No Considerations: Doing Business in India Without Bribes

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Development Economics

Course (256 videos)


No Considerations: Doing Business in India Without Bribes

Entrepreneurship can seem glamorous. But ask any business owner and they’ll tell you that the reality is a lot of hard work, long hours, and tough decisions. And where you set up shop can have a huge impact on the difficulty level of starting and running a legal enterprise.

The World Bank ranks economies on that difficulty level, in terms of costs and time involved due to regulations, in its Doing Business index.

India comes in at 130 out of 190 in that index. According to the World Bank, it takes 14 procedures and 26 days just to secure a business license in Mumbai. In practice, it can be much more troublesome and take quite a bit longer. For example, in order to even register a business, you have to already have your commercial property for the company.

In this video, economist and MRU co-founder Alex Tabarrok is on the ground at Koinonia Coffee Roasters in Mumbai to chat with one of its co-owners, Shannon D'Souza, about what it took to navigate regulatory hurdles get this small business up and running.

Teacher Resources


[Alex] The World Bank ranks India 130 out of 190 countries on its Doing Business index. 130 out of 190 -- that's not a great score. It's better than Venezuela, which ranks at 187, but it's nowhere near as good as New Zealand, which captures the very top ranking. The Doing Business index summarizes the costs and the time that it takes to start a new business, to import and to export, to pay taxes. And we're here today in Mumbai, India, at my favorite coffee shop - Koinonia Coffee Roasters - to put a face on these numbers. We're here today to see what it really takes for doing business in India.


[Alex] Wow! That's really good coffee, Shannon.



[Shannon] It's all Indian -- that's the point of Koinonia Coffee. We want to be proud and passionate about Indian coffee. This one's from my family's estate in Chikmagalur. It's Kelagur Estates. We send coffee all the way to Australia in Melbourne -- probably about 20-30 tons a year. So we get it from the farm, we roast it here, and we brew it just for people like you, Alex.



[Alex] Well the product is fantastic, but I want to find out more about the process. So the World Bank -- they say that in Mumbai it takes 14 procedures and 26 days to get a simple business license, which is much higher than the OECD average. Is this consistent with your experiences?



[Shannon] If it was 26 days, it would be a dream. Definitely 14 procedures might be there. Each company -- I think we had a few more that we had to go through with licenses and importing stuff. Some of it's just a bit of a fallacy in how it's composed. In some ways you have to get a commercial property before your business is registered to show that's where it's going to be registered at, and sign a lease for that, and then ---



[Alex] Hold on, hold on, explain this to me. You need a commercial property to get a commercial property?



[Shannon] Yeah, so this is quite a challenge. I live in a rented place. My family has a rented place here. So I couldn't register the business there. I had to get a commercial property, which is this little 60-square-foot place, which basically just has our company's board at the front, and I had to register this and take it on a lease so that I could register my company there before the company's in existence.



[Alex] So let's start at the beginning. So give me -- what's the first step to getting this business started?



[Shannon] The first step -- usually everyone just says you need to get a name registered, and you need to get an MOA and AOA in place. But there are so many steps before that. So you have to start off individually with the directors of the company, and you need to make sure all their identity is in check. For me, coming from Australia, I had all my, obviously, passport, OCI, in place. And then you have to register a director's identification number, and a professional tax number, etc., to get that going. You also need to have a PAN card. So these are all the identities I had to have.



[Alex] So a P-A-N, that's a Personal Identification Number? Tell me more.



[Shannon] It's actually not a very complicated process. It's just that all your identity has to be in line and show the same details. So your PAN is basically a way of -- kind of a tax file number, or a social security number, in another country. But the address on that needs to match your bank account, which needs to match maybe your Aadhaar card, which is another identification system. So India has all these identification systems.



[Alex] And your memorandum of understanding -- this is about what the business is going to do? What goes into that?



[Shannon] That's a very complicated process. You basically have to look down the list of all the things that you can create in a business in India, so they have a list in terms of -- Are you an events company? Are you a food business? So, we'd come under "food," with coffee. And then you have to write down the whole script that your business could do. So we basically had to sit in a brainstorming session and say, "Well, maybe one day we're going to take this green coffee and export it," or, "We're going to get this, and we're going to roast it, and maybe make some, I don't know, some facial creams out of it and stuff," and had to write that in the MOA, and say any coffee-related product -- we would bottle it, or we would pack it, or we would roast it. And come up with everything, and stick it in this MOA. And once it's in this MOA, you can't add anything to the business scope unless you get the MOA re-amended.



The hardest part in this process was working out if the building's -- the license the building's registered under -- if it allows you to have this business. We actually met three consultants and had a list of 10 to 12 different licenses we had to get for this business. And some of them didn't exist anymore, then a new license got brought in. Then you didn't need this license, you needed a category -- so for this roasting machine, we needed a pollution-control license.



[Alex] My guess is this machine puts out less pollution than a tuk-tuk that we took to get here today.



