MMPC-013

BUSINESS LAW

BLOCK 1 OVERVIEW OF BUSINESS LAW 5

Unit 1 Introduction to Business Law 7
Unit 2 Concepts and Principles 22

BLOCK 2 BUSINESS FORMS AND LEGISLATIONS 37

Unit 3 The Partnership Act, 1932 39
Unit 4 The Companies Act, 2013 72

BLOCK 3 BUSINESS CONTRACTS 109

Unit 5 General Principles of Contracts 111
Unit 6 International Contracts of Sale 132

BLOCK 4 LEGAL AND REGULATORY FRAMEWORK FOR

FINANCING AND INVESTMENTS OF BUSINESS 147
Unit 7 Banking and Other Allied Regulations 149
Unit 8 Foreign Exchange Management and Related Regulations 162
Unit 9 Insolvency and Bankruptcy 184

BLOCK 5 INTELLECTUAL PROPERTY AND DATA

MANAGEMENT 203
Unit 10 Intellectual Property Rights 205
Unit 11 Data Protection and Privacy 224

BLOCK 6 BUSINESS AND SUSTAINABILITY 237

Unit 12 Environment Protection and Sustainability 239
Unit 13 Competition Law 257
Unit 14 Consumer Protection Law 273
COURSE DESIGN AND PREPARATION TEAM
Prof. K. Ravi Sankar Prof. Srikrishna Deva Rao
Director, SOMS Vice Chancellor
IGNOU, New Delhi National Law University
Delhi
Prof. Harpreet Kaur
Professor Prof. C.M. Rao
National Law University, Delhi Principal
Manikchand Pahade Law College
Prof. Anil Kumar Rai Aurangabad
Professor
National Law University, Delhi Prof. Bharti
Professor
Dr. Monika Verma National Law University, Delhi
Associate Professor
Marwari Educational Foundation’s Group Dr. Arul George Scaria
Institutions Rajkot, Gujarat Associate Professor
National Law University, Delhi
Dr. Sushila
Associate Professor Dr. Rashim Garg
National Law University, Delhi Associate Professor
National Law University, Delhi
Dr. Aprajita Bhatt
Assistant Professor Ms. Vidya Subramanian
National Law University, Delhi Independent Law Researcher, Delhi

Course Editor Course Coordinator

Prof. Harpreet Kaur Prof. K. Ravi Sankar

PRINT PRODUCTION
Mr. Tilak Raj
Assistant Registrar
MPDD, IGNOU, New Delhi
February, 2022
© Indira Gandhi National Open University, 2022
ISBN:
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained
from the University’s office at Maidan Garhi, New Delhi-110 068.
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi, by
the Registrar, MPDD, IGNOU.
Laser typeset by Tessa Media & Computers, C-206, A.F.E-II, Jamia Nagar, New Delhi-110025
COURSE INTRODUCTION

The occupation of business plays an extremely important role in the economy of

any country. The act of engaging in business, which consequently results in the
creation of jobs and opportunities, along with the generation of revenues for the
economic sector forms a significant part in nation building. The proliferation of
business activities calls for a mechanism to regulate its conduct, and law facilitates
this purpose. For strong and productive economies, the need to have an adequately
enforced system of equally applied law has been increasingly felt. Law has become
an important part of any business activity. A certain framework of law is necessary
for maximum incentive to entrepreneurs, investors and inventors. Business law
has taken an important place because it secures the elements of trust and certainty
that are vital to economic transactions amongst strangers.

The scope of business laws is very vast. It takes into its ambit the laws related to
all the activities proving indispensable for the successful conduct of the business.
The scope of business laws is not restricted to the laws related to companies but
it also provides laws for business activities conducted by other forms of business
organisations. There are laws to deal with contracts, property, agency, negotiable
instruments, sale of goods, bailment, guarantees, intellectual property, etc. In
relation to companies, there is multitude of laws such as corporate laws, securities
laws, competition law, foreign exchange laws, tax laws, etc. Right from the
incorporation of a business entity till it attains finality, numerous laws are provided
for every significant act that may be resorted by a business entity throughout its
life. Business laws also sub-serve the interests of society at large. Laws dealing
with insurance, environmental protection, taxation, etc., are extremely beneficial
for the promotion of rights and interests of the general public. Antitrust law,
which also forms an important part of business law, keeps a check on market
concentration, monopolistic and oligopolistic companies along with the
dominance exerted by these companies in the market.

Therefore, understanding the basics of business law are extremely important for
the students of business management stream to get a firm grasp on the concepts
and gaining deeper knowledge of the subject.

The terms “Business law” and “Business Laws” are used interchangeably used
in this material. “Business Law” is a generic or umbrella term which provides
legal and regulatory framework for doing business. Business environment in
any country is governed by its business laws that are necessary for conducting
business transactions and regulate business.

Keeping this in view, the present course MMPC-013 on Business Law has been
written. All important legislations and related concepts have been explained to
familiarise the students and facilitate their easy understanding. This course has
been prepared with following course outline to cover almost all important
legislations and nuances of Business Law:
Block 1 : Overview of Business Law
Unit 1 : Introduction to Business Law
Unit 2 : Concepts and Principles
Block 2 : Business Forms and Legislations
Unit 3 : The Partnership Act, 1932
Unit 4 : The Companies Act, 2013
Block 3 : Business Contracts
Unit 5 : General Principles of Contracts
Unit 6 : International Contracts of Sale
Block 4 : Legal and Regulatory Framework for Financing and
Investments of Business
Unit 7 : Banking and other Allied Regulations
Unit 8 : Foreign Exchange Management and Related Regulations
Unit 9 : Insolvency and Bankruptcy
Block 5 : Intellectual Property and Data Management
Unit 10 : Intellectual Property Rights
Unit 11 : Data Protection and Privacy
Block 6 : Business and Sustainability
Unit 12 : Environment Protection and Sustainability
Unit 13 : Competition Law
Unit 14 : Consumer Protection Law
 BLOCK-1
OVERVIEW OF BUSINESS LAW
Unit 1 : Introduction to Business Law
Unit 2 : Concepts and Principles
Overview of Business Law

6
 Introduction to Business Law
UNIT 1 INTRODUCTION TO BUSINESS
LAW

Objectives

After studying this unit you should be able to:

Explain the concept of Business
Understand the objectives, scope and significance of business law in the
present business environment
Describe the various sources through which business law has evolved
Structure
1.1 Introduction
1.2 Meaning of Business
1.3 Business Environment
1.4 Significance of Business Law
1.5 Objectives of Business Law
1.6 Scope of Business Law
1.7 Corporate Restructuring under Business Law
1.8 Sources of Business Law
1.9 Summary
1.10 Self-Assessment Questions
1.11 Further Readings/References

1.1 INTRODUCTION
The occupation of business plays an extremely important role in the economy of
any country. The act of engaging in business, which consequently results in the
creation of jobs and opportunities, along with the generation of revenues for the
economic sector, forms a significant part in nation building. The proliferation of
business activities calls for a mechanism to regulate its conduct, and law facilitates
this purpose. For strong and productive economies, the need to have an adequately
enforced system of equally applied law has been increasingly felt. Law has become
an important part of any business activity. A certain framework of law is necessary
for maximum incentive to entrepreneurs, investors and inventors. Business law
has taken an important place because it secures the elements of trust and certainty
that are vital to economic transactions amongst strangers. It also includes a study
of legal compliances related to any business activity. In this Unit, there will be a
discussion on the concept of ‘Business’ and the objectives of ‘Business Law’.
The Unit will help in the understanding of the significance of business law in the
present business environment and elaborate on the various sources of business
law.

The terms “Business law” and “Business Laws” are used interchangeably in the
text. “Business Law” is a generic or umbrella term which provides legal and
regulatory framework for doing business. Business environment in any country
7
Overview of Business Law is governed by its business laws that are necessary for conducting business
transactions and regulate business.

Understanding the basics of business law are extremely important for the students
of business management stream to get a firm grasp on the concepts and gaining
deeper knowledge of the subject. This Unit shall focus on defining the meaning
of business, the scope and significance of business law in the current economic
scenario, and to acknowledge the different sources of law which contributed in
the evolution of business law.

Three concepts establish a necessary framework for the most effective functioning
of market in the modern nation- Law, the Rule of Law and the Property.1 The
forces that hold societies together range from custom and religion to law and
economic ties. In the modern nation, however, the most significant of the social
forces is law because law can glue together diverse peoples of different
backgrounds in to very large, organized groups. Law is known by everyone as
being intended to tell members of society what they can and cannot do.2

Law:

It is necessary to have preliminary discussion on ‘what is law’ before students

are introduced to ‘Business Law’. The term “law” has been defined in many
ways. It is not easy to give a precise definition of law. It has been defined as rules
of human action.3 A simple definition of law provides that law is a formal social
force, is made up of rules which are laid down by the state and are backed by
enforcement.4

Rule of Law:

Under the Rule of law, laws are made generally and equally applicable. They
apply to all members of society and to various groups in the same way. In the
words of Secretary General of United Nations, “without confidence based on the
rule of law; without trust and transparency- there could be no well-functioning
markets.”

“Without the rule of law, major economic institutions such as corporations, banks
and trade unions would not function, and the government’s many involvements
in the economy- regulatory mechanisms, tax systems, customs structure, monetary
policy and the like- would be unfair, inefficient and opaque.”5

Property:

The term ‘property’ has two meanings, something that is owned and ownership.
It is through the law of property that individuals and business organizations can
possess, use and transfer their private resources. The property is a legal fence
that keeps others out without your permission. The exclusionary right of property
provides a basis for the private market and modern business. Property has been
thought of as the central concept underlying Western Legal Systems.6 Contract
law enables an owner to exchange resources at a future date, tort law compensates
owners whose resources are wrongfully harmed by actions of others, criminal
law punishes those who harm an owner’s resources in a particular way and the
law of business organizations identifies how individuals can own and use private
resources in groups. The below mentioned figure indicates the Wheel of Property.7
8
 Introduction to Business Law

Figure .1.1: Wheel of Property

1.2 MEANING OF BUSINESS

A business can be defined as an enterprise or organization involved in an industrial,
mercantile or commercial activity. A business entity may be brought forth for a
profit purpose or it can serve non-profit purposes supporting a charitable or a
social cause. A business may also be referred to the activities of an individual or
a group of individuals engaged in the sale of goods and provision of services
with a profit motive.

“The term ‘business’ may be understood as the organised efforts of enterprises

to supply consumers with goods and services and to earn profit in the process.
Business is a broad term and includes such varied activities as production,
promotion, wholesaling, retailing, distribution, transportation, warehousing,
financing, insurance, consultancy, and the like.”8 L.R. Dickson has defined
‘business’ as a form of activity pursued primarily with the object of earning
profit for the benefit of those on whose behalf the activity is conducted.

“Businesses vary in size, as measured by the number of employees or by sales

volume etc. But all businesses share one common purpose that is to earn profits.
The purposes of business that goes beyond earning profits are -an important
institution in society, for the supply of goods and services, creating job
opportunities, offering better quality of life, contributing to the economic growth
of the country, etc.”9

Business law, also commonly known as commercial or mercantile law, is that

branch of law that conducts the relationship between the enterprises, companies
and individuals engaged in commercial matters. This section of law governs
issues in relation to the legal rights, duties and liabilities of the entities engaged
in business transactions.

Business Law has attained a significant position in the current era, due to the
formidable position held by the business enterprises and corporations in
contributing to the economy and by the supply of abundant job positions boosting
the employment sector, thereby contributing towards the generation of revenues.
“Business law consists of the enforceable rules of conduct that govern commercial
relationships. In other words, buyers and sellers interact in market exchanges
9
Overview of Business Law within the rules that indicate the boundaries of legal business behavior.
Constitutions, legislatures, regulatory bodies, and courts spell out what market
participants may or may not legally do. Understanding business law is necessary
for future businesspeople because there simply is no market transaction that occurs
outside legal guidelines. All contracts, employment decisions, and payments to
a supplier are limited and protected by business law. Each of the six functional
areas of business - management, production and transportation, marketing,
research and development, accounting and finance, and human resource
management - sits on a foundation of business law.”10

Business law is a body of legal rules regulating business activities. Business

Law can also be defined as follows:
1) “Business law is that portion of the legal system which guarantees an orderly
conduct of business affairs and the settlement of legitimate disputes in a just
manner.”
2) “Business law establishes a set of rules and prescribes conduct that enables
us to avoid misunderstandings and injury in our business relationships.”11

1.3 BUSINESS ENVIRONMENT

The business environment consists of all those factors or forces which shape the
conduct of business. Such factors may be categorized as internal and external
factors. Internal factors included factors within the control of any business.
External factors, on the other hand include factors that are beyond the powers or
control of any business. Both internal and external factors keep on changing and
are dynamic in nature. External factors also include laws, regulations and policies
that affect the conduct of business. Figure -1.2 very clearly explains the
characteristics of business environment in which businesses operate.

Figure-1.212: Business Environment

1.4 SIGNIFICANCE OF BUSINESS LAW

Business law is that branch of the legal system which promotes an orderly
treatment of business affairs, facilitates the regulation of commercial activities
in accordance with established practices of law, and provides for settlement of
disputes in an amicable manner. It constitutes that part of the legal system which
is most fundamental to national wealth creation. It also specifies the rules and
the conduct that needs to be adhered to, for the creation of successful business
relationships among the government, business entities and the public, and business
enterprises inter se. Business law also aids in establishing the environment needed
10
for responsible and peaceful business dealings not just amongst the different Introduction to Business Law
enterprises but also for safeguarding the rights of the employees. Business law
also requires understanding and firm grounding of multiple substantive areas of
law.

Business law has gained significance due to the changing business environment.
Business environment is dynamic in nature and there is a requirement of having
adequate laws in place to govern the business organisations functioning in the
society.

1.5 OBJECTIVES OF BUSINESS LAW

We enter into contracts every day. Some of these contracts are made consciously,
for example, for the purchase or sale of any goods, purchase of a share of a
company or a plot of land. Entering into contracts determines the legal rights of
each party giving rise to legal obligations as well. People who are engaged in
business activities such as business owners enter into a contract on a daily basis
to further the business transactions. All business activities include a variety of
transactions which give rise to contracts on a daily basis. Some of these contracts
are as simple as purchasing goods from a shop thus giving rise to a legal right
and legal obligation.

Business law serves a variety of purposes some of which are listed below:

i) A comprehensive set of standards established universally: Business laws

are comprehensive and uniform set of standards that are applicable to all
business entities. Uniformity in laws helps in maintaining smooth relations
between the businesses and its various stakeholders including consumers,
suppliers, etc. It provides an environment where the businesses can function
smoothly and efficiently as the same rule shall be applicable to all the business
organisations falling in a particular category. However, there can be different
compliances for different kinds of business organisations depending upon
the size, nature of business activity or certain threshold limits.

It also helps in identifying and establishing the rights and liabilities of the
various parties interacting with each other. It provides a framework for
reducing the harm caused to either party due to fraudulent or unethical
activities. Business law also provides for steps that needs to be followed
while conducting due diligence before engaging with a particular company.

ii) Promoting industrial growth: Business laws not only provides different
provisions for compliance for the business but also facilitate industrial growth
by protecting and promoting the rights of businesses. Adherence to the rules
prescribed by the range of laws falling under the domain of business facilitates
businesses to achieve growth and success. Thus, business laws enable; capital
formation, promote industrial relations, facilitation of licensing, ease of doing
business, financial inclusion, etc. which promote economic growth.

iii) Laying down the procedure for the establishment of business: The laws
dealing with business provide the necessary framework required for the
commencement of a business corporation along with building of a strong
foundation for the business entity to thrive in the market. The formal process
provided under the laws also facilitates successful conduct throughout the
11
Overview of Business Law life-cycle of the business. For instance, Companies Act, 2013 lays out the
steps involved in the incorporation of a company, and provisions related to
the Articles of Association and the Memorandum of Association in detail.

iv) Enforcement of Rights: Business laws provide provisions for judicially

enforcing the rights of all the parties involved in a business transaction.
Thus, the businesses can approach the court to enforce the claims against
the debtors or right to a patent or copyright or the right to hold property, etc.
Businesses also have a right to defend themselves in case actions are filed
by the central, state and local bodies. Thus, businesses have been given the
power of initiating legal action in case any legal compliance are breached
by any outside party and also allowed to defend themselves against the
litigation filed by the government for the various stakeholders. Various
provisions aiding in carrying out the enforcement action have been provided
in statutes for effective regulation of the business practices.

v) Contributes to the building of healthy business relationships: Laws

dealing with business matters are extremely significant in the establishment
of secure and effective business relationships amongst the concerned entities
as the formation of strong business ties is an absolute must for building a
strong economy of a country. For instance, the Partnership Act lists out the
rights, duties, and obligations of the partners in a firm for carrying out a
successful venture.

Business Law also plays an extremely important role in facilitating Mergers

and Acquisitions (M&As) between enterprises looking to collaborate and
expand their business. Cross-Border M&AS transactions also contribute
immensely to the economy of a country by playing a significant role in
increasing the revenues generated through the means of Foreign Direct
Investment. Cross border M&A occurs between companies situated in two
different jurisdictions. If the resulting company is an Indian company, it
qualifies as an inbound merger, and if the resulting company is a foreign
company, it is christened as an outbound merger.

vi) Reduced possibilities of fraud: A robust and effective business law

framework helps in reducing the possibility of fraud as the parties entering
into contracts or dealing with each other are well aware of their rights and
liabilities which would prevent them in falling prey to the illegal or fraudulent
activities by the other party. The laws associated with Business Law also
provides for a highly effective enforcement mechanism, which are further
lined with stringent measures that could minimize the possibility of
perpetuating fraud.

vii) Business laws help maintain equilibrium: Business laws help in bringing

about uniformity and maintaining equilibrium as there are set rules which
have to be followed by each entity. Different forms of business organisations
are regulated by different laws. This helps in the ease of dealing and
conducting business as the same standards are followed throughout the
country. It helps in making the business transactions easier and smoother
across the country.

viii) Ethical conduct: Business laws also help in improving the conduct of the
business as the laws have to be followed in letter and spirit. Therefore, the
12
 business organisations have a responsibility of maintaining ethical conduct Introduction to Business Law
while functioning in the society. As businesses survive in the society and
use its resources, there is a responsibility on the businesses to give back by
dealing ethically with all its stakeholders.

For instance, the multi-billion-dollar scam orchestrated by the promoters of

Satyam Computer Services, also referred to as “Satyam Scam”, made the
regulators across the country re-examine the then-existing corporate
governance standards and the fallacies therein. The scam resulted in the
violation of multiple provisions of various statutes, such as, Companies Act,
1956 (Sections 209, 233 and 628), Securities (Contract) Regulation Act 1956
(Sections 23A, 23E), SEBI Act (Sections 15HA and 24, and Criminal law.
Under the Companies Act, 1956, the resulting violations included failure to
maintain proper books of account, penalty for false statements and non-
compliance of auditor duties. However, after this incident, sweeping changes
were brought forth in the Companies Act, 2013 to combat any unforeseen
deviations that may be resorted by the corporate enterprises. The new
Companies Act, 2013 mandated at least one-third of the Board to be
comprised of Independent Directors, and that they shall not be eligible to
receive any stock options and be remunerated only in fee. The new Act also
imposed strict norms on any related party transactions along with providing
for class action suit options against the company and auditors, for protecting
minority shareholders’ interests. It also brough forth provisions clearly
defined demarcating the accountability of auditors.

ix) Social Responsibility: Business laws also lay down the criteria for business
to function in a society as the business utilize the resources of the society
there arises a responsibility of the business to give back to the various
stakeholders. This enables social justice and social responsibility in the form
of good employment practices, non-discrimination, sustainable utilization
of resources, prevention of environmental damage etc. Thus, it prohibits
businesses from entering into practices that are harmful to the society at
large. 

x) Laying down law in accordance with the evolving standards: The

business environment is ever-changing and dynamic in nature. The laws
have to be enacted taking into account the economic and business
environment of the country. These laws not only provide uniformity in
business operations but also provide clarity to unforeseen situations.
Legislative changes in the form of amendments are made to address the
occurrence of unforeseen situations.

An example for this would be the Indian Competition Act, which handles
and regulates antitrust issues in the country. The Competition Act, 2002 is
concerned with keeping a check on the prevailing anti-competitive acts in
the relevant market being governed. The Act encompasses horizontal and
vertical agreements, cases related to abuse of dominance, and regulation of
combinations. It must be noted that until now Competition Act only focused
on price parameters such as unreasonable increase in prices or reduced output
in the supply of the goods. However, the advent of digital technology has
ushered an era demanding a change in the traditional methods employed to
gauge anti-competitive practices. The Indian Competition regulatory
authorities have also initiated investigation into degradation of non-price 13
Overview of Business Law parameters such as quality, privacy and innovation keeping pace with the
changing needs of the society in an era of online platform markets. The
Competition Commission of India, which until recently investigated anti-
competitive conduct solely based on monetary price increase, has
acknowledged the importance of data as a currency in the current business
scenario and initiated investigation against data monopolies.

xi) Providing penalties for violation of laws: Business law serves an extremely
important purpose of enlisting the various penalties that may be employed
by the regulatory bodies to ensure that the conduct of business activities
conforms to the prescribed standards set by the concerned branch of law.
The legislations dealing with the various aspects of the business have
provided the penalties that may be incurred by the wrongdoers on
contravention of the law and the rules provided therein. For instance, chapter
VI under the Competition Act, provides for various penalties for
contravention of the orders of the Commission or for non-compliance of the
directions of the Director-general or the Commission. Similarly, Chapter
VII of the Insolvency and Bankruptcy code (IBC) provides for punishment
of offences, penalties for acts including falsification of books of corporate
debtor, false representations to creditors and transactions for defrauding
creditors, etc.

xii) Insurance against Risks: Every business involves inherent risks that may
be related to operations of business, movement or transit of goods, and
financial risks, etc. Insurance laws provide mechanisms for insuring against
such unforeseen circumstances for the business. Directors and officers of
the companies can also take D & O insurance policies for protection against
future liabilities.

1.6 SCOPE OF BUSINESS LAW

For a better understanding of business laws and the scenario giving rise to their
emergence, it is imperative to understand the frame of societal reference which
gave birth to this branch of law. Any study of business law must necessarily
provide major thrust to the rules framed in relation to business law, because
“society has imposed constructive notice of that law.”.13 Understanding the
background sheds light on the reason behind the emergence and the functioning
of a particular law and shall aid in making policies that might prove beneficial in
the long run.

The scope of business laws is very vast. It takes into its ambit the laws related to
all the activities proving indispensable for the successful conduct of the business.
The scope of business laws is not restricted to the laws related to companies but
it also provides laws for business activities conducted by other forms of business
organisations. There are laws to deal with contracts, property, agency, negotiable
instruments, sale of goods, bailment, guarantees, intellectual property, etc. In
relation to companies, there is multitude of laws such as corporate laws, securities
laws, competition law, foreign exchange laws, tax laws, etc. Right from the
incorporation of a business entity till it attains finality, numerous laws are provided
for every significant act that may be resorted by a business entity throughout its
life. There are a range of laws that have been enacted for the proper
commencement of business activities, for the required conduct during its life
14
cycle, with finally laws laying down procedures directing the regulation and Introduction to Business Law
culmination of the business activity in question. Business law also aids in raising
questions against governmental regulations in case it results in violation of
legitimate business practices. The legal consequences of the multifarious business
transactions also play a significant role for the accountant of the company in
auditing the company’s books and in the course of preparing required financial
statements. Business laws also subserve the interests of society at large. Laws
dealing with insurance, environmental protection, taxation etc., are extremely
beneficial for the promotion of rights and interests of the general public. Antitrust
law, which also forms an important part of business law, keeps a check on market
concentration, monopolistic and oligopolistic companies along with the
dominance exerted by these companies in the market.

Government also facilitates business transactions wherever it is required in the

best interests of the company. The Government had invited bids for the Air India
divestment process, for which the Tata Group and Spice Jet promoters have
submitted bids. The Government has decided to offer hundred percent stake in
the debt-ridden state-run airline this time. This has been done after Air India had
failed to attract any bidder when the government had offered a 76 percent stake
in the former three years ago.14

1.7 CORPORATE RESTRUCTURING UNDER

BUSINESS LAW
Corporate restructuring also forms an essential part of the business development.
Corporate restructuring is a process whereby a firm looks to enhance its
shareholder value. It encompasses a broad range of transactions within its ambit,
including within its purview, changing its capital structure through the infusion
of high levels of debt to selling-off business lines or making acquisitions by
taking over corporations and making internal changes in the organization of the
firm. It is an absolute necessity for a company’s basic survival or sustenance in
the corporate sector to combat multiple competitors in the market looking to
dominate15. There are numerous ways by which a company may look to restructure
its business – viz., merger and amalgamation, merger through absorption, merger
through consolidation, acquisition, takeovers, divestiture, demerger, joint venture,
and buyback of securities, to name a few. There can exist multiple reasons for a
company to opt for internal or external restructuring such as, to focus on core
competency, for hiving-off assets, eliminating competition, achieving economies
of scope and economies of scale, gaining access to R&D and technology
knowhow, synergistic effects, diversification and enhancing public perception.
These different forms of restructuring are also supervised by different branches
of business law, such as Companies Act, FEMA, Taxation laws, SEBI Act to
name a few.

One recent example of a company engaging in restructuring, in the form of

acquisition as a means to expand could be the case of Ed-tech giant Byju’s,
which is looking to achieve success in K-12 (Kindergarten to 12th standard) online
education. Byju’s has already engaged in multiple acquisitions including medical
coaching Institute Aakash, Epic games, Great Learning, Scholr, Gradeup, to name
a few spending close to $2 billion for the same in this year. Byju’s has recently
made its ninth acquisition of the year when it acquired Tynker, a silicon-valley
based coding platform for children, for an estimated amount of $100 million, 15
Overview of Business Law also its third acquisition of a US-based company. These slew of acquisitions by
the company have been made with a view to obtain a public listing in the US.
The phenomenon of M&A is governed by legislations such as, Companies Act,
SEBI Act and its Substantial Acquisition of Shares and Takeover (SAST)
regulations among others.16

Most of the current dialogues about corporate governance can also be attributed
to discussing a corporation’s existence and for whose interests the corporate
exists and ultimately serves. Most commonly, the obvious answer is the
maximization of wealth for the shareholders of a company. The principle of
shareholder wealth focuses on the aspect of cash flows that may not be immediate
profit-generating and more of a future outcome. A company aims to amplify the
residual profits that remain after all the incidental costs are reduced. Profit
generation may not be the only aim of a company, but it may prove to be a
significant reason. From a shareholder perspective, in a competitive and
flourishing market, anything a company does to enhance share prices is a plus.
Moreover, whenever a shareholder does any activities, such as selling, buying,
or retaining their shares, it adds to their value.

1.8 SOURCES OF BUSINESS LAW

There are many sources from which the business law evolves. Some of these
main sources are:

i) Constitution:
The text of the Constitution along with its interpretation by the Supreme
Court from time to time, is considered as the supreme law of the land. All
laws and authority flowing from and traceable to the Constitution are
recognised as lawful power. The Indian Constitution establishes the
fundamental principles and rules by which the individual States are governed.
The term constitutional law refers to the general limits and powers of the
Central and State governments as stated in written constitutions. The Indian
Constitution is the supreme law of the land, and all the laws of the country
have their foundation in the Indian Constitution.

The Indian Constitution was drafted with certain objectives that were latent
in the text and provided directions to the State to achieve a social order for
the upliftment and welfare of the people. Even otherwise, post the 42nd
amendment, the Preamble of the Constitution was incorporated with the
terms “Socialist” and “Secular”, which strengthened the objective to promote
social welfare. Article 38 places the responsibility on the State to strive to
promote the welfare of the people by achieving a social order, while Article
39 provides for a few principles of policy to be observed by the State. Article
38 and 39, though having been placed in part IV of the Constitution as
Directive Principles of State Policy, and cannot be enforced in a Court of
Law, prove extremely significant laying down directions for good governance
of a State. Especially, it directs the State to frame policies that ensure that
the ownership and control of the material resources are adequately distributed,
and that the operation of the economic system must not lead to a concentration
of wealth to the common detriment. For instance, the Government of India
ordered the formation of a committee (Mahalanobis Committee) to assess
the income distribution in the society due to the rising monopolistic and
16
 restrictive trade practices that were being observed in the Country. This led Introduction to Business Law
to the formation of the Monopolies Inquiry Committee and the report
submitted paved the way for the Monopolies and Restrictive Trade
commission Act (MRTP Act). This way, the Constitution of India, specifically
Article 39 sowed the seeds for the genesis of competition laws in India.

Article 19 (1) (g) of the Constitution guarantees that all citizens shall have
the right to practice any profession, or to carry on occupation, trade or
business. The right to carry on a profession, trade or business is not absolute.
Reasonable restrictions can be imposed by the state in the exercise of such
right. Part XIII of the Constitution deals with Trade, Commerce and
Intercourse within the territory of India. Article 301 provides that subject to
the other provisions of this Part, trade, commerce and intercourse throughout
the territory of India shall be free. Article 302 gives power to the Parliament
to impose restrictions. It says that the Parliament may by law impose such
restrictions on the freedom of trade, commerce or intercourse between one
State and another or within any part of the territory of India as may be required
in the public interest.

ii) Statutes:
A Statute can be defined as an act of the legislature in written form.
“Legislative actions, called statutes, are another important source of law.
The assortment of rules and regulations put forth by Legislatures is what we
call statutory law.”17 The Parliament and the State Legislatures have been
conferred the primary responsibility to enact laws as per the requirements of
the Union and the State respectively. “Legislation is the common source of
law. Both Parliament and State assemblies have enacted a number of
legislations that cover various aspects of business.”18

The act of creating laws, also known as legislating, cannot solely be

performed by the Parliament, due to the enormous number of legislations
required to run a State. The act of legislations can be delegated to subordinate
authorities such as executive bodies and individuals, by providing the
necessary guidelines, policies and rules that must be resorted to while laying
down the law. This area of legislations is also known as delegated or
subordinate legislation. The Legislature has come up with various laws to
counter the issues cropping up in the business administration in our country.

iii) Cases:
Case laws play an important role in shaping the law and bringing out its
relevance as per the prevailing conditions in the society. The interpretation
offered by the judges in the form of ratio decidendi aids in clarifying the
nuances of the law. Judicial decisions, in the form of precedents, are one of
the most important sources of law. Case laws, Constitution, legislatures,
and administrative agencies encourage certain behavior and prevent other
actions. But the boundaries of these laws are seldom self-explanatory.
Consequently, law must be interpreted. Case law is the collection of legal
interpretations made by judges. An alternative name for case law is common
law as common law is a judge made law. Interpretations provided by courts
in cases are law unless they are revoked later by new statutory law. Case law
is especially significant for businesses because a modern business often
operates in multiple legal jurisdictions. Because statutory laws are subject
17
Overview of Business Law to interpretation, one court may have interpreted laws one way at one business
location, and a second court may interpret a similarly worded statute
differently at a second business location. Courts issue judicial decisions that
often include interpretations of statutes and administrative regulations. These
decisions contain the reasoning the courts use to arrive at their decisions.
The reasoning depends heavily on precedent, the use of past decisions to
guide future decisions. An earlier decision in a similar fact pattern is a
precedent that guides later decisions, thereby providing greater stability and
predictability to the law.”19

iv) Custom:
Custom is one of the most important sources of law. It is possible to detect
two basic elements in the make-up of the custom - material facts, which is
the actual behavior of states founded upon the performance of the state
activities and practices; psychological element, which is the belief by the
state that behaved in a certain way that it was a legal obligation to act that
way. There are a number of factors concerning the nature of a particular
practice – Duration, repetition, consistency and generality. “A substantial
part of business law is customary, notwithstanding advances made in science
and technology. This is true both in developed and developing countries. A
custom, when accepted by courts and incorporated in judicial interpretations,
becomes a law. Many of the business customs or usages have already been
adopted and legalized. The Indian Contract Act provides that nothing therein
contained, “shall affect any usage or custom of trade.” Similarly, the
Negotiable Instruments Act provides that nothing there-in contained “shall
affect any local usage relating to instruments in an oriental language.”20

v) Treaties:
Treaties are a source of international business law. They are one of the sources
that have been mentioned under Article 38 of the Statute of the International
Court of Justice. Treaties are obligatory in nature and are founded upon the
customary principle that agreements are binding upon the parties and must
be performed in good faith. For many writers, treaties constitute most
important source as they require the express consent of the contracting states,
they are thus considered superior to custom. The consent to a treaty can be
signified by signature, exchange of instruments, ratification or accession by
the concerned countries. “The purpose of international laws is to permit
countries as much authority as possible over their own international business
affairs, while maximizing economic benefits of trade and working
relationships with other nations. Since many countries have historically
allowed governance by international agreements when conducting global
business, there exists an evolving body of international laws that facilitate
global trade and commerce.”21 “A treaty is similar to a contract in two
important ways. Both treaties and contracts are attempts by parties to
determine rights and obligations among themselves. In addition, when a
party fails to obey a treaty or an international contract, international law
imposes liability on that party.”22 Treaties can be multilateral – signed
amongst many countries, and bilateral – existing between two countries.

vi) Government Policies:

The legal power to make laws comes to the government from the Constitution.
18 Laws are framed according to the policies of the government. One can
 understand the focus of any government through its policies. For example, Introduction to Business Law
when the focus is to promote ease of doing business, the government
accordingly brought new legislations and regulated to remove bottlenecks
which had increased time consumed in contracts enforcement. Similarly,
the economic reforms undertaken, provision of easy financing for MSME
sector or women entrepreneurs, bringing new polices like e-commerce policy,
etc., are examples of government intervention for regulating the business
through policies. Laws are made according to the policies.

1.9 SUMMARY
Understanding the basics of business law are extremely important for the students
of business management stream to get a firm grasp on the concepts and gaining
deeper knowledge of the subject. This Unit focuses on defining the meaning of
business, the scope and significance of business law in the current economic
scenario, and to explain the different sources of law which contributed in the
evolution of business law.

A business can be defined as an enterprise or organization involved in an industrial,

mercantile or commercial activity. A business entity may be brought forth for a
profit purpose or it can serve non-profit purposes supporting a charitable or a
social cause. A business may also be referred to the activities of an individual or
a group of individuals engaged in the sale of goods and provision of services
with a profit motive.

Business law is that branch of the legal system which promotes an orderly
treatment of business affairs, facilitates the regulation of commercial activities
in accordance with established practices of law, and provides for settlement of
disputes in an amicable manner. It constitutes that part of the legal system which
is most fundamental to national wealth creation. It also specifies the rules and
the conduct that needs to be adhered to, for the creation of successful business
relationships among the government, business entities and the public, and business
enterprises inter se. Business law also aids in establishing the environment needed
for responsible and peaceful business dealings not just amongst the different
enterprises but also for safeguarding the rights of the employees. Business law
also requires understanding and firm grounding of multiple substantive areas of
law.

There are many sources from which the business law evolves. Some of these
main sources are: Constitution, Statutes, Cases, Custom, Treaties, and Government
Policies.

1.9 SELF ASSESSMENT QUESTIONS

1) What do you understand by the term “Business”? Elaborate.
2) What is the significance of business law in governing the functioning of the
business enterprises and companies in the society?
3) Explain out the different sources of business law and their significance in
the growth of business law.
4) Briefly explain the meaning of the term “corporate restructuring”.
19
Overview of Business Law 5) Which Article in the Indian Constitution promotes the idea of framing policies
to ensure that the operation of the economic system does not result in the
concentration of wealth in the society?

1.10 FURTHER READINGS/REFERENCES

Weblinks:
1. https://www.mca.gov.in/content/mca/global/en/home.html
2. https://www.sebi.gov.in/
3. https://www.cci.gov.in/
4. https://legislative.gov.in/sites/default/files/COI_1.pdf
References:
1
Reed, Pagnattaro, Cahoy, Shedd and Morehead, The Legal and Regulatory
Environment of Business, 16th edition, Part 1, Chapter 1, p.7, McGraw Hill
2
Ibid, p. 6
3
AVTAR SINGH, INTRODUCTION TO JURISPRUDENCE, CHAPTER V, KINDS OF LAW, 5TH
EDITION, LEXISNEXIS, 2020
4
Reed, Pagnattaro, Cahoy, Shedd and Morehead, The Legal and Regulatory
Environment of Business, 16th edition, Part 1, Chapter 1, p.7, McGraw Hill
5
Thomas Carothers, Director, Democracy and Rule of Law Project, Carnagie
Endowment for International Peace.
6
REED, PAGNATTARO, CAHOY, SHEDD AND MOREHEAD, THE LEGAL AND REGULATORY
ENVIRONMENT OF BUSINESS, 16TH EDITION, PART 1, CHAPTER 1, P.9, MCGRAW HILL
7
Ibid, p. 10
8
Aswathappa K. and Reddy G. Sudarsana, BUSINESS REGULATIONS 1
(Himalaya Publishing House 2015)
9
BUSINESS ENVIRONMENT AND LAW 3 (The Institute of Company
Secretaries of India 2017)
10
Kubasek Nancy et. al., DYNAMIC BUSINESS LAW: THE ESSENTIALS 3
(McGraw Hill Education 2016)
11
Supra note 1, at 3
12
Understanding The Importance of International Business Law, https://
elforeingoffice.com/understanding-the-importance-of-international-business-
law/ (Last visited on May 11, 2021)
13
Joseph L. Frascona, Business Law Is Business Law, 15 Am. Bus. L.J. 7, 8
(1977-1978).
14
Nikunj Ohri & Aneesh Phadnis, Govt may select winner in Air India’s
disinvestment in about three weeks, (Sept., 17, 2021) https://www.business-
standard.com/article/companies/govt-may-select-winner-in-air-india-s-
disinvestment-in-about-three-weeks-121091700029_1.html,
15
Kenneth Lehn, Public Policy Towards Corporate Restructuring, 25(2) Business
Economics. 26, 26-31 (1990)
16
Chandra R Srikanth, Byju’s buys US-based coding platform Tynker, its 9th
acquisition this year, (Sept., 16, 2021) https://www.moneycontrol.com/news/
20 business/startup/byjus-buys-us-based-coding-platform-tynker-its-9th-
 acquisition-this-year-7474051.html Introduction to Business Law
17
Supra note 3, at 4
18
Supra note 1, at 6
19
Supra note 3, at 5
20
Supra note 1, at 6
21
Valbrune Miranda and Assis Renee De, BUSINESS LAW 1 ESSENTIALS
(OpenStax 2019), https://openstax.org/books/business-law-i-essentials/pages/
1-introduction (Last Visited on 12/05/2021)
22
Supra note 3, at 7

21
Overview of Business Law
UNIT 2 CONCEPTS AND PRINCIPLES

Objectives

The objectives of this unit are to:

Understand important concepts under Business law
Appreciate various principles under Business law
Explain the statutes that fall under Business law in India
Discuss the methods for dispute resolutions including Alternate Dispute
Resolution (ADR)
Structure
2.1 Introduction
2.2 Concepts under Business Law
2.3 Principles of Business Law
2.4 Statutes under Business Law
2.5 Basic Scheme of Litigation- Resolution through Courts
2.6 Alternative Dispute Resolution
2.7 Summary
2.8 Self Assessment Questions
2.9 Further Readings/References

2.1 INTRODUCTION
Law has become an important part of any business activity. Business law has
taken an important place in the legal study. Business law provides legal and
regulatory framework for doing business. It includes study of legal compliances
related to any business activity. This Unit will elaborate the concepts that fall
under the business law. It will discuss the various principles of business law and
the statutes that fall under business laws in India. The Unit also examines the
dispute resolution mechanisms for resolving business disputes including the
Alternate Dispute Resolution mechanisms.

Business Law incorporates into its ambit the set of laws that directs the process
of formation and continuance of business, setting forth the laws which establish
the rules that the companies and enterprises follow. “All legitimate businesses
need to operate within the framework of the law. It is essential for persons working
within the business world to have an understanding of how law works and affects
their businesses, for example a contract will only be of value to a business if it is
legally enforceable. The law sets down rules for the setting up and administration
of certain types of business and governs areas of employment of staff. Although
specialist legal advice is usually obtained on specific legal issues, it is essential
to understand the core principles of business law.”1

The enactment of laws and their staunch governance is of utmost importance in

a country. “Laws are rules and regulations which govern the activities of persons
within a country. They provide necessary rules, and balance the various interests
22
of different members of the community. Both natural persons (human beings) Concepts and Principles
and legal persons (companies) are bound by laws of the country they reside in.
From these laws they can ascertain what they are permitted to do and what they
are not permitted to do.”2

2.2 CONCEPTS UNDER BUSINESS LAW

Any business begins with the basic understanding of what has to be done under
any particular business and in what form it has to be done. A business may be
established for production, manufacturing, provision of service or sale or purchase
of products. Every such objective involves a complex set of contracts, transactions
and payments. Similarly, in what form business has to be done requires
deliberation about the type of business organization through which the business
will be conducted. The types of business organizations would begin from sole
proprietorship in which an individual carries the business followed by traditional
partnerships, limited liability partnerships and incorporation of a company. Doing
business in Hindu Undivided Family (HUF) is also prevalent in India in which
male members of the family become coparceners in the business by birth in the
family. The business is conducted by the Karta of the family. Therefore, the
following concepts become important for any entrepreneur to understand:

1) Whether the business involves sale and purchase? If yes, basic concepts
relating to contracts of sale should be well known.

2) Whether the business involves production or manufacturing? If yes, basic

concepts relating to the contracts, intellectual property, product liability,
contractual and tortious liability, should be known.

3) Whether the business involves formation of a partnership? If yes, depending

upon the type of partnership, the process of formation and forthcoming
liabilities of all partners should be very well known. In traditional
partnerships, registration is not mandatory but has serious consequences in
reducing remedies for the partnership against third parties. Partnership deed
is advisable to be prepared as such partnerships have unlimited liabilities of
partners. Limited Liability Partnerships (LLPs) provide opportunity to enjoy
the benefit of partnership with limited liability of partners through
incorporation of LLPs.

4) Whether the business involves incorporation of a company? If yes, which

type of company will be suitable for the business should be understood.
Generally, a limited liability company should be constituted for business
involving capital and financial risks.

Rights and liabilities of shareholders of companies should be well understood

for both private and public limited liability companies.

5) Whether the business is capital intensive? If yes, it should be known how

the capital would be raised through public issues or borrowing.

6) Whether payments are required to be made? Generally, all businesses would

require payments to be made to different persons. Basic knowledge about
the concepts of negotiable instruments is required.

23
Overview of Business Law 7) Every business involves different types of risks. Concepts relating to the
insurance and risk management should be known and accordingly risks
should be insured through proper insurance policies.
8) Disputes are also part and parcel of doing any business. Concepts relating to
the rights, remedies, dispute resolution including alternative dispute
resolution mechanisms should be well understood.
9) Legal and regulatory compliances should be properly adhered to by all
businesses. For example, if business makes profits, how to comply with tax
liability, if business involves off shore transactions how the tax liability should
be covered becomes important for any business.

2.3 PRINCIPLES OF BUSINESS LAW

1) Law and Morality: “The Natural Law School of jurisprudence postulates
that the law is based on what is “correct.” Natural law philosophers emphasize
a moral theory of law—that is, law should be based on morality and ethics.
Natural law is “discovered” by humans through the use of reason and
choosing between good and evil.”3 “The very efficiency of the legal system
depends on the moral attitude towards the notion of legality, since conformity
with the law is not, in itself, a legal matter, but a moral obligation. Every law
can be, and should be, evaluated from a moral viewpoint. The law cannot
and must not regulate every aspect and each moment of our lives. Most
often the law tells us how to proceed, but not what we should do.”4 Thus,
businesses also have moral obligations and the business law acts as a guiding
force to fulfill these moral obligations. Morality is achieved by following
the law not only in letter but also in spirit.
2) Business Ethics:  Business being part of the society has an assortment of
responsibilities. Businesses have a relationship with the other parts of the
community such as consumers, workers, vendors, marketers, etc. Businesses
owe responsibility towards these parties of the community. The degree of
responsibility may vary from business to business or stakeholder to
stakeholder. Responsibilities are of diverse nature such as safe working
conditions for the employees, good quality products, profit maximization
for the shareholders, and sustainable use of the society’s resources. “Ethics
is the study and practice of decisions about what is good or right. Ethics
guides us when we are wondering what we should be doing in a particular
situation. Business ethics is the application of ethics to the special problems
and opportunities business people experience. An ethical dilemma is a
problem about what a firm should do for which no clear, right decision is
available. At the same time the business ethics guides decisions within firms,
ethics helps guide the law. Law and business ethics serve as an interactive
system—informing and assessing each other. The principles of contract law,
for instance, facilitate market exchanges and trade because the parties to an
exchange can count on the enforceability of agreements. Legal rules that
govern the exchange have been shaped in large part by our sense of
commercial ethics.”5
“The law dictates how a person must behave. Any choice about how a person
should behave that is based on a sense of right and wrong is an ethics decision.
Laws represent society’s view of basic ethics rules. And most people agree
24 that certain activities such as murder, assault, and fraud are wrong. However,
 laws may permit behavior that some feel is wrong, and it may criminalize Concepts and Principles
acts that some feel are right.”6 Similar situations arise under business law
for example, Factories Act, 1948 permits employment of children above 14
years of age, this may be wrong for some people however, it has been
permitted under the law to allow them to earn a living according to the
provisions set out in the law.
3) Common Law: Common law has been a major source of developing
business law. Earlier commercial law was not regulated through specific
statues rather the principles of equity and justice were adopted in the common
law approach, where precedents acted as a guiding force. Thus, common
law still plays a very important role in the evolution and enactment of
commercial law. “The term common law has several different meanings. It
is usually used to mean the law that is not the result of legislation but is the
law created by the decisions of the judges. When common law is given this
meaning, it encompasses cases that have used both, or either, equity and
common law.”7 “English common law was law developed by judges who
issued their opinions when deciding cases. The principles announced in these
cases became precedent for later judges deciding similar cases. The English
common law can be divided into cases decided by the law courts, equity
courts, and merchant courts.”8
“The common law is a beautiful system, containing the wisdom and
experiences of ages. Like the people it ruled and protected, it was simple
and crude in its infancy and became enlarged, improved, and polished as the
nation advanced in civilization, virtue, and intelligence. Adapting itself to
the conditions and circumstances of the people and relying upon them for
its administration, it necessarily improved as the condition of the people
was elevated. The inhabitants of this country always claimed the common
law as their birth right, and at an early period established it as the basis of
their jurisprudence.”9
4) Natural Law: “The term ‘natural law’ refers to the idea that there are certain
ethical laws and principles that are morally right and above the laws devised
by humans. This concept suggests that individuals should have the freedom
to disobey a law enacted by a majority of people if their individual conscience
goes against the law and they believe the law is wrong. The idea that people
have basic human rights, for example, is rooted in the concept of natural
law.”10 “The Natural Law School of jurisprudence postulates that the law is
based on what is “correct.” Natural law philosophers emphasize a moral
theory of law—that is, law should be based on morality and ethics. Natural
law is discovered by humans through the use of reason and choosing between
good and evil.”11
“The law must have a moral basis. Where do we find the moral basis that
would justify a law? Aquinas says that “good is that which all things seek
after.” Therefore, the fundamental rule of all laws is that “good is to be done
and promoted, and evil is to be avoided.” This sounds appealing, but also
vague. Exactly which laws promote good and which do not? Is it better to
have a huge corporation dominate a market or many smaller companies
competing? Did the huge company get that way by being better than its
competitors?”12
There can be numerous examples of the natural law theory to business laws,
as business laws have evolved over time through customs and general usages
25
Overview of Business Law which were considered as the rules of the trade. These rules were based on
ethical conduct, equity and fairness which has been ingrained in the laws by
the law making bodies.
5) Contractual Principles: Salmon has defined a contract as an agreement
that creates and defines obligation between the parties. Section 2(h) of the
Indian Contracts Act, 1872 defines the term contract as an agreement
enforceable by law. This also means that a contract is fundamentally an
agreement having the power to legally bind the parties.
“A contract is an agreement that is enforceable by a court of law or equity.
Every contract involves at least two parties. The offer or is the party who
makes an offer to enter into a contract. The offeree is the party to whom the
offer is made. In making an offer, the offer or promises to do—or to refrain
from doing—something. The offeree then has the power to create a contract
by accepting the offeror’s offer. A contract is created if the offer is accepted.
No contract is created if the offer is not accepted.”13
All business laws have an element of contractual relationships which are
governed as per the law. The Indian Contracts Act specifies the essentials of
a valid contract also stating the various provisions that govern its
enforceability. Simple transactions such as purchase of goods and services
is a contract which attracts various statutes under the business law.

Offer

Offeror Offeree

Acceptance
Offeror makes an Offeree has the power to
offer to the offeree accept the offer and
create a contract.

Figure 2.1
14

6) Equity and Fairness: Equity and fairness is an important principle of

business law. The provisions under business seek to provide equitable
treatment to all. There are laws which vary according to the size of the
business organization or the nature of business activity thereby differentiating
between the business and the laws applicable to them. One such example
can be the provisions of Corporate Social Responsibility where the amount
of contribution by the companies is divided by thresholds on the basis of
turnover, net worth or net profit thereby putting more responsibility on the
bigger companies.

Equality Isn’t the

same as
Equity

Figure 2.2
15

26
 Concepts and Principles
2.4 STATUTES UNDER BUSINESS LAW
There are various enactments brought forth by the legislature which provide
guidance for the carrying out business activities, along with their procedure,
regulation and enforcement. Some of the legislations are listed below:

1) INDIAN CONTRACTS ACT, 1872:

A Contract is an agreement enforceable by law. The formation of Contracts
plays an important role in business world and the law of contracts in India is
governed by the Indian Contract Act, 1872. This law has its origins in the
English common law. The drafting and formation of business contracts plays
an extremely important role in paving the way for business entities to establish
business relationships. The Contract Act also encompasses provisions related
to the laws of agency, bailment, guarantee and indemnity.

2) SALES OF GOODS ACT, 1930:

The Sale of Goods Act, 1930, is an enactment to define and amend the law
associated with the sale of goods. Earlier falling within the purview of chapter
VII of the Indian Contracts Act, the principles of sale of goods came to be
regulated under a separate act eventually. This Act performs the function of
protecting the rights of buyers and sellers, laying down rules for transfer of
ownership of goods, along with creation of remedies for an effective
enforcement. The enactment also contains provisions for the principle of
caveat emptor.

3) NEGOTIABLE INSTRUMENTS ACT, 1881:

Financial System encompasses credit as well as cash transactions. All
transactions under the wing of finance are either dealt with cash payments
or by issuance of negotiable instruments such as; Bills of Exchange, Cheques
or Hundies, to name a few. The Negotiable Instruments Act, 1881, is an Act
to define and modify the law relating to promissory notes, bills of exchange
and cheques. This enactment also ensures that obligations that are assumed
by the issuance of cheques as a mode of deferred payment are honoured.

4) INDIAN PARTNERSHIP ACT, 1932:

The Partnership Act governs the relation between persons engaged in a
business who have decided to share the profits of a business undertaken by
all or any one person on behalf of all. Partnership Act is also one amongst
the bundle of laws, playing an important role in regulating business relations.

5) LIMITED LIABILITY PARTNERSHIP ACT, 2008:

This Act lays down provisions for the creation and regulation of Limited
Liability Partnerships (LLPs), and provides the flexibility and dual benefits
associated with partnerships and companies. LLP is an alternative corporate
body form to conventional partnership firms, where a partner’s liabilities
are confined to their respective investments in the business. The Limited
Liability Partnerships (Amendment) Bill, 2021 was passed by the Lok Sabha
on August 09, 2021 and seeks to amend the prior Act. The new Act seeks to
introduce certain changes providing for compounding of offences,
decriminalizing certain offences and empowering the central government to
direct an LLP to change its name on certain grounds. 27
Overview of Business Law 6) COMPANIES ACT, 2013:
Though the legal system facilitates the formation of different business
organizations, a company or a corporation is the most preferred vehicle to
perform industrial and commercial activities. The Companies Act, 2013 was
enacted to consolidate and amend the law associated with companies. The
provisions of this Act shall be applicable to every company formed under
the present or the previous Act (Companies Act, 1956). This enactment shall
also apply to insurance companies, banking companies, companies engaged
in the electricity generation, etc. The Act also provides for provisions in
reference to corporate social responsibility. Companies Act also lays down
the procedure to be followed by the companies willing to go for a restructuring
in the form of mergers, amalgamation or demergers.

7) EMPLOYMENT AND LABOUR LAW:

Employment law comprises of laws and rules that aid in the enforcement,
regulation and governing employer-employee relationships. With a view to
consolidate the different legislations dealing with labour employment,
industrial disputes, wages and other employment concerned matters, this
branch of law which was traditionally governed by contract and numerous
other legislations, the Government in 2019, brought forth four bills. They
are - The Code of Wages, 2019; The Industrial Relation Code, 2020, The
Occupational Safety, Health and Working Conditions Code, 2020; and The
Code of Social Security, 2020. Employment and Labour Laws form an
important part of the business practices being followed by the companies
and enterprises and contributes in maintaining a healthy relationship between
the employers and the employees.

8) TAX LAWS:
The financial obligations, in the form of taxes, that are levied on income,
capital gains, sales, property etc., by the State Government, Central
Government and also by local authorities, such as municipality is involuntary
in nature. “While direct taxes are levied on taxable income earned by
individuals and corporate entities, the burden to deposit taxes is on the
assessees themselves. On the other hand, indirect taxes, such as Goods and
Services Tax (GST) are levied on the sale and provision of goods and services
respectively and the burden to collect and deposit taxes is on the sellers
instead of the assessees directly.”16 The Income Tax Act,1961 is the legislation
dealing with the areas covered under direct taxes.

9) ANTITRUST LAWS:
The Competition Act, which came into force in 2002, is an economic
legislation for bringing about the economic development in our country.
The primary aim of this piece of legislation is to avert practices having anti-
competitive effects, for the advancement of competition in the markets, to
safeguard the interests of the consumers and to guarantee freedom of trade
to the market participants. This legislation is the successor to Monopolies
and Restrictive Trade Practices Act, 1961. The Act lays down provisions
relating to horizontal and vertical anti-competitive agreements having an
adverse effect on competition, abuse of dominance, combinations and their
regulation.
28
 The Competition Commission of India (CCI) has also embarked on Concepts and Principles
investigating the conduct of anti-competitive activities by Big-tech
enterprises thriving on data. For instance, a recent probe conducted by the
CCI has found social-media giant Google guilty of stifling innovation and
thwarting competition to exert its dominance in the markets related to search,
app library, music among others. The CCI probe also holds that Google has
been espousing anti-competitive, unfair and restrictive trade practices by
imposing one-sided contracts on devices and app-makers such that its
products and apps come pre-installed on the devices garnering highest
consumer preferences. The Commission will determine if this amounts to
abuse of dominance under the Competition Act.

10) FINANCE LAWS:

Finance Laws are entrusted with the regulation of finance after taking into
account the various risks that may be encountered amongst the financial
players, such as banks, NBFCs, insurance companies etc. The main function
of the finance laws is risk minimization, with the various risks being liquidity,
management, credit, exchange rate, legal among others. This branch of law
also deals with different kinds of consensual security such as mortgage,
contractual lien, charge, pledge and perfection of security interest. Law of
Finance also encompasses floating and fixed charges along with governing
the process of consortium (or syndicate) finance and project finance.

The Reserve Bank of India (RBI) plays an extremely important role in the
management and regulation of banks. For instance, last year, the Central
Bank gave a go-ahead for the merger of debilitating Lakshmi Vilas Bank
with Singapore DBS Bank’s Indian subsidiary. This step was taken after
many credible revival plans for the bank and safeguarding depositors failed
to materialise.

11) SECURITIES LAW AND REGULATIONS:

Securities laws and Regulations, also known as Capital Market Laws and
Regulations comprise the bunch of laws and rules that oversee the issuance
of securities. Securities laws and regulations advise the corporations on the
steps that need to be undertaken for offering their investments to the general
public. They are extremely vital to the development of the market economy.
The Laws associated with Securities may provide regulatory or transactional
assistance, which assumes significant role in the conduct of business. In
India, the Securities Contracts (Regulation) Act, 1956, governs the issuance
of securities. The Securities and Exchange Board of India Act (SEBI) is
entrusted the function of regulating the securities market and safeguarding
the interests of the investors in securities.

12) INTERNATIONAL BUSINESS LAW:

International business involves the sale and purchase of goods across the
border. It is the principal determinant for the aspects related to international
trade and globalization. The major benefits of international business law
transactions include increase in the level of profits, availability of advanced
technology and raw materials, to explore avenues beyond domestic markets
and for facilitating growth in market share.

29
Overview of Business Law 13) FOREIGN EXCHANGE LAWS:
In India, the foreign exchange regulations are governed by the Foreign
Exchange Management Act, 1999 (FEMA). The Reserve Bank of India is
entrusted with the responsibility and management of the foreign exchange.

14) CONSUMER PROTECTION ACT, 2019:

The Consumer Protection Act, 2019, which replaced the Act of 1986, is
intended to protect the interests of the consumers and laying down rules for
the settlement of consumers’ disputes. This Act also enlists various consumer
rights, such as, the right to be protected against the marketing of goods, the
right to be informed, the right to be heard, right to consumer awareness, and
the right to seek redressal in case of exploitation, to name a few. The recent
Act also incorporates provisions related to product liability actions and
provides procedure for mediation.

15) LAW OF ARBITRATION:

Law of Arbitration plays an important role in resolution and settlement of
disputes. The Arbitration and Conciliation Act of 1996, was enacted in order
to define the laws in relation to conciliation, and for consolidating and
amending the law relating to domestic arbitration, international commercial
arbitration along with overseeing the enforcement of arbitral awards.

Arbitration is being considered as an effective means for dispute resolution

in addition to the usual court conducted litigation. One of the recent instances
of International Arbitration has been the case of US retail giant Amazon
against the acquisition of Future Retail by Reliance Industries. The Singapore
International Arbitration Centre (SIAC) had begun hearing the case last year,
and in the course of proceedings, passed an emergency award supporting
the claims of Amazon. The sale between Reliance and the Future Group’s
assets was thereby stayed. It was the contention of the Reliance Industries
and Future Group that the Singapore Arbitration Centre’s order was not
binding in the South Asian Market. However, the Indian Supreme Court
upheld the verdict of Singapore’s Emergency Arbitrator (EA) award and
was enforceable under Section 17(2) of India’s Arbitration Act.17

16) INTELLECTUAL PROPERTY LAW:

Intellectual property is associated with the creations of the mind which are
intangible in nature, and includes literary and artistic works, inventions and
symbols. Intellectual property rights provide protection to patents, copyright,
trademarks, industrial designs, geographical indications, trade secrets and
semiconductor integrated circuits layout designs. Intellectual property and
technological knowhow are proving immensely significant in the current
industrial set-up. IP law can also help provide protection to innovative
products, aid in differentiating one business from its rivals, and grant
protection from the mutilation or destruction of artistic words. Intellectual
property has gained immense significance in the current business environment
due to the value it garners for an industry. The role played by intellectual
property in contributing to the Research & Development (R&D) of a company
is immense, especially at the time of merger or takeover of the company.
It undoubtedly holds true that intellectual property protection has been
30 designed to promote innovation and stimulate creativity and to reward the
 innovators for the risks undertaken by them.18 Intellectual property is a must Concepts and Principles
for investors and scientists to expend time and monetary resources into R&D
and in the absence of any incentives, such as the expectation of financial
gains in return, no one may be willing to innovate. Intellectual property, in
the form of patents and technological knowhow have also taken up an
extremely significant role in the current vaccine unavailability crisis, with
big pharmaceutical companies unwilling to share the trade secrets with other
countries fearing loss of profits.
The following are the legislations governing the law of intellectual property
in India:
The Patents Act, 1970: This Act governs the protection of patentable
inventions in India. The Patent protection is offered for a period of 20
years under this Act.
The Copyright Act, 1957: This Act provides for the consolidation of
laws related to Copyright protection by granting protection to literary,
dramatic, musical, artistic works, cinematographic works and sound
recordings. Under this Act, copyright protection is granted for a period
of sixty years plus the life of the author.
The Trademarks Act, 1999: This Act was enacted to consolidate the
law relating to trademarks, providing for registration and protection of
trademarks for goods and services and for further preventing use of
fraudulent marks. The protection for trademarks lasts for twenty-five
years under this legislation.
The Designs Act, 2000: This Act was enacted to amend the law relating
to protection of designs. The protection offered for the designs registered
under this Act is for ten years.
The Semiconductor Integrated Circuits Layout-Design Act, 2000: This
Act was enacted to secure protection of semiconductor integrated
circuits layout-designs. The duration of registration under this Act is
for a period of ten years.

17) INSOLVENCY LAW:

The Insolvency and Bankruptcy Code, was enacted in the year 2016, for
addressing issues related to reorganization and insolvency of individuals,
partnership firms and corporate persons in minimal time with a view to
increase the value of the assets. The code further strives to promote
entrepreneurship, availability of credit and to satisfy the interests of all the
shareholders.

Corporate insolvency resolution process, under Section 14 of this Act also

includes the process of declaring moratorium, which prohibits the
performance of acts allowing the institution of suits, continuing the
proceedings or following up on pending suits against the corporate debtor.
This provision also blocks any act that results in transfer, encumbrance,
alienation or disposal of assets by the corporate debtor, and any act seeking
foreclosure, recovery or enforcement of security interest made by the
corporate debtor with regards to the property in question.

31
Overview of Business Law 18) COMMERCIAL COURTS ACT, 2015

The Commercial Courts Act was brought forth in 2015, for the creation of
Commercial Courts, Commercial Appellate Courts, Commercial Division
and Commercial Appellate Division in the High Courts for resolving
commercial disputes of specified value. A Commercial Court is empowered
to handle complex commercial disputes in a time bound manner. The Act
also is also embedded with specialized features such as, pre-institution
settlement (offering a mode for a pre-trial conference for settlement), and
case management hearing (court providing a timeline before the start of the
trial for the entire life-cycle of the suit).

2.5 BASIC SCHEME OF LITIGATION-

RESOLUTION THROUGH COURTS
In India, the adjudication of disputes is carried out by the judiciary. The Court
system follows a hierarchical structure with the Supreme Court at the apex, being
the Union Judiciary. The Supreme Court is empowered to exercise original,
appellate and extraordinary jurisdiction. The State Judiciary comprises of High
Courts, entrusted with the power to supervise the functioning of all other lower
courts and tribunals in the Country, including district courts. The adjudicatory
courts are categorized into Civil Courts and Criminal Courts.

India follows an adversarial form of system. A plaintiff is the party bringing a

lawsuit before a court of law in pursuance of a legal remedy. A defendant is the
party against whom relief is sought in a Civil proceeding. The Code of Civil
Procedure, 1908, governs the procedure in relation to civil suits. The code lays
down the substantive and procedural aspects in the form of provisions and orders
drafted in the code for regulating the proceedings in courts of civil judicature.
The orders provide for rules in regards to parties to the suits, framing and
institution of suits, the particulars to be present in pleadings, plaints and written
statements, pronouncement of judgement or decree, among others. The Code
also provides rules regarding the grant of temporary and permanent injunction,
and summary procedure.

2.6 ALTERNATIVE DISPUTE RESOLUTION

The path of litigation and use of the court system to resolve the commercial
disputes usually takes years to resolve and costs a lot due to the legal fees and
expenses. During the process of litigation, the normal business operations are
hampered and disrupted. In order to avoid these issues, the businesses usually
prefer the mode of settlement without involving the courts. Here the disputes are
resolved outside the court judicial system this is often referred to as the Alternative
Dispute Resolution (ADR). ADR is being increasingly used to resolve legal
problems as it provides many benefits in terms of quick redressal and resolution
and are much cheaper than litigation. ADR includes within its scope arbitration,
negotiation and mediation.

The active participation by the parties in the negotiations produces satisfying

results for both the parties. The flexibility offered by the ADR methods can prove
useful in combating the ever-increasing backlog of cases. These also address the
delays associated with the onerous procedure of litigation. The sheer volume of
32
cases, lengthy and time-consuming procedures for appeals and review further Concepts and Principles
aggravate the delays in the finality of proceedings in an adversarial set-up,
overwhelming the system. This may also thwart investments as firms looking to
invest in the country may be cautious on evaluation of legal and financial risks,
that the exit mechanism may be drawn-out pending the resolution of laborious
litigation. ADR techniques are gaining popularity due to the flexibility in
procedures and the wide range of innovative solutions available at disposal based
on the problem at hand, side-stepping the rigidity associated with precedents
giving rise to creative ideas.

“The technique of ADR is an effort to design a workable and fair alternative to

our traditional judicial system. It is a fast-track system of dispensing justice.
These techniques have been developed on scientific lines in USA, UK, France,
Canada, China, Japan, South Africa, Australia and Singapore. ADR has emerged
as a significant movement in these countries and has not only helped reduce cost
and time taken for resolution of disputes, but also in providing a congenial
atmosphere and a less formal and less complicated forum for various types of
disputes. The advantage of ADR is that it is more flexible and avoids seeking
recourse to the courts. In conciliation/mediation, parties are free to withdraw at
any stage of time. It has been seen that resolution of disputes is quicker and
cheaper through ADR. The parties involved in ADR do not develop strained
relations; rather they maintain the continued relationship between themselves.”19

Past events are dealt with in order to reach future agreements.

Non-adversarial method: both sides win. They make compromises and look for and
NEGOTIATION agreement that satisfies common interests.
A third party does not intervene.
The process is voluntary.
The parties are the ones that resolve the situation.
Try to reach an agreement to improve future relationships.
Non-adversarial method: both sides win. They look for mututal understanding and
MEDIATION collaborate to reach an agreement that both sides find satisfactory.
A third party intervenes; the mediator/s that control the process and help the parties
identify and satisfy their interests. This is done among equals.
The process is voluntary.
The mediator proposes solutions and the parties resolve the situation.

This is where past issues are resolved without a commitment for the future.
Non-adversarial method; both sides win. Reconciliation is sought after.
CONCILIATION A third party intervenes and brings both parties together to talk or transmit information
between each other.
The process is voluntary.
The parties resolve the conflict.

Post events are discussed and the arbitrator makes a recommendation that the parties
can accept or reject.
Adversarial method: one side wins and the other side loses.
ARBITRATION A third party intervenes. This tends to be the person with more authority.
The process is voluntary. The two sides present their needs, interests and positions to
the arbitrator.
The sides are not autonomous when it comes to the result, as the result is imposed by
the third party.

The parties lose their power to resolve the conflict.

Adversarial method.
A neutral third party intervenes the judge dictates the sentence that ends the process
TRIAL and resolves the conflict. The sentence is a mandate so it holds weight, ties and
obliges.
This is not a voluntary process.

Figure 2.320 33
Overview of Business Law Section 89 of the Civil Procedure Code (CPC), 1908, enlists the different ADR
techniques that the Court may refer to after reformulating the terms of possible
settlement between the parties, if it appears to the Court that the parties to the
dispute may be willing to settle. The court may formulate the terms of settlement
of a dispute and after receiving observations of parties refer the terms to arbitration,
conciliation, judicial settlement through Lok Adalat or mediation.

2.7 SUMMARY
The diverse set of legislations enacted by the law-making bodies promote effective
regulation and promotion of business activities, and aid in designing a framework
which encourages smaller enterprises to expand their business offering a level-
playing field. Thus, Business laws play a significant role is shaping the economy
of the country.

2.8 SELF ASSESSMENT QUESTIONS

1) What are the main concepts under Business Law?
2) What is the significance of business ethics in the development of business
laws?
3) What is the provision under the Civil Procedure Code, 1908 which refers to
settlement of disputes outside the Court?
4) Which Act was previously responsible for governing issues related to the
sale of goods?
5) Which chapter under the Companies Act, 2013 deals with incorporation of
any company?
6) In which year did the Goods and Services Tax (GST) Act come into force?
7) Which Article under the Indian Constitution governs provisions in relation
to tax?
8) Which legislation was the predecessor to the Competition Act, 2002?
9) What does Consensus ad idem under the Indian Contract Act, 1872 mean?
10) Which case challenged the Constitutional validity of the Insolvency and
Bankruptcy Act, 2016?
11) Name the new provisions of the Consumer Protection Act, 2019?

2.9 FURTHER READINGS/ REFERENCES

Weblinks:
1) https://legislative.gov.in/sites/default/files/A1872-09.pdf
2) https://legislative.gov.in/sites/default/files/A1930-3_0.pdf
3) https://legislative.gov.in/sites/default/files/A1881-26.pdf
4) https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf
5) https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
6) https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx

34 7) https://www.cci.gov.in/sites/default/files/cci_pdf/competitionact2012.pdf
8) https://www.indiacode.nic.in/handle/123456789/15256?locale=en Concepts and Principles

9) https://www.indiacode.nic.in/bitstream/123456789/1978/1/AAA1996-
26.pdf
10) https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyof
India.pdf
11) https://legislative.gov.in/sites/default/files/A1908-05.pdf
12) https://legislative.gov.in/sites/default/files/A2016-4_1.pdf
13) https://legislative.gov.in/sites/default/files/A1996-26.pdf
References:
1
LUCY JONES, INTRODUCTION TO BUSINESS LAW, OXFORD UNIVERSITY PRESS 1 (2013)
2
Ibid, at 3.
3
Henry Cheeseman, BUSINESS LAW, 6 (Pearson 2016)
4
Dan Cramium, Law and Morality in Modern Business, Logos Universality
Mentality Education Novelty 3(1), 83, (2015)
5
Kubasek Nancy et. al., DYNAMIC BUSINESS LAW: THE ESSENTIALS
14 (McGraw Hill Education 2016)
6
Jeffrey F. Beatty, BUSINESS LAW AND THE LEGAL ENVIRONMENT 26
(Cengage Learning Inc. 2019)
7
Supra note 1, at 8
8
Supra note 6, at 9
9
Supra note 6, at 10
10
Supra note 8, at 7
11
Supra not 6, at 6
12
Supra note 5, at 13
13
Supra note 6, at 187
14
Supra note 6, at 187
15
Community week event, https://laout.org/community-equity-event/ (Last
visited on May 20, 2021).
16
The tax structure in India is divided into direct and indirect taxes.https://
www.investindia.gov.in/taxation (Last visited Sept. 16, 2021).
17
H.R Ranina, Amazon-Future Group verdict: Indian cos should opt for
arbitration in India, (Aug, 06, 2021)https://economictimes.indiatimes.com/
markets/expert-view/amazon-future-group-verdict-indian-cos-should-opt-for-
arbitration-in-india-says-hr-ranina/articleshow/85096749.cms
18
James Bacchus, An Unnecessary Proposal: A WTO Waiver of Intellectual
Property Rights for COVID-19 Vaccines, CATO INSTITUTE, (Jun. 01 2021),
https://www.cato.org/publications/free-trade-bulletin/unnecessary-proposal-
wto-waiver-intellectual-property-rights-covid.
19
http://www.legalservicesindia.com/article/224/ADR-Mechanism-in-
India.html (Last visited on 20/05/2021); Refer also to https://
lawcommissionofindia.nic.in/adr_conf/concepts%20med%20rao%201.pdf 
20
https://www.ddfsocialelearning.com/alternative-methods-to-resolving-
conflict/tabla-mediacion-ingles/ (Last visited on May 20, 2021)
35
 BLOCK-2
BUSINESS FORMS AND LEGISLATIONS
Unit 3 : The Partnership Act, 1932
Unit 4 : The Companies Act, 2013
Overview of Business Law

38
 Concepts and Principles
UNIT 3 THE PARTNERSHIP ACT, 1932

Objectives

On completion of studying this Unit, you will be able to:

Define partnership and explain its essential features
Describe different types of partners and partnerships
Differentiate between partnership and other forms of organization.
Discuss how registration of a partnership firm can be done
Explain the circumstances when a partnership is reconstituted and a firm is
dissolved
Appreciate the meaning of the term ‘Limited Liability Partnership’(LLP),
its need, scope advantages and incorporation of LLP
Structure
3.1 Introduction
3.2 Nature of Partnership
3.2.1 Definition of Partnership, ‘Partners’, ‘Firm’ and ‘Firm’s name’
3.2.2 Essentials of a Partnership
3.2.3 Types of Partner
3.2.4 Position of Minor as a Partner
3.2.5 Types of Partnerships
3.2.6 Partnership distinguished from other Forms of Organisation
3.3 Formation and Registration of Partnership
3.3.1 Formation of Partnership
3.3.2 Partnership Deed
3.3.3 Registration of Partnership
3.3.4 Effects of Non-Registration
3.4 Relation of partners to one Another
3.4.1 Rights of Partners
3.4.2 Duties of Partners
3.5 Relation of Partners to Third Parties
3.5.1 Partners as Agents
3.5.2 Authority of a Partner
3.6 Reconstitution of Firm
3.6.1 Admission of Partner
3.6.2 Retirement of Partner
3.6.3 Expulsion of partner
3.6.4 Death or Insolvency
3.7 Dissolution
3.8 Limited Liability Partnership Act, 2008
3.9 Differences with other Forms of Organisation
3.10 Advantages and Disadvantage of LLP
39
Business Forms and 3.11 Incorporation of LLP
Legislations
3.12 Summary
3.13 Self Assessment Questions
3.14 Further Readings

3.1 INTRODUCTION
The development of business and growth in business transactions lead to the
replacement of the proprietary form of organizations with partnership enterprises.
Partnership is a form of business organization, where two or more persons come
together for jointly carrying on some business. In partnership two or more persons
pool their resources; both money and material, to their mutual advantage and
thus share the business risk.
Towards the end of 19th century it was considered absolutely crucial to regulate
the partnership form of business, so as to control the evils (many evils crept in
over passage of time) from spreading and contaminating the business organization
and mercantile transactions.
Initially, The Indian Contract Act, 1872, governed all aspects of Commerce and
trade and Chapter IX, sections 239 to 266 of the Act regulated the partnership
business. But these provisions were not exhaustive. Many aspects remained
unnoticed and unregulated. This lead to a need for more specific governance and
the government took steps to legislate further. Chapter IX, sections 239 to 266
are replaced by Indian Partnership Act, 1932. It is based on the English Partnership
Act, 1890.
Partnership is a mere voluntary collective and has no force of law to its
constitution. Thus, the concept of partnership is that a firm is not an entity or a
person in law but is merely an association of persons and the firm name is only
a collective name for individuals who have agreed to carry on business in
partnership. A Partnership arises from a contract, and therefore, such a contract
is governed not only by the provisions of the Partnership Act in that regard, but
also by the general law of contract in such matters, where the Partnership Act
does not specifically make any provision. Thus, the rules relating to offer and
acceptance, consideration, free consent, legality of object, etc, as contained in
the Indian Contract Act, are applicable to a contract of Partnership also.

3.2 NATURE OF PARTNERSHIP

3.2.1 Definition of Partnership, ‘Partners’, ‘Firm’ and ‘Firm’s
Name’
Section 4, The Indian Partnership Act, 1932, lays down the definition of
“Partnership”, “Partner”, “Firm” and “Firm-Name”.
“Partnership” is the relationship between persons who have agreed to share the
profits of the business carried on by all or any of them acting for all”.
There are three aspects to partnership: partners, firm, and the firm name.
Persons who have entered into partnership with one another are called individually
‘partners’ and collectively ‘a firm’, and the name under which the business is
carried on is called the ‘firm’s name’.
40
Thus “a firm” in law is only a collective name of the partners of a partnership. It The Partnership Act, 1932
doesn’t have a separate legal existence as is in a corporation.

While acquiring the “firm name”, the partners should keep in mind that they do
not violate the rules relating to trade name or goodwill. The adopted name must
not mislead the public to confuse them with a firm of repute already in existence
with a similar name. They must not use a name implying the sanction of patronage
of the Government. A partnership firm cannot use the word “Limited” as a part
of its name.

3.2.2 Essentials of a Partnership

The examination of the definition of partnership given in section 4 of the Act
indicates that the following elements must co-exist before a partnership can come
into existence:
1) There must be minimum two persons.
2) The relationship must arise out of an agreement between two or more persons
to carry on a business
3) The agreement must be to share the profits of a business
4) The business must be carried on by all or any of them acting for all.
5) Each partner is liable for all the acts of a firm done by a partner.
We shall now discuss the aforesaid elements, briefly:

1) Association of two or more Persons: In order to form partnership, there

must be a contract between two or more persons coming together for a
common goal. Persons must be competent to enter into a contract. They
may all be natural or artificial or some natural and other artificial -

There are at least two persons required otherwise it cannot be a partnership.

