MODEL TEST PAPER I BUSINESS AND LEGAL ENVIRONMENT Time: 3 Hours Maximum Marks: 60

Q 1. Write short notes on any 5 of the following: (a) Public control of business (b) National Development Council (c) Traditional Partnership Vs. Limited Liability Partnership (d) 3-tier redressal Mechanism under Consumer Protection Act (e) Lifting of Corporate Veil (f) Private Vs Public Comapny (g) Doctrine of Caveat Emptor Ans. 1(a) Public control of business is exercised through the interventions by the government at the centre and at the state level. World Bank has classified the functions of the state along the continuum theses functions vary from activities in which state intervention is essential to activities in which state plays an active role. Basic function: activities that are undertaken only by the state. It is the governments responsibility to provide pure public goods like defence, law and order, property rights, macroeconomic stability etc. These functions are very essential for healthy and prosperous nation. Intermediate functions: management of externalities regulation of monopolies, consumer protection, and provision of social insurance Activist functions: Enforcement of rules and regulations regarding the land acting watch dogs as Ministry of Corporate Affairs, CBI and CCB etc. In order to ensure transparency and openness, the state can provide its citizens a greater say in the formulation of public policies. Business councils, interaction groups and consumer groups can be used as the forum. Ans. 1(b) The Government of India set up a National Development Council in order to direct the activities for the development of the nation. The Council comprises of the Prime Minister of India, the Chief Minister of States and Members of the Planning Commission. National Development Council plays a decisive role in the formulation and review of the National Plan. Its role indicates the federal and democratic nature of economic planning in India. Its functions are: (1) To review the working of the National Plan from time to time (2) To consider important questions of social and economic policy affecting national development, and (3) To recommend measures for the achievement of the aims and the targets set out in the National Plan, including measures to secure the active participation and co-operation

of the people, improve the efficiency of the administrative services, ensure the fullest development of the less advanced regions and sections of the community and, through sacrifice borne equally by all citizens, build up the resources for national development. (4) To prescribe the guidelines for the formulation of the National Plan as well assessment of the resources of the plan. Thus, in this new set-up, the function of the Planning Commission is to prepare the Plan according to the guidelines provided by the NDC. In this way, the National Development Council has emerged as the top- most policy-laying agency in the Government. Thus success of this new planning organization could depend mainly upon the tact and sagacity of the Prime Minister and Chief Minister.

Ans. 1(c) Keeping in mind the growth and expansion of the Indian economy a need was felt for the introduction of a new corporate vehicle which could provide for the benefits of a partnership as well as ensure restricted personal liability. Thus the parliament enacted the Limited Liability Partnership Act in 2008. In a limited liability partnership one partner is not responsible for the misconduct or negligence of the acts caused by the other. A limited liability partnership although exhibits all the features of a partnership in the normal course but under its special provision, the concept of limited liability partnership gives the latter an upper hand over the former. The basic differences between the traditional partnership and LLP are as follows: Features Registration Partnership firm Not compulsory. Unregistered Partnership Firm will not have the ability to sue. No guidelines. LLP Compulsory registration required with the ROC Name to end with LLP Limited Liability Partnership and no two companies can have the same name. Is a separate legal entity Limited to the extent of the contribution to the LLP. Minimum of 2 partners. No maximum limit. Foreign nationals partners. can be

Name

Legal status Liability

entity

Not a separate legal entity Unlimited, can extend to the personal assets of the partners Limit of 2- 20 partners

No. of shareholders / Partners Foreign Nationals as

Foreign nationals cannot form partnership firm.

shareholder / Partner Annual Return No returns to be filed with the Registrar of Firms Annual statement of accounts and solvency & Annual Return has to be filed with ROC Required, if the contribution is above Rs.25 lakhs or if annual turnover is above Rs.60 lac. Perception is higher compared to that of a partnership but lesser than a company. Less procedural compared to company. Voluntary or by Order of National Company Law Tribunal Protection provided to employees and partners who provide useful information during the investigation process.

Audit

Not compulsory only if turnover rate is greater than Rs. 60 lac. Creditworthiness depends on goodwill and credit worthiness of the partners By agreement of the partners, insolvency or by Court Order

