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Ever-greening of Patents and Public Health: Emerging Issues
Dr. Ashwani Mahajan, Reader, Department of Economics, PGDAV College, University of Delhi
Patents and intellectual property rights are no new terms. First patent law in India came into being in 1852. This patent law was obviously aimed at giving preference to foreign pharmaceutical companies. After independence Indian Patent Act 1970 was enacted after deliberating on the issue for 15 years. This law was aimed at providing medicines at affordable prices to the masses, apart from giving encouragement to research and development and domestic competition while protecting interests of the patent holders. Provision was made only for the process patent and to ensure the availability of medicines at affordable prices to the public, provisions were made for compulsory licensing. Royalty to the patent holders was limited to 5 percent for use of patent by others and for patent to be effective, domestic production was the essential condition.
Then came TRIPS agreement under WTO. The government gave the commitment to amend Indian Patent Act in tune with TRIP’s agreement, which necessitated the inclusion of provisions in the Patent Act, which were undoubtedly not in the national interest in general and public health in particular. Indian Patent Act was amended which led to inclusion of Product Patent, limiting the scope for compulsory licensing, lengthening the period of patent to 20 years and patent protection, even in case there is no domestic production of that product and patent protection was provided even on the import.
Thanks to Indian Patent Act 1970, India emerged as an important production centre for medicines. Medicines are available in India at the cheapest prices. Our pharmaceutical industry in comparison with the rest of the world served not only our own country; rather it emerged as one of the important exporters of medicines all over the world, especially to the developing countries. While Indian Patent Act was being amended by the government under the pressure from WTO appeals were coming from not only within India but even from other countries including WHO to safeguard public health. Under severe criticism from different quarters the government was forced to introduce amendments in Indian Patent Act (Amendment) Bill 2005. Under these amendments provisions were introduced so as to allow the existing domestic production of medicines to continue despite the Patent. Another provision was made to discourage continuation of Patent Right beyond the period of patent by preventing the grant of frivolous patents and ever-greening.
“Ever greening” is when patent owners attempt to extend the patent monopoly by seeking a new patent that “updates” the first one before its expiration. This is usually done by claiming things such as an “inventive” method for administering the pharmaceutical compound covered by the base patent. For pharmaceutical products, this means an extended monopoly that excludes generic drugs from the market.
Ever greening, in one common form, occurs when the brand-name manufacturer literally “stockpiles” patent protection by obtaining separate 20-year patents on multiple attributes of a single product. These patents can cover everything from aspects of the manufacturing process to tablet colour, or even a chemical produced by the body when the drug is ingested and metabolised by the patient.
According to European Generic Medicines Association ,in the 1980s the list of a drug’s properties eligible for patenting was relatively limited. They included:
Primary uses
Processes and intermediates
Bulk forms
Simple formulations
Composition of matter
During the 1990s the catalogue (1) grew to 18, nearly four times the amount of a decade earlier, to include patents on such additional aspects as:
Expansive numbers of uses
Methods of treatment
Mechanism of action
Packaging
Delivery profiles
Dosing regimen
Dosing range
Dosing route
Combinations
Screening Methods
Chemistry Methods
Biological Target
Field of use