If this number gets reduced to one for reason like death or insolvency, the
partnership ceases to exist. The Act is silent on the maximum number of
partners but section 464 of the Companies Act, 2013 has now put a limit of
50 partners in any association/partnership firm. The Companies Act, 2013,
lays limit on number of partners in a partnership as under:

a) The Central Government has prescribed maximum number of

partners in a firm to be 50 vide Rule 10 of the Companies
(Miscellaneous) Rules, 2014.

b) Section 464 (1) of the Companies Act 2013 states “provided that the
number of persons which may be prescribed under this sub-section
shall not exceed one hundred.

Thus, the ceiling under rules can be varied but under no circumstance can
go beyond 100.

2) Agreement: According to section 5, the relation of partnership arises from

contract and not from status; thus, the members of a Hindu undivided family
carrying on a family business, or a Burmese Buddhist husband and wife
carrying on business, are not partners in such business. The agreement is the
basis of relationship between the partners. The agreement can be in written
41
Business Forms and or oral form. But it is preferred that the partners have a written agreement so
Legislations
that in case of dispute there is a greater clarity as to their relation and position.
3) Business: The agreement should be to carry on some lawful business. The
term “business” includes trade, occupation and profession (Section 2(b) of
the Act). In the definition of partnership the word “business” means “carrying
on business” that is continuity or repetition of acts. But that doesn’t mean it
should be lengthy operations, even a single venture of an undertaking, if
there is continued participation of two or more persons for acquisition of
gains is considered.
4) Sharing of Profit: To constitute a partnership, the parties must have agreed
to carry on a business (not a charitable activity) and to share profits in
common. Unless otherwise agreed sharing of profits also involves sharing
of losses as well. However, the sharing of profit is an essential element of
partnership, the sharing of losses is not. The partners can agree to share the
profits in any ratio and either in specific proportions or in specific sums, but
if only one partner is entitled to whole of the profit then there will be no
partnership.
5) Mutual Agency: The business of a partnership concern may be carried on
by all the partners or any of them acting for all. This statement has two
important implications. First, every partner is entitled to participate in the
conduct of the affairs of its business. Second, that there exists a relationship
of mutual agency between all the partners. Each partner carrying on the
business is the principal as well as the agent for all the other partners. He
can bind other partners by his acts and also is bound by the acts of other
partners with regard to business of the firm.
6) Liability of Partners: Each partner is liable jointly and severally to the third
party for all the acts of the firm done while he is a partner. The liability of a
partner for acts of the firm is unlimited i.e., the partners private assets can
also be used for paying off the firm’s debts.

3.2.3 Types of Partner

There are basically two categories of partners:-
i) Partners by virtue of Partnership Agreement; and
ii) Partners by virtue of holding out [section 28]
The Act does not provide about the types of partners. This is decided on the
partnership contract. In practice based on the extent of liability, the different
classes of partners are:
1) Actual, Active or Ostensible Partner: Such a partner actively participates
in the functioning and management of the business and shares its profits or
losses. He acts as an agent of other partners for all acts done in the ordinary
course of business. In the event of his retirement, he must give a public
notice in order to absolve himself of liabilities for acts of other partners
done after his retirement.
2) Sleeping or dormant partners: These partners invest money in the firm’s
business and share profits but do not participate in the functioning and
management of the business. However, they are liable to the third parties
42
 for all acts of the firm. Such a partner can retire from the firm without giving The Partnership Act, 1932
any public notice to this effect. His liability for the acts of the firm ceases
soon after retirement. Such partner has no duties to perform but is entitled
to have access to books and accounts of the firm and he can have a copy of
them.
3) Nominal partner: Such a partner neither invests nor participates in the
management of the firm but only gives his name to the business or firm.
However, such partners are liable to third parties for all the acts of the firm.
Unlike a sleeping partner, they are known to the outsiders as partners in the
firm, whereas they are not. They require to give public notice at the time of
being separated from the firm.
4) Partners in profit only: A partner, who is entitled to share in the profits of a
partnership firm without being liable to share the losses, is called a partner
in profits only. Thus, a person who has sufficient capital but is not prepared
to take risk may be admitted to the partnership by the other partners. In spite
of his specific position, he continues to be liable to the third parties for all
acts of the firm, just like other partners.
5) Sub-partner: Where a partner agrees to share his profits in the firm with a
third person, that third person is called a sub-partner. A sub-partner is not
the partner in firm. He is partner of a partner. A sub-partner has no rights or
duties towards the firm and does not carry any liability for the debts of the
firm. He can neither participate in partnership business nor check the accounts
of such partner and claim share. Also he cannot bind the firm or other partners
by his acts. The only right he has to share the profits in property at the time
of winding-up.
6) Partner by ‘estoppel’ or by holding out: If a person by his act or words,
gives another person reason to believe that he is a partner in a firm (when
actually he is not) and that other person takes action on those set of facts,
such a person is estopped from later on denying the liabilities for the acts of
the firm. Thus, it is a legally binding partnership that may occur where
previously, no formal partnership agreement was in place. Such person is
called partner by estoppel and is liable to all third parties. Similarly, when
the firm declares a person to be a partner (when actually he is not), and that
person knowingly permits himself to be represented, to be a partner in a
firm or does not deny the fact that he is a partner, then such a person is
known as partner by holding out. An active partner who fails to give public
notice at the time of retirement is also liable as partner by holding out.

3.2.4 Position of Minor as a Partner

Minor Admitted to the Benefits of Partnership:
Since partnership is a contractual relationship. The parties to contract must be
competent to contract under the law to which they are subject. A minor is
incompetent to contract. Hence, he cannot become a partner but, with the consent
of all the partners, he may be admitted to the benefits of partnership.

Rights of Minor:
He is entitled to share of the property and of the profits of the firm as agreed
upon. He can have access to and inspect and copy any of the accounts of the firm
but not any other book [section 30(2)] 43
Business Forms and A minor can sue the partners for an account or payment of his share of the property
Legislations
or profits of the firm, when severing his connection with the firm. The amount of
his share shall be determined by a valuation made as far as possible in accordance
with the rules contained in section 48.

Liabilities of Minor:
A minor is liable to the extent of his share in the firm. He is neither personally
liable nor is his private estate liable for the acts of the firm. He cannot be declared
insolvent if the firm’s debts cannot be paid out of the firm’s property.

Position on attaining majority:

A minor has a choice to become a partner, or sever his connection from the firm,
within six months of his attaining the age of majority or when he comes to know
of his being admitted to the benefit of partnership, whichever date is later.

He has to give a public notice if he intends to become or that he has elected not
to become a partner in the firm within six months. If he fails to give such notice,
he shall become a partner in the firm on the expiry of the said six months. [Section
30(5)]
Where such person becomes a partner-
a) his right and liabilities as a minor continue up to the date on which he becomes
a partner,
b) he also becomes personally liable to third parties for all acts of the firm
done since he was admitted to the benefits of partnership, and
c) his share in the property and profits of firm shall be the share to which he
was entitled as a minor.
Where such person elects not to become a partner-
a) his rights and liabilities shall continue to be those of a minor under this
section up to the date on which he gives public notice,
b) his share shall not be liable for any acts of the firm done after the date of the
notice, and
c) he shall be entitled to sue the partners for his share of the property and
profits

3.2.5 Types of Partnerships

A partnership may be for - a particular adventure or for a fixed period or at will.
From the duration point of view, a partnership may be classified into the following
two:
i) Partnership-At-Will (Section 7)
ii) Particular Partnership (Section 8)
i) Partnership-At-Will: According to Section 7 of the Act, partnership is at
will when:
i) no fixed period has been agreed upon for the duration of partnership, and
ii) there is no provision made as to the determination of partnership in any
other way.
44
 The death or retirement of a partner does not affect the existence of such The Partnership Act, 1932
partnership as there is no fixed or definite date of termination. Such a
partnership can be dissolved by any partner giving notice in writing to all
the other partners of his intention to dissolve the firm [Section 43(1)]. The
firm is dissolved from the date mentioned in the notice as the date of
dissolution or, if no such date is mentioned, as from the date of
communication of the notice”.

ii) Particular Partnership: When a partnership is formed for a particular

adventure or undertaking or for a particular period, such a partnership is
called “Particular Partnership. Such partnership automatically comes to an
end on completion of venture or on expiry of the period. If partners want to
dissolve the partnership before fixed period it can be done by mutual consent
and if the partnership is continued after the expiry of the term or completion
of venture it is deemed to be partnership at will.

3.2.6 Partnership Distinguished from other Forms of

Organisation
i) Co-ownership and Partnership:
If two or more persons own a property jointly and employ the same property in
a business and share the profits, it is co-ownership and not partnership. The
main point of distinction between the two is:
1) Partnership always arises out of a contract, express or implied. Whereas co-
ownership may arise from an agreement or by the operation of law or from
status or any other way. e.g., co-heirs of a property.
2) A partner is the agent of the other partners, but a co-owner is not the agent
of the other co-owner(s).
3) Partnership involves sharing of profits and loss. Whereas co-ownership does
not necessarily do so.
4) A partner cannot transfer his rights and interests to anyone without the consent
of all other partners. However, a co-owner can do so without the consent of
the others.
5) A partner can only ask for share of the profits out of the properties. Whereas
a co-owner can ask for division of property,
6) A partner has a lien on the firm property whereas co-owner doesnot.

ii) Hindu Joint Family Firm and Partnership:

A Hindu joint family firm differs from a partnership in the following ways:
1) A partnership arises out of contract and a Hindu joint family (HUF) firm out
of status, i.e., by birth in the family.
2) Partnership is governed by Indian Partnership Act and HUF by Hindu Law
3) A minor cannot be a partner, although he may be admitted to the benefits of
partnership. Whereas, in HUF a minor is a member from the very day of his
birth by virtue of his status, but he is not personally liable.

45
Business Forms and 4) The death of a partner dissolves the partnership, but the death of a co-parcener
Legislations
does not.
5) In partnership each partner has implied authority to borrow and bind other
partner but in HUF firm only the Karta or manager (who is the head of the
family) is entitled to do so.
6) Every partner is personally liable for the debts of the firm; but in a HUF
business only the Karta is personally liable.
7) A partner can demand the accounts of the firm, a co-parcener cannot ask for
accounts; his only remedy is to ask for partition of the assets of the family
firm.
8) Partnership firm must be registered before it can maintain suits against
outsiders. Whereas for HUF no registration is necessary.
9) Every partner has a definite share and it can be changed only by agreement,
but the share of a coparcener enlarges or reduces depending on death or
birth in family.
10) There is a definite limit to the number of partners, but there is no such limit
in the case of a Hindu joint family firm.

Activity 1
1) Can the following be called partnership?
a) Several persons jointly purchase goods for resale with a view to divide
the profits arising from the transaction.
b) Widow or child of a deceased receiving profits
c) Persons who join in the purchase of goods for the purpose of dividing
the goods themselves.
d) A. B and C agreed that each should furnish Rs. 3000 worth of goods
to be shipped on a joint venture, the profits is to be divided between
them according to the amount of their several shipments
e) Two tenants in common of a house and divide the rent equally
2) Tick the right answer:
a) Where a partnership firm is constituted for a fixed period and after
expiry of that term the firm continues its business without any
agreement
i) The partnership becomes the partnership at will
ii) The partnership becomes illegal
b) Which is not an essential element of partnership firms?
i) Perpetual succession ii) Mutual agency
c) The relationship of partnership arises from
i) Contract ii) status
d) which of the following is the conclusive test of partnership
i) sharing of profit ii) mutual agency relationship
e) Goodwill of the business is the property of the business in absence
of contract to contrary. True/False.
46
 The Partnership Act, 1932
3.3 FORMATION AND REGISTRATION OF
PARTNERSHIP
3.3.1 Formation of Partnership
Partnership comes into existence by contract and this contract may be written or
oral- or implied, which is inferred from the conduct of the parties in business
circumstances. According to the definition of partnership under the Indian
Partnership Act, 1932, there must be an agreement between the partners of a
partnership firm.

To constitute a valid contract, the parties to the contract must be competent to

contract, their consent must be free and objective should not be forbidden by law
or immoral or opposed to public policy. However, two exceptions may be noted:
i) A minor may be admitted to the benefits of an existing partnership firm with
the consent of all other partners.
ii) As relations of partners inter se are that of agency, no consideration is
required to create the partnership.

3.3.2 Partnership Deed

As already stated the agreement of partnership may be oral. But it is advisable to
have it in writing so as to avoid any future disputes. The written document that
contains the mutual rights and obligations of partners is known as partnership
deed. The deed must be stamped according to the provisions of the Indian Stamp
Act and copy of the same must be given to each partner and at the time of
registration, a copy of the deed should be filed with the Registrar of Firms. The
partnership deed is not a public document and therefore binds only third parties
so far as they have notice of it.

Contents of Partnership Deed

The exact terms of the partnership deed (or agreement) will depend upon the
circumstances but generally a partnership deed contains the following covenants:
i) The firm name, date of establishment, duration of partnership .
ii) Full names and permanent addresses of all the partners and the date when
each partner joined the firm.
iii) Nature and scope of business; the place or principal place of business of the
firm,.
iv) Total capital and the contribution by each partner.
v) Provision for further capital and loans by partners to the firm.
vi) Partner’s drawings,
vii) Interest on capital, loans, drawings and current account.
viii) Salaries, commission and remuneration to partners,
ix) Profit sharing ratio of partners.
x) Guideline for maintaining proper books of accounts, inspection and audit,
Bank Accounts and their operation. 47
Business Forms and xi) Rights and duties of the partners.
Legislations
xii) Whether and in what circumstances, notice of retirement or dissolution
can be given by a partner.
xiii) Provision that death or retirement of a partner will not bring about
dissolution of partnership,
xiv) Valuation of goodwill on retirement, death, dissolution, etc.
xv) The method of valuation of assets (and liabilities) on retirement or death
of any partner.
xvi) Provision for expulsion of a partner.
xvii) Provision regarding the allocation of business activities to be performed
by individual partners
xviii) The arbitration clause for the settlement of disputes. The terms contained
in the partnership deed may be varied with the consent of all the parties,
and such consent may be express or implied by a course of dealing. [Section
11(1)]

3.3.3 Registration of Partnership

Registration of Partnership in not mandatory in India. But registering with a
document deed puts into black and white all the intentions and the purposes of
the partnership as well as its functioning. However, it is to be noted that registration
only creates an instance or evidence of the existence of partnership, and not a
creation of a legal entity.

Registration means getting the firm registered with the Registrar of the firm in
the area where the business is situated or proposed to be situated.

Application for Registration

The registration of a firm may be affected at any time by sending by post or
delivering to the Registrar of the area in which any place of business of the firm
is situated or proposed to be situated, a statement in the prescribed form and
accompanied by the prescribed fee, stating:
a) the name of the firm;
b) the place or principal place of business of the firm;
c) the names of any other places where the firm carries on business;
d) the date when each partner joined the firm;
e) the names in full and permanent addresses of the partners; and
f) the duration of the firm
The statement shall be signed and verified by all the partners or by their agents
specially authorised in this behalf. (Section 58)

Registrar on being duly satisfied, record an entry of the statement in “Register of

Firm” and then issue a certificate of registration. The firm, which is registered,
shall use the brackets and word (Registered) immediately after its name. If, any
change is made in points (a) to (f) above same should be duly notified to the
registrar so that the same is incorporated in the register of the firm.
48
3.3.4 Effects of Non-Registration The Partnership Act, 1932

Non-registration (section 69) leads to following effects:

i) The partners of a firm cannot sue each other or the firm for enforcing any
right arising from a contract or conferred by the Partnership Act,
ii) The firm cannot institute a suit against a third party. Thus the firm cannot
sue but can be sued.
iii) The third party can sue the firm as well as any partner

However, the Act allows the following suits:

a) A suit for the dissolution of a firm.
b) A suit for rendering of accounts of a dissolved firm.
c) A suit for realisation of the property of a dissolved firm.
d) A suit or claim of set-off, the value of which does not exceed one hundred
rupees,
e) A proceeding in execution or other proceeding incidental to or arising from
a suit or claim for not exceeding one hundred rupees in value.
f) A suit by a firm which has no place of business in the territories to which the
Indian Partnership Act extends.
g) A suit for the realisation of the property of an insolvent partner.
h) A suit by a firm whose places of business are situated in areas which are
exempted from the application of Chapter VII of the Indian Partnership Act,
1932
Exceptions: Non-registration of a firm does not, however affect the following
rights:
a) The right of third parties to sue the firm or any partner.
b) The right of partners to sue for the dissolution of the firm or for the settlement
of the accounts of a dissolved firm, or for realization of the property of a
dissolved firm.
c) The power of an Official Assignees, Receiver of Court to release the property
of the insolvent partner and to bring an action.
d) The right to sue or claim a set-off if the value of suit does not exceed Rs. 100
in value.
e) The right to suit and proceeding instituted by legal representatives or heirs
of the deceased partner of a firm for accounts of the firm or to realise the
property of the firm.
Activity 2
1) Whether following is true or false?
a) The relationship of partnership is created by contract which can be
expressed or implied.
b) As relations of partners inter se are that of agency, no consideration
is required to create the partnership.
49
Business Forms and
Legislations c) Partnership deed can be prepared on plain paper as it is not mandatory
to have one.
d) Registration only creates an instance or evidence of the existence of
partnership, and not a creation of a legal entity.
e) If a partnership firm is not registered it cannot institute a suit against
a third party.
2) Fill in the blanks:
a) Registration of partnership is ____________
b) A non registered firm can file suit for _________ of firm.
c) Non registration does not affect the right of ______ party to sue any
partner or firm.
d) Non-registration of a firm does not, however affect the right to sue
or claim a set-off if the value of suit does not exceed ‘____ in value.
e) The firm, which is registered, shall use the brackets and word
________.

3.4 RELATION OF PARTNERS TO ONE ANOTHER

The deed of registration drawn and agreed by the partners governs the requisite
relationship among the partners. In the event where there is no specific mention
of mandatory relationship, sec 9-17 are applicable. These cover the general duties
of a partner, the duty to indemnify for loss caused by fraud, the conduct of business,
mutual rights and liabilities, property of firm, profits, etc.

3.4.1 Rights of Partners

Unless otherwise agreed by the partners, the following rules apply:
A) Right of partners in normal course
i) Right to participate in the conduct of the Business [Section 12(a)]: Every
partner has a right to take part in the conduct and management of the business.
ii) Right to be consulted [Section 12(c)]: Every partner has right to express his
opinion, before the matter is decided, but no change may be made in the
nature of the business without the consent of all the partners. However, the
ordinary matters connected with the business may be decided by majority of
the partners.
iii) Right of access to books [Section 12(d)]: Every partner, has a right to access
and inspect and copy all records, books and accounts of the business.
iv) Right of legal heirs/ representatives/ their duly authorised agents [Section
12(e)]: The heirs or legal representatives or the duly authorised agents of
deceased partner shall have a right of access to and to inspect and copy any
of the books of the firm.
v) Right to share Profits [Section 13(b)]: Unless there is contract to the contrary
the partners are entitled to share equally in the profits, and shall contribute
equally to the losses sustained by the firm. There is no connection between
the proportion in which the partners shall share the profits and the proportion
50 in which they have contributed towards the capital of the firm.
vi) Interest on Advances [Section 13(d)]: Any contribution beyond the amount The Partnership Act, 1932
of capital agreed by partner to subscribe, is entitled to an interest at a rate
agreed upon, and where no rate is stipulated for, at six per cent per annum.
But it is to be noted that a partner cannot claim interest on capital, unless
there is an agreement to pay it.
vii) Interest on Capital [Section 13 (c)]: A partner can be entitled to interest on
capital if there is (i) an express agreement to that effect, or practice of the
particular partnership or (ii) any trade custom to that effect; or (iii) a statutory
provision which entitles him to such interest. This interest is payable only
out of profit.
viii) Right to be indemnified [Section 13(e)]: A partner is entitled to be
indemnified by the firm for all expenses incurred by him-
a) in ordinary and proper conduct of the business, and
b) for all payments made by him in respect of partnership debts or liabilities
and disbursements made in an emergency for protecting the firm from
loss, if the payments, liability and act are such as a prudent man would
make, incur or perform in his own case, under similar circumstances.
ix) Right to use partnership property (Section 15): Every partner is, as a rule,
a joint owner of the partnership property, and has it applied exclusively for
the purposes of the partnership.

B) Right of Partners in special circumstances

i) Right in emergency (Section 21): A partner has power to act in an emergency
for protecting the firm from loss.
ii) Right to prevent admission of new partner (Section 31): A new partner
can be admitted only with the consent of all the partners. Therefore, the
dissenting partner has right to stop admission of a partner.
iii) Right to Retire: a partner may retire-
a) With the consent of all the partners,
b) In accordance with an expressed agreement by partners,
c) by giving notice where the partnership is at will. [Section 32(1)(c)].
iv) Right to continue as partner: Every partner has a right to continue in the
partnership and not to be expelled from firm by any majority of the partner.
[Section 33(1)]

v) Right of an outgoing partner to carry on competing business (Section

36): An outgoing partner may carry on a business competing with that of the
firm and he may advertise such a business, but, subject to contract to the
contrary, he may not-
a) Use the firm’s name,
b) Represent himself as carrying on the business of the firm, or
c) Solicit the custom of persons who were dealing with the firm before he
ceased to be a partner.

51
Business Forms and vi) Right To Share Subsequent Profits (Section 37): Where any member of a
Legislations
firm has died or otherwise ceased to be a partner, and the surviving or
continuing partners carry on the business of the firm with the property of the
firm without any final settlement of accounts as between them and the
outgoing partner or his estate, then, in the absence of a contract to the contrary,
the outgoing partner or his estate is entitled at the option of himself or his
representatives to such share of the profits made since he ceased to be a
partner as may be attributable to the use of his share of the property of the
firm or to interest at the rate of six per cent per annum on the amount of his
share in the property of the firm.

3.4.2 Duties of Partners

A partner may have two types of duties:-
a) Those envisaged in the partnership contract, and
b) Those prescribed in the Act
a) Duties envisaged in the partnership contract:
Partners may fix any duties. These may be expressed or implied by a course
of dealing. But these duties should not violate the Act or the general principles
of contract.
b) Duties prescribed in the Act:
The following statutory duties are implied:
i) Duty of Good Faith (Section 9): Partners are bound to carry on the
business of the firm to the greatest common advantage, to be just and
faithful to each other, and to render true accounts and full information
of all things affecting the firm to any partner or his legal representative.
Duty to be just and faithful is a mutual duty on which the foundation of
partnership stands.
ii) Duty to Indemnify for Loss Caused by Fraud (Section10): Every
partner is bound to indemnify firm for any loss caused to it by his fraud
in the conduct of the business of the firm.
iii) Duty of Due Diligence [Section 12(b) and 13(a)]: Every partner is
bound to attend diligently to the business of the firm and in the absence
of any agreement to the contrary, he is not entitled to receive any
remuneration.
iv) Duty to Proper use of Property (Section 15): Every partner must hold
and use the partnership property exclusively for the purpose of firm’s
business.
v) Duty to account for profit and pay it to the firm [Section 16(a)]
If a partner derives any profit for himself from any transaction of
the firm, or from the use of the property or business connection of
the firm or the firm name, he shall account for that profit and pay
it to the firm;
If a partner carries on any business of the same nature as and
competing with that of the firm, he shall account for and pay to the
firm all profits made by him in that business.
52
vi) Duty not to Compete [Section 16(b)]: A partner must not compete with the The Partnership Act, 1932
firm, without the consent of the other partners. Any profits made by such
unauthorised competition can be claimed by the firm.

vii) A partner who is guilty of willful neglect in the conduct of the business and
the firm suffers loss in consequence, is bound to make compensation to the
firm and other partners. [Section 13(f)]

viii) No partner can assign or transfer his partnership interest to any other person,
so as to make him a partner in the business. But a partner may assign the
profits and share in the partnership assets. But the assignee or transferee
will have no right to ask for the accounts or to interfere in the management
of the business; he would be entitled only to share the actual profits. On
dissolution of the firm, he will be entitled to the share of the assets and also
to accounts but only from the date of dissolution. (Section 29)

ix) Every partner is bound to act within the scope of his actual authority. If he
exceeds his authority, he shall compensate the other partners for loss unless
they ratify his act.

3.5 RELATION OF PARTNERS TO THIRD

PARTIES
There are two sets of relationships. First, the relationship between the partners
themselves which are implied relations due to the rights and duties arising out of
contracting partnership. Second, relations of partners to third parties consist of
the business carried on by one or all members of the firm in the name to the firm.
They are responsible as a firm to their customers.

3.5.1 Partners as Agents

As already discussed every partner is both a principal and an agent. Thus, the
general law of agency is incorporated into the law of partnership. The acts of
every partner which is done to carry on, in the usual way, the business of the kind
carried on by the firm, bind the firm and his partners unless:
i) The partner so acting has no authority to act for the firm in that matter; and
ii) The person with whom he is dealing knows that he has no authority; or
iii) Does not know or believe him to be a partner.

3.5.2 Authority of a Partner

The authority of a partner means the capacity of a partner to bind the firm by his
act. This authority may be express or implied.
i) Express Authority: The authority is said to be express when it is given by
words, spoken or written. The firm is bound by all acts of a partner done
within the scope of his express authority even if the acts are not within the
scope of the partnership business.
ii) Implied Authority: The authority which is inferred from the conduct of the
parties, nature of business, circumstances, customs and usage are said to be
implied authority. Sections 19 and 22 contain provisions regarding the scope
53
Business Forms and of the implied authority of a partner. The implied authority is subject to the
Legislations
following conditions: (1) the act done must relate to the “normal business”
of the firm; (2) the act must be done in the usual way or in the ordinary
course of business, and; (3) the act must be done in the name of the firm.

The general scope of implied authority is that it is limited to all that is just
necessary to do the business and doesn’t extend beyond that. Following acts are
under the implied authority:
a) To sell firm’s goods;
b) To purchase goods for the firm;
c) To accept any payment of debts due to the firm; and
d) To engage and discharge employees.
In a Trading Firm (one which carries on business of buying and selling goods), a
partner has the following additional powers:
a) To borrow money on the firm’s credit and to pledge the firm’s goods for that
purpose;
b) To accept, make and issue negotiable instruments in the firm’s name; and
c) To employ a solicitor or attorney on behalf of the firm
It is, however, open to the partners by means of an express contract to extend or
limit the implied authority, but third parties will be bound by such limitations
only when they have notice of such curtailment.

All partners are liable jointly and severally for all acts or omissions binding on
the firm including liabilities arising from contracts as well as torts (Section 25).
This is known as the liability of partners for the acts of the firm. But in order that
an act done may be an act of the firm and, therefore, binding on the firm, it is
necessary that the partner doing the act on behalf of the firm must have done that
act in the name of and on behalf of the firm and not in his personal capacity. The
act must have been done in the ordinary course of the business of the firm.
[Sections 19(1) and 22]

Activity 3
Choose the right answer.
a) Which of the following acts are included in the implied authority of
a partner?
i) To borrow money for the purpose of firm.
ii) To enter into partnership on behalf of firm
b) The implied authority of a partner of the firm does empower him to:
i) Enter into partnership on behalf of the firm.
ii) act expressing or implying an intention to bind the firm
c) If a partner commits fraud in the conduct of the business of the firm:
i) He shall indemnify the firm for any loss caused to it by his fraud
ii) He is liable to the third parties
54
 The Partnership Act, 1932
d) Which of the following is the right of partner i.e., which he cannot
claim as a matter of right?
i) Right to take part in business
ii) Right to receive remuneration.
e) Partners are bound to carry on the business of the firm-
i) To the greatest common advantage
ii) For the welfare of the society

3.6 RECONSTITUTION OF FIRM

A firm is said to be reconstituted, when there is change in the composition of the
partnership. The reconstitution of the firm takes place on account of admission,
death, retirement, expulsion, if partnership carries on business other than the
business for which it was originally formed or when the partnership business is
carried on after the expiry of the term fixed for the purpose. The reconstitution
involves changes in the rights and liabilities of partners. How does the law cope
with change concerning partnership is made amply clear in the following sections
of the law.

3.6.1 Admission of a Partner

As discussed earlier, subject to a contract between partners and to the provisions
regarding minors in a firm, no new partners can be introduced into a firm without
the consent of all the existing partners.

As a general rule, an incoming partner is not liable for the debts incurred before
he joined the firm as a partner [Section 31(2)]. The incoming partner may,
however, assume liability for past debts by novation, i.e., by a tripartite agreement
between (i) the creditor of the firm, (ii) the partners existing at the time the debt
was incurred, and (iii) the incoming partner.

3.6.2 Retirement of a Partner

A partner can retire from the firm i) with the consent of all the other partners; or
ii) in accordance with the expressed agreement among the partners; or iii) by
giving a written notice to all the partners of his intention to retire, if partnership
is at will.

An outgoing partner remains liable for the partnership debts contracted while he
was a partner. He may, however, be discharged by novation, i.e., by an agreement
between himself, the new firm and the creditors. He may also continue to be
liable after retirement if he allows himself to be held out as a partner, e.g. by
allowing his name to remain the firm name. To protect himself from his liability,
he should give express notice of his retirement to the persons who were dealing
with the firm before his retirement or give public notice in the manner as laid
down in Section 72 of the Act, that is to say, by publishing it in the Official
Gazette and in at least one vernacular newspaper where the firm carries on the
business. [Section 32(3)]

55
Business Forms and
Legislations
3.6.3 Expulsion of a partner
A partner can be expelled only if i) the power of expulsion exists in a contract
between the partners; ii) the power has been exercised by a majority of the
partners; and iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bona
fide interest of the business of the firm.
The rights and liabilities of the expelled partner are same as that of a retired
partner.

3.6.4 Death or Insolvency

The estate of a partner who dies, or who becomes insolvent, is not liable for
partnership debts contracted after the date of the death or insolvency. It will,
however, be liable for debts incurred before death or insolvency. (Sections 34
and 35).

Activity 4
Fill in the blanks:
a) A new partner can be admitted in the firm with the consent of __________.
b) Admission, Retirement, Expulsion or death of a partner leads to
_______________.
c) A partner can retire by _________________ if partnership is at will.
d) The estate of a partner who dies, or who becomes insolvent, is not liable
for partnership debts contracted _____ the date of the death or insolvency.

3.7 DISSOLUTION
According to Section 39, “The dissolution of partnership between all the partners
of a firm” is called the “Dissolution of the Firm”.
The law of Partnership makes a distinction between the “dissolution of
partnership” and “dissolution of firm”. Where the relation between all the
partners come to an end, it is a dissolution of the firm (Section 39). Where there
is an extinction of relationship between some of the partners only, it is a dissolution
of partnership. So the dissolution of a partnership may or may not include the
dissolution of the firm, but the dissolution of the firm necessarily means the
dissolution of the partnership as well.
Dissolution of Partnership
The dissolution of partnership takes place (even when there is no dissolution of
the firm) in the following circumstances:
a) On the expiry of the fixed term for which the partnership was formed. [Section
42(a)]
b) On the completion of the adventure. [Section 42(b)]
c) On the death of a partner. [Section 42(c)]
d) On the insolvency of a partner. [Section 42(d)]
56
e) On the retirement of a partner. [Section 42(e)] The Partnership Act, 1932

In all the above cases, the remaining partners may continue the firm in pursuance
of an agreement to that effect. If they do not continue then the dissolution of the
firm takes place automatically.
Dissolution of the Firm
In the following cases there is necessarily a breaking up or extinction of the
relationship between all the partners of the firm, and closing up of the business:

a) By mutual agreement: A firm may be dissolved where all the partners agree
that it shall be dissolved. (Section 40)

b) By the insolvency of all the partners but one: If all the partners or except
one all the partners become insolvent, the firm must come to an end, as a
partnership firm with one partner cannot continue. [Section 41(a)]

c) By business becoming illegal: If the business of the firm becomes illegal

because of some subsequent events, such as change of law, it is automatically
or compulsorily dissolved by the operation of law. [Section 41(b)]

d) By notice of dissolution: Where the partnership is at will, the firm may be

dissolved at any time, by any partner giving notice in writing of his intention
to dissolve the firm, to all the other partners. The dissolution will take place
from the date mentioned in the notice or, if no such date is mentioned, as
from the date of the communication of the notice. (Section 43)
Modes of Dissolution of a firm (section 40 to 44)
The dissolution of partnership firm may be in any of the following ways:
1) Dissolution without the order of the court or voluntary dissolution.
2) Dissolution by the court (section 44)
1) Dissolution without the Order of the Court or Voluntary Dissolution:
It consists of following four types:
i) Dissolution by Agreement (Section 40): A firm may be dissolved with the
consent of all the partners or in accordance with a contract between the
partners.
ii) Compulsory dissolution (Section 41): A firm is compulsorily dissolved by
the:
a) adjudication of all the partners or of all the partners but one as insolvent;
or
b) happening of any event which makes it unlawful for the business of the
firm to be carried on or for the partners to carry it on in partnership.
However, it should be noted that when more than one separate venture or
undertaking is carried on by the firm, the illegality of one or more shall not
of itself cause the dissolution of the firm in respect of its lawful adventures
and undertakings.
iii) Dissolution on the happening of certain contingencies (Section 42): Subject
to contract between the partners, a firm can be dissolved on the happening
of any of the following contingencies-
57
Business Forms and a) Where firm is constituted for a fixed term, on the expiry of that term
Legislations
b) Where the firm is constituted to carry out one or more adventures or
undertaking, then by completion thereof
c) By the death of a partner, and
d) By the adjudication of a partner as an insolvent.
iv) Dissolution by notice of partnership at will (Section 43): Where the
partnership is at will, the firm may be dissolved by any partner giving notice
in writing to all the other partners of his intention to dissolve the firm.
The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the
communication of the notice.

2) Dissolution of the Firm through Court

As per Section 44, at the suit of a partner, the Court may order dissolve a
firm on any of the following grounds, namely:

a) If a partner becomes of unsound mind: As the insanity of a partner

does not automatically dissolve the firm, in such a case the suit for the
dissolution of the firm may be brought by other partners or by next
friend of partner who has become of unsound mind. In either case the
Court may order dissolution which will take effect from the date of the
order.

b) Permanent incapacity of a partner: Where a partner has become

permanently incapable of performing his duties as a partner, e.g., he
becomes blind, paralytic, etc., the Court may, at the instance of any of
the other partners, order the dissolution of the firm.

c) Misconduct of a partner affecting the business: Where a partner, other

than the partner suing, is guilty of conduct which is likely to affect
prejudicially the carrying on of the business, the Court may dissolve
the firm at the instance of any of the other partners. Gambling by a
partner or conviction of a partner for travelling without ticket would
be sufficient ground for dissolution.

d) Persistent disregard of partnership agreement by a partner: Where a

partner, other than the partner suing, willfully or persistently commits
breaches of the partnership agreement relating to the management of
the affairs of the firm of the conduct of its business; or otherwise so
conducts himself in matters relating to the business that it is not
reasonably practicable for the other partners to carry on the business in
partnership with him; the Court may order dissolution at the instance
of the other partners.

e) Transfer of interest or share by a partner: A partner cannot assign his

interest so as to introduce a new partner into the firm. Where a partner
has transferred the whole of his interest to a third person or where his
interest has been attached under a decree or sold under a process of
law, the other partners may sue for dissolution.

58
 f) Business working at a loss: if the Court is satisfied that the business The Partnership Act, 1932
of the firm cannot be carried on except at a loss, it may order for
dissolution.

g) Any just and equitable: As the grounds mentioned are not exhaustive,
the Court may dissolve a firm on any other ground if it is satisfied that
it would be just and equitable to dissolve the firm. The Court may
order dissolution where the sub-stratum of the partnership firm has
gone or where there is a complete deadlock and destruction of
confidence between the partners [re. Yenidjee Tobacco Co. Ltd. (1916)
2 Ch. 426].

Dissolution of Firm

Without the order of the By order of the Court

Court (Section 40 to 43) (Section 44)

Just and
Permanent Persistent Transfer Continous
Insanity Misconduct incapacity breach of equitable
of Interest loss
agreement ground

Compulsory dissolution On happening of certain

By mutual agreement By notice (Section 43)
(Section 41) event (Section 42

Figure 3.1: Different Forms of Dissolution of a Firm

Effect of Dissolution:
After dissolution, the rights and obligations of partners continue in all things
necessary for the winding up of the business. The partners may complete
unfinished transactions. But this authority is only for the winding up of the affairs
of the firm and not for new transactions. These rights and liabilities are discussed
below:

Rights of Partners on Dissolution:

Right of partners to have business wound up after dissolution (section 46): On
the dissolution of a firm every partner or his representative is entitled, as against
all the other partners or their representative, to have the property of the firm
applied in payment of the debts and liabilities of the firm, and to have the surplus
distributed among the partners or their representatives according to their rights.
This lien can be enforced by injunction forbiding unfair distribution. (Section
46)
Right to Return of Premium (Section 51): To buy entry into an existing firm, a
new partner sometimes has to pay a premium to the existing partners in addition
to any investment of capital. On dissolution, he is entitled to demand the return
of a proportion of the premium if the partnership was for a fixed term and was
dissolved before the expiry of that term, unless dissolution was caused by (i)
agreement, or (ii) misconduct of the party seeking return of the premium, or (iii)
death of a partner. (Section 51)
Rights Where Partnership Contract is Rescinded for Fraud Or
Misrepresentation (Section52): Where a contract creating partnership is rescinded
on the ground of fraud or misrepresentation of any of the parties thereto, the 59
Business Forms and party entitled to rescind is, without prejudice to any other right, entitle - (a) to a
Legislations
lien on, or right of retention of, the surplus of the assets of the firm remaining
after the debts of the firm have been paid, for any sum paid by him for the purchase
of a share in the firm and for any capital contributed by him; (b) to rank as a
creditor of the firm in respect of any payment made by him towards the debts of
the firm; and (c) to be indemnified by the partner or partners guilty of fraud or
misrepresentation against all the debts of the firm.
Right to Restrain from Use of Firm-Name or Firm-Property (Section 53): After
a firm is dissolved, every partner or his representative may, in the absence of a
contract between the partners to the contrary, restrain any other partner or his
representative from carrying on a similar business in the firm-name or from using
any of the property of the firm for his own benefit, until the affairs of the firm
have been completely wound up : Provided that where any partner or his
representative has brought the goodwill of the firm, nothing in this section shall
affect his right to use the firm-name.
Partners may, upon or in anticipation of the dissolution of the firm, make an
agreement that some or all of them will not carry on a business similar to that of
the firm within a specified period or within specified local limits and
notwithstanding anything contained in section 27, of the Indian Contract Act,
1872, such agreement shall be valid if the restrictions imposed are reasonable.

3.8 LIMITED LIABILITY PARTNERSHIP ACT, 2008

Limited Liability Partnership (LLP) has been introduced in India by way of
Limited Liability Partnership Bill on 12th December, 2008; passed by both the
houses of Parliament and assented by the President of India on 7th January,
2009 and called as the Limited Liability Partnership Act, 2008. It extends to
whole of India. It fundamentally changes the nature of partnership from that of a
free and voluntary entity to a legal one. However, the LLP, Act does not harm
the existence Partnership Act; it remains as it is , and both are independent of
each other.
The LLP Act, 2008 has 81 sections and 4 schedules.
The First Schedule deals with mutual rights and duties of partners, as well as
limited liability partnership and its partners where there is absence of a formal
agreement with respect to them.
The Second Schedule deals with conversion of a firm into LLP.
The Third Schedule deals with conversion of a private company into LLP.
The Fourth Schedule deals with conversion of unlisted public company into
LLP.
The Ministry of Corporate Affairs and the Registrar of Companies (ROC) are
entrusted with the task of administrating the LLP Act, 2008. The Central
Government has the authority to frame the Rules with regard to the LLP Act,
2008, and can amend them by notifications in the Official Gazette, from time to
time.

Definitions
Limited Liability Partnership means a partnership formed and registered under
60 this Act. [Section 2(n)]
Accordingly– The Partnership Act, 1932

1) A limited liability partnership is a body corporate formed and incorporated

under this Act and is a legal entity separate from that of its partners.
2) A limited liability partnership shall have perpetual succession.
3) Any change in the partners of a limited liability partnership shall not affect
the existence, rights or liabilities of the limited liability partnership.
Features of LLP
Body corporate: LLP is a body corporate formed and incorporated under this
Act.
Separate Legal Entity: The LLP is a legal entity separate from that of its partners.
Therefore, LLP is liable to the full extent of its assets but liability of the partners
is limited to their agreed contribution in the LLP. In other words, creditors of
LLP shall be the creditors of LLP alone.
Perpetual Succession: Any change in the partners of a LLP shall not affect the
existence, rights or liabilities of the LLP [Section 2(1)(d)].
Limited Liability: The liability of the partners is limited to their agreed
contribution in the LLP. Such contribution may be of tangible or intangible nature
or both.
Minimum and Maximum number of Partners: Every LLP shall have at least
two partners and shall also have at least 2 individuals as designated partners, of
whom at least one shall be resident in India. There is no maximum limit on the
partners in LLP.
If in LLP, all the partners are bodies corporate or in which one or more partners
are individuals and bodies corporate, at least two individuals who are partners of
such LLP or nominees of such bodies corporate shall act as designated partners.
Example: A LLP by the name SMY LLP has three partners namely 1. SI Limited,
2. MIS Limited, 3. YI Private Limited. This will not be considered for registration
because the requirement for LLP is to have 2 individual members as partners
apart from the body corporate. Accordingly, the said SMY LLP must consist of
at least five partners; namely the three body corporates and 2 individual members,
to constitute the LLP and the two individuals need to be treated as designated
partners.

Third party liability: unlimited to all partners.

Artificial Legal Person: LLP is an artificial legal person because it is created by

a legal process and is clothed with all rights of an individual. LLP is invisible,
intangible, immortal (it can be dissolved by law alone) but not fictitious because
it really exists.

Rights and Duties: Mutual rights and duties of the partners within a LLP are
governed by an agreement between the partners. In the absence of any such
agreement, the mutual rights and duties shall be governed by the provisions of
the LLP Act, 2008.

Mutual Agency: Every partner of a LLP, for the purpose of the business of LLP,
is the agent of the LLP, but not of other partners (Section 26). In other words, no 61
Business Forms and partner is liable on account of the independent or un-authorized actions of other
Legislations
partners, thus individual partners are shielded from joint liability created by
another partner’s wrongful business decisions or misconduct.

Example: The professionals like Engineering consultants, Legal Advisors and

Accounting Professional are afraid of entering into business due to unlimited
liability. Hence the LLP partnership Act provides an avenue for these professionals
to Limited Liability Partnership firms which restricts their liability to the agreed
amount. This has encouraged Professionals to form LLP.

Management of Business: The partners in the LLP are entitled to manage the
business of LLP. But only the designated partners are responsible for legal
compliances.

Business for Profit Only: The essential requirement for forming LLP is carrying
on a lawful business with a view to earn profit. LLP cannot be formed for charitable
or non-economic purpose.

Common Seal: Any LLP being an artificial person can act through its partners
and designated partners. LLP may have a common seal, if it decides to have one
[Section 14(c)]. Thus, it is not mandatory for a LLP to have a common seal. It
shall remain under the custody of some responsible official and it shall be affixed
in the presence of at least 2 designated partners of the LLP.

Foreign LLPs: Foreign LLP can become a partner in an Indian LLP. Section
2(1)(m) defines foreign limited liability partnership “as a limited liability
partnership formed, incorporated, or registered outside India which established
as place of business within India”.

Who can be a Partner?

“Partner” in relation to LLP, means any person who becomes a partner in the
LLP in accordance with the LLP agreement. Section-5 lays down that -

Any individual or body corporate may be a partner in a LLP. Provided that

an individual shall not be capable of becoming a partner, if —
a) he has been found to be of unsound mind by a Court of competent jurisdiction
and the finding is in force;
b) he is an undischarged insolvent; or
c) he has applied to be adjudicated as an insolvent and his application is pending.
Body Corporate shall exclude:
a corporation sole, means a public office established by the Act of Parliament,
a sole officeholder;
a co-operative society; and
any other body corporate not being a company as defined under Companies
Act, 2013.
NBFCs are prohibited to be partner of LLPs.
Following can be partners in LLP:
A company incorporated outside India.
62 A LLP can become a partner in another LLP
 A trust cannot become partner in LLP. However, trustee can become a partner The Partnership Act, 1932
of LLP in his “individual capacity” but not in a representative capacity of
trust
Similarly, an HUF cannot become a partner but Karta can in his “individual
capacity” but not in a representative capacity of HUF
Liability of Partners:
Nature & extent of liability of a partner of an LLP: Every partner of an LLP
would be, for the purpose of the business of the LLP, an agent of the LLP but not
of the other partners. Liability of partners shall be limited except in case of
unauthorized acts, fraud and negligence. But a partner shall not be personally
liable for the wrongful acts or omission of any other partner. An obligation of the
LLP whether arising in contract or otherwise, is solely the obligation of the LLP.
The liabilities of LLP shall be met out of the property of the LLP.
Liability of a Partner upon reduction of minimum number of members in an
LLP: If at any time the number of partners of LLP is reduced below two and the
LLP carries on business for more than six months while the number is so reduced,
the person, who is the only partner of the LLP during the time that it so carries on
business after those six months and has the knowledge of the fact that it is carrying
on business with him alone, shall be liable personally for the obligation of LLP
incurred during that period.
Liability of ‘partner by holding out : The Act provides that any person (not
being a partner in any LLP), who by words spoken or written or by conduct,
represents himself, or knowingly permits himself to be represented as a partner
in a LLP (known as ‘partner by Holding out’) is liable to any person who has on
the faith of any such representation given credit to the LLP, whether the person
representing himself or represented to be a partner does or does not know that
the representation has reached the person so giving credit.
It has further been provided that where any credit is received by the LLP as a
result of such representation, the LLP shall, without prejudice to the liability of
the person so representing himself or represented to be a partner, be liable to the
extent of credit received by it or any financial benefit derived thereon.
The provisions have also been made in the Act to provide that where after a
partner’s death the business is continued in the same LLP name, the continued
use of that name or of the deceased partner’s name as a part thereof shall not of
itself make his legal representative or his estate liable for any act of the LLP
done after his death.

Designated Partners (Section 7)

A designated partner means any partner designated as such u/s 7. Appointment
of at least two ”Designated Partners” is mandatory for all LLPs. “Designated
Partners” shall also be accountable for regulatory and legal compliances, besides
their liability as ‘partners, per-se”.
1) Every LLP must have atleast two individuals as Designated Partners  and at
least one of them shall be a resident of India (Resident means a person who
stayed in India in Previous year not less than 182 days).
2) In a LLP where all the partners are bodies corporate or where one or more
partners are individuals and bodies corporate, at least two individuals who
63
Business Forms and are partners of such LLP or nominees of such bodies corporate shall act as
Legislations
designated partners.
3) U/s 7(2) one become the designated partner if the incorporation document
- Specifies such person/s; or
- States that each of the partners from time to time of a LLP is to be a
designated partner, then every partner shall be a designated partner;
4) Any partner may become the designated partner or cease to be a designated
partner, in accordance with the LLP agreement;
5) An Individual shall not become a designated partner unless he has given his
prior consent ;
6) Every LLP shall file with ROC the particulars of every Individual who has
given his consent to act as designated partner, within 30 days of his
appointment;
7) An individual eligible to be a designated Partner must satisfy the condition
and requirement as may be prescribed.
8) A person shall not be capable of being appointed as a designated partner of
LLP, if he 
- At any time within the preceding five years, has been adjudged
insolvent;
- Suspends at any time within the preceding five years, payment to his
creditors and has not, at any time in preceding five year, made a
composition with them;
- Has been convicted for any offence involving moral turpitude and
sentenced to imprisonment for not less than six months;
- Has been convicted by Court for an offence involving section 30 of
the LLP Act;
9) Every designated partner must obtain Designated Partner Identification
Number (DPIN) from Central Government and provision of Section 153 to
159 of the Companies Act, 2013;
– If a person holds both DIN and DPIN then his DPIN shall stand
cancelled and DIN shall be sufficient for being appointed as Designated
Partner 
– Every designated Partner shall in the event of any changes as stated
in Form 10 or DIR-3, intimate the Central Government in Form DIR-
6 under Companies (Appointment and Qualification of Directors) Rules,
2014; {Rule 10(4)(i)}
– The concerned designated partner shall fill-in the relevant changes to
the LLP on which he is a designated partner within 30 days of such
changes; {Rule 10(4)(ii)}
Liability of a Designated Partner (Section 8)
Unless expressly provided otherwise in this Act, a designated Partner shall be-
a) Responsible for performing all acts, matters and things including filing of
any document, return, statement and the like report as mentioned under this
64 Act and specified in the LLP agreement; and
b) Liable to all penalties imposed on the LLP for contravention of those The Partnership Act, 1932
provisions.
Change in Designated Partners (Section-9)
A LLP may appoint a designated partner within 30 days of a vacancy
arising for any reason and provision of section 7 (4) and (5) shall apply in
respect of such new designated partner;
If no Designated Partner appointed within 30 days of vacancy or if number
of designated partner at any time reduced below the two then all partner
shall deemed to be a designated partner.
Section 64 (b) of the LLP Act, provides that if number of partners reduced
below the two and LLP continues, as same, for more than 6 months then the
LLP may be wound up by the Tribunal.

3.9 DIFFERENCES WITH OTHER FORMS OF

ORGANISATION
LLP and Partnership:
LLP is regulated by The Limited Liability Partnership Act, 2008 where as
Partnership firm by The Indian Partnership Act, 1932.
LLP is a body corporate where as Partnership is not.
LLP is a separate legal entity where as partnership is not.
LLP is created by a legal process called registration under the LLP Act,
2008, where as the partnership is created by an agreement between the
partners
Registration is mandatory for LLP where as it is voluntary for partnership.
LLP can sue and be sued in its own name. Only the registered partnership
firm can sue the third parties
LLP has perpetual succession. The death, insanity, retirement or insolvency
of the partner(s) does not affect its existence, where as it is not so in
partnership
Name of the LLP to contain the word limited liability partners (LLP) as
suffix. No guidelines for partnership.
Liability of each partner limited to the extent to agreed contribution except
in case of willful fraud. Liability of each partner is unlimited in partnership.
Each partner can bind the LLP by his own acts but not the other partners.
However, in partnership each partner can bind the firm as well as other
partners by his own acts.
Every LLP should have at least two designated partners and at least one of
them shall be resident in India. There is no provision for such partners under
the Partnership Act, 1932.
LLP may have its common seal as its official signatures. No such concept
in partnership.
In LLP only designated partners are responsible for all the compliances and
penalties under the Act where as in partnership all partners are responsible
for all the compliances and penalties under the Act. 65
Business Forms and Partnership firm is not required to file any annual document with the Registrar
Legislations
of firms. However, LLP is required to file -Annual statement of accounts,
Statement of solvency, Annual return with the registration of LLP every
year.
Foreign nationals can become a partner in a LLP. However, it is not so in
partnership.
Minor can be admitted to the benefits of the partnership with the prior consent
of the existing partners, but it is not so in the case of LLP.
LLP and Company:
LLP is regulated by the LLP Act, 2008, and the companies by the Companies
Act, 2013.
The persons who contribute to LLP are known as partners of the LLP. The
persons who invest the money in the shares are known as members of the
company.
The internal governance structure of a LLP is governed by contract agreement
between the partners. The internal governance structure of a company is
regulated by statute (i.e., Companies Act, 2013).
Name of the LLP to contain the word “Limited Liability partnership” or
“LLP” as suffix. Name of the public company to contain the word “limited”
and Pvt. Co. to contain the word “Private limited” as suffix.
Minimum – 2 members. Maximum – No such limit on the members in the
LLP Act. The members of the LLP can be individuals/or body corporate
through the nominees. Private company: Minimum – 2 members Maximum
200 members Public company: Minimum – 7 members Maximum – No
such limit on the members. Members can be organizations, trusts, another
business form or individuals.
Liability of a partners is limited to the extent of agreed contribution except
in case of intention is fraud. Liability of a member is limited to the amount
unpaid on the shares held by them.
The business of the LLP is managed by the partners including the designated
partners authorized in the agreement. The affairs of the company are managed
by Board of Directors elected by the shareholders.
Minimum 2 designated partners for LLP, Pvt. Co. – 2 Directors, Public co. –
3 Directors.

3.10 ADVANTAGES AND DISADVANTAGE OF LLP

Advantages of LLP:
Easy to form: less legal and procedural requirements
Low Cost of formation: The minimum fees of incorporation is as low as Rs
800 and maximum is Rs 5600.
Separate legal entity: LLP & its partners are distinct from each other
Perpetual existence: The LLP shall continue to exist till its wound up in
accordance with the provisions of the relevant law
66
 Limited Liability: liability is limited to extent of his contribution. Personal The Partnership Act, 1932
assets of the partners are exposed in case of fraud
Flexibility in management: The LLP Act does not regulate the LLP to large
extent rather it gives freedom to partners to decide the way they want to run
and manage the LLP, in form of LLP Agreement.
No requirement of minimum capital contribution
No restrictions as to maximum number of partners
A partner cannot bind the other partner for his act.
Easy to dissolve or wind-up
No requirement to maintain statutory records except Books of Accounts
Disadvantages of LLP:
The documents filed through the Ministry of Corporate Affairs portal are
public documents and any person can assess them by paying a nominal fee
LLP cannot raise funds from Public, it can either borrow debt from financial
institutions or via a loan from partners.
Any act of the partner without the knowledge of other partners may bind the
LLP
No separation of Management from owner.

3.11 INCORPORATION OF LLP

Pre-requisites for Incorporating a LLP
Minimum two partners (Individual or body corporate).
Minimum two designated partners who are individuals and at least one of
them should be resident in India.
Digital signature certificate
LLP Name
LLP Agreement
Registered office
LLP incorporation Process
The Ministry of Corporate Affairs (MCA) vide its Notification dated 18th
September, 2018 made major amendments in the rules for incorporation of LLP
vide Limited Liability Partnership (Second Amendment) Rules, 2018, which came
into force from 2nd October, 2018.

The highlights of the amended LLP incorporation process includes the

introduction of specified LLP-RUN services (similar to RUN service for
Company Incorporation) for Reservation of Name for the proposed LLP, Form
FiLLiP i.e. Form for Incorporation of LLP. Form FiLLiP is similar to form SPiCe
for Company Incorporation. 
STEP – I: Procure Digital Signature Certificate
STEP – II: Apply for Name Approval
STEP – III Preparation of Documents for Incorporation of LLP: 67
Business Forms and STEP – IV: Fill the Information in Form: [FiLLiP]
Legislations
STEP – V: Certificate of Incorporation
STEP – VI: Apply for PAN and TAN
STEP – VII: Preparation of LLP Agreement
Step 1: Procure Digital Signature Certificate (DSC)

The first step towards registering LLP is to procure the digital signatures with
validity of 2 years for the designated partners. A digital signature is must because
every form is filed online with the Ministry of Corporate Affairs and each requires
to be signed digitally by the applicants and partners of the LLP. The DSC is
associated with the PAN card of the application.

Digital signatures required can be obtained from certified government agencies,

such as National Informatics Center, IDRBT Certifying Authority, E-MUDHRA,
CDAC and NSDL. The cost of acquiring a DSC will be according to the certifying
agency that the applicant has applied for.

Step 2: Apply for Name Approval

To register a proposed LLP, the applicant needs to get a Limited Liability
Partnership-Reserve Unique Name (LLP-RUN) that can be processed at the
Central Registration Centre. However, before citing or quoting the name, it is
always advisable to check from the Ministry of Corporate Affairs (MCA) portal
for a free name. The new process requires the applicants to file the web form
named RUN-LLP (Reserve Unique Name – Limited Liability Partnership). RUN-
LLP replaces the old form LLP Form 1. The new form has been simplified that
requires information related to the desired name, its significance and other basic
details.

The application can be made with maximum 2 names in preference order

providing their significance. The names must comply with the provisions for
name reservation. If none of the names is approved by the MCA, another chance
is provided to apply two more names. The government fees for RUN, as per
Register Office Fees Rules, shall be Rs 1,000. DSC and DIN are not required for
filing of RUN form for reservation of name but account of MCA portal is
mandatory. The name allotted under LLP-RUN will be reserved for a period of
90 days. If the LLP registration application is not filed in given period, the name
will expire and it can be reserved through new application.

Step 3: Preparation of Documents for Incorporation of LLP

After approval of name, LLP applicant is required to prepare the following
documents:
Proof of office address (Conveyance/Lease Deed/Rent Agreement etc. along
with rent receipts)
NOC from owner of the property
Copy of utility bills (not older than 2 months)
Subscription sheet including consent
In case, a designated partner does not have a DIN, it is mandatory to attach:
Proof of identity and residential address of the subscribers
68
 All the DPs should have digital signature The Partnership Act, 1932

Detail of LLP(s) and/or Company(s) in which partner or designated partner

is a director/partner
Copy of approval in case the proposed name contains any word(s) or
expression(s) which requires approval from Central Government.
Step 4: Fill the Information in Form: [FiLLiP]

Once all the above mentioned documents/ information are available. Applicant
has to fill the information in the e-form “ FiLLiP” (Form for incorporation of
Limited Liability Partnership). This is a major change in the new process. FiLLiP
replaces the earlier, form 2.

Earlier if a Person wants to incorporate LLP then s/he had to apply separately for
the DIN, Approval of the Name avaibility, registered office address, etc. But this
form is a single window for Incorporation of LLP and it can be used for the
following purposes:
Application of DIN
Application for Avaibility of Name
No need to file separate form for address of registered office
Only 2 DPIN/DIN can be allotted through FiLLiP. In case, there are more than
2 DPs or DPs are to be changed; the respective partners is required to obtain it
by filing DIR-3 after incorporation.

The e-form is to be attested by the partners through DSC and certified by the
practicing Chartered Accountant or Company Secretary or Cost & Works
Accountant.

The application will be processed for approval by Central Registration Centre

(CRC). If the registrar finds it necessary to call for further documents or
information, he may do so by directing for re-submission within 15 days. Another
opportunity of re-submission maybe provided after re-examination of application,
which again has 15 days period. It is provided that the total period for re-
submission of documents shall not exceed 20 days in total.

Step 5: Certificate of Incorporation

Once the Registrar approves all the forms and documents, the Certificate
of Incorporation (CoI) is issued in form 16 along with DPIN/DIN allotted to the
Designated Partners. CoI will also consist of the Limited Liability Partnership
Identification Number (LLPIN). Registrar of Companies (ROC) assigns a Limited
Liability Partnership Identification Number (LLPIN) for every LLP which is
registered. The date of CoI will be the date of LLP incorporation since when it
has come into legal existence. LLP is now entitled to commence business in its
name. The certificate of incorporation shall be the conclusive evidence that the
limited liability partnership is incorporated by the name specified therein.

Step 6: Apply for PAN and TAN

Soon after getting the incorporation certificate, the application for PAN and TAN
is required to be made separately for LLP through offline or online mode. The
applications are made directly to the Income Tax Department and also processed
69
Business Forms and by it. The applications are made in forms 49A and 49B respectively with
Legislations
Certificate of Incorporation as supporting proof.

Step 7: Drafting and Filing LLP Agreement

The next step is to draft LLP Agreement and other documents for registration.
An LLP agreement is essential, as it determines the mutual rights and duties
amongst the partners, and between the LLP and the partners. The agreement
must be filed with MCA within 30 days of date of incorporation. The delay leads
to penalty of Rs. 100/- per day till the date of actual filing.

LLP Agreement contains, the name of LLP, name and address of partners and
designated partners, business object, place of business and other details of LLP.
Other clauses will be form of contribution and interest on contribution, profit
sharing ratio, rights and duties of partners in case of admission, resignation,
retirement, cessation and expulsion, proposed business, and rules for governing
the LLP.

Once the LLP Agreement is reviewed and agreed upon by the partners, it will be
executed by payment of stamp duty as applicable in the state where the registered
office of the LLP is situated. Then with signature by partners and attestation by
the witnesses, the agreement will be executed.

Activity 5
State whether the following statement are true or false.
a) LLP is a separate legal entity__________________________________
b) LLP should be for profit or charitable business____________________
c) LLP is registered with Registrar of companies_____________________
d) LLP can be converted into partnership___________________________
e) An unlisted public company can be converted into LLP______________

3.12 SUMMARY
Partnership is the relation between persons who have agreed to share the profits
of a business carried on by all or any one of them acting for all. Persons who
have entered into partnership with one another are called individually ‘partners’
and collectively ‘a firm’, and the name under which the business is carried on is
called the ‘firm’s name’. The true test, in determining whether a partnership exists,
is to see whether the relation of mutual agency i.e., principal and agent exists
between the parties and not. Registration of firm is not mandatory but desirable
as an unregistered firm suffers from a number of disabilities. Based on their
conduct or profit sharing, partners can be of different types like; Actual, Active
or Ostensible Partner, Sleeping or dormant partner, Nominal partner, Partner by
estoppel or by holding out and so on.

A minor cannot be a partner but he can be admitted to the benefit of partnership

with the consent of all. He has right to share profits but his liability is limited to
the extent of his share and not personally liable for any losses.

The rights and duties of partners are governed by the agreement among them but

70
in case of absence of the same the provisions of the Partnership Act, are applicable. The Partnership Act, 1932
Unless there is contract to the contrary every partner is the joint owner of the
property of the firm. Every partner binds the firm for the acts done within the
scope of implied authority. A change in the constitution of a firm takes place on
admission, retirement, expulsion, death or insolvency and transfer of interest.

The dissolution of partnership firm may be without the order of the court or
voluntary dissolution or by the court. After dissolution, the rights and obligations
of partners continue in all things necessary for the winding up of the business.
The partners may complete unfinished transactions. But this authority is only for
the winding up of the affairs of the firm and not for new transactions.

Limited Liability Partnership (LLP) is a body corporate with separate legal

existence, perpetual succession and a common seal if it decides to have one. It is
mandatory for a LLP to register with ‘LLP’ at the end of its name. The rights and
duties of a partners and the partnership are governed by the agreement to the
same. LLP should have at least two members and two individuals as its designated
partners, one of whom should be resident in India. A firm, private company,
unlisted public company can be converted into LLP.

3.13 SELF ASSESSMENT QUESTIONS

1) Define partnership.
2) Can a minor be admitted to partnership? If so, what are his rights and liabilities
3) What is partnership property?
4) Can a partner be expelled? If so, under what conditions?
5) Distinguish between dissolution of partnership and partnership firm.
6) Discuss the rights and liabilities of the partners on dissolution of the firm.
7) What is LLP? State the need of LLP How is it different from partnership?
8) Who is a designated partner?

3.14 FURTHER READINGS

1) Avtar Singh, 2018, Introduction to Law of Partnership, Eastern Book
Company.
2) Bangia, R.K., 2019, The Indian Partnership Act, Allahabad law Agency.
3) Mitra, S.C., and Pradeep Kacker, 2019, Law of Partnership in India, Orient
Publishing.
4) Jain, D.K., and Ishan Jain, 2021, Bharat’s Law and Procedure of Limited
Liability Partnership, Bharat Law House Pvt. ltd.

71
Business Forms and
Legislations UNIT 4 THE COMPANIES ACT, 2013
Objectives
After studying this unit, you should be able to:
Understand the meaning of a company form of business
Define a company and describe its characteristics and types
Explain the stages in formation of a company
Explain the meaning and importance of promoters
Identify the need for Memorandum of Association and Articles of Association.
Explain the meaning, importance, and contents of prospectus
Explain the meaning of shares, share capital, debenture and deposits
Understand how a company is managed and the role of Board of Directors
Explain the meaning and mode of winding-up of company
Structure
4.1 Introduction
4.2 Formation of a Company
4.3 Principal Documents of a company
3.3.1 Memorandum of Association
3.3.2 Articles of Association
3.3.3 Prospectus
4.4 Share and Loan Capital
4.4.1 Share Capital
4.4.2 Debentures
4.4.3 Deposits
4.5 Company Management
4.6 Meetings
4.7 Winding Up of Companies
4.8 Summary
4.9 Self Assessment Questions
4.10 Further Readings

4.1 INTRODUCTION
The expansion in business needed an unlimited extent of capital. But the unlimited
liability of the partners of the traditional partnerships under the Partnership Act,
1930 became a hurdle to meet the capital requirement. The corporate form of
business helped to solve this problem through introduction of concept of limited
liability. From formation to its winding up a company is governed by Companies
Act. Apart from the Companies Act, the Parliament of India has enacted several
other acts like, The Company Secretaries Act, The Competition Act, Monopolies
& Restrictive Trade Practices Act, Indian Partnership Act, Sick Industries Act,
etc., to have a control over the changing corporate world.
72
The Companies Act, 1956, which preceded the Companies Act, 2013, had The Companies Act, 2013
numerous amendments; making it a complicated legislation with overlapping
provisions. As it was becoming increasingly difficult to implement the Companies
Act, 1956, the need to streamline the legislation and reduce regulation was
recognized. As a result the Companies Act, 2013, was enactment which
consolidates and amends the law relating to the companies.

The Companies Act, 2013, is divided into 29 chapters, containing 470 sections
and seven schedules. A sizeable part of this Act is in the form of Companies
Rules.
Applicability of the Companies Act, 2013:
The provisions of the Act apply to-
1) Companies incorporated under this Act or under any previous company law.
2) Insurance companies
3) Banking companies
4) Companies engaged in the generation or supply of electricity
5) Any other company governed by any special Act for the time being in force,
and
6) Such body corporates which are incorporated by any Act for time being in
force, and as the Central Government may by notification specify in this
behalf.
In each of the case, from 2 to 6 above the provisions of the Act should not be in
conflict with the provisions of other Act (Insurance Act, Banking Regulation
Act, Electricity Act, etc.) by which the company is regulated; and if it is so, the
provisions of respective Act/Acts to which it is governed and regulated by shall
apply.

4.2 FORMATION OF A COMPANY

“Company means a company incorporated under this Act or under any previous
company law”, Section 2(20) of the Companies Act, 2013.
This definition does not clearly bring out the meaning of the company. To define
and understand the nature of a company the outside attempts and judicial decisions
may be explored. Accordingly, ‘a corporation is an artificial being, invisible,
intangible, existing only in contemplation of law. Being a mere creation of law,
it possesses only those properties which the charter of its creation confers upon
it, either expressly or as accidental to its very existence’ Chief Justice Marshall.
In the words of professor Haney “A company is an incorporated association,
which is an artificial person created by law, having a separate entity, with a
perpetual succession and a common seal.” This definition sums up the meaning
as well as the features of a company succinctly.
Features:
The distinctive features of the company help to understand the realms of a
company. Following are the main features:
a) Incorporated Association: Registration of a company is mandatory under
the Companies Act. The minimum number required for the same is seven in 73
Business Forms and case of public company, two in case of a private company and one for one
Legislations
Person Company.
b) Separate Legal Entity:On incorporation a company acquires a unique
character of being a separate legal entity. It bears its own name and acts
under the same and owns assets in its name. It has a separate existence from
that of the subscribers to the memorandum and also from the personality of
those who compose it. Members can enter into contract with company, acquire
right against it or incur liability to it. For the debts of the company, only its
creditors can sue it and not its members.

A company can own property, have bank account, raise loans, incur liabilities
and enter into contracts. A company is capable of owning, enjoying and
disposing of property in its own name. Although the capital and assets are
contributed by the shareholders, the company becomes the owner of its capital
and assets. The shareholders are not the private or joint owners of the
company’s property.

A member does not even have an insurable interest in the property of the
company The leading case on this point is of Macaura v. Northern Assurance
Co. Limited (1925). Macaura (M) was the holder of nearly all (except one)
shares of a timber company. He was also a major creditor of the company.
M insured the company’s timber in his own name. The timber was lost in a
fire. M claimed insurance compensation. Held, the insurance company was
not liable to him as no shareholder has any right to any item of property
owned by the company, for he has no legal or equitable interest in them.

c) Perpetual Succession: A company once incorporated can never be

incapacitated till it is wound up on the grounds specified by the Act. Its
members may come and go, but the company goes on forever. Even the
death or insolvency or retirement of its members leaves the company
unaffected. For example companies like TATA and Birla are in existence for
over 100 years. This is possible only due to the fact that the company has
perpetual existence.

d) Limited Liability: Limited liability means that the member of the company,
in case of liquidation or winding-up of the company, cannot be called upon
to contribute more than that has been agreed. The liability of a member
depends upon the kind of company of which he is a member. Thus, in the
case of a limited liability company, the liability of the members of the
company is limited to the extent of the nominal value of shares held by
them. In the case of a company limited by guarantee, the members are liable
only to the extent of the amount guaranteed by them and that too only when
the company goes into liquidation. However, if it is an unlimited company,
the liability of its members is unlimited as well.

e) Artificial Person: A company is an artificial person created by law and is

clothed with all the rights of an individual and being subject to duties. It is
called an artificial person since it is invisible, intangible, existing only in the
contemplation of law. As a legal person it can enter into contracts, possess
properties in its own name, sue and can be sued by others. However, it is not
a citizen under the Citizenship Act, 1955 or the Constitution of India. But,
certain fundamental rights enshrined in the Constitution for protection of
74
 “person”, e.g., right to equality (Article 14) are available to company and The Companies Act, 2013
also, it has nationality, domicile and residence.

f) Common Seal: A company being an artificial person functions through its

Directors. Common seal is the official signature of a company, which is
affixed by the officers and employees of the company on its every document.
The Companies (Amendment) Act, 2015, has made the common seal optional
by omitting the words “and a common seal” from Section 9 so as to provide
an alternative mode of authorization for companies who opt not to have a
common seal. This amendment provides that the documents which need to
be authenticated by a common seal will be required to be so done, only if the
company chooses to have a common seal. In case a company does not have
a common seal, the authorization shall be made by two Directors or by a
Director and the Company Secretary, wherever the company has appointed
a Company Secretary.

g) Transferability of Shares: Section 44 of the Companies Act, 2013, provides

that the shares held by the members are movable property and can be
transferred from one person to another in the manner provided by the Articles
of Association. If the Articles are silent on the provision for the transfer of
shares, the Regulations contained in Table “F” in Schedule I to the Companies
Act, 2013, are applicable; and if Table “F” is expressly excluded, the transfer
of shares will be governed by the general law relating to transfer of movable
property. However, in Private Company, there are restrictions with respect
to transferability of shares, but the right to transfer is not taken away
absolutely. The objective behind the right of restriction on the transfer of
shares is to preserve the composition of the shareholding.

Types of Companies
The Companies Act, 2013, has broadly classified the companies into various
classes. Companies may be classified into various classes on the following basis:
i) On the basis of liability:
a) Company limited by shares: is one in which the liability of the members
is limited by its memorandum of association to the amount (if any)
unpaid on the shares held by them [Section 2(22)].
b) Company limited by guarantee: is one where the liability of its members
is limited by the memorandum to such amount as the members may
respectively undertake by the memorandum to contribute to the assets
of the company in the event of its being wound up Section 2(21). These
types of companies may or may not have a share capital. Such a
company may be useful only where no working funds are needed or
where these funds can be held from other sources like endowment,
fees, charges, donations, etc.
In Narendra Kumar Agarwal vs. Saroj Maloo, the Supreme Court laid
down that the right of a guarantee company to refuse to accept the
transfer by a member of his interest in the company is on a different
footing than that of a company limited by shares. Similarly, the
membership of a guarantee company may carry privileges much
different from those of ordinary shareholders.
75
Business Forms and c) Unlimited company: is a company where the liability of its members
Legislations
is unlimited [Section 2(92)] and the liability of a member ceases when
he ceases to be a member. The liability of each member extends to the
whole amount of the company’s debts and liabilities, but he will be
entitled to claim contribution from other members. Till the time a
company is a going concern the liability will be limited to the extent of
shares. The creditors can institute proceedings for winding up of the
company for their claims. The official liquidator may call the members
for their contribution towards the liabilities and debts of the company,
which can be unlimited.
ii) On the basis of members:
a) One Person Company (OPC): The Companies Act, 2013, introduced
a new class of companies which can be incorporated by a single person.
The concept of OPC was recommended in 2005, by a committee headed
by Dr JJ Irani. Section 2(62) of the Companies Act, 2013, defines one
person company (OPC) as a company which has only one person as a
member. OPC, unlike the sole proprietorship is a separate legal entity
with a limited liability of the member.

b) Private Company [Section 2(68)]: “Private company” means a

company having a minimum paid-up share capital as may be prescribed,
and which by its articles,—
i) restricts the right to transfer its shares;
ii) except in case of One Person Company, limits the number of its
members to two hundred
iii) prohibits any invitation to the public to subscribe for any securities
of the company
c) Small Company: Small company given under the section 2(85) of the
Companies Act, 2013 which means a company, other than a public
company—
1) paid-up share capital of which does not exceed fifty lakh rupees or
such higher amount as may be prescribed which shall not be more
than ten crore rupees; and
2) turnover of which as per profit and loss account for the immediately
preceding financial year does not exceed two crore rupees or such
higher amount as may be prescribed which shall not be more than
one hundred crore rupees.
The features of Small Company
– A private company
– Paid up capital – not more than Rs. 50 lakhs or Turnover – not
more than Rs. 2 crores.
– Should not be – Section 8 company or a holding or a subsidiary
company.
d) Public company [Section 2(71)]: “Public company” means a company
which
76
 – is not a private company; and The Companies Act, 2013

– has a minimum paid-up share capital, as may be prescribed.

Status of private company, which is subsidiary to public company: In
view of Section 2(71) of the Companies Act, 2013, a Private company, which
is subsidiary of a public company, shall be deemed to be a public company
for the purpose of this Act, even where such subsidiary company continues
to be a private company in its articles.

According to section 3(1) (a), a company may be formed for any lawful
purpose by seven or more persons, where the company to be formed is to be
a public company.

iii) On the basis of control:

a) Holding and subsidiary companies: ‘Holding and subsidiary’

companies are relative terms. A company is a holding company of
another if the other is its subsidiary. According to section 2(87) a
company shall be deemed to be a subsidiary of another if—
– the other company controls the composition of the Board of
Directors; or
– exercises or controls more than one-half of the total share capital
either at its own or together with one or more of its subsidiary
companies.
b) Associate company [Section 2(6)]: means a company in which that
other company has a significant influence ie., control of at least twenty
per cent of total voting power, or control of or participation in business
decisions under an agreement; but which is not a subsidiary company
of the company having such influence and includes a joint venture
company. Example : A Ltd. is a Public Company and holds 23% of
share capital in B Ltd. and 15% share capital of C Ltd. By virtue of the
shareholding pattern, B Ltd. will be known as the Associate Company
of A Ltd. (as the holding is more than 20%), whereas C Ltd. will not be
Associate as the required 20% is not there and hence no significant
influence.

iv) On the basis of Access to Capital:

a) Listed company: A company which has any of its securities listed on
any recognised stock exchange. [section 2(52)]
b) Unlisted company means a company other than listed company.
v) Other companies:
a) Government company [Section 2(45): is a Company in which not less
than 51% of the paid-up share capital is held by-
– the Central Government, or
– by any State Government or Governments, or
– partly by the Central Government and partly by one or more State
Governments, and the section includes a company which is a
subsidiary company of such a Government company.
77
Business Forms and b) Foreign Company [Section 2(42)]: is any company or body corporate
Legislations
incorporated outside India which—
– has a place of business in India whether by itself or through an
agent, physically or through electronic mode; and
– conducts any business activity in India in any other manner
c) Section 8 company: Company which is formed to-
– promote the charitable objects of commerce, art, science, sports,
education, research, social welfare, religion, charity, protection of
environment, etc.
– Such company intends to apply its profit (if any) in:
o promoting its objects and
o prohibiting the payment of any dividend to its members.
Examples of section 8 companies are FICCI, ASSOCHAM, National
Sports Club of India, CII, etc.

These companies are licensed by Central government and the registrar,

on application register such person or association of persons as a
company under this section 8. On registration the company enjoys same
privileges and obligations as a limited company.

