LEGAL ENVIRONMENT
For describing and analyzing the legal environment of business in India, we present here briefly
an overview of some specific socio-economic legislation. We may list these legislations which
define the legal environment of business.
A. Company Laws
For smooth governance of the business, the company laws play a crucial role. These become the
focal laws which impact the commercial environment and subsequent decision making. These
important set of laws are governed by the Ministry of Corporate Affairs through the Companies
Act, 1956, 2013 and other allied acts, bills and rules. The underlying object is to safeguard the
interest of various investors, stakeholders and customers. Two primary bodies ensure its
execution namely the Serious Fraud Investigation Office (SFIO) and the Competition
Commission of India (CCI). Different acts which are constituted in this direction are “Companies
Act 2013, Limited Liability Partnership Act, 2008, Insolvency and Bankruptcy Code, 2016,
Competition Act, 2002, Partnership Act, 1932, Chartered Accountants Act, 1949, Cost and
Works Accountants Act, 1959, Company Secretaries Act, 1980, and Societies Registration Act,
1860” etc. It is regulated through National Company Law Tribunal (Tribunal or NCLT),
National Financial Reporting Authority (NFRA), and the Serious Fraud Investigation Office
(SFIO).
COMPANIES ACT 2013
Meant at improved corporate governance and increased accountability, this act aims at
improving the ‘ease of doing business’ in India. It brings forth conceptions like one–person
company, small company, dormant company and corporate social responsibility (CSR) etc. It
hosts noteworthy modifications in the ways of doing business, including the technologically
advanced ways such as improved governance (e-governance), e-management, timely and orderly
compliance, legal enforcement, self-disclosure and related norms, role of auditors, mergers and
acquisitions, class action suits and registered valuers.
a) The One Person Company: requires having minimum paid up capital of INR 1 Lac
without any legal obligation for holding Annual General meeting (AGM).
b) Small Company (other than a public company) with a paid-up share capital of maximum
fifty lakh rupees or upto five crore rupees (if prescribed) or its last reported profits is not
more than two crore rupees and turnover of maximum twenty crore rupees (if prescribed).
c) Minimum members for private company –maximum member heads can be 200 now from
the earlier 50.
d) All official communications, should bear the full name of contact person, address of
company’s registered office, Corporate Identity Number (CIN No. which is a 21-digit
number allotted by Government), Telephone number, fax number, Email id, contact
website (if any).
e) All companies (public/private) under the Companies Act 2013 to comply with the
Registrar of Companies (RoC) for beginning their business operations. They require
submitting the Performa with the director’s declaration mentioning the subscribers/
promoters, with the number of paid-up shares or agreed to be taken by them. The
company also requires verifying its registered office with the RoC.
f) The new Companies Act 2013 mandates closing the financial year by the 31stMarch. Also
the eligible age for Managing Director or whole time Director is decreased from 25 to 21
years.
g) The Indian company requires constituting a ‘CSR committee’ and 2% of the average net
profits of the last three financial years be compulsorily be spent on the CSR activities
subjected to fulfilment of certain conditions like the minimum net worth of INR 500 cr.
Or minimum annual turnover of INR 1000 cr. or net profit of Rs. 5 crore or more.
h) Financial Statements are now defined under the act as comprising of all companies
(except one person company, small company and dormant company) are now
mandatorily required to maintain the following, which may not include the cash flow
statement), a balance sheet as at the end of the financial year, a profit and loss account /
an income and expenditure account for the financial year, as the case may be Cash flow
statement for the financial year, a statement of changes in equity (if applicable) etc.
B. Capital Market
The Securities Contracts (Regulation Act, 1956)
SCR Act 1956 is the core law which governs the activities of the Indian stock exchanges.
Besides safeguarding the investors, it aims to curb unsolicited transactions/dealings of
securities and formulate a transparent mechanism. This act recognizes various stock
exchanges’ memberships and the rules governing thereof; lays down processes for trading
activities, including that of security contracts and listing of the securities at the bourses.
