Coping with Changing regulations- A challenge to SMEs in India
Regulations governing the trade, business practice, processes, or products are evolving and now stricter than previously. The speed of executions is posing a serious risk to SMEs.
Recently I had a call from an entrepreneur who has a fairly well-established business in edible oil segment from upper Assam region seeking advice on coping with a new amendment to allow blending of palm oil to mustard oil.
The order from the govt though has noble thought of bringing down the price of edible oil and thus making it affordable for the larger section of society, it indeed damaged the fairly well established edible oil industry in the region. He said many of the units were funded by the banks. About 90% of the units have been closed down in the region which had been giving employment opportunities for thousands of labours. As a direct consequence, it leads to migration to other region and putting the whole society in a stressful situation. Many SMEs are facing recovery action.
When we analysed the reasons for such a tragic turn of events, we found that speed of implementation of government order of allowing the blend of the cheaper palm oil to mustard oil is to be blamed. The decision affected the businesses because the very large section of consumers are price sensitive and huge price gradient between locally produced mustard oil and imported palm oil led to the increased flow of blended oil into the market. The speed at which the blended oil flooded the market gave little space for smaller units to realign the business and made them cave in before the large national players who have resources and supply chain to outsmart the smaller ones.
The speed of implementation is the concern:
Nobody disputes the discretion of Govt in framing laws, regulations and rules or even the courts’ intervention under public interest. The issue here is the time frame. Many a time the Govts’ and other bodies or courts frame rules and guidelines without giving opportunities for affected people to readjust to new reality. Secondly, it is seen that many times, the regulations are coming without application of mind on the gravity of its impact. In other words, the gains are a fraction of losses to larger society.
For instance, recent Supreme Court ruling on banning liquor gave a body blow to many small business owners. The ruling came after 20 years(from the date of filing) and not taken cognisance of its impact on larger society in terms of loss of investment, loss of jobs, loss of govt revenue etc. It also ignored the very transformation of national highways undergone in the last two decades like effective segregation of arterial roads and better safety records in toll roads. The ruling led to the chaotic situation and thereby resulted in dilution of the content of judgement to such as extent that it did not yield any targeted results but caused huge loss to all those dependants in the country.
Similarly, in case of banning combo medicines, the decision came suddenly such that the industry was taken by surprise and there was absolutely no room for readjustment. This led to series of litigations and uncertainty.
Why SMEs are more prone to losses compared to others:
Regulatory actions affect all and are non-discriminatory. However, the impact will vary. We see the impact of legal risks is more pronounced for SMEs than others. It is because of basic characteristics of SMEs as explained below:
1. SMEs are the key link in the production as well as distribution value chain in the economy. There are as many as 5 crores small businesses in India occupying significant space in the economy and employment generation. Corporates are outsourcing the manufacturing and distribution functions to SMEs. Outsourcing model transfers a significant proportion of regulatory risk.
2. Low equity base deprives them to readjust immediately. It is the common sight that most of the SMEs thrive on the support of bank finance. Their equity base is very small. Thus they are very vulnerable to any industry related risks such as regulatory ones. Further, as we discussed above, many a time legal actions come so fast that there is hardly any time to readjust. As a result, SMEs are more prone to suffer loss and eventually fail due to legal actions by the govt.
Sources of Regulatory changes- Global national, state, local bodies and courts:
Regulatory Changes meant to cover the risks from changes in law, executive orders of Govt(state/central), actions by various sector-specific regulators, High Court/Supreme Court rulings, and new standards under global actions such Paris Climate Pact or other UN frameworks and guidelines. It may also emanate from the decision of urban local bodies.
SMEs to expect more pain:
We have been seeing many legal actions in recent times governing business environment. It seems that there will be more such changes in the offing. Govt is looking at removing the archaic laws in many sectors. Driven by the motive of improving the living environment, concern for health hazards, improving the access to better living standards, or to drive the concept of Ease of doing business to improve the competitiveness etc, the scale and scope of regulatory changes in India are set to increase going forward.
SMEs need to improve the resilience to deal with regulatory changes which also brings in newer opportunities alongside pains. We only wish that changes may be brought in through broader engagement and in the longer time frame.