LAB – STUDY NOTE - Dr. I.

Sridhar

Corporate Law

1. Company – Meaning & Features

The Companies Act, 2013 does not define a company in terms of its features. It merely states
that a company means a company formed and registered under this Act or under any previous
company law. A company to which Companies Act applies comes into existence only when it is
registered under the Act. On registration it acquires a legal personality of its own, separate and
distinct from its members / shareholders. A registered company is therefore created by law and
law alone can regulate, modify or dissolve it.

The following are some of the features of a company organization:

- Incorporated Association
- Legal entity distinct from its members / shareholders
- Artificial Person
- Limited Liability
- Separate Property
- Transferability of Shares
- Perpetual Succession / Continuous existence
- Common Seal.
2. Lifting of Corporate Veil
No doubt a company is an entity distinct from the members but it is an artificial person. The
human beings who are engaged to manage its affairs may commit certain illegal acts or frauds in
its name. It may therefore become necessary to identify these individuals and make them
personally liable for their deeds. In other words, the veil of corporate personality may be lifted
or pierced. The circumstances under which the corporate veil may be lifted are :

- Reduction of membership below the statutory minimum

- Mis representation in Prospectus
- Failure to return the application money
- Where the business is found have been carried for fraudulent purpose
- For ultra vires acts

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- For violation of provisions of statutes like Income Tax Act, etc.
- For the determination of the enemy character of the company.
- Where the company acts as an agent for its shareholders.
- Where the company is used to avoid welfare legislation
- Where the company is used for some illegal or improper purpose.
3. Kinds of Companies

Private Company

A Private company means a company which has a minimum paid up capital of Rs. 1 Lakh or
such sum as may be prescribed and which by its articles:

(i). Restricts the right to transfer its shares

(ii). Prohibits invitations to the public to subscribe for any shares, debentures of the company.

(iii). Limits the total the number of members to 200

(iv). Prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives

Public Company

A public company means a company which

(i). is not a private company

(ii). has a minimum paidup capital of Rs. 5 lakhs or such higher paid up capital as may be
prescribed. Further the minimum number of members to form a public company is seven
members.

Government Company

A government company is one in which either the central government or the state government or
both hold not less than 51%of its paid up capital. A government company may be incorporated
as a private company or a public company. A government company is governed by the
provisions of the Companies Act unless exempted by the Central Government.

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Foreign Company

A foreign company means a company incorporated outside India but having a place of business
in India. A foreign company is required to furnish to the Registrar of Companies documents
specified in Sec – 592 of the Companies Act.

Holding and Subsidiary Companies

Holding & Subsidiary companies are relative terms. A company shall be holding company of
another where (a) it controls the composition of its board of directors; or (b) holds more than half
in nominal value of its equity share capital (c) it is subsidiary of its subsidiary.

Section – 25 Company

It is a company which is formed not for making profits but for promoting commerce, art, science,
religion, charity or any other useful social purpose. The company prohibits payment of any
dividend to its members but intends to apply its profits or their income in the promotion of its
objects

Producer Company

The companies amendment act, 2002 has introduced he concept of producer company. This is
provision not only provides an opportunity to the co-operative sector to corporatise itself but also
opens up new avenues for them. The conversion to producer companies will enable them to
invite greater investment and modernize themselves. Accordingly, it specified that a producer
shall mean any person engaged in any activity connected with or relatable to any primary
produce which encompasses produce of farmers, arising from agriculture, animal husbandly,
horticulture, handloom, handicraft etc.

One Person Company

The introduction of On Person Company in the legal system is a move that would encourage
corporatization of micro businesses and entrepreneurship.

OPC will be registered as a private company with one member and one director.

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4. Promotion of Company

Promotion denotes preliminary steps taken for the purpose of registration and flotation of the
company. The persons who undertake these steps are called promoters. The status of a promoter
is generally terminated when the boards of directors have been formed and they start governing
the company.

Position of promoters: The promoters occupy an important position and have wide powers
relating to the formation of a company. It is however, interesting to note that so far as the legal
position is concerned, he is neither an agent nor a trustee of the proposed company. He is not
the agent because there is no company yet in existence and he is not a trustee because there is no
trust in existence. But it does not mean that the promoter does not have any legal relationship
with the company. The correct way to describe his legal position is that he stands in a fiduciary
position towards the company about to be formed.

Duties of promoters: The Companies Act contains no provisions regarding the duties of
promoters; it merely imposes liability on promoters for untrue statements in prospectus. The
Courts have charged them with two fiduciary duties, namely (a). not to make secret profit out of
promotion and (b). to disclose to the company any interest which he had in a transaction entered
into with the company.

5. Procedure for Registration / Incorporation of a Company

Type of Company The first thing the promoters must decide is the type of company proposed
to be floated – Public company or – Private company

Application for availability of name A company cannot be registered by a name, which in the
opinion of the Central Government is undesirable. The promoters in this regard have to make an
application to ROC of the State in which the registered office is proposed to be situated. Three
names in the order of priority should be submitted to afford flexibility to the Registrar.

