake of the shock of the oil price
Industrial Policy and Industrial Licensing 6l
increases, first in 1973 and again in 1979, Government initiated a number of

measures to relax and liberalize licensing provisions. However, these meas-
ures were still somewhat halting and half-hearted as a result of the persis-
tence ofthe restrictive prejudices ofthe preceding phase, and the impact of
the relaxations was therefore often neutralizedby the simultaneously intro-
duced countenailing measures such as denial of institutional funds, in-
creased reservation for small-scale industries, exclusion from these relaxa-
tions ofa large list ofindustries, which are subject to special regulation and
continued prohibition of MRTP and FERA companies.
Meanwhile the Janata Party Government which came to power after the
General Elections of 197'7 announced a new Industrial Policy Statement on
December 23, 1977.It did not replace the Industrial Policy Resolution of
1956 or the Industrial Licensing Poliry of 1973 but only supplemented them
by redefining some of the priorities. It claimed to differ from the 1956
Resolution mainly in two respects:
(i) by giving the priority of place to small scale village and the so+alled
'tiny sector' industries in the future industrialization strategy; and
(ii) by providing for a new compulsive tlrust towards geographical dis-
persal of industries from metropolitan and congested urban centres to
nual and backward areas.
In order to provide a fillip to the small-scale it reserved over 500 items

(subsequenfly raised to about 800) for the small scale sector. In order to
ensure locational redistribution of industry it declared that no more licence
should be issued to new industrial units within certain limits of large metro-
politan cities having a population of more than I million and in urban areas
with a population of more than 5 lakhs according to 1971 census. Finally, it
provided for locating a district industrial centre in each district in order to
help growth of small scale sector. It was announced that this centre will
have adequate decision-making authority and expertise.
THE INDUSTRIAL POLICY STATEMENTS OF 1980 AND 1982
The general elections of 1980 and the return to power ofthe Congress Parly
brought about the Industrial Poliry Statements of 1980 and 1982 in quick
succession. These sought to introduce greater flexibility in the operation of
the industrial investrnent control system within the parameters set by the
Industrial Policy Resolution of 1956. The primary concern of the new Gov-
ernment was to overcome the deteriorating state of industrial development.
Against a backdrop of secular stagnation in investment industrial output
recorded a decline of about 1% during the year 1979-80. The new policy
framework was therefore an attempt to mitigate the adverse impact of pol-

iry constraints both in respect of full utilisation of capacity on the one hand
and the expansion ofcapacity on the other.
The Statement stressed the need for toning up the management of public
sector enlerpris'es and identi$ing and irutiating corrective measures in the
case of inefficient enterprises in order to "rehabilitate faith in the public
sector".
As regards the role of the private sector the statement reiterated govern-
ment's faith in the 1956 policy statement recognizing the desirability of
permitting the private sector to develop "in consonance with the targets and
objectives of national plans and policies", firmly stressing that the Govern-
ment would "not permit the growth of monopolistic tendencies or concen-
tration of economic power and wealth in a few hands". The omission of the
statement to raise the asset criterion for determining alarge industrial house
from the level of Rs 20 crores at which it was pegged for the past decade, to
a more realistic level. came as a disappointment to the large scale sector.
Nevertheless industry circles welcomed the numerous concessions which
could give a fresh impetus to the growth of assets both in the medium and
the large sector in spite of the restrictive provisions of the M.R.T.P. Act in
the case ofthe latter.
Under the 1982 poliry, capacity could be re-endorsed upto the level of
actual production plus l/3 wherever this is higher than licensed capacity
plus 25%. In the very next year the firm can once again become eligible for
re-endorsement provided its production plus l/3 is once again higher than
the new capaciq'after re-endorsement. There was thus an inbuilt mecha-
nism for continuous growth. This re-endorsement principle as a concept was
even more attractive than the earlier poliry of automatic growth which
limited capacity growth to one time 25%o increase over licensed capacity.
Also, it was not confined to only a select list of industries and was thus
much broader in scope.
Of special significance in this poliry package was the broadening of the
scope for new investment by M.R.T.P./F.E.|..A. companies through the
enlargement of the list of Appendix I industries from 19 to 24 (subsequently
raised further to 30): the announcement of 9 industries of national impor-
tance in which investment will not require M.R.T.P. clearance; special in-
centives for investment in backward areas and zero industry districts, the
exclusion of production for exports from the approved capacrty, the provi-
sion for 100% export production units outside export processing zones get-
ting the same hscal benefits, and the raising of the de.licensed investment
limit from Rs 3 crores to tts 5 crores. The tempo and range of poliry
liberalisation vastly increased after the Parliamentary Elections of Decem-
ber 1984 and the assumption of power by new Government headed by Rajiv
Industrial Polic.v and Industrial Licensing 63
Gandhi. with the launching of the vII Plan there seemed to be a realisation
that the liberalisation measures announced in the decade of structural ad-
justment to the oil shocks have not brought about the desired results. Inbuilt
procedure and poliry constraints had slorved down the growth of investment
and output by 1984. Therefore, there appeared to be a new poliry of fo-
cussing on specific problems of selected critical sectors and involving a
package of poliry measures applicable to these sectors. Some of the impor-
talt liberalisations were:
(a) Enlargement of the Appendix I List to 20 industries;
(b) the opening of the telecommunication equipment manufacturing by
the private sector;
(c) the broad-banding of licenses in automobiles, machinery and power
and other industries;
(d) withdrawal of restrictions on the production of consumer electronics
in the large scale private sector:
(e) permitting foreign equity companies to manufacture computers;
(f) the removal of licensing ceilings on production of computers in the
private sector outside small scale industry:
(g) reducing the export obligation in respect of MRTP/FERA companies
proposing to set up production capacity in non-Appendix I items in
backward areas from 50 per cent to 25 per cent in category B and C
backward districts, and totally dispensing with it in category A back-
ward districts;
and
(h) exclusion ofall delicensed industries, shipping and hotels from Sec-
tions 2l and22 of MRTP Act.
One of the important policy relaxation of the new govemment related to

the broad-banding ofproducts for industrial licensing in place ofthe narrow
specific product licensing which was introduced in the early Sixties. The
rationale for the new approach was that given the common design and
production facilities for many aggregates of products, flexibility in product
mix would lead to fuller capacity utilization and higher output growth. The
new poliry would also permit manufacturers to follow market trends more
effectively, changing products in response to shifts in demand. Overall
licensed capacity would remain unchanged and separate clearances would
be required for foreign collaboration where necessary.
The process of liberalisation during 1984-85 culminated in certain pol-
icy decisions the new Government announced on 15 March 1985 at the time
of the presentation of the Budget for 1985-86. The most significant element
was the decision to raise the asset limit for large houses from R; 20 crores
to Rs 100 crores. This increase was consistent with the growth of the
economy since 1969, when the previous limit of Rs 20 crores was estab-
lished. Logically, it could be expected that raising the limit would reduce
the coverage of the MRTP Act. But the revised definition of interconnection
in the 1984 Amendment of the MRTP Act was to operate in the opposite
direction.
THE NEW INDUSTRIAL POLICY OF JULY 1997
Meanwhile, despite the impressive growth performance of the 1980s,

serious budgetary and fiscal deficits ofthe Government and severe pressure
on the country's balance of payments position led to a critical economic and
financial situation by 1991, further aggravated by the political uncertainty .
By the time there was a new government at the Centre in June, l99l there
was no other alternative to introducing a new deregulatory and liberal eco-
nomic regime and drastically reducing the government's licensing and regu-
latory functions. This was the rationale behind the sweeping changes in
industrial and trade policies brought about by the Narasimha Rao govern-
ment in I99l and,1992.
The following are the major reforms in the new industrial policy which
replaces all the previous policy documents :
L lndustrial licensing will be abolished except for a short list of indus-

tries, 18 in number, reduced to 15 since then, after the delincesing of
white goods, leather and motor vehicles related to security and strate-
gic concerns, social reasons, hazardous chemicals and over-riding
environmental reasons and items of elitist consumption. Industries
reserved for the small-scale sector will continue to be so reserved.
2. The areas reserved for the public sector has been reduced from earlier
29 (17 in Schedule A + 12 in Schedule B of 1956 Poliry) to 8.
(Annexure I attached to the 1991 Policy). These are areas where
security and strategic concerns predominate.
3. Automatic clearance will be given by the Reserve Bank of India to
projects in 34 groups of industries with direct foreign investment up
to 5ITo of equity. This list is given in Annexure of the policy.
4. Also there will be automatic clearance for proposals for capital goods
import:
a) In cases where foreign exchange availability is secured through
foreign equity participation, and
b) If the CIF value of imported capital goods required is less than 25
per cent of total value (net of taxes) of plant and equipment, upto a
maximum value of Rs 2 crore. This scheme will however cope into
force from Aprrl 1992.in view of current diffrcult foreign exchange
Industrial Policy ancl Industrial Licensing 65
situation. In other cases. import of capital goods will require clear-

ance from the Secretariat of Industrrai Approvals (SIA) in the Depart-
ment of Industrial Development acLr)rding to the availability of for-
eign exchange resources.
5. There will be no requirement of obtaining industrial approvals from
the Central Government in locations other than cities of more than I
million population except for industries subject to compulsory licens-
ing. Industries other than flrose of non-polluting nature such as elec-
tronics, computer software and printing will be located outside
25 kms. of the periphery of such towns except in prior designated
industrial areas. There will however be flexible location policy in
respect of cities (with population greater than one million) which
require industrial re-generation.
6. The system of a phased manufacturing programme run on an admin-
istrative case by case basis. will not be applicable to new projects.
Existing projects with such programmes will continue to be governed
by them.
7. All existing units will be prwided new broad-banding facility to
enable them to produce any article without any additional invest-
ment.
8. The exemption from licensing will apply to all substantial expansions
of existing units.
9. The mandatory convertibility clause will no longer be applicable for
term loans from the hnancial institutions for new projects.
10. Foreign direct investment up to 51 per cent will be allowed to trading
companies primanly engaged in export activities.
11. Foreign technologv agreements up to payments not exceeding Rs l0
million and royalties up to 5 per cent on domestic sales and 8 per
cent on export sales will now get aulomatic clearance.
12. Limits on tlre assets in respect of Indian MRTP Co. and Dominant
Co. in India have been removed. The Monopolies and Restrictive
Trade Practices Act of India, 1969 O{RTP) regulated the economic
activities of enterprises that were classified either as giant undertak-
ings (based on market share). This is expected to release Indian in-
dustry from regulations that earlier controlled substantial expansions.
There would now be no need for prior approval from the govemment
for new undertakings, expansions, mergers, amalgamations, takeover,
appointment of.directors, etc. This was legalised by a recent amend-
ment of the N{RTP Act, 1969 which among other things repealed the
controversial Chapter IIL A copy of the ftrll statement is given in the
Annexure following this chapter.
Also signifrcant are the following highlights of the small scale industry
Ciovernment and Business
policy announced in August, l99l:

* To provide access to the capital market and to encourage modernisa-
tion and technological upgradation in the small scale industry sector,
equity participation not exceeding 24oh of the total shareholding will
be allowed in the SSI by other industrial undertaking including for-
eign participation.
* No licenses or approvals needed from the Government of India for
the small scale industry sector only with a few exceptions.
* Investment limits of the tiny enterprise in India will be increased
from the present limit of Rs 2 lakh to Rs 5 lakh.
* The rules and procedures pertaining to the SSI sector handloom and
handicraft and agro-processing will be further simplified within a
specffied time-frame of three months. There will also be special pro-
motional efforts and entrepreneurship development programmes.
* Single Windorv Loan Schemes for the SSI sector have been enlarged
to cover projects up to Rs 20 lakh with working capitd margin up to
Rs l0lakh.
* Small Industries Development Organisation (SIDO) of India will set
up a Technology Development Cell (TDC) and an Export Develop-
ment Cell (EDC) to provide technolory inputs io, and boost exports
of the small scale industry sector. TDC will interact with other indus-
trial research & development organisations in India and abroad.
This new industrial poliry should also be viewed with several other
measures by the new government such as the policy announcements in the
Central budget of the same date and the trade poliry announced on 4 July,
1991. The opening up of at least nine industries in Schedule 'A' of the 1956
Resolution and all the 12 industries in Schedule 'B' to private enterprises
opened up new horizons for private sector industry. This will go a long way
in enlarging the role of the private sector and in making the public sector
more effrcient. Also there were other important der6guhtory measures such
as the decontrol of the pricing and distribution of steal and iron. In retro-
spect, it is easy to understand that industrial production has shown a pro-
nounced tempo of increase during the 1980s largely in response to the
policies of deregulation including delicensing of several industries and in-
creasing use of broad-banding. successful promotional efforts and good
supportive performance of some of the key infrastructure sectors. It record-
ed a compound annual growth rate of 8.6 per cent during the 1980s. The
index of industrial production with the base 1980-81:100 showed a com-
pound arurual rate of growth of '7 .7 per cent betrveen 1980-81 and 1988-89.
Clearly. there is an intention to shift the main responsibility for invest-
ment decision from the Ministers and bureaucrats on whom it was vested for
the last forty years back to where it should logically belong, viz., the entre-
Industrial Policy and Industrial Licensing 6'7
preneurs and the industrial managers. A determined pursuit of these policies

should free India from the policy aberrations and ills which have afflicted
her during these decades.
The current industrial scene is a picture of contrasts. There are very
effrcient enterprises. There are utterly ineffrcient units. Most sophisticated
technology exists side by side with total technological obsolescence. There
is overproduction in many industries while many items, not necessarily
critical ones, but even items like sugar have to be imported largely because
capacity was not allowed to be increased for years on poliry or ideological
considerations. In many industries there is serious under-utilization of ca-
pacity on account of problems of the infrastructue such as non-availability
of power or coal and the inability of the railways to lift goods. Many of the
capital goods industries are suffering from inadequacy of orders while im-
ports also go on with massive reduction of custom duties. In the public
sector there are serious problems of ineffrcient capital-out-put ratio, market-
ing, lack of modernization resource crunch caused by the withdrawal of
governments budgetary support, massive manpower redundancy and mana-
gerial and industrial relations problems. Indian industry must be compelled
of production, to upgrade its technolory to
and to expand according to economic logic
to compete with goods from abroad both on
the overseas market and the domestic market. The most serious problem for
India's industry will be facing competition not only from domestic competi-
tors, but also from overseas suppliers. The passage from a seller,s market
where for several decades anything
buyers had no choice, to a buyer's
enterprises. Those which are unable to
will peter out. But the efficient ones will flourish and prosper, specially
those that can successfully accept the change of competition and
globalisation. Industry can also legitimately claim government support in a
whole list of matters including infrastructure, an appropriate pricing policy
for basic inputs such as power and coal and raw materials as also the
finished products, a reasonable structure of duties and facilities for techno-
logical upgradation. These should demand greater attention from the gov-
ernment than the mechanics of industrial licensing whose area of signifi-
cance has dwindled into insignificance since 1991.
Chapter Four
Control of Monopolies :
Experience and lmplications
Control of Monopolies : Experience and Implications 111
sion had limited advisory role under this Chapter-to conduct an ipquiry
into and submit recommendations in respect of any proposal of expansion,
referred to it by the Central Government. This was in contrast to what the
Commission's role is under chapters V and W dealing with restrictive trade
practices, namely, as a tribunal enquiring into and passing judgement on
restrictive trade agreements.
The MRTP Act had three objectives: (l) to control and regulate the
concentration of economic power to the common detriment; (Chapter III of
the Act); (2) to control monopolies and monopolistic trade practices (chap-
ter IV); and (3) to prohibit restrictive trade practices unless any ofthem can
be justifred to be in the public interest (chapter v and M). The MRTP
Amendment Act, 1984 introduced a fourth objective, i.e., regulation of
unfair trade practices by inserting Part B to chapter v ofthe Act containing
sections 36A,36F.,36C, 36D and 36E which empowered the commission
to enquire into such practices as if they are restrictive trade practices. How-
ever, there has been no corresponding amendment of the preamble of the
Act to include unfair trade practices.
It is important to emphasize that chapter III of the Act rvhich had no
parallel ilmong monopolies or anti-trust legislations of other countries. In
iheir r"ope and application, the provisions of this Chapter, in particular
Sections 2l and 22, impinge on the area of industrial licensing and almost
introduced a parallel system of regulation through licensing applicable to a
fairly large cross-section among industrial entrepreneurs. It had its own
administrative apparatus distinct from the administrative apparatus for in-
dustrial licensing, its own statutory advisory body in the form of the MRTP
Cdmmission, its own assumptions and principles, distinct from those guid-
ing the industrial licensing, and indeed, its own terminology. For entrepre-
neurs who were covered by these provisions, it is not enough to have a letter
of intent or industrial licence for the implementation of any programme of
substantial expansion or the setting up of a new undertaking. They must also
have the central Government',s approval under chapter III of the MRTP
Act, before they can go ahead with these proposals. Similarly, the mergers,
amalgamations or takeovers in which such companies are involved also
industrial houses or dominant undertakings must submit to some special

requirements of national poliry before they could implement their expan-
sron progrzlmmes.
Though much have been
India during the last two dec
Regulation) Act, 1951, it was
ll2 Government and Business
any particular commodity or service, the controlling powff (whgther by

reason of ownership of capital or otherwise) was in a single concern of
Control of Monopolies : Experience and Implications I 13
comparatively limited number of concerns or though in a fairly large num-

ber of concerns and when these concerns themselves *a.r iottt olled by
only one family or few families or business houses. where the industry was
engaged in the manufacture of one product it may be called ,,industry-wise
concentration". As regards "country-wise concentration", the commission
felt that where a large number of concerns were engaged in the production
or distribution of different commodities, but were in the controtiing hands
of one individual or family or group of persons, whether incorpoiated or
not, connected closely by financial or other business interests, concentration
of economic power clearly existed, and this could be termed as .,country-
wise" concentration.6
In its report, the Dutt committee came to the conclusion that the op€ra-
tion of the mechanism of the industrial licensing and, added to it, the role of
the public financial institutions, had, by and large, helped the growth of
large industrial houses, rather than newer entrepreneurs, and recommended
a thorough revamping of the licensing policy. while in terms of referenoe,
this committee was not directly concerned with the proposed legislation on
monopoly and concentration of economic power, the implications of its
reportT for the new Act were obvious. unfortunately, the poliry makers
and
Iegislators while framing this law were guided much moie byan obsession
with big business rather than by rational consideration on preventing mo-
nopolies and restrictive business practices, and fostering true competition in
the economy. chapter III of this Act (now repealed) dealing with concentra-
tion of economic power received disproportionately large attention ignoring
the simple fact that concentration of economic power which had been cre-
ated by industrial licensing could well he deconcentrated by corrective
action under industrial licensing. on the other hand, chapter IVwhich deals
with monopolies and monopolistic trade practices received the least atten-
tion. what is more surprising is that in planning the provisions of
chapter III, the poliry makers ignored the rational recommendations of the
Monopolies Inquiry commission for creating an independent Monopolies
commission which could on its own enquire into complaints of concentra-
tion or monopolies and pass order which will be binding on the Govern-
ment. They made the central Government the supreme decision making
authority in all cases of expansion or merger, etc., by MRTP companies
made it compulsory for them to apply in all such cases for upprooul,
reduced the commission to a mere advisory body in respect # on$ those-d
applications which would be referred to it by the centril Government for
advice. For all practical purposes, chapter III introduced a parallel and
duplicate industrial licensing system for MRTp companies *1t , h""ny
legalistic overtone facilitated by unclear legal concepts such as.,,undertak-
ing", "inter-connected undertakings", "dominant undertakings", "substantial
ll4 Government and Rusiness
eryansion" and "value of assets". If the decade of the 1970s, registered one
of the poorest growth records for Indian industry and saw many other dwel-
oping countries overtaking India in industrial growth, much of the blame
would rest on this negative and counter-productive legislation which emas-
culated large-scale Indian industry for well over a decade. That there was a
semblance of growth was in no small measure due to the fact that there
were sections in the government who chose to take the view that Chapter III
did not aim at stopping all growth by MRTP undertakings but only that tpe
of growth which was prejudicial to public interest, relied on Section 28 of
this Chapter which laid down certain economic and social criteria for deter-
mining public interest a'nd approved a number of projects from these com-
panies on the ground that these satisfied these criteria.
From the annual reports on the administration of the MRTP Act placed
by the Central Government before Parliament it is possible to get a glimpse
of the manner of the working of Chapter III of this Act and the considera-
tions and constraints which are shaping the government decisions. Also
throwing interesting light are the reports submitted by the MRTP Commis-
sion on applications under Section2l-23 referred to it by the Central Gov-
ernment and also the orders passed by the Central Governmerrt on these
applications.
The very first report states "In dealing with the various applications
under Chapter III of the Act, close scrutiny is exercised rvith reference to
the broad guidelines laid down in Section 28 of the Act. In addition, a list of
14 points has been drawn up and circulated for eliciting information and
cornments of the concerned administrative ministries for the purpose of
processing the application under Sections 2l to 22 before their considera-
tions by the Advisory Committee. These points are:
1. All-India production figures in the goods or products in question.

2. The applicant's share in it (i.e., whether i1 is a 'dominant' undertak-
ing)'
3. Whether attempts have been made to locate newer entrepreneurs for
producing the particular product and with what success.
4. How nrany 'letters of intent' have been issued for the same product
and the names of parties; and what would be the applicants' market
share u'hen all these letters of intent are implemented.
5. Where the applicants belong to a larger house as defined by the
ILPIC Conmittee, whether the product is in the core or healy invest-
ment sector. If it is in the middle sector, any special justification for
allowing larger houses to come in.
6. The plan target, if any. for the product proposed to be manufactured.
7. How much of this product is now imported ?
Control of Monopolies : Experience and Implications t15
8. The export potential.