How do the bankers view Dissolution

Whistle blowing

No such provision

Ans. 1(d) The Consumer Protection Act has set up a three-tier quasi-judicial consumer disputes redressal machinery at the National, State and District levels, for expeditious and inexpensive settlement of consumer disputes. It is an alternative to the ordinary process of instituting actions before a civil court. These forums are mandated to provide simple, speedy and inexpensive redressal of the consumers' grievances. The three redressal agencies are as follows: National Consumer Disputes Redressal Commission (NCDRC) Composition: a) The National Commission consist of a person who is or has been the judge of the Supreme Court, to be appointed by the central government, who shall be its president. b) Not less than four and not more than such number of member as may be prescribed one of whom shall be a woman, who shall have the following qualifications namely: Be not less than 35 years of age Possess a bachelors degree from a recognized university Be persons of ability, integrity and standing and have adequate knowledge and experience of at least ten years in dealing with problems relating to economic, law, commerce, accountancy, industry, public affair or administration The reward can be appealed by any of the aggrieved parties in the supreme court Jurisdiction:

a) Entertain complaints where the value of the goods or services and compensation, if any, claimed exceeds rupees one crore, and appeals against the orders of any State Commission; and b) Call for the records and pass appropriate orders in any consumer dispute which is pending before or has been decided by any State Commission where it appears to the National Commission that such State Commission has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with material irregularity. State Consumer Disputes Redressal Commission Under the Act, a State Consumer Disputes Redressal Commission shall be set up by the State Government for the respective State. The State Commissions are headed by a person who is or has been a Judge of High Court. Under the Consumer Protection Act, 1986, the National Consumer Disputes Redressal Commission exercises administrative control over the State Commissions. Composition: a) The State Commission consists of a person who is or has been the judge of the high court, to be appointed by the State government, who shall be its president. b) Not less than two and not more than such number of member as may be prescribed one of whom shall be a woman, who shall have the following qualifications namely: Be not less than 35 years of age Possess a bachelors degree from a recognized university Be persons of ability, integrity and standing and have adequate knowledge and experience of at least ten years in dealing with problems relating to economic, law, commerce, accountancy, industry, public affair or administration The reward can be appealed in the national council. Jurisdiction: a) Entertain complaints where the value of the goods or services and compensation, if any, claimed exceeds rupees twenty lakhs but does not exceed rupees one crore and appeals against the orders of any District Forum within the State; and b) Call for the records and pass appropriate orders in any consumer dispute which is pending before or has been decided by any District Forum within the State, where it appears to the State Commission that such District Forum has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested or has acted in exercise of its jurisdiction illegally or with material irregularity. District Forum Under the Act, the State Government shall establish a District Forum in each district of the State. The District Forums are headed by the person who is or has been or is eligible to be appointed as a District Judge. The Forum shall have jurisdiction (subject to the other provisions of this Act) to entertain complaints where the value of the goods or services and the compensation, if any, claimed does not exceed rupees twenty lakhs. Composition:

a) The district forum consist of a person who is or has been or is qualified to be district judge, who shall be its president; b) Two other members one of whom shall be a woman, who shall have the following qualifications: Be not less than 35 years of age Possess a bachelors degree from a recognized university Be persons of ability, integrity and standing and have adequate knowledge and experience of at least ten years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affair or administration Ans. 1(e) Lifting of Corporate Veil: Lifting of the corporate Veil means Disregarding the corporate entity and paying regard to the individual members behind the legal facade. Circumstances when the corporate Veil can be pierced: Under express provisions statutory Under judicial interpretations

When the number of members falls below the statutory minimum Non Disclosure of Representative capacity To examine the relationship of the holding and subsidiary To investigate into the affairs of related companies To investigate the ownership of a company When business is carried on to defraud the creditors.

For determination of the character of the company For prevention of fraud or improper conduct For the protection of revenue When company is formed to avoid the welfare laws.

Ans. 1(f). 1. Minimum number of members: The minimum number of person required to form a public company is seven, whereas in a private company their number is only two. 2. Maximum number of members: There is no limit on the maximum number of member of a public company, but a private company cannot have more than fifty members excluding past and present employees. 3. Commencement of Business: A private company can commence its business as soon as it is incorporated. But a public company shall not commence its business immediately unless it has been granted the certificate of commencement of business. 4. Invitation to public: A public company by issuing a prospectus may invite public to subscribe to its shares whereas a private company cannot extend such invitation to the public. 5. Transferability of shares: There is no restriction on the transfer of share In the case of public company whereas a private company by its articles must restrict the right of members to transfer the share. 6. Number of Directors: A public company must have at least three directors whereas a private company may have two directors. 7. Statutory Meeting: A public company must hold a statutory meeting and file with the register a statutory report. But in a private company there are no such obligations. 8. Restrictions on the appointment of Directors: A director of a public company shall file with the register a consent to act as such. He shall sign the memorandum and enter into a contact for qualification shares. He cannot vote or take part in the discussion on a contract in which he is interested. Two-thirds of the directors of a public company must retire by rotation. These restrictions do not apply to a private company. 10. Further Issue of Capital: A public company proposing further issue of shares must offer them to the existing members. A private company is free to allot new issue to outsiders. 11. Name: A private company has to use words private limited at the end of its name. But a public company has to use only the word Limited at the end of its name.

Ans. 1(g) In business laws, the phrase Caveat Emptor stands for let the buyer beware. This implies that the responsibility of identifying goods and finding defects with them lies with buyer. He should be finalizing the goods that he needs. It implies that the seller is not responsible to enquire what the buyers requirements are and not required to reveal faults in his products or services. Exceptions to the Doctrine of Caveat Emptor Over time, some exceptions have been made to the rule of let the buyer beware, in business laws. These exceptions include: a) Quality: Under Section 16(1), these conditions are: When the buyer makes the seller aware of the purpose for which the goods are needed.

