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:
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