‘Address proof’ demands go against PM’s push for work from home

A firm without a traditional office isn't necessarily a shell company. And so, verification of physical address can't be the policy instrument to check if the business is legitimate.

31 August, 2022
The Print

In a recent speech given to the National Labour Conference, Prime Minister Narendra Modi emphasised the importance of flexible workplaces, a work-from-home ecosystem, and flexible working hours. This is a welcome statement for the millions of workers in the gig economy as well as start-ups who power the Indian economy. At the same time, the Ministry of Corporate Affairs has brought in rules to allow for physical verification of firms’ registered offices to weed out inoperative or shell companies.

On the one hand we aspire to be a modern economy with a mix of large complex firms and a flexible, work-from-home ecosystem. On the other, we vilify complex financial transactions and impose requirements of a registered physical address that “looks like an office”. This does not bode well for our growth aspirations.

Physical address in a WFH world

Let’s take the example of a person who wants to set up a design company that builds websites. This is not a capital intensive activity – one needs a laptop, good internet connection, and design skills to conceptualise and actually code the website. The person can hire other designers and coders who can equally offer their services from the comfort of their current place of residence, or their neighbourhood coffee shops, or the AirBnB by the beach.

The person setting up such a company will, however, have to furnish an “address proof” to register the company. An obvious one would be of the home in which the person lives, or in which their parents live.

In a service economy, where the saleable commodity is human capital, and where the physical tools of trade are a laptop and a router for the internet, the notion of a physical office address should be irrelevant. Why can’t a post office box serve as the office address? Many great start-ups in the world began their journey in a garage. It is highly unlikely that these founders spent time obtaining and filing no objection certificates (NOCs) from their families to use the garage. If we want to encourage flexible workplaces, the idea of a physical address needs to be revisited. Office space is expensive; insisting on it will ensure that most entrepreneurs stop before they can even dream of starting up.

Verifying the existence of companies

The central government recently amended the Companies Act 2013, to allow the Registrar of Companies (RoC) to do a physical verification of a company’s registered office if it believes that the company is not carrying out its business in a proper manner. The verification of physical addresses seems to be driven by the government’s view that a) a company that is inoperative is a shell company, and b) a shell company is a channel for generating black money.

But if we agree that economic activity is decoupled from a physical address, then the verification of physical addresses cannot be the policy instrument for confirming either the existence of a business or its legitimacy. It is entirely possible that the “business” is being carried out far away from one’s registered address.

It is also unclear what manner is considered proper. For example, the idea that an office must have a desk and a chair, and where customers can visit seems quaint. Perhaps the founders and their employees sit on the floor or on the beds in their respective homes and type away. Is the government going to decide the appropriate physical work environment in one’s home office?

Companies will now have to deal with the quality of due process followed by the RoC (or the local police) in conducting these verification checks. As we have seen in different instances, street-level officials are also motivated by incentives and pressures faced by them, and the friction of dealing with the State only adds to the (un)ease of doing business.

Dealing with shell companies

At heart, the Indian State seems to be uncomfortable with what it sees as a “shell” company. It is true that a shell company is one that exists on paper, has no office, and does not carry out any economic activity. However, the reverse is not necessarily true.

A company that does not have a traditional office, and does not generate business for a few years need not be a shell company. This is especially true in a world where business is conducted over the internet and does not require a physical space distinct from one’s home. Perhaps it is just a company that has not been able to generate business, or has chosen to go dormant for a few years, or just messed up and delayed filing its returns. Perhaps it is difficult to deregister a firm, and promoters prefer to keep the company dormant.

More importantly, a shell company by itself is not illegal. Large corporations often use such companies for the staging of hostile takeovers, getting access to international markets, or safeguarding assets from lawsuits. Shell companies can be an effective instrument for carrying out financial transactions.

We need to urgently re-orient our notions of what constitutes a company, find less intrusive ways to differentiate between legal and illegal financial transactions if we are to realise our dreams of a several trillion dollar economy. A high-income economy is one in which business arrangements are complex, office space is fungible, and shell companies can be perfectly legitimate building blocks of complex production arrangements.

India’s financial sector sees no point in addressing consumer grievances. Here’s how to fix it

It's not enough to have laws that regulate firms or nodal officers who address grievances. India needs a system that sets right incentives for firms and consumers.

03 August, 2022
The Print

One of the features of every new regulation in India has been the requirement to set up a grievance redress mechanism for consumers. For example, the Information Technology Rules, 2021 and the Consumer Protection (E-Commerce) Rules, 2020 require the appointment of a nodal or a resident grievance redress officer to address consumer complaints. The Centralised Public Grievance Redress and Monitoring System has been set up so that citizens can lodge complaints about service delivery by public entities.

The financial sector in India has been running a system of grievance redress for decades. Understanding what works, and what (mostly) doesn’t, will hold important lessons for improving redress mechanisms in other domains.

Firms and regulators

One would assume that it would be in the interest of firms to provide their customers with good service. A firm more responsive to complaints would attract loyal customers. However, this has not been our experience in the financial sector.

Firms in India are not geared toward providing better systems of even collecting complaints, forget resolving them. Most financial firms do not provide details of their policy, and when they do, the policies are extremely difficult to understand. Customers require college-level reading skills in English to make sense of the policies on offer.

It is possible that firms do not see value in providing better systems of redress because of limited competition. Despite the great progress made on financial inclusion, customers repeatedly say that they fear retribution by financial firms, or fear not being able to access the product if they go against the provider. This is true especially in rural areas, where consumers do not seem to have much choice.

It is not surprising then if firms don’t seem too troubled at the prospect of losing a consumer; they probably know that this is unlikely to happen. The loss in revenue from a customer who exits may also not matter much to public sector financial firms. Unless firms see value in dealing with consumer grievances, we are not going to see them making the investments to do so.

If carrots don’t work, perhaps the stick of regulation will? The regulatory process, however, also leaves much to be desired. The structure is broken. For example, in India, the regulator often appoints an ‘Ombudsman’, thus creating a potential conflict of interest. A redress agency will have more teeth if it is independent of the regulatory body. The processes at the redress agencies are complicated, and complaints are often dismissed due to technicalities, and not actually heard on merit.

Even if a customer escalates the complaint, closure at the Ombudsman is uncertain. Most importantly, the consequences of failing to comply with the decision of the Ombudsman are unclear. Of the 68 awards passed by the Banking Ombudsman in 2019-20, only 38 (or 56%) were implemented. There seems to be no penalty on the firm for not addressing the problem, and several financial sector regulators are not able to act against non-compliance by firms.

Do customers complain?

Firms do not seem to be interested, regulation is broken. In such an environment, to what extent do consumers access the grievance redress mechanisms?

The problem is that official records do not capture the extent of grievances. Firms do not adequately report the number of complaints that come to them, and the number they resolve. Annual reports by all financial sector regulators would have you believe that there is no problem. The extent and nature of grievances remain unknown. However, research finds that in the financial sector, actual grievances are 60-80 times of those actually reported.

There are several reasons — sometimes consumers don’t know where to go, and sometimes they have little faith that a resolution will be possible, and do not want to invest their time in the process. It is true that not all the grievances may be legitimate, and that several of these (such as transaction failures on UPI) may get reversed in the next few days. But in the absence of regular and transparent capturing of this data, we will never know.

Where do we go from here?

Our experience from the financial sector tells us that it is not enough to have laws that set up a nodal officer. One needs a careful design of a system that sets the right incentives for firms and consumers.

There may be lessons to be learned from international experience on issues of manner of establishment, governance, funding, dispute resolution processes, and performance evaluation of grievance redress systems. Closer home, in 2015-16, the Ministry of Finance had undertaken preparatory work for the setting up of the Financial Redress Agency to deal with consumer complaints against all financial service providers.

Even if there is no appetite for reform in the financial sector, the findings of the task force may be beneficial for setting up redress systems in domains such as intermediary regulation and e-commerce.

Finally, without regular evaluation of the working of any system through collection of qualitative and quantitative data, as well as mystery shopping exercises, we will all be flying blind.