INSTITUTE OF AERONAUTICAL ENGINEERING

(Autonomous)
Dundial, Hyderabad - 500 04

LECTURE NOTES

ON

BUSINESS LAW AND BUSINESS ENVIRONMENT

MBA I semester
(Autonomous-R16)

K.LAKSHMI REVATHI
Assistant Professor
 UNIT – I

LAW OF CONTRACT - 1872

 INTRODUCTION TO LAW

Law is a system of rules and guidelines, usually

enforced through a set of institutions. Contract
law regulates everything from buying a bus ticket
to trading on derivatives markets.

Property law defines rights and obligations

related to the transfer and title of personal and real
property. If the harm is criminalised in legislation
or case law, criminal law offers means by which
the state can prosecute the perpetrator.
 Introduction

1. The English Connection:

2. Common law: precedents & customs.
3. Equity: natural justice.
4. Pacta sunt servanda: agreements must be
honored.
5. Stare decisis: settled law should not be
disturbed.
 Definitions.

• Proposal - When one person signifies to another

his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of
that other to such act or abstinence, he is said to
make a proposal.
• Promise - When the person to whom the
proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when
accepted, becomes a promise.
Continued…
• The person making the proposal is called the
"promiser and the person accepting the
proposal is called the It promise":
• Consideration - When, at the desire of the
promiser, the promisee or any other person
has clone or abstained from doing, or does or
abstains from doing, or promises to do or to
abstain from doing, something, such Act or
abstinence or promise is called a consideration
for the promise.
Continued…

• Agreement - Every promise and every set of

promises, forming the consideration for each
other, is an agreement.
• Contract - An agreement enforceable by law is
a contract.
• An agreement not enforceable by law is said to
be void.
 Contracts

Contracts –
• Contract - An agreement enforceable by law
is a contract.

• All agreements are contracts if they are made

by the free consent of parties competent to
contract, for a lawful consideration and with a
lawful object, and are not hereby expressly
declared to be void.
 What is a contract?
Examples
• I promise to bring chocolates to the whole
class. Is there a contract?
• I promise to give you 100 Rs. if ride your bike
to Tiananmen Square and back to ICB in less
than 2 hours. Is there a contract?
• I give you 2 Rs. for your Coca-Cola. Is there a
contract?
• I promise to give you a new bicycle if you
agree not to eat Chinese food for one year. Is
there a contract?
 Definition of a contract

• A legally binding agreement

• that means there must be some kind of
agreement between two parties
• However, not all agreements are contracts
because not all agreements are legally
enforceable
• legally enforceable means that a court will say
that an agreement is a contract
Definition of a contract (cont.)

• To decide if an agreement is legally enforceable as

a contract, a court will apply the rules and
principles of the law of contract
• Therefore, knowing a little about these rules can
help businesspeople to create valid contracts
 Essential elements of a valid
contract: (Sec. 10)
Agreement - Offer & acceptance
Legal consequences - rights & obligations
Capacity of the contracting parties
Consideration
Legal object
Free consent
Certainty
Possibility of performance
Writing & registration
Not expressly declared to be void.
 Offer: Sec.2(a)

An Offer Can be Defined as follows:

An expression of willingness to contract on
certain terms, made with the intention that it
shall become binding as soon as it is accepted
by the person to whom it is addressed.
 Essentials of offer

It must be an expression of the willingness to

do or abstain from doing something.

Such expression must be to another person.

Such expression must be made with the

intention to obtain the assent of the other
person to such an act or abstinence.
 Communication of Offer.

• The communication of a proposal is complete

when it comes to the knowledge of the person
to whom it is made.
• E.g. - A proposes, by letter, to sell a house to B
at a certain price. The communication of the
proposal is complete when B receives the
letter.
 Acceptance: Sec 2(b)
Acceptance is the second „half‟ of a contract. If
Bill offers Ben a bag of sweets for 20p, and Ben
says „I accept‟, clearly a contract has been made.
The law explains that there must be evidence
from both sides of genuine agreement between
parties – the old idea of consensus ad idem, or
meeting of minds.
Acceptance can be defined as:
Agreement to all terms of an offer by words or
conduct.
 Essentials of Acceptance