The Central Government may revoke the licence of such a company if

it contravenes any of the requirements or the conditions to which a
licence is issued or where the affairs of the company are conducted
fraudulently or violate the objectives of the company or are prejudicial
to public interest. But before such revocation, the Central Government
must give it a written notice of its intention to revoke the licence and
opportunity to be heard in the matter. On revocation of the licence; in
the public interest, the central government has power to amalgamate it
with another company registered under this section having similar
objects.

d) Dormant company (Section 455): where a company is formed and

registered under this Act for a future project or to hold an asset or
intellectual property and has no significant accounting transaction, such
a company or an inactive company may make an application to the
Registrar in such manner as may be prescribed for obtaining the status
of a dormant company.
e) “Inactive company” means a company which has not been carrying
on any business or operation, or has not made any significant accounting
transaction during the last two financial years, or has not filed financial
statements and annual returns during the last two financial years.
f) Nidhi Companies: also called the ‘Mutual benefit society’ means a
company which the Central Government may, by notification in the
Official Gazette, declare to be a Nidhi or Mutual Benefit Society, as
the case may be. Its main objective is to lend and borrow money to the
members, for the purpose of their mutual benefits and to cultivate
savings habits among the members. These are classified as non-banking
financial Company (NBFC).
78
 g) Public Financial Institutions (PFI): By virtue of Section 2(72) of the The Companies Act, 2013
Companies Act, 2013, the following institutions are to be regarded as
public financial institutions:
i) the Life Insurance Corporation of India, established under the Life
Insurance Corporation Act, 1956;
ii) the Infrastructure Development Finance Company Limited,
iii) specified company referred to in the Unit Trust of India (Transfer
of Undertaking and Repeal) Act, 2002;
iv) institutions notified by the Central Government under section 4A(2)
of the Companies Act, 1956 so repealed under section 465 of this
Act;
v) such other institution as may be notified by the Central Government
in consultation with the Reserve Bank of India:
An institution shall be so notified as PFI if —
– it has been established or constituted by or under any Central
or State Act other than this Act or the previous Companies
Law; or
– at least 51% of the paid-up share capital is held or controlled
by the Central Government or by any State Government or
partly by the Central Government and partly by one or more
State Governments.
Formation and Incorporation of Companies
Section 3(1) states that a company may be formed for any lawful purpose by –
a) seven or more persons, where the company to be formed is to be a public
company;
b) two or more persons, where the company to be formed is to be a private
company; or
c) one person, where the company to be formed is to be One Person Company.
A company formed under Section 3(1) may be either –
a) a company limited by shares; or
b) a company limited by guarantee; or
c) an unlimited company.
Stages in the formation of a company
Formation of a company is a lengthy process involving completion of legal
formalities and procedures. It involves following stages
a) Promotion
b) Registration or incorporation
c) Commencement of business
a) Promotion
The 1st stage in the formation of a company is ‘promotion’. At this stage the
idea to carry on the business is conceived by an individual or a group of
persons called ‘ Promoter’. Thus a persons who conceives the idea of forming
79
Business Forms and the company, floats the company, enters into preliminary contracts,
Legislations
agreements and purchase of property in his own name and hands it over to
the company on its incorporation, is called a “Promoter”. A promoter may
be an individual, firm, an association of persons or a body corporate.
However, a person acting merely in a professional capacity e.g., the solicitor,
banker, accountant, etc., are not regarded as promoters. Every company shall
interalia, while preparing the annual returns, give particulars of its promoter.
The Companies Act, 2013 defines the term “Promoter” under section 2(69)
which means a person—
– who has been named as such in a prospectus or is identified by the
company in the annual return; or
– who has control over the affairs of the company, directly or indirectly
whether as a shareholder, director or otherwise; or
– in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act.
b) Registration or incorporation
Section 7(1) of the Act provides for the detailed procedure for incorporation
of company.
Filing of the documents and information with the registrar of the
company: Following documents and information is to be filed with the
registrar within whose jurisdiction the registered office of the company is
proposed to be situated-
i) the Memorandum and Articles of the company duly signed by all
the subscribers to the Memorandum.
ii) a declaration by person who is engaged in the formation of the company
(an advocate, a chartered accountant, cost accountant or company
secretary in practice), and by a person named in the Articles (director,
manager or secretary of the company), that all the requirements of this
Act and the rules made in respect of registration and matters precedent
or incidental thereto have been complied with;
iii) a declaration from each of the subscribers to the Memorandum and
from persons named as the First Directors, if any, in the Articles stating
that-
a) he is not convicted of any offence in connection with the promotion,
formation or management of any company, or
b) he has not been found guilty of any fraud or misfeasance or of any
breach of duty to any company under this Act or any previous
company law during the last five years, and that all the documents
filed with the Registrar for registration of the company contain
information that is correct and complete and true to the best of his
knowledge and belief;
iv) the address for correspondence till its registered office is established;
v) the particulars (names, including surnames or family names, residential
address, nationality) of every subscriber to the Memorandum along
with proof of identity, and in the case of a subscriber being a body
80 corporate, such particulars as may be prescribed.
 vi) the particulars (names, including surnames or family names, the Director The Companies Act, 2013
Identification Number, residential address, nationality) of the persons
mentioned in the articles as the first director of the company ; and
vii) the particulars of the interests of the persons mentioned in the articles
as the first directors of the company in other firms or bodies corporate
along with their consent to act as directors of the company in such
form and manner as may be prescribed.
Particulars provided in this provision shall be of the individual subscriber
and not of the professional engaged in the incorporation of the company
[The Companies (Incorporation) Rules, 2014].
Issue of certificate of incorporation on registration: once satisfied the
Registrar, shall register all the documents and information in the register
and issue a certificate of incorporation in the prescribed form to the effect
that the proposed company is incorporated under this Act.
The Registrar shall allot to the company a corporate identity number on and
from the date mentioned in certificate of incorporation and it will be included
in the certificate.

c) Commencement of Business [Section10A]

According to Section 10A, a company incorporated after the commencement
of the Companies (Amendment) Ordinance, 2019, and having a share capital
shall not commence any business or exercise any borrowing powers unless—
– a declaration is filed by a director within 180 days of the date of
incorporation, in a prescribed form and verified, with the Registrar
that every subscriber to the Memorandum has paid the value of the
shares agreed to be taken by him on the date of making of such
declaration; and
– The company has filed with the Registrar a verification of its registered
office as provided in sub-section (2) of section 12.
In case of default, in complying with the requirements of this section, the company
shall be liable to a penalty of fifty thousand rupees and every officer who is in
default shall be liable to a penalty of one thousand rupees for each day during
which such default continues but not exceeding an amount of one lakh rupees.

Further, the registrar has power to initiate action for the removal of the name of
the company from the register of companies, if declaration is not filed in 180
days and the Registrar has reasonable cause to believe that the company is not
carrying on any business or operations.

From the date of incorporation, the subscribers to the Memorandum and all other
persons, who subsequently, become members of the company, shall be a body
corporate by the name contained in the Memorandum, capable of exercising all
the functions of an incorporated company under this Act and having perpetual
succession (until it is dissolved by liquidation or struck out of the register). A
company on registration acquires a separate existence and the law recognizes it
as a legal person separate and distinct from its members, thereby have power to
acquire, hold and dispose of property, both movable and immovable, tangible
and intangible, to contract and to sue and be sued, by the said name. There will
81
Business Forms and also come into existence a binding contract between the company and its members
Legislations
as evidenced by the Memorandum and Articles of Association.

Activity 1
1) Is company a citizen?
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) Why a company is called an artificial person?
......................................................................................................................
......................................................................................................................
......................................................................................................................
3) Does a company has nationality
......................................................................................................................
......................................................................................................................
......................................................................................................................
4) Choose the right answer:
i) A company, in which the liability of its members is limited to unpaid
amount on the shares.
a) Company limited by guarantee b) Company limited by shares

ii) The minimum number of members required to register a public

company is___ (a) 2 (b) 7
iii) When is a company said to have been registered?
a) When it gets the certificate of commencement of business.
b) When it gets the certificate of incorporation

5) State whether true or false

a) The Companies Act, 2013 is applicable on Insurance companies.
b) Is it compulsory for every company to have a common seal?

4.3 PRINCIPAL DOCUMENTS OF A COMPANY

There are three fundamental documents of a company. They are:
a) Memorandum of Association is the charter of a company which lays down
the objects of the company and also all the specific functions, operations
and limitations.
b) Articles of Association is the document that constitutes all the rules and
regulations for the conduct of the internal management of the company.
c) Prospectus
82
4.3.1 Memorandum of Association (MoA) The Companies Act, 2013

Memorandum means the memorandum of association of a company as originally

framed or as altered from time to time in pursuance of any previous company
law or of this Act [ section 2(56)]. It is the document that regulates the company’s
external affairs, and complements the Articles of Association. It is the most
important document and commonly referred as the constitution or the charter of
the company. It is the very foundation on which the whole edifice of the company
is built. It defines the constitution and the scope of the powers of the company
with which it has been established under the Act.

A company has to stick to the provisions laid in the Memorandum, no matter

how crucial may be the necessity for the departure. It cannot enter into a contract
or engage in any trade or business, which is beyond the power conferred on it by
the Memorandum. If it does so, it would be ultra vires the company and void.

The Memorandum of a company shall be in respective forms specified in Tables

A, B, C, D and E in Schedule I [Section 4].

Table A- for company limited by shares.

Table B - for a company limited by guarantee and not having a share capital.
Table C -for company limited by guarantee and having a share capital.
Table D - for association of an unlimited company.
Table E - for an unlimited company and having share capital.
The Memorandum and Articles of a company must be as closed to model forms,
as possible, depending upon the circumstances.

Contents of Memorandum
The memorandum of a company shall state—
a) Name Clause: Name clause consists the name of the company with the last
word “Limited” in the case of a public limited company and “Private Limited”
in the case of a private limited company. This clause is not applicable on the
companies formed under section 8 of the Act. As per MCA notification
dated 5th June, 2015, a Government company’s name must end with the
word “Limited”. In the case of One Person Company, the words “One Person
Company” should be included below its name.

If a company changes its activities which are not reflected in its name, it
shall change its name in line with its activities within six months from the
change of activities after complying with all the provisions as applicable to
change of name.

b) Domicile/Registered Office clause: Name of the State in which the registered

office of the company is to be situated. A company shall, on and from the
fifteenth day of its incorporation and at all times thereafter, have a registered
office capable of receiving and acknowledging all communications and
notices as may be addressed to it.

83
Business Forms and c) Object clause : it states:
Legislations
i) the main objects which the company wishes to pursue at the time of
incorporation; and
ii) objects incidental to the attainment of the main object; and
iii) other objects.
d) Liability clause : the liability of members of the company, whether limited
or unlimited, and also state:
in the case of a company limited by shares, that the liability of its
members is limited to the amount unpaid, if any, on the shares held by
them; and
in the case of a company limited by guarantee, the amount up to which
each member undertakes to contribute:
– to the assets of the company in the event of its being wound-up
while he is a member or within one year after he ceases to be a
member, for payment of the debts and liabilities of the company
or of such debts and liabilities as may have been contracted before
he ceases to be a member, as the case may be; and
– to the costs, charges and expenses of winding-up and for adjustment
of the rights of the contributories among themselves;

e) Capital Clause: In case of company the amount of the share capital with
which the company is to be registered i.e., authorized capital, the number
and face value of shares into which the capital of the company is divided
and the number of shares, the subscribers to the Memorandum have agreed
to take, indicated opposite their names, which shall not be less than one
share. A company not having share capital need not have this clause.

f) Association clause: The Memorandum concludes with the association clause.

It contains declaration from several persons whose names are subscribed
are desirous of forming a company and agree to take shares mentioned against
the name of each person. Every subscriber to the Memorandum shall take at
least one share, and shall write against his name, the number of shares taken
by him.

The above clauses are called compulsory clauses, or “Conditions”. In addition

to these a memorandum may contain other provisions, for example rights attached
to various classes of shares.

In the case of OPC, the name of the person who, in the event of death of the
subscriber, shall become the member of the company.

The memorandum must be printed, divided into paragraphs, numbered

consecutively, and signed by at least seven persons (two in the case of a private
company and one in the case of One Person Company) in the presence of at least
one witness, who will attest the signatures. The particulars about the signatories
to the memorandum as well as the witness, as to their address, description,
occupation, etc., must also be entered.

84
The Memorandum of Association of a company cannot contain anything contrary The Companies Act, 2013
to the provisions of the Companies Act. If it does, the same shall be devoid of
any legal effect. Similarly, all other documents of the company must comply
with the provisions of the Memorandum.

The Memorandum of Association (MOA) can be altered anytime but there are
certain conditions which have to be complied before alteration [section 13].

4.3.2 Articles of Association (AoA)

Articles means the Articles of Association of a company as originally framed or
as altered from time to time or applied in pursuance of any previous company
law or of this Act[ section2(5)]. It is a document supplementary to the
Memorandum of Association, which deals exclusively with the rules and
regulations of the internal management of the company. These articles or rules
are commonly known as the by laws of the company. These express a contract
between the company and its members and among the members themselves.
These are subordinate to the Memorandum and, hence, not in anyway contradict
it. Schedule I of the Act gives four formats in Table F,G,H,I and J which may be
used to frame the Articles of Association. A company may adopt all or any of the
regulations contained in the model articles applicable to such company.

Contents:
Section 5 of the Companies Act, 2013, seeks to provide the contents and
model of articles of association. The section lays the following law-
1) The regulations for management of the company.
2) Such matters, as are prescribed under the rules. However, a company may
also include such additional matters as may be considered necessary for its
management.
3) Provisions for entrenchment: Usually an article of association may be altered
by passing special resolution but entrenchment makes it more difficult to
change it. Entrenchment means making something more protective. The
articles may contain provisions for entrenchment to the effect that specified
provisions of the articles may be altered only if conditions or procedures as
that are more restrictive than those applicable in the case of a special
resolution, are met or complied with. The provisions for entrenchment shall
only be made either on formation of a company, or by an amendment in the
articles agreed to by all the members of the company in the case of a private
company and by a special resolution in the case of a public company. The
company shall give notice to the Registrar of such provisions in such form
and manner as may be prescribed.

Section 14 of the Companies Act, 2013, vests companies with power to alter or
add to its articles. A company cannot divest itself of these powers [Andrews vs.
Gas Meter Co. [1897] 1 Ch. 161]. Matters as to which the memorandum is silent
can be dealt with by the alteration of article.

4.3.3 Prospectus
Companies raise their enormous capital needs from banks, international financial
institutions, defined group or inner circle (called ‘Private Placement of securities’)
85
Business Forms and ,as well as from general public (called ‘Public Offer’). These creditors lend only
Legislations
if the company is creditworthy. In order to assure its creditors that it is creditworthy
and has business acumen to develop, manage, and earn profits for its shareholders,
it offers the details of its competence in a document called ‘prospectus’. It is
after studying this document, the creditor makes his decision to accept it. Thus a
contract between a public company and its creditors comes into existence.

According to the definition u/s 2(70) prospectus mean any document described
or issued as a prospectus and includes a red herring prospectus referred to in
section 32 or shelf prospectus referred to in section 31 or any notice, circular,
advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of a body corporate.

The definition includes any notice, circular, advertisement or any other document
inviting offers from public for the subscription or purchase of securities.

Legal Requirements
Prospectus to be dated and signed and to state information set out such reports
on financial information as may be specified by the Securities and Exchange
Board of India in consultation with the Central Government.
Prospectus can be issued only after delivery to Registrar for filing.
Prospectus shall not be valid if it is issued after days from the date on which a
copy thereof is delivered to the Registrar of Companies (ROC).
Types of Prospectus:
i) Red Herring Prospectus: Red herring Prospectus means a prospectus which
does not include complete particulars of the quantum or price of the securities
included therein. In simple terms a red herring prospectus contains most of
the information pertaining to the company’s operations and prospects, but
does not include key details of the issue such as its price and the number of
shares offered.

According to section 32 a company proposing to make an offer of securities

may issue a red herring prospectus prior to the issue of a prospectus. It
should be filed with the Registrar at least three days prior to the opening of
the subscription list and the offer.

A red herring prospectus has the same obligations as the prospectus and any
variation between the two shall be highlighted as variations in the prospectus.

Upon the closing of the offer of securities under this section, the prospectus
stating- the total capital raised, the closing price of the securities and any
other details not included in the red herring prospectus shall be filed with
the Registrar and the Securities and Exchange Board of India (SEBI).

ii) Shelf Prospectus & Information Memorandum: ‘Shelf Prospectus’ is a

prospectus in respect of which the securities or class of securities included
therein are issued for subscription in one or more issues over a certain period
without the issue of a further prospectus. In other words a Shelf Prospectus
is a single prospectus for multiple public issues. Issuer is permitted to offer
and sell securities to the public without a separate prospectus for each act of
86
 offering for a certain period. It is a prospectus issued by financial institution The Companies Act, 2013
or banks.

As already discussed it is mandatory for public company which issues

securities to public, to issue prospectus. This is a cumbersome process. In
order to save time and simplify the process a leeway is given under law in
the form of shelf prospectus. Such companies can issue one time prospectus
which will be valid for maximum one year. During this duration when every
the company thinks of issuing securities as per that prospectus – it doesn’t
have to go through the whole process of issue of fresh prospectus.

Under the Act, SEBI may provide by regulations in this behalf any class or
classes of companies to file a shelf prospectus with ROC.

Such prospectus is to be submitted at the stage of the first offer of securities,

indicating a period not exceeding one year as the period of validity of such
prospectus. The validity period shall commence from the date of opening of
the first offer of securities under that prospectus and in respect of a second
or subsequent offer of such securities issued during the period of validity of
that prospectus, no further prospectus is required.

An information memorandum is required to be filed by a company filing

a shelf prospectus which shall contain all material facts relating to
– new charges created,
– changes in the financial position of the company as have occurred
between the first offer of securities or the previous offer of securities
and the succeeding offer of securities and
– such other changes as may be prescribed, with the Registrar within the
prescribed time, prior to the issue of a second or subsequent offer of
securities under the shelf prospectus.
The information memorandum shall be prepared in Form PAS-2 and filed
with the Registrar along with the prescribed fee within one month prior to
the issue of a second or subsequent offer of securities under the shelf
prospectus.
iii) Abridged Prospectus: A prospectus is a very voluminous document, and
one cannot be expected to read it completely. An abridged prospectus is a
summary of the prospectus containing such details as prescribed by the SEBI.
According to section 2(1) of the Act “abridged prospectus” means a
memorandum containing such salient features of a prospectus as may be
specified by the SEBI by making regulations in this behalf.
Section 33 makes it compulsory that every application form for the purchase
of any of the securities shall be accompanied by an abridged prospectus.
And a copy of the prospectus shall, on a request being made by any person
before the closing of the subscription list and the offer, be furnished to him.

iv) Deemed Prospectus (Offer for Sale): The document “Offer for sale” is an
invitation to the general public to purchase the shares of a company through
an intermediary, such as an issuing house or a merchant bank. A company
may allot or agree to allot any shares or debentures to an “Issue house”
without there being any intention on the part of the company to make shares 87
Business Forms and or debentures available directly to the public through issue of prospectus.
Legislations
The issue house in turn makes an “Offer for sale” to the public.
Any document by which the offer for sale to the public is made shall, for all
purposes, be deemed to be a prospectus issued by the company.
Securities will be considered to be offered for sale to the public if it is shown:
a) that an offer of the securities or of any of them for sale to the public
was made within 6 months after the allotment or agreement to allot; or
b) that at the date when the offer was made, the whole consideration to be
received by the company in respect of the securities had not been
received by it.
Information Memorandum together with the Shelf Prospectus is deemed
Prospectus
Matters to be stated in the Prospectus:
A prospectus is any document through which a company communicates and
invites the public to invest into it and subscribe or purchase its securities. A
prospectus contains information about the financial position of the company, its
directors, signatories to the memorandum, the objects of public offer, additional
charges created, changes in the finance etc. It is mandatory for a company to
provide correct information in the prospectus or it would be liable for
misrepresentation and fraud.
Section 26 (1) lays down the matters required to be disclosed and included in a
prospectus and requires the filing of the prospectus with the Registrar before it is
issued.
The matters which are to be stated in a prospectus are as under:
i) names and addresses of the registered office of the company, company
secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees,
if any, underwriters and such other persons as may be prescribed;
ii) dates of the opening and closing of the issue, and declaration about the issue
of allotment letters and refunds within the prescribed time;
iii) a statement by the Board of Directors about the separate bank account where
all monies received out of the issue are to be transferred and disclosure of
details of all monies including utilised and unutilised monies out of the
previous issue in the prescribed manner;
iv) details about underwriting of the issue;
v) consent of the directors, auditors, bankers to the issue, expert‘s opinion, if
any, and of such other persons, as may be prescribed;
vi) the authority for the issue and the details of the resolution passed therefor;
vii) procedure and time schedule for allotment and issue of securities;
viii) capital structure of the company in the prescribed manner;
ix) main objects of public offer, terms of the present issue and such other
particulars as may be prescribed;
x) main objects and present business of the company and its location, schedule
88 of implementation of the project;
xi) particulars relating to— (A) management perception of risk factors specific The Companies Act, 2013
to the project; (B) gestation period of the project; (C) extent of progress
made in the project; (D) deadlines for completion of the project; and (E) any
litigation or legal action pending or taken by a Government Department or a
statutory body during the last five years immediately preceding the year of
the issue of prospectus against the promoter of the company;
xii) minimum subscription, amount payable by way of premium, issue of shares
otherwise than on cash;
xiii) details of directors including their appointments and remuneration, and such
particulars of the nature and extent of their interests in the company as may
be prescribed; and
xiv) disclosures in such manner as may be prescribed about sources of promoter‘s
contribution;

If a prospectus is issued in contravention of the provisions of section 26, the

company shall be punishable with fine which shall not be less than 50,000 rupees
but which may extend to 3 lakh rupees and every person who is knowingly a
party to the issue of such prospectus shall be punishable with imprisonment for
a term which may extend to 3 years or with fine which shall not be less than
50,000 rupees but which may extend to 3 lakhs rupees, or with both.

The company has to use the funds strictly in accordance with the prospectus.
Any deviations require pre-approval of the investors and ‘recall option’ needs to
be given to the dissenting investors. Deviation regarding use of proceeds of issue
for buying, trading or otherwise dealing in equity shares of any other listed
company is not permitted [section 27].

Misstatements in Prospectus and Consequences:

Misstatement means stating something that is false or inaccurate. It can either be
due to commission or omission or both. Anything in the prospectus that deceives
and misleads an investor and induces him to buy shares or debentures calls for
remedies both against the company and its promoters, directors and every person
involved. Misstatement in prospectus is a serious offence and attracts civil liability
against company and criminal liability or civil liability or both on every person
who authorises the issue of such prospectus.

Activity 2

1) What is a shelf Prospectus?

......................................................................................................................
......................................................................................................................
......................................................................................................................

2) ______ is known as a charter of a Company.

3) The rules and regulations for the internal management of a company are
contained in its_______________

4) ______________ documents may be changed with retrospective effect?

89
Business Forms and
Legislations 4.4 SHARE AND LOAN CAPITAL
A public company raises the necessary funds by issuing shares, debentures, and
by accepting public deposits. These are discussed in detail in the following paras:

4.4.1 Share Capital

Share Capital is the capital raised by the company by issue of shares. It is the
corpus or fund to be used for the object of the company to generate profits. The
memorandum of company provides for share capital clause. Companies limited
by guarantee or unlimited companies need not have share capital. Various terms
used with reference to capital can be understood as:
1) Nominal or Authorised or Registered Capital: Represents the maximum
share capital which the company is authorized to issue by its memorandum
and upon which it pays the stamp duty. This form of capital has been defined
in section 2(8).
2) Issued capital: It denotes the nominal value of that part of authorized share
capital which is issued or offered to the general public from time to time for
subscription and includes the shares allotted for consideration other than
cash. This form of capital has been defined in section 2(50).
3) Subscribed capital: It is that part of the issued share capital, which the general
public for the time being has subscribed or application has been received
from the public. This form of capital has been defined in Section 2(86).
4) Called-up capital: It denotes that part of allotted (Subscribed) share capital,
which has been called up by the company, from the subscribers to pay. Section
2(15).
5) Paid up Capital: It is the total amount paid or credited as paid up on shares
issued. It is equal to called up capital less calls in arrears.
6) Uncalled capital: it is the remainder of the issued capital which is not been
called ; it may be called any time but is subject to the term of issue of shares
and provision in article of association.
7) Reserve Share Capital: A limited company, by a special resolution, may
declare that a portion or whole of its uncalled share capital shall not be
called except in the event of company’s winding up and this portion of
uncalled share capital is called reserve capital.

Types of Shares:
The capital of the company is divided into invisible units of a fixed amount.
Each of such unit is called a ‘share’. Share, means a share in the share capital of
a company and includes stock except where a distinction between stock and
share is expressed or implied. Evidenced by share certificate [Section 2(84)]. It
is a measure of the interest in the company’s assets to which a person holding a
share is entitled. The rights and obligations attaching to a share are those prescribed
by the Memorandum and the Articles of a company. A shareholder not only has
contractual rights against the company, but also certain other rights which accrue
to him according to the provisions of the Companies Act.

90
Stock can be defined as the “aggregate of fully paid- up shares” consolidated The Companies Act, 2013
and divided for the convenience of holding into different parts. Its advantage is
that unlike the share which is indivisible, it may split into a fraction of any amount,
without regard to the original face value of share. Stock can be validly issued
only when shares are fully paid-up.

According to the provisions u/s 43, the share capital of a company limited by
shares; shall be of two kinds, namely:—
1) Equity share capital
- with voting rights; or
- with differential rights as to dividend, voting or otherwise in accordance
with prescribed rules;
All share capital which is not preference share capital means equity share
capital;
2) Preference share capital is that part of the issued share capital of the company
limited by shares which carries or would carry a preferential right with respect
to—
a) payment of dividend; and
b) repayment of capital, in the case of a winding up
Issue of Shares

A company can issue its shares either at par, at a premium or even at a discount

i) Issue of shares at par: Shares are issued at par when subscribers are required
to pay only the amount equivalent to the nominal or face value of the shares
issued. ‘Par value’ is the notional face value of the shares which a company
issues to its investors.
ii) Issue of shares at premium: If the buyer is required to pay more than the
face value of the share, then the share is said to be issued at a premium. The
premium cannot be treated as profit and, therefore, cannot be distributed as
dividend. The amount of premium received in cash and the equivalent of it
received in kind must be kept in a separate bank account known as the
‘Securities Premium Account’.
iii) Issue of shares at discount: If the buyer of shares is required to pay less
than the face value of the share, then the share is said to be issued or sold at
a discount. Share can be issued at discount if it is authorized by a resolution,
that is,
– The issue is of class of shares already issued 
– The maximum rate of discount must not exceed 10 per cent.             
– Not less than one year has, at the date of issue, elapsed since the date
on which the company was entitled to commence business.             
– Issued within two months of the sanction by the Company Law Board.  
– Every prospectus must mention particulars of the discount allowed on
the issue of shares.

91
Business Forms and iv) Issue of sweat Equity shares : ‘Sweat-equity shares’ means equity shares
Legislations
issued by the company to employees or directors at a discount or for
consideration other than cash . ‘Sweat equity shares’ may be issued for
providing know-how or making available intellectual property rights (say,
patents) or value additions.

v) Rights Issue [62(1)(a)]: The existing members of the company have a right
to be offered shares, when the company wants to increase its subscribed
capital. Such shares are known as “right shares”. Or when a company
(whether Private Limited Company, a Public Limited Company, listed or
unlisted company) offers it shares to the existing shareholders in proportion
to their existing share holding in the company for the purpose of raising
fresh capital for the company. In other words it is a’ pre-emptive right’ that
an existing shareholder has in a company in preference to the outsider. It is
a non- dilutive pro rata way to raise capital. It is not mandatory to buy the
rights offered. A shareholder can either:
1) Ignore their rights and let it lapse.
2) Transfer or sell the rights to other interested investors.
With these rights the shareholders of the company can purchase new shares
at a discounted rate to the market price.

Legal requirements:
1) the offer shall be made by notice specifying the number of shares offered
and limiting a time not being less than fifteen days and not exceeding
thirty days from the date of the offer within which the offer, if not
accepted, shall be deemed to have been declined;
2) unless the articles of the company otherwise provide, the offer aforesaid
shall be deemed to include a right exercisable by the person concerned
to renounce the shares offered to him or any of them in favour of any
other person; and the notice referred to in clause (i) shall contain a
statement of this right;
3) after the expiry of the time specified in the notice aforesaid, or on
receipt of earlier intimation from the person to whom such notice is
given that he declines to accept the shares offered, the Board of Directors
may dispose of them in such manner which is not disadvantageous to
the shareholders and the company.

vi) Bonus Issue: Bonus Shares refers to a further issue of shares made by a
company having share capital to its existing shareholders without any
additional cost, in proportion to their existing holdings. Bonus shares are
fully paid-up shares, issued to its members, out of-
– Its free reserves;
– The securities premium account; or
– The capital redemption reserve account.

No issue of bonus shares shall be made by capitalizing reserves created by the 

revaluation of assets.
92
Legal requirements: The Companies Act, 2013

The bonus shares can be issued only when:

1) it is authorized by its articles; If not, then amend the AOA
2) Recommended by the Board and authorized in the general meeting of the
company;
3 The Company has not defaulted in
– payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
– payment of statutory dues of the employees, such as, contribution to
provident fund, gratuity and bonus;
4) The partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up;
5) The company which has once announced the decision of its Board
recommending a bonus issue shall not subsequently withdraw the same.
6) The authorized Capital should be sufficient to issue Bonus Shares, If not it
should be increased first.
7) Bonus issue must be made out of free reserves built out of the genuine profits
or securities premium or capital redemption reserve account.
8) Reserves created by revaluation of assets should not be used for issue of
Bonus Shares.
9) Bonus issue should not be made in lieu of dividend.
10) Other such conditions as may be prescribed.
Transfer and Transmission

Transfer: it refers to the transfer of title to shares, voluntarily, by one party to

another for adequate consideration under contract. Transfer deed is executed in
transfer of share and stamp duty is payable on the market value of shares.
Liabilities of transferor cease on the completion of transfer.

Transmission: it refers to the transfer of title to shares by the operation of law

(i.e., death, insolvency or lunacy).It is initiated by legal heir or receiver. On
death of a shareholder, his shares are transmitted to his legal representative. When
a shareholder becomes insolvent, his shares are transmitted to his Official
Receiver. And on shareholder becoming lunatic, his shares are transmitted to his
administrator appointed by the Court.
Provisions relating to transfer and transmission are stated in section 56.
Buyback of Shares
A company whether public or private is empowered to purchase its own shares
or other securities in certain cases out of following sources : a) Its free reserves;
or b) The securities premium account; or c )The proceeds of any shares or other
specified securities. However, buy-back of any kind of shares or securities shall
not be made out of the proceeds of an earlier issue of the same kind of shares or
same kind of other specified securities.

93
Business Forms and Conditions for Buyback:
Legislations
1) The buy-back must be authorized by the article and
2) approved by Board of Directors at a board meeting and/or by a special
resolution (SR) passed by shareholders in general meeting, depending on
the quantum of buy back:
– Approval of Board of Directors- upto10% of the total paid-up equity
capital and free reserves of the company.
– Approval of Shareholders- upto 25% of the aggregate of paid-up capital
and free reserves of the company.
3) Shares to be bought back must be fully paid up
4) The Buy-back of shares of private & unlisted public companies may be:
– from the existing shareholders on a proportionate basis;
– by purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.
5) Before the buy-back of shares, the company shall file with the Registrar of
Companies a Letter of Offer.
6) The offer for buy back shall remain open for a minimum period of 15 days
but not more than 30 days from the date of dispatch of letter of offer. 
7) Buy-back shall be completed within a period of 1 (one) year from the date
of passing of Special Resolution or Board Resolution, as the case may be.
8) The ratio of the aggregate of secured and unsecured debts owed by the
company after buy-back shall not be more than twice the paid-up capital
and its free reserves.

Surrender and forfeiture of shares

Surrender of shares implies giving the shares back to the company either by
way of settlement of a dispute or for any other reason. The Companies Act contains
no provision for surrender of shares. Thus, surrender of shares is valid only when
Articles of Association provide for the same and; (a) Where forfeiture of such
shares is justified; or (b) When shares are surrendered in exchange for new shares
of same nominal value.

Forfeiture of shares: if a shareholder fails the call on share, the company has
following option: (a) to sue him for amount due; and (b) forfeit the shares (i.e.,
take away the shares forcefully). A company may if expressly authorizes by its
articles, forfeit shares for non-payment of calls and the same will not require
confirmation of the Tribunal. Where power is given in the articles, it must be
exercised strictly in accordance with the regulations regarding notice, procedure
and manner stated therein, otherwise the forfeiture will be void. The power of
forfeiture must be exercised bona fide and in the interest of the company. When
the shares have been forfeited, the defaulting shareholder ceases to be member
of the company and he loses all rights or interests in his shares.

Surrender is effected with the assent of the shareholder, whereas forfeiture is a

proceeding in invitum (i.e., against a reluctant shareholder). But a surrender of
shares not fully paid can only be accepted where forfeiture would be justified.
94
4.4.2 Debentures The Companies Act, 2013

The debenture is the most common form of raising loan from the public by a
company. Under section 2(30), debenture includes debenture stock, bonds or
any other instrument of a company evidencing a debt, whether constituting a
charge on the assets of the company or not

When debentures are issued, the applicants are given certificates, under its
common seal, if any, or under the signatures of two directors or a director and
the company secretary, if he has been appointed, representing the money they
have lent to the company.
Main characteristics of debenture are as follows:
– A debenture is in the form of a certificate.
– A debenture certificate must be delivered within six months from the date of
allotment of debentures, unless the company is prohibited by any provision
of law or any order of Court, Tribunal or any other authority.
– The company pays periodic interest, on the amount raised by issuing
debentures till they are fully redeemed.
– Generally debentures carry a charge (fixed or floating) on the companies
assets. However, debentures may be issued without charge.
– Like shares, debenture too is a movable property which is transferable as
per the provisions contained in the Articles.
– Debentures, may be redeemed at the end of full term or in installments, say
yearly or bi-yearly or any other period like in two installments.
– Debenture holders have no right to vote at any meeting.

4.4.3 Deposits
Apart from shares and debentures, Public Deposits are yet another important
source of raising fund by a company. According to the Section 2(31) of the Act
read with Rule 2(1)(c) of Companies (Acceptance of Deposits) Rules, 2014,
‘deposit’ includes any receipt of money by way of deposit or loan or in any other
form by a company.
There are various receipts by the company that neither are nor include in deposits.
Following are few of them:
– Receipts from the Central Government or a State Government or a local
authority, or any amount received from any other source whose repayment
is guaranteed by central, state or local government or any amount received
from a statutory authority constituted under an Act of Parliament or a State
Legislature.
– Receipts from foreign Governments, foreign/international banks, multilateral
financial institutions etc.,
– Receipts as a loan from any banking company or from State Bank of India
or its subsidiaries or from a co-operative bank.
– any amount received as a loan or financial assistance from Public Financial
Institutions notified by the Central Government or any regional financial
institutions, Insurance Companies or Scheduled Banks 95
Business Forms and – any amount received by a company from any other company;
Legislations
– any amount received by way of subscription in respect of a chit under the
Chit Fund Act, 1982
– any amount brought in by the promoters of the company by way of unsecured
loan in pursuance of the stipulation of any lending financial institution or a
bank
– any amount received in the course of or for the purposes of the business of
the company
Activity 3
1) What is a preference share?
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
2) What is buyback ?
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
3) What is transfer and transmission of share?
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
4) In absence of provision in article regarding transferability of shares and
expressly exclusion of Table F, the transfer of shares will be governed
by ______
5) _______ is a movable property and hence _____in the manner provided
by the articles of the company

4.5 COMPANY MANAGEMENT

Since a company is an artificial person its affairs are to be managed by natural
persons. The management of corporation is a collective responsibility and those
who manage the corporation are known by various names such as Director,
Managing Directors, Secretaries, etc. The Board of Directors is a group of people
elected by a company’s shareholders to represent their interests. The Board acts
as a governing body for a company or corporation The Board of Directors in
carrying out the day-to- day affairs of the company has to perform the role within
the powers which are granted to them. Certain powers can be exercised by the
96
Board on their own and some with the consent of the company at the general The Companies Act, 2013
meeting. The shareholders as owners of the company ratify the actions of the
Board at the general meetings of the company. The meetings of the shareholders
serve as the focal point for the shareholders to converge and give their decisions
on the actions taken by the directors.

Board Constitution and its Powers:

The Board of Directors (BoD) is selected according to the procedure prescribed
in the Companies Act, 2013, and the Articles of Association of the Company. All
public companies are required to have a Board of Directors that includes members
from inside and outside the organization.

Section 2(10) of the Companies Act, 2013, defines that “Board of Directors” or
“Board”, as a collective body of the Directors of the company. Thus, the term
‘Board of Directors’ means a body duly constituted to direct, control and supervise
the affairs of the company.

The BoD is the trustee of the company. They are responsible to act in the best
interests of the Company and oversees that the management serves and protects
the long term interests of all the stakeholders of the Company. They do this by
meeting regularly to create policies for overall company oversight and
management. The minutes of Board meeting and general meeting; and the reports
of various committees are recorded and documented as the acts of the company.

Composition of Board
The BoD of every company shall consist of individuals only [Section 149]. Thus,
no body corporate, association or firm shall be appointed as a Director in a
company.

Section 149 of the Act, states that every company’s Board must have minimum 3
Directors in case of a public company, 2 Directors in the case of a private company,
and 1 Director in the case of a One Person Company. A Company can appoint
maximum 15 Directors but this can be increased after passing a special resolution
in its General Meeting. Section 8 companies can have more than 15 Directors
even without passing a special resolution.
Every company to have:
a) At least one resident Director who must have stayed in India for a total
period of not less than 182 days during the financial year.
b) One women director.
c) At least 1/3 of the total number of Directors as independent directors (fraction
is to be rounded off to one).
Regulation 17 of SEBI (LODR) Regulations, 2018, further elaborates the
composition of Board of Directors of the listed entity.

Power of Board [Section 179]

Section 179 deals with the powers of the Board. The Board cannot act on things
for which powers are specifically vested with the members and are to be exercised
during the general meeting. The powers of the BoD are exercised only by means
of resolutions passed at meetings of the Board, namely :-
97
Business Forms and a) to make calls on shares for unpaid money; to authorise buy-back of securities;
Legislations
to issue securities, including debentures, in or outside India
b) to borrow monies;
c) to invest the funds of the company;
d) to grant loans or give guarantee or provide security in respect of loans;
e) to approve financial statement and the Board’s report;
f) to diversify the business of the company
g) to approve amalgamation, merger or reconstruction; or takeover of a company
or acquire a controlling or substantial stake in another company
h) to make political contributions or to Charitable trust (with prior permission
at General Meeting if the aggregate amount, in any financial year, exceeds
five percent of its average net profits for the three immediately preceding
financial years
i)) to appoint or remove key managerial personnel (KMP);
j) to appoint internal auditors and secretarial auditor
k) to invite or accept or renew public deposits and related matters.

Restriction on Powers of Board [Section 180]

The following powers (with exemption to Private Companies) can be exercised
by board only with the consent of the company by passing a special resolution,
namely –
a) to sell, lease or dispose of the whole or substantially the whole of the
undertaking of the company
b) to invest the amount of compensation received as a result of any merger or
amalgamation; otherwise than in trust securities;
c) to borrow money that exceed aggregate of its paid-up share capital, free
reserves and securities premium ,
d) to remit, or give time for the repayment of, any debt due from a Director
Directors:
The persons who are in charge of the management of the affairs of a company
are termed as Directors. They are collectively known as Board of Directors or
the Board.

There is no exhaustive definition of the term “Director” in the Act. Section 2(34)
of the Act prescribed that “Director” means a Director appointed to the Board of
a company. Only a natural person can be a Director.

Directors are both, agents and trustees in relation to a company. As agents of the
Company they bind the company in various transactions that they enter on behalf
of the company and as Trustees of the Company, the Directors are in a fiduciary
relation, the Directors have to take care of properties, money, trade secrets,
belongings, etc., of the company.

The maximum number of directorships, including any alternate directorship, a

98 person can hold, is 20. However, the number of directorships in public companies/
private companies that are either holding or subsidiary company of a public The Companies Act, 2013
company shall be limited to 10.[ Section165].
A person shall not be eligible for appointment as a Director of a company, if –
a) He is of unsound mind
b) Undercharged insolvent;
c) Pending application to be adjudicated as insolvent
d) Convicted for moral turpitude, foreign exchange regulation, bears
imprisonment for not less than six months and five years are yet to elapse
from the date of expiry of the sentence. If a person is convicted of any offence
and sentenced in respect thereof to imprisonment of seven years or more, he
shall not be eligible to be appointed as a director in any company.
e) A court or Tribunal has passed an order disqualifying him for appointment
as a director and the order is in force;
f) Shares held by him are in arrears for more than six months.
g) Accepts directorships exceeding the maximum number of directorships
h) If the court refrains for committing fraud, such as when the director of a
public company, not filed financial statements or annual returns for any
continuous period of three financial years, failed to repay the deposits or
pay interest thereon or to redeem any debentures on the due date or pay
interest due thereon or pay any dividend declared and such failure to pay or
redeem continues for one year or more, and the five years have not elapsed.
Directors and their appointment
A Director to the Board may be appointed as:
Appointment of First Director Section 152(1): article of the company may
provide for appointment of the first director. If no provision is made in the articles;
the subscribers to the memorandum who are individuals shall be deemed to be
the first directors of the company until the directors are duly appointed and in
case of a One Person Company an individual being member shall be deemed to
be its first director until the director or directors are duly appointed by the member
in accordance with the provisions of this section.

Appointment of Subsequent Directors Section 152(2): Save as otherwise

expressly provided in this Act, Every Subsequent Directors shall be appointed
by the company in general meeting.

No person shall be appointed as a director of a company unless he has been

allotted the Director Identification Number under section 154.

A person appointed as a Director shall not act as a Director unless he gives his
consent to hold the office as Director and such consent has been filed with the
Registrar within thirty days of his appointment in such manner as may be
prescribed.

Women Director: Following class of companies should appoint at least one

woman director

99
Business Forms and a) Every listed company
Legislations
b) And every other public company with paid up capital of Rs.100 crores or
more or with turnover of Rs. 300 crores or more must have at least one
Women Director
Every existing company was required to appoint a woman Director within one
year from the commencement of the Act and every newly incorporated company
shall appoint a women director within six months.

Independent Director: An independent director means a director other than a

Managing Director or a whole-time Director or a nominee Director who does
not have any material or pecuniary relationship with the company/ directors.

Following companies to have specified number of independent directors.

All the listed public company would have at least 1/3 of the total number of
Directors as Independent Directors (fraction is to be rounded off to one).

Other public companies, with paid up capital of Rs.10 crore or more, or with
turnover of Rs.100 crore or more, or with outstanding loans, debentures and
deposits of Rs.50 crore or more to have at least 2 Independent Directors.

An independent director can be appointed for a term of up to five consecutive

years on the Board. However, in case of his reappointment for further five year
then special resolution is to be passed in general meeting and disclosure of such
appointment is made in the Board’s report.

Alternate Director: Whether in public or private company, the Board can appoint
Alternate Director, provided it is authorized by its articles or by a resolution
passed by the company in general meeting. The person to be appointed as alternate
director should not be director in the same company or acting as a an alternate
director for any other Director in the company

Alternate Director can be appointed only if a director is absent for a period of not
less than 3 months from India.

In case an alternate director is to be appointed as an Independent Director, it

must be ensured that the proposed appointee also satisfies the criteria of
Independence.

An alternate Director cannot hold the office longer than the term of the Director
in whose place he has been appointed. Further, he will have to vacate the office,
if and when the original Director returns to India.

Additional Director: The Articles of a company may confer on its Board of

Directors the power to appoint any person, other than a person who fails to get
appointed as a director in a general meeting, as an additional director at any
time. s/he shall hold office up to the date of the next annual general meeting or
the last date on which the annual general meeting should have been held,
whichever is earlier.

Small Shareholder Director: Every listed company on its own or upon a notice
from a) not less than one thousand small shareholders; or (b) one-tenth of the
total number of such shareholder may have one director elected by such small
100
shareholders, whichever is lower; have a small shareholders’ director elected by The Companies Act, 2013
the small shareholder and appointed.

“Small shareholder” means a shareholder holding shares of nominal value of not

more than twenty thousand rupees or such other sum as may be prescribed

Nominee Director: Subject to the articles of a company, the Board may appoint
any person as a director nominated by any institution in pursuance of the
provisions of any law for the time being in force or of any agreement or by the
Central Government or the State Government by virtue of its shareholding in a
Government company

Appointment of Directors by Tribunal: While giving order on an application

made for relief in cases of oppression, the Tribunal may order for appointment of
such numbers of persons as Directors of the company and ask them to report to
the Tribunal on matters as the Tribunal may direct. The directors, so appointed,
may or may not be the members of the company. While counting 2/3 or any other
proportion of the total number of directors of the company, these directors will
not be take into account nor they shall be liable to determination by retirement of
directors by rotation. But they can be removed by the Tribunal at any time and
other persons can be appointed by it in their place. Where the directors have
been appointed by the Tribunal, it may also issue such directions to the company,
as it may consider necessary or appropriate in regard to their affairs.
Vacation of Office by Directors:
The office of a director shall become vacant in case –
a) he incurs any of the disqualifications
b) he absents himself from all the meetings of the Board of Directors held
during a period of twelve months (date to date ) with or without seeking
leave of absence of the Board;
c) he acts in contravention of the provisions, relating to entering into contracts
or arrangements in which he is directly or indirectly interested;
d) he becomes disqualified by an order of a court or the Tribunal;
e) He is convicted by court of any offence, whether moral turpitude or otherwise
and sentenced to imprisonment for not less than six months
f) Retirement
g) Resignation

Resignation of Director: A director may resign from its office by giving a notice
with the reasons of resignation in writing to the company. The company shall
within 30 days from the date of receipt of notice of resignation from a director,
intimate the registrar and lay the facts of such resignation in the Report of Directors
laid in immediately following general meeting by the company. The resignation
is effective from the date on which the notice is received by the company or the
date specified by the Director in the notice whichever is later.

Retirement of directors: In case of public company, unless it is provided by the

articles , 2/3rd directors are liable to retire by rotation and 1/3rd are liable to
retire at every general meeting after the meeting at which first directors are
101
Business Forms and appointed. 1/3rd directors which are liable to retire at AGM will be decided by
Legislations
First in First Out (FIFO) method.

The retiring Directors can be re-appointed by shareholders by casting votes in

favour in excess of votes casted against the resolution.

Further, Independent Directors and Nominee Directors are excluded from the
calculation of 2/3rd. A small shareholder director will always be a non rotational
direction. He will be counted in 2/3rd but cannot be retired by rotation.

Removal of director: A company may, by ordinary resolution remove Director

before the expiry of the period of his office irrespective of the fact how he was
appointed or any provision to that affect in Article or any agreement.

By shareholder: shareholders may remove director, not being a director appointed

by the Tribunal before expiry of his term. An application to this effect must be
made by the shareholders along with the reasons for their action. And the Director
must be allowed to make representation.

By the National Company Law Tribunal: Where an application has been made to
the National Company Law Tribunal for prevention of oppression or
mismanagement and the Tribunal has conducted its proceedings on the
application, it has the power, to remove any Director.

Activity 4
1) Minimum ____ number of directors in public company and minimum
____ in private company
2) A Company can appoint maximum ____ Directors.
3) Listed public company must have _____of the total number of directors
as independent directors.
4) The maximum number of directorship that a person can hold _____
5) What is the provision for appointment of women director?
.................................................................................................................
.................................................................................................................
.................................................................................................................
6) Who is an additional director?
.................................................................................................................
.................................................................................................................
.................................................................................................................

4.6 MEETINGS
A company, since is not a natural person, is not endowed with the wherewithal of
decision- making. The Board of Directors, according to prescribed system, come
together to take decision on behalf of the company. This coming together as a
decision-making body is called a ‘meeting’.
102
Kind of Meetings The Companies Act, 2013

Company meetings can be classified as follows:

1) Shareholders meeting
a) Annual General Meeting
b) Extraordinary General Meeting
c) Class Meeting
2) Board meetings
3) Creditors and Debenture holders meeting
Shareholders meetings:
a) Annual General Meeting: The meeting to be held annually for seeking
approval to certain ‘ordinary business’ is called Annual General Meeting
(AGM). If the Board fails to convene its Annual General Meeting in any
year, any Member of the company may approach the prescribed authority,
which may then direct the calling of the Annual General Meeting of the
company.
b) Extraordinary General Meeting: All general meetings other than annual
general meeting are called extra-ordinary general meetings (EGM). These
are held to transact any business other than ordinary business.
EGM can be called by Board of Directors, or by the Board on requisition of
shareholders, or by requisitionists themselves if Board does not proceed to
call the same or by Tribunal.
c) Class Meeting: It is a meeting of shareholders, holding a particular class of
share. The resolution passed at this meeting bind only the members of the
class concerned. Only members of the class concerned may attend and vote
at meeting. These class meetings are convened whenever it is necessary to
alter or change the rights or privileges of that class as provided by the articles.

Board Meetings:
“Meeting of Board” means a duly convened, held and conducted meeting of the
Board or any Committee thereof. To be an effective Board meeting it requires to:
– have a purpose;
– members of the Board must be provided with adequate notice and appropriate
materials in advance;
– be chaired effectively;
– follow proper meeting procedures and respect the time of Board Members;
– have clear supporting documents such as an agenda, minutes and other
reports;
– have action taken reports;
– be documented with minutes.
First board meeting should be held within thirty days of the date of incorporation.
Thereafter there shall be minimum four board meetings every year and not more
than 120 days shall intervene between two consecutive Board meetings.
103
Business Forms and In case of one person company (OPC), small company, dormant company and
Legislations
private company which is startup, at least one Board meeting should be conducted
in each half of the calendar year and the gap between two meetings should not be
less than ninety days.

One third of total strength or two directors, whichever is higher, shall be the
quorum for a Board meeting. The board cannot transact business without quorum,
the meeting stands adjourned, unless the articles otherwise provide to be held to
the same day at the same time and place in the next week or if that day is a
National Holiday, till the next succeeding day, which is not a national holiday, at
the same time and place.

The Chairman of the Company shall be the Chairman of the Board. If the company
does not have a Chairman, the Directors may elect one of themselves to be the
Chairman of the Board.

The Chairman of the Board shall conduct the Meetings of the Board. If no such
Chairman is elected or if the Chairman is unable to attend the Meeting, the
Directors present at the Meeting shall elect one of themselves to chair and conduct
the Meeting, unless otherwise provided in the Articles.

Every company shall prepare, sign and keep minutes of proceedings of meeting
of Board of Directors or of every committee of the Board within thirty days of
the conclusion of the meeting. The minutes shall contain: (a) Name of the directors
present at the meeting; and (b) In the case of each resolution passed at the meeting,
the names of dissenting Director or a Director who has not concurred the
resolution.

4.7 WINDING UP OF COMPANIES

Winding up of a company is a process by which the life of a company is brought
to an end and its property administered for the benefit of its members and creditors.

As per Section 2(94A) of the Companies Act, 2013, the term “winding up” means
winding up under this Act or liquidation under the Insolvency and Bankruptcy
Code, 2016, as applicable. The procedures for Winding up of companies are
provided under Chapter XX of the Companies Act, 2013, and the Insolvency
and Bankruptcy Code of India, 2016.
There are two Modes of Winding Up:
1) Winding Up By the Tribunal
2) Voluntary Winding Up
1) Winding Up by the Tribunal:
A company may, on a petition under section 272, be wound up by the Tribunal—

1) if the company has, by special resolution, resolved that the company be

wound up by the Tribunal;

2) if the company has acted against the interests of the sovereignty and integrity
of India, the security of the State, friendly relations with foreign States,
public order, decency or morality;
104
3) if on an application made by the Registrar or any other person authorised by The Companies Act, 2013
the Central Government by notification under this Act, the Tribunal is of the
opinion that the affairs of the company have been conducted in a fraudulent
manner or the company was formed for fraudulent and unlawful purpose or
the persons concerned in the formation or management of its affairs have
been guilty of fraud, misfeasance or misconduct in connection therewith
and that it is proper that the company be wound up;

4) if the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive
financial years; or

5) if the Tribunal is of the opinion that it is just and equitable that the company
should be wound up.
Petition for Winding Up to Tribunal can be made by
– The Company
– Any Contributory or Contributories
– All or any of the persons specified above
– The Registrar
– Any person authorized by Central Government in that behalf
– In case affairs of the company conducted against the nation interest, by the
Central / State Government.
The Tribunal on receipt of a petition, for winding may within 90 days pass any
of the following orders with :—
a) dismiss it, with or without costs;
b) make any interim order as it thinks fit;
c) appoint a provisional liquidator of the company till the making of a winding
up order;
d) make an order for the winding up of the company with or without costs; or
e) any other order as it thinks fit:
2) Voluntary Winding Up:
Chapter V of the Insolvency and Bankruptcy Code of India, 2016, deals with the
Voluntary Liquidation of Corporate Persons. Voluntary liquidation proceedings
can be initiated by a corporate person if it has not committed any default.
a) a declaration from majority of the Directors of the company verified by an
affidavit is required stating that—
they have made a full inquiry into the affairs of the company and
they have formed an opinion that either the company has no debt or
that it will be able to pay its debts in full from the proceeds of assets
to be sold in the voluntary liquidation; and
the company is not being liquidated to defraud any person
b) Within four weeks of a declaration at (a) above, there shall be in a general
meeting—
105
Business Forms and i) a special resolution of the members, to liquidated the company
Legislations
voluntarily and appointing an insolvency professional to act as the
liquidator; or

ii) a resolution of the members, to be liquidated voluntarily as a result of

expiry of the period of its duration, if any, fixed by its articles or on the
occurrence of any event in respect of which the articles provide that
the company shall be dissolved, as the case may be and appointing an
insolvency professional to act as the liquidator.

c) Provided that the company owes any debt to any person, creditors
representing two thirds in value of the debt of the company shall approve
the resolution passed within seven days of such resolution.

d) The company shall notify the Registrar of Companies and the Board about
the resolution to liquidate the company within seven days of such resolution
or the subsequent approval by the creditors, as the case may be.

e) Subject to approval of the creditors, the voluntary liquidation proceedings

in respect of a company shall be deemed to have commenced from the date
of passing of the resolution

Activity 5
1) What should be the frequency of Board meeting?
......................................................................................................................
......................................................................................................................
2) Name the meetings classified as shareholders meetings.
......................................................................................................................
......................................................................................................................
3) What is ‘winding-up’ of a company?
......................................................................................................................
......................................................................................................................
4) Name the different mode of winding-up.
......................................................................................................................
......................................................................................................................

4.8 SUMMARY
The expansion in business needed an unlimited extent of capital. But the unlimited
liability of the partners of the traditional partnerships under the Partnership Act,
1930 became a hurdle to meet the capital requirement. The corporate form of
business helped to solve this problem through introduction of concept of limited
liability. From formation to its winding up a company is governed by Companies
Act.

The Companies Act, 2013, has broadly classified the companies into various
106 classes. There are three fundamental documents of a company. They are:
a) Memorandum of Association is the charter of a company which lays down The Companies Act, 2013
the objects of the company and also all the specific functions, operations
and limitations.
b) Articles of Association is the document that constitutes all the rules and
regulations for the conduct of the internal management of the company.
c) Prospectus
A public company raises the necessary funds by issuing Shares, Debentures,
and by accepting Public Deposits.
Since a company is an artificial person its affairs are to be managed by natural
persons. The management of corporation is a collective responsibility and those
who manage the corporation are known by various names such as Director,
Managing Directors, Secretaries, etc. The Board of Directors is a group of people
elected by the shareholders of the company to represent their interests. The Board
acts as a governing body for a company or corporation.
Since a company is not a natural person, the Board of Directors, according to
prescribed system, come together to take decision on behalf of the company.
This coming together as a decision-making body is called a ‘meeting’. There are
different kind of meetings held in the company by the Shareholders, Board, or
by Creditors and Debenture holders.
Winding up of a company is a process by which the life of a company is brought
to an end and its property administered for the benefit of its members and creditors.

4.9 SELF ASSESSMENT QUESTIONS

1) Explain the salient features of a company.
2) What is a one person company? State its salient features?
3) Write note on small company and Associate Company.
4) Explain section 8 companies.
5) Elaborate different stages in formation of a company.
6) What is the effect of registration of a company?
7) When and how a company can buyback its shares?
8) What are the disqualifications of a director?
9) In what circumstances the office of the director is vacant?
10) What are the provisions for holding a Board meeting?
11) Mention directives for Board Meeting
12) Explain the modes of winding-up of a company.

4.10 FURTHER READINGS

1) Avatar Singh, 2018, Company law, Eastern Book company
2) Taxmann’s Companies Act with Rules, Taxmann, (2022)
3) Companies Act ,2013, Commercial Law Publishers, (2021)

107
 BLOCK-3
BUSINESS CONTRACTS
Unit 5 General Principles of Contracts
Unit 6 International Contracts of Sale
Business Contracts

110
 General Principles of
UNIT 5 GENERAL PRINCIPLES OF Contracts

CONTRACTS

Objectives

After studying this Unit, you should be able to:

Identify different Sources of Mercantile Law
Understand the process of Formation of Contracts
Explain the completion of Contracts and Jurisdiction
Appreciate essentials of Valid Contract and Performance of the Contracts
Describe the consequences of Breach of Contract
Structure
5.1 Introduction
5.2 Sources of Mercantile Law
5.3 Formation of Contracts
5.4 Completion of Contracts and Jurisdiction
5.5 Essentials of Valid Contract
5.6 Performance of the Contracts
5.7 Doctrine of Frustration or Agreement to do an Impossible Act
5.8 Appropriation of Payments
5.9 Consequences of Breach of Contract
5.10 Summary
5.11 Self Assessment Questions
5.12 Further Readings/References

5.1 INTRODUCTION
Every human being owes certain obligations to his family members and society.
These obligations fall under the Law of obligations that covers rights and duties
arising between the individuals which are collateral in nature. The concept of
obligations existed since the ancient period where the word of mouth was
considered to create a bond. In other words, people will never leave from their
words i.e., promises. The concept of primary obligations is one of humanity’s
greatest moral inventions. Wherever the promises are breached they will be
brought before the panch system for resolving the dispute between the parties.

The law that is applicable to mercantile transactions is called the mercantile law
which includes General Contracts, Special Contracts and the law of Insolvency
and Bankruptcy. This law relates to the rights and obligations arising out of
mercantile transactions between traders or merchants. The movable property
connected with mercantile is of two types namely Choose in possession and
Choose in action. If person ‘A’ had a ring on his hand which is stolen by a thief,
‘A’ is a person having choose in possession. In other words, it means an Individual
who had legal possession of any property of movable nature and physically visible.
111
Business Contracts Person ‘A’ can resist the thief from snatching and recover it in a court of law.
Recovering the amount due on a promissory note is considered as choose in
action. This right of the payee or holder is not visible as compared to the ring.
Further, it must also be noted that the law of Contracts is applicable even to non-
mercantile transactions.

5.2 SOURCES OF MERCANTILE LAW

The main sources of Mercantile Law in England are: The Law of Merchant or
Lex Mercatoria; Acts of Parliament or Statutes; Common Law of England and
Principles of Equity. Lex Mercatoria is the set of customs and usages which are
recognised and enforced between merchants and part of the Common Law of
England. The second one is the sanction of the State and most superior and
powerful source and it overrides any rule of Common Law of Equity. The phrase
common law is used to denote the law that can be based on judicial
pronouncements delivered from generations. King Henry II in 12th Century
established the Common Law Courts or King’s Courts which were also known
as Chancery or Equity Courts. Equity courts were not bound to grant relief in
every case, as it was always a matter in discretion and governed by certain maxims.
There are two maxims which the courts of Equity act: “he who seeks equity
must do equity” and “he who comes to Equity must come with clean hands.”

Prior to the Indian Contract Act, 1872, the English Common Law with some
modifications suited to Indian conditions for some time in the British India Courts.
After the Establishment of courts at Madras, Bombay and Calcutta the Hindu
Law and Mohmeddan law and the law of defendants are to be considered for the
application of law.

The introduction of judicial system during the British India paved the way to
introduce a legislation to recognize and legalize the concept of obligations and
the practices among the people by the Contract Act, 1872. The principles of Law
of contract are divided into four categories namely the formation of the contracts,
content of contracts, excuses for non-performance, and enforcement of
contracts.1

5.3 FORMATION OF CONTRACTS

A contract is an agreement enforceable in a court of law. An agreement is a set
of reciprocal promises between the parties to the contract. These set of promises
arises from an offer and acceptance from the parties to the contract.

The contract may be express or implied i.e., it may be oral words or in writing
and even inferred from the conduct of the parties.2 It may be bilateral or unilateral
contract. The former one refers to the involvement of two parties and the latter
refers one party alone can perform without the other.

Agreements: Two or more persons agree mutually to undertake to do or not do

certain things through an agreement, for example, to deliver goods and to pay
for them. This is not through a process of offer and acceptance.

Offer: The offer is a proposal by the offeror to undertake to do or abstains from

doing something provided the offeree will also undertake to do or abstains from
112 doing something.3 The offer contains two things namely ‘an expression of a
willingness to be bound’ and ‘a statement of what each party to the proposed General Principles of
Contracts
agreement must do or not to do.’ The person making the proposal is said to be
called as ‘Promisor’, ‘Offeror,’ or‘Proposer.’4 The offer is of two types namely
specific offer and General offer. An offer to a specific person is specific offer
and the offer to public at large is general offer. ‘A’’s offer to sell his watch to ‘B’
is specific and ‘X’ offer to pay Rs.1,000/- to one who finds his lost dog is the
example of general offer.

Acceptance: The person to whom the proposal is made signifies his assent thereto,
the offer/proposal has been accepted and which raises a promise.5 The person to
whom the proposal is made or the person from whom the promisor seeks the
assent is said to be called as ‘Promisee’or ‘Acceptor.’6

Example: When ‘A’ signifies his willingness to sell his motor cycle for Rs.55,000/- to
B, and B express his willingness to purchase for the said price, A is the proposer/
promisor or offeror and B is the promisee/acceptor.
The proposal/offer/promise must possess the following characteristics:
1) It must be intended and capable of creating legal relationship between
the parties to give rise to legal consequences: The set of promises rise
between the parties must create legal relations. In the above example, if A
does not deliver the vehicle after receiving the price or if B does not pay the
price, the other party having right for breach of promise/obligation undertaken
by the party in the offer/acceptance as the case may be. The set of promises
between parties which are not capable of giving rise to legal relationship or
those which are not enforceable in a court of law are called as social
obligations/agreement. If a person makes a promise to his friend to take him
to dinner at a restaurant and the other agrees and if the promisor failed to
perform his obligation, the promise could not be enforceable in a court of
law as it was a social obligation. In other words, the social obligations through
set of promises are incapable of giving rise to create legal relations between
the parties.7

2) The terms of it must be certain or capable of being certain: The terms of

the offer must be certain i.e., without ambiguity or vagueness. In other words,
the person to whom it was made must be in a position to understand and
respond with his assent.

3) It must be different from the following:

a) Quotation, catalogue, Auction, Tenders etc.: These are regarded as
invitation to make an offer for a particular thing specified therein by
the person who gave the quotation /catalogue. Calling for tenders and
auctioning of goods also come under invitation to make offer.
b) Window displays at show rooms: This is also considered as an
invitation to make an offer by the showroom owner from the public.
c) Railway timetables: Issuing of ticket by the Railway authorities against
payment to a commuter is amounting to an offer but the time tables of
the railways not regarded as an offer.

4) It must be offered to an individual or to the public at large: The offer is

of two types namely specific offer and General offer. An offer to a specific
113
Business Contracts person is specific offer and the offer to public at large is general offer. A’s
offer to sell his watch to B is specific and X offer to pay Rs.1,000/- to anyone
who finds his lost dog is the example of general offer.

5) It must be communicated to the offeree: The offeror is having obligation

to communicate to the respective offeree within reasonable time and manner.

In order to convert a proposal into a promise, the acceptance must be absolute

and unqualified.8 It must be expressed in some usual and reasonable manner. If
the acceptance is conditional the promisor can withdraw the proposal before the
acceptance becomes absolute. Performance of the conditions of the offer or
acceptance of any consideration for reciprocal promise which may be offered
with a proposal is an acceptance of proposal.9

Essentials of valid acceptance:

1) The acceptance is not valid if it was communicated in the manner otherwise
than mentioned in the offer. English law invalidates such acceptance. But
Indian law10 says that after receiving the acceptance in different manner, the
receiver must inform the acceptor that your acceptance is not accepted unless
and until it is communicated in the specified manner, failing which the
proposer accepts the acceptance.
2) The offeror may waive the communication of an acceptance.11
3) Acceptance must be made before the offer lapses or revoked by the proposer.
4) It should be absolute in terms with the offer. Variation or addition of terms
to the original offer is not valid acceptance. A statement of fact to an offer
does not amount to acceptance.12

Lapse or revocation or rejection of offer: The proposal of the offeror lapses on

the death of the proposer and before the offeree accepts. There will be no contract
in English law even the acceptance was made in ignorance of the death of the
offeror. But under Indian law, there will be a valid contract except where the
acceptance is made with knowledge of the death of the offeror.13This rule will be
applicable in case of insanity of the offeror also.

If the offeree does not respond to the offer in the manner prescribed or within
reasonable time there will be no contract. The term ‘reasonable time’ is used in
wider sense which varies from the circumstances of each case.

The offeror is at liberty to revoke the offer by communication at any time before
the offeree makes the acceptance of it. Even if the offer is valid for a fixed term
or period; the offeror can communicate the revocation of the offer before the
offeree accepts.

The offeree can communicate his rejection to the offeror or he may make counter
offer or he may accept with certain conditions.

5.4 COMPLETION OF CONTRACTS AND

JURISDICTION
Generally, the contract completes when the acceptance of the offeree is posted
or put in to transmission. It was made at the place where the acceptance is received
114
by the offeror. It was easy to determine the completion of contract when the General Principles of
Contracts
parties negotiate in person. But it will be difficult to determine in case of
negotiation by post, telegram, telephone and mail, etc. The contract in case of
instantaneous contracts completes only when the communication of the
acceptance is received by the offeror. In other words, the contract is said to be
made at the place where the acceptance received but not at the place where it is
transmitted.14

The United Nations Commission on International Trade Law (UNCITRAL)

adopted the Model Law on Electronic Commerce in 1996. As a result the
Information Technology Act, 2000, governs the rules relating to the e-commerce
contracts. The offeror and acceptor are substituted by expression soriginato15
and addressee. The electronic record sent by the originator may be received
intact or it may vary. The addressee has to acknowledge the receipt of electronic
record by communication automated or any mode or by conduct.16 The contract
completes where the principal place of business of the originator, in case of
more than one place of business of originator or addressee the principal place of
business of the originator or addressee and in case of no place of business his
usual place of residence will be considered as the completion of the contract for
the purpose of jurisdiction.17

5.5 ESSENTIALS OF VALID CONTRACT

Consideration, capacity to contract, free consent, and legality of consideration
and object are some of the essentials of a valid contract. These are explained in
detail below:

1) Consideration:
Consideration is one of the essential conditions for the validity of contract.18 The
essential condition for the enforceability of simple contacts is consideration,
and the rule is expressed by the Latin maxim: ex-nudopacto non orituractio
which means out of nude pact no cause of action arises. It can be understood in
the sense quid pro quo.

“ A valuable consideration in the sense of the law may consist either some right,
interest, profit or benefit accruing to one party, or some forbearance, detriment,
loss or responsibility, given suffered undertaken by the other.”19

“An act or forbearance of one party or the promise thereof, is the price for which
the promise of the other is brought and the promise thus given for value is
enforceable.”20

“When at the desire of the promisor, the promisee or any other person has done
or abstained from doing, or does or abstains from doing, or promise to do or
abstain from doing something, such act or abstinence or promise is called a
consideration for the promise.”21

The analysis of the above definitions says that the consideration may be executed
or executory. In a contract to deliver a watch by A to B for Rs.100, A and B
gained money and watch and in another stand point A and B lost watch and
Rs.100, respectively. The law insists more upon the presence of the element of
detriment to the promisee B and then the presence of benefit to the promisor A.
115
Business Contracts A promise from one party to the other and a promise from the other to the former
support the consideration. In other words, the reciprocity of promises between
the parties establishes the consideration.

The absence of consideration makes the contract void.22 This principle has certain
exceptions recognized under the provisions of law. They are:
i) Where the contract reduced in to writing and registered and made out of
natural love and affection between the parties standing in near relationship
to each other.
ii) Where the contract is to compensate the person who voluntarily rendered
services in past. In other words, past services rendered at the desire of the
promisor constitute a valid consideration in India.23 But under English law
past consideration is not valid.
iii) Where a promise is made to pay a time-barred debt does not require a fresh
consideration.
iv) Where a gift between the donor and donee is not affected for want of
consideration if it is registered and attested by two witnesses.

Though consideration is necessary it need not be adequate. The adequacy and

sufficiency of consideration is immaterial. It is said that pepper corn is sufficient
for purchase of an elephant.

The consideration is to move from whom is the question to be determined for the
enforceability of the contract. It must proceed or move from the promisee. Under
English law a stranger to a consideration cannot sue. In other words, the promisee
cannot sue the promisor if the consideration doesn’t move from him. But under
Indian law, a stranger to consideration can sue.

The rule stranger to contract cannot sue is the same both under English law as
well as under Indian law. This principle was explained by the doctrine of Privity
of Contract.24 Under English law there are certain principles which are
fundamental. A person who is a party to the contract can sue on it. This principle
has certain exceptions recognized by the provisions of law, as stated hereunder:
a) Where a trust is created for the benefit of a party, the beneficiary can enforce
it though he is a stranger to contract.25
b) Where there is an acknowledgement of liability or estoppel. For example,
‘A’ receives money from ‘B’ to pay it to ‘C’, ‘A’ admits to ‘C’ the receipt of
this amount and liable to pay it to ‘C’.
Apart from the above the Indian law recognizes two more exceptions:
c) A benamidar in whose name a property was registered is entitled to enforce
though he is not a party to the contract.
d) In family arrangements such as maintenance or expenses for marriages of
female members, the beneficiaries can sue though they are not party to the
contract.

Consideration and Discharge of Contract:

The doctrine of consideration is not extended to the discharge of contract. The
116 reciprocal promises between the parties constitute consideration. Subsequently,
if both the parties agree not to enforce the contract also constitute consideration General Principles of
Contracts
in India. But it is not so in English law. Till 1947 the law of England applied the
doctrine of consideration not only to the formation of a contract, but also to its
discharge. It was pointed out that a creditor ‘might accept anything in satisfaction
of his debt except a less amount of money’26 A canary or pepper corn may be
accepted in full discharge of a debt, but a part payment of the debt cannot be
accepted so as to operate as full discharge of the debt. The following are the
exceptions to the rule in Pinnel’s case.27
a) Under the scheme of composition if the debtor agrees to pay a portion of the
debt discharges liability without application of the doctrine of consideration
under English law.
b) In case a third party pays a part of the amount less than the amount due from
the debtor discharges the debtor without application of the doctrine of
consideration under English law.
c) The doctrine of estoppel or quasi-estoppel neutralized the rule in Pinnel’s
case.28

Under Indian law, a contract may be discharged by what is called “an accord
and satisfaction” i.e., mutually agreed settlement.29 The English law allows the
delivery of horse against the payment of debt but not accept the delivery in future
to discharge the debt. The part payment of debt is also not accepted as accord
and satisfaction.

2) Capacity to Contract:
There are certain persons in law who are incapable wholly or in part, of binding
themselves by a promise or of enforcing a promise made to them. In mercantile
contracts lexloci contractus i.e., the law of the place will prevail whereas in case
of land lexsitus i.e., the law of the place where the land situate will be applicable.
The incapacity of a party to enter into a contract will arise in two ways namely,
on account of status, or on account of mental deficiency. The former would occur
on the grounds of political consideration and expediency, the latter is imposed to
protect the interest of the disabled person.

The incapacity of a party is broadly divided into two;

one which arises out of status of an individual for the following reasons:
a) Political or Civil status e.g., where the contracting party is a ruler of a foreign
state, Ambassador or envoy or alien enemy, or a convict or a bankrupt.
b) Profession of the contracting person e.g., barrister
c) Incorporation
d) Marriage
The other which arises from mental deficiency (soundness of mind) of the person
contracting in case of:
a) Minors
b) Insane persons
c) Idiots
d) Drunken persons 117
Business Contracts The person below the age of 21 is called as an infant as per the Infant Relief Act,
1874 under the Common Law and the person below the age of 18 is a minor as
per the Family Reforms Act, 1969, under English law and Indian law respectively.
He is a person who is not a major. The Infant Relief Act, 1874 which modified
the Common Law of England allows an infant to enter into a contract for the
following:
a) For necessaries
b) Beneficial contracts of service
c) Contracts involving recurring rights and duties e.g., an interest in property
binding on him unless he rescind them either during infancy or within
reasonable time of becoming a major
d) An isolated act or a contract to pay for goods supplied other than necessaries,
were voidable and not binding on him unless he ratified them within
reasonable time after attaining majority.

The law relating to infants/minor contracts is at present provided in Minor’s

Contract Act, 1987, under English law.

The Indian contract Act, 1872, provides that the contracting party must be a
major.30 A person becomes major on attaining the age of 18 years.31 The provision
of the Contact Act does not specify whether a minor’s contract is void or voidable.
The analogy of English law made such contracts as voidable and becomes valid
by ratification on attaining majority. The Privy Council in Mohori Bibi v.
Dharmadas Ghose32 pointed out this erroneous view and held that a minor’s
contract is void abintio. There will be no question of avoiding it or ratifying it.
Similar to English law the person supplying necessaries to minor is protected
under Indian law.33 The binding nature of a guardian contract on the minor is
depending on the legal power of the guardian to enter into a contract or not.
There will be no estoppel against a minor as both the parties are aware of the
truth. The power to order restitution in India is wider than England. It was clear
under Indian law that any benefit, even cash received, may be directed to be
restored. But it must be shown that the minor or his estate derived some benefit
therefrom.34

Mutuality of mind: The parties to the contract must have consensus-ad-idem35

which means mutuality of mind as to the subject matter of the contract. The lack
of mutuality of mind makes the contract void. ‘A’ had two houses namely ‘X’
and ‘Y’. ‘A’ enters into contract with ‘B’ to sell keeping ‘X’ house in his mind
and ‘B’ entered into contract with ‘A’ by keeping ‘Y’ house in his mind. This
results the contract void due to lack of consensus-ad-idem on the subject matter
of the contract.

3) Free Consent:
“The consent of the party to the contract is said to be free36 if it is not caused by;
coercion, undue influence, fraud, misrepresentation and mistake. These are
explained hereunder:

i) Coercion:37 “The committing, or threatening to commit, any act forbidden

by the Indian Penal code, or the unlawful detaining, or threatening to detain,
any property to the prejudice, of any person whatever, with the intention of
118
 causing any person to enter in to an agreement.” The term duress in English General Principles of
Contracts
law defined as causing, threatening to cause, bodily violence or imprisonment,
with a view to obtain the consent of the other party to the contract. Coercion
in Indian law has a much wider connotation than duress in English law. The
main distinction between coercion and duress as the first denotes the offense
forbidden by Indian Penal Code whereas the latter confined only to bodily
violence and imprisonment. The presence of coercion or duressin both Indian
and English law was an invalidating element for the enforceability of contract.

ii) Undue Influence:38 This was also called as constructive fraud. It covers all
the contracts where one party will be in a position to dominate the will of
the other because of relationship while entering the contract. This influence
can be presumed in existence among the following relationships:
a. Parent and child b. Guardian and ward
c. Trustee and beneficiary d. Spiritual master and Disciple
e. Lawyer and client f. Doctor and patient
The contract between the parties with above relationship turns it voidable
by presuming the existence of undue influence of the former against the
other. It is the burden on the former party to prove that he was not in
dominating position and that his position was not used to obtain the consent
of the other.
iii) Fraud:39 The following acts of a party to a contract establish fraud while
entering into a contract with the other:
a) the suggestion of a fact, of that which is not true by one who does not
believe it to be true
b) the active concealment of a fact by one having knowledge or belief of
the fact
c) a promise made without intention of performing it;
d) any other act fitted to deceive
e) any such act or omission as the law specially declares as fraudulent.
The mere silence on the part of party does not amount to fraud. But silence
amount to fraud where there is a duty on the party to speak.

iv) Misrepresentation:40 A party may give his consent to enter into a contract
because of misrepresentation of the other. These false statements or
misrepresentations may be either inducing cause of contract. These statements
may be called as innocent misrepresentation and willful or actionable
misrepresentation which amounts to fraud.
A misrepresentation consists of the following ingredients:
a) Failure to disclosure of a fact
b) Such non-disclosure must relate to a fact not to an opinion
c) Such representation must be untrue
d) It must be material to influence the other to enter into a contract
Any representation made by a party with full knowledge of the fact that it is
119
Business Contracts not true, or without belief in its truth or recklessly, not caring whether it is
true or false, it is said to be fraudulent. 41
Whenever the consent of the party is obtained in the absence of free consent
the contract is voidable at the option of the party whose consent is not free
because of the presence of coercion, or fraud, or misrepresentation. The
aggrieved party of such voidable contract had an option to continue the
contract or rescind the contract42 and entitled for damages. Further, the
contract induced by undue influence can be set side or it is voidable at the
option of the party whose consent was obtained by dominating the will of
the aggrieved party.43

v) Mistake:44 While entering into a contract the parties to the contract may be
under a mistake. This mistake may be as to a fact or law. Mistake of fact
may be as to subject matter of the contract e.g., regarding the existence,
quality or quantity etc.; nature of contract; person entering into contract.
Mistake of law may be regarding foreign law, or ordinary law, law of our
country, or private rights of the contracting parties. Another classification
of these mistakes is bilateral and unilateral.

