Opinion (Spotlight Weekly)

Making the Law Work for Business: A Practitioner's Perspective

By BHARAT RAJ UPRETI

A fundamental change in the perception of the state's role in economic development has been seen in Asian countries since the 1960s. However, such a policy shift became visible in Nepal only after 1990 as a result of the restoration of multiparty democracy. There has been a policy shift in favor of the economic liberalization and privatization of public enterprises. This has necessitated a shift in legislative policy. Though the policy shift has been reflected in some of the laws, others are in the process of being enacted. The process of streamlining economic and business laws has started.

How can the law be made to work for business in Nepal? The word law, in this context, is taken in a very broad sense to include policy directives, operational directives, work procedures/manuals, department orders, circulars, etc., issued down the line of administrative bureaucracy. Legal framework is only one of the basic fundamental aspects of liberalized market economy. If the bureaucracy is not tuned to the liberalized economic policies and in the absence of an effective mechanism for addressing grievances against the state agent, the legal framework does not make any sense. Effective and expeditious mechanism for the settlement of business disputes is the other important precondition to making the law work for business. Thus, the issue of law as an instrument of economic development can be discussed in four perspectives: (1) legislative, (ii) administrative/bureaucratic, (iii) regulatory and (iv) remedial.

Existing Legal Framework For Business

The existing legal framework is not tuned to the business requirements of the day. Most of these laws are based on an allocative approach, restricting market forces in the matter of the allocation of resources. The procedural dimension of the existing legal system is discretionary. These are full of gaps, giving more and more discretionary power to government agencies. Lack of administrative manuals and norms for such agencies have added to the problem. Therefore, the need of the day is a shift in legislative policy of the government from allocative to market and from discretionary to rule-based legal system. This requires the streamlining of existing legislation to fit in the policy shift. New laws are required for developing the legal framework at par with the internally workable standard. Such development should be aimed at (i) building the confidence of the investing public, including foreign investors, (ii) establishing institutions providing effective mechanism for regulatory oversight of the market, and (iii) for providing effective and expeditious mechanism for the settlement of business and commercial disputes.

The agenda for reforming the legal framework has been debated in several forums organized by several professional organizations and Focal Point For Financial Sector Reforms. Two aspects of the legal reform package have been identified. The first consists of reform in the existing legislation. These are (1) Companies Act 2053, (2) Stock Exchange Act 2040, (3) Commercial Bank Act 2031 and several other financial sector legislation such as Finance Company Act 2042, (4) Foreign Investment and Technology Transfer Act 2049, (5) Patent, Design and Trademark Act 2022. Some preliminary work for reforming some of these acts has already started. The idea of developing umbrella legislation for commercial banks and financial institution has also been initiated and Nepal Rastra Bank has circulated a preliminary draft within closed doors. Reform in intellectual property legislation is overdue. But, somehow, it has remained ignored by the government. Since Nepal has already ratified the Paris Convention for the Protection of Industrial Property and has come into effect from March 16, 2001 revamping of the existing Patent, Design and Trademark Act 2022 is overdue.

Some priority areas for new legislation were identified in a recent symposium jointly organized by the Focal Point and Nepal Bar Association. Appropriate legislation in the following areas has been identified as the minimum for making the law work for business:

(i) House Rental and Leasehold Property (Act)
(ii) Power of Attorney (Act)
(iii) Notary Public (Act)
(iv) Service of Process in Foreign Country (Act)
(v) Formation of Commercial Law Court (Act)
(vi) Law Relating to Trust (Act)
(vii) Money Laundering (Act)
(viii) Competition (Act)
(ix) International Transaction and Payment (Act)
(x) Enforcement of Foreign Court's Judgment (Act)
(xi) Company Act (reforming the existing Act)
(xii) Commercial Bank Act (reforming the existing Act)
(xiii) Insolvency Act
(xiv) Secured Transaction Act

There are three examples where the government has passed important laws and no purpose has been served due to the failure of government to make required bylaws and procedural guidelines. The Joint Housing Ownership Act 2054 became law in 2054 but it has not yet come into effect because the government has not framed the required rules and procedure. It is a pity to note that tens of millions of rupees have been invested in the joint housing project relying on the act of parliament but the government has not made
required bylaws for transferring the ownership. Investors have seen the opportunities, individuals have paid huge amount of advance/package price for flats but the government still seems to be apathetic to the problem of small investors who have taken the risk of buying their own flat. The same is the fate of the Debt Recovery Act 2058. The new Income Tax Act 2058 was designed to give its effect even in the absence of related rules and huge number of directives required under the act. The Income Tax Act has come into effect from 2058/12/29 (April 11, 2002). But the related rules, procedures, manuals, directives, which are part of the act, have not been framed even four months after the commencement of the act. The professionals are confused and honest taxpayers are terrorized. But it has created a haven for tax evaders. If the government was not able to bring the rules and bylaws/directives, what was the hurry in bringing the act into force? This is the question everybody asks but no one in the government has the time to answer it nor ready to take any responsibility for it. Transparency and predictability are the two basic fundamentals expected from a system of laws in a democratic set-up. How can we think of transparency and predictability when we put an act into effect without making the required rules, procedure/directives that are part of a particular act? The other aspect to be addressed while making new laws is the mechanism for quick redressal of the grievances against the state agents for their alleged irregular acts/inactions. The other important aspect of the legislative process is to make the process participatory.
How to Make Bureaucrats Work for Business

An equally important issue in the present context of Nepal is how to make the state agents and bureaucrats accountable for their acts and inactions. The letters of law do not speak themselves. Its life is given by the users and administrators. We may make very progressive and good laws but if the administrators are not tuned to it or do not want it to be implemented, these laws become useless. So any initiative to make the law to work for
business would be futile in the absence of an appropriate strategy to tune and clean the system of bureaucracy in Nepal. This does not happen without political commitment. This requires a political leadership that is clean and committed to making things happen by setting up a system of governance and confining itself within the system. In the absence of such commitment and committed leadership, legal framework reform alone cannot produce the desired results.