Acceptance must be given only by the person

to whom the offer is made.
Must be absolute & unqualified.
Must be in prescribed mode or reasonable
manner.
Must be communicated.
Within reasonable time.
Acceptance must succeed an offer.
Rejected offers can be accepted only if
renewed.
 Communication of an
acceptance
The communication of an acceptance is complete,
-
as against the proposer, when it is put in a course
of transmission to him, so as to be out of the
power of the acceptor; as against the acceptor,
when it comes to the, knowledge, of the
proposer.
E.g. : B accepts A's proposal by a letter sent by
post. The communication of the acceptance is
complete, as against A when the letter is posted
as against B, when the letter is received by A.
 Void Contracts

• In fact, these are not contracts at all

• They have no legal effect
• As we will see in later classes, there are a
number of things which can make a contract
void
– e.g. mistake, illegality
• The important thing to remember is that you
cannot enforce a void contract
 Void Agreements:

• Agreements in restraint of marriage [Sec. 26]

• Agreements in restraint of trade [Sec. 27]
• Agreements in restraint of legal proceedings
[Sec. 28]
• Agreements the meaning of which is uncertain
[Sec. 29]
• Agreements by way of wager [Sec. 30]
• Agreements contingent on impossible events
[Sec. 36]
• Agreements to do impossible acts [Sec. 56]
 Void Contracts - Example
 Daniel gives his students so much homework
that they decide to kill him

 They pay a Russian hit man 5000 RMB to kill

Daniel
 Void Contracts – Example
(cont.)

• However, the Russian simply spends all the

money in bars in Sanlitun and then goes home
• He does not kill Daniel
• 
• The students cannot claim their money back
because it is illegal to hire a hit man to kill
someone
 UNIT – II

COMPANIES ACT ESTABLISHED YEAR 1956

 Introduction
WHAT IS COMPANY:

 A company is an artificial person created by law.

 A company means a group of persons associated
With the attainment of a common end, social or
otgeh

economic.
 Section 3(1)(i) of the Companies Act, 1956 defines a
company as: “a company formed and registered under
this Act or an existing Company”.
 Existing Company‟ means a company formed
registered under any of the earlier CompanyLaws.
 Characteristics of a company

1. Separatelegal entity
2. Limited liability
3. Perpetual succession
4. Common seal
5. Transferability of shares
6. Separate property
SEPARATE LEGAL ENTITY-
1. A company is in law regarded as an entity from its
members. It has an independent corporate
existence.
2. Any of its member can enter into contracts with it in
the same manner as any other individual can and he
cannot be held liable for the acts of the company
even if he holds virtually the entire share capital.
3. The company‟s money and property belongs to it
and not to the shareholders (although the
shareholders own the company)
LIMITED LIABILITY-
A company may be a company limited by shares or
acompany limited by guarantee. In a company limited
by shares, the liability of members is limited to the
unpaid value of the shares.
PERPETUAL SUCCESSION-
Being an artificial person a company never dies, nor
does its life depend on the life of its members.
Members may come and go but the company can go
on
forever. It continues to exist even if all its members are
dead. The existence of company can be terminated
only by law.
It means that a company‟s existence persists
irrespective of the change in the composition of its
membership.
 COMMON SEAL

 Act through its agents and all such contracts entered

into by its agents must be under a seal of the company.
The common seal acts as the official signature of the
company.

TRANSFERABILITY OF SHARES

These shares are, subject to certain conditions, freely

transferable, so that no shareholder is permanently
wedded to the company. When the join stock
companies were established the great object was that
the shares should be capable of being easily
transferred.
 SEPARATE PROPERTY:
A s a company is a legal person distinct from its
members, it is capable of owning, enjoying and
disposing of property in its own name. Although
its capital and assets are contributed by its
shareholders, they are not the private and joint
owners of its property. The company is the real
person in which all its property is vested and by
which it is controlled, managed and disposed of.
ON THE BASIS OF INCORPORATION

Statutory companies-
These are the companies which are created by a
special Act of the legislature e.g. RBI, SBI, LIC,
etc. These are mostly concerned with public
utilities as railways,tramways,gas and electricity
companies and enterprises of national level
importance.