A mistake of fact in the minds of both the parties negatives the consensus ad
idem and the contract in such cases is void. Where both parties to an
agreement are at mistake as to a matter of fact essential to the agreement,
the agreement is void.45 This will come under the classification of bilateral
mistake.

In case of unilateral mistake, i.e., where only one party to a contract is under
a mistake, the contract, generally speaking, is not valid. A contract is not
merely voidable because it was caused by one of the parties to it being under
mistake as to a matter of fact.46

A contract is not voidable because it was caused by mistake as to any law in

force in India but a mistake as to a law not in force in India has the same
effect as a mistake of fact.47

4) Legality of Consideration and Object:

Apart from the above essentials for the formation of a valid contract the legality
of consideration and object48 is must. The unlawful agreements may be classified
as follows:
1) Illegal-where the agreement is contrary to the statute law
2) Immoral- where it is opposed to public morals e.g., agreement for illicit
cohabitation, or separation between husband and wife
3) Opposed to public policy- where the agreement is forbidden as conflicting
with the well-being of the state e.g., agreements tending to the abuse of
legal process, agreements in restraint of trade, agreements in restraint of
marriage, agreements in restraint of parental rights, etc.

Where a part of consideration or object of an agreement is unlawful the agreement

is void. In case of non-separation of the unlawful part from the agreement the
total transaction will be void. The rule applicable to separate the unlawful and
lawful part is known as blue pencil rule. In such cases the lawful part which
120
separated by drawing blue pencil lining from the unlawful part can be General Principles of
Contracts
enforceable.49. A contract without consideration is said to be void with certain
exceptions;50
a) Every agreement in restraint of marriage of any person, other than a minor
is void.51
b) An agreement in restraint of trade is void with an exception where goodwill
is sold or as per the provisions of the Partnership Act, 1932.52
c) Any agreement in restraint of legal proceeding is void with an exception of
arbitration agreement.53
d) Where the meaning of an agreement is not certain, or capable of being certain
are void,54
e) Agreement by way of wager is void.55
f) The performance of the contract is depending on the happening or non-
happening of an event at a future date is called as contingent contract.56 If
the happening of the event is impossible the contract becomes void.57
g) The enforcement of a contingent contract is possible before the impossibility
of its occurrence.58 The promise of A to pay B a sum of money if B marries
C. C marries D. Marriage between B and C is impossible during the life
time of A makes the agreement void.59
h) The contingent contract to do or not to do within a specified becomes void
after the expiry of the time.60
i) Any agreement contingent on impossible events is void.61

5.6 PERFORMANCE OF THE CONTRACTS

Both the parties to the contract either perform, or offer to perform their respective
promises until such performance is dispensed with or excused under any
provisions of this Act or any other law in force. Even the death of one of the
party makes his legal representatives liable unless the intention of the parties to
the contract differs.62 The promisee’s non-acceptance of offer of performance of
the promisor, the promisor is not responsible for the performance, nor does he
lose his rights under the contract subject to the following conditions:63
a) The offer must be unconditional.
b) It must be made at a proper time and place, and in the circumstances that
the person to whom it is made must have a reasonable opportunity to ascertain
that the person is able and willing to do i.e., accept
c) If it is the delivery of anything to the promisee, he must have an opportunity
of seeing the delivered thing which the promisor is bound by his promise to
deliver.

In case of anticipatory breach of contract by the promisor, the promisee may put
an end to the contract, and sue for damages immediately though he had a right to
keep open the contract until the performance is actually due.64 Keeping the promise
alive may lead the promisor to take advantage of supervening circumstances.

121
Business Contracts The performance may by the person who makes the promise, the promisor or his
representatives may employ a competent person to perform depending on the
intention of parties to the contract.6 If the performance from the third person is
accepted by the other party, later the promisee can’t enforce against the promisor.7

When the promise is made jointly, it is to be performed by all such joint promisors
during their living and after the death any of them, his representative jointly with
surviving promisor. After the death of the last survivor, the representatives must
fulfill the promise jointly. This is subject to a contrary condition of the contract.67
The promisee may compel one of the joint promisor to perform in the absence of
express agreement to the contrary. On such performance by one of the promisor
he can compel the other promisor to contribute. In an occasion where one of the
promisor failed to contribute the remaining promisors has to share the loss of
contribution.68This is also subject to a contrary appears in the language of the
contract. The release of the joint promisor from performance does not discharge
the other from liability. There is a point of difference in English law and Indian
law. In India, they are presumed to be jointly and severally liable.69 When a party
makes a promise to two or more persons, the right to claim the performance rests
between him and them, with them during the life time of the parties and on the
event of death of either party, between the representative and survivor/
representative as the case may be, with joint promisee or survivor/representative
or representatives.70 This is subject to a contrary condition of the contract.

Time and Place of Performance:

When the promisor has to perform without the application of the promisee, and
no time is specified in the contract to perform, the performance must be done
within reasonable time. What is reasonable time is a question of fact?71 When the
time is specified but no application to be made by the promisee, the promisor
may perform it any time during the usual hours of business on such day, and the
place at which the promise ought to be performed.72 It is the duty of the promisee
to make the application for performance on certain day to be at proper time and
place during the usual hours. What is proper time and place is a question of
fact?73 It is the duty of the promisor to make an application to the promisee as to
the time and place to perform when a promise is to be performed without
application.74 The promisee may prescribe or sanction the manner, the time and
place of performance.75

Performance of Reciprocal Promises:

In case of existence of reciprocal promises, the promisor needs to perform only
when the promisee is ready or willing to perform his part of promise in the
contract.76 The reciprocal promises are to be performed as per the order specified
in the contract, in the absence of such specification of order they must be
performed in the order of the transaction requires.77 The party preventing the
other ready to perform his part of the reciprocal promise, the contract becomes
voidable at the option of the party so prevented; he is entitled for compensation
for loss because of non-performance of the contract.78 The order of the
performance of the reciprocal promises in the sequence as specified. The non-
performance does not entitle the performance of the reciprocal promise and must
make compensation to the other party for any loss because of his non-performance
of the contract.79 The performance to do a thing at or before specified time has to
be performed accordingly. Failing which the contract becomes voidable in case
122 the contract specifies the time is essence of the contract. The intention of the
contract does not specify time as essence of contract, the contract is not voidable General Principles of
Contracts
and the promisee is entitled for compensation for any loss because of non-
performance of the contract.80 If the promisee agreed the acceptance of
performance by the promisor other than at the agreed time, he can’t claim damages
for the delay in performance. However, he is entitled for compensation if he
gives notice to the promisor of his intention to do so at the time of acceptance.81

5.7 DOCTRINE OF FRUSTRATION OR

AGREEMENT TO DO AN IMPOSSIBLE ACT
The agreement between two parties to do an impossible act itself is void. A
contract may also void because of an event which makes the performance of
promise impossible or unlawful after the completion of the contract. Any person
who makes promise to perform by knowing it to be impossible or unlawful is
liable to pay compensation to the promisee that is not aware of impossibility or
unlawful nature of the contract at the time of arriving it.82 This is known under
the doctrine of frustration. This will be applicable in two classes of cases:
1) Where a supervening event makes the performance of a contract impossible
2) Where a supervening event or events have frustrated the object of both the
parties and the changing circumstances the promise fails to be performed.
The dislocation of business in the wake of the first and second World Wars brought
before courts a large number of ‘frustration cases’ and it has now been recognized
the term ‘frustration’ includes the cases of ‘impossibility’ as well as the ‘frustration
of adventure.’

Supervening impossibility:
The very object of the subject-matter relating to the contract disappears; the
contract is discharged by frustration on the ground of destruction of subject matter.
A contract is also considered as frustrated in case of non-occurrence of expected
events. The musician who failed to perform a concert due to illness as agreed in
a theatre was held to be frustrated and so discharged by supervening
impossibility.83 The requisitioning of land by government for military purposes
from the contract of sale of land by a company which undertook to construct
drains and roads on the land to make it suitable for residential purpose is not
considered as supervening impossibility as it was a temporary interruption and
does not discharge the parties from the performance of the contract.84

Supervening Illegality:
The contracts entered with the enemy nationals prior to the outbreak of war are
suspended during the war and revived after restoration of peace only if it is not a
continuous mutual duty between the parties. The changes in law also make the
contract unlawful and the performance of the contract impossible. The judiciary
expressed different theories for the judicial basis on the subject. The implied
theory propounded by Viscount Simon says that no term could be implied to put
an end to the contract in those circumstances.85 According to the disappearance
theory, if the foundation of the contract disappears either by the destruction of
the subject-matter or by reason of interruption of performance, it must be regarded
as frustrated. In case of Just and reasonable solution theory, even the express
term in the contract render the performance impossible, and the contract purporting
123
Business Contracts to be alive, courts may hold the parties discharged from liability under the doctrine
of frustration.

Doctrine of frustration limitations:

The party who himself responsible for frustration can’t invoke the doctrine. This
doctrine is not applicable to leases. In England, this doctrine is not applicable to
the contract of sale of land as the buyer becomes the equitable owner of the
property. In India, there is no equitable estate as such and so the doctrine is
applicable even to contracts for sale of immovable property.86

When there are two sets of reciprocal promises between the parties, one is legal
and the other is illegal based on the circumstances, the legal one becomes a valid
contract and the other is a void agreement.87 In case of alternative promise, the
legal one can be enforced and the other is void.88

5.8 APPROPRIATION OF PAYMENTS

When the payment is made by the debtor, the payment has to be remitted by the
creditor towards the amount outstanding as suggested by the debtor.89 If the debtor
not specified to which debt the payment is to be adjusted, the creditor had a right
to pay even the time-barred debt also.90 Neither the debtor or creditor appropriated
the payment made by the debtor; the payment must be adjusted towards the first
debt which is outstanding between the creditor and the debtor.91 The above rules
for the appropriation of payments are known as Rule in Clayton’s case.

Contracts which need not be performed:

The original contract between the parties need not be performed in case of
novation, rescission and alteration of such contract. If the parties agree to
substitute a new contract instead of the original one, or to rescind or to make an
alteration of the contract, the parties to the original contract need not perform the
obligations therein.92 The promisee is at liberty to dispense with performance of
the promisor wholly or partly or extend the time of performance or may also
accept instead of it any satisfaction which he deems just.93 When a person having
the option of rescinding the voidable contract, exercises his option to rescind the
other party need not perform his part of promise in the contract.94 Further, the
party rescinding receives any benefit under voidable contract is liable to restore
the benefit to the other. When a contract becomes void afterwards, the party
deriving benefit or advantage of such contract is under obligation to restore it.95
In case of rescission of a voidable contract, the party exercising the option must
communicate the rescission of contract in the same manner as followed for
communication of the revocation of the proposal.96The neglect or refusal of the
promisee to afford the reasonable facilities for the performance of the promisor,
the promisor is excused for the non-performance caused thereby.97

Of certain relations resembling those created by contract:

These are also called as implied contracts or quasi-contracts or Constructive
contracts which are created by lawyers and judges, based on certain equitable
considerations. The early common Law of England had only two kinds of
remedies: contractual and delictual. The absence of contract, the remedy could
only be in tort. Quasi is a Latin term which means ‘as if.’ In quasi contracts,
there will be no actual contract between the parties but the law attributes to a
124
particular situation consequence which is similar to that of a contract. Action of General Principles of
Contracts
account is the early quasi-contractual liability. This was available against Bailiffs,
receivers and guardians who had to account for money kept with them. The 14th
and 15th century extend to every case where money is paid to the defendant by a
third party to the use of plaintiff. The underlining principle to determine the
liability of the defendant is unjust enrichment at the expense of plaintiff. The
equity courts applied the principle of preventing unjust enrichment in evolving
the concept of trust.

There is no exact definition of a quasi-contract given anywhere even in the

Contract Act. Those given by Dr. Winfield98 and Dr. Jenks99 may be accepted in
the absence of a better one. ‘A’ delivers goods to ‘B’ without any contract either
expressly or in writing. ‘B’ consumed the goods delivered by ‘A’. The obligation
of ‘B’ to pay ‘A’ the price arises from his promise implied by his conduct. This
kind of contract is called a tacit contract. Similarly, if ‘A’ delivers to ‘C’ assuming
him to be ‘B’, and ‘C’ consumed them, the obligation of ‘C’ to pay compensation
to A for their value. This is quasi or implied contract.

The following are the examples of quasi-contract:

1) Action for money had and received:100 This was based on the equitable
principle that no person shall enrich himself at the expense of the other.
Even the payments made under mistake of law may be recovered. The
payment made under coercion is also recoverable under this principle.
2) Money paid to plaintiff for use of defendant:101 Where tenant A pays the
taxes due from his landlord B to C in order to protect his possession from
being processed against in execution of B’s debt. In such cases, there is an
obligation on B to repay the amount paid for his benefit. The enforcement
of obligation under this head depends on two conditions namely the payment
must be bonofide to protect his interest and it should not be a voluntary one.
3) Quantum meruit:102 The person derived benefit from an act of another has
to compensate the other even there is no contract or invalid contract. This
was based on the principle of quantum meruit which means ‘as much as he
deserves.’ The compensation is subject to the face that the delivery of goods
is not made gratuitously and the defendant enjoyed the benefit.
4) Obligation of finder of last goods:103 Though there is no contract between
the finder and looser of the last goods the finder is having an obligation to
return the goods find to the owner as a bailee.
5) Necessaries supplied to a person incapable of contracting:104 This will
discuss the contractual liability of a minor or lunatic to whom the necessaries
are supplied which are suited to his condition of life. The person supplied
necessaries entitled only to the property of the incapable party but he can’t
make him personally liable for the dues of the supply.

5.9 CONSEQUENCES OF BREACH OF

CONTRACT
Any party who is responsible for breach of contract is liable to pay damages/
compensation to the other party who suffers loss because of non-performance by
the other. In other words, the party aggrieved by the default of performance of 125
Business Contracts the other’s obligation leads to breach of contract and entitles him for
compensation. There were two remedies available in case of breach of contract
by a party.

1) Common Law Remedy, i.e, damages: The remedy of damages, therefore,

only tries to evaluate in terms of money, the loss which a party sustains as a
result of breach of contract.

2) Equitable Remedy, i.e., specific performance of contract, injunction,

rectification and cancellation, etc.: Keeping in mind that Specific
performance is not available in every case, subject to several limitations;
there is no other alternative for courts than to award damages which, of
course, is available in every case.

Measure of damages is the value of performance of the contract to the plaintiff,

and not what it costs the defendant to perform it.

There are four kinds of damages:

A) General, or ordinary, or substantial damages:105These are the damages

which are to be paid as a consequence of breach of contract. In other words,
it means the natural following consequences out of breach.
B) Special damages:106These are the damages which are to be paid for the loss
of the profit in case of breach of contract of sale by the buyer. In other
words, it was a kind of damages which are to be paid on account of usual or
extra ordinary circumstances of the case.
C) Vindictive, or Punitive or Exemplary damages: These are awarded with a
view to punish the defendant. Generally, vindictive damages are not awarded
in case of contracts, but will be awarded in actions in tort. But they may be
awarded in contracts like breach of contract to marry and the breach of
payment of the customer to honor the cheque.
D) Nominal damages: These are paid in case of technical violation but no
substantial loss. Proof of damage necessary even for claiming nominal
damages.
The English law on the question of damages is laid down in Hadely v.
Baxendale.107 The following are the rules relating the award of damages for breach
of contract:
1) The injured party is to be placed in the same financial position as if the
contract has been performed.
2) Damages which are fair and reasonable arising from breach of contract can
be recovered.
3) Damages which are contemplated in the contract at the time of contract108
can be recovered though they are not naturally arising. These are called as
liquidated damages.
4) Damages which will not fall under 2 or 3 above, but arise of special
circumstances called special damages are not recoverable, unless they are
brought to the notice of the other party before the contract is made.
5) It is the duty of the aggrieved party to minimise the damages.
126
6) It should not be more than agreed amount of the damages. General Principles of
Contracts
7) The injured is not disentitled to damages because of difficulty to assess
them.
8) Vindictive or exemplary damages can’t be awarded, except for the breach
of contract of marriage.
9) The party rightfully rescinding the contract on the non-performance of the
other is entitled to compensation,109

5.10 SUMMARY
The law that is applicable to mercantile transactions is called the mercantile law
which includes General Contracts, Special Contracts and the law of Insolvency
and Bankruptcy. This law relates to the rights and obligations arising out of
mercantile transactions between traders or merchants. Prior to the Indian Contract
Act, 1872, the English Common Law with some modifications suited to Indian
conditions for some time in the British India Courts.

A contract is an agreement enforceable in a court of law. An agreement is a set of

reciprocal promises between the parties to the contract. These set of promises
arises from an offer and acceptance from the parties to the contract. The contract
may be express or implied i.e., it may be oral words or in writing and even
inferred from the conduct of the parties. It may be bilateral or unilateral contract.
Generally, the contract completes when the acceptance of the offeree is posted
or put in to transmission. It was made at the place where the acceptance is received
by the offeror. It was easy to determine the completion of contract when the
parties negotiate in person.

Consideration, capacity to contract, free consent, and legality of consideration

and object are some of the essentials of a valid contract.

The agreement between two parties to do an impossible act itself is void. A

contract may also void because of an event which makes the performance of
promise impossible or unlawful after the completion of the contract.

5.11 SELF ASSESSMENT QUESTIONS

1) Discuss the origin and sources of Mercantile Law.
2) Explain the formation of contract.
3) Describe the completion of contract and jurisdiction.
4) What are the essentials of a contract?
5) Briefly give a not on the capacity of party to the contract.
6) Critically analyze “a contract without consideration is void.”
7) When consent is said to be free?
8) Differentiate valid, void and voidable contracts.
9) Elucidate the performance of the contract and the reciprocal promises.
10) ‘Time is not the essence of contract.’ Comment.
11) How is the doctrine of frustration applicable in a contract?
127
Business Contracts 12) Define the applicability of rule in Clayton’s case for the appropriation of
payments.
13) State the contracts which need not be performed or discharge of contract.
14) Enumerate the obligations which resemble the contracts under the head quasi-
contracts.
15) Mention the consequences of the breach of contract.

5.12 FURTHER READINGS/ REFERENCES

Books:
1) J.C.Smith, 1976, Legal Obligation, University of London, TheAthlone Press
2) Stefen Smith, Atiyah’s Introduction to the Law of Contract, CLARENDON
LAW SERIES 6thedition Oxford Press.
3) J.Beaston, A.Burrows, J. Cartwright, Anson’s Law of Contract, 29th edition,
Oxford press.
4) Michael Frumton, Chesire & Fifoot’s Law of Contract, 14thedition, Lexis
Nexis Butterworths.
5) Richard Stone, Contract Law, The Cavendish Q & A Series, 2nd edition,
Cavendish Publishing Limited
6) Ewan McKendrick, Contract Law, Palgrave Law Series, 5th edition
7) Prof.G.C.V.SubbaRao, Law of Contracts I & II 11th edition , Narendra Gogia
& Company.
8) E.Venkatesam, 1969, Hand Book on Contracts and Negotiable
Instruments,7th edition .M.L.J.Office, Madras.
9) Anirudh Wadhwa, Mulla, The Indian contract Act, 15th Edition, Lexis Nexis
10) Dr. Avatar Singh, Contract Act and Specific Relief Act, 12th Edition, EBC
Publishers.
11) Dr. R. K. Bangia, Indian Contract Act, 15th Edition, Allahabad Law
Publishers.
12) Dr. V. Kesava Rao, Contract I Cases and Materials, Lexis Nexis Students’
Series.

References:
1
Atiyah’s Introduction to the Law of Contract,6thEdn Oxford University Press
at p.29
2
Section 9 of the Indian Contract Act, 1872.
3
Sec.2(a) of the Indian Contract Act, 1872 “when one person signifies to another
his willingness to do abstain from doing anything, with a view to obtaining
the assent of that other to such abstinence, he is said to make a proposal.”
4
Sec.2(c) of the Indian Contract Act, 1872
5
Sec.2(b) of the Indian Contract Act, 1872
6
Supra note 2
7
Lord Atkin Balfour v.Balfour 1919 (2) KB 571
128
8
Section 7 of the Indian Contract Act,1872 General Principles of
Contracts
9
Section 8 of the Indian Contract Act,1872
10
Section 7(2) of the Indian Contact Act, 1872
11
Carlilv. Carbolic Smoke Ball co. (1893) 1 Q.B 256
12
Harvey v.Facey 1893 AC 552
13
Section 6(4) 0f the Indian Contract Act,1872
14
Lord Denning in Entoresv. Miles Far East Corporation 1955 2QB 327; see
also BhgawandasKediav.Giridharilal AIR 1966 SC 543
15
Section 11 of the Information Technology Act,2000
16
Section 12 of the Information Technology Act,2000
17
Section 13 of the Information Technology Act,2000
18
Section 10 of the Indian Contract Act, 1872
20
As per Sir Frederick Pollock approved by House of Lords
21
Section 2(d) of the Indian Contract Act,1872
22
Section 25 of the Indian Contract Act,1872
23
Supra 20
24
Dunlop Pneumatice Tyre Compayv. Selfridge& Company 1915 Ac 847
25
Under English law Rights of Third Parties Act,1999.
26
Pinnel’s case 1602 77 ER 237
27
Central London Property Trust Ltd. V. High Trees House Ltd 1947 KB 130 ;
see also Foakesv. Beer 1884 9AC 605
28
ibid
29
Section 63 of the Indian Contract Act,1872.
30
Section 11
31
The Indian Majority Act, 1875
32
ILR 1903 (30) Cal.539 (PC)
33
see quasi- contract under Sec.68 of the Indian Contract Act,1872
34
Section 33 (1) of the Specific Relief Act,1963
35
Section 13 of the Indian Contract Act,1872
36
Section 14 of the Indian Contract Act,1872
37
Section 15 of the Indian Contract Act,1872
38
Section 16 of the Indian Contract Act,1872
39
Section 17 of the Indian Contract Act, 1872
40
Section 18 of the Indian Contract Act, 1872
41
Supra note 38
42
Section 19 of the Indian Contract Act, 1872
43
Section 19-A of the Indian Contract Act,1872
44
Sections 20,21,22 of the Indian Contract Act, 1872
45
Section 20 of the Indian Contract Act,1872
46
Section 22 of the Indian contract Act, 1872
129
Business Contracts 47
Section 21 of the Indian Contract Act,1872
48
Section 23 of the Indian Contract Act, 1872
49.
Section 24 of the Indian Contract Act,1872
50
See supra note 22
51
Section 26 of the Indian Contract Act,1872
52
Section 27 of the Indian Contract Act,1872
53
Section 28 of the Indian Contract Act, 1872
55
Section 30 of the Indian Contract Act, 1872
56
Section 31 of the Indian Contract Act, 1872
57
Section 32of the Indian Contract Act, 1872
58
Section 33of the Indian Contract Act, 1872
59
Section 34 of the Indian Contract Act, 1872
60
Section 35 of the Indian Contract Act, 1872
61
Section 36 of the Indian Contract Act, 1872
62
Section 37 of the Indian contract Act, 1872
63
Section 38 of the Indian Contract Act,1872
64
Section 39 of the Indian Contract Act,1872
65
Section 40 of the Indian Contract Act,1872
66
Section 41 of the Indian Contract Act,1872
67
Section 42 of the Indian Contract Act,1872
68
Section 43 of the Indian Contract Act, 1872
69
Section 44 of the Indian Contract Act, 1872
70
Section 45 of the Indian Contract Act, 1872
71
Section 46 of the Indian Contract Act, 1872
72
Section 47 of the Indian Contract Act,1872
73
Section 48 of the Indian Contract Act, 1872
74
Section 49 of the Indian Contract Act, 1872
75
Section 50 of the Indian Contract Act, 1872
76
Section 51 of the Indian Contract Act, 1872
77
Section 52 of the Indian Contract Act,1872
78
Section 53 of the Indian Contract Act, 1872
79
Section 53 of the Indian Contract Act, 1872
81
Section 55 of the Indian Contract Act, 1872
82
Section 56 of the Indian Contract Act, 1872
83
Robinson v. Davidson 1871 LR 6 Ex.269
84
SatyabrataGhosev.MugneeramBasngur AIR 1954 SC 54
85
Crickelwood Property and Investment Trust Ltd v. Leighton’s investments
Trust Ltd 1945 AC 221
86
Supra note 82.
87
Section 57 of the Indian Contract Act, 1872
130
88
Section 58 of the Indian Contract Act, 1872 General Principles of
Contracts
89
Section 59 of the Indian Contract Act, 1872
90
Section 60 of the Indian Contract Act, 1872
91
Section 61 of the Indian Contract Act, 1872
92
Section 62 of the Indian Contract Act, 1872
93
Section 63 of the Indian Contract Act, 1872; see also Pinnel’s case at
Consideration.
94
Section 64 of the Indian Contract Act, 1872
95
Section 65 of the Indian Contract Act, 1872
96
Section 66 of the Indian Contract Act, 1872
97
Section 67 of the Indian Contract Act, 1872
98
“as liability not exclusively referable to any other head of law imposed on a
particular person to pay money to another , on the ground of unjust benefit.”
99
“a situation in which law imposes upon one person, on grounds of natural
justice, an obligation similar to that which arises from true contract, although
no contract, express or implied, has in fact been entered into by them.”
100
Section 72 of the Contract Act, 1872
101
Section 69 of the Contract Act, 1872
102
Section70 of the Contract Act, 1872
103
Section71 of the Contract Act,1872
104
Section68 of the Contract Act, 1872
105
Section 73 of the Contract Act, 1872
106
ibid
107
1854 9Ex. 341
108
Section 74 of the Indian Contract Act,1872
109
Section 75 of the Indian Contract Act, 1872

131
Business Contracts
UNIT 6 INTERNATIONAL CONTRACTS OF
SALE

Objectives

After studying this unit you should be able to:

Explain the meaning and relevance of the Contracts for International Sale of
Goods
Understand the historical background of the Contracts for International Sale
of Goods
Discuss the Applicable Law And Rules for International Sale of Goods
Describe the different Model Contracts And Clauses Contracts for
International Sale of Goods
Structure
6.1 Introduction
6.2 Historical Background
6.3 Applicable Law and Rules
6.4 Model Contracts and Clauses
6.5 Assessment of Sale of Goods by Transfer of Property with Certainty and
Flexibility
6.6 CISG Influence on Individual National Systems
6.7 Regional Efforts
6.8 Covid-19 Pandemic and its Impact on the Performance of International
Sale of Goods Contract
6.9 Summary
6.10 Self Assessment Questions
6.11 Further Readings/References

6.1 INTRODUCTION
The Liberalisation, Privatisation and Globalisation (LPG) wiped out the
boundaries amongst countries and made the world as a global village. There
were different substantive laws relating to contracts in different legal systems
which will conflict in legal scenario. It paves the way for thinking of uniform
laws comfortable to both the parties from different countries when they enter
into contract with flexibility and without bias.

The transactions of sale at the international level are considered to be the backbone
of international trade through international contracts. The contracts are regarded
as international contracts when the parties to the contract are coming from two
different States (Countries).1 More flexible definitions are possible, such as
contracts with “significant connections with more than one State,’’ ‘involving a
choice between the laws of different States’, or ‘affecting the interests of
international trade.’2 As described in the Hague Principles, one approach to
identifying a contract as “commercial” may be where “each party is acting in the
132
exercise of its trade or profession.” (Hague Principles, Article 1(1)). Another International Contracts of
Sale
approach is found in the United Nations Convention on Contracts for the
International Sale of Goods (CISG), which limits its scope to commercial matters
by excluding, for example, consumer contracts, such as those for “goods bought
for personal, family or household use” (CISG, Article 2(a)).3

There were two important questions which are vital to be answered when a dispute
arises between two parties in an international commercial contract. They are:
1) Where the dispute of the parties is to be heard i.e., seat of settlement of
dispute?
2) What are the law or rules that govern the contract i.e., choice of law by the
parties?
Answers to the above questions are to be made by the parties to an international
contract where they opted an ‘arbitration Clause’ in their contract with an intention
to avoid the litigation in the local legal system and the application of the
substantive law of countries to which the parties belonging. International
commercial arbitration may be particularly popular because, unlike court
proceedings, there is a single nearly comprehensive regime for enforcement of
foreign arbitral awards. 4

6.2 HISTORICAL BACKGROUND

The differences in laws are the by –products of different histories, philosophies
and worldviews, uniformity is often difficult to achieve. One of the major
challenges faced by an international contract of sale is the diversity of legal
systems. The conflict of laws exacerbated world-wide because of the global supply
chains and contractual networks which operates across the globe. The 20th century
focuses on uniform framework to tackle the situation of the diversified legal
system. Before the Second world war Ernst Rabel suggested the possibility of
uniform sales law to the Institute for the Harmonisation of Private Law. In 1930,
the UNIDROIT initiated the project to prepare a law unifying the substantive
rules governing international sales contracts under the auspices of the League of
Nations. In 1935, the Commission of European Scholars under the leadership of
Rabel prepared a preliminary Report. Though the Second world war interrupted
the work, it was resumed in 1951 in the Hague Conference. In 1964, two
conventions namely Uniform Law on the International Sale of Goods (ULIS)
and Uniform Law on the Formation of Contracts (ULF) unifying the law of
international sale of goods were adopted and came into force in 1972. These are
still not widely recognised outside Western Europe as instruments of international
harmonisation. The establishment of UN Commission for International Trade
Law in 1968 paved the way to draft a new unified sales law. The final draft of the
Convention on the International Sale of Goods (CISG) approved by the General
Assembly of UN in 1980 and came into operation on 1st January 1988.
The CISG is now supported by number of Conventions like the UN Convention
on the Limitation Period in the International Sale of goods, the 1983 Geneva
Convention on Agency in the International Sale of Goods, the 2005 Convention
on the Use of Electronic communications in International Contracts, the
1983Uniform Rule on Contract Clauses for an Agreed Sum Due upon Failure of
Performance. 94 countries ratified and acceded to the Convention as of 2020.
The CISG is the best example of unification of private law till date. 133
Business Contracts There are no statistics available to prove the success of the CISG in developing
international trade. The ratification does not mean the unification of international
sales law effectively; it provides the contractual parties with a useful or efficient
regulatory framework.

The CISG is based on the principle of party autonomy. The parties are at liberty
to adopt or exclude the applicability of the principles laid down thereon in the
CISG. The ratifying State may ratify in total or with certain restrictions which
creates un-certainty to the fact that the Convention is a unifying law on
international sale of goods. This creates gaps in the provisions of the Convention.

In interpretational disputes, the national courts and arbitral tribunals have to take
the international character and the uniformity in its application and the observance
of good faith in international trade into consideration. The CISG does not specify
or state a list what these principles are and, consequently, they have to be deduced
from the other provisions of the Convention through a process of analogy. The
judge may venture outside the four corners of the CISG and settle the matter in
conformity with the applicable law. It is clear that the CISG does not unify the
law of international sales in an exhaustive manner but instead operates in a
supplementary and symbolic relationship with national law, trade usage, party
autonomy and other international instruments of harmonisation.

6.3 APPLICABLE LAW AND RULES

I) Conventions
In some international sale contracts, the law applicable to a contract will be
provided for in a Treaty. The United Nations Commission on International Trade
Law (UNCITRAL) has created three treaties that provide the applicable rules
governing certain contracts.

a) United Nations Convention on Contracts for the International Sale of

Goods (CISG):
The United Nations Convention on Contracts for the International Sale of
Goods  is the most widely adopted treaty providing substantive contract
rules.5 The CISG’s scope is limited to commercial contracts for the cross-
border sale of goods6 Successful implementation of the CISG requires more
countries to adopt it and parties to use it. Courts and arbitral tribunals must
interpret the CISG in a uniform manner and not through the lens of domestic
laws.7

b) The Convention on the Limitation Period in the International Sale of

Goods:
The Convention on the Limitation Period in the International Sale of
Goods (the “Limitation Convention”) is a sister treaty to the CISG. Originally
adopted in 1974, it was amended in 1980 in order to operate seamlessly with
the CISG.8 The Limitation Convention applies to the same types of
international sales contracts as the CISG with the same scope of application,9
but its substantive provisions deal solely with limitation or prescription,
providing a sort of statute of limitations for international sales disputes. The
general period of limitation provided in the Limitation Convention is four
years.10
134
  Till date, there are 30 State parties to the Limitation Convention whereas 84 International Contracts of
Sale
State parties in the CISG’s. As is the case with the CISG, parties may opt out
of its provisions.11 The rules of uniform interpretation for the Limitation
Convention generally mirror those found in the CISG.12

c) United Nations Convention on the Use of Electronic Communications

Convention in International Contracts:

The United Nations Convention on the Use of Electronic Communications

in International Contracts 13 is a much more recent Treaty than the CISG or
Limitation Convention. Adopted in 2005, it currently has seven State parties.
The purpose of the treaty is to remove any legal obstacles to the use of
electronic communications in international contracting, creating certainty
for contractual parties that contracts and other communications exchanged
electronically are as valid and enforceable as their traditional paper-based
equivalents.

The scope of the Electronic Communications Convention is broader than

that of the other UNCITRAL Treaties in that it is not limited to sales contracts,
although it is still aimed at only commercial contracts. Contractual parties
may, of course, opt out of its provisions.14 Like the Limitation Convention,
the rules of uniform interpretation for the Electronic Communications
Convention mirror those found in the CISG,15 making the same general
categories of research resources relevant.

II) National Laws

Parties may also choose national laws to apply to their international commercial
contracts. The party with greater bargaining power may insist on its national
laws, or parties may instead choose the law of a third State, usually one considered
to have a well-developed law with regards to commercial transactions.

English law is frequently used in international transactions, in particular with

reference to reinsurance, charter parties, and sea trade, among other areas.16 Parties
may select Swiss law because of the perception that Switzerland’s political
neutrality makes this a neutral law. Nonetheless, political neutrality may not
always be the best guide as to the suitability of a chosen law for a specific
transaction.17 The ICC International Court of Arbitration 2013 Statistical Report
mirrors the 201018 survey and also indicates frequent choice of German and
French law.19 When considering these types of surveys, it is important to recall
that, generally, the choice of law of any CISG State will also include the CISG
unless the Convention’s application is clearly excluded by the parties.20

Soft Law and Trade Usages

There are many international texts and standards that may be chosen by traders
to govern their contracts. These rules may be referred to variably as “rules of
law,” “soft law” or “trade usages,” 21 but they are connected by their use in
international contracting and potential direct application by arbitral tribunals.
Even otherwise binding texts, such as the CISG, may fall into this category when
chosen by parties to apply to their contracts without reference to a specific State
law22. Like arbitral tribunals23, State courts may recognize and apply these rules,
but, depending on the relevant domestic law, they may do so simply as a set of
rules that are considered to be part of the contract and not overriding any
135
Business Contracts mandatory law.24 The Hague Principles, where followed, may serve to further
legitimize some of these sources. The Hague Principles, in Article 3, allow for
the law chosen by contracting parties to be “rules of law that are generally accepted
on an international, supranational or regional level as a neutral and balanced set
of rules, unless the law of the forum provides otherwise,” specifically naming
the CISG, the UNIDROIT Principles, and the Principles of European Contract
Law (PECL) in the accompanying commentary. A few of the more prominent
texts and standards generally discussed in this category of “rules of law,” “soft
law” or “trade usages” are as follows:

UNIDROIT Principles
The UNIDROIT Principles of International Commercial Contracts (the
“UNIDROIT Principles”) were first finalized by UNIDROIT in 1994 and revised
in 2004 and 2010. UNIDROIT continues to revise the Principles as appropriate,
currently considering revisions meant to deal with specific aspects of long-term
contracts. While following the CISG’s approach in many instances, the
UNIDROIT Principles are a set of general rules for international commercial ,
addition, they are able to cover areas that the drafters of the CISG were not able
to agree upon, such as validity, agency, and assignment, among others. Also
unlike the CISG, the UNIDROIT Principles are not a binding text and will
generally only be applied where chosen by the parties or through application by
an arbitral tribunal with the authority to do so.25 

Significantly, the UNIDROIT Principles contain rules of interpretation almost

identical to CISG,26 making case law and academic writings of great use in
interpreting the Principles. In addition, the UNIDROIT Principles have a built-
in commentary that gives detailed guidance.

The advantage of Principles of International Commercial Contracts (PICC) is

that they do not favour one particular domestic system of contract law or even
legal system but rather provide a neutral set of rules that combine the best practices
from legal systems around the world. The UNCITRAL on its’ endorsement of
the 2010 PICC stated that these Principles and the CISG principles are
complementary relationship and that PICC can be used to interpret and supplement
the convention.27 The 2015 Hague principles on choice of law in International
Commercial Contracts, which were adopted by the Hague Conference on Private
International Law might trigger welcome change.28Continuously improved since
their first inception in 1983, the PICC have been described as a ‘restatement of
international contract law’29 The PICC could function as a new lex mecatoria.

Lex mercatoria
The lex mercatoria has been described as “a synthesis of generally held and
generally accepted commercial principles that may be expected to be applied to
contracts among the major trading nations.”30 There is a controversy31 surrounding
the lex mercatoria  and, in particular, the specifics of its content,32but arbitral
tribunals can, nonetheless, where authorized, apply these principles.33 Certainly,
the content of the lex mercatoria may be informed by or, in fact, contain the
content of international instruments, such as the CISG and the UNIDROIT
Principles.34 For an example of a contract clause containing choice of such broad
principles, consider the United Nations General Conditions of Contract, which
state, with regard to dispute settlement, that “the decisions of the arbitral tribunal
shall be based on general principles of international commercial law.”35
136
Incoterms International Contracts of
Sale
In the specific area of delivery of goods, the International Chamber of Commerce
(ICC) has developed a set of rules governing trade terms that describe the
obligations of buyers and sellers and supplement any other rules governing the
contract. The terms are in combination of three letters. One example is FOB,
standing for “Free on Board”, and the Incoterms rules cover who bears the risks
and obligations when the seller has contracted to deliver goods in this way, namely
“on board the vessel nominated by the buyer at the named port of shipment or
procures the goods already so delivered.”36The Incoterms come with instructions
as to how parties can incorporate them in their contracts. There have been many
versions of the rules, and the most recent are the Incoterms 2010 and 2020. They
were first published in 1936. Incoterms 2010 defines 11 rules. They are upgraded
as per the trade practices.

The Uniform Customs and Practice for Documentary Credits (UCP 600)
This was another creation of International Chamber of Commerce for the
convenience of international trade. The Uniform Customs and Practice for
Documentary Credits, 2007 revision UCP 600, is the soft-law instrument for
regulating letters of credit, a common payment method in international
transactions. The contract must indicate the application of UCP 600 towards the
credit document. It contains rules specifically for electronic records.

6.4 MODEL CONTRACTS AND CLAUSES

International contracts refer to a legally binding agreement between parties, based
on different countries, in which they are obligated to do or not to do certain
things. International contracts may be written in a formal way. Most businesses
create contracts in writing to make the terms of agreement clear, often seeking
legal counsel when drafting important contracts. Contracts can cover all aspects
of international trade, although the most commonly used are:
International Sale Contract
International Distribution Contract
International Agency Contract
International Sales Representative Contract
International Supply Contract
International Manufacturing Contract
International Service Contract
International Strategic Alliance Contract
International Joint Contract
International Franchise Contract
Model contracts are particularly useful for preparing international business
transactions, but they are often expensive. The International Trade Centre offers
for free online its Model Contracts for Small Firms and Legal Guidance for Doing
International Business. The ICC offers (for purchase) an array of model contracts
for international transactions, including an influential model for sales contracts.
The contracts are the products of some of the finest legal minds in the field of
international commercial law. They are constructed to protect the interests of all 137
Business Contracts the parties, combining a single framework of rules with flexible provisions
allowing the parties to insert their own requirements.
Arbitration institutions and rules typically offer model clauses that can be useful
for incorporating an arbitration clause in a contract. For example, the model
clauses of the Arbitration Institute of the Stockholm Chamber of Commerce,
the LCIA, and the International Centre for Dispute Resolution.

Choice of law clauses can be found in the model contracts mentioned above, but
there are also other sources. UNIDROIT, for example, has prepared Model
Clauses for the use of the UNIDROIT Principles of International Commercial
Contracts. Some arbitration institutions also offer model choice of law clauses.
For example, the clauses from the Chinese European Arbitration Centre.

The ICC Confidentiality Agreement is the latest in a series of widely used model
contracts published by the International Chamber of Commerce.

The ICC Force Majeure Clause2003 and the ICC Hardship Clause 2003 are the
examples of the model readymade clauses to be inserted by the parties in their
International Commercial contract.

6.5 ASSESSMENT OF SALE OF GOODS BY

TRANSFER OF PROPERTY WITH CERTAINTY
AND FLEXIBILITY
The transfer of property takes place when the contract is concluded even the
delivery and payment of price happens subsequently. This principle was adopted
by French law by Code Civil of 1804. The same appears in English rule set out in
Sale of Goods Act (SOGA), 1893. The other system of transfer of property is
stipulated by the delivery which was seen in German Law and Australian Law;
the former talks of abstract delivery and the latter with casual delivery. The transfer
of property i.e., the ownership belongs to the realm of general formulas, while
the solutions of the various practical problems belong to the realm of operational
rules. Thus, it is observed that even legal systems with contrasting general
formulas can share identical operational rules.

When questions emerge from the perspective of the ownership, the judge must
refer to the domestic law applicable according to the usual rules of conflict. The
absence of precise rule in the CISG is not a loophole; it was a deliberate choice
by the drafters to leave it the judge to decide as it was a highly sensitive aspect in
the sale of goods. This facilitated the adoption of CISG by divergent legal systems
that adopt one solution or the other for domestic sales.

A certain degree of certainty is attributed to the sale laws that guarantee the
maximum predictability of the solutions asked by the judges and arbitrators.
This implies that legal rule must be as precise as possible and must avoid
loopholes, generic directive for the parties or interpretation gapes for the decision
of cases. On the other hand, any sale law that contains general clauses, such as
the good faith principle, binding the contracting parties to behaviour, whose
legitimacy is decided after the event by Judge or arbitrator, is considered flexible.
In particular, the English law considered a bulwark of certainty, and German law
is considered as very flexible. The former does not have an obligation to act in
138
good faith, while the latter, good faith and reasonableness permeate the entire International Contracts of
Sale
spectrum of contract relationships. The tension between certainty and fairness is
solved by the CISG principles.

6.6 CISG INFLUENCE ON INDIVIDUAL

NATIONAL SYSTEMS
It was noted by the scholars that CISG is having impact regarding both sales of
goods, obligations law and contractual law generally on the numerous legal
systems.37 Its’ influence on individual legal systems may be felt by the courts,
by doctrine, by legal practice and law-makers. The Dutch judges used the CISG
principles in interpreting the national law regarding the formation of contract,
breach of contract and non-conformity of goods sold.

The Scandinavian countries except Denmark revised their national Sale of Goods
Acts in line with the most of the principles of CISG: Finland in 1988, Norway in
1989, Sweden in 1991, and Iceland in 2000.

The CISG influenced the Europe by the Law of Obligations Act in 2002 which is
the identical transposed binding’s nature of usages and practices, the objective
interpretation of the declaration of intent, the freedom of form, the mitigation of
harm and the prohibition of abuse of rights38. The Tokelu Islands has adopted the
rules of the CISG as domestic law both for the sale of goods and for general
contract law. The largest economy, China, the CISG has essentially become part
of domestic law. The Contract Law 1999 was amply supported by CISG rules.
The drafters of new Chinese Civil code were able to find in the CISG a very
important resource of rules both for the sale of goods and the contract law in
general.

In some legal systems reforms in the national laws have begun or have been
suggested. New Zealand Sale of Goods Act, 1908 is the example of this reform.
The largest economy in Africa, Nigeria though not ratified the CISG; Nigerian
Law Reform Commission began to consider a reform of the Sale of Goods Act,
189339. It reproduces the old English law on sale of goods and now there is a call
for the reform to take the CISG as model law40.

Japan didn’t ratify the CISG for a long period. The scholars noted that CISG
rules are arguably better than the Japanese sales law41. The on-going reform42 of
the Japanese law of obligation could raise the level of reception of CISG principles
and rules in the Japanese legal system. The Turkey new Code of Obligations
deeply reformed the contract law which was, based on the Swiss model adopted
in 192043.

Seventeen central African countries who are currently the members of the
Organization for the Harmonization of business law in Africa (OHADA) intended
to remedy the legal and juridical uncertainty that exists among the signatory
states. In 1997 they adopted a uniform law governing commercial law which
was modified and modernised in 2010. This regulates all the sales of goods
between companies, and excludes the sales to consumers. With French culture
they adopted the CISG principles to domestic sale of goods, including several
rules deriving from English Common Law.

139
Business Contracts
6.7 REGIONAL EFFORTS
The preamble to CISG states that: The adaptation of uniform rules which govern
contracts for the international sale of goods and take into account the different
social, economic, and legal systems would contribute to the removal of legal
barriers in international trade and promote the development of international trade.

The European Commission proposed a new uniform law on the sale of goods,
intending to solve the problems arising from this diversity of national contract
laws. The Common European Sales law (CESL) governs sales to both consumers
and businesses. The CESL would then offer a new choice between the legal
systems that the parties can make freely; any national law either of EU members
or of other states.

The Association of Southeast Asian Nations (ASEAN) approved the ASEAN

Trade in Goods Agreement. These treaties expand the free trade area beyond the
borders of the community of ASEAN countries, and envisage the gradual
implementation of the free circulation of goods between ratifying state, elimination
of customs and protectionist barriers. However, these treaties do not contain rule
to be applied to the international trade contracts, but are limited to encouraging
strong regional standardisation.

The UNCITRAL and The Hague have recently established regional centres that
offer a significant opportunity to promote the various private international law
instruments, including those relating to international contract law.44 In the light
of the importance of the issue, efforts by the UNCITRAL Secretariat are welcome
to explore other means of promoting and maintaining uniformity in the
interpretation of the CISG. The Secretariat recently proposed the establishment
of a system of national centres of expertise in the field of commercial law that go
beyond the current national correspondent system of Case Law on Uncitral
Texts (CLOUT).
According to the Secretariat, the system would
a) Collect, analyse, and monitor national case law related to UNCITRAL texts
b) Report the findings to UNCITRAL, and
c) Address the need of the judiciary to better understand the internationally
prevailing application and interpretation of UNCITRAL standards and
achieve effective cross-border co-operation.45
Resources are the biggest obstacle to such a proposal as noted by the Secretariat.

Cooperation:
The UNCITRAL and its sibling operations, UNIDROIT and the Hague
Conference should continue to coordinate and cooperate on all matters regarding
the international contract law in order to ensure that the organisations’ agendas
remain complimentary. The UNIDROIT and UNCITRAL have recently supported
consideration of joint collaboration between the two organisations on substantive
law projects as suggested by US46. These two may consider a joint project on
long-term contracts.

Naturally evolving harmonisation through progressive interpretation and the use

140 of existing instruments will continue to ensure that harmonisation is workable
and feasible. The CISG and PICC working together, have been remarkably International Contracts of
Sale
successful in addressing the needs of commercial players in international
commerce. There are more practical, positive and forward-looking alternative
that build on the existing platform of the CISG and the PICC. The UNCITRAL
must continue its efforts to assist States in maintaining uniform interpretation
and implementation of the CISG.

Battle of forms:
Battle of the forms is one of the unresolved legal problems to which different
counties’ courts have their own approach. There are three main approaches in
the literature as to the battle of forms; domestic approach, last shot rule and
knock-out rule. The last shot rule and knock-out rule are in competition with
each other. The courts are required to answer two questions; a. Is there a valid
contract between the parties? b. If yes, which terms of the standard forms are the
parts of the contract? The CISG has not given uniform answers to solve the
arisen disputes.47 The battle of forms dilemma can’t be resolved by single formula
as there are different situations of collusion and the various positive behaviours
of the parties.
The CISG is not concerned with validity of contract. Which standard terms should
be incorporated into the contract shall be solved by the applicable domestic law.48
The courts are required to look to the general principles of the CISG first, before
recourse to domestic law. Domestic approach is not widespread as this is
inconsistent with the main reason with the existence of CISG, namely unification
of the sales law.
A reply to an offer which purports to be an acceptance but contains additions,
limitations or other modifications is a rejection of the offer and constitutes a
counter-offer. The traditional common law rule namely the ‘mirror image ‘ rule
, which produces the last shot rule in order to answer to the battle of forms issue.
The last shot rule ‘treats every statement made with reference to confliction
standard terms as a rejection of the earlier offer, combined with counteroffer.49
In other words, the contract is concluded on the terms of the final form used,
without being objected by the other party.50 The conflicting standard terms knock
each other out and the provisions of CISG are applied instead of them. The courts
are to find the actual or deemed consensus of the parties based on their negotiations
in respect of the essential elements of transaction.
The aforesaid analysis of the battle of the forms makes it clear that knock-out
rule is supported by scholars and cases, because of advantages such as conformity
with the intention of the parties to the business, balanced and fair approach,
supportive approach to the contract validity issue, and providing uniform
application of the Convention by referring to its provisions in case of knock –out
terms.

6.8 COVID-19 PANDEMIC AND ITS IMPACT ON

THE PERFORMANCE OF INTERNATIONAL
SALE OF GOODS CONTRACT
A force majeure clause in international sale of goods contract relives a party
from performing its contractual obligations when certain circumstance beyond
its control arise, making performance inadvisable, commercially impracticable,
illegal or impossible. 141
Business Contracts The CISG Article 79 provides that “(a) Party is not liable for a failure to perform
any of his obligations if he proves that the failure was due to an impediment
beyond his control and that he could not reasonably be expected to have taken
impediment into account at the time of conclusion of the contract or to have
avoided or overcome it, or its consequences”

The treatment of impediment under CISG is different from the treatment under
common law. Generally, four conditions must be satisfied to assert the force
majeure protection under the CISG:
1) The impediment must be beyond the party’s control
2) The impediment is unforeseeable at the time the contract was signed.
3) The impediment and its consequences could not be reasonably avoided or
overcome.
4) The non-performance of the party is the result of the impediment.
Under Article 2 of the Uniform Commercial Code (UCC) of US a seller may be
excused from delay or non-delivery of the goods if performance has been made
impracticable by either:
1) The occurrence of an event “The non occurrence of the which was a basic
assumption on which contract was made” or
2) Good faith compliance with foreign or domestic government regulation

The Common law doctrines of frustration and impossibility may be invoked, but
they have higher threshold to overcome.

Predating the Covid-19 pandemic, well known examples such contractual

arrangements are found in model clauses issued by International Chamber of
Commerce (ICC), namely ICC’s 2003 force majeure clause, and the ICC’s
Hardship clause. This has changed with the ICC’s 2020 Hardship clause which
suggest three different legal consequences in the event of failed renegotiations,
any of which the parties can choose when concluding the contract;
1) The termination of the contract by one of the parties,
2) The termination of the contract by a Judge (or Arbitrator) or
3) finally, the adjustment or termination of the contract by a Judge (or Arbitrator)
To combat uncertainties for future crises like COVID-19, it is therefore advisable
to negotiate individual contractual clauses pertaining to force majeure and
hardship in order to determine the desired distribution of contractual risk in
advance51.

6.9 SUMMARY
In business-to-business international transactions, it would appear that the market
is operating affectively on that differences in contract law do not pose a serious
obstacle to cross-border trade. The conventions, the national laws, soft laws and
trade usages, Unidriot principles, lex Mercatoria, incoterms, UCP 600, model
contracts and clauses, CISG, PICC, Uncitral principles will help to overcome the
obstacles faced by the parties in their cross-border trade through international
contracts of sale of goods.
142
 International Contracts of
6.10 SELF ASSESSMENT QUESTIONS Sale

1) Explain the importance and significance of international contracts.

2) Discuss in detail the law and rules applicable to international contracts
3) Write a note on the historical back ground of the international sale of goods
contracts.
4) Analyse the assessment of sale of goods by transfer of property with certainty
and flexibility.
5) Make a brief note on CISG influence on individual national systems
6) Elucidate the regional efforts and cooperation in unifying the sales law.
7) Critically evaluate the methods of battle of forms.
8) Discuss the unforeseen circumstances which resulted the non-performance
by a seller in an international contract of sale.

6.11 FURTHER READINGS

1) Michael J. Dennis, Modernizing and harmonizing International Contract
law: The CISG and the UNIDROIT Principles continue to provide the best
war forward, Unif.L.Rev.Vol.19,2014,114-151
2) Jurgen Basedow, Some conflict-of-Laws Perspectives on the European
Banking Union,Texas Inernational Journal Vol.54:2 p.245
3) Kamal Huseynli, different Aproaches to conflicting Standard Terms under
the United Nations Convention on Contracts for the International Sale of
Goods, BAKU State University Law Review, vol.2. Issue 2, May 2016 p.197
4) J Cotzee, A Pluralist Approach to the Law of International Sales,PER/PELJ
2017(20) p.1
5) Angelo Chianale, The CISG As a Model Law: A Comparative Law Approach,
Singapore Journal of Legal Studies(2016) 29-45
6) Phillip Hellwege, Understanding Usage in International Contract Law
Harmonization,Vol.66 The American Journal of Comparative Law,127-171
7) Marija D. Mijatovic,The Currentness of the UNIDROIT Principles of
International Contracts-Effects of bottom –up method of Law Harmonization
8) Luca G. Castellani, Review: LRethinking Choice of Law in Cross-Border
Sales, NJCL2019/1
9) Petra Butler, Book Review: UNIDROIT Principles of International
Commercial. Contracts
10) IEckart Broderman, Book Review:UNIDROIT Principles of International
Commercial. Contracts
11) Andre Janssen and Christian Johannes Wahnschaffe, COVID-19 and
international sale contracts: unprecedented grounds for exemptions are
business as usual? Uniform Law Review, 2021 February 2, published online
2021 Feb 2. doi: 10.1093/ulr/unaa026.

143
Business Contracts References:
1
see United Nations Convention on Contracts for the International Sale of
Goods (Vienna, 1980) (the “CISG”), Article 1(1); Principles on Choice of
Law in International Commercial Contracts (2015) (the “Hague Principles”),
Article 1(2)).
2
Preamble Comment UNIDROIT Principles of International Commercial
Contracts 2010
3
Cyril Emery , International Commercial Contracts, Published in March 2016
4
governed by the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (New York, 1958) (the “New York Convention”) with 156
State parties
5
(Vienna, 1980, the “CISG”)
6
see CISG, Part I, Articles 1-5
7
Renaud Sorieul et al., Possible Future Work by UNCITRAL in the Field of
Contract Law: Preliminary Thoughts from the Secretariat, 58 VILL. L.
REV. 491, 500 at n.25 (2013) (citing John O. Honnold, The Sales Convention
in Action—Uniform International Words: Uniform Application?, 8 J.L. &
COM. 207, 208 (1988)).
8
References in this text are to the amended Convention unless stated otherwise.
9
see Limitation Convention, Articles 1-6
10
Limitation Convention, Article 8
11
Limitation Convention, Article 3(2)
12
Limitation Convention, Article 7
13
New York, 2005-the “Electronic Communications Convention”
14
Electronic Communications Convention, Article 3
15
Ibid, Article 5.
16
See, e.g., GIUDITTA CORDERO-MOSS, INTERNATIONAL COMMERCIAL CONTRACTS:
APPLICABLE SOURCES AND ENFORCEABILITY 137 (2014); Gerhard Dannemann,
Common Law-Based Contracts under German Law, in BOILERPLATE CLAUSES,
INTERNATIONAL COMMERCIAL CONTRACTS AND THE APPLICABLE LAW 62, 63
(Giuditta Cordero-Moss ed., 2011).
17
Ingeborg Schwenzer & Christopher Kee, International Sales Law – The Actual
Practice, 29 PENN ST. INT’L L. REV. 425, 440-441 (2011).
18
2010International Arbitration Survey:Choices in International Arbitration
19
2013 Statistical Report, 25 ICC INT’L CT. OF ARB. BULL., no.1, 2014 at 5, 13.
20
A few States have made declarations under CISG, Article 95, including the
United States, indicating that they will not be bound by Article 1(1)(b). With
regard to choice of law, it should be noted that courts and arbitration tribunals
have generally found that, for the purposes of considering which law should
apply when parties have generically chosen the law of a CISG State, the
CISG forms part of the law of that State and will apply unless the parties
have excluded its application or have specifically referred to the domestic
law of the State, for example, by identifying the particular code in
144
 question. UNCITRAL D IGEST OF C ASE LAW ON THE U NITED N ATIONS International Contracts of
Sale
CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS Art. 6, paras.
9-17 (2012).
21
See, e.g., CORDERO-MOSS, supra note 16, at 31.
22
see section 3.1.1
23
see section 2.2
24
Consider, for example, the UCP 600 (see section 3.3.4). While very widely
used and applied, State courts have, in some instances, overridden the UCP
600 with State law despite party choice to be governed by its
provisions. CORDERO-MOSS, supra note 16, at 64-68.
25
MODEL CLAUSES FOR THE USE OF THE UNIDROIT PRINCIPLES OF INTERNATIONAL
COMMERCIAL CONTRACTS 4-6 (2013).
26
, Article 7, (UNIDROIT Principles, Article 1.6)
27
Report of the United Nations Commission on International Trade Law, 45th
Session UN Doc A/67/17 (2012)
28
These principles were endorsed by UNCITRAL at its 48th session. Report of
the United Nations Commission on International Trade Law,48th Session Un
Doc/A70/17(2015)
29
Michael Joachim Bonell “The Law governing International Commercial
Contracts: Hard law Versus Soft law” in collected courses of the Hague
Academy of International law (Brill Leiden-2018) vol 388
30
WILLIAM F. FOX, INTERNATIONAL COMMERCIAL AGREEMENTS AND ELECTRONIC
COMMERCE 31 (5th rev. ed. 2013).
31
Regarding the customary, trade practice and normative understanding of
contractual terms in the international sales contracts with regard to dispute
between the parties to an international sales contract.
32
INGEBORG SCHWENZER ET AL., GLOBAL SALES AND CONTRACT LAW  (3d ed. 2012)at
49-50
33
ibid
34
See, e.g., Alexis Mourre, Applications of the Vienna International Sales
Convention in Arbitration, 17 ICC INT’L CT. OF ARB. BULL., no.1, 2006 at 43,
49; SCHWENZER, supra note 27, at 49-50.
35
The term that was used in an international sales contract keep in view the
meaning of the term as per customary, trade practice or normative
understanding of the said term.
36
  INCOTERMS 2010: ICC RULES FOR THE USE OF DOMESTIC AND INTERNATIONAL
TRADE TERMS 87 (2010).
37
Cf Franco Ferrari, ed, The CISG and its Impact on National Legal Systems
(Munich: Sellier European Publishers 2008); Peter Schlechtriem, “Basic
Structures and General Concepts of the CISG as models for harmonisation
of Law Obligations” (2005) 10 Juridica Int’l. 27
38
Cf Irene Krull, “Reform of Contract Law in Estonia: Influences of
Harmonisation of European Private Law” (2008) 14 Juridica Int’l 1 22.
39
At a workshop on 2nd September 2014, the Nigerian Law Reform Commission
began to consider a reform of the Sale of Goods Act, 1893 though CISG was
not ratified by Nigeria. 145
Business Contracts 40
Cf Nkiruka Maduekwe, “The CISG and Nigeria: is there a Meeting Point”
(2009/10) 14 CEPMLP Ann. Rev., online.
41
Cf Noboru Kashiwagi, “Accession by Japan to Vienna Sales Convention
(CISG)” (2008) 25 J Japan L 207 at page 214.
42
Ibid.
43
The New Code (Article 208) follows the solution of the CISG (arts. 67, 68)
regarding risk of accidental destruction and deterioration of the goods sold.
The old code connected the passage of risk with the conclusion of the contract
where as risk and benefit on the goods sold in the new code pass to the buyer
at the moment of the transfer of possession.
44
See UN Information Service, New UNCITRAL Regional Center for Asia
and the Pacific opens Republic of Korea, Press release UNIS/L/159(26
January 2012); see Hague Permanent Bureau, Report on the Activities of the
New Regional Offices of Latin America and the Pacific, Doc Information no
1(March 2013)
See Unicitral Secretariate, Technical Cooperation And Assistance Un Doc
A/CN.9/775(May2013) Para 11.
45
See Renaud Sorieul, Emma Hatcher and Cyril Emery, “Possible Future work
by UNICITRAL in the field of Contract Law: Preliminary Thoughts from
the Secretariat” 58 VillanovalLaw Review 491, 505
46
US proposal on UNCITRAL Future Work (n 10) 4-5; UNIDROIT Governing
Council, 92nd Session (n 133) para 35.
47
See Larry A. Dimatteo et.al., The interpretive turn in International Sales law:
An Analysis of Fifteen years of CISG Jurisprudence, 24Nw.J.Intl & Bus.299,
pp.349-357(2004)
48
Freancois Vergne, The “Battle of the Forms” Under the United Nations
convention on Contracts for the International Sale of Goods, 33 Am.J. Comp.
L 233 pp.256-257(1985)
49
Andre Corterier, A Peace Plan for the Battle of the Forms, 10 Int’l Trade &
Bus.L.Rev.195 p .197 (2006)
50
Peter Huber, Standard Terms under the CISG, 13 Vinodnona Journal of
International Commercial law & Arbitration 123, p.129( 2009)
51
Andre Janssen and Christian Johannes Wahnschaffe, COVID-19 and
international sale contracts: unprecedented grounds for exemptions are
business as usual? Uniform Law Review, 2021 February 2, published online
2021 Feb 2. doi: 10.1093/ulr/unaa026.

146
 International Contracts of
Sale

BLOCK-4
LEGAL AND REGULATORY FRAMEWORK
FOR FINANCING AND INVESTMENTS OF
BUSINESS
Unit 7 Banking and Other Allied Regulations
Unit 8 Foreign Exchange Management and Related Regulations
Unit 9 Insolvency and Bankruptcy

147
Legal and Regulatory
Framework for Financing and
Investments of Business

148
 Banking and Other Allied
UNIT 7 BANKING AND OTHER ALLIED Regulations

REGULATIONS

Objectives

After studying this unit you should be able to:

Understand the evolution of Banking Regulation
Explain the terms and conditions to be complied with for obtaining a bank
license.
Discuss the interface of Banking Regulation Act with other laws
Describe the role of Central Government in regulating the banking sector in
India
Structure
7.1 Introduction
7.2 Evolution of Banking Regulation
7.3 Regulation in relation to Chartering / Licensing
7.4 Regulation in relation to the Bank Management
7.5 Regulations with respect to ensuring Liquidity and Healthy Lending
Practices
7.6 Reporting Requirements, Inspections, and Audit
7.7 Penal Powers
7.8 Summary
7.9 Self Assessment Questions
7.10 Further Readings

7.1 INTRODUCTION
Regulation of financial sector is extremely important. But within the sector,
banking sector regulation is most important. The reason has to do with the
importance of the role it plays in the economy, the fragile nature of the business
model of the banks and the consequences of bank failures, as has been observed
in most serious recessionary phases in recent history, including Great Recession
of 2008.

Banks not only serve as depository of people’s savings, but also serve as a payment
mechanism. The payment system, which majorly runs on payment orders made
to and cheques drawn by us on our banks, runs on the assumption that the amount
standing to our credit in the account is as good as real money. The agreement
between two parties to do an impossible act itself is void. A contract may also
void because of an event which makes the performance of promise impossible or
unlawful after the completion of the contract. The amount shown in our account
as credit is a mere debt due to us from the bank which is repayable on our demand.
Our confidence that it would be so paid whenever asked for, and the ability of
banks in almost all instances to do so ensures that we treat it as good as money.
But we tend to forget that the bank lends this money, and to cover for its cost of
149
Legal and Regulatory operations and the interest paid to us, it has to lend it at a higher interest rate
Framework for Financing and
Investments of Business
which would usually be for a fixed duration. Thus, we come to a situation where
the bank has liabilities which are short term in nature, and assets which are long
term. This mismatch between the time frame of assets and liabilities is what
underlies the fragility of the banking business. The business not only has to
manage the liquidity, but also ensure that the depositors retain confidence in the
bank, so that not only fresh funds keep coming in to match the payment orders
and instructions, but also that the depositors do not lose confidence in the bank
as the loss of confidence would certainly would cause a run on the bank causing
it to fail.

A bank failure has an effect on all segments of the economy. The depositors not
only lose their liquid assets, but may even be the cause of failure of businesses
which used the failed bank for receiving and making payments, for providing
bank guarantees or which had an overdraft facility on the back of the security
given by them. This would now not be released any time soon till the bank
insolvency process is completed. This may even have a systemic effect, if the
entity is large. A bank failure may lead to a panic reaction amongst the general
mass of depositors, leading them to withdraw deposits from other banks, causing
a bank run. Healthy banks would fail if suddenly there is a run on their deposits.
Depositors and businesses dependent upon them fail and soon enough an isolated
instance of bank failure balloons into a system wide series of failures as was
experienced during the Great Depression of 1929 and Great Recession of 2008.
The failures also affect the money supply floating in the economy, as the banking
system multiplies the money. The money in circulation due to the operation of
the banking system is usually a few multiples of the base money (the printed
money or the issued coins).

7.2 EVOLUTION OF BANKING REGULATION

After understanding the importance of banks in the economy and the necessity
of regulating them, more than other players in the economy, the question arises
as to who is best placed to regulate the banks and the legal basis of the regulatory
power.

The first necessity for bank regulation came by the need for cooperation amongst
the banks in executing payment instructions and making collections on the cheques
deposited with them. Instead of chasing each bank individually, it was thought
fit to have a central place where the banks of a local area could meet and instead
of paying each cheque individually to another bank for the other bank’s customers,
only the net balance due to each bank be paid. So, local areas had a clearing
houses. Since cheques honoured in the interim may bounce, either due to
insufficiency of funds or signature of the purported cheque writer not matching,
the collecting bank had to be solvent enough for return of moneys in such cases.
Clearing house membership was an informal regulation of the industry as it was
dependent upon confidence in the solvency of the banks who met. But the role of
industry specific bodies in forming standards for the guidance of its members
has over a period of time has become more formal, and recognized by courts in
determination of industry standards for service.

The fragility of the banking system meant that whenever there was a run on the
banks, howsoever well run and solvent they might be individually, howsoever
150
good their asset quality be, there would always be a chance that they might fail. Banking and Other Allied
Regulations
No other financier would be willing to lend to the bank because it would be
afraid that even if the money lent is not lost, it may not be available to it in times
of crisis. So, a need was felt for a lender of last resort in times of crisis – an entity
willing to lend when no one is willing to do so because they are dependent on
demand deposits to lend. The entity should not depend on retail deposits and
have the power to create the money which is accepted as a valid tender.

In the late nineteenth century, Bank of England emerged as a lender of last resort
to the English banks. In the first decade of the twentieth century, the Federal
Reserve Board was formed to be the lender of last resort in the United States of
America. During the Great Depression a need was felt to have a lender of last
resort. In pursuance of this strongly felt need, the Reserve Bank of India (RBI)
was formed in 1934. Basically, the structure followed was that the banks which
wanted to be eligible to be considered for lending by the RBI, had to maintain a
certain percentage of their deposits with such lender of last resort (central bank)
and had to observe prudent business practices to be considered for lending in
emergency situations. It is like a bank exercising some control and surveillance
over a borrower who has been given an overdraft facility. With banks having
deposits with the RBI, it also has a role in the clearing house operations, thus
giving it a bird’s eye view of the working of the financial system and the solvency
of the individual players.

Regulation by perceptions of solvency and contract were thought to be insufficient.

Regulatory power was not statutory, as though the entities like Bank of England
or RBI may have come into existence either by charter or statute, the shareholders
were private individuals. After the nationalization of Bank of England and the
Reserve Bank of India, regulatory powers were given to the central bank, in the
same way as they could be exercised by the said executive wing of the government.
The powers have been reserved with the executive wing of the government in
some countries. But it was thought appropriate to give it to an entity which has
expertise in the sector, which would anyway perform a regulatory role with regard
to most of the banks because of it being the lender of last resort and thus avoid
duplication of effort. In this way, Banking Regulation Act, 1949, gave the Reserve
Bank of India the statutory regulatory power over most of the banks. The
government retained for itself the role of giving directions where it found
appropriate, and being a forum for appeal for most decisions taken by the RBI.

While RBI has the primary role in regulation of banks, it shares the regulatory
space with certain other bodies. In the case of agricultural cooperative banks and
regional rural banks, National Bank for Agriculture and Rural Development
(NABARD) also has a regulatory role as it is the principle refinancing body for
these banks serving specific needs of a sector of the economy. In the case of
urban cooperative banks, the principle means by which the RBI used to regulate
was by being the lender of the last resort for the banks which were in the second
schedule of the RBI Act. Recently, by amendment to the Banking Regulation
Act, RBI has been given a primary regulatory role over these banks, almost at
par with what it has in the case of commercial banks. However, it ought to be
noted that cooperatives having been organized under the state statutes relating to
cooperatives, the registrar of cooperatives of the state of incorporation will also
have a regulatory role (not so in the case of multi state cooperatives). In the case
of public sector banks, the regulatory role of the RBI is dependent upon how
much of the regulatory powers relating to them is ceded by the Central 151
Legal and Regulatory Government to the RBI under the Banking Regulation Act (BRA). At present,
Framework for Financing and
Investments of Business
Central Government has given the RBI almost all the powers over the public
sector banks which the RBI has over the private commercial banks, with the
exception of the powers over the Board and other Officers of the bank.

We have considered the regulation by industry standards setting bodies,

contractual arrangements for deriving of benefits, either as lender of last resort
or refinancing arrangements or deposit insurance etc., and by statute. Another
source of regulation is the soft law framed by different international associations
for regulators for the guidance of the member regulatory bodies. As far as banking
is concerned two transnational bodies are important. The first is Bank of
International Settlements, Basel, and the Financial Action Task Force.

Bank for International Settlements (BIS) was originally a small body of central
banks of developed economies, but its membership has recently expanded. The
bank has as its primary remit the stability of the international financial system.
After the Herstatt crisis in the mid 1970s, when the failure of a German bank
created problems for the payment system in New York, BIS has sought to address
the issue of how to ensure that the banks which are participants in the international
payments systems and mechanisms, stay solvent to honour their commitments.
Towards this end, with the sanction of the member central banks it has periodically
made rules for calculation of the capital required by a bank for doing business.
Though the rules are meant only for the banks engaged in cross border payments
and which belong to the member states, requirements of international trade and
international payment system operation almost made it incumbent to most central
banks to frame regulations based on the BIS guidelines. International trade
depends upon letters of credit and banks must have confidence in the letter of
credit opened by its counter party in another country to agree to become the
payer on being presented the documents by the exporter. In a similar manner,
the guidelines of the Financial Action Task Force (FATF), formed for the purpose
of curbing the use of the financial system for money laundering, are adopted by
not just the member countries but all others who want their financial institutions
not to be excluded from the international financial system.

One has to remember that regulatory bodies acquire expertise in certain sectors
of the economy. The legislature may want to use the expertise developed by
these bodies for regulating the allied sectors. Sometimes it is necessary, as carrying
out the responsibilities in one area may require an input from or a corresponding
action in another arena of economic activity. Inactivity in the allied area may
lead to the players exercising what many would call the regulatory arbitrage -
taking advantage of the absence of rules in the allied sector to carry on the same
activity without checks and balances. Banks and non banking finance companies
(NBFCs) are different. The deposits of the latter are not repayable on demand
and they don’t act as the agent of their customers in the payment system and so
don’t form part of the payment system. But a very short term deposit or
commercial paper (as in the case of Lehman Bros which failed in 2008) may
make them also very fragile. If the lenders to these institutions are banks, then
the regulator for banks becomes interested in their solvency, more so if the banks
form these NBFCs to bypass the regulatory barriers. That is why they are
sometimes called shadow banks. As a result of this, the RBI was given the
regulatory remit for the NBFC sector by an amendment to the RBI Act in 1997,
when a regulatory vacuum in the NBFC sector was noticed after the failure of
152
many depository NBFCs. Similarly, since the RBI has the remit to maintain the Banking and Other Allied
Regulations
monetary stability (stability in the value of the currency), it has the regulatory
powers in the money market (short duration loan and short term debenture market)
under the RBI Act, monetary payment and settlement systems (under Payment
and Settlement Systems Act) and regulates the capital flows in the foreign
exchange market (under Foreign Exchange Management Act).

7.3 REGULATION IN RELATION TO

CHARTERING / LICENSING
Banking is a business of borrowing and lending money, but with special features
which are absent in other borrowing and lending businesses. Not only are deposits
with it repayable on demand, but they are repayable only in the branch with
which the account is kept, and the bank also gives the cheque facility to its
customers and would collect cheques on their behalf. The last requirement means
that the bank has to take a debt/deposit from its customer and whenever the
customer wants it the bank cannot refuse it as in case of ordinary debtors.
Banking Regulation Act prevents any person or entity to give a cheque writing
facility to its customers if the person or entity is not a bank. Further it prevents
the use of the term bank by any entity which is not a banking company registered
under the Banking Regulation Act (though some entities use the terminology
under the special statutes by which they are created or under which they are
incorporated). While banks were in business long before BRA came to be enacted,
a time frame was given for such banks to get the license to operate as a bank
from the RBI. All new banks to operate as a bank needed a license from the RBI.
The grant of a license is the discretion of the RBI, but the BRA lays down certain
conditions for the exercise of its discretion, conditions which it is required to be
satisfied about before grant of a license. The company must not only be in a
position to repay present and future depositors in full as their claims accrue, but
should have adequate capital structure and earning prospects along with the
character of the proposed management and the conduct of its affairs not being
opposed to public interest or interests of depositors . In addition, the RBI will
look into the public interest and availability of banking facilities in the proposed
area of operations. While granting license, the RBI may lay down conditions to
be fulfilled by the licensee when operating as a bank.
Banking Regulation Act (BRA) gives RBI wide amplitude in the granting of a
license. The RBI has in recent times given out a policy papers on how it would
exercise its discretion. The conditions for license for different types of banks are
different as each of them would pose different risks to the financial system. At
present, banking license for commercial banks are in three categories - payment
banks, small finance banks and full-fledged commercial banks. The first do
not give out any commercial loans while the second give loans only up to a
specific amount allowed by the RBI (Rupees twenty five lakhs at present). Since
the first and second categories of banks pose a lower risk, the licensing conditions
are less onerous for them. The third category of banks has more onerous conditions
regarding capital and character of the management. One change by the RBI in
the latest policy statement is that from now on the bank licenses are to be on tap
provided the applicant meets its rigorous conditions for them and it has also laid
out a roadmap for payments banks to progress to small finance banks and then to
full-fledged commercial banks.
153
Legal and Regulatory The RBI license is also required for the opening of bank branches, the definition
Framework for Financing and
Investments of Business
of which is very wide in the BRA to take into account all payment offices. At
present, such licenses are not individually given but banking companies have
been given general permission to open branches provided a spatial distribution
in terms of rural and urban branches is maintained. Foreign banks wanting to
open branches in India are required to have a license from the RBI. The license
is granted on the basis of reciprocity (Indian banks can open branches in the
country of incorporation of the foreign bank). The latest guidelines of the RBI
provide that the foreign banks wanting to start a bank in India will have to do so
through a subsidiary incorporated in India, as it wants to insulate the Indian limb
of the business of the foreign bank from the fluctuations in the fortunes of the
foreign bank in other jurisdictions.