EXPERIENCE OF EVER GREENING IN OTHER COUNTRIES
When ever-greening through patent strategies, the originator manufacturer simply keeps adding patents to the product (whether legitimate or not), essentially forcing the generic manufacturer to choose between waiting for all the patents to expire and applying for marketing authorisation anyway, running the risks of litigation and the associated costs and delays.
Drug patent evergreening is the single most important strategy that multinational pharmaceutical companies have been using since 1983 in the US (and since 1993 in Canada) to retain profits from "blockbuster" (high sales volume) drugs for as long as possible.
When the original patent over the active compound of a brand-name drug is due to expire, these drug companies often claim large numbers of complex and often highly speculative patents. Laws in the US and Canada require manufacturers to notify the original brand-name patent holders of their intention to market copies at the expiry of the original patent. The original patent holders can then threaten these potential generic competitors with breaching their now "evergreened" patents and seek a court order preventing their marketing approval.
The ultimate consequence could be elderly and poor patients paying several times the present price for drugs.
The problem is a severe one in the US. In 2002, an extensive inquiry by the US Federal Trade Commission found that as many as 75 per cent of new drug applications by generic drug manufacturers were the subject of legal actions under patent laws by the original brand-name patent owner. These were driving up US drug costs by keeping the cheaper generic versions off the market.
In Canada, a similarly extensive investigation by the Competition Bureau revealed similar problems with drug patent evergreening. It found that the hundreds of legal actions involving evergreening claims were having a disastrous effect on drug prices.
The evergreening article in the Australia-US FTA (article 17.10.4) is far worse than the US or Canadian versions. For the first time it links the operations of our Therapeutic Drug Administration (the drug safety and efficacy body) with supervising patent law.
It requires that TGA drug marketing approval be "prevented" indefinitely (not for the 30-month and 24-month periods as in the US and Canada) whenever any type of patent (including a speculative evergreening patent) is merely "claimed".
The Generic Medicines Industry Association of Australia, in its submission to the Senate inquiry on the FTA, stated that this evergreening provision could lead to "long delays or generic equivalents not reaching the market".
If the big companies succeeded in delaying generic drug market entry for as little as 24 months, the federal cost for just the first few highest expenditure PBS drugs could be $1.5 billion between 2006 and 2009. Public hospital drug expenditures could increase by 12 per cent over the same period.
ATTEMPTS TO RESTRICT EVER GREENING IN INDIA
As per the amendments readied by the commerce and industry ministry and passed by the Parliament, scope of patentability was restricted by expounding mandated terms namely inventive step and new invention. A patentable pharmaceutical substance will now be any new entity involving one or more inventive steps (as redefined). In this regard an issue was raised in the Parliament about the pharmaceutical substance, that whether it will be a New Chemical Entity (NCE) or a New Medical Entity (NME). The matter was then decided to be referred to a Technical Expert Committee to go into the question of whether it would be TRIPS compatible to limit the patent to New Chemical Entity of New Medical Entity involving one or more inventive steps. Apart from this another issue was raised that whether it would be TRIPS compatible to exclude micro-organisms from patenting Hence, an Expert Committee was constituted to examine these issues. This Expert Committee headed by Dr. R.A. Mashelkar submitted its report on the issue of TRIPS compatibility of NCE or NME and recommended as follows:
“It would not be TRIPS compliant to limit granting of patents for pharmaceutical substance to New Chemical Entities only. However, every effort must be made to provide drugs at affordable prices to the people of India. Further, every effort should be made to prevent the grant of frivolous patents and ‘ever-greening. Detailed Guidelines should be formulated and rigorously used by the Indian Patent Office for examining the patent applications in the pharmaceutical sector so that the remotest possibility of granting frivolous patents is eliminated.
NOVARATIS LOST EVERGREENING TEST CASE
Pharmaceutical giant Novartis first file a suit against Indian companies producing generic version of cancer drug imatinib, which was marketed as Glivec (or Gleevec in the US) after second amendment of Indian patent Act 1970, claiming generic producers of the drug violates it’s (Novartis’s) patent rights. The company was granted interim relief and wad granted one of first exclusive marketing rights.
As a developing country, India was not required to full comply with TRIPS rules, which include pharmaceutical product patents, until 2005. in the interim, however, it introduced a temporary system of ‘exclusive marketing rights’ for new products that would then be considered for patents with the advent of full TRIPS compliance. When Novartis was granted one of the first such exclusive marketing rights. For Glivec in November 2003, the price increased from $230 to $2,740.
After India reformed its patent laws to make them compliant with WTO rules in 2005, Novartis was refused a patent for Glivec on the basis that the beta crystalline from did not provide a significant enough “enhancement of efficacy” of the original imatinib molecule. Novartis responded with a writ to the High Court appealing against the ruling. It argued that Section 3(d) of the Indian Patent Act was “unconstitutional as it is vague, arbitrary and violative of Article 14 of the constitution (right to equality)”, and alleged that it contravened India’s obligations under the TRIPS Agreement.
Defending the patent-worthiness of Glivec, Novartis research chief Paul Herrling said “medical progress occurs through incremental innovation. If Indian patent law does not recognise these important advances, patients will be denied new and better medicines”.
India attempts to differentiate genuine innovation from evergreening by using the “enhancement of efficacy” concept. The High Court suggested only that efficacy can be defined as the ability of a drug to produce a desired therapeutic effect.
Novartis maintains that Glivec boosts bioavailability (i.e. the degree to which the drug is absorbed by the patient) by 30 percent over the original form of imatinib, which should constitute an enhancement of efficacy. The Chennai Patent Ofice disagreed in rejecting the application.

THE ISSUE
So far we have talked about the technicalities and what Expert Committee had recommended. It is not merely a question of what definition of pharmaceutical substance is adopted. It is a question of whether our people would be able to afford medicines and can enjoy the right to live as provided by our constitution. Though apparently Mashelkar report seems to be concerned with provision of medicines at affordable prices, prevention of ever-greening of patents and grant of frivolous patents, but its recommendations in fact go against what it says. Theoretically, the logic for patent protection is straightforward. Discovery of new medicines involves heavy cost, those who invent (companies) need an incentive to make this investment. Grant of patent provides this incentive and protection.
But, practically issue is not so straightforward. Those who have invented medicine were given protection for a long period. Now innovative drugs are no longer coming in a big way. They (companies) have very little to add in terms of new medicines. Now their strategy is to get minor tweaks to existing drugs patented and thereby get an ever-extended monopoly wherever possible. In trade circles this phenomenon is called ever greening. In real terms recommendations by Mashelkar Committee actually allow these companies to get this ever extended monopoly by way of ever-greening of patents. This phenomenon is also known as Swiss Patents.
MASHELKAR COMMITTEE’ ARGUEMENTS
1. Given the terms of reference of the committee to find out whether it would be TRIPS compatible to limit the grant of patent for a pharmaceutical substance to a New Chemical Entity or to a New Medical Entity by involving one or more inventive steps. Analysing the TRIPS agreement and also the practice in different countries, Mashelkar Committee comes to the conclusion that it would not be TRIPS compatible to limit the grant of patent for a pharmaceutical substance to a New Chemical Entity or New Medical Entity.
2. It would also not be in the national interest to limit grant of patent for a pharmaceutical substance to a New Chemical Entity or to a New Medical Entity. For this the argument put forward by the committee is that Restricting patentability just to NCEs or NMEs could have both legal and scientific ramifications. There is a perception that even the current provisions in the Patents Act could be held to be TRIPS non-compliant. Drug discovery research is still finding its feet in India. Though many companies are investing, it will at least be a decade before a critical mass is in place and results start accruing. Thus, restricting patentability to just NCEs would mean that most of the pharmaceutical product patents would be owned by MNCs.
3. The report suggests not to confuse ever greening of patents with incremental innovations.
HOLES IN THE REPORT
1.It would be interesting to note that Mashelkar’s report came in December 2006 ,when Novaratis’s case was pending in the court. Faced with severe charges of plagiarism ,when Mashelkar was preparing to withdraw his report ,Novaratis issued a press statement stating” A report from the Mashelkar committee, commissioned by Indian Government and comprised of Indian experts, supports many of the concerns about Indian patent law expressed by Novaratis, mentioning that the laws are not complying with international agreements like TRIPS."
2. Mashelkar Committee while recommending on the issue, chose to ignore the arguments put forward by eminent jurists and experts, different stake holders and groups. It would not be out of context to mention that while ignoring the arguments, contrary to its recommendations, it borrowed (without acknowledgement) from UK based research funded by Interpat, an association of major multinational pharmaceutical companies. The question is if this committee of five renowned experts was to base its recommendations on secondary sources and that too on research funded by the beneficiaries of the recommendations, why it took a long duration of one and a half years to finalise its report.
3. While amending its patent law the Parliament included some unique provisions to prevent ever-greening of patents. It stipulated that if the patent holder wanted a patent for an improvement on an already existing drug it must show the improvement actually made the drug more effective. Though, this stipulation is very logical but it does not concur with the interest of the multinational corporations. The TRIPS agreement explicitly gives us the flexibility to set higher patent standards. The Mashelkar Committees report ignores these flexibilities and declares the present provisions in the Patent Act incompatible with TRIPS.
4. The report though suggests not to confuse ever-greening of patents with incremental innovation, it fails to really distinguish these two.
Dangers Ahead
1. The recommendations of the committee if accepted would go a long way to translate existing patents into an infinite monopoly and artificially high prices for essential medicines for infinite period because only one manufacturer is allowed to supply the market.
2. Hard earned protections placed in the existing law as a result of continuous efforts by experts and activists may also become doubtful and multi national corporations may use these recommendations as a weapon to build up argument against the protections available in the existing law.
Mashelkar retracts
After having thoroughly been exposed, Dr. Mashelkar the chairman of the committee has sought to withdraw the report on the grounds of 'technical inaccuracy and plagiarism' and has requested for three months time to reexamine and resubmit the report. But it is a fact that the committee has not only recommended in tune with the dictates of MNCs, but has also misstated India right to define the scope of patentability and thereby threatened the access to medicines by the masses. The committee therefore loses the moral right to continue and re examine and resubmit its report
References:
Eric Larson, A presentation entitled “Evolution of IPR and Pharmaceutical Discovery and Development”, at the conference: “Intellectual Property Rights: How Far Should They Be Extended?”, organised by The National Academies, Committee on Intellectual Property Rights in the Knowledge-based Economy (22 October 2001).
Eric Larson’s comments during panel discussions in the verbatim report of the conference proceedings, pp 119-127.
Evergreening of Pharmuceutical Market Protection ,www.egagenerics.com
Report of Technical Expert Group on Patent Law Issues , Government of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion, February 2006
Indian Patent (Amendment) Act,2005,Government of India

