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Are we ready to enforce our laws?

July 18, 2003

There has been a slew of activity undertaken by the government over the past 12 months, viz the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or SARFAESI Act, the Electricity Act 2003, the setting up of the Competition Commission, and the gathering pace of divestment.

And we have not even begun counting the dramatic changes proposed in the new Companies Act. The implications of these developments have not been fully understood.

The overwhelming cynicism with which these initiatives have been ignored points to both the belief that nothing changes in our country and, more disturbingly, to our state of unpreparedness.

Each of the acts mentioned above has the potential to change both the markets it pertains to and the lives of a large number of people of this country.

For instance, the Electricity Act 2003 has done away with the very notion of the state electricity boards. This will therefore require a big change in the way state governments need to take care of the current constituencies they cater to, be they agriculturists, employees of the SEBs, those consumers of SEB who do not pay, and indeed those who do.

The Act potentially touches every consumer of electricity. It is already in force and those entrepreneurial enough to understand and take advantage of it will benefit.

However, perhaps driven by the many past failures to see any change taking place in this sector, most people are sceptical about the impact of the Electricity Act.

They also rightly point out that there is still a lot that can be done by the State Governments and the State Regulatory Commissions to undo the effect of the liberalisation that the Act seeks to unleash.

Agreed. However, what is important is that these ententes, if they could be so termed, are untested and have to be generated in the face of competitive forces.

Whether they will be effective, or whether creative entrepreneurship will overcome these hurdles, remains to be seen. I would prepare for the latter.

Similarly, the SARFAESI has also been dismissed as a lightweight hindrance. I think not. The cynics point to the fact that the force of the Act has been annulled in the very first case that the antagonists proffered.

They refer to the Mardia case, where the Supreme Court has restrained the financial institutions that have seized the assets of Mardia Chemicals for non-payment of dues, from selling the same to realise their dues.

While the case now awaits the Court's decision, and therefore gives rise to apprehensions about the efficacy of the new Act, it needs to be borne in mind that the roadblock to recovering loans now comes from the judiciary.

The issues that the defaulters face today, are completely different from the ones they faced earlier. Even assuming that the courts disallow sale of assets, the very act of seizing the assets has checkmated incumbent managements.

The guidance, if any that may come from the courts will set the context of reference in which SARFAESI will henceforth act. That will be a lot easier for the financial system to comply with, than the dark prospect of not being able to make recovery from defaulting assets.

Once these initial hiccups are ironed out, the ability of the financial system to foreclose their security and therefore reduce losses on weak assets will increase dramatically.

In any case, it restores a sense of balance in the borrower-lender equation and that is good for the financial system and good entrepreneurship.

Why is SARFAESI good for the common man? The fact that the bad loans of institutions and banks in the country could have mounted a difficult burden on government finances, and therefore exposed the country to vulnerabilities of financial crisis and higher taxation, is now sought to be addressed by this Act.

It behoves well for right-thinking citizens to support the implementation of this Act in full earnest.

Then comes the newly formed Competition Commission. This again is a big step in a country's journey towards a market system. The Competition Act is also a broad sweeping Act, which has many potent provisions that can be used to safeguard consumers' interest.

It again has not attracted the attention it deserves as it will examine industry practices, monopolistic or oligopolistic behaviour and fair trade practices.

It will be interesting to watch its interface with the various regulated regimes, especially as regards pricing policies and also in the face of the trend of consolidation one is witnessing in many industries.

Lack of preparedness to account for the effect of the Competition Commission may lead to costly unwinding later.

The success of the Maruti divestment appears to have buoyed the prospect for an acceleration of the divestment process. Here again sceptics point out that now that the Government has gone into the election mode, the Nalco divestment is stalled, and therefore the slippery performance of the Government in the past with respect to divestment will continue.

I beg to differ. By successfully establishing the viability of divestment, and showcasing the enormous benefits it brings to the people of India, the Government has clearly paved the way for large-scale progress on this score.

Why is divestment important for the people of India? It reduces their tax burden, as simple as that.

Systemically, all changes weave a saw-teeth path, never a straight line. The forces of the past and those of the future will always fight the battle at the cutting edge of change, yielding this seesaw during the period of turbulence.

Most of these new Acts are witnessing these gyrations; in time, they will change our lives.

While we have highlighted the benefits, there are also those who face uncertainties as a result of these changes. Should changes be stopped because they bring uncertainties with them? Is there an alternative, where the players are well prepared to take advantage of the changes, rather than falling victim to the same?

In the past, changes that were resisted, but were rammed through nevertheless, have brought tremendous new opportunities with them. The modernisation of our stock markets through the nineties is a good case in point.

There are two ways to measure the impact of changes -- by winners and losers or by those who changed and those who weren't prepared for the change. Usually, those who didn't prepare for the change were the ones to lose out.

These acts of the government, to my mind, represent perhaps the most potent changes ever brought about by any government, barring that of P V Narasimha Rao following the '91 crisis.

The direction and the depth of reform bestow more power to creative enterprise. We need to wake up from a decade of the ennui that has engulfed us and take note of the new market reality.

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