Consentia on Business Laws and Constitutional Laws

Compromising Sovereign Existence of States: An Adverse Influence of Globalization on Developing Countries

Introduction

With the advent of Globalization the lives of millions has been claimed to have improved by the way of increasing employment and improvement in the standard of living. Globalization as a phenomenon is not a new one but has been in existence ever since the dawn of the civilization. During ancient and medieval times there were exchange of agricultural products, metals and others. Information of such trade and commerce has been obtained from various artefacts and excavations, both whether in excavated sites in India or China or Central Asia and even as far as Rome. Various literatures also have extensively dealt with this aspect where they have explained exchange of trade and commerce, in length. With the advent of British in India a more standard approach was taken towards Globalization.[1]

The Globalization in modern era has emerged as a pertinent topic for discussion with the advent of Industrialization and a need to expand market. According to some scholars the term globalization has attained centre stage for discussion since mid 1980s, with extensive discussion and debate beginning since mid 1990s.[2] Countries that have been able to integrate with process of globalization are seeing up gradation in standard of living and faster rate of growth. An example of the India in this context clearly manifests that how globalization has affected living standard here where the people had limited choice before liberalization but post 1991 liberalization, there has been a steep rise in consumer’s activity with the demand for goods having increased.[3]

By contrast when many developing countries had adopted inward oriented policies, African and South Asian countries with India being one among them, they saw decline in their employment rate due to lesser opportunity, stagnation of economies, and increase in poverty leading to high inflation. Ultimately, these countries under the increased pressure from various international organizations and developed countries liberalized their economy, many at a time when they were not fully prepared to adapt to such changes.

In contrast, to the positive changes brought about in the developed world, the developing countries have become the worst victim of Globalization. They are abruptly opened for competition from the already developed and thriving markets world over and thus could not face challenges from it effectively. They lack equal representation in the international stage and therefore their grievances are not properly redressed. The unhindered and speedy flow of information has also contributed in emergence of threats to governments in such countries. The Globalization has contributed in the ruining of local traditional business houses and has affected employment rate.

Since, the developed countries are able to intrude and make an important place in such economies; the latter is forced to compromise with its Sovereignty.[4] New forms of International conflicts have emerged, one being way of trade embargo, wherein the developed countries by exerting their influence in International organizations could force a target nation into subduing and forcing it to adhere to their wishes.

Developing Countries and Globalization

The formulation of idea of MNCs and TNCs have helped business establishments by allowing themselves establish in various resources rich African and Asian countries to produce the commodities without having to pay for excessive amount incurred in unnecessary transactions and various duties imposed. The local workers were employed in such production houses and it in a way helped increase employment rate in such countries where these units were established. With this a need was felt of making businesses self-regulating mechanism whereby it can monitor and ensures its active compliance within the spirit of the law, ethical standards, and international norms. Thus the idea of Corporate Social Responsibility was formulated in 1970’s.[5]

The role among corporate stakeholders is to work collectively to pressure corporations towards ensuring that they function while limiting themselves to the ethics and social responsibility. Several NGOs backed by media have also been leveraging an attempt to ensure that business houses of these foreign establishments act in accordance with prescribed standard. Businesses establishments functioning at various countries are required to follow a due procedure of law and ensure that their activities will run only paralleling with safeguarding the general interest of workers. The companies have themselves been active enough to meet the minimum proper requirement of its employees. They have launched several services for providing education, medical treatment and various other desirable services.

The need for an active participation of foreign business establishments based in developing countries holds its own importance. The government in developing countries have a major problem of Deficit Budget. The expenditure cannot be much in any particular sector because governments are also required to undertake responsibility of various other sectors. For such countries development of infrastructure and from external threats are a priority. In Africa, it is most obvious that one country is always hostile towards the other and thus they always try to influence the politics of each other by instigating unrest.[6] As such the roles of established foreign business units come to be of immense importance to help local citizens in providing welfare services.