Appendix 1
Extracts of the Report of Technical Expert Group on Patent Law Issues
(a) New Chemical Entity

Terms of Reference: Whether it would be TRIPS compatible to limit the grant of patent for pharmaceutical substance to new chemical entity or to new medical entity involving one or more inventive steps:

5.2 The term "new chemical entity" appears for the first time in International Intellectual Property agreements in the TRIPS Agreement of 1994, under Article 39.3:

"Members, when requiring, as a condition of approving the marketing of pharmaceutical or of agricultural chemical products which utilize new chemical entities, (emphasis added) the submission of undisclosed test or other data, the origination of which involves a considerable effort, shall protect such data against unfair commercial use. In addition, Members shall protect such data against disclosure, except where necessary to protect the public or unless steps are taken to ensure that the data are protected against unfair commercial use."

5.3 According to the United States (US) Food and Drug Administration (FDA), a new molecular entity (NME) or new chemical entity (NCE) means a drug that contains no active moiety that has been approved by FDA in any other application submitted under section 505(b) of the Federal Food, Drug, and Cosmetic Act.

5.4 The term "new medical entity" has neither been used nor defined in the TRIPS Agreement.

5.5 Article 27 of the TRIPS Agreement elaborates the scope of patentable subject matter as follows:

“1. Subject to the provisions of paragraphs 2 and 3, patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application. Subject to paragraph 4 of Article 65, paragraph 8 of Article 70 and paragraph 3 of this Article, patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced.

2. Members may exclude from patentability inventions, the prevention within their territory of the commercial exploitation of which is necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to the environment, provided that such exclusion is not made merely because the exploitation is prohibited by their law.

3. Members may also exclude from patentability:

(a) diagnostic, therapeutic and surgical methods for the treatment of humans or animals;
(b) plants and animals other than micro-organisms, and essentially biological processes for the production of plants or animals other than non-biological and microbiological processes. However, Members shall provide for the protection of plant varieties either by patents or by an effective sui generis system or by any combination thereof. The provisions of this subparagraph shall be reviewed four years after the date of entry into force of the WTO Agreement.”

5.6 Granting patents only to NCEs or NMEs and thereby excluding other categories of pharmaceutical inventions is likely to contravene the mandate under Article 27 to grant patents to all 'inventions'. Neither Articles 7 and 8 of the TRIPS Agreement nor the Doha Declaration on TRIPS Agreement and Public Health can be used to derogate from this specific mandate under Article 27.

5.7 Article 1 of the TRIPS Agreement requires compliance to the provisions of the Agreement, while TRIPS plus provisions are optional. This would mean that limiting grant of patents to pharmaceutical substances to new chemical entities only, and excluding new forms of crystals, polymorphs, etc., if they satisfy the criteria of patentability, is not consistent with TRIPS Agreement.

5.8 Section 2 (1) (j) of the Indian Patents Act defines “invention” as a new product or process involving an inventive step and capable of industrial application. The term “pharmaceutical substance” has also been defined in Section 2 (1) (ia) as any new entity involving one or more inventive steps. The term “inventive step” has been defined in Section 2 (1) (ja) as a feature of an invention that involves technical advance as compared to the existing knowledge or having economic significance or both and that makes the invention not obvious to a person skilled in the art. Thus, a chemical to be patentable must be new, non-obvious and have utility. However, Section 3 excludes certain inventions from being patented. This, inter alia, includes the exclusions under Section 3 (d) as under:

“The mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.

Explanation: For the purposes of this clause, salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations and other derivatives of known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to efficacy.”

Thus, the new form of a known substance would not be patentable unless it differs significantly in properties with regard to efficacy.
National Interest perspective

5.9 If the aim of limiting patents to new chemical entities is to prevent a phenomenon loosely referred to as 'ever-greening', this can be done by a proper application of patentability criteria as present in the current patent regime.