9. Whether the proposed expansion or setting up of a new undertaking
is in backward area.
10. The estimated volume of employment to be generated by the project.
I l.The quality of goods already produced by the applicant; their general
reputation in this project.
12. The price stmcture and the margin of profit in the products manufac-
tured by the company.
13. Where expansion is justified on the ground of economy of scale,
whether thi's economy will be reflected in the resultant price of the
product and whether this will be passed on the consumer for price
reduction.
14. The views of the Licensing Committee on the corresponding appli-
cant under the Industries @evelopment and Regulation) Act where
that application has already been considered by that committee.r0
Chapter IV, consisting of Sections 3l and 32, deals with monopolistic

trade practices. whenever it appears to the central Government that any
monopolistic undertaking one which by itself or with others produces or
-
controls 50 per cent or more of the market in any goods in indulging in
-
any monopolistic trade practices or that monopolistic trade practices are
prevalent in any industry, it has to refer this to the MRTP commission for a
full-scale inquiry. On receipt of the Commission's report, the Central Gov-
ernment is required to pass remedial orders. As in the case of chapter III,
here also, the role of the Commission is advisory, although unlike in chapter
III, there is automatic reference by central Government of wery case to the
commission for inquiry. It should be observed that before the Government
initiates any case under this chapter, it is necessary to determine whether
the concerned undertaking is a monopolistic undertaking in terms of the
definition in the Act.
The 1984 Amendment enlarged the scope of the Commission's investi-
gation to cover any undertaking indulging in monopolistic trade practices
and not only monopolistic undertakings as has been the position earlier. The
definition of monopolistic undertaking as contained in Section 2O were
deleted. Also the Commission has been given power to initiate suo moto
inquiry into any monopolistic trade practices and to report its hndings to the
Government. The power to pass order still rests with the Government. The
Government has been empowered to pass the "cease and desist', order to
prevent any mischief resulting from the continuance of such practice. provi-
sion has also been introduced for a conrpliance report within thirty days of
the order by the owner ofthe undertaking against whom the oider has been
passed. The Director General of Investigation and Registration is also re-
I 16 Government and Business
quired to make his report on the compliance of the order within ninety days
of the date of the order. The monopolistic trade practice will be considered
prejudicial to public interest except when (i) such practice has been au-
thsrised by any law or (b) the Government is satisfied that the trade practice
is necessary to meet defence requirements, or to ensure service of essential
goods or services or to give effect to any amendment to which Government
is a party.
Chapters V and W deal with what are by far the most important provi-
sions of the MRTP Act. For, these provisions, for the first time in our
legislative history, have tried to cover an area where legal control has been
notoriously absent and yet there is the all too well-known phenomenon of
restrictive trade practices indulged in by our business men. On the other
hand, chapter III only provides the Government with an additional control
in a field where, thanks to industrial licensing, there was already an im-
mense volume of Government control over further growth of industry. Re-
strictive trade practice is defined in section 2(o) as a trade practice which
results in preventing, distorting or restricting competition in any manner and
which, in particular, tends to obstruct the flow of capital or resources into
the stream of production or to bring about manipulation of prices or condi-
tions of delivery and thus impose unjustified costs or restrictions on the
consumers. The importance of this definition was emphasised by the Su-
preme Court in its famous judgements in the TELCO case (AIR 1977 SC
973) and the case of Mahindra & Mahindra (1970) when it laid down that
the tests contained in sbction 2(o) must be satished before the MRTP Com-
mission could go into the question of whether an agreement which confront-
ed to qny tion 33 could be
prejudipial to the TELCO jud
sion hfd b line of considerin
entirel! in and pronouncing
public interest whenever they confronted to the descriptions in that section.
But the Supreme Court cautioned against it, and upheld the company's
contention that even if an agreement contained clauses with regard to area
allocation or exclusive dealership, these were not restrictive trade practices
within the meaning of section 2(o) as long as they did not have, or were not
likely td have the effect of preventing, distorting or restricting competition,
or imposing on the consumers unjustified cost or restriction etc. This same
position was reaffrrmed in the Mahindra & Mahindra Judgement (19'79).
However, the 1984 Amendment Act amended Section 33 to provide that
every agreement falling within one or more of the categories specihed in
that Section shall be deemed to be an agreement relating to restrictive trade
practices and to that extent subject to registration thereby trying to deal with
the situation created by Supreme Court's decision in TELCO aird Mahindra
& Mahindra cases. Section 33 lists out 14 t'?es of restrictive trade agree-
Control of Monopolies : Experience and Implications ll7
ments which (two of these categories brought about by 1984 agreement)
should be registered with the Director General of Investigation and Regis-
tration an important function any appointed by the Central Government. It
may be mentioned that under the Original Act, there were a Director of
Investigation for purposes of carrying out investigation under this Act and a
Registrar of Restrictive Trade Agreement for purposes of registration of
restrictive trade agreements. The 1984 amendment combined these, two
functionaries into one, viz. the Director General of Investigation and Regis-
tration.
These gpes are : refusal to deal with particular dealers or classes of
dealers : exclusive dealerships : price fixing in a concerted manner; forced
buyng by the purchaser of a product of another product; discriminating
between dealers in granting special benefits or concessions; resale price
maintenance; exclusive distributorship and allocation of areas or markets to
sole distributors; restrictions on the manufacture of process; boycott from
trade association membership; price control arangements. Any agreement
restricting a class/member of wholesalers, purchasers or suppliers from
whom goods may be bought and agreement relating to offer of bids on an
occasion for sale of goods or for obtaining share, any agreement to enforce
the carrying out of the foregoing agreements. These features have been
borrowed from similar provisions in the British Law on restrictive trade
practices. The applicability of some of them to Indian conditions will seem
doubtful. In our conditions of shortage, the distribution and pricing of many
commodities are often controlled and supervised by the government authori-
ties, and they are often parties to such agreements. This Act will not apply
to these agreements, although technically they are restrictive ones. To take
another instance, territorial restrictions on dealers on allocation of specifred
markets to them, however undesirable from the point of view of British law,
will appear inwitable in a country of India's continental size and diversity.
Under sub-section (3) any agreement which has been expressly authorised
by or under any law in force, has the approval of the Central Government,
or if the Government is a party to such agreement shall not be subject to
registration even though it comes within the purview of Section 33.
The Registrar is expected to scrutinize the agreements and whenwer he
feels that any one ofthem is contrary to public interest, it is his duty to refer
this matter to the MRTP Commission for an inquiry. When the Comrnission
receives such a complaint from the Registrar or from the Government or
from a consumer's association or starts an inquiry suo moto on receipt of
information on its own, it sits as a judicial tribunal and passes an order
which is binding on all the parties concerned.
As stated above the Supreme Court has held that the restrictive nature of
a trade practice is not to be determined by applying the provisions of section
33(l) that the catsgories mentioned in sec. 33(l) are not statutory illustra-
tions ofrestrictive trade practices and that the restrictive nature ofthe trade
practice has to be determined by application of the rule of reason contained
in section 2(o) of the Act, and that this rule could be applied by following a
certain methodolory which takes into account conditions of the relevant
trade before and after the introduction of the trade practice, the history of
the trade practice and the effect of the trade practice.rr The implication of
this decision is that before the Registrar could succeed in establishing his
allegation that the particular trade practice was a restrictive trade practice,
he must establish, according to the methodology so indicated by the Su-
preme Court, that the trade practice in question had some injurious effect on
tlte relevant area of effective competition. Also, before registration of an
agreement could be insisted upon, the restrictive nature of the impugned
clause had to be shown by the Registrar. It should, however, be reiterated
that the 1984 Amendment by laying down that the categories of agreement
indicated in Section 33 arc to be treated as a statutory illustrations of
restrictive trade practices has considerably the situation caused by the Su-
preme Court Judgement. The net cost of the restrictive trade practices indi-
cated in sub-section (1) of section 33 has been cast so widely as to cover all
possible restrictive trade agreements.
Section 38 creates a presumption that a restrictive trade practice is
deemed to be prejudicial to the public interest unless the Commission is
satisfied that any of the following eight circumstances exists :
(a) The character of the goods and the possibility of injury to the public.
(b) The substantial benefits or advantages conferred on purchasers, etc.
by the agreement or any arrangement arising out of it.
(c) The need for counteracting measures takenby any person, not a party
to the agreement with a view to preventing or restricting competition.
(d) Enabling parties to the agreement to negotiate fair terms for the
supply of goods.
(e) Adverse effect of the withdrawal of the agreement on tlte general
level of unemployment.
(D Possible reduction in the volume of earnings of the export business.
(e) The necessity of the restriction for maintaining another restriction
found by the Commission to be not contrary to the public interest.
(h) Insignificance ofthe relevant restriction for purposes ofrestricting or
discouraging competition.
These eight circumstances, described in English law as "the eight gate-

ways of escape" can always be invoked by any one to just$ before the
Commission that a particular agreement is not against the public interest
Control of Monopolies: Experience and Implications 119
and is to that extent justifiable. They should be carefully studied by business

with reference to the rich case laws on them in Britain so that appropriate
case laws are also built up in our country in this rrery new freld of legisk-
tion. Sections 39, 40 and 41 deal with the well-known form of restric{ive
trade practices which is known as resale price maintenance. It is significant
that under the MRTP Ac! there is absolute prohibition of resale price
maintenance, especially when an agreement fixes lowest permissible price
for resale. In India, very often, resale price maintenance takes the form of
the maintenance of a highest ceiling price. As this is intended primarily to
prevent abnormal price rise'to unscrupulous dealers, this practice in itself
need not be viewed unfavourably. Horvever, the more abnormal retail price
maintenance is the fixing of a lowest floor price and this is sought to be
prohibited completely by the MRTP Ac.t.
The 1984 Amendment has enlarged the scope of exceptions which a
party can plead in order that a particular restrictive trade practice may be
allowed in public interest by ercluding restrictions which are (a) authorised
and approved by the Government; (b) necessary to meet defence require-
ments; and (c) to ensure supply ofessential goods or services.
As already indicated above, tlre 1984 Amendment considerably widened
the coverage ofthe Act by introducing under Part B of Chapter V certain
provisions relating to unfair trade practices and investigations into such
practices and their regulations.
0
Section 36(a) identifres certain well-known unfair tralde pihctices, such

as false and misleading advertisement, bargain and short selling, conducting
promotional contests, hoarding and destruction of goods, etc. Under Section
360), the Commission has been empowered to enquire into any unfair trade
practice on the lines of Section 10 of the Act relating to restrictive trade
practices. On the lines of Section II preliminary investigation by the Direc-
tor General can be ordered on receipt of a complaint alleging unfair trade
practices by any trade or consumers association or 25 or more consumers.
The Commission is empowered to make an inquiry and to pass order includ-
ing seizing and desist orders (on the line of Section 37). Under Section
36(e), the Commission, the Director General or any authorised offrcer can
exercise such powers in relation to an unfair trade practice as are exercised
by them in respect of restrictive trade practice. These provisions by and
large followed the recommendations made by Sachar Committee in 1979.
We should remember that much greater responsibility rests on the
shoulders of the MRTP Commission under Chapters V & VI, than under
Chapter III, for it is the Commission which is e4pected to be not only the
adjudicator in the case of a restrictive trade practice, or uniform trade
practice, but also the watch-dog on behalf of the public to prevent and
regulate such practices. The role of the Central Government is minimal
l2O Government and Business
under these chapters. Further these provisions
effect small or big busi'ess
alike, whereas Chapter III covered orrty u ,""iion
of big torirr"r..^"
"
Director General by energetic action
and con_
gnificant impact in the industrial and
commer_
orrestrictivetradeagreeme",lT,T,:"tr"n}5::#j:f
dishonest businessman, and unfair trade
li,HrTJ,".'ff;
iractices.
and having regard to the supreme need
for
oving all unnecessary and irksome procedural
in the Act, first by an Ordinance, and subse_
,t be welcomed. The principal changes intro_
duced are ,
l. The MRTP Act has been restructured and pre-entry
restrictions have
been removed w{h regard to prior approval
of the Government for
establishment of a new Undertrkirrg, expansion,
amalgamation,
merger, take-over and appointment of Directors
in
stances as also registration ofUndertakings, ""rt"ii-.ir",r__
under section 20 to 26 of
Part-A of Chapter III.
2. In chapter-Ill rerating to concentration of economic power,
sections
been retained relating to thl power
of the
vision of an Undertaking and severance of
if it is of the opinion that the
working of an Undert*t#i3iT*ngs'
led, or is leading or is likely to
listic or restrictive trade pra
Undertakings is being removed,
cable to all Undertakings.
reference to the MRTp Co rovisions. As per
Ordinance, the Commission m
suo moto or any
complaint from any Trade Assoc
consumer,s asso_
ciation or from any State Government.
3. I_A (Sections 30-A to 30_G) regarding
transfer of shares have been ,e_truns_
1956 as Section l0g_A to l0g_1. These
provisions will apply in cases where the
acquirer or transferer of
shares is a dominant undertaking, as defined under
the vnrp a.t.
4. Additional powers have been girren to the MRTp
commission to
require Director General to make a preriminary
investigation;;;"--
plaints of all types involving monopolistic, restrictive .
or unfair trade
practices. similarly, Director-General has been
empow...a to *rt.
an application to the commission regarding monopolistic
trade prac-
tioes.
Control of Monopolies : Experience and Implications l2l
5. Deterrent penal punishment has been provided under Sections 48C
and 50 for contravention of the orders passed by the Commission and
the Central Government. At the same time, a new Section 53A has
been incorporated empowering the Commission to compound of-
fences relating to contravention of orders passed by the Commission
either before or after launching prosecution.
6. The definition of "goods" has been enlarged by including issue of
shares before allotment. The scope of the definition of "service" also
covers chit funds and real estate.
7. The definition of"unfair trade practice" under Section 36,4' has been
enlarged and includes false representation in respect of quantity of
goods also. It is now not necessary to establish loss or inquiry to the
consumer.
8. Section 55 has been amended to provide for appeal before the Su-
preme Court against temporary injunction granted by the Commis-
sion under Section l2-A.
The only portions of Chapter III which still stand unrepealed are Sec-
tions 27 @ivision of undertakings), 27-A @ower of the Central Govern-
ment to direct severance ofinter-connection between undertakings) and27-
B (manner in which order made under Section 27 or Section 27-A shall be
carried ouQ. S 27 empowers the MRTP Commission on receipt of (i) a
complaint from any trade association or consumers, (ii) a reference from the
Central Golernment or a State Government, or (iii) on its own knowledge
or information to make an order after enquiry for the division of an under-
taking or interconnected undertakings into smaller undertakings through
sale of assets, etc, when the Commission is of the opinion that the working
ofan undertaking is prejudicial to public interest or is leading to the adop-
tion of monopolistic or restrictive trade practices where the Commission
passes such an order the Central Government will also pass an order in
writing directing such division and ordering such consequential changes is
shares, payment of compensation and changes in memorandum and articles
as may be necessary S 27-A confers similar powers on the Commission and
the Central Government respectively for severance of interconnection
among undertakings. S 27-B outlines the detailed manner of disinvestment,
fresh capital issue or sale to give eflect to orders passed under Section 27
and27-4.
122 \
Government and Business
References
I India, committee on Distribution of Income and Levels of Living

New Delhi, Manager of publications, 1964, p.2g. - Report, ..
2. Indra,Industrial Plaruring and Licensing poricy, Finar Reporl, New
Delhi,
Manager of Publications, 1967.
3. India, Monopolies hrqu'y Commission, Report, New Delhi, Manager of
Publications,'1969.
4. India, The Industrial policy Inquiry committee, Report, New Derhi,
Man-
ager of Publications, I 969.
5 India Monopolies Inqury Commissio4 op, citpp. l_2.
6. Ibid. pp.7-10.
7. India' The Iadushial Licensing poricy Inquiry committee, op. cit. chap-
ters IV, V, VI, VII.
8. India, The Indushial Licensing policy Inquiry committee, Report,Ibid.
9. Ibid.
10. Supreme cor:rt's judgements in the cases of rELCo and Mahindra &
Mahindra
Chapter Five
Company Law in lndia
Companl' Law according to its traditional view is concerned with the

organisation and functioning of joint stock companies, the incorporation of
these companies. their constitution and the inter-relationshipi amongst
members, their management and eventually with the manner of dissolution.
Today it has become the principal law of organisation and management for
corporate business. sir Francis Palmer, the famous commentator on English
company Law. said in his book torvards the end of the last century, "that
now--a-days looking to the vast number of persons as directors, shareholders,
officials, customers, creditors or otherwise in companies. there are but few
businessmen rvho can escape the task of acquiring some knowledge of
Company Law". This has become much more true today. As against the
traditional view there is also a modern view lyhich seeks to enlarge the
scope of company law and make it a major instrument of national, social
and economic policies in relation to busrness.
In the last few years there has been a vigorous debate in the west on the
precise role of company law and its adequacy in the context ofthe present
day economy. There are those called "preservationists" and those *ho ,t.
called "reformers". In a way both the schools are vigorously engaged in re-
examining the very basis of company law. Both are concerned with the need
for sweeping changes in company law. The former put the emphasis on
tidying up the law as it now stands in respect of suchlhingt th. powers
", Exeiutive,
and position of the shareholders or of the Directors and the chief
but their essential thrust is on improving and streamlining the present struc-
1ure,,
irot on changing its scope and objects. But the ,-.fo.*.r, go much
further. They question the relationship of the company with its inviron-
ments and the modes by which this relationship is expressed and call for a
fundamental review of both its internal mechanism and external role. Some
of the reforms advocated by the Jenkins committeer in England and already
implernented, the controversy over the Bullock report which has suggested
putting worker-directors in board-rooms, and the recent cadbu.y r"pott oo
the structure of company broads including a part-time chairmanafld a full-
time chief Executive are indeed of far-reaching significance, and indicate
124 Governmenl and Business
that even in England, the home of conrpany law, the traditional concept is
fast disappearing. Indeed there is increasing realisation in most of the west-
ern countries that much of the legislation for joint-stock enterprise now in
force is not in tune with contemporary conditions and ideas, and that private
enterprise working in the corporate form should in some way, leaving its
autonomy unaffected, be made answerable to the society for its decision and
actrons.
In this respect, India has been far ahead ofmost ofthe western countries
in the last two decades. Until 1956 our company law from its modest
beginning in a larv of 1850 (on the model of the English Companies Act
1844), which merely provided for registration of joint-stock companies,
generally followed the course of British Company Law. Changes were in-
troduced in 1860, 1866 and 1892 and again in the Companies Act 1913
closely reflecting changes in the British law from time to time such as the
introduction of limited liability. There were some half-hearted attempts in
1913 to introduce special provisions to take care of special Indian features
such as the system ofmanaging agency, but without any success.
It was the strains and stresses in the Indian economy created by the
Second World War which focused public attention on the need for revitali-
sing the Companies Act, 1913. There had been very serious complaints of
malpractices and manipulations in company formation and management
during the war. It was, therefore, felt that the existing Act contained some
very serious lacunae and was unable to control the activities of dishonest
businessmen and hnanciers. The advent of Independence and the adoption
of the Constitution in 1950 with its Directive Principles of State Policy
further high-lighted the need for the revision of the Companies Act. The
idea grew that the Companies Act should no longer be regarded in its
orthodox sense as just a mechanism for the regulation ofjoint-stock enter-
prise and to take care only of the shareholders and the creditors and that it
has a much greater role to play as a principal instrument of Government's
social and economic policy. The acceptance of Socialist Pattern of Society
as our national goal in 1954 further strengthened this approach. The result
was the Companies Act, 1956 which, along with its amendments, is the
substantive law in our country today. It is based substantially on a report
submitted by the Bhaba Committee (1950) which appeared to have accepted
the modern view that seeks to entrust company law with a much larger
responsibility in contrast with the traditional view of the company law.
Inevitably, therefore, it contained alarge number of new, and to Western
eyes
-
startling provisions for public control over the functioning of joint-
-
stock companies.
The following were declared as the basic objectives of the Companies
Act, 1956 by Shri C.D. Deshmukh, the then Finance Minister vvhile moving
Company Law in India
l2s
the bill in the parliament:
(i) Minimum standard of business integrity

and conduct in promotion
and management of companies;
(ii) Full and fair disclosure olail reasonable
information relating to the
of the
a_ffairs company:
(iii) Effective participation and contror
by shareholders and the protec-
tion of their legitimate interests;
(iv) Enforcement of proper performance
of their duties by company
management:
(v) stigation into the affairs of compa_
a manner prejudicial to the interest
ublic interest.
.COMPANY'
DEF'INEI)
ith different meanings in

is applied to almost any
n. It is also diffrcult to
I theory, a company can be defined
as
ns for a common object, that object
its members' (Gower, Mod.ern Com_
rearities of todav. rt is diffrcurt, ," *.oiijr*TJr:1T""'#.fi l*"Jr:.T:lil:
expression 'company, to trading .orr..,,', alone. In fact, many non_profit_
making bodies are also registered under
the companies A", ;;i ,i" ,uuj."t
to the same rules as trading companies.
Sim'arly, it will be unreal to
describe a holder of shares in a moiern joint-stock
company
as associating
with the other members in running the b;rin"ss.
correct to
It would not even be
describe a modern shareholder as
a co-owner of the business. In
realiT, is o
simply a supplier
-he f the busi_
ness. Thus none of the accepted
to prac any seems
co A modern
hara
(iii) Transferability of shares.

to these characteris-
tics 3 of the Companies
Act registeJed under this
Act r any of the previous
company laws in India.
PARTNERSHIP AND COMPANIES
It is useful to note in brief the distinctions

between a joint-stock company
and a partnership both of which are very common forms of business enter-
tal differences between a partnership and a company, botl of them associa-

tions of more than one person for the purpose of doing business for profit
may be enumerated as follows:
(i) Unlike a company, a partnership has no separate legal personality.

It means the persons constituting the partnership. It is thus avail-
differences follow from this corporate personality of a company.