When the buyer relies on the judgment of the seller. Merchantability: As per section 16(3), if the goods are sold on the basis of description, there is a tacit condition that these are of merchantable quality.

b) Wholesomeness: This exception implies that foodstuff sold must be apt for human consumption. c) Misrepresentation or fraud by seller: A condition in which a seller misrepresents the products and the buyer buys it trusting the misrepresentation, would be an exception to the principle Caveat Emptor as others get the chance to mislead, cheat or exploit you during any purchase or transaction.

Q.2(a) How socio cultural environment influence the business operations? (b) State the main objectives of planning in India. Do you think that five year plans have been successful in achieving these objectives? OR (a) Evaluate fiscal policy of India and give suggestions for its reforms. (b) Explain the instruments of monetary policy generally used by RBI to handle liquidity problems in the economy. Ans. 2(a) A lot of variables should be taken into account if one should decide to do a business in a certain location. One variable to consider is to what degree a social environment of the business is conducive to the business success. Business will accumulate wealth only if the business ecosystem supports the growth of business. One aspects of business ecosystem is the social environment. Decision to invest in a certain location (either community, region or state) should consider to what degree the social environment at a particular location is conducive for business development. For example, Social responsibility of business is an important force that modern business organizations cannot shirk out of their duties and responsibilities towards the society. For example, every leather manufacturing or process unit is made to install pollution prevention system. The shareholders, promoters and owners expect a reasonable return on their investments. The workers expect security of service, terminal benefits, accident relief and various other compensations from the organizations. Government expects the business units to pay tax regularly and participate in social improvement. The distributors and agents expect the organizations to ensure smooth delivery process and demand more commission and compensation. Suppliers expect the organizations to give them continuous business and prompt payment of bills. Therefore each social group has a specific interest, the combination of all these, exerts enormous pressure on the business unit. A business unit which succeeds in meeting the interests of all these groups remains successful and grows. Culture is based on our basic system of values, including: knowledge, belief art morals law customs. Culture is made up of three inter-related elements: Physical environment, social environment, training environment. Marketers should understand the difference between the core values and peripheral cultural value. The increasing cultural diversity has directed the efforts of the marketers toward multicultural marketing which again

considers the cultural aspects of all while catering to the needs of the consumer. For example, if we notice the banking practices in Arab countries we find the differences, as under the banking law the amount of interest is not acceptable whereas in Indian banking law all the transactions are done on the basis of the interest rate. So, this example portrays the influence of the culture on the marketing of the products to the marketers. Ans. 2(b) Planning may be defined as a continuous process which involves decisions or choices pertaining to alternative ways of utilizing the available resources for achieving particular goals during a specified time period in the future. Economic planning is taken by the central authority which is entrusted with the powers of formulating, implementing and reviewing the national plan. The significance of economic planning lies in the allocation of the available resources optimally, identification of the deficiencies in the economy and the social structure, identification of critical issues of development and taking preventive and curative measures to facilitate the development of the nation. The objectives of the five year planning in India: a) Increase in national income b) Full employment c) Reduction in inequalities of income and wealth d) Social justice e) Self reliance The performance of five year planning in India can be assessed under the following heads: Growth of national income and per capita income: Statistical data shows that there is an increase in both but not as expected by the planners. Growth in employment: The Second important objective of economic planning in india has been to increase the employment and our planning has increased the level of employment by taking initiatives like NREGA and contributed toward the development if the nation. Industrial progress: With the entry of FDI and FIIs there is increase in the infrastructural development and the living standards of people has seen a remarkable improvements. There is improvement in the agricultural produce and the ways of farming. Farmers are now more independent and self reliant. Development of industrial infrastructure, diversification of exports import substitution, development of science and technology, improvement in the quality of life of people have been other achievements of five year planning in india. Ans. 2(a) Fiscal Policy Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates

and spending. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact the following variables in the economy: Aggregate demand and the level of economic activity The pattern of resource allocation The distribution of income

