Law can be good or bad driver of nation’s Economy (by

Hemant K Batra)
A prosperous society may be more concerned about piracy of the intellectual wealth. It may also
show greater concern about environmental pollutions that affect the quality of life or about
adherence to the highest standards of competence, which a professional is expected to
observe. Laws and legal systems, in this manner, codify social values, attitudes and
expectations of behaviour from members of the society. They have their own impact, good as
well as adverse, on the economic activity of the nation, depending on how far they are
consistent with actual conduct, habits and thinking of the majority of members comprising the
society. Certain laws, like income tax rates, customs duties, prohibition, etc. are known more for
creating certain values in society, which ultimately act as deterrent in the larger interest of the
society itself. Similarly, laws relating to economic activity can have different impacts, depending
on what their content are. The reason is that ultimately, a law consists of the intent of the law-
makers and strategies to achieve this intent. The laws could become coercive, restrictive or
highly facilitatory, depending on what the ideals have been accepted and how the drafting has
been done. If the intent of the law and the contents of law are to facilitate growth in an
unmistakable manner, law has to be drafted accordingly in an unambiguous manner. Dealing
with foreign direct investment, first, basically it depends on real factors, interest rates, tax laws
and Government’s other economic policies as well as their stability. Law and legal system can,
at best, be one factor, but certainly not a major one (in determining the climate of investment). If
laws relating to closure, transfer of management and labour appear to be “obstructive”, that
obstructive character could be an act of design. If the very intention is to protect labour, then it is
an act of design. There could be a wide gap between the intent of the law and the contents and
the interpretation of the law. Larger the ambiguity, larger the scope for litigation. There is a need
to ensure that a law must be drafted in an unambiguous manner so that it is identically
understood by legislators (who approve the law), by administrators (who have to administer the
law), by administrators (who have to administer the law) and society (which lives with it and is
affected by it) and the judiciary (who has to interpret the law). Then only can the intent of the law
be fully carried out.

Talking about liberalization, we are creating for ourselves new environments where some of our
old laws have been rendered obsolete and many more laws need to be re-written. Liberalization
is intended to serve the purpose of efficiency, namely, that whatever resources, are made
available to us must be made most productive. Laws need to be under constant revision so that
they meet the challenges of today’s environments, today’s thinking and today’s involvement in
the global economy. Foreign investors need to be invited to participate under such
environments in the spirit of efficiency-oriented growth that all these countries want to pursue.
Such a participation pre-supposes the creation of environments which are more or less identical
with the best available anywhere in the world. Then only can we attract more resources in
quantity and more qualitative resources, to our countries. As to competitiveness, efficiency
flowers best in competitive environment, for it impels all of them to make the best use of
resources. An investor who comes from abroad would like to feel secure that this approach to
liberalization and abiding commitment are administered in the form of legal framework in the
country. He would also like to feel secure that there was an adequate statutorily backed
regulatory framework for ensuring fairness and observance of all rules of competition. An
investor, domestic or international, basically looks for returns on his investment. The logic of
investment is identical across all the countries. Hence domestic as well as foreign investors
have to be provided identical opportunities. A level playing ground is needed for all investors in
the country in order to bring out the best efforts from both of them. Any discriminatory treatment
to anyone can ultimately hurt the overall interest of investment in the economy. An economy,
which is largely dependent on domestic savings for investments, cannot afford to discriminate in
favour of foreign investors, or (to put it differently), against the interest do domestic investors. At
the same time, knowing the need for foreign resources and having decided to invite foreign
investment, the laws just cannot discriminate against foreign investment, in order merely to
reflect patriotic sentiments. However, the legal system is essentially a domestic one, as there is
no universally applicable commercial code for various countries. The philosophy of law may be
universal, at least among similar political systems. But the language of legal systems across the
countries are distinctly not so. This aspect required attention. Concentrating on the approach to
be adopted by the legal system in regard to foreign investment, an environment of mutual trust
between domestic investor and foreign investor is to be created. The legal system has to be
such as created such a mutual trust among all the investors. An investor needs freedom of both
entry and exits. He needs freedom to decide where to locate the industry, how much to produce,
how much and where to purchase, how many persons he should employ, and at what prices to
sell. He needs freedom to allocate and appropriate high profits after tax. He needs protection
from unfair play and restrictive practices from other competitors, suppliers, utilities and tax
collectors. He needs inexpensive access to a speedy system of justice and arbitration. He
needs laws that reflect a new philosophy, a new business environment, new business
requirements-laws that encourage initiative, speedy response, clearances and single-minded
pursuit of efficiency, where there cannot be more barriers. Labour laws continue to remain
highly contentious areas in many highly populated developing economies. The issues of exit
policy transferability of resources to more productive, business and implementation of
productivity-linked incentive structure have become highly essential issues in order to create
investors’ friendliness about labour. Similarly, a free market for corporate control, that is,
takeover and mergers, may be perceived by some as investment-friendly and some as
hindrance. Corporate laws need to be re-worked to make them more investor friendly. The
ultimate aim is to achieve free mobility of managerial resources and financial resources, with a
view to the optimization of country’s resources in the long run and making them as productive
as possible. And, all this should be in the interest of shareholders and consumers. Laws can be
made simpler and complemented by transparent regulations, designed to facilitate a competitive
market for corporate control. These can contribute significantly to the productivity of resources.
It is only when a transparent regulatory regime could be established that it would become highly
comfortable and attractive to the foreign investors.

By Hemant Batra, Lead Partner, Kaden Boriss Legal LLP, India; Vice President, SAARCLAW;
Chairperson, IICLAM, Singapore; Advisory Board Member, OIC, USA