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1st Edition, December 2016 2nd Edition, December 2020
CONTENTS
Contents
Chapter No. Chapter Name Page No.
1 Introduction to Law of Contract 4-140
2 Sale of Goods Act, 1930 141-166
3 Consumer Protection Act, 1986 167-204
4 Company Act, 2013 205-346
5 Cyber Law 347-378
6 E-Commerce Regulations 379-414
7 Intellectual Property Legislations 412-452
INTRODUCTION TO LAW OF CONTRACT
Chapter 1
Objectives
After studying this Chapter, you should be able to:
• Meaning and Scope of Business Laws;
• Indian Contract Act, 1872 - Meaning,
• Definition and Types of Contract,
• Essentials – Offer,
• Acceptance and Consideration,
• Capacity of Parties,
• Free Consent,
• Legality of Object,
• Remedies for Breach of Contract, and
• Quasi Contract.
Structure:
1.1 Overview
1.2 Introduction
1.3 Object of Law
1.4 Need for Law
1.5 Commercial Law or Business Law
1.6 Scope of Commercial or Business Law
1.7 Sources of Business Law
1.8 Sources of Indian Business Law
1.9 Concepts of Business Laws of India
1.10 Nature of Law of Contract
1.11 Types of Contract
1.12 Classification of Contracts in English Law
1.13 Offer [Proposal]
1.14 Acceptance
1.15 Consideration
1.16 Capacity of Parties
1.17 Free Consent
1.18 Legality of Object
1.19 Various Modes of Discharge of a Contract
1.20 Remedies for Breach of Contract
1.21 Quasi Contract
1.22 Rationale of Quasi Contracts
1.23 Theory of implied-in-fact Contract
1.24 Restoration of Theory of Unjust Enrichment
1.25 Position of Quasi Contract in Indian Law
1.26 Types of Quasi-Contracts
1.27 Summary
1.28 Self Assessment Questions
1.1 OVERVIEW
General Caption
Need for Law
“Ignorantia Juris non-exusat” [Ignorance of law is no excuse]
1. To know the rules & regulations by which the individual is governed.

2. To know the general principles of the law of the country.
3. It helps in taking sound decisions by businessman.
4. It stand as strong guide line towards commercial transactions.
Commercial law: Branch of law concerned with the matters which are of
commercial/business nature.
It deals with contractual situations rights and obligations arising out of

commercial/ business transactions.
Scope of law: It includes the law relating to contracts, sale of goods,

partnership, negotiable instruments, insurance, insolvency, carriage of
goods, companies activities etc.
1.2 INTRODUCTION
Law is a main contributory factor for man’s welfare and wellbeing. The
study of law is of enormous practical value and vital and ever- present
force in modern life. Every individual and even more a business man needs
even more through knowledge of the law than the person not so engaged.
As he carried his business, he is confronted with problems arising out of
contract, sale of goods, bailment, agency, negotiable instruments, cyber-
crimes environmental issues, international dealing and so on. At present
situation business are facing a lot of formidable problems as every activity
of the business is vigilantly watched by the public and law. In economics is

started developing in the positive direction and exposed to global
competition and followed the path of economic liberalization to the greater
extent. This made compulsory to study ‘Business Law’ or to the knowledge
of various legal aspects as a part of commerce, management and business
study curriculum with different titles.
With the growth of people’s social and economic behavior has assumed a
multi-dimensional character. Most civilized societies, therefore, provide and
enforce different set of rules, regulations and principles for different kind of
social behavior. In this connection there are different branches of law both
for social, individual and business such as constitutional law, civil
procedure codes, criminal procedure codes, International law, Mercantile
law/Business law and so on. The mercantile law is referred to the branch of
law which comprises laws concerning trade, industry, business or
commerce with the increasing complexities of modern business world, the
scope of mercantile law has enormously widened. Since the business is
related to society, any activity related society and main’s welfare are
directly related, hence it is now termed as business law or legal aspects of
business or business regulations.
Prior to the enactment of the various Acts like the Contract Acts, Sales of
Goods Acts, Companies Act, The Negotiable Instrument Act, Insurance Act,
etc., business transactions were regulated by the personal laws of the
parties to the suit. The rights of Hindus and Muslims were governed by
their respective laws and usages. Where both parties were Hindus, they
were regulated by the Hindu Law and where both parties were Muslims,
the Mohammedan Law was applied. In cases where one party was a Hindu
and the other was of Muslims, the personal law of the defendant was
applied. In case of persons other than Hindus and Muslims, and also where
laws and usages of Hindus and Muslims were silent on any point, the
courts generally applied the principles of English law.
In the present era the General law applicable to all sort of persons in the
society irrespective of any religious differences. The applications are based
on nature and type of situation faced by every man in the society. Hence
the study on different activity and the practices of an individual man is
essential.
Man is a rational and social being who comes into contact with various
types and varieties of people with different capabilities and dimensions.
The Role of a man in the society given is below:
The above role of the man is the different contacts and the associations
which are inevitable for the modern world. Man as a buyer, beneficiary,
promisee, tenant, taxpayer, customer and so on, is expected to observe a
set of rules or code of conduct. The object of these rules is to make human
associations possible and conducive to the state and its people.
Meaning of Law
Law is a rule of action evolved to regulate social life and to avoid conflict of
interests. Law is enacted or customary in a community and recognised as
commanding or avoiding certain action.
Law is:
• Commanding or influencing of certain actions;
• Collectively as a social system or subject of study;
• Binding force on individuals or society;
• Rule of action and procedure;
• Regularity in natural occurrences;
• Judicial remedy.
The above different meaning of law reflection on man and has different
connotations for different people as;
• A citizen A set of rules which he must obey.

• A lawyer Profession/vocation.
• A legislator Something created by him.
• A judge Guiding principles applicable for decisions
• A social scientist Social control.
Thus the meaning of law differs from person to person according to the
individual’s perception. It is, therefore very difficult to give one confirmed
and accurate definition of Law. It is often preceded by an adjective to give
it a more precise meaning, example: Civil Law, Criminal Law, Commercial
Law, Labour Law, Industrial Law, Common Law, International Law and so
on. However, in the legal sense, the word “Law” includes all the rules and
principles which regulate our relations with other individuals, with the
society and with the state.
It is the duty of the state to regulate the conduct of people by a Notes

set of rules. Intern the people of the state to follow these rules directly or
indirectly and implicitly or explicitly. Such rules of conduct after its
recognition by the state and enforced by it on people, are termed as ‘Law’.
This is to confirm, the reference can be taken from the Salmond, an
eminent jury as “Law is the body of principles recognised and applied by
the state in the administration of justice”.
The meaning of law can be justified with some of the following

definitions:
• Woodrow Wilson, “ Law is that portion of the established habit and

thought of mankind which has gained distinct and formal recognition in
the shape of uniform rules backed by the authority and power of the
government”.
• Austin, “A law is a rule of conduct imposed and enforced by the

sovereign”.
10

• Scotland, “ Law as rules of external human action enforced by the

sovereign political authority i.e., the state”.
• Oxford Dictionary, “Law is rule made by authority for the proper

regulation of a community or society or for correct conduct of life”.
From the above discussions and definitions, it is clear that the law
can be applicable as the following:
1. Body of rules which includes Statute Law like;
a. The Indian Contract Act 1872,

b. The Indian Partnership Act 1932
c. The Companies Act 1956
d. Case Laws
e. Customs and Usages.
2. Guide to human conduct.
3. Imposed by some authority in whom special power is vested,

like;
a. Municipal Bodies.
b. State Legislative Assemblies.
c. Parliament
d. All statute law laid down by the state.
e. Case law laid down by the superior Courts.
f. Customs and usages practiced by the people over period of time.
4. Enforcement, which is main characteristic of law, carried by the state.

“The law which is not enforced ceases to be law”.
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1.3 OBJECT OF LAW
1. To incorporate uniformity and social security among all category of

people of the society.
2. To establish socio-economic justice and remove the existing imbalances

in the socio-economic structure.
3. To impose social justice on the basis of social change by considering all

round welfare and improvement of the community, through welfare and
well-being of the citizens individually and collectively from material,
moral and spiritual stand points.
4. To create awareness of law among the citizen, its contents, purpose,

requirements, regulations and manner involves which its serves them. It
is able to make them follow the law and respect it.
5. To make a strong government or state to implement the law positively

for the benefit of human-being and for the welfare and well being of the
society.
1.4 NEED FOR LAW
As law is a body of rules passed, and it is guidance which is imposed to

certain level to the general public, it is obvious that the law must be known
and practiced by each and every person in the society.
“Ignorantia juris non–excusat” is a familiar and well accepted maxim and

the meaning of the same is, “ignorance of law is no excuse”. Though it is
not possible for any common man to learn every branch of law, yet it is to
the advantage of each member of the community to know something of
rules and regulations by which he is governed and as such he must
acquaint himself with the general principles of the law of the country.
It is understood that, some knowledge of law is necessary for every

member of the society in general and particular with the business class. As
such no sound businessman would attempt to solve important legal
problems affecting his business interest without expert legal advice. A
general knowledge of some of the more important legal principles and how
they apply to certain problems will definitely help a business man in
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avoiding conflict with the persons with whom he comes into business
contacts. Mercantile Law, Commercial Law or Business Law are in particular
importance to business people or general public to certain extent engaged
in economic and social activities.
1.5 COMMERCIAL LAW OR BUSINESS LAW
The term commercial law is used to denote that branch of law which is
concerned with the matters of commercial or business nature. Many a time
it deals with contractual situations, rights and obligations arising out of
commercial or business transactions.
The term commercial is used to denote the aggregate body of those legal
rules which are contracted with trade, industry and commerce.
It is also defined as, “ that branch of law which comprises laws concerning
trade industry and commerce”.
Mercantile Law or Business Law is also known as a body of legal rules

which relates to the conduct of business.
According to Slaters,
“The phrase, Mercantile Law or Commercial Law, is generally used to

denote those portions of the law which deal with the rights and obligations
arising out of transactions between mercantile persons”. It also comprises
a vast number of transactions pertaining to business transactions, and
these laws govern the relation of different business to society. There is no
separate statute entitled ‘Mercantile law’ or ‘Commercial law’ or ‘Business
law’ but for the shake of convenience, some of the Acts related to men and
society and men in business are grouped together and called Mercantile
Law or Business Law.
These laws are part of civil law which is connected to society directly. Some
of them are like, Law of Contracts, Sales of Goods Act, Consumer
Protection Act, Environmental Protection Act, Intellectual Property Act and
so on.
13
1.6 SCOPE OF COMMERCIAL OR BUSINESS LAW
Most civilized societies provide and enforce different sets of rules and
guiding principles for different kinds or social behaviour. Hence there are
several branches of law such as Constitutional Law, Criminal Law, Civil Law,
Industrial Law, Labour Law, Commercial Law or Business Law and so on.
The scope of commercial or business law is fairly large. It includes the law
relating to contracts, sale of goods, partnership, negotiable instruments,
insurance, insolvency, carriage of goods, company’s activities and so on. In
respect of Business Law in particular
a. Law of contract Deals with any agreement which may be in

particular or general with the individuals
belonging to the society and also of various
commercial activities.
b. Law of sale of goods Deals with the agreement between one trader
to another trader with only commercial
transactions.
c. Economic and other Are termed as ‘General Law’, deals with both
Legislation- the business and society which sets the rules
towards rights, duties and obligations for any
category of people in the society. Some of the
law of this nature which are termed as ‘Act’
are:
a. The Monopolies and Restrictive Trade Practices Act 1969.
b. The Environment (Protection) Act 1986.
c. The Patents Act 1970.
d. The Sick Industrial Companies (Special Provision) Act 1985.
e. The Consumer Protection Act of 1986.
f. The Securities Contracts (Regulation) Act 1956.
g. The Foreign Exchange Management Act and so on.
14
which is also dealing with the activities pertaining with the any class of
people who are directly or indirectly connected with the business activities.
Hence the scope of business law can be broadly classified as:
1.7 SOURCES OF BUSINESS LAW
Major part of Indian Mercantile Law or Commercial Law is based on English

Law. Any Practices, customs and usages are also used in formulating
Business Law. The courts in India are however, selective in the application
of English Law.
English Mercantile Law
Constitutes the foundation on which the super structure of the Indian

Business Law has been built. Again the main source of English Mercantile
Laws are:
a. Law of Merchants or ‘Lex Mercatoria’ was based on customs and

practices prevalent among English merchants. This law was developed
during the 14th and 15th centuries. But in later merged with common
law.
b. Common Law: This law is based upon Judicial precedent handed over
from generation to generation. It also refers to a system of law based
upon English customs, usages and traditions which were developed over
centuries by the English courts. It existed in England even prior to the
creation of the parliament, which is not written in any Statute or Act of
Parliament. Hence it is the oldest unwritten Law. Its principles are
applied even today as the law of contract. However it is not codified and
did not provide an adequate remedy to an injured party. In India the
same is codified and adoptable to the suitability.
c. Equity: This is also an unwritten law. It grew as a system of law,

supplementary to the Common Law. The term ‘Equity’ in Latin word
which is referred as ‘aequitas’ which means ‘fair’ or ‘justice’ according to
natural law. In a sense equity covered the deficiencies of the common
law. This law is based upon the concepts of justice developed by the
judges whose decisions became precedents. These precedents now
constitute Equity Law. In the other sense it is soul and spirit of all law
and is synonymous with justice.
15
d. Statute Law: The Statute law is another English Mercantile Law which
is referred to the Law laid down in Acts of parliament. It is a written law
superior to and overrides any rule of the common law or equity. It is
also referred as Enacted Law. According to Salmond, “Law that has its
source in legislation may be most accurately termed enacted law, all
other forms being distinguished as unenacted”.
Statutes of Indian Legislation
The Law of Merchant or Lex Mercatoria was English Law relating to

mercantile transactions like Negotiable Instruments, Contracts of
Partnership, Carriage and Insurance. In India, the same Law are embodied
in the Acts passed by the State Legislatures or Parliament.
The bulk of the Indian Mercantile Law is Statute Law. The laws of such
category are:
• The Indian Contract Act,1872.
• The Negotiable Instrument Act 1881.
• The Sale of goods Act 1930.
• The Indian partnership Act 1932.
• The companies Act 1956.
Judicial decisions
It referred to something done or said that may serve as an example or rule

to authorize or justify an act. Judicial decisions are usually referred to as
precedents and are binding on all courts having jurisdiction power to that
of court which give the judgement which is popularly known as Case Laws.
Case Laws: Originally case laws are considered as very important

source of the English Mercantile Law. It is built upon previous judicial
decisions. They are also generally followed even by those of equal
jurisdiction in deciding similar points of law.
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Application English Law in India: The English Law even though

founded on ‘justice, equity and good conscience’, its application to India,
has to conform to the peculiar circumstances and conditions prevailing in
the country. Our courts are selective in using the English Law [Waghela
Vs Sheik (1887) 14.I.A 89]. However in several occasions the courts
refuse to apply the rules of English Law if they are found inapplicable to
Indian circumstances [Tagore Vs Tagore(1872) I.A Supp. 47]
In M.C Mehta Vs Union of India, AIR(1987) S.C 1086, the Supreme court
observed that: “We cannot allow our Judicial thinking to be constituted
by reference to the law as it prevails in England or for the matter of that
in any other foreign country. We no longer need the crutches of a foreign
legal order”.
However in India, we take the judicial decisions of any previous cases as

the source for the new cases to decide suitable to their relevance.
Customs and Usages
‘Custom’, refers to usage or practice common to many or to a particular

place. It is long-established practice considered as unwritten law. A
particular act, usage or conduct practiced by a group of people for a long
period becomes a custom. The following are the reasons for attributing to
custom as in force of law:
a. Based on principles of justice and public utility: Custom is the

embodiment of those principles which have commended themselves to
the national conscience as principle of justice and public utility. The
natural conscience may well be accepted by the courts as an authority
to guide. Such of the customs should also obtain the sanctions of law.
The customs must be acknowledged and approved not by the power of
the state but by the public opinion of the society at large.
b. Rational expectation: Rational expectation of the customs and usages

and its continuance is another stage to be accepted as source of law.
Generally the rational expectation is been fulfilled unless there is a
contrary, rather than frustration. Even if customs are not ideally just
and reasonable, even if it can be shown that the rational conscience has
astray in establishing them, it is accepted as they are.
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c. Observance over a long period: Customs observed by a large

number of people over a long period acquires the force of law. Thus the
custom of granting three days of grace in calculating the date of
maturity of bills of exchange has come to have the force of law.
d. Interest of society: Custom rests on the popular convictions that it is

in the interest of society. This conviction is so strong that it is not found
desirable to go against it.
A custom or usage, in order to be legally recognised and binding must be

established by long usage. Custom is useful both to the law- giver and the
people. Further it must not be opposed by an statute law. To the people, a
custom is already known. Its observance over a long period makes its
acceptance easier by the people. It is easier to secure reference for a code
or law if it claims to be based on customs immemorially observed and no
new legislation can completely ignore it.
When custom is accepted by court and is incorporated becomes Judicial. It

becomes legally recognised custom or usages have already been either
codified and given legal sanctions or have been satisfied by the decisions of
the competent courts of law.
18

The following are the sources of Business Law:
English Mercantile Law
The Law of Merchant Common Law Equity Statute Law
Statute of Indian Legislation
Indian Contract Sale of The Indian The Companies

Act Goods Partnership Act
Act Act
Judicial Decisions
Case Laws
Customs and Usages
Principles of Rational Observance Interest

justice and expectation over a long of society
public utility the period
1.8 SOURCES OF INDIAN BUSINESS LAW
India’s laws are derived from English common law and seem recognizable
to American, Canadian, British, Australian and New Zealand attorney and
others familiar with the heritage of English legal practices.
Many business laws in India predate its independence in 1947. For

examples, the Indian Contracts Act of 1972 is still in force although specific
contracts such as partnerships and the sale of goods are now covered by
newer laws. Specifically business laws in India covering partnerships were
19
passed in 1932, and the Indian Companies Act in 1956, amended four
times since 2000.
Employees are offered many protections by business laws in India, which is

a member of the International Labor Organization. These include the
Payment of Wages Act of 1936, the Industrial Employment Act of 1946, the
Industrial Disputes Act of 1947, the Payment of Bonus Act of 1965 and the
1972 Payment of Gratuity Act.
1.9 CONCEPTS OF BUSINESS LAWS OF INDIA
Indian Companies Act 1956
The Companies Act 1956 is an Act of the Parliament of India, enacted in

1956, which enabled companies to be formed by registration, and set out
the responsibilities of companies, their directors and secretaries.
The Companies Act 1956 is administered by the Government of India

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) handles
incorporation of new companies and the administration of running
companies.
The Act has now been replaced by the Companies Act, 2013 after receiving
the assent of the President of India on August, 2013. The Companies Act,
2013 is divided into 29 chapters containing 470 clauses as against 658
Sections in the Companies Act, 1956. The Central Government has
appoints Thursday, 12 September, 2013 as the date on which some notified
sections the Companies Act, 2013 shall come into force.
The new law has been passed and is considered as trend changer in Indian
Corporate law the new law has been rewritten extensively with several new
provisions for investor protection, better corporate governance and
corporate social responsibility etc. It defines a number of new terms that
have come into vogue in recent times.
The bill provides for class action suit, which is key weapon for individual
shareholders to take collective action against errant companies. Better
disclosure requirements in financial statements and disclosure of interests
20

of directors etc. It has also streamlined procedures relating to disclosure of

transactions with parties related to directors, promoters etc.
It provides for new concepts such as a single person company. Cap on

number of persons in a private company raised to 200. E- voting has been
recognized.
State of the Economy
Post independence, India decided to tread the socialist path which

encouraged Government sponsored commercial activities and discouraged
private wealth. This period was characterized by Government control, high
taxation and retrograde financial policies. All this culminated in a financial
crisis by the early 1990's. Finally the Government was goaded into
liberalizing and embracing economic reforms. This has brought about a
dramatic change in the fortunes of the country. Within a very short period
India has emerged from the shadows of poverty and has become a super
power in the making. Some economic indicators are as follows:
i. India's GDP is growing at 9% per annum - the second fastest in the

world.
ii. According to Goldman Sachs, Indian economy is set to overtake that of

Western Europe by 2030 and by 2050 it is set to overtake the US
economy to become the second largest economy in the world, (next
only to China). In terms of Purchasing Power Parity (PPP) India is
already the third largest economy in the world.
iii. The forex reserves of India currently stand at US$ 230 billion. In March
1991 when India was in the throes of its financial crisis it stood at
merely US$ 5.8 billion.
iv. According to US Department of Commerce, India has amongst the

highest returns on Foreign Investment and as per the FDI Confidence
Index, India is amongst the three most attractive FDI destinations in the
world.
v. In the first quarter of 2007, there were 72 foreign takeovers by Indian

companies worth nearly US$ 25 billion.
21
vi. India's capital markets have soared six times in five years.
vii.26% of the US technology companies founded by immigrants in the last

decade have an Indian founder, which is more than those from the U.K.,
China, Taiwan and Japan combined.
viii.1/5th of the Fortune 500 companies have set up R & D centres in India.
Some like, Microsoft have their only R & D centre outside their home
country in India. IBM has its largest non – US workforce in India.
However at the same time India is far from shaking off its shackles of
poverty. There are extremes in wealth disparity. On the one hand India is
home to 36 dollar billionaires; on the other hand one out of four persons
survives at a dollar or less a day.
Overview
“An agreement enforceable by law is a contract.”

Sec. 2(h)
Elements = Agreement + Legal
obligation Agreement = Offer +
Acceptance Contract = Agreement +
“All contracts are agreements but all agreements are not contract”-
To make all agreements are contracts, the following essentials to be

present: Sec. 10]
22

Types l Classifications
23

Introduction
Business and society go hand in hand, and at the same time Law and
society are very closely related. It is often found that law changes with a
change in the society. Society lays down rules of conduct for common
good, sometimes at the expense of the individuals. Every individual should
be a man and he is a social being. Every social being should surrender a
part of his freedom to the society especially towards law that in turn
ensures him safety, security and peace. So Law aims in bringing and
maintaining peace and order in the society. One such law is the Indian
Contract Act. The law of Contracts forms the oldest branch of the law
relating to business and general transactions, as it affects every person in
one way or the other, as all of us enter into some kind of agreement or
contract everyday. Law of contract is very essential to all merchants, when
they are involved with huge money and dealings. At the same time it is
also for the general public like a person buys a movable property, hires
some goods or services, booking for a marriage hall, putting up of a show
and so on. Such contracts create legal relations giving rise to certain rights
and obligations.
According to Asen; “The law of contract is intended to ensure that what a

man has been led to expect shall come to pass, that what has been
promised shall be performed.”
1.10 NATURE OF LAW OF CONTRACT
The law of contract is that branch of law which determines the

circumstances in which a promise or an agreement shall be legally binding
on the person making it. The law relating to contracts in India is confined
to the Indian Contact Act, 1872. The Act came into force on the first day of
September 1872. Originally this Act was included with general principles of
law of contract, contracts relating to sale of goods, special kinds of
contracts like indemnity, guarantee and so on. Later the Indian Contract
Act has been divided into two, Part I as general principles of Law of
Contract and Sale of goods Act, where as in Part II it is Partnership Act and
so an.
Unlike other branches of law, law of contract does not apply, but it
determines the circumstance in which a Promise has been made. The
parties to an agreement may lay down their own terms and conditions. The
24
Indian Contract Act does not declare to be a complete and exhaustive

code, it deals with the general principles of the law of contract and with
special contracts only.
The law of contract differs from other branches of law. The Act does not lay
down a number of rights and duties which the law will enforce. In this Act
the party themselves creates rights and duties which will be supported with
a limited principles.
Definition of Contract
Sir John Salmond defines a contract as, “An agreement creating and
defining obligations between two parties.”
According to Sir William Anson, “A contract as a legally binding

agreement made between two or more persons, by which rights are
acquired by one or more to acts or forbearance on the part of the
other or others.”
In simple words, a contract is an agreement between two or more parties

which is intended to have legal consequences.
According to Halsburey, “A contract is an agreement between two or

more persons which is intended to be enforceable at law and is
constituted by the acceptance by one party of an offer made to him by
the other party to do or abstain from doing some act.”
Sir Fredirck Pollock defines, “Every agreement and promise enforceable

at law is a Contract.”
According to the Indian Contact Act, Section 2 (h) “An agreement

enforceable by law is a Contract.”
According to above definitions, it is clear that a contract should

consist of two elements;
i. Agreement
ii. Legal obligation or agreement must be enforceable by law.
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i) Agreement
Agreement is an acceptance to a offer. Agreement is considered to be

prime element to form any contact. According to the Act, the word
‘agreement’ is defined under Section 2(e) as, “Every promise or every set
of promise, forming the consideration for each other is an agreement.”
According to this act for agreement there should be a promise then,
What is a Promise?
A Promise is defined under Section 2 (b) as, “when the person to whom the
proposal is made signifies his assent there to, the proposal is said to be
accepted. A proposal when accepted, becomes a promise.”
Then, how does the word Proposal is defined under the Act? According to
the Act again the proposal is also defined under Section 2 (a) as, “When
one person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtain the assent of that other to such act
or abstinence, he is said to make a proposal.”
agreement Promise
So, An should have a and Promise should
have Proposal.
From the above it is clear that, an agreement involves proposal or offer

by one party and the acceptance of the same by the other party. It should
be understood that the word proposal is an English term, whereas offer is
another term for the proposal used in Indian contract. Hence proposal and
offer are similar terms.
An agreement requires existence of two or more persons i.e.
plurality of persons
as a person cannot enter into an agreement with
himself.
From the above it can be concluded that an agreement consist of an ‘offer’

or ‘proposal’ from one party and its acceptance by the other. It also implies
that the parties have a common interest and intention about the subject-
26
matter of their agreement. Thus, Agreement is created through offer and

acceptance.
Agreement = offer + Acceptance

So,
ii) Legal obligation
An agreement to become a contract must give rise to legal obligation. A

legal obligation is a duty enforceable by law. That is the common
acceptance formed and communicated between two parties, must create
legal obligation. It binds the parties to a contract and imposes the
necessity of doing or to abstain from doing a definite act. If an agreement
does not create a duty enforceable by law, then it is not a contract. Thus,
an agreement is a wider term than a contract. But agreement creating
social, religion or moral obligations cannot be taken for a contract.
For example, A invite B for a dinner and the invitation is accepted by B, the
obligation of A is to prepare the dinner and the obligation of B is to attend
dinner. These obligations are purely social obligations and they do not
create a legally enforceable agreement. If any one of them does not
perform his part of the social obligation, the other cannot take any action
against the former.
One more example of social contract is a contract or agreement between

husband and wife which are purely domestic and not intended to create
legal obligations.
In connection with the above circumstance the leading case explain this
sort of situations clearly like,
Balfour Vls Balfour (1919)
Mr. Balfour was employed in Ceylon. Mrs. Balfour owing to ill health, had to
stay in England and could not accompany him to Ceylon. Mr. Balfour
promised to send her £ 30 per month, while he was abroad. But Mr. Balfour
failed to pay the agreed amount. Mrs. Balfour filed a suit against her
husband for recovering the said amount. The court held that it was a mere
domestic agreement and that the promise made by the husband in this
27

case was not intended to create obligation and it was clear from the
conduct of the parties.
Thus, from the above, one can decide as, “All contracts are agreements,
but all agreements are not contracts. Only those agreements are contracts
which give rise to legal obligation.
Therefore; Agreements are wider, which may be constituted both for social
and business transactions. Whereas the contract is restricted to create
legal obligations. So all contracts should have agreement, where as all
agreement need not be termed as contract.
Thus it is said, “All contracts are agreements but all agreements are not
contracts.”
Contract = Agreement + Legal obligation