Registered companies-
These are the companies which are formed
and registered under the Companies
Act,1956 .
 ON THE BASIS OF LIABILITY
1)Companies with limited liability:

LIMITED BY SHARES:
Where the liability of the members of a company
is limited to the amount unpaid on the shares ,it is
known as company limited by shares. If the shares are
fully paid, the liability of the members holding such
shares is nil. It may be a public or a private company.
LIMITED BY GUARANTEE:
 Where the liability of the members of a company is
limited to a fixed amount which the members
undertake to contribute to the assets of a company in
the event of its being wound up, the company is
called a company limited by guarantee.

 These companies are not formed for the purpose of

profit but for the promotion of art, science, charity,
sports or for some similar purposes. They may or may
not have a share capital.
2) Companies with unlimited liability

 Sec 12 specifically provides that any 7 or more

persons may form an incorporated company with or
without limited liability. In such case every member is
liable for the debts of the company.

An unlimited company may or may not have a share

capital. If it has a share capital, it may be a public
company or a private company. It must have its own
Articles of Association.
ON THE BASIS OF NUMBER OF MEMBERS

PRIVATE COMPANY-
A company which has a minimum paid-up capital of
Rs 1,00,000 or such higher paid up capital as may be
prescribed, and by its articles
a. Restricts the right to transfer its shares, if any
b. Limits the number of its members to 50.
c. Prohibits any invitation to the public to subscribe for
any shares in, or debentures of, the company,
d. Prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their
relatives.
PUBLIC COMPANY:
A public company means a company which-
(a)has a minimum paid-up capital of Rs. 5 lakh or such
higher paid-up capital, as may be prescribed;
(b)is a privatecompany which is a subsidiary of a
company which is not a private company;
Every public company, existing on the commencement
of the Companies Act, 2000, with a paid-up capital of
less than Rs. 5 lakh, within a period of two years from
such commencement, enhance its paid-up capital to Rs.
5 lakh.
ON THE BASIS OF CONTROL

Holding companies-
A company is known as the holding company of
another company if it has the control over that other
company. A company is deemed to be the holding
company of another if, but only if, that other is its
subsidiary.
Subsidiary company-
A company is known as a subsidiary of another
company when control is exercised by the holding
company over the former called a subsidiary company.
ON THE BASIS OF OWNERSHIP

Government company -
A government company means any company in
which not less than 51% of the paid-up share
capital is held by-
a) The central government, or
b) Any state government, or governments, or
c) Partly by central government and partly by one
or more state government.
Foreigncompany
It means any company incorporated outside India
which has an established place of business in India.
Where a minimum of 50% of the paid up share
capital of a foreign company is held by one or
more citizens of India or/and by one or more bodies
corporate incorporated in India, whether singly or
jointly, such company shall comply with such
provisions as may be prescribed as if it were an
Indian company.
 UNIT – III

BASIC BUSINESS REGULATIONS

Introduction
BASIC BUSINESS REGULATIONS

The chapter examines the relationship between business and

government and in particular the government’s role in
influencing business decision making.
Government’s Role in Influencing Business
1. Prescribes the rules of the game for business.
2. Purchases business‟ products and services.
3. Uses it contracting power to get business to do
things it wants.
4. Is a major promoter and subsidizer of business.
5. Is the owner of vast quantities of productive
equipment and wealth.
Government’s Role in Influencing Business
6. Is an architect of economic growth.
7. Is a financier.
8. Is the protector of various interests in society
against business exploitation.
9. Directly manages large areas of private business.
10. Is the repository of the social conscience and
redistributes resources to meet social objectives
 Roles of Government and Business

 What should be the respective roles of business and

government in our socioeconomic system?

 Given all of the tasks that must be accomplished to make

our society work, which of these tasks should be handled
by the government and which should be handled by
business?

 How much autonomy are we willing to allow business?