5.10 It is important to distinguish 'ever-greening' from what is commonly referred to as 'incremental innovation'. While 'ever-greening' refers to an extension of a patent monopoly, achieved by executing trivial and insignificant changes to an already existing patented product, 'incremental innovations' are sequential developments that build on the original patented product and may be of tremendous value in a country like India. Therefore, such incremental developments ought to be encouraged by the Indian patent regime.

5.11 Restricting patentability just to NCEs or NMEs could have both legal and scientific ramifications. There is a perception that even the current provisions in the Patents Act could be held to be TRIPS non-compliant. Drug discovery research is still finding its feet in India. Though many companies are investing, it will at least be a decade before a critical mass is in place and results start accruing. Thus, restricting patentability to just NCEs would mean that most of the pharmaceutical product patents would be owned by MNCs.
5.12 In case of patenting of drugs, the protection to various forms of same substance (salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixture, etc.) is often seen as ‘ever-greening’ (extending incremental protection to a subsisting patent) and hence such protection is objected to.

5.13 In most countries, patenting of an invention for different forms of the same substance is subjected to the test of novelty, non-obviousness (unexpected effect) and utility before it is granted patent protection. Such a protection in the form of incremental inventions in respect of known and new molecules or a process potentially provides an added advantage to an inventor or a firm to retain its market share or capture a space in the established market. However, patenting an invention does not imply that a person can practice the invention; he would have to exercise due diligence and ensure that the rights of others are not infringed.

5.14 Many drug industry stakeholders feel that the use of the expression “new chemical entity” under the Patents Act would lead to many interpretations. While some Indian drug industry representatives feel that limiting grant of patents to new chemical entities will not be conducive to competitive growth, some others feel that patent protection should only be given based on the strict compliance of the patentability criteria. Many Indian industry representatives are not in favour of widening the scope of patentability.

5.15 The group examined the current level and type of R&D innovations that the Indian drugs and Pharma industry was undertaking. Annexure IV and V provide some representative samples of international patents filed by the Indian industry. It is clearly seen that most of them are based on incremental inventions.

5.16 In the light of the above discussion, it would not be TRIPS compliant to limit granting of patents for pharmaceutical substance to New Chemical Entities only. However, every effort must be made to provide drugs at affordable prices to the people of India. Further, every effort should be made to prevent the grant of frivolous patents and ‘ever-greening’. Detailed Guidelines should be formulated and rigorously used by the Indian Patent Office for examining the patent applications in the pharmaceutical sector so that the remotest possibility of granting frivolous patents is eliminated.
Appendix 2
Extracts from Patent (Amendment) Act,2005
3. In section 3 of the principal Act, for clause (d), the following shall be substitued, namely:—
"(d) the mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.
Explanation.—For the purposes of this clause, salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations and other derivatives of known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to effica