Socialism and Welfare Concept

Post Imperialistic era and advent of bipolar world under USSR and USA during Cold war, the world got polarized into either serving capitalistic interest or adhering to communism.[7] Almost all nations, even those of Non Aligned nations could not keep themselves immune from such an economy based political ideology. The newly independent countries had every reason to believe that they were in major need of protecting their economy and the government alone could provide such safeguard. This saw an incorporation of concept of Social Welfare and Socialist ideology in their political affiliation. In India, Jawahar Lal Nehru sought to adhere to socialist economy. Later, Indira Gandhi government expressedly inserted the word Socialism in preamble to the Constitution and nationalized several banks. These all initiatives were taken while government still followed protectionist approach. But with decrease in the government treasury followed with pressure from International financial institution, the Indian government liberalized economy in 1991. Since then the consumers in India have been provides with lot of options to buy, but this has adversely affected the traditional and local industries for the reason that their commodities could not compete with the good made in developed countries for one major reason being too costly. The home productions of such countries are now in fragile condition due to increasing demand of commodities from developed countries. This dependency on the foreign goods has compelled the governments to look for alternatives for encouraging domestic production houses. Some of major industries in India, like Tata Group, Aditya Birla Group and Reliance Industries have been able to influence the government’s decision and expand their own economic business not only in India but also abroad. This motivation generated from the successful overcoming of few industries up from foreign challenge has encouraged government to relegate the protectionist approach. Though, even here, the influence of pressure of international organizations and other countries could not be ignored.

Human Rights Obligations

The business establishments, particularly those which functions across the national boundaries, are typically nongovernmental, private entities which are governed only by laws of such country where the company has its headquarters or in the host countries where the company has investments.[8] Despite such companies having a significant presence in multiple countries, technically they lag in basic requirement of having international legal status which has been limited only to states and various intergovernmental organizations like European Union and the United Nations. This also implies that they are not the subject and parties to various conventions and laws laying standards for rights and obligations of international law, including international human rights law.

In recent times an attempt has been made towards revising this practice. In the era of highly globalized world there are various international treaties in form of bilateral and multilateral trade and investment agreements this has up to a greater level brought certain typology of obligations on such corporations to adhere to such standards. Such rights and obligations are enforceable by the laws of the country where it functions or such other international arbitration tribunals.[9] There are several bilateral treaties which include mechanisms that allow companies to get redressed from the States such as the International Centre for the Settlement of Investment Disputes on expropriation, losses incurred due to civil disturbances and restriction on the reparation of capital and other matters. Article 18 of the ASEAN-India Free Trade Area provides for dispute settlement mechanism. Article 4 of the agreement provides for tariff reduction and elimination which would take place gradually. Similarly North American Free Trade Agreement (NAFTA) also provides for a separate chapter which provides for investors to bring direct claims against participating States for presumed violations of the investment provisions in the treaty.

With the increasing influence and role of such business enterprises in across countries they are in sheer need of workforce and cheap labourers. The developing countries provide better option to them in this regard. With this the human rights have emerged explicitly demanding in both theory and practice. Universal Declaration of Human Rights clearly states the rights of the person employed and therefore it can be assumed that these two articles lay the foundation for all basic privileges and immunity of labourers who work under such MNCs and TNCs. It has been held time and again that such obligations also include entities like companies and therefore by the virtue of this they need to adhere to already conventions and laws governing the aspects of human rights. International Labour Organization is yet another international standard which also attempts to regulate the conduct and preserve the rights of labourers against companies by putting certain obligations upon it. Apart from this, Tripartite Declaration on Principles concerning Multinational Enterprises and Social Policy, 1977 and Organization for Economic Co-operation and Development Guidelines for Multinational Enterprises, 1976 also are crucial in this regard.