[Shannon] Yeah! Forget about it! It's as good as putting a kitchen stove and having a gas cylinder. It works on LPG, and it works. But there's a whole lot of restrictions for this category. You can't be this close to the ocean. You have to assure how many meters you are away from it. You have to give a map. You have to show what you are doing. I have to show them a map of getting the beans, what happens in this machine, what's the emission, where's the chimney...



[Alex] Really?



[Shannon] All of this stuff had to go into a form. And then you have to hire a guy to put together the forms because you don't want to keep going back and forth. So this pollution -- our board is in a place called Navi Mumbai. It's about an hour away. I might have done 8 to 12 visits just to get this license: sitting down with the guy, making sure he knew everything, that they would process, online submission. Then it just sits in a pile for weeks.



In India, when you take the property papers, so you want to say, "Will we get this license here?" there's a lot of head bobble going on, which is kind of like, "Yeah, you might." But no one gives you a yes or no answer. It's sort of like you put in the papers, and you sit down with the guys and you work out some arrangement. There's very little advice that's given that is clear, that is to the point, and that allows you to work out how to do your business.



[Alex] So let's talk about a controversial issue, which is the issue of bribes in Indian business and politics. Now you've taken a pretty strong position on that.



[Shannon] Yes. So, I'm really straight to say Koinonia Coffee -- we haven't paid a single bribe for any of our licenses. Not even a hundred rupees to a peon, to make sure a paper goes through -- not to say that -- that happens here. I know people have stories. I've heard that that's how India operates. So, we sat with a lot of licensing firms, saying, "How do we do this process?" And a lot of them are like, "Okay, well you fill out these forms, and then you leave the rest up to us." And then when you say, "Okay, well when I get official receipts back, are they going to include the amount I'm paying you?" And they're like, "No, no, no, Sir. Unfortunately we have to negotiate some certain things." And you put two and two together, and you don't press, and you say, "Well, how do I do this without having to go by the means that you're maybe suggesting in this meeting?"



We were at one particular firm, and they were quite proud that their record was 100% for getting all their licenses for their clients. And when we told them that we weren't going to pay considerations, we weren't going to go by their method of getting the licenses; we just wanted them to help us with the documentation -- getting the architect plans in place, working out the compliance procedures for this facility -- we'd said, "Can you pay us, and just put the documents in place, and you tell us where to go, and I'll go myself. I'll go meet the commissioner, I'll go meet the guys and I'll ask them for the licenses. And they came back, and they said, "Sir, unfortunately, we have a 100% record of our clients getting all their licenses, and we just don't feel like you're going to get your licenses going this path, so we wouldn't like to take up the work of just preparing your documents.



[Alex] Okay, so I think I understand what you're saying. But I've got to make it clear. So what you mean, I think, is that the firm was saying, "If we can't pay bribes, we can't guarantee our 100% rate."



[Shannon] Yeah. I'm just being very cautious in making what they suggested, and what they tabled, and how they were... Colloquially, I'd say that's one of the things that they brought up in the conversation.



[Alex] Wow! So they didn't want you as a customer because you wanted to be 100% honest, and 100% straight.



[Shannon] We didn't want to continue with the methods that they suggested. It's been tough. It's hurt. It's hurt, whether financially, but it's hurt emotionally. I'd say that. We started all our business, we had everything up and ready to start, and we had to shut down the business for three months to wait to get licenses. We had people walk past this roastery every day and say, "Are you open? Are you serving coffee yet?" And we'd say, "No." We took a lot of staff cost. We took a lot of rental cost. It's one of the reasons why we're in this little bungalow in this little village. We couldn't go and be in a very high street-frontage place and be like -- or I felt like we couldn't do that -- and just keep paying rent waiting for license processes to go through. We had to find a small place, as small as we could, and secure the business.



[Alex] So you had to do some construction to build at least part of the interior here, and you also had to import a lot of equipment and machinery. What was that process like?



[Shannon] Importing is quite a challenge. There's a great system, because India wants to look at what it imports and the value of importing and those duties to protect the currency, or the economy, or domestic trade and manufacturing, but it places all these stringencies on getting an espresso machine in here, having an import-export license, going through that procedure, then getting your importer to know, "Hey, we have an ethics code. We don't want to be having considerations in importing products. What's on the sheet is what we pay. We want all the receipts placed. We want everything to be done correctly because we're doing the right thing."



[Alex] So it's great for sleeping at night, but for actually getting the business running, this is pretty costly, it would seem.



[Shannon] Yeah, so this little place, it's been our little speakeasy coffee shop. People have to ring me up. I get maybe ten calls a day -- "I can't find your place. Where is it?" I'm like, "You have to go down this little one-way lane to come and find us. But sometimes I have to go to the street to find people and walk them down, and they're like, "Why are you here?" And I'm like, "I get to share the story." I get to share the story about why we're in this little village, and why we took such a small place. And we just had an idea that we wanted to start a coffee company, you know?



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