Legal aspects of business in india

by DrRajesh Patel,Director,NRV
11/13/2011 3:37:38 AM 1
MBA,email:1966patel@gmail.com

Legal aspects are an indispensable part of a successful business environment in any country.
They reflect the policy framework and the mind set of the Governmental structure of that
country. They ensure that every company is functioning as per the statutory framework of the
country. Every enterprise must take into account this legal set up while framing the basic aims
and objectives of its company. This is because, it is necessary for efficient and healthy
functioning of the organisation and helps it to know about the rights, responsibilities as well as
the challenges that it may have to face.

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In India, the most important law which regulates all aspects relating to a company is the
Companies Act,1956. It contains provisions relating to formation of a company, powers and
responsibilities of the directors and managers, raising of capital, holding company meetings,
maintenance and audit of company accounts, powers of inspection and investigation of
company affairs, reconstruction and amalgamation of a company and even winding up of a
company.

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The other major legislations are:- the Industries (Development and Regulation) Act 1951; Trade
Unions Act; the Competition Act, 2002; the Arbitration and Conciliation Act, 1996; the Foreign
Exchange Management Act (FEMA),1999; laws relating to intellectual property rights; as well as
laws relating to labour welfare.

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Industrial Acts and Legislations

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In India there are several Acts and legislations enacted by the Government of India for
regulation of industries in the country. These enactments play a very important role in the
country's overall progress and economic development. These legislations are amended from
time to time in accordance with the changing circumstances and environment. The most
important Act is the Companies Act,1956 which relates to setting up and operation of
companies in India. It empowers the Central Government to regulate the formation, financing,
functioning and winding up of companies. It contains the mechanism regarding organisational,
financial, managerial and all the relevant aspects of a company.

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In order to provide the Central Government with the means
to implement its industrial policies, several legislations have
been enacted. The most important being the Industries
(Development and Regulation) Act, 1951 (IDRA). The main
objectives of the Act is to empower the Government to take
necessary steps for the development of industries; to
regulate the pattern and direction of industrial
development; and to control the activities, performance and
results of industrial undertakings in the public interest.
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The bulk of the transactions in trade, commerce and industry are based on contracts.
In India, the Indian Contract Act,1872 is the governing legislation for contracts, which
lays down the general principles relating to formation, performance and enforceability
of contracts and the rules relating to certain special types of contracts like Indemnity
and Guarantee; Bailment and Pledge; as well as Agency.

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Another important aspect of legislations is the industrial relations, which involves
various aspects of interactions between the employer and the employees; among the
employees as well as between the employers. In such relations whenever there is a
clash of interest, it may result in dissatisfaction for either of the parties involved and
hence lead to industrial disputes or conflicts. The Industrial Disputes Act, 1947 is the
main legislation for investigation and settlement of all industrial disputes. The Act
enumerates the contingencies when a strike or lock-out can be lawfully resorted to,
when they can be declared illegal or unlawful, conditions for laying off, retrenching,
discharging or dismissing a workman, circumstances under which an industrial unit can
be closed down and several other matters related to industrial employees and
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employers. MBA,email:1966patel@gmail.com

Trade unions are also an important part of an industrial set up. The legislation regulating these
trade unions is the Indian Trade Unions Act, 1926 . The Act deals with the registration of trade
unions, their rights, their liabilities and responsibilities as well as ensures that their funds are
utilised properly. It gives legal and corporate status to the registered trade unions. It also seeks
to protect them from civil or criminal prosecution so that they could carry on their legitimate
activities for the benefit of the working class.
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INDIAN Companies
Act.1956

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A Company is defined as a voluntary association of persons formed for
the purpose of doing business, having a distinct name and limited
liability. Companies, whether public or private, are an indispensable part
of an economy. They are the modes through which a country grows and
expands world wide. Their performance is an important parameter of a
countries economic position.by DrRajesh Patel,Director,NRV
11/13/2011 3:37:39 AM 12