 Clash of Ethical Systems
Roles of Government and Business
Business Beliefs Government Beliefs
 Maximizes concession  Subordinated individual goals
to self-interest and self-interest to group goals
 Minimizes the load of and group interests
obligations society  Maximized obligations assumed

imposes on the by the individual and

discouraging self-interest
individual (personal
 Emphasized equality of
freedom) individuals
 Emphasizes inequalities
of individuals
 Roles of Government and Business
Social, Technological, and Value
Change
 National society
 Communal society
 Entitlements
 Quality of life
Interaction of Business, Government,
and the Public
Lobbying

Regulations
Business and Government
Other Forms
of Political Process
Persuasion Voting
Advertising Interest Groups
Public Relations Contributions
Public
 Interaction of Business, Government,
and the Public

 Government/business relationship
 Public/government relationship
 Business/public relationship
 Government’s Nonregulatory Influence
on Business

Two Major Nonregulatory Issues

 Industrial policy
 Privatization
Government’s Nonregulatory Influence
on Business
Industrial Policy: Schools of Thought
 Accelerationists
 Adjusters
 Targeters
 Central planners
 Bankers
Government’s Nonregulatory Influence on
Business

Industrial Policy
Pros Cons
• Decline of U.S. • Reduces market efficiency
competitiveness • Promotes political decisions
• Use by other nations • Foreign success variable
• Ad hoc system • National attempts uncoordinated
and irrational
Government’s Nonregulatory Influence
on Business
Privatization
 Producing versus providing a service
 Privatization debate
 Federalization of certain functions
 Airport security
 Government’s Nonregulatory Influence
on Business

Other Nonregulatory Influences

 Major employer  Major lender
 Large purchaser  Taxation
 Major influence  Monetary policy
 Subsidies
 Moral suasion
 Transfer payments
 Major competitor
Government’s Regulatory Influence on
Business

Factors to Consider Regarding

Government Regulation
 Protection
 Scope
 Cost
Government’s Regulatory Influence on
Business
Federal Regulatory Agency
1. Has decision-making authority
2. Establishes standards or guidelines conferring benefits and
imposing restrictions on business conduct
3. Operates principally in the sphere of domestic business activity
4. Has its head and/or members appointed by the president
(generally subject to Senate confirmation)
5. Has its legal procedures generally governed by the
Administrative Procedures Act
Government’s Regulatory Influence on
Business

Reasons for Regulation

 Controls natural monopolies
 Controls negative externalities
 Achieves social goals
 Other reasons
 Controls excess profits
 Controls excessive competition
Government’s Regulatory Influence on
Business
Types of Regulation
 Economic regulation
 Interstate Commerce Commission (ICC)
 Civil Aeronautics Board (CAB)
 Federal Communications Commission (FCC)
 Social regulation
 Environmental Protection Agency (EPA)
 Occupational Safety and Health Administration (OSHA)
 Equal Employment Opportunity Commission (EEOC)
 Government’s Regulatory Influence on Business

Comparison of Economic and Social Regulation

Economic Regulations Social Regulations
Focus Market conditions; People in roles as
economic variables employees, consumers
and citizens
Affected Selected (railroads, Virtually all industries
Industries aeronautics,
communications)
Examples CAB; FCC EEOC, OSHA, CPSC,
EPA
Current From regulation to Stable
Trend deregulation
10-21
Government’s Regulatory Influence on
Business

Benefits of Regulation

 Fair treatment of employees

 Safer working conditions
 Safer products
 Cleaner air and water
Government’s Regulatory Influence on
Business
Costs of Regulation
 Direct costs
 Indirect costs
 Induced costs
 Effects
 Reduced innovation
 Reduced investment in plant and equipment
 Increased pressure on small business
Deregulation
 Purpose Purpose & Dilemma
 Intended to increase competition with the expected benefits of
greater efficiency, lower prices, and enhanced innovation.
 Dilemma
 Must enhance competition without sacrificing applicable social
regulations (e.g., health and safety requirements).
Selected Key Terms
• Accelerationists • Individualistic ethic
• Induced costs
• Adjusters
• Bankers • Industrial policy
• Market failure
• Central planners
• Natural monopoly
• Deregulation
• Negative externalities
• Direct costs of regulation
• Privatization
• Economic regulation
• Excess profits • Regulation
• Social Costs
• Excessive competition
• Federalization • Social regulation
• Targeters
 UNIT – IV

INTRODUCTION TO BUSINESS
ENVIRONMENT
 What do you mean by Business
Environment??