So,
Or
Contract = Agreement + Enforceability at law
Therefore Salmond rightly says, “The Law of contracts is not a whole law of
agreements or is it whole law of obligations, it is the law of those
agreements which create obligations, and of those obligations which have
their source in agreements”.
Thus “the law of contract is not the whole law of obligations” The law of
contacts is the law of those legal obligations which have their source in
agreements. The law of contracts is not concerned with those obligations
which do not arise out of agreement.
Example: Obligation arising from judgement of Courts, obligations arising

from tort or civil wrong and obligation to maintain wife and children do not
arise out of agreement and hence they do not constitute contracts.
28
Essentials of Valid Contract or Essential Elements of a Valid

Contract.
All contracts are agreements but all agreements are not contracts. As
stated above, an agreement to become a contract must give rise to a legal
obligation. If an agreement is incapable of creating a duty enforceable by
law, it is not a contract. Thus an agreement is a wider term than a
contract. This is clearly given under Sec 10, Chapter II of the Contract Act
as, “All agreements are contracts if they are made by the free consent of
parties, competent to contract, for a lawful consideration and with a lawful
object, and are not hereby expressly declared to be void.” “From this it is
obvious to make a contract void or valid, there need to be certain
conditions to be followed. These conditions are termed as elements which
are essential for an agreement into contract.
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1. Plurality of Parties: An agreement is constituted by means of an offer

by one party and an acceptance to that offer by the other party, which
is known as plurality of parties for a valid contract. Here, one party may
be an offeror and the other party may be the acceptor.
2. Offer and Acceptance: An agreement is the result of an offer and its

acceptance. In order to create a valid contract both ‘lawful offer’ and
‘Lawful acceptance’ are essential. Thus, in agreement there should be
two parties i.e. offeror, one who is making the offer and another person
acceptor who is accepting or giving his assent for the offer. There are
certain rules laid down by the Contract Act to make both offer and
acceptance to be valid.
3. Legal obligation: An agreement to become a contract must give rise to

a legal obligation. Section. 10 of the Act, which lays down the
essentials of a valid contract does not specify ‘intention to create legal
relations,’ as one of the ingredients. This is also considered as one of
the necessary contractual ingredient in English Law. Under Indian
Contract Act, an obligation is the legal duty to do or abstain from doing
a definite act or acts.
If the parties do not intend to create legal obligations, there is no

contract between them, whereas an agreement for social obligations
cannot be a contract.
As previously referred to Balfour Vs Balfour (1919) In this case, there is

an agreement between husband and wife and agreement without the
intention of creating legal obligations (refer page 17) same is hold good
for the agreement to have lunch at a friend’s house.
In case of commercial transactions, an intention to create legal

obligation is presumed. If the parties expressly declare and resolved
that their agreement is not intended to create legal relationships, then
even a business transaction will not amount to contract.
4. Lawful consideration: The legal meaning of consideration is ‘quid-pro-

quo’ or something in return. Consideration is one of the essential
elements of contract. Contradiction is defined as, “Consideration is the
price for which the promise of another is brought.” (Black stone).
Promises made without consideration is not enforceable contract.
30
 
 
 
 
 

According to Sec 25 of the Act, that an agreement without consideration

is void. An agreement which is not supported by consideration is
considered as ‘nudum pactum’ (a nude or bare agreement). So it should
be supported by the parties. Each party to the agreement must give or
promise something and receive something or a promise in return.
Example: If A offers to sell his vehicle for Rs. 1,00,000 and B accepts
the offer, then for A- Rs. 1,00,000 is the consideration and for B-vehicle
is the consideration. Consideration may take in the form of money,
goods or services. Consideration may also be past, present and future,
whereas it must be real and unlawful.
5. Capacity of parties: When an agreement is formed to make it to be a

valid contract, there arises, question of contractual capacity of parties
who make the agreement. The parties to an agreement must be
competent to a contract, otherwise it cannot be enforced by Court of
Law. If either of the parties does not have the capacity to contract, the
contract is not valid. Section 11 of the Contract Act also says that,
“every person is competent to contract, who is in the age group of
majority, according to the law to which he is subject, and who is sound
mind, and not disqualified from contracting by any law to which he is
subject.” (For more detail refers the topic ‘capacity of parties)’.
6. Free consent: The word consent means the parties must have agreed
upon the same thing in the same sense. So, the consent should come
from both the parties, that is the offeror and the accepter. The consent
must be free and genuine. When the agreement is made between the
parties, both the parties should agree upon same-thing with the same
sense. This is known as “Consensus-ad- idem” in English Law. The
consent of the parties should not be obtained by mis-representation,
fraud, undue-influence, coercion or mistake, otherwise such of the
agreement is invalid under law. Hence an agreement must be made with
free consent.
7. Lawful object: Object is nothing to do with consideration but it should

be lawful. The object for which the agreement has been entered must
not be illegal or immoral or opposed to public policy. The purpose or
design of the contract is lawful, but, when a party hires a house and use
it as a gambling house, then the object of the contract is to run a
gambling house, then it is unlawful and it not accepted under law.
31
 

 
Hence the object which is not agreeable under law or for defeat of any
law, intention of creating fraud, any injury to person and property, any
act against the public policy are not lawful objects.
8. Certainty of meaning: Agreements to form valid contracts must be

certain. As per section 29 of the Act, “Agreements, the meaning of
which is not certain, or capable of being made certain, are void. The
terms of the contract must be precise and certain. It cannot be left
vague. A contract may be void on the ground of uncertainty.
Example: If A agrees to sell to B, a white horse for rupees five thousand

or rupees ten thousand, there is nothing to show which of the two prices
was to be given. This sort of agreement will become invalid.
9. Possibility of performance: If the act is impossible to act by itself,

both physically or legally, it cannot be enforced at law.
Example: If A agrees with B to discover treasure by magic, such

agreement is unenforceable.
10.Agreement not declared void or illegal: The agreements must have

been expressly declared to be void by any law in force in country, when
such agreements if entered into, shall not be enforceable by courts of
Law. According to the Law, agreement in restraint of marriage, trade,
legal proceedings, uncertainty of meaning and wagering agreement are
void, unlawful or illegal.
11.Legal formalities: There is no specification for the agreement or

contract which should be made in oral or written. An oral contract is a
perfectly valid contract, except in those cases where writing, registration
etc., are required for some statutes. In India agreement in writing is
required in cases of sale, mortgage, lease or gift of immoveable
property and so on. If the legal formalities are not followed then there
cannot be a valid agreement to form a contract.
Hence from the above essential, it is clear that all the agreement of
offer and acceptance alone will not form the contract. To form a valid
contract the above mentioned eleven elements, are essentially to be
present. Hence it is said that, “All contracts are agreement but all
agreements are not contract.”
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1.11 TYPES OF CONTRACT
The types of contract can be grouped on the basis of the classification. This
can be classified differently connected to Indian Contract Act and English
Law.
Classification Under English Law:
English Law
Formal Contract Simple Contract
Contract of Contract
records under seal
According to the Indian Contract Act contracts may be classified on the

basis of their Validity, formation or performance. The classification of
the same is given below:
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A brief explanation of the above classification is as follows:
1. On the basis of formation or mode of creation
i. Express Contract
An express contract is entered into by words which may be either

spoken or written, where the proposal and acceptance is made in
words, then it is an express contract.
ii. Implied contract
When both offer an acceptance is constituted’, a contract is

made, other than the words, the contract is said to be implied
contract. Many a times the implied contracts are understood out of
the surrounding circumstances and the conduct of the parties who
made them; and is fallowed with various legal obligations. So, where
a person employs another person to do some work, the law implies
that the former agrees to pay for the work.
Example: Mr. A, a coolie in uniform takes up the luggage and carried

it out of the railway station without being asked by Mr. B, and B
allows him to do so, then the law implies that Mr. B agrees to pay for
the services of Mr. A.
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iii. Quasi Contract
It is also known as constructive contract. Quasi contract is a contract

in which there is no intention on either side to make a contract, but
the law imposes a contract. In other words quasi contract or
constructive contract is not a contract at all. It is created by law and
not intentionally entered into by the parties, i.e. ‘Quasi-contractual
obligations’ are imposed by law without offer and acceptance. To be
clear in understanding of Quasi contract, under certain
circumstances, a person may receive a benefit to which the law
regards another person as better entitled, or for which the law
considers he should pay to the other person, even though there is no
contract between the parties. In this case the parties are put in the
same position as if these were formed a contract between them.
Example: A, a merchant, leaves goods at B’ house by mistake, B

treats the goods as his own. Here B is bound to pay A for the goods
used.
The Quasi contract or constructive contract is used in English Law

whereas under Indian Contract Act, from section 68 to 72, is
explained this sort of situations and ground, in the name of “of
certain Relations Resembling those created by contract.” In other
sense it aims at “nemo debt locuplatari ex-Liena justua” that
means “a person shall not be allowed to rich himself unjustly at the
expenses of another”.
Quasi-contracts under Indian Contract Act: The Indian Contract Act

refers the
Quasi-contract under the heading. Certain relations resembling those

created by contract,(Section 68 to 72).
a. Claim for necessaries supplied to a person incapable of contracting on

his account (Sec. 68).
b. Reimbursement of a person paying money due by another in

payment of which he is interested (Sec. 69).
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c. Obligation of person enjoying benefit of a non-gratuitous act (Sec.

70).
d. Rights and liabilities of the finder of lost goods (Sec. 71).
e. Liability of persons to whom money is paid or things delivered, by

mistake or under coercion (Sec. 72).
2. On the basis of Validity or enforceability
i. Valid contract
An agreement becomes enforceable by law when all the essential

elements of a valid contract are present. In other words an
agreement enforceable at law is a valid contract. According to the
Contract Act, under Sec. 10, “all agreement are contracts if they are
made by the free consent, competent parties, lawful consideration
and lawful object. Such of the contract should not declared to be
void.”
ii. Void contracts
Void contracts are contracts which not enforceable by law. According

to Sec 2(j) of the Contract Act, “Void contract is a contract which
cease to be enforceable by law becomes void, when it ceases to be
enforceable.” According to this section it is clear that, a void contract
is a contract which was valid originally, ie. at the time of formation
but the same becomes void subsequently. The following are the
different situation or circumstances to make a contract a void:
a. Supervening impossibility [Sec. 56]
Example: A enters into a contract to import goods from a foreign

country. It becomes void subsequently when a war breaks out
between the country of import and export.
b. Subsequent illegality: A contract also becomes void by

subsequent illegality, for Example: A agrees to sell B 1000 bags of
wheat at Rs 800 per bag. Before delivery, the Government bans
private trading of paddy. In this case the contract become void.
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iii. Void agreements
Void agreement is agreements which does not create any legal rights
and obligations According to Sec 2(g), “void agreement is an
agreement not enforceable by law.” Hence the void agreement
confers no rights on any person and, creates no obligations. Such an
agreement without any legal effect is void-abinitio i.e. void at the
very beginning
Example : An agreement with a minor and an agreement without

considerations, an agreement in restraint of marriage, trade, legal
proceedings and so on are void agreements.
iv. Voidable contracts
It is a contract which can be enforced or avoided at the option of the

aggrieved party. According to Sec 2 (i), “An agreement which is
enforceable by law at the option of one or more of the parties there
to, but not at the option of the others is a voidable contract.” From
this section it is clear that the word used here is ‘contract’ and not
just ‘agreement’. That is so because the rights and duties are
created and contract is valid unit the option to avoid and it is
exercised by the person whose consent to the agreement was not
free but was obtained by coercion, undue influence, fraud and mis-
representation. That is why it is expected to enter into a contract by
a person who comes into Equity (i.e. before law) must come with
clean hands.”
Thus a voidable contract is valid and enforceable until it is repudiated

or avoided by the party entitled to avoid it.
A voidable contract continues to be valid till it is avoided or

repudiated by the aggrieved party. According to Sec 64, when the
aggrieved party avoids the contract, the other party need not to
perform any promise, and party avoiding the contract should restore
any benefit he has received, under the contract to the other party.
Example: A by misrepresentation forces B to sell 100 bags of rice at

Rs 100 per bag, and pays Rs. 4000 in part payment of the price. B,
being the aggrieved party, can rescind or cancel the contract.
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However, he has to pay back Rs. 4000 to B and B need not pay the
balance. So here the option is left to B to make it a valid or cancel
the contract.
v. Unenforceable contracts
An unenforceable contract is a contract which is valid in itself, but

cannot be enforced in the court of Law due to some technical defects,
like absence of written form or absence of a proper stamp. Such
contracts must be sued upon by one or both of the parties. According
to Sir William Anson, “An unenforceable contract is one which is good
in substance, though by reason of some technical defect, one or both
the parties cannot be sued on it. Many a times the court of law
cannot enforce it for the reason for the expiry of date, registration
and attestation along with the other reasons given above. If the
technical defect could be cured, the contract becomes enforceable, if
it cannot be cured, the contract remains unenforceable.
Example: A borrows Rs. 20,000 from B and makes a promissory note

and a one rupee stamp is pasted on the pro-note. The agreement
though complete is unenforceable because of the technical defect.
i.e., Promissory note not being stamped properly and it is
undervalued.
vi. Illegal contracts
Illegal contracts are also termed as unlawful contracts. Illegal

contract is a contract which is either prohibited by law or otherwise
against the policy of law. According to Sec.23, “the consideration or
object of an agreement is unlawful if it is forbidden by law, or is of
such a nature that if permitted, it would defeat the provisions of law,
or is fraudulent or involves or implies injury to the person or property
of another, or the court regards it as immoral or opposed to public
policy.”
Example: A borrows Rs. 1,00,000 from B for the purpose of

smuggling goods. B knows the purpose of loan by A, the agreement
between A and B is collateral to the main agreement which is illegal.
38
 
 
 
 
 
 

 
 
 
 
An illegal agreement is void-ab-into. All illegal agreements are void

but all void agreements are not illegal. The money paid or Property
transferred under an illegal agreement cannot be recovered. No
action can be taken for breach of an illegal agreement. With the
example given above that the illegal agreement in this collateral
transaction, is also void.
3. On the basis of performance
I. Executed Contract
An executed contract is one when both the parties have performed

their obligations or carried out the terms of the contract. It is referred
as a complete contract. In other sense when offeror and acceptor
have completely performed their respective obligations under the
contract, then such contract is said to be executed contract. That is,
it is a contract where under the terms of the contract nothing
remains to be done by both the party. For instance, in case of cash
sales, the contract is executed at once.
Example: A agrees to sell certain goods to B at a certain price. A

delivers the goods and B pays the price. Thus both the parties have
performed their respective obligations. Then this contract becomes
an executed contract.
II. Executory Contract
In this type of contract the obligations of the parties are to be

performed at a later time, or where the contract is yet to be
performed either wholly or partially when one or both parties have
their obligation, then such contracts are called as executory contract.
Example: A agrees to make a painting for B for Rs. 10,000. Mr. A has
yet to make a painting and Mr. B has not made any payment. So,
both the parties are yet to perform their obligations. Suppose if A has
made the painting, but B yet to make payment in such cases, it is
executed on A’ s part and executory on B’s part.
Thus, executory contract may be. (a) Unilateral (b) Bilateral.
39
 
 
 
 
 
 
 

 
 

 
a. Unilateral Contract: Unilateral contract is one sided contract. In

this type, one party would have discharged the obligations. In
certain contracts one party has to fullfil his obligations, where as
the other party has already performed his obligations. Such
contract may also be termed as ‘contract with executed
consideration’ along with ‘unilateral’ and ‘one sided’ contracts.
Thus, in case of unilateral contract the obligation is outstanding

only against one of the parties at the time of formation of contract.
Example: Mr. A has lost his documents which are very valuable. He
offers by advertisement a reward of Rs. 1,00,000 to any person,
who will find and bring the documents very safely and hand over
to him. Mr. B who comes across the advertisement, searches and
finds the documents and hand it over to Mr. A. As soon as B does
this act, the contract comes into existence. Now only, A has to
perform his obligation by paying Rs. 1,00,000 to B, as B had
already performed his part of obligation by finding the documents.
b. Bilateral Contract: Bilateral contracts are the contracts in which

the obligation on the part of both the parties to the contract are
outstanding at the time of formation of the contract. In such
contracts, promise on one side is exchanged for a promise on the
other. Thus bilateral contracts, under executory contracts are also
known as contracts with executory consideration.
Example: A manufacturer agrees to supply certain goods at a

certain price to a retailer after certain time. The payment is to be
made at the time of delivery of goods. This is a bilateral contract
as the obligations of both the parties are outstanding at the time
of formation of the contract.
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1.12 CLASSIFICATION OF CONTRACTS IN ENGLISH LAW
As main source of contract Act is from English Law, if is meaningful to

study the classification under English Law.
1. Formal Contract: Formal contracts and its validity depends upon their
form and they are valid even without consideration. They are two types;
I. Contract under seal. This type of contract are in writing and signed
by the parties. The following contracts should be under seal,
otherwise they are not valid:
a. Contracts without consideration.

b. Lease of land for period of more than three years.
c. Contracts by corporations and
d. Contracts with British shipping.
II. Contracts of Records. This is included in the court judgements and

recognisances. Obligations in which cases arise out of court
judgements and not under contracts.
2. Simple Contract: All contracts other than the formal ones are called
simple contracts or parol contracts. They may be created orally, in
writing and which may be implied by conduct.
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1.13 OFFER [PROPOSAL]
Overview
42

Introduction
Any activity or understanding of two persons begins with some proposal

from one person to another. This proposal in turn will be understood as
‘Offer’. At the inception of every agreement, there must be a definite offer
by one person to another and acceptance of the same person to whom the
offer is made.
The term proposal and offer are considered synonymous and are used
interchangeably. The word ‘Proposal’ is used under Indian Law, whereas
the same is used as ‘Offer’ under English Law.
Meaning and Definition of Offer: Offer is basis and one of the major
element of essentials of valid contract.
According to the Indian Contract Act, Section 2(a) “When one person
signifies to another his willingness to do or to abstain from doing anything
with a view to obtain the assent of that other to such act or abstinence, he
is set to make a proposal.”
From the above definition the word ‘offer’ can be understood as lender:
Specific turns to Promise turns to Offer
The word offer is the other meaning of Proposal
Promise, Section 2(b) defines a Promise as, “When the person to whom the
proposal is made signifies his assent there to, the proposal is said to be
accepted. A proposal when accepted becomes a promise”.
The Dictionary meaning which clears both meaning of proposal and offer
as:
Proposal is an act of proposing something, course of action.
Promise is an assurance that one will or will not undertake a certain

action. Sign of future achievement, good results.
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Offer is to present for acceptance, refusal or consideration, express

readiness or show intention.
Thus, proposal and offer are synonymous and all that it means is an
expression of will or intention.
Example 1: Mr. X offers to sell his computers to Mr. Y for Rs. 25,000. In
this case it is only offer. Whereas when Mr. Y, agrees to buy the same, then
it will become acceptance.
Or
Example 2: “Mr. Ashok says to Mr. Bhima, “Will you purchase my Maruti car
for Rs. 1,00,000?” In this case, Mr. Ashok is making an offer to Mr. Bhima
as he signifies to Bhima, his willingness to sell his car for Rs. 1,00,000 with
a view to obtain Bhima’s assent to purchase the car.
The person making the offer is known as “Offeror”, or “Proposer” or

Promisor” and the person to whom it is made is called the “Offeree” or
“Proposee”. When the offeree accepts the offer, he is called as acceptor or
promisee [Section 2(d)].
Section 2(a) states, there must be three elements to be present

essentially, present for an offer, they are:
a. Expression of willingness to do or not to do something.
b. Made to another person i.e. a person cannot make an offer to

himself.
c. With the object of giving the consent to the other person to such act
or abstinence.
From the above three elements it can be clear that a casual enquiry,
information, a statement of fact or statement of mere intention are not
offers.
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How an offer is made?
An offer can be made by expression of words, spoken or written which is

called as “Express offer” “Will you buy my business at Mumbai for 5
crores?” or when A advertises in a newspaper, offering Rs. 5,000 to anyone
who returns his lost documents, these are express offer.
An offer may also be implied from the conduct of the parties or the
circumstances of the case. This is referred as “implied offer”. Thus, when a
company runs a cab on a particular route, there is an implied offer by the
company to carry passengers for a certain fare. The acceptance of the offer
completes as soon as passenger boards the cab.
An offer may be made to a specific person or general public.
Express Offer: When an offer is communicated by words, spoken or

written, then it is termed as an express offer. It can also be communicated
through advertisement telephone, messenger or telegram.
Implied Offer: An offer communicated by conduct or act is an implied

offer. When a person goes to a consultant for an advice his conduct implies
an offer to pay the usual fee to the consultant.
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Specific Offer: An offer made to a specific or definite person or class of

persons is known as specific offer. Specific offers are also referred to
“Offer to individuals”, (Case Boulton Vs Jones).
General Offer: An offer made to the world or “Public at large” is known as

general offer. It can be accepted by any member of the public. According to
Salmond, it is to be referred as “offer at large”. An offer of reward for
some information, made to the public at large through a public
advertisement is an example of general offer.
In respect this a popular case is,
Carlill Vs Carbolic Smoke Ball Co (1983)
The company advertised in several news papers that a reward of £ 100

world be given to any person who contact influenza. After using the smoke
balls which is medicine in the form of capsules, which is the company’s
product, according to the printed direction. One, Mrs. Carlill used the
smoke balls according to the directions of the company, but contracted
influenza; then, Mrs. Carlill demanded the reward, but the company
refused to pay the reward. (compensation) She then filed a suit in the
court of law. Then the court held that she could recover reward offered
on the ground that the company’s offer through public advertisement
amounted to a general offer, and a general offer may be accepted by any
member of the public. In return the company filed the petition, pleading
that Mrs. Carlill had not communicated her intention to accept, then the
judge refusing the petition, pointed that in cases like this, communication
is not necessary, since, her doing the required act amounted to an
acceptance of the offer.
This case is referred to both general offer and Implied offer.
Positive Offer: When an offer is to do something focused, then the offer is

said to be positive. i.e. an offer is to act or intention to do some act
certainly.
Example: X offers to sell his van for a certain price, with the intention to
sell the van, is positive offer.
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Negative Offer: When an offer with the intention to not to do or abstain

from doing something, this offer is known as negative offer.
Example: A creditor says to his debtor that he will not file a suit, if the
debtor is prepared to pay interest on the debt at 15% p.a, then this offer
amounts to be negative.
Definite Offer: If a tender (quotation) is submitted for goods or services

in specified quantity, the tender offer is known as a definite tender or offer.
Standing Offer: It is also known as ‘open’ or “Continuing” offer or tender.

When a concern requires large quantities of goods or services from time to
time, it is accepted by the supplier over a definite period and price, such
tender or offer is called as standing offer.
Cross Offer: When two parties make identical offers to each other, in
ignorance of each other’s offer, such offers are known as cross offers. They
shall not constitute acceptance of one’s offer by the other.
Example: A wrote to B on 28th Dec 2005, offering to sell 1,000 tons of

irons at Rs. 7,000 per ton. On the same day B wrote to A offering to buy
1,000 tonnes of iron Rs. 7,000 per ton. The two letters crossed in post and
neither of them knew anything about the offer to the other. B contended
that there was a good contract. It was held that B was not bound as a
result of the simultaneous offers, each being made in ignorance of the
other.
Counter Offer: A counter offer is a rejection of original offer, it is a new

offer which needs acceptance by the original promisor before a contract is
made. In case of Hyde Vs Wrench; An offer to sell a form for £1,000 was
rejected by the plaintiff, who offered £ 950 for it. This was turned down by
the offeror and then the plaintiff agreed to pay £ 1,000. It was held that
the defendant was not bound by any such acceptance as the original offer
was conditionally accepted.
From the above, different types/kinds of offer or proposal may be classified

on the basis of Method and Man i.e., (i) How an offer is made? (ii) To whom
an offer is made?
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What are not offers?
Not all offers are valid offers as they differ from:
a. A mere statement of intention. Example: An announcement of a forth

coming auction sale.
b. An invitation to offer. Example: An advertisement in newspapers, to

display of goods for window shopping and so on.
c. A mere communication of information. Example: Book-seller’s

catalogue.
d. A casual enquiry.
e. A prospectus, inviting the public to subscribe to the shares or debenture

of a company.
f. An advertisement for the tenders. Example: In; “Harris Vs Nickerson”,

Nickerson, an auctioner, advertised in a newspaper that a sale of office
furniture would be held in a specified day. Harris, with an intention of
buying some furniture came from a distant place to attend auction but
due to some reasons all the furniture was withdrawn from the sale.
Harris thereupon sued Nickerson for his loss of time and expenses. It
was held, that a declaration of intention to do a thing did not create a
binding contract with those who acted upon it, so that Harris could not
recover any compensation.
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Essentials of a valid offer or Rules regarding valid offer
1. Capable of creating legal relationship: Offer must be such that it

should create legal relationship. An offeror must intend to create legal
bindings and legal relationships. Not all offers will create legal binding
like a social invitation, even if it is accepted, and does not create legal
relationship, as it is not intended.
Example: A accepts an invitation to dine at B’s place on a certain date,

but fails to turn up on the appointed date. Here A cannot be sued for a
breach of contract because in contracts regulating social invitation or
domestic arrangements cannot create legal binding or legal relationships
and it do not intend legal consequences to follow from the breach of a
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contract. The essential elements is that, an offer therefore must be such

as would result in a valid contract when it is accepted.
2. Offer may be express or implied: There is no legal rule that how it

must be made. It can be express, which means mere by a word of
mouth or implied through understanding. The Contract Act is not giving
any specification regarding the mode of making contract. Hence it may
be express or implied.
3. Offer must be certain, definite and not vague: Terms of offer must
be definite, certain, unambiguous and clear or not loose and vague.
Both offeror and offeree should be clear about the legal consequences
arising out of contract. Any vague offers does not convey or
communicate what it exactly means. According to the famous case,
Taylor Vs Portington (1855); A offered to take a house on lease for
three years at £ 284 per annum if the house was put into through repair
and drawing rooms handsomely decorated according to the present
style. It was held that, the offer was too vague to result in a contractual
relationship because the term ‘Present style’ may mean one thing to A
and another to B. Hence here the agreement is void.
Example:(a) A says B, “I will sell a house” whereas A owns 5 houses.

