India - Validity Of Operational Licenses In The Wake Of Covid-19 – A Grey Area!

Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance

13 May, 2020

 

In the wake of the pandemic Covid-19, many legal and regulatory modifications have been undertaken in the country to facilitate compliances by the business houses as well as ease of doing business.

 

Recently, the Ministry of Corporate Affairs, Securities and Exchange Board of India, Insolvency and Bankruptcy Board of India, Real Estate Regulatory Authority, to name a few, have issued various regulations as well as amended the existing ones to suitably modify timelines and processes needed for secretarial compliances, periodic reporting, disclosure requirements, tasks to be undertaken under liquidation process etc. 

 

While the measures introduced are significant and can be seen as steps in the right direction to facilitate the businesses to run amidst lockdown and social distancing, a lot needs to be done to ensure business continuity.

 

The importance of possessing valid and subsisting operational licences and permits for running businesses in India is well established and cannot be undermined.  Depending upon the nature of the business, a company is required to obtain its key operational licences and permits even before it could commence work.

 

What are Operational Licences and Permits:

 

Under various legislations, permissions & approvals of industry-specific regulators are required to set up, maintain and conduct day-to-day businesses.  Operational licences and permits are those fundamental approvals without possessing which commencement of business activities (depending upon the nature of the industry) can be called into question.

 

In this article, we focus on some of the key operational licenses related to construction and manufacturing activities and analyse the impact of lockdown on their validity and renewability.

 

Some Key Operational Licences for construction and manufacturing activities are as follows:

 

Environment Clearance (EC) Certificate

 

Most of the companies engaged in construction and manufacturing activities would require environment clearance certificate (EC) from State Level Environment Impact Assessment Authority depending upon the level of emission of any environmental pollutant.  Though under the present regulatory regime, the ECs are issued for a period up to seven years, almost all states regulations make it clear that the application for seeking extension should be made within the validity period of the EC.

 

Consent to Establish (CTE)

 

Before undertaking construction activities, which is likely to discharge sewerage or trade effluent into the environment or cause air pollution when setting up industrial plants, building large residential/commercial complexes, townships or area development projects, it is mandatory to obtain a Consent to Establish (CTE) from the relevant State Pollution Control Board. The validity of such CTE is mostly one year, though in certain cases, it can go up to three years.  However, any extension of the same has to be sought within the validity period.

 

Consent to Operate (CTO)

 

Once an industry or a plant is established along with the required pollution control systems, the entrepreneur is required to obtain Consent to Operate (CTO) the unit. This consent is given for a particular period (usually for one to five years depending upon the nature of the industries and the regulation of the state where the industry is set up), and needs to be renewed regularly. Almost all the state regulations require that the application for renewal should be made within the validity period of the CTO.

 

Factories Licence

 

The Factories Act, 1948 has empowered the State governments to make rules regarding licensing and registration of factories under the Act. An analysis of Rules issued by various States indicates that such licence/ registration is granted or renewed for a specified period.

 

For example, in the State of Delhi under the Delhi Factories Rule, 1950 such licences can be obtained for one year or five years and accordingly their renewal can also be for one year or five years. Every application for the renewal of a licence should be submitted not less than 30 days before the date on which it expires.

 

In the State of Uttar Pradesh under the Uttar Pradesh Factories Rules, 1950, as amended from time-to-time, depending of the nature of the factory in question, a factory license can be granted for a period of 1 year, 3 years, 5 years or 10 years. For renewing each category of licence, an application has to be submitted electronically two months before the expiry of the validity period.

 

Similarly, the Maharashtra Factories Rules, 1963, prescribes that the application for renewal of a factories licence should be made two months prior to its expiry.

 

Registration under Shops and Establishment Act

 

Most businesses in India are governed by regulations under the Shop and Establishment Acts, enacted by every State in India. This Act is designed to regulate the payment of wages, hours of work, leave, holidays, terms of service and other work conditions of people employed in the shop and commercial establishments.

 

The Shop and Establishment Act is promulgated by the States and the regulations may slightly vary from State to State. However, it is mandatory to register every shop and establishment under this Act within a specified period of time, in accordance with the guidelines provided in respective State Acts. In most of the cases, the registration certificate has a specified validity period and is required to be renewed periodically. Even though some of the States have dispensed with the requirement of renewal of the registration and replaced it with payment of annual fee and receipt of acknowledgement to ensure continued validity of registration certificate, the requirement for renewal still exists in others.

 

Impact of Lockdown on the Validity Period/ Renewal Process:

 

Due to the Covid-19 crisis, a nation-wide lockdown was imposed from March 25, 2020, which is currently in force till May 17, 2020. However, it needs to be clarified if the lockdown period will be excluded while calculating the validity period of operational as well as many other licences, permits and registrations required for day-to-day running of businesses. Can the operation of such licences be considered suspended during this period?

 

For example, construction activities are suspended substantially due to the lockdown and cannot resume fully in the near future, partly due mass exodus of migrant labourers to their native place. For such cases, a question mark hangs over the validity of CTE, which in most cases expire within one year. The industry needs clarity if such CTEs can be extended accordingly.

 

Similarly, the lockdown may have deprived many businesses from fulfilling the terms of operational licences wherein renewal applications are to be submitted within the validity period. Since a large number of documents relating to the company and the business is required to be annexed to such renewal applications (depending upon the nature of the operational licence), restrictions in movement may force many from accessing/collating all necessary documents in time. Therefore, the question arises as to how these delays will be viewed by the respective state authorities while considering the applications?

 

Additionally, third-party services such as surveyors, technical consultants, site inspectors etc., would remain unavailable until normalcy is attained. Non-availability of such services poses yet another operational challenge in applying for the renewal of licences as well as grant of new ones.

 

Conclusion:

 

In the absence of any clarity in this regard, the treatment of validity period of operational licences during the lockdown period remains a grey area. Urgent action by the concerned departments is the need of the hour to clear the air and allay the fears of the industry. A consolidated advisory providing blanket relaxations by way of extending the timeline for renewing the key approvals/ licences is essential to keep the business rolling. If already cash strapped industries or business(es) are further penalised for not obtaining or renewing the licenses due to lockdown restrictions and social distancing norms, it will certainly be contrary to the spirit of ease of doing business.

 

Also, since most of these licences are issued by different departments of the State government, it would be helpful if they come up with business facilitation measures such as ‘online single window clearance’ for such licences and approvals.  This will go hand-in-hand with the initiatives announced by other industry regulators.

 

 

For further information, please contact:

 

 

Abhilash Pillai , Partner, Cyril Amarchand Mangaldas

abhilash.pillai@cyrilshroff.com