Background
While introducing and pursuing new economic policy it was promised that the administrative procedures will be simplified, inspector raj will be done away with and to give a reprieve to the small scale sector from cumbersome procedures, a new unified simple small enterprise act would be enacted. In fact liberalization policy boasted all along in the name of new economic policy, means among other things liberalization from unwarranted government intervention, unhealthy administrative procedures and end of inspector raj.
After more than 15 years of the beginning of the new economic policy, this is the right time to look into this aspect of policy. We understand that Inspector Raj has been a stumbling block not only in the development but also for survival of the Small Scale Units. Given the number of inspectors and other conditions with which these small entrepreneurs deal with, there is hardly any time and scope for them to think for the welfare and future of the unit. Much of entrepreneurs time is wasted in fulfilling the obligations prescribed under never ending rules and regulations.
Despite talks about reforms there has hardly been any reform with regard to procedures in the recent past. There has been no simplification after new economic policy came into force, except occasional and frequent changes in the formats and returns. There are about 40 Acts which an entrepreneur has to comply with. While complying with these Acts and other rules and procedures an entrepreneur has to fill up more than 300 forms per year and a number of inspectors visit their units, all making it almost impossible to think about the improvement or development of the production unit.
Despite talks about reforms very little has been done with regard to burden of procedures in the recent past. There has been very little simplification after new economic policy came into force, except occasional and frequent changes in the formats and returns. Rather in some cases new rules are being added to make scenario worst.
Different Acts/Rules/Schemes, must have had some objective at the time of their enactment, but it is generally seen that as it penetrates to the lower level or the implementation level, the entire objective and the spirit behind the policy seems to had been forgotten and lost. The officers concerned are more interested and busy in finding who has not updated the records, who has not filed the return in time and try to grill from all possible angles, rather than to what extent their department has performed in achieving objectives like pollution department in clearing the atmosphere, the employment exchange in achieving the employment objectives etc. Law is stiffened to such an extent that the follower always fails and offers then take pride in having more violators than the followers.
There have been only a few studies about the plethora of regulations and procedures inhabiting the growth of small scale industries. There has been an occasional reference about the same in different commissions and committees concerning small scale sector. It is worth looking at the report of the Study Group on Development of Small Scale Enterprises headed by Dr. S.P.Gupta, Study made by Administrative Staff College of India on laws, rules, regulations and procedures relating to Small Scale Industries in India, report of the Second Labour Commission.
All these studies and reports indicate that Small Scale Industries in India are reeling under the plethora of rules, regulations and procedures etc. which come in a big way in the development of Small Scale Industry in the country. It has been recommended that this burden of procedures be reduced for the betterment of SSI sector.
Burden of Policy Framework on SSI Units
Small Scale Sector is a vibrant part of Indian Economy with significant contribution towards production, employment and exports. It not only contributes, it’s performance is better than big industries in the field of production, employment and exports.
Small industries not only provide large scale employment with much less capital, they play a significant role in the industrialisation in the rural and backward areas. Thus they are helpful in equal distribution of national income and wealth by way of reducing regional imbalances. Small industries also work as ancillary to big and medium industries and thus help in their growth. In a country like India where labour is abundant but capital is scarce, this sector has special and multi-dimensional importance due to its ability to provide large scale employment to the unemployed labour force.
There are two types of trends emerging simultaneously. One, the number of SSI units both registered and unregistered is growing. The number of SSI units in the country (including registered and unregistered) is estimated to have grown from 10.52 million in 2001-02 to 11.86 million in 2004-05; the employment estimate has correspondingly gone up from 24.91 million persons in 2001-02 to 28.28 millions in 2004-05.
Two, a large number of SSI units are getting closed down for one or the other reasons. According to the Third Census, in November 2002, covering units registered permanently up to March 31, 2001, a total of 22.62,401 units were surveyed. Of these 13,74,974 were found to be working and the remaining 8,87,427 units (39 per cent) closed, according to the 2004-05 Annual Report of the Ministry of Small Scale Industries.
The size of the total SSI sector, as per the 2002 Survey, is estimated to be over one crore units, with as much as 47.22 per cent of the units located in Uttar Pradesh, Andhra Pradesh, Madhya Pradesh and Tamil Nadu.
According to the various committees constituted by the government to study the problems of Small Scale Sector, the factors hampering the healthy growth of this sector range from inadequate access to timely credit, technological obsolescence and infrastructure bottlenecks, to marketing constraints and cumbersome rules and regulations.
A super structure of rules and regulations have been created by the combination of Central and State governments and Provincial authorities. These rules and regulations can be complied with, but with a high cost in terms of human efforts. A SSI units typically has to go through the process of obtaining a number of statuory clearances, even much before the start of actual production. The moment a project is conceived, this compliance with rules and regulations start inhibiting the very start of the project. First of all a certificate of registration from the relevant authorities has to be obtained. This certificate of registration is the pre-requisite to seek allotment of an industrial shed, sanction of requisite power connection and clearance from municipal authorities. Thus the authority empowered under the law to grant such registration is in a position to wield tremendous influence over the fortunes of the enterprise. This registration may even be cancelled. And units require re-registration at the end of every five years.
Further, the entrepreneur must obtain sales tax, excise and pollution control clearances before commencing manufacture of the product. Sales tax registration, central excise registration and consent letter from pollution control authorities require a whole range of formalities of filling up the forms, inspections etc.
Thus, we understand that regulatory system has inbuilt provisions for entrepreneural overload with its emphasis on prior registration and periodic renewals. Record keeping is another aspect. Labour laws for instance require the entrepreneurs to maintain registration of workmen on his rolls, of wages paid, deduction effected, overtimes paid, fines extracted, advances paid, engagement of sub-contractors etc. The law on sales tax typically requires the registered units to maintain eleven registers, eight books of accounts and files of ten different types of the documents taken together with registers and records under other statutes. The SSI units obligations under law in this regard could easily running to about hundred types of documents and other records. A list of the various Acts faced by SSI units, different forms which an entrepreneur has to fill up and the registers they have to maintain is attempted at and is given in the appendix.
The entrepreneur managing a small scale unit has basically two options, one, expend all his energies in ensuring compliance with the multitude of state regulations applicable to industrial establishments. In this case he will have a very little time left to pay attention for improving quality, business promotion, technical innovation etc. Two, he enters into some sort of secret arrangements with the regulatory establishments to save him from troubles and wastage of energy. But such an arrangement carries a price tag. This enhances cost of production and thus reduces competitive strength of the Small Scale Units. Thus it is very clear that this so called regulatory framework undermine the financial viability of these units. This regulatory framework does not make any distinction between large and small units (except very small units). Presently, units employing ten or more workers (where manufacturing is carried out with the aid of electric power) are brought within the ambit of Factories Act. In certain aspects of regulations such as in case of Environmental Protection even size in terms of number of workers employed is not a relevant criterion.
The Factories Act is a classic example of how rules and regulations governing Small Scale Manufacturing Sector work against the smooth functioning of Small Scale Units. It is also a classic example of the Inspector Raj. There are too many parameters of functioning of the unit that the entrepreneur has to monitor and ensure compliance. They are not only too stringent to be complied with, they are loosely specified too.

The Menace of Inspector Raj
The Factories Act, E.S.I. Act, Provident Fund Act, Central Excise Act, State Sales Tax Act, Income Tax Act etc. are only a few of the various Acts faced by the Small Scale Units. There are number of other legislations faced by SSI units. A list of such Acts is given in the Appendix 1. Of course various Inspector numbering more than 50 visit a unit to inspect whether the provisions, rules and regulations as specified by the Act are complied with or not. Adding to the agony of SSI units sometimes Inspectors visit a unit not for any inspection, but for collection of data for various types of census records.
The Factories Act 1948 followed by the Contract Labour Act 1948, Minimum Wages Act 1948, Payment of Bonus Act 1965, Employment Exchange (Compulsory Notification of Vacancies Act 1959, Air (Prevention & Control of Pollution) Act 1981 empower the maximum number of inspectors.
Some of these inspectors are vested with wide ranging powers, including order of imprisonment (which ranges anywhere between 6 months and 7 years), sealing the unit, and stopping the operations of a unit. Other powers comprise imposing a penalty, disconnecting water and electricity supply, filing a case in the court of law, and denying renewal or canceling the operating license.
A list of inspectors is tabulated below on the basis of these powers. The following inspectors have all the three powers of - imprisonment, sealing and stopping operations of a unit - vested with them :-
 Asst P.F Commissioner/ P.F Enforcement Inspector
 ESI Inspector
 Asst/ Jt/ Dy Director (Industrial Health & Safety
 Officials of the State Pollution Control Board
 Director of Intelligence & Revenue
 Dy/ Chief Electrical Inspector
 Assistant Controller of Weights & Measures
 Range Inspector
The first 4 categories of inspectors in the above-mentioned list visit a unit most regularly, as has been pointed out by our survey. Hence, it is evident that, those inspectors with maximum powers also visit most regularly.
The enormous powers vested with these inspectors coupled with the frequency of their visits, perpetuates Inspector Raj and breeds corruption.