The offer is not definite.
(b) In case of Gould Vs Gould (1970), A husband on divorce and

leaving his wife promised to pay her £ 154 a week, ‘So long as I can
manage it’. It was held that although the husband and wife who lived
apart because of break-up of their marriage, could enter into a legally
binding agreement, the vague and discretionary terms of the agreement
indicated an intention not to create legal relations.
4. Offer must be communicated to the offeree: Offer cannot be made

by a person to himself. It must be always be communicated to the
offeree. “No communication, no offer”, i.e. if there is no communication
of an offer, there is no acceptance resulting in the contract. e. g: A
writes a letter to B offering to sell his bike for Rs. 40,000 but not
posting the letter he keeps it in his bag, here it is not an offer and B can
never accept it.
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Again a person cannot accept an offer about which he is not aware. In

case of Lalman Shukla Vs Gauri Dutt (1913); A sent his servant B to
trace his missing nephew. A in the meantime announced a reward for
providing information about the missing boy. B in ignorance of the
announcement traced the boy and informed A. B later on came to know
of the reward and he claimed it. Held – the claim was dismissed, since he
cannot be held to accept an offer of which he is unaware. Another case in
connection with this ‘Fitch Vs Snedakar (1868), A offered a reward to
anyone who returned his lost dog. B brought the dog to A without having
heard of the offer. Held, B will not be able to claim the reward, since he
cannot be held to accept an offer of which he is unaware.
5. Offer must be made with a view to obtaining the acceptance or

assent of the other party. The offer to do or not to do something
should have the focus of getting assent from the other party and it is
not an offer when it is made merely with a view to disclosing the
intention of making an offer.
Announcement of notice of auction sale of certain articles at a certain

place on a certain date is merely an invitation of offer and not an actual
offer.
The case related to this is, Harris Vs Nickerson 1873, according to

this, A advertised in the newspaper to effect sale of his goods on a
particular day at a particular place. Mr. B, travelled a long distance to
bid for the things. On arrival, he found that the sale was cancelled. He
sued Mr. A for the breach of contract. It was held that advertisement
was merely expression of an intention and not an offer and B could not
recover his expenditure.
6. An offer may be positive or negative: A positive offer is an offer to

do something. A negative offer is, on the other hand, is an offer not to
do something or abstain from doing something and both are accepted.
7. An offer may be conditional: An valid offer can also be conditional.

Such offers are offer that can be accepted only subject to that
conditions. A conditional offer lapses when the condition is not accepted.
In this, a conditional offer by the management of a company to the
trade union to pay a certain amount lapses when condition is not
accepted. In connection to his there is a case, Thomson Vs LMS
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Railway Company (1930), according to this case, Mr. A a traveler

takes a ticket for a railway journey. On the front of the ticket, it was
printed as “for conditions see back”. One of the conditions was that the
Railway Company would not be liable for the personal injuries to the
passengers. A the traveler was injured by a railway accident and sued
for the injury. It was held that the travellers were bound by the
conditions and could not recover any damages. In this case, the LMS
Railway Company is not bound to pay any of the compensation due to
the accidents.
Again, one of the recent case in India connected to this is, Lily white
Vs Munuswami (AIR 1966), A delivered one new saree to a laundry
for washing, on the back of the printed receipt it was stated that the
customer would be entitled to recover only 15% of the market price of
the article in case of loss. The saree was lost owing to the negligence of
the laundry. In a suit by A, it was held that the laundry showed its
negligence and is against the public interest. It was held the laundry is
to pay full value of the saree.
8. An offer should not contain a term, the non-compliance of which

would amount to acceptance: While making the offer should not
presumed to be accepted, one cannot say while making the offer that if
the offer is not accepted before a certain date, it will be presumed to
have been accepted. Thus, an offeror cannot say that if acceptance is
not communicated upto a certain date, the offer would be presumed to
have been accepted. If the offeree does not reply, there is no contract,
as no obligation to reply can be imposed on to him on the ground of
justice.
9. Offer is not a mere statement: A mere statement without any

intention is not an offer. An invitation or an answer to a question and a
statement of price list does not constitute a valid offer. i.e. a price lists,
window displays, tenders, invitation by a company to public to subscribe
to its shares, railway displays, sign boards, hoarding and so an are not
an offer.
10.Offer must be intentional to do an act: An offer without intention of

the offeror to commit something is not an offer.
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That is offeror may not be serious in his expression and the offer is
made just like that, but it does not constitute a valid offer.
11.Offer should not be a cross offer: Cross offer does not constitute a
valid offer as here two persons make identical offer. The court does not
approve one person is offer an offer and another persons offer is not an
offer.
12.Offer through printed contracts: An offer through printed matters

for the special purpose formulate a valid offer/contract
Example: Life Insurance Corporation of India, Indian Railways,

Nationalised banks, Credit Co-operative societies and so on. These are
some of the examples of organisation where in thousands of people
enter into agreement for their own benefits. It is difficult to make
organisations to stand with the different types of offer to different
people. This type of offer or contracts are also known as Standard
Forms of Contracts.
Revocation of Offer
Revocation means ‘cancellation’. Revocation of offer here is withdrawal of

offer by the offeror. It can be revoked or cancelled anytime before it is
accepted by the offeree. Before acceptance it is not communicated to the
concern person, then it can be cancelled.
According to Section 5 of the Indian Contract Act, “A Proposal may be

revoked at any time before the communication of its acceptance as against
the proposer”.
Section 6 of the Act gives the following conditions for the revocation of
offer;
1. Revocation by communications of notice: An offer may be revoked

by the offeror by giving notice of the revocation to the other party
before it is accepted. Notice of revocation will take effect only when it
comes to the knowledge of the offeree.
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2. Revocation by lapse of times: An offer can be cancelled when the

time given is crossed. i.e, if the time is prescribed by the offeror for the
acceptance, of the offeree, if offeree fails to given his consent within
that time limit then automatically the offer gets cancelled.
3. Revocation by non fulfillment of conditions: An offer lapses or gets

cancelled when an acceptor fails to fulfill a condition precedent to the
acceptance of the offer. Example: A offers to sell a motor van to B on a
condition that B pays a certain amount before a certain date. If B fails to
pay the required amount with in given time, then the stands cancelled.
4. Revocation by the death or insanity of the offeror or offeree:

When either of the party i.e. offeror or offeree dies or become insane
before it is accepted, then the offer gets cancelled.
5. Revocation by rejection: When the offeree dis-agrees or rejects the

offer made by the offeror the offer is cancelled or revoked. Rejection of
an offer is effective only when it comes to the knowledge of the offeror.
Rejection takes place:
a. When the offeree communicates his rejection of the offer to the

offeror.
b. When the offeree makes a counter offer.
6. Revocation by failure to accept in the mode prescribed: An offer

must be accepted according to the mode prescribed. In absence of the
mode prescribed, then it should be on a reasonable or usual mode.
7. Revocation by subsequent illegality: An offer lapses, if it becomes

illegal after it is made and before it is accepted. Thus, where an offer is
made to sell 100 bags of rice for Rs. 25,000 and before it is accepted, a
law prohibiting the sale of rice by the private individuals is enacted Here
the offer comes to an end.
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1.14 ACCEPTANCE
Overview
Offer and acceptance go hand in hand, as a contract is formed when an

offer is accepted. Acceptance signifies the willingness of the receiving party
to whom the offer has been made. The dictionary meaning of acceptance
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refers to the willingness to accept or affirmative answer to an invitation or

approval. When a person to whom the proposal is made signifies his
assent, it is an acceptance of the proposal. An accepted proposal is called a
promise or an agreement. According to the Section 2(b) of the Indian
Contract Act, acceptance is defined as, “when the person to whom the
proposal is made signifies his assent thereto, the proposal is to be
accepted. A proposal when accepted becomes a promise”, Thus,
acceptance is the assent or consent given to proposal. The offeree will
become acceptor or promisee when he accepts the offer.
Thus, acceptance is the manifestation by the offeree of his assent to the

term. The acceptor should do something to signify his intention to accept.
A common example of an act amounting to acceptance is the fall of the
hammer in the case of an auction sale. No mental acceptance will form an
acceptance, except where a proposal prescribes a particular mode of
acceptance. The acceptance may be made in several different ways.
Example: A offers to sell his vehicle for Rs. 5 lakhs, B accepts the offers to
purchase the vehicle for the same amount. This is acceptance.
Who can accept the offer
The acceptance must be from the person to whom the offer is made. The
offer cannot be accepted by the another without the consent of the person
making it. Thus, where an offer is made by X to Y, the acceptance by Z
would be inoperative.
Essentials of valid acceptance or legal rules for acceptance
Offer and acceptance are the back-bone of the contract. The acceptance of
an offer is the very essence of a contract. For the validity and legal
effectiveness the following are the essential conditions of an acceptance:
1. Acceptance for an offer must be absolute and unconditional:

Section 7(1) of the Act says, “The acceptance must be absolute and
unqualified” that is absolute or in full and unqualified or unconditional. A
qualified and conditional acceptance amounts to a counter offer and
rejection of the original offer. Any alteration or variation, however, small
of the offer will make the acceptance invalid. In the case of;
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Jordan Vs Norton (1838)
A wrote to B offering to buy his horse if he warranted her sound and quiet
in harness by which the horse is fastened and also controlled. B wrote back
to A that he accepted the offer and warranted her sound and quiet in
double harness. It was held that A was not bound by his offer as B’s reply
was, in effect, a counter offer and not an unqualified acceptance of A’s
offer.
Another case, Neale Vs Merret (1930) M offered to sell a piece of land to

N at £ 280. N accepted and enclosed £ 80 with a promise to pay the
balance by monthly installments of £ 50 each. It was held, there is no
contract between M and N, as the acceptance was not absolute.
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2. Acceptance may be express or implied: When an acceptance is

express in words, spoken or written i.e. by word of mouth, by post, by
telephone, telegram or through messenger or through any means, it is
express acceptance.
When the acceptance is given by conduct, it is implied acceptance.

When an acceptance is to be inferred from the circumstances of the
case or from the conduct of the parties it is referred to implied
acceptance.
In case of V. Rao Vs A. Rao (1916), A widow promised to settle some

immovable property to her niece if the niece stayed with her in her
residence. Thus, niece stayed with her in her residence till her death. It
was held that the niece was entitled to the property.
3. Acceptance must be communicated to the offeror: The acceptance

must be communicated to the offeror through some means. Instead if
the offeree remains silent and does nothing to show that he has
accepted the offer, then no contract is formed. The acceptor should
signify his intention to accept. Thus where a person accepts an offer but
fails to post the letter of acceptance, it is no acceptances. In case of
Brogden Vs Metropolitan Railway Company (1877) A draft agreement
relating to the supply of coal was sent to the manager of a Railway
Company for his acceptance. The manager wrote the word ‘approved’
and put the draft in the drawer of his table intending to send it to the
Company’s solicitor for a formal contract to be drawn up. By oversight
the document remained in the drawer. It was held there is no contract.
The offeror need not to communicate his acceptance in respect of
implied offer and acceptance. It happens when performance of certain
conditions takes place, or some required act is done. For this situation
the example is Carlill Vs Carbolic smoke ball Co. (1893). In this
case, Carlill used smoke balls of the company according to its directions
and contracted influenza, it is amounted to acceptance of the offer by
doing the required act and could claim the reward.
4. Acceptance must be in response to offer: There can be no

acceptance without offer. Acceptance cannot be made before the offer.
For example, no allotment of shares in a company can be made unless
the allotee has applied for them before hand. As such, acceptance
should follow the offer.
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5. Acceptance must be made with in a reasonable time: A valid

acceptance will be made within the reasonable time allowed by the
offeror. When there is no mention of time by the offeror then it can be
made within a reasonable time. What is reasonable time is a question of
fact depending on a particular circumstance. Acceptance may be made
at any time till the offer is alive otherwise such of the acceptance are
invalid.
6. Acceptance must be in the prescribed manner or a reasonable

mode: Where the offeror prescribes mode of acceptance then the
acceptor should adopt the same mode. Section 7(2) states that if the
acceptance is not made in the manner prescribed, the proposer may
within a reasonable time after the acceptance is communicated to him,
insist that the acceptance must be made in a manner prescribed.
Otherwise the acceptance can be made through other reasonable
manner in which it is communicated to the offeror.
In case of, Surendra Nath Vs Kedarnath AIR(1936) An offer was

made in the following terms, “I intend to sell my house for Rs.
1,00,000, if you are willing to have it, write to ‘A’ at his address”.
Instead of writing to A, the purchaser sent an agent to A and agreed to
purchase. It was held that the seller was bound by the acceptance and
there was no violation of Section 7, when the purchaser, instead of
writing to the particular person, met him personally to communicate his
acceptance.
7. The acceptance must be by the offeree: An offer can be accepted

only by the person or persons to whom it is made. A valid contract
arises only if its acceptance is communicated by a person who has the
authority to accept. If it is communicated by the unauthorised person, it
is not valid acceptance.
In case of, Powel Vs Lee (1908), A applied for the post of a Head
master in a school. He was selected by the appointing authorities. But
the decision of his appointment was not communicated to him. One of
the members of the appointing committee informed him of his
appointment. But the member was not authorised to communicate the
decision and he is communicated the decision in his individual capacity.
Subsequently, the appointing authority cancelled his selection. A
brought a legal action for the breach of contract. His action was rejected
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by the court and it was observed that, “There must be notice of

acceptance from the contracting party. Information from an
unauthorised person is as insufficient and it is considered as over
hearing from behind the door”.
8. The acceptor must be aware of the proposal at the time of the

offer:
a. Acceptance is made when the offer is created. When an acceptor is

not aware of existence of the offer and conveys his acceptance, then
there is no valid contract. There must be knowledge of the offer
before anyone could consent to it. An act done out of ignorance of
the offer for a reward cannot be called an acceptance. Another
examples is, case, “Lalman Shukla Vs Gauri Datt”. (1913)
b. A sold his business to his manager B without disclosing the fact to his
customers. C a customer, who had running an account with A, sent
an order for the supply of goods to A by name. B received the order
and executed the same. C refused to pay the price. It was held that
there was no contract between B and C because C never made any
offer to B and as such C was not liable to pay the price to B. The
same kind of example is also taken from the case Boulton Vs Jones
(1857).
9. Acceptance must be made before the offer lapses or revoked:

Acceptance must be given when the offer is in force. Due to the reasons
offer may be lapsed or revoked, but the acceptance is to be before the
lapse or revoke of an offer.
10.Acceptance cannot be made through silence: Silence is not a mode

of acceptance. No contract is formed if the offeree remains silent and
does nothing to show that he has accepted the offer.
Silence is not always accepted. Generally speaking, the person to whom

the offer is made need not to reply. But his silence cannot be regarded
as an acceptance of the proposal. For Example: If A expresses to B that
if “I don’t hear from you by next Monday, I shall presume that you have
bought the goods”. Here, there is no contract and silence is not
acceptance.
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11.A mental acceptance is ineffectual: No acceptance can be made by

mind without expression or implied. Such of the acceptance is not valid
or not effected.
12.Acceptance can be made for the renewal of rejected offers: The

acceptor can give his acceptance for the rejected offer, if the same is
reviewed.
Revocation of Acceptance
According to Sec. 5 of the Act, acceptance may be revoked at any time

before the communication of the acceptance is complete as against the
acceptor, but not afterwards. Revocation of acceptance amounts of
withdrawal of the acceptance to a proposal by the offeree himself.
Example: A propose, by a letter sent by post, to sell his house to B. B

accepts the proposal by a letter sent by post. B may revoke his acceptance
any time before the letter communicating it, reaches A, but not afterwards.
The following are the additional circumstances for the rejection:
1. The acceptance can be revoked by the failure of the acceptor to fulfill a

condition precedent.
2. By death or insanity of the proposer.
3. When it is not in a reasonable time and manner.
4. The acceptance can be revoked by the rejection of the offer.
5. It can be made by supervening impossibility.
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1.15 CONSIDERATION
Overview
Meaning of Consideration
Consideration is another important elements of contract. Many a times it is

considered as the foundation of the contract. The Contract Act enforces
only those promises which are made for consideration. Where one party
promises to do something it must get something in exchange. This
“Something in return” is known as consideration. Subject to certain
exception, an agreement made without consideration is “nudum pactum”
i.e. is a nude or bare contract, and hence it is void.
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According to the Section 10 of the contract Act which declares that an

agreement becomes enforceable by law only if it is made for lawful
consideration and Section 25 of the Act lays down that an agreement made
without consideration is void. Consideration is always referred as
something which is made in cash or kind and it is also considered as life
blood of every contract. Again, Section 23,24 and 25 lays emphasis on the
essential nature of lawful consideration and thus it plays a significant role
in regulating the contractual relationship.
Definition of Consideration
Apart from the Contract Act, consideration is defined in many ways and by
many persons including juries which are as follows.
In the English case, Currie Vs Misa (1875) the word consideration was
defined by Lush J as, “A valuable consideration in the sense of the law may
consist either in some right, interest, profit or benefit accruing to one
party, or some forbearance, detriment, loss or responsibility given, suffered
or undertaken by the other”.
Justice Patterson defines as, “Consideration means something which is of

some value in the eye of law. It may be some benefit to the plaintiff or
some detriment to the defendant”
According to Calcutta High Court, “Consideration is a price of a promise

or a return or quid-proquo (something in return), something of value
received by the promisee as inducement of promise”.
Black Stone defines consideration as, the recompense (reward) given by

the party contracting to the other. In other words, it is a price of the
promise”.
The Indian Contract Act is giving more emphasis on consideration and the
same is incorporated in the interpretation clause by mentioning as, In this
Act the word ‘Proposal’, Promise, Consideration, agreement, void
agreement, contract etc. are used in the senses which are mentioned
under Section 2, from (a) to (j), unless a contrary intentions appears from
the context, Section 2(d) defines consideration as “When at the desire of
the promisor, the promisee, or any other person has done or abstained
from doing, or does or abstains from doing, or promises to do or to abstain
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from doing something, such act or abstinence or promise is called

consideration for the promise”.
From the above legal definition on consideration, the following are the
analysis point which are considered as essential point of the consideration.
a. The consideration is an act, or abstinence.
b. Such Act, or abstinence should be done by the promisee or any other

person.
c. Such Act or abstinence is either already executed, or is the process of

execution or still executory.
Examples
i. A agrees to sell his car to B for Rs. 3 lakhs. For A’s promise the
consideration is Rs. 3 lakhs. For B’s promise, the consideration is the
car.
ii. A promises to maintain B’s child and B promises to pay A Rs. 1,000
per month for the same. Here the promise of each party is the
consideration for promise of the other party.
Essentials and Legal Rules for valid Consideration
From the definitions, the case laws, judgment and also the Act, the
following are considered as essentials of a valid considerations:
A brief explanation of the above essentials are as follows:
1. Consider must move at the desire of the promisor: The Indian

Contract Act says that an act or abstinence, which forms consideration
for the promise, must be done according to the desire of the promisor.
It can also be done at the request of the promisor.
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Any Act performed at the desire or request of the third party cannot
form a consideration. Thus an act done or services rendered voluntarily,
or may also be at the desire of the third person will not amount to valid
consideration so as to support a contract.
Example: A saves B’s goods from fire without being asked to do so.
Here A cannot demand payment for his services.
According to the case, ‘Durga Prasad Vs Baldeo’ (1880).
The plaintiff constructed shops in a market at a request of the district

collector. The defendants who occupied the shops promised to pay the
plaintiff a commission on articles sold through shops, in consideration of
the plaintiff having spent money on the construction of the shops. In a
suit by the plaintiff for the recovery of commission, it was held that the
promise was not supported by considerations. Held, the agreement was
void being without consideration as plaintiff did not construct the shops
at the desire of defendant, but at the desire of the district collector.
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2. Consideration may move from the promisee or any other person:

As per Section 2(d) of the Act, the consideration may be done either by
the promisee or any other person. Here promisee is the person to whom
the promise is made. It means a person can sue on contract, even if the
consideration for the promise moved from a third party. While under the
English Law consideration must be moved from the promisee only.
In the case of, ‘Chinnayya Vs Ramayya (1881).
A, an old lady, by a deed of gift, made over certain property to her

daughter R, with a direction that the daughter should pay an annuity to
A’s brother C, as has been done by A. Accordingly, on the same day, R,
the daughter, executed a writing in favour of her maternal uncle C
agreeing to pay the annuity. Afterwards she declined to fulfill her
promise saying that no consideration had moved from her maternal
uncle i.e. the promisee. It was held that, the word, “The promisee or
any other person”, in Section 2(d) clearly show that a stranger to the
consideration may maintain a suit. Hence the maternal uncle, though a
stranger to the consideration was entitled to maintain the suit.
3. Consideration may be past, present and future Under 2(d) states

that consideration may be past, present and future, has done or
abstained from doing (Past), or does or abstains from doing (Present) or
promises to do or abstain from doing (Future) something”. Hence,
consideration may be:
a. Past consideration: A past consideration is something wholly done

or suffered before making the agreement. Here the present promise
is based on the consideration already taken place.
Example: A found B’s purse and gave it to him. B promised to give

Rs. 100 as a reward. Here for B’s promise, the act of A in finding B’s
purse is the past consideration.
b. Present consideration: Consideration which are executed in nature

should move simultaneously with the promisee is called present
consideration.
Example: A receives Rs. 20,000 in cash from B, in return of an
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article, which he promises to deliver to B. It is present consideration

for the promise to deliver the article.
c. Future consideration: It is also referred to executory in nature and

here when the consideration from one party to the other is to pass
subsequently in making of the contract, then it is known as future
agreement.
Example: A promises to sell and deliver a bag of rice of 50 kgs to B

at Rs. 1,000 after a week, upon B’s promise to pay the amount to A
at the time of delivery. The promise of A is Notes supported by
promise of B and the consideration is executory on both the sides.
Thus, in case of future consideration, it is outstanding on both the

sides where as in case of present consideration it is outstanding on
one side only.
4. Consideration need not be adequate to the promise: The real

meaning of consideration is something in return. This ‘something in
return’, need not necessarily be equal in value to “something given”.
There is no mentioning of adequacy of consideration by Law. It is no
where laid down that the consideration should be adequate to the
promise. Adequacy is for the parties to decide at the time of making the
agreement. No contract can be refused on the ground of inadequacy of
the consideration. All that the laws says, it has some value or something
in return. Even a smallest consideration is sufficient provided it has
some value. Under Explanation 2 to Section 25 of the Contract Act
mentions that, “An agreement to which the consent of the promisor is
freely given is not void merely because the consideration is inadequate,
but the in-adequacy of the consideration may be taken into account by
the court in determining the question whether the consent of the
promisor was freely given or not.
Example: A agrees to sell his house worth Rs. 10 lakhs to B for Rs. 10
thousand. As consent to the agreement was freely given, the agreement
is contract, not withstanding the inadequacy of the consideration.
5. Consideration must be real and not illusory: Although the

consideration can be past, present and future and also need not be
adequate but it should be competent, real and valuable in the eyes of
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law. It should not be unreal or illusory. Consideration is illusory when a

person promises to do something which he is already bound to do by
law or by contract. Consideration must be something more than what a
promise is already bound to do. Performance of a legal or public duty is
no consideration for a promise. Similarly, performing or promising to
perform a legal obligation imposed by a contract with the promisor
cannot form consideration. But doing or agreeing to do more than a
persons official duty will serve as consideration.
Example: If A promises to put life in the dead body of B’s son for Rs.
1,00,000, the agreement is void, because of the physical impossibility of
the performance.
6. Consideration must be lawful: Consideration must not be illegal,

immoral or opposed to public policy. As per Section 23 of the Act, which
is giving the consideration, which are unlawful and which are not
unlawful. “The consideration or object of an agreement is lawful, unless:
“It is forbidden by law or is of such a nature that, is permitted, it would

defeat the provisions of any law; or is fraudulent or involves or implies
injury to the person or property of another; or the court regards it as
immoral or opposed to public policy”
In each of the above cases, the consideration of an agreement is said to

be unlawful. Every agreement of which consideration is unlawful is void.
Example: A promise to obtain B an employment in the Government

services and B promises to pay Rs. 50,000 to A. The agreement is void
as the consideration for it is unlawful.
7. Consideration may be act, abstinence or promise: According to

Section 2(d), consideration may be an act, abstinence or promise. In
other words consideration may consist of either a positive act or
abstinence i.e. a negative act or a promise.
a. An act which is a positive act.
Example: A request B to sell and deliver certain goods on credit. B

agrees to do so provided C guarantees the payment of the price.
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Here sale of goods by B to A is the consideration for C’s promise to

guarantee the payment.
b. An abstinence refers to a negative act.
Example: A the leader, entered into an agreement with borrower who

is B, the loan becomes due. B fails to pay the loan. B promises to
raise the rate of interest from 10% to 12% p.a. in consideration of a
refraining from filing a suit against B for a year. Here A’s abstinence is
in consideration of B’s promise.
c. A return promise
In this consideration may be a promise by one party in return of a

promise by the other party.
Example: A agrees to sell his house to B for Rs. 10,00,000. Here B’s
promise to pay the sum of Rs. 10,00,000 is the consideration for A’s
promise to sell the house and A’s promise to sell the house is the
consideration for B’s promise to pay Rs. 10,00,000.
8. Dis-charging Pre-existing obligation is no consideration:

Consideration must be something more that what the promise is already
bound to do; either by general law or under an existing contract, is not
a good consideration for a new promise. Performance of legal obligation
is not a consideration for the promise. And there is no detriment to the
promise or benefit to the promisor over and above their existing rights
and obligation. Example: Under the case Collins Vs Godfrey (1834).
A promise to pay money to a police officer to investigate into a crime.

The agreement was held to be invalid because “the officer is already
under the duty to do so by law”.
However, where a person agrees to do more than his official duty, this
will be a good consideration for the promise.
In the case, England Vs Davidson (1840).
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“A police constable provided information leading to the conviction of a

criminal. He sued for the reward offered for giving such information. It
was held that he had rendered services outside the scope of his official
duty and he was entitled to recover the reward”.
Exceptions to rule of Lawful Consideration
As per the law it is clearly defined it as “No consideration and no contract”

and all considerations must be lawful and unlawful consideration are
considered as void. But there are few exception given by the law, where a
contract can be enforceable even though there is no consideration. The
following are exceptions.
1. Natural Love and affection [Sec. 25(1)]: As per this section, the
agreement without consideration may be valid if it is in writing and
registered and is made on account of natural love and affection
between parties standing in a near relation to each other.
Example: A for natural love and affection, promises to give his son B
Rs. 10,000. A puts his promise to B into writing and registered it,
Hence there is a contract.
2. Compensation for services rendered [Sec. 25(2)]: An

agreement made without consideration may be valid if it is a promise
to compensate wholly or in part, a person who has already voluntarily
done something for the promisor or something which the promisor
was legally compellable to do.
Example: A finds B’s purse and gives it to him B promises to give Rs.
200. Thus, there is a contract.
3. Time-bared debt. [Sec. 25(3)]: A promise to pay time barred debt

is also a enforceable agreement. But promise must be in writing and
be signed by the promisor or his agent authorized. An oral promise is
not enforceable.
4. Completed Gift: The Act under Sec. 25 states that nothing in this
section shall affect the validity, as between the donor and donee, of
any gift actually made.
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5. Agency [Sec 185]: There is no exception to the general rule. Under

the above section it says no consideration is needed to create an
agency.
6. Guarantee [Sec. 127]: A contract of guarantee are made without

consideration.
7. Remission [Sec. 63]: No consideration is required for an agreement
to receive less than what is due, which may be referred as remission
in the law.
Stranger to a contract and who can sue for Consideration?