(ii) The liability of a shareholder in a company is usually limited to the
extent of the money contributed by him (unless it is an unlimited
liability company). But the liability of a partner in a f,rrm is un-
limited.
(iii) Partners in a firm can make any agreement between themselves
regarding conduct or management of the firm. But shareholders
cannot make certain arrangements between themselves, as for ex-
ample, a company cannot buy shares ofthe company.
(iv) In a partnership, unless there is an agreement, each partner can
participate in management. But in a company, management is usu-
ally carried on by the directors only, and a shareholder has ordinar-
ily no right to participate in management.
(v) The death of a partner dissolves partnership. But a company has
perpetual succession.
(vi) A partnership cannot have more rhan 20 members (10 in the case
of a banking firm). There is no such madmum limit in the case of
a public company although a private company cannot have more
than 50 members.
(vii) A partnership cannot transfer his shares without the consent of co-
Company lqw in India
127
partners. But in the case of a public company. there is no such

restriction on transfer of shares.
TYPES OF COMPANIES
There are three basic qpes of companies in

our law:
(i) opularly knorvn as limited compa_

of a joint_stock company in our
finances by the issue of shares to
rimited ro the share m",",

#;
jilX,[ trl.",llTt?til., t'
(ii) "Ili
companies limited by guaranteer. tn u guarantee
company the lia-
bility of the members is limited by the memorand'urn
to such
amount as the mernbers may undertake to contribute
to the assets
of the company in the event of its being wound up
In'soch a
company the members are really guarantors
of the company,s debts
upto the guaranteed amount. They have no obligation
io subscribe
rvhile the company is a going concdrn, Uut traie
obligation onty
when it is wound up to pay the guaranteed amount
to meet the
liabilities of the company. Law that the wortir,g
"rru*.. ot
a guarantee company q,ill come from other sources, g."upirut
e"aow_
"
ments, grants, fees, etc. A guarantee company particu'iarly
is suit_
able for a non-profit-making
(iii) Companies with unlimited I
de-
fined by the English Compa any
m
limits on the liauility of its
law, an unlimired .o-puryt *t
est. In practice, there is no known unlimited
company in existence
today.
Each of these three types may again be formed as either

public company
or private company. As the principle of limited liability
hoids almost unr_
versal swa5', the commonest types of companies
today aie the public limited
and private limited companies, the word .rimited'
.onnotir,g'til; iimited
liability.
we may note another'class of companies, either limited
by shares, or by
guarantees under the category of associations
not for profit. ihese u* uru-
ally registered under Section 25 of the Indian companies
Act. tt es" a.e
generally for promotion of ar1, science, religion
etc., and arg commonly
known as guarantee companies. But they u." iot
to be conf-rsed with socie-
ties, clubs and professional associations governed
by the societi", R"girtru-
tion Act of 1860 which also allows them to hold properry, buy and sell,
borrow or lend in furtherance ofthe object.
Public and Private Companies: The general presumption in the Act is

tlata company is a public company unless it clear from iis constitution that
other u'ords, in our Act, there is a statutory
able that the company is not a private one.
te company as a company which by its articles:
(a) restricts the right to transfer its shares,

(b) limits the number of its members to fifty (excluding those who
are or were employees at the time of the acquisition of shares);
two or more persons jointly holding shares being counted as a
single member: and
(c) prohibits any invitation to the public to subscribe for any shares
of the company.
compan)' carries on its business for more than six months, it forfeits its
limited liability and the members become personally liable for any action
after six months.
It should be borne in mind that ns of the
Act apply only to public cornpanie they do
business with the money offered by interests
require to be safe-guarded.
In passing. it should be noted that only the shares and debentures of
public limited companies and not those of private limited companies can be
quoted on stock exchanges.
is required to be raised to 7 and that ofdirectors to 3. The company also has

to file with the Registrar a statement in lieu of a prospectus.. A public
company can be convert-ed into a private one by inserting in its articles the
Company Law in India 1.29
three restrictive provision with the approval of the Central Government

[Article 31 (1)].
There is also a category of 'deemed' public companies. Section 43A
lays down that tf or more of the paid up capital of a private company is
25%o
held at any time by one or more bodies corporate, it would be deemed to
have become a public company and will be subject to all the provisions of
the law applicable to public companies except that :
(i) the three restrictive clauses of a private company need not be

deleted, and
(ii) its membership rnay be less than seven.
Also such a company need not comply with the following restrictions :
(i) It is not necessary to have tlre presence of five members in a

general meeting in order to have quonrm.
(ii) The profit and loss account filed with the Registrar need not be
open to inspection by the public provided the Government ap-
proves. (Section 220).
(iii) Filing of statement in lieu of the prospectus under Section 44 is
not necessary unless the company raises subscription from the
public by complying with the provisions of Section 70.
The object of this amendment is to ensure that private companies, u'hich

employ sizeable amount of public money or operate on a large-scale are
made subject to more or less the same restrictions and limitations. A
'deemed' public company also forfeits the word 'private' in its name. A
private company will not be so 'deemed' as a public company where :
(a) its entire paid up capital is held by a single Indian private com-
pany or one or more foreign companies: or
O) the shares are held by one or more foreign bodies corporate
which or each of which, if incorporated in India, would be re-
garded as a private company; or
(c) any shares in it are held by one or more private companies in
which no other company holds shares and the total membership
of all these companies including the private company in question
does not exceed fifty.
Shares of the following description need not be taken intg account in

calculating the subscribed 25% if these shares are held by a banking com-
pany (1) ab a trustee or on behalf of a tnrstee and the shares have not been
r (ii) as executor of a
body corporate or they
or administrator of the
Holding and ording to Section 4(a) which

defines 'holding' a company is a holding com_
pany and another
(i) the former controls tlrc composition of the Board of Directors of

the latter or
(ii) the former controls more than half of the voting power of the
latter or
(iii) the latter is a subsidiary of a subsidiary of the former.
(i) it is concerned as the legal representative of a deceased member

of the holding company or
(ii) where it is concerned as a trustee or
(iii) where the shareholder is a security for the putpose of a transac-
tion entered into by it in the ordinary course of business which
includes lending of money.
partly by one or more state Governments, is called a Government company.

A Government company can be either public or private, although they need
Company Law in India 131
not write the word 'private' after their nzrmes. Section 619 lays down certain
special provisions in respect of Government companies, as fot example:
(i) A Government company is subject to a regular system of special

audit under the direction of the Comptrolier & Auditor General in
addition to the normal statutory audit (Section 619); and
(iD A Government company operates under the overall control of the
Parliament or the State Legislature as tlte case may be and an
annual report on the working and affairs of every company along
with the audit report made by the Comptroller and Auditor Gen-
eral has to be laid down on the floor of the concerned legislature
(Section 619A). Under Section 6198 newly inserted by the 1974
amending Act the provisions of Section 619 are to apply to any
company in which not less than fiftyone per cent of the paid up
share capital is held by the Central or State Government or Gov-
effrnent companies and public f,rnancial institutions in combina-
tion as if it were a Government company. Section 620 authorizes
the Central Government to exempt by notification in the Official
Gazette any Government company from compliance with any of
the provisions of the Companies Act.
Foreign Company: Indian Company Law contains certain special provi-

sions for the foreign companies (Sections 591603). A foreign company is
defined in Section 591 as one which incorporated outside India and which
has established a place of business in India. The 19'74 amendments have
introduced a new sub-section to this section which enjoins that when Indi-
an citizens or corporate bodies hold frfty per cent or more of the share
capital in such a company, the company shall comply with the provision
prescribed in the Act with regard to its business in India as if it were a
company incorporated in India. The Registrar of Companies, New Delhi is
the Registrar for foreign companies. Such companies are required to submit
all the documents prescribed to be delivered under the law to him, and also
copies of these documents to the Registrar in the State which has their
principal place of business. The provisions of the Indian Companies Act
relating to many matters e.g.,the issue of prospectus, the provisions relating
to changes, are applicable to the foreign companies. The Registrar has the
power to call for information from these companies [Section 23a (8)]. It is
incumbent upon foreign companies to exhibit in English the name, the
country of incorporation and tlre nature of the liability of members in the
prospectus, on the outside of wery place of business and in all business
letters, notices and official publications, etc. A company, which ceases to
do business in India, can be wound up tbrough a court as an unregistered
I32 Government ancl Business
body although it may still exist according to the law of the country of
incorporation.2
SOME MAIN FEATURES OF THE ACT
The companies Act contains a large number of measures by which the

control of the shareholders enrbodied in ordinary Resolution and in some
Special
cases a s made a necessary condi_
taking
tion for a l36ge area of Company
Management. I to the Indian shareholder
uiider the L.aw, but which they have
imilarly, the Act also tried to resrore
which had been lying under a shad_
ow, so to say, as a result of the rise of the managing agency as the doruinant
form of corporale management in our country. In order to reduce this stran-
glehold of big business houses on industry through the instrument of manag-
ing agents, this Act contained drastic regulatory provisions with a view io
making the managing agents accountable to both the Board of Directors and
the shareholders of the company. In fact the Act sounded the death-knell of
this historical institution. It was allowed under stringent restrictions and on
a sort of grace period until it was finally abolished with effect from 3rd
April, 1970 by an amendment of the Act.
This Act also contains stirrtling provisions for central Government's
approval (section 269). similarly, their remuneration for which the Act
itself lays down some statutory limits (not more than 5% of the net profit for
an industrial Managing Director etc. and not more than I lo% for ali of them
taken together) requires to be approved by the central Government bv
virtue of the administrative ceilings which the central Government have
been enforcing since 1959 over and above these statutory ceilings as condi-
tions for approval. There has been considerable relaxation in recent times in
the wake of the liberalisation process from 1991 onwards and companies in
general are not required to apply for government's specific approval so long
as they fix the remuneration ryithin the guidelines.
Thirdly, Indian company Law has placed certain restrictions on loans
made or guarantees grvenby one company to another. These restrictions are
more stringent in the case of transactions involving companies under the
s:rme management (section 370). The Act also prescribed (Section 372)
certain limitations on a company investing in the share of another company
Company Luw in India 133
depending on the proportion ofsuch investment to the subscribed capital of

the investing company on tlre one hand and on the other that of ttre corpo-
rate body in which the investment is made. Prior approval of the company,
in general meeting and of the Central Government, is necessary if :
(i) the invesfinent is in excess of 10 per cent of the subscribed

capital of the corporate body in which the investment is made;
(ii) the aggregate of all such investments made in all corporate bod-
ies in the same group is in excess of the 20 per cent of the share
capital of the investing company; or
(iii) the aggegate of such investment made in all the corporate bodies
is in excess of the 30 per cent of the investing company.
This limit of 30 per cent is, however, not applicable to an investing

company under certain conditions. They have also been applied to the in-
vesEnents made by a holding company on its subsidiary;
(i) Banking or Insurance Companies;

(ii) a company established with the object of financing industrial
enterprises; or
(iii) a private company which is not a subsidiary of a public limited
company.
Fourthly, the Act also contains a number of provisions for maintenance

of proper books of accounts by companies, the auditing of these accounts by
independent auditors, and for inspection ofcompanies' accounts and recdrds
by the Registrar of Companies or by other inspecting officers appointed by
the Central Government. These provisions are in fulfilment of one basic aim
of the Companies Act, vZ compelling company management to disclose
maximum possible information about the company. They are codified in
Sections 209-233A. The maintenance of accounts in accordance with ac-
cepted methods is considered to be one of the primary duties of manage-
ment. Sections 234-251confer on the Registrar and other prescribed Gov-
ernment authorities very wide powers to call for information and inspect a
company's records. There is also provision for ordering investigation by the
Central Government in certain circumstances (Sections 235 and 237). These
provisions are intended to check malpractices and fraudulent activities in
the company management. The Board of Directors is required by the Act to
present before every annual general meeting ofthe shareholders the follow-
ing documents :
(i) a balance sheet for the year
(ii) a profit and loss account
(iii) a report by the directors indicating
(a) the state of the company,s affairs
(b) the amount in the balance sheet which is proposed
carried on
to be
to any reserves
(c)
comrnend as dividend and
(d) nts,if any, affecting the fi_
company.
The companies Act also protects the statutory

auditors from the
and arbitrary action of the directors and virtuallymakes,t"*"gr*. whims
shareholders and the watch-dogs of their interests.
orru
Today, while the audi_
tors' foremost duty is to check the accurary of ac"o,rntr,
they are not to
confine themselves merely to the risk of verising
the mathematical accu_
rary of the balance-sheet, but to go into the correct
state of affairs and to
report to the shareholders accordingly.
Section 40g enables the centr;r Governrnent
to take certain actions to
company, and also obtain reports from the Government

directors. Section
409 also gives the central Governmer some drastic
powers to take correc_
tive action after there have been representations from
the shareholders of a
change in the shareholding of
interests of the company or to
409 is passed there cannot be
voting rights are frozen. rt shourd o"

"Juo,iT,T#;T''#i:il.1fi:T
ssion are also available under
only illustrative and not ex_

haustive. But they do make it clear that our
company r.a* s.ercloachieve
certain socio-economic objectives enshrined in-oui
Constitution. It also
seek rol of the shareholders,
over
company management,
and
rhe ures carcuratfiTlHlril"fff,'#nl
tion- of economic power and also to reduce inequalities
of income and
rvealth. These follow the_Directive principles of
our constitution and also
the priorities of the Five-year plans ana the objective
of Socialist pattern of
society. It is with these ends in view that in the
administr4tion of the Act
attempts halr been made not only to restore the
authority oi t ,rr"Lrroro_
"
' CompanY Law in India
135
ers and the Board of Directors

but also to Promote some me
management and to assert the
wards larger interests like the
interest.
AXIEIIDMENTS OF 1974
The extensive amendments brought about by the companies (Amendment)
Lct, 1974 vastly strengthened the process of the gradual tightening of cen-
tral Government's control over the functioning of joint-stock companies.
the MRTP Act on those comPanies.
state ofaffairs.
4. It severely restricted the operation of private limited companies by
enlarging the definition of "deemed" public company in Section
43 A.
Undei tlis new definition any private company with an average annual
turnover of Rs I cr
cent of the Paid-uP
is to be treated as
and 205B provide inter alia for

special unpaid dividend account
, if still unpaid, to the general
. 9' section 2074 gives additional po*"r, to Government authorities for

inspection of books of accounts of companies.
Company Law in India l3j
public companies obligatory even in the case of reappointnent, and not
only for first appointment, as previously. The earlier provision did not
indicate the criteria on the basis of which the Cerrtral Gorrernment was to
exercise its power of approval. Now it is laid down that the Central Govern-
ment is not to accord unless it was satisfied that
(a) it is in the interests of the comparD/ to have a managing or wirole-
time director,
O) the proposed person is a fit and proper person to be appointr.j 'nd
that the proposed appointment is not against the public interest. i,nd
(c) the terms and conditions of appointment of the proposed managir.g
or whole-time directors of the company are fair and reasonable.
This should be read along with the change in Section 637Aby which the
Central Government has formally assumed powers to fix the remuneralion
of the managing directors, whole-time directors, managers, etc., as condi-
tions of approval to their appointments.
13. The amending Act inserted a new Section 294,4' under which the
Central Government has taken powers to prohibit the appointment of sole
selling agents where the demand for the goods produced by a company is
substantially in excess of the production or supply of such goods. It also
provided that Central Government's prior approval was needed before a
company appointed any individual firm or body corporate having substan-
tial interest in it as its sole selling agents or before any sole selling agents
were appointed when the company had a paid-up share capital of Rs 50
lakhs or more
14. Section 314 was amended to strengthen the restrictions on the ap-
pointment of partners or relatives etc of directors or private companies in
which such a director or his relative is a director to any sffrce or place of
profit in tlte company with a tolal monthly remuneration of less than three
thousand rupees, and make Central Government's prior approval to such
appointment obligatory.
15. This amendment inserted a new Section 383 making it obligatory for
companies with paid-up share capital of rupees twenty-five lakhs to have a
whole-time secretary.
16. Section 408 was amended strengthening the Government's powers of
intervention to safeguard minority interests, or the public interest Now Gov-
ernment can appoint an unlimited number of directors in public companies.
A significant change was the amendment of the Company Law Board
(Bench) Rules, 1975 in January, 1986 coinciding with an amendment of the
Securities Contract @egulations) Act 1956. This blanket power affected the
free marketability of listed shares and ifso facto the healthy growth of the
capital market.
Under the new provisions. the companies are entitled to refuse registra-
tion of transfer under cerlain circumstances onl.,'. such :r. thtrt tlie r". -
,
oftransfer is not proper or has

in contravention ofany law or
tion of the board of directors i
the interests of the company or
The phenomenal growth of the corporate sector in recent years is illus-

trated in the following table :
T.lsl,r 5.1
Companies Limited by Shares at Work During 1935_86 to 1990_91

(Paid-up capital in Rs. crores)
As on 3lst Public Limited Private Limited Total

March of
the year Paid-up No Paid-up Paid-up
Capital Capital Capital
I 986 20,280 12,495.2 1,04,099 24,099.4 1,24,379 36,594.6

I 987 21,892 17,062.4 1,18,778 26,905.6 1,40,670 43,967.8
I 988 23,027 22.,052.6 1,35,297 28,071.5 1,58,324 50,124.1
I 989 24,282 24,753.9 1,56,046 32,949.6 1,80,328 57,703.5
I 990 2s,755 31,059.4 1,76,373 33,s83.9 2,02,128 64,643.3
1991 27,358 33,386.5 1,97,094 34,723.7 2,24,452 68,110.6
Note : Data has been revised and updated in the light of

euinquennial Sur-
vey, 1990 and will not tally with 34th Arurual Report.
Thirteenth Arurual Report on Companies Act, 1792,p.9.
Companlt Law in India I39
22,433 Companies including 19 Government companies were registered --\

under the Companies Act during the year 1990-91 reflecting a growth of
7I.10 % during the year. At the end of 1990-91 the number of companies at
work was 2,24,452 (paid up capital Rs. 68,110.2 crore) from only 29,357
(paid-up capital Rs 1,078 crore) at the end of 1956-57.
Company Law Board

The Central Government under S. 10-E of the Companies Act set up the
Company Law Board to exercise many of the powers of the Central Govern-
ment delegated to it. The Board, a quasijudicial body, is subjected to the
control of the Central Government. But it also exercises certain independent
powers conferred on it under Section I7, 18, 19, 58-4'(9). '79, Il3, l4l, and
186 of the Companies Act. It also exercises the powers of the Central
Government under 52A of the MRTP Act, 1969 and S.22A(4)(c) of the
Securities Contracts (Regulation) Act, 1956. The Board consists of a Chair-
man and several members and has four Benches, one each at Delhi, Calcutta,
Bombay, and Madras.
AN OVERVIEW
All that has been stated above will go to show that in its evolution in the last
two decades Indian Company Law has moved spectacularly away from its
earlier dependence on British Law with a 'traditional reluctance to analyse
and rationalise the effect of social changes on contemporary law'.3 It has
become in conjunction with industrial licensing and the MRTP Act one of
the major instruments of Government policy towards corpomte business.
Under its provisions Central Government has assumed in larger public inter-
est very wide powers of intervention in large areas of what in orthodox view
till the other day were preserves of decision-making by corporate nianage-
ment. But it should also be noted that this is also in keeping with the recent
trends in company or corporation law in the entire West. Ever since the
publication of the epoch-making study of corporations in modern society by
Berle and Meansa the separadon between corporate ownership and corporate
management in a tlpical modern joint-stock enterprise has been understood.
From this came a realisation of the minimal role of shareholders in a mod-
ern corporation with its widely dispersed share-holding and hung number of
shareholders and an awareness that in to-day's context the shareholders is
neither the owner, nor the manager, but only the supplier of the risk capital,
or an investor. The position ofthe shareholders in a modern corporation is
picturesquely described by John Kenneth Galbraith: "As stock-holders cease
to have influence, however, efforts are made tp disguise this nullity. Their
convenience is considered in selecting the place of meeting. They are pre-
140 Government attcl Business
Company Law in India r4t
lions for international agencies for regulating the multinationals, lnve added
a new dimension to company law. All these developments, and above all'
and awareness that ajoint-stock enterprise is not a private association, but a
public, socially responsible body have made for greatu and grcater public,
social or go.r,ernmental control over these enterprises, and India is no excep-
tion. Then again, one has to recognise that in the Indian corporate sector a
very significant change has taken place in the last two decades rvith the rise
of Government companies to the dominant position. This has been partly
due to nationalisation of private industry, but largely due to the burgeon-
ing of Government's entrepreneurship resulting in thc growth of such corpo-
rate giants as the SAIL. the BI{EL, the FCI, the MMTC and the STC. In
lg5I-52 the Government cornpanies accounted for only 7 per cent of the
total corporate sector's equity capital, Today they account for over 70 per
cent. If we add to this the share of public sector institution in the share
capital of the private sector conrpanies the over-all government interest in
the corporate sector will appear ovenvhelming, The government companies
are a nerd hybrid organisation partly independent juristic entilv and partly
extension of the government itself."8 Company law will have to concern
itself increasingly r.vith these large, wholly public, industrial companies, as
with the large, private but socially responsible and professionally managed
industrial companies. The difference between the trvo is fast disappearing.
This will be all the more so as the announced and on-going policy of the
Central Government selling some of its shares in government companies to
mutual funds, etc., progresses. Finally, we have to accept that some of the
provisions in the present Act appear to be outdatetl by the great changes in
the corporate sector in lecent years. lndian corpolate sector today is nruch
larger, much more diverse and integrated with global economy than what it
was in 1956. It is no longer family-dominated as in those days. Professional
managers have come irrto the corporate scenario I'ery prominantly replacing
owner-managers. 'Ihe share holding population has increasr.:d enormously.
Our company law needs to shed off some of i1s earlier prejudices. Many of
the restrictive provisions are anachronistic. Abolc all. the Companies Act
needs to be brought in line with the srveeping policy changes in the direc-
tion of deregulation, debureaucratisation and glotralisation As we go to the
press there are reports of massive changes in the preset( .{ct to be passed
before Parliament soon,
References
1. See PEP Companies Beyonc!,Ienkins.

- guidelines issued for the new Scotion 29 of the F'oreign Ex-
2. Under the
t-'
I42 Government and Business
change Regulation Act all branches of foreign companies were required

' to convert themselves into Irrdian comparries except on the basis of recip-
rocity in certain special oases, e.8:., shipping and airlines. This oategory of ..\
companies therefore beoame insigrrificant by the 1980s.
3. Friedmann Lot in aChanging Society.
4. A.A. -
Berle (Jr) and Gardiner C. Means
Private Property, 1933.
- The Modern Corporation and
5. Galbraith Modern Industrial State.
6. -
James Bumham Managerial Revolution.
7. -The
The Responsible Compmy. Also see S.C. SsN
George Goyder
-
New Frontier of Comparry Zaru. N.K. Sengupta
- The
Corporate Manage'
ment in India.. Neil Jacobi
-
Corporate Power & Social Responsibility.
8. Op. cit.,p.l7.
-
t
Chapter Six
Trends in Corporate Management

Since lndependence
Independent lndia inherited a structure of corporate management which was

dominated organisationally by the managing agency system, and entrepre-
nerrrially by some particular business communities, and among them again,
bV a group of families or houses. Some other features which characterised
it, were:
(i) a phenomenal expansion ofthe corporate sector in response to the

needs of the war-time economy, during the Second World War;
(ii) an increased domination of big industrial house over the econ-
omy as it exPanded and diversified;
(iii) a wazen misuse of the provisions of the companies Act and of
other laws during the years immediately preceding independence
by some businessmen and financiers in control of companies to
serve their own ends and the consequent unsaYoury image which
corporate management in general, and management in the large-
scale sector, in particular, acquired in the eyes ofthe public; and
(iv) the preponderance of European business houses in the manufac-
turing sector of the corporate economy.
In sketching the developments in the field of corporate management in

the last twenty-five years, 11'e may divide this into tlyee clearly marked
periods, namely, 1947 to 1956, 1956 to 1969 and 1969 to date'
FIRST PHASE: 1947 TO 1956
During the War and in the years following it, there was a phenomenal rise
in both the number of companies and the volume of paid-up capital. In
March 1948, there were 22,6',15 cornpanies with a paid up capital of Rs 570
cror€s as against only ll,l14 companies in lg3g with a paid-up

capital of
Rs 290 cro'es. But, along with this expansion, the quality of rianagement
started deteriorating and the evils of consciously practised dishonesty,
mis_
management and malpractices also started dominating the corporate
scene.
Irievitably, therefore, there was much public clamoui for reforms
in com-
pany management and the tightening of the Government
control over the
functioning of corporate management. A committee was appointed
in 1950
urder the chairmanship of Shri c.H. Bhaba, to suggest amendments
to the
companies Act. But the situation became so criticai ihat rvithout waiting
for
the comn.ittee's report an ordinance was promulgated in 1951, followed
by
an amendir'g law for bringing about certain very urgent reforms in
corporate
marragement.
on the whole, the 19-51 reforms were based on the assumption that
mansgmg agencv was still necessary for the country's economy.
The Gov-
ernmeilt inten'errtion was, however, restricted only to extension of
the terms
conditions ol ):r*r!€ging agents wherever there was an intention to
extend
these terms or i.-r rr:ins.fer the office to another person. In several
important
respects, thu r._i..,r,-.r; of i9_il can be said to have culminated in
the io-p"_
nies Act, l9:li'. ft,,:r.also nurked the beginning of the Central
Govern_
ment's assurnption of ver_v extensive powers of control and regulation
over
the working of corporate management
During these years, the corporate management in the large-scare sector
was characterised by the concentration of ownership and iontrol in the
close-knit family groups or business associate groups. one factor, which
accentuated this trend. was the acquiring ofthe controlling interest
by large
Indian houses in companies which were formerly Europeair-owned oi
E rro-
pean-managed.z It is, however, interesting to note that
until lg50-51, few
Indians held directorships in the foreign-controlled segments of the corpo-
rate economy. There were, in fact, trvo distinct corporate sectors,
one domi-
nated by foreigners and the other by Indians. The other notable
trends,
during this period, were a general movement among managing agency hous-
es to change orer from partnership to private companiei arrc
ag*n rrom
prirate cornparucs into public companies: the beginning of charige
in the
ownership of some European business houses and the ionr.qu.t t partial
Indianisation of some of these houses; and a general scramble urnorrg
bigg.,
houses. European and Iudian, to absorb smaller houses.
Sf,COND PHASE: 1956 TO 1969
The companies Aci 1956, based on the recommendations of the Bhaba

committee, was s?id to have "for the first time attempted to bring about
some changes in the larv by superimposing on the traditional legal
concept a
Trends in Corporate Management Since Independence t4s
system of partial social control in the public interest."3 In brief, this Act
attempted to restore the eclipsed authority of the board of directors and
shareholders, and to subject management to a large degree of government
contfol, including tJre power of intervention in certain circumstances in
order to uphold public interest. Implicit in the whole scheme of the Act is a
recognition that the shareholders are the ultimate source of authority in
company management but they cannot exercise the powers of actual man-
agement which must therefore rest with the board of directors which is
statutorily recognised as the top management body in a company. There
could be direct management of a company by the board. But board can also
manage indirect$ through any one from among the categories of corporate
managers, such as (l) Managing Agents, (2) Secretaries and Treasurers, (3)
Managing Director, and (4) Manager.
The various forms of corporate management, which prevailed during
1956 to 1969, can be illustrated in the following diagram:
Without tr4role-time Directors

II Direct I *iftwhole-time Directors
Management ] Committee of Directors
L___J
;Indirect
I Managenrent.l I Manager
rl r\',f.p. wilh whole-time Directors
I Managenrent 1
Managing Agents
I bv others I Secretaries & Treasuren
LL__J
The 1956 Act also took a number of significant steps in order to reduce
the concentration of managedal control in fewer hands and in general, to
improve the quality of management and remove mis-management.a The
quality of corporate management was sought to be improved by making it
responsive to shareholders, providing a built-in mechanism through the wid-
est possible disclosure of the company's working and financial position and
also by providing not only for judicial remedy but also direct Government
control over a very large area of the functioning of corporate management.
Ihe objcctive of these regulatory provisions is to impose a degree of disci-
pline on regulatory management so as to ensure a clean administration for
the benefit of shareholders and of the community, and also to provide a
proper code of conduct under which an enlightened top management is able
to achieve the highest standard of performance.
The intention of the 1956 Act as clarified by Shri c.D. Deshmukh, the
then Finance Minister, seems to have been lhat "the managing agency
not a very distant future will be abolished. But
system, at a future date
- -
the time, place and the manner of its abolition are reft to the Government.,,
with this end in view, the Act put the managing agents under a code of
rigorous discipline within the overall control ofboard of directors and in a
way put this institution on a sort of grace period pending its eventual
extinction. Between 1954-55 and 1968-69, the managing agenc,v system
was steadily declining both in terms of the number of managed companies
and their paid-up capital. This is illustrated by Table l.
TasI-r 6.1
Decline in the Number of Managed Companies
t2
Total No. of No. of companies 2 as %o of I
public companies managed by A,I/As
1954-55 1e78 (616.6) 4091 (439.0) 44.6 (71.2)

1 960-61 5688 (826.0) 104e (3e1.7) t8.4 (47.4)
1962-63 5477 (t076.r) l r4e (409.8) 21.0 (38.1)
1963-64 5607 (ll87.l) 1121 (s23.9) 20.0 (44.1)
1964-65 s639 (t236.3) 1090 (509.4) 19.3 (41.2)
1965-66 s609 (12s5.0) 800 (487.5) 14.3 (38.8)
1966-67 5543 (1309.4) 683 (493.0) 12.3 (37.7)
1967-68 s4s2 (137s.4) 642 (s84.8) tt.7 (42.s)
1 968-69 s432 (1402.3) 568 10.4 (4.1)
Note : Figrues in column I exclude the banking, inswance and Government

companies which could not have Managing Agents under the law. Fig_
ures in parenthesis indicate paid-up capital in crores ofrupees.
The controver
gradually became
the finding of the
added to it was its relationship with the growth of concentration of eco-
nomic power. A Managing Agency Inquiry Committee was appointed in
1965 under the chairmanship of Dr. I.G. patel. The committee confined its
enquiry into five well established industries, such as sugar, cotton textiles,
jute, cement and paper and recommended the abolition of the system in
sugar, cement and cotton textiles. But the central Government went beycntl
the balanced recommendations of this committee and decided to abolish the
Trends in Corporate Management Since Independence t47
Teere 6.2
Diminishing Managing Agency System
Total No. of No. of companies No. of cos. o%

of col. % of col
registered whieh cane up for vhere 3to 2 4 io 2
fear Companies approval to approval was
managing given
agency form
1956-57 848 10 l0 t.2 1.2

I 957-58 961 11 10 1.1 1.0
I 958-59 1095 I I 0.1 0.1
195960 1452 6 5 0.4 0.3
I
I 960-6 1683 l5 l3 0.9 0.8
t96t-62 1614 20 l9 1.2 t.2
1962-63 1497 l8 13 1.2 0.9
1963-64 1227 1l 6 0.9
1964-65 1366 6 0.4 :
1966-67 1039 1 0.1
196748 1044 I 0.1
t5167 101
tion of the institution of sec

of the Companies Act 1959,
companies to accept profess
of the much abused institution of managing agency.
avoided a certain amount of dislocation which followed the compulsory

abolition of the institution in 1970. But on the whole, there was very little
munnur and the company management in the corporate sector directly ef-
fected it as an inevitable and unalterable
measure and the overall impression
remains that such a momentous event did
not lead to any
in industry or in the economy as a whole as had ,*i"a-i.'to"utio'
been forecast by the
protagonists of this wstem. After the
abolition of managing ug.rr.y, tfr.
following forms of corporate managemr nt are permissible
undcr the law :
Coupnurps
Managing Director (with or without
whole-time directors)
105
Board of Directors
96
Authorised Controller under Industries
@evelopment and Regulation) Act
General Manager
I
I
Total
t76
A detailed analysis of the management pattern
-
having managrng or whole-time directors
in the 105 companies
,.u.A, the following p"i*.ir,
CorwaNrps
Persons educationally qualified as well as professionals 8l
Persons educationally qualified but not proiessionals 9
Persons who are prof.-essional managers ^but
_ not educationally qualified 3

Persons neither educationally qualified nor
professionals but ordinarily having sub-
stantial financial stake j
Details not immediately available
5
Total -*
Trends in Corporate Management Since Independence t49.
It will be seen that the nurnber of companies led by professional rnanag-

ers in the widest sense of the term was surprisingly large. Others were led
by large investors and yet others represented a compromise between the
two. One reason why professional management seems apparently to be in
such a dominant position is that in India professional management is very
often equated with non-proprietary management. But the available data do
indicate tlnt we are, on the whole, still a long way from the stage at which
the ancient regime of orvner-manager-entrepreneur can be replaced by a
managerial revolution, although there are indications that our top corporate
ilranagement is proceeding in that direction.
The management, structure and pattern in the large public companies in
corporate management between 1956 and 1969 had several other interesting
features. First, Indianisation of the top management on a very significant
scale was underlaken in the companies owned or managed by foreign enter-
prises. Another significant change was the decline in both volume and
proportion to the total equity of direct shareholding by the directors. The
data furnistred by some of these companies in response to a questionaire
indicated that whereas in most of these companies directors themselves
owned a substantial bloc of shares at the time of incorporation, by 1968-69,
in the majority of cases, directors were just holding qualiSing slrares. A
casual obsen'er of the corporate scene may get an impression that this
indicates a gradual process of replacement of proprietary management by
professional management. But the real picture seems to have been quite
different. In the great majority of the cases, the domination of the Board by
the entrepreneurial class having a financial stake in the fortunes of the
company hardly gave way, although the sheer complexity of modern busi-
ness very often necessitated the handing over of day+o-day management
excluding finances to technical persormel with seats on the Board.
It also appears that in most of these companies, shareholding does not
bear any significant relationship to management control. Traditionally, the
shareholder has been content to entrust the control in the hands of those in
lhom he has confidence, and does not take any interest whatsoever in the
company's management so long at least as he gets his arurual dividend. It is
only in recent years that he has started showing a very half-hearted degree
of interest. It is thus possible for a family or a combination of a few families
or a group-at times a professional group-to control the affairs of compa-
nies where their own shareholding may be as little as l0 per cent. As
Merchant observers: "Unless one belongs to the 'charmed circle' of the
family or friends of the existing management which, more often than not,
has only a minor share interest in the company, one has no chance whatso-
ever of becoming a director, however competent one might be. Hence, the
only legitimate method available to anyone to crash into management is by
buyrng up the requisite number of shares"s. The recent controveisies over
National Rayon and Synthetics & Chemicals indicate the struggles for man-
150 Government antl Business
s, each claiming to represent the mute

ses from one group to another, the new
ofessional, still retains most of the ob_
specially the characteristics of being a
the way of our large companies going
nt, or developing along the lines of the
There is in fact no indication as group manage_

ment control is withering away on The distinction
drawn by some writers between an e nd an executive
dian context except in the case of some foreign
ign equity holders in some of the latter type is
reliance on particular Indian families to direct
participation by themselves i
cannot be said that all Indian
fact, one finds both modern
modern technology. AIso the
modern thinking has been still slorv" 6
It would thus appear that today we are face to face with two forceful
Trends in Corporate Management Since Independence l5l
clear$, the contribution would largely depend on their own character
private companies and pursue a coordinated policy. This surely represents a

healrhy trend.
Finally, with an increase in size and the growing complexity in corpo-
rate business and the need for professionalisation even aithe board level,
there has been a marked shift of appointing whole-time executive directors
and also the induction of professional managers in the higher echelons of

company management in India.
t52 Government and Business
THrRD PHASE (196e TO DATE)
It is possible to indicate the folrowing emerging trends since 1969. The

abolition of managing
group managenent or the Ssenq di_d not ieally mean the end of the-system of
end of domination by large industrial houses over
vast industrial territories. In a large number oi.asis, ttre
erstwhiie'manag_
ing agents entered into various type; of service agreements
*in-trr"i, ror-
mer managed companies under which the services of
the former were avail_
able to strative services, financial-services-
manag work. In some cases, the old man-
aging b the forme.ty _*ug;J.o.pa.,i.r.
So-me of the managing agency houses have convert.o ,rt.-i.i*r-inio
.or,-
sultanry organisations- In several cases, this represents a genuine
effort to
break new grounds. The Tatas, for instance, set up a management
oriented
manag_
il""rlf;
former
eir control. For instance, the six com_
mselves merged into one company at the
end of 1969. Thus, today there is, rndeed, a growing trend
toward, *"rg"r,
and amalgamations in the corporate scene.
An overall impression is that the old managing agents, by and
large,
retained the hold over their former managed companies.
one shourd, how-
ever' pause to remember that the managing agenry was not
the cause but
really the efiect of concentration of economic oi industriat power
in certain
families and houses. It existed in India even before company
introduced and also flourished for about half a century
i"* *",
befoie ii was taken
for about four decades more, it was brought
1956 Act. From this point of view, it may
of the'provision in thu Companies Act on
r#:l*:"fi;lT:ttff
the pre- r e r 3 state or affairs :t',XJ'.tln:,,T'l:
which had favoured managing agency ..*"io.d, ,orn. iort oigroop
*un_
agement or control mechanism would also be there perhaps
in a different
name, but without the disciprine imposed on managing
uy tt co,n-
panies Act, 1956. "g.ntr "
- From
from
an analysis of the proposars received by the central Government
former managed companies during 1969-70, it appears that
the great
majonty of them switched on to manatement by managing at".io.r.
nut
this does not necessarily.show a marked preference ror s-oart ,n*ul.*.rrt,
but only that the majorilv rvere undecid^ed about the appropriate form
of
corporate management they should finally adopt.
The dominance of the old managing agency houses and families
started
Trends in Corporate Management Since Independence 153
getting eroded from the late 70s on account of sweral new factors. The
forergn houses by and iarge stagnated without expansion or diversification
and eventually made their exit through disinvestment to Indian houses, or
just stopped business forcing the government to take over. Many of the
great old names (e.g. Andrew Yule, Forbes & Campbell, Bird, Balmer
Laurie, Duncans) fall in this category. Many of the Indian houses went
through family feuds or partition resulting in the emergencc of several
separate clusters. In some cases, after the passing away ofthe old patriarchs,
there was no uniffing control any more, and the successors carved out their
own domains. This was the pattern in houses such as the Birlas, the
Goenkas and the Singhanias. Also, very often business was becoming so
diversified and complex that professionals had to be entrusted with fuIl
management control over enterprises, and there was no room for the kind of
control the old managing agents exercised. To take one example, to-day's
Tata Steel, Tata Engineering or Tata Chemicals are totaily separate compa-
nies with virtually nothing in common except the name Tata, and the shared
history and traditions. These developments, coupled with the growing en-
largement of the equity base of own companies, the rising percentage of the
shares held by frnancial institutions in private sector companies and the
inJluence exercised by the latter in the management of these companies
considerably accelerated the drive towards professional management in the
corporate sector.
Indian corporate managed suffered some critical challenges during the
decade of the 1970s on account of several government policy intewentions
such as the MRTP Act, introduced in 1970. the FERA of 1973, and the
general anti-large house stances of government policy. Many old well-
known managing agency houses disappeared or dwindled into insignifi-
cance. Many familiar foreign names also disappeared because the foreign
shareholders sold off their stocks to Indian houses straight forwardly, or
sometimes in covert manner through dummy foreign registered corporate
bodies. The movement of professional management steadily developed fos-
tered by the management schools, the universities and management associa-
tions. Many of the old family-managed companies slowly inducted ptofes-
sional managers to their board rocms. Some of the scions of the traditional
business families also turned professionals through acquiring formal man-
agement training or other types of professional education. Family domi-
nance which characterized India's corporate management all along started
disintegrating during the 1980s. There were amicable partitions among fam-
ily members. Also, there were violent and noisy family splits. As a result
most of the old family conglomerates disappeared. Some of them got
regrouped. This process helped the growth of professional management.
Also, many of the old family managed companies were turning into widely
held modern corporations. The phenomenal expansion of the capital market
during the 1980s added another new dimension to corporate management.
As more and more companies through public issues became public. limited
compzrnies or vastly enlarged their share-holding base they acquired the
l-54 Government and Business
considerably blurred this original difference between the FICCI and the
ASSOCHAM. one can only say that today in the former there is more
whetherit is the approach toward the Government that has made a chamber
somewhat weak in its relation with the Govemment. Unless a chamber can
take part in the economic affairs of the Government as a right, any attempt
to bring consensus between Government and business is bound to fail. A
chamber must do this right by discharging its obligations.
Apart from these two apex bodies, there are very effective industry
associations such as Indian Jute Mills Association, Indian cotton Mills
Federation, as also regional bodies such as the Bengal chamber of com-
merce and Indian chanrber cf commerce in calcutta, the Indian Merchant
Chamber and the Bombay Chamber of Commerce in Bombay, the punjab,
Haryana and Delhi chamber of commerce in Delhi, and the Madras cham-
ber of commerce in Madras. Also, more specialised bodies such as the very
active and effective Association of Indian Engineering Industry (AIEI) now
renamed confederation of Indian Industries, are serving a useful role as
professional forum in Government business dialogue, and in the dialogue
between Indian industry and international industry.
Happily, the interfacing between the Chambers on the one hand and
Government agencies on the other has improved qualitatil'ely in recent
times. In today's environment some people are questioning the wisdom of
having so many chambers of commerce to represent their interests. They
would like all these apex bodies to merge and the regional bodies to work in
uruson.
Trends in Corporate Management Since Independence 155
The separation between corporate ownership and corporate management

has become an acknowledged phenomenon in the West ever sirtce Berle and
Means came out with their pioneering work. There can be no doubt that the
future development of corporate management in India will also reflect this
trend. Some of the key factors, which will accelerate this trend, are growing
size and complexity of modern corporations, the wide diftrsion of share-
holding, the growing interest taken in nanagement by the public agencies
holding shares in companies. the need for professionalising top manage-
ment, and last but not the least, the declared Government poliry of system-
atically trying to broadbase the equity-structure of companies which are
closely held by families or groups. Increasingly company management will
have to be "a sort of government of best minds, ultimately responsible to a
comnrunity consensus which sets up general objectives, standards of per-
formance, and results." Corporate managers will have to hold top positions
in the company hierarchy, not because of their shareholding, or because of
their'family, caste or community background, but because of their educa-
tion, ability, experience, and managerial skill. Such managers will be re-
sponsible not only to the shareholders, but to a number of other
interests-the employees, the consumers, the community around and the
State.
Indeed, the corporate management all the u'orld over is today in quest of
a new business ideology. In the great debate norv going on in the West over
the concept of social responsibiliry in rvhich very eminent people like Gal-
braith (The ]rlew Industrial State), George Go1'dar (The Responsible Com-
pany) and Jean-Francois Revel (Without A[arx or Jesus) have taken part, the
central issue is the imperative need for the general acceptance of the con-
cept of social responsibility of business. This implies giving due priority to
the interests of the society, and treating the business corporation as a face
for social change. In our country, there are only a few isolated ripples in this
direction. Corporate management by and large is stili to accept it.
The corporate management in India has to strive to create a proper
image for itseH consistent with the social environment in which it operates.
Its image in the eyes of the larger public is still very hary. Unfortunately,
the corporate business has collectively done little to dispel these impres-
sions, to bridge the great gulf between itself and the larger public, or to
create a proper image of itself. It has to learn to operate in the environment
created by the Government policy in response to the people's aspirations. It
is also expected to conform to the broader social and economic goals ac-
cepted by the country, and to play its role as an agent for achieving these
goals. Indeed, it would be correct to say that the awareness of the Govern-
ment policies and responsiveness to them constitutes one of the crucial
,aronria, for corporate Lnanagement todal'. Once our corporat€ management
accepts this basic philosophy and a business ideologv consistent with it, it
References
l' Reprinted from Adminislralive staff college of India,

Jottrnar of Afan-
agement, Vol. 2 No. 2 (Ir4arch, 1973) pp. 7l_82.
Article by N.K, Sen_
guph.
7. See Th-e C-ompqny, edited by Charles de Houghton_pEp, London 1970,

pp. 141-163.
I
9.
fEP, Companies Beyond Jenkins,p.6l.
Interviews
Chapter Seven
Government Control Over Foreign