Preparation of Memorandum and Articles of Association The memorandum of association

is the constitution of a company. It is a document which defines the area within which the

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company can operate. Like wise another important document, namely , the articles of
association containing the rules and regulations relating to the internal management of the
company has also to be prepared.

Statutory Declaration Statutory declaration in Form – 1be filed with the ROC along with
Memorandum and Articles. It can be made by Advocate, Chartered Accountant or Company
Secretary in practice that the company has complied with all the requirements of Companies Act,
2013 in respect of registration and matters incidental thereto.

Filing of documents for registration and payment of fees.

6. Certificate of Incorporation

The company comes into existence only after receiving the Certificate of Incorporation. On
scrutiny of the documents filed and being satisfied that they are in order, the Registrar will enter
the name of the company in the Register of Companies and shall certify under his hand that the
company is incorporated. The certificate so issued by the Registrar is called the Certificate of
Incorporation. Certificate of incorporation is shall be conclusive evidence that all the
requirements of the Act have been complied with respect to registration and matter precedent and
incidental thereto. The Certificate prevents anyone from alleging that the company does not
exist.

7. Allotment of Corporate Identity Number ( CIN)

8. Memorandum of Association

Meaning & its Importance The memorandum of association of a company contains the
fundamental conditions upon which alone the company has been incorporated. It contains the
objects for which the company is formed and therefore identifies the possible scope of its
operations beyond which its actions cannot go. It enables shareholders, creditors and all those
who deal with the company to know what its powers are and what is the range of its activities.

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An intending shareholder can find out the purposes for which his money is going to be used by
the company and what risk he is taking in

making the investment. Likewise, anyone dealing with the company will know whether the
transaction he intends to make with the company is within the objects of the company.

Contents

Name clause A company being a distinct legal entity must have a name to establish its separate
identity. The promoters are free to choose any suitable name for the company. However, in the
opinion of the central govt. the name chosen is not undesirable or should not nearly resemble the
name of an existence company.

Registered Office clause This clause states the name of the State in which the registered office
of the company is situated. Every company must have a registered office which establishes its
domicile and is also the address at which its statutory books are kept.

Objects clause The objects clause defines the objects of the company and indicates the sphere
of its activities. A company cannot do anything beyond or outside its objects and any act done
beyond that will be ultra vires and void and cannot be ratified even by the assent of the whole
body of shareholders. A company is required to divide its objects clause into 2 parts:

- main objects of the company to be pursued by the company on its incorporation and objects
incidental or ancillary to the attainment of the main objects
- other objects of the company not included in the above clause
Liability clause This clause states the nature of liability of the members. In the case of a
company with limited liability, it must state that liability of members is limited by shares or by
guarantee.

Capital clause This clause states the amount of share capital with which the company is
registered and the mode of its division, ie., the number of shares into which the capital is divided
and the amount of each share.

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Subscription clause The subscribers to the memorandum must sign giving details of name,
addresses & occupations. It should be noted that the memorandum must be signed by each
subscriber in the presence of at least one witness who must attest the signature.

Alteration of Memorandum

- The name of the company may be changed at any time by passing a special resolution at a
general meeting of the company and with the written approval of the Central Government.
- Change of registered office from one premise to another in the same city, town requires
passing of resolution by the Board of directors.
- Change of registered office from one city to another within the same State, requires passing
of special resolution at a general meeting of the shareholders.
- Change of registered office from one State to another, requires passing of special resolution
and confirmation of Company Law Board (now Central Government).
- Company can change its objects clause by passing special resolution.
- Capital clause can be altered by passing an ordinary resolution at a general meeting.

9. Articles of Association

Meaning The articles of association of a company are its bye-laws or rules and regulations that
govern the management of its internal affairs and the conduct of its business. The articles
regulate the internal management of the company. They also establish contract between the
company and its members and between members inter se.

Contents Articles usually contain provisions relating to the following matters:

- Share capital
- Lien on shares
- Calls on shares
- Transfer of shares
- Transmission of shares
- Alteration of capital
- General meetings

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- Directors – appointment, remuneration, meetings
- Dividends & reserves
- Accounts & Audit
- Winding up
Alteration of Articles of Association: Subject to provisions of the Companies Act,
Memorandum , Articles of Association may be altered by passing a special resolution at a
general meeting

10. Meaning of Prospectus

Prospectus means any document described or issued as prospectus and includes any notice,
circular, advertisement or other document inviting deposits from public or inviting offers
from the public for the subscription or purchase of any shares or debentures.

Thus, a prospectus is not merely an advertisement; it may circular or notice. A document

shall be called a prospectus if it satisfies two things:

- It invites subscription to shares or debentures or invites deposits

- The aforesaid invitation is made to public
Contents of Prospectus

Brief particulars are given below:

- General information
- Capital structure of the company
- Terms of the present issue
- Particulars of the issue
- Company Management & Project
Abridged form of prospectus

No company shall issue any form of application for shares / debentures to the public unless the
same is accompanied by a memorandum containing salient features of prospectus as may be
prescribed. The following are the SEBI guidelines with respect to abridged prospectus:

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 - Every application distributed by the issuer company is accompanied by a copy of
Abridged prospectus.
- The application form may be stapled to form part of the Abridged prospectus or it may be
perforated part of the Abridged prospectus.
- The Abridged prospectus shall not contain matters which are extraneous to the contents
of the prospectus.
- The Abridged prospectus shall be printed at leas in point 7 size with proper spacing
Deemed Prospectus

The provisions relating to prospectus are restricted to cases where the invitation is made by or on
behalf of the company for subscription of its shares / debentures. As such it was possible for the
company to avoid the statutory provisions relating to prospectus by allotting shares or debentures
to the public through the medium of Issue House.