Experts’ View Point
Number of Experts, Committees, Commissions and Study Groups has tried to look into the various aspects of this menace of plethora of rules and regulations and other aspects of policy framework inhibiting the growth of Small Scale Sector. All of them without exception have suggested for amending rules, simplification of procedures and exempting Small Scale Sector from various Acts. They have also suggested to minimise the number of forms to be submitted by the Small Scale Sector under various rules. Dutta Committe on Inspector Raj, Sub-Committees of SSI Board, Bhatt Committee on Legislature for Small Industries etc. had gone into this aspect.
Later on Study Group on Development of Small Scale Enterprises headed by Dr. S.P.Gupta, Second National Commission on Labour and Study Group of Administrative Staff College of India went into the problems faced by Small Scale Sector due to the burden of policy and legal framework. An attempt has been made in this chapter to realise recommendations made by the above three.
Study Group on Development of Small Scale Enterprises
The report of Planning Commission’s Study Group on Development of Small Scale Enterprises headed by S.P.Gupta suggests that the vision for the 21st century for SSEs cannot be realised with plethora of laws and rules and regulations governing this sector and there is need for a single Unified Act governing promotion and development of small scale enterprises in the country.
The report further suggests that there should be a separate Small Enterprises Development Act for SSEs similar to the Industrial Development and Regulation (IDR) Act. This comprehensive Act may cover all aspects relating to regulation and growth of SSEs.
The report further observes that the small Business Administration (SBA) of United States has a comprehensive single law governing SMEs. On the same lines, there should be a separate comprehensive law for SSI units, which has been long pending demand of SSI units.
Study group recommends that the SSE units should be free from Laws/procedures which cause undue harassment. As far as possible, inspection should be replaced by self certification and procedures should be transparent and hassle-free. Broadly, the existing laws could be classified in three categories a) Laws governing set- ting up of industries; (b) Laws governing working of the industry; and (c) Laws relating to Labour and their Welfare.
The study group observes that the laws relating to labour and welfare have been found more deterrent and troublesome because the small entrepreneurs are not able to comply with the requirement of maintaining a large number of registers, forms returns, etc. Further, the labour strength of small enterprises may vary as per availability of orders, which increases difficulties of small enterprises to comply with the labour laws. In view of the above difficulties experienced by the SSI entrepreneurs, especially tiny units, it is felt necessary to recommend exemption from all laws/regulations to tiny units. This would leave more time for entrepreneurs to pay attention to their work and make efforts for increasing productivity and profitability.
The Study Group on Development of Small Scale Enterprises suggested that :
1. Tiny units should be exempted from all laws/regulations excepting those which relate to safety of human beings and the environment.
2. It was noted that the system of Inspection on fiscal matters such as Income Tax, Excise Duty, Sales Tax etc., have been greatly simplified in recent years. There is need for similar simplifications in other fields as well.
3, Inspections carried out for SSE’s could be prescribed under three conditions: (i) on receipt of complaints, (ii) selection of unit for sample check (10% of total units), and (iii) for audit purposes. The Study Group feels that self-certification and voluntary declarations would help the SSE’s.
4. System of self-certification be introduced, which will obviated the need for regular inspections. Electronic transmission of data should be encouraged to make the system more transparent and hassle free.
5. The regualtory laws/ procedures for SSI units should be further simplified. Number of visits by Inspectors should be programmed that all inspections could be held on only one day within a quarter as far as possible, so that the entrepreneurs are not harassed frequently. The day of inspections should be communicated in advance.
6. For new units, single window clearances should be arranged irrespective of whether they relate to clearances from Central Authorities or State Authorities or Local Authorities.
7. The regulatory laws/ procedures for SSE’s should be clubbed together wherever possible.
8. The jurisdiction of various Sections/ Clauses and Departments should be clubbed so that minimum possible inspectors are required to visit the SSE units.
Apart from this rules can be simplified in the following manner.
Second National Commission on Labour
The report of the Second National Commission on Labour, Government of India appreciates Labour Laws (Exemption from furnishing returns and Maintaining Registers by Certain Establishments) Act, 1988 in their observation. By this enactment employers in small and very small establishments were exempted from furnishing return and maintaining registers under certain labour laws. Small establishment has been defined to mean an establishment in which not less than ten and not more than nineteen persons are employed or were employed on any day of the preceding twelve months; ‘very small establishment’ has been defined to mean an establishment in which not more than nine persons are employed or were employed on any day of the preceding twelve months. The laws in respect of which this law provides for exemption from filling returns and maintaining registers as prescribed are the following :-
Payment of Wages Act, 1936
Weekly holiday Act, 1942
Minimum Wages Act, 1948
Factories Act, 1951
Working Journalists and other Newspaper Employees (Conditions of Service)
and
Miscellaneous Provisions Act 1955
Contract labour (Regulation and Abolition) Act, 1970
Sales Promotion Employees (condition of Service) Act 1976
and Equal Remuneration Act 1976
The above mentioned Act of 1988 does not intend to all Labour Laws but only to those listed above. Second National Commission on labour, Govt. of India noted that there is no reason why the simplification of returns to be sent and registers to be maintained cannot be extended to all aspects, including social security. Commission notes “After all, it must be recognised that the returns are being asked for, essentially for statistical purposes and in some cases for information on compliance with safety regulations. But considering the delays, the gaps and unevenness of data, these returns in the aggregate do not serve much purpose. It may be desirable to rely on periodic sample surveys which will furnish the data necessary for policy formulation. We would urge that this matter be pursued vigorously. Some States have already simplified the forms that are to be submitted, and are experimenting with one simple form. There is no reason why this should not be prescribed and given effect to”.
Study Group of Administrative College of India
The SSI Law Project Commissioned by the Union Ministry of Small Scale and Agro and Rural Industries, has been undertaken to reduce the harassment faced by SSI’s due to plethora of laws, rules and regulations and the burden of inspections under various laws.