Apart from these, a growing number of corporations are drafting and thereby implementing specific human rights policies. About more than 5200 companies are listed as active members of the UN Global Compact[10] which is a multi-stakeholder initiative that commits businesses for respecting human rights, labour rights, and environmental issues and anti graft practices.

Threat from Flow of Information and Communication

One important aspect through which Globalization has also affected the sovereignty of the state is through directly challenging the political establishments in such countries. The Arab Spring is its best example where the increased influence and coveted support to the rebellions has greatly hampered peace process in the Middle Eastern world and has led to series of regime falls. One important reason attributed to such a direct challenge is the uncontrolled flow of information from one corner of the world to another. The threat arising from the enhanced communication technology has been very well perceived by the political establishments in China, which has always tried to contain any such threat to its sovereignty. Post July 2009 Ürümqi riots in Xinjiang province of China, the government has responded by censuring[11] all major social media like Google (its accessories), Facebook, YouTube, Twitter, WordPress and BlogSpot, along with many others.

With the rapid advancement in communication technology the flow of information is just a matter of few moments. The presence of knowledge at finger-tip and easy access to various domains world over has led to increased trouble for the government’s which are of non-democratic nature. It also serves as a major cause of discontentment and dissatisfaction among even in those developing countries which are democratic but could not effectively provide the means to its citizens for better standard of living. Citizens in such countries when come across the developments of other countries a sort of discontentment is bound to develop. In this context, the comparison between China and India best serves this explanation. In China after decade of active massive government effort of improving its economy and overcoming internal disturbances, the country has reached to a position from where it could ensure best opportunity to its best minds in various sectors in within their own country, but in India, the government has been unable to meet the internal challenges as a result there has been a brain drain which further deteriorated the situation.

Since, many major news media houses are based in west; they are easily exploited by the government’s to achieve their objectives in international politics. The governments of developing world could not respond back in same manner due to lack of resources and therefore have no other option other than blocking those.

Special Economic Zone – Land Acquisition and Challenges

The Indian government in an attempt to attract foreign investment has implemented Special Economic Zone (SEZ). The special status give to these zones are almost like immunity and extended privileges to the companies which function over here. The Government while providing such privileges to companies by way of SEZ has to incur certain loses with the ambition of long term benefit. Such a privilege also includes an element of challenge to State’s sovereignty. Indian is a welfare state by the virtue of which it has to ensure optimum benefits for its citizens. In SEZ the lands are taken away from farmers or village men under Eminent Domain and are allotted to the companies for setting up their establishments. One basic requirement for such land acquisition is that such land should be uncultivated but the government has often been criticized for labelling certain cultivated land as otherwise and thus selling those. Also the cost paid at which such land is taken away from the owner is quite below the market price. Recently, the Parliament of India by the way of its legislative power has passed The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 which has incorporated certain provisions which attempts to provide better cost for the land acquired. It also provides for non-acquisition of irrigated land but allows for acquisition under certain circumstances. Section 27 of the Act has given methodology by which market value of the land shall be computed and resettlement and rehabilitation issues. But since this Act is newly passed, the practical application and its success are yet to be ascertained.

Secondly, this also greatly hampers the revenue earning of the Government. Since the units located in SEZ can import/purchase goods without paying custom/excise duties. They are also exempted from paying Income Tax or income derived from business of development, Central Sales Tax, Service Tax and dividend distribution tax.

Under land acquisition policy, companies promise the local people with providing them job security and fixed salary. It has been found that companies here recruit the labour force for this purpose but since these people are mostly unskilled labourers, they are easily victimized and are given nominal wage and in some cases are even not allowed social security schemes.

Statutory laws dealing with foreign companies in India

For the purpose of this paper two Acts, the Companies Act of 2013 and the Competition Act of 2002, have been studied to analyze how they deal with matters of Companies with headquarters outside India but have considerable investment within the territory of India as well.