A fiscal policy does help the economy for a short period of time by affecting the elements of aggregate demand namely investment and consumption it does have several problems that hinder its effectiveness. An expansionary fiscal policy by decreasing taxation and increasing government spending the fiscal policy will probably achieve in increasing aggregate demand. This will happen since the decrease in taxation will increase peoples disposable income and consequently depending on the marginal propensity to consume the domestic consumption of an economy which in turn will increase aggregate demand. Similarly, the government by increasing spending in all sectors of its economy it will increase investment which in turn may lead to an increase in aggregate demand. This is an effective way to combat economic problems such as unemployment and recession. On the other hand if a government wants to eliminate recession it will have to pursue a contractionary demand side policy. This policy will increase taxation thus decreasing the citizens disposable income thus in turn reducing consumption which will reduce aggregate demand which will in turn reduce inflation. On the other hand it will decrease government spending thus decreasing investment which will again reduce aggregate demand and thus in turn reduce inflation. Fiscal and Administrative Reforms To improve its tax system, India should: a) Increase taxes on services and implement a tax on e-commerce; b) Modernize tax administration through better utilizing technology; c) Restructure tax collection and allocation system to increase revenues at local and state levels; d) Complete the replacement of complex sales taxes with a more coordinated, coherent VAT system a) Use technology to better enforce property and agricultural income taxes; b) Reduce the mean and variance of import tariffs; c) Repeal the corporate tax. On the expenditure side, the various levels of government should: a) Reduce subsidies (which are generally poorly targeted); b) Downsize overstaffed public institutions, particularly at state and local levels; c) Separate policy and implementation functions through administrative reforms; d) Reduce bureaucratic controls and set performance targets; e) Institute mechanisms like greater public transparency to increase accountability.

Financial Sector Reforms In order to continue supporting the most dynamic sectors of the economy, India should: a) Design strategies to increase venture capital; b) Allow investment in securities as an alternative to domestic saving in order to c) reduce reliance on foreign inflows in capital markets d) Allow pension funds to invest in stocks e) Improve and deepen debt markets for larger corporations; f) Increase competition from commercial and foreign banks in the financial sector

Ans. 2(b) The Reserve Bank of India is the apex bank of the country. It plays an instrumental role on the financial markets of the country through its monetary policy. There are various instruments of RBIs Monetary policy. Instruments of Monetary Policy: The RBI aims to achieve its objectives of economic growth and control of inflation through various methods. These methods can be grouped as: - General or Quantitative Methods. - Selective or Qualitative methods. 1. General or Quantitative Methods: These methods maintain and control the total quantity or volume of credit or money supply in the economy. They are also called as credit control measures. The following are the different credit control measures adopted by the RBI: i) Bank Rate: Bank rate (also known as discount rate) is the rate at which RBI rediscounts eligible papers like approved securities, bill of exchange and commercial papers held by the commercial banks. Thus it is the rate at which the RBI lends money to the commercial banks for their liquidity requirements. Changes in the bank rate affect the banks borrowing power from the RBI which in turn influences the banks lending rates. Thus, bank rate acts as a guideline to the banks for fixing their interest rates. ii) Open Market Operations: Open Market Operations indicate the buying/selling of government securities in the open market to balance the money supply in the economy. During inflation, RBI sells the government securities to the commercial banks and other financial institution. This reduces their cash lending and credit creation capacities. Thus, Inflation can be controlled. During recessions, RBI purchases government securities from commercial banks and other financial institution. This leaves them with more cash balances for lending and increases their credit creation capacities. Thus, recession can be overcome. iii) Repo Rates and Reverse Repo Rates: Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to repurchase the same at a predetermined rate and date. In this way for the

lender of the cash (usually Reserve Bank) the securities sold by the borrower are the collateral against default risk and for the borrower of cash (usually commercial banks) cash received from the lender is the collateral. Reserve bank charges some interest rate on the cash borrowed by banks. This rate is usually less than the interest rate on bonds as the borrowing is collateral. This interest rate is called repo rate. In a reverse repo Reserve Bank borrows money from banks by lending securities. The interest paid by Reserve Bank in this case is called reverse repo rate. iv) Cash Reserve Ratio: The money supply in the economy is influenced by the cash reserve ratio. It is the ratio of a banks time and demand liabilities to be kept in reserve with the RBI. The RBI is authorised to vary the CRR between 3% and 15%. A high CRR reduces the flow of money in the economy and is used to control inflation. A low CRR increases the flow of money and is used to overcome recession. v) Statutory Liquidity Ratio: SLR is the ratio requirement peculiar to India. Under SLR, banks have to invest a certain percentage of its time and demand liabilities in Government approved securities. The reduction in SLR enhances the liquidity of commercial banks. 2) Selective / Qualitative Measures: The RBI directs commercial banks to meet their social obligations through selective/ qualitative measures. These measures control the distribution and direction of credit to various sectors of the economy. The following are the various selective measures: i) Ceiling on Credit: The RBI has imposed ceiling on bank credit against the security of certain commodities or Securities. This imposes a limit on the amount of credit to different sectors. Such measures ensure financial discipline in the banking sector. ii) Margin Requirements: A loan is sanctioned against collateral security. Margin is that proportion of the value of the security against which loan is not sanctioned. Higher margin indicates lesser amount of loan. The margin (that varies from 20% to 80%) can be increased /decreased to encourage/discourage the flow of credit to a certain sector. iii) Discriminatory Rates of Interest: The RBI has introduced differential rates of interest for different use of credit. Through this method, resources can be directed to priority sectors and speculative use of bank finance can be avoided. iv) Directives: RBI uses strict disciplinary action against banks that fail to follow its directives. The directives may be related to:

Minimum margin requirement, Maximum limit on advances to borrowers, % of CRR and SLR, Minimum lock-in period, etc. v) Moral Suasion: This is the most actively used technique of monetary control. The RBI issues periodic letters and discussions to the banks about the trends in the economy, especially in money and credit. Thus the RBI acts as a reminder to the banking sector to follow credit control norms and meet its social obligation. Q3(a) All contracts are agreements but all agreements are not contracts by Salmond. Explain with suitable examples. b) What are the essentials of a valid contract? OR (a) No one can give what he does not possess. Explain and give any three exceptions to this rule. (b) What are NI and explain various types of endorsements under negotiable instruments act, 1881. Ans. 3(a) All agreements are not contract but all contracts are the agreements is a statement which is justified by the definition which are given under the section 2(h) of the Indian Contract Act: "An agreement enforceable by law is a contract." A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law. From the above definition, we find that a contract essentially consists of two elements: (1) An agreement (2) Legal obligation i.e., a duty enforceable by law. Agreement is a much wider term than the contract and is defined as per section 2 (e): "Every promise and every set of promises, forming the consideration for each other, is an agreement." Thus it is clear from this definition that a 'promise' is an agreement. What is a 'promise'? The answer to this question is contained in section 2 (b) which defines the term." When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a promise." An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent (i.e., gives his acceptance) thereto. In short, an agreement is the sum total of 'offer' and 'acceptance', which does not have any legal binding. So, the remarkable feature is the enforceability by the law, i.e. the terms are binding on the parties entering into the contract. E.g: If A agrees to come to the house of B for a dinner at Bs request ,there is an agreement, but it cannot be termed as a contract because it does not carry any legal obligation. So all contracts are the agreements but all agreements are not the contracts due to non binding nature of the terms and conditions on the parties entering.

Ans. 3(b) The law of contract affects every single transaction between buyers and sellers. It is a legally binding relationship between two or more people that is enforceable by law. Essential Elements of a contract( Must be learned) 1. Offer 2. Acceptance 3. Consideration 4. Intention to contract 5. Capacity to contract 6. Consent to contract 7. Legality of form 8. Legality of purpose a) Offer: An offer is a proposal to give or do something and, when accepted, there is said to be an agreement. It must be clear and may be implied by conduct e.g. taking goods to the checkout. b) Acceptance: This is a positive unqualified assent to all terms of the offer e.g. a house buyer makes an offer of price for a house and seller is happy to accept. c) Consideration: This refers to whatever is exchanged between the parties. 1. It must be real 2. It need not be adequate 3. It must be legal d) Intention to create legal obligation: The Person must want to create legal relations. Therefore the parties signing a contract must know that they are entering a legal agreement that cannot be broken e) Capacity to contract: This is the power of a natural person to enter into a contract. The following parties do not have the capacity to enter a contract. 1. Minors- people under 18 except for necessities e.g. food 2. Persons under the influence of alcohol or illegal drugs 3. Persons of unsound mind. f) Consent to Contract: A person must enter into a contract of their own free will. There should be no use of force or lies. e.g. a groom only married his pregnant wifeafter he was threatened by her father. One month later the marriage contract was cancelled. g) Legality of Form: This refers to the manner in which the contract is made. It can be oral (simple contract) or written. h) Legality of Purpose: This means that legally binding contracts can only be for legal transactions Ans. 3(a) The protection of property rights of a person over his belongings is ensured by the general rule that sale by a non- owner is invalid and the buyer acquires no title over the goods through such a sale. A sale of goods can be made by a person, who is either the owner of goods or is the authorised agent of the owner. This rule is based on the maxim nemo dat quod non habet, which means that none can give what he does not have. If a person does not himself have a property right in some goods, how can he give such property right in those goods to another. It was held in Whiteley Ltd vs Hilt that the hirer did not have a right to sell the goods, but he had a right