The shares or debentures will be allotted to these Issue House which will in turn invite
subscription from the public through their own offer document. Thus the company could
indirectly raise subscription from the members of ht public without issuing an offer document or
prospectus.

Shelf Prospectus

Shelf prospectus means a prospectus issued by any financial institution or bank for one or more
issues of securities. Any public financial institution, or public sector banks or scheduled banks
whose main object is financing are entitled to file a shelf prospectus with the concerned ROC
and then they are not required to file prospectus afresh at every stage of offer of securities within
the validity period of one year from the date of opening of first issue of securities. The facility
of shelf prospectus will save companies expenditure and time in issuing a new prospectus every
time they wish to issue securities to the public within a period of one year.

Information Memorandum

The circulation of information memorandum is an international practice and refers to collecting

orders from investment bankers and large investors based on an indicative price range. This is

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essentially a pre-issue exercise to facilitate the issuers to get a better idea of the demand and final
price of an IPO.

Information memorandum means a process undertaken prior to the filing of a prospectus by

which a demand for the securities proposed to be issued by a company is elicited and price and
terms of issue for such securities is assessed, by means of notice, circular, advertisement. In
other words, a public company making an issue of securities may circulate information
memorandum to the public prior to filing of a prospectus.

Red-Herring Prospectus

A red-herring prospectus is a prospectus which does not have complete particulars on the price
of securities offered and quantum of securities offered. The information memorandum and red-
herring prospectus shall carry same obligation as are applicable in the case of a prospectus. The
company is required to file a prospectus prior to the opening of the subscription list and the offer
as red-herring prospectus at least 3 days before opening of the offer.

Statement in lieu of prospectus

A public company having a share capital is required to file with the ROC a statement in lie of
prospectus in the following cases:

- where it does not issue prospectus.

- where it issues a prospectus but has not proceeded to allot any of the shares offered to the
public for subscription (because the issues has been a failure and the minimum subscription has
not been received)

Mis-Statement in a Prospectus

A statement included in prospectus shall be deemed to be untrue, if the statement is misleading

in the form and context in which it is included; and where the omission from a prospectus of any
matter is calculated to mislead, the prospectus shall be deemed in respect of such omission to be
a prospectus in which an untrue statement is included.

Liability for Mis-statement in a prospectus

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Any person relying on the faith of a prospectus containing untrue statement or mis-statement
may

- rescind the contract to take the shares

- claim damages
Criminal liability: Where a prospectus contains an untrue statement, every person authorizing
such issue shall be punishable with imprisonment and fine or both.

11. Kinds of Shares

Companies Act, provides that the new issues of share capital of a company limited by shares
shall be of two kinds only, namely,

(i). equity share capital –

- with voting rights

- with differential rights as to dividend, voting or otherwise

(ii). preference share capital

With respect to issues of equity share with differential voting rights, the Dept. of Company
Affairs, provides rules for the issue, which are:

- Shares with differential voting rights shall be allowed to the extent of 25% of the total
issue share capital;
- Issues of such shares shall be approved by the shareholders resolution in a general
meeting. In the case of a listed company, shareholder’s approval may be obtained
through a postal ballot.
- A company defaulting in filing annual returns during immediately preceding three
financial years or has failed to repay its deposits or interest thereon on due date or redeem
debentures on due date or pay dividend shall not be eligible to issues shares with
differential rights.

12. Raising of Capital

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Private Placement of shares A public company can raise its capital by placing the shares
privately and without inviting the public for subscription of shares or debentures. In this kind of
arrangement, an underwriter or a broker finds persons, normally his clients who wish to buy the
shares. Since no public offer is made for shares, there is no need to issue any prospectus.
However, the company is required to file with the Registrar a statement in lieu of prospectus at
least 3 days before making allotment of any shares or debentures.

By an Offer for Sale Under this arrangement, the company allots or agrees to allot shares or
debentures at a price to a financial institution or an Issue – House for sale to the public. The
Issue house publishes a document called an offer for sale, with an application form attached,
offering to the public shares or debentures for sale at a price higher than what is paid by it or at
par. This document is deemed to be a prospectus.

By inviting public through Prospectus This is the most common method by which a company
seeks to raise capital form the public. The company invites offers from the members of the
public to subscribe for the shares or debentures through the prospectus.

Issue of shares to existing shareholders Further capital is also raised by issue of rights shares
to the existing shareholders. In this case, the shares are allotted to the existing equity
shareholders in proportion to their original shareholding.