 The environment of any organization is “ the aggregate of

all conditions, events and influences that surround and
affect it.”
 In other words , business environment is individual and
organisation that exists outside the business and have
influence direct and indirect to the business.
 Why study Business Environment??
The success of every business depends upon
adapting itself to the environment within which it
functions.
For Example:
1. When there is a change in government policies,
the business has to make the necessary changes
to adapt itself to the new policies.
2. Change in technology may render the existing
products obsolete, introduction of colour T.V
television replaced the black and white T.Vor
introduction of computers replaced type writers.
 Importance Of Business Environment

 Firm to identify Opportunities and getting the first

mover advantage.
E.g. Maruti for small cars.

2.Firms to identify threats and early warning signals.

E.g.. Multinational entering Indian market.

3. Continuous learning: Environmental analysis makes

the tasks of managers easier in dealing with business
challenges.
Features Of Business Environment
a) Business environment is the sum of all factors
external to the business firm and that greatly
influence their functioning.
b) It covers factors and forces like customers,
competitors, suppliers, government and the social,
cultural, political, technological and legal
conditions.
c) The business environment is dynamic in nature and
it keeps on changing.
Political factors affecting business environment :

Political factors are the factors relating and nature

of the government. Some of the factors are :
•Taxation Policy
•Regulatory framework
•Governmental stability
•Nature ofgovernment‟ s policies towards business-
related to taxation,regulation of business and industry
 Examples :

Retrospective taxation and GAAR spooked

investors as it was thought that it was a disincentive
for companies to do business in India. Therefore,
the implementation of GAAR has been postponed
to 2016 since the growth rates are already low right
now. And this policy might slump the growth
further by creating a negative business environment
Economic factors relate to the general conditions of the
economy within which a firm/business operates.

These factors can be :

•Inflation
•Interest rates
•Growth rates
•Unemployment levels
•Levels of disposable incomes
•Whether the country is experiencing
boom/recession
 Examples :

Increasing disposable incomes would mean that

people would have greater demand for products.
Therefore, firms would respond to such
increasing incomes by expanding their
businesses in such areas.

An increase in interest rates would mean increase in

borrowing costs for both consumers and firms.
Therefore, investments would be curtailed or
postponed resulting in lower growth rates for the
entire economy
 SOCIO-CULTURAL ENVIRONMENT
1.Set of customs,beliefs,behaviour and practices that exists
within a population.
2.Companies often include an examination of socio-
cultural environment before entering their target markets.
Factors which affect socio-cultural environment

1.Demographic factors
2.Attitude ofpeople
3.Social responsibilities
4.Religion
5.Taste & Preference
6.Education
7.Family
8.Natural & Technological factors
9.Income & Lifestyle
 Social culture adopted by Indians

1.Language : Sometimes a firm faces language problems

like ford faced when they intorduced their truck brand
named „fiera‟ which means ugly old woman in spanish.
2.Taste & Preference : Taste & preference of a consumer
also affects a product‟ s demand, so companies have to
modify their product accordingly.
3.Dressing & Lifestyle: These factors also impact the
demand for a product.
A company which benefited due to socio cultural environment

McDonalds made segment

according to the demographic
in Indian socities.
McDonalds made their food
according to religions in India.

McDonalds believed in Total Quality

Management.
They offer food at affordable and
convenience rates which gives direct
benefit to them.
 Physical & technological environment
Business prospects demands availability of certain
physical facilities

E.g. demand for electrical appliances is affected by

the extent of electrification and the reliability of
power supply.