to assign his rights as hirer to any person; therefore, a purchaser from him would only become a hirer and by paying the remaining instalments, he too can become owner. Some of the exceptions to this rule are as follows: (i) By estoppel: an owner of goods may by his words or conduct lead another to believe that the person from whom he was buying the good was his agent. In Eastern Distributors Ltd vs Goldring, the owner of a car handed over blank sale papers duly signed by him to a person which enabled that person to pretend that he was authorised by the owner to sell his car, it was held that the owner was stopped from challenging buyers title. (ii) By mercantile agent: an unauthorised sale of goods by a mercantile agent would be valid for the buyer if certain requirements are met. The conditions required for this exception are: (a) The goods should have been possessed by the mercantile agent with the permission of the owner in the capacity of that agent only and in no other capacity. (b) The buyer should have acted in a bona fide manner. (c) The agent should have acted in the ordinary course of business of a mercantile agent i.e. in a manner in which any such agent would act. (iii)By seller in possession after sale: a seller of goods may continue to keep possession of goods even after the property has passed to the buyer. A sale or pledge or any other disposition of goods by such a seller should be valid, even if improper. But this sale will be valid if two conditions are fulfilled: one, the seller had kept the possession of goods as seller and with buyers approval, and two, the second buyer had acted in good faith. Ans. 3(b) A negotiable instrument means promissory note, bill of exchange or cheque, payable either to order or to bearer, whether the words order OR Bearer appears on the instrument or not. The term endorsement means writing of a persons name on the back of the instrument for the purpose of negotiation. Endorsements can be of the following kinds: 1. Blank or general endorsements: this is the endorsement done through a mere signature on the instrument without mentioning the name of the indorsee or the transferee. This converts the order instrument into a bearer instrument. Where the holder puts signature on the back of the instrument before handing it over to the payer for payment, it would not be endorsement but merely a receipt for the money received. 2. Full or special endorsement: if the endorser puts on the body of the instrument, in addition to his signature, an order to pay the amount, mentioned in instrument, to the order of, a specified person, the endorsement would be said to to be in full. 3. Partial endorsement: a negotiable instrument can not be endorsed for a part of the amount appearing to be due on the instrument. A partial endorsement transferring the rights over only a part of the amount due on the instrument invalid. The reason for this is that it would subject the prior parties to inconvenience in the form of plurality of actions- one action by the endorsee for one part of the amount, and another action by the endorser for the other part. It would be create hurdles in free negotiability also.

4. Restrictive endorsement: an endorsement which by express words, restricts or excludes the endorsees right of further negotiation or merely constitutes the endorsee as his agent, is called restrictive endorsement. Examples: pay Mr. A only, Pay A or order for the account of B. 5. Conditional endorsement: where the endorser of a negotiable instrument, by express words in the endorsement, excludes his liability, or makes his liability or the endorsees right of receiving payment dependent on the happening of a specified event, although such event may never happen, such endorsement may be called as a conditional endorsement. 6. Facultative endorsement: this is an endorsement wherein the endorser expressly gives up some of his rights under the negotiable instrument. Example: pay A or order, notice of dishonour waived. Q4 (a) Discuss the doctrine of Ultra-vires with reference to the Memorandum of Association of a limited company. (b) Write a short note on Doctrine of Constructive Notice and Doctrine of Indoor Management. OR (a) Define the term consumer and complainant as per Consumer Protection Act, 1986. (b) Comment upon state of corporate governance in India. Cite some corporate examples to support your answer. Ans. 4(a) Memorandum of Association of a company defines and confines the powers of the company. Any act done contrary or in excess to the scope of the company will be ultravires the company, i.e. beyond the legal powers and authority of the company and shall be wholly void and not binding on the company. Acts ultra- vires the company can neither be legalised nor ratified even with the unanimous consent of all the members of the company. This doctrine is to protect the interest of the investors and creditors. If an act is beyond the scope of the powers of directors, i.e, ultra- vires the directors, it can be ratified by the general body of shareholders. Acts of a company may also be ultra vires the Articles can be ratified and made binding upon the company by altering the articles by a special resolution at a general meeting. Alteration of Articles with retrospective effect, if to the benefit of the company shall be valid. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action. Consequently, here we restrict the meaning of ultra vires objects clause of the companys memorandum. Basic principles included the following: 1. An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to be ratified.

2. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party 3. If the contract was fully executory, the defense of ultra vires might be raised by either party. 4. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was available. 5. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires. Ans. 4(b) Doctrine of Constructive Notice says that since the Memorandum and Article of association on their registration with the registrar become public documents and are available for public inspection in the registrars office on payment of prescribed fee, every person dealing with the company is presumed to have the knowledge of the contents of these documents and also have understood them according to their proper meaning. Thus, if a person enters into a contract which ultra vires the company, he must do so at his own peril. Doctrine of Indoor Mangement is an exception to the doctrine of constructive notice. This doctrine protects the outsiders against the company by entitling them to assume that the provisions of the articles of association have been duly complied with by the company in its internal working. The doctrine is based on the principle of justice and public convenience. Ans. 4(a) As per Consumer Protection Act, 1986 "Consumer" means any person whoa) 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 other than the person who buys such goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purpose; or b) 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 services other than the person who [hires or avails of] the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person; (but does not include a person who avails of such services of any commercial purpose;) According to the act the actual definition of : "Complainant" means(i) A consumer; or (ii) Any voluntary consumer association registered under the Companies Act, 1956 (1 of 1956) or under any other law for the time being in force; or (iii)The Central Government or any State Government;