13. Book Building

Concept Book building is an international practice which refers to collecting orders from
investment bankers and large investors based on an indicative price range. Such a pre issue
exercise often allows the issuer to get a better idea of the demand and the final offer price of the
IPO. The price of the instrument is weighted average at which the majority of investors are
willing to buy the instrument. The basic philosophy of book building is based on the fact that the
price of any scrip mainly depends upon the perception of the investors about the corporate. This
exercise is normally carried out by the issuers with the help of intermediary called as book
runner.
Process:

- Draft prospectus containing all information except the price shall be filed with SEBI.

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 - One of the lead merchant banker shall be nominated as book runner and his name
mentioned in the prospectus.

- The draft prospectus indicating the price band is circulated by the book runner to the
institutional buyers. The book runner shall keep a record of the same.

- The book runner and the issuer company shall determine the price at which the securities
shall be offered to the public. The issue price for the placement portion and offer to the
public shall be the same.

- Within 2 days of determination of price the prospectus shall be filed with ROC.

Benefits
-- Book building helps in evaluating the intrinsic worth of the instrument being offered and
the company’s credibility in the eyes of the public. The entire exercise is done on wholesale
basis.

-- Price of the instrument is determined in a more realistic way on the commitments made by
the prospective investors.

-- As the issue is pre-sold there would be no uncertainities relating to the issue.

-- Book building inspires investors confidence.

-- Optimal demand based pricing is possible.

-- Efficient capital raising with improved issue procedures, leading to a reduction in issue
costs, paper work and lead time.

14. Green Shoe Option

A Green Shoe Option as an integral part of Book Building process, aims to stablise the market
price of securities, close to IPO price, in the week following listing.

Simply put GSO, is a public disclosed over allotment option that an issuer grants to the
underwriters in the public offering. It allows the underwriter to purchase additional securities
from the issuer at the original offer price. The result is that the issuer is happy with the

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additional IPO proceeds, while investors are happy with the trade up in IPO price. On the flip
side, if the IPO does not perform in the days post listing, the underwriter purchases excess supply
in the market and there by helping stock in stabilising the price. The main beneficiaries are the
investors who see better capital preservation.

15. Minimum Subscription

A public company cannot make any allotment of shares unless, the amount stated in the
prospectus as the minimum amount has been subscribed and the sum payable on application for
such amount has been paid to and received by the company. As per SEBI guidelines, company
making any public issue of shares, debentures must receive a minimum of 90%subscription
against the entire issue within 60 days from closing of subscription list including underwriters
devolvement.

16. Underwriting

Underwriting is an agreement between the company and an outside party called as underwriters, that
in the event of company unable to get minimum subscription to the public issue, the underwriters shall
subscribe to the issue. Therefore underwriting is in the nature of an insurance against the possibility of
inadequate subscription.
As per SEBI guidelines, underwriting is optional and the lead merchant banker shall satisfy themselves
about the ability of the underwriters to discharge their underwriting obligations and in respect of
every underwritten issue, the lead merchant banker shall undertake a minimum obligation of 5% of the
total underwriting commitment or Rs. 25 lakhs whichever is less.
The maximum commission payable to the underwriters shall not exceed 5% in the case of shares and
2.5% in the case of debentures and that such commission shall be payable on the issued capital of the
company.

17. Buy Back of Shares

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 Companies Act provides that a company limited by shares cannot buy its own shares. This restriction
is applicable to all companies having share capital, whether public or private. Companies Amendment
Act, 1999 , allows companies to purchase their own shares. subject to certain conditions.
- Company can buy back its shares out of free reserves, securities premium account or out of proceeds
of any shares. However buyback is not allowed out of proceeds of any earlier issue of the same
kind.
- Buy back should be authorized by the company’s articles
- Special resolution should be passed for buy back of shares.
- Board resolution can also be passed for buy back of shares provided the buy back does not exceed
10% of the total paid up capital and free reserves.
- Buy back should not exceed 25% of paid up capital and free reserves of the company.
- The ratio of debt owed by the company is not more than twice the capital and its free reserves after
buy back.
- Buy back shall be completed within 12 months from the date of passing the special resolution /
board resolution.
- After buy back is completed the company shall physically destroy the securities so bought back
- Company shall maintain a register at its registered office giving details of buy back of shares.
- Details of buy back of shares shall be filed with SEBI and ROC.

18. Rights Shares

When the directors feel the need to raise additional capital for expansion, diversification or
modernization, they may issue additional shares. The Act imposes certain conditions for the
issue of further shares. Such offer should first be made to the existing members of the company.
They are known as rights shares.

Where at any time after the expiration of 2 years from the date of incorporation of the company
or after one year from the date of the first allotment of shares, whichever is earlier, company
going in for a further issue should first offer shares to the existing shareholders in proportion to
the capital paid up by them. However the company by passing a special resolution may allot
shares to outsiders.

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19. Bonus Shares

A company may, if its Articles so provide, capitalize profits by issuing fully paid up shares to the
members thereby transferring the sums capitalized from the profit & loss account to the share
capital. Bonus shares are issued to the existing members free of charge and are always fully
paid.