A stranger to a contract cannot sue for lack of consideration except in the
following case:
1. Trust: Here a stranger can sue when he is beneficiary under no

obligation amounting to a trust arising out of the contract.
2. Where provision is made in a marriage settlement: Where an

agreement is made in connection with marriage and the provision is
made for the benefit of a person he may take advantage of that
agreement although he is not a party to it.
3. Where provision is made in partition or family arrangement for

maintenance or marriage expenses of female members: Here,
where such female members though not parties to the agreement can
sue for the arrangements.
4. Where a change is created in favour of a stranger on specific

immoveable property: A stranger to a contract can sue for the money
made payable to him by it where the money is charged on immovable
properties.
5. Where the promisor has by his conduct created privity of

contract with the stranger: In this situation, where an agreement
between a tenant and sub-tenant the latter was paying the rent directly
to the landlord, the landlord was allowed to recover repaid rent from the
sub-tenant.
6. Where it is conductive to justice.
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7. Contract can be entered into by an agent and can be enforced by

the principal
8. Covenants running with the land: It is understood as at the time of

immovable property, a notice that the owner of land is bound due to
certain obligations created by an agreement relating to land, the new
purchaser will be bound by them though he was not a party to the
original covenant.
1.16 CAPACITY OF PARTIES

Overview
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Introduction
All persons cannot be entered into a contract. For a valid contract, the
parties to a contract must have capacity i.e. competency to enter into a
contract. Section 10 of the Indian Contract Act requires the parties to be
competent to make a valid contract. According to this Section, which states
as, “All agreement are contract, if they are made by the free consent of the
parties competent to contract”. In this, the question of party’s competency
arises. So all the parties who entered into a contract must be verified with
copentency or incopentency of entering into a contract. Every person is
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presumed to have capacity to contract but there are certain persons whose
age, condition or status render them incapable of binding themselves by a
contract. In-capacity must be proved by the parties to get the benefits
under the contract.
The term capacity to a contract is defined clearly under Section 12 of the

contract Act, under the heading as who are competent to contract as,
“Every person is competent to contract who is in the age of majority
avoiding to the law to which he is subject, and who is of sound mind, and
is not disqualified from contracting by any law to which he is subject.”
From Sec. 11 of the Act, one can draw the conclusion that the following are
the persons who are not capable to enter into a contract:
i. Minor
ii. Persons of unsound mind
a. Idiot
b. Insane/ Lunacy
c. Drunkard
d. Old person
iii. Persons disqualified by any law to which they are subject, they
are:
a. A married women
b. Insolvent
c. Alien enemies
d. A convict (who is imprisoned)
e. Foreign sovereigns and ambassadors
f. Corporations
g. Professionals.
1. Minor
Who is a minor? A minor is a person who has not attained the age of
majority. For the purpose of entering into a contract, the age of majority is
eighteen years. The Indian Majority Act, 1875, provides the meaning for
majority under Sec. 3 as, “A minor is a person who has not completed
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eighteen years of age”. However for some reasons the person continued to
be a minor upto his age of 21 years. The following are the two reasons, for
the age of majority at 21 years:
i. In case of a minor of whose person or property or both, a guardian is

appointed by the court
ii. The property of the minor is under the superintendence of a court of

words.
From above two exceptional cases the minor attains majority only at the
age of 21 years. In England, a person becomes major on the completion of
18 years for all the purposes.
Law relating to a Minor
The law is protecting a minor in all respect. Why should minor be

protected? This is a general question. It is presumed as a minor has an
immature mind and cannot think what is good or bad to him. Minor is
considered as infant and infancy is said to have disability. Hence in practice
the protection is granted by the court of law. As minors are often exploited,
the law is protecting them from any exploitation. The courts of law giving
them by justifying their act by observing this as, “The law protects their
(infants) persons, preserves the right and estates, excuse their laches, and
assists them in their pleadings, the judges are their counsellors, the jury
are their servants and law is their guardian”. Thus it is understood as in
case of a minor, judges are counsellors, Jury is his servant and the law is
his guardian, who take care of his needs and secrurity.
Minor under the Indian Law
The Indian Contract Act gives special privileges and special position to a
minor. Contracts made with minors are either void or voidable. Minor binds
others, but he is never bound by others. i.e. a minor is allowed to take the
advantages but not the obligations. There is no personal liabilities for any
of this wrongs. No legal action can be taken against a minor, even for this
misbehaviour and false promises. The parents of minors are also not
responsible for the contract, unless they act as an agent.
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The following are rules protecting the minor under the Indian
Contract Act:
1. An agreement with a minor is void-ab-initio: Entering a contract

with a minor is void-ab-initio i.e void right from the beginning.
Section 10 of the Contract Act requires that the parties to a contract
must be competent and Section 11 says that a minor is not
competent. But both Sec. 10 and 11 of the Act is not giving a clean
picture that entering into a contract with a minor is either void nor
voidable. This was made clear under the leading case, “Mohori Bibi
Vs Dharmo Das Ghose” in the year 1903.
According to this case, a minor mortgaged his house in favour of a

money-lender to secure a loan of Rs. 20,000 out of which the
mortgagee (the money-lender) paid the minor a sum of Rs. 8,000.
Subsequently the minor sued for setting aside the mortgage, stating
that he was underage when he executed the mortgage. It was held
that the mortgage was void, and therefore, it was cancelled. Further
the money lender’s request for the repayment of the amount
advanced to the minor as part of the consideration for the mortgagee
was also not accepted.
However if the minor has carried out his obligation by other party,
then he can bring in a suit against such party for enforcement of the
such party’s obligation.
Example: A, a minor under a contract of sale delivered goods to the

purchase. It was held that he was entitled to maintain a suit for the
recovery of the price. A minor enters into agreement and attains
majority during the course of contract. He cannot enforce even to
protect his obligation.
2. Minor can be a promisee or beneficiary: Incapacity or incapability

of a minor to enter into contract is incapacity to bind himself to a
contract. Where as, if a contract is beneficial to a minor it can be
enforced by him. Minor can be a beneficiary or a promisee and there
is no restriction being a promisee or payee or a beneficiary.
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Example: A, a minor aged 17 years, agreed to purchase a second-

hand scooter for Rs. 10,000 from B. Minor paid Rs. 1,000 as advance
and agreed to pay the balance the next day and collect the scooter.
When he came with the money on the next day, B told him that he
had changed his mind and offered to return the advance. Here B
cannot avoid the contract.
3. No ratification and minor’s agreement cannot be ratified by

him on attaining the age majority: Ratification refers to
something related to before. Here when an agreement is made by a
minor it is void. But the agreement for consideration, one cannot
enforce the same with the minor after he attains majority i.e a minor
cannot ratify the agreement even on attaining majority, because a
void agreement cannot be ratified. Case Arumugam vs Duxri Singhia
(1914)
Example: A minor borrowed a sum of money executing a simple bond

for it, and after attaining majority executed a second bond in respect
of the original loan and interest. It was held that suit upon the
second bond was not maintainable.
Where as, if on becoming major, a new promise for fresh

consideration, then this new promise will be binding.
4. No restitution: Restitution refers resorting of a thing to its proper

owner. Here a minor need not be made compensated for a benefit
obtained under a void agreement. Under Section 64 and 65 of the
Contract Act, the obligation of persons who has received advantage
should compensate such advantage when once the contract become
void. This is applicable only in respect of competent parties to the
contracts and not the minors. So a minor not liable to pay any money
or compensate for any benefit that he might have received under a
void agreement.
Example: A a minor sold a shop to B, the consideration was paid to A,

but the sale deed could not be registered as A was a minor. B filled a
case against the minor A, to recover the consideration paid by him. It
was held that the agreement is void and A need to pay back the
consideration received to B.
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5. A minor can always plead minority or No Estoppel against a

minor: Where a minor by mis-representing his age has induced the
other party to enter into a contract with him, he cannot be made
liable on the contract and he can always plead for his minority. In
other words there is no estoppel against a minor. Estoppel refers to
an impediment (hindrance or obstruction) that prevents from
assertion or act. Here a minor is not estopped or obstructed from
pleading his infancy in order to avoid contract. A minor has got his
right to protect himself but he has no liberty to cheat anybody.
Example: A, a minor, borrowed Rs. 1,000 on a fraudulent

representation, saying that he was a major. Here the creditor cannot
sue to get his money back.
6. Minor’s liability for Necessaries: Minor is liable for necessaries

supplied or ‘necessary services’ rendered to him or his minor
dependents. In other words, if a person supplies necessaries to a
person who is incapable of entering into a contract or to anyone when
such incapable person is legally bound to support, then he can claim
re-imbursement from the property of such incapable person. In case,
he cannot be held liable personally for such contracts, and all that his
property or estate alone will be liable.
7. Minor need not hold any specific performance except in

certain cases: Since an agreement by a minor is absolutely void,
the court will never direct ‘specific performance’ of any contractual
agreement by a minor. A guardian of minor cannot bind the minor by
an agreement for the purchase of immovable property. Here even
minor cannot ask for the specific performance of the contract where
the guardian had no power to enter into. But a guardian can enforce
the contract only when it is beneficial to the minor.
8. Minor cannot be a partner: Basic principle of partnership is

agreement. A minor being incompetent to enter into a contract,
cannot enter into a partnership agreement. However he can enter
into an agreement only for the benefit of the firm. According to the
Indian Partnership Act 1932, under Sec. 30(1), observes as, “A
person who is a minor, according to the law to which he is subject
may not be a partner of a firm, but with the consent of all the
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partners for the time being he may be admitted to the benefits of

partnership.”
9. Minor cannot be an insolvent: A minor cannot be declared

insolvent as he is incapable of contracting debts and dues are
payable from the personal properties of minor and he is not
personally liable. In other words, even for necessaries supplied to
him, he is not personally liable, only his property is liable.
10.Minor cannot be a surety: As minor is considered as incapable

person for contracting transaction, he cannot act as a surety, and he
is not liable to pay or compensate anything under a contract.
11.Joint contract by minor and adult: In this case of joint contract,

the adult will be liable for the contract and not a minor. In case, “Sain
Das Vs Ramchand,” where there was a joint purchase by two
purchasers, one of them was a minor. It was held that the vendor
could enforce the contract against the major purchaser and not a
minor.
12.Minor as a share holder? A minor cannot be a member or share

holder of any company. When he is holding partly paid-up shares, the
partly paid up shares are subject to various number of calls. However
he can be a share holder in respect of fully paid-up shares of a
company. Since membership of a company arises on the basis of
contract, a minor cannot be a member of a company. A company can
also refuse to register transfer or transmission of shares in favour of
a minor unless the shares are fully paid.
13.Minor cannot stand as a surety: A minor cannot be a surety as he

is not liable to pay or compensate anything under a contract.
14.Minor can be an Agent: The concept of agency is merely

connecting link between the agent and his principal. Here the
question of contract does not appear in agency. Therefore a minor
can be appointed as an agent. But he will not be liable for any of his
act under Sec 184 of the Indian Contract Act. which explains that
who may be an agent, runs as “As between the principal and third
persons, any person may become an agent, but no person who is not
of the age of majority and of sound mind can become an agent, so as
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to be responsible to his principle according to the provisions in that

behalf herein contained”.
15.A minor can be beneficiary: Minor is considered as an incompetent

person and also incompetency to enter into contract, which means
incompetency to bind himself to a contract. But there is no provisions
under the Act which debars him from becoming a beneficiary.
Example: a payee, an endorsee or a promisee in a contract. The
contract which are enforced at the option of a minor and not at the
option of the other party, then the minor can choose the benefit of
the contract to his favour. Here the law does not regard him as
incompetent for accepting a benefit. This is clear in the Case Sharafat
Ali Vs Noor Mohamad (1924). Here the Rangoon High Court held that
a minor may enforce a promissory note executed in his favor. A minor
may become a promisee.
16.Minor and the position of his parents: No liability has been

imposed on the parents even if the contracts are for necessaries. The
parents or the guardians of the minor may pay money borrowed by
him just out of moral obligations. But the parents or guardians can be
held liable when the minor child is acting as an agent of his parents
or guardians.
17.Minor’s Contract of Apprenticeship and Service: Entering, into a

contract for the training of apprenticeship is valid since, it is the
beneficial to the minor. The Apprentice Act 1961, is also protecting
the minor to enter into a contract with the employer to get training
and employment to meet his livelihood. But the terms of the contract
must fall within the terms of the Act and it also provides that the
minor must not be less than fourteen years of the age and the
contract must be entered into on behalf of the minor by his guardian.
The main aim of Act is to provide full training to learn trades, crafts
and employment, by which, when they come to full age, the minors
may gain a livelihood. But a contract of service is not binding by or
against a minor.
18.Minor’s liability for torts: A tort means a ‘civil wrong’. A minor is

liable for tort unless the tort in reality is a breach of contract. Here
for guilty of civil wrong, he is liable. However if a minor in the course
of doing, what is entitled to do under the contract is found guilty of
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negligence, he can be made liable for the tort. This is clear in the
leading case “Bornad Vs Haggis (1863).
According to this case, a minor hired a horse for riding under

expressed instructions that, not to jump on it. He rented the horse to
one of his friends, who jumped on it for a long distance, where by the
horse became sick and ultimately died.
It was held that the minor is liable for tort since it was a bare
tresspass and not within the object and the purpose of hiring.
On the whole the contract with a minor is given below on the basis its
situation/circumstance/provision.
2. Others persons who are not capable
As explained earlier as to who are competent persons for valid contract, as

per section 11 of the Contract Act, each party to the contract must have a
sound mind and other party who have unsound mind cannot form the valid
contract.
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Persons of unsound mind:
Next to the minor towards the disqualification for the purpose of forming of
a valid contract, the persons of unsound mind are placed. As per the
Contract Act, contracts made by persons of unsound mind are void. For the
purpose of valid contract, the essentials is “Free Consent”, A person of
unsound mind cannot give his assent for a contract. Under Sec. 12, which
deals with the capability of understanding the mind to form a contract is
also given. This Section also extents the status of mind during different
situation like:
a. A person who is usually of unsound mind, but occasionally of sound

mind, may make a contract during those intervals when he is sound
mind.
b. A person who is usually of sound mind but occasionally of unsound

mind is not considered as competent to make a contract when he is
of unsound mind.
However the question of soundness of minor or unsoundness must be

proved in the court of law. Whereas unsoundness of mind does not mean
weakness of mind or loss of memory. It means lack of understating the
effectiveness of contract as well as the terms of the contract. The following
are persons who come under this category of incapability:
a. Idiocy: Generally he is considered as incapable of entering into

contract. His mental status is such that even ordinary matters cannot be
understood and judged by him, because of lack of development of his
mind. The agreement with an idiot is void.
b. Insanity or Lunacy: Insanity or Lunacy appears in a person who is

totally out of control. It is a disease which occur in the brain. Such
persons cannot use his reasoning power due to some mental strain or
disease. If his mind becomes sound due to the cure of his disease. In
such cases he can enter into contract other wise he is totally incapable
of making a contract.
c. Drunkness: Drunkness is another reason for incapability and it

produces temporary incapability till a man is under the effect of
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intoxication creating impotence of mind. Drunkness is also treated as

lunacy.
d. Old person: Many a time persons who are very old will lose the
memory and become weak. Such person’s mind and memory may decay
due to his old age. Even such person are considered as incapable person
for entering into a valid contract.
Persons disqualified from contracting by any other law:
Person who are not recognized as persons are dis-qualified in forming the
valid contract. The following are the persons who are disqualified:
a. A Married Women: A women as an individual is competent enough to

enter into a contract. Law has not made any distinction regarding
contractual capacity of men and women. Whether persons are married
or unmarried, they enjoy the some contractual capacity. In respect of a
property which belongs to woman, she holds absolute authority over it
and she enters into a contract. But a married women cannot enter into a
contract in respect of her husband’s property. However a married
women can bind her husband’s property for necessaries supplied to her
in certain cases.
b. Insolvents: According to the law a person who is declared insolvent is

not a person. All the property of such person ceased by his creditors or
his property vests in the hands of the receiver or official assignee.
Therefore such person who is declared as insolvent cannot posses the
contractual capacity.
c. Alien enemies: Aliens are referred to the persons who are not
belonging to country or citizen of any country. An Alien is a person who
may be called as foreigner to the land. Such persons can be either an
‘alien friend’ or an ‘alien enemy’, and is created during peace or war of
any country. Generally an alien is competent to contract with citizens of
India living in India. The contractual capacity arises by such persons
during peace of the country. But if the country declared war, in such
cases the alien will be enemy and such persons cannot enter into a
contract. Contracts before the declaration war stands void during the
war and cannot be enforced.
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d. A Convict: A convict is a man who is imprisoned. A convict while

undergoing imprisonment is incapable of entering into a contact. But
incapability stands cancelled when once period of sentence or
imprisoned expires.
e. Foreign Sovereigns and ambassadors: Foreign sovereigns and

accredited representatives of a foreign state or ambassadors enjoy
special privilege, by which they cannot be sued in courts of law. Here
these persons have right to contract but can claim the privilege of not
being sued. However in India, under Section 86 of the Civil Procedure
Code, previous sanction of Central Government is to be obtained, for
suing the rulers of foreign state, ambassadors and envoys.
f. Corporations: A corporation is an artificial person created by the

company and recognised by Law and exists only in the eyes of Law. In
other words, joint stock companies and corporations are incorporated
under an Act passed by Parliament or State Legislature, which referred
to artificial persons. Such of the companies cannot enter into contract
directly, as they cannot act beyond the powers of Memorandum of
Association. These persons cannot enter directly including the contract
of marriage. But these are competent to enter into a contract only
through its agents or Board of Directors.
g. Professionals: Professionals are person who have specialised

knowledge, skill and qualification in their respective field. Professionals
are not bared in entering into contracts. They have their right to be
claimed after their service. But in England, there is a restriction that the
barristers cannot sue their clients for their professional fees. In India,
according to the Bar Council Act 1927, advocates of the High court can
enter into a contract with his client and can also bring a suit against him
for his fees.
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1.17 FREE CONSENT
Overview
“Consensus - as - idems” - Meeting of mind at the sometime with same

sense
Meaning and Definition of Free Consent
Free consent is very important and essential element of the valid contract.
It is essential to the creation of a contract that the parties are “ad-idem”,
i.e. they agree upon the same thing in the same sense at the same time
and their consent is free and real. Under Sec 10 of the Contract Act
provides that all the contracts are made with free consent. There is no
misunderstanding between parties regarding the subject matter or any
other essentials of the contract. It is not necessary only the consent of the
parties to the contract, but there should be ‘free consent’. Both these terms
are provided in the Contract Act.
According to Section. 13, consent is defined as, “Two or more persons are
said to consent when they agree upon the same thing in the same sense.”
From the above section, consent means that the parties should have the
identity of mind.
To-consolidate the Free consent as:
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In presence of any one of the above mentioned elements, there is no free

consent.
Under Section 14, Free consent is defined as ‘consent is said to be free

when it is not caused by-
i. Coercion as defined in Section 15, or

ii. Undue influence, as defined in Section 16, or
iii. Fraud, as defined in Section 17, or
iv. Mis-representation as defined in Section 18 or
v. Mistake, subject to the provisions of Section 20, 21, and 22.
Consent is said to be caused when it would not have been given but for the
existence of such coercion, undue-influence, fraud, misrepresentation or
mistake.
In absence of the above elements when a consent is given by the parties,

then they are called Free consent. Thus consent and Free consent involves
the identity of minds or “consensus-ad-idem”. This creates when two
parties of a contract meet their mind at the same time and on the same
thing. In absence of this and no common intention no contract can come
into existence. Such of those contract maybe void or voidable.
The following are the elements which affects the free consent:
Coercion
Coercion refers making a person to do an act forcibly or compelling him to

do so.
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A per section 15 of the Act coercion is defined as; “Coercion is the

committing or threatening to commit , any act forbidden by the Indian
Penal Code, or the unlawful detaining, or threatening to detain, any
property, to the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement.
From the above section the following are the analysis or elements for
coercion:
a. The committing of any act forbidden by the IPC (Indian Penal Code) or
b. The threatening to commit any act forbidden by IPC, or
c. The unlawful detaining of any property, or
d. Threatening to detain a property wrongfully.
Thus, for an act to be forbidden by the IPC, there must not be merely a
threat but the act should be such as to be punishable under the IPC. The
agreement under coercion is voidable agreement
Undue-influence
Undue influence is another vitality element renders a contract voidable at

the option of the party whose consent was procured by undue influence.
The term ‘under influence’ means the unfair use of one’s authority or
superior power in order to obtain the consent of a persons who is
subordinates or in weaker position. According to Section 16 of the contract
Act, undue influence is defined as,
“A contract is said to be induced by “undue influence” where the relation

subsisting between the parties are such that one of the party is in a
position to dominate the will of the other and uses that position to obtain
an unfair advantage over the other.”
From section 16, it is understood that sometimes the parties to an

agreement are so related to each other that one party is in a position to
dominate the will of the other. As a result of which other party is compelled
to into an agreement against his will as a result of “undue influence”.
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Undue influence is moral coercion as opposed to physical coercion

mentioned in section 15.
In continuation of section 16 under 16(2) the Act giving the exceptions to

the persons who can dominate the will of other. The following are persons,
exempted from undue influence:-
As per section 16(2), “A person is deemed to be in a position to dominate

the will of another:
a. Where he holds a real or apparent authority over the other.”
Example: (i) Relationship between master and servant

(ii) Relationship between officer and accused
(iii) Relationship between teacher and student.
b. “Where he stands in a fiduciary relation of mutual trust and confidence.”
Example: (i) Relationship between father and son.

(ii) Relationship between doctor and patient.
(iii) Relationship between trustee and beneficiary & so on.
c. “Where he makes a contract with a person whose mental capacity is

temporarily or permanently affected by reason of age, illness or mental
or bodily distress etc.
Example: (i) Persons who are mentally weak, illiterates, very old-age
and so on.
(ii) A contract formed out of undue influence in not valid but

voidable.
Fraud
Fraud refers to deceive or to cheat. The term fraud includes all acts
committed by a person with an intention to device another person. Fraud is
the willful representation made by a party to a contract with the intent to
deceive other party or induce such party to enter into a contract.
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According to the Indian Contract Act under Section 17, Fraud is defined as,
“Fraud means and includes any of the following acts committed by a party
to a contract or with his connivance (disregard), or by his agent, with
intent to deceive another party there to or his agent, or to induce him to
enter into a contract.”
i. The suggestion as to a fact, of that which is not true by one who does
not believe it to be true.
ii. The active concealment of a fact by one having knowledge or belief

or the fact.
iii. A promise made without any intention of performing it.
iv. Any other act fitted to deceive.
v. Any such act or omission as the law specially declares to be

fraudulent.
Mere silence will not amount to fraud, but where the person is supposed to
talk and does not speak, in such cases it amounts to fraud. Half truth
revealed by a party also amounts to fraud.
Mis-representation
Mis-representation means false representation made innocently with an

honest belief as to it truth by a party without any intention to deceive the
other party.
As per section 18 of the Act, it defined as, “mis-representation” means and

includes:
i. The positive assertion, in a manner not warranted by the information of

the person making it, of that which is not true, through he believes it to
be true.
ii. Any breach of duty which without any intent to deceive, gains an
advantage to the person committing it, or anyone claiming under him,
by misleading another to his prejudice or the prejudice of any one
claiming under him.
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iii. Causing however innocently a party to an agreement to make a mistake

as to the substance of the thing which is the subject of the agreement.
It also includes non-disclosure of material fact or facts where there’s legal

duty to disclosure without any intention to deceive.
If a false statement is known to be false by the person making it, it is

called fraudulent mis-representation or fraud; if it is honestly believed to
be true, it is called an innocent mis-representation or just mis-
representation. It is not every false or misleading statement amounts to
mis-representation.
Mistake
A contract which is otherwise valid, may sometimes become vitiated owing

to mistake which affects the consenting minds of the parties to it. Mistake
may be defined as ‘an erroneous belief concerning something’. Mistake may
also as an incorrect belief which leads one party to mis-understand the
other. Mistake many times takes place where the parties to the contract are
not fully aware of the terms of the agreement, and they take the terms in
a different sense.
Section 20,21 and 22 of the contract Act deal with the legal effect of
mistake without defining the term;
Sec.20 lays down that, “where both the parties to an agreement are under
a mistake as to a matter of fact essential to the agreement, the agreement
is void.”
Sec.21 lays down that, “A contract is not voidable because it was caused
by a mistake as to any law in force in India. But mistake as to a law not in
force in India has the same effect as a mistake of fact.
Sec.22 states that, “A contract is not voidable merely because it was

caused by one of the parties to it being under a mistake as to matter of
fact.”
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The mistake may be,
(i) Mistake of fact and (ii) Mistake of law.
Mistake of fact may be-
(a) Bilateral mistake (b) Unilateral mistake.
1.18 LEGALITY OF OBJECT
Overview
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Legality of Object
The formation of contract should not only present consideration for the
validity of a contract but the object should also possesses its validity. The
object must be lawful and unlawful objects are void under Contract Act.
The word ‘objects’ means purpose or design. In some cases consideration
for an agreement may be lawful but the purpose for which the agreement
is entered into may be unlawful. In such cases the agreement is void. Both
the consideration and object of the agreement must be unlawful thereby
such agreements are void. Both Section 10 and 23 of the contract Act
provides about lawful consideration and object. There is no separate
provisions for consideration and object.As object refers to purpose or
design of the contract and it also implies the manifestation of intention.
Thus if a person while in insolvent circumstances transfers to another for
consideration of some property with the object of defrauding his creditors,
the considerations of the contract is lawful but the object is unlawful. The
Contract Act along with speaking on what agreements are contracts under
Sec 10, and also speaks on what consideration and objects are lawful and
what not, under Section 23 A.
According to the Sec 23:
The consideration or object of an agreement or object of an agreement is

unlawful, unless:
it is forbidden by law; or is of such a nature that, if permitted, it would

defeat the provisions of any laws; or
is fraudulent; or involves or implies injury to the person or property of

another; or the courts regard it as immoral; or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said

to be unlawful. Every agreement of which the object or consideration is
unlawful is void.
Example:
1. A, B and C enter into an agreement for the division among them of

gains acquired, or to be acquired, by them through fraud. Here the
agreement is void, as its object is unlawful.
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2. ‘A’ promises to obtain for ‘B’ an employment in the public service, and
‘B’ promises to pay 10,000 rupees to ‘A’. Here also the agreement is
void as the consideration for it is unlawful.
According to Sec 23 of the Act, the consideration and object of an

agreement are unlawful in the following cases:
I. If it is forbidden by law:
The object or the consideration of an agreement is forbidden by law, such

agreement is void. This may be;
i. When it is punishable by the criminal law of the country, or (ii) When

it is or prohibited by special legislation or regulations made by a
competent authority under powers derived from the legislature.
Example:
a. An agreement for the purpose of smuggling is forbidden by law.