In India, the Companies Act, 1956, is the most important piece of legislation that empowers the
Central Government to regulate the formation, financing, functioning and winding up of
companies. The Act contains the mechanism regarding organisational, financial, managerial and
all the relevant aspects of a company. It provides for the powers and responsibilities of the
directors and managers, raising of capital, holding of company meetings, maintenance and audit
of company accounts, powers of inspection, etc. The Act applies to whole of India and to all
types of companies, whether registered under this Act or an earlier Act. But it does not apply to
universities, co-operative societies, unincorporated trading, scientific and other societies.
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The Act empowers the Central Government to inspect the books of accounts of a company, to
direct special audit, to order investigation into the affairs of a company and to launch
prosecution for violation of the Act. These inspections are designed to find out whether the
companies conduct their affairs in accordance with the provisions of the Act, whether any unfair
practices prejudicial to the public interest are being resorted to by any company or a group of
companies and to examine whether there is any mismanagement which may adversely affect
any interest of the shareholders, creditors, employees and others. If an inspection discloses a
prima facie case of fraud or cheating, action is initiated under provisions of the Companies Act
or the same is referred to the Central Bureau of Investigation.

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The Companies Act is administered by the Central Government through
the Ministry of Corporate Affairs and the Offices of Registrar of
Companies, Official Liquidators, Public Trustee, Company Law Board,
Director of Inspection, etc. The Registrar of Companies (ROC) controls
the task of incorporation of new companies and the administration of
running companies.
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The Ministry of Corporate Affairs, earlier known as Department of
Corporate Affairs under Ministry of Finance, is primarily concerned with
administration of the Companies Act, 1956, other allied Acts and rules &
regulations framed there-under mainly for regulating the functioning of
the corporate sector in accordance with law. The Ministry has a three-
tier organisational set-up:-
The Headquarters at New Delhi,
The Regional Directorates at Mumbai, Kolkata, Chennai and Noida, and
The Registrars of Companies (ROCs) in States and Union Territories.
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The Official Liquidators who are attached to the various High Courts functioning in the country
are also under the overall administrative control of the Ministry. The set-up at the Headquarters
includes the Company Law Board, a quasi-judicial body, having the principal Bench at New Delhi,
an additional principal bench for Southern Region at Chennai and four Regional Benches located
at New Delhi, Mumbai, Kolkata and Chennai. The organisation at the Headquarters also includes
two Directors of Inspection and Investigation with a complement of staff, an Economic Adviser
for Research and Statistics and other Officials providing expertise on legal, accounting, economic
and statistical matters.

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The four Regional Directors, who are in charge of the respective regions, comprising a number
of States and Union Territories, interalia, supervise the working of the Offices of Registrars of
Companies and the Official Liquidators working in their regions. They also maintain liaison with
the respective State Governments and the Central Government in matters relating to the
administration of the Companies Act, 1956.
Registrar of Companies (ROCs) appointed under Section 609 of the Companies Act, covering
various States and Union Territories, are vested with the primary duty of registering companies
floated in the respective States and the Union Territories and ensuring that such companies
comply with the statutory requirements under the Act. Their offices function as registry of
records relating to the companies registered with them. The powers vested with the ROCs are:-

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Registration of memorandum and articles.

Registration of prospectus.

Registration of reduction of capital.

Call information or explanation.

Seizure of documents.

Investigation into affairs of a company.

Inspection of books of accounts, etc of companies.

To strike off defunct companies from register.

Enforcement of duty of company to make returns, etc to Registrar.

Non-disclosure of information in certain cases.

Winding up petition by the Registrar. Patel,Director,NRV
by DrRajesh
11/13/2011 3:37:39 AM 19