(iv) One or more consumers, where there are numerous consumers having the same interest (v) In case of death of a consumer, his legal heir or representative who or which makes a complaint Ans. 4(b) Issues of corporate governance have been hotly debated in the United States and Europe over the last decade or two. In India, these issues have come to the fore only in the last couple of years. The corporate governance code proposed by the Confederation of Indian Industry (Bajaj, 1997) is modeled on the lines of the Cadbury Committee (Cadbury, 1992) in the United Kingdom. Corporate governance is "the system by which companies are directed and controlled" (Cadbury Committee, 1992). It involves a set of relationships between a corporation's stakeholders. The potential for conflict of interests between stakeholders can be prevented or mitigated by the processes, customs, policies, laws, and institutions that influence the way a corporation is controlled. An important theme of discussions concerning corporate governance is the nature and extent of accountability of decision makers inside the corporation, and mechanisms that try to decrease the principalagent problem. The corporate governance problems in India require very different solutions at this stage of our corporate development. One finds increasing concern about improving the performance of the Board. This is doubtless an important issue, but a close analysis of the ground reality would force one to conclude that the Board is not really central to the corporate governance malaise in India. The central problem in Indian corporate governance is not a conflict between management and owners as but a conflict between the dominant shareholders and the minority shareholders. The Board cannot even in theory resolve this conflict. One can in principle visualize an effective Board which can discipline the management. At least in theory, management exercises only such powers as are delegated to it by the Board. But, how can one, even in theory, envisage a Board that can discipline the dominant shareholders from whom the Board derives all its powers. Some of the most glaring abuses of corporate governance in India have been defended on the principle of shareholder democracy since they have been sanctioned by resolutions of the general body of shareholders. The Board is indeed powerless to prevent such abuses. It is indeed self evident that the remedies against these abuses can lie only outside the company itself. It is useful at this point to take a closer look at corporate governance abuses by dominant shareholders in India. The problem of the dominant shareholder arises in three large categories of Indian companies. First are the public sector units (PSUs) where the government is the dominant (in fact, majority) shareholder and the general public holds a minority stake (often as little as 20%). Second are the multi national companies (MNCs) where the foreign parent is the dominant (in most cases, majority) shareholder. Third are the Indian business groups where the promoters (together with their friends and relatives) are the dominant shareholders with large minority stakes, government owned financial institutions hold a comparable stake, and the balance is held by the general public. In short, the key to better corporate governance in India today lies in a more efficient and vibrant capital market. Over a period of time, it is possible that Indian corporate

structures may approach the Anglo-American pattern of near complete separation of management and ownership. Example: the Satyam debacle has exposed the chinks in Indian corporate governance mechanism and the monitoring authorities. It has raised many questions about corporate governance in India- the role of boards of independent directors, of the auditors, of investors and of analysts. Unanimously it has been a gross failure of corporate governance standards in India and protection of minority investors. Q.5(a) Compare and contrast provisions of FERA, 1973 and FEMA, 1999. b) Explain the function of SEBI and its Objective. OR (a) Explain salient features of Environment Protection Act, 1986. (b) Write a note on Competition Commission of India. Ans. 5(a) The Foreign Exchange Regulation Act (FERA) was legislation passed by the Indian Parliament in 1973 and came into force with effect from January 1, 1974. FERA imposed stringent regulations on certain kinds of payments, the dealings in foreign exchange and securities and the transactions which had an indirect impact on the foreign exchange and the import and export of currency. FERA was repealed in 1999 by the government and replaced by the Foreign Exchange Management Act, which liberalized foreign exchange controls and restrictions on foreign investment. The Foreign Exchange Management Act (FEMA) was an act passed in the winter session of Parliament in 1999 which replaced Foreign Exchange Regulation Act. This act seeks to make offenses related to foreign exchange civil offenses. It extends to the whole of India. FEMA, which replaced Foreign Exchange Regulation Act (FERA), had become the need of the hour since FERA had become incompatible with the pro-liberalisation policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organisation (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act 2002, which came into effect from 1 July 2005. FERA vs. FEMA The similarities between FEMA and FERA are: 1. The RBI and central government would continue to be the regulatory bodies. 2. Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained. 3. The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seizure. The major differences between the two are:

1. FERA consists of 81 complex sections, while FEMA has only 49 which are relatively simpler. 2. Some terms like Capital Account Transaction, current Account Transaction, person, service etc were not defined at all in FERA while they have been defined in detail in FEMA. 3. Definition of Authorized person as per FERA was limited while in FEMA it has been extended to include banks, money changes, off shore banking Units etc. 4. While defining Resident, FERA and Income Tax Act differed a lot. In FEMA, the term has been defined in accordance with the act. 5. Under FERA, any offence was a criminal one which included imprisonment as per code of criminal procedure, 1973. Under FEMA, offence is treated as civil offence. A penalty has to be paid in terms of money and imprisonment is only for those people who do not pay the penalty. 6. The amount of money paid as penalty was quite large in FERA. It was five times the amount involved. In FEMA, the amount has been considerably reduced to three times the amount involved. 7. Any appeal against the order of "Adjudicating office", before Foreign Exchange Regulation Appellate Board went before High Court. The appellate authority under FEMA is the special Director (Appeals). Appeal against the order of Adjudicating Authorities and special Director (appeals) lies before "Appellate Tribunal for Foreign Exchange. An appeal from an order of Appellate Tribunal would lie to the High Court. 8. FERA does not have any provision for the complainant to take any legal help whereas FEMA clearly recognizes the right of the complainant to take help from a lawyer or a chartered accountant. Ans. 5(b) The government of india established in 1988, the Securities and Exchange Board of India through an executive resolution. It works with the basic objective: To protect the interest of investors in securities. To promote the development the development of Securities Market. To regulate the securities Market. For matters connected therewith or incidental thereto. Functions of SEBI: (a)Regulate the business in stock exchange and any other securities markets. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;
(b)