20. Inter Corporate Loans & Investments

Section 372A inserted by the Companies Amendment Act, 1999 contains consolidated
provisions relating to inter corporate loans and investments. The new section provides that no
company shall directly or indirectly –

(a). make any loan to any body corporate

(b). given any guarantee, or provide security, in connection with a loan made by any other person
to, or to any other person

(c). acquire, by way of subscription, purchase or otherwise the securities of any other body
corporate

Exceeding 60% of its paid up capital and free reserves, or 100% of its free reserves, whichever is
more.

This new provision allows more flexibility to the companies between loans and investments.

21. Company Management

Meaning of Director

Companies Act, 2013, defines a “director” as any person occupying the position of the director by
whatever name called. Thus it is not the name by which is called but the position and he occupies and
the functions & duties he discharges that determine whether in fact he is a director or not. Only
individual can be appointed as a director.

Qualifications for a Director

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The Companies Act has not prescribed any academic or professional qualifications for directors. Also
the Act has not imposed any share qualification. So unless the companies’ articles contain a provision to
that effect, a director need not be a shareholder. But articles usually provide for a minimum share
qualification.

Disqualifications for Director

The following persons shall not be capable of being appointed as director of any company:

(a). a person found by the court to be of unsound mind;

(b). an undischarged insolvent

(c). a person who has been convicted by court of an offence involving moral turpitude;

(d). a person who has not paid any call in respect of shares held by him and 6 months have lapsed
from the last date fixed for the payment of the call;

(e). a person who has been disqualified by the court;

(f). a person who is already a director of a public company which (i).has not filed annual accounts and
annual return for any continuous 3 financial years commencing on or after 1-4-1999 (or) (ii).has failed
to repay its deposits or interest on due date or redeem its debentures on due date or payment of
dividend and such failures continues for one year or more.

Legal position of Director

Directors as agents Directors may correctly be described as agents of the company. Company itself
cannot act on its own, it can only act through the agency of directors and the case as regards those
directors, merely the ordinary case of principal and agent. Thus, where directors contract for and on
behalf of the company, it is the company, which is liable but not the directors.

Directors as trustees Directors are regarded as trustees of the company’s assets, and the powers that
vest in them because they administer those assets and perform duties in the interest of the company
and not for their own personal advantage.

Minimum & Maximum Number of Directors

Every public company must have at least 3 directors and every private company must have at
least 2 directors. Regarding the maximum number of directors, there is nothing provided in the

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Act. Thus, there is no limit to the maximum number of directors. All the members may also be
appointed directors. The articles may and usually do fix the minimum & maximum number of
directors of its board.

Appointment of Directors
Appointment of First Directors The first directors are usually appointed by name in the articles or
in the manner provided therein. Where the articles do not provide for the appointment of first
directors, the subscribers to the memorandum, who are individuals shall be deemed to be the first
directors. The first directors can hold office until the directors are duly appointed in a general
meeting.
Appointment of directors at general meeting The company in general meeting must appoint the
directors. Unless the articles otherwise provide for the retirement of all directors at every annual
general meeting, at least 2/3rd of the total number of directors must be persons whose period of office
is liable to determination by rotation. In other words, one-third of the total number of directors can be
non-rotational directors.
Appointment by the Board
Additional Directors: If the articles authorize, the board may appoint additional directors. Such
additional directors are entitled to hold office only upto the date of the next annual general meeting of
the company.
Filing up the Casual Vacancy: Casual vacancy means a vacancy in the office of a director caused
by death, resignation, insolvency or disqualification. The board can fill casual vacancy and the
person appointed in casual vacancy shall hold office for the entire period in whose place he was
appointed would have held office.
Alternate Director The board may appoint alternate director to act for a director during his
absence for a period of not less than 3 months from the State where the board meetings are
ordinarily held. The alternate directors merely fills a temporary vacancy in the office of a
director which already exists and no new office of director is created by his appointment. The
alternate director vacates his office as and when the original director returns to the State.

Nominee Directors Usually, government, foreign collaborators, holding companies,

financial institutions or other lenders reserve a right to nominate a director to represent their
interest on the Board. In the case of public company, there should be a provision in the

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 memorandum or articles which effects the appointment of nominee directors. The total
strength of the non-rotational directors including the nominee directors should not exceed 1/3 rd
of the total strength of the board.

Woman Director

Independent Director

Removal of Directors

A director may be removed by shareholders, the central govt or by the company law board
(now tribunal. Shareholders have been given the inherent power under sec 284 to remove the
directors by passing an ordinary resolution in the general meeting of which special notice is
required to be given. The vacancy caused by the removal of the director may be filled at the
same meeting. However a special notice of the intended appointment also be given. It may be
noted that the provisions of sec 284 apply to all companies including private companies.

Managerial Remuneration

Under Companies Act, 2013, managerial remuneration must not exceed 11% of the net profits
of any financial year.

A simple director cannot be paid more than 1% of the net profits of the company, if the
company has a managing director, or whole time director or a manager. In any other case, it
cannot exceed 3% of the net profits.

A whole time director or a managing director may ordinarily be paid subject to ceiling of 5%
of the net profits and if there is more than one such director, 10% for all them together. This
can be exceeded with the permission of the Central Govt.