Demand for LPG stoves depend on rate of growth of

gas connections
Market Intermediaeries
Firms that aid the company in promoting, selling and
distributing its goods to final buyers.
Vital links between the company and the final consumers.
Include
The middlemen and merchants who “help the company
find customers or close sales with them”
Physical distribution firms which “ assist the company in
stocking and moving goods from their origin to their
destinations”
 Customers
 The company must study its customer
markets closely since each market has its
own special characteristics.
 The least controllable of all.
 New customers may be affected by any aspect of your
business.
 E.g. Toyota cars in year 2002 had issues with its clutch
system. They recalled the faulty cars and resolved the
issue. It was expected because of this the market
share will fall for Toyota but nothing happened.
Why??? Because their previous experience with
Toyota products or services means they're more likely
to opt for Toyota after the problem is resolved.
 Publics
 Publics are small groups of people who follow one or
more particular issue very closely. They are well
informed about the issue(s) and also have a very strong
opinion on it/them.
In simple terms, a Public is any group of people that may
have an real or potential interest in or an impact on
your business's ability to achieve its objectives.
• Financial Publics
• Media Publics
• Government Publics
 TECHNIQUES OF ANALYSIS

Verbal & Written Information

Search and Scanning
Spying
Forecasting and Formal Studies
 Verbal & Written Information

Verbal information includes,

information obtained by
direct talk with people, by
attending seminars, meetings,
etc..
Written or documentary
information includes both
published and unpublished
materials
 Search & Scanning

This involves research for

obtaining the required information
Search for knowledge and
systematic investigation to
establish facts
 Spyin
g
Working for an organization by
secretly collecting information
about enemies or competitors.
Even though it is not considered
as ethical, spying to get
information about the competitor
is not uncommon.
Many renowned companies
have followed this technique.
 12 Ways to Legally Spy:
 Read the local papers
 Tap your vendors
Go to trade shows
Take a plant tour
Play secret shopper
Browse public documents
Google your competitor's website
 Forecasting & Formal Studying

 Forecasting is the process of

making statements about events
whose actual outcomes
(typically) have not yet been
observed
 Done by corporate planners
her staff personnel or consultants
 This pertains to use the
information gathered by above
mentioned 3 methods for
picturing the future scenario.
 Forecasting Steps

Identification of Relevant Environmental

Variables
Collection of Information
Selection of Forecasting Technique
Monitoring
 UNIT – V

BALANCE OF PAYMENTS
 BALANCE OF PAYMENTS

• It is a double entry system of record of all economic

transactions between the residents of the country and
the rest of the world carried out in a specific period of
time.
• It takes into account the export and import of both
visible and invisible items.
 BOP statement includes
• All the receipts on account of goods exported
• Services rendered
• Capital received by residents
• Payments of residents
• Capital transferred to foreign
 Current Account
– It includes visible exports and imports, and
invisible items like receipts and payments for
various services.
– It contains credit and debit items.
– Credit includes merchandise exports and invisible
exports.
– Debit includes merchandise imports and invisible
imports.
 BOP position of India on current account
• Its position is satisfactory at first five year plan. During
the period inflow of foreign capital was 127 cr. Deficit
of current account was only 42.3 cr.
• The second and third five year plans recorded negative
balance of payments.
• The fourth and fifth five year plans recorded positive
balance of payments with 100 cr. and 3082 cr.
respectively.
• From 1985-86 to 1989-90 Balance of Payments are
negative.
• During 2001-02 to 2004-05 India have surplus of BOP,
but 2005-06 onwards it suffered with the deficit. Again
India experienced positive BOP in 2008-09.
Reasons for Deficit Balance
• Government liberalized imports in 1985 this leads to
the increase in imports significantly.
• the Gulf war in 1990’s
• the rapid industrialization (import of capital goods,
technology, etc.)
• the slow growth of invisibles
• the devaluation/depreciation of rupee against
importing countries
• 1990-91 crisis
• less exports
 Private capital
• Long term (> 1 year)
» Foreign investments
» Long term loans
» Foreign currency deposits
» Estimated portion of the unclaimed receipts allocated to the CA
• Short term (< 1 year)
 Bank capital

• External financial assets

• Liabilities of commercial and
cooperative banks authorized to deal
in foreign currency
 Official capital
– RBI’s holdings in terms of foreign currency & Special
Drawing Rights
– Capital outflow from home country to a foreign
country is treated as debit.
– The inflow of capital from a foreign country to home
country is credit.
– Credit includes foreign long-term investment in the
home country and short term investment in the home
country
– Debit includes long term investments in foreign
country and short term investments in foreign
country.
 Official Settlements Account
• The official sales of foreign currencies and other
reserves to foreign countries or official purchases of
foreign currencies or other reserves from foreign
countries.
THANK YOU