According to the Act, a company means "a company formed and registered under the Act or an existing company
i.e. a company formed or registered under any of the previous company laws". The salient features of a company
are:-
Artificial legal person:- a company is an artificial person in the sense that it is created by law and lacks the
attributes possessed by natural persons. It is invisible, intangible, immortal and exists only in the contemplation of
law. Hence, it has to operate through a board of directors consisting of individuals.
Separate legal entity:- a company is a distinct legal entity, different from its members or shareholders. This
implies that:- the property of the company belongs to it and not to the members or shareholders; no member can
either individually or jointly claim any ownership rights in the assets of the company; an individual member cannot
be held liable for the wrongful acts of the company even if he/she holds virtually the entire share capital; the
members of the company can enter into contracts with the company.
Perpetual succession:- a company enjoys continuous existence and its continuance is not affected by the death,
insolvency, mental or physical incapacity of its members. It is created by law and law alone can dissolve it.
Limited liability of members:- the liability of its members is limited to the amount remaining unpaid on the shares
subscribed by them. Thus, in case of fully paid-up shares, the members cannot be asked to contribute any further,
if the company goes into liquidation.
Common seal:- a company has a common seal, which is the signature of that company and signifies common
consent of all the members. The company's seal is affixed on all the documents executed for and on its behalf.
Transferability of shares:- the shares of a public company are freely transferable without the permission of the
company but in a manner provided in the Articles. The shareholders may transfer their shares to another person
and this does not affect the funds of the company. But, a private company imposes restrictions on transfer of its
shares.
Separate property:- all the property of the company vests in it. The company can control, manage and hold the
same in its own name. The members have no ownership rights in the company's property, either individually or
collectively. A shareholder does not even have an insurable right in the property of the company. The creditors of
the company can have a claim only against the property of the company and not against the property of the
individual members.
Capacity to sue and being sued:- a company can enforce its rights through suits and can also be sued for
breach of its statutory rights.
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Laws relating
To
Intellectual Property Rights (IPRs)
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Intellectual property(IP) is the creation of human intellect. It refers to
the ideas, knowledge, invention, innovation, creativity, research etc, all
being the product of human mind and is similar to any property,
whether movable or immovable, wherein the proprietor or the owner
may exclusively use his property at will and has the right to prevent
others from using it, without his permission. The rights relating to
intellectual property are known as 'Intellectual Property Rights'.
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Intellectual Property Rights, by providing exclusive rights to
the inventor or creator, encourages more and more people to
invest time, efforts and money in such innovations and
creations. Intellectual property rights are customarily divided
into two main areas:-

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•Copyright and rights related to copyright:- the rights of authors of
literary and artistic works (such as books and other writings,
musical compositions, paintings, sculpture, computer programs
and films) are protected by copyright. Also, protection is granted to
related or neighbouring rights like the rights of performers
(e.g. actors, singers and musicians), producers of phonograms
(sound recordings) and broadcasting organizations.

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INTELLECTUAL property, which is divided into two main areas:-

One area can be characterized as the protection of distinctive signs, in particular
trademarks (which distinguish the goods or services of one undertaking from those
of other undertakings) and geographical indications (which identify a good as
originating in a place where a given characteristic of the good is essentially
attributable to its geographical origin).
Other types of INTELLECTUAL property are protected primarily to stimulate
innovation, design and the creation of technology. This category includes inventions
(protected by patents), industrial designs and trade secrets.

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Key Regulations
An entrepreneur has to take into account the basic
regulatory requirements of the country in order to ensure
sustainability of the profits and productivity of his/her
business. The most important regulation relates to the
environment. The environmental regulatory requirements
envisage a wide legislative framework covering every aspect
of environment protection. Broadly, it includes the emission
standards for air, noise, water, etc. Separate set of laws for
emission of hazardous wastes have also been enacted. Every
industry has to abide by these guidelines and parameters for
environmental protection.
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An organization for its smooth and effective functioning, must ensure
health and safety of its employees. The major legislations relating to
Occupational Health and Safety in India are:- the Factories Act, 1948;
the Mines Act, 1952 and the Dock Workers (Safety, Health & Welfare)
Act, 1986. The Directorate General of Mines Safety (DGMS) and the
Directorate General of Factory Advice Service and Labour Institutes
(DGFASLI) are the two field organisations of the Ministry of Labour and
Employment in the area of occupational safety and health in mines,
factories and ports.

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Besides, the Government of India has taken steps like,
announcing a competition policy, enacting Competition Act,
2002 and setting up of Competition Commission of India , in
order to ensure a healthy and fair competition in the market
economy. These aim to prohibit the anti-competitive business
practices, abuse of dominance by an enterprise as well as
regulate various business combinations like mergers and
acquisitions.

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For regulation of the export and import of goods and
services an entrepreneur has to abide by the Foreign Trade
(Development and Regulation) Act, 1992 and the EXIM
policy announced by the Government from time to time.
The Ministry of Commerce and Industry is the most
important organ concerned with the promotion and
regulation of the foreign trade in India. The Ministry has an
elaborate organizational set up to look after the various
aspects of trade. Within the Ministry, the Department of
Commerce is responsible for formulating and implementing
the foreign trade policy.
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Legal aspects of business in india

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