For any company to be licensed to operate as a bank, one essential aspect which
is required to be looked into is its capital. Capital of the banking company will
have two aspects, initial capital and capital in relation to business. BRA concerned
itself only with the initial capital and the amounts mentioned therein have only a
historical importance, no longer relevant in the present times. RBI gives out the
minimum capital the bank requires to have(depending upon the type of bank
license applied for), but also lays out the capital which a bank needs to have in
accordance with the size of business and the risk profile of its loan assets. This is
in pursuance of the application of the norms agreed upon by the central banks in
the Basel Accords. Basel Accords (at present we have Basel III) take into account
the reality that the shareholder, who controls the management, has a limited
liability. Because the liability of the shareholder is limited, the shareholder body
has an incentive to push the management to take greater risks in lending so as to
increase the shareholder returns. This risk reward conundrum in a limited liability
entity can only be broken by requiring that the shareholder put in additional
capital where the risks are greater. So now the capital requirements of a bank are
based on the size of its loan book and the quality of its loan book. Less shareholder
capital is required when money is lent to the government, more capital is required
when money is lent to an individual backed by the security of mortgage of self
occupied house and most capital is required when an unsecured loan is given for
a business. Basel norms also takes into account of balance sheet exposure of
banks in the form of bank guarantees, etc. The Basel capital requirements refers
to capital which is available to depositors of the bank as a cushion in the event of
bank not performing well. The capital can be in the form of equity shares,
irredeemable preference shares and debt in form of debentures (convertible or
non convertible) or bonds which are subordinate to debt due to the depositors.
The capital requirements can further be divided into tier one and tier two,
depending upon how permanent the capital is. Tier one comprises equity shares,
irredeemable preference shares and some debentures or bonds with the condition
that their redemption is dependent upon the banking company fulfilling certain
conditions and it wanting to redeem it.

7.4 REGULATION IN RELATION TO THE BANK

MANAGEMENT
As was observed earlier, that the law is concerned about the general character of
the proposed management and as to how the affairs of the bank are conducted so
that the public interest and the interests of the depositors are not affected. There
154
are two aspects to the above issue. One is who controls the bank that is the Banking and Other Allied
Regulations
shareholding composition and the degree of control a body of shareholders can
exercise, and the second issue comprises the quality of the management and its
conduct.

It is important for the banking company’s depositors as to the distribution of the

shareholding and the extent of the control that the dominant group of
shareholders exercises over the bank. Part of the problem is taken care of by the
BRA, and part of the problem is taken care of by the conditionalities laid out by
the RBI in giving the license and its powers to issue directions to the banks.

First of all the statute denies voting rights to preference shareholders irrespective
of the fact that they have not been paid preferential dividend for two years or
more.

Secondly, even in the case of equity shares, no shareholder can exercise voting
rights in excess of ten percent of the issued equity share capital. This cap on
voting powers can be increased by the RBI up to twenty six percent. Thirdly, no
one on his own or in concert with others can own five percent or more of the
equity share capital or voting rights in a company without the prior permission
of the RBI.

In addition to these statutory restrictions, the RBI at the time of the granting the
license lays down a schedule for the dilution of the promoter of the banking
company. These are to ensure that individual interests do not get equivocated
with the interests of the bank and there is a diversity of shareholding and voting
power so that there is sufficient control over the dominant shareholder without
there being a takeover which may not be in the interests of the depositors.

Second limb of ensuring good management is quality of management and its

conduct. BRA covers almost all aspects of potential control over the management
and almost all the aspects of a Board of Directors working which may affect the
bank. The provisions may appear at some times to be repetitive.
First of all, the BRA deals with the potential conflict of interest between the
bank and its Board. A banking company is forbidden to lend to any director or
any person in whom the director may be interested in. Further, a bank may not
remit any debt due from a director or any person in whom the director may be
interested in without the prior permission of the RBI. This blanket ban on power
to remit extends to extension of time for repayment or change in the terms of
repayment. A person to be a director must not be a proprietor of any business
concern or have a substantial interest (defined by BRA) in any company or firm
or be connected with it in any form if it were not a small scale industrial concern.
The Act prevents a director on the board of a banking company to be a director
on the board of any other company, even another banking company. The only
exception granted to this ban is membership of the board of a subsidiary of the
bank or that of a non-profit company. In addition, from a Chairman appointed on
a whole time basis, directors to all employees of a bank, irrespective of whatever
rank or office they hold, all are deemed to be public servants under Prevention of
Corruption Act and can therefore be prosecuted for causing any loss to the bank
by their corrupt actions.
After dealing with the conflict of interest, the BRA deals with the composition
of the Board. Majority of the board needs to have technical expertise specified 155
Legal and Regulatory by the BRA, with a further requirement of special knowledge and practical
Framework for Financing and
Investments of Business
experience in the case of a whole time Chairman or Managing Director (there
can be only one of the two in a bank). What is important is the power of the RBI
to interfere with the appointment process of the appointment of the Board, the
Chairman and the Managing Director. No amendment in the articles of association
or memorandum, no contract or resolution of the shareholders or the Board of
Directors with regard to the appointment, termination or remuneration of a
Chairman, Managing Director, Director or Chief Executive Officer shall be
effective unless approved by the RBI. Other than Directors who are not whole
time Directors, even the appointment, reappointment or termination of
appointment of the aforesaid managerial personnel requires the prior permission
of the RBI. The RBI can ask the banking company to reconstitute its Board if the
composition of the Board is not in accordance with the BRA. Non compliance
by the banking company of the direction would allow the RBI to remove the
Director/s whose appointment is not in compliance of the law and appoint its
own nominees on the Board. In the same vein, in case the RBI comes to the
conclusion that the whole time Chairman or Managing Director of the company
is not a fit and proper person, it may require the company to change the whole
time Chairman or Managing Director and non compliance with the direction
would allow the RBI to appoint its own nominee to the post. This power is in
addition to the power of the RBI to appoint when the said post is vacant for an
inordinately long period.

In public interest, interest of the depositors or for securing proper management

of the banking company, the RBI can remove any managerial personnel
(Chairman, Managing Director, Chief Executive Officer, etc.) or officer or
employee from the office after following due procedure, and appoint its own
nominee to the post. For the same reasons it may also appoint Additional Directors
on the Board of the banking company and also in consultation with the Central
Government supersede the Board of Directors and appoint an Administrator to
manage the affairs of the banking company.

It would be worthwhile to note that many of these provisions with regard to

managerial personnel, with suitable modifications are also applicable to
cooperative banks. In the case of the public sector banks (which are governed by
separate statutes by which they were formed or nationalized), the powers are
exercised by the Central Government.

7.5 REGULATIONS WITH RESPECT TO

ENSURING LIQUIDITY AND HEALTHY
LENDING PRACTICES
As discussed above, the banking business is inherently fragile as it lends for
long term purposes, from on the basis of funds which are borrowed from short
term sources. Other than ensuring that the management should not be such that it
may compromise the interests of the depositors, certain norms have to be in
place so that liquidity is maintained and the bank’s business is run in such a
manner that it remains solvent. These statutory provisions came about in the
background of historical experiences from some famous bank failures, which
the legislature did not want to be repeated. So there are certain no go areas for
the bank which the Parliament has itself prohibited, or allowed a relaxation only
156
with the prior permission of the RBI. As to the rest it has allowed the RBI to give Banking and Other Allied
Regulations
guidelines or directions taking into account the best practices in the world and
the economic reality of India.

First of all, a bank, in addition to banking business, can only do a business that is
permitted by section 6(1) of the BRA, though the last sub-clause of section 6(1)
allows the government to notify any other business or activity which a bank
could engage in. What it cannot do directly, it cannot do indirectly, as well. So,
no bank could have shares in excess of thirty percent of the shares in any entity
not engaged in a business mentioned in section 6(1) of the BRA. This restraint
on shareholding is with reference to holding in any form whatsoever i.e., as an
absolute owner, mortgagee or pledgee. Pursuant to historical experience, a bank
is forbidden to trade in goods and hold immovable property (which is not required
for banking business) for a period of more than seven years. In addition, as the
ambit of a bank’s permissible activities are also circumscribed like any company
by the object clause of its Memorandum of Association, and any change in the
Memorandum of Association of the bank requires the prior approval of the RBI.
RBI can also caution or prohibit a bank or banks from entering into a transaction
or class of transactions based upon its apprehensions. The reason for this
comprehensive set of limitations is that the bank which has an opportunity to use
the money parked by its depositors, should limit itself to the business related to
money lending and allied activities. Banks should not venture into a full-fledged
business entity by itself, as then the chances are that the easy liquidity made
available to it by the unsuspecting depositors may incentivize the management
to take risky bets and suppress losses and thus turning the bank in effect into a
ponzi scheme, satisfying old depositors by new deposits of the unsuspecting
customers. Moreover, the drafters of the BRA were concerned that the interests
of the depositors should not be made subservient to the interests of other creditors
of the bank. In pursuance of this objective, there is a prohibition on banks in
giving a floating charge on its assets to any creditor without the prior approval of
the RBI.

In addition to the restraints imposed expressly by it, the BRA gives rule making
powers to the RBI. Though BRA uses the term guidelines and directions for such
rules made by the RBI, they are binding on the bank, though a lending decision
in contravention of them may still be enforceable in a court of law. BRA recognizes
that such guidelines may be specific to a bank or may be general, applicable to
all or a class of banks or a bank. The RBI, when granting a license, may grant it
subject to conditions including conditions relating to loans which a bank can
give, as it does in the case of small finance banks and payment banks. Then
section 21 of the BRA allows the RBI to lay down the policy for bank advances,
generally for all or specific to a bank, including laying down the purpose, margins
for a security, considerations for determining maximum exposures which a
banking company can have to an individual, company or group as well as rates
of interests and conditions for financial accommodation of a borrower. It is in
pursuance of these powers that the RBI lays out the policies for social sector
lending, syndicate lending for large ticket loans, prompt corrective action for
weak banks, margin requirements for different types of securities including market
securities, purposes for which no money could be lent, minimum interest
chargeable and calculation of interest rate in the case of floating rate loans, etc.

Even otherwise, the RBI in public interest or in the interests of the banking
policy or interest of depositors or for proper management of the banking company 157
Legal and Regulatory may give general or specific directions to banks. It is in pursuance of this power
Framework for Financing and
Investments of Business
the RBI has implemented the Basel Accord norms in India and given banks
guidelines as to income recognition (a frequent cause of bank failure by
suppressing its weaknesses), NPA recognition and classification, debt restructuring
of sick enterprises and hauling the insolvent enterprises to the NCLT for
insolvency proceedings. As per one of its directions, every bank should have a
risk management committee to monitor the lending practices of the bank so as to
ensure its stability.

To handle potential liquidity crisis in a bank, even if it is well run, the law follows
a two pronged approach. The first is to prevent a sudden abnormal surge in the
need for liquidity due to panic amongst bank customers and the second approach
is to ensure that the bank has enough investment in assets which can be considered
liquid so that cash could be rustled up whenever the need for it arises. To prevent
panic, BRA makes it a punishable offence any act which is designed to undermine
the confidence of depositors in a banking company. Further, the depositors are
automatically given a deposit insurance to the extent of Rupees five lakhs. To
ensure liquidity in case of sudden demand, in addition to the lender of last resort
role of the RBI under section 19 of the RBI Act to the scheduled banks (a lending
done at the Bank Rate fixed by the RBI), every scheduled bank has to maintain
a deposit with RBI a certain percentage (fixed by the RBI, but at a minimum
three percent) of its time and demand liabilities. This cash reserve ratio helps in
the settlement in interbank transactions via the RBI and also is an emergency
liquid reserve available in an emergency. In addition to cash reserve ratio, the
banks have also to invest a certain fixed percentage of deposits in assets which
can be liquidated easily to raise cash. Called statutory liquidity ratio, these assets
are generally government bonds or bonds guaranteed by the government, though
few other assets have also been qualified to be part of the statutory liquidity
ratio. Subject to the floor and ceiling rates prescribed by the BRA, the cash
reserve ratio and the statutory liquidity ratio is fixed by the RBI. In addition to
these three means to ensure liquidity, the RBI has also provided a repo window
to the banks. Essentially, a repo transaction is a short term lending disguised as a
sale and repurchase transaction between the parties. Securities are sold by the
bank to the RBI with an understanding that they will be bought back by the bank
after a specified period (usually a few weeks), at a fixed rate which represents
the price of original sale and a specified interest rate called the repo rate (fixed
by the Monetary Policy Committee).

7.6 REPORTING REQUIREMENTS, INSPECTIONS

AND AUDIT
It is important for the regulator to be aware of the health of the regulated entities.
This is not just to see whether compliance is in accordance with the letter and
spirit of the regulations, but also to allow a preemptive action to be taken to
ensure that the regulated entity does not fail or its failure, if inevitable, does not
pose a systemic risk. The three pillars of this regulatory awareness are regular
reporting, statutory audits by trusted auditors and inspections. In the case of
banks, these three serve as an additional avenue of information in addition to
what is gleaned by the RBI from the working of the payment system.

The banks have to maintain the cash reserve ratio, statutory liquidity ration and
158 a minimum of seventy five percent of assets in India equal to its demand and
time liabilities in India. These three ratios have to be regularly calculated at Banking and Other Allied
Regulations
given intervals, so the RBI also needs to be informed about their compliance.
Therefore, on the last Friday of every month, every bank has to submit in the
given format data with regard to the liabilities and assets of the bank along with
any other information which the RBI may ask for. Further, under the RBI Act,
the banks have to share with the RBI credit information (which is much more
than advances made by the banks and includes information about guarantees,
securities and other potential liabilities), which the RBI can share with other
banks (express provision for sharing of such information was necessary because
of the customary law that banks should maintain confidentiality about their
customers financial affairs). This was thought of as a way to reduce systemic
risk. BRA now allows the RBI to publish any information received by it from the
banks as well as any credit information disclosed under Credit Information
Companies (Regulation) Act. This power should be read in consonance with the
power given in the RBI Act by which the information shared with the public
should not name the borrower and the lender.
The second limb of maintaining financial health through awareness is audit. While
the company law provisions with regard to audit are also applicable in so far as
they are not in conflict with the BRA, in the audit process of a company the RBI
has a certain control as it is, on behalf of the depositors, also interested in the
audit process. The auditor in addition to being deemed to be a public servant
under Prevention of Corruption Act, has to be approved by the RBI before his/
her appointment, reappointment or removal in addition to following the
Companies Act in such matters (RBI has a list of approved auditors). The RBI
can also order a special audit of the banking company, to be conducted either by
the banking company’s auditor or any other auditor appointed by the RBI. The
auditors are also supposed to report on matters directed by RBI to be looked into
and the report of the auditors, normal as well as the special shall be shared with
RBI.
The third important pillar of this process to find the truth is the inspection powers
of RBI, which it may do so on its own or shall do so on the directions of the
Central Government. During inspections not only the records of the bank will be
scrutinized, but the officers and employees may also be examined under oath.

7.7 PENAL POWERS

Any regulator’s powers have three components i.e., legislative (rule making),
executive and judicial (power to impose penal sanctions). The third component
is as important as the first two components because it is the third component
along with its expertise in the subject matter which puts the fear of the regulator
in the hearts of the regulated. What can be the penal consequences for non
observance of the regulatory guidelines and directions other than that of the
change of key personnel, supersession of Board, nomination of additional
members on the Board etc., which the RBI can exercise or threaten to exercise to
ensure compliance?

At the first level the RBI can deny the permissions which can be expected from
it, or deny the enjoyment by the regulated entity (banking company) of the general
permissions granted to the sector. So as a disciplinary step it may not sanction
the renewal of a Chairman or Managing Director’s appointment, or tell a bank
not to open new branches under a general permission given to all banks.
159
Legal and Regulatory The second method of penalizing a bank is to forbid it from doing what constitutes
Framework for Financing and
Investments of Business
the core of the banking business, a denial of which might mean a slow death of
the bank. So, using its powers to prohibit a certain transaction or class of
transactions generally or specifically, it can impose restrictions on a bank on
making advances or certain types of advances. The Central Government, if it is
convinced on the basis of an inspection report by the RBI that the banking
company’s affairs are being run in a manner which is detrimental to the interests
of the depositors, then it may prohibit the bank from taking fresh deposits. Failure
to comply with cash reserve ratio may also result in the RBI prohibiting the bank
from accepting fresh deposits.

The third way of penalizing is imposing a fine on the bank and/or its officers. So
non observance of the mandated cash reserve ratio and statutory liquidity ratio
would result in the imposition of penal interest on the bank to the extent it is
short of the required ratio and in addition the officers of the bank may be liable
for fine calculated on the basis of per day the bank was in default. Penalty is also
prescribed to those responsible for furnishing misleading information, not
furnishing the asked for information, accepting fresh deposits in contravention
of the prohibition or contravening the provisions of the BRA. However, a court
can take cognizance of the offence only if the RBI approaches it. The RBI also
has the powers to impose fines on its own.

The fourth way the penal consequence visits the non compliant bank is the
cancellation of license of the bank itself or of its branch. There are certain
conditions which BRA requires for grant of license (discussed above) and in
addition there can be certain conditions which the RBI may impose in granting a
license. If these conditions are not being fulfilled then the RBI may cancel the
license issued by it.

The fifth way in which the RBI may discipline the bank is by initiating the
winding up of the banking company. The RBI may make an application before
the Tribunal for winding up a banking company if it is convinced that the affairs
of the banking company are being conducted in a manner detrimental to the
interests of the depositors. Non adherence to the capital requirements of a bank,
non compliance with the conditions of the license, prohibition from acceptance
of fresh deposits and non compliance with the provisions of the BRA are also
grounds for initiating such action in addition to the insolvency of the bank.

The sixth tool to discipline a bank is by penalizing the shareholders without

winding up the bank. The Central Government can acquire a banking company
(on the basis of a report by the RBI) if it is in repeated violation of the RBI
directions or the affairs of the banking company are being conducted in a manner
detrimental to the interests of the shareholders. There is provision for shareholder
compensation for the expropriation, but no control premium is paid. In a similar
vein the RBI can reconstruct a banking company or amalgamate it with another
after imposing a moratorium on the bank. Here, in addition to the shareholders,
the depositors too may lose a part of their deposits (a ‘haircut’).

7.8 SUMMARY
Regulation of financial institutions is extremely important because of the unique
nature of a financial asset. It is an asset which derives its value by description
160
and its own existence is dependent upon the solvency/existence of the parties. Banking and Other Allied
Regulations
Amongst all the players in a financial system, the banks are the most unstable of
the lot because of their business model. Regulation seeks to reduce the risks of
operation to the bank itself, to the banking system and to the overall financial
system and the economy. Since banking as an industry keeps in evolving and
new risks keep on getting identified and the relative importance of some of the
old identified risks may get reduced, regulatory legal structure needs to be flexible
enough to take into account the new challenges with alacrity. Indian regulatory
structure for the banking industry tries to merge flexibility, so as to take into
account the global best practices and Indian reality, with some certainties as to
the considerations which will go into the rule making. Some provisions also
seek to ease the hurdles in the smooth conduct of the banking business. Therefore,
provisions for evidence by banks in Bankers Book of Evidence Act, nomination
in the BRA and sharing of credit information under the RBI Act and Credit
Information Companies (Regulation) Act seek to remove the landmines which
are there in law in the conduct of banking business.

7.9 SELF ASSESSMENT QUESTIONS

1) “RBI is the banker of the last resort”. Do you agree with the statement?
2) Stringent terms and conditions are required to be complied with for obtaining
a bank license. Please explain such terms and conditions.
3) Discuss the interface of Banking Regulation Act with other laws.
4) Discuss the socio-economic impact of the banking system in any country.
5) Discuss the role of shareholders in banking companies.
6) Discuss the role of Central Government in controlling and regulating the
banking sector in India.

7.10 FURTHER READINGS

1) Gupta, S.N., 2017, The Banking Law In Theory And Practice, Universal
Law Publishing 
2) M.L. Tannan, M.L., 2014, Banking Law And Practice In India, Lexis Nexis

161
Legal and Regulatory
Framework for Financing and UNIT 8 FOREIGN EXCHANGE
Investments of Business
MANAGEMENT AND RELATED
REGULATIONS

Objectives

After studying this unit you should be able to:

understand by the term ‘Foreign Exchange’
Explain the objectives and background of Foreign Exchange Management
Act (FEMA)
Identify the prohibited transactions under the FEMA
Describe the process of regulation and management of Foreign Exchange
Distinguish between Person resident in India and Person Non-resident in
India
Differentiate between Capital account transactions and current transactions
Structure
8.1 Introduction
8.2 Objectives of FEMA
8.3 Background of FEMA
8.4 FEMA: An Overview
8.5 Important Definitions and Concepts
8.6 Regulation & Management of Foreign Exchange
8.7 Types of Transactions under FEMA
8.8 Capital Account Transactions
8.9 Current Account Transactions
8.10 Authorised Person
8.11 Contraventions & Penalties
8.12 Provision for Appeal
8.13 Directorate of Enforcement
8.14 Compounding of Offences under FEMA
8.15 Summary
8.16 Self Assessment Questions
8.17 Further Readings/References

8.1 INTRODUCTION
This Unit is designed to introduce the important regulations related to the foreign
exchange management in India. It aims to provide the basic understanding of
different concepts under the Foreign Exchange Management Act, 1999, and its
related rules and regulations. It would also help the students to have a broad
understanding of how foreign exchange is managed in India and what is the
162 regulatory framework which govern the people who deal with foreign exchange.
 Foreign Exchange
8.2 OBJECTIVES OF FEMA Management and Related
Regulations
The Foreign Exchange Management Act (Act No 42 of 1999) has been formulated
by the Central Government to consolidate and amend the law relating to foreign
exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market
in India.1

8.3 BACKGROUND OF FEMA

The Defence of India Act, 1939, was temporary yet the first legislative attempt
to regulate and control the foreign exchange in India. With an aim to settle the
foreign exchange crisis in the country, the Foreign Exchange Regulation Act
was first enacted in 1947; however, it was further replaced by the FERA 1957.
The immediate predecessor of FEMA was the Foreign Exchange Regulation
Act, 1973. It was enacted with an objective to regulate the foreign exchange
rather than managing it. FERA aimed to regulate the foreign exchange by
preventing the outflow of Indian currency, regulating dealings in foreign exchange
and securities, by imposing several kinds of restrictions on transactions involving
foreign exchange and on persons dealing with foreign exchange. FERA also
aimed to only conserve the foreign exchange and regulate the use of it. FERA
provided for number of criminal offences with mens rea and had provision for
easy arrest by the Enforcement Directorate, even without an arrest warrant.

In the light of the economic liberalisation policy adopted by the Government of

India in 1991-92, and the changing economic and financial landscape in the
country, there was a need to modify the foreign exchange regulation also. Hence,
with an aim to modify the FERA and adopt more liberal policy and approach
towards foreign exchange, the FERA was replaced by the Foreign Exchange
Management Act, 1999. The FEMA 1999 was also formulated to encourage and
attract more foreign investments in the country; hence the regulations related to
the foreign investments were also simplified. Many provisions under FERA were
liberalised or removed to facilitate foreign exchange; however, few others were
still included under the FEMA.

The FEMA is more transparent in its approach and implementation than its
predecessor. It marks and very clearly identifies those areas and situations which
require specific approval by the RBI or the Central Government for acquiring or
holding foreign exchange. The philosophical approach was shifted from that of
conservation of foreign exchange to one of facilitating trade and payments as
well as developing orderly foreign exchange market.

8.4 FEMA: AN OVERVIEW

The Foreign Exchange Management Act, 1999, provides the legal framework
for the proper management and administration of the foreign exchange
transactions in the country. The Act came into force from June 1, 2000 and since
then, has been amended from time to time according to the changing economic
policies and objectives of the government. There are approximately six Rules
framed by the Central Government and twenty three Regulations notified by the
Reserve Bank of India (RBI) under the FEMA Act.
163
Legal and Regulatory The Act extends to the whole of India and also applies to all branches, offices
Framework for Financing and
Investments of Business
and agencies outside India owned or controlled by a person resident in India and
also to any contravention thereunder committed outside India by any person to
whom this Act applies.

The statutory power under this Act empowers the RBI as well as the Central
Government to frame and pass regulations and the rules from time to time, which
are consistent with the foreign trade policy of the country. The Act provides for
a legislative and regulatory framework, for inbound and outbound investments,
and facilitates trade and business opportunity between Indian and other countries.
FEMA lays down provisions for current account and capital account transactions.
The RBI is the regulatory body and plays a controlling role in the management
of the foreign exchange. The Act also makes provisions for enforcement, penalties,
adjudication and appeal. FEMA along with the various rules and regulation applies
to different practical aspects of the management of foreign exchange in India.

Structure of FEMA-
The Act is divided into 7 chapters, which are further divided into 49 sections.
The following is the scheme of chapters under FEMA-
CHAPTER I – Preliminary (Section 1&2)
CHAPTER II- Regulation and Management of Foreign Exchange (Section 3 –9)
CHAPTER III – Authorised Person (Section 10 –12)
CHAPTER IV – Contravention and Penalties (Section 13-15)
CHAPTER V – Adjudication and Appeal (Section 16- 35)
CHAPTER VI – Directorate of Enforcement (Section 36-38)
CHAPTER VII- Miscellaneous (Section 39 – 49)
It also includes-
Rules made by Ministry of Finance under Section 46 of FEMA (Subordinate
or delegated Legislations)
Regulations made by RBI under Section 47 of FEMA (Subordinate or
delegated Legislations)
Master Direction issued by RBI every year
Foreign Direct Investment policy issued by the Department for Promotion
of Industry and Internal Trade (DPIIT).
Notifications and Circulars issued by Reserve Bank of India
Rules made under FEMA:
1) FEM (Encashment of Draft, Cheque, Instrument and Payment of Interest)
Rules, 2000
2) FEM (Authentication of Documents) Rules, 2000
3) FEM (Current Account Transaction) Rules, 2000
4) FEM (Adjudication Proceedings and Appeal) Rules, 2000
5) FEM (Compounding Proceedings) Rules, 2000
6) The Appellate Tribunal for Foreign Exchange (Recruitment, Salary and
Allowances and Other Conditions of Service of Chairperson and Members)
Rules, 2000.
164
Regulations made under FEMA- Foreign Exchange
Management and Related
1) FEM (Acquisition and Transfer of Immovable Property outside India) Regulations
Regulations, 2015
2) FEM (Borrowing and Lending in Rupees) Regulations, 2000
3) FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000
4) FEM (Deposit) Regulations, 2016
5) FEM (Export and Import of Currency) Regulations, 2015
6) FEM (Guarantees) Regulations, 2000
7) FEM (Acquisition and Transfer of Immovable Property in India) Regulations,
2000
8) FEM (Establishment in India of Branch office or a Project office or any
other Place of Business) Regulations, 2016
9) FEM (Export of Goods and Services) Regulations, 2015
10) FEM (Foreign Currency Accounts by a Person Resident in India) Regulations,
2015
11) FEM (Insurance) Regulations, 2015
12) FEM (Investment in Firm or Proprietary Concern in India) Regulations, 2000
13) FEM (Manner of Receipt and Payment) Regulations, 2016
14) FEM (Permissible Capital Account Transactions) Regulations, 2000
15) FEM (Possession and Retention of Foreign Currency) Regulations, 2015
16) FEM (Realization, Repatriation and Surrender of Foreign Exchange)
Regulations, 2015
17) FEM (Remittance of Assets) Regulations, 2016
18) FEM (Transfer or Issue of Security by a person Resident outside India)
Regulations, 2017
19) FEM (Foreign Exchange Derivative Contracts) Regulations, 2000
20) FEM (Transfer or Issue of any Foreign Security) Regulations, 2004
21) FEM (Crystallization of inoperative Foreign Currency Deposits) Regulations,
2014
22) F.E.M (Transfer or Issue of any foreign Security) Regulations, 2004
23) FEM (International Financial Services Centre) Regulations, 2015
24) FEM (Regularization of Assets Held Abroad by a Person Resident in India)
Regulations, 2015.

FEMA

Free Transcations Capital a/c Dealings in Adjudication of

on current a/c transactions foreignexchange Offences
subject to reason- Realisation of through authorized Appeal provisions
able restritions export proceeds persons

165
Legal and Regulatory
Framework for Financing and 8.5 IMPORTANT DEFINITIONS AND CONCEPTS
Investments of Business
Persons Resident in India2 means:
i) a person residing in India for more than one hundred and eighty-two days
during the course of the preceding financial year but does not include—
A) a person who has gone out of India or who stays outside India, in either
case:
a) for or on taking up employment outside India, or
b) for carrying on outside India a business or vocation outside India,
or
c) for any other purpose, in such circumstances as would indicate his
intention to stay outside India for an uncertain period;
B) a person who has come to or stays in India, in either case, otherwise
than—
a) for or on taking up employment in India, or
b) for carrying on in India a business or vocation in India, or
c) for any other purpose, in such circumstances as would indicate his
intention to stay in India for an uncertain period;
ii) any person or body corporate registered or incorporated in India,
iii) an office, branch or agency in India owned or controlled by a person resident
outside India,
iv) an office, branch or agency outside India owned or controlled by a person
resident in India;

Person resident outside India3 means a person who is not resident in India.

Mr. X landed in India on 1st August 2019 to take up employment.

For the Financial Year 2018-19, he was not in India. So for the financial
year 20018-19 he is not resident of India.
For the Financial Year 2019-20, he was in India for more than 182
days, so for the financial year 2019-20 days, he is resident of India.

Authorized persons4 means an authorised dealer, money changer, off-shore

banking unit or any other person who are authorized to deal in foreign exchange
or foreign securities.

Capital Account Transaction5 means a transaction which alters the assets or

liabilities, including contingent liabilities, outside India of persons resident in
India or assets or liabilities in India of persons resident outside India, and includes
transactions referred to in sub-section (3) of section 6 of the Act.

Current account transaction6 means a transaction other than a capital account

transaction and without prejudice to the generality of the foregoing such
transaction includes;
166
i) payments due in connection with foreign trade, other current business, Foreign Exchange
Management and Related
services, and short-term banking and credit facilities in the ordinary course Regulations
of business,

ii) payments due as interest on loans and as net income from investments,

iii) remittances for living expenses of parents, spouse and children residing
abroad, and

iv) expenses in connection with foreign travel, education and medical care of
parents, spouse and children;

Foreign currency7 means any currency other than Indian currency.

Foreign exchange8 means foreign currency and includes;

i) deposits, credits and balances payable in any foreign currency,

ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or

drawn in Indian currency but payable in any foreign currency,

iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by

banks, institutions or persons outside India, but payable in Indian currency

8.6 REGULATION & MANAGEMENT OF

FOREIGN EXCHANGE
Chapter II of the FEMA Act, 1999, provides for the provisions related to the
regulation and management of foreign exchange in India. There can be no dealing
in foreign exchange without the general or special permission of the Reserve
Bank of India. The Act also does not empower the RBI or any other person to
directly handle the foreign exchange. For this, the RBI can authorize the
“Authorized persons” and issue directions to such authorized persons from time
to time.9Other than the ordinary or special permission of the RBI under the Act,
or other than the manner provided under the Act, its rules or regulations, no
person is allowed to:
a) deal in or transfer any foreign exchange or foreign security to any person
not being an authorised person;
b) make any payment to or for the credit of any person resident outside India in
any manner;
c) receive otherwise through an authorised person, any payment by order or
on behalf of any person resident outside India in any manner.10
d) enter into any financial transaction in India as consideration for or in
association with acquisition or creation or transfer of a right to acquire, any
asset outside India by any person.
A financial transaction means making any payment to or for the credit of any
person or receiving any payment for, by order or on behalf of any person.
Financial transaction also includes drawing, issuing or negotiating any bill of
exchange or promissory note or transferring any security or acknowledging
any debt.
167
Legal and Regulatory
Framework for Financing and Situation 1) Whether Mr. X, a resident of USA, asks his uncle staying in
Investments of Business Delhi to make a payment of Rs 20000 to Mr. Y?
Ans: No. Such payment is not permitted under clause (b) of section 3 of the
Act.
Situation 2) Mr. X, a resident of Germany asks his Company Secretary in
India to form a Company in India and proposes to reimburse all the expenses
after the formation of the company. Whether, the Indian Company Secretary,
can spend for the above purpose on behalf of Mr. X?
Ans: No. Such payment is not permitted under clause (b) of section 3 of the
Act.
There is a blanket prohibition on a person resident in India to acquire, hold, own,
possess or transfer any foreign exchange, foreign security or any immovable
property situated outside India, except as permitted under the Act, Rules or
Regulations thereunder.11

8.7 TYPES OF TRANSACTIONS UNDER FEMA

The Act recognises two types of transactions. They are; 1. Capital Account
Transactions and, 2. Current Account Transactions. Each type of the transaction
is governed by a relevant regulation. Let us discuss these in detail.

8.8 CAPITAL ACCOUNT TRANSACTIONS12

The capital account transactions are governed by the Act and the FEMA
(Permissible Capital Account Transactions) Regulations 2000. Such transactions
which alter the assets or liabilities, including contingent liabilities, outside India
of persons resident in India or assets or liabilities in India of persons resident
outside India are called as capital account transactions.13 The Act allows any
person to sell or draw foreign exchange to or from an authorised person for a
capital account transaction subject to the condition that the RBI may, in
consultation with the Central Government, specify14-
i) The permissible classes or classes of capital account transactions
ii) The limit upto which foreign exchange shall be admissible for such
transactions
iii) Any condition which may be placed on such transactions
However, the Reserve Bank cannot impose any restriction on the drawal of foreign
exchange for payments which are due on account of amortization of loans or not
depreciation of direct investments in the ordinary course of business.

Similarly, the Central Government, in consultation with the RBI can also
prescribe15—
a) the permissible class or classes of capital account transactions, not involving
debt instruments;
b) the limit up to which foreign exchange shall be admissible for such
transactions; and
c) any conditions which may be placed on such transactions.
168
Powers of RBI to regulate the foreign exchange16 Foreign Exchange
Management and Related
The Act empowers the RBI to prohibit, restrict or regulate the following- Regulations

a) transfer or issue of any foreign security by a person resident in India;

b) transfer or issue of any security by a person resident outside India;
c) transfer or issue of any security or foreign security by any branch, office or
agency in India of a person resident outside India;
d) any borrowing or lending in foreign exchange in whatever form or by
whatever name called;
e) any borrowing or lending in rupees in whatever form or by whatever name
called between a person resident in India and a person resident outside India;
f) deposits between persons resident in India and persons resident outside India;
g) export, import or holding of currency or currency notes;
h) transfer of immovable property outside India, other than a lease not exceeding
five years, by a person resident in India;
i) acquisition or transfer of immovable property in India, other than a lease not
exceeding five years, by a person resident outside India;
j) giving of a guarantee or surety in respect of any debt, obligation or other
liability incurred—
i) by a person resident in India and owed to a person resident outside India;
or
ii) by a person resident outside India.
Modes of Acquiring Property in and Outside India-

The FEMA Act 1999 lays down the mechanism for acquiring property in India
by a non-resident and outside India by a resident. The Act provides the following-

I) Modes of acquiring property outside India by a resident-

A person resident in India can hold, own, transfer or invest in foreign currency,
foreign security or any immovable property situated outside India, if such
currency, security or property was acquired, held or owned by such person when
he was resident outside India or inherited from a person who was resident outside
India.17In this regard, the provisions laid down under the Foreign Exchange
Management (Acquisition and transfer of immovable property outside India)
Regulations, 2015 state that the following-
1) A resident can acquire immovable property outside India by way of gift or
inheritance from:
a) a person referred to in sub-section (4) of Section 6 of the Act, or referred
to in clause (b) of regulation 4; or
b) a person resident in India who had acquired such property on or before
July 8, 1947 and continued to be held by him with the permission of
the Reserve Bank.
c) a person resident in India who has acquired such property in accordance
with the foreign exchange provisions in force at the time of such
acquisition.18
169
Legal and Regulatory 2) A resident can acquire immovable property outside India by way of purchase
Framework for Financing and
Investments of Business
out of foreign exchange held in Resident Foreign Currency (RFC) account
maintained in accordance with the Foreign Exchange Management (Foreign
Currency accounts by a person resident in India) Regulations, 2015;

3) A resident can acquire immovable property outside Indiajointly with a relative

who is a person resident outside India, provided there is no outflow of funds
from India;

II) Modes of acquiring property in India by a non-resident

A person resident outside India is also permitted to hold, own, transfer or invest
in Indian currency, security, or any immovable property situated in India if such
currency, security or property was acquired, held or owned by such person when
he was resident in India or inherited from a person who was resident in India.19
The provisions related to acquisition of immovable property by a non-resident
or Overseas Citizen of India (OCI) have been laid down in Foreign Exchange
Management (Foreign Currency accounts by a person resident in India)
Regulations, 2015.

Acquisition of Immovable Property by a non-resident or OCI20

Other than agricultural land, plantation property and farm house, an NRI or OCI
can-
acquire by way of purchase any immovable property in India21.
acquire by way of gift any immovable property in India from person resident
in India or from an NRI or an OCI who in any case is a relative as defined in
section 2(77) of the Companies Act, 2013.22
acquire any immovable property in India by way of inheritance from a person
resident outside India who had acquired the property in accordance with the
provisions of the foreign exchange law in force at the time of acquisition.23
acquire any immovable property in India by way of inheritance from a person
resident in India.24
Similarly a non-resident or OCI can also transfer any immovable property to a
person resident in India under the Foreign Exchange Management (Foreign
Currency accounts by a person resident in India) Regulations, 2015.

Although, the Act as well as the Regulations facilitate the acquisition of

immovable property, the Reserve Bank of India has wide powers to regulate,
prohibit, restrict establishment in India of a branch, office or other place of
business by a person resident outside India for carrying on any activity relating
to such branch, office or other place of business.25

Classes of Capital Account Transactions

There are two main classes of capital account transactions which are permissible
as per the Schedule I & II to Foreign Exchange Management (Permissible Capital
Account Transactions) Regulations, 2000;26 viz-

1) Classes of capital account transactions of Persons resident in India

Investment by a person resident in India in foreign securities
170
 Foreign currency loans raised in India and abroad by a person resident in Foreign Exchange
Management and Related
India Regulations
Transfer of immovable property outside India by person resident in India
Guarantees issued by a person resident in India in favour of a person resident
outside India
Export, import and holding of currency/currency notes
Remittance outside India of capital assets of a person resident in India
Loans and overdrafts by a person resident in India to a person resident outside
India
Maintenance of foreign currency accounts in India and outside India by a
person resident in India
Taking out of insurance policy by a person resident in India from an insurance
company outside India
Loans and overdrafts by a person resident in India to a person resident outside
India
Sale and purchase of foreign exchange derivatives in India and abroad and
commodity derivatives abroad by a person resident in India
Examples of capital account transaction would include making equity
investment in any other country, transfer including sale of immovable property
situated outside India by a person resident in India.

2) Classes of capital account transactions of persons resident outside India

Investment in India by a person resident outside India, that is to say:
o issue of security by a body corporate or an entity in India and investment
therein by a person resident outside India; and
o investment by way of contribution by a person resident outside India to
the capital of a firm or a proprietorship concern or an association of
persons in India.
Acquisition and transfer of immovable property in India by a person resident
outside India
Guarantee by a person resident outside India in favour of, or on behalf of a
person resident in India
Import and export of currency/currency notes into/from India by a person
resident outside India.
Deposits between a person resident in India and a person resident outside
India
Foreign Currency accounts in India of a person resident outside India
Remittance outside India of capital assets in India of a person resident outside
India.
Subject to the provisions of the Act or the rules or regulations or direction or
orders made or issued thereunder, any person may sell or draw foreign exchange
to or from an authorised person for a capital account transaction specified in the
Schedules provided that the transaction is within the limit, if any, specified in the
regulations relevant to the transaction.27 171
Legal and Regulatory The FEMA (Permissible Capital Account Transactions) Regulations 200028 also
Framework for Financing and
Investments of Business
envisage that save as otherwise provided in the Act, rules or regulations made
thereunder, no person is allowed to undertake or sell or draw foreign exchange
to or from an authorised person for any capital account transaction.29 Similarly,
no person resident outside India can make investment in India , in any form, in
any company or partnership firm or proprietary concern or any entity, whether
incorporated or not, which is engaged or proposes to engage in the30-
Business of chit fund, or
As Nidhi company, or
In agriculture or plantation activities, or
In real estate business or construction of farm houses, or
In trading of Transferable Development Rights (TDRs)
For this purpose, the payment for investment can be made by remittance from
abroad through normal banking channels or by debit to an account of the investor
maintained with an authorised person in India in accordance with the regulations
made by the Reserve Bank under the Act.31 However, every person selling or
drawing foreign exchange to or from an authorised person for a capital account
transaction is required to furnish a declaration to the RBI in the form and within
the time specified in the regulations relevant to the transaction.32

8.9 CURRENT ACCOUNT TRANSACTIONS

Transactions other than a capital account transaction are current account
transaction. They include the following transactions33—
i) payments due in connection with foreign trade, other current business,
services, and short-term banking and credit facilities in the ordinary course
of business,
ii) payments due as interest on loans and as net income from investments,
iii) remittances for living expenses of parents, spouse and children residing
abroad, and
iv) expenses in connection with foreign travel, education and medical care of
parents, spouse and children.
The Act allows any person to sell or draw foreign exchange to or from an
authorised person if such sale or drawl is a current account transaction. However,
the Central Government may, in public interest and in consultation with the
Reserve Bank, impose reasonable restrictions for current account transactions.34

The Foreign Exchange Management (Current Account Transactions) Rules, 2000

defines the term “Drawal” to mean drawal of foreign exchange from an authorised
person and includes opening of Letter of Credit or use of International Credit
Card or International Debit Card or ATM Card or any other thing by whatever
name called which has the effect of creating foreign exchange liability.35

Rule 3 imposes prohibition on drawal of foreign exchange by any person for the
following purpose36:
a) a transaction specified in the Schedule I; or
172
b) a travel to Nepal and/or Bhutan; or Foreign Exchange
Management and Related
c) a transaction with a person resident in Nepal or Bhutan. This prohibition Regulations
may be exempted by RBI subject to such terms and conditions as it may
consider necessary to stipulate by special or general order.
Rule 4 requires prior approval of the Government of India for the transactions as
specified in Schedule II. However, this does not apply to the cases where the
payment is made out of funds held in Resident Foreign Currency Account (RFC)
of the remitter.

Rule 5 governs every drawal of foreign exchange for transactions included in

Schedule III. However, it does not apply to those cases where the payment is
made out of funds held in Resident Foreign Currency (RFC) Account of the
remitter.

Schedule I- Transactions which are prohibited

1) Remittance out of lottery winnings.
2) Remittance of income from racing/riding etc. or any other hobby.
3) Remittance for purchase of lottery tickets, banned/proscribed magazines,
football pools, sweepstakes, etc.
4) Payment of commission on exports made towards equity investment in Joint
Ventures/ Wholly Owned Subsidiaries abroad of Indian companies.
5) Remittance of dividend by any company to which the requirement of dividend
balancing is applicable.
6) Payment of commission on exports under Rupee State Credit Route, except
commission upto 10% of invoice value of exports of tea and tobacco.
7) Payment related to “Call Back Services” of telephones. 8. Remittance of
interest income on funds held in Non-Resident Special Rupee (Account)
Scheme.
Schedule II- Transactions which require prior approval of the Central
Government
S.No. Purpose of Remittance Approval of
1. Cultural Tours Ministry of Human Resources
Development (Department of
Education and Culture)
2. Advertisement in foreign print media Ministry of Finance (Department
for the purposes other than promotion of Economic Affairs)
of tourism, foreign investments and
international bidding (exceeding USD
10,000) by a State Government and
its PSUs
3. Remittance of freight of vessel Ministry of Surface Transport
chartered by a PSU (Chartering Wing)
4. Payment of import through ocean Ministry of Surface Transport,
transport by a government department (Chartering Wing)
or a PSU on CIF basis
173
Legal and Regulatory
Framework for Financing and 5. Multi-modal transport operators Registration Certificate from the
Investments of Business making remittance to their agents Director General of Shipping
abroad.
6. Remittance of hiring charges of Ministry of Information and
transponders by: Broadcasting (Ministry of
TV Channels Communication and Information
Technology)
Internet Service Providers
7. Remittance of container detention Ministry of Surface Transport
charges exceeding the rate prescribed (Director General of Shipping)
by Director General of Shipping
8. Remittance of prize money/ Ministry of Human Resources
sponsorship of sports activity abroad Development
by a person other than International/
National/ State Level sports bodies,
if the amount involved exceeds USD
100,000
9. Remittance for membership of P & I Ministry of Finance (Insurance
Club Division)

However, if the payment is made out of funds held in Resident Foreign Currency
(RFC) Account of the remitter, prior approval of Government of India will not
be required.

Schedule III- Transactions which require prior approval of the Reserve Bank
of India

A) Facilities for individuals— Individuals can avail of foreign exchange facility

for the following purposes within the limit of USD 2,50,000 only. Any
additional remittance in excess thereof requires prior approval of the Reserve
Bank of India.
1) Private visits to any country (except Nepal and Bhutan)
2) Gift or donation exceeding USD 5,000 per remitter/donor per annum
3) Exchange facility or going abroad for employment exceeding USD
100,000 or amount prescribed by country of emigration
4) Emigration
5) Maintenance of close relatives abroad
i) exceeding net salary (after deduction of taxes, contribution to
provident fund and other deductions) of a person who is resident
but not permanently resident in India and –
a) is a citizen of a foreign State other than Pakistan; or
b) is a citizen of India, who is on deputation to the office or branch
or subsidiary or joint venture in India of such foreign company.
ii) exceeding USD 100,000 per year, per recipient, in all other cases.
6) Release of foreign exchange, exceeding USD 25,000 to a person
irrespective of period of stay, for business travel, or attending a
174
 conference or specialised training or for meeting expenses for meeting Foreign Exchange
Management and Related
medical expenses, or check-up abroad, or for accompanying as attendant Regulations
to a patient going abroad for medical treatment/ check-up.
7) Expenses in connection with medical treatment abroad exceeding the
estimate from the doctor in India or hospital/doctor abroad.
8) Studies abroad exceeding the estimate from the institution abroad or
USD 100,000, per academic year, whichever is higher.
9) Any other current account transaction
The FEM (Current Account Transaction) Rules, 2000, also provides
that a person who is resident but not permanently resident in India
and-
a) is a citizen of a foreign State other than Pakistan; or
b) is a citizen of India, who is on deputation to the office or branch of
a foreign company or subsidiary or joint venture in India of such
foreign company, may make remittance upto his net salary (after
deduction of taxes, contribution to provident fund and other
deductions).
A person resident in India on account of his employment or deputation of a
specified duration (irrespective of length thereof) or for a specific job or
assignments, the duration of which does not exceed three years, is a resident
but not permanently resident: It is to be noted that a person other than an
individual may also avail of foreign exchange facility, mutatis mutandis,
within the limit prescribed under the said Liberalised Remittance Scheme
for the purposes mentioned herein above.

B) Facilities for Persons Other than Individuals-

The following remittances by persons other than individuals require prior
approval of the Reserve Bank of India.
i) Donations exceeding one per cent of their foreign exchange earnings
during the previous three financial years or USD 5,000,000, whichever
is less, for-
a) creation of Chairs in reputed educational institutes,
b) contribution to funds (not being an investment fund) promoted by
educational institutes; and
c) contribution to a technical institution or body or association in the
field of activity of the donor Company.
ii) Commission, per transaction, to agents abroad for sale of residential
flats or commercial plots in India exceeding USD 25,000 or five percent
of the inward remittance whichever is more.
iii) Remittances exceeding USD 10,000,000 per project for any consultancy
services in respect of infrastructure projects and USD 1,000,000 per
project, for other consultancy services procured from outside India.
iv) Remittances exceeding five per cent of investment brought into India
or USD 100,000 whichever is higher, by an entity in India by way of
reimbursement of pre-incorporation expenses.
175
Legal and Regulatory
Framework for Financing and 8.10 AUTHORISED PERSON
Investments of Business
The authorized persons are the authorized dealers, money changers, off-shore
banking units or may be called by any other name; who are authorized on behalf
of the RBI to deal in foreign exchange or foreign securities.37 The RBI shall
authorize such person in writing and shall be subject to the conditions laid down
by the RBI.38 The RBI can also revoke the authorization at any time if the
revocation is required to be done in public interest or the authorized dealer fails
to comply with the condition subject to which authorisation was granted. 39
However, before revocation, the authorized dealer has to be given a reasonable
opportunity of being heard.

Duties of Authorised Person

1) An authorised person shall, in all his dealings in foreign exchange or foreign
security, comply with general or special directions/or orders of the Reserve
Bank. Without the prior permission of the Reserve Bank, an authorised person
shall not engage in any transaction involving any foreign exchange or foreign
security which is not in conformity with the terms of his authorisation.40

2) Before undertaking any transaction in foreign exchange on behalf of any

person, the Authorised Person shall require that person to make such
declaration and to give such information as will reasonably satisfy him that
the transaction will not involve, and is not designed for the purpose of any
contravention or evasion of the provisions of this Act or of any rule,
regulation, notification, direction or order made thereunder. Where the said
person refuses to comply with any such requirement or makes only
unsatisfactory compliance therewith, the authorised person shall refuse in
writing to undertake the transaction and shall, if he has reason to believe
that any such contravention or evasion as aforesaid is contemplated by the
person, report the matter to the Reserve Bank.41

3) The Reserve Bank may give any direction in regard to making of payment
or the doing or desist from doing any act relating to foreign exchange or
foreign security to the authorised persons.42

4) The Reserve Bank may also direct any authorised person to furnish such
information, in such manner, as it deems fit.43 However, where any authorised
person contravenes any direction given by the Reserve Bank under this Act
or fails to file any return as directed by the Reserve Bank, the Reserve Bank
may, after giving reasonable opportunity of being heard, impose on the
authorised person a penalty which may extend to ten thousand rupees and in
the case of continuing contravention with an additional penalty which may
extend to two thousand rupees for every day during which such contravention
continues.44

The Reserve Bank also has the power to inspect the authorised persons by
authorizing an officer on its behalf, for the purpose of –
a) verifying the correctness of any statement, information or particulars
furnished to the Reserve Bank;
b) obtaining any information or particulars which such authorised person has
failed to furnish on being called upon to do so;
176
c) securing compliance with the provisions of this Act or of any rules, Foreign Exchange
Management and Related
regulations, directions or orders made thereunder. Regulations

Every authorised person is under a duty to produce such books, accounts and
other documents in his custody or power and to furnish any statement or
information relating to the affairs of such personas may be required.45

8.11 CONTRAVENTIONS & PENALTIES46

If any person contravenes with the provisions of the Act, Rules, Regulations,
notification, direction or order thereunder or contravenes any condition subject
to which an authorization is issued by the RBI , the following penalties have
been provided for under the Act:

1) Such a person shall, upon adjudication, be liable to a penalty up to thrice the

sum involved in such contravention where such amount is quantifiable, or
up to two lakh rupees where the amount is not quantifiable, and where such
contravention is a continuing one, further penalty which may extend to five
thousand rupees for every day after the first day during which the
contravention continues.47

2) If any person is found to have acquired any foreign exchange, foreign security
or immovable property, situated outside India, of the aggregate value
exceeding the threshold prescribed under the proviso to sub-section (1) of
section 37A, he shall be liable to a penalty upto three times the sum involved
in such contravention and confiscation of the value equivalent, situated in
India, the foreign exchange, foreign security or immovable property.48

If the Adjudicating Authority, deems fits, he may, after recording the reasons
in writing, recommend for the initiation of prosecution. If the Director of
Enforcement is satisfied, he may, after recording the reasons in writing, direct
prosecution by filing a Criminal Complaint against the guilty person by an
officer not below the rank of Assistant Director.49

3) In addition to the penalty, such a person shall also be punishable with

imprisonment for a term which may extend to five years and with fine.50

The court cannot take cognizance of an offence under section 13 except as

on complaint in writing by an officer not below the rank of Assistant Director.

4) An Adjudicating Authority, in addition to any for contravention, may also

direct that any currency, security or any other money or property in respect
of which the contravention has taken place shall be confiscated to the Central
Government and further direct that the foreign exchange holdings, if any, of
the persons committing the contraventions or any part thereof, shall be
brought back into India or shall be retained outside India in accordance with
the directions made in this behalf.51

Enforcement of the Order of the AA

Any person who fails to make full payment of the penalty imposed on him under
the Act within a period of ninety days from the date on which the notice for
payment of such penalty is served on him, is liable to civil imprisonment.52
177
Legal and Regulatory The Adjudicating Authority has been vested with the powers of issuing warrant
Framework for Financing and
Investments of Business
of arrest and detention in the following circumstances-
1) An order for the arrest and detention in civil prison of a defaulter can be
made53-
i) When the Adjudicating Authority has issued and served a notice upon
the defaulter calling upon him to appear before him on the date specified
in the notice and to show cause why he should not be committed to the
civil prison., and
ii) When the Adjudicating Authority, for reasons in writing, is satisfied—
a) that the defaulter, with the object or effect of obstructing the
recovery of penalty, has, after the issue of notice, dishonestly
transferred, concealed, or removed any part of his property, or
b) that the defaulter has, or has had since the issuing of notice, the
means to pay the arrears or some substantial part thereof and refuses
or neglects or has refused or neglected to pay the same.
2) A warrant for the arrest of the defaulter may be issued by the Adjudicating
Authority, upon satisfaction by affidavit or otherwise, that the defaulter is
likely to abscond or leave the local limits of the jurisdiction of the
Adjudicating Authority.54
3) Where appearance is not made pursuant to a notice issued and served, the
Adjudicating Authority may issue a warrant for the arrest of the defaulter.55
4) A warrant of arrest issued by the Adjudicating Authority may also be executed
by any other Adjudicating Authority within whose jurisdiction the defaulter
may for the time being be found.56
The following provisions are also needed to be complied with:
a) Every arrested person shall be brought before the Adjudicating Authority as
soon as practicable and in any event within twenty-four hours of his arrest
(exclusive of the time required for the journey). Provided that the defaulter
shall be released at once, if he pays the amount entered in the warrant of
arrest as due and the costs of the arrest to the officer arresting him.57
b) When a defaulter appears before the Adjudicating Authority, he shall be
given an opportunity by the Adjudicating Authority showing cause why he
should not be committed to the civil prison.

c) Pending the conclusion of the inquiry, the defaulter can also be detained in
the custody of such officer as the Adjudicating Authority may think fit. He
can also be released on his furnishing the security to the satisfaction of the
Adjudicating Authority for his appearance as and when required.

d) Upon the conclusion of the inquiry, the Adjudicating Authority may make
an order for the detention of the defaulter in the civil prison and shall in that
event cause him to be arrested if he is not already under arrest. Provided that
in order to give a defaulter an opportunity of satisfying the arrears, the
Adjudicating Authority may, before making the order of detention, leave the
defaulter in the custody of the officer arresting him or of any other officer
178 for a specified period not exceeding fifteen days, or release him on his
 furnishing security to the satisfaction of the Adjudicating Authority for his Foreign Exchange
Management and Related
appearance at the expiration of the specified period if the arrears are not Regulations
satisfied.

e) The detention order may be executed at any place in India in the manner
provided for the execution of warrant of arrest under the Code of Criminal
Procedure, 1973.58

f) The Adjudicating Authority may, by order in writing, authorise an officer of

Enforcement not below the rank of Assistant Director to recover any arrears
of penalty from any person who fails to make full payment of penalty imposed
on him within the period of ninety days from the date on which the notice
for payment of such penalty is served on him.59

g) Any contravention may, on an application made by the person committing

such contravention, be compounded within one hundred and eighty days
from the date of receipt of application by the Director of Enforcement or
such other officers of the Directorate of Enforcement and officers of the
Reserve Bank as may be authorised in this behalf by the Central Government.
Where a contravention is compounded, no proceeding or further proceeding,
shall be initiated or continued, against the person committing such
contravention under that section, in respect of the contravention so
compounded.60

8.12 PROVISION FOR APPEAL

The Act provides the provision for appeal in three stages-
i) Appeal before the Special Director(Appeals) against the order of the
Adjudicating Officer
ii) Appeal before the Appellate Tribunal Against the Order of the Special
Director
iii) Appeal before the High Court
Appeal to the Special Director (Appeals)61
An appeal against the order of the Adjudicating Authority many be made to the
Special Director (Appeals) appointed by the Central Government.62 Every appeal
should be filed within forty-five days from the date on which the copy of the
order made by the Adjudicating Authority is received by the aggrieved person.
The Special Director (Appeals) may entertain an appeal after the expiry of the
said period of forty-five days, if he is satisfied that there was sufficient cause for
not filing it within that period.63

Appeal before the Appellate Tribunal64

The Central Government or any person aggrieved by an order made by an
Adjudicating Authority, or the Special Director (Appeals), may prefer an appeal
to the Appellate Tribunal. Any person appealing against the order of the
Adjudicating Authority or the Special Director (Appeals) levying any penalty, is
required while filing the appeal, to deposit the amount of such penalty with such
authority as may be notified by the Central Government. However, if the Appellate
Tribunal is of the opinion that the deposit of such penalty would cause undue
hardship to such person, the Appellate Tribunal may dispense with such deposit
179
Legal and Regulatory subject to such conditions as it may deem fit to impose so as to safeguard the
Framework for Financing and
Investments of Business
realisation of penalty.

Every appeal before the Appellate Tribunal must be filed within a period of forty-
five days from the date on which a copy of the order made by the Adjudicating
Authority or the Special Director (Appeals) is received by the aggrieved person
or by the Central Government. The Appellate Tribunal may entertain an appeal
after the expiry of the said period of forty-five days if it is satisfied that there was
sufficient cause for not filing it within that period.

Appeal before the High Court65

Any person aggrieved by any decision or order of the Appellate Tribunal may
file an appeal to the High Court within sixty days from the date of communication
of the decision or order of the Appellate Tribunal to him on any question of law
arising out of such order. The High Court may allow an appeal after the expiry of
the said period for a further period not exceeding sixty days, if it is satisfied that
the appellant was prevented by sufficient cause from filing the appeal within the
said period., allow it to be filed within a further period not exceeding sixty days.

8.13 DIRECTORATE OF ENFORCEMENT

The Directorate of Enforcement is established under the Act by the Central
Government. The Government appoints the Director and other officers who are
together called the Officers of Enforcement.66

Powers of Directorate of Enforcement-

The following powers are being vested in the Directorate of Enforcement and its
officers:

1) Power of search & Seizure67- The Director of Enforcement and other officers
of Enforcement, not below the rank of an Assistant Director, can do
investigation of the contraventions under the Act. The Central Government
may also, by notification, authorise any officer or class of officers in the
Central Government, State Government or the Reserve Bank, not below the
rank of an Under Secretary to the Government of India to investigate any
contravention under the Act. The officers are also vested with the like powers
which are conferred on income-tax authorities under the Income-tax Act,
1961.

2) Special provisions relating to assets held outside India in contravention of

section 4- 68 If the Authorised Officer has reason to believe that any foreign
exchange, foreign security, or any immovable property, situated outside India,
is suspected to have been held in contravention of section 4, he may after
recording the reasons in writing, by an order, seize value equivalent, situated
within India, of such foreign exchange, foreign security or immovable
property. No such seizure can be made in case where the aggregate value of
such foreign exchange, foreign security or any immovable property, situated
outside India, is less than the prescribed value.

180
 Foreign Exchange
8.14 COMPOUNDING OF OFFENCES UNDER Management and Related
Regulations
FEMA
The Act allows for compounding for contraventions under section 15 of the Act.
However, in this regard, the RBI has issued a Master Direction on Compounding
of Contraventions under the FEMA 1999. According to the notification issued
dated May 3, 2000 and  FEMA 20(R)/2017-RB dated November 07, 2017, the
power to compound contraventions has been delegated to the Regional offices/
sub-offices of the Reserve Bank. In exercise of the powers conferred by section
46 read with sub-section (1) of section 15 of the Foreign Exchange Management
Act, 1999, the relevant rules are the Foreign Exchange (Compounding
Proceedings) Rules, 2000 made by the Central Government in this behalf. In
terms of these Rules, the Reserve Bank is empowered to compound contraventions
relating to Section 7, 8 and 9 and the third schedule to FEMCAT Rules. RBI was
empowered to compound all the contraventions of FEMA 1999 except Section
3(a) of the Act.69

The following contraventions can be compounded by the RBI where the sum
involved in such contravention is:
a) ten lakhs rupees or below, by the Assistant General Manager of the Reserve
Bank of India;
b) more than rupees ten lakhs but less than rupees forty lakhs, by the Deputy
General Manager of Reserve Bank of India;
c) rupees forty lakhs or more but less than rupees hundred lakhs by the General
Manager of Reserve Bank of India;
d) rupees one hundred lakhs or more, by the Chief General Manager of the
Reserve Bank of India;

No contravention shall be compounded unless the amount involved in such

contravention is quantifiable.

8.15 SUMMARY
The objective of formulating the FEMA Act 1999 was to consolidate the laws
related to foreign exchange, facilitate the external trade &payments and to promote
the orderly development and maintenance of foreign exchange market in India.
It can be said that the Central Government and the RBI have been able to fulfil
the broad objectives of FEMA. FEMA has been a reformative legislation which
has also been successful in eliminating the ills of its predecessor.

8.16 SELF ASSESSMENT QUESTIONS

1) Discuss the rights relating to immovable property of persons who are not
resident in India.
2) What are the prohibited transactions under the FEMA?
3) What are the rights of persons who are alleged to have contravened provisions
of the FEMA?
4) What do you understand by the term ‘foreign exchange’?
181
Legal and Regulatory 5) Distinguish between the following:
Framework for Financing and
Investments of Business a) Person resident in India and Person Non-resident in India
b) Capital account transactions and current transactions

8.17 FURTHER READINGS/REFERENCES

Books:
1) R. Sridhar. R., 2019, FEMA Ready Reckoner with Commentary, Bloomsbury
2) Taxmann’s Foreign Exchange Management (FEMA) Manual (2021)
References:
1
The FEMA 1999
2
Sec 2(v) FEMA Act 1999
3
Sec 2(w) FEMA Act 1999
4
Sec 2 (c) FEMA Act 1999
5
Sec 2(e), FEMA Act 1999
6
Sec 2(j), FEMA Act 1999
7
Sec 2(m), FEMA Act 1999
8
Sec 2 (n), FEMA Act 1999
9
Sec 11, FEMA Act 1999
10
Sec 3, FEMA Act 1999
11
Sec 4, FEMA 1999
12
Sec 6, FEMA 1999
13
Sec 2(e) FEMA 1999
14
Sec 6(2) FEMA 1999
15
Sec 6(2A) FEMA 1999
16
Sec 6(3) FEMA 1999
17
Sec 6(4)
18
Inserted by FEM (Acquisition and Transfer of Immovable Property Outside
India) Regulations, 2015 with effect from January 21, 2016.
19
Sec 6(5)
20
Inserted by FEM (Acquisition and transfer of Immovable Property in India)
Regulations, 2018 with effect from March 26, 2018 through FEMA 21(R),
dated 26.03.2018
21
ibid
22
ibid
23
ibid
24
ibid
25
Sec 6(6)
26
Reg 3(1) FEMA (Permissible Capital Account Transactions) Regulations 2000
27
Regulation 3(2) FEMA (Permissible Capital Account Transactions)
Regulations 2000
28
Annexure
182 29
Reg 4 FEMA (Permissible Capital Account Transactions) Regulations 2000
30
ibid Foreign Exchange
Management and Related
31
Reg 5 FEMA (Permissible Capital Account Transactions) Regulations 2000 Regulations
32
Reg 6 FEMA (Permissible Capital Account Transactions) Regulations 2000
33
Sect 2(j) FEMA 1999
34
Sec 5, FEMA 1999
35
Rule 2(b) Foreign Exchange Management (Current Account Transactions)
Rules, 2000
36
Rule 3 Foreign Exchange Management (Current Account Transactions) Rules,
2000
37
Sec 10 (1)
38
Sec 10(2)
39
Sec 10(3)
40
Sec 10(4)
41
Sec 10(5)
42
Sec 11(1)
43
Sec 11(2)
44
Sec 11(3)
45
Sec 12 (2)
46
Chapter IV FEMA 1999
47
Sec 13 (1)
48
Sec 13(1A)
49
Sec 13(1 B)
50
Sec 13(1 C)
51
Sec 13(2)
52
Sec 14
53
Sec 14(2)
54
Sec 14(3)
55
Sec 14(4)
56
Sec 14 (5)
57
Sec 14(6)
58
Sec 13(13)
59
Sec 14
60
Sec 15
61
Sec 17
62
Sec 17(1)
63
Sec 17(3)
64
Sec 19
65
Sec 35
66
Sec 36 (1)
67
Sec 37
68
Sec 37 A
69
Vide GSR 609 (E) dated 13-09-2004
183
Legal and Regulatory
Framework for Financing and UNIT 9 INSOLVENCY AND BANKRUPTCY
Investments of Business

Objectives
After studying this unit, you should be able to:
Understand the basics of Insolvency Law & Practice.
Describe the legal and regulatory system relating to distress or insolvency
resolution in India prior to the enactment of the IBC.
Explain the essential segments of the Corporate Insolvency under the
Insolvency and Bankruptcy Code, 2016
Discuss different aspects relating to individual bankruptcy, and liquidation
of insolvent companies.
Structure
9.1 Introduction
9.2 Definition of ‘Insolvency’
9.3 Corporate Insolvency Legislative Framework in India Prior to 2016
9.4 Unified Insolvency and Bankruptcy Law - The Insolvency and Bankruptcy
Code, 2016
9.5 Four Pillars of Institutional Infrastructure under IBC 2016
9.6 Corporate Insolvency Resolution Process
9.7 Liquidation Process under IBC 2016
9.8 Individual Insolvency
9.9 Cross Border Insolvency
9.10 Leading Cases
9.11 Summary
9.12 Self Assessment Questions
9.13 Further Readings/References

9.1 INTRODUCTION
This Unit explains the law and mechanism related to corporate insolvency
resolution process for corporates in India. The Unit commences describing the
legal and regulatory situation in place prior to enacting of the Insolvency and
Bankruptcy Code 2016. It further examines the need to adopt the Insolvency and
Bankruptcy Code, 2016 (hereinafter referred to as IBC or the Code). It discusses
the salient aspects of the Code with the help of leading cases.
An effective and efficient insolvency regime should aim to achieve the key
objectives which are identified below in a balanced manner:
Provide certainty in the market to promote economic stability and growth;
Maximize value of assets;
Strike a balance between liquidation and reorganization;
Ensure equitable treatment of similarly situated creditors;
Provide for timely, efficient and impartial resolution of insolvency;
184
 Insolvency and Bankruptcy
9.2 DEFINITION OF INSOLVENCY
The United Nations Commission on International Trade Law (UNCITRAL),
Legislative Guide on Insolvency Law” defines ‘insolvency’ as;
“Insolvency is when a debtor is generally unable to pay its debts as
they mature or when its liabilities exceed the value of its assets”
In the context of the UK Insolvency Act, 1986, the renowned author, Sir Roy
Goode observed;
“A company is insolvent when it is unable to pay its debts. The concept
is simple enough but as we shall see there is more than one test of
inability to pay debts and in marginal cases it may be far from easy to
determine whether the test is satisfied as at the relevant time. Insolvency
as such is not a condition to which legal consequences attach. These
occur only after there has been some formal proceeding, such as
winding up or the appointment of an administrator or administrative
receiver. Thus it is neither a criminal offence nor a civil wrong for a
company to become insolvent or even to trade while insolvent.”1
The Oxford dictionary defines word insolvent as,
“Not having enough money to pay debt, creditors, etc.; belonging
or relating to insolvent people; or the stale of being insolvent “2
Surprisingly, unlike the international laws, the Code does not define ‘insolvency’
in explicit terms. However, ‘default’ by the corporate debtor has been marked as
a trigger for initiating the insolvency proceedings. The Bankruptcy Law Reform
Committee Report (BLRC Report) explains in following terms:
Financial failure - a persistent mismatch between payments by the enterprise
and receivables into the enterprise, even though the business model is
generating revenues,
Business failure - which is a breakdown in the business model of the
enterprise, and it is unable to generate sufficient revenues to meet payments3.

9.3 CORPORATE INSOLVENCY LEGISLATIVE

FRAMEWORK IN INDIA PRIOR TO 2016
India had a patchwork of insolvency courts and tribunals applying to different
classes of stakeholders or processes which resulted in parallel proceedings,
conflicts between different statutes and uncertainty for creditors over their
recovery. The conflicts and multiple proceedings that have arisen from the multi-
layered Insolvency law framework pointed towards a strong need for a unified
bankruptcy code that could be applicable to all aspects of a company in distress
and for all stakeholders. The complex web of laws which till recent past governed
corporate bankruptcy and insolvency included:
Companies Act, 2013 (CA 2013) – This Act contains provisions on collective
insolvency resolution by way of restructuring, rehabilitation, or
reorganization of entities registered under the Act. Adjudication Authority
is the National Company Law Tribunal (NCLT). CA 2013 contains provisions
for rescue and rehabilitation of all registered entities in Chapter XIX, and
Liquidation in Chapter XX. 185
Legal and Regulatory Companies Act, 1956 (CA, 1956) – This legislation deals with winding up
Framework for Financing and
Investments of Business
of companies. There is however no separate provisions for restructuring
except through Mergers & Acquisitions (M&As) and voluntary compromise.
Adjudication authority is the High Court.
Sick Industrial Companies Act, 1985 (SICA, 1985) – This Act dealt with
restructuring of distressed ‘industrial’ firms. Under this Act, the Board for
Industrial and Financial Reconstruction (BIFR) assessed the viability of the
industrial company, and referred an unviable company to the High Court for
liquidation. SICA, 1985 contained special provisions for timely detection of
sick industrial companies and for undertaking preventative, ameliorative,
remedial and other measures in respect of such companies.
The Recovery of Debt Due to Banks and Financial Institutions Act, 1993
(RDDBFIA, 1993) – This Act gives banks and a specified set of financial
institutions greater powers to recover collateral at default. The law provides
for the establishment of special Debt Recovery Tribunals (DRTs) to enforce
debt recovery by these institutions only. The law also provides for the Debt
Recovery Appellate Tribunals (DRATs) as the appellate forum.
The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI, 2002) – This
Act enables secured creditors to take possession of collateral without
requiring the involvement of a court or tribunal. This law provides for actions
by secured creditors to take precedence over a reference by a debtor to BIFR.
The DRT is the forum for appeals against such recovery.
Issues relating to various legislations dealing with Corporate Insolvency and
Restructuring;
SICA: Under the SICA industrial companies whose networth has eroded by
100% are identified as being in distress and are referenced to the BIFR.
Thereafter the BIFR must investigate the potential viability of the industrial
company and then either recommend its rehabilitation scheme or winding
up before the High Court.
Major issues with the legislation are:
* Delay: Under SICA provisions 5 to 7 years are required for reviving a
company4. Out of which around 3 to 4 years are required just to decide
whether a particular company needs rehabilitation or liquidation.
Delays further contribute to other issues such as debtors using the delay
to defer payments to the creditors because of the moratorium that is
placed upon creditor enforcement, corporate assets being siphoned off
during the long drawn process, managers coercing creditors into
extending further finance or giving concessions in existing debts. It has
been observed that SICA is capable of achieving a swift liquidation
only where creditors rejected possibility of revival.
* Improper identification of companies that can be restructured: It has
been repeatedly stated that the BIFR has failed to satisfactorily identify
companies capable of restructuring or have sanctioned schemes which
have severely hampered the creditors’ interests.

186
 * SICA does not assist the creditor: In many cases where the creditors Insolvency and Bankruptcy
seek liquidation the cases have been sent back to the BIFR to conduct
inquiry into rehabilitation.

SARFAESI: The Act provides mechanism to the secured creditor to take

possession of the property of the debtor without intervention by the Courts
or Tribunals. Appeals against such possession may be made to the DRT.

RDDBFI: This Act focuses specifically on the easing recovery for banks
and other financial institutions both secured and unsecured creditors. The
Act additionally provided for the establishment of DRTs and DRATs.

9.4 UNIFIED INSOLVENCY AND BANKRUPTCY

LAW - THE INSOLVENCY AND BANKRUPTCY
CODE, 2016
As mentioned above a host of legislation and forum combined with potentially
conflicting jurisdictional issues had resulted in systemic delays and complexities
in the insolvency and bankruptcy process. Additionally, all these legislations
have been identified as being inadequate in by themselves. Thus the Insolvency
and Bankruptcy Code, 2016 (hereinafter referred to as IBC or the Code) was
enacted. This Code aims to consolidate the laws relating to insolvency of
companies and limited liability entities (including limited liability partnerships
and other entities with limited liability), unlimited liability partnerships and
individuals, presently contained in a number of legislations, into a single
legislation. Such consolidation will provide for a greater clarity in law and
facilitate the application of consistent and coherent provisions to different
stakeholders affected by business failure or inability to pay debt.

“An effective insolvency regime is a critical component of ease of

doing business in India”.

This Code is considered as the biggest economic reform next only to GST5. The
insolvency regime is expected not only to facilitate an easy revival and
rehabilitation process for companies in financial trouble but also to be very
effective in safeguarding the interests of the stakeholders such as creditors,
shareholders, government, etc. It is also expected to stabilize the commercial
dealings, financial stability and better environment for attracting investments,
besides mitigation of corporate failures. Further, it should also ensure that the
financial resources of a country are utilized efficiently to enhance the overall
growth of the economy.
Salient features of IBC 2016
The salient features of the IBC 2016 are as follows:
Clear, coherent and speedy process for early identification of financial distress
and resolution of companies and limited liability entities if the underlying
business is found to be viable.
Two distinct processes for resolution of individuals, namely- “Fresh Start”
and “Insolvency Resolution”.
Debt Recovery Tribunal and National Company Law Tribunal to act as
187
Legal and Regulatory Adjudicating Authority and deal with the cases related to insolvency,
Framework for Financing and
Investments of Business
liquidation and bankruptcy process in respect of individuals and unlimited
partnership firms, and in respect of companies and limited liabilities entities
respectively.
Establishment of an Insolvency and Bankruptcy Board of India to exercise
regulatory oversight over insolvency professionals, insolvency professional
agencies and information utilities.
Insolvency professionals would handle the commercial aspects of insolvency
resolution process. Insolvency professional agencies will develop
professional standards, code of ethics and be first level regulator for
insolvency professionals leading to development of a competitive industry
for such professionals.
Information utilities would collect, collate, authenticate and disseminate
financial information to be used in insolvency, liquidation and bankruptcy
proceedings.
Enabling provisions to deal with cross border insolvency.

9.5 FOUR PILLARS OF INSTITUTIONAL

INFRASTRUCTURE UNDER IBC 2016
There exist four pillars of institutional infrastructure created by the IBC 2016.
These are as follows:

1. Insolvency Professionals and Insolvency Professionals Agencies:

The first pillar of institutional infrastructure is a class of regulated persons,
the Insolvency Professionals. They play a key role in the efficient working
of the bankruptcy process and are regulated by Insolvency Professional
Agencies.

An Insolvency Professional (IP) plays a central role in the effective and

efficient implementation of an insolvency law, with certain powers over
debtors and their assets and a duty to protect those assets and their value, as
well as the interests of creditors and employees, and to ensure that the law is
applied effectively and impartially.

An IP may hold any of the following roles under the Code:

i) Resolution professional (RP) to resolve insolvency for a firm or an
individual;
ii) Bankruptcy Trustee in an individual bankruptcy process;
iii) Liquidator in a firm liquidation process;
Who can be Insolvency Professional under IBC, 2016?
Regulation 5 of the Insolvency and Bankruptcy Board of India (Insolvency
Professionals) Regulations, 20166, provides the following qualifications and
experience to become an “Insolvency professional”:

Subject to the other provisions of these Regulations, an individual shall be

eligible for registration, if he;
188
 a) has passed the National Insolvency Examination; Insolvency and Bankruptcy

b) has passed the Limited Insolvency Examination, and has fifteen years
of experience in management, after he received a Bachelor’s degree
from a university established or recognized by law; or
c) has passed the Limited Insolvency Examination and has ten years of
experience as -
i) a chartered accountant enrolled as a member of Institute of
Chartered Accountants of India,
ii) a company secretary enrolled as a member of Institute of Company
Secretaries of India,
iii) a cost accountant enrolled as a member of the Institute of Cost
Accountants of India, or
iv) an advocate enrolled with a Bar Council.
2) Information Utilities
The second pillar of institutional infrastructure is a new industry of
‘Information Utilities’. These are service providers which are required to
store facts about lenders and terms of lending in electronic databases. This
is intended to eliminate delays and disputes about facts when default takes
place. Chapter V of Part IV of the IBC contains provisions with respect to
Information Utilities7. An information utility is contemplated as a registered
service provider, which shall be obliged to8:
• Create and store financial information in a universally accessible format;
• Accept electronic submissions of financial information from persons
who are under obligations to submit financial information under the
CODE, in such form and manner as may be specified by regulations;
• Accept, in specified form and manner, electronic submissions of
financial information from persons who intend to submit such
information;
• Meet such minimum service quality standards as may be specified by
regulations;
• Get the information received from various persons authenticated by
all concerned parties before storing such information;
• Provide access to the financial information stored by it to any person
who intends to access such information in such manner as may be
specified by regulations;
• Publish such statistical information as may be specified by regulations;
• Have inter-operability with other information utilities.
Any person who intends to submit financial information to the information
utility or access the information from the information utility shall pay such
fee and submit information in such form and manner as may be specified by
regulations9.