Both purchasing and selling of such goods are also forbidden by
law and such agreement is unlawful.
b. Under Hindu Law, a Hindu cannot marry another women, if his

lawful wife is alive. Such agreement of marriage would be unlawful
under this clause.
c. A person is granted an opium licence under ‘Abkari and Opium

Act’, on the condition that he would not sell or transfer his right to
anybody. In case if it is transferred to any person by different
object to earn more money, then such agreement is unlawful and
void.
d. An agreement to enter into the trade of prostitution/robbery and

so on, such of the agreements are unlawful and void.
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II.If it is of such nature that, if permitted, it would defeat the

provisions of any law:
In this, if the object or consideration of an agreement is of such nature

that if permitted it would defeat the provision of any law, here the
agreement is void, or the agreement of such nature that, though not
directly forbidden by law, it would indirectly lead to a violation of law,
whether enacted or otherwise (Hindu and Mohammedan Laws)
Example:
i. As per the case A.E. Thimmal Naidu Vs Rajammal (1968), An

agreement between husband and wife to live separately is invalid as
this is opposed under Hindu Law.
ii. In case of Chandra Sreenivasa Rao Vs Korrapati Raja Rama Mohana

Rao (1951), the Madras court held that the amount advanced under a
promissory note for the purpose of celebrating a marriage of a minor,
contrary to the provisions of the Child Marriage Restraint Act 1929.
Here such an act is unlawful and void.
III.If it is fraudulent
In this, agreements which are entered into to promote fraud is unlawful

and void and an agreement in fraud of creditors with a view to defeating
their right is void.
Example: A, B and C enter into an agreement for the division among them
for the gains acquired, or to be acquired, by them by fraud. Here the
object is unlawful and such agreements are void.
IV.If it involves or implies injury to the person or property of

another:
The agreements which create injury to a person or to his property, such of

the agreements are unlawful and void. An agreement to commit a crime
such as assault, or to indemnify a person against the consequences of
tortious act like publication of libel is unlawful under Section 23.
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Example:
a. ‘A’ and ‘B’ enter into an agreement to commit an assault or to beat a

person it is unlawful and void.
b. ‘A’ and ‘B’ agrees to put the house of another on fire, is unlawful and
therefore void.
V. If the court regards it as immoral
Where the object of an agreement is such that the court regards it as

immoral, the consideration is void. The real meaning of immorality is
depends upon the circumstances. The term immorality may be an act
which is not accepted by the consciences and also the society.
Example:
i. Sexual immorality, i.e., ‘A’ agrees to give his daughter to ‘B’ for
prostitution.
ii. An agreement for letting out a flat to a prostitution which is referred

as sexual immorality.
iii. An agreement between husband and wife for future separation, which
is considered as an interference with martial relations, and same is
considered as immoral.
iv. An agreement for future marriage after the first wife expires which is
nothing but an act against the public morale.
(VI)If the court regards it as being opposed to public policy
The term public policy may be defined as that policy of the law which
prevents the enforceability of agreements that are inimical to the interest
of the community ie., injuries to the society. Such of the act or agreement
the court regards it as opposed to public policy. Any agreement which
tends to promote corruption or injustice or is against the interests of the
public is considered to be opposed to public policy. Public policy is that
principle of law which holds that, no citizen can lawfully do that which has
a tendency to be injurious to the public.
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The following are the agreements as opposed to public policy and hence
such of the agreements are unlawful and void. These are also called as
Doctrine of public policy:
a. An agreement to trade with alien enemies: Here enemy refers to

a person who belongs to a foreign country with which the home
country is at war.
b. An agreement for the interference with the course of justice:

Here when an offence has been committed, the guilty party must be
prosecuted and any agreement which seeks to prevent the
prosecution of such a person is opposed to public policy and is void.
Again an agreement, the object of which is to interfere with the
course of justice is also unlawful.
Example: An agreement to influence a judge to induce him to decide

the case in a party’s favour, is obviously opposed to public policy and
is void.
c. Agreement for stifling prosecution: Stifling refers to suppressing

and any agreement for suppressing the prosecution is unlawful. As
per the public interest, all criminals should be prosecuted and
punished. Contracts for stifling prosecution are a common type of
contracts opposed to public policy.
Example: A promises B to drop a prosecution which he has instituted

against B for robbery, and B promises to restore the value of the
things taken. Here the agreement is void as its object is unlawful.
d. Agreements of maintenance and champerty: When a person

agrees to help another by money or otherwise in litigation in which
he is not himself interested it is called maintenance. When a person
helps another in litigation in exchange of a promise to handover a
portion of the fruits of the litigation, if any, it is called champerty.
The principle of English Law provides that an agreement on

maintenance and champerty is void and same is not applicable in
India. But an agreement by a chartered accountant with his client to
change fees on the basis of percentage of the benefit received by the
client in Income tax proceedings is void.
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Under the Indian Law, agreements of maintenance and champerty

are not absolutely void. They are valid if they are reasonable and
made with the bona-fide object of helping a claim believed to be just.
e. Agreements for the sale of public offices, titles and honours:

Agreements for the sale or transfer of public offices and titles or for
the procurement of public recognition like Bharath Ratna, Padma
Vibushan and so on, for monetary consideration are opposed to
public policy. It tends to the prejudice of the public service by
interfering with the selection of the best qualified persons. Such
agreements, if enforced, would lead to inefficiency and corruption in
public life.
f. Marriage brokerage agreements: An agreement to procure the

marriage of a person in consideration of a sum of money is called
brokerage agreement. It is the interest of society that reckless or
unsuitable marriage should be prevented and third parties are not
allowed to make money by bringing about matrimonial unions. An
agreement for marriage must be free and it should be voluntary
decision of the concerned parties. Excepting of such agreements,
others are void.
Example: Under the case of Amirchand Vs Ram Rattan chand (1903).

“A proposed the marriage of his widow niece to B and offered to
given her gold, jewels and land. The marriage took place, but A
refused to fulfill the rest of his promise. It was held that the
agreement was not enforceable.
In India, however, marriage are in most cases negotiated by the

parents of the parties and the custom of appointing agents or brokers
for finding out a suitable match is well established. Therefore there is
some difference of opinion on the question whether the English rule
regarding marriage brokerage contracts should be applied here.
Again, an agreement of dowry i.e. to pay money to the parents of the

bride or the bridegroom in consideration of their agreeing to the
contract of marriage is also illegal and cannot be offered. But such an
agreement is illegal in respect of payment only, the validity of the
marriage is not affected.
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g. Agreement interfacing with parental duties: The parents are the

natural guardians to their children. Both father and mother have full
authority over their children. Any agreement which is inconsistent
with the duties arising out of such guardianship is void as being
opposed to public policy.
In the case of Atma Ram Vs Banku Mal (1930): For monetary

consideration, A agrees to place his daughter at the disposal of B to
be married as B likes. The agreement is illegal and void as it would
interfere, with A’s parental duty to select a husband in the best
interest of the girl.
h. Agreement in Restrain of trade: As per Section 27 of the Act,

“Every agreement by which anyone is restrained from excising a
lawful profession, trade or business of any kind, is to that extent
void”. Again an agreement which prevents a person from carrying an
any lawful business is void.
i. Agreement restraining personal liberty: An agreement which

unduly restricts the liberty of the individual is illegal and thus void.
j. Agreement tending to create monopolies: An agreement to

create monopoly is void and opposed to the public policy. There can
be monopoly rights given to one person to the exclusion of others.
Example: A promises B, the owner of a newspaper Rs. 500 in

consideration of the publication by B, in his newspaper of false
statements in regard to a candidate for election. B published them.
The agreement in void as apposed to public policy.
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1.19 VARIOUS MODES OF DISCHARGE OF A CONTRACT
Overview
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Introduction
The Contract Act provides various rights and obligations between the
parties to form a contract. When the contractual relationship subsisting
between the parties come to an end the contract is said to be discharged.
In other words, a contract is said to be discharged or terminated when the
rights and obligations created by it are extinguished. Here the parties are
no more liable under the contract, when once the discharge of the contract
exist. Thus, discharge is anend of the contract and termination of the
contractual relationship. The Act provides under different section the
various modes of discharging of a contract, which are follow as under:
i. Discharge by agreement (Section 62, 63)

ii. Discharge by performance (Sec. 37, 38)
iii. Discharge by breach (Sec. 39)
iv. Discharge by operation of law.
v. Discharge by impossibility (Sec. 56)
vi. Discharge by lapse of time.
I. Discharge by agreement
Since a contract is formed on the basis of an agreement, it follows that the

contract can be discharged by mutual agreement.The rights and obligations
created by an agreement can be discharged without their performance by
means of another agreement between the parties which provides for the
extinguishments of the earlier rights and obligations.
Section 62 provides: “If the parties to a contract agrees to substitute a

new contract for it, or rescind or alter it, the original contract need not be
performed.” From this section, it contemplates three distinct modes of
discharge of contract by agreement. Novation, Alterations, and Rescission
are three different ways in which parties agree to terminate the existence
of the contract.
As per section 63 of the Act, “Every person who accepts a proposal may
dispense with or remit, wholly or in part, the performance of the promise
made to him, or may extend the time for such performance, or may accept
instead of it any satisfaction which he thinks fit. This section also provides
the modes of discharging the contract through Remission and Waiver.
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Section 62 and 63 on the whole provides the ways in which the discharge
of contract by mutual agreement is explained, which are discussed in brief,
below:
Novation
Novation refers to the substitution of a new contract for the existing one,
either between the same parties or between different parties and the
consideration for the new contract is the discharge of the old contract. It is
a transaction by which, with the consent of all the parties concerned, the
old contract is revoked and substituted by a new contract, unless there is
extinguishments of all rights and obligations under the old contract, there
is no novation. Thus, where the original debtors is given up the creditor
and an other person undertakes the liability, then it is a case of novation.
As the novation implies a fresh contract in place of original one, all the
parties to the old contract must agree to it. The new contract should be
valid and enforceable. The novation may be of following two types:
a. Novation involves change of parties. Here substituting a new debtor

in place of an old one are with consent of the creditors.
b. Novation without change of parties. Here no parties will be changed

but substitution of contract may be changed. Sometimes the
concerned parties to a contract agree to substitute the existing
contract for a new contract. In such case the original contract is
discharged and need not be performed.
Rules regarding Novation
i. Novation must appear before the expiry of the time of performance of

the original contract.
ii. It should have mutual consent of the parties and should not be made
compulsory.
iii. The replaced contract for the old one should be legally enforceable.
iv. It must have been substituted to the present contract. An agreement

to institute a contract in future will not be novation.
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v. As a result of novation, the contract is totally discharged and law

does not entertain any action based upon the terms of the old
contract.
In novation, the new contract must also be valid and enforceable.If not,
the parties remain bound by the original contract.
Example: A owes B Rs. 10,000 under a contract, Bowes C Rs. 10,000. B

orders A to credit C with Rs. 10,000 in his books, but C does not assent to
the arrangement. B still owes C Rs. 10,000 and no new contract has been
entered into.
Rescission
The word Rescission refers to cancellation. While novation results in a new

contract in the place of the old one, rescission result in the cancellation of
the original contract. Rescission results in the dissolution of the contract
while novation results in replacement of the contract. An agreement of
recession releases the parties from their obligations arising out of the
contract. The example for the rescission follows:
Example: A promises to sell a property to B on a certain day. Before the

actual date of performance, A and B mutually agree that the contract will
not be performed. Here the contract is rescinded.
The following are the modes of Rescission: Under to Sec. 64,
i. The parties to the contract must have mutual agreement to rescind

the contract before it breaches.
ii. On breach of a contract by any one of the parties his aggrieved party
can rescind the contract and claim for the compensation.
iii. The parties to the contract whose consent is not free, such of them
are voidable contract, the parties whose consent is not free may
rescind the contract.
iv. When the parties to the contract shows non-performance for a long
time, and no other party has objected against it, the contract may be
taken as rescinded.
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Rescission may be total or partial. The total rescission appears where the
discharge of the contract is full or whole. The partial is the variation of the
original contract through;
a. Rescinding certain terms of the contract.
b. Substituting new terms for the one’s which are rescinded.
c. Adding new terms without rescinding any of the terms of the original
contract.
Alteration
Alteration refers to a change to one or more of the material terms of the

contract. A contract may be discharged by alteration also. Alteration may
be both material and immaterial. In case of the alteration, there is no
change of parties to the contract but change of terms of the contract.
Alteration made with the consent terms of the contract. Alteration made
with the consent of all the parties results in the discharge of the original
contract.
Example: A enters into a contract with B for the supply of goods at his
warehouse, on 1st July. Later both A and B agree to postpone the date of
delivery to 30th Nov. This change, turns to alteration of the contract.
Remission
Under the Sec. 63 of the Contract Act Remission has been explained under
the title as ‘Promisee may dispense with or remit performance or promise’
– which gives us every Promise may dispense with or remit, wholly or in
part, the performance of the promisee made to him, or may extend the
time for such performance or may accept instead of it any satisfaction
which he thinks fit.” As per this section remission may be defined as the
acceptance of a lesser sum than what was contracted for or a lesser
fulfillment of the promise made.
Remission may be a unilateral act of the promisee discharging at his will

and pleasure of the obligation of another. The situation is different in
England, where a person cannot remit unless the fresh promise is
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supported by consideration. In India a promisee may remit or give up a

part of his claim as full settlement with the ascent of the promisor.
Example: A owes B Rs. 2000. A pays to B who accepts in satisfaction of the

whole debt Rs. 1000 paid at the time and place at which the Rs. 2000 were
payable. The whole debt is discharged.
In case of Kapur Chand Godha Vs Mir Nawab Himayat Ali Khan (1963).
The defendant, the eldest son of the Nizam of Hyderabad, who had
purchased jewellery for Rs. 27 lakhs from a Bombay merchant, executed a
promissory note for a price. After the military occupation of Hyderabad, a
debt settlement committee was set up by the military Governor.The
committee paid Rs. 20 lakhs to the plaintiff, the jeweler, in the full
settlement of 27 lakhs due to him, and he accepted in two installments.
But after some days he said the defendant for the balance due. The
Supreme Court held the case is covered by Sec.63 and he is not entitled to
sue.
Waiver
Waiver refers to the abandonment of a right which a person entitled to. In

other sense, Waiver means abandoning the right or waiving of a legal right.
Normally everybody is at liberty to waive. A waiver is nothing unless it
amounts to release. It signifies nothing. More than an intention not to
insist upon the right. Thus when the promisee abandons his right of
demanding performance, he is said to have waived this right. In such case,
the promisor is released from his obligation to perform the promise
undertaken. As per see 63, to constitute a waiver neither an agreement
nor consideration is necessary.
Example: A agrees to repair the car of B. B later on forbids or refuse A to

repair the car. A is no longer bound to perform the promise. Thus, the
contract is terminated by Waiver.
Merger
Merger is combining two things. Merger takes place when an inferior right
accruing to the contract mergers into a superior rights. Again on this the
inferior rights vanish and not required to be enforced.
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Example: A purchases a house, which he was having on lease. His right of

a lessee is inferior to the right of an owner.
Accord and satisfaction
The term ‘accord’ may be defined as the promise to accept less amount
than what is due under the contract satisfaction refers to the payment or
fulfillment of the lesser obligation. These two terms are used in English
Law, who has no relevance under the Indian Law. Under English Law, the
old contract is discharged when the accord is followed by satisfaction.
II.Discharge by Performance
Performance of a contract is the usual mode of discharging a contract. The

performance of a contact takes place, when the parties to the contract
undertake the rights and obligation to do as per the terms of the
agreement. When both the parties have performed their obligation, the
contract is said to be discharged by performance.
According to Sec. 37 of the Contract Act, “The parties to a contract must

either perform or offer to perform their respective promises, unless such
performance is dispensed with or excused under the provisions of the Act,
or of any other law. Promises bind the representatives of the promisors in
case of the death of such provisions before performance unless a contrary
intention appears from the contract.
According to the above section the contracting parties are bound to

perform their respective promises or obligations unless the performance is
dispensed with or excused under the provision of the Contract Act or any
other law. If the promisors die before the performance, it is the obligation
of the legal representatives to perform the promise, unless a contrary
appears from the contract.
III.Discharge by Breach
It is also another mode of discharging the contract. Here, when a party to

contract fails to perform his obligations, he is said to have committed
breach of contract. A breach of a contract discharges the aggrieved party
from performing his obligations. The breach of contract may either be
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i. Actual Breach of contract

ii. Anticipatory Breach of contract Again,
i) Actual Breach of Contract may take place in two different

situations i.e.
a. at a time, when performance is actually due: In this situation,

if a party to a contract fails to perform his obligation at the
specified time, he is liable for its breach.
Example: A agrees to deliver a furniture worth Rs. 10, 000 to B on

31st March 2005, but fails to do so on that date, he is said to have
committed a breach of the contract. Similarly, if A delivers
furniture worth Rs. 10,000, on 31st March 2005, but B, for no
valid reason, refuses to accept them, B becomes guilty of breach.
b. Breach during the performance: It occurs when one party fails

or refuses to perform the obligation under the contract during the
performance of the contract. Such a situation is likely to happen in
case of contracts on installment of delivery of goods or
constructions of a building and payments by installment and so on.
Refusal of performance may be express or implied. Here the
aggrieved party to repudiate the contract and sue the other party
for damages due to breach of contract.
Example: Cort Vs Ambergate Railway Co. (1851): In this case,

the plaintiff entered into contract to supply the defendant Co, 3900
tons of railway chairs at a certain price. After 1787 tons had been
delivered to the company, the company requested him to deliver
no more of Railway chairs. There upon, the plaintiff brought an
action contending that he was always ready and willing to perform
his part, but had been prevented from doing so by the action of
the company. It was held that, since the contract has been
renounced, he could maintain an action without manufacturing and
tendering the rest of the goods. The measure of damages in such
a case would ordinarily be the difference between the cost of
production and delivery and the contract price.
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ii) Anticipating Breach of contract
When a party to a contract has refused or repudiate, or renounces to

perform his obligation, before the time fixed for performance is
known as Anticipatory Breach of contract. Anticipatory breach is
premature destruction of the contract rather than a failure to perform
it.
Under Section 39 of the Indian contract Act lays down as “when a

party to the contract,
a. has refused to perform or

b. disabled himself from performing the contract,
c. in its entirety, the promises may put an end to the contract,
d. unless he had signified by words or conduct, his acquiescence in
its continuance.
When it put in a simple word, when the promisor, prior to the due date
of performance, altogether refuses to perform his obligations under the
contract or disables himself from doing so, then there occurs a breach of
contract.
Example: A singer enters into a contract with B, the manager of a

theatre, to sing at his theatre two nights, every week during the next
two months, and B engages to pay her Rs. 1000 per night. On the sixth
night A, willfully absent herself. With the assent of B, A sings on the
seventh night. B has signified his acquiescence in the continuance of the
contract and cannot now put an end to it but he is entitled for
compensation for the damages sustained by him though A’s failure to
sing on the sixth night.
IV.Discharge by operation of law
Discharge by operation of law is another mode of discharge of the

obligation of the contract: The following are the circumstances:
a. Unauthorized Material alteration: If a party to a contract effects

any material alterations in a written document or contract without the
consent of the other party, then the contract has been done with
unauthorized material alterations, which is void. In this case both the
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parties will be discharged from their respective obligations. A

material alteration is one which changes, in a significant manner, the
legal identity or character of the contract or the rights and liabilities
of the parties to the contract. The effect of making such an alteration
is exactly the same as that of canceling the contract. Both the parties
will be discharged from their respective obligation.
b. Insolvency:Under insolvency, the contract is discharged by the

insolvency of one of the parties to it and when court passes an ‘order
of discharge’.
c. Merger: It takes place when there is acceptance of a higher security

in the place the lower. In other words when a contract with an inferior
right give place to another contract with a superior right, the original
contract gets discharged by its merger in the latter.
Example: A was tenant of B’s house. A purchases the house from B.

The rights of A as the lessee of the house merge into his rights as the
owner of the house. The tendency is discharged by merger.
d. Death: Death of the promisor results in termination of the contract in

case involving of personal skill and ability. Excepting the skills and
ability of the contracting party’s death, the other cases, the rights
and liabilities of the deceased person pass on to the legal
representatives.
V. Discharge by impossibility (Sec. 56)
Impossibility is another situation for the discharging of the contract. A

contract is discharged if its performance become impossible. Impossibility
may arise on the face of two contract or may exist unknown to the parties
at the time of making contract, or it may also arise subsequently after the
contract is made.
Hence the impossibility of performance may be,
(i) Initial impossibility (ii) Subsequent impossibility
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i. Initial impossibility
It is also referred as Pre–contractual impossibility. It is the impossibility

which exists at the time of formation of contract. If an agreement
contemplates doing something which is absolutely impossible the same
becomes void–ab–intio [void at the very beginning]
As per Sec 56 of the Contract Act, under first paragraph it is said that “An
agreement to do an act impossible in itself is void.” Here the word
“impossible in itself” obviously means to something which is inherently
impossible of performance.
If an agreement becomes void–ab–intio due to impossibility, the question

of discharge of the contract does not arise since there is no contract to be
discharged or terminated
Example: A agrees with B to discover trasure by magic. Here the

agreement is void -ab–intio, since it is impossible at the very beginning of
the agreement.
The rule on void–ab–initio is based on the following maxims:
a. “Lex non Cogit ad impossibilla” est, i.e “the law does not recognize
what is impossible” and
b. “Impossibillium nulla obligatio est”, i.e “what is impossible does not

create an obligation.”
According to the above maxims, the parties discharged as a void

agreement does not create any rights and obligations on the contracting
parties. The impossibility reason may be known and unknown to the
parties. In both the cases the agreement is void.
Even in this case of impossibility the Law provides compensation for loss
through non–performance of act, under Sec. 56, where one person has
promised to do some thing, which he knew or with reasonable diligence,
might have known, and which the promisee did not know to be impossible
or unlawful, such promisor must make compensation, to such promisee for
any loss which such promise sustains through the non-performance of the
promise.”
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The above section will be understood with the example given below:
Example: A contract to marry B, being already married to C, and being

forbidden by the law to which he is subject to practice polygamy. A must
make compensation to B for the loss caused to her by the non–
performance of his promise.
ii. Subsequent impossibility
Subsequent impossibility is also referred as ‘Supervening’ impossibility.
A contracting parties who are capable of performing the contract at the

time of entering into it, may tern to be incapable due to some reasons,
which are beyond the control of the parties are known as supervening or
subsequent impossibility. Here the contract may be valid at the time when
it was entered into, but subsequently there may arise an impossibility,
which may prevent its performance. In such cases the contracts become
void and the parties to its are discharged from their obligations.
The same situation has been explained under Sec 56, in second paragraph
of the Contract Act which provides it as, under the sub heading as
‘Contract to’ do act afterwards becoming impossible or unlawful” – “A
contract to do an act which after the contract is made, becomes
impossible, or, by reason of same event which the promisor could not
prevent, unlawful becomes void when the act becomes impossible or
unlawful.
Example: A contracts to take in cargo for B at a foreign port, A’s

Government afterwards declares war against the country in which the port
is situated. The contract becomes void when war is declared.
Subsequent impossibility or supervening impossibility will hold good only

when the following instances or circumstances takes place:
a. Destruction of the Subject–matter
Subject matter is one of the essentials to form a valid contract. When the
subject–matter of a contract, subsequent to its formation, is destroyed,
without the fault of the promisor or promisee, then the contract gets
discharged.
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Example: (1) Under the case Tylor Vs Caldwell (1863), the dependent
agreed to let a music hall for a series of concerts. Before the day of
performance, the music hall was destroyed by fire. The plaintiff sued the
dependent for damages for breach of contract. It was held that the
contract had become void to the destruction of the hall and thus dependant
was not liable.
Example: (2) Case – V. L Narasu Vs. P.S.V Iyer (1953)
In this case, there was an agreement between the owner of a theater and
a producer, to exhibit a picture. The Municipal authority issued an order to
demolish the theatre because it was unsafe. The owner of the theatre has
no knowledge of the defective and unsafe nature of the building. In this it
was held that continued existence of the theatre was a fundamental basis
of the contract and the demolition of the theatre discharged the contact
because of supervencing impossibility.
b. Unanticipated change of circumstances
It is another type of situation for subsequent impossibility, in case change

of circumstances which has affected the performance of the contract to
such an extent as to make it virtually impossible, the courts will not
enforce the contract.
Example: In case of Joseph Constantine steamship Line Ltd. Vs. Imperial

Smelting Corporation Ltd. (1941), “A ship was chartered to load a cargo
but on the day before she could have proceeded to her berth, an explosion
occurred in the auxiliary boiler, which made it impossible for her to
undertake the voyage at the schedule time.
It was held by the House of Lords that frustration had occurred in the
circumstances. As per Section 56, an abnormal rise or fall in price,a sudden
depreciation of currency, an unexpected obstacle to execution or the like
will not in itself make the contract impossible.
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c. Death or in Capacity of the Promisor
A contract may be impossible when a promise made physically incapable of

performance by reason of the death or incapacity of some person whose
continued life and health are necessary for the performance of the
contract. Such impossibility discharges the promisor liability.
Example: A contracts to act at a theater for six months in consideration of

a sum paid in advance by B. On several occasions A is too ill to act. The
contract to act on those occasions becomes void.
d. Change of Law
All agreements turn to contracts when they are lawful. Whereas contracts
which are lawful when made but become unlawful later by reason of
change in law, becomes impossible of performance. Impossibility created
by law is a valid excuse for non performance.
Example: A agreed to sell B 100 tonnes bag of sugar stocked in his

godown. Before the delivery could be made, the godown was sealed by the
Government and it requisitioned the whole of sugar under statutory
powers. It was held that the contract is discharged as the delivery of the
sugar becomes impossible.
e. Declaration of war
When two parties entered in to a contract the contract is valid for

performance, but the same contract gets discharged, if the war declared
between two countries. However, such a contract may have the opportunity
of reviving and may be enforced at the end of the war, which is left to
parties discretion. Whereas if the performance of the contract goes to help
the enemy and enemy country, then such contracts become void.
Example: A contract to take in cargo for B in a foreign port.A’s Government

declares war against the country in which the port is situated. Here the
contract becomes void when the war is declared.
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f. Failure of pre-condition:
This refer to where there non–existence or non-occurring of a particular

state of things. In this situation when certain things necessary for
performance cease to exist the contract for the reason of impossibility,
then such contract becomes void. If a contract depends on the occurrence
of an event, which does not in fact happen the contract is discharged.
Example: In the case of Krell Vs Henry (1903)
A contract was to hire a flat for viewing the coronation procession of the
king in 1902. The procession had to be cancelled on account of king’s
illness. A suit was filed for the recovery of the rent for the flat. It was held
that the hirer need not pay the rent as the existence of the procession was
the basis of the contract and its cancellation stands discharge of the
contract.
Example: A and B entered in to contract to marry each other. Before the

time fixed for marriage A goes mad. In this case of impossibility arises
there by the contract is void.
The impossibility of performance is not always the ground of discharge of

the contract. But there are certain circumstances in which a contract is not
discharged on the ground of subsequent or supervencing impossibility.
Such of them are referred to the exceptions. Then following are the
exceptions referred to the impossibility or frustration
1. Self induced impossibility or frustration

2. Commercial impossibility
3. Difficulty of performance
4. Failure of a third party
5. Strikes, Lockouts and civil disturbances.
6. Failure of one of the objects.
The following are the effects of supervencing impossibility.
1. Contract becomes void

2. Benefits to be restored
3. Compensation for non-performance
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Doctrine of Frustration
The other concept of supervencing impossibility is Doctrine of frustration.