Direct lnvestment and Collaboration
Since Independence the fiolicy of the Government of India towards private

foreign investment and collaboration, has movetl from cautious encourage-
ment through a brief spell of near 'open door' in the hfties, a long phase of
rigorous selectivity from 1968 to l99l on to the current post-1991 policy of
open encouragement of foreign direct investment specialry in priority areas
even with 57%o participation in equity. Independent India started with a
legacy of well-established foreign capital and all the fear and prejudice
associated with it. while the overwhelming thrust has all along been to-
wards the goal of a self-sufFrcient economy and of freeing national econom-
ic and industrial polioy from the distates and manipulations of foreign capi-
tal, the compulsions of an economy of scarcity and the chronic foreign
exchange deficiencv also had an effect is shaping offrcial poliry towards
foreign investment and foreign collaboration. During the seventies and
eighties official view has been inevitably influenced by the controversy the
world over on the role of multi-national corporations in relation to the third
world countries. Based on the exposure of a series of misdeeds perpetrated
on some third countries by some of the multinationals like International
Telephone and relegraph corporation (ITT), united Fruit, Union Miniere
and Lockheed,' criticism welled up against the MNCs in the lndian parlia-
ment and outside. on the other hand there was also a realization that all
foreign enterprises operating in India should not be tarred with the same
brush and that there rvere some amongst them who were performing a useful
role in the economy by their import-substituting or export-oriented opera-
tion, or by making valuable contribution to the technological skilr and capa-
bility of our country. ofhcial policy after several years of oscillation settled
down to one of allowing foreign private investment or collaboration on a se-
lective basis in only priority, export-oriented or sophisticated technology-
based industries, of disallowing them in any other area. and of permitting
existing foreign investment in these non-priority areas to operate in futur€

only on the basis of upto 40 per cent of equity holding. A general xenopho-
bia has throughout been the backdrop oflndia's foreign investrnent policy.
The total volume of private foreign investment in India, excluding bank-
ing and insurance, increased from Rs 680 crores in 1965 to Rs 1000 crores
in 1966, Rs 1755 crores by 1972 and over Rs 1800 crores in 1973.2 Thereaf-
ter, thanks to the government's negative policies, it showed a steep decline,
registering a figure of only Rs 917 crores at the end of 1974.It marginally
rose to Rs 933 crores by March 1980. Then, under the impact of the new
liberal policies it rose to Rs 1557 crores by March 1986, Rs 1742 croresby
March 1987 and Rs 1991 crores by March 1988. This shows that foreign
direct investment has been occupying a relatively insignificant'position in
the overall spectrum of India's industrial economy. The sharp drop in the
volume of foreign direct investment in India is consistent with the general
declining trend of FDI to non-oil developing countries (SDR 12.9 billion in
1981 and SDR l0 billion in 1986). The following tables indicate:
(1) The Country-wise foreign direct investment.
(2) The Industry-wise direct investment.
(3) The Country-wise Portrolio Investment, and
(4) Industry-wise Porfolio Investment.2
TeeI,s 7.1
F'oreign Direct Investment (Country-Wise)
(Rs. crores)
End-March 1986 End-March 1987 Vaiation

Country
Amount per cerfi Amount per cent Amount Per cent
UK 821 52.7 901 51;7 80 9.7

USA 294 18.9 332 19.1 38 12.9
West Germany 132 8.5 154 8.8 22 16.7
Switzerland 58 3.'7 65 3.7 7 12.1
Japan 5l 3.3 64 3.7 13 2s.5
Sweden 47 3.0 51 2.9 4 8.f
Canada 43 2.8 46 2.6 3 7.0
Netherlands 2l 1.3 29 1.7 8 38.1
Luxemberg 20 1.3 t7 1.0 -3 -15.0
France 12 0.8 12 0;7
Otirers 58 7.t 7l 4.7 13 22.4
Total |,557 100.0 t,742 100.0 11 9

Govt. Control Over Foreign Direct Investment and Collaboration I59
Test"E.7.2
Direct Investment (Industry-Wise)
(Rs. crores)
End-March End-March Vaiation

Industry 1986 1987
Amount pel cent Amount per cent Amount per cent
L Plantations 138 8.9 153 8.8 l5 10.9
il. Petroleum 2 0.1 2 0.1
m. Mining 4 0.3 6 0.4 2 50.0
IV. Manufacturing 1,335 85.7 t,492 85.6 t57 l 1.8

1. Food,
beverages, etc. 99 6.4 I 14 6.5 l5 15.2
2. Textile products 86 5.5 81 4.6 -5 -5.8
3. Transport
equipments 157 l0.l 173 9.9 l6 t0.2
4. Machinery &
machine tools 184 I 1.8 210 12.1 26 14.1
5. Metals and
metal products 77 4.9 85 4.9 8 10.4
6. Electrical goods
& machinery 179 11.5 207 lt.9 28 15.6
7. Chemicals &
allied products 461 29.6 516 29.6 55 11.9
8. O(hers 92 5.9 106 6.1 t4 t5.2
V. Trading 4 0.3 7 0-4 3 75.0
VI. Construction t4 0.9 16 0.9 2 14.3
VII. 'l'ransport 10 0.6 12 0.7 2 20.0

VI[. Utilities 10 0.6 ll 0.6 1 10.0
D(. Financial
X. Others 40 2.6 43 2.5 3 7.5
Total t,557 100.0 1,742 100 0 185 119

Tle.np,7.3
Break Up of Direct Investnent in tr'CRCs into Equity and Retained Eamings
Outstanding I*vels (Country-Wise)
(Rs. crores)
End-March 1986 End-March 1987

Country
Equity Retained Total EEtity Retained Total
earnings eamings
2 3 4 5 6n 7
l. IJK 294 509 803 319 560 879

(36.6) (63.4) (36.3) (63.7)
2. USA 109 t73 282 124 195 319
(38.7) (61.3) (38.e) (61.1)
3. West Germany 50 82 132 63 91 154
(37.e) (62.1) (40.e) (5e.1)
4. Switzedand 24 34 58 26 39 65
(41.4) (58.6) (40.0) (60.0)
5. Japan 37 9 46 44 13 57
(80.4) (1e.6) (77.2) (22.8)
6. Sweden 20 28 48 23 29 52
(41.7) (58.3) (44.2) (55.8)
7. Canada 19 24 43 21 25 45
(44.2) (s5.8) (4s.7) (54.3)
8. Netherlands 11 10 2l 16 13 29
(s2.4) (47.6) (5s.2) (44.8)
9. Luxenrberg 3 17 20 4 13 l7
(15.0) (85.0) (23.s) (76.s)
lO.France 4 7 11 4 7 ll
(36.4) (63.6) (36.4). (63.6)
11. Others 27 25 52 31 33 64
(51. e) (48.1) (48.4) (51.6)
rotal 598 918 1,516 675 1,018 1,693
(3e.4) (60.6) (3e.e) (60.1) :
Note : Figures in brackets represent percentage shares ofequity and retained earn- i
ings to the total.
Govt' Control over Foreign Direct Investment qnd Coilaboration
l6l
Tla;tp.7.4
Net Inflow of Direct Investment 19g6_g7
(FcRCs) -
(Rs. crores)
Country Equity Retained

eamrngs
1. UK 2s (33) 5t (67) 76
2. USA 1s (41) 22 (se) JI
3. West Germany 13 (se) e (41) 22
4. Japart 7 (64)
5. Netherlands
1 (36) ll
5 (62) 3 (38) 8
6. Switzerland 2 (2e) 5 (71) 7
7. Sweden 3 (7s) 1 (2s) 4
8. Canada 2 (67) 1 (33) -t
9 Others 5 (56) 4 (44) 9
Total 77 (44) 100 (56) t77
It is seen that porfolio investment at the end of March tssa ,.;;;
to Rs 626 crores indicating a rise ofRs 167 crores during l9g7-gg. This was
ARGUMENTS AGAINST AND FOR F'OREIGN INVESTMENT

The l'arious grounds of objections to the import of
foreign capitat may thus
be summerised: First, the historical exploitaiive charactJr
of ioreign i'nvest_
ment as a partner of colonialism naturally arouses deep-rooted
riationatist
sentiments and suspicions. Secondly, there is a u,ide_spread
belief.based on
suffrcient empirical evidence that foreign capital is essentially
intei"stea in
low technology but high profitable consumers' goods,
and not in techno_
logically difficult, long gestation industries which are of high priority from
the point of view of the host nations. Thirdly, in trying to interpret direct
foreign investment as a capital movement economists have often found that
investors do not generally take money with them to the host country, but
raise capital locally from profits out of sale of their own imported goods or
by bonowing in the local market. Thus there is only gross capital move-
ment, not net, through patents, technology or machinery etc. against equity
claims etc. and through reinvestment of profits with the so-called outflow
rarely matched by earnings on past investment, and not through the normal
transfer of funds through the foreign exchange market. The clue to direct
investment lies not in physical movement of capital from a developed coun-
try to a less developed country, but in capital formation in the latter country
through the local operation of a multinadonal corporation based on the
former.a Fourthly, foreign capital has historically been accused of an atti-
tude of discrimination against employment of local nationals in high-sala-
riedjobs and against local transport, insurance or credit organisations. Fifth-
ly, the development caused by foreign investment tends to have an 'en-
clave' character. That is to say, it only creates small pockets of affluence
isolated from the main stream of the host country's state of social and
economic development.s Sixthly, the foreign enterprises by virtue of their
financial strength and general competitive effrciency inevitably obstruct and
stifle the growth of indigenous industrial entrepreneurship. Seventhly, the
cost offoreign capital for the host country tends to be very high. According
to the well-known Reserve Bank of India Study Census of Foreign Assets
and Liabilities, published in the 60s, the weighted average ofthe return on
U.S. capital invested in India was 19.2 per cent and that of Canadian capital
rvas 33.3 per cent. How costly this tends to be becomes clear when it is
understood that a normal return of l0 per cent or so on U.S. domestic
investment would be considered attractive. That such costly capital imposes
a very severe strain on the host country's foreign exchange can easily be
understood by comparing the quantum of capital inflow excluding invest-
ment profits with the quantum of foreign exchange outgo on account of
capital and profit remittances. Finally, there are questions of political strings
attached sometimes to foreign capital, of the inevitable stranglehold that
foreign governments gain over important sectors of the host country's econ-
omy and the uncertainty of stay of foreign capital and skill. The recent
history ofthe third world countries is replete rvith such instances.6
As against these, there are three major economic arguments which have
been reiterated again in favour of allowing unrestricted flow of foreign
private capital:
l. It would supplement inadequate domestic savings and capital forma-
tion.
Govt. Control Over Foreign Direct Inveshnent and Collaboration 163
2. It would increase the foreign exchange resources of the country and

reduce strain on balance ofpayment.
3. It would facilitate the transfer of modem and sophisticated technol-
ogy not otherwise available from advanced countries.
It is interesting to note that during the three inirial phases of the evolu-
tion of the Indian Govcrnment's policy tolvards foreign capital since 1949
each one of these arguments has been successivel]' entphasised. Another
consideration sometimes advanced is that foreign private irrvestment in In-
dia is too small to be a threat to the Indian economy occupl,ing as it does a
bare 9 per cent ofthe total capital employed in the corporate sector.
POLICY TILL 1968
Until the early 50s foreign investment was welcomed with reference to the
first argument. The policy of cautious rvelcome to foreign capital was brief-
ly reflected in the Industrial Policy Resolution of April 1948. This was
subsequently amplified by Prime Minister Nehru in his statemenl to Parlia-
ment on April 6, 1949 rvhich for a very long time remained the only major
policy statement. He declared that the stress on the need to regulate, in the
national interest. the scope and manner of foreign capital arose from past
association of foreign capital and control with domination of the economy
of the country. But circumstances today are quite different. The object of
our regulation should, therefore, be the utilisation of foreign capital in a
manner most advantageous to the country. Indian capital needs to be supple-
mented by foreign capital, not only because our national savings will not be
enough for the rapid development of the country on the scale we wish, but
also because in many cases scientific, technical and industrial knowledge
and capital equipment can best be secured along with foreign capital. The
Prime Minister further added that the Government of India would expect all
undertakings. Indian or foreign, to conform to the general requiremints of
their industrial poliry. In return he assured them that there would be no
discrimination between Indian and forei$n interests. He proceeded further to
say that 'as regards existing foreign interests Government do not intent to
place any restrictions or impose any conditions which are not applicable to
similar Indian enterprises. Secondlv, foreign interests would be permitted to
earn profits. subject onh' to regulations common to all. Thirdly, if and when
foreign enterprises are compulsorily acquired, compensation will be paid on
a fair and equitable basis ... . The Government of India have no desire to
injure in any \vay British or other non-Indian interest in India and would
gladly welcome their contribution in a constructive and cooperative role in
the developrnent of lndia's econonry.' He assured foreign enterprises that
164 Gotternnrent and Business
there will be no
foreign
capitalinvestme ' IfanY
foreign collcern
ld Pro-
vide reasonabre
PROCEDURAL AND PoLIcY CHANCES C,F 1968

Govt. Control Over Foreign Direct Investment and Collaboration 165
The Foreign Investment Board was set up in December 1968 as a single

agency within the Government to deal with all matters relating to foreign
investment and collaboration. The Board itself was not a statutory body, but
its powers to approve foreign collaboration agreements are derived from the
Foreign Exchange Regulation Act 1947, which requires all remittances of
foreign exchange to be approved by the Goverrfment or the Reserve Bank of
India.
Since 1973, under the new industrial licensing procedure when an appli-
cant submits composite application for both industrial licence and approval
of foreign investment or technical collaborations such composite cases were
decided by the Projects Approval Board (chaired by Secretary, Ministry of
Industrial Development, and do not go to the Foreign Investment Board).
With the estaulishment of the Foreign Investment Board, the Govern-
ment also laid down clear guidelines for foreign investrnent in respect of the
areas in which they would be allowed, in what forms, and the conditions to
which they would be subject as regards royalty, lumpsum payment etc.
Three illustrative lists of industries were issued which showed three broad
categories:
l. Industries in which foreign investment would be permitted.

2. Industries in which only technical collaboration would be permifted.
3. Industries in which neither foreign investment nor technical collabo-
ration is to be permitted.
These lists were subject to review from time to time.

A general decision was taken to limit foreign equity participation to less
than 40 per cent except in cases where the required technology was highly
sophisticated, or the project was export-oriented. There is nothing mystical
about this 40 per cent which came to be established as the norm becauSe the
Foreign Investment Board had powers to permit foreign investment only
upto 40 per cent. But this 40 per cent survived through many years and
acquired a special sanctity after it was recognised by the FERA guidelines,
1973 as the normal permissible foreign equity ceiting in a company operat-
ing in non-priority areas.
When a reviewing a collaboration proposal. the Foreign Investment
Board was guided by the following principles:
(a) The technology purchased should not already be available in Indi4

and once purchased, the Indian company should be able to sub-lease
it to other Indian enterprises.
(b) The agreement should not place any restriction on imports of plant,
machinery, raw materials, pricing poliry and selling arrangements, or
on the use of consurtant's seryice (for which the Indian

forms are to
be given top priority).
(c) No rest'ction should be praced on the Indian parfy
to export the
product.
(d) Therc should be no provision for the use of foreign
brand names on
the products for internal sare. though there is no oijection
totheir use
on products to be exported.
INDUSTRJAL LICENSING POLICIES I97O AND T973

Govt. Control over Foreign Direct Investment and collaboration 167
The number offoreign financial collaborations approved by the govern-

ment in recent years is given below:
Teslp 7.5
Approvals fqr Foreign Collaborations
Year Number of Collaborations approved
Total ofwhich Financial
1981 389 57
1982 590 ll3
I 983 673 129
I 984 752 151
I 985 t,204 238
I 986 957 240
REMITTANCES AND CAPITAL REPATRHTION

India has freely permitted remittances of profits and dividends. There was
ne\/er anY o
ties for use
have to pay
in India at rates varying from 24.5 per cent to 70 per ccnt. Interests on
foreign loans granted to companies with Government approval are not sub-
ject to taxes nor are there any obstacles to the repatriation offoreign capital.
THE FOREIGN EXCHA}IGE REGULATION

(AMENDMENT) ACT,1973
The Foreign Exchange Regulation Act of 1947, tlre basis law of exchange
control, also become the main legal instrument for controlling the operation
of foreign-controlled companies in India. Its preamble states that "it is
expedient in the economic and financial interests oflndia to provide for the
regulation ofcertain payments, dealings in foreign exchange and securities,
and the import and export of currency and bullion". The Act empowers the
Reserve Bank of India to ensure that the foreign exchange earned by exports
or otherwise is properly accounted for or released, and that the acquisition
and holding of foreign exchange in any form and the making of payments in
foreign exchange are controlled. Section l8 prohibits without the Resen,e
Bank's approval (l) the transfer ofbusiness from the control ofresidents to
non-residents (2) the transfer belween two non-residents of an interest in
business in India and (3) the transfer to a non-resident of any business in
India by a resident. An Indian company cannot make investment outside
India without the Reserve Bank's approval. The Foreign Exchange Regula-
tion Rules framed under the Act contain detailed and fairly drastic regula-
tions for declaration of full value of all exports, all remittances and receipts
to prevent devices such as undervaluation of exports, overvaluafion of im-
ports and building up hidden foreign exchange reserves.
In 1973 the Government felt it necessary to review the entire gamut of
private foreign investment, in particular investments which occurred in the
remote past when controls were non-existent, and determine on a selective
basis, in the light of current licensing and foreign investment policies, the
nature and extent of foreign investment that may be permitted. The FERA
was therefore substantially amended.'
The Sections in the amended Act which were relevant for our purposes
are 28 and 29. According to the provisions of Section 28, non-residents.
branches of foreign companies, and Indian companies having more than 40
per cent shareholding, will require the permission of the Reserve Bank of
India before they can accept an appointment in India as an agent or techni-
cal or management adviser.
Under Section 29, the permission of the Reserve Bank of India will
further be necessary for the above categories of individuals and firms if they
seek to carry on or establish in India any activity of a trading, commercial
'The 1973 amendmentS were almost wholly repealed by an ordinance on Jan

8, 1993 which vrrually rcstored the pre-I973 situation.
or industrial nature, and also if they propose to acquire in whole or in part
any Indian undertaking engaged in a trade, commerce or industry. Under the
Act individuals and companies holding appointments as agents or advisers
who are engaged in any trading, commercial or industrial undertaking, prior
to the commencement of the Act will be required to apply to the Reserve
Bank of India for permission to continue to act, or carry on business, what-
ever the case may be, within a period of six months after the commence-
ment of the Act.
To avoid the tremendous pressure that these applications would impose
on administration certain guidelines were issued which clear$ laid down
the terms and conditions the Government wished to impose on various
forms of foreign capital engaged in different types of activities.
The main principles of the FERA guidelines are given below:
(a) If the activities of a company under Appendix I together with activi-
ties requiring sophisticated technology and exports, account for not less than
75 per cent of its total annual turnover, such a company will be allowed to
continue its actil'ities subject to the condition that it u'ill increase Indian
participation. within a specified period, to not less than 26 per cent of the
equity capital of the company. This will also apply to tea plantation compa-
nies engaged in exports.
(b) If the activities of a company under Appendix I together rvith activi-
ties requiring sophisticated technology and exports account for not less than
60 per cent of the total annual turnover, such a company will be allowed to
continue its activities, subject to the condition that it sill increase within a
specified period, Indian participation to not less than 49 per cent of the
equity of the company. In such cases a condition will be stipulated that the
company concerned should undertake to export a minimum of l0 per cent
of its total annual turnover within a period of two years commencing from
the date of approval by the Resewe Bank of India.
(c) Ifthe exports ofa company account for more than 40 per cent ofthe
total annual turnover, such a company will be allowed to continue its activi-
ties subject to the condition that it will increase. within a specified period,
Indian participation to not less than 49 per cent of the equity of the com-
pany.
(d) Cases of companies coming with proposals for substantial exports
could be considered, on merits, for higher level of equity participation,
provided such participation is in the overall interest of the ecorrcmy ofthe
country.
(e) The ceiling of 25 per cent of the ex-factory value of the annual
production for permissible trading activity by multi-activity companies will
be raised to 40 per cent and 60 per cent respectively in the'gpes of cases
mentioned in (b) and (c) above.
L70 Government and Business
(D All branches of foreign companies except airlines and shipping com-

panies have to convert themselves into Indian companies.
Notes:
(i) The item treated as being covered by Appendix I or sophisticated
technology will not be again counted towards exports while clubbing
the three together in (a) to (c) above.
(ii) The above clarification and amplification of the guidelines will not
be applicable to the drug industry.
The misapprehensions and doubts that the 1973 FERA changes aroused
in certain quarters both in India and abroad were not justified. There was no
warrant for the belief either that foreign investment is no more welcome or
.that the existing foreign investments must invariably be brought down in all
cases to 40 per cent. Nowhere does the Act hint at the sell-off of foreign
investments, or of the prohibition of further inllow of foreign capital. The
declared industrial policies with reference to Prime Minister Nehm's 1949
declaration, the Industrial Licensing Policy of 1973 and other pronounce-
ments still remained valid, and the general poliry of selectivity continues.
All that happened was that Government took the power of reviewT of all
pre-1970 cases of existing foreign investment (over 40 per cent in a compa-
ny) which by and large took place before the policy of selectivity came to
be crystallised, to allow continuance of majority foreign holding in those
cases where it would have normally been allowed under the present poliry,
and to bring down foreign holding in other cases to 40 per cent.
All the companies where foreign shareholding was more than 40 per
cent were made to change their capital structwe or their product-mix in
order to conform to the FERA guidelines. A majority seemed inclined to
meet the requirements of the guidelines by panially bringing down the
foreign shareholdings, but retaining a majority holding by diversiffing into
I
Appendix areas and by stepping up the exports to the stipulated level
during the period of two years allowed to them from the date of the ap-
proval by the Resen'e Bank for complying with the FERA guidelines. There
was a pronounced trend among the majority not opting for expansion in the
core or high technolog,v sectors, but rather for low technology sectors with
high export potential e.g. canned meat or food products, (Brooke Bond), sea
food processing (Union Carbide, ITC), hotels (ITC).
Another visible trend was thal nearl.v all the foreign companies with
high reserves capitalised huge amounts from the reserves before they went
for nelv public issues'to the Indian public. This rvas due to restrictions on
the repatriation of earnings, the changing value of currencies, and also the
anticipated diffrculty in obtaining too high a premium on fresh issues. and
in getting equities rvith high premia subscribed in the depressed capital
market at that time.
Govt. Control Over Foreign Direct Investment and Collaboration l7l
The process of corporate restructuring under the FERA was completed.
between 1975 and 1980. Nearly all the branches except shipping, airlines
and banks were either transformed into Indian companies or closed. Also,
the process of restructuring of the shareholding of the foreign companies
according to the permissible limits of 74%o, 5lYo or 40o/o, as the case may be
was cornpleted except for about 20 drug companies whose cases were con-
sidered separately. In this process there was very substantial increase in
Indian shareholding in these companies, a spectacular upsurge ofthe Indian
stock market and significant increase in export activity. close to 1.3 million
new stock-holders were added and the volume of fresh capital issued to
them was of the order of about Rs 583 millions. The forced diversion of
some of the companies with their managerial strength and financial ability
from low technology, consumer products areas into Appendix I industries
was a standing gain for the Indian economy. Also important was the stimu-
lus given to exports by the concerned efforts of some of the companies with
their marketing skill and international linkage.
For so many years foreign companies in India were suffering from some
kind of stagnation. They made large profits and built up huge reserves. But
they were not allowed to expand in the existing usually non-essential lines
of production where they were often dominant. The ner.v FERA rules with
their linkage between expansion and dilution gave them an opportunity to
use their reserves. and also raise fresh capital for expansion programmes in
areas of national priority, and thus to resume a process of corporate growth
after years of stagnation. some foreign companies diversihed into areas of
high profitability such as hotels, fisheries, food processing and detergents.
Some of them chose to expand into exports. Over time, however, most of
even those companies who had initially sought to retain majority foreign
holding found it to their corporate long-term advantage to reduce foreign
holding to 40%o or less so as to go out of the FERA requirements imposing
special restraints on their activities such as internal trading, acquisition of
properly and diversification. This led to a new wave of dilutions during the
early 1980s, no longer compulsory but voluntary. The cases of the foreign
drug companies were delayed, as the Central Government waited for the
Flathi Committee Report on dmg industry, and announced a new drug pol-
icy only in 1978. Under this policy, only the manufacture of basic drugs was
to be treated as Appendix I activities, and not mere formulation activities as
hitheto. The process of FERA exercise for foreign drug companies on this
basis was completed by 1982. It is important to note that between 1973 and
1983, as a result of the FERA process, the number of foreign majonty
companies came down sharply. In 1985, there were only 142 FERA compa-
nies of whichorily 84 were clear foreign subsidiaries.
In two signifrcant cases, viz., IBM and Coca Cola which were required
172 Government and Busine.ss
to bring down non-resident holdings to i4oh and,40%o respectively but de-