By definition, “A stock exchange has been defined as a body of individuals, whether
incorporated or not, constituted for the purpose of assisting, regulating or controlling the
business of buying, selling, or dealing in securities”. Our country had a separate mechanism
to operate the stock exchanges across the nation but now we have nine recognised stock
exchanges namely, the Bombay Stock Exchange (BSE), Calcutta Stock Exchange (CSE),
India International Exchange (India INX), Indian Commodity Exchange Limited,
Metropolitan Stock Exchange of India Ltd., Multi Commodity Exchange of India (MCX),
National Commodity & Derivatives Exchange Ltd., National Stock Exchange Ltd. (NSE) and
NSE IFSC Ltd.
Securities and Exchange Board of India Act, 1992
Enacted on 4thApril, 1992, the SEBI Act aims developing the securities market in transparent
and disciplined manner for providing investor protection. It attains for providing fairness in
dealings, high governance and institutionalization of standard business practices aimed at
fostering efficiencies by an integrated system offering the services at genuine costs thereby
building trust in investors and issuers, both; flexible to continuously match the emerging
requirements.
SEBI is a statutory regulatory body established under this act. The SEBI board comprises of
the chairman, two members of finance and law background nominated by the Central
Government, one member from the RBI, and two more members appointed by the
Government of India. They ensure the investors security in various ways. Cumulatively, the
SEBI pursues the following functions:
a. Manage the stock exchanges’ and security markets’ business operations.
b. Registering and supervising various capital market entities like stock brokers, subbrokers, share transfer agents, bankers to public issues, trustee of trust deeds,
registrars to public issues, merchant bankers, underwriters, portfolio managers,
investment advisers and similar intermediaries or self-regulatory organisations having
roles in the capital markets. This also includes recording and managing the combined
investment schemes like the mutual funds.
c. Curbing prohibitive, fraudulent, unfair and unethical trade practices by promoting
investors’ education, training and awareness initiatives of intermediaries and
customers.
d. Prohibiting ‘insider trading’. It also regulates the acquisition of shares, mergers and
takeovers.
e. Periodic audits of the bourses and related intermediaries, seeking information,
inspections, enquiry matters etc. The board may levy underlying fee or similar charge
for it. Besides, the board carries research for the above purposes to coordinate and
regulate the control over the activities performed.
Over-the-Counter Exchange of India (OTCEI)
OTCEI was established in 1990 (started functioning in 1992) as an electronic stock exchange
without a proper trading floor. The Exchange was established with an objective of supporting
enterprising promoters for securing cost effective project finance besides offering its investors
with transparent transaction systems. It went further in the capital markets by providing
technologically enabled mechanisms like screen-based nationwide trading, market making
and scrip-less trading. The OTCEI performs the following functions:
i) Extend services to small companies for generating cost effective funds from the capital
market;
ii) Provide easy access for the small investors to the capital market. Also, facilitating
investors’ by boosting their confidence;
iii) Smooth, transparent investor grievance redressal mechanism even to the far geographical
areas; and providing much required liquidity.
C. Foreign Exchange Management Act (FEMA)
Under the guidance from the central government which articulates the foreign trade policy, the
central bank i.e. the Reserve bank of India carries the responsibility of implementing it by
deploying the foreign exchange control act, known as “Foreign Exchange Regulation Act 1947”.
This act stood updated in the year 1974 by FERA. Thereafter in 1991, the globalization saw the
requirement of newer policy measures and thus FERA made way for the
Foreign Exchange
Management Act (FEMA), 1999.
It carries significance in the view point of foreign trade and foreign exchange. It is applicable on any business entity involving an Indian resident. Significant
features of FEMA are enlisted below:
I. Limitations concerning assets owned by the non-residents and transactions pertaining to
bringing in and taking out of the currency and precious metals stood abolished.
Limitation pertaining to the acquisitions of immovable property and its holding etc. in
India also has been done away with.
II. Hospitality to non-residents on Indian visits stood allowed. On similar lines, the Indian
residents visiting outside India for related activities stood allowed too.
III. Lowered restrictions for holding the immovable property outside India.
IV. Cases pertaining to seeking funds, deposits or loans in India from the Indian residents
stand simplified. Also, foreign nationals need not seek approval for taking up
employment in India; appointment of people as agents, advisors on technical/
management profiles relaxed. The new act encourages setting up of branch offices/
liaison offices encouraged and foreign travel permissions have been relaxed.