3) Adjudication
The third pillar of institutional infrastructure are the adjudication authorities.
The National Company Law Tribunal (NCLT) is the forum where insolvency 189
Legal and Regulatory of corporate persons will be heard and DRT is the forum where individual
Framework for Financing and
Investments of Business
insolvencies will be heard. These institutions, along with their Appellate
bodies, viz., NCLAT and DRATs will be adequately strengthened so as to
achieve world class functioning of the bankruptcy process.

Individual and Companies &

Partnership LLP
Firms

DRT NCLT

DRAT NCLAT

Supreme
Court

i) Adjudicator for Corporate Insolvency and Bankruptcy- National

Company Law Tribunal
The Adjudicating Authority, in relation to insolvency resolution and
liquidation for corporate persons including corporate debtors and personal
guarantors thereof shall be the National Company Law Tribunal.
Territorial jurisdiction
The NCLT will have territorial jurisdiction over the place where the registered
office of the corporate person is located10. The NCLT, before which a
corporate insolvency resolution process or liquidation proceeding of a
corporate debtor is pending, will also have jurisdiction in the matter of the
insolvency resolution or bankruptcy of a personal guarantor of such corporate
debtor11.
An insolvency resolution process or bankruptcy proceeding of a personal
guarantor of the corporate debtor pending in any court or tribunal shall stand
transferred to the NCLT dealing with insolvency resolution process or
liquidation proceeding of such corporate debtor.
The NCLT is vested with all the powers of the Debt Recovery Tribunal and
shall have jurisdiction to entertain or dispose of;
Any application or proceeding by or against the corporate debtor or
corporate person;
Any claim made by or against the corporate debtor or corporate person,
including claims by or against any of its subsidiaries situated in India;
and
  Any question of priorities or any question of law or facts, arising out
of or in relation to the insolvency resolution or liquidation proceedings
190 of the corporate debtor or corporate person under the Code.
 Civil court not to have jurisdiction Insolvency and Bankruptcy

No civil court or authority has jurisdiction to entertain any suit or proceedings

in respect of any matter on which NCLT or the National Company Law
Appellate Tribunal has jurisdiction under this Code12. No court, tribunal or
authority shall grant an injunction in respect of any action taken, or to be
taken, in pursuance of any power conferred on the NCLT or the National
Company Law Appellate Tribunal under the Code.

ii) Adjudicator for Insolvency Resolution and Bankruptcy of Individuals

& Partnerships- Debt Recovery Tribunal (DRT)13
The Adjudicating Authority, in relation to insolvency matters of individuals
and firms shall be the Debt Recovery Tribunal, having territorial jurisdiction
over the place where the individual debtor actually and voluntarily resides
or carries on business or personally works for gain and can entertain an
application under this Code regarding such person.
The Debt Recovery Tribunal shall have jurisdiction to entertain or dispose
of:
any suit or proceeding by or against the individual debtor;
any claim made by or against the individual debtor;
any question of priorities or any other question whether of law or facts,
arising out of or in relation to insolvency and bankruptcy of the
individual debtor or firm under this Code.
An appeal from an order of the Debt Recovery Tribunal under this Code
shall be filed within thirty days before the Debt Recovery Appellate Tribunal
(DRAT). An appeal from an order of the Debt Recovery Appellate Tribunal
on a question of law under this Code shall be filed within forty-five days
before the Supreme Court.

4) The Insolvency and Bankruptcy Board of India (IBBI)

The fourth pillar of institutional infrastructure is the regulator, the Insolvency
and Bankruptcy Board of India (hereinafter referred to as the Board or IBBI)
with head office in the National Capital Region and offices at other places in
India.14 The central government has the power to designate a financial sector
regulator to perform the functions till such time the Board is constituted.
Until the Board is constituted or a financial sector regulator is designated
under Section 195, as the case may be, the powers and functions of the
Board or such designated financial sector regulator, including its power to
make regulations, shall be exercised by the Central Government.15

The Insolvency and

Bankruptcy Board
of India (IBBI)

Insolvency Insolvency Information

Professional Professionals Utilities
Agency

191
Legal and Regulatory Constitution of Board and selection of Members
Framework for Financing and
Investments of Business The Board shall consist of the following Members to be appointed by the Central
Government, who shall appoint them (other than the ex officio members) after
obtaining the recommendation of a selection committee. The Board consists of:
Chairperson;
Three ex-officio Members from amongst the officers of the Central
Government not below the rank of Joint Secretary or equivalent, one each to
represent the Ministry of Finance, the Ministry of Corporate Affairs and
Ministry of Law;
One ex-officio Member to be nominated by the Reserve Bank of India; and
Five other Members to be nominated by the Central Government, of whom
at least three shall be the whole-time members.
The tenure of the office bearers is given in Section 189(4) of the IBC 2016. The
term of office of all the members (except ex office members) shall be for a period
of 5 years or until they attain the age of 65, whichever is earlier. They are eligible
for re-appointment as well.

Objectives of the Board:

The objective of the Board is to utilize all legislative, executive and quasi-judicial
functions so as to achieve a well-functioning bankruptcy process in India. This
would include features of:
• High recovery rates in an NPV sense;
Low delays from start to end;
Sound coverage of the widest possible class of claims e.g., bank loans,
corporate bonds, etc.;
A perception in the minds of persons in the economy that India has a swift
and competent bankruptcy process.

9.6 CORPORATE INSOLVENCY RESOLUTION

PROCESS
Trigger point for initiation
A corporate insolvency resolution process may be initiated under Chapter II of
the Code in respect of a corporate debtor that has committed a default. The trigger
point for initiating the corporate insolvency resolution process is the occurrence
of default. A default16 would have occurred when the debtor fails to pay whole or
any part or installment of the amount of debt that has become due and payable.
The “debt”17 has been defined under Code as a liability or obligation in respect
of a claim, which is due from any person and includes a financial debt and
operational debt. While a financial creditor is required to present record of default
before NCLT for initiation of corporate insolvency resolution process, an
operational credit or must issue a statutory notice to corporate debtor in the manner
provided in Code.

The “claim”18, financial debt” and “operation debt” are defined in Code. A “claim”
means (a) a right to payment, whether or not such right is reduced to judgment,
192 fixed, disputed, undisputed, legal, equitable, secured, or unsecured; (b) right to
remedy for breach of contract under any law for the time being in force, if such Insolvency and Bankruptcy
breach gives rise to a right to payment, whether or not such right is reduced to
judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.
The corresponding obligation of the debtor to pay may arise out of a financial
debtor or an operational debt.

Who can initiate the process?

The process for initiating corporate insolvency resolution may be initiated by
any of the following:
A financial creditor19
An operational creditor20 or
The corporate debtor21 itself
Commencement by financial creditor
Application by financial creditor
A financial creditor may initiate the process either by itself or jointly with other
financial creditors by filing an application before the NCLT, if a default has
occurred in respect of a financial debt owed not only to the applicant financial
creditor but to any other financial creditor of the corporate debtor. A financial
creditor is a person to whom a financial debt is owed and includes a person to
whom such debt has been legally assigned or transferred to.

Ascertaining existence of debt default by NCLT

Within 14 days of receipt of application by NCLT22, it must ascertain the existence
of a default from the records of an information utility or on the basis of other
evidence furnished by the financial creditor. If NCLT is satisfied that (i) a default
has occurred; or (ii) the application made by financial creditor is complete; or
(iii) there is no disciplinary proceedings pending against the proposed resolution
professional, it may, by order, admit such application. Under SICA, admission
of reference made to BIFR was by way of an administrative act of registration of
reference by the registry of BIFR. Now, an order must be passed by NCLT. It
appears that the corporate debtor need not be heard by NCLT while ascertaining
the existence of default.

The NCLT can reject the application if it finds that default has not occurred or
the application made by financial creditor is incomplete or any disciplinary
proceeding is pending against the proposed resolution professional. The NCLT
is required to provide an opportunity to the applicant to rectify the defect in the
application if the NCLT finds the application to be defective. The applicant must
rectify the defect in his application within 7 days of receipt of such notice from
the Adjudicating Authority.

Date of commencement
The corporate insolvency resolution process shall commence from the date of
admission of the application of financial creditor by the NCLT. Order of admission
of such application shall be communicated by the NCLT to the applicant and
corporate debtor, and of rejection to the financial creditor, within seven days.

193
Legal and Regulatory Declaration of moratorium and public announcement23
Framework for Financing and
Investments of Business With regard to creditors, one of the fundamental principles of insolvency law is
that insolvency proceedings are collective proceedings, which require the interests
of all creditors to be protected against individual action by one of them. Many
insolvency laws include a mechanism to protect the value of the insolvency estate
that not only prevents creditors from commencing actions to enforce their rights
through legal remedies during some or all of the period of the liquidation or
reorganization proceedings, but also suspends actions already under way against
the debtor. Such a mechanism is variously termed a “moratorium”, “suspension”
or “stay”, depending on the effect of the mechanism.

The Code provides for a moratorium from creditors action against the corporate
debtor. Where the NCLT passes an order of admission of an application for
commencement of corporate resolution process, the NCLT shall, by an order:
Grant a moratorium mentioned in section 14.
Appoint an interim resolution professional in the manner as laid down section
16 of the Code.
Cause a public announcement of the initiation of corporate insolvency
resolution process and call for the submission of claims immediately after
the appointment of the interim resolution professional.
Moratorium
The order to declare moratorium prohibits:
the institution of suits or continuation of pending suits or proceedings against
the corporate debtor including execution of any judgement, decree or order
in any court of law, tribunal, arbitration panel or other authority
Transferring, encumbering, alienating or disposing of by the corporate debtor
any of its assets or any legal right or beneficial interest therein
Any action to foreclose, recover or enforce any security interest created by
the corporate debtor in respect of its property including any action under the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
The recovery of any property by an owner or lessor where such property is
occupied by or in the possession of the corporate debtor
Exclusion from moratorium
The order of moratorium should not affect supply of essential goods or services
to the corporate debtor, which shall not be terminated or suspended or interrupted
during moratorium period. This is important to explore resolution of the corporate
debtor as a going concern.

Conduct of corporate resolution process by resolution professional

The resolution professional is responsible for the conduct of the entire corporate
insolvency resolution process and manage the operations of the corporate debtor
during the corporate insolvency resolution process period. For this purpose, the
resolution professional has the same powers and must perform same duties as
vested or conferred on the interim resolution professional.

194
Resolution Plan24 Insolvency and Bankruptcy

A resolution applicant may submit a resolution plan to the resolution professional

prepared on the basis of the information memorandum25. A resolution plan means
a plan proposed by any person for insolvency resolution of the corporate debtor
as a going concern in accordance with Part II of the Code. As already mentioned,
a resolution applicant means any person who submits a resolution plan to the
resolution professional. The resolution professional shall examine each resolution
plan received by him to confirm that each resolution plan is compliant of the
specifications provided in the Code.

Approval of resolution plan by creditors

A resolution plan, which confirms the conditions referred above, must be placed
before the committee of creditors by the resolution professional for its approval.
The committee of creditors may approve a resolution plan by a vote of not less
than seventy five per cent of voting share of the financial creditors. The resolution
applicant may attend the meeting of the committee of creditors in which the
resolution plan of the applicant is considered. However, the resolution applicant
shall not have a right to vote at the meeting of the committee of creditors unless
such resolution applicant is also a financial creditor.

Approval of plan by NCLT

The resolution plan as approved by the committee of creditors must be presented
by resolution professional to the NCLT for approval. If the NCLT is satisfied
that the resolution plan as approved by the committee of creditors meets the
requirements of resolution plan referred above (sub-section (2) of section 30), it
shall, by order, approve the resolution plan. The resolution plan approved by the
NCLT shall be binding on the corporate debtor and its employees, members,
creditors, guarantors and other stakeholders involved in the resolution plan. As a
consequence of the order of approval, the moratorium order passed by NCLT
shall cease to have effect. Following the order of approval of resolution plan by
the NCLT, the resolution professional shall forward all records relating to the
conduct of the corporate insolvency resolution process and the resolution plan to
the Board to be recorded on its database.

Rejection of resolution plan

If the NCLT is satisfied that the resolution plan does not confirm to the
requirements (of sub-section (2) of section 30), it may, by an order, reject the
resolution plan.

Punishment for contravention of resolution plan

If a corporate debtor, any of its officers or creditors or any person on whom the
approved resolution plan is binding under section 31, knowingly and willfully
contravenes any of the terms of such resolution plan or abets such contravention,
such corporate debtor, officer, creditor or person shall be punishable with
imprisonment of not less than one year, but may extend to five years, or with fine
which shall not be less than one lakh rupees, but may extend to one crore rupees,
or with both.

Time limit for completion of insolvency resolution process26

The corporate insolvency resolution process provided in Chapter II must be
completed within a period of 180 days from the date of admission of the 195
Legal and Regulatory application to initiate such process (effective date). The period of 180 days can
Framework for Financing and
Investments of Business
be extended by NCLT upto a maximum period of 90 days. Therefore, the total
period for resolution of corporate insolvency, including extended period, can be
upto a maximum of 270 days. An extension can be granted by the NCLT on an
application filed by the resolution professional only if instructed to do so by a
resolution passed at a meeting of the committee of creditors by a vote of seventy-
five percent of the voting shares, and if it is satisfied that the subject matter of
the case is such that corporate insolvency resolution process cannot be completed
within 180 days. Any extension of the period of corporate insolvency resolution
process cannot be granted more than once.

Appeal before National Company Law Appellate Tribunal

An appeal by a person aggrieved by an order approving the resolution plan by
the NCLT may be filed before National Company Law Appellate Tribunal
(hereinafter referred to as NCLAT) on the following grounds:
The approved resolution plan is in contravention of the provisions of any
law for the time being in force;
There has been material irregularity in exercise of the powers by the
resolution professional during the corporate insolvency resolution period;
The debts owed to operational creditors of the corporate debtor have not
been provided for in the resolution plan in the manner specified by the Board;
The insolvency resolution process costs have not been provided for
repayment in priority to all other debts; or
The resolution plan does not comply with any other criteria specified by the
Board.
Every such appeal shall be filed within 30 days. The NCLAT may allow an
appeal to be filed after the expiry of the said period of 30 days if it is satisfied
that there was sufficient cause for not filing the appeal but such period shall not
exceed 15 days.

Appeal before Supreme Court of India

Any person aggrieved by an order of the NCLAT may file an appeal to the Supreme
Court on a question of law arising out of such order under Code within 45 days
from the date of receipt of such order. The Supreme Court may, if it is satisfied
that a person was prevented by sufficient cause from filing an appeal within 45
days, allow the appeal to be filed within a further period not exceeding 15 days.

Fast track corporate insolvency resolution process27

The Code provides for a fast-track corporate insolvency resolution process to be
completed within a period of ninety days from the insolvency commencement
date. The period of 90 days may be extended by a maximum period of 45 days
by the NCLT on an application filed by resolution professional. The resolution
professional can make such application for extension if instructed to do so by a
resolution passed at a meeting of the committee of creditors and supported by a
vote of seventy five percent of the voting share. Any extension of the fast-track
corporate insolvency resolution process can be granted by the NCLT only once.

196
 Insolvency and Bankruptcy
9.7 LIQUIDATION PROCESS UNDER IBC 2016
Commencement
Liquidation order under this Code is passed only where the corporate insolvency
resolution and no resolution plan can be passed within the time provided or a
resolution plan passed is not complied with. Liquidation in other cases or other
grounds is dealt as proceedings for winding up under the Companies Act, 2013.

Grounds for passing order of liquidation of corporate debtor by the NCLT

An order of liquidation is to be passed by the NCLT in the following
circumstances28:

If before the expiry of the insolvency resolution process period a resolution

plan is not received for approval by the NCLT.

If it rejects the resolution plan for the non-compliance of the requirements29

specified.

If the committee of creditors decides to liquidate the corporate debtor at any

time during the corporate insolvency resolution process (but before
confirmation of resolution plan by the NCLT), and an application is filed by
the resolution professional to pass an order to liquidate the corporate debtor.

If the corporate debtor contravenes the resolution plan approved by the NCLT,
any person, whose interests are prejudicially affected by such contravention,
can file a liquidation application.

Public announcement
Where an order of liquidation is passed by the NCLT, a public announcement
stating that the corporate debtor is in liquidation must be issued. The NCLT shall
also require such order to be sent to the authority with which the corporate debtor
is registered. Protection of all interested persons is linked to publicity
requirements, designed to apprise potentially interested persons that liquidation
order has been passed.

9.8 INDIVIDUAL INSOLVENCY

The Insolvency and Bankruptcy Code, 2016, in its Part III provides for insolvency
resolution and bankruptcy for individual and partnership firms.
The significant features of Part III are as follows:
There exist two distinct processes in case of insolvencies: automatic fresh
start and insolvency resolution.
The code applies in all cases where the minimum default amount is Rs.
1000 and above.
The insolvency resolution process consists of preparation of a repayment
plan by the debtor, for approval of creditors. If approved, the DRT passes an
order binding the debtor and creditors to the repayment plan. If the plan is
rejected or fails, the debtor or creditors may apply for a bankruptcy order.

197
Legal and Regulatory The creditors and the debtor are required to agree on repayment plan for
Framework for Financing and
Investments of Business
restructuring debts and affairs of the debtor under the supervision of an IP.
Such a repayment plan requires approval of 75% of the financial creditors.
The code prescribes a timeline of 180 days for the insolvency resolution
process.30
Fresh Start Process31
Under the automatic fresh start process, eligible debtors (basis gross income)
can apply to the Debt Recovery Tribunal (DRT) for discharge from certain debts
not exceeding a specified threshold, allowing them to start afresh. Under this, an
application may be made by eligible debtor for any debt (other than secured
debt, which has been availed of 3 months prior to the date of application, ‘excluded
debt’).

Eligibility for a fresh start process application under the code are: (i) applicant
should not own a dwelling unit and has a gross annual income of less that Rs.
60,000/-, with assets of value not exceeding Rs. 20,000/-, and (ii) aggregate
value of the qualifying debt of such individual or partnership firm should not
exceed Rs. 35,000/-. In addition, the applicant should not be an un-discharged
insolvent and there be no other previous fresh start process applications submitted
by him.

Discharge Order and its effects

The bankruptcy trustee should apply to the Adjudicating Authority for a discharge
order either on the expiry of one year from the bankruptcy commencement date,
or within seven days of the approval of the committee of creditors of the
completion of administration of the estates of the bankrupt. The discharge order
releases the bankrupt from all the bankruptcy debt.
However, a discharge order will not be granted if the discharge:
Affects the functions of the bankruptcy trustee; or
affects the operation of the provisions of Chapters IV and V of Part III; or
releases the bankrupt from any debt incurred by means of fraud or breach of
trust to which he was a party; or
discharges the bankrupt from any excluded debt
Disqualifications Provisions
On the bankruptcy commencement date, the bankrupt is disqualified from:
Appointment or acting as a trustee or representative in respect of any trust,
estate or settlement;
Appointment or acting as a public servant;
Election to any public office;
Election as a member of any local authority

9.9 CROSS BORDER INSOLVENCY

Cross border insolvency arrangement with other countries:32

198 Sections 234 and 235 of the Code deals with cross border insolvency.
The Central Government may enter into an agreement with the government of Insolvency and Bankruptcy
any country outside India for enforcing the provisions of the Code. The Central
Government may, by notification in the official gazette, direct that the application
of provisions of the Code in relation to assets or property of corporate debtor or
debtor, including a personal guarantor of a corporate debtor, as the case may be,
situated at any place in a country outside India with which reciprocal arrangements
have been made, shall be subject to such conditions as may be specified.

Letter of request to a country

If, in the course of insolvency resolution process, or liquidation or bankruptcy
proceedings, as the case may be, the resolution professional, liquidator or
bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate
debtor or debtor, including a personal guarantor of a corporate debtor, are situated
in a country outside India with which reciprocal arrangements have been made
under section 234, he may make an application to the NCLT or DRT as the case
may be, that evidence or action relating to such assets is required in connection
with such process or proceeding. On receipt of such an application the NCLT
may issue a letter of request to a court or an authority of such country competent
to deal with such request.

9.10 LEADING CASES

Some important cases on IBC are:
1) Innoventive Industries Ltd. Vs ICICI Bank Ltd. (Supreme Court CA
No. 8337-8338 of 2017)
The Hon’ble Supreme Court held that in the event of any repugnancy between
any State law and the Code, in respect of matters related to Insolvency &
Bankruptcy, the Code would prevail over such State laws.

2) IDBI Bank Ltd. V. Lanco Infratech (CP (LB) No. 111/7 HDB/2017)
In this case the NCLT denied appointment of Interim Resolution Professional
(IRP) on the ground that he was already handling three big assignments and
had recently been appointed IRP for two large companies.

3) Lokhandwala Kataria Cons. Pvt. Ltd. Vs. Nisus Finance & Investment
Managers LLP., (Supreme Court CA No. 9279 of 2017)
The Hon’ble Supreme Court, in exercise of its inherent power to ensure
justice under Art.142, allowed the parties to withdraw the insolvency
application upon the undertaking of the appellant to pay the outstanding
dues to the applicant as per the consent terms.

4) Surendra Trading Co. vs. Juggilal Kamlapat Jute Mills Co. Ltd.,
(Supreme Court CA No. 8400 of 2017)
The issues for consideration by the Supreme Court were with regards to
relaxation of time period prescribed under IBC

Whether the time period of 14 days for admitting or rejecting an

application by NCLT is directory or mandatory?

The NCLAT held that that such time period is directory in nature.
199
Legal and Regulatory • Whether the time limit of 7 days prescribed under the Code for rectifying or
Framework for Financing and
Investments of Business
removing defects in the application filed by an operational creditor for
initiating CIRP is mandatory?

The Supreme Court observing that in a given case there might be weighty,
valid and justifiable reasons for not able to remove defects within 7 days,
held this to be merely a directory provision.

5) Mobilox Innovations Private Ltd vs Kirusa Software Pvt. Ltd., (Supreme

Court C.A. No. 9405 of 2017)

The Supreme Court held that while examining admissibility of an Application

u/s 9 of IBC, the NCLT will have to determine the three conditions mentioned
under section 5(6). It was held that the definition of the term ‘dispute’ is an
inclusive one and the present case was not one where suit or arbitration
proceeding had been filed before receipt of demand notice, only in which
case the dispute must relate to the three sub clauses of section 5(6).

6) Arun Kumar Jagatramka v. Jindal Steel and Power Ltd., (2021 SCC

OnLine SC 220)

The Supreme Court decided on 15th March 2021 that a person who is
ineligible under Section 29A of the Insolvency Bankruptcy Code, 2016, to
submit a resolution plan, is also barred from proposing a scheme of
compromise and arrangement under Section 230 of the Companies Act, 2013.

7) Kalparaj Dharamshi v. Kotak Investment Advisors Ltd, (2021 SCC

OnLine SC 204)
The Supreme Court held that the commercial wisdom of Committee of
Creditors (CoC) is not to be interfered with, excepting the limited scope as
provided under Sections 30 and 31 of the Insolvency and Bankruptcy Code,
2016. It stated that “the Court ought to cede ground to the commercial wisdom
of the creditors rather than assess the resolution plan on the basis of
quantitative analysis”

8) P. Mohanraj vs M/S. Shah Brothers Ispat Pvt. Ltd (CIVIL APPEAL

NO.10355 OF 2018)

The Supreme Court in March 2021 decided that when an order of moratorium
is passed under the Insolvency and Bankruptcy Code, parallel proceedings
under Section 138 of the Negotiable Instruments Act against the Corporate
Debtor cannot be allowed to continue as the same will be covered by the bar
under Section 14 of the IBC

9) Lalit Kumar Jain v. Union of India (TRANSFERRED CASE (CIVIL)

NO. 245/2020)
The provisions of the Insolvency and Bankruptcy Code, 2016 concerning
the liability of the personal guarantors to the corporate debtors were upheld.
With the decision in place, the creditors can now initiate insolvency
proceedings against individuals such as promoters, managing directors and
chairpersons who stand as personal guarantors on the monies lent or goods
and services extended to the corporate debtors. 
200
10) Phoenix Arc Private Limited Vs Spade Financial Services Limited & Insolvency and Bankruptcy
Ors (Civil Appeal No. 2842 of 2020).
The Supreme Court has held that a financial creditor which is not a “related
party” to the corporate debtor at present can also be excluded from the
Committee of Creditors (CoC) if it is found that he was earlier a related
party and had removed this label only to bypass S.21(2) Proviso.

9.11 SUMMARY
This unit explains the law and mechanism related to corporate insolvency
resolution process for corporates in India. The unit commences describing the
legal and regulatory situation in place prior to enacting of the Insolvency and
Bankruptcy Code 2016. It further examines the need to adopt the Insolvency and
Bankruptcy Code, 2016 (hereinafter referred to as IBC or the Code). It discusses
the salient aspects of the Code with the help of leading cases.

9.12 SELF ASSESSMENT QUESTIONS

1) Define ‘Insolvency’.
2) Explain the corporate insolvency legislative framework in India prior to the
Insolvency and Bankruptcy Code, 2016.
3) Discuss the corporate insolvency resolution process.
4) Explain the liquidation process under the Insolvency and Bankruptcy Code,
2016.
5) Discuss the four pillars of institutional infrastructure created by the
Insolvency and Bankruptcy Code, 2016.

9.13 FURTHR READINGS/REFERENCES

Books:
1) Vinod Kothari & Sikha Bansal, 2016, Law Relating to Insolvency &
Bankruptcy Code, 2016; Taxmann Publications Pvt. Ltd.
2) Manzar Saeed Commentary on The Insolvency and Bankruptcy Code, 2017,
Thomson Reuters India.
3) Jyoti Singh & Vishnu Shriram , Insolvency and Bankruptcy Code, 2016-
Concepts and Procedure, Bloomsbury India Professional.
4) EBC’s Insolvency and Bankruptcy Code, 2016: Manual of Bare Act along
with Regulations
Weblinks:
http://www.ibbi.gov.in/
http://www.ibbi.gov.in/wg-04report.pdf
http://www.ibbi.gov.in/Wg-01%20Report.pdf
http://ibbi.gov.in/16_Joint_Committee_on_Insolvency_ and_Bankruptcy_
Code_2015_1.pdf
http://ibbi.gov.in/BLRCReportVol1_04112015.pdf
201
Legal and Regulatory References
Framework for Financing and
Investments of Business 1
Professor Sir Roy Goode, Principles of Corporate Insolvency Law (Sweet
and Maxwell, 4th ed, 2011).
2
Insolvency, https://www.oxfordlearnersdictionaries.com/definition/english/
insolvency Last accessed 7th August 2021
3
The report of the Bankruptcy Law Reforms Committee, Ministry of Finance,
Government of India (November 2015)
4
Kang, Nimrit & Nayar, Nitin. (2004). The Evolution of Corporate Bankruptcy
Law in India. ICRA Bulletin Money and Finance. 3.
5
Ministry of Finance on Insolvency and Bankruptcy Code, 2016; NO. 31 OF
2016 [28th May, 2016]
6
Insolvency Professional, http://www.ibbi.gov.in/Law/GAZETTEIP_
professional.pdf, Last accessed 7th August 2021
7
Sections 209 to 216 of IBC 2016
8
Section 214 of IBC 2016
9
Section 215 IBC
10
Section 60(1) IBC
11
Section 60(2) IBC
12
Section 63 IBC
13
Sections 179-183 of the IBC
14
Section 195, IBC 2016
15
Section 244, IBC 2016
16
S.3(12), IBC 2016
17
S.3(11), IBC 2016
18
S.3(6), IBC 2016
19
S.7, IBC 2016
20
S.9, IBC 2016
21
S.10,IBC 2016
22
S.7(4), IBC 2016
23
S.30 IBC
24
S.13,14 IBC 2016
25
S.29 IBC
26
S.12 IBC
27
S.55-58 of IBC
28
S.33 IBC 2016
29
S.31 IBC 2016
30
S.85(4) IBC, 2016
31
S.80, 81 IBC, 2016
32
S.234, 235 of IBC 2016

202
 Insolvency and Bankruptcy

BLOCK-5
INTELLECTUAL PROPERTY AND DATA
MANAGEMENT
Unit 10 Intellectual Property Rights
Unit 11 Data Protection and Privacy

203
Intellectual Property and Data
Management

204
 Intellectual Property Rights
UNIT 10 INTELLECTUAL PROPERTY
RIGHTS

Objectives
After studying this unit, you should be able to:
Understand the meaning of Intellectual Property
Explain the need for protecting Intellectual Property
Describe the different types of Intellectual Property
Structure
10.1 Introduction
10.2 Intellectual Property
10.3 Justification for protecting Intellectual Property
10.4 Types of Intellectual Property
10.4.1 Patents
10.4.2 Copyright
10.4.3 Trademarks
10.4.4 Geographical Indications
10.4.5 Industrial Designs
10.4.6 Plant Variety Protection
10.4.7 Protection of Layout Designs of Integrated Circuits
10.4.8 Trade Secrets
10.5 Summary
10.6 Self Assessment Questions
10.7 Further Readings/References

10.1 INTRODUCTION
We live in a world surrounded by diverse types of intellectual property rights.
The books you read, the songs you hear, the movies you watch and the diverse
apps you use on your phone are just some of the many kinds of works which
might be or which might have been protected under different kinds of intellectual
property protection. Thanks to the frequent appearances of the term “intellectual
property” in mainstream media as well as every day conversations, it has by now
become familiar among a substantial segment of the public. However, as in the
case of the parable of blind men and an elephant, different people perceive IP
very differently, depending on their source of information and their day to day
interactions with different types of IP. For some, it is that branch of law which
protects trade names or trade symbols while for some, it is a branch of law that
protects technological innovations. For others, it may be a branch of law that
protects movies and books. But many of them might find it difficult to define
what IP is. Part of the reason for the diverging perceptions on IP and the difficulty
in defining the term is the constant expansion of the subject matter covered under
this area of law. Thanks to the expansion of subject matter over the years, it has
become increasingly difficult to find common elements in all types of IP that can
provide a comprehensive definition for the term. 205
Intellectual Property and Data Hence, one of the first things to remember is that IP is not a single, homogenous
Management
body of law, but rather a term that attempts to collectively describe a number of
areas of law with distinctive characteristics.1 The next section in this unit will
provide learners an overview of some of the prominent definitions of IP to
showcase its vast and dynamic character. Further, the discussions in the following
sections seek to encourage the learners to critically analyse whether it would
ever be possible to have one common definition for IP.

10.2 INTELLECTUAL PROPERTY

There is no universally accepted definition of ‘intellectual property’. This is not
surprising, as it is nearly impossible to find one definition that can
comprehensively cover all the subject matters that are currently considered as
intellectual property.

The World Intellectual Property Organisation (WIPO) has provided a relatively

more comprehensive definition which reads as follows:

Intellectual property (IP) refers to creations of the mind, such as

inventions; literary and artistic works; designs; and symbols, names
and images used in commerce.2

Some of the scholars like William Fisher highlight the fact that intellectual
property is not a single homogenous law when he says that the term ‘intellectual
property’ refers to a loose cluster of legal doctrines that regulate the uses of
different sorts of ideas and insignia.3 However, if the term intellectual property
refers to a loose cluster of legal doctrines, then it becomes pertinent to ask when
we can call something as intellectual property. According to Bently and Sherman,
the term ‘intellectual’ (adjective) indicates the character of some of the material
this area of law protects, i.e., products of human mind/ intellect and the term
‘property’ indicates the form of regulation, i.e., the grant of exclusive rights which
operate in a manner similar to property rights over tangibles.4

Different countries protect these diverse creations of the mind under different
branches of law such as patent law, copyright law, trademark law, and design
law. Together they are often referred to as ‘intellectual property laws’, though it
needs to be kept in mind that it is becoming increasingly difficult to find common
theoretical justifications for all such branches of law and that there are major
differences between the legal and economic foundations of these laws.

10.3 JUSTIFICATION FOR PROTECTING

INTELLECTUAL PROPERTY
While there are different theoretical rationales for affording legal protection to
different types of IP, the most widely used one is the ‘incentive theory’, also
known as ‘welfare theory’.5 According to the proponents of this theory, most
information products like books or music have two characteristics of public goods.

The first characteristic is the non-rivalrous character in consumption. We say

that a good has non-rivalrous character in consumption when more than one
person is able to use the good simultaneously without affecting the possibilities
of consumption of that good by another. For example, a digital copy of a book
206
which is stored on the cloud could be read by more than one person and each Intellectual Property Rights
person would be able to read the book without diminishing the possibilities of
enjoyment of reading of that book by another. On the other hand, if the book is in
physical form or hard copy, only one person might be able to use that copy at a
time. Most information products have non-rivalrous character in consumption.

The second characteristic is relative non-excludability. It is relatively hard to

exclude people from the consumption of information goods. This is a particularly
important challenge, as many information goods also have strong positive
externalities. Economists argue that because of these public goods characteristics,
inventors or creators will not have the incentives to create information products
and there will ultimately be under-production of information goods.6 To address
this issue of under-production, the economists suggest that there should be at
least some legal protection against copying.

The legal protection suitable for different information products would have to be
fine-tuned both in terms of duration of protection and scope of protection, keeping
in mind both the requirements of protecting the incentives for production of
such goods as well as the broader interest of the society in getting access to such
products. Most laws that come under the broader umbrella of IP laws, particularly
patents and copyrights, can be seen attempting to seek this fundamental balance
through diverse measures such as limited term protection and exceptions to
infringement.

In the context of trademarks, there are two commonly cited economic arguments.7
Firstly, trademarks can reduce consumer search costs. In the absence of
trademarks, consumers may have to spend substantial amount of time and efforts
to identify a product that they wish to consume. Secondly, in the absence of
trademark protection, there may not be much incentives for producers to maintain
or improve the quality of their products or services. In other words, trademarks
have a self-enforcing characteristic when it comes to quality improvements.

10.4 TYPES OF INTELLECTUAL PROPERTY

As indicated earlier, IP law is not a homogenous body of law, but rather a collection
of distinct, but related legal doctrines covering diverse subject matters. This sub-
section will explore the basic aspects of some of the major types of IP.

10.4.1 Patents
A patent is a limited term monopoly granted for an invention in return for the
disclosure of the invention to the public.8 In India, patents are governed by the
Patents Act 1970 and registration is mandatory for patent protection. Patents are
granted after a rigorous examination process, which involves different steps. A
patent application will contain the title of the invention, description of the
invention in a manner in which a person skilled in the art could work or reproduce
that invention, and a set of claims that defines the legal boundaries of the invention.

The term of patent protection in India is 20 years from the date of filing of the
application.9 During the term of protection, patents ensure that the concerned
invention cannot be made, sold, distributed, or used without the consent of the
patent owner.10 Once the term of protection is over, the patents enter the public
domain and anyone can use the invention in any manner they like. 207
Intellectual Property and Data A patentable invention can be relating to a product or a process. To be considered
Management
as an ‘invention’ for the purpose of patent law, there are three general
requirements11:
1) Novelty;
2) Inventive step; and
3) Industrial application.
It is also important to ensure that the concerned product or process is not a
specifically excluded subject matter under the relevant patent statute. In India,
Sec. 3 of the Patents Act 1970 has provided a long list of exclusions from patent
protection. These exclusions are based on diverse public policy reasons. Similarly,
Sec. 4 of the Patents Act provides that inventions relating to atomic energy, which
fall within sub-section (1) of Sec. 20 of the Atomic Energy Act 1962, are not
patentable. 12

While the term ‘novelty’ has not been defined under the Patents Act 1970, the
standards of novelty followed in India are clarified through Sec. 2(1)(l) of the
statute, which has defined ‘new invention’. As per this definition, new invention
means “any invention or technology which has not been anticipated by publication
in any document or used in the country or elsewhere in the world before the date
of filing of patent application with complete specification, i.e., the subject matter
has not fallen in public domain or that it does not form part of the state of the
art.” In other words, publication of the details of the invention in any document
or use of the invention in any part of the globe can negate novelty, and the patent
application may be rejected on grounds of lack of novelty. However, it must be
noted that novelty has to be determined in the light of a single prior art reference
and ‘mosaicking’ is not permitted in novelty analysis.13 In other words, compiling
different documents and then comparing it with the technological features
disclosed in the application is not allowed. The cited prior art should disclose the
invention either explicitly or implicitly. There also needs to be a complete match
between all the technological features as disclosed in the application and the
cited single prior art reference.14 However, the statute has also provided certain
specific exceptions to anticipation.15
The second requirement, i.e., inventive step, is the toughest requirement to meet
among the three essential factors in patentability. In India, the Patents Act 1970
defines ‘inventive step’ 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.”16
Inventive step analysis is done from the hypothetical construct of a Person Skilled
In The Art (PSITA). The statute hasn’t provided any definition for the terms
technical advancement or economic significance. The statute also does not provide
any specific guidelines for determining non-obviousness from the point of view
of a person skilled in the art. However, the courts have evolved certain guidelines
in this regard and an important decision in this regard is Biswanath Prasad Radhey
Shyam vs Hindustan Metal Industries, a decision of the Supreme Court of India.
In this decision the Court clarified that whether an alleged invention involves an
‘inventive step’ will be a mixed question of law and fact.17 The answer would
invariably depend on the facts and circumstances of each application.
The third requirement for patentability, i.e., capable of industrial application, is
relatively easier to meet in most circumstances. As per Sec. Sec. 2 (1)(ac) of
208
Patents Act 1970, “capable of industrial application”, in relation to an invention, Intellectual Property Rights
means that the invention is capable of being made or used in an industry.

It needs to be reminded that even if an applicant can show that the application
meets all the three requirements of patentability, to be successful in a patent
application, it is also important to ensure that the subject matter of the invention
is not a specifically excluded subject matter under Indian patent law. As discussed
earlier, India has a relatively long list of excluded subject matter under Sec. 3 of
the Patents Act 1970. The list includes business models, computer programmes
per se, and traditional knowledge. Accordingly, if the application belongs to any
of those specifically excluded subject matter, it is bound to be rejected.

10.4.2 Copyright
Copyright protects creative and artistic works. The diverse kind of works that
can be protected by copyright include books, music, movies, paintings, sculptures,
and computer software. In India, copyright is governed by the Copyright Act
1957.

Copyright provides a bundle of rights for the creators and the types of rights
provided would vary with the subject matter. For example, the bundle of rights
provided under Indian copyright law for creators of literary works are:
i) right to reproduce the work in any material form including the storing of it
in any medium by electronic means;
ii) right to issue copies of the work to the public not being copies already in
circulation;
iii) right to perform the work in public, or communicate it to the public;
iv) right to make any cinematograph film or sound recording in respect of the
work;
v) right to make any translation of the work;
vi) right to make any adaptation of the work; and
vii) right to do any of the above, in relation to a translation or an adaptation of
the work.18
On the other hand, for cinematograph films, the bundle of rights provided under
Indian copyright law are only:
i) right to make a copy of the film, including—
A) a photograph of any image forming part thereof; or
B) storing of it in any medium by electronic or other means;
ii) right to sell or give on commercial rental or offer for sale or for such rental,
any copy of the film; and
iii) right to communicate the film to the public.19
As the example illustrates, depending on the subject matter, the type of rights
and the extent of rights granted under copyright law to the creators would vary
substantially.
Apart from these economic rights, some of the jurisdictions like India also strongly
209
Intellectual Property and Data protect certain non-economic rights of creators and they are known as moral
Management
rights. Under Copyright Act 1957, moral rights are referred to as author’s special
rights.20 The moral rights protected under Copyright Act 1957 are:
1) right of attribution (right to be attributed as the author of her work); and
2) right of integrity (right to prevent or claim damages with regard to any
changes made in the work that could harm the reputation of the creator).21

Unlike patents, registration is not mandatory for receiving copyright protection.

Copyright protection is received the moment a copyrightable work is created.
However, for most categories of works (literary, dramatic, musical and artistic
works), to be copyrightable, the work needs to meet the requirement of
‘originality’.22 To meet the requirement of originality, a work must be an
independent creation and it should show some minimal amount of creativity.
However, different jurisdictions follow different standards for the amount of
creativity required to meet the requirements of originality.

In India, for a very long time, the courts followed the so called “sweat of the
brow” approach, which focused primarily on the labour put in by the creators.23
But in the landmark decision of the Indian Supreme Court in Eastern Book
Company v. D.B. Modak, the Court rejected the sweat of the brow doctrine
explicitly and adopted the skill and judgment test, which was laid down in the
Canadian Supreme Court decision in CCH Canadian v. Law Society of Upper
Canada.24 As pointed out by the Supreme Court, as long as the work originated
from the author (and not copied from another source) and the work is a product
of exercise of skill and judgment, it can meet the requirements of originality
under Indian copyright law.25 In the EBC decision, the court also clarified that
“creative works by definition are original and are protected by copyright, but
creativity is not required in order to render a work original.”26 In other words,
the threshold level for meeting originality is not that high under Indian copyright
law and works would qualify for protection as long as they can meet the minimum
standards suggested in the EBC case.

As compared to patents, the duration of protection is much longer in the case of

copyright. The term of copyright protection varies with the subject matter and
duration for different subject matter under Indian copyright law are dealt with in
Chapter V of the Copyright Act 1957.27 The copyright protection for literary,
dramatic, musical or artistic works (other than a photograph) published within
the lifetime of the author continue until sixty years from the beginning of the
calendar year next following the year in which the author dies.28 The term of
protection for photographs under Indian copyright law subsists until sixty years
from the beginning of the calendar year next following the year in which the
photograph is published.29 For cinematograph films, the term of protection is
until sixty years from the beginning of the calendar year next following the year
in which the film is published.30 The term of protection provided for sound
recordings is sixty years from the beginning of the calendar year next following
the year in which the sound recording is published.31 It is also important to note
that moral rights protection in India extend beyond the term of copyright
protection.32

Collective management of rights is very common in the case of copyright, as it is

difficult to monitor and enforce rights at the individual level. For this purpose,
210 different copyright societies are established and they collectively manage the
rights of authors.33 Some of the famous copyright societies include Indian Intellectual Property Rights
Performing Right Society (IPRS), which deals with the rights of authors,
composers and publishers of music.34

While most discussions on copyright focus on the rights of creators of copyrighted

works, it is also important to note that copyright law is not just about the rights
of creators. Copyright law also provides many rights to the users of copyrighted
works and they appear in the form of exceptions and limitations to copyright. In
India, Sec. 52 of the Copyright Act 1957 provides a long list of exceptions to
copyright infringement. While Sec. 52(1)(a) of Copyright Act 1957, which is
known as the fair dealing exception, provides a relatively broad and open-ended
exception, Sec. 52(1)(b) to Sec. 52(1)(zc) provides a long list of enumerated
exceptions that cater to diverse access requirements in the country. For example,
Sec. 52(1)(i) provides an important educational use exception. In a country like
India, wherein the vast majority of students cannot afford to buy expensive
reference books, such exceptions plays an important role in ensuring access to
knowledge.

10.4.3 Trademarks
Trademarks are another important type of IP rights. In general, a trademark refers
to a word, symbol, or any other signifier that can distinguish the goods or services
produced by one firm from the goods or services of another firm.35 In India,
trademarks are governed by Trademarks Act 1999.

The Trademarks Act 1999 defines a trademark as a mark capable of being

represented graphically and which is capable of distinguishing the goods or
services of one person from those of others and may include shape of goods,
their packaging and combination of colours.36 If one looks at the definition given
for ‘mark’ under the Trademarks Act 1999, it can be seen that the term has been
provided with an inclusive definition, so as to meet the contemporary as well as
future requirements. As per Sec. 2(1)(m) of the statute, the term ‘mark’ includes
a device, brand, heading, label, ticket, name, signature, word, letter, numeral,
shape of goods, packaging or combination of colours or any combination thereof.
Thanks to this inclusive approach, Indian trademark law is able to protect not
just conventional signs like logos or words, but also many non-conventional
marks like sound marks and colour marks, as long as they can meet the other
requirements under the law, particularly the requirement that the sign should be
capable of distinguishing the goods or services of the producer from those of
others. With regard to the shapes, it needs to be noted that if the shape is resulting
from the nature of the goods themselves, it cannot be protected as a trademark
under Indian trademark law.37 For example, the shape of a cricket ball cannot be
registered as a trademark for the product category of cricket ball. Similarly, if
the shape is necessary to obtain a technical result, it cannot be protected as a
trademark.38 This is also an important prohibition, as many producers might seek
protection for technical solutions under trademark law, even if the same should
have been a subject matter of protection under patent law. This is primarily due
to the fact that the term of protection for trademarks is infinite, provided the
producer renews the registration promptly. But allowing trademark owners to
seek protection for technical solutions under trademark law would defeat the
purpose of creating other types of IP regimes like patents, which provide a limited
term monopoly right for inventors and ensure that those inventions can be used
211
Intellectual Property and Data by the general public after the expiry of the patent term. In the past, there have
Management
been attempts to protect inventions like a three-headed rotary shaver and the
courts have denied trademark protection to such technical solutions.39 Finally, if
a shape adds substantial value to the goods, it cannot be protected as a trademark
under Indian trademark law.40

Indian trademark law also has a graphical representation requirement.41 In other

words, a mark can be protected as a trademark in India, only if it can be represented
graphically. Since non-conventional marks like taste marks and smell marks are
hard to be represented graphically, they are generally considered not capable of
attaining protection under the current Indian trademark law. The capacity of a
mark to distinguish the goods or services of one undertaking from the goods or
services of another is also an important requirement.

To obtain trademark protection in India, an applicant has to file a trademark

application in the prescribed format before one of the trademark offices in India.42
The applications can be refused on several grounds which can be broadly classified
as absolute grounds for refusal and relative grounds for refusal.43 Once a trademark
is granted in India, the protection is given for a duration of ten years and it can be
renewed further.44 Like most other types of IP rights, trademark protection is
also territorial in character, and if a trader wishes to get trademark protection
abroad, she may make use of the flexibilities provided under the Paris
Convention.45 The alternate option is to file an application under the Madrid
Protocol (Protocol Relating to the Madrid Agreement Concerning the International
Registration of Marks) route.46 The Madrid Protocol is administered by the World
Intellectual Property Organisation and India is a party to this international treaty.
It provides an easier pathway for registering and managing trademarks in different
member countries of the Madrid Protocol.47 India became a party to the protocol
in 2013 and currently many firms from India are using the Madrid Protocol to
file trademark applications abroad.

Registration of a trademark in India provides the trademark owner the exclusive

right to use the trade mark in relation to the goods or services in respect of which
the trade mark is registered. It also entails her to obtain reliefs in respect of
infringement of trade mark.48 Trademark owners can assign or license their rights.

However, like most other areas of IP, such rights are also subject to the specific
limitations and exceptions provided under the legislation.49 For example, if a
defendant is using a trademark only to describe the product of the competitor or
to compare it to her own products, it will be a nominative use and it will not
amount to infringement of trademark. Similar is the case of the use of trademarks
for making a critical comment on someone’s product or service.

One concept closely related to trademark infringement is passing off, which is a

common law cause of action that can apply to diverse factual scenarios. It is the
oldest of the modern legal regimes used for protecting trade symbols.50 In a nut-
shell, this remedy can help a trader X to prevent a competitor Y from passing
their goods or services off as if they were the goods or services of trader X.51 In
Reckitt & Colman v. Borden, Lord Oliver has summarised the essence and essential
elements of a passing off action as follows:

212
 “The law of passing off can be summarised in one short general Intellectual Property Rights
proposition – no man may pass off his goods as those of another. More
specifically, it may be expressed in terms of the elements which the
plaintiff in such an action has to prove in order to succeed. These are
three in number. First, he must establish a goodwill or reputation
attached to the goods or services which he supplies in the mind of the
purchasing public by association with the identifying “get-up” (whether
it consists simply of a brand name or a trade description, or the
individual features of labelling or packaging) under which his particular
goods or services are offered to the public, such that the get-up is
recognised by the public as distinctive specifically of the plaintiff’s goods
or services. Secondly, he must demonstrate a misrepresentation by the
defendant to the public (whether or not intentional) leading or likely to
lead the public to believe that goods or services offered by him are the
goods or services of the plaintiff. Whether the public is aware of the
plaintiff ’s identity as the manufacturer or supplier of the goods or
services is immaterial, as long as they are identified with a particular
source which is in fact the plaintiff. For example, if the public is
accustomed to rely upon a particular brand name in purchasing goods
of a particular description, it matters not at all that there is little or no
public awareness of the identity of the proprietor of the brand name.
Thirdly, he must demonstrate that he suffers or, in a quia timet action
that he is likely to suffer, damage by reason of the erroneous belief
engendered by the defendant’s misrepresentation that the source of the
defendant’s goods or services is the same as the source of those offered
by the plaintiff.” 52

10.4.4 Geographical Indications

Geographical Indications (GI) broadly refers to signs used on products that have
a specific geographical origin and the quality or the reputation of that product is
attributable to that geographical origin.53 The TRIPS Agreement has mandated
protection of geographical indications.54 In furtherance to the TRIPS Agreement,
India has drafted a sui generis law for protecting GIs. The title of the legislation
is the Geographical Indications of Goods (Registration and Protection) Act, 1999
(“GI Act”). However, even before the enactment of this legislation, passing off
action has been acting as a powerful remedy in India against unauthorised use of
GIs. It is still a very useful remedy in cases of authorized uses of unregistered
GIs in India. Some of the producers have also been using certification marks and
collective marks to protect GIs. For example, the word ‘Darjeeling’ and its logo
were registered as certificate marks in India by the Tea Board of India.55

GI Act defines the term ‘geographical indication’ as follows:

“Geographical indication, in relation to goods, means an indication which

identifies such goods as agricultural goods, natural goods or manufactured goods
as originating, or manufactured in the territory of a country, or a region or
locality in that territory, where a given quality, reputation or other characteristic
of such goods is essentially attributable to its geographical origin and in case
where such goods are manufactured goods one of the activities of either the
production or of processing or preparation of the goods concerned takes place
in such territory, region or locality, as the case may be.”56
213
Intellectual Property and Data As one may notice from the definition, the key requirement for GI protection is
Management
that the given quality, reputation or other characteristic of the good is essentially
attributable to its geographical origin. While many of the GIs might be agricultural
products or food-related products, it is important to remember that there could
also be other categories of products such as handicrafts wherein the specific
qualities of the products are attributable to human skills such as manufacturing
skills or traditional knowledge in the location where the product was produced.57
Examples of handicrafts protected as GIs in India include Aranmula Kannadi
(mirror) and Kashmir Pashmina.58

The term ‘indication’ is given an inclusive definition in the GI Act and as per the
statute, “indication includes any name, geographical or figurative representation
or any combination of them conveying or suggesting the geographical origin of
goods to which it applies.”59 Though many GIs consist of the name of the
geographical location, it is important to remember that a GI registration could
also be on figurative representations like logos or any combination of names and
geographical or figurative representations. For example, the first and second GI
applications filed in India under the GI Act were relating to the word ‘Darjeeling
Tea’ and the logo of Darjeeling Tea, for tea produced from 87 tea gardens in the
Darjeeling region.60

To get GI protection, an application has to be filed in the prescribed format before

the Geographical Indications Registry. As GI is a collective right, it is important
to note that unlike trademark applications, individuals cannot file and get GI
protection. The GI application has to be filed by an association of persons or
producers or any organisation or authority representing the interest of producers
of the concerned goods.61 The applicants are also required to file an affidavit
clearly indicating how they represent their interest. Once a GI is granted, the
registration is valid for a duration of 10 years and it can be renewed from time to
time in accordance with the provisions of the statute.62 The registration of a GI
can help the producers of such goods to prevent unauthorised uses of the GI by
others. For example, with the GI registration, Kancheepuram Silk producers will
be able to prevent anyone who is not an authorised producer of Kancheepuram
silk from using the indication ‘Kancheepuram’ in their silk products. The
possibilities for prevention of free riding on the reputation of GIs may help in
quality control and increase in revenues. While registration provides legal
protection against unauthorised uses of GIs, it is important to note that other
remedies like passing off action can also be effective against unauthorised use of
GIs, even when those indications are not registered under the GI Act.

10.4.5 Industrial Designs

Industrial designs is another type of IP rights, which has garnered considerable
prominence in the context of high profile litigations such as Apple v. Samsung.63
In the Apple v. Samsung litigation saga, one of the questions that had to be
addressed by the courts was whether Apple was entitled to prevent competitors
from using a rectangular shape with rounded corners and a round home button at
the bottom of the screen on their phones.64 In the United States, the jury initially
awarded Apple $1.049 billion in damages in 2012, on different grounds including
the infringement of rights over those designs.65 Even though IP scholars disagree
on the justifiability of the outcomes in Apple v. Samsung, most scholars would
agree that the litigation has raised awareness among firms on the economic
214 importance of IP protection over aesthetic elements in a product.
Industrial designs is the type of intellectual property rights that protects the Intellectual Property Rights
aesthetic or ornamental features of an article.66 Unlike patents, which tries to
protect the functional aspects, the focus here is only on the aesthetic aspects. In
India, designs are protected under the Designs Act 2000. As per the statute, a
design “[m]eans only the features of shape, configuration, pattern, ornament
or composition of lines or colours applied to any article whether in two
dimensional or three dimensional or in both forms, by any industrial process
or means, whether manual, mechanical or chemical, separate or combined,
which in the finished article appeal to and are judged solely by the eye; but
does not include any mode or principle of construction or anything which
is in substance a mere mechanical device, and does not include any trade
mark as defined in clause (v) of sub-section(1) of section 2 of the Trade and
Merchandise Marks Act, 1958 or property mark as defined in section 479 of
the Indian Penal Code or any artistic work as defined in clause (c) of section
2 of the Copyright Act, 1957.” As one may notice from the definition, the scope
of protection under design law is limited to aesthetic or ornamental aspects.
However, its applications are unlimited and today design law has major
implications in diverse fields such as pharmaceuticals, electronics, automobiles
and fashion industry.

To receive design protection in India, one has to file an application as per the
provisions of the Designs Act 2000. The substantive examination of the application
includes answering four questions: Firstly, whether the application is a ‘design’,
as defined under the Act; Secondly, whether the design is new or original; Thirdly,
whether the design is prejudicial to public order or morality; and Fourthly, whether
the design is prejudicial to the security of India.67 To be registered, the design
should not have been published or used anywhere in the world before the date of
application.68 However, the originality requirement won’t be defeated when a
known shape or pattern is applied in a novel manner.69

The registration confers ‘copyright’ in the design for the duration of registration
and the registered owner will have the exclusive right to apply that design to the
article in the class for which it is registered.70 The duration of copyright protection
in the design shall be initially for a period of 10 years from the date of registration.71
But the protection may be extended for another 5 years, provided the applicant
files an application in the prescribed format, before the expiry of the initial 10
years.72

10.4.6 Plant Variety Protection

Given the enormous demands from diverse stakeholders for protecting new plant
varieties, different countries have taken different steps for protecting new plant
varieties. In some countries, they are protected under patent law and in some
others, they are protected under sui generis laws. The TRIPS agreement, to which
India is a signatory, has mandated that member states “shall provide for the
protection of plant varieties either by patents or by an effective sui generis system
or by any combination thereof.”73 In other words, though the TRIPS agreement
has mandated protection of plant varieties, it has also provided sufficient flexibility
to the member states to decide the path for protection. Being a country wherein
a substantial portion of the population is engaged in agriculture, India decided to
follow the path for a sui generis system that can balance the interests of both the
innovators and the users of such innovations. This attempt for finding a balance
215
Intellectual Property and Data in the rights is visible even in the title of the legislation India enacted in this
Management
regard - the Protection of Plant Varieties and Farmers’ Rights Act, 2001 (“PPVFR
Act”).

The PPVFR Act defines a ‘variety’ as “a plant grouping except micro-organism

within a single botanical taxon of the lowest known rank, which can be - (i)
defined by the expression of the characteristics resulting from a given
genotype of that plant grouping; (ii) distinguished from any other plant
grouping by expression of at least one of the said characteristics; and (iii)
considered as a unit with regard to its suitability for being propagated,
which remains unchanged after such propagation, and includes propagating
material of such variety, extant variety, transgenic variety, farmers’ variety and
essentially derived variety.”74
The statute defines a ‘farmer’ as “any person who - (i) cultivates crops by
cultivating the land himself; or (ii) cultivates crops by directly supervising the
cultivation of land through any other person; or (iii) conserves and preserves,
severally or jointly, with any person any wild species or traditional varieties or
adds value to such wild species or traditional varieties through selection and
identification of their useful properties.”75
The different categories in which a plant variety can be registered in India are
New Variety, Extant Variety, and Essentially Derived Variety (EDV).76 A new
variety can be registered under the Act if the variety meets the requirements of
novelty, distinctiveness, uniformity and stability. As per the statute, a variety
shall be deemed novel, if on the date of filing of the application for registration,
“the propagating or harvested material of such variety has not been sold or
otherwise disposed of by or with the consent of its breeder or his successor for
the purposes of exploitation of such variety—(i) in India, earlier than one year;
or (ii) outside India, in the case of trees or vines earlier than six years, or in any
other case, earlier than four years, before the date of filing such application.”77
The proviso to the provision has also clarified that the trials conducted for a new
variety, which has not been sold or otherwise disposed of, shall not affect the
novelty requirement.78 The distinctiveness requirement would be met, when the
variety is “clearly distinguishable by at least one essential characteristic from
any another variety whose existence is a matter of common knowledge in any
country at the time of filing of the application.”79 The uniformity requirement
would be met, “if subject to the variation that may be expected from the particular
features of its propagation it is sufficiently uniform in its essential
characteristics.”80 Finally, the variety would be considered as stable, “if its
essential characteristics remain unchanged after repeated propagation or, in
the case a particular cycle of propagation, at the end of each such cycle.”81
As per the statute, an extant variety means “a variety available in India which is
- (i) notified under section 5 of the Seeds Act, 1966(54 of 1966); or (ii) farmers’
variety82; or (iii) a variety about which there is common knowledge; or (iv) any
other variety which is in public domain.”83
According to PPVFR Act, an essentially derived variety, in respect of a variety
(the initial variety), shall be said to be essentially derived from such initial variety
when it – “(i) is predominantly derived from such initial variety, or from a variety
that itself is predominantly derived from such initial variety, while retaining the
expression of the essential characteristics that results from the genotype or
216 combination of genotype of such initial variety; (ii) is clearly distinguishable
from such initial variety; and (iii) conforms (except for the differences which Intellectual Property Rights
result from the act of derivation) to such initial variety in the expression of the
essential characteristics that result from the genotype or combination of genotype
of such initial variety.”84

In the case of trees and vines, the initial registration confers 9 years protection
from the date of registration and it is renewable, subject to the condition that the
total duration of protection cannot exceed 18 years from the date of grant of
registration.85 For other crops, the initial duration of protection is 6 years and the
total duration cannot exceed 15 years from the date of grant of registration.86 For
extant varieties notified under Section 5 of Seeds Act 1966 also, the total
duration of protection cannot exceed 15 years from the date of notification under
the Seeds Act 1966.87 During the period of registration, subject to the specific
limitations provided in the statute, exclusive rights are vested with the breeder
or her successor, her agent or licensee and to produce, sell, market, distribute,
import or export the variety.88

However, as discussed earlier, what makes the Indian statute unique is its attempt
to balance the interests of all stakeholders. As a result, one can see strong rights
vested upon farmers as well. This includes the right for farmers to save, use,
sow, resow, exchange, share or sell her farm produce, including seeds of varieties
protected under the Act, in the same manner as she was entitled to before the
coming into force of this Act.89 The only condition is that the farmer cannot put
the seeds in any package or any other container and label it in a manner which
may convey that such seed is of a variety protected under the Act.90 Similarly,
researchers are also vested with certain important rights under the PPVFR Act.91
This includes the freedom to use any of the registered varieties for conducting
experiments or research.92

10.4.7 Protection of Layout Designs of Integrated Circuits

In India, the layout designs of integrated circuits are specifically protected under
the Semiconductor Integrated Circuits Layout-Designs Act, 2000. This statute
was enacted in furtherance to the obligations of India under the TRIPS
Agreement.93
The statute defines a semiconductor integrated circuit as “a product having
transistors and other circuitry elements which are inseparably formed on a
semiconductor material or an insulating material or inside the semiconductor
material and designed to perform an electronic circuitry function.”94 ‘Layout
Design’ is defined in the statute as “a layout of transistors and other circuitry
elements and includes lead wires connecting such elements and expressed in
any manner in a semiconductor integrated circuit.”95
To be protectable, a layout design has to be original; not been commercially
exploited in India or in a convention country; inherently distinctive; and
distinguishable from other registered layout-designs.96 However, the proviso to
Sec. 7 clarifies that any layout design which has been commercially exploited in
India or in a convention country for not more than 2 years shall be treated as not
been commercially exploited in India or in a convention country. The requirements
of ‘originality’ under the statute will be met if the layout design is the result of
the creator’s own intellectual efforts and is not commonly known to creators of
layout designs and manufacturers of integrated circuits at the time of creation.97
217
Intellectual Property and Data The duration of protection for layout designs in India is 10 years from the date of
Management
filing the application or commercial exploitation in any country, whichever is
earlier.98 Semiconductor Integrated Circuits Layout-Design Registry (“SICLDR”)
is the office accepting applications under the Semiconductor Integrated Circuits
Layout-Designs Act, 2000.

10.4.8 Trade Secrets

Trade secrets are IP rights over confidential information. Some of the most
prominent examples of information protected as trade secrets include the Coke
recipe and the recipe behind Kentucky Fried Chicken. Other information like
customer lists can also qualify for trade secrets protection. However, not all
information would qualify to attain trade secrets protection. To qualify for trade
secrets protection, there are primarily three requirements: Firstly, the confidential
nature of the information makes the information a commercially valuable one;
secondly, the information is known among only a limited group of persons; and
lastly, the holder of the information has taken reasonable steps to keep the
information secret.99

Art. 39 of the TRIPS Agreement has mandated the protection of trade secrets by
the member states. The provision reads as follows:

“Natural and legal persons shall have the possibility of preventing information
lawfully within their control from being disclosed to, acquired by, or used by
others without their consent in a manner contrary to honest commercial practices
so long as such information:
a) is secret in the sense that it is not, as a body or in the precise configuration
and assembly of its components, generally known among or readily accessible
to persons within the circles that normally deal with the kind of information
in question;
b) has commercial value because it is secret; and
c) has been subject to reasonable steps under the circumstances, by the person
lawfully in control of the information, to keep it secret.”
However, the TRIPS Agreement has provided sufficient flexibility to the member
states in determining the paths through which trade secret protection may be
given. While some countries have enacted specific laws for the protection of
trade secrets, countries like India protect trade secrets through principles of equity
and common law remedies for breach of confidence.100 Like most other types of
IP rights, trade secrets can also be assigned or licensed.

10.5 SUMMARY
As one may notice from the discussions in this unit, different kinds of IP rights
play a major role in determining access to knowledge and resources today. The
significance of different kinds of IP rights may only increase as we shift more
and more to a knowledge based economy. One of the important issues that needs
to be kept in mind while engaging in any policy reforms in this area is the need
for retaining a fair balance between the rights of IP holders and that of the society.
The current IP related debates in the context of the Covid19 pandemic should be
a good reminder on the need for retaining a fair balance within the IP system.
218
 Intellectual Property Rights
10.6 SELF ASSESSMENT QUESTIONS
1) Are the following statements true or false
a) Registration is not mandatory for getting copyright protection in India.
b) By filing a patent application in India, an inventor can protect his
invention from patent infringements across the globe.
c) India provides patent protection for new plant varieties.
d) India has a sui generis legal system for protecting geographical
indications.
e) The duration of trademark protection is for a maximum of 50 years
from the date of grant of a trademark.
2) What are the major types of intellectual property rights?
3) What are the differences between trademarks and geographical indications?
4) What are the differences between industrial designs and patents?
5) How are trade secrets protected in India?
6) What are the requirements for patentability in India?

10.7 FURTHER READINGS/REFERENCES

Books:
1) Lionel Bently and Brad Sherman, 2014, Intellectual Property Law, Oxford
University Press
2) Kalyan C. Kankanala, Arun K, Narasani and Vinita Radhakrishnan, 2012,
Indian Patent Law and Practice, Oxford University Press.
References:
1
Lionel Bently and Brad Sherman, Intellectual Property Law (Oxford
University Press, 2014).
2
World Intellectual Property Organisation, ‘What is Intellectual Property’
<https://www.wipo.int/about-ip/en/> accessed 25 August 2020.
3
William Fisher, ‘Theories of Intellectual Property’ in Stephen Munzer (ed),
New Essays in the Legal and Political Theory of Property (Cambridge
University Press, 2001) <http://www.law.harvard.edu/faculty/tfisher/
iptheory.html> accessed 13 September 2020.
4
Lionel Bently and Brad Sherman, Intellectual Property Law (Oxford
University Press, 2014) 1.
5
For an excellent overview of different theories of intellectual property, see
William Fisher, ‘Theories of Intellectual Property’.
6
Ibid.
7
Ibid. For detailed discussion on other economic arguments, see William M.
Landes and Richard Posner, ‘Trademark Law: An Economic Perspective’
<https://cyber.harvard.edu/IPCoop/87land1.html> accessed 13 September
2020.
8
Lionel Bently and Brad Sherman, Intellectual Property Law (Oxford
University Press, 2003) 309.
219
Intellectual Property and Data 9
See Sec. 53 of Patents Act 1970.
Management
10
World Intellectual Property Organisation, What is Intellectual Property?, 5
< h t t p s : / / w w w. w i p o . i n t / e d o c s / p u b d o c s / e n / i n t p r o p e r t y / 4 5 0 /
wipo_pub_450.pdf> accessed 14 September 2020.
11
See Sec. 2(1)(j) of Patents Act 1970, which defines the term ‘invention’.
12
See Sec. 4 of Patents Act 1970.
13
Kalyan C. Kankanala, Arun K, Narasani and Vinita Radhakrishnan, Indian
Patent Law and Practice (Oxford University Press, 2012) 25.
14
Ibid.
15
See Sec. 29(1), Sec. 29(2), Sec. 29(3), Sec. 30, Sec. 31, Sec. 32, and Sec. 33
of Patents Act 1970.
16
See Sec. 2(1)(ja) of Patents Act 1970.
17
Biswanath Prasad Radhey Shyam vs Hindustan Metal Industries <https://
indiankanoon.org/doc/1905157/> accessed 4 November 2020.
18
See Sec. 14 (a) of Copyright Act 1957.
19
See Sec. 14(d) of Copyright Act 1957.
20
See Sec. 57 of Copyright Act 1957
21
Ibid.
22
Lionel Bently and Brad Sherman, Intellectual Property Law (Oxford
University Press, 2003) 80. See also, Sec. 13(1)(a) of Copyright Act 1957. As
one may notice from Sec. 13(1)(b) and Sec. 13(1)(c) of Copyright Act 1957,
for sound recordings and cinematograph films, the statute doesn’t require the
work to be original to qualify for protection.
23
For example, see Burlington Home Shopping Pvt Ltd. v. Rajnish Chibber
(Delhi High Court, 1995) <https://indiankanoon.org/doc/130087/> accessed
14 September 2020.
24
See Eastern Book Company v. D.B. Modak (2008) 1 SCC 1 and CCH Canadian
v. Law Society of Upper Canada (2004) 1 SCR 339.
25
See Eastern Book Company v. D.B. Modak, Para 37.
26
Ibid.
27
See Sec. 22 to 29 of Copyright Act 1957.
28
See Sec. 22 of Copyright Act 1957.
29
See Sec. 25 of Copyright Act 1957.
30
See Sec. 26 of Copyright Act 1957.
31
See Sec. 27 of Copyright Act 1957.
32
See Sec. 57 of Copyright Act 1957.
33
Chapter VII of the Copyright Act 1957 deals with copyright societies in India.
34
<https://www.iprs.org/about-iprs/> accessed 14 September 2020.
35
See William M. Landes and Richard Posner, ‘Trademark Law: An Economic
Perspective’ <https://cyber.harvard.edu/IPCoop/87land1.html> accessed 13
September 2020.
36
See Sec. 2(1)(zb) of Trademarks Act 1999.
37
See Sec. 9(3)(a) of Trademarks Act 1999.
220
38
See Sec. 9(3)(b) of Trademarks Act 1999. Intellectual Property Rights
39
For example, see Koninklijke Philips Electronics Ltd. v. Remington Consumers
Products Ltd., (CJEU, C-299/99, 2002).
40
See Sec. 9(3)(c) of Trademarks Act 1999.
41
See the definition given for ‘trademark’ in Sec 2(zb) of Trademarks Act 1999.
42
For the list of trademark offices and their jurisdiction, see
<www.ipindia.nic.in%2Flocations-and-jurisdiction.htm> accessed 14
September 2020.
43
Sec. 9 of the Trademarks Act 1999 deals with absolute grounds for refusal of
registration and Sec. 11 of the Trademarks Act deals with relative grounds for
refusal of registration.
44
See Sec. 25 of Trademarks Act 1999.
45
<https://www.wipo.int/treaties/en/ip/paris/> accessed 14 September 2020.
46
<https://www.wipo.int/madrid/en/> accessed 14 September 2020.
47
For details regarding the working of Madrid system, <https://www.wipo.int/
export/sites/www/madrid/en/forms/docs/making_the_most_of_the_madrid_
system_mm_forms.pdf > accessed 14 September 2020.
48
See Secs. 28 and 29 of Trademarks Act 1999.
49
See Sec. 30 of Trademarks Act 1999.
50
Lionel Bently and Brad Sherman, Intellectual Property Law (Oxford
University Press, 2003) 671.
51
Ibid.
52
Reckitt & Colman Products Limited v. Borden Inc. & Others, [1990] R.P.C.
341, 406.
53
World Intellectual Property Organisation, Geographical Indications - An
Introduction (2017) 8 <https://www.wipo.int/edocs/pubdocs/en/geographical/
952/wipo_pub_952.pdf> accessed 14 September 2020.
54
See Sec. 3 (Art. 22 to Art 25) of TRIPS Agreement.
55
<http://www.teaboard.gov.in/TEABOARDCSM/NQ> accessed 14 September
2020.
56
See Sec. 2(1)(e) of Geographical Indications of Goods (Registration and
Protection) Act, 1999.
57
World Intellectual Property Organisation, Geographical Indications - An
Introduction, 10 <https://www.wipo.int/edocs/pubdocs/en/geographical/952/
wipo_pub_952.pdf> accessed 14 September 2020.
58
http://www.ipindia.nic.in/writereaddata/Portal/Images/pdf/GI_Application_
Register_10-09-2019.pdf
59
See Sec. 2(1)(g) of Geographical Indications of Goods (Registration and
Protection) Act, 1999.
60
Darjeeling Tea: A Geographical Indication, 25-26 <https://www.wipo.int/
edocs/mdocs/geoind/en/wipo_geo_lim_11/wipo_geo_lim_11_11.pdf>
accessed 14 September 2020,. See, also <http://www.teaboard.gov.in/
TEABOARDCSM/NQ> accessed 14 September 2020.
61
See Sec. 11(1) of Geographical Indications of Goods (Registration and
Protection) Act, 1999.
221
Intellectual Property and Data 62
See Sec. 18(1) of Geographical Indications of Goods (Registration and
Management
Protection) Act, 1999.
63
<https://www.lexology.com/library/detail.aspx?g=bd796b2e-c0a0-409a-b0f0-
ed8570418401> accessed 14 September 2020.
64
Ibid. and also see U.S. Design Patent No. D593087.
65
Josh Lowensohn, ‘Jury Awards Apple More than $1B, Finds Samsung
Infringed’ (CNET, 24 Aug 2012) <https://www.cnet.com/news/jury-awards-
apple-more-than-1b-finds-samsung-infringed/> accessed 14 September 2020.
However, in a second jury trial subsequent to the appeals, damages awarded
to Apple were reduced substantially. <https://www.nytimes.com/2018/05/24/
business/apple-samsung-patent-trial.html> accessed, 14 September 2020.
66
In some jurisdictions like the United States, they are referred to as design
patents.
67
See Secs. 2(d), 2(g), 5(1) and 46 of the Designs Act 2000.
68
See Sec. 4(b) of Designs Act 2000.
69
See Sec. 2(g) of the Designs Act 2000.
70
See Sec. 2(1)(c) of the Designs Act 2000.
71
See Sec. 11(1) of the Designs Act 2000.
72
See Sec. 11(2) of the Designs Act 2000.
73
See Art. 27(3)(b) of the TRIPS Agreement.
74
Sec. 2(za) of the Protection of Plant Varieties and Farmers’ Rights Act 2001.
75
Sec. 2(k) of the Protection of Plant Varieties and Farmers’ Rights Act 2001.
76
See Sec. 15 and Sec. 23 of the Protection of Plant Varieties and Farmers’
Rights Act 2001.
77
See Sec. 15(3)(a) of the Protection of Plant Varieties and Farmers’ Rights Act
2001.
78
Ibid.
79
See Sec. 15 (3)(b) of the Protection of Plant Varieties and Farmers’ Rights
Act 2001.
80
See Sec. 15(3)(c) of the Protection of Plant Varieties and Farmers’ Rights Act
2001.
81
See Sec. 15(3)(d) of the Protection of Plant Varieties and Farmers’ Rights Act
2001.
82
Sec. 2(l) defines ‘farmers variety’ as follows: Farmers’variety” means a
variety which—(i) has been traditionally cultivated and evolved by the farmers
in their fields; or (ii) is a wild relative or land race of a variety about which
the farmers possess the common knowledge.
83
See Sec. 2(i) of the Protection of Plant Varieties and Farmers’ Rights Act
2001.
84
See Sec. 2(j) of the Protection of Plant Varieties and Farmers’ Rights Act
2001.
85
See Sec. 24(6) of the Protection of Plant Varieties and Farmers’ Rights Act
2001.
86
Ibid.
222
87
Ibid. Intellectual Property Rights
88
Sec. 28 of the Protection of Plant Varieties and Farmers’ Rights Act 2001.
89
See Sec. 39 of the Protection of Plant Varieties and Farmers’ Rights Act 2001.
90
See the explanation to Sec. 39 (1)(iv) of the Protection of Plant Varieties and
Farmers’ Rights Act 2001, which defines “branded seed” as any seed put in a
package or any other container and labelled in a manner indicating that such
seed is of a variety protected under this Act.
91
Sec. 30 of the Protection of Plant Varieties and Farmers’ Rights Act 2001.
92
Ibid.
93
See Arts. 35 to 38 (Section 6) of the TRIPS Agreement.
94
See Sec. 2(1)(r) of the Semiconductor Integrated Circuits Layout-Designs
Act, 2000
95
Sec. 2(1)(h) of the Semiconductor Integrated Circuits Layout-Designs Act,
2000.
96
See Sec. 7 of the Semiconductor Integrated Circuits Layout-Designs Act 2000,
which talks about layout designs that cannot be registered.
97
See Sec. 8 of the Semiconductor Integrated Circuits Layout-Designs Act 2000.
98
Sec. 15 of the Semiconductor Integrated Circuits Layout-Designs Act 2000.
99
<https://www.wipo.int/tradesecrets/en/> accessed 8 September 2020.
100
Chandni Raina, ‘Trade Secret Protection in India: The Policy Debate’ (Centre
for WTO Studies Working Paper Series) 9 <http://wtocentre.iift.ac.in/
workingpaper/Trade%20Secret%20Protection%20in%20India-%20The%20
policy%20debate.pdf> accessed, 8 September 2020 and Kamakhya
Srivastava, ‘Trade Secrets In Indian Courts’ <https://www.mondaq.com/india/
trade-secrets/204598/trade-secrets-in-indian-courts> accessed 8 September
2020).

223
Intellectual Property and Data
Management UNIT 11 DATA PROTECTION AND PRIVACY

Objectives

After studying this unit, you should be able to:

Describe evolution of the right to privacy and other key elements and
principles of data protection in India.
Highlight the Information Technology Act, 2000, and the provisions therein
that relate to data protection;
Discuss the need for specific data protection legislations;
Explain the state of the data protection framework in India
Appreciate the provisions of the Personal Data Protection Bill, 2019
Structure
11.1 Introduction
11.2 Privacy as an Evolving Concept in the Digital Context
11.3 Right to Privacy In India
11.4 Information Technology Act and the Right to Privacy
11.5 Right to Privacy and the Need for Specific Data Protection Laws
11.6 Data Protection Framework in India
11.7 The Personal Data Protection Bill, 2019
11.8 Summary
11.9 Self-Assessment Questions
11.10 References

11.1 INTRODUCTION
We live in a world where each and every second of our life creates millions of
bits of data about us. For example, every keystroke we make on our phones
conveys extensive data about us. This includes, but is not limited to, several
personal aspects of our life like what time we wake up, how much time we spent
on our phone, what apps we use, with whom all we communicate, with whom
we communicate most, what we prefer to eat, what we prefer to shop, what our
current health condition is, where we are traveling, where we want to travel, and
even, which movie we may want to watch next. Similarly, every financial
transaction we do digitally within or outside our phones, creates extensive data
about our financial behaviours. If you are a fitness tracker user, even your
movements within and outside your home may be creating diverse data about
your physical activities. While the individual bits of data about us may not always
be problematic, the aggregation of data can result in detailed profiling of the
individuals, with enormous consequences. The use of data for targeted/
personalised advertisements is just one of the many such consequences for the
privacy rights of individuals. Unfortunately, most of the data gathering happens
without any explicit permission from us, and far too often without any notification
of the gathering of data. Therefore, a robust data protection framework is very
much necessary for protecting the privacy rights of individuals. This unit will
224
provide an overview of the current legislative and policy framework regarding Data Protection and Privacy
privacy rights and data protection in India.

11.2 PRIVACY AS AN EVOLVING CONCEPT IN THE

DIGITAL CONTEXT
One of the primary factors that necessitated the evolution of privacy rights was
the need to safeguard and preserve the dignity of an individual and consequently
preventing unauthorized disclosure of personal information in the public domain.
As defined by Samuel D. Warren and Louis D. Brandeis, two among the earliest
scholars, who contributed immensely to the evolution of privacy laws, “privacy
is a concept encompassing the inviolate personality of a person, which does not
include within its ambit matters which are privileged, published with consent or,
existing in the public domain.”1 Over the years, privacy rights have risen to become
one of the most prominent factors for facilitating self-definition irrespective of
whether an individual is in public or in a private space.2

But with the advent of the digital age, the scale of data produced and used have
changed drastically. The ability to store large swathes of data and their subsequent
analysis using diverse data mining techniques have unearthed unprecedented
opportunities for firms to use and trade on personal data. The fast developments
in the area of artificial intelligence further contributes to unparalleled challenges
to privacy and autonomy.3 The manner in which the digital revolution impacts
privacy, particularly the concerns with regard to the misuse and manipulation of
personal information, has also given rise to the concept of informational privacy.4

While anecdotal accounts might suggest that awareness about privacy rights might
be improving among the public due to the diverse discussions on privacy in the
mainstream media as well as social media, most people still rarely hesitate to
surrender their informational privacy in return for the receipt of free or ‘better’
services, or ‘convenience’ in the digital context. The manner in which most of us
share our location data with so many apps on our phones or smart watches is just
one of the many examples in this regard. At times, firms might also not give
consumers any choices. When a firm takes an approach that they will allow
consumers to use their services only if they agree to the data policies of the firm,
consumers are often left with no choices, but to agree to the terms of the firm. It
is in this broader context that we need strong legislative and policy frameworks
that can protect the privacy rights of consumers.

This Unit attempts to trace the evolution of the right to privacy and other key
elements and principles of data protection in India. Accordingly it has six parts–
namely, First, that deals with a brief summary on the evolution of privacy as a
right in India, in particular through judicial pronouncements; Second, the
Information Technology Act, 2000 and the provisions therein that relate to data
protection; Third, the need for specific data protection legislations; Fourth, the
state of the data protection framework in India – the aspect which receives
elaboration in the next two sections namely the Fifth, that discusses the salient
features of the Justice Srikrishna Committee Report and the Personal Data
Protection Bill, 2018; and Sixth, a discussion on the provisions of the Personal
Data Protection Bill, 2019, with particular reference to the departures it has made
from the 2018 Bill.
225
Intellectual Property and Data
Management 11.3 RIGHT TO PRIVACY IN INDIA
While the Constitution of India does not explicitly mention the right to privacy,
the courts in India have dealt with the question of whether privacy is a fundamental
right in India. The case of M.P Sharma v. Satish Chandra, decided by an eight-
judge bench of the Supreme Court, dealt with questions regarding the legitimacy
of the search warrant issued under Section 96(1) of the Criminal Procedure Code,
1973, and was the first ever case to touch upon aspects related to privacy.5 The
Apex Court has in that case held that the fundamental right to privacy was not a
guaranteed right under the Indian Constitution. This position was reiterated in
Kharak Singh v. State of Uttar Pradesh.6 However, cases such as PUCL v. Union
of India7, which held tapping of telephones to be an infringement of the right to
privacy, and Selvi v. State of Karnataka8, which declared the use of investigation
techniques including polygraph, narco-analysis and BEAP without the prior
consent of an individual amounting to violation of an individual’s privacy,
necessitated the need to resolve the conundrum regarding the status of the right
to privacy under the Constitution.

Finally, a larger Bench of the Supreme Court had the opportunity to address this
question in K.S Puttaswamy v. Union of India.9 This case arose in the context of
Aadhar, the biometric ID system of the Government of India. In this case, the
constitutional validity of Aadhaar was challenged on the ground that it violated
the right to privacy of an individual. It was contended that Aadhar posed a
serious threat to an individual’s privacy by compromising on their bodily integrity
as it required collection and storage of biometric information for authentication
(fingerprints, iris scans), opening up possibilities of misuse. Further, the collection
of personal information also heightened the risks regarding data security, coupled
with dangers associated in relation to data storage and data breaches.10

The judgment of the Supreme Court in that case discussed many key aspects and
laid down the essential principles in relation to the guarantee, protection,
promotion and fulfilment of the right to privacy.11 Chandrachud J. held that the
right to privacy is an aspect of human dignity and is a basic natural right. He
also made observations regarding informational privacy and the impact of privacy
in the digital economy and highlighted the requirement of a data protection law.12
Chelameshwar J. held that privacy consists of three major elements - repose
(freedom from groundless stimuli), sanctuary (safeguarding against invasive
observation), and intimate decision (freedom to make personal and intimate life
choices).13 Kaul J, emphasized on the claims against the state actors (issues of
surveillance and profiling), and non-state actors (technological influence which
encompasses collection, storage and dissemination of big data). Bobde J.
recognized it as a fundamental right consisting of two facets - firstly, restricting
legislative powers and secondly, affording conditions for the advancement of
individuals.14

The judgement also discussed elements of judicial review and how they can be
accommodated in cases of invasion into privacy by the State. Chelameshwar J.
highlighted the significance of the idea and the concept of reasonableness in Part
III of the Constitution and its varying role depending on the right in question, by
stating that infringement of privacy due to arbitrary action by state would exact
testing its reasonableness under Art. 14, violation of privacy with respect to Art.
19 must fall within the exceptions provided, and actions infringing Art. 21 must
226
be just, fair and reasonable, and including instances requiring “highest standard Data Protection and Privacy
of scrutiny” which can only be warranted in cases of compelling state interest.15
Nariman J. cited instances to assert that restrictions on privacy must be tested on
the combination of rights being encroached, while Bobde J. held that privacy
invasions will have to satisfy not only the tests under the particular rights but
also those applicable under Art. 21.16 In Sapre J.’s opinion, the state may place
reasonable restrictions on the right to privacy only on the basis of social or moral
or compelling public interest.17

Arguably, the combined reading of the opinions of Chandrachud J. (who wrote

on behalf of four judges, including himself) and Kaul J. can provide a clearer
picture of the legal test for infringement of privacy in India. The test suggests the
need for looking at four elements: legality (the presence of law), legitimate goal
(law made must be for a legitimate state aim); the existence of a rational connection
between the aim sought to be achieved and the privacy infringing state action;
and the test of proportionality (that there must exist a rational nexus between the
objects that needs to be achieved and the means).18

The Court directed the Union Government to set up a data protection regime, for
safeguarding individual interests in relation to infringement of privacy. Pursuant
to the judgement, the government formed a committee of experts under the
leadership of Justice B.N Srikrishna to consider all issues related to data protection
and come up with a draft legislation thereon. The recommendations of the
committee and the subsequent legislative developments are discussed later in
this Unit.

11.4 INFORMATION TECHNOLOGY ACT AND THE

RIGHT TO PRIVACY
Though not a legislation drafted primarily with the aim of privacy protection in
the digital context, some of the provisions of the Information Technology (IT)
Act, 2000 have implications for privacy protection. For example, Section 43A of
the IT Act deals with compensation for failure to protect ‘data’ and clarifies that
an enterprise handling any Sensitive Personal Data (SPD) or information can be
held liable for causing any wrongful gain or wrongful loss by being negligent in
establishing reasonable security practices and procedures in handling SPD or
information.19 While this statute does not define ‘sensitive personal data’, the
term ‘data’ has been given a broad definition in this statute. It is defined as “a
representation of information, knowledge, facts, concepts or instructions which
are being prepared or have been prepared in a formalised manner, and is intended
to be processed, is being processed or has been processed in a computer system
or computer network, and may be in any form (including computer printouts
magnetic or optical storage media, punched cards, punched tapes) or stored
internally in the memory of the computer”.20

Rule 3 of the IT Rules, 2011 has however provided a definition for ‘sensitive
personal data or information’ and as per the Rule, sensitive personal data or
information of a person means such personal information which consists of
information relating to (i) password; (ii) financial information such as Bank
account or credit card or debit card or other payment instrument details; (iii)
physical, physiological and mental health condition; (iv) sexual orientation; (v)
medical records and history; (vi) Biometric information; (vii) any detail relating
227
Intellectual Property and Data to the above clauses as provided to body corporate for providing service; and
Management
(viii) any of the information received under above clauses by body corporate for
processing, stored or processed under lawful contract or otherwise. However,
Rule 3 also clarifies that any information which is available in the public domain
or furnished under any law will not fall within the purview of the provision.21

Section 66E of the IT Act deals with voyeurism and provides that any person,
who willfully captures, publishes or disseminates the image of a private part of
any individual without consent, leading to violation of their privacy, shall be
liable to punishment with imprisonment extending up to three years, or fined for
an amount not more than two lakh rupees, or with both.22

Section 72 of the IT Act provides penalty for breach of confidentiality and privacy
by statutory authorities empowered under the IT Act to secure access to private
information in the form of record, book etc. and, for its consequent disclosure to
a third person without the consent of the person concerned.23 As per the provision,
violators may face imprisonment up to two years or fine upto one lakh rupees, or
both imprisonment and fine.

Section 72A provides punishment for disclosure of information in breach of lawful

contract by any person including an intermediary, who has gotten access to
personal information about a person and without his consent discloses it to another
with an intent to cause wrongful loss or wrongful gain.24 The prescribed
punishment is imprisonment upto three years or fine upto five lakh rupees or
both.

The transfer of personal data is regulated by the Information Technology

(Reasonable Security Practices and Procedures and Sensitive Personal Data or
Information) Rules, 2011.

Rule 4 directs body corporate collecting, receiving, or storing information, to

provide a privacy policy for dealing with the personal information and to guarantee
that the same can be viewed by the providers of such information. This Rule
further directs the body corporate or any person on its behalf to publish on the
website the statements, type, the purpose of collection and, the reasonable security
practices employed by the former.25 Rule 5 provides that the collection of
information by a body corporate shall be done only after obtaining consent in
writing from the provider of the information.26 Rule 6 provides that disclosure of
SPD or information by the body corporate can only be done post obtaining the
consent of the provider of the information where it is required for complying
with any legal obligation.27 Rule 7 lays down that the transfer of SPD or
information to any other body corporate located in India or any other country,
shall only be done with the consent of the provider after guaranteeing that the
level of data protection offered there is commensurate with these rules.28

As we can see, some of these provisions do deal with protection of privacy rights.
However, it is now indisputable that the effectiveness and adequacy of these
provisions have been in dealing with the privacy related challenges in the digital
context are far from ideal. Some provisions of the IT Act such as Sections 69,
69A, and 66A (which was struck down29) may have also resulted in chilling
effects on free speech by empowering authorities to issue blocking orders to
network providers based on interceptions.30 Also, the provisions were increasingly
proving inadequate to deal with the increasing amount of data breaches.31
228
 Data Protection and Privacy
11.5 RIGHT TO PRIVACY AND THE NEED FOR
SPECIFIC DATA PROTECTION LAWS
Protection of privacy in the current digital context requires framing of specific
policies and procedures that can minimise the intrusion of both private persons
(including companies) and the state into the privacy of an individual by generating,
collecting, storing, using, collating or deriving data about the individuals. For
the purpose of discussions in this unit, data can be categorized into two - personal
data and non-personal data.32 Personal data includes characteristics or traits, which
may be used to identify an individual, while non-personal data, on the other
hand, encompasses aggregated data which may not serve in identifying an
individual.33

If we look at the data protection approaches in the United States, China and
Europe, one can see them taking diverging approaches to data protection, based
on their respective socio-political requirements and outlooks. For example, the
United States pursues a somewhat laissez-faire approach and is seen not so keen
to have a specific comprehensive legislative framework for data protection, with
the emphasis traditionally being on protection of business interests and
deregulation. The US uses an amalgamation of constitutional provisions and
general laws for establishing a framework for privacy protection.34 China does
not have a unified data protection legislation like that of the European Union
(EU) and takes reference from numerous sector-specific legislations to establish
a data protection regime.35 Provisions relating to protection of personal data also
appear in the PRC cyber security law of 2017, despite it being touted as a national
security legislation.36 In EU, the Data Protection Directive was adopted by the
European Commission in 1995 which laid out the framework for data protection
regulation. The directive provided a framework for processing of personal data,
including rules in relation to collection and destruction of data.37 In 2018, EU
took the approach of drafting a comprehensive privacy legislation, with great
emphasis on the protection of user rights, through extensive discussions among
the member states to enact the General Data Protection Regulation (GDPR).
Under this legislation, the state is entrusted with strengthening the individuals’
privacy in the digital era and for laying down privacy rules as regards companies
and public bodies.38

11.6 DATA PROTECTION FRAMEWORK IN INDIA

It may be recalled from the discussions in the earlier part of this unit, in the
Puttaswamy decision, the Supreme Court had categorically mentioned the need
for an appropriate data protection framework in India.39

In July 2017, the Indian government decided to form a committee to study various
dimensions of data protection and suggest inputs for an appropriate legislative
framework in the area. Under the chairmanship of Justice (Retd.) B. N. Srikrishna,
the committee gave a comprehensive report delineating the rationale for a robust
legal framework for data protection and the committee also provided a Draft
Personal Data Protection Bill.40

229
Intellectual Property and Data Key aspects of the Justice (Retd.) Srikrishna Committee Report:
Management
The Srikrishna Committee Report defined personal information to include any
data which may be used to identify an individual, either directly or indirectly.41
Personal data was defined on the basis of their identifiability, with the law
including processing by private and public entities.42 Sensitive personal data
was to include financial information, passwords, health information, sexual
orientation, religious and political inclination, sexual orientation, with the Data
Protection Authority (DPA) empowered to include further categories.43 The
Committee also sought to differentiate personal data protection from the protection
of sensitive personal data.44 The Committee noted that the relationship between
the individual and any service provider must be observed to be a fiduciary
relationship (a relationship based on fundamental expectation of trust between
the two parties) and that there should be a fine balancing of interests between the
two.45 This conception of the relationship also led to the committee adopting the
terminology of ‘data principal’ and ‘data fiduciary’ – as opposed to the terminology
used in other data protection legislations in the world i.e. as that of ‘data subject’
and ‘data controller’.

The establishment of a regulatory framework stems from the fact that there is a
need for protecting the rights of an individual, referred to as the data principal,
who is the focal actor in a digital ecosystem with reference to their personal
data.46 The basis of a fiduciary relationship is the expectation by an individual
regarding fair use of her or his data for legitimate purposes. Hence, there arises
a duty on the part of the entities collecting the data for dealing with the data
responsibly. Such entities are referred to as data fiduciaries. 47

The draft bill suggested regulation of personal data by providing rules for
protection of autonomy of individuals with reference to their data, along with
laying down norms for processing, collection and storage of such data by the
data processing entities.48 The report provided a number of recommendations
starting with the need for setting up an independent regulatory authority, the
Data Protection Authority (DPA), which would be entrusted with the enforcement
of the law.49 The DPA, as per the suggestions of the report, shall be empowered
to classify certain data fiduciaries as significant data fiduciaries depending on
their power to cause greater harm in pursuance of their data processing
techniques.50 The data fiduciaries have been mandated to undertake obligations,
including consenting to data audits, data protection impact assessments, along
with getting registered with the DPA.51 The DPA was also bestowed with
enforcement mechanisms empowering them to issue directions, calling for
information, publishing guidance and codes of practice, providing injunctive
measures while carrying out inquiry, issuing warnings, cease and desist orders,
and suspension of business of entities violating the law.52 Establishment of an
appellate tribunal for adjudicating and disposing off appeals against any order of
the DPA also found place in the suggestions in the committee report.53

As per the suggestions in the report, consent was considered to be mandatory for
processing of personal data. The report suggests adoption of a modified consent
framework, where data fiduciaries shall be held liable for any harm befalling on
the data principal.54 Consent needs to be free, specific, clear, informed, and capable
of being withdrawn in order to be valid.55 The report also suggests that processing
of personal data by the fiduciaries must be fair and reasonable.56 Data fiduciaries
shall be bound to follow the principles of purpose limitation57 (data fiduciary
230
shall use the personal data collected only for the purpose for which the data Data Protection and Privacy
principal expects it to be used), transparency58, providing notice59 (right at the
time of collection of personal data), and storage limitation60 (storage of data
only for the time period required to fulfill the purpose for which it was collected).
Also, processing cannot be performed in the absence of an express consent by
the data principal, unless the purpose for the same has been communicated at the
time of collection.61

The Committee also recommended the inclusion of data principal rights - such
as right to confirmation (data principal’s right to inquire about the processing of
her/ his personal data), access (right of the data principal to obtain access to her/
his personal data in the control of the data fiduciary), correction,62 right to data
portability63 (right to receive and transfer the data stored with the data fiduciary),
right to object to processing,64 right to object to direct marketing65, and the right
to be forgotten66 (right of the data principals to de-link, amend, or correct the
information that may be disclosed on the Internet by the data fiduciary).

The draft bill also proposed a three-tier system based on the data localization
requirements. Data has been categorized as - personal data, sensitive personal
data, and critical personal data. While personal data may be allowed to be
transferred freely, sensitive personal data may be transferred only after obtaining
explicit consent by the data principal, and subject to government approval.67
Critical personal data may not be transferred except on very limited
grounds.68Cross border transfer of data, apart from critical personal data (not
subject to cross border transfer, which may only be processed in India), may
only be done with the help of a model contract containing clauses holding the
transferor liable for any harm caused to the data principal due to violation of the
law.69

The Committee also provided grounds where processing may be done on non-
consensual grounds, which include, welfare functions of the state, compliance
with any law or order of a court or tribunal, or any other reasonable purpose.70
Further, the processing of personal data or sensitive personal data may be
exempted in certain situations, including, in the interest of security of state, for
personal or domestic purposes, disclosure of personal data for the purpose of
legal proceedings, for acts in contravention of any law in force, personal purposes
and, manual processing by small entities.71 The draft bill laid down that the Data
Protection Authority (DPA) may levy penalties on the data fiduciaries for failure
to comply with data processing obligations, the directions issued by the DPA or,
cross-border data storage and transfer requirements.72 The report along with the
draft bill was submitted to the Ministry of Electronics and Information Technology
on July 27, 2018.

11.7 THE PERSONAL DATA PROTECTION BILL,

2019
The Personal Data Protection Bill (PDP Bill) was introduced in the Lok Sabha
on 11.12.2019, and it was subsequently forwarded to a Joint Parliamentary
Committee (JPC)73. While the Bill has retained many elements of the draft bill
provided by the Srikrishna Committee, it has also made some radical changes.
This section will highlight the major differences between the draft bill provided
by the Srikrishna Committee and the Bill which was introduced in the Lok Sabha.
231
Intellectual Property and Data The definition of personal data, which was defined in a way so as to include
Management
characteristics, traits or attributes of identity used to identify an individual, was
expanded to also include any inference being drawn from such data for profiling
purposes.74 The definition of sensitive personal data which included passwords
as per the Bill proposed by the Srikrishna Committee, was amended to remove
passwords from under this category.75 The power to categorise personal data as
sensitive personal data, which was conferred upon the Data Protection Authority
(DPA) under the draft PDP Bill, has been granted to the Central Government (in
consonance with DPA) under the 2019 Bill.76
The Srikrishna Committee bill had no reference to social media intermediaries.
However, the 2019 PDP bill not only provided a definition but further necessitated
the social media intermediaries classified as significant data fiduciaries to provide
a voluntary user verification mechanism for all users.77 The Srikrishna Committee
bill had further exempted the State from abiding by the requirements of the bill
while processing personal data in the interest of national security, as long as it
was permissible under law and performed in a fair and reasonable manner.78 The
2019 bill, on the other hand, grants the government the power to exempt any of
its agencies from the provisions of this Act in certain cases (security of state,
sovereignty and integrity of India, public order etc.), thus enhancing the powers
of the Government.79
The 2019 PDP Bill incorporates data subject rights such as the right to erasure,
granting the right to the data principal to request data fiduciaries for erasing any
personal data that may have been stored by the latter once the purpose has been
fulfilled.80 The Srikrishna Committee bill also required one serving copy of all
personal data to be stored in India every time transfer of personal data took place
outside the country.81 This mandatory storage requirement for all personal data
has been removed in the 2019 PDP bill, necessitating only mirror copies of
sensitive personal data and critical personal data to be stored in the country.82
The conditions for transfer of sensitive personal data also includes receiving
express consent by the individual whose data is being transferred outside the
Country.83
The composition of the Data Protection Authority (DPA) was also subjected to
certain modifications in the 2019 PDP bill. Under the Srikrishna Committee bill,
the selection committee was empowered to give recommendations to the Central
Government for the appointment of members of the Data Protection Authority,
comprised of (i) Chief Justice of India or a Judge of Supreme Court as the
chairperson, (ii) Cabinet Secretary, and (iii) an expert in field of data protection,
information technology and related subjects.84 However, the 2019 Bill does away
with the requirement of a judicial member from the selection committee. The
selection committee, as per the 2019 Bill consists of (i) Cabinet Secretary as the
chairperson, (ii) Secretary, Department of Legal Affairs, and (iii) Secretary,
Ministry of Electronics and Information Technology.85
While the Srikrishna Committee Bill neither defined non-personal data nor
envisaged application of non-personal data by the Government for making policies
for digital economy or security, the 2019 PDP bill, in addition to defining the
term, also empowers the government to direct data fiduciaries to provide any
non-personal data and anonymised personal data for better targeting of provision
of services.86 Additionally, the 2019 PDP Bill has brought forth the concept of
privacy by design policy whereby every data fiduciary has to prepare a privacy
232 by design policy and get it approved by the Data Protection Authority.87
 Data Protection and Privacy
11.8 SUMMARY
As the Supreme Court has clarified through the landmark decision in Puttaswamy
case, the right to privacy is a fundamental right in India. Like many other
fundamental rights, while a privacy right cannot be considered as an absolute
right, it is very important that effective and adequate measures are put in place to
protect privacy rights, particularly in the current digital context wherein the threat
of infringement by actors including the state is non-trivial and profound. A robust
data protection regime that can assure the best possible protection of privacy
rights for individuals is the need of the time. The key principles laid down by the
Supreme Court in the Puttaswamy decision has been a good starting point for
designing a robust data protection regime for India.

The report of the Joint Parliamentary Committee on Personal Data Protection

Bill has been tabled before both the houses of the Parliament on December 16,
2021. With the bill titled as “The Data Protection Bill, 2021”, it looks to regulate
not just personal data as was envisaged by the Srikrishna Committee, but also
include within its scope non-personal data until a framework to differentiate
between personal and non-personal data is set up by the Government.

11.9 SELF ASSESSMENT QUESTIONS

1) In which of the following case did Supreme Court held that privacy is a
fundamental right in India?
a) Kharak Singh v. State of Uttar Pradesh b) M.P Sharma v. Satish Chandra
c) K.S Puttaswamy v. Union of India d) Gobind v. State of M.P
2) GDPR stands for -
a) Global Directive for Privacy Regulation b) General Data Protection Regulation
c) Global Data Protection Regulation d) General Directive for Privacy Regulation
3) Which provision of the Information Technology Act, 2000, deals with
violation of privacy?
a) Section 72A b) Section 66B c) Section 72 d) Section 66E
4) Which of the following has not been recognized as a user right under the
Personal Data Protection Bill, 2019?
a) Right to access b) Right to be forgotten
c) Right to anonymous speech d) Right to data portability
5) Based on data localization requirements, the PDP Bill has categorized
personal data into _______ types
a) 4 b) 5 c) 3 d) 2
6) Briefly discuss the provisions under the Information Protection Act, 2000,
having privacy implications.
7) Write a short note on the essential principles laid down by the Supreme
Court in K.S Puttaswamy v. Union of India.
8) Enumerate and discuss the set of user rights provided by the Srikrishna
Committee on personal data protection.
233
Intellectual Property and Data 9) Briefly discuss the principles laid down in Srikrishna Committee Report
Management
finding place in the PDP Bill, 2019.
10) Write a brief note on the changes brought about by the Personal Data
Protection Bill, 2019.

11.10 REFERENCES
1
Warren and Brandeis, The Right to Privacy, 4 HARV. L. REV. 193, 195 (1890).
2
Christopher Slobogin, Public Privacy: Camera Surveillance of Public Places
and the Right to Anonymity,72 Missi. L. J. 213, 214 (2002).
3
Natalie M. Banta, Death and Privacy in the Digital Age, 94 N.C. L. Rev. 927,
929 (2015-2016).
4
Will Thomas DeVries, Protecting Privacy in the Digital Age, 18 Berkeley
Tech. L.J. 283, 291 (2003).
5
M.P Sharma v. Satish Chandra, 1954 SCR 1077.
6
Kharak Singh v. State of Uttar Pradesh, (1964) (1) SCR 332.
7
PUCL v. Union of India, (1997) 1 SCC 301.
8
Selvi v. State of Karnataka, (2010) 7 SCC 263.
9
K.S Puttaswamy v. Union of India, (2017) 10 SCC 1.
10
Reetika Khera, The Different Ways in Which Aadhaar Infringes on Privacy,
THE WIRE, https://thewire.in/government/privacy-aadhaar-supreme-court (Last
accessed on Oct. 30, 2021)
11
Puttaswamy, supra note 9.
12
Id. at 598.
13
Bhandari, V., Kak, A., Parsheera, S., & Rahman, F. An Analysis of Puttaswamy:
The Supreme Court’s Privacy Verdict. IndraStra Global, 11, 1-5. https://nbn-
resolving.org/urn:nbn:de:0168-ssoar-54766-2. (2017).
14
Ibid.
15
Puttaswamy, supra note 9, at 532.
16
Id. at 549.
17
Id. at 616.
18
Bhandari, V., Kak, A., Parsheera, S., & Rahman, F. (2017). An Analysis of
Puttaswamy: The Supreme Court’s Privacy Verdict. IndraStra Global, 11, 1-
5. https://nbn-resolving.org/urn:nbn:de:0168-ssoar-54766-2.
19
Information Technology Act, 2000, § 43A, SPD Rules, No. 21, Acts of
Parliament, 2000 (India).
20
Id. at § 2(1)(o).
21
Information Technology (Reasonable Security Practices and Procedures and
Sensitive Personal Data or Information) Rules, 2011, Rule 3.
22
IT Act, supra note 19, at § 66E.
23
Id. at § 72.
24
Id. at § 72A.
25
IT Rules, supra note 21, at Rule 4.
26
Id. at Rule 5.
234
27
Id. at Rule 6. Data Protection and Privacy
28
Id. at Rule 7.
29
Shreya Singhal v. Union of India, AIR 2015 SC 1523
30
INTERNET FREEDOM FOUNDATION, https://internetfreedom.in/update-the-it-act-
2000-india-needs-a-reboot/ (Last accessed at Oct. 30, 2021)
31
Sreenidhi Srinivasan and Namrata Mukherjee, Building an effective data
protection regime, Vidhi Centre for Legal Policy 1, 8 (2017).
32
Anurag Vaishnav, The Personal Data Protection Bill, 2019: All you need to
know, PRS LEGISLATIVE RESEARCH (Dec. 23, 2019), https://prsindia.org/
theprsblog/personal-data-protection-bill-2019-all-you-need-know
33
Id.
34
Ryan Moshell, And Then There Was One: The Outlook for A Self-Regulatory
United States Amidst A Global Trend Towards Comprehensive Data Protection,
37 Texas Tech. L. Rev. 1, 1 (2005).
35
Anja Geller, How Comprehensive Is Chinese Data Protection Law? A
Systematisation of Chinese Data Protection Law from a European Perspective,
69(12) GRUR INTL. 1191, 1191 (2020).
36
Id. at 1192.
37
DIRECTIVE 95/46/EC, https://ec.europa.eu/eip/ageing/standards/ict-and-
communication/data/directive-9546ec_en.html (Last accessed on Oct. 30,
2021).
38
DATA PROTECTION IN THE EU, https://ec.europa.eu/info/law/law-topic/data-
protection/data-protection-eu_en (Last accessed on Oct. 29, 2020).
39
Puttaswamy, supra note 9, at 510.
40
Justice Srikrishna Committee Report on Data Protection (2018).
41
Id. at 27.
42
Personal Data Protection Bill, 2018, § 3(29).
43
Id. at § 3(35).
44
Report on Data Protection, supra note 40, at 30.
45
Id. at 8.
46
Ibid.
47
Ibid.
48
PDP Bill 2018, supra note 42.
49
Report on Data Protection, supra note 40, at 167.
50
PDP Bill 2018, supra note 42, at § 38.
51
Id. at § 33, 35.
52
Id. at § 64.
53
Id. at § 84.
54
Id. at § 12.
55
Id. at § 18.
56
Id. at § 8.
57
Id. at § 5.
58
PDP Bill 2018, supra note 42, at § 8. 235
Intellectual Property and Data 59
Id. at § 28.
Management
60
Id. at § 9.
61
Id. at § 12.
62
Id. at § 24, 25.
63
Id. at § 26.
64
Report on Data Protection, supra note 40, at 74.
65
Ibid.
66
PDP Bill 2018, supra note 42, at § 27.
67
Id. at § 34.
68
Id. at § 33.
69
PDP Bill 2018, supra note 42, at § 41(1)(a).
70
Report on Data Protection, supra note 40, at 174.
71
Id. at 175.
72
Draft Personal Data Protection Bill, 2018, PRS LEGISLATIVE RESEARCH https:/
/prsindia.org/billtrack/draft-personal-data-protection-bill-2018 (Last accessed
on Oct. 9, 2021).
73
JPC gets time to present a report on the personal data protection bill. (Jul. 23,
2021) https://www.livemint.com/news/india/jpc-to-seek-time-to-present-
report-on-personal-data-protection-bill-11627017273374.html (Last accessed
on Oct. 08, 2021).
74
Personal Data Protection Bill, 2019, § 3(28), No. 373 (India).
75
Id. at § 3(36).
76
Anurag Vaishnav, The Personal Data Protection Bill, 2019: All you need to
know, PRS LEGISLATIVE RESEARCH (Dec. 23, 2019), https://prsindia.org/
theprsblog/personal-data-protection-bill-2019-all-you-need-know.
77
PDP Bill 2019, supra note 74, at § 26.
78
Id. at § 42.
79
Id. at § 35.
80
Id. at § 18(1)(d).
81
PDP Bill 2018, supra note 42, at § 40.
82
DEFENDER OF YOUR DIGITAL FREEDOM, Key Changes in the Personal Data
Protection Bill, 2019 from the Srikrishna Committee Draft, https://sflc.in/
key-changes-personal-data-protection-bill-2019-srikrishna-committee-draft.
(Last accessed on Oct. 09, 2021).
83
Ibid.
84
PDP Bill 2019, supra note 74, at § 50(2).
85
Id. at § 42(2).
86
Id. at § 91.
87
Id. at § 22.

236
 Data Protection and Privacy

BLOCK-6
BUSINESS AND SUSTAINABILITY
Unit 12 Environment Protection and Sustainability
Unit 13 Competition Law
Unit 14 Consumer Protection Law

237
Business and Sustainability

238
 Environment Protection and
UNIT 12 ENVIRONMENT PROTECTION AND Sustainability

SUSTAINABILITY

Objectives

After studying this unit, you should be able to:

Understand the key constitutional provisions in India relating to Environment
Discuss the International Developments in the field of Environmental Law
and its impact on Businesses and Industries
Appreciate the important provisions of Water Act, 1974, Air Act 1981,
Environment Act, 1986, and Forest Act, 1980.
Describe the major schemes that have been specially implemented for the
MSME sector.
Structure
12.1 Introduction
12.2 Evolution of Environmental Protection Legislation in India
12.3 Environmental framework in India and its impact on businesses and
industries
12.4 Implementation, Compliance, and Enforcement
12.5 Judicial Forums on environmental protection and liability of corporates
12.6 Climate Change and India
12.7 Schemes, Fiscal Policies, and market-based measures
12.8 Important Developments
12.9 Summary
12.10 Self Assessment Questions
12.11 References

12.1 INTRODUCTION
In the past fifty years the world has developed ample understanding on the
relationship between human beings and environment. The Stockholm Declaration
adopted at the United Nations Conference on Environment in Stockholm, 1972,
placed environmental issues at the forefront of international concerns and marked
the start of a dialogue between industrialized and developing countries on the
link between economic growth, the pollution of the air, water, oceans and the
well-being of people around the world.

In the general debate, special emphasis was placed on the role of corporations,
as most developing nations protested against the activities of multinational
corporations and argued that there was rampant exploitation of natural resources
by the developed countries. The need for more effective and less wasteful
utilization of natural resources was underlined by several speakers.1

Since 1972 awareness on environmental issues has steadily increased. Human

activities such as deforestation, burning of fossil fuels, changes in land use, rising
239
Business and Sustainability population, excessive use of natural resources, rampant industrialization have
adversely affected the environment. However, such issues often take a back seat
in view of industrialization, economic growth and maximising profits.

In an effort to link economic development and environmental stability, Brundtland

commission published a report titled “Our Common future” in 1987 which talks
about the concept of Sustainable development and defined it as,

“Development that meets the needs of the present without compromising

the ability of future generations to meet their own needs”2

This last decade has seen several important developments in the international
arena which specifically deal with sustainable industrialisation, production and
consumption.

The 2030 Agenda for Sustainable Development adopted in September 2015

includes 17 Sustainable Development Goals, specifically SDG 93 and SDG
124puts the onus of sustainable development not just on the governments but
also on other stakeholders like industries, businesses and consumers. Under the
International Framework for Climate Change, Kyoto Protocol 5 and Paris
Agreement6 have both called for the financial assistance from developed countries
with more financial resources to those countries that are more vulnerable and are
less financially endowed. Further, the Paris Agreement had seen unprecedented
participation of several companies including Mahindra group from India
showcasing their clean technologies and pledging to reduce greenhouse gas
emissions at the Caring for Climate business forum.

It is important to imbibe a culture of sustainability and profitability with clean

and sustainable technologies within the corporate structure. In recent years,
realising the economic impacts of environmental pollution7 and climate change,
even the corporate sector has acknowledged that addressing environmental issues
and tackling climate change is key to managing risks and ensuring long term
returns on investment.

International Finance Corporation in its report8 suggests that climate financing

cannot be done by governments alone, in fact private entities are far more suitable
to invest in climate friendly projects, it further states that between 2018 -2030,
USD 3.4 trillion dollars of Climate investment opportunities in key sectors will
arise in South Asia, if NDC’s are met by countries in the South Asia, out of this
USD 3.1 trillion dollar of opportunities will be presented in India alone.

However, the global economy continues to grow, resulting in a possible tripling

of resource extraction by 2050.9 There is widespread increase in population
especially in developing countries wherein the current world population of 7.3
billion is expected to reach 9.7 billion by 2050. There is increase in global
consumption, manufacturing, pollution levels and we are nowhere near to
achieving the target set at the Paris agreement (1.5degreecelsius increase) which
will further aggravate the negative impacts on our environment, livelihood and
health.

Dealing with such multidisciplinary and cross sectoral issues, requires two-
pronged strategy, firstly; develop proactive legal mechanisms with effective
compliance and monitoring for reducing pollution as well as creating a
240 comprehensive framework of liability and payable damages and secondly;
promoting sustainable industrial development and infrastructure by way of Environment Protection and
Sustainability
appropriate incentive-based schemes, fiscal policies and market mechanisms. It
is important to note that successful implementation of such measures depends
on the collective effort of all the relevant stakeholders including governments,
consumers along with industries and businesses.

12.2 EVOLUTION OF ENVIRONMENTAL

PROTECTION LEGISLATION IN INDIA
India’s approach towards environmental protection was piecemeal and reactive
in nature. In response to Stockholm declaration 1972, Air (Prevention and Control
of Pollution) Act, 1981, and Water (Prevention and Control of Pollution) Act,
1974, were introduced. Further, Art 48 A and 51(g) were incorporated in Indian
Constitution by way of 42nd amendment in 1976.

It is unfortunate to note that beyond causing continual environmental harms

industries can also be responsible for severe and large-scale disasters resulting
in the deaths of millions of people. India was ill fated to witness one of the
world’s worst industrial disasters in the form of Bhopal gas tragedy in 1984
killing thousands of people.

This incident was a turning point for environmental jurisprudence in India. Several
prominent legislations, rules, notifications were adopted after this incidenttaking
into account issues and challenges that increasingly emerged as part of modern-
day developments. India experienced a virtual explosion of public interest
litigations specifically on environmental issues and courts also assumed a more
pro-active role in the form of public educator10, policy maker11and administrator12.
India even started contemplating on having a specialized tribunal dealing
specifically with environmental matters13 as the Supreme Court stressed on its
importance in numerous instances.14Finally after much deliberation and failed
attempts, National Green Tribunal was established in 2010. Since its inception,
it has played an important role in shaping the environmental litigation in India.15

Thus, India started adopting a more holistic and comprehensive approach towards
environmental protection and regulating the pollution emanating from industries.

Constitutional provisions for Environmental Protection:

The Indian Constitution is a living document which has evolved and grown with
time. Substantive provisions for environmental rights and duties were lacking in
our original Constitution. However, its landscape was changed by way of 42nd
amendment which introduced specific provisions for environmental protection
in the form of Directive Principles of State Policy16 and Fundamental Duties17.
With the introduction of these two Articles, both the State and the Citizens are
now under the constitutional obligation to protect, preserve and safeguard the
environment.

Article 21 of the Indian Constitution states that, “no person shall be deprived of
his life or personal liberty except according to procedure established by law”.
Supreme Court in the case of Virender Gaur Ors. vs. State of Haryana18 interpreted
the word ‘life’ in a liberal manner and stated that,

241
Business and Sustainability ‘Article 21 protects right to life as a fundamental right. Enjoyment of
life and its attainment including their right to life with human dignity
encompasses within its ambit, the protection and preservation of
environment, ecological balance free from pollution of air and water,
sanitation without which life cannot be enjoyed. Any contra acts or
actions that would cause environmental, ecological, air, water, pollution,
etc. should be regarded as amounting to violation of Article 21.”

Further, in the case of M.C Mehta v. Union of India19the Supreme Court treated
the right to live in healthy and pollution-free environment as a part of fundamental
right to “life” under Article 21 of the Constitution.

Public Interest Litigations under art. 32 and art 226 also resulted in a wave of
environmental litigations, producing a rich environmental jurisprudence in India.
Thus, India’s Constitution now guarantees a right to healthy environment20, right
to clean air21, right to clean water22 etc.

Article 19 (1) (g) of the Indian constitution confers fundamental right on every
citizen to practice any profession or to carry on any occupation, trade or
business. However, it is subject to reasonable restrictions. In the case of Burra
bazar Fireworks Dealers Association v.  Commissioner of police, Calcutta23it
was held that,

“Art. 19(1)(g) of the Constitution of India does not guarantee the

fundamental right to carry on trade or business which creates pollution
or which takes away that community’s safety, health and peace.”

12.3 ENVIRONMENTAL FRAMEWORK IN INDIA

AND ITS IMPACT ON BUSINESSES AND
INDUSTRIES
In the present section we will be dealing with Environment Protection Act 1986,
Water (Prevention and Control of Pollution) Act 1974, Air (Prevention and Control
of Pollution) Act 1981, Forest Conservation Act 1980 and The Wildlife
(Protection) Act, 1972, etc.

a) Water (Prevention and Control of Pollution) Act 1974

In order to deal with the issue of water pollution, the Water Act was enacted
in 1974 with the primary objective of prevention and control of water
pollution and maintaining or restoring the wholesomeness of water. The Act
specifically prohibits the disposal of any poisonous, noxious or polluting
matter directly or indirectly into any stream, well, sewer or land.24 In order
to achieve its objective, it established Central and State Pollution Control
Boards with the function of developing standards for effluents and sewage
as well as the quality of water etc. It empowers the State Boards to obtain
information from any establishment regarding its construction, installation
or operation with a view to prevent and control water pollution.25 It also
authorizes the State Boards to take water samples from any stream, well,
sewage or trade effluent passing through any plant or vessel.26 The act further
authorises the State Boards27 to enter and inspect any plant, record, register,
or document in order to determine whether the orders or directions of Boards
242
 have been complied with or not. With regard to the power of entry and Environment Protection and
Sustainability
inspection, the State Boards shall have the powers of district magistrate under
section 94 of CRPC relating to search and seizure. It is important to point
that if an offence is committed under this Act by a company, then every
person who at the time of offence, was responsible for the affairs of the
company or in charge thereof shall be guilty of the offence and punished
accordingly.28 The Act provides for a wide array of penalties ranging from
imprisonment of 3 months to 6 years and daily fines as well in case of
continuous violations.

Consent to Establish and Consent to Operate-Establishment of any industry,

operation or process, which is likely to discharge sewage or trade effluent
into a stream, well, sewer, well or land requires prior consent of the Board.29

b) Air (Prevention and Control of Pollution) Act 1981

The Act was enacted in 1981 to provide for the prevention, control and
abatement of air pollution in India. In the case of New Era High School v.
State of Bihar30it was stated that,

“Statute mandates board to inspect air pollution control areas at intervals,

assess quality of air therein and take steps for prevention, control and
abatement of air pollution in such areas”

The Act includes noise pollution. It specifically prohibits the industries from
emitting air pollutants in excess of the standards laid down by the State
Boards.31 Similar to the Water Act, the Air Act also authorises the State
Boards with the power to obtain information32, power of entry and
inspection33, power to take samples from air emissions34 and permits action
against company officials in case of contravention of its provisions by a
company35. The Air Act as well provides for a wide array of penalties ranging
from imprisonment of 3 months to 6 years and daily fines in case of
continuous violations.

Consent to Establish and Consent to Operate- The Act requires certain

industrial plants to apply for consent from the State Boards before establishing
or operating any industrial plant in an air pollution control area.36 The Board
while granting consent may also impose certain conditions, which are
required to be followed by the concerned industry. Failure to comply with
conditions or operating without appropriate consent could result in the closure
of the industry. Supreme Court in the case of M.C Mehta v. Union of India37
held that,

“Carrying of mining operation of stones on the border of Rajasthan and

U.P without obtaining necessary permission from competent authority was
held to be illegal and persons were restrained from working out mining
activities”

c) Environment (Protection) Act 1986

Even though there were existing laws in India dealing directly or indirectly
with a vast array of environmental issues, India still lacked a general
legislation for environmental protection in India. Due to constantly changing
paradigms in the field of environmental law, a need was felt to have an
243
Business and Sustainability umbrella legislation for environmental protection in India, which would
enable better coordination between regulatory authorities and provide for
speedy and adequate responses to varying environmental issues. Further,
Bhopal Gas tragedy also exacerbated the loopholes in the existing system of
environmental protection and highlighted the need for an all-encompassing
legislation for the protection of environment in India. In view of these issues
the Environment (Protection)Act was enacted in 1986. The Act gave sweeping
powers to the Central Government38, providing that it could take, “all such
measures as it deems necessary or expedient for the purpose of protecting
and improving the quality of the environment and preventing, controlling
and abating environmental pollution.” In particular, for instance, measures
could include restriction of areas in which any industries, operations or
processes shall not be carried out or shall be carried out subject to certain
safeguards; laying down procedures and safeguards for prevention of
accidents which may cause environmental pollution and remedial measures
for such accidents; laying down procedures and safeguards for handling of
hazardous substances; examination of such manufacturing processes,
materials and substances as are likely to cause environment.39

The Act also empowered the Central Government to make rules by

notification on specific issues pertaining to environmental conservation and
protection.40 However, each rule made under the Act, is required to be laid
before each House of the Parliament.41 In light of this power, Central
Government has been able to issue notifications on a plethora of
environmental issues in India such as waste management, environmental
impact assessment, Coastal Regulation Zone (CRZ) etc.

The Act also provides for a penalty of imprisonment ranging from five years
to seven years along with fines which may extend to Rs. one lakh and daily
fines of Rs.5000 in case of continuous contravention.

i) Coastal Regulation Zones Notification: The first CRZ Notification

was issued in 1991, since then there have been several changes and
amendments in these notifications. The most recent notification was
implemented in 2019. As per the 2019 notification, CRZ’s have been
classified as follows:
 CRZ I A- Ecologically Sensitive Areas, which play an important
role in maintaining the integrity of coast such as mangroves, coral
reefs, salt marshes, nesting grounds for birds and animals etc.
 CRZ I B- Inter- tidal zone i.e., area between High tide line and low
tide line
 CRZ II- developed areas upto or close to shoreline.
 CRZ III- Land areas that are relatively undisturbed, have further
been classified as A and B based on population density.
 CRZ IV- deals with water areas and sea bed areas and further
classified into A and B on the basis of distance from Low tide line.
The new notification has certain provisions which are favourable for
industries and businesses such as:

244
 Clearance procedures for projects or activities located in CRZ-I and Environment Protection and
Sustainability
CRZ-IV to be dealt with by the Ministry of Environment, Forests &
Climate Change. Whereas, powers for clearance under CRZ-II and CRZ-
III have been delegated to State level with necessary guidance.
There is a boost for the tourism industry as temporary tourism facilities
like shacks, toilets, change rooms, drinking water facilities have been
permitted in the No Development Zone of CRZ-III areas with a minimum
distance of 10m from the HTL.
The notification also lifted the prohibition on construction in the
previously-protected 200-metre no-development zone in rural areas and
100-metre no-development zone along the tidal-influenced water bodies,
reducing it to 50 meters for these water bodies and densely populated
rural areas. This will make way for more real estate, Hotels and resorts.
As per the 1991 Development Control Regulation, Floor Area Ratio
had been frozen. As of now it stands defreezed and Floor Space Index
is permitted for construction projects which imply a boost for the real
estate sector.
ii) Waste Management Rules: In a developing country like India with
high consumption pattern and huge quantities of different kinds of waste,
lack of proper management and disposal system can be a serious issue.
Several rules have been notified in India dealing with different kinds of
waste such as municipal solid waste, plastic waste, hazardous waste,
bio- medical waste, etc. These rules are based on the principle of making
stakeholders accountable for the management of waste. Most
importantly, the rules stipulate that it is the responsibility of the producers
to ensure that the waste generated from their products is disposed of in
an environmentally friendly manner. It can be defined as,”a policy
principle to promote total life cycle environmental improvements of
product systems by extending the responsibilities of the manufacturer
of the product to various parts of the entire life cycle of the product,
and especially the take-back, recycling and final disposal of the
product.42"In India, the principle of Extended Producers Responsibility
(EPR) has been an integral part of the waste management rules. The
Batteries (Management and Handling) Rules (BMHR), 2001, was the
first to be based on the concept of EPR without explicitly mentioning
it. Thereafter, the rules made for plastic waste (Plastic Waste
[Management and Handling] Rules, 2011) and e-waste (E-Waste
[Management and Handling] Rules, 2011) explicitly laid down the
provisions for EPR in managing waste.
The concept of EPR has received much-needed attention in the recent
rules formulated for effective management of solid waste. It is one of
the most important parts of the e- waste rules 2016 and Plastic Waste
Management Rules, 2016. For the first time, it has also been included
in the Solid Waste Management Rules, 2016 as well. Plastic Waste
Management Rules, 2016, illustrates that the primary responsibility for
collection of used multi-layered plastic sachet or pouches or packaging
is of Producers, Importers and Brand Owners who introduce the products
in the market. They need to establish a system for collecting back the
plastic waste generated due to their products. There are different
245
Business and Sustainability approaches for successful implementation of EPR. Indore adopted a
ward wise approach, and in one year achieved 100% segregation of
waste at source from households and commercial establishments. The
sorted waste is easily saleable to the recyclers. The recyclers are queuing
up daily for collecting their category of waste with an assured quantity
and quality.

iii) Environment Impact Assessment (EIA) Notification: Initiated formally

in 1994, the current EIA Notification 2006 lays out a detailed process
for obtaining Prior Environment Clearance for any new projects or
activities, or the expansion or modernisation of existing projects and
projects seeking capacity addition with change in process or technology.
Category A projects acquire their clearance from the Ministry of
Environment, Forest and Climate Change (MoEFCC) while category
B projects apply for clearances to the State Environment Impact
Assessment Authority (SEIAA). Category B projects can be further
broken down to B1 and B2, thereby determining which projects and
activities will require an EIA before approval. Since January 2016,
institutions have been created at the District level as well and they too
have been included in the EIA Notification for approving certain
instances of mining of minor minerals. These are the District
Environmental Impact Assessment Authority (DEIAA) and District
Level Expert Appraisal Committee (DEAC).

Since March 2016, Ministry of Environment, Forest and Climate

Change, has adopted a new method of classifying each type of industry.
A concept of ‘white industries’ has been introduced to denote ‘non
polluting’ industries. They do not need permit or consent and just require
to notify the relevant State Pollution Control Board. For other colour
coded industries (red, orange, green) environmental permits are needed
according to kind of activity and size of activity being conducted. A
Pollution Index (PI) score is given to each industry, depending on
utilization of resources, air emissions, hazardous waste generated, etc.
(e.g., red category – PI score of 60 and above including but not restricted
to asbestos, nuclear power plants, ship breaking, oil and gas extraction;
orange category- PI score of 41 to 59 including food processing,
pharmaceutical formulations; green category- PI score of 21 to 40
including sawmills, tyres/tubes retreading; white category- PI score upto
20 including wind power, mini hydel electric power less than 25
megawatts). No red category of industries shall normally be permitted
in ecologically fragile area/protected area.43

An integrated permit system can be submitted to relevant State Pollution

Control Board to obtain consent to establish and consent to operate,
authorisation under various Acts/Rules- submit a combined consent
application to relevant SPCB/CPCB. In August 2018, a new online
environmental portal was launched by MoEFCC named Parivesh which
stands for Pro-Active and Responsive facilitation by Interactive,
Virtuous and Environmental Single window Hub.- to facilitate online
submission and tracking of various environmental clearance
applications. It allows a single registration and single sign in for all
types of clearances (environment, forest, wildlife, CRZ) and create a
246 unique ID for each project.
 There is a particular period for validity of various permits and most of Environment Protection and
Sustainability
consent orders, EC can be transferred.

iv) Forest (Conservation) Act, 1980: The Forest (Conservation) Act, 1980
lays down the provisions that regulate the diversion of forestland for
non-forest purposes. This is with the stated objective of ensuring long-
term conservation of the forests in India, and reducing forest degradation.
Any user agency (both government and non-government) has to seek
prior permission from the Central Government before de-reserving any
forest land, felling of trees or before diverting any forestland for non-
forest use. The application for the same is moved through the Forest
Department of the State Government, which is the final point of approval
for forest diversion under this legislation. Non-forest use implies the
breaking up or clearing of any forest land for the cultivation of tea,
spices, rubber, palms, oil-bearing plants, horticultural crops or medicinal
plants and for any purpose other than re-afforestation.

Proposals involving forest land upto 40 hectares (not including activities

related to mining and encroachments) are handled by the regional office
of the MoEFCC. Proposals involving forest land above 40 hectares and
those related to mining and encroachments are handled by the MoEFCC.

v) The Wildlife (Protection) Act, 1972: The Wildlife (Protection) Act, 1972,
is a statute to provide for the protection of wild animals, birds and plants.
It provides for declaration of national parks and sanctuaries and prohibits
hunting and harm of wild animals and uprooting of specified plants in
general.

A permit is required in case any activity including industrial, mining or

infrastructure is likely to destroy, exploit or remove any wildlife
including forest produce from a Protected Area. A Protected Area
includes a Sanctuary, National Park, Conservation Reserve or a
Community Reserve. It is also required in case an activity could destroy,
damage or divert the habitat of any wild animal and in cases where
activities are likely to divert, stop or enhance the flow of water into or
outside the protected area. This is granted through the Chief Wildlife
Warden only after the state government in consultation with the National
Board for Wild Life (NBWL) is satisfied that such an action is necessary
for the improvement and better management of the wild life. In case of
non-compliance the permits can be cancelled and punishment can be
imposed through imprisonment and/or fine.

12.4 IMPLEMENTATION, COMPLIANCE AND

ENFORCEMENT
Good governance requires the establishment of viable institutions with adequate
powers and competent personnel with the knowledge and means to deal with
challenges while keeping public interest in mind. This is especially true in case
of environmental pollution, which requires specialised scientific knowledge while
dealing with various aspects of pollution.

247
Business and Sustainability

Good
Governance Enforcement

Compliance

Tata Institute of Social Sciences in a Report published in 2013 titled

“Environmental Regulatory Authorities in India: An Assessment of State Pollution
Control Boards” observed that,

“time and again across state governments have not been able to choose
a qualified, impartial, and politically neutral person of high standing
to this crucial regulatory post. The recent appointments of chairpersons
of various State Pollution Control Boards like Karnataka (A a senior
BJP leader), Himachal Pradesh (B a Congress party leader and former
MLA), Uttar Pradesh (C appointed on the recommendation of SP
leader X), Arunachal Pradesh (D a sitting NCP party MLA), Manipur
Pollution Control Board (E a sitting MLA), Maharashtra Pollution
Control Board (F a former bureaucrat) are in blatant violation of the
apex court guidelines.”

Further, Supreme court in the case of Techi Tagi Tara vs Rajendra Singh
Bhandari44 highlighted that State Pollution Control Boards (or SPCBs) constituted
under the Water (Prevention and Control of Pollution) Act, 1974 and the Air
(Prevention and Control of Pollution) Act, 1981 possess only a few or sometimes
none of the attributes of good governance and again a few or none of them are
adequately empowered. It further stated, this is a serious problem afflicting the
SPCBs for at least two decades (if not more).

Moreover, as per the NCRB data of 2020, a total number of 589 cases were
registered under Water and Air Act throughout India. Further, under Environment
Protection Act, a total number of 992 cases were registered all over India. Even
though it’s a substantial increase in the number of cases from 2019, still there is
long way to go in order to ensure protection from environmental pollution and
determining the liability of individuals and other such industries responsible for
environmental pollution.

Thus, even though India has necessary provisions regarding protection of

environment in the form of legislations and detailed rules, still issues regarding
its implementation, compliance and enforcement have not been resolved entirely.
Judicial forums in India have tried to resolve these issues to a certain extent.

248
 Environment Protection and
12.5 JUDICIAL FORUMS ON ENVIRONMENTAL Sustainability

PROTECTION AND LIABILITY OF

CORPORATES
The judicial forums in India, primarily the Supreme court and the National Green
Tribunal have played an important role in providing environmental protection
and determining the liability as well as damages for environmental wrongs.

i) Supreme Court:
Over the years Supreme Court has developed a rich jurisprudence pertaining to
environmental law and policy in India. It has been the endeavour of this court to
promote and imbibe the principles of International Environmental Law such as
Precautionary Principle45, Polluter pays principle46 and Sustainable development47
within the domestic jurisdiction and endorse environmental sustainability. The
court has on several occasions directed the violators to pay hefty fines, which
acts as a deterrent against future violations and also results in better enforcement
of the law of the land.

The Hon’ble Supreme Court in the case of Indian Council for Enviro-Legal Action
v. Union of India48 stated that

“The polluter pays principle demands that the financial costs of

preventing or remedying damage caused by pollution should lie with the
undertakings which cause the pollution, or produce the goods which
cause the pollution…………”

Similarly, in the case of Vellore Citizens Welfare Forum v. Union of India49the

Hon’ble Supreme Court defined the polluter pays principle as:

“Polluter Pays principle has been held to be a sound principle. The

Polluter Pays principle as interpreted by the Supreme Court means that
the absolute liability for harm to the environment extends not only to
compensate the victims of pollution but also the cost of restoring the
environmental degradation. Remediation of the damaged environment
is part of the process of “Sustainable Development” and as such the
polluter is liable to pay the cost to the individual sufferers as well as the
cost of reversing the damaged ecology. Apart from the constitutional
mandate to protect and improve the environment there are plenty of post-
independence legislations on the subject. In view of the constitutional
and statutory provisions it must be held that Precautionary principle
and the Polluter Pays Principle are part of the environmental law of the
country.”

While dealing with varied environmental issues in the country, Supreme Court
has never shied away from developing new principles of Liability in accordance
with the changing times. On the issue of determining liability of enterprises
engaged in hazardous or inherently dangerous activity in the case of M.C Mehta
v. Union of India50, Supreme Court developed the principle of Absolute Liability
and refuted the rule of Strict Liability as adopted in the case of Ryland v. Fletcher.
The court stated that,

249
Business and Sustainability “an enterprise which is engaged in a hazardous or inherently dangerous
industry which poses a potential threat to the health and safety of the
persons working in the factory and residing in the surrounding areas
owes an absolute and non-delegable duty to the community to ensure
that no harm results to anyone on account of hazardous or inherently
dangerous nature of the activity which it has undertaken”

Further, in the case of Indian Council for Enviro Legal Action Vs. Union of India51,
the Court examined the grave pollution of a village, caused by the trial run of
certain ‘rogue’ industries, and held that it was a case where principle of absolute
liability for damages shall be applied.

Moreover, in the case of Kamal Nath v. Union of India52 while adopting public
trust doctrine, Supreme Court highlighted the difference between damages and
exemplary damages that offenders are required to pay and imposed a fine of Rs.
10 lakh as exemplary damages. It stated that,

“A person who is guilty of causing pollution has to pay damages

(compensation) for restoration of the environment and ecology. He has
also to pay damages to those who have suffered loss on account of the
act of the offender. In addition to damages aforesaid, the person guilty
of causing pollution can also be held liable to pay exemplary damages
so that it may act as a deterrent for others not to cause pollution in any
manner. The considerations for which fine can be imposed upon a person
guilty of committing an offence are different from those on the basis of
which exemplary damages can be awarded.”

Thus, the apex court and the High Court scan and do impose exemplary damages
for causing harm to environment. In Sterlite Industries case (2013), the copper
smelter plant was found to be operating without a valid renewal of its
environmental consent to operate. The Supreme Court in assessing the company’s
liability to pay damages reviewed the company’s annual report and determined
that 10% of profit before depreciation, interest and taxes (PBDIT) had to be paid
which amounted to INR 1 billion.

In its effort to promote environmental justice in India, Supreme Court delivered

a landmark judgement53 wherein it was argued that statutory tribunal like NGT
does not have sou moto powers as only constitutional courts can exercise it.
However, court while stressing on the importance of NGT in dealing with
environmental issues in this contemporary era stated that,

“NGT was conceived as a specialized forum not only as a like substitute

for a civil court but more importantly to take over all the environment
related cases from the High Courts and the Supreme Court. Many of
those cases transferred to the NGT, emanated in the superior courts and
it would be appropriate thus to assume that similar power to initiate suo
motu proceedings should also be available with the NGT.”

ii) National Green Tribunal:

NGT was established as a statutory tribunal in year 2010, with the objective to
make environmental justice accessible, effective and expeditious in India. Since
its inception it has played an important role in determining the liability of
250 wrongdoers and providing swift justice to the aggrieved parties.
Realising the lack of enforcement of environmental framework and the Environment Protection and
Sustainability
unwillingness of State Pollution Control Boards to act against industries and
other such perpetrators, NGT in the case of Paryavaran Suraksha Samiti & Anr.
Vs. Union of India & Ors.54 vide order dated 03.08.2018 stated that-

“The Central Pollution Control Board may take penal action for failure,
if any, against those accountable for setting up and maintaining STPs,
CETPs and ETPs. Central Pollution Control Board may also assess
and recover compensation for damage to the environment and the said
fund be kept in a separate account and utilized in terms of an action
plan for protection of the environment.”

Further, in the case of Praveen Kakar & Ors v. Ministry of Environment & Forests
& Ors.55 vide Order dated 08.01.2019 the Tribunal stated that,

“the Pollution Control Board had failed to perform its duties in taking
statutorily mandated coercive measures under Section 31A of the Air
(Prevention and Control of Pollution) Act, 1981 and 33A of the Water
(Prevention and Control of Pollution) Act, 1974 or initiating prosecution.
This Tribunal directed CPCB to exercise its statutory powers to
determine and recover damages for violation of environmental norms
by the respondent therein.”

In view of the directions issued by the NGT, CPCB has started maintaining an
Environmental Compensation Fund. It has also constituted a committee, in order
to manage the said fund.

Further, specific guidelines on calculation of Environmental Compensation to

be imposed on perpetrators have been issued in line with the orders of NGT.

It is to be noted that penalties have been drastically increased under NGT Act.
Under Section 26(1) of the Act, the tribunal can award punishment upto 3 years
or fine upto 10 crores for non compliance of order of NGT.

Thus, the proactive nature of NGT with respect to the preservation and
conservation of Environment in India, has led to the development of a practical
regime of fines and environmental compensation in line with polluter pays
principle, for various types of offences such as illegal mining, wrongful disposal
of waste including hazardous waste, air pollution, water pollution etc. It has
resulted in better enforcement of environmental laws and has acted as an effective
deterrent against future violations.

12.6 CLIMATE CHANGE AND INDIA

India launched its National Action Plan on Climate Change in 2008. India has
been a leading host country of Clean Development Mechanism investments,
enabling Annex 1 countries to invest in emission reducing projects (thereby
earning certified emission reductions). India has emerged as second largest
beneficiary to China in CDM projects. Its share in CDM projects is around 20%
(China is 50%) and share in CERs is 13% (China is 60%). The opportunities of
CDM in energy sector, electric vehicles sector are many.

251
Business and Sustainability India submitted its Intended Nationally Determined Contribution in October 2015
which gives an outline of post 2020 climate actions that the country shall take.
India is a founder member of International Solar Alliance launched in 2015 itself.
Recently, at COP 26, India made announcement of new climate action targets
and has indicated that it shall be carbon neutral by 2070.

12.7 SCHEMES, FISCAL POLICIES, AND MARKET-

BASED MEASURES
India is one the fastest growing economies of the world. Indian government has
initiated several measures in the form of policies, schemes etc in order to promote
sustainable production, consumption and also providing better and clean
technologies to industries. Some of these are:

a) Perform, Achieve and Trade (PAT) Scheme

It is a flagship programme of Bureau of Energy Efficiency under the National
Mission for Enhanced Energy Efficiency (NMEEE). PAT is a multi-cycle
program started in 2012, with the objective to reduce the specific energy
consumption in the most energy-intensive industries in the country. While
the legal standing was built through the amendment of the Energy
Conservation Act 2001, the operational artifacts were largely built around
the principles of market-based mechanisms. It identifies sectors and
designated consumers within such sectors and awards overachieving
consumers with Energy saving certificates which could then be traded on
Indian Energy Exchange.56

b) Green Bonds
Green bonds are the bonds issued by any sovereign entity, inter-governmental
groups or alliances and corporates with the aim that the proceeds of the
bonds are utilised for projects classified as environmentally sustainable. As
of February 12, 2020, the outstanding amount of green bonds in India was
US$16.3 billion. India issued green bonds of about US$8 billion since January
1, 2018, which constituted about 0.7 per cent of all the bonds issued in the
Indian financial market. Although the value of green bonds issued in India
since 2018 constituted a very small portion of the total bond issuance, India
maintained a favourable position compared to several advanced and emerging
economies.

c) Securities and Exchange Board of India (SEBI)

In 2012, SEBI mandated the top 100 listed entities by market capitalisation
to file Business Responsibility Reports (BRR) as part of their annual report,
as per the disclosure requirement emanating from the ‘National Voluntary
Guidelines on Social, Environmental and Economic Responsibilities of
Business’ (NVGs). The requirement for filing BRRs was progressively
extended to the top 500 listed entities. Further on March 25, 2021, SEBI has
introduced Business Responsibility and Sustainability Report, which requires
top 1000 listed entities (by market capitalization) to mandatorily disclose-
resource usage, air emissions, waste management and compliance with EPR
and PAT scheme.57

252
d) Micro, Small and Medium Enterprises (MSME) Environment Protection and
Sustainability
MSME sector in India is one of the largest contributors to manufacturing,
provides employment to millions of people and is considered to be the
backbone of our economy. However, most of the industries in this sector are
still using first generation technologies which result in high pollution levels
and low productivity. In order to promote new and green technologies in
this sector government has adopted several schemes and policies such as:
Zero Defect Zero Effect (ZED) Certification Scheme: It is an extensive
drive to create proper awareness in MSMEs about ZED manufacturing
and motivate them for assessment of their enterprise for ZED and
support them. After ZED assessment, MSMEs can reduce wastages
substantially, increase productivity, expand their market as IOPs,
become vendors to CPSUs, have more IPRs, develop new products
and processes etc.
Scheme for Promoting Innovation, Rural Industry &
Entrepreneurship (ASPIRE): It was launched to set up a network of
technology centres and incubation centres to accelerate entrepreneurship
and promote start-ups for innovation in agro industry.
Credit Linked Capital Subsidy for Technology Up gradation (CLCSS):
The objective of the Scheme is to facilitate technology up-gradation in
MSEs by providing an upfront capital subsidy of 15 per cent (on
institutional finance of upto Rs 1 crore availed by them) for induction
of well-established and improved technology in the specified 51 sub-
sectors/products approved.

12.8 IMPORTANT DEVELOPMENTS

Concept of Corporate Social Responsibility- The 2013 amendment to the
Companies Act introduced the significant concept of CSR as a practical regulatory
measure but nothing concrete was referred to environmental protection that
emerged as a nominal component. There needs to be efforts made to develop a
supplementary concept of Corporate Environmental Responsibility in India.

Environmental Audit- is not mandatory but some states as Gujrat, Maharashtra

and Karnataka offer incentives to industrial units obtaining an ISO certification.
The incentives are longer validity period of consent/authorisation, expeditious
clearance of renewal applications etc. These efforts need to be coordinated at the
national level to provide the necessary catalyst to develop sustainably.

12.9 SUMMARY
In the past fifty years the world has developed ample understanding on the
relationship between human beings and environment. The Stockholm Declaration
adopted at the United Nations Conference on Environment in Stockholm, 1972,
placed environmental issues at the forefront of international concerns and marked
the start of a dialogue between industrialized and developing countries on the
link between economic growth, the pollution of the air, water, oceans and the
well-being of people around the world.

253
Business and Sustainability India’s approach towards environmental protection was piecemeal and reactive
in nature. In response to Stockholm declaration 1972, Air (Prevention and Control
of Pollution) Act, 1981, and Water (Prevention and Control of Pollution) Act,
1974, were introduced. Further, Art 48 A and 51(g) were incorporated in Indian
Constitution by way of 42nd amendment in 1976.

The judicial forums in India, primarily the Supreme court and the National Green
Tribunal have played an important role in providing environmental protection
and determining the liability as well as damages for environmental wrongs.

India is one the fastest growing economies of the world. Indian government has
initiated several measures in the form of policies, schemes etc in order to promote
sustainable production, consumption and also providing better and clean
technologies to industries.

12.10 SELF ASSESSMENT QUESTIONS

1) What are the key constitutional provisions in India relating to Environment?
2) Write a brief note on International Developments in the field of
Environmental Law and its impact on Businesses and Industries?
3) What are the important provisions of Water Act, 1974 and Air Act 1981?
4) What is the concept of Extended Producer’s Responsibility?
5) Describe the major schemes that have been specially implemented for the
MSME sector?
6) Briefly discuss how the concept of sustainable development is being
implemented in India?

12.11 REFERENCES
1
Para 45 and 46, General debates, Report on the Conference of Human
Environment, 1972
2
United Nations General Assembly, 1987, p. 43
3
Build resilient infrastructure, promote inclusive and sustainable
industrialization and foster innovation
4
Ensure sustainable consumption and production patterns
5
Kyoto Protocol established flexible market-based mechanisms namely
International emissions trading, clean development mechanism and joint
implementation in order to help the countries to achieve their targets.
6
Art. 9 Paris Agreement- reaffirms the obligations of developed countries to
support the efforts of developing country Parties to build clean, climate-
resilient futures, while for the first time encouraging voluntary contributions
by other Parties.
7
As per World Bank study released in 2016, India lost more than 8.5% of its
GDP in 2013 due to the cost of increased welfare and lost labour due to air
pollution. 
8
Climate Investment Opportunities in South Asia: An IFC Analysis, 2017
pg. 4
254
9
Nina Chestney, Global Extraction of Primary Materials to Triple by 2050 - Environment Protection and
Sustainability
UNEP, RUETERS
10
M.C Mehta v. Union of India AIR 1992 SC 382(court directions to broadcast
and telecast ecology programmes on the electronic media and include
environmental study in school and college curriculum)
11
S. Jagannath v. Union of India AIR 1997 SC 811(directions prohibiting non-
traditional aquaculture along the coast): M.C Mehta v. Union of India AIR
1996 (2) SCALE 92 (court directions for the introduction of unleaded petrol
vehicles)
12
T.N Godavarman Thirumulkpad v. Union of India AIR 1997 SC 1228 (judicial
supervision over the implementation of national forest laws): M.C Mehta v.
Union of India 1992(Supp.2) SCC 633 (directions in the Ganga Pollution
Case to riparian industries, tanneries and distilleries regarding abatement of
pollution)
13
Law Commission of India, Proposal to Constitute Environmental Courts,
Report No. 186 (September 2003)
14
M.C. Mehta v. Union of India, 1986 (2) SCC 176; Indian Council for Enviro-
Legal Action v. Union of India, 1996 (3) SCC 212; A.P. Pollution Control
Board v. M.V. Nayudu, 1999 (2) SCC 718.
15
See,
Aryavart Foundation Versus M/s Vapi Green Enviro Ltd. &Ors. (Original
Application No. 95/2018);
News item published in “The Times of India” Authored by Shri Vishwa
Mohan Titled “NCAP with multiple timelines to clean air in 102 cities to
be released around August 15”(Original Application No. 681/2018);
Westend Green Farms Society Versus Union of India & Ors. (Original
Application No. 400/2017);
News item published in “The Asian Age” Authored by Sanjay Kaw Titled
“CPCB to rank industrial units on pollution levels” (Original Application
No. 1038/2018)
Compliance of Municipal Solid Waste Management Rules, 2016 (OA
606/2018)
16
Art. 48A- ‘the state shall endeavour to protect and improve the environment
and to safeguard the forests and wild life of the country’. Also entries 17(A)
and 17 (B) (protection of wild animals and birds) have been added to the
concurrent list.
17
Art 51A (g)- it shall be the duty of every citizen of India to protect and improve
the natural environment including forests, lakes, rivers, wildlife and to have
compassion for living creatures.
18
(1995) 2 SCC 577
19
MC. Mehta v. Union of India, AIR 1987 SC 1086(Ind.) (Popularly known as
‘Oleum Gas Leak Case).
20
Subhash Kumar v. State of Bihar, (1991) 1 SCC 598
21
MC. Mehta v. Union of India, (1998) 6 SCC 60
22
A.P. Pollution Control Board II case (2006) 6 SCC 543(Ind.), Narmada
Bachao Andolan v. Union ofIndia, (2000) 10 SCC 664
255
Business and Sustainability 23
AIR 1998 Cal. 121
24
Section 24,Water (Prevention and Control of Pollution) Act 1974
25
Section 20, Water (Prevention and Control of Pollution) Act 1974
26
Section 21, Water (Prevention and Control of Pollution) Act 1974
27
Section 23, Water (Prevention and Control of Pollution) Act 1974
28
Section 47, Water (Prevention and Control of Pollution) Act 1974
29
Section 25, Water (Prevention and Control of Pollution) Act 1974
30
AIR 2013 Pat 70
31
Section 22Air (Prevention and Control of Pollution) Act 1981
32
Section 25 Air (Prevention and Control of Pollution) Act 1981
33
Section 24 Air (Prevention and Control of Pollution) Act 1981
34
Section 26 Air (Prevention and Control of Pollution) Act 1981
35
Section 40 Air (Prevention and Control of Pollution) Act 1981
36
Section 21 Air (Prevention and Control of Pollution) Act 1981
37
2003 (7) Scale 475
38
Section 3 (1) Environment (Protection) Act, 1986
39
Section 3(2) EPA, 1986
40
Section 25 EPA, 1986
41
Section 26 EPA, 1986
42
Lindhqvist, T. (2000). Extended Producer Responsibility in Cleaner
Production: Policy Principle to Promote Environmental Improvements of
Product Systems IIIEE, Lund University
43
PIB, GOI, MOEF&CC, March 2016
44
CIVIL APPEAL NO. 1359 OF 2017
45
Vellore Citizens’ Welfare Forum v. Union of India, (1996) 5 SCC 647
46
MC. Mehta v. Kamal Nath, (2000) 6 SCC 213
47
Narmada Bachao Andolan v. Union of India, (2000) 10 SCC 664
48
Para 67 of [(1996 AIR SCW 1069)].
49
Para 11-14 (1996 5 SCC 647) 
50
AIR 1987 S.C. 1086
51
Refer Para No.70, Supra note 42
52
Para 24 of 2002 (2) SCALE 654
53
Municipal Corporation of Greater Mumbai v. Ankita Sinha and other and
connected cases, LL 2021 SC 549
54
Original Application No. 593/2017
55
O.A. No. 661/2018
56
UNLEASHING MARKET-BASED APPROACHES TO DRIVE ENERGY
EFFICIENCY INTERVENTIONS IN INDIA: AN ANALYSIS OF THE
PERFORM, ACHIEVE, TRADE (PAT) SCHEME, ADB Working paper series
no. 1177, August 2020
57
Memorandum on Business Responsibility and Sustainability Reporting by
listed entities, SEBI

256
 Environment Protection and
UNIT 13 COMPETITION LAW Sustainability

Objectives
After studying this unit, you should be able to:
Understand the Objectives of Competition Law and Brief Historical
Overview of Indian Competition Law
Describe Monopolies and Restrictive Trade Practices Act, 1969, and
Competition Act, 2002
Appreciate different Anti-competitive Agreements and Vertical Agreements
Explain the different Enforcement Authorities of Competition Law
Structure
13.1 Introduction
13.2 Objectives of Competition Law
13.3 Brief Historical Overview of Indian Competition Law
13.4 Monopolies and Restrictive Trade Practices Act, 1969
13.5 Raghavan Committee Report
13.6 Competition Act, 2002
13.7 Anti-competitive Agreements
13.8 Vertical Agreements
13.9 Relevant Market
13.10 Abuse of Dominance
13.11 Mergers and Combinations
13.12 Enforcement of Competition Law
13.13 Summary
13.14 Self-Assessment Questions
13.15 Further Readings/References

13.1 INTRODUCTION
Competition law, which is also referred to as antitrust law in some jurisdictions,
plays a pivotal role in ensuring smooth functioning of a dynamic market economy.
Competition law takes diverse measures and approaches for ensuring fair
competition among firms, which in turn can augment customer welfare by offering
quality products at lowest possible prices. Fair competition in markets is important
for all, be it the consumers, the competing firms, and the economy.