clined to comply rvith these requirements, the Government directei the tvgo
companies to close their brrsiness in India. Significantly, after the
liberalisation from l99l ourvards. coca cola has returned to Inolu. so has
IBM through joint ventures. Mosl cf the foreign companies took steps to
comply with the FERA guidelines through disinvestment or ti.esh issue of
capital, and only a fer.l' chose to wind up their brnirress. It is important to
note that in the wake of the structural adjustnrcr)r process from July l99l
and the great importance given by the Indian governnrent to the inflow of
foreign direct investment a new foreign investment policy was announced.
By an ordinance issued on January 8. 1993. the 1973 changes in the FERA
were almost wholly repeated. This virtually restored the prc-1973 situation
making it much easier for foreign companies to operate in India.
IMPACT OF' FOREIGN CAPITAL
Any attempt to evaluate the over-all impact of foreign capital on the Indiarl
economy by way of a cost-benefit analysis must reckon with some obvious
diffrculties. It is not easy to determine how much of industrial development
has ti*en place solely through foreign i*estment, nor to come to am,
precise qualitative assessment of the actual degree of transfer of skill or
technology or of the volume of employment generation, or the volume of
import substitution, or of the other secondar!' multiplier effects. In the
absence of precise data on these aspects except possibly for the very recent
past (say since 1970) any evaluation has to be of a somewhat limited nature
based on the figures for oufflow and inllow of foreign exchange, or the
assets or resen€s built up by. foreign pontrolled companies in India through
local operation.
lewed the intended pu{poses for which it was allowed, and secondly to
identiff the negative effects in such investments.
In order to obtain conrprehensive information on the main features of
Govl. Control (h'er F'oreign Direc:t Investntent and (lollaboration l'73
foreign technical and financial collaboration, the Reserve Bank of India

conducted trvo major sun'eys for the perioll 1960-70. Unfortunatelv bolh
these surueys suffered from inadcquata data base, and have also becomc
quite outdated. The first study'r0 was published in 1958, and the second in
I 97.1 i t (briefly reported iu J une. I 974 issue of the RBI Bulletin). The fornrer
revealed that the foreign collaborating firrns generally preferred equity par-
ticipation against sale of capital goods and technical know-how rather than
equig. subscription in free foreign exclnnge. This merelv postponed the
liabililv for pavment, and nade equitv more costiy by giving it the right
share prohts for an indefinite period. Further. most of the collaboration
agreements included restrictive clauses relating to the sources of supply of
raw materials, plant and machinery. This is also supported by Kidron who
also suggests the existence of.informal agreements for tie-in equity partici-
pation with the supply of capital goods and materials.I2 This RBI study also
showed that the exports by foreign companies did not increase in proportion
to the increase in their production and that on the rvhole India did not make
a nel gain by way of additional foreign exchange inflow on account of the
investment or collaboration agrcenrents during these years.
The second suwey of the Resen'c llank covered the period 1964-1970.
It included exports and imports, rernittance of dividends royalties and tech-
nical fees paid. payments made to for-eigrr technicians. interest charges paid,
foreign loan receipts and foreign loar r;pavments b1, all mpee companies
u'ith ma_iority or minoriq'forcign shareht;lding. It did not indicate the actual
inflorv of equity capital; nor thl- otitflorrs on account of the branches of
foreign companies.r3
It indicated that if thc inrpo(s and e.xports *'ere included the picttrre was
one of ne1 inllorv of Rs l-13.48 crorcs 'rhe retained earnings in India were
clubbcd with inflorv according to the lorrnal practice, as they would other-
wise be repatriable causing an outflou oi capital. If these earnings are not
shown under inflows, 1he piclure rvonld even then place foreign private
investment in a favorrable light, the net inflorv being Rs 24.38 crores.
There lvas an or,'erall net outflon of Rs 728.12 crores over a six-year
period, but this was due to the high lo'el of imports made by the foreign
subsidiaries. Horv n.ruch of these inrports lvere essentially import-substitut-
ing in nalure, or ho$' much o[ it rcprescnted the goods rvhich the country
rvould have to inrport in an1' casc, irrespective of the foreign source of
supply or agcncv for irnport are nol ktrorvn. To conclude, on the basis of
these hgures alone and *ilhout hat.ing counten'ailing data on these points,
that the net impact of private foreign capital has been harmfirl, or that the
overall effect on forcign cxchangc has been minus will be a sweeping
generalisation n'hich rrra)'not match reaiity. Nor do we have any indication
of other more intangible possible benefits such as the volume of employ-
ment generated.
From the point of vierv of resourcc transfer. foreign in'estment policy in
I74 Government and Business
the early and mid-fifties was fairly liberal on the expectation that it would
have a positive effect on the balance of payments. From the studies con-
ducted by the RBI it appeared that contrary to the normal expectation of
FDI having a positive effect on balance of payments that the actual inflow
of foreign cash capital was e*remely small. In the first place about 60 per
cent ofthe outstanding foreign investment during the survey period rryas on
account of the retained rupee earnings of foreign-controlled companies and
branches. Secondly, much of the fresh inflow was in the form of investment
in kind, and new collaborations found entry by trading capital goods and
know-how for a claim on equity. But in fairness it must be emphasized that
during most of this period Indian policy never encouraged foreign direct
investment as such, but only permitted it as exceptions in selective cases
rather than as a rule, and that too on a minority basis. Requirement of
investment in kind rather than inward cash remittance has resulted in uneco-
nomical import of goods at marked-up prices. It has been further established
that ofthe total foreign exchange requirements in joint venture projects, the
foreign collaborator's equity participation has accounted for only 25 per
cent, the balance having been covered by foreign aids.
In the matter of transfer of technolog,t we have already mentioned that
until the 1970s the government poliry was fairly indiscriminate. Another
problem was that most collaboration agreements (40 per cent according to
RBI survey) had restrictive clauses relating to secrecy of technology, lim-
ited freedom to change the basic design, restrictions of choice and source of
input, and restrictions on changing the output structure. The consequences
of this has been that even *ith minority participation foreign investors have
found it possible to maintain control at the plant level. At the same time
restrictive clauses have prevented the transfer oftechnology in a real sense,
and has made way for a perpetual dependence on imported technology. The
other main issue in regard to collaboration agreements is that the govern-
ment has allowed the inJlow of technology in a package, which no doubt
from the view-point of both the Indian party and the foreign investment has
been very attractive, but from the country's point of view has been more
expensive.
There are several other broad issues rve have to consider. To what extent
is technology that has gained entry, consistent with India's employment
objective? Has local technological development received a set-back on
account of foreign technology'/ What are the long-term effects of foreign
collaboration on Research and Derelopment? The RBI suwey indicates
that companies with pure financial parlicipation lvere not very active in
setting up R & D units (18 per cent) iu comparison r,vith companies with
foreign technical collaboralion (42 per cent), probablS' orving to the avail-
abililv of newer technology from their parent bodies or partners.rs Then
again, what is the precise degree of import substitution brought about in
capital goods and consumers' goods sectors and its quantitative impact on
foreign exchange. Finally, what is the net contribution of foreign companies

tolvards the host country's export efforts. While there are some leading
examples of outstanding export achievements (e.g. companies such as Hin-
dustan Lever), it is diffrcult to come to a general conclusion about the
foreign sector as a whole having made outstanding export efforts. Con-
versely, while there are cases of large volume of imports by foreign compa-
nies from their affrliates abroad with possibility of transfer pricing, there is
no evidence of the foreign companies in India as a whole following such
practice.
Two other poliry strands deserve to be highlighted. Starting late in the
1970s the Indian government announced far-reaching relaxations for invest-
ment by non-resident Indians. They were even allowed limited volume of
portfolio investment in Indian companies through the stock exchange from
1982 onwards, although this policy was opposed by sections of Indian in-
dustry. This policy has continued ever since. Secondly, in the early 80s a
new poliry for permitting investment from petroleum exporting developing
countries in some selected industries without necessarily involving techno-
logy infiision was announced.
To sum up. India has traditionally accepted that private foreign capital
can play a limited role and also announced, on the basis of the experience
gained, the various parameters within which private foreign capital both
existing companies and new investments could operate. Indian policy
steered a middle course and avoided both the extremes of a highly romanti-
cised propaganda on the one hand about the so-called valuable role of the
multinational corporations in the development process of the third tvorld,
and on the other a posture of not accepting an5' such role. In that process,
India made a clear distinction between the old colonial period sty'le of
foreign investment and a new type of technology-oriented foreign invest-
ment consistent with the economic goals of the nation. It is only in recent
years that there is evidence of national poliry welcoming foreign direct
investment in general. 1991 policy is fairly liberal in permitting foreign
investment and permits its automatic cntn'with 5l% equity participation in
34 groups of industries. But it will be unfortunate if in that process foreign
investment is indiscriminately allowed in all non-essential activities such as
ice cream and beverages. without being accompanied by rigorous perform-
ance criteria.
RECENT LIBERALISATIONS
In sharp contrast to the pewasive anti-MNC feeling in the world during the
1970s and early 1980s, the outlook changed dramatically in the late 1980s.
All developing and erstwhile socialist countries appeared to vie with one
another in courting foreign direct investment as a means of bringing nerv
technolory investment capital and reducing pressure on balance of pay-
ments.
In-
the
ign
I to direct foreign investment up to 5l%

oj sh,are capital in 34 groups of high priority-industries:
the declaration that foreign- equity proposals need not necessarily
- st by foreign technology agreements;
be
given to foreign technology agreements in

umpsum payment of Rs I crore.
videdrheroreigne-"o,"Jl'ril"ll:nT-fJ"","iitlii,l'.t,'#ffi lo,l:-
eign equity participation:
the announcement that companies rvith foreign equity upto 5l%
- be encouraged to act as trading houses pri'mariiy enlagea in the
will
export business;
the provision for permitting upto 5l%o of foreign holdings in trading
- companies mainly engaged in export business from Indiai
th9 access given to the small-scile industries sector to foreign tech-
-
l919cy tie up and even to limited volume of foreign investmelnt lupto
24%);
- ing
the
ano ;;T:,fi:,H::lfi
Minister for clear_
ing
. Tl.f .are very important sign posts. These neasures together w,ith
the abolition of industrial licensing except in 15 industrles, tn?-iearrction
of the number of industries reserved roi tne state sector from 29 to g
of pre-entrv scrutint. of investment deci_
repeal of the FERA restrictions and the
orvn chronicalll sick public sector enter_
le do open up nell'vista for direct foreign
investmentin India.
They signifl' that India has made virtuail_v a u turn from the negati'e
foreign investment policies that prer,ailed during the last three decades
and
is entering into a foreign investment friendly regime. Gone are the days
of
strict selectivity for permitting foreign investrnent uhjch vyas viewed not
as
a substitute for domestic savings, but onll' as a r.ehicle for acquiring
tech-
nology lvhen a lechnology was needed and could not be acquired-except
through foreign investment. Also, gone are the da_l,s rvhen multinationals
were viewed as camp follor.vers of western colonialisrn no1 esse'tially
interested in the development of the third rvorld countries. but only
in
exploiting their market and cheap labour. Also over is the almost theologi-
cal preference for permitting to foreigners nol more than lTyo of equity and
permitting foreign majori[' orrlf in \:ery very exccptional cases. During
the
Govt. Control Over Foreign Direct Investment and Collaboration I71
1970s India earned a certain amount of notoriety in the global foreign

investment market on account of the FERA (Foreign Exchange Regulation
Act, 1973) exercises when the existing foreign companies were compelled
to go down to 40yo of foreign equity by a variety of means except in some
cases where their engagement in export oriented activities or sophisticated
technology justiired higher level of foreign shareholding. This poliry culmi-
nated in the withdrawal from India of IBM and Coca Cola, two Chair
leaders among MNCs. That lead to a general fcar psychosis for foreign
investment in India. It was on account of this negative policy that the total
volume of direct foreign inveslment i.e.. foreign equity participation in
India increased only marginally from Rs 1.4 billion in 1960-61 to Rs 2.07
billion in 1964-65 and Rs 3.06 billion in 1969-70. Also the share of foreign-
ers in the equiqv of the foreign companies steadily declined. All these are
now things of the past and India has clearly decided to opt for the general
global trend covering both developing countries and former socialist coun-
tries of trying to woe direct foreign investment as a means of accelerating
development efforts and bridging the growing balance of payment difftcul-
ties.
From thc point of view of foreign investors. India is indeed a land of
great promise. The following are some of the positive inducements for
foreign investment in this country.
l) India's huge market potential. Even if we were to exclude from the
currently estimated population of 850 million those who are below the
poverty i.e. around 3O%o or taking a more realistic point of view, even if we
were to assume that only 25%o of the Indian population are able to buy
products of modern industry, that would constitute a market almost equal in
size with the markets of Western Europe and North America. It is observed
that in the long run it is not so much the incentives offered by most coun-
tries as the market opportunities that attract foreign direct investment.
2) The remarkable record of profrtability of the Indian companies in the
private sector, in particular, the so-called foreign controlled companies,
would itself provide suffrcient inducement. The recent studies made by
organisations such as the Indo-US Business Council would provide eloquent
support. According to the study of 34 Indo-US joint ventures in India for the
period 1976-81 the combined sales ofall these companies grow at an aver-
age annual compound rate of l7 .9oh. Net profit grew at 20.3 per cent, profit
before tax at 15.6 per cent, dividends at 14.8 per cent and retained earnings
at 22.8 per cent. Equity capital grew lt an annual rate of 21.5 per cent.
Gross fixed,assets grew at an annual average compound rate of 13.4 per
cent and total assets at l7 per cent. Sonte of these rates were higher than
those of iheir US principles.
3) India's impeccable record of honouring international payment obliga-
tions. Even in her most critical foreigu erchange crises like the one in the
late 1950s or the one duri4g the last one or two years India always honoured
her international payment obligations and never sought to put restrictions on
the right of foreign investor to repatriate the profits earned or to disinvest
whenever he chose to do so. This contrasts sharply with the records of most
other third world countries.
4) The existence of a vibrant private sector in this country is itself an
inducement and a protection for direct foreign investment. There is a solid
industrial base which has recorded an annual growth rate of 8.5olo in recent
years.
5) India has built up a huge and diversified capital market during the
1980s. This market comprising 21 stock exchanges is capable of raising
Rs 10,000 to Rs 15,000 crores a year is also opened to foreign investors to
raise parts oftheir project financing. The country has an impressive savings
record, and a fast growing number of people turning from savers to inves-
tors.
. 6) India is the world's third largest pool of scientific and technological
skill and manpower.
7) O4e of the widespread banking and insurance networks in the third
world.
8) India has developed considerable managerial capability in recent dec-
ades. There is a well-spread system ol'management education which can
compare with the best in the world. and Indian managers have proved their
worth the world over. This, along u'ith lndia's traditional enlrepreneurial
capability, must be considered great assets unlike in most third rvorld coun-
tries.
9) India has been following a stable democratic regime since her inde-
pendence and there is a general rule of law which also means non discrimi-
natory treatment of foreign companies vis-a-vis Indian companies.
All these special inducements must be vicwed along with the general
positive aspects ofthe Indian economy like a strong and vibrant agricultural
sector which showed its resilience even during the drought of 1987, a gen-
eral growth rate of 5.6Yoper annum in the Swenth Plan (1985-90) which is
higher than that of most economies, a fast growing seryices sector which
itself indicates a mature economy and one of the most widespread transport
systems in the third world including the railway system which can perform
fairly efficiently under good management, and dependable private sector
tnrck services.
As against these plus points there are also some negative points.
1) There is a continuing fear of a long lasting negative poliry regime
deqpite the announced liberalisation in recent years and recent months.
There is even now a pervasive xenophobia in some circles, political and
aqidemic, in relation to foreign investment. The recent.embroils over
Effon's Dabhol power project, and the cancellation of Kentucky Fried
Chicken restaurant's in Bangalore and Delhi have underscored this.
2) The fear of procedural difficulties still remains. Many foreign inves-
tors are still not very sure whether what is being brought about by the
liberalised policy announcements will not be negatived by bureaucratic and
procedural obstacles. Many foreign investors may therefore prefer to wait
and watch for some more time.
3) There is a lurking fear of trade union intransigence and industrial
unrest leading to loss ofproduction and productivity and failure to be inter-
nationally competitive.
4) There is perception that in India there is no easy 'exit' for investors,
after they have effected investments. These perceptions even if somewhat
true in the yester-years are fast losing their validity in the changing scenario
of current times. The recent policy and procedural changes have made
things easier, faster and mrrch more flexible than before. India's trade un-
ions have shown responsibility and responsiveness to the needs of the time.
Even most leftist leaders have shown considerable pragmatism. As regards
'exit' there are clear provisions in our Industrial Disputes Act and Compa-
nies Act for 'exit'. These need to be implemented with political will and
economic realism.
India has been passing through a policy of adjustment to overcome the
current strain on balance ofpayment and severe budgetary deficits and the
Government have taken a number of significant steps to restore effrciency
and speed in the economy and to combat inflationary presstrres. Some of
them have already started showing fruits and will no doubt yield good
dividend as time passes, if only the nation is able to withstand the populist
pressure and does not slacken in its grim determination to overcome the
crisis through appropriate adjustments. On balancing the attractions and
disincentives there can be no doubt that India is a very attractive destination
for foreign direct investment, and foreign investors will have no cause for
regret.
Some of the other new poliry relaxations are:
(l) The introduction of partial convertibility of the nrpee for trading
account (60% of the earnings) followed by full convertibility on the
current trading account by the I 993 and I 994 central budgets.
(2) Permitting Indian cornpanies to raise equity capital from international
capital markets and listing shares on foreign stock exchanges. Some
Indian companies have already taken steps to raise bonds internation-
ally and to get its scrips listed on stock exchanges overseas.
(3) A new policy on counter trade which will have a possible list of
items eligible for counter trade as against the negative list of items as
at present.
(4) Permitting foreign curency non-resident accounts as a collateral by a
third party for obtaining loan frombanks and lrxtiUrtions.
1E0 Government and Business
(5) Automatic clearance for foreign investment proposals in 14 days.