This act aims at consolidating and amending the legal forex related impediments to promote
international business and external trade besides regulating the Indian forex market.
D. The Sick Industrial Companies (Special Provisions) Act 1985, (SICA, 1985)
The rapid industrialization clubbed with the multinational corporations influencing the business
environments in India, there was a growing need for institutionalizing an act to govern the
menace of growing industrial sickness. On one hand the government puts efforts to promote the
industrial setups and on the contrary when these setups are graded ‘sick’ it causes multiple damage in terms of employment, production loss, locking of funds etc. So reviving these
companies to salvage and monetise the assets becomes important. Thus, the Sick Industrial
Companies (Special Provisions) Act, 1985 (SICA) was legislated for appropriate recognition of
sick (and potentially sick) companies. In the same direction the SICA proposed the constitution
of the Board for Industrial and Financial Reconstruction (BIFR) for identifying the industrial
sickness reason, its extent and putting forward remedial measures to limit the sickness. Besides it
aims to contain this sickness and take measures to revive these industrial units. From 1st
December’ 2016, the SICA stood repealed by the Sick Industrial Companies (Special Provisions)
Repeal Act, 2003 (“Repeal Act”), thereby diluting the BIFR and its constituent/ related bodies.
SICA and its Repeal
Broadly, the functioning of BIFR and AAIFR (Appellate Authority for Industrial and Financial
Reconstruction) was not only much time consuming but stood uncertain too. It was therefore
decided to solve the ambiguities and single entity be formed to handle and dispose all such
company related matters.
Thus, the National Company Law Tribunal (NCLT) and the National Company Law Appellate
Tribunal (NCLAT) were formed under the guidelines of the Companies Act, 2013 (Companies
Act). The NCLT works on the company management issues and it got further strengthened by
the Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code) thus obsoleting the BIFR and
AAIFR besides the pending proceedings only.
SICA has the following objectives:
i. identification and timely perusal of sick and potentially sick business entities;
ii. initiation of the ‘Redressal mechanism’ for fast resolvance, either preventive or remedial
process by the expert panel;
iii. accelerate the desired corrective actions;
iv. apprehend, review and coordinate for future scope.
With the increasing complexities in the politico-legal business environments, SICA became
obsolete in combating corporate sickness.
THE INSOLVENCY AND BANKRUPTCY BOARD OF INDIA
The board, established on 1st October, 2016 under the Insolvency and Bankruptcy Code, 2016
(Code), is one of the important pillars in the corporate business system which relates to the
various laws pertaining to re-organisation/ restructuring, insolvency of the company and resolution pertaining to corporate board and stakeholders, partnership firms on scheduled
timelines. It aims at asset maximization (both in quality and quantity), encouraging
entrepreneurship, leveraging assets, etc.
Being a one of its kind entity, it strives to aim at business governance by enhancing its processes.
It oversees the Insolvency Professionals, Insolvency Professional Agencies, Insolvency
Professional Entities and Information Utilities by regularly administers the processes pertaining
to corporate insolvency resolution, corporate liquidation, individual insolvency resolution and
individual bankruptcy. It has recently been tasked to promote and manage corporate
insolvencies.
The function of the Chapter XIX (sections 253 to 269) in Companies Act, 2013, particularly
pertains to the revitalization of the sick units. In the initiatives towards ‘Ease of Doing Business’
27 Sections have been amended in the Companies (Amendment) Act, 2017including redefining
the Associate Company by bringing in the Joint venture perspective. The voting powers of
subsidiary company was also changed. Disclosures by the companies at the time of prospectus to
SEBI were added to. Other modifications involved loans, audits and qualifications and powers of
the directors.