The Administrative College of India made a study of laws, rules, regulations and procedures relating to small scale industries in India, has recommended that none other than environment laws should be made applicable to SSI units employing less than 50 persons (including part-time, contractual and casual) or with less than Rs. 25 lakh in plant and machinery at historical value.
The study has identified the following laws as redundant for the SSI sector:
The Employment Exchange (Compulsory Notification of Vacancies) Act, 1959 (Act 31 of 1959).
The Employees Liability Act, 1936 (Act 24 of 1938).
The Weekly Holidays Act, 1942 (Act 18 of 1942)
The Collection of Statistics Act, 1953 (Act 32 of 1953).
The Labour Laws (Exemption from Furnishing Returns and Maintenance of Registers by Certain Establishments) Act, 1988 (Act 32 of 1953).
The Study Group further recommended that laws and procedures should be simplified. In this context it was recommended to substitute 52 forms with one common annual return. It also recommended for substitution of all inspections with only one inspection once in five years or when the whistle is blown regarding non-compliance of statutory provisions by any particular unit and replacement of all the registers with one muster roll register and a binder of wage slips.
Thus, from the above analysis it is clear that burden of regulatory framework comes in the way of the development of SSI’s and there is no alternative to minimisation of this burden.
Occasional Reprieve from Burden of Legal Framework
According to Andhra Pradesh government claim, Andhra Pradesh is among the first few states in the country to initiate reforms relating to simplifying and minimising instructions. According to Andhra Pradesh government annual schedule is prepared for inspection of specific industrial areas and the industries are timely informed about the same.
All inspections, except for statutory inspections, regarding the violation of rules and regulations by any unit were to be permitted only on the basis of written, signed and verified complaints.
Surprise inspections are to be conducted only by Gazetted Officer with permission in writing from the regional authority or Head of the Department. Accredited agencies carry out statutory inspections on payment of fees in technical areas. Government formulated a regulated and systematized trial unit. Common annual return has been issued in consultation with the SSI associations to cover the returns filed under various laws of Factories and Employment Department.
Government of Andhra Pradesh further claims that a system of Common General Register has been started to meet the requirements of storing information. Further permanent licenses are being given provided some formalities which are completed. These formalities include proof of ownership/tenancy rights of the premises where the unit is located, municipal corporation clearances, clearance from pollution authorities, power releasing certificate, copy of partnership deed or memorandum of articles of associations in case of private limited companies etc. All small scale and tiny industries operating without power or operating with power up to 30 HP and employing up to 30 persons are exempted from obtaining prior approvals/clearances from government agencies. The industries with no power or having power up to 5 HP are exempted from obtaining all clearances. All proposed industries with installed power up to 75 HP are exempted from obtaining prior approvals for site/factory plan from the Factories Department. The clearance from the Pollution Control Board has been made automatic except for the enlisted 65 highly polluting industries. District Industries Centre will give NOC (acknowledgement) which will be considered as clearance. Government dispensed obtaining approvals from Medical & Health Department for setting up of industries. Self-certification by the industry to comply with labour laws is sufficient under provisions of certain Labour Laws to all types of industries except for major hazardous industries.
Labour Laws (Exemptions from furnishing returns and Maintaining Registers by Certain Establishments) Act, 1988
By this enactment employers in small and very small establishments were exempted from furnishing return and maintaining registers under certain labour laws. Small establishment has been defined to mean an establishment in which not less than ten and not more than nineteen persons are employed or were employed on any day of the preceding twelve months; ‘very small establishment’ has been defined to mean an establishment in which not more than nine persons are employed or were employed on any day of the preceding twelve months. The laws in respect of which this law provides for exemption from filling returns and maintaining registers as prescribed are the following :-
Payment of Wages Act, 1936
Weekly holiday Act, 1942
Minimum Wages Act, 1948
Factories Act, 1951
Working Journalists and other Newspaper Employees (Conditions of Service)
Miscellaneous Provisions Act 1955
Contract labour (Regulation and Abolition) Act, 1970
Sales Promotion Employees (condition of Service) Act 1976
and Equal Remuneration Act 1976
The above mentioned Act of 1988 does not extend to all Labour Laws but only to those listed above.
Example of Andhra Pradesh with regard to simplification of legal provisions and procedures show that we can give some reprieve to the Small Scale Sector, provided their is a will to do so. Andhra Pradesh and such other examples should be replicated in other places. But this does not fully solve the problem of Small Scale Sector with regard to burden of legal procedures. Fundamental changes are required even if they involve legislative changes.
Conclusions and Policy Suggestions
Inspector Raj has been a stumbling block not only in the development but also for survival of the Small Scale Units. Given the number of inspectors and other obligations the small entrepreneurs have to deal with, there is hardly any time and scope for small entrepreneurs to think for the development and future of the unit, as much of the time is wasted in fulfilling the obligations prescribed under never ending rules and regulations.
Despite talks about reforms very little effort has been made with regard to procedures in the recent past. There has been no simplification after new economic policy came into force, except occassional and frequent changes in the formats and returns.
Different Acts/Rules/Schemes, must have had some objective at the time of their enactment, but it is generally seen that as it penetrates to the lower level or the implementation level, the entire objective and the spirit behind the policy seems to had been forgotten and lost. The Officers concerned are more interested and busy in finding who has not updated the records, who has not filed the return in time and try to grill from all possible angles, rather than to what extent their department has preferred in achieving objectives like pollution department in clearing the atmosphere, the employment exchange in achieving the employment objectives etc. Law is stiffened to such an extent that the follower always fail than they take pride in having more violations than the followers.
Coming to the policy suggestions, we may catagorise the Small Scale Enterprises into three parts, one tiny industrial units, two Small Scale Industrial Units and three Service and Business Enterprises. This is essential due to the fact that it would not be advisable to have uniform law for all types of Small Scale Enterprises. A note of caution here that for the reasons best known to the government, a new concept of Small and Medium Enterprises (SME) has been coined. Apparently due to this concept Medium Scale Enterprises are being clubbed with Small Scale Enterprises. In view of the fact that there is a need to have separate policy descriptions for different sizes of Small Scale Enterprises, Medium Enterprises should not be clubbed with Small Scale Enterprises in any case.