(6) Foreign firms will be allowed to participate in mutual funds in India.
(7) An announcement that the present requirement for foreign investors
to hnance the import needs of projects in India through their equity
to last only during the present critical balance ofpayments crisis and
is likely to be removed soon.
(8) Allowing foreign provident funds, pension funds, trusts and similar
financial bodies to make portfolio investment in Indian companies.
As a matter of fact foreign institutional investors have become signif-
icant portrolios investors in India accounting for an aggregate funds
folio of U.S. $ 1.2 billion in 1993.
(9) Repeal ofthe 1973 FERA changes on Jan. 8, 1993.
(10) Massive reduction of customs duties and withdrawal of import re-
strictions. But while this would no doubt encourage foreign compa-
nies, this may also harm India's economy in two ways viz by hurting
India's manufacturers and by encouraging foreign companies to im-
port rather than invest.
These are highly significant concessions. Overnight all the notorious
restrictions ofthe past on foreign investment seem to have been cleaned up
by a giant broomstick, and in that process attempts have been made to
integrate Indian economy with the global economy in a way it never was
after the 1950s. The massive overhaul of the FERA guidelines, the bugbear
for foreign companies of yester-yeaps, will remove the procedural irritants
and impediments which have obstructed foreign direct investment and sti-
fled the operation of the foreign controlled Indian companies for well over
two decades. Foreign investors can take full advantage of these concessions
to submit investment proposals and ensure speedy completion of these
projects within a short time to avoid cost and time overrun. In that way they
will be able to take full advantage of the huge domestic market and also the
potential for larger exports from India. Foreign investment in India so far
has been abysmally low, not because of the lack of opportunities, but be-
cause ofthe fact that India never encouraged foreign investment as a part of
her planned economic development and by and large relied on domestic
savings. India does not even figure in the IMF list of countries with foreign
investment. That policy has outlived its time and therefore India for the first
time is going all out to woo foreign investment. The prospects of her suc-
cess will also be affected by the currently prevailing recession in most of
the western countries, and the fact that on account of the recessionary
conditions the great majonty of the multinational corporations may not just
have enough of investible surplus. India should therefore tap small and
medium companies as well as also the trusts and pension funds etc. which
often have enough resources for investment and who do not seek to control
the companies whgre they invest, h look al them only as imrcsfment
Govt. Control Over Foreign Direct Investment and Collaboration l8l
opportunities for steady and handsome returns. Fund Managers for such
funds need to be specially addressed to. But for the general recessionary
conditions there is no doubt that India could u'ell emulate the performance
of several countries like China, Indonesia, Thailand, Singapore and Malay-
sia in attracting sizeable volume of foreign investment.
The question now is whether the recent and on-going policy initiatives,
and reforms will succeed immediately in renewing the confidence of foreign
investors and MNCs and bring in substantial investment flow. Clearly, the
success of these policies will depend on the sincerity with which they are
given immediate effect, the skill with which they are marketed abroad and
the speed with which the bureaucratic and procedural bottlenecks are re-
moved. Deeprooted among foreign investors and bankers is a fear of the
Indian bureaucracy and the image of India being a difficult country. Unfor-
tunately there are even in the recent announcements aspects which conjure
up unpleasant visions of bureaucratic skulduggery. Thus the statement that
dividend repatriations from the new investments will have to be covered by
exports earnings although confined only to the industries specified in Ap-
pendix 3 of the industrial policy statement may definitely create some fear.
Similarly, the requirement of the import of capital goods having to be
financed entirely from foreign equity is also irksome. These conditions are
in a way not different from those which the Asian tigers or even China have
been insisting upon for years. But in the case of India these requirements
bring in fear of having to face interminably the bureaucrats, a prospect
which the foreign investors detest. It is common knowledge that payment in
the case of foreign investment only takes the form of repatriation of certain
percentage of the profit earned by an enterprise after it has started produc-
tion, reached the stage of commercial profitability and declared dividend.
That would normally happen after at least 5 to 7 years and well after the
foreign investment has already been unpacked and its components like for-
eign capital, management, technology and marketing skill have been ab-
sorbed in the country. This repayment will be normally much less costly
than the repayment of international commercial borrowing. It should there-
fore be appreciated that FDI in the long run is much less expensive and
much more productive than commercial borrowings. In Indian case divi-
dend remittance by foreign companies have always been very minimal ris-
ing from Rs 19.40 crores in 1965-66 to Rs 85.50 in 1986-87 i.e. less than
l% of the foreign capital invested. If this is the record and if India's main
conc€rn is to ease the current pressure on balance of payments by signifi-
cant inflow of FDI, it is not understood why it is necessary to put such a
stipulation which is neither necessary, nor desirable. So also is the stipula-
tion about import of capital goods being financed entirely from foreign
equity. Many investment proposals may not require the import of capital
goods. In such cases such stipulation will be viewed as an unnecessary

irritant. There may be many cases where additional imports can be financed
by foreign investors from foreign loans. Such investment proposals with
foreign equity holding up to 5l% supplemented by foreign loans should also
quahry for automatic clearance without the stipulation that the foreign in-
vestors cover the import of capital goods from their share of the equity.
These are some of the irritants that need to be removed if India is to make a
poliry package which is firlly attractive to foreign invdstors. A little modifi-
cation can bring in a lot more investment and substantially reduce pressure
on the Balance of Payments.
India has a very large degree of absorptive capacity for FDI. The volume
of FDI in India is only around Rs 3 billion which works out to l% of the
GDP and I to 2oh of the country's aggregate corporate equity capital. India
is not wen included in the IMF list of countries with foreign investment.
Also, fresh foreign investment has been one of tlre lowest in the world
starting with 36.14 million rupees in 1969 reaching 88.26 million in 1980
and only reaching the somewhat respectable figure of 2391.21 in 1988 and
3166.65 in 1989. Even that declined sharply in 1990 by 48% at 1283.21
million rupees. This was on account of the political uncertainty that pre-
vailed during the year and the fact that the still bom foreign investment
policies of the two successive Governments also kept foreign investment
out. Also there was no improvement during the caretaker Government dur-
ing the first part of 1991. Thus on the whole fresh foreign investment in
lndia from 1969 to 1990 aggregated only to the level of Rs 13400.08
million, a very modest figure compared to the record of many of our
neighbours like Sri Lanka or several other Asian countries which recently
attracted impressive foreign investment. China attracted fresh foreign in-
vestment of the value of US $ 6 billion i.e., several times the aggregate
foreign capital investment in India in 6 years between 1979 and 1986.
Indonesia attracted $ 4.9 million in 1988, and $ 4.8 million in 1989. A lot
more of special promotional efforts and hard-sell would be necessary for
undoing the special negative image that India has in the global foreign
investment market. India needs to do some vigorous global marketing to
attract FDI and show some spectacular and visible speed in clearing long
pending invesfinent proposals. The demonstration effect of such qpeed is
expected to show foreigrr investors that the changes are really not make-
beliefs, but do signi$ a new era of pragmatism and reforms. It is understood
that the RBI, under the new policy of'automatic approval scheme, the FIPB,
and the Secretariat for Industrial Appro-vals have by 31st March, 1992
cleared investment proposals of the value of Rs 3 98 qore, Rs 5 I I crore, and
Rs 348 crore respectively. The erstwhile Foreign Investment Board has now
been abolislreci so that new investors only need to go either to the Secretari-
Govt. Control Over Foreign Direct Investment and Collaboratior 183
at for industrial approval or to the newly created Foreign Investment Promo-

tion Board. In normal cases investors are not even required to go to the
Governmen! but Resewe Bank of India has been authorised to clear all
normal foreign investment proposals falling within the parameters of the
announced policy. According to the available figures the actual inflow of
foreign investment after l99l reforms amount to over Rs 4000 crores (351.4
in 1991 Rs 700.2 in 1992, Rs 1800 in 1993 and 875 crores in 1994.
Annexure I after this chapter gives a region-wise break-up of the foreign
investment approved since 1991.) as against Rs 15000 crores which has
been approved in the aggregate. This is substantially higher than India's past
trends, but quite modest in comparison with the figures for China, Malaysia
or Thailand. The procedural delays in the case of U.S. telecom giang
Motorola whose 1991 application took nearly three years for final approval
illustrated the tortuous nature of the Indian procedural and legal system.
India needs to do much more than what she has done so far in scrapping her
notorious procedures and administrative practices in the interest of high
speed decisions. The current controversy over Emon's Dabhol power
project shows the need for greatil transParency and secondly, tlte problems
that political factors can sometimes create when a new political group com-
ing to power insists on reopening a contract entered into by a prwious
government. All this can create much uncertainty in the mind of foreign
investors.
In permitting FDI a number of developing countries have in recent times
shown much innovativeness. Venezuela used foreign investment in combi-
nation with the policy of privatisation of state-owned enterprises to improrrc
her BOP position. She gave foreign investors shareholding in dsmestic
enterprises as against foreign funds inflow. Foreigners acquired control over
these enterprises at depreciated prices, but they also brought technolory,
marketing and management skill along with investment capital. Thus both
the foreign investors and the host countries gained. A number of Latin
American countries followed this practice. Malaysia in trying to make use
of foreign capital for BOP support even curtailed her traditional domestic
@umiputera) equity requirenent in joint ventures. Korea reduce{ her inter-
nal debt in two years by l/3rd by following a liberal foreign investment
policy. All these developments have lessons for the Indian situation. A large
munber of India's public sector enterprises need induction of capital, tech-
nology, new products and marketing skill. FDI could well be utilised with
this objective in view.
The foreign investment market in the world is huge. In 1990, the total
direct cross-border investment in the world roughly amounted to $ 198
billion. It has grown annually at more than 30 per cent in recent years Tnre,
tlrat nearly '70Yo of it was confined only to the developed countries, but if
/
' 184 Government qnd Business
India could attract a fair percentage of whatwer portion went from the
dweloped i.e., around $ 65 billion, ttat
itself will Accord.ing to the present fig-
utes, only hed the shores of India. whiie
there is no reason why we should not aspire to achiwe the rate at which
china or Indonesia attracted foreign investment (china attracting $ 6 billion
between 1980 and 1986 and Indonesia attracting $ 4.g billion in both lggg
and 1989), even if we succeed in getting a I per cent share of the world
queue. But it is never too late. And given the attractive conditions that India
offers, if only she can remove the fears and prejudices which haunt foreign
investors fear of the procedure and of hostile policy she can easily
- -
attract massive investment funds. This will be true even if we take into
account the current recessionary conditions in the global economy, in par-
ticular the economies of the developed countries which generate most of the
foreign direct investment. Indeed, taking into account all the pluses and
minuses of investment in India, there is no doubt that, for foreign investors,
investing in India can never be a risk. Not investing in India can be one
from their corporate point of view in the long run. Interestingly much more
foreign funds are coming through the route of portfolio investment in the
stock market by foreign financial institutions rather than through foreign
direct investment as such. These institutions are reported to have brought
over $3 million so far for portfolio investment in India. In the year 1995,
despite the depression in the market their investments in each month was
reported to have been hovering at around $ 50-60 million dollars.
Before we leave the subject, it is important to note in passing that during
the last two decades a considerable volume of international attention has
been given to the role of the multinational corporations, some of their
controversial activities as also some of their strong points, the issue of
safeguarding the interest of the developing host countries and the need for
multilateral action for regulating the operations of MNCs. one of the earli-
est exercises was the adoption of a code of conduct for trans-national corpo-
rations by the OECD. Then, following a report submitted by the IJN group
on MNCs headed by L K Jha (1975) in the wake of the controversy over
the interference in the internal affairs of Chile by the ITT, the U.N. decided
to establish a commission on Trans-national corporations to act as the focal
point within the U.N. system for comprehensive consideration of issues
relating to Trans-national corporations. A U.N. Centre for TNCs was also
set up and a goup was constituted to formulate a code of conduct for TNCs.
Although the group's deliberations remained inconclusive till the very end,
the negotiations in corurection with the draft code of conduct covered very
Govt. Control over Foreign Direct Investment and collaboration 185
wide grounds relating to both positil'e and negative effects of the operations
of TNCs, the need for the TNCs respecting the political system and policies
of the host countries and for the host country evolving pragmatic policies
and administrative practices in which the positive factors in the operations
of the TNCs are encouraged and the negative factors are eliminated. The
Commission also organised many progranmes for improving the negotiat-
ing capability of the dweloping countries in dealing with TNCs and to
evolve a comprehensive data system on the operation of the TNC5. There is
no doubt that all this created much awareness all over the world regarding
the role of foreign direct investment, its beneficial aspects and also the
uqdesirable aspects, as also the need for the host countries creating their
own poliry and procedural system which could promote the former aspects
and checkmate the latter aspects.
References
1. For a lucid readable account see Louis Tumer, Multinational companies
countnes.
2. Reserve Bank of India-Census of India's Foreign Liability and Assets as
on March 31, 1987 published in RBI Bulletrn, April 1991. Two tables
given here are obtained from this study
3. ihese ligures are mostly obtained from Indian Journal of Public Admini-
strationlyoL XX, July-Sept. 1974, Article by T.N Cru.n.nvrnt entitled
order to ensure its most optimum use'

5. This has been very forcefully propounded by the renowned economist
Raul Prebisch who has asserted that far from helping developing coun-
distribution.
6. It replaced the relelant Defence of ladia Rules, 1939 which for the fnst
time introduced foreign exchange cortrol in India'
186
Government and Business
8.
9.
10.
Y!UuiS, Collaborations in Indian Industry,survey Report, 196g.
11. Foreign
\B^l Collaborations in Indian Induitry, Second 'S"*V n"p..t,
1974.
12. Kidron, op. cit., pp.250-51,266.
13.
t4.
15.
16.
Chapter Eight
Capital Issues Control
Until its abolition in lgg2capital issues control was a major instrument of

Central Government's intervention over corporate business. With the repeal
ofthis Act the issue of securities and their pricing have been placed under the
discretion of companies subject to guidance from merchant bankers who will
operate with recognition from the Securities & Exchange Board oflndia and
within SEBI's guidelines. Also the prospectuses to be issued by companies
before capital issues are compulsarily required to be vetted by the SEBI.
Capital Issues Control was introduced at first under the Defence of India
Rules 1943, purely as a war-time measure, with a view to restricting the use
ofscarce resources for non-essential pu4loses, and their diversion to the more
essential, primarily defence-oriented purpose. After the war this control was
retained as a purely temporary legislative measure in 1947 and was continued
from year to year. It was only in 1956 that the capital Issues control Act was
permanently put on the Statute Book. Another law of the same year closely
ielated to the operation ofcapital issues control was the Securities Contracts
Regulation Act (1956) which governs the working of the stock exchanges.
The main object of capital issues control was to ensure that investments in all
sectors of economy are according to the priorities laid down under the
national policy. Indeed prior to the MRTP Act, 1969, this was the principal
tool in the hands of the government for regulating the financial aspects of
various projects for which industrial licences were being issued.
This control was administered through the Ministry of Finance @eptt. of
Economic Affairs) under which the Central Government appointed the Con-
troller of Capital Issues who was invested with the powers conferred on the
Central Government by this Act. The preamble to the Act laid down that its
to
object is- iss been
defined as of sh or
othemrise, of ses of
converting partly paid up shares into fully paid up shares, or increasing the
part value of shares, already issued."
The Purpose of Capital Issucs Control

The primary object of the Act was to ensure that investments are channel-
ised into priority areas essential from the development point of view, and
thus to prevent to the extent feasible possible misdirection of investments.
Another major object is the maintenance of a healthy capital narket. Regula-
tion of the capital structure of nerv and existing companies is also an impor-
tant tool to discourage undesirable practices in the capital market. In foster-
ing the growth of a healthy capital market the government has also a role in
protecting the interests of nevy investors by appropriate securiq, of the terms
of capital issues. Both the Capital Issues Act 1956, and the Securities Con-
tracts Regulation Act 1956 recognised the trvin roles of the state as promoter
of the capital market and protector of the shareholders. The necessity for
control of capital issues arose also in the case of mergers and amalgamations
as it provided the necessary instruments to supen'ise thg capital reorganisa-
tion plans for mergers. This aspect acquired special importance after the
advent of the MRTP Act which aimed at reducing concentration of economic
porver. It also plaved a crucial role in connection with the capital restructur-
ing of the FERA companies during the years 1974-82 through the issue of
fresh shares or the dilution offoreign shareholding othenuise as required by
the Central Government under the FERA guidelines. In many of these cases
there were bonus issues bt'companies g'ith large reseryes and these rvere also
governed under this Act. Capital issues control covered initial issues of
capital (shares and bonds) by joint stock companies. further issue of capital
including rights issues, fixation of premium on high value shares in cases of
further issues and the issue of bonus shares through the capitalising of
reserves. central Government used to announce detailed guidelines for each
of these activities. and companies were required to apply to the controller of
Capital Issues for approval.
Shares covered by public issue u'ere listed with the Stock Exchange. The
object of listing is that the shares are quoted on the Stock Exchange and
become freely transferable. The intending seller finds it easy to sell shares if
he so desires at the quoted prices and the prospective buyer also finds it easy
to acquire them. It facilitates the transactions in purchase and sale of shares
and consequently inspires confidence among the investors. Necessary guide-
lines were laid down which inter alia provided that the promoters' holding
including their friends, associates and interconnected companies shall be
limited to 40 per cent of the equity.
If there lvas any equity panicipation by foreign collaborators the com-
bined holdings of the Indian promoters and foreign collaborators were not
exceed 66.6 per eent and the balance was to be offered to the public.
Sometimes the financial institutions made it obligatory on the promoters that
their contribution in thil project should not be less than a prescribed Dropor-
Capital Issues Control 257
tion (say 15 per cent) ofthe total capital out-lay and, while prescribing this
figure, the financial institutions ensure that it would not hurt the 'listing'
guidelines under which the promoters' holdings are limited to 40 per cent. A
firm allotment in favour of public financial institutions was permissible
under the listing guidelines. No premium was allowed on the first issue of
shares.
RIGHTS ISSUE
When an existing company wants to issue additional shares in order to

finance any expansion or diversification prograntme, and limits the offer to
its existing shareholders, such issue of capital is known as rights issue.
Whether rights issue rvas to be allowed at par or at premium, was decidedby
the Controller on the merits of each case. The request for a premium was
examined carefully after consideration of several factors such as the net value
of the assets, the market value, profit-earning capacity, future growth and
prospects, the record'ofdividends, etc. The break-up value ofthe company's
share was worked out and a premium for the new shares fixed on that basis.
From l960s onrvards in the case of foreign majorityt companies rights issues
lvere normally allowed only to Indian nationals. When a company proposed a
public issue, the Controller apart from satisfing himself about the objects
behind the issue also ensured that the proposed public issue had been ap-
proved b)'the shareholders of the company through a resolution in a general
meeting in pursuance of S: 18 I of the Companies Act.
BONUS ISSUE, 1981
Under the Capital Issues Control Act, the capitalisation of free reseryes of a
company by the issue of the Bonus shares to the share-holders was allowed.
Detailed guidelines were issued by the Government for such bonus issues, the
revised guidelines on bonus issue announced in August, 1981 were in force
till t992.
APPLICATION FOR DEBENTURES ISSUE
Applications for issue of debentures were examined with reference to:

(a) purpose ofthe issue,
@) equity-debt ratio,
(c) adequary ofsecurity, and
(d) whether the company would be able to service the debentures without
difficulty.
In order to revive the debenture market as a secondary source offinance
for industry Central Government announced,new guidelines for public de-

benture issue (vide press note daled 27th October, 1980). The ceiling of
interest rate was raised from 11 per cent to i3.5 per cent on secured public
debenture. In order to enable companies to raise more funds through deben-
tures the debt-equity ratio for this purpose has been raised from l:l to 2:1.
The facilities were available to all companies listed with stock e.xchanges.
Permission was also required for the issue of convertible bonds and
debentures. In such cases the time when the debenture-holders were to have
the option to convert debentures into'equity and the ratio at which such
conversion shall take place would be indicated at the time of the issue.
Permission under the Act was also necessary if a part of the debenture or any
loan was to be converted into equity.
Since 1980 there was a growing trend for issue of convertible bonds or
debentures by established companies. These bonds carry the usual rate of
interest on debentures in the short run and become convertible either wholely
or partly into equities after a certain number of years at a price to be approved
by the Controller of Capital Issues in advance. These convertible bonds some
of which were remarkably successful in the 80s appeared to set the pattern for
the future.
In a further bid to make debentures attractive. to promote a secondary
market in debentures and tb induce companies to use debentures for project
financing as lvell as for working capital, the government issued a revised set
of guidelines on 17.4.1982. These guidelines made a distinction between
corn,ertible and non-convertible debentures in certain respects, e.g. rate of
interest, premium on redemption. The ceiling for interest rate on non-con-
vertible debentures was raised to 15 per cent per annum, while for converti-
ble debentures it was retained at l3-ll2 per cent. Further abuy-back guaran-
tee was provided by the financial insiitutions through the concerned company
after one year of the issue of the non-convertible debentures.yet another
incentive was providing a discount of 5 per cent of the issue price for the
redemption of the non-convertible debentures at the time of redemption. All
these incentives led to an unprecedented upsurge for non-convertible deben-
tures. While convertible debentures accounted for the greater part of the
capital issues during the period 1980 and 1982, non-convertible debentures
)ecame the major instrument after 1982. Many conrpanies revived huge
volumes of capital including one issue of Rs 100 crores by issuing non-
:onvertible debentures. A secondary debentures market has indeed become a
eality.
The Central Government consolidated and rationalised the debenture
3riidelines in 1984. A set of guidelines were also issued for the issue of bonds .
rr debentures by public sector undertakings in 1985.
Capital market was, by ahd large, in a state of boom during the 1950s
rllowing the rising tempo of industrial growth. If the funds raised from the
- capital market declined after the mid 60s, the explanation lies in factors such
as deterioration of the investment climate, the hghly restrictive industrial
licensing policies, the regulatory legislations, such as M.R.T.P. Act, the ban
on forward trading in the stock market in 1969 and the restriction on payment
of dividend in 1974. The revival of the capital market began in the late 1970s
with the new issues made by the FERA companies which were forced to
dilute their foreign shareholding. It entered into a real boom from 1980
onwards.
Indian capital market had.an unprecedented and phenomenal quantum
jump during the period 1980-90. Indeed, there would be few comparable
developments in our economic development annals after independence. Be-
tween 1947 and 1949, Indian companies annually raised only Rs 58 crores on
an avetage. But starting with Rs 120 crores in 1980, this figure jumped to
about Rs 1,000 crores in three years time and it is now almost reaching the
annual figure ofRs 25,000 crores. There has been both a deepening and a
widening of shareholding structure. Our capital market from having been
confined to only the cities of Bombay, Calcutta, Delhi, Madras and
Ahmedabad now extended to many newer areas of the country and has also
reached new non-traditional sections, such as agriculturists, the middle class
investors and the non-resident Indians. As against only about 5 to 6 stock
exchanges which operated a few years ago, to-day they are 23 ofthem. In the
olden days, an issue of Rs 2 or 3 crores was considered a big issue, but in
recent years there have been any number of cases of companies raising
staggering volumes of thousands of crores in single issue. At the same time,
many more companies have become broadbased. While until l98l the com-
pany with the largest number of shareholders had only about 80,000 of them,
today there are any number of companies with several lakhs of shareholders.
In a way, these Indian companies, widely held and professionally managed,
are becoming similar to the modern public corporations of the west. This
happened largely because of the general improvement in the investment
climate and a consciously thought government policy, relentlessly pursued
from 1980 onwards, of compelling M.R.T.P. companies, whenever they
sought permission for expansion, to raise substantial portion of the cost of the
project from the market through shares or debentures rather than relying
almost wholly on long-term.institutional finance as they had been doing till
then. The demonstration effect of several such cases of successful public
.issues during the 1980s and 1990s was phenomenal. Convertible debentures
became the main instrument of these issues. It gave the investors both a good
return from the beginning and the certainty of conversion into risk capital by
ihe time the company will have reached the stage of profitability. Convertible
-debentures,
therefore, became a highly popular instrument and mainly did the
trick. From 1982 onwards, after the government had arnounced a package of
policies to make non-convertible debentures attractive, non-convertible de-

bentures also became popular. A parallel market in debentures was thus
created side by side with the share market. Many more companies, aware of
the newly found strength of the capital market, and the fact that public
response was expected to be overwhelming if they had business reputation
and if the project in question was sound, now went to the public, and the
public responded overwhelmingly. A number of industrial houses which
throughout the 70s had been sitting on the sidelines and not gone in for any
expansion for fear of the convertibility clause also followed suit with new
projects and concommitant public issues. Indeed, a new horizon had been
created for the corporate sector. At the same tir4e, pressure on the Govern-
ment financial institutions substantially eased, as companies were no longer
dependent on them for raising their requirement of long term capital.
Encouraged by the growth of the capital market, the government also
permitted public sector companies to revise resources through non-convert-
ible debentures. Such debentures have been given some fiscal concessions,
and were also listed on the stock exchanges. Many companies, e.g. LT.I.,
H.M.T. successfully floated such debentures. The guidelines issued by the
Ministry of Finance regarding floatation of Bonds by Public Sector Undertak-
ings in the Telecommunications and Power Sectors in September 1985 are
significant. Following this several public sector enterprises went to the capi-
tal and raised non-convertible bonds including tax-free ones. It should be
highlighted that in the past-1991 scenario of globalisation many Indian
companies have successfully tapped the overseas capital market by issuing
global depository receipts (GDRs) which are regularly quoted and traded in
the leading world stock markets.
Capitat Issues Control Abolished