Insolvency and Bankruptcy Code, 2016
The competitive business environments, particularly resulting from the evolving technologies
and increasing competition have served to be an enabler for new businesses but on the other
hand, the weaker ones increasingly demonstrated tendencies towards sickness thus seeking
amendments in repealing the SICA Repeal Act. This was executed by substituting the section 4,
sub-clause (b), the following sub-clause shall be substituted, namely—
“(b) On such date as may be notified by the Central Government in this behalf, any appeal
preferred to the Appellate Authority or any reference made or inquiry pending to or before the
Board or any proceeding of whatever nature pending before the Appellate Authority or the
Board under the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) shall
stand abated:
Provided that a company in respect of which such appeal or reference or inquiry stands abated
under this clause may make reference to the National Company Law Tribunal under the
Insolvency and Bankruptcy Code, 2016 within one hundred and eighty days from the
commencement of the Insolvency and Bankruptcy Code, 2016 in accordance with the provisions
of the Insolvency and Bankruptcy Code, 2016:
Provided further that no fees shall be payable for making such reference under Insolvency and
Bankruptcy Code, 2016 by a company whose appeal or reference or inquiry stands abated under
this clause.
The provisions of the Code dealing with amendment to the SICA Repeal Act came into force
from November 1, 2016; however, the Ministry has appointed December 1, 2016 as a date on
which the provisions of the SICA Repeal Act shall come into force. A question may arise as to
which date shall be considered i.e. November 1, 2016 or December 1, 2016. On careful reading,
one may note that clause (b) of section 4 states as follows:
The Central Government, vide notification dated November 25, 2016 has notified the provisions
of the SICA Repeal Act. Therefore, any reference made to BIFR, any inquiry pending before
BIFR, any appeal preferred to AAIFR, or any proceedings pending before BIFR/AAIFR shall
automatically stand abated w.e.f. December 1, 2016.”
‘Sick Company’
The sick company thus is defined as “Where on a demand by the secured creditors of a company
representing fifty per cent or more of its outstanding amount of debt, the company has failed to
pay the debt within a period of thirty days of the service of the notice of demand or to secure or
compound it to the reasonable satisfaction of the creditors, any secured creditor may file an
application to the Tribunal in the prescribed manner enclosing relevant evidence for such default,
non-repayment or failure to offer security or compound it, for a determination that the company
be declared as a sick company”.
E. Monopolies and Restrictive Trade Practices (MRTP) Act 1969 (MRTP ACT)
The MRTP act has its roots arising out of the Directive Principles of State Policy embodied in
the Constitution of India. Article 39(b) and (c) which says to ensure:
i) “that the ownership and control and material resources of the community are so
distributed as best to sub serve the common good, and
ii) that the operation of the economic system does not result in the concentration of wealth
and means of production to the common detriment”.
Monopolies generally benefit a few but harm many as they tend restricting the competition
mainly controlling the prices of commodities in the market thereby resulting manipulation by a
few.
The MRTP (Amendment) Act, 1991, has omitted provisions regarding the Central Government’s
permission for substantial expansion, establishment of a new undertakings, mergers, take-over, etc. Establishments, howsoever big or small, are now free to expand, or establish new
undertakings, or effect mergers.
Monopolistic Trade Practices
“Any trade practice which leads or is likely to lead to any of the following effects is regarded as
a monopolistic trade practice”.
i) Unreasonably high price;
ii) Unreasonably high cost of the production of goods or the provision of services;
iii) Unreasonably high profits;
iv) Prevention or reduction of competition;
v) Limited technical development;
vi) Limited capital investment; and
vii) Deterioration in the quality of goods”
Restrictive Trade Practices
The term restrictive trade practice is defined t mean a trade practice which has or may have the
effect of preventing, distorting or restricting competition in any manner and in particular if it:
i. tends to obstruct the follow of capital or resources into the stream of production; or
ii. tends to bring about manipulation of prices or conditions of delivery or to affect the flow
of supplies in the market relating to goods or services in such manner as to impose on the
consumers unjustified costs or restrictions.
Every agreement falling within the one or more of the following categories is deemed to be an
agreement relating to restrictive trade practices and is subject to registration under the Act:
• Refusal to deal and/ or Boycott
• Tie-up sales and Exclusive dealing and/or Discriminatory dealings or Territorial
restriction/restrictions or withholding of output or supply
• Concert in prices and terms and conditions of purchase or sale
• Resale price maintenance and controlling manufacturing process
• Agreement having the effect of eliminating competition/competitors etc.