13.2 OBJECTIVES OF COMPETITION LAW

Competition law concerns itself with firms enjoying undisputed market power,
which opens up the possibility of hindering consumer welfare by increasing prices,
reducing output, diminishing product quality and suppressing innovation.1
Competition law also keeps a check on the possibility of business firms from
colluding with each other, affecting the supply of a product or a service, thereby
proving detrimental for the consumers. The basic assumption is that markets 257
Business and Sustainability populated by a few participants may prove to be less competitive than markets
housing multiple participants, as oligopolistic and monopolistic enterprises can
exert their dominance to hinder the entry of new participants.2

13.3 BRIEF HISTORICAL OVERVIEW OF INDIAN

COMPETITION LAW
The Indian Constitution has been drafted carefully with several measures aimed
at safeguarding diverse rights that can contribute to the flourishing of the country
as well as its citizens. Articles 38 and 39, though having been placed in part IV
of the Constitution as Directive Principles of State Policy and unenforceable in a
court of law, have proven extremely significant in laying down directions for
good governance of a State. They direct the State to frame policies for ensuring
that the ownership and control of the material resources are adequately distributed,
and that the operation of the economic system does not lead to a concentration of
wealth to the common detriment.3

The first phase of market regulation in India began in 1950-1951, which was
characterized by an increased reliance on the government to take the initiative in
economic activities. Also known as the closed economy model, policies at that
time were less focused on ensuring competition and more on the prevention of
concentration of economic power. The Government of India ordered the formation
of a committee, the Mahalanobis Committee, to assess the income distribution
in the society owing to rising monopolistic and restrictive trade practices in the
country. This led to the formation of the Monopolies Inquiry Committee and, the
report submitted by the former paved the way for the Monopolies and Restrictive
Trade Practices Act, 1969 (MRTP Act). This way, the Constitution of India,
specifically Article 39, sowed the seeds for the genesis of competition laws in
India.4

13.4 MONOPOLIES AND RESTRICTIVE TRADE

PRACTICES ACT, 1969
The MRTP Act was enacted to control monopolies, to ensure that the economic
system does not culminate in concentration of economic power and, to disallow
monopolistic and restrictive trade practices.5 What highlighted the second phase,
ranging from 1991 to present, was bringing forth market-oriented economic
policies with the coming of the New Economic Policy (NEP), that needed to be
in tune with the rise of globalization, liberalization and privatization policies.6
These policies led to de-licensing and deregulation of sectors, that were priorly
under the control of the public sector. Industrial activities which were exclusively
operated by the public sector were opened up for entry by the private sector. The
MRTP Act was observed to be incompatible with this shift in industrial policies,
which focused on competition and market orientation. Thus, arose the need for a
regulator which could facilitate market functioning in accordance with the
country’s changing industrial policies.7

13.5 RAGHAVAN COMMITTEE REPORT

The call seeking a shift of focus from restraining monopolies to the promotion of
competition was one of the primary reasons for the MRTP Act becoming obsolete,
258
thereby paving way for a new legislation.8 What ensued was the appointment of Competition Law
a High-Level Committee on Competition Policy and Law in 1999, often referred
to as the “Raghavan Committee”.9 The Committee was responsible for providing
suggestions for the establishment of a suitable legislative framework for
competition law and recommended changes in relation to restrictive trade
practices. The Committee, in its final report submitted to the Government in
May 2000, highlighted the need for a Competition Policy to attain efficient
allocation of resources, to regulate concentration of economic power and to
promote consumer welfare.10 It was submitted that Competition Policy has its
primary economic goal as the preservation and promotion of competition, which
can further contribute in making the process of production and allocation of
goods structured and more efficient.11 The Committee pressed on the need to
balance the conflict between the existing government policies and the competition
policy and, highlighted the requirement for a law and a law enforcement authority
in the form of Competition Act and Competition Commission of India (referred
as CCI or Commission hereinafter), respectively.12

13.6 COMPETITION ACT, 2002

The Competition Act was enacted in 2002, based on the recommendations of the
Raghavan Committee for ensuring fair competition and ushering economic
development in the country. The primary aim of this piece of legislation is to
avert practices having anti-competitive effects, for the advancement of
competition in the markets, to safeguard the interests of the consumers and, to
guarantee freedom of trade to the market participants. This legislation is the
successor to Monopolies and Restrictive Trade Practices Act, 1961. The Act lays
down provisions relating to horizontal and vertical anti-competitive agreements
having an adverse effect on competition, prohibition of abuse of dominance, and
rules for combinations and their regulation. The Competition Act also contains
certain provisions to promote competition advocacy.

13.7 ANTI COMPETITIVE AGREEMENTS

Agreements entered between enterprises, persons, or association of enterprises
or persons in pursuance of production, distribution, supply, storage or control of
products or services, which have a tendency to result in Appreciable Adverse
Effect on Competition (AAEC) within the jurisdiction are referred to as anti-
competitive agreements13 and they shall be declared void.14 To determine if an
agreement has an appreciable adverse effect on competition, the Commission
shall have due regard to factors including, creation of barriers to new entrants,
driving off existing competitors, foreclosure of competition by hindering entry,
improvement of production or distribution of goods, etc.15

In a competitive market set-up, firms vying for the business or the consumers are
supposed to compete with one another, not collude and cooperate to alter the
process of competition. Cartels are horizontal agreements made for the purpose
of market allocation, price fixing, output restriction and, the submission of
collusive tenders to rig the outcome of competitive tenders are some of the
techniques employed by conniving firms to distort competition.16

Under the Competition Act, 2002, section 2(c) puts forth an inclusive definition
of ‘cartel’, as “an association of producers, sellers, distributors, traders or service
259
Business and Sustainability providers who, by agreement amongst themselves, limit, control or attempt to
control the production, distribution, sale or price of, or, trade in goods or provision
of services.” In the cartelization by public sector insurance companies’17case,
the CCI took suo motu cognizance to investigate if four public sector insurance
companies had formed a cartel and engaged in bid-rigging in response to a tender
issued by the Kerala Government. Rejecting the argument of the insurance
companies that they formed a single economic entity and were thus subject to
the control of the central government, the CCI held that the submission of separate
bids by the companies for the tender, along with the resolution regarding
determination of bid amounts being taken voluntarily through an internal meeting
without the supervision by the Finance Ministry, proved the contrary. Based on
the business sharing agreement and the evidence of the Opposite Parties (OPs)
having met one day before the submission of tender, the CCI held that there was
a conclusive proof of bid rigging and collusive bidding by the OPs, satisfying
the requirements for contravention under section 3(3)(d) of the Competition Act.

Any agreement entered or decision taken amongst enterprises, persons, association

of enterprises or persons or, between a person and an enterprise, including cartels,
shall be presumed to have an appreciable adverse effect on competition and shall
be considered anti-competitive per se, if they result in the following:18

a) Determination of sale prices:

The competition regulatory framework not only concerns itself with blatant
price fixing, but also agreements having an effect on suppressing price
competition. In other words, the act of price fixing does not just encompass
the final price but also instances having an indirect impact on the final price.

Reducing price competition by agreeing not to offer discounts, making use

of an open information scheme and, charging uniform delivered prices may
also be instances of price fixing.19 Market participants forming a cartel,
agreeing to offer identical discounts and applying the same in the downstream
market was also held to be another facet of price fixing and declared to be
anticompetitive in nature.20

b) Output control
An agreement among firms to control or limit production, supply, technical
progress, markets or provision of goods and services shall be presumed to
be anticompetitive.21 The CCI generally focuses on factors such as production
capacity, capacity utilization of the competitors, demand for the product in
question to decipher any patterns of output control for the concerned
product.22 In the Cement Cartel23case, the Commission found evidences
regarding the formation of understanding and agreement among the Opposite
Parties (OPs) via the Cement Manufacturing Association(CMA) for
communicating and information sharing in relation to manufacture of cement.
The Commission also unearthed low-capacity utilization leading to controlled
supply of cement by the companies, which was in clear contravention of
section 3(3)(b) of the Competition Act. The commission opined that limiting
the supplies of cement over the course of years and giving rise to shortages
had led to an upward demand, resulting in a hike in prices thereafter. In the
absence of any efficiency or improvement in manufacture owing to the
coordinated behavior of the cement manufacturing companies, the OPs were
held to have formed a cartel.
260
 Recently, the CCI passed a final order against three beer companies, viz., Competition Law
United Breweries Limited, SABMiller India Limited (renamed as Anheuser
Busch InBev India Ltd.) and, Carlsberg India Private Limited for forming a
cartel and selling beer in many States and Union Territories, in conjunction
with the All-India Brewers’ Association. The cartel had engaged in price
parallelism which was in contravention of Section 3(3)(a) of the Competition
Act, 2002.24
c) Market allocation
Competition may also be threatened by an agreement between the firms to
apportion segments of market amongst themselves, to be handled exclusively
by each seller such that they no longer have to compete with each other.
When the participating firms concur to share particular markets based on
geographical area, classes of customers or, on the basis of the product, such
agreements may be referred to as horizontal market sharing agreements.25
In HFB Holding v. Commission, the opposite parties were penalized for
forming a cartel and indulging in sharing of the entire European market
among themselves. They further engaged in acts to hinder the only substantial
competitor not forming a part of the cartel, driving it away from the concerned
market.26
d) Bid rigging or collusive bidding
Agreements capable of lessening or wiping off competition for bids or, which
have the effect of manipulating the process of bidding are held to be
anticompetitive per se. Bid rigging or collusive tendering is said to occur
when competing bidders decide not to compete genuinely, or endeavor to
secretly influence the outcome of a bidding process by submission of identical
or cover bids.27
In the case of cartelization in tenders of Pune Municipal Corporation for
Solid Waste Processing28, a prima facie opinion was formed by the CCI
against the OPs for having engaged in the acts of bid rigging or collusive
bidding violating Section 3(3)(d) of the Competition Act, 2002. The CCI
opined that bid rigging under Section 3(3)(d) shall be presumed to have an
adverse effect on the competition irrespective of the purpose or duration of
the cartel and, it is immaterial if the act culminated in a benefit being accrued
from the cartelization. The CCI also held that so long as a subset of bidders
are found rigging the bidding process by colluding, the onus shall shift on
the OPs to rebut the presumption of having caused an AAEC. Disagreeing
with the contention of the OPs that the latter were engaged in different
business activities at the time of the bidding process, and thus not amenable
under section 3, the commission held that the activity for which bidding was
held and in pursuance of which the alleged violation of law took place is
what proves significant in determination of cartels.

13.8 VERTICAL AGREEMENTS

Vertical agreements are agreements between persons or enterprises at different
levels of the production chain in distinct markets in relation to production,
distribution, supply, storage or price of goods or provision of services.29 Unlike
horizontal agreements, vertical agreements are not anti-competitive per se, and
it needs to be established that the alleged activity has caused an appreciable
adverse effect on competition (AAEC) in the country.30 Vertical agreements also
comprise the following: 261
Business and Sustainability i) Tie-in arrangement
Tying is the practice of supplying a product, the tying product, while also
making the buyer purchase a second product, known as the tied product.
Tying may be employed by a dominant firm for increasing the sales of the
tied product in the market by leveraging its position with respect to the tying
product, leading to a horizontal foreclosure of market.31 A tie-in arrangement
is detrimental for competition as a consumer is coerced into purchasing a
product (the tied product) which she or he may not necessarily require.32 In
Hilti AG v. Commission, Tetra Pak, a company engaged in the sale of liquid
packaging machines, required customers to also buy cartons from it, further
insisting that services for repair and maintenance should be provided by
them. The Commission opined that sale of cartons along with the machines
was not customary, with the former forming a separate market upon which
Tetra Pak was trying to eliminate competition.33

ii) Exclusive supply agreement:

Agreements restricting the buyer from purchasing goods or services other
than those of a particular supplier are termed as exclusive supply agreements.
Such agreements can also be referred to as exclusive purchasing or single
branding agreements. By employing such agreements, the purchaser is barred
from acquiring products from other competing sellers, defeating the process
of market competition.34 In Jindal Steel & Power Ltd. v Steel Authority of
India Ltd, it was alleged that the agreement between Steel Authority of India
Limited (SAIL) and Indian Railways (IR) for exclusive supply of rails to IR
was anti-competitive, resulting in foreclosure of market for new entrants,
including Jindal Steel. The Commission held that the exclusive arrangement
between SAIL and IR was not in violation of the provisions of competition
law, as only a small segment of SAIL’s total sales made up the sales to IR.
Also, IR required assurances for steadiness of supply of long rails which
was being offered by SAIL, with Jindal having failed to establish itself as a
viable competitor to SAIL.35

iii) Exclusive distribution agreement:

Agreements requiring the supplier to sell its goods to one specific distributor
in a particular territory, thereby restricting the output or supply of any
products, falls under the category of exclusive distribution agreements. These
may diminish intra-brand competition and heighten the risks of market
partitioning or market allocation for the sale of goods, facilitating price
discrimination.36

iv) Refusal to deal:

Refusal to deal refers to scenarios wherein restrictions are placed on persons
or classes of persons to whom goods may be sold or from whom the goods
may be bought.37 Refusal to deal agreements result in market foreclosure for
new entrants, making it difficult for the latter to compete. In English Welsh
& Scottish Railway Ltd. v. E. ON UK plc, the railway company was fined
for entering into exclusive agreements with various power stations for the
carriage of coal.38

262
v) Resale price maintenance: Competition Law

Resale Price Maintenance occurs when a seller (mostly, manufacturer)

demands that the buyer (mostly retailers) should engage in resale of that
good only at a price fixed by the seller and the buyer cannot resell at prices
lower than the prices suggested by the seller. In Fx Enterprise Solutions
India Pvt. Ltd v. M/s Hyundai Motor India Limited 39, the CCI found
Hyundai Motors placing restrictions on its dealers by imposing a maximum
permissible discount at which the vehicles may be sold to an end-consumer.
Dealers not adhering to the upper limits on discount prices were being
penalized. The CCI held that the imposition of minimum resale price prevents
the dealers from effectively competing on the price factor, and is anti-
competitive in nature.

Section 3(5) of the Competition Act holds that such agreements shall not
affect the rights of any person to restrain infringement or, from laying down
reasonable conditions imperative to protect her or his intellectual property
rights, including patents, copyright, trademarks, designs, and geographical
indications.

13.9 RELEVANT MARKET

Under the statutory framework of the Competition Act, the delineation of a
relevant market is of utmost significance. For an abuse of dominance investigation,
an enterprise shall be considered dominant only if it has attained a position of
strength in the relevant market. Determination of a relevant market is also
significant in a combination analysis, where the CCI has to ensure that the
proposed combination does not result in appreciable adverse effect on competition.
In the case of Competition Commission of India (CCI) v. Coordination
Committee of Artists and Technicians of West Bengal Film and Television
Industry, the Supreme Court had held that the delineation of relevant market is
not a necessary precondition for investigations under Section 3 of the Act, as
there is a presumption of AAEC in an agreement between market participants
under that provision.

Relevant market may be determined by the CCI with respect to the relevant
product market or the relevant geographic market or with regards to both.40
Relevant product market is referred to as a market with products or services
considered interchangeable or substitutable by a consumer due to factors such as
characteristics of the products, price, or use.41 In the case of In Re Matrimony.com
and Google, Google was charged with abusing its dominant position by granting
preference to its own services and its verticals by manipulating the search results.
The relevant market in this case was delineated to be - the market for online web
search services in India and, the market for online search advertising in India.
This was done by differentiating between offline and online sections of
advertising, on the basis that they are not substitutable.42 Relevant geographic
market is referred to a market comprising the area where the conditions of
competition for supply of goods or provision of services are distinctly
homogeneous and can be differentiated from the conditions existing in the adjacent
areas.43 In Re Harshita Chawla and Others, since conditions for the functionality
of OTT messaging apps through smartphones were found to be homogeneous
throughout India, the entire geographic area of India was delineated to be the
relevant geographic market.44 263
Business and Sustainability
13.10 ABUSE OF DOMINANCE
Under Competition law, mere dominance exerted by a firm is neither considered
bad nor held punishable. However, the abuse of its dominance by an enterprise
merits investigation by the competition authorities. This is in contrast with the
earlier legislative framework, as under the erstwhile MRTP Act, violation was
gauged based on the size of an enterprise, rather than the abusive conduct of the
latter.45

An enterprise is said to be in a dominant position, when it is able to operate

independent of other competitive forces existing in the relevant market and has
the power to affect the consumers or its competitors in its favour.46 Competition
law makes abuse of dominance by an enterprise punishable under law. Some of
the acts considered to be an abuse of dominant position includes, imposing of
conditions or prices which are unfair or discriminatory either through direct or
indirect means (which includes price discrimination and predatory pricing) and,
restricting the production of goods or provision of services.47 The Commission
seeks to capture conduct which may be exploitative (wherein the acts of the
enterprise prove detrimental to the consumers in the form of rise in prices, reducing
output or imposition of other unfair terms and conditions) and, exclusionary
(affecting the competitors of the dominant firm through the acts of exclusive
dealing, margin squeezing, denying market entry etc. to name a few).

In the case of European Union v. Google, also known as Google Search

(shopping) case, Google was fined €2.42 billion by the European
Commission for abusing its dominance in the general search market, and
stifling market competition by granting primacy to its own vertical
comparison-shopping services. It was held that Google’s self-preferencing
conduct had foreclosed competition in the shopping services market, which
represented a separate market from the search market. Leveraging its position
in the general search market, Google had resorted to bumping down other
rival sites down the list, distorting competition.48

The three important steps required in every abuse of dominance investigation

are as follows:
Determination of the relevant market.
Determining if the enterprise is dominant in the relevant market.
If found dominant, investigating whether the dominant entity has engaged
in acts falling under the purview of abuse of dominance.
The CCI, while inquiring into the dominance of an enterprise, shall consider the
factors provided under Section 19(4) of the Competition Act, which include market
share, size and resources, countervailing buyer power, market structure, and
dependence of consumers.49

Section 4 of the Indian Competition Act also takes into account the use of
dominance in one market to enter into another relevant market. In the case of
Harshita Chawla and WhatsApp50 the issue was whether WhatsApp was using
its dominance in the relevant market of internet based instant messaging apps to
gain entry into another relevant market, being Unified Payments Interface (UPI)
264 digital payments app market (WhatsApp Pay), which was aided by pre-installation
of WhatsApp on mobile phones. The Commission, post investigation, held that Competition Law
there was no abuse of dominance as the users were allowed discretion before
usage of the payment app along with separate registration requirements (terms
and conditions) prior to initiation of services.

13.11 MERGERS AND COMBINATIONS

One of the significant business developments in the field of corporate law has
been a plethora of transactions encompassing mergers and acquisitions. The
rationale behind companies opting to merge may range from increasing market
power, economies of scope, economies of scale, synergistic gains, eliminating
competition, obtaining access to R&D and technological knowhow.

Competition law is entrusted with the task of scrutinizing mergers that have a
potential for undermining competition. While assessing a merger, the competition
authorities investigate if the merger will generate horizontal effects (effects borne
out of mergers between actual or potential competitors at the same level of the
production chain and dealing with the same product or geographic markets),
vertical effects (effects occurring as a result of merger between enterprises
operating in different albeit complementary stages or levels in the market for the
same final product)51or, conglomerate effects (effects originating due to mergers,
which is neither functionally vertical or horizontal, but enables the merged entity
to foreclose competition in two distinct but related/unrelated markets by exercise
of its market power.52

Merger control, as a means to keep a check on the market power of dominant

firms on an ex-ante basis, is essential to preserve competitive market structures
and for achieving pro-competitive effects for the consumers.53 A complicated
element of merger control is that its role is forward looking in nature, focusing
on whether a proposed merger will lead to detrimental effects on competition in
the future.54 Numerous theories of competitive harm have been brought forth to
highlight the negative impact of a merger on consumer welfare, which includes
unilateral effects (resulting entity of a merger exercising market power post-
merger)55, coordinated effects (resulting entity of a merger able to harmonize
competitive behaviour with other firms in the market), vertical effects and
conglomerate effects.56 Competition authorities conduct merger assessment by
weighing the pro-competitive effects of a combination on the market against the
anti-competitive ramifications if the merger is allowed to be consummated.

Under the Indian Competition Act, Sections 5 and 6 are the significant provisions
regulating combinations, encompassing corporate restructuring methods such as
mergers, acquisitions & amalgamations. According to these provisions, enterprises
or persons choosing to enter into combinations crossing the specified assets or
turnover thresholds mentioned in Section 5 have to inform the CCI, divulging
the details of the proposed combination.57 A combination likely to result in an
AAEC within the relevant market shall be void, in accordance with section 6.
The various factors providing guidance to the Commission for approving or
rejecting a combination are given under section 20(4) of the Competition Act
and includes factors such as, extent of barriers to entry, the extent of countervailing
power present in the market, market share of the enterprise, the presence of
substitutes, etc. The notifications are handled with reference to Procedure in
Regard to the Transaction of Business Relating to Combinations Regulations
265
Business and Sustainability 2011. Within 210 days after the notification of the proposed combination gets
served, the CCI performs analysis if the combination causes or is likely to cause
an appreciable adverse effect on competition (AAEC) which is done based on
the factors enlisted under section 20(4) of the Competition Act.58 The commission
can approve59 a combination to take effect if found not to be causing an AAEC or
disallow60otherwise.

The assessment of significant AAEC that may arise as a result of a combination

and the subsequent decision in case of the former can also be assuaged by remedies
or notifications, termed as ‘modifications.61 Under the Act, modifications may
be suggested by the CCI62or the parties, who can also propose changes to the
suggested modifications63in order to bring about a mutually workable feature
within the specified time. Merger modifications rather than outright rejections is
slowly gaining momentum for resolving combination issues threatening to disturb
the status quo in the market framework.64

For instance, in Abbott Laboratories & St. Jude Medical, Inc., a proposed
combination was notified to the CCI under section 6(2) of the Competition Act,
2002 between Abbott laboratories and St. Jude Medical, Inc (SJM). Abbott dealt
in manufacture, sale and research of global healthcare products. SJM, on the
other hand, is a global medical device company in the United States, engaged in
the production, development and research of cardiovascular medical devices. It
was observed that the functions of both the parties intersected in the manufacture
of ‘small hole’ VCDs (VCDs are healthcare devices used in covering the holes
arising out of the arteries). As a result of the combination, the market share of the
combined entity would be elevated to around 90-100 percent in the small hole
segment, and the other active competitor would only have a market share of 5
percent. The entities proposed a voluntary modification by agreeing to engage in
a divestiture involving the small hole VCD segment of SJM to Terumo
Corporation, a third-party provider of cardiovascular products based in Japan
not having any structural or financial linkages with the parties on a world-wide
scale, and this was approved by the CCI.65

Also, one of the recent developments in the area of combinations is the advent of
‘green channel’ for combinations that are unlikely to have any anti-competitive
effects in the relevant market. The merging parties, based on their self-assessment,
specified criteria and subsequent consultation with the Commission may qualify
for green channel and, after notifying the CCI may consummate their combination
through an automatic approval, whereby they may avoid the 210-day statutory
standstill period.66 An example for a transaction that has taken the green channel
route is the acquisition of Dodla Dairy Limited (Dodla), a public limited company
engaged in sale and processing of milk and milk products, by, Industrial Finance
Corporation (IFC), a multilateral finance institution, under sec 6(2) read with
sec 5(a)(i)(A) of the Competition Act. Since the proposed combination was not
likely to result in any AAEC concerns, the relevant market definition was kept
open. After ensuring that the acquirer was not engaged in any activities of
production, distribution etc. which were similar to that of the target, the
combination was given a go-ahead under the green channel route.

Interestingly, when it comes to digital platforms, the conventional methods

employed to assess anti-competitive effects may fall short. With the advent of
Big Data, strong network effects and the significance of personal data in the
266 digital ecosystems, relying on traditional thresholds for gauging market power
may not yield fruitful results. Different jurisdictions have opened up investigations Competition Law
to ensure that dominant online platforms do not engage in anti-competitive
practices. The European Commission had initiated a formal antitrust investigation
to unearth if Amazon’s utilization of sensitive data obtained from independent
retailers doing business in its marketplace is in contravention of EU competition
rules.67 The CCI, has also acknowledged the dual role played by data as an input
and as a currency for monetizing services while investigating abuse of dominance
and combination cases.68 In Re Updated Terms of Service and Privacy Policy
for WhatsApp Users and WhatsApp LLC & Facebook, the CCI stated that factors
such as, innovation, customer service and quality have been elevated as non-
price parameters of competition on the basis of which market participants
compete.69 Recently, a probe conducted by CCI found tech giant Google guilty
of stifling competition and engaging in practices leading to denial of market
access to extend its dominance in services such as, browser, search, app library
among others for ensuring that its services serve as default options for achieving
highest user preference.70 There have been calls in multiple jurisdictions to revisit
the traditional thresholds in accordance with challenges posed in the digital
markets.71 The Competition Law Review Committee has also recommended
inclusion of data deals as one of the thresholds to be employed during merger
control.72

13.12 ENFORCEMENT OF COMPETITION LAW

The Competition Act also provides a multi-tiered enforcement mechanism. As
per the provisions of the Competition Act, the Commission can inquire into any
alleged infringement of Section 3(1) or Section 4(1) of the Competition Act,
based on its own motion or on the receipt of any information or, by a reference
received from the Central Government, State Government or any statutory
authority.73 Under the statute, there is no locus standi requirement. The CCI,
after the receipt of the information, is expected to satisfy itself as to the existence
of a prima facie case, and pass directions to the Director General under Section
26(1) for initiating investigation.74

Director-General:
The Director General or the DG, is duty bound to assist the Commission whilst
conducting investigation for infringement of any provisions, rules or regulations
made under the Competition Act, for which the DG shall be empowered with all
the powers that are conferred on the Commission by the Act.75 Where the
Commission considers that a prima facie case exists, it directs the DG to
investigate the matter. In Excel Crop Care Limited v. Competition Commission
of India & Another, the Supreme Court held that an investigation by the DG
must cover all the relevant facts and evidence in order to assess any anti-
competitive conduct complained of. The Court held that the “the starting point
of the inquiry would be the allegations contained in the complaint but during the
course of the investigation if other facts also get revealed and are brought to
light, the DG would be well within his powers to include those as well in his
report”.76

Competition Commission of India (CCI):

The Director General shall, after conducting investigation, submit his findings
to the Commission. The Commission, based on the findings of the DG may either
267
Business and Sustainability choose to close the matter and pass such orders as it deems fit (if no contravention
of the provision of the Act is found) or, call for further investigation if required.77
The Competition Commission of India, being the statutory regulatory authority
entrusted to promote and sustain competition in the markets in India is empowered
to issue interim orders in the course of inquiry to prevent acts that may have an
appreciable adverse effect on competition or culminates in abuse of dominance
by a group or an enterprise.78The Commission also has the power to impose
penalties for non-compliance with the directions of Commission and the Director
General79 and for failing to provide adequate information on combinations when
sought by the CCI.80 Aside from the power to impose penalties for omission,
willful alteration or furnishing a false statement before the Commission,81 the
CCI also has the power to impose lesser penalty on a person included in a cartel,
provided he makes a full disclosure regarding the violations. However, it needs
to be noted that this feature of imposing lesser penalty shall not be available if
the investigation report pertaining to the cartel has been received from the Director
General by the Commission before making of such disclosure.82 The CCI is also
required to provide its opinion to the Government in the formulation of
competition policy.83

Appellate authorities:
The National Company Law Appellate Tribunal (NCLAT) has been designated
as the Appellate Tribunal for handling the appeals arising from the CCI. The
Appellate body has been empowered to hear and dispose of appeals against any
order, direction or decision issued by the CCI. Additionally, the NCLAT has
been empowered to adjudicate on claims for compensation arising from the
findings of the Commission as well as passing of orders for the recovery of
compensation.84The Appellate Tribunal, after providing parties to the appeal an
opportunity of being heard, is empowered to pass orders modifying, affirming or
setting aside the decision, direction or order appealed against.85The Appellate
Tribunal need not be bound by the Code of Civil Procedure, 1908 but must
conform to the principles of natural justice while conducting its procedure. The
Tribunal shall be vested with all the powers that are vested in a civil court for
performing its functions during the trial of suit.86 Appeals from the Appellate
Tribunal shall lie to the Supreme Court which needs to be filed within sixty days
from the date of communication of the decision or order passed by the Appellate
Tribunal.87

13.13 SUMMARY
Competition law is an economic legislation of immense significance and plays
an important role in managing the dynamics of the market. The provisions related
to anti-competitive arguments, abuse of dominance and combinations help to
ensure fair competition in the market and thereby augment consumer welfare.
With the rise in online platforms and the rapid shift to e-markets, competition
authorities are also forced to recognize the significance of non-price parameters
of competition such as quality, innovation, privacy, etc. Ensuring fair competition
in digital markets poses far more challenges for the competition enforcement
authorities as compared to the traditional markets. But the dynamic character of
the markets and the constant emergence of new challenges also make competition
law one of the most interesting areas of law for students as well as practitioners.

268
 Competition Law
13.14 SELF ASSESSMENT QUESTIONS
1) Competition Law facilitates in-
a) increasing prices b) diminishing output
c) thwarting innovation d) improving product quality
2) Which of the following legislation was the predecessor to the Competition
Act, 2002?
a) Consumer Protection Act, 1986
b) Monopolies and Restrictive Trade Practices Act, 1969
c) Unfair Trade Practices Act, 1972
d) Companies Act, 1956
3) Which Committee was constituted by the Government before enacting the
Competition Act, 2002?
a) Mahalanobis Committee b) Dr. J J Irani Committee
c) Bhabha Committee d) Raghavan Committee
4) Competition Commission of India (CCI) is a -
a) Statutory body b) Administrative body c) Quasi-judicial body
5) What are the different kinds of horizontal and vertical agreements? Explain
with relevant examples.
6) What is meant by abuse of dominance? Mention the three important steps
required in every abuse of dominance investigation.
7) How are mergers and combinations regulated under the Competition Act,
2002?
8) What do you understand by the term “Green Channel” under the Competition
Act, 2002?
9) Write a brief note on the powers and functions of the Competition
Commission of India (CCI) under the Competition Act, 2002.

13.15 FURTHER READINGS/REFERENCES

Books:
1) Richard Whish & David Bailey, 2015, Competition Law, Oxford University
press.
2) Abir Roy & Jayant Kumar, 2018, Competition Law in India, Eastern Law
House.
3) Versha Vahini, 2020, Textbook on Indian Competition Law, Lexis Nexis.
References:
1
RICHARD WHISH & DAVID BAILEY, COMPETITION LAW 1(7TH ED., 2016).
2
Lina M. Khan, Amazon’s Antitrust Paradox, The Yale L.J. 710,718 (2017).
3
India Const. art 39.
4
Altamas Kabir, Competition Laws and the Indian Economy, 23(1) National
Law School of India Review. 1, 1 (2011).
269
Business and Sustainability 5
Monopolies and Restrictive Trade Practices Act, 1969, No. 54, Acts of
Parliament, 1969 (India).
6
B.S. Chauhan, Indian Competition Law: Global Context, 54(3) J. of the Ind.
L. Inst. 315, 316 (2012).
7
Geeta Gouri, Convergence of competition policy, competition law and public
interest in India, 6 Russ. J. of Economics. 277, 280 (2020).
8
Budget Speech of Shri Yashwant Sinha, Finance Minister, GOI, 27th Feb,
1999 (Union Budget 1999-2000).
9
Report Of the Working Group On Competition Policy, Planning Commission,
Government of India. 15 (2007), https://niti.gov.in/planningcommission.
gov.in/docs/aboutus/committee/wrkgrp11/wg11_cpolicy.pdf (Last accessed
on Oct. 2, 2021).
10
Ibid.
11
Ibid.
12
Id. at 16.
13
Competition Act, 2002, § 3(1), No. 12, Acts of Parliament, 2003 (India).
14
Id. at § 3(2).
15
Competition Act, supra note 13, at § 19(3).
16
WHISH, supra note 1, at 513.
17
In Re Cartelization by public sector insurance companies in rigging the bids
submitted in response to the tenders floated by the Government of Kerala for
selecting insurance service provider for Rashtriya Swasthya Bima Yojna, 2015
SCC OnLine CCI 192.
18
Competition Act, supra note 13, at § 3(3).
19
IFTRA Rules on Glass Containers, OJ [1974] L160/1.
20
Italian Flat Glass, OJ [198] L 33/44.
21
Competition Act, supra note 13, at § 3(3)(b)
22
ABIR ROY, COMPETITION LAW IN INDIA: A PRACTICAL GUIDE 31 (2016).
23
In Re Builders Association of India and Cement Manufacturers’ Association
& Ors., 2016 SCC OnLine CCI 46.
24
Competition Commission penalises beer companies for indulging into
cartelisation, Press Release No. 40/2021-22, https://www.cci.gov.in/sites/
default/files/press_release/PR40-2021-22.pdf (Last accessed on Oct. 2, 2021).
25
WHISH, supra note 1, at 530.
26
HFB Holding v. Commission, [2001] 4 CMLR 1066.
27
ROY, supra note 22, at 32.
28
In re Cartelization in Tender No. 59 of 2014 of Pune Municipal Corporation
for Solid Waste Processing, 2018 SCC OnLine CCI 40.
29
Competition Act, supra note 13, at § 3(4).
30
Ibid.
31
WHISH, supra note 1, at 689.
32
In Re IELTS Australia Pty Ltd., IDP Education Pty Ltd., IDP Education India
Pvt. Ltd. and Planet EDU Pvt. Ltd., 2010 SCC OnLine CCI 33.
270
33
Hilti AG v. Commission, [1992] 4 CMLR 16.
34
WHISH, supra note 1, at 683. Competition Law
35
Jindal Steel & Power Ltd. v Steel Authority of India Ltd, [2012] 107 CLA
278.
36
ROY, supra note 22, at 82.
37
Competition Act, 2002, § 3(4), No. 12, Acts of Parliament, 2003 (India).
38
English Welsh & Scottish Railway Ltd. v. E. ON UK plc, [2007] UKCLR
1653.
39
Fx Enterprise Solutions India Pvt. Ltd v. M/s Hyundai Motor India Limited,
2017 SCC OnLine CCI 26.
40
Competition Act, supra note 13, at § 2(r).
41
Id. at § 2(t).
42
In Re Matrimony.com and Google, 2018 SCC OnLine CCI 1.
43
Competition Act, supra note 13, at § 2(s).
44
In Re Harshita Chawla and Others, 2020 SCC OnLine CCI 32.
45
ROY, supra note 22, at 95.
46
Competition Act, 2002, § 4, No. 12, Acts of Parliament, 2003 (India).
47
Ibid.
48
Antitrust: Commission fines Google €2.42 billion for abusing dominance as
search engine by giving illegal advantage to own comparison-shopping
service, (Jun. 27, 2017) https://ec.europa.eu/commission/presscorner/detail/
en/IP_17_1784.
49
Competition Act, supra note 13, at § 19(4).
50
In Re Harshita Chawla and Others, 2020 SCC OnLine CCI 32.
51
WHISH, supra note 1, at 810.
52
Id. at 811.
53
WHISH, supra note 1, at 817.
54
Ibid.
55
Id. at 818
56
Id. at 819.
57
Competition Act, supra note 13, at § 6(2).
58
Id. at § 6(2A).
59
Id. at § 31(1).
60
Id. at § 31(2).
61
Combination Regulations 2011, Regulation 25 (1).
62
Competition Act, supra note 13, at § 31(3).
63
Id. at § 31(6).
64
John Kwoka, Merger Remedies: An Incentives/Constraints Framework, 62
Antitrust Bull. 367, 368(2017).
65
In re Abbott Laboratories, 2016 SCC OnLine CCI 83.
66
Combination Regulations 2011, Regulation 5A.
67
Antitrust: Commission opens investigation into possible anti-competitive
conduct of Amazon, https://ec.europa.eu/commission/presscorner/detail/pl/
ip_19_4291 (Last accessed on Oct. 4, 2021). 271
Business and Sustainability 68
Matrimony.com Ltd v. Google LLC, 2018 SCC OnLine CCI 1.
69
In Re Updated Terms of Service and Privacy Policy for WhatsApp Users and
WhatsApp LLC & Facebook, 2021 SCC OnLine CCI 19.
70
Pankaj Doval, Google abusing position, playing unfair: CCI probe, (Sept.
18, 2021), https://timesofindia.indiatimes.com/business/india-business/
google-abusing-position-playing-unfair-cci-probe/articleshow/86306396.cms
(Last accessed on Oct. 4, 2021).
71
Ariel Ezrachi & Jay Modrall, Rising to the Challenge - Competition Law and
the Digital Economy, 15 COMPETITION L. INT’L 117, 122 (2019).
72
Report of The Competition Law Review Committee, 2019.
73
Competition Act, 2002, § 19(1)(a), No. 12, Acts of Parliament, 2003 (India).
74
Id. at § 26(1).
75
Id. at § 41.
76
Excel Crop Care Limited v. Competition Commission of India & Another,
(2017) 8 SCC 47.
77
Competition Act, 2002, § 26, No. 12, Acts of Parliament, 2003 (India).
78
Id. at § 33.
79
Id. at § 43A.
80
Id. at § 44.
81
Id. at § 45(1).
82
Id. at § 46.
83
Id. at § 49.
84
Id. at § 53A.
85
Id. at § 53B (3).
86
Id. at § 53(O).
87
Id. at § 53T.

272
 Competition Law
UNIT 14 CONSUMER PROTECTION LAW

Objectives
After studying this unit, you should be able to:
Understand the Evolution of Consumer Protection
Identify the Consumer Authorities under the Act
Discuss the Powers of the Central Consumer Protection Authority
Explain the Process of Filing of Complaints
Appreciate the important provisions of Consumer Protection (E-Commerce)
Rules, 2020
Structure
14.1 Introduction
14.2 The Evolution of Consumer Protection
14.3 Consumer Authorities under the Act
14.4 Process of Complaint
14.5 Filing of Complaints
14.6 Powers of the Central Consumer Protection Authority
14.7 Product Liability
14.8 E-Commerce
14.9 Enforcement of Orders of Forums
14.10 Offences & Penalties
14.11 Consumer Protection Councils
14.12 Mediation
14.13 Summary
14.14 Self Assessment Questions

14.1 INTRODUCTION
The economic growth of a country depends on consumers, and it is vital that
they trust the products and services providers. In 1930, when the United States
of America was facing great recession, the then President Herbert Hoover while
addressing the congress had remarked, “Economic depression cannot be cured
by legislative action or executive pronouncement. Economic wounds must be
healed by the action of the cells of the economic body - the producers and
consumers themselves.” In a free economy, the substandard products / services
has to be sacrificed for producers/providers of quality goods/ services which
will have an overall impact on the economy.

Consumer satisfaction and taking care of consumer’s interest is in the long-term

interest of businesses, as a happy customer would not only prefer purchasing the
quality products/services for himself repeatedly, but would also encourage
prospective customers by giving good feedback and thus, help in increasing the
customer-base of business. Secondly, self-regulation in producing quality products
273
Business and Sustainability may protect the produces from government intervention or action which can
impair and tarnish the goodwill of the business firms.

Consumer protection and empowerment attains prime importance since all human
beings are consumers of goods and services and even businessmen who partake
in selling of other goods and services are ultimately consumers of goods & services
produced by other sellers or service providers. Business and consumer protection
go hand in hand and consumer protection is as important for businessmen as for
others because of long-term interest of business in consumer satisfaction.

14.2 THE EVOLUTION OF CONSUMER

PROTECTION
The concept of consumer protection is not new. We find reference of the law and
policies for consumer protection in Ancient Indian texts including Kautilya’s
Arthshastra. The modern consumer movement worldwide initiated when US
President, John F. Kennedy on 15th March 1952 referred to four consumer rights
in his famous speech in the US Congress. From the next year, 15th March was
celebrated as World Consumer Rights Day on the initiative of Consumer
International, an international consumer association (formerly known as
‘Consumer Union’). It was a result of worldwide consumer movement, that in
the year 1985, the United Nations adopted the Consumer Protection Guidelines
and one of the mandates of these Guidelines for the signatory countries was to
pass consumer protection legislations in their respective countries. India, being
a signatory to the Guidelines, became the forerunner to pass the Consumer
Protection Act in 1986, the very next year of adoption of the Guidelines in 1985.
In fact, India is perhaps the only country where a dedicated machinery for redressal
of consumer complaints has been set up.

Before the passing of the Consumer Protection Act, 1986, there were various
other existing legislations to protect consumer interests including Indian Contract
Act, the Sale of Goods Act, the Standards of Weights and Measures Act, the
Dangerous Drugs Act, the Agricultural Produce (Grading and Marketing) Act,
the Indian Standards Institution (Certification Marks) Act, the Prevention of
Food Adulteration Act etc., which to some extent protected the interests of the
consumers. However, a need was felt to pass the Consumer Protection Act,
1986, as the procedure of availing remedy under the above laws was very
expensive, time consuming and was full of complexities.

The Consumer Protection Act, 1986, was enacted to provide for better protection
of the consumers’ interests and for making provision for establishment of
consumer protection councils and other authorities for the settlement of
consumer disputes, etc. This welfare legislation was well received as a boon
by Indian consumers and the working of the consumer dispute redressal agencies
has served the purpose to a considerable extent under the said Act. To provide
a speedier remedy over ordinary civil courts, the 1986 Act, included a fixed
period of time for disposal of consumer disputes. However, it was found that
the cases were rarely decided within the period given in the Act. The process
in the consumer forums established under the Act was intended to be summary
in nature which does not include any intricacies as involved in a Civil Court
and free of complexities of ordinary civil courts. However, these forums have
274
ended up to become civil courts full of complexities when forums have started Consumer Protection Law
pressing for voluminous evidence and arguments primarily due to the presence
of lawyers defending the companies which forced the consumers/complainant
too to hire lawyers for his case. In some cases, forums referred the parties to
mediation under the provisions of Civil Procedure Code, 1908 (CPC), however
such cases were very less in number. Besides, there were several shortcomings
noticed while administering the various provisions of the said Act.

Consumer markets for goods and services also have undergone drastic
transformation since the enactment of the Consumer Protection Act in 1986.
The modern marketplace contains a plethora of products and services. The
emergence of global supply chains, rise in international trade and the rapid
development of e-commerce have led to new delivery systems for goods and
services and have provided new options and opportunities for consumers.
Equally, this has rendered consumers vulnerable to new forms of unfair trade
and unethical business practices. Misleading advertisements, tele-marketing,
multi-level marketing, direct selling and e-commerce pose new challenges to
consumer protection, requiring appropriate and swift executive interventions
to prevent consumer detriment. Therefore, it became inevitable to amend the
Act to address the myriad and constantly emerging vulnerabilities of the
consumers.

In view of the above, it was deemed expedient to repeal the extant law and
enact a new law, namely, the Consumer Protection Act, 2019, which was
eventually notified on 20th July 2020.

The provisions of the new Consumer Protection Act (the 2019 Act) will have
an impact of revolutionising the Indian justice delivery system in the consumer
cases.

Now let’s discuss the provisions of the consumer legislation by focussing on

the new features of Consumer Protection Act, 2019. The case laws under the
Consumer Protection Act, 1986 are still applicable and will be discussed
wherever needed.

The Consumer Protection Act, 2019 is really comprehensive and added various
new features in comparison to the erstwhile regime i.e. the Consumer Protection
Act, 1986. As, all the features cannot be analysed in this unit, only the main
provisions are covered with special focus on newly added provisions. Let us
discuss the new Act now while focussing on the following topics:
Consumer Authorities under the Act
Who Can file a case? Definition of Consumer
Process of Filing Complaint & Online Complaint
Mediation under the Consumer Protection Act, 2019
E-Commerce: Issues and Challenges
Product Liability under the Consumer Protection Act, 2019
Central Consumer Protection Authority
Offences and Penalties

275
Business and Sustainability
14.3 CONSUMER AUTHORITIES UNDER THE ACT
The Consumer Protection Act, 2019 (“the 2019 Act”) provides for four types of
entities/ authorities, which are as under:
Consumer Protection Councils (Sections 3-9) (this was also there in the old
Act);
Central Consumer Protection Authority (Sections 10-27) (for protection of
rights of common consumers & to deal with misleading advertisements and
unfair trade practices);
Consumer Disputes Redressal Commissions (Sections 28-73);
Mediation Cells (Sections 74-81).
Three-Tiered System of Consumer Agencies (Consumer Disputes Redressal
Commissions)
For adjudication of consumer disputes, there are consumer authorities
established at District, State, and Centre level. These authorities/ forums provide
an alternative remedy and have not taken away the jurisdiction of the civil courts.
The consumer forums have been vested with certain powers of a civil court for
adjudication of disputes. Some additional powers for ordering search and seizure
have also been conferred. The commissions have the powers of a Judicial
Magistrate of first class for the trial of offences of non- compliance of their
orders (which may extend to 3 years). The above powers are vested with all the
commissions irrespective of their hierarchy. The chart depicts different
jurisdictions of consumer forums.
District Commission Upto 1 cr
State Commission 1 cr – 10 cr
National Commission above 10 cr

Supreme Court Revision & Appellate Jurisdiction

National Commission Original, Review, Revision & Appellate
(SCDRC & CCPA)
State Commission Original, Review, Revision & Appellate
Jurisdiction
District Commission Original & Review Jurisdiction

District Level

Just like civil courts, the consumer agencies are established at three tiers or levels
i.e. district, state and national level. First Tier is at District Level - District
Consumer Disputes Redressal Commission (“DCDRC”). There is one DCDRC
for every District in a State; DCDRC consists of President and at least two
Members; The number of members in a DCDRC can go upto 10 Members.
President in DCDRC can be a person who is or has been a District Judge or a
person who is qualified to be a district Judge, whereas a member in DCDRC can
be a person who is not less than 35 years of age and has a Bachelor’s Degree and
has 15 years of relevant experience. DCDRC must have at least one Female
276
Member. DCDRC can hear a Complaint when the quorum consists of President Consumer Protection Law
and at least one Member.

DCDRC has two jurisdictions- original and review. Under original jurisdiction
it has pecuniary jurisdiction up to Rs 1 Crore which means such complaints in
which the amount paid for the goods and services is less than Rs 1 Crore can be
filed before the DCDRC. This provision is different from the Act of 1986 under
which the jurisdiction was relating to the cases below 20 Lakhs. Increasing the
jurisdiction is beneficial for consumers who had to travel to state capitals for
filing their cases before the State commission in cases of more than 20 Lakhs.
DCDRC has territorial jurisdiction over a place where the opposite party resides
or carries on its business or has a branch office; or a place where any of the
Opposite Parties reside or carry-on business or have a branch office; or a place
where the cause of action has arisen; or a place where the Complainant resides
or personally works for gain. The last clause i.e., the complainant’s place has
been added by the 2019 Act which makes it really convenient to access justice at
his own city. The DCDRC has also been conferred Review Jurisdiction under
which it can now review its own orders on the ground of an error apparent on the
face of the record.

State Level:
At the state level the State Consumer Disputes Redressal Commission (“SCDRC”)
has been established. There is one SCDRC for every State. Some States like
Maharashtra have multiple Benches in one State. SCDRC consists of one President
and not less than four Members. President of SCDRC can be a person who is or
has been a Judge of a High Court. Members can be persons not less than 40 years
of age and is or has been a Presiding Officer of a Court or Tribunal (only for 50%
Members) or has a Bachelor’s Degree and 20 years of experience in the relevant
fields. SCDRC shall have at least one Female Member. SCDRC has four types
of judications- original, appellate, revision and review. Under original jurisdiction
it has pecuniary jurisdiction between Rs 1 Crore to 10 Crores which means such
Complaints in which the amount paid for the goods and services is between Rs 1
Crore to 10 Crores can be filed before the SCDRC. Just like DCDRC, pecuniary
jurisdiction of SCDRC has been increased under 2019 Act. Earlier SCDRC could
entertain cases whose value was between 20 lakhs to 1 crore. Increasing
jurisdiction is beneficial for consumers who had to travel to state capitals for
filing their cases before the State commission in cases of more than 20 Lakhs.
SCDRC has territorial jurisdiction over the territory of the whole state i.e. all
cases of the state may be filed before SCDRC subject to pecuniary value of
goods or services. The SCDRC also has to power to entertain appeals from orders
of all DCDRCs of the State in which SCDRC is situated. Just like the DCDRC,
the SCDRC has also been conferred the Review Jurisdiction under the 2019 Act.
SCDRC also has power of revision of orders of DCDRCs on limited grounds of
error of jurisdiction. SCDRC may also transfer cases from one DCDRC to another
DCDRC but within the State. Such transfer orders can be passed on the grounds
like where any person in the quorum has any conflict of interest or where multiple
cases are pending against an entity in various DCDRCs under the State.

National Level:
At the apex or national level is the National Consumer Disputes Redressal
Commission (“NCDRC”). There is one NCDRC in the Country situated in the
national capital i.e. New Delhi. NCDRC consists of one President and not less 277
Business and Sustainability than four Members. President of NCDRC can be a person who is or has been a
Judge of the Supreme Court; or has been a Chief Justice of any High Court; or
has held the post of Member or Judicial Member for a period of three years; or
has an experience of twenty-five years in relevant fields. The members of NCDRC
can be persons who are or have been a Judge of a High Court or is or has been
District Judge or Additional District Judge for a period of ten years or have
Bachelor’s Degree and twenty-five years of experience in the relevant fields.

Just like the SCDRC, the NCDRC also has four types of judications- original,
appellate, revision and review. Under original jurisdiction it has pecuniary
jurisdiction over complaints in which the amount paid for the goods and services
is more than 10 Crores. The pecuniary jurisdiction of NCDRC has been increased
which earlier was Rs. 1 Crore and above. Increasing jurisdiction would reduce
the pressure on NCDRC as most cases would be filed before DCDRCs &
SCDRCs. The NCDRC has power to entertain appeals from orders of all SCDRCs.
Just like the DCDRC & SCDRC, the NCDRC also has power to Review its
orders. NCDRC also has power of Revision of orders of SCDRCs on limited
grounds of error of jurisdiction. NCDRC may have circuit benches in different
States. NCDRC also has the power to transfer complaints pending before one
DCDRC of one State to DCDRC of another State or before one SCDRC to another
SCDRC (Section 62). NCDRC also has administrative control over all the
SCDRCs. under the Act of 2019, a second appeal on substantial questions of law
may be filed before NCDRC (1ST appeal heard by the SCDRC).

SYSTEM OF APPEALS
Supreme Court
First Appeal from National Commission
(within 30 days from the date of the order)

National Commission
First Appeal from State Commission
(within 30 days from the date of order)
Second Appeal from State Commission
[from any order passed in appeal by any State Commission]
[only on substantial questions of law- within 30 days from the date of the
order]
State Commission
First Appeal from District Commission
(within 30 days from the date of order)
District Commission

14.4 PROCESS OF COMPLAINT

Section 2(5) of the 2019 Act defines “complainant” as —(i) a consumer; or (ii)
any voluntary consumer association registered under any law for the time being
in force; (iii) the Central Government or any State Government; or (iv) the Central
278 Consumer Protection Authority (CCPA); or (v) one or more consumers, where
there are numerous consumers having the same interest; or (vi) in case of death Consumer Protection Law
of a consumer, his legal heir or legal representative; or (vii) in case of a consumer
being a minor, his parent or legal guardian.

Definition of Consumer
“Consumer” means any person who buys any goods or hires services for a
consideration and includes any user of such goods with the approval of buyer.
But if goods are bought or service are hired for resale or for any commercial
purpose the case falls outside the Act. It has also been made clear that if a person
used the goods bought exclusively for the purpose of earning his livelihood, by
means of self-employment, s/he is still a consumer and may avail the remedy
under the Act. The new Act also includes online transactions through electronic
means or by teleshopping or direct selling or multi-level marketing under it.

Section 2(6) contains the definition of “complaint” which means any allegation
in writing, made by a complainant for obtaining any relief provided by or under
this Act, that:
i) an unfair contract or unfair trade practice or a restrictive trade practice has
been adopted by any trader or service provider;
ii) the goods bought by him or agreed to be bought by him suffer from one or
more defects;
iii) the services hired or availed of or agreed to be hired or availed of by him
suffer from any deficiency;
iv) a trader or a service provider, as the case may be, has charged for the goods
or for the services mentioned in the complaint, a price in excess of the price—
(a) fixed by or under any law for the time being in force; or (b) displayed on
the goods or any package containing such goods; or (c) displayed on the
price list exhibited by him by or under any law for the time being in force; or
(d) agreed between the parties;
v) the goods, which are hazardous to life and safety when used, are being offered
for sale to the public—(a) in contravention of standards relating to safety of
such goods as required to be complied with, by or under any law for the time
being in force; (b) where the trader knows that the goods so offered are
unsafe to the public;
vi) the services which are hazardous or likely to be hazardous to life and safety
of the public when used, are being offered by a person who provides any
service and who knows it to be injurious to life and safety;
vii) a claim for product liability action lies against the product manufacturer,
product seller or product service provider, as the case may be.” As noted
above, unfair contract has also been included in definition of complaint.

14.5 FILING OF COMPLAINTS

Complaint containing the relevant facts and with supporting documents need to
be filed before the commission of competent jurisdiction in writing.

The new 2012, Act, provides for online complaints. Complaints can be filed
online on http://edaakhil.nic.in/. The system of online complaints is being 279
Business and Sustainability streamlined throughout the country. However, currently, not all Commissions
have this option. There is a fee prescribed for filing complaints under Rules but
there is no fee payable if the value of goods and services paid as consideration
amount is less than rupees five lakhs.

Procedure to be followed at the time of and after the Complaint:

There must be a written complaint filed by the complainant alongwith relevant
evidence like receipts, etc. After filing the complaint, there is an admission
hearing and if admitted, a notice is directed to be issued to the opposite party. If
the admissibility of the complaint not decided within 21 days, the complaint will
be deemed to be admitted. The opposite party needs to file its reply within 45
days and the said 45 days cannot be extended by the Commission. The reply is
then followed by a rejoinder and evidence. Thereafter, final arguments are heard
and if felt necessary the Commission can seek an expert opinion in the matter
and even testing of goods can be ordered by the Commission.

Limitation for Filing Complaint:

The period within which a Complaint is required to be filed before the Commission
is two years from the date on which the cause of action has arisen. However, a
complaint may be entertained after the said period, if the complainant satisfies
the Commission that he had sufficient cause for not filing the complaint within
such period and if such a complaint is entertained by the Commission, then reasons
for condoning such delay need to be recorded.
Reliefs that Can Be Granted & Execution of Orders:
The following reliefs can be passed by the Consumer forums:
Removal of defects or deficiencies in the services;
Replacement of the goods;
refund of the price paid;
Award of compensation for the loss or injury suffered (may also award
punitive damages);
Discontinue and not to repeat unfair trade practice or restrictive trade practice;
To withdraw hazardous goods from being offered for sale;
To cease manufacture of hazardous goods and desist from offering services
which are hazardous in nature;
If the loss or injury has been suffered by a large number of consumers who
are not identifiable conveniently, to pay such sum (not less than 5% of the
value of such defective goods or services provided) which shall be determined
by the forum;
To issue corrective advertisement to neutralize the effect of misleading
advertisement;
To cease and desist from issuing any misleading advertisement
To provide adequate costs to parties
As noted above some new types of orders may be passed by consumer for a
under the 2019 Act which will improve effectiveness of the Act particularly in
the area of misleading advertisements, the order against erring company or
280
individual to issue a corrective advertisement in case misleading advertisement Consumer Protection Law
to neutralize the effect at their cost is will prove effective to curb the menace of
misleading advertisement.

14.6 POWERS OF THE CENTRAL CONSUMER

PROTECTION AUTHORITY
A landmark feature of the 2019 Act is the provision for establishment of a new
authority i.e., Central Consumer Protection Authority for protecting, promoting
& enforcing rights of consumers as a class and for regulating matters relating to
violation of rights of consumers, unfair trade practices and false or misleading
advertisements which are prejudicial to the interests of public. The Authority
has been established in the year 2020 with its office in the capital of India and
has started its activities of consumer welfare. It has its own investigation wing
which can investigate instances of violations of consumer rights. For the purpose
of filing any complaint, consumers can directly approach the Central Authority,
or any of its appointed officers for this purpose. Complaint can also be filed
before district magistrate. The CCPA can also refer matters for investigation to
other regulators such as SEBI.

Under the Act, the CCPA has the power to inquire or cause an inquiry to be made
into a matter of violation of consumer rights or unfair trade practices, suo moto
or on receiving a complaint or on being asked by the central government. It can
also file complaints before appropriate forums to enforce rights of consumers.
CCPA is listed under the Act as a complainant. In matters relating to consumer
rights, the CCPA can intervene in any pending case before any forums or review
the prevailing safeguards and recommend changes. The Authority can recommend
to the government, the adoption of international covenants to protect the rights
of consumers.

The CCPA also has mandate to promote research into consumer rights and raise
awareness about consumer rights at the ground level. It can also team up with
NGOs and encourage them to work with consumer protection agencies. It can
mandate the use of identifiers on goods to protect consumer rights. It can warn
consumers against hazardous goods and services by issuing notices and alerts. It
can advise the central and state governments and can issue necessary guidelines
to prevent unfair trade practices and protect consumer rights.
During the course of the investigation, the investigator has the power of search
and seizure under the Act. It follows the provisions for search and seizure as
given in the Code of Criminal Procedure 1973.
Where after investigation, the CCPA is convinced that consumer rights have
been violated, it can order recalling of goods or withdrawal of services,
reimbursement of the cost of goods and services, and discontinuation of unfair
trade practices. In cases of misleading advertisement, it can also order for any
advertisement to be withdrawn or modified. It can also impose a penalty on
advertisers which may extend up to 10 lakhs or up to 50 lakhs in case of repeat
contravention. This penalty can also be issued on endorsers such as celebrities
also, provided they did not do due diligence before endorsing the product. It can
also impose a ban on the endorser from endorsing any product for up to 1 year,
or up to 3 years in case of a repeat contravention. However, in all these cases, it
shall give the other party an opportunity of being heard before imposing penalty. 281
Business and Sustainability The Central Government, and the State Governments have been conferred with
the power to make Rules under the Act, whereas the NCDRC & CCPA can make
regulations under the 2019 Act. Orders passed by the Central Authority may be
challenged in appeal to the National Commission within a period of thirty days
from the date of receipt of such order.

14.7 PRODUCT LIABILITY

The Act of 2019 provides a new provision of Product Liability which will be
applicable to all cases where harm has been caused due to a defective product.
The Act defines “harm” as including personal injury, mental agony and emotional
distress occurring as a result of a personal injury.

Under this provision, a complainant can bring an action for product liability
against a manufacturer or a product service provider or a product seller. A
manufacturer can be made liable if the product has a manufacturing defect or
when the product is defective in design. Manufacturers will also be liable if
there is a deviation from manufacturing specifications or when they do not
conform to the warranty or if the product does not contain proper instructions for
correct usage to prevent harm. It is clarified under the Act that liability is not
contingent on the presence of fault on the part of the manufacturer.

The product/service provider is liable in case of imperfect, deficient, or inadequate

service, negligence or conscious withholding of information that caused harm,
not issuing adequate warnings, non-conformity with warranty. The product sellers
will also be liable if they had substantial control over the designing, testing,
manufacturing, packaging or labelling of the product, they alter or modify the
product and this was a substantial factor in causing the harm, the seller has made
an express warranty for the product, the identity of product manufacturer is not
known or they are not within the jurisdiction of India, they did not properly
assemble, inspect or maintain the product or did not pass on information about
the correct use of the product from the manufacturer to the consumer. The product
liability provision also provides exception from liability to product seller in case
the product was misused, altered, or modified, by the consumer.

14.8 E-COMMERCE
The new consumer protection regime under 2019 Act covers all modes of
transactions offline, online through electronic means, teleshopping, direct selling
or multi-level marketing.

To regulate the E-commerce sector in India and protect consumers from unfair
trade practices in e-commerce, Consumer Protection (E-Commerce) Rules, 2020,
were passed which came into effect from 23 July 2020. These rules put a lot of
duties on e-commerce entities in the interest of consumers.
Applicability of the Rules:
The Consumer Protection (E-Commerce) Rules, 2020, are applicable to the
following:
a) These rules apply to all goods and services bought or sold over digital or
electronic network including digital products;
282
b) all models of e-commerce, including marketplace and inventory models of Consumer Protection Law
e-commerce;
c) all e-commerce retail, including multi-channel single brand retailers and
single brand retailers in single or multiple formats; and
d) all forms of unfair trade practices across all models of e-commerce.
However, these rules shall not apply to any activity of a natural person carried
out in a personal capacity not being part of any professional or commercial activity
undertaken on a regular or systematic basis. As provided under the Act, these
rules shall apply to a multinational e-commerce entity offering goods or services
to consumers in India.
Duties of e-Commerce Entities:
Some of the duties of e-commerce entities are:
As per the Rules an e-commerce entity be a company incorporated under
Indian Companies Act, 1956/2013 or a foreign company covered under clause
(42) of section 2 of the Companies Act, 2013 or an office, branch or agency
outside India owned or controlled by a person resident in India as provided
in sub-clause (iii) of clause (v) of section 2 of the Foreign Exchange
Management Act, 1999, needs to appoint a nodal person of contact or an
alternate senior designated functionary who is resident in India, to ensure
compliance with the provisions of the Act or the rules made thereunder.
Every e-commerce entity shall provide the following information in a clear
and accessible manner on its platform, displayed prominently to its users:—
i) legal name of the e-commerce entity;
ii) principal geographic address of its headquarters and all branches;
iii) name and details of its website; and
iv) contact details like e-mail address, fax, landline and mobile numbers
of customer care as well as of grievance officer.
No e-commerce entity shall adopt any unfair trade practice, whether in the
course of business on its platform or otherwise.
Every e-commerce entity shall establish an adequate grievance redressal
mechanism having regard to the number of grievances ordinarily received
by such entity from India, and shall appoint a grievance officer for consumer
grievance redressal, and shall display the name, contact details, and
designation of such officer on its platform.
Every e-commerce entity shall ensure that the grievance officer referred to
in sub-rule (4) acknowledges the receipt of any consumer complaint within
forty-eight hours and redresses the complaint within one month from the
date of receipt of the complaint.
Where an e-commerce entity offers imported goods or services for sale, it
shall mention the name and details of the importer from whom it has
purchased such goods or services, or who may be a seller on its platform.
Every e-commerce entity shall endeavour on a best effort basis to become a
partner in the convergence process of the National Consumer Helpline of
the Central Government.
283
Business and Sustainability No e-commerce entity shall impose cancellation charges on consumers
cancelling after confirming.
Purchase unless similar charges are also borne by the e-commerce entity, if
they cancel the purchase order unilaterally for any reason.
Every e-commerce entity shall only record the consent of a consumer for
the purchase of any good or service offered on its platform where such consent
is expressed through an explicit and affirmative action, and no such entity
shall record such consent automatically, including in the form of pre-ticked
checkboxes.
Every e-commerce entity shall affect all payments towards accepted refund
requests of the consumers as prescribed by the Reserve Bank of India or any
other competent authority under any law for the time being in force, within
a reasonable period of time, or as prescribed under applicable laws.
No e-commerce entity shall—
a) manipulate the price of the goods or services offered on its platform in
such a manner as to gain unreasonable profit by imposing on consumers
any unjustified price having regard to the prevailing market conditions,
the essential nature of the good or service, any extraordinary
circumstances under which the good or service is offered, and any other
relevant consideration in determining whether the price charged is
justified;
b) discriminate between consumers of the same class or make any arbitrary
classification of consumers affecting their rights under the Act.
Liabilities of Marketplace E-Commerce Entities:
A marketplace e-commerce entity which seeks to avail the exemption from
liability under sub-section (1) of section 79 of the Information Technology Act,
2000 shall comply with sub-sections (2) and (3) of that section, including the
provisions of the Information Technology (Intermediary Guidelines) Rules, 2011.
Every marketplace e-commerce entity shall require sellers through an
undertaking to ensure that descriptions, images, and other content pertaining
to goods or services on their platform is accurate and corresponds directly
with the appearance, nature, quality, purpose and other general features of
such good or service.
Every marketplace e-commerce entity shall provide the following
information in a clear and accessible manner, displayed prominently to its
users at the appropriate place on its platform:
a) details about the sellers offering goods and services, including the name
of their business, whether registered or not, their geographic address,
customer care number, any rating or other aggregated feedback about
such seller, and any other information necessary for enabling consumers
to make informed decisions at the pre-purchase stage.
Provided that a marketplace e-commerce entity shall, on a request in
writing made by a consumer after the purchase of any goods or services
on its platform by such consumer, provide him with information
regarding the seller from which such consumer has made such purchase,
284
 including the principal geographic address of its headquarters and all Consumer Protection Law
branches, name and details of its website, its email address and any
other information necessary for communication with the seller for
effective dispute resolution;
b) a ticket number for each complaint lodged through which the consumer
can track the status of the complaint;
c) information relating to return, refund, exchange, warranty and
guarantee, delivery and shipment, modes of payment, and grievance
redressal mechanism, and any other similar information which may be
required by consumers to make informed decisions;
d) information on available payment methods, the security of those
payment methods, any fees or charges payable by users, the procedure
to cancel regular payments under those methods, charge-back options,
if any, and the contact information of the relevant payment service
provider;
i) all information provided to it by sellers under sub-rule (5) of rule
6; and
ii) an explanation of the main parameters which, individually or
collectively, are most significant in determining the ranking of
goods or sellers on its platform and the relative importance of those
main parameters through an easily and publicly available
description drafted in plain and intelligible language.
Every marketplace e-commerce entity shall include in its terms and conditions
generally governing its relationship with sellers on its platform, a description
of any differentiated treatment which it gives or might give between goods
or services or sellers of the same category.

Every marketplace e-commerce entity shall take reasonable efforts to

maintain a record of relevant information allowing for the identification of
all sellers who have repeatedly offered goods or services that have previously
been removed or access to which has previously been disabled under the
Copyright Act, 1957, the Trade Marks Act, 1999, or the Information
Technology Act, 2000.

Provided that no such e-commerce entity shall be required to terminate the

access of such seller to its platform pursuant to this sub-rule but may do so
on a voluntary basis.

Duties of sellers on marketplace:

The following duties of sellers on marketplace are mentioned under the E-
Commerce (Consumer Protection) Rules, 2020:
No seller offering goods or services through a marketplace e-commerce entity
shall adopt any unfair trade practice whether in the course of the offer on the
e-commerce entity’s platform or otherwise.
No such seller shall falsely represent itself as a consumer and post reviews
about goods or services or misrepresent the quality or the features of any
goods or services.
285
Business and Sustainability No seller offering goods or services through a marketplace e-commerce entity
shall refuse to take back goods, or withdraw or discontinue services purchased
or agreed to be purchased, or refuse to refund consideration, if paid, if such
goods or services are defective, deficient or spurious, or if the goods or
services are not of the characteristics or features as advertised or as agreed
to, or if such goods or services are delivered late from the stated delivery
schedule.

Provided that in the case of late delivery, this sub-rule shall not be applied if
such late delivery was due to force majeure.
Any seller offering goods or services through a marketplace e-commerce
entity shall:
a) have a prior written contract with the respective e-commerce entity in
order to undertake or solicit such sale or offer;
b) appoint a grievance officer for consumer grievance redressal and ensure
that the grievance officer acknowledges the receipt of any consumer
complaint within forty-eight hours and redresses the complaint within
one month from the date of receipt of the complaint;
c) ensure that the advertisements for marketing of goods or services are
consistent with the actual characteristics, access and usage conditions
of such goods or services.
d) provide to the e-commerce entity its legal name, principal geographic
address of its headquarters and all branches, the name and details of its
website, its e-mail address, customer care contact details such as fax,
landline, and mobile numbers and where applicable, its GSTIN and
PAN details.
Any seller offering goods or services through a marketplace e-commerce
entity shall provide the following information to the e-commerce entity to
be displayed on its platform or website:
a) all contractual information required to be disclosed by law;
b) total price in single figure of any good or service, along with the breakup
price for the good or service, showing all the compulsory and voluntary
charges such as delivery charges, postage and handling charges,
conveyance charges and the applicable tax, as applicable;
c) all mandatory notices and information provided by applicable laws,
and the expiry date of the good being offered for sale, where applicable;
d) all relevant details about the goods and services offered for sale by the
seller including country of origin which are necessary for enabling the
consumer to make an informed decision at the prepurchase stage;
e) the name and contact numbers, and designation of the grievance officer
for consumer grievance redressal or for reporting any other matter;
f) name and details of importer, and guarantees related to the authenticity
or genuineness of theimported products;
g) accurate information related to terms of exchange, returns, and refund
including information related to costs of return shipping in a clear and
accessible manner;
286
 h) relevant details related to delivery and shipment of such goods or Consumer Protection Law
services; and
i) any relevant guarantees or warranties applicable to such goods or
services.
Duties and Liabilities of Inventory E-Commerce Entities:
Following are the duties and liabilities of Inventory E-commerce Entities:
Every inventory e-commerce entity shall provide the following information
in a clear and accessible manner, displayed prominently to its users:
a) accurate information related to return, refund, exchange, warranty and
guarantee, delivery and shipment, cost of return shipping, mode of
payments, grievance redressal mechanism, and any other similar
information which may be required by consumers to make informed
decisions;
b) all mandatory notices and information required by applicable laws;
c) information on available payment methods, the security of those
payment methods, the procedure to cancel regular payments under those
methods, any fees or charges payable by users, charge back options, if
any, and the contact information of the relevant payment service
provider;
d) all contractual information required to be disclosed by law;
e) total price in single figure of any good or service along with the breakup
price for the good or service, showing all the compulsory and voluntary
charges, such as delivery charges, postage and handling charges,
conveyance charges and the applicable tax; and
f) a ticket number for each complaint lodged, through which the consumer
can track the status of their complaint.
No inventory e-commerce entity shall falsely represent itself as a consumer
and post reviews about goods and services or misrepresent the quality or the
features of any goods or services.
Every inventory e-commerce entity shall ensure that the advertisements for
marketing of goods or services are consistent with the actual characteristics,
access and usage conditions of such goods or services;
No inventory e-commerce entity shall refuse to take back goods, or withdraw
or discontinue services purchased or agreed to be purchased, or refuse to
refund consideration, if paid, if such goods or services are defective, deficient
spurious, or if the goods or services are not of the characteristics or features
as advertised or as agreed to, or if such goods or services are delivered late
from the stated delivery schedule.
Provided that in the case of late delivery, this sub rule shall not apply if such
late delivery was due to force majeure.
Any inventory e-commerce entity which explicitly or implicitly vouches
for the authenticity of the goods or services sold by it, or guarantees that
such goods or services are authentic, shall bear appropriate liability in any
action related to the authenticity of such good or service. 287
Business and Sustainability Contravention of e-Commerce Rules:
The provisions of the Consumer Protection Act, 2019, shall apply for any violation
of the provisions of these rules. Therefore, the punishments and fines provided
under the Act for non-compliance of orders of consumer forums are also applicable
to any violation of the provisions of these rules.

Amendment to the Rules:

The government is taking initiatives to amend the 2020 Rules to bring transparency
in the e-commerce platforms and further strengthen the regulatory regime to
curb the prevalent unfair trade practices. Therefore, draft of proposed amendments
to the rules was put for public comments in July 2021. Prohibition of fraudulent
flash sales and mis-selling, appointment of chief compliance officer/ grievance
redressal officer, etc., are inter alia the key amendments proposed to the Consumer
Protection (e-commerce) Rules, 2020.

14.9 ENFORCEMENT OF ORDERS OF FORUMS

After the completion of the proceedings, the successful party can apply for
enforcement of the order if the party against whom the order is passed, does not
comply. Every order shall be enforced by it in the same manner as if it were a
decree made by a Court in a suit before it. It means that unlike the previous Act
the 2019 Act gives the consumer forums the power to enforce their own orders.
Earlier the parties had to file application to district collector for execution. This
provision would be really useful, as under the previous law for non-compliance
of order the commission may impose punishment on the defaulting party in the
form of imprisonment from 1 month to 3 years or a fine from 25k to 1 lakh or
with both. For exercising this function, the commissions have been given the
power of judicial magistrate first class. An opportunity of being heard will be
given to the party before taking any action under the above provision. There is a
provision for imprisonment and fine for non-compliance of order of CCPA which
will be dealt with in the next section.

14.10 OFFENCES & PENALTIES

Unlike the Act of 1986, the Act of 2019 provides for news provisions relating to
offences. There is a punishment prescribed for non-compliance of order of CCPA,
for false and misleading advertisement, for manufacturing or storing, selling or
distributing or importing of adulterated products. An imprisonment for a term
upto six months or fine upto twenty lakh rupees, or both may be imposed for
non-compliance of order of CCPA. False or misleading advertisement,
imprisonment upto 2 years and fine upto 10 lakh rupees which, in case of any
subsequent offence, will increase to imprisonment upto 5 years and fine upto
fifty lakh rupees may be imposed on manufacturer or service provider. For the
first time in the history of consumer law, penalty is provided for manufacturing,
for sale or storing, selling or distributing or importing of spurious goods under
the Consumer Act. In case of non-compliance of orders of CCPA, the Court will
take up the action only on complaint filed by the CCPA. The penalty can be upto
6 months and with fine which may extend up to 1 lakh if such act does not result
in any injury to the consumer, upto one year and fine up to 3 lakh rupees it
caused injury not amounting to grievous hurt to the consumer; upto 7 years and
fine up to 37 lakh rupees it caused grievous hurt to the consumer; if such act
288
results in the death of a consumer, minimum imprisonment shall be 7 years, Consumer Protection Law
maximum imprisonment shall be for life and with fine which shall not be less
than 10 lakh rupees. The Act allows for compounding of these two offences at
any time before or after the proceedings has been initiated. For checks and
balances, a provision for punishment of the CCPA officers in case of vexatious
searches has also been included.

14.11 CONSUMER PROTECTION COUNCILS

The old provision relating to the establishment of Consumer Protection Councils
at Centre, State and District levels has been kept as it is under the Act of 2019.
The above bodies are mandated to review consumer related policies of the
government and suggest measures for further improvements for protecting and
promoting rights of the consumers. The Minister In charge of Consumer Affairs
in the Centre is the Chairman of the Central Consumer Protection Council and it
has other official and non-official members. The State Consumer Protection
Council is headed by Minister In-charge of Consumer Affairs in the State and
the District Consumer Protection Council is headed by the Collector of the District.
These Councils are advisory in nature and their object is to protect the rights of
the consumers enshrined under the Act.

14.12 MEDIATION
Another landmark feature of the Consumer Protection Act, 2019 is the provision
of mediation for resolution of consumer cases. Cases where there is existence of
elements of a settlement that may be acceptable to both the parties may be referred
to mediation. For this purpose, at every commission a mediation cell will be
established and trained mediators will be empanelled by the commissions.

Mediation is a process where parties to a dispute, voluntarily try and settle their
dispute, amicably. It is a consensual process where the party can exit anytime,
they want. The process of mediation is a closed process and is totally confidential
in nature. The mediator only plays the role of a facilitator and the parties are the
actual decision makers and they control the whole process unlike the courts. 

If unsatisfied with the process, the parties may withdraw anytime from the process
and prefer to move to court, unlike in the court system where you once started
cannot easily back out. Besides, in the process of mediation, as a mediator you
are more closely in conversation directly to the parties and thus in a better position
to understand their concerns and provide solution accordingly. Unlike the courts,
Mediation believes that the parties themselves have the capacity to solve their
problems.

14.13 SUMMARY
Consumer protection and empowerment attains prime importance since all human
beings are consumers of goods and services and even businessmen who partake
in selling of other goods and services are ultimately consumers of goods & services
produced by other sellers or service providers. Business and consumer protection
go hand in hand and consumer protection is as important for businessmen as for
others because of long-term interest of business in consumer satisfaction.
289
Business and Sustainability The concept of consumer protection is not new. We find reference of the law and
policies for consumer protection in Ancient Indian texts including Kautilya’s
Arthshastra. The modern consumer movement worldwide initiated when US
President, John F. Kennedy on 15th March 1952 referred to four consumer rights
in his famous speech in the US Congress. From the next year, 15th March was
celebrated as World Consumer Rights Day on the initiative of Consumer
International, an international consumer association.
Before the passing of the Consumer Protection Act, 1986, there were various
other existing legislations to protect consumer interests including Indian Contract
Act. The Consumer Protection Act, 1986, was enacted to provide for better
protection of the consumers’ interests and for making provision for establishment
of consumer protection councils and other authorities for the settlement of
consumer disputes, etc. This Act was subsequently replaced with the Consumer
Protection Act, 2019.
For adjudication of consumer disputes, there are consumer authorities established
at District, State, and Centre level. These authorities/ forums provide an alternative
remedy and have not taken away the jurisdiction of the civil courts. Complaint
containing the relevant facts and with supporting documents need to be filed
before the commission of competent jurisdiction in writing. There must be a
written complaint filed by the complainant alongwith relevant evidence like
receipts, etc. After filing the complaint, there is an admission hearing and if
admitted, a notice is directed to be issued to the opposite party.
The new consumer protection regime under 2019 Act covers all modes of
transactions offline, online through electronic means, teleshopping, direct selling
or multi-level marketing.
To regulate the E-commerce sector in India and protect consumers from unfair
trade practices in e-commerce, Consumer Protection (E-Commerce) Rules, 2020,
were passed which came into effect from 23 July 2020. These rules put a lot of
duties on e-commerce entities in the interest of consumers.

14.14 SELF ASSESSMENT QUESTIONS

1) What actions can be taken by the authorities in case contravention of e-
Commerce Rules?
2) What powers have been conferred on forums for enforcement of their orders?
3) Discuss the duties and liabilities that are prescribed by the Consumer
Protection (E-Commerce) Rules, 2020 for different e-commerce entities.
4) Explain the different penalties imposed by the Central Consumer Protection
Authority.
5) What is the process of mediation under the new Act? Is Mediation binding
on parties?

290