22. Elements of Corporate Governance

The necessity of good corporate governance is unquestionable. But what actually constitutes
good governance and how that governance should be enforced are very much under debate. Is
governance an issue of ethics or an issue of law?

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Corporate Governance is an admixture of voluntary and legally mandated codes. The idea of
good corporate governance is as old as hills. Some of the core principles of corporate governance
are: honesty, transparency and corporate decision making in the best interest of stakeholders of
corporates. A recent well-published survey by McKinsey & Co. in this regard is illuminating. In
the survey, around one-fifth of institutional investors in the sample expressed preference towards
corporate governance over financials while deciding their emerging market portfolios. In fact the
respondents to the survey were ready to pay a premium of 28% for well-governed companies in
emerging markets. The survey established the link between market evaluation and corporate
governance that the companies with better corporate governance command a higher price-to-
book ratio.

The world has really caught corporate governance fever, which has resulted in this kind of
quantitative approach to governance. Sarbanes-Oxley is only one example. There is OECD, the
New York Stock Exchange, the Global Reporting Initiative. Every country is establishing its
own guidelines because it has its own special circumstances. But the question is that, is
quantitative governance the answer?

In the years to come companies should be less concerned about the vehicle of disclosure and
more concerned with substance of information made available to public. The improvements in
transparency are necessary response to the recent corporate scandals and will definitely help
strengthen corporate governance. Thus corporate governance has clearly become an
international issue.

Good corporate governance holds the key to wealth creation, wealth management and wealth
sharing in any society and to investors confidence in the securities market. The onus of
maintaining / improving corporate governance standards squarely falls on the management team
consisting of minority shareholders and / or professionals, who are entrusted with the valued
resources of the silent majority and are expected to enhance the interests of all the stakeholders
in compliance with ethical principles2.

Good corporate governance seeks to the following objectives:

(i). A properly structured Board capable of taking independent and objective decisions is in place
at the helm of affairs;

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(ii). The Board is balanced as regards the representation of adequate number of non-executive
and independent directors who will take care of the interests and well – being of all the
stakeholders;

(iii). The Board adopts transparent procedures and practices and arrives at decisions on the
strength of adequate information;

(iv). The Board has an effective machinery to subserve the concerns of stakeholders;

(v). The Board keeps the shareholders informed of relevant developments impacting the
company.

(vi). The Board effectively and regularly monitors the functioning of the management team;

(vii). The Board remains in effective control of the affairs of the company at all times

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Competition Law

1. Overview of Competition Act, 2002

Purpose

With the globalization of world economy, it became necessary to encourage competition to foster
speedy economic development. The MRTP Act is based on pre-reform scenario, lacks
regulation of combinations, provides for compulsory registration of agreements, complex in
arrangements and based on size as a factor. The govt, therefore thought fit to enact a new law
namely, Competition Act

, 2002.

The Act seeks to provide keeping in view the economic developments of the country for the
establishment of Competition Commission

- to prevent practices having adverse effect on competition

- to protect the interests of consumers
- to ensure freedom of trade carried on by other participants in markets in India and for
matters connected therewith or incidental thereto.
Further the commission shall also take up competition advocacy for creating awareness and
imparting training on competition issues.

Objectives

It is a tool to implement and enforce competition policy and to prevent and punish anti-
competitive business practices by firms and unnecessary Government interference in the market.
Competition Law generally covers 3 areas:

– Anti - Competitive Agreements, e.g., cartels,

– Abuse of Dominant Position by enterprises, e.g., predatory pricing,

barriers to entry

- Regulation of Mergers and Acquisitions (M&As).

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2. Prohibition of anti-competitive agreements

It is provided under Sec 3(1) of the Competition Act that no enterprise or association of persons
shall enter into any agreement in respect of production, supply, distribution, storage or control of
goods or provision of services, which causes or is likely to cause an appreciable adverse effect
on competition.

Any anti-competitive agreement shall be void. Under the law, the whole agreement is construed
as void if it contains anticompetitive clauses having appreciable adverse effect on competition.

The position under MRTP Act is distinct as only restrictive clauses of agreements are dubbed as
void in that Act and not the whole agreement as such.

Therefore, anti-competitive agreement include

(i). Agreement to limit production / supply

(ii). Agreement to allocate markets

(iii). Agreement to fix price

(iv). Bid rigging / Collusive bidding

(v). Tie-in arrangement

(vi). Exclusive supply agreement

(vii). Exclusive distribution agreement

(viii). Refusal to deal

(ix). Resale price maintenance

Items (i) to (iv) are presumed to have an appreciable adverse effect on the competition and onus
to prove otherwise lies on the defendant. And for items (v) to (ix) the Act stipulates that these be
judged by Rule of Reason.

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3. Prohibition of abuse of dominant position

No enterprise shall abuse its dominant position. Dominant position means a position of
strength, enjoyed by an enterprise, in the relevant market in India which enables to

- Operate independently of competitive forces prevailing in the relevant market or

- affect its competitors or consumers or the relevant market in its favour.
Abuse of dominant position impedes fair competition between firms, exploits consumers and
makes it difficult for the other players to compete with the dominant undertaking on merit.
Abuse of dominant position includes

- imposing unfair conditions or price

- predatory pricing
- limiting production / market
- creating barriers to entry and applying dissimilar conditions to similar transactions
4. Regulation of combinations

Section – 6 of the Act prohibits any person or enterprise from entering into a combination which
causes or is likely to cause an appreciable adverse effect on competition within the relevant
market in India and if such a combination is formed, it shall be void.