Capital Issues Control became one of the hrst casualties of the Indian
Government's economic reform and restructuring prograrnme of l99l-92. It
was felt that the phenomenal growth of the capital market, the advent of the
SEBI and the burgeoning of the merchants banking had made the capital
issues control apparatus redundent and counter-productive. The Central
budget for 1992-93 announced the decision to abolish capital issues control.
Shortly after this, by Ordinance No. 9 of 1992 followed by a one line
legislation, the Capital Issues Control Act was repealed on May 29,1992 and.
companies were declared as competent to issue capital including rights issues
and bonus issues provided they did so through merchant bankers within thg
guidelines announced and subject to the superintendence and monitoring by
the SEBI. A copy of the press release and of the announced guidelines for-
disclosure and investor protection is given in the annexure to this Chapter. In
lheory the issue of shares and their pricing have been freed. But companies
Capital Issues Control 26I
have to go through the merchant bankers who have been placed under the
S.E.B.I's supervisory authority. Also, companies must comply with the
S.E.B.I's disclosure and investment protection noflns as given in its an-
nounced guidelines. They are also required to get the draft prospectuses
vetted by the s.E.B.I. The sudden abolition of capital issues control, in
particular permitting companies to price their own shares, led to a certain
amount of abuses by unscrupulous company promoters and merchant bank-
ers. Under the C.C.I. guidelines the premium for a share could be fixed only
on the basis of the company's track record (net asset value and profrtability).
But in the new environment, many companies, even when their reserves and
dividend records did not justiS it, and even new companies fixed up high
premia on the basis of projected growth and profitability. Gullible investors
were simply duped. As an inevitable reaction the SEBI appointed a commit-
tee (the Malegam Committee) in order to recommend corrective measures.
This report has inter a/ia suggested the forbidding of premia on the basis of
projections. This may mean the return of the c.c.I. guidelines in a different
form.
Apart from the merchant banking, another beneficiary of the new system
of free pricing of shares was mutual funds industry. Under the new directions
ofthe SEBI, between 1991 and 1995 the percentage ofshares for the general
public in a new issue was drastically reduced and the percentage ofpreferen-
tial allotments to corporate bodies sharply raised. This considerably helped
the growth of mutual funds. Available statistics indicate that the aggregate of
such schemes has registered an average growth of 3.89 per cent in 1994'95
over 1993-94 for all schemes against a growthrate of minus 13.71 per cent
for the 30-share Bombay Stock Exchange Sensitive Index (Sensex) and
minus 12.24 per cent for the 100-share national index. Thus mutual fund
industry initially outperformed the market indices spectacular$ in generally
depresied conditions, but thereafter became a victim of the generdl depres-
sion of the stock market from 1993 onwards with sharp fall in the quoted
value of their shares. But the sEBI',s most recent decision to raise the
percentage reseryed for the general public in all public issues will affect the
mutual funds. Apparently SEBI is trying to return to the old C.C'I' regime's
preference for larger share for the public. This must be considered a welcome
development.
\
263
Capital Issues Conlrol
Exchange Board ofIndia bcfore a public issue is made.

No private placement of the promoters shar.e shall be made by solicitation of
share contribution from un-related investors through aqr kind of market interme-
diaries. The shares of the above companies can be listed on either the over the
Counter Exchange of India or any other stock exchanges.
B First Issue b1' Erist.ng Private/Ckrsely Held Companies
i) Such cornpanies u'ith a three year track reoord ol consistent prolitability shall
be penniticd to freely price the issue.and list their securities on the stock
exchanges
ii) Not less than 20o/o of the equiq' should be otlered-'
iii) The drall prospectus u,ill be vetted by SEBI to ensure adequacy of disclo-
sures.
ir') The pricing rvould be detcrmincd b1' the issuer and the lead managers to ihe
issue and u,ould be subject to specihc disclcsure requirements including:
a) disclosure of the net asset ralue of the compan)r as per the last audited
balance sheet
b) justitication for the issue price.
C. Public Issue by Existing Listed Companies
a) These companies rvill be allorved to raise tiesh capital by freely pricing their
further issues.
t) Pricing - The issue price w'ill bedetermined by the.issuer in coltsultation with
the lead manager(s) to the issrie
c) Disclosures
(i) The draft prcispectus rvill be vetted by SEBI to ensure adeqriacy ofdisclo-
sures
(ii) The prospectus or ofl'er documents shall contain the net asset value ol the
' compatry and a justitication for the price of the issue.
(iii) High and lorv price ofthe shares for the last 2 years.
D. Underwriting
(a) Underwriting is mandalory'for the full tSsug and minimum requiremelt of
900/o subscription is also mandatory for each issue of capital to public. Num-
ber ofunderwriters would be decided by the issuers
o)
subscription if the above conditions are rrot met.

(c) The lead manager(s) must satisfu themselves about the net worth of ths
underwriters and the outstanding commitments arrd disclose the same to
SEBI.
(d) The undernnitting agreements may be frled with the Stock Exchanges
264 Government and Busine.ss
E. Composite issues
Issues to. the public by existing company can be priced differentially as

compared to issues to the rights shareholders.
F. Fulll' convertiblc Debentureslpartiaily convertiblc Debentures/Non-con-

vertible Debcntures
a) Issuc of FCDs having a oonversion period more than 36 months u,ill not be
pcrmissible, unless conr,ersion is made optional u.ith "put" and ..call" option.
b) compulsory credit rating will be required if conrersion is made fbr FCDs
after 18 months.
c) Premium amount on conr,ersion, time of con'"'ersion, in stages. if any, shall be
'- -'pre-determined and stated in the prospectus. The interest rate ibr above
debentures vvill be freely determinable b1.the issuer.
d) Issue of deb months or less are exempt from the
requirement ure Trustee or creating a Debenture
Redemption cases, the names oflhe debenturc
trustees must be stated in the prospectus and DRp. u'ill be created in accor-
dance with Section (N. l) The trust deed shall be executed u,ithin six montlrs
ofthc closure ofthe issue.
t,) ArDi con'r,ersion in part or ra'hole of the debenture u'ill be optional at the hands
of the debenture holder, if the conversion takes place at or atier lg months
from the date of allotment, but before 36 months.
f) In case of NCDs/PCDs credit rating is compulsorl,where maturity exceed lg
months.
g) he PCD shall be pre-deter-
amount, period of maturity,
h) 'il'JT3$'l"t3JTf;li'li;
traded and procedure for their purchase on spot trading basis must u" ai.-
closed in the prospectus.
In case, the non-convertible portions of PCDA{cD are to be rolled over w-ith
or u'ithout change in the interest rate, a compulsorl' option should be given to
those debenture holders u.ho vyant to withdraw and encash from the de-benture
programme. Roll over shall be done only in cases where debenture holders
hale sent their positive consent and not on the basis ofthe non-receipt oftheir
negative reply.
i.) -convertible portion of the pCDs, fiesh
a period of six months prior to the due
d to debenture holders before roll over
and fresh trust deed shall be made.
k) Letter of informalion regarding roll over shall be vetted by SEBI with regard
to the credit rating, debenture holder resolution, optiofr for conversion and
such other items which SEBI may prescribe from time to time.
Thr disclosures relating to raising of debentures will contain, amongst other
things, the existing and future equity and long term debt ratio, servicing
Capitat Issues Control 265
behaviour on existing debentures, payment of due interest on due dates on

terms loans and debentures, certificate from a.financial institution or bankers
about their no objection fbr a second or pari passtt chatge being created in
favour ofthe tnrstees to the proposed debenture issues.
m) SEBI may prescribe additional disclosure requirement tiom time to time, after
due notice.
G. Nerv Financial Instruments
Issucr of capital shall make adequate disclosures regarding the terms and condi-
tions, redemption, ser:urity, conversion and any other relel'ant t'eatures of the
instruments such as Deep Discount Bonds, Debentures rvith Warrants, Secured
Premrum Notes etc., so that an investor can make reasonable determination of the
risks, returns, saf-ety and liquidity of the instruments The disclosures shall be
rettcd by SEBI in this regard.
H. Resen'ation in Issues
a) Un-reserved otl'er of equitl' or instruments convertible into equiq' shall not be
less than the minimum required for listing purposes in case of ncu' issues
made eiiher by the ne\r' company or by the existing closell' held/private
cornpany going public
b) In case of issues of capital by nerv companies, resenations for ernployees of
new companies, promoting companies, associate companies, working Direc-
tors on a suitable percentage is permissible.
c) Shareholders of group companies in case of existing companies can be ofl'ered
capital on a preferential basis.
d) Shareholders of promoters companies shall also be eligible fbr pret-erential
allotment.
e) Resenations tbr NRIs shall be according to the schemes prescribed by RBI
from time to time.
l. Deployment of Issue Proceeds

a) In case of issues, where on application and on allotment an amount together
exceeding Rs. 250 crores is raised, the issuer u'ill voluntarily disclose and
make arrangements for the use of proceeds of the issue as per disclosure to be
monitored by one of the financial institutions. A copv of their monitoring
report shall be filed with SEBI by the institutions and by the company for
purposes of record.
b) In issue ofthe above size and beyond, the amount to be called up on applica-
tiony'allotment and on various calls should not exceed 25%o oflhe total quan-
tum of issue.
J. Minimum Interval Time Between Two Issues
a) No bonus shall be made within 12 months of any Public/Rights issue'

266 Government and Bttsiness
b) The promoters shall bring in their capital in full befbre public issue.
c) The capital issued should.be made fully paid up within 12 months from the
date of issue
K. Emplol'ee Stock Option Scheme

This is a voluntan, scheme on the part of the cornpanl, to encolrage employees to
hale higher partir:ipatiorr in the company. suitable percentage o1'reservation can
be made by the issuer fbr the ernplovees of his cornpanY or the promoters
company as the need may arise, Reservation should not be more rhan 5o/o.
Equitable distribution of shares among the emplol,sg5 r.r'ill contribute to the
smooth rvorking of the scheme. The issuer may like to hare non-transferabilitt, at
his discretion in nerv issues. In other cases, employees' participation upto 5,%
(maximum 200 shares) shall be non-transferable fbr a period of 3 years.
L. Promotcrs' Contrihution and Lock in Pcriod

a) Equity capital to be subscribed in any issue to the public by the promoters i.e.
those described in the prospectus as promotcrs, directors, frienas, relati'"'es
and associates should not be less than25%o ofthe total issue ofequity capital
upto Rs. 100 crores and 20o/o for the issues above Rs. 100 crores. In the case of
FCDs. one third of issue arnount should be contributed by promoters, direc-
tors, friends, relatives and associates b1'u,ay of equiq,betbre issue is made. In
the case of PCDs. one third of the convertible portion shourd be brought i'as
contribution of promoters. directors, friends, ielatives and associates betbre
issue is made. Minimum subscription by each of the friends/reratir,'es and
associates under promoters quota should not be less than Rs I lakh,
b) This promoters' contribution shall not be diluted fbr a lock in period of 5
1,ears
from the date of conunencement of the production or date of allotment
whichever is later. Promoters must bring in their full subscription to issues in
advance before public issue.
c) All firm allotmc'nts, preferential allotments to collaborators, shareholders of
promoters companies whether corporate or individual shall not be transferable
for three years from the date of the commencement of production or date of
allotment u,hichever is later.
d) The share certificate issued to promoters, friends, relatives and associates etc.
should carr1, the inscription, "not transferable" fbr a period of 3 or 5 years as
may be applicable from the date of conunerrcement of production or date of
allotment whichever is later.
M. Bonus Shares
Subject to the proviso to Sec J(a) above, the company shall, while issuing
Bonus Shares ensure the following:
a) the Bonus issue is made out offree reserves built out ofthe genuine profits or
share premium collected in cash only
b) resen'es oreated by revaluation of fixed assets are not capitalised.
26',7
Capital Issues Control
c) the Development Rebate Reserves or the Investmenl Allowance Reserve rs

considered aS free reserve for the purpose of calculation of residual reserves
test only;
d) all contingent liabilities disclosed in the Audited Accounts which have bear-
ing on the net profits, shall be taken into account in the calculation of the
residual reserves;
e) the residual reserves after the proposed capitalisation shall be atleast 40 per
cent of th'e increased paid-up capital:
0 30 per cent of the arerage profits befbre tax of the company for the previous
three years should yield a rate of dividend on the expanded capital base ofthe
company at 10o/o',
g) the Capital Resenes appearing in the Balance Sheet of the eompany as a
result of revaluation of assets or u'ithtrut accrual of cash resources are neither
capitalised nor taken into account in the computation ofthe residual reserves
of 40o/o fbr the purpose ofbonus issues,
h) the declaration of bonus issue- in lieu of dividend, is not made:
i) the bonus issue is not made unless the partll^paid shares, if any existing, are
made tully paid-up,
j) The company -
(1) has not defaulted in payment of interest or principal in respect of hxed
deposits and interest on existing debentures or principal on redemption
thereof and
(2) has sufficient reason to believe that it has not defaulted in respect of the
payment of statutory dues of the employees such as contribution to
provident fund, gratuitY, bonus etc.:
k) a company $hich announces its bonus issue after the approl'al of the Board of
Direct,ors must implement the proposals *'ithin a period of six months from
the date of such approral and shall not have the option of changing the
decision;
l) there should be a provision in the Artioles of Association of the oompany for
capitalisation ofreserves, etc. and ifnot, the company shall pass a Resolution
at its General Body Meeting making provisions in the Articles of Association
for capitalisation;
m) consequent to the issue ofBonus shares ifthe subscribed and paid-up capital
exceed the authorised share capital, a Resolution shall be passed by the
, company at its General Body Meeting for increasing the authorised capital;
n) the shall get a Resolution passed at its General Body Meeting fbr
"o-puny
bonus issue and in the said Resolution the management's intention regarding
the rate of dividend to be declared in the year immediately after the bonus
issue should be indicated;
o) no bonus issue shall be made which will dilute the value or rights of the
holders of <iebentures, convertible fully or partly.
N. Guidelines for the Protection of the Interest of Debentureholders

l. Servicing of Debentures
268 Governnrent and Business
sha
(u)
P^P
ded for
creation of the debenture redemption reserve in respect of debentures raised
for project finance.
(b) The debentures redemption resen€ may be creatcd either in equal instalments
for the remaining period or higher amounts if profits permit.
(c) In the case ol'partll' convertible debcntures, DRR should be created in respect
of non-con',,ertible portion of debenture issue on the same lines as applicable
for fully non-convertible debenture issue. In respect of convertible issues b1,
nerv companies, the creation of DRR should commence fiom the year the
company earns protits for the remaining life of debentures.
(d) companies may distribute dividends out of general reserves in certain years if
residual profits after transfer to DRR are inadequate to distribute reasonable
dividends.
(e) DRR u'ill be treated as a part of General Reserve for consideration of bonus
issue proposals and tbr price tixation related to post tax retum.
(f) In case of neu companies, distribution of dividend shall require approval of
the trustees to the issue and the lead institution, ifany.
(g) Company should create a DRR equivalent to 50Yo of the amount of debenture
issue befbre debenture redemption conunences. Drawal from DRR is permis-
sible only after l0o/r of the debenture liabililv has been actualll,redeemed by
the company.
(h) In the case of existing companies prior permission of the lead institution for
declaring dividend exceeding 20Yo or as part of the loan covenants is neces-
sary if the company does not comply with institutional condition regarding
interest and debt service corerage ratio.
(i) Companl, may redeem debentures in greater number of instalments. The first
instalment may start tiom 5th instead of 7th vear.
2. Protection of Debentureholders' Interest

(a) Trustees to the debenture issue shall be vested with the requisite powers for
protecting the interest of debentureholders including a right to appoint a
nominee director on the Boa;d of the company in consultation with institu-
tional debentureholders.
(b) Lead institution/investment institution will monitor the progress in respect of
debentures fbr project finance/modemisation/expansion/diversificatior/nor-
mal capital expenditure. The lead bank for the Company will monitor deben-
tures raised for working capital frrnds.
(c) Ins'titutional
debentureholders and trustees should obtain a certif,rcate from the
company's auditors in respect of utilisation of funds during the implementa-
tion period of projects. In the case of debentures for working capital, certih-
cate should be obtained at the end ofeach accounting year.
(d) Debenture issues by companies belonging to the groups for financing replen-
ishing funds or acquiring shareholding iri other companies will not be permit-
ted.
(e) The cornpanies shall, along with their application, file with SEBI, certifrcates
from their bantriers that the assets on which security is to be created are free
from any encumberances and the necessary permissions to mortgage the
assets have been obtained or a No Objection Certificate from the financial
institutions or banks for a second or pari pasw charge in cases where assets
are encumbered. The security should be created within six months from thq
date of issue of debentures, If for any reasons the companies are not in a
position to create securiS'q'ithin 12 months t'rom the date of issue of deben-
tures the company shall be liable to pay 2Yn penal interest to debentureholders.
If security is not created even after l8 months. a meeting of the debenture-
holders should be called rvithin 21 days to explain the reasons thereofand the
date by u.hich the security would be created.
(1) The trustees to the debentureholders rvill supervise the implementation of the
conditions regarding creation of securig, for the debentures and regarding the
debenture redemption reserve.
O General
(a) Subscription list for public issues should be kept open fbr at least 3 working
da1,s and disclosed in the prospectus
(b) Rights issues should not be kept open for more than 60 days.
(c) The quantum of issue, rvhether through a right or public issue, shall not
exceed the amount specified in the prospectusAetter of ofler. No retention of
over subscription is permissible under an1' circumstances.
(d) Within 45 days of the closwes of an issue a report in a prescribed form with a
compliance certificate from the Chartered Accountants should be tbrwarded
to SEBI by the lead managers.
(e) The gap betu,een the closrue dates of various issues e.g. rights and Indian
(D or partly made in the past, rvhere the

to be determined by the Controller of
Capital Issues at a later date, the price of con'ersion and time of conversion
shall be determined by the company in a duly organised meeting of the
debenture holders and shareholders. The decision in the above meeting may
be ratified by the shareholders in their meeting. Such conversions will be
optional for acceptance on the part of individual debenture holders. The
dissenting debenture holders shall have the right to continue as debentwe
holders if the terms of conversion are not acceptable to them. The Ietter of
tted by SEBL
(g) guidelines for modifring the existing
protection, enhance the qualitY of
disclosures and to bring about transparency in the primary market.
(tr) SEBI shall have right to issue necessary clarification to these guidelines to
remove any difficulty in its implementation.
(D Any violation of the guidelines by the issuers/intermediaries will be punish-
able by proseoution by SEBI under the SEBI Act.
O Th" provisions in the Companies Act, 1956 and other applicable laws shall be
complied with in connection with issue of shares and debentures.

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Contents

1. Public Control of Business : The Historical Setting l-32

2. Constitutional Framework of Government

3. Industrial Policy and Industrial Licensing 45-109

4. Control of Monopolies : Experience and Implications ll0-122

6. Trends in Corporate Management Since Independence 143-156

7. Government Control over Foreign Direct Investment

Capital Issues Control 254-268

9. Regulation ofthe Stock Exchanges 269-302

10. Government Control Over Distribution and Price 303-343

11. ImpofiControl 344-367

12. Exports and Government Policy, Promotion and

13. Government's Promotional Role in Industrial

14. Public Sector Development Banking 449-491

15. Government Policy and Small-Scale Industry 492-5ll

Centres: Ercise Concessions; Khadi, Village and Cottage Industries;

16. Government and Planning 512-544

18. Interface Between Government and Public Sector 563-609

20. New Economic Policy Environnent in India and I

Public Gontrol of Business :

In the present-day world no one will seriously dispute Government's power

3. Income is received in monetary terms through the sale of goods

al model. In actual practice the private enter-

only in the interest of a more equitable distribution of liberty. All other

People anong whom there is no habit of spontaneous action for a collec-

tive interest. who look habitually to their Government to commend or

Against these objections to State interference, Mill also put forward

the contrary. both as the only practicable means of avoiding

of a social philosophy that

sentialll', Marx and his companion theoreticianr ron".otrii.tat:lt

ism. In e lgth century

ter. Marx transplanted it from this 'idealist' matix to the environment

12 Goventment and Business

created by the pervasir,e materiali

change which constitute the economic

Fourthll', there is the doctrinc of surplus value of labour which empha-

14 Governmenl and Busine.ts

roletarian movement in its struggle

l'.il lXTTll ; -ff ruHn"Hi"ill:

all over thc uorld sincc thc S

to old style capitalism or laissez faire. Government control will have to

proper contribution of each.

16 Government and Business

no means the worst consequence. British steam and

Talking of Surat. an important textile manufacturing centre of yester_

''The petitioners and more especially the labouring and manufacturing

introduced machinery into the locomotion of a country, which possesses

The development of railways broke down the isoration of the village.

among Indian entrepreneurs. after much initial failures, succeeded only

success was secured.

(not departments), their working was confined to collecting

Industrial Policy After 1914

led to the appointment of the famous Indian Industrial Commission in 1916,

man) and the improvement of conditions in factories and industrial

Second World War

nlanganese; non-ferrous metals and metal fabricating industries

Government's pragmatism was shown in the fact that Walchand Hira-

Gnrvnnql llunx or lNrusrnr,ql, PnooucrroN

r939 102.7 1943 117.0

Independence, Pardtion and After

Aspects of Government's Role

(iD Capital issue control:

agencies. on the one hand, they promote industry by providing finance. on