Multiple regulatory structures can hinder the growth of entrepreneurship culture. Critically analyze in the context of Companies Rules 2017. What could be the ramifications of such moves on the economy ?

In order to reap the advantage of demographic dividend, India needs to create more formal sector jobs which has been slow, between 1989 to 2010 of all the jobs only 35% were created in formal sector.

• In order to deliver a blow to money laundering, shell companies, government has come out with Companies (Restriction on number of layers) Rules, 2017.
• These rules require both operating and investment companies to not have more than two layers of subsidiaries except wholly owned subsidiaries.
• Multi-layering  is used for abusive routing and diversion of funds

Rules would negatively impact entrepreneurship:

• The rules interfere with the ability of entrepreneurs to structure their business activities in the manner they deem suitable.
• Group holding structures lower the cost of capital and thereby incentivize entrepreneurial risk-taking.
• Regulatory intervention imposes unnecessary costs that are a drag on business and entrepreneurship which are already burdened by archaic labour laws, multitudes of permits etc
• Start-ups and technology companies are already choosing foreign bourses in countries like Singapore  to raise capital due to the ease of listing and compliance costs.

 
Entrepreneurship and investment are necessary for creation of formal jobs, innovation and economic growth. The need to deal with evils of illicit funds should be balanced with requirement of economic growth.

Topics: GS-III: Changes in Industrial Policy and Their Effects On Industrial Growth