It may be noted under the law, the combinations are only regulated whereas anti-competitive
agreements and abuse of dominance are prohibited. CCI will only examine as to whether or not
combination is likely to have an appreciable adverse effect on competition.

Commission to regulate Combinations, i.e., large mergers, acquisitions which are likely to have
appreciable adverse effect on competition

5. Functions of CCI

(i). CCI shall prohibit anti-competitive agreements and abuse of dominance, and regulate
combinations (merger or amalgamation or acquisition) through a process of enquiry.

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(ii). It shall give opinion on competition issues on a reference received from an authority
established under any law (statutory authority)/Central Government.

(iii). CCI is also mandated to undertake competition advocacy, create public awareness and
impart training on competition issues.

6. Orders the Commission can pass in case of anti-competitive agreements and abuse of
dominance

(i). During the course of enquiry, the Commission can grant interim relief restraining a party
from continuing with anti competitive agreement or abuse of dominant position

(iii). To impose a penalty of not more than 10% of turn-over of the enterprises and in case of
cartel - 3 times of the amount of profit made out of cartel or 10% of turnover of all the
enterprises whichever is higher

(iii).  After the enquiry, the Commission may direct a delinquent enterprise to discontinue and
not to re-enter anti-competitive agreement or abuse the dominant position

(iv). To award compensation

(v). To modify agreement

(v). To recommend to the Central Govt. for division of enterprise in case it enjoys dominant
position.

7. Procedure for investigation of combinations

If the Commission is of the opinion that a combination is likely to cause or has caused adverse
effect on competition, it shall issue a notice to show cause the parties as to why investigation in
respect of such combination should not be conducted. On receipt of the response, if Commission
is of the prima facie opinion that the combination has or is likely to have appreciable adverse
effect on competition, it may direct publication of details inviting objections of public and hear
them, if considered appropriate. It may invite any person, likely to be affected by the
combination, to file his objections. The Commission may also enquire whether the disclosure
made in the notice is correct and combination is likely to have an adverse effect on competition.

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8. Orders the Commission can pass in case of combinations

(i). It shall approve the combination if no appreciable adverse effect on competition is found

(ii). It shall disapprove of combination in case of appreciable adverse effect on competition

(iii). May propose suitable modification as accepted by parties

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Consumer Protection Law

1. Need for Consumer Protection

The doctrine of Caveat Emptor – let the buyer beware which came into existence in the middle
ages had been replaced by the principle of ‘consumer sovereignty’ or consumer is the king. But
with tremendous increase in the world population, the growing markets were unable to meet the
rising demand with naturally created a gap between the general demand and supply levels in the
market. Advertising though ostensibly directed at informing potential consumers about the
availability and uses of a product began to be resorted as a medium for exaggerating the uses of
a product or disparaging others product so as to cut an edge over competition. Unfair and
deceptive practices such as selling of defective or sub-standard goods, charging exorbitant prices,
misrepresenting the efficiency or usefulness of the goods, negligence to safety standards became
rampant.
It therefore became necessary to evolve statutory measures to make producers / traders more
accountable to consumers. It also became inevitable for consumers to unite on a common
platform to deal with issues of common concern and have their grievances redressed
satisfactorily.

2. Objects of CPA

The consumer protection act was enacted in 1986 with the object of better protection of the
consumers and for the settlement of consumer disputes and also to provide for the establishment
oaf consumer councils and other authorities for the settlement for disputes and for matters
connected therewith. It has paved the way for a simple, quick and easy remedy to consumers.
Consumer Protection Act was amended in 2019 with the objective to empower consumer &
enhance consumer justice.

3. Rights of Consumers

The basic rights of consumers that are sought to be promoted and protected are:
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 - the right to be protected against marketing of goods and services which are hazardous to life
and property.

- The right to be informed about the quality, quantity, potency, purity, standard and price of
goods or services so as to protect the consumer against unfair trade practice.

- The right to be assured, wherever possible access to variety of goods and services at
competitive prices.

- The right to be heard and assured that consumers interest will receive due consideration at
appropriate forums.

- The right to seek redressal against unfair trade practices or restrictive trade practice or
unscrupulous exploitation of consumers.

- Right to consumer education.

4. Fundamental Terms

Consumer means any person who

- buys any goods for a consideration which has been paid or promised or partly paid and
partly promised, or under any system of deferred payment and includes any user of such
goods, but does not include a person who obtains such goods for resale or for any
commercial purpose.
- Hires or avails of any services for a consideration which has been paid or promised or
partly paid and partly promised or under any system of deferred payment and includes
any beneficiary of such service.
Commercial purpose A purchase of goods could be said to be for commercial purpose only if 2
conditions were satisfied, namely, (i) the goods must have been purchased for being used in
some profit making activity on a large scale and (ii). there should be close and direct nexus
between the purchase of goods and the profit making activity.