Unfair Trade Practices
They have been defined as per the Act “to mean a trade practice which for the purpose of
promoting sales, use or supply of any goods or for the provision of any services, adopts any unfair method or deceptive practice, including: i) bargain sale, ii) bait and switch selling, iii)
offering gift or prizes in promotional contests, and not providing them etc”.
F. Consumer Protection Act, 1986
Our country has been a large market and has attracted traders from the business and commercial
perspective. Owing to the large geographical spread and low level of education amongst the
people, the fraudulent practices were witnessed and in order to curb them many legislations were
enforced like the Sale of Goods Act, 1930; Essential Commodities Act, 1955; the Prevention of
Food Adulteration Act, 1954; Prevention of Black Marketing and Maintenance of Supplies of
Essential Commodities Act, 1980; Standards of Weights and Measures Act, 1956; Agricultural
Products Grading and Marketing Act (AGMARK),1937; Indian Standards Institution
Certification Act, 1952; MRTP Act, 1969, etc.
MRTP Act though was able to put a check on the rapidly increasing consumer fraudulent
practices the need for an inclusive consumer protection legislation was much required, thus
making way for the Consumer Protection Act, 1986 for providing fast and cheap redressal to
consumer grievances.
The Act recognizes the following six rights of consumers namely:
1. “Right to safety, i.e., the right to be protected against the marketing of goods and services
which are hazardous to life and property.
2. Right to be informed, i.e., to be informed about the quality, quantity, potency, purity,
standard and price of goods or services, as the case may be, so as to protect the consumer
against unfair trade practices.
2 Right to choose, i.e., the right of access to a verity of goods and services at competitive
prices. In case of monopolies, say railways, telephones, etc., It means right to be assured
of satisfactory quality and service at a fair price.
3 Right to be heart, i.e., the consumers; interests will receive due consideration at
appropriate forums. It also includes the right to be represented in various forums formed
to consider consumers’ welfare.
4 Right to seek redressal, i.e., the right to seek redressal giant unfair practices or restrictive
trade practices or unscrupulous exploitation of consumers.
5 Right to consume education, i.e., the right to acquire the knowledge and skill to be an
informed consumer.”
G. Competition Commission of India
The informal activity of regulating the market rivalry by business houses is traditional however it
surfaced in the year 2002 when the government recognised the need to regulate this market
competition and thus the Monopolies and Restrictive Trade Practices Act of 1969 was repealed
thereby making way for the Competition Act of 2002. This act was subsequently amended in
2007 and 2009. The act proposes for a legitimate framework be articulated and practiced in the
competition policies (thereby curbing the anti-competitive practices with punitive action). CCI
was formed under this Act which makes way for providing an environmental culture imbibed
with free, fair and healthy market competition, clubbed with trade freedom and customer and
societal orientation. This forms the three structural pillars to deter the unhealthy competition
namely, anti-competitive agreements, their combination meanings and abuse of dominance. The
commission stands empowered to levy penalty on the offenders amounting “up to 10 per cent of
the average turnover of the company” during the last three financial years upon all offending
enterprises and/or alleged individuals. Further, the entities found involved in cartelization by the
Commission can be penalized for the higher amount of ‘up to three times of the profit’ for the
found period, or ten per cent of the turnover for the period in the agreement.
H. The Environment Protection Act, 1986
The Indian Constitution mentions Indian citizens compassionately protecting and improving the
natural environment including forests, lakes, rivers and wild life. In this direction, the
Environment Protection Act, 1986, envisaged with two complementing acts namely the Water
(Prevention and Control of Pollution) Act,1974, and Air (Prevention and Control of Pollution)
Act, 1981, have an objective to lay down a framework for environmental protection and its
subsequent preservation. The components of the natural environment comprise of water, air and
land besides their interactive relationships with humans and other living elements and the
ecosystem. This act enables the Central Government with certain powers to protect and improve
the environmental quality by curbing and abating the environmental pollution. This involves
constituting and delegate authoritative office to achieve the abovementioned objectives.
I. A Few Other Legislations
We have understood by now that the legally structured environment stands robust enough and we
have gone through certain laws and enactments influencing the said environment. Besides them,
there are certain more legislations which impact the Indian business environment in various other
conditional circumstances:
