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| Global trade in some sectors unviable |
| Kumkum Sen / New Delhi Nov 23, 2009, 00:21 IST |
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My first meaningful encounter with environmental law was in a Supreme Court PIL involving use and storage of asbestos in industrial activity, specifically in relation to employee health. I recall a random remark, meant in good faith, in a preparatory meeting with the manufacturer client alluding to “a price one paid for the benefits of industrialisation". It was not meant to be frivolous. Several judicial determinations later, notwithstanding the CNG decision which temporarily reversed climate change in Delhi — the attitude has not really changed and will not - unless defaulters have an ultimatum to do or die. India has its environmental regime, but in the actual adherences to norms, there lies a tale.
Which is where EU's REACH initiative in placing the responsibility of protection of public and environmental health on manufacturers, importers, suppliers, distributors and all downstream users, to ensure in these interests are not adversely affected, represents a paradigm shift in the regulatory approach,. The Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) Regulation requires manufacturers and importers to be responsible for providing complete transparency in the disclosed data to define the hazards arising in the process from chemicals used. As on date, there is no data of the number of chemicals manufactured and marketed in the EU, the leading chemical producing area in the world.
The regulation extends beyond the core chemical industry and is expected to impact automotive, electronics, cosmetic, textile industries -within the EU or otherwise having their dependence on chemicals in Europe REACH has extra-territorial implications for companies which have outsourced chemical additive procurement, as the intrinsic information on all substances used in the process also require disclosure for the purpose of registration.
REACH is applicable to any entity which manufactures or imports more than one tonne of the registrable items. For all players, collaboratively or otherwise, the thresholds are fixed. For distributors the activity is storage and marketing, and in case of downstream users - any kind of application. There is a single registration agency ECHA in Finland.
November 2008 was the deadline for pre registrations — which was free and fast, and permitted operations to continue till formal registration is accomplished. Parties who have not pre-registered have to suspend activities and register for resuming the same. The details in technical dossier requiring submission are mind boggling — information on the properties, uses, classification, test data, guidance of safe use. If the annual consumption of a party exceeds 10 tonne, then the registrant has to additionally submit a chemical safety report (CSR) to define all risks arising from the various uses. The focus is on Substances of Very High Concern (SVHC) having carcinogenic, mutagenic or toxicological implications items. The eventual objective is to phase out or narrow down the authorisation for use of these items.
How is REACH impacting the European manufacturing sector, already beset with high labour costs, complex and disparate regulatory regimes, not to speak of the virtually contemporaneous global recession. Surveys suggest that pre-registrations have been abysmally low, and with higher costs and lower profits, companies have to ensure their chemicals are registrable, otherwise shut shop. Efforts at sell out / or relocations are not always viable — Most Asians groups would not risk taking on an industry with environmental regime they are not familiar with, involving huge compliance costs.
Even in relocating the business to the acquirer's destination, if the benefits of access to the EU market cannot be leveraged, that itself a disincentive. But REACH's extraterritorial "reach' (sic) is what is causing concern to players further down in the supply chain. Chinese import costs to EU for dyes and paints and other fabric enhancers have gone up substantially. Ultimately in crunching the numbers, the cumulative effect on transfer pricing mechanisms are making cross border trading and cooperation in many sectors unviable.
From the legal perspective — there are fundamental challenges. Increased costs, in compliances which involve information gathering and analysis of a kind the industry has not handled before.
Every due diligence will have to study the compliances, the CSR and more. Transaction documents will have to provide for safeguards and aggressive penalty and indemnity clauses. There is the issue enforcement of REACH which is where the scepticism stems -the member States have to establish and implement the regime of controls, inspections and penalties.
Finally, there will also be slow down in investment, industry, employment and technological innovations.
Kumkum Sen is a Partner at Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com
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