In England before 1863 it was the law that every one was absolutely bound
to perform any obligation which he had undertaken to perform and could
not claim to be excused on the ground that the performance subsequently
became impossible. It comes under the purview of Sec 56 Contract Act.
Even today in many cases, this is taken as reference & it is referred as,
“When the party by his own contract creates a duty or change upon
himself, he is bound to make it good, if he may, not withstanding any
accident by inevitable necessity, because he might have provided against it
by his contract” [Paradise Vs Jane].
In case of Satyabrata Ghose Vs. Mugneeram (1954)
The Supreme Court observed as:
“Although various theories have been propounded by the judges and jurists
in England regarding the Judicial basis of the doctrine of frustration, yet the
essential idea upon which the doctrine is based, is that of impossibility of
performance of the contract, in fact impossibility and frustration are often
used inter changeable expressions.”
The actual circumstances of the above said case was, an agreement was
entered in to for the safe of land subject to the condition that the seller
would do some development work on the land. Before the work could be
completed the land was requisitioned by the Government for war purpose.
Held, the contract was not frustrated.
VI.Discharge by lapse of time
The another mode of discharging the contract is by lapse of time The

Indian Limitations Act has prescribed period with in which the existing
rights can be enforced in courts of law. The main object of this act is to
guide and assist the vigilant on ones own act but not those who sleep over
their rights. The Law fixes a specific period of performance and if no action
is taken by the promisee in the court of Law with in the specific time, he is
debarred from enforcing the contract. Many a times and in the case of
simple contracts, the period of limitation is three years. If an aggrieved
party does not enforce his rights with in the time prescribed by the Act, his
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remedy by way of a suit is barred, which in effect means, that the other
party is discharged from his obligation. For example, the price of goods
sold should be paid with in three years of the delivery of goods. In case of
goods on credit, payment should be made after the expiry of a fixed period
of credit, the price should be paid with in three years of the expiry of the
period of credit. If the price is paid and the creditor does not file a suit
against the buyer for the recovery of price within three years, the debt
recovery of price within three years, the debt becomes time– barred and
hence irrecoverable. Thus lapse of time terminates a contract.
Example: ‘A’ agrees to supply certain goods to ‘B’ at a certain price. Goods
are to be delivered after a week and payment is to be made on delivery. ‘A’
supplies the goods as per the agreement. But, ‘B’ does not make the
payment. ‘A’ must file the suit within three years after debt has become
due. If he does not file, the suit against ‘B’ for the price of the goods, the
debt become time barred.
Hence, Lapse of time terminates a contract.
1.20 REMEDIES FOR BREACH OF CONTRACT
It is the duty of any lawful contracting parties to perform their respective

promises. When the contract formed is valid, it is the commitment of both
the parties to perform the contract. Where as when any one of the parties
refuses to perform his promise, he is said to have committed a breach of
the contract. The aggrieved party is given full right to file a case or bring
an action for his damage. In some circumstance, the breach not only gives
rise to a cause or bring an action for his damages. In some circumstances,
the breach not only gives rise to a cause of action but also discharge the
injured party from performance of his part of the agreement. The Contract
Act provides certain remedies for breach of contract under section 73 to
75. They are as follows:
i. Filing a suit for Damages.

ii. Suit for cancellation or Recession.
iii. Suit for specific performance.
iv. Suit upon Quantum Meruit.
v. Suit for Injunction
vi. Demanding for Restitutions
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I. Filing a suit for Damages
The aggrieved party, usually like to get back their money and pain in form
of claiming the damages. Damages refer to compensation in terms of
money to the aggrieved party for the loss or injury suffered by him. In the
breach of contract, the other party earns certain rights including the right
to claim damages or loss arising there from. The main aim of the
‘damages’ is Compensation not punishment. The damages are to be
awarded for the loss which naturally arose from the breach (Sec 73). In
this case the Contract Act does not seek to punish the guilty. Here the
court will compel the party for breach of the contract to make good the loss
by paying to the other party. The following are kinds of damages in order
to protect the rights of the aggrieved parties.
(i) Ordinary or General or Compensatory Damages: Ordinary

damages are also termed as general or compensatory damages.
These are the damages which will be arising in the usual course of
things from such breach. Those damages which are awarded to
compensate the injured party for the actual amount of loss suffered
by him consequent upon the breach are known as general damages.
This sort of damages assessed on the basis of actual loss.
Example: A contract to deliver 100 bags of oil seeds for Rs. 1,000 per
bag on a future date. On the due date he refuses to deliver 100 bags
of oil seeds. The price on that day was Rs. 1,100 per bag. The
measure of damages is the difference between the market price on
the date of breach and the contract price, (1000 x 100) Rs. 1,00,000.
(ii)Special damages: Special damages arises in case of special

circumstances. These damages cannot be recovered unless the
special circumstances are brought to the knowledge of the other
party. Special damages can be claimed by the aggrieved party along
with the general damages, for the loss suffered under special
circumstances. Special damages cannot be claimed as a matter of
right.
(iii)Vindictive or exemplary damages: Vindictive or exemplary

damages are damages awarded to punish the wrong doing or
defaulting parties. In this case of damages the main purpose is to
punish the defaulting party and not make them only to pay the
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compensation. The vindictive damages are also known as punitive

damages. Although the main contract is to compensate the injured
party for the loss suffered and to punish him, there are two
exceptions to the rule:
a. Breach of a contract to marry: In two case the amount of

damages will depend upon the extend of injury to the party’s
feelings one may be ruined, other may not mind so much.
b. Dishonour of a cheque by a banker when there are sufficient

funds to the credit of customer. In this case the rule of ascertainity
damages is, ‘the smaller the cheque, greater the damages”. The
actual amount of damages will differ according to the status of the
party.
(iv)Nominal damages: This type of damages are neither compensatory

nor punishable. Nominal damages are warded only for the name
sake. To maintain the decree of sight and when the aggrieved party
has not suffered, then this sort of damages take place. These are
usually awarded if the contract price and the market price are same
at the time of breach of control and aggrieved party has thus suffered
no loss. Awarding the nominal damages many a times in the
discretion of the court.
II.Suit for cancellation or Recession
Rescission or cancellation means setting side the contract. The simple

meaning of rescission means cancellation of the contract. When contract is
broken by one party, then the other party may treat the contract as breach
and refuse to perform his part of the contract, in other words putting an
end to the contract. In the situation of rescission of the contract, the
aggrieved or injured party is discharged from all the obligations under the
contract.
Example: A promises to sell his Lorry for 2 lakhs on certain date. B agreed
to pay the price on the receipt of the lorry. A refused to sell his Lorry to B.
B need not pay the price.
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The Contract Act under sec . 75 provides s “A person who rightly rescinds a
contract is entitled to compensation for any damages which he has
substituted through the non – fulfillment of the contract.”
Again under section 66 of the Contract Act provides that such rescission
may be communicated in the same manner as the communication of the
revocation of a proposal. A party on rescinding contract is bound to restore
the advantage a received under the contract.
The following circumstances where the last may grant the rescission:
i. Where the contract is voidable or terminated by the plaintiff.
ii. Where the contract is unlawful for causes apparent on its face and
defendant is more to blame than the plaintiff.
The following are the circumstances, where the court may not grant
recession:
i. When the contract is ratified

ii. When the parties cannot be restored to their original position.
iii. When the third parties acquired the contract in good faith and use of
value.
Practical Problems
Attempt the following problems, giving reasons for your answers:
1. A promises to pay a certain sum of money to B, who is an intended

witness in a suit against A, in consideration of B's absenting himself at
the trial. B absents but fails to get the money. Can he recover?
[Hint: B cannot recover the money because an agreement which tends

to create a conflict between interest and duty is illegal and void being
opposed to public policy.]
2. In a suit by A against B for the recovery of Rs. 5,000, A is in need of

money. C agrees to provide funds to A in consideration of sharing one-
fourth of the money recovered from B. Decide the validity of the
agreement between C and A.
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[Hint: The agreement between C and A is valid. It is a champertous

agreement which is valid provided its terms are fair and reasonable and
is made with a bona fide object of assisting a just claim]
3. A, while his wife B was alive, promised to marry C in the event of

B's death.
Subsequently B died but A refused to marry. C sues A for damages for

breach of promise. Decide.
[Hint: C will not succeed because an agreement for future marriage,

after the death of first wife is against good public morals and hence
illegal and void (Wilson vs Carnley, 1908, 1 K.B.729)].
4. A, entered into an agreement with B and engaged B for the purpose of

performing puja (prayer) for A's success in a.suit which he had before
the court and promised to pay Rs. 2,000 in the event of success. A
succeeded in the suit. B sued A for the amount agreed upon. Will B
succeed?
[Hint: No, B will not succeed as the object of the agreement is to

interfere with the course of justice, making the agreement illegal and
void. It has been held that where the object of an agreement is to
exercise some extraneous influence, unauthorised by law, on the mind
of the court, the agreement is contrary to public policy and hence void
[Bhagwan Datt Shastri vs Raja Ram, (1927) All. 406]. However, in
Balasundara Mudaliar vs Mahomed Usman, AI.R. (1929) Mad. 812, a
promise of reward by a Muslim litigant to a Hindu devotee in
consideration of offering prayers-for the success of his suit has been
held not against public policy. Thus accordingly the agreement between
A and B is valid and B must succeed.]
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1.21 QUASI CONTRACT
A quasi-contract is a fictional contract created by courts for equitable, not

contractual, purposes. A quasi-contract is not an actual contract, but is a
legal substitute for formed to impose equity between two parties. The
concept of a quasi contract is that of a contract that should have been
formed, even though in actuality it was not. It is used when a court finds it
appropriate to create an obligation upon a non-contracting party to avoid
injustice and to ensure fairness. It is invoked in circumstances and is
connected with the concept of restitution.
In contracts, it is the consent of the contracting parties which produces the

obligation; in quasi-contracts no consent is required, and the obligation
arises from the law or natural equity, on the facts of the case. These acts
are called quasi-contracts, because, without being contracts, they bind the
parties as contracts do. "A quasi- contract is not really a contract at all in
the normal meaning of a contract," according to one scholar, but rather is
"an obligation imposed on a party to make things fair."
Meaning of Quasi Contract
A quasi contract is an obligation invoked by law in the absence of an

agreement. Its purpose is to create a legal duty where, in fact, no
agreement was entered into by the parties. Quasi contracts are based on
the principle of equity and justice. It simply states that nobody shall enrich
himself unjustly at the expense of another.
Example: A is knocked down by a vehicle. B, a stranger, who found A on

the road in unconscious state, takes A to doctor. The doctor provides
treatment to A, who is an unconscious state. In such a situation, there is
no contract between A and doctor and A claims that he is not liable to pay
for the services offered by the doctor, as he was unconscious at the time of
treatment and there is no agreement between the two.
Application: In such a situation, the theory of quasi contract applies. In

this case the doctor has spent his valuable time for the treatment of
accident victim (A) and so, A is liable to pay for the services of the doctor.
If A fails to do so, the court can apply the doctrine of quasi contract and
order A to pay. This is to prevent the unjust enrichment of A at the
expense of doctor.
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Liability: The main question that arises in such situations is the liability of
the defendant. As the aim of this doctrine is to prevent unjust enrichment
of one party, at the expense of the other,
The damages are usually restricted to the value of services rendered or the
cost of the goods delivered. If the damages exceed that value, the whole
concept of quasi contract will be defeated, as it will be unfair for the
defendant.
A quasi contract is a fictitious contract created under legal obligations,

similar to a valid contract. These contracts are also known as implied-in-
law contracts. What makes this different is that the parties involved do not
intend to create a contract. A quasi contract is created by the Court. For
the same reason, there is no actual offer or acceptance or an agreement
between the parties. Also, a quasi contract is based on the principle of
unjust enrichment. According to this principle, a person is not allowed to
draw benefit at the cost of someone else.
Let’s understand how to apply the term ‘quasi contract’ through the
following example: Suppose a mechanic is called to repair the car of Mr. X.
However, the mechanic thinks that Mr. Y’s car is the one belonging to Mr. X
and repairs it accidentally. Mr. Y sees the mechanic repairing his car, but he
does not stop him from doing so, because he is secretly pleased to get his
car fixed free of cost. When the mechanic asks for payment from Mr. Y, he
refuses to pay the bill. However, by implication, a quasi contract has been
created from the moment Mr. Y spotted the mechanic repairing his car and
let it continue. Mr. Y would be held liable for payment if it can be proved in
court that he was aware of the mistake of the mechanic and let him
continue.
The Contract Act: Cases Where Quasi Contractual Obligations Arise
The following are some cases where quasi contractual obligations arise:
i. Supply of Necessaries to an Incompetent Person: Under section 68

of the Indian Contract Act, 1872, a person, who supplies another
person, who is inept to enter into a contract, with necessaries of life is
entitled to get a share from the property of the latter.
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ii. Payment by an Interested Person: Under section 69 of the Act, a

person, who is interested in payment of money which was supposed to
be paid by another but pays it, is entitled for reimbursement from the
said person. Let’s use a simple example to explain this. Suppose you
were on a holiday and your neighbour pays your house tax on your
behalf, you are liable to pay back your neighbour for making payment of
your behalf in your absence.
iii. Performance of Non-Gratuitous Act: Section 70 provides that if a

person has received lawful services from another person, which the
former had not asked for but needed at that moment, the other person
is entitled to be compensated for the services that were rendered.
iv. Becoming Finder of Lost Goods: Under section 71 of the Act, a

person who finds goods belonging to another person and takes the
custody of the goods is subjected to the responsibilities of having the
possession of the property under bailment and cannot use it for his own
good. By implication, the finer has to safeguard it.
v. Payment of Money by Mistake: Under section 72 of the Act, a person

who receives money or goods by mistake or under compulsion is liable
to return it.
1.22 RATIONALE OF QUASI CONTRACTS
Under the general heading of the Quasi contract there has been grouped a
number of cases which have little or no affinity with contract. A simple
illustration is afforded by the action to recover money paid by mistake. If
the plaintiff on an erroneous interpretation of the facts, pays to the
defendant a sum of money which he does not really owe, law, no less than
justice, will require he defendant to restore it. But his obligation is
manifestly not based upon the consent, even in the extended meaning
borne by the word in the English law, and its description as a quasi
contractual liability serves only to emphasize its remoteness from any
genuine conception of contract.
This shows that there are many situations in which Law as well as justice
require that a certain person be required to conform an obligation,
although he has not broken any contract nor committed any tort. an
another example for Quasi Contract would be worthy of Quoting for the
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better understanding of Quasi Contract, that is if a person in whose home

certain goods have been left by mistake is bound to restore them. This
shows that a person cannot entertain unjust benefits at the cost of some
other person. such kind of obligations are generally described, for the want
of better or more appropriate name, as Quasi Contractual Obligations.
This would be better to explain it up that Quasi contract consists of the

Contractual Obligation which is entered upon not because the parties has
consented to it but because law does not allow a person to have unjustified
benefit at the cost of other party.
Rationale
So far as there was not an established rule of Quasi Contractual obligation

the English Lawyers were content to enumerate the cases of the Quasi
Contract for which they are provided a remedy as to many species of
“indebitatus assumpsit”, but they evaded the odious task of rationalization.
But as soon as the urge was felt to explore their juristic basis, controversy
was born.
The first and the most ambitious attempt to provide such a basis were
made by Lord Mansfield in Moses v. Macferlan in year 1760.
Thus it was Lord MANSFIELD, who is considered to be the real founder of

such obligations, explained them on the principle that Law as well as
Justice should try to prevent “Unjust Enrichment”, that is enrichment of
one person at the cost of another. His Lordship offered this explanation in
Moses v. Macferlan:
Facts of the case:
One Jacob issued four promissory notes to Moses and the latter indorsed
them to Macferlan, excluding, by a written agreement, his personal liability
on the endorsement. Even so Macferlan sued Moses on the endorsement
and he was held liable despite the agreement. Moses was thus compelled
to discharge a liability which he had excluded and, therefore, sued to
recover back his money from Macferlan.
He was allowed to do so. After making the defendant liable to restore the
money Lord Mansfield continued as follows:
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After stating that such money cannot be recovered where the person to
whom it is given can “retain it with a safe conscience”, he stated that “here
it lies for the money paid by mistake; or upon a consideration which
happens to be fail; or for money got through imposition; or extortion; or
oppression; or for an undue advantage taken off the plaintiff’s situation,
contrary to laws made for the protection of the persons under those
circumstances. In one word the gist of this kind of action is that the
defendant, upon the circumstances of the case, is obliged by ties of the
natural justice and equity to refund the money.”
POSITION AFTER THE CASE: (Moses v. Macferlan in year 1760)
A liability of this kind is hard to classify as:
i. Partly it resembles liability under the law of tort in as much as it arises

independently of any contract.
ii. Partly it resembles to contract in as much as it is owed only to one party

and not to the “persons generally”.
Thus it can be accounted for either under an implied contract or under

natural justice and equity for the prevention of unjust enrichment. But Lord
MANSFIELD preferred the latter theory that the bases for quasi contracts
are for the purpose of prevention of unjust enrichment.
1.23 THEORY OF IMPLIED-IN-FACT CONTRACT
The gist of this kind of action is that the defendant, upon the
circumstances of the case, is obliged by the ties of natural justice and
equity to refund the money. But apart from this it should be observed that
did not use the word equity to denote the jurisdiction of chancery but the
synonym for “jus naturale”. Nor, while he based the obligations of quasi
contract upon the duty of restoring benefits unjustly obtained, did he
assert that in every such case an action would lie. As he declared in
Weston v. Downes, ‘I am a great friend to the action for money had and
received, and therefore I am not stretching, lest I should endanger it’ thus
the principle of unjust benefit explained the cases falling within the scope
of quasi contracts: it did not automatically invoke the remedy.
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Subject to these qualifications the rationalization of the quasi contract upon

the basis of unjust benefit was accepted for over a hundred years. But
when, in the course of the nineteenth century, the form of the action was
replaced by the dichotomy of tort and contract, Lord Mansfield’s views were
challenged.
According to Lord Sumner in Sinclair v. Brougham in 1914 “the various

actions grouped under the title of quasi contract were clearly not tortious;
if the new antithesis of the common law were inevitable they must perforce
be contractual. And as they were equally clearly not based on any genuine
consent, they must rest upon an implied and hypothetical agreement”.
Such at least was the conclusion of Lord Sumner. After this decision it
becomes fashionable to discard Lord Mansfield’s formulation and to rely
upon an implied-in-fact contract.
After that it was Lord Haldane who maintained that common law knows
personal actions of only two classes, namely those who founded on
contract and those who founded on tort. “When it speaks of action arising
quasi ex contract it refers to only a class of action in theory which is
imputed to the defendant by fiction of law.
Lord PARKER expressly pointed out that if a promise to pay back an ultra
virus loan could be imputed to the company as quasi contractual
obligation, the result would be to validate a transaction which has been
declared to be void on the ground of public policy and the law would be
enforcing a notional contract where a express contract would have been
void.
This approach dominated the decisions for a long time and the decision
was taken to have settled that the juridical basis for the quasi contract was
the implied, notional or the fictional contract. Where the circumstances of
the case do not lead to an inference of this kind or where such inference
would be against the law, no liability will arise.
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1.24 RESTORATION OF THEORY OF UNJUST ENRICHMENT
The identification of quasi contracts with the implied contracts restricted

the scope of relief which would have been possible without any such
hindrance under the principle of “natural justice and equity”.
The facts of the case are as follows:
A sum of money was paid in advance under a contract for the supply of a
machine or ‘for the supply of machinery’, and the performance was
obstructed by the outbreak of war. Their Lordship allowed the advance to
be recovered back as having paid for a consideration which had wholly
failed.
Lord Wright lent a support to Lord Mansfield’s theory of unjust enrichment.

He observed:
“It is clear that any civilized system of law is bound to provide remedies for
the cases of what has been called unjust enrichment or unjust benefit that
is to prevent a man from retaining the money of or some benefit derived
from, another which is against the conscience that he should keep. Such
remedies in English law are generally different from remedies in contract or
tort, and are now recognized to fall within a third category of the common
law which has been called quasi-contract or restitution”.
Support for this approach is also to be found in Lord ATKIN’S speech in

United Australia Ltd v. Barclays Bank Ltd.
Thus Academic, as well as judicial, opinion has been divided upon the
merits of Lord Mansfield’s Doctrine. But in the leading modern discussion,
Goff and Jones have accepted as its rationale the principle of unjust benefit
or unjust enrichment. This principle presupposes three things:
i. First, that the defendant has been enriched by the receipt of a benefit;
ii. Secondly, that he has been so enriched at the plaintiff’s expense;
iii. Thirdly, that it would be unjust to allow him to retain the benefit.
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1.25 POSITION OF QUASI CONTRACT IN INDIAN LAW
Chapter V of the Indian contract Act 1872 deals with the situations
qualifying the quasi contractual obligations under the heading “Of certain
relations resembling to those created by contract”. The chapter avoids the
words “quasi contract”, and in view of the clear statutory authorization of
the courts in India is not hindered in allowing relief under the different
sections of the Act by the theoretical considerations concerning quasi
contracts. But the English cases do provide valuable guidance:
i. Not only as to the scope of the relief.
ii. But also as to the way the provisions should be interpreted to keep
them in tune with the changing notions of justice.
Provisions under Indian contract law:
Section 68 to 72 of the Indian Contract Act 1872 provides for five kinds of
quasi-contractual obligations they are as follows:
1. Supply of necessaries [sec.68]

2. Payment by interested person [sec. 69]
3. Liability to pay for non-gratuitous acts [sec. 70]
4. Finder of goods [sec. 71]
5. Mistake or coercion [sec. 72]
1. Supply of Necessaries [Section 68]: Where necessaries are supplied

to a person who is incompetent to contract or to someone who is legally
bound to support, the supplier is entitled to recover the price from the
property of the incompetent person.
Section 68 reads as under:
The claim for the necessaries supplied to person incapable of

contracting, or on his account: “If a person, incapable of entering into a
contract or anyone whom he is legally bound to support, is supplied by
the another person with necessaries suited to his condition in life, the
person who has furnished such supplies is entitled to be reimbursed
from the property of such incapable person”.
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Ingredients of the section:
According to the language drawn upon by section 68 we got to know the

following essentials to apply this section.
i. Necessaries are being supplied,
ii. Necessaries so supplied must be suited to the condition of life of that

person, to whom they are supplied,
iii. Necessaries are supplied to a person who is incapable of entering into

a contract or anyone, whom he is legally bound to support,
iv. The reimbursement is to be claimed from the property of that

incapable person.
Examples:
a. A, Supplies to B, a lunatic, with the necessaries suitable to his

condition in life. A is entitled to be reimbursed from B’s property.
b. A, supplies the wife and children of B, a lunatic, with the necessaries

suitable to their conditions in life. A is entitled to be reimbursed from
B’s property.
2. Payment by Interested Person [Section 69]: Reimbursement by a

person paying money due by another, in payment of which he is
interested: A person who is interested in the payment of money, which
another is bound by law to pay, and who therefore pays it, is entitled to
be reimbursed by the other.
Illustration: B holds a land in Bengal, on a lease granted by A, the

Zamindar. The Revenue payable by A to the Government being in
arrears, his land is advertised for the sale by the government. Under the
Revenue Law, the consequences of such sale will be the annulment of
B’s Lease. B, to prevent the sale and annulment of his own lease, pays
to the government the sum due from A. A is bound to make good to B
the amount so paid.
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The conditions for liability under this section may now be stated:
i. Payer Must Be Interested In Making Payment: The first

condition for establishing the liability is that the Plantiff should be
interested in making payment. The interest which the plantiff seeks
to protect must be of course legally recognizable.
Allahabad High Court in Munni Bibi v. Triloki Nath, and accordingly

Madhya Pradesh High Court in Transworld Shipping Services v.
Owners etc. has held that the plantiff’s honest belief that he has an
interest to protect is enough for provide him reimbursement under
this section.
ii. Should Not Be Bound to Pay: he second essential condition is that

it is necessary that the plaintiff himself should not be bound to pay.
He should only be interested in making the payment only for the
purpose of protecting his own interest. Where a person is jointly
liable with others to pay, a payment by him of the others’ share
would not give him a right of recovery under this section.
iii. Defendant should be under a legal compulsion to pay:
Thirdly the defendant should have been “Bound by Law” to pay the
money. The words “bound by law” have been held after some
hesitation, to mean bound by law or by contract. It is not necessary
that the liability should only be statutory. In a judgment of Privy
Council it was held that it is enough that “the defendant at the suit of
any person might be compelled to pay”.
Thus it has to be kept in mind as held by Madras High Court in

Raghavan v. Alameru Ammal, that where a person is morally bound
and not legally compellable to pay, he will not be bound to pay the
party discharging his moral obligation.
iv. Payment should be made by one party to some other person:

Lastly the Plantiff should have made payment to some other person
and not to himself. As for example in Secretary of State for India v.
Fernandes, a certain government was a tenant of a land and paid to
itself out of the rent due to the Landlord the arrears of the Land
Revenue due to itself, the government could not recover from the
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Landlord. This did not come within the principle of this section as this
is not a “payment to another”.
3. Liability to Pay for Non Gratuitous Acts: [Section 70]: Obligation

of a person enjoying benefit of a non-gratuitous act:- where a person
lawfully does anything for another person, or delivers anything to him,
not intending to do so gratuitously, and such other person enjoys the
benefit thereof, the latter is bound to make compensation to the former
in this respect of, to restore, the thing so done or delivered.
Illustrations:
a. A, a tradesman leaves his good at B’s place/home by mistake. B

treats the goods as his own. He is bound to pay A for them.
b. A saves B’s property from fire. A is not entitled to compensation from

B, if the circumstances shows that he intended to act gratuitously.
Conditions of Liability under the section:
According to Gajendra Gadekar J (afterwards CJ) stated in State of West