Commercial purpose does not include use by a consumer of goods brought and use by him
exclusively for the purpose of earning his livelihood by means of self employment.

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Consumer dispute means dispute where the person against whom a complaint has been made,
denies or disputes the allegation contained in the complaint. The allegation referred to may
relate to any unfair trade practice adopted by a trader, or against defect in goods or against any
deficiency in services or against charging of exorbitant price.

Complaint means any allegation in writing made by a complainant that

- an unfair trade practice or a restrictive trade practice has been adopted by any trader.
- the goods bought by him or agreed to be bought by him suffer from one or more defects.
- the services hired or availed of or agreed to be hired or availed of by him suffer from
deficiency in any respect.
- the trader has charged for the goods mentioned in the complaint a price in excess of the
price fixed by or under any law for the time being in force
- goods which will be hazardous to life and safety when used are being offered for sale to
the public in contravention of provisions of any law for the time being in force.
With a view to obtaining relief provided under this Act.

Complainant means

- a consumer
- voluntary consumer association registered under the companies act or under any other
law
- central govt or state govt
- one or more consumers having the same interest
5. Contract of Service and Contract for Service

In Indian Medical Association Vs VP Shantha & Others, Supreme Court has given a landmark
judgment with regard thereto. It distinguished the terms ‘ contract of service and contract for
service’. According to SC, contract for service implies a contract whereby one party undertakes
to render service to another in the performance of which he is not subjected to detailed
directions, control or supervision. Whereas, a contract of service implies a relationship of master
and servant and involves an obligation to obey orders in the work to be performed. There it may
be concluded that contract for service is covered under the provisions of CPA but not contract of
service.

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6. Supreme Court conclusions on medical profession

- Service rendered to patient by a medical practitioner (except where the doctor renders
service free of charge to every patient or under a contract of personal service) by way of
consultation, diagnosis and treatment would fall within the ambit of service under CPA
- The fact that medical practitioners are subject to disciplinary control of the Medical
council of India / State constituted under the provisions of Indian Medical Council Act
would not exclude the services rendered by them from the ambit of the Act
- A contract of personal service has to be distinguished from a contract for personal
service. In the absence of a relationship of master and servant between the patient and
medical practitioner, the service rendered by a medical practitioner to the patient cannot
be regarded as service rendered under a contract of personal service. Such service is
service rendered under a contract for personal service.
- Service rendered free of charge by a medical practitioner to everyone would not be a
service as defined under CPA
- Service rendered at a non-govt hospital / nursing home where no charge is made from
any person availing the service and all patients are given free service is outside the
purview of CPA.
- Service rendered at a non-govt hospital / nursing home where charges are required to be
paid by the persons availing such service falls within the purview of the expression ‘
service ‘.
- Service rendered at a govt hospital / health centre / dispensary where no charge
whatsoever is made from any person availing the services and all patients (rich and poor)
are given free service is outside the purview of the expression service.

7. Redressal Machinery under the Act

The Act provides for a three-tier quasi-judicial redressal machinery at the District, State and
National levels for redressal of consumer disputes and grievances.

District Forum

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District forum is established by the State Govt in each district of the State. DF consist of a
person who is or has been district judge, who shall be its president and two other members one of
whom who shall be a woman.

The pecuniary jurisdiction of district forum empowers to entertain complaints where the value of
goods and services and the compensation if any claimed is less than 1 Crore.

State Commission

State Commission shall be established by the State Govt which shall consist of a person who is
or has been a judge of High Court who shall be its President and not less than two other members
one of whom should be a woman.

The state commission shall entertain complaints where the value of the goods or services and the
compensation, if any claimed exceed Rs 1 Crore but does not exceed Rs. 10 crore.

The state commission also has the jurisdiction to entertain appeals against the orders of any
District fourm within the state.

National commission

The Act empowers the central government to establish the National consumer disputes redressal
commission (National Commission) which shall consist of a person who is or has been judge of
Supreme Court, who shall be its president and not less than four other members, one of whom
shall be a woman.

The National Commission shall entertain complaints where the value of the goods and services
and compensation, if any, claimed exceeds Rs. 10 crore.

It has also the jurisdiction to entertain appeals against the orders of any State Commission.

9. Powers of Redressal Agencies

The District Forum, State Commision, National Commission have been vested with powers of a
civil court in the following matters:

- summoning and enforcing attendance of any defendant or witness

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 - the production of any document as evidence through affidavit
- issuing commission for the examination of witness
- any other matter as may be prescribed.
10. Nature & Scope of Remedies under the Act

In respect of complaints / allegations, the District Forum, State Commission or National

Commission may pass one or more of the following orders:

- to remove the defects pointed out by the appropriate laboratory from the goods in
question
- to replace the goods with new goods of similar description which shall be free from any
defect
- to return to the complainant the price or the charges paid by the complainant
- to pay such amount as may be awarded as compensation to the consumer
- to remove the deficiencies in services
- to discontinue the UTP or RTP
- not to offer the hazardous goods for sale
- to provide adequate cost to parties.

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