Small businesses hit legal hurdles at various stages of their growth. A few law firms are offering to help :AND JUSTICE FOR ALL!

THE GOVERNMENT recently wove a nettle around a mid-sized producer of bio-diesel by repeatedly demanding licences for production, marketing, selling and retailing of bio-diesel. In the absence of a specific regulatory framework on the product, the government’s action does tantamount to harassment—there’s no provisioning of licence for the various activities linked to bio-diesel. Hoping against hope, the company approached industry body, Confederation of Indian Industries (CII), which in turn passed on the case to a Delhi-based legal eagle, which works pro bono for CII to crack cases pertaining to small and medium enterprises (SMEs). While the case is now being thrashed out in courtrooms, the company has got a breather to produce what it always produced—biodiesel—without licence.

Or, take the case of this very small concern, which developed a unique automotive hydraulic accessory for two-wheelers to aid parking. Sheer invention, particularly when the inventor took three long years to perfect the technology. The company needed to file a patent, and fast. But the costs involved in hiring a patent lawyer came as somewhat of a dampener. Seeing the potential of the product and the client’s inability to pay even a nominal lump-sum fee (due to heavy investments made by the client in developing the product), a law firm ultimately agreed to represent the inventor on a no-charge basis.

For the legal fraternity, work coming out of SMEs is yet to evolve to the stage of big companies with multiple processes and big bucks. But that doesn’t stop solutions flowing across various law firms around the country to help smaller firms out of meddlesome litigation. Law firms may still consider a philanthropic treatment meted out to an SME here or there, but going by the growing number of smaller clients in their practice today, the SMEs are definitely no pushovers.

Some common grouses that keep recurring among SMEs relate to financing, delayed payments, inability to recover payments, duty drawbacks, patents, customs and excise, lack of knowledge and resources, ignorance about the legal and regulatory framework, low awareness about rights and special privileges/schemes run by the government for SMEs and the inability to hire good consultants/advisers.

Then there are new amendments made in the existing law, which smaller companies find hard to comprehend. Take the case of India Juris, an NCR-based counsel, which is assisting SME members of CII on the various issues and problems faced by them owing to an amendment in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. “We have been advising and educating SME members of CII on various provisions and benefits under the Act,” points out Samir Rastogi, partner at India Juris. The firm started out working for SMEs around three years back, and it already accounts for 25% of its total practice, though on a pro bono basis.

Besides, SMEs also tend to get bogged down by legal requirements arising from the incorporation of the company, obtaining various approvals and the likes. “To elaborate, single directorship companies with limited liability are still not permitted in our country. Too many procedural tasks go into the incorporation of companies. For the sake of registration, excise, customs, service tax, VAT, import-export code number, are becoming extremely complex, dictated by paperwork and delays in the process,” admits Rajkishore Bhagwatsaran, partner with the Chennai-based Rajkishore Associates. “Apart from this, there is no single window clearance, except when the company is situated in a Special Economic Zone (SEZ), and this geographical location has now become a very tall order for SMEs, given the steep land costs.”

Moreover, the paperwork that goes into the clearing of goods at customs can oftentimes be best understood by the Custom House Agent (CHA) and cannot be undertaken by company officials themselves. While big MNCs are being rolled out the red carpet by every state government, SMEs do not have the opportunity to even meet lower level officials. This is where the services of a law firm become sacrosanct.

Technology throws up perhaps the most worrisome aspect of legal recourse. Typically, SMEs (due to the vary nature and scale of their operations) lack optimum technologies, which restricts them from effectively competing. “A significant amount of our recent representations have been in the area of technology licensing,” says Diljeet Titus of Titus & Co., Advocates. SMEs are also unable to competitively innovate resulting in their dependence on outside R&D to develop technologies and processes for them. “In several cases SMEs are unable to properly innovate or they are unable to properly document development of technologies they have frequently compromised or even lost their IP rights. A great part of our representation therefore focuses on helping SMEs to document inventions to enable them properly establish their intellectual property rights,” adds Titus, claiming that SMEs today make up about 30% of his firm’s total practice, witnessing a 15% growth year-on-year.

Protection of intellectual property (IP) arising out of indigenous innovation/invention has long been a gray area insofar as SMEs are concerned. The whole patenting process is expensive. “There aren’t many qualified people for drafting specifications for a patent, and therefore, the ones who do, charge a high fee, and the timeframe for going through the whole IPR process is long, at least 1-1.5 years for approval,” highlights Chandan, partner at the Bangalorebased Chandan Associates. Only after necessary approvals can the company market its product.

Mumbai-based Jotwani Associates is a law firm that specialises in IP, with as much as half of its practice coming from SMEs. “We handle patent, trademark and copyright management for these clients,” says Harpreet Oberoi, a partner at the firm. She feels that while in the past smaller firms preferred not to spend too much time and money on legal issues, things have changed. Small firms are extremely particular about protecting their intellectual property, especially their trademarks. “We also help SMEs which are expanding their operations abroad to prepare and manage their IP portfolio.” A good portfolio is critical, since it is a reliable indicator of the firm’s prospects—something that a venture capitalist or private equity company always considers before pouring money into any venture. However, experts say that unlike the West, where law firms offer a bouquet of specialised services to SMEs, the same cannot be said of firms based out of the subcontinent. “Most law firms don’t have dedicated SME divisions. The concept hasn’t caught on yet in India,” Oberoi explains. Again, the lack of niche legal services for SMEs means that a small enterprise is treated on par with a big one.

Apart from tech-related issues, SMEs also find it difficult to attract and retain senior level talent. Owing to the small scale of operations and the perceived low growth potential at senior levels, exits at senior management are common. “We have been helping clients in structuring employment, which provide senior employees with competitive salaries and benefits and termination provisions, which discourage liberal job hopping,” contends Titus.

There are also issues pertaining to funding, risk mitigation and compliance. Most SMEs require assistance when it comes to funding issues and scouting for alternate sources of capital, including venture capital and private equity. Also, since most SMEs have low risk control, the supplier and distributor contracts need to be strengthened even in the export market. But the nail in the coffin for most small companies comes from both cost as well as time constraints, which arise out of complying with a plethora of regulations requiring obtaining and maintaining innumerable licences, registrations, approvals as well as reporting requirements. Due to a lack of proper control, enterprises frequently face both fines and penalties resulting in diversion of senior management time and resources to the resolution of these disputes. In such cases, law firms come in handy in more ways than one conducting legal and operational audits to ensure compliance on an ongoing basis. LEGAL TENDER Typically, SMEs lack optimum technologies, which restricts them from effectively competing As the whole patenting process is expensive, protection of IP has been a gray area for SMEs It’s hard to retain talent at senior levels and hence structuring strong employment provisions become necessary .

With inputs from ANIRVAN GHOSH & NIKHIL MENON

The Economic Times 21 April 2008 P. 8 Delhi
With thanks from The Economic Times
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