(c) Registering and regulating the working of collective investment schemes, including mutual funds; (d) Promoting and regulating self-regulatory organizations;

(e) Prohibiting fraudulent and unfair trade practices relating to securities markets; (f) Promoting investors' education and training of intermediaries of securities markets; (g) Prohibiting insider trading in securities; (h) Regulating substantial acquisition of shares and take-over of companies; (i) Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market] intermediaries and self- regulatory organizations in the securities market; Since its inception SEBI has been working targeting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market.

Ans. 5(a) As compared to all other previous laws on environment protection, the Environment (Protection) Act, 1986 is a more effective and bold measure to fight the problem of pollution. The Environment (Protection) Act, 1986 has 26 Sections and it has been divided into i) Preliminary, ii) General Powers of the Central Government, iii) Prevention, Control, and Abatement of Environmental Pollution, iv) Miscellaneous. The Act consists of and deals with more stringent penal provisions. The minimum penalty for contravention or violation of any provision of the law is an imprisonment for a term which may extend to five years or fine up to one lakh rupees, or both. The Act also provides for the further penalty if the failure or contravention continues after the date of conviction. It is Rs. 5000/- per day. If the failure of contravention continues beyond the period of one year, then the offender is punished with imprisonment for a term which may extend to seven years. The Act empowers the Central Government to take all appropriate measures to prevent and control pollution and to establish effective machinery for the purpose of protecting and improving the quality of the environment and protecting controlling and abating environmental pollution. The Central Government or any other person duly authorised is empowered to collect the samples of air, water, soil or other substances as evidence of the offences under the Environment (Protection) Act, 1986. It prescribes a special procedure for handling hazardous substances and the concerned person has to handle the hazardous substances according to the procedure of the Act. The Environment (Protection) Act, 1986 has relaxed the rule of Locus Standi and because of such relaxation even a common citizen can approach the Court provided he has given a notice of

sixty days of the alleged offence and his intention to make a complaint to the Central Government or any other competent authority. In the commission of the offence under this Act by Government Department, the Act holds the Head of the Department as guilty of the offence unless the head of the Department proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence. This Act also empowers and authorizes the Central Government to issue directions for the operation or process, prohibition, closure, or regulation of any industry. The Central Government is also authorized to stop, regulate the supply of electricity or water or any other service directly without obtaining the order of the Court in this regard. It is also authorized to enter and inspect any place through any person or through any agency authorized by Central Government. The Act debars the Civil Courts from having any jurisdiction to entertain any suit or proceeding in respect of an action, direction, order issued by Central Government or other statutory authority under this Act. Ans. 5(b) The Competition Act, 2002 was passed by the Parliament in the year 2002, to which the President accorded assent in January, 2003. It was subsequently amended by the Competition (Amendment) Act, 2007. The competition Act has been passed to provide for the establishment of a competition commission for the following purposes: a) To prevent practices having adverse effect on competition. b) To promote and sustain competition in markets. c) To protect the interest of consumers d) To ensure freedom of trade carried on by the other participants in markets in India. In accordance with the provisions of the Amendment Act, the Competition Commission of India and the Competition Appellate Tribunal have been established. The Competition Commission of India is now fully functional with a Chairperson and six members. The provisions of the Competition Act relating to anti-competitive agreements and abuse of dominant position were notified on May 20, 2009. It is the duty of the Commission to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade in the markets of India. The Commission is also required to give opinion on competition issues on a reference received from a statutory authority established under any law and to undertake competition advocacy, create public awareness and impart training on competition issues. To achieve its objectives, the Competition Commission of India endeavors to do the following: Make the markets work for the benefit and welfare of consumers. Ensure fair and healthy competition in economic activities in the country for faster and inclusive growth and development of economy. Implement competition policies with an aim to effectuate the most efficient utilization of economic resources.

Develop and nurture effective relations and interactions with sectoral regulators to ensure smooth alignment of sectoral regulatory laws in tandem with the competition law. Effectively carry out competition advocacy and spread the information on benefits of competition among all stakeholders to establish and nurture competition culture in Indian economy.