Coming to the suggestions regarding reducing the burden of regulatory for Small Scale Enterprises, we can classify the existing laws governing the Small Scale Sector as follows:
1. Laws governing setting up of industries.
2. Laws governing working of the industries.
3. Laws relating to labour and their welfare.
1. Laws governing setting up of industries
Given the fact that before starting up of the industry an entrepreneur has to run from pillar to post for obtaining sanctions to start an industrial unit may it be tiny or small scale. Clearances from Central Authorities, State Authorities and Local Authorities are required to be obtained, which involve heavy cost in terms of energy, time and money for the entrepreneur. In some States attempts have been made to adopt Single Window Clearances for different types of authorities. There is no reason why this cannot be done. Online registration of Small Scale Industrial Units and Single Window Clearances from various authorities as given above should be arranged.
2. Laws governing working of the industries
As discussed earlier various inspectors from departments tend to visit a Small Scale Unit, causing a lot of trouble for the entrepreneurs. In this regard a Unified Act incorporating aspects of different Acts pertaining to Small Scale Sectors should be legislated.
Towards a Unified Act for SSI’s
A well designed simple, transparent, impetial and understandable by all unified Act will definitely solve the problem.
Second National Commission on Labour rightly points out that returns which are being asked for stastical purposes, information on compliance with safety regulations etc. should be done away with because the delays, the gaps and unevenness of data provided by these returns make them redundant and they serve no purpose.
The regulatory regime of SSI is quite burdensome in comparison with their capability to cop with it. Although the SSI unit should not be exempted from the necessary social and safety legislature, it is common complaint that the SSI units are subjected to repeated and random inspections at the will and pleasure of local inspectors of various departments. It is a fact that the individual entrepreneurs are not strong enough to stand up to these inspectors whose intentions are often questionable.
There is a need for a simple practical law for small scale industries comprising of various Acts and rules like Central Excise Act, Factories Act, Provident Fund Act and rules, E.S.I. Act and rules, Income Tax Act. All the above aspects can be covered under a single Act, governing promotion and development of Small Scale Enterprises in the country.
Inspection
Dr. S.P.Gupta’s Study Group noted that the system of inspection on fiscal matters such as Income Tax, Excise Duty, Sales Tax etc., had been greatly simplified in recent years. A further suggested that there is a need for similar simplifications in other fields as well. Regarding inspections it rightly suggested that (a) system of self certification be introduced which will obviate the need for regular inspections, (b) electronic transmission of data.
Apart from this, given the computerisation and development in information technology a system of online returns for various Tax Authorities can further ease out the burden of inspections by various bodies.
The Study Group recommendation about clubbing the jurisdiction of various section/clauses and departments should be adopted at the earliest to minimise the inspections of Small Scale Enterprises. Further arrangements should be made. This is in line with clubbing of regulatory laws/ procedures for Small Scale Enterprises.There are no problem in making arrangement of single day inspection by inspectors from all the departments so that the hassles of repeated inspections are minimised. The day of inspections should be communicated in advance.
Regarding pollution laws except for highly polluting industries clearance from Pollution Control Board be made automatic and acknowledgment by District Industry Centre be considered as a clearance as is the case in Andhra Pradesh.
3. Laws relating to labour and their welfare
It is found that laws relating to labour and their welfare are more deterrent and troublesome because the small entrepreneurs are not able to comply with the requirement of maintaining a large number of registers, forms, returns etc. Labour strength of small enterprise varies according to the availability of orders, which increases difficulties of small enterprises to comply with labour laws. As per the recommendation of Study Group headed by Dr. S.P.Gupta tiny units may be exempted from labour and their welfare laws. This would definitely increase productivity and profitability of tiny units.
Factory rules
1. Factory Act rules should be made applicable only if the no. of persons employed are 50 and more with power and 100 and more without power.
2. A single return should be allowed to be filed in one year.
3. The Factory Act should be very clear in respect of installation of motors; machines etc. and the units should be allowed to go ahead with production if they satisfy the above norms. If there is any breach penal action could be taken against the offenders. This way any unit can commence production without delay.
Provident Fund Act and Rules: - The present system of collecting fixed amounts every month from both the employers and employees are good, but when there is an emergency for the workers they are not able to draw any money from their savings. Special provisions may be made for them for drawls from their savings in emergencies otherwise they are forced to borrow money from money lenders at very high interest rates.
E.S.I. Act: - Presently ESI contributions are made both by employers and employees with the laudable aim of giving medical facilities to the workers. The treatment given in most of the hospital is far from satisfactory. Most of the workers are forced to take medical aid outside even after paying sizeable amount every month. This could be discussed directly with the workers and made optional. Similarly employees earning more than Rs. 3000 per month may be exempted from the above payment or it could be made optional for them.
Corporation/Municipality/Panchayat Act: - There is enormous delay in the issue of installation licences. Therefore units may be allowed to remit the licence fees along with the applications. A time limit of 30 days may be fixed for the issue of licences after which it should be deemed that licence has been issued. Wherever possible system of online submission of applications for new units be introduced.
Electricity Act: - Now there is a long delay in giving connections. Therefore it should be made mandatory for the electricity board to give connection within a time frame of 30 to 60 days. This will go a long way in helping units in the initial stages.
Presently electricity boards supply power to units based on the installed horse power. Here the breakup of the load, motors with H.P. are to be indicated and no variations are permitted. In the case of larger units they are permitted to vary the motors etc. so long as they do not exceed the total H.P. permitted. This facility should be extended to small scale industry and tiny units also.