The other problem of the bureaucracy is the lack of interdepartmental coordination and cooperation. There are several allegations. For example, most of the bureaucrats in different government offices treat themselves as solitary/isolated emperor and are adamantly against listening to colleagues in other government offices.

Everybody is aware of the above-mentioned problems. Some recent examples are worth citing. The first relates to the issuing of residential visa to the representative of a foreign company who invested in a large-scale industry at Hetauda after obtaining required approval from the Department of Industries. Section 6 (2) of the Foreign Investment and Technology Transfer Act 1992 entitles a foreign investor investing more than US$ 100,000 at a time is entitled to residential visa. Representative of the said foreign company who has already invested more than $3 million in Nepal wanted a residential visa. The Department of Industries recommended the visa. The Department of Immigration was of the view that benefit was only available to the investor and not to the investor's representative. Legal opinion from the Ministry of Home Affairs was sought. Its opinion supported the view taken by the Immigration Department. They concluded that the representative of the said foreign investor company was not entitled to residential visa. The matter was taken up again with the Department of Industries, which ultimately rescued the poor investor investing more than $3 million in Nepal on the basis of the cabinet's decision.

It may be relevant to cite a problem faced by the importers of electric vehicle. It provides an example of how business transactions suffer due to the apathy of government officers toward their duty. Relying on the provisions made in the current Finance Act 2058 granting benefit of the reduced rate of the custom duty of 10 percent on the import of vehicles run by the electric power against the vehicles using petrol or diesel fuel. An importer imported few electric cars made in Bangalore of India. These cars are made to run with electric power generated from charged batteries. The Birgunj Customs Office denied to give the facilities of reduced rate of 10 percent customs to these cars on the ground that they were run by electricity generated from charged battery and they may not be treated as vehicles run by electric power. The customs officer asked for the clearance from his superior, which cannot be faulted. But the problem is that the customs officer is charging heavy demurrage on the car for months and the importer is not sure when the matter would be cleared.

There is another example of the apathy of government agents. A foreign investor invested in tobacco industry as per the law of Nepal during 1980s. The Foreign Investment and Technology Transfer Act 1992 was amended in 1996 and the tobacco industry was put in the negative list for foreign investment. The investor had the right to purchase the shares of Nepalese investors, if the latter wished to sell it under the joint venture agreement
approved by the government of Nepal. Since the Nepalese partner wished to sell the shares, the foreign investor was obliged to buy it under the joint venture agreement. The issue of negative list came in course of completing the transaction. It took more than half a year to clear the matter. The matter ended with the legal opinion to be approved by the law minister, who is a layman politician.

Problem of Dispute Settlement Mechanism

An effective and expeditious system of dispute resolution is a must for making the law to work for business and economic development. The existing law provides for two forums for the settlement of business disputes: the formal (court system, both the regular courts and tribunals) and the private mechanism (the arbitration tribunals set up pursuant to the agreements made between the parties). None of these is performing well.

Formal courts are not free from allegations of corruption and mismanagement. The judiciary also faces the problem of manpower trained and sensitized to understand technicality and urgency of expeditious settlement of business disputes put before it.

Revenue tribunals formed by the government for expeditious settlement of revenue disputes lags far behind the regular courts in the matter of disposal of cases. It seats on huge number of old cases. These cases are pending for four and more years in the revenue tribunals. Even the highest court of the country is more sensitized by cases of political nature and the cases filed by the employees. The Supreme Court is not free from the allegation that it favors the government in most of the revenue cases. This again is attitudinal issue rather than one of law.

The private mechanism of dispute settlement is also not performing well. The process of dispute settlement through arbitration has been equally time consuming and expensive. Arbitrators work part time or during their free time and they take more time than a regular court. There are many reasons. One is the frequent interference of the court and its attitude to frustrate the award than to support it. In fact, the government has completely neglected the institutionalization of the process of arbitration as a private forum of dispute settlement.

Nepal Council of Arbitration, registered as voluntary organization by some lawyers and engineers, is providing institutional support to arbitration in a very modest form. The institutionalization of the process of dispute settlement through arbitration could save time and money, ensuring fairer justice to the business community.

Issues to be Addressed

The legal framework is definitely the basic infrastructure for the business and the economy to work and prosper. But it is equally important to make the administrative decision-making process more transparent and predictable. Any initiative to reform the existing legal framework would remain incomplete if it fails to ensure these two components of good governance are properly incorporated in the new laws. Reforming the law would not produce any result unless the mind-set of bureaucrats is changed and they are made to behave as servants of the public rather than as their masters. The dispute resolution mechanism should be tuned to business requirements. The implementation of new legal framework tuned to address the issues of globalized business environment also requires battalions of judges and lawyers trained in and capable of understanding the complicated issues related to business transactions, both domestic and global.

(Upreti is one of the leading corporate lawyers)