Bengal v. B.K. Mondal and sons.
“The condition on which the liability under this section arises would be:
a. A person should lawfully do something for another person or deliver

something to him;
b. In doing the sad thing or delivering the sad thing he must not intend
to act gratuitously; and
c. The other person for something is done or to whom something is

delivered must enjoy the benefit thereof.”
4. Finder of Goods: [Section 71]: Responsibility of finder of goods: A

person, who finds goods belonging to some another and takes them into
his custody, is subject to the same responsibility as a bailee.
Thus in respect of duties and liabilities, a finder is treated at par with

bailee. The finder’s position is therefore considered along with bailment.
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5. Mistake or Coercion: [Section 72]: Section 72 deals with the

payments made or things delivered under mistake or coercion.
Liability of a person to whom money is paid, or things delivered, by

mistake or under coercion: A person to whom money has been paid, or
anything delivered, by mistake or under coercion, must repay or return
it.
Illustration:
i. A and B jointly owe 100 rupees to C. “A” alone pays the amount to C
and B, not knowing the fact pays another 100 rupees to C. C is bound
to repay the amount to B.
ii. A railway company refuses to deliver up certain goods to the

consignee except upon the payment of an illegal charge of carriage.
The consignee pays the sum charged in order to obtain the goods. He
is entitled to recover so much of the charge as was illegally
excessive.
Mistake of Fact or Mistake of Law:
Money paid under mistake is recoverable irrespective of the fact that

whether the mistake is of fact or of law. The controversy between the
High Court Decisions as to whether money paid under mistake of law
could be recovered was set at rest by the Privy Council in Sri Sri Shiba
Prasad Singh v. Maharaja Srish Chandra Nanadi.
“The Payment by Mistake” in section 72 must refer to a payment which

was not legally due and which could not have been enforced: the
“Mistake” is on thinking that the money paid was due when in fact, it
was not due. There is nothing in section 72 to relate with that whether
the mistake is of law or of a fact.
Refund of tax money paid without being due
The Supreme Court in its decision in Sales tax Officer, Banaras v Kanhaiya
Lal Mukund Lal Saraf has accepted this interpretation of section 72.
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“A certain amount of the Sales Tax was paid by a firm under the U.P. Sales
Tax Law on its forward transactions and subsequently to the payment; the
Allahabad High Court ruled the levy of the sales tax on such transaction to
be ultra virus. The firm sought to recover back the tax money.
And as far as English, American and Australian Laws and their contentions
are concerned they do not allow the payments made under mistake of law
to be recovered.
1.26 TYPES OF QUASI-CONTRACTS
The following are of Quasi-contracts are discussed below:
1. Supply of necessaries (sec68)
According to section 68, if a person incapable of entering into a contract or

any one whom he as legally bound to support is supplied by another with
necessaries suited to his condition in life the person who has furnished
such supplies I entitled to be reimbursed from the property of such
incapable person.
Example: ‘A’, supplies “B” a lunatic with necessaries suitable to his

condition in life. ”A” is entitled to reimburse from B’s property.
2. Payment by an interested person (Section.69)
A person, who is interested in payment of money which another is bound

by law to pay and who therefore pays it, is entitled to be reimbursed by
other.
The essential requirements of Section 69 as follows:
a. The payment mode should be bonafide for the protection of one’s

interest.
b. The payment should not be a voluntary one.
c. The payment must be such as the other party was bound by law to
pay.
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Example: “B” holds land Bengal on a lease granted by the Zamindar. The
revenue payable by “A” to the Government being in arrears his land is
advertised for sale by the Government under the Revenue Law.
The sale will be annulment of “B’s lease. ’B’ to prevent the sale and the
consequent of annulment of his own lease pays to the Government the
sum due from A. A is bound to make good to B the amount so paid.
3. Obligation to pay for non-gratuitous acts (Section.70)
When a person lawfully does anything for another person or delivers

anything to him not intending to do so, gratuitously, and such other person
enjoys the benefit thereof, the latter is bound to make the compensation to
the former in respect of or restore, the things do done or delivered.
Example: “A”, a tradesman lease goods at “B” house by mistake. B treats

the goods as his own. He is bound to pay for them to A.
4. Responsibility of finder of goods (Section.71)
A person who finds goods belonging to another and takes them into his
custody is subject to the same responsibility as Bailee. He is bound to take
as much care o the goods as a man of ordinary prudence would under
similar circumstances take of his own goods of the same bulk, quality and
value. He must also take all necessary measures to trace its owner. If he
does not, he will be guilty of wrongful conservation of the property till the
owner is found out, the property in goods will vest in the finder and he can
retain the goods as his own against the whole world (except the owner).
Example: “F” picks up a diamond on the floor of ‘S’s shop. He hands it over
to ‘S’ to keep it till the real owner is found out. No one appears to claim it
for quite some week’s inspite of wide advertisement in the news papers. ‘F’
claims the diamond from ‘S’ who refuses to return. ‘S’ is bound to return
the Diamond to ‘F’ who is entitled to retain the diamond against the whole
world except the true owner.
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5. Mistake or Coercion (Section.72)
A person to whom money has been paid, or anything delivered by mistake

or under coercion, must repay or return it to the person who paid it by
mistake or under coercion.
Ex: “A” & “B” jointly owe Rs. 100/- to “C”. A alone pays the amount to C
and B not knowing this fact pays Rs. 100/- over again to “C”. C is bound to
pay the amount to B.
1.27 SUMMARY
Law is rule made by authority for the proper regulation of a community or

society or for correct conduct of life. The scope of commercial or business
law includes the law relating to contracts, sale of goods, partnership,
negotiable instruments, etc. A contract should consist of two elements: (i)
agreement and (ii) legal obligation or agreement must be enforceable by
law. To make a contract void or valid, certain conditions such as plurality of
parties, offer and acceptance, legal obligation, lawful consideration,
capacity of parties, free consent, lawful object, certainty of meaning,
possibility of performance, agreement not declared void or illegal and legal
formalities need to be followed. The types of contract can be classified
differently connected to Indian Contract Act and English Law. The various
modes of discharging of a contract are discharge by agreement, discharge
by performance, discharge by breach, discharge by operation of law,
discharge by impossibility and discharge by lapse of time.
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1.28 SELF ASSESSMENT QUESTIONS
Conceptual Type
1. Define law.
2. Define business law.
3. What are the objectives of business law?
4. What is law of merchant or mercantile?
5. What is common law?
6. What is case law?
7. What is “Lex Mercatoria”?
8. What is statue law?
9. Mention the sources of business law.
10.State the need for law.
11.Define Indian Contract Act.
12.Define term of contract.
13.What are the essential requirements of a contract?
14.Define Agreement.
15.What do you mean Promise?
16.Give the meaning of Formal Contract.
17.What is Implied Contract?
18.Give the meaning of Quasi Contract.
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19.What is Void Contract?
20.Give the meaning of Valid Contract.
21.What is Void Agreement?
22.What do you mean by Voidable Contract?
23.What is Unenforceable Contract?
24.Give the meaning of Legal Contract.
25.What is Executed Contract?
26.What is Executory?
27.Give the meaning of Offer.
28.How an Offer is made?
29.Give the meaning of General and Express Offer?
30.Give the meaning of Counter Offer.
31.Define exceptance.
32.Who can accept the Offer?
33.Define consideration.
34.What is Free Consent?
35.What is fraud?
36.Define Proposal.
37.What is Injunction and Restitution?
38.What is unlawful consideration?
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39.Define Coercion.
40.Define Minor.
41.Define Mistake.
42.Give the meaning of Legality of Objects.
43.What is Discharges by Contract?
44.What is Discharges by Agreement?
45.Define Novation.
46.What is Rescission?
47.Give the meaning of Remission.
48.What are the different types of remedies for branch of contract?
49.What is Doctrine of Frustration?
50.What is Quasi Contract?
Analytical Type
1. Explain the scope of business law.
2. Explain need for business law.
3. Whether an agreement made without consideration in void? Explain.
4. What is the difference between void agreements and void able contract?
5. What are the essentials of a valid contract?
6. Define proposal or offers. What are the essentials of a valid offer?
7. Distinction between Coercion and Undue Influence.
137

8. What are the difference between Illegal and Agreements and Void
Agreements?
9. Define acceptance? What are the essentials of a valid acceptance?
10.Distinguish between Fraud and Misrepresentation.
11.“All contract are agreements, but all agreement are not contracts”?
Discuss.
12.Define contingent contract and discuss the essential element of a

contingent contract? Differentiate between contingent contract and
wagering agreement.
13.State the various ways in which a contract may be discharged.
14.State the various remedies available to an aggrieved party in case of

breach of contract? Explain.
15.Who are the parties to competent the contract? Discuss who are
incapable contracting.
16.Write note on: Quasi contract.
Essay Type
1. What is business law? Explain its objectives.
2. Explain the various sources of Indian business law.
3. Explain overview of business laws in India.
4. Explain Nature and Importance of Indian Contract Act.
5. Discuss the essential elements of a Valid Contract?
6. Define Contract? Bring out the various classes of contract.
7. What is Offer? Explain essential of Valid Offer.
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8. Discuss different types of Offer.
9. Explain Revocation of Offer.
10.Define consideration? Describe the characteristics features of a valid

consideration?
11.State the exception of the rule. “An agreement in restraint of trade is

void”.
12.Write a note on:
i. Coercion
ii. Undue Influence
iii. Fraud
iv. Misrepresentation
v. Mistake.
13.Explain in details Legality Objects in Indian Contract Act.
14.Explain the types of Quasi contract.
139
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
140

SALE OF GOODS ACT, 1930
Chapter 2
Objectives
After studying this Chapter, you should be able to:
• Essentials and Legal Rules of a Contract of Sale
• Difference between Contract of Sale and Agreement to Sale
• Implied and Express Conditions and Warranties
• Rights and Duties of Buyer
Structure:
1. Sales of Goods Act, 1930
2. Condition and Warranty
3. Distinguish between Condition and Warranty
4. Passing of the Property from the Seller to the Buyer
5. Reservation of Right of Disposal
6. Sale by Person not the Owner
7. Performance of the Contract of Sale
8. Rights and Duties of Buyer
9. Summary
10.Self Assessment Questions
141

Sales of Goods Act
142
 
2.1 SALES OF GOODS ACT, 1930
In trade and commerce, sales and purchase of goods are very common
transactions. These transactions may appear to be very simple but the
possibilities of complications is always there. Therefore knowledge of basic
principles of sale and purchase is very much essential for all the concerned
parties as well as for the entire community.
The Sale of Goods Act contains the basic principles as well as the legal
framework of transactions of sale and purchase.
Earlier the Sale of Goods Act was a part of the Indian Contract Act. A
separate Act was framed in the year 1930.
Basic Concepts
1. ‘Buyer” means a person, who buys or agrees to buy goods,
2. “Delivery” means voluntary transfer of possession from one person to

another.
3. “Sale” means transfer of property in goods for a price.
4. “Hire – Purchase Agreement” means the seller delivers the possession of

the goods to the other person and he charges rent for the goods. After
receiving the price of the goods, the ownership of the goods is passed
on to the purchaser
5. “Barter exchange” means exchange of goods for goods.
6. “Bailment” means only the possession is transferred from the bailor to

the bailee. Such transactions may be for the purpose of keeping the
goods in the safe custody or may be for furnishing security.
Definition of Sale
Section 4 defines ‘sale’ as, A contract of sale of goods is a contract

whereby the seller transfers or agrees to transfer the property in goods to
the buyer for a price.
143
1. A contract of sale is made by an offer to buy or sell goods for a price

and the acceptance of such offer.
The contract may provide for the immediate delivery of the goods or
immediate payment of the price or both, or for the delivery or payment
by installments, or that the delivery or payment or both shall be
postponed.
2. Subject to the provisions of any law for the time being in force, a
contract of sale may be made in writing or by word of mouth, or partly
in writing and partly by word of mouth or may be implied from the
conduct of the parties.
Essential of a Contract of Sale
1. There must be at least two parties as a person cannot sale goods to

himself. However there may be a contract of sale between one part-
owner and another.
2. There must be a transfer or agreement to transfer the ownership of

goods from one person to another. Mere transfer of possession is not
sale.
3. The subject matter of sale must be ‘goods’ and movable. The transfer of
immovable property is not governed by Sale of Goods Act, 1930.
4. The consideration for sale is called price which should be stated in terms
of ‘money’. Exchange of ‘goods’ for ‘goods’ is barter and not sale.
However price may be paid partly in terms of money and partly in kind.
5. All essential elements of a valid contract must be present in a contract

of sale.
6. A contract of sale may be absolute or conditional.
144
Classification of Goods
The goods which form the subject of a contract of sale may be either
existing goods, owned or possessed by the seller, or future goods Sec 6(1)
or contingent goods [Sec 6(2)].
1. Existing goods are owned by the seller at the time of sale. They are of
the following types:
i. Specific goods: These are identified and agreed upon at the time of
sale.
ii. Ascertained goods: These become ascertained after the contract is

made.
iii. Generic goods : These are not ascertained at the time of contract
and is defined only by description.
2. Future goods are not owned by the seller at the time of contract but
manufactured or acquired by him subsequent to formation of contract.
Where by a contract of sale the seller purports to effect a present sale
of future goods , the contract operates as an agreement to sale.
3. Contingent goods: These are goods the acquisition of which by seller

depends upon a contingency which may or may not happen.
145
Difference between Sale and Agreement to sale
Sale Agreement to sale
1. Sale is an executed contract. 1. It is an executory contract. Transfer

Property in the goods passes from of property in goods is to take place at
seller to buyer. a future date subject to fulfillment of
certain conditions.
2. If goods are destroyed, the loss will 2. The loss will be borne by the seller
be borne by the buyer even though even though the goods may be in
they may be in possession of the seller. possession of the buyer.
3. A sale gives right to the buyer to 3. The buyer only can sue the seller for
enjoy the goods against the whole damages.
world including the seller.
4. In case of sale, the buyer can be 4. The buyer can be used only for
sued for price of goods. damages.
5. If buyer becomes insolvent before 5. Seller may refuse to deliver the

payment is made, the seller has to goods to the official receiver.
deliver the goods to the official
receiver unless he has lien on them.
6.If the seller becomes insolvent after 6. The buyer cannot claim the goods.
payment of price, the buyer can claim He can only claim ratable dividend for
the goods from the official receiver. the amount paid by him.
7.The seller cannot resale the goods. 7. The original buyer may only sue the
In this case, if the subsequent buyer seller for damages.
takes in good faith and for
consideration, he gets a good title.
Effect of Destruction of Goods [Sec 7]

Goods perishing before making of contract (Sec 7) – Where there is a
contract for the sale of specific goods, the contract is void if the goods
without the knowledge of the seller have, at the time when the contract
was made, perished or become so damaged as no longer to answer to their
description in the contract.
Goods perishing before sale but after agreement to sell (Sec 8)

– Where there is an agreement to sell specific goods, and subsequently the
goods without any fault on the part of the seller or buyer perish or become
146

so damaged as no longer to answer to their description in the agreement

before the risk passes to the buyer, the agreement is thereby avoided.
Sec (7 & 8) are applicable only in case of specific goods and not
uncertained/generic goods.
Price
(Secs. 9 & 10) In a contract of sale ‘price’ to the consideration for sale of
goods and is expressed in terms of money. It forms essential part of
contract.
Ascertainment of Price
1. The price in a contract of sale may be fixed by the contract or may be

left to be fixed in manner thereby agreed or may be determined by the
course of dealing between the parties.
2. Where the price is not determined in accordance with the foregoing

provisions, the buyer shall pay the seller a reasonable price. What is a
reasonable price is a question of fact dependent on the circumstances of
each particular case.
Document of title of goods

It symbolizes the goods and confers a right to the owner to take
possession of the same or further transfer the right to some other person.
A delivery order , railway receipt, bill of lading are some of the examples of
document of title to goods.
Agreement to sell at valuation
1. Where there is an agreement to sell goods on the terms that the price is
to be fixed by the valuation of a third party and such third party cannot
or does not make such valuation, the agreement is thereby avoided:
Provided that, if the goods or any part thereof have been delivered to,
and appropriated by, the buyer, he shall pay a reasonable price therefor.
2. Where such third party is prevented from making the valuation by the
fault of the seller or buyer, the party not in fault may maintain a suit for
damages against the party in fault.
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Stipulations as to time (Sec 11)

Unless a different intention appears from the terms of the contract,
stipulations as to time of payment are not deemed to be of the essence of
a contract of sale. Whether any other stipulation as to time is of the
essence of the contract or not depends on the terms of the contract.
2.2 CONDITION AND WARRANTY
Definitions
1. A stipulation in a contract of sale with reference to goods which are the

subject thereof may be a condition or a warranty.
2. As per Sec 12(2) of the sale of Goods Act, a condition is a stipulation

essential to the main purpose of the contract, the breach of which gives
rise to right to treat the contract as repudiated.
3. As per Sec 12(3) of the sale of Goods Act, a warranty is a stipulation

collateral to the main purpose of the contract, the breach of which gives
rise to a claim for damages but not to a right to reject the goods and
treat the contract as repudiated.
4. Whether a stipulation in a contract of sale is condition or a warranty

depends in each case on the construction of the contract, a stipulation
may be a condition though called warranty in a contract. [Sec 12(4)]
When condition to be treated as warranty
1. Where a contract of sale is subject to any condition to the fulfilled by the

seller, the buyer may way give the condition or elect to treat the breach
of the condition as a breach of warranty and not as a ground for relating
the contract as repudiated.
2. Where a contract of sale is not severable and the buyer has accepted
the goods or part thereof, the breach of any condition to be fulfilled by
the seller can only be treated as a breach of warranty and not as a
ground for rejecting the goods and treating the contract as repudiated,
unless there is a term of the contract, express or implied, to that effect.
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3. Nothing in this section shall affect the case of any condition or warranty
fulfilment of which is excused by law by reason of impossibility of
otherwise.
Conditions and Warranties may be either expressed or implied
When terms of contract expressly provide for them, they are known as
express conditions or warranties. Implied conditions and warranties are
incorporated in every contract of sale unless the circumstances show a
different intention.
Implied conditions are of the following types:
i. Condition as to title [Sec 14(a)]
In a contract of sale, unless the circumstances of the contract are such as

to show a different intention, there is:
a. An implied condition on the part of the seller that, in the case of a

sale, he has a right to sell the goods and that, in the case of an
agreement to sell, he will have a right to sell the goods at the time
when the property is to pass.
b. An implied warranty that the buyer shall have and enjoy quiet
possession of the goods.
c. An implied warranty that the goods shall be free from any charge
orencumbrance in favour of any third party not declared or known to
the buyer before or at the time when the contract is made.
ii. Sale by description (Sec 15)

Where there is a contract for the sale of goods by description, there is an
implied condition that the goods shall correspond with the description, and,
if the sale is by sample as well as by description, it is not sufficient that the
bulk of the goods corresponds with the sample if the goods do not also
correspond with the description.
iii. Condition as to quality or fitness (Sec 16)

As per Sec 16 of the Sale of Goods Act Subject to the provisions of this Act
and of any other law for the time being in force, there is no implied
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warranty or condition as to the quality or fitness for any particular purpose

of goods supplied under a contract of sale, excepts as follows:
a. Where the buyer, expressly or by implication, makes known to the

seller the particular purpose for which the goods are required, so as
to show that the buyer relies on the seller’s skill or judgement, and
the goods are of a description which it is in the course of the seller’s
business to supply (whether he is the manufacturer or producer or
not), there is an implied condition that the goods shall be reasonably
fit for such purpose:
Provided that, in the case of a contract for the sale of a specified

article under its patent or other trade name, there is no implied
conditions to its fitness for any particular purpose.
b. Where goods are bought by description from a seller who deals in

goods of that description (whether he is the manufacturer or
producer or not), there is an implied condition that the goods shall be
of merchantable quality. Provided that, if the buyer has examined the
goods, there shall be no implied conditions as regards defects which
such examination ought to have revealed.
c. An implied warranty or condition as to quality or fitness for a

particular purpose may be annexed by the usage of trade.
d. An express warranty or conditions does not negative a warranty or

condition implied by this Act unless inconsistent therewith.
iv. Sale by sample (Sec 17)
1. A contract of sale is a contract for sale by sample where there is a term

in the contract, express or implied, to that effect.
2. In the case of a contract for sale by sample there is an implied

condition:
a. That the bulk shall correspond with the sample in quality.
b. That they shall have a reasonable opportunity of comparing the bulk

with the sample.
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c. That the goods shall be free from any defect, rendering them un-
merchantable, which would not be apparent on reasonable
examination of the goods.
Implied warranties are of following types:
a. Warranty of quiet possession [Sec.14(b)]

If the buyer in any way is disturbed from enjoying the quiet possession of
goods purchased because of seller’s defective title, the buyer can claim
damages from seller.
b. Warranty of freedom from encumbrances[Sec.14(c)]

The buyer is also entitled to additional warranty that the goods are free
from any charge or right of any third party, not declared or known to the
buyer.
Goods Must be Ascertained
Where there is a contract for the sale of unascertained goods, no property

in the goods is transferred to the buyer unless and until the goods are
sanctioned.
Doctrine of Caveat Emptor-Caveat Emptor means ‘let buyer be aware’. It is

a fundamental principle of law of sale of goods and implies that the seller is
under no obligation to point out the defects in his own goods. The doctrine
is however subject to following exceptions:
i. In case of implied conditions and warranties.
ii. When the buyer makes it known to seller the purpose and depends
on his expertise.
iii. When the seller commits fraud.
iv. When there is a usage of trade.
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2.3 DISTINGUISH BETWEEN CONDITION AND WARRANTY
Condition Warranty
1. It is a stipulation which is essential 1. It is also a stipulation, which is

to the main purpose of the Contract. collateral to the main purpose of the
Contract.
2. Conditions is essential and to 2. It is may or may not be present for

present for the execuation of the the execuation of the Contract.
goods.
3. A breach of condition will be lead to 3. A breach warranty may or may not

cancellation of a Contract. lead cancellation of the Contract.
4. Condition formulate a very basis of 4. Warranty stands as only with

a Contract. secondary importance.
5. A breach of condition may be 5. A breach of warranty may lead to

treated as the Contract is repudiated. claim for damages and not to lead to
repudiated the Contract.
2.4 PASSING OF THE PROPERTY FROM THE SELLER TO THE

BUYER
A Sale is defined as transfer of ownership of the goods from the seller to

the buyer for a price. Therefore what is important in a transaction of sale is
the transfer of the ownership. It is essential to determine the exact point of
time at which the ownership of the goods is transferred in favour of the
buyer. Sections 18 to 25 of the Sale of Goods Act, determine when the
property passes from the seller to the buyer.
i. Goods must be ascertained

Where there is a contract for sale of unascertained goods, the property in
the goods does not pass to the buyer till the goods are ascertained.
ii. Intention of the parties for such transfer
a. Where there is a contract for the sale of specific or ascertained goods

the property in them is transferred to the buyer at such time as the
parties to the contract intend it to be transferred.
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b. For the purpose of ascertaining the intention of the parties regard

shall be had to the terms of the contract, the conduct of the parties
and the circumstances of the case.
Specific goods
i. Specific goods in a deliverable state

Where there is an unconditional contract for the sale of specific goods in a
deliverable state, the property in the goods passes to the buyer when the
contract is made, and it is immaterial whether the time of payment of the
price or the time of delivery of the goods, or both, is postponed.
ii. Specific goods to be put into a deliverable state

Where there is a contract for the sale of specific goods and the seller is
bound to do something to the goods for the purpose of putting them into a
deliverable state, the property does not pass until such thing is done and
the buyer has notice thereof.
iii. Specific goods in a deliverable state

When the seller has to do anything thereto in order to ascertain price
Where there is a contract for the sale of specific goods in a deliverable
state, but the seller is bound to weigh, measure, test or do some other act
or thing with reference to the goods for the purpose of ascertaining the
price, the property does not pass until such act or thing is done and the
buyer has notice thereof.
Unascertained goods
1. Where there is a contract for the sale of unascertained or future goods

by description and goods of that description and in a deliverable state
are unconditionally appropriated to the contract, either by the seller
with the assent of the buyer or by the buyer with the assent of the
seller, the property in the goods thereupon passes to the buyer. Such
assent may be expressed or implied, and may be given either before or
after the appropriation is made.
2. Delivery to carrier-Where, in pursuance of the contract, the seller

delivers the goods.
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Goods on approval or ‘on sale or return’
When goods are delivered to the buyer on approval or on sale or return or

other similar terms, the property therein passes to the buyer:
a. When he signifies his approval or acceptance to the seller to does not

other act adopting the transaction.
b. If he does not signify his approval or acceptance to the seller but retains
the gods without giving notice of rejection, then, if a time has been
fixed for the return of the goods, on the expiration of such time, and, if
not time has been fixed, on the expiration of a reasonable time.
2.5 RESERVATION OF RIGHT OF DISPOSAL
1. Where there is a contract for the sale of specific goods or where goods
are subsequently appropriated to the contract, the seller may, by the
terms of the contract or appropriation, reserve the right of disposal of
the goods until certain conditions are fulfilled. In such case,
notwithstanding the delivery of the goods to a buyer, or to a carrier or
other bailee for the purpose of transmission to the buyer, the property in
the goods does not pass to the buyer until the conditions imposed by
the seller are fulfilled.
2. Where goods are shipped or delivered to a railway administration for

carriage by railway and by the bill of landing or railway receipt, as the
case may be, the goods are deliverable to the order of the seller or his
agent, the seller is prima facie deemed to reserve the right of disposal.
3. Where the seller of goods draws on the buyer for the price and ransmits
to the buyer the bill of exchange together with the bill of lading or, as
the may be, the railway receipt, to secure acceptance to payment of the
bill of exchange, the buyer is bound to return the bill of lading or the
railway receipt if he does not honour the bill of exchange, and, if he
wrongfully retains the bill of lading or the railway receipt, the property
in the goods does not pass to him.
Explanation: In this section, the expression “railway” and “railway

administration” shall have the meanings respectively assigned to them
under the Indian Railways Act, 1890.
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Risk prima facie passes with property

Unless otherwise agreed, the goods remain at the seller’s risk until the
property therein is transferred to the buyer, but when the property therein
is transferred to the buyer, the goods are at the buyer’s risk whether
delivery has been made or not.
2.6 SALE BY PERSON NOT THE OWNER
Where goods are sold by a person who is not the owner thereof and who
does not sell them under the authority or with the consent of the owner,
the buyer acquires no better title to the goods than the seller had, unless
the owner of the goods is by conduct precluded from denying the seller’s
authority to sell.
However, this is subject to certain exceptions as follows:
i. Sale by mercantile agent

Where a mercantile agent is, with the consent of the owner, in possession
of the goods or of a document of title to the goods, any sale made by him,
when acting in the ordinary course of business of a mercantile agent, shall
be as valid as if he were expressly authroised by the owner of the goods to
make the same, provided that the buyer act is good faith and has not at
the time of the contract of sale notice that the seller has not authority to
sell.
ii. Sale by one of joint owners

If one of several joint owners of goods has the sole possession of them by
permission of the co-owners, the property in the goods is transferred to
any person who buys them of such joint owner in good faith and has not at
the time of the contract of sale notice that the seller has not authority to
sell.
iii. Sale by person in possession under voidable contract

When the seller of goods has obtained possession thereof under a contract
voidable under Section 19 or Section 19A of the Indian Contract Act, 1872,
but the contract has not rescinded at the time of the sale, the buyer
acquires a good title to the goods, provided he buys them in good faith and
without notice of the seller’s defect of title.
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iv. Seller or buyer in possession after sale
a. Where a person, having sold goods, continues or is in possession of the

goods or of the documents of title to the goods, the delivery or transfer
by that person or by a mercantile agent acting for him of the gods or
documents of title under any sale, pledge of other disposition thereof to
any person receiving the same in good faith and without notice of the
previous sale shall have the same effect as if the person making the
delivery to transfer were expressly authorised by the owner of the gods
to make the same.
b. Where a person, having bought or agreed to buy goods, obtains with

the con sent of the seller, possession of the goods or the documents of
title to the goods, the delivery or transfer by that person or by a
mercantile agent acting for him, of the goods or documents of tile under
any sale, pledge or other disposition thereof to any person receiving the
same in good faith and without notice of any lien or other right of the
original seller in respect of the gods shall have effect as if such lien or
right did not exist.
v. Sale by estoppel
Where the owner by his conduct or omission, leads the buyer to believe
that the seller has authority to sell, he is estopped from denying the fact
afterwards. The buyer thus gets a better title than the seller.
For example, A tells B in presence of C that A is agent of C. C maintains

silence instead of denying it. Later if A sells C’s goods to B, C cannot
dispute B’s title to the goods.
vi. Sale by an unpaid seller after exercising his right of lien or

stoppage in transit
vii.Exceptions in other Acts
a. Sale by Official Receiver or Liquidator.

b. Sale by a pawnee or pledgee in certain cases.
c. Sale by finder of lost goods in certain cases.
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2.7 PERFORMANCE OF THE CONTRACT OF SALE
Performance of a Contract of sale means as regards the Seller, delivery of

goods to the buyer. From buyer’s side the performance means the
acceptance of the delivery of goods and payment for them as per the terms
and conditions of sale.
Payment and delivery