  1. Companies Act, 2013

The Indian Parliament in its exercise of legislative power passed the Companies Act, 2013 effectively substituting it with the Companies Act of 1956. This Act has an extensive ambit and has attempted to also address several challenges in the era of Globalization. It should be remembered that the previous Act was made at the time when Indian economy was not yet liberalized and thus at that time Indian Government had protectionist approach. With the advent of liberalization a need was felt to address the challenges arising out of globalized economy. This was dealt with first by the passage of the Competition Act, 2002 and subsequently by the recent act i.e. the Companies Act, 2013.

According to Sec. 42 of the Act, the foreign company means any company or body corporate incorporated outside India which has a place of business in India whether by itself or through an agent and conducts any business activity in India. Chapter XXII deals extensively with the foreign companies. Section 379 provides that 50% or more of paid up share capital, whether equity or preference, of a foreign company should be held up by a citizen of India and/or company incorporated in India and such a company shall be treated as if incorporated in India. This provision helps automatically extends the full jurisdiction of Indian legality on such company and will help government in effectively dealing with legal matters of such company and ensure that they don’t violate any laws of the India.

Section 392 of the Act specifies that if a foreign company contravenes the provisions of Act, it shall be punishable with fine of more than one lakh rupees but limited to three lakh rupees. Furthermore, if offence continues then it would be fined with fifty thousand rupees for every successive day with the officers at default being imprisoned for maximum period of six months or fine which may be between twenty five thousand to five lakh rupees or both.

Section 149(3) conspicuously provides for at least one director of any company to be present in territory of India, this provision is intended towards suing him in case of company involved in any offences or otherwise.

Section 382 requires foreign companies to conspicuously exhibit its basic information in all of its documents and physical structures in English language and the language of locality. Chapter XIV deals with power of tribunal to investigate, inquire and inspect. U/s 92 (1)(j) Foreign Institutional Investors are required to furnish the details about the share held by them while preparing their Annual Return. U/s 217(10) of the Act, the Central government can enter into an agreement with the Government of foreign State for arrangements of assistance in any inspection, inquiry or investigation against company. Whereas U/s 228 it has clearly been laid that the provisions of the investigation, inquiry or investigation would apply mutatis mutandis to the foreign companies.

Under Section 234(2) the foreign Company, in case of merger with companies registered under Act, is required to take permission from RBI. One other important aspect included in this Act which protects the sovereignty of the Country is section 271(1)(c) according to which if a company has acted against the interest of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States could be wound up on a petition through section 272 by a Tribunal.

  1. Corporate Social Responsibility

During the era of globalisation, CSR has come as a priority for every democratic nation to ensure that their civilian population can also extract some benefit from the earnings of the company. The Companies Act, 2013 in this regard has extensively dealt with under section 135. Though the concept became popular in 1960s at global level[12] but it took another four more decades for its application in India in a much standardized form because the Act of 1956 had not dealt with any such thing.

135(1) specifies that company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or net profit of rupees five crore or more during a financial year will have to constitute a CSR Committee of Board with three or more directors including one independent director which would work in formulating, implementing and regulating the company’s CSR policy.

It requires that every such company should spent minimum of two percent of its average net profit in three preceding financial years under its CSR policy. Furthermore, the act provides for the priority based approach according to which first preference should be given to the areas where it is established.

Though, the section has dealt with implementation of CSR but it does not provide for any guideline on its expenditure neither it deals with actions which could be taken if such policy is not adhered to. The Indian Government has left this decision of spending to the company themselves.[13] The schedule VII to the Act has though laid down the areas of activity where companies could spend through CSR.

  1. Competition Act, 2002

In the wake of liberalization a need was felt to set up new set of rules and guidelines which could effectively look over the matters related to the amalgamation, acquisition and merger of the industries. The preamble of the Act clearly specifies that it is intended towards setting up a Commission to prevent practices which adversely affect the competition in market and ensure the freedom of the trade. The implementation of this Act was also driven by the obligation imposed by the WTO on India to pass such legislation. This act came in a response to the outdated Monopolistic and Restrictive Trade Practices, 1969n which was made during the protectionist period of independent India. The need of effective legislation and to re-examine the MRTP Act was felt to face new challenges in the era of liberalization and privatization was felt by NDA government and thus a committee was formed under Shri S.V.S. Raghvan to examine the MRTP Act. One of the important reforms brought about by the act was that it minimized the influence of government in such commissions as contrast to MRTP Act. This has allowed for the commission to work independently and carry out more effectively its function while dealing with matters related to the corporate world and ensuring that political greed does not become a cause for hurting the sovereignty of country.

Conclusion

There has been a steep rise in the interdependency of states with MNCs, TNCs and etc. Even the strict adherence to Socialism and Communism can’t overcome the dependency in modern era. As manifested by the changes in China, which has though maintained its communist ideology politically, but has shifted its approach to open-market economy, has shown that in the era of stiff competition in-ward approach cannot be adhered to. The former president of Ghana, Kwame Nkrumah raised the issue of Globalization and had even went to the extent of terming it as Neo-colonialism, to describe the socio-economic and political control by superior west which has not only led to developing countries dependency on economy but also a silent destruction and intrusion of west culturally and linguistically.

The flow of information and passage of knowledge are two most important aspect of Globalization and therefore they should be immune from any sort of influence so that such an influence does not become a reason of threat for someone else.

The Developing countries need to be provided with the proper platform to their issues and need to be protected against the developed country onslaught. The International organizations, particularly World Bank, International Monetary Fund and World Trade Organization should ensure the balanced trade exist and is void of any undue influence. The former two international organizations have been progressively involved in encouraging the Good Governance at the international level and at state’s level. Such a Good Governance concept should prioritize the need of effectively making the weaker state powerful enough to compete strongly in international market. The employees working with major business establishments in such countries should also be given benefits and social security schemes with the support of local government should be properly implemented.

[1] Chaudhuri, K.N. (1965\1999). The English East India Company: The Study of an Early Joint-stock Company 1600–1640 (Vol. 4). London: Routledge Press.

[2] The Challenges of Globalization for Africa retrieved from http://www.imf.org/external/np/speeches/1997/052197.htm assessed on 15/12/2013.

[3] Revesz, R.L. Federalism and Environmental Regulation: A Normative Critique. The New Federalism: Can the States Be Trusted?. Stanford, CA: Hoover Institution Press. 1997.

[4] Hirst, P. & Grahame, Globalization in question: the international economy and the possibilities of governance. Published by Polity Press, 1996.

[5] http://issues.tigweb.org/csr?gclid=CJzi-enVg7YCFZEf6wodAG4Azg visited on 17/12/2013.

[6] For example: The Allied Democratic Forces (ADF) is a rebel group opposed to the Ugandan government. It is based in western Uganda with rear bases in the Democratic Republic of the Congo.

[7] David, H. Global Transformations. Cambridge: Polity Press. 1999.

[8] For example, The Companies Act, 2013 of India has a separate chapter (Chapter XXII) in it which exclusively deals with foreign companies.

[9] Hopkins, A.G. Globalization in World History. New York City, Published by Norton. 2003, pg. 6.

[10] Global Compact Network Area retrieved from http://www.unglobalcompact.kr/eng/31.htm assessed on 18/12/2013.

[11] See http://www.dailymail.co.uk/sciencetech/article-2431861/China-lifts-ban-Facebook–people-living-working-small-area-Shanghai.html assessed on 18/12/2013.

[12] George, D. & Richard T., Business Ethics. 7th ed. Upper Saddle River: Pearson Education, Inc., 2010.

[13] Government clarifies on CSR spending, the Hindu Newspaper online edition retrieved from http://www.thehindu.com/business/Industry/government-clarifies-on-csr-spending/article5320157.ece assessed on 14/12/2013.

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