Unless otherwise agreed, delivery of the goods and payment of the price
are concurrent conditions, that is to say, the seller shall be ready and
willing to give possession of the goods to the buyer in exchange for the
price, and the buyer shall be ready and willing to pay the price in exchange
for possession of the goods.
Delivery
As per the Sale of Goods Act, Delivery is defined as the voluntary transfer
of possession from one person to another. Delivery of goods sold may be
made by doing anything which the parties agree shall be treated as
delivery or which has the effect of putting the goods in the possession of
the buyer or of any person authorised to hold them on his behalf.
Rules as to Delivery
1. Delivery of goods and payment of price are concurrent

conditions unless otherwise agreed upon.
2. Effect of part delivery

A delivery of part of goods, in progress of the delivery of the whole has the
same effect, for the purpose of passing the property in such goods, as a
delivery of the whole, but a delivery of part of the goods, with an intention
of severing it from the whole, does not operate as a delivery of the
remainder.
3. Buyer to apply for delivery

Apart from any express contract, the seller of goods in not bound to deliver
them until the buyer applies for delivery.
4. Place of delivery
Whether it is for the buyer to take possession of the goods or for the seller
to send them to the buyer is a question depending in each case on the
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contract, express or implied, between the parties. Apart from any such
contract, goods sold are to be delivered at the place at which they are the
time of the sale, and goods agreed to be sold are to be delivered at the
place at which they are at the time of the agreement to sell, if not then in
existence, at the place at which they are manufactured or produced.
5. Time of delivery
Where under the contract of sale the seller is bound to send the goods to
the buyer, but no time for sending them is fixed, the seller is bound to send
them within a reasonable time.
Demand or tender of delivery may be treated as ineffectual unless made at

a reasonable hour. What is a reasonable hour is a question of fact.
6. Goods in possession of a third person

Where the goods at the time of sale are in the possession of a third person,
there is no delivery by seller to buyer unless and until such third person
acknowledges to the buyer that he holds the goods on his behalf.
7. Cost of delivery
Unless otherwise agreed, the expense of and incidental to putting the
goods into a deliverable state shall be borne by the seller.
8. Mode of delivery
Delivery of goods may be actual, symbolic or constructive.
9. Delivery of wrong quality
a. Where the seller delivers to the buyer a quantity of good less than he
contracted to sell, the buyer may reject them, but if the buyer accepts
the goods so delivered he shall pay for them at the contract rate.
b. Where the seller delivers to the buyer a quantity of goods larger than he
contracted to sell the buyer may accept the goods included in the
contact and reject the rest, or he may reject the whole. If the buyer
accepts the whole of the goods so delivered, he shall pay for them at
the contract rate.
c. Where the seller delivers to the buyer the gods he contract to sell mixed
with goods of a different description not included in the contract, the
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buyer may accept the goods which are in accordance with the contract
and reject the rest, or may reject the whole.
d. The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.
10.Instalment delivery
a. Unless otherwise agreed, the buyer of goods is not bound to accept

delivery thereof by instalments.
b. Where there is a contract for the sale of goods to be delivered by stated

instalments which are to be separately paid for, and the seller makes no
delivery or defective delivery in respect of one or more instalments, or
the buyer neglects or refuses to take delivery of or pay for one or more
instalments, it is a question in each case depending on the terms of the
contract and the circumstances of the case, whether the breach of
contract is a repudiation of the whole contract, or whether it is a sever
able breach giving rise to a claim for compensation, but not a right to
treat the whole contract as repudiated.
11.Delivery to carrier or wharfinger
i. Where, in pursuance of a contract of sale, the seller is authorised or

required to send the goods to he buyer, delivery of the goods to a
carrier, whether named by the buyer or not, for the purpose of
transmission to the buyer, or delivery of the goods to a wharfinger for
safe custody, is prima facie deemed to be a delivery of the goods to the
buyer.
ii. Unless otherwise authorised by the buyer, the seller shall makes such
contract with the carrier or wharfinger on behalf of the buyer as may be
reasonable having regard to the nature of the goods and the other
circumstances of the case. If the seller omits so to do, and the goods
are lost or damaged in course of transit or whilst in the custody of the
wharfinger, the buyer made decline to treat the delivery to the carrier or
wharfinger as a delivery to himself, or may hold the seller responsible in
damages.
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iii. Unless otherwise agreed, where goods are sent by the seller to the
buyer by a route involving sea transit, in circumstances in which it is
usual to insure, the seller shall give such notice to the buyer as may
enable him to insure them during their sea transit and if the seller fails
so to do, the goods shall be deemed to be at his risk during such sea
transit.
12.Risk where goods are delivered at distant place

Where the seller of goods agrees to deliver them at his own risk at place
other than that where they are when sold, the buyer shall, nevertheless,
unless otherwise agreed, take any risk of deterioration in the goods
necessarily incident to the course of transit.
13.Buyer’s right of examination the goods
a. Where goods are delivered to the buyer which he has not previously
examined, he is not deemed to have accepted them unless and until
he has a reasonable opportunity of examining them for the purpose
of ascertaining whether they are in conformity with the contract.
b. Unless otherwise agreed, when the seller tenders delivery of goods to

the buyer, he is bound, on request, on request, to afford the buyer a
reasonable opportunity of examining the goods for the purpose of
ascertaining whether they are in conformity with the contract.
14.Buyer not bound to return rejected goods

Unless otherwise agreed, where goods are delivered to the buyer and he
refuses to accept them, having the right so to do, he is not bound to return
them to the seller, but it is sufficient it he intimates to the seller that he
refuses to accept them.
15.Liability of buyer for neglecting or refusing delivery of goods

When the seller is ready and willing to deliver the goods and requests the
buyer to take delivery, and the buyer does not within a reasonable time
after such request take delivery of the goods, he is liable to the seller for
any loss occasioned by his neglect or refusal to take delivery and also for a
reasonable charge for the care and custody of the goods.
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Nothing in this section shall affect the rights of the seller where the neglect
or refusal of the buyer to take delivery amounts to a repudiation of the
contract :
Delivery are of following types:
Actual- In this case goods are handed over by the seller to the buyer or
his authorized agent.
Symbolic- When goods are bulky and actual delivery is not possible, the
delivery may be symbolic ,e.g. handing over the keys of the godown.
Constructive - This happens in the ways mentioned below:
i. When seller holding the possession of goods, agrees to hold them on

behalf of the buyer.
ii. When buyer holding the possession of goods, with seller’s consent,
holds them as owner.
iii. When a third person holding the possession of goods on behalf of seller,
acknowledges to hold them on behalf buyer.
2.8 RIGHTS AND DUTIES OF BUYER
The following are the rights of a buyer:
i. Right to have delivery as per contract: The first right of the buyer is
to have delivery of the goods as per contract.
ii. Right to reject the goods: If the seller sends to the buyer a larger or
smaller quantity of goods than he ordered, the buyer may reject the
whole, accept the whole or accept the quantity to ordered and reject the
rest.
iii. Right to repudiate: The buyer of goods has a right not to accept
delivery thereof by installment.
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iv. Right to notice of insurance: Unless otherwise agreed, where goods

are sent by the seller to the buyer by a sea route, the buyer, has a right
to be informed by the seller so that he may get the goods insured.
v. Right to examine: The buyer has right to examine the goods which he
has not previously examined before he accepts them. If the buyer
repudiates the contract the seller is entitle to damages from the buyer.
vi. Right against the seller for breach of contract
a. Suit for damages: Where the seller wrongfully neglects or refuses

to deliver the goods to the buyer, the buyer may sue the seller for
damage for non payment.
b. Suit for price: If the buyer has paid the price and goods are not
delivered, he can recover the amount paid.
c. Suit for specific performance: The buyer can sue the seller for
specific performance of the contract to sell.
d. Suit for breach of warranty: Where there is a breach of warranty

by the seller, or where the buyer elects or is compelled to treat any
breach of condition of the part of the seller as breach of warranty, the
buyer is not by reason only of the seller as a breach of warranty
e. Repudiation of contract before due date: When the seller

repudiate the contract before the date of delivery, the buyer may
either treat the contract as substituting and wait till date of delivery,
or he may treat the contract as rescinded and sue for damages for
the breach.
f. Suit for interest: Where there is a breach of contract on the part of

the seller and as a result the price has to be refunded to the buyer,
buyer has a right to claim interest on the amount of the price
refunded to him from the date on which the payment was made. The
court may award the interest at such rate as it thinks fit.
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Following are the Duties of the buyer:
i. Duty to accept the goods and pay for them in exchange for possession:
It is the duty of the buyer to accept the goods and pay for them, in
accordance with the term of the contract of sale.
ii. Duty to apply for delivery: It is the duty of the buyer to apply for
delivery.
iii. Duty to demand delivery at a reasonable hour.
iv. Duty to accept installment delivery and pay for it.
v. Duty to take risk of deterioration in the course of transit.
vi. Duty to intimate the seller where he rejects the goods
vii.Duty to take delivery
viii.Duty to pay prices according to the terms of contract.
ix. Duty to pay damages for non acceptance.
Rights of an Unpaid Seller

In a transaction of sale it is not possible to avoid credit sales. In credit
sales there is a risk of a debtor not paying the price of the goods even after
the credit period is over. The seller of the goods therefore must possess
some rights which he can use to secure payment of the price. If the
recovery of the price is not possible due to the reason of bankruptcy of the
buyer, he must have some other remedies. The Sale of Goods Act has
made elaborate provisions regarding the rights of an unpaid seller.
Unpaid Seller
1. The seller of goods is an “unpaid seller”:
a. When the whole of the price has not been paid or tendered.
b. When a bill of exchange or other negotiable instrument has been

received as conditional payment and the conditions on which it was
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received has not been fulfilled by reason of the dishonour of the

instrument or otherwise.
2. The term “seller” includes any person who is in the position of a seller,
as for instance, an agent of the seller to whom the bill of lading has
been endorsed or a consignor or agent who has himself paid or is
directly responsible for, the price.
2.9 SUMMARY
A contract of sale of goods is a contract whereby the seller transfers or

agrees to transfer the property in goods to the buyer for a price. A
stipulation in a contract of sale with reference to goods which are the
subject thereof may be a condition or a warranty. Doctrine of Caveat
Emptor is a fundamental principle of law of sale of goods and implies that
the seller is under no obligation to point out the defects in his own goods.
The transfer of the ownership is important in a transaction of sale. The Sale
of Goods Act has made elaborate provisions regarding the rights of an
unpaid seller.
Conceptual Type
1. What do you mean by Sales of Goods?
2. Who is a buyer?
3. Who is an unpaid seller?
4. What are conditions?
5. Define goods.
6. What are future goods?
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Analytical Type
1. Explain classification of Goods.
2. Distinguish between Sales and agreement to sell.
3. Brief the rights and duties of buyer.
4. What do you mean by Sales of Goods? What are its essentials under
Sale of Goods Act?
5. Define goods. Breifly explain the classification of goods.
6. Distinguish between Condition and Warranty
7. Who is an unpaid seller? What are the rights of an unpaid seller.
165

REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
166

CONSUMER PROTECTION ACT, 1986
Chapter 3
Objectives
After studying this chapter you should be able to understand:
★ Background of Consumer Protection
★ The Consumer Protection Act 1986
★ Definitions and Authorities under the Act
Structure:
3.1 Introduction
3.2 Background of Consumer Protection
3.3 The Consumer Protection Act 1986
3.4 Definitions under the Act
3.5 Authorities under the Act
3.6 Object of the State Council
3.7 Recognised Consumer Association in Karnataka
3.8 Summary
167

Consumer Protect Act (1986)

Overview
168
3.1 Introduction
India is a fast developing country where majority of the people still belong
to the rural areas. Such of those people are many a times innocent and
ignorant of their products. It is due to lack of information or knowledge of
the market position. Such of those persons who may be termed as
consumers. These are to be given support and protection from the
unscrupulous sellers. The marketers are to be socially responsible in
protecting the interest of the consumers. Consumers are considered as one
of the pillars of the business.
Peter F. Drucker was apt in saying, “it is the consumer who determines
what a business is … What the consumer thinks he is buying, what he
considers ‘value’ is decisive – it determines what a business is, what it
produces and whether it will prosper.”
According to Adam Smith; “Consumption is the sole end and purpose of all
production.”
The consumer is the king in a free market economy. The consumers must
be given priority to enable him to fulfill his wants and desires according to
his capacity. He is to be protected from unsafe, harmful, unsuitable
alternatives and thus he will be freed from insecurity and fear of
exploitation. Many a times the consumers may not be in a position to
approach civil court, as the matter is involved with comparatively small,
both in respect of product and price. It will thus be seen that only a social
movement can ensure such a condition.
Consumerism has been defined again by Philip Kotler as “a social

movement seeking to augment the rights and powers of the buyers in
relation to sellers”. From this it can be known that the consumers are to be
treated as kings. But what is the status of consumers in India? The Indian
philosophy of tolerance and perseverance have still been accepted in many
parts of India. To create awareness among the consumers there are many
consumer protection organization. To provide awareness towards rights to
safety, right to be informed, the right to choose and right to be heard, a
special legislation is enacted by the Central Government.
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In order to make the consumers more powerful a separate legislation

namely, the Consumer Protection Act, 1986 was enacted. To seek speedy/
quick, cheap and efficient remedies and to benefit the consumers and
consumer groups, the Act was amended, known as The Consumers
Protection (Amendment) Act, 1993. It is also known as COPRA which is not
only recognised consumer rights but also established a redressal system,
which is of unique in nature.
3.2 BACKGROUND OF CONSUMER PROTECTION
Consumer protection has always been sought to be maintained and

enhanced from ancient times in different parts of the world. It is
considered as an essential part towards the welfare of the population.
People in the society in 320 B.C, Kautilya, has codified the rules of conduct
of merchants, artisans, craftsmen and professionals. Manu in his Dharma
Shastra, has given a detailed description of unethical trade practices and
the punishments to be met by the traders.
Even in Europe, during the middle age period, dishonest traders had their
hands cut off and punished in other ways. Sale of adultered food and drink
was subjected to criminal penalties in the 14th century.
Even the American ex-president John F Kennedy made a significant

contribution to consumer movement by highlighting four rights of the
consumers namely.
i. The right to safety

ii. The right to be informed
iii. The right to choose and
iv. The right to be heard
He also further went ahead by equating the consumers interest with

national interest. This was brought to the light of on implementation of
Article 25, the Declaration of Human Rights, which says, “Everyone has
right to a standard of living, adequate for health and well–being of himself,
and his family, including food, clothing, housing and medical care and
necessary social services.”
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According to the principles of the “Consumers International” (formerly

IOCU), “The right to satisfaction of basic needs; to have access to basic
essential goods and services, adequate food, clothing, shelter, health care,
education and sanitation.”
Consumer Protection in India
A brief study of the movement towards consumer protection in different

countries is given highlighting the salient features of consumerism. It is
touching upon the various environment like marketing, advertising,
products safety, pricing and so on. The consumerism also enlightened
through consumer education and the legislative action as the part of the
Government. The Constitution of India, under Article 21, enshrines, “The
right to life and liberty” and this has been expanded by the Supreme Court
to include the right to live with human dignity, and all that necessarily
follows it, such as the basic necessities of life with adequate nutrition,
clothing and shelter.
The consumer’s rights have been expanded to the following:
(a) Right to basic Food, shelter, clothing, health care and education.
needs:
(b) Right to Right to be protected against products, production
safety: processes and services which are hazardous to health
and life.
(c) Right to Right to get access to all the facts necessary to make an
information: informed and conscious choice. This right includes the
right to protection against dishonest, deceitful and
misleading advertisements.
(d) Right to Right to have access to a variety of product and services
Choice/ at competitive prices and in case of an existing
Choose monopoly the right to have assurance of satisfactory
quality and service at a reasonable price, which is a right
against exploitation.
(e) Right to be This is the right to be heard by any person, organisation,
heard: business and government, the voice of the consumers.
This right has been represented during the formulation
and execution of economic policy.
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(f) Right to It is for right to a fair settlement of just claims, and this
redress: includes right to receive compensation for mis-
representation.
(g) Right to In this right to acquire knowledge and skill to become an
consumer enlightened consumer.
education:
(h) Right to a Right to have protection under misrepresentation over
healthy which he as an individual has no control, but
environment: nevertheless falls as a victim.
Contributors for Consumer Protection and Consumer Organisation
Mahatma Gandhi was the foremost important persons among Indians to

focus on businessmen’s outlook on the consumer. When he pointed out
that; “The consumer is the purpose of all business, its cause and goals. To
serve him honestly and faithfully, ought to be every business man’s
endeavour.”
R. R. Dalwai (1949), a noted Gandhian and Raja Gopalachari (1950) were

the persons who inspired the establishment of the first Consumer
Protection Council in India. The leading industrialists like Ramakrishna
Bajaj and J.R.D Tata are instrumental to form the Fair Trade Practice
Association in Bombay in the year 1966. In the year 1974, B. M. Joshi
started a consumer forum namely ‘Akhil Bharatiya Grahak’ in Pune. At
present there are over 350 organisations in all states providing assistance
to consumers in India. In 1978, the largest and the most prominent among
all councils the Consumer Education and Research Centre (CERC)
established in Ahmedabad. There is a separate consumer Unions
comprising of 160 member countries at the International level organisation
situated at Hague.
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3.3 THE CONSUMER PROTECTION ACT 1986
Consumer Protection Act was enacted in the year 1986 to provide a better
protection of the interests of consumers and encourage the consumer
movements through consumer councils and other authorities for the
settlement of consumer’s disputes and for matters connected therewith.
The Act gives full freedom to consumers in getting legal protection and free
from fear, complexities and technicalities involved with the various legal
procedure in the regular course of action like complaints and so on.
Moreover there is no court fees or stamp duty to be affixed, no matter
whatever may be the amount involved in the complaints. So the Act
facilitates the consumers a better, inexpensive and speedy remedy. The Act
shall be applicable to all goods and services unless otherwise, expressly
provided by the Central Government by notifications. The law shall see to
the benefit of the general public, that is the consumers. The act applies in
addition to the sale of all goods and services, in the private sector and the
public sector as well as Government agencies.
It provides for the establishment of Central Consumer Protection Council by

the Central Government and likewise State Consumer Protection Councils
by the respective State Governments.
The Act is considered as a revolutionary piece of legislative which can grow

into an important tool for development. The objects and reasons behind
the Act are based on inherent rights. The Act also seeks to provide for
better protection of the interests of consumers. In addition to this it also
makes provision for the establishment of consumer councils and other
authorities for the settlement of consumer disputes.
There are six consumer rights recognised by the Act in form of its objects,
and are as follows:
a. The right to be protected against marketing of goods and services which

are hazardous to life and property. So consumers should always sport
an attitude of beware as, “Don’t sell me goods hazardous to my life and
property”.
b. Secondly, ‘the right to be informed’ about the quality, quantity, potency,

(marked or branded) purity, standards and price of goods and services
to protect against unfair trade practices.
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c. Then, ‘the right to be assured’, whenever possible, access to an

authority of goods and services at competitive prices.
d. ‘The right to be heard’ and to be assured that the consumers interest

will receive due consideration from appropriate forums.
e. The right to seek redressal against unfair trade practices or restrictive

trade practice or unscrupulous exploitation; and finally;
f. The right to consumer education.
The Central and State Consumer Protection Councils are to protect and
promote the above objects.
Actuated with above purpose a speedy, inexpensive and simple quasi –

judicial machinery of redressal agencies to settle consumer disputes have
been set up at the District, State and National level. These bodies are to
decide disputes while observing the fundamental principles of natural
justice and have power to grant certain specific reliefs. In some cases when
it is appropriate, compensation or damages are also awarded. The system
in this Act is simple in one hand and effective and authoritative in other
hand.
3.4 DEFINITIONS UNDER THE ACT
Section 2 of the Act gives provision on who can file a complaint, what type
of compliant can be filed, on what the complaint can be filed and so on.
The following are the extraction of some of the definitions;
i. Consumer:
According to the Sec 2 (1) (d), “Any person, who buys any goods against
consideration is a consumer.”
For that matter it also includes any user of such goods other than the
person who buys such goods, where such user is made with the original
buyer’s approval. However, if the goods are purchased for resale or any
commercial purpose then the buyer is not a consumer and cannot avail of
the protection under this Act.
174
• In other words the consumer is any user of goods or beneficiary of

services, who has legal right and ‘locus standi’ to initiate action, as
referred in the case, B. Shekar Hegde Vs Dr. Sudharshu Bhattacharya
and others – II (1992) CPJ. 449.
• And in The Regional Manager, APILC Vs Ch. A. N. Raju – II (1992) CPJ

532 case, the consumers are the allotees of flats as well as prospective
allotees in the waiting list maintained by the Andhra Pradesh Industrial
Infrastructure Corporation Ltd., are consumers. A Consumer is also
means when a person indulge his activities for earning his livelihood is
consumer. This is clear in the case “The Secretary, Consumer Guidance
and Research Society of India Vs M/s P. L. India Ltd. – I (1992) CPJ 140
NC. Here a lady purchased a photo copier for the sole purpose of
earning her livelihood and not for large scale business or trading
activity. It was not a commercial activity and she was a consumer.
ii. Who can file a Complaint?
The following categories of persons may file a complaint under the Act:
a. A consumer [Sec 2 (1) d]
b. Any voluntary organisation, registered under, “The Societies Registration

Act”, 1860 or The Companies Act 1956 or render any law for the time
being in force.
c. The Central Government.
d. The State Government or Union Territory Administrations [Sec 2 (1) (b)]
e. One or more consumers, where there are numerous consumers having

the same interest.
Complaint
When one makes any allegation in writing under Section [2 (1) (c)] and to
remember in writing to invoke the provisions of this Act to obtain certain
relief on account of any grievance occasioned by:
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a. an unfair trade practice or restrictive trade practice adopted by any

trader burdening a consumer with loss or damage:
b. defective goods bought or agreed to be bought;
c. deficiency in service availed or agreed to be availed,
d. price charged in excess of fixed or displayed price.
e. hazardous goods and services being offered for sale.
The compliant can be attached with receipt, invoice guarantee or warranty

cards, correspondence and so on.
Again under section 12(1)B and section 12(1); A detail provision on, “who
can file a complaint”? Which is given under in detail.
Who can file a Complaint [Sec. 2(1) (B) and Sec. 12(1)]
A complaint in relation to any goods sold or delivered or agreed to be sold

or delivered or any service provided or agreed to be provided, may be
filed, with a Consumer Forum, by -
a. A consumer; or
b. Any recognised consumer association, any voluntary consumer

association registered under the Companies Act or under any other law
for the time being in force, whether the consumer is a member of such
association or not; or
c. One or more consumers, where there are numerous consumers having

the same interest, with the permission of the Consumer Forum, on
behalf of, or for the benefit of all consumers so interested; or
d. The Central Government or the State Government, as the case may be,
either in its individual capacity or as a representative of interests of the
consumers in general; or
e. In case of death of a consumer, his legal their or representative.
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Further, the following are also considered as a consumer and hence they
may file a complaint:
i. User of goods and beneficiary of services. It may be recalled that the

definition os ‘consumer’ itself includes user of goods and beneficiary of
services.
ii. Husband of the consumer. A husband can file a complaint on behalf of

his wife (Punjab National Bank, Bombay vs K. B Shetty).
iii. Insurance company. Where Insurance Company pays and settles the
claim of the insured, it can file a complaint for the loss caused to the
insured goods by negligence of goods/service provides. For example,
when loss caused to such goods because of negligence of transport
company, the insurance company can file a claim against the transport
company (New India Assurance Company Ltd. vs Green Transport Co.)
Grounds on which a complaint can be made [Sec. 2(1)(C)]
The Consumer Protection Act has provided certain grounds on which

complaint can be made. A complaint must contain any of the following
allegations:
i. An ‘unfair trade practice’ or a ‘restrictive trade practice’ has been

adopted by any trader or service provider;
Illustration: A sold a second-hand computer to B representing it to be

a new one. Here B can make a complaint against A for adopting an
unfair trade practice.
ii. The goods bought by him or agreed to be bought by him suffer from
one or more defects;
Illustration: A bought a computer from B. It was not working properly

since day one. A can make a complaint against B for supplying him a
defective computer.
iii. The services hired or availed of or agreed to be hired or availed of by

him suffer from deficiency in any respect;
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Illustration: A booked a taxi at a taxi stand which should reach at his

residence at 5.30 a.m. The taxi did not reach at the appointed hour. As a
result A had to miss his train. A can make a complaint against the taxi
stand for deficiency in service.
iv. A trade or service provider, as the case may be, has charged for the
goods or for the services mentioned in the complaint, a price in excess
of the price fixed by any law or displayed on the goods or any package
containing such goods or displayed on the price list exhibited bby him or
agreed between the parties;
Illustration: A bought a maruti Car from an authorised dealer of the

company who charged him Rs. 4,000 over and above the price displayed
on the price list of the Maruthi Company. A can file a complaint against
the dealer.
v. Goods which will be hazardous to life and safety when used, are being
offered for sale to the public in contravention of any standards relating
to safety of such goods as required to be complied with by any law or if
the trader could have known with due diligence that the goods so
offered are unsafe to the public;
Under the Sale of Goods Act also there is an implied warranty on the part
of the seller to disclose the dangerous nature of goods to the ignorant
buyer. If there is breach of this warranty, the buyer is entitled to claim
compensation for the injury caused to him.
Illustration: C purchases a tin of disinfectant powder from A. A knows

that the lid of the tin is to be opened in a specific manner and if it it
opened without special care it may be dangerous, but tells nothing to
C.C opens the tin in the normal way where upon the disinfectant powder
flies into her eyes and causes injury. C can make a complaint against A
as he should have warned C of the probable danger.
vi. Services which are hazardous or likely to be hazardous to life and safety
of the public when used are being offered by the service provider which
such person could have known with due diligence to be injurious to life
and safety.
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Note: The terms ‘unfair trade practice’, ‘restrictive trade practice’, ‘defect’,
‘deficiency’, ‘trader’, etc. as defined under the Act have been discussed
after the next heading.
This frame within which a complaint can be filed (Limitation

Period). Section 24A provides that a complaint can be filed before the
Forums constituted under the Act (District forum, State Commission or
National Commission) within two years from the date on which the cause
of action has arisen.
There are no set rules to decide the point of time when cause of action
arises. It depends on the facts and circumstances of each case.
Deficiency
This is given in the [Sec. 2 (1) g] under this, deficiency in relation to any
service means any fault, imperfection, short-coming or inadequacy in the
quality, nature and manner of performance which is required to be
maintained under law or has been undertaken by the opposite party to be
performed under a contract or otherwise.
There are many individuals, skilled professionals, agencies and institutions

who are rendering service to public at large, and get away with occasional
carelessness, incompetent handling or even deliberate practices will lead to
bad services and create disturbances and loss to the consumers. These
actions of negligence can also be referred to as ‘deficiency’ under this Act
and court will accept them as deficiency and award them with suitable
punishment.
Service
Under Section - 2 (1) (0) of this Act, a very comprehensive definition has
been incorporated for service. It says “Service of any description which is
made available to potential users”. The word “Potential user’s are
consumers who enjoy the facilities given through services by banking,
financing, insurance, transport, supply of electrical and other energy,
boarding or lodging or both, house construction, entertainment,
amusement and so on. Rendering of free services or personal service are
exempted under this Act. The services rendered by the doctors are covered
under the provision of this Act. In case of Tilak Raj Vs Haryana School
179
Education Board, Bhiwani – I (1992) C P J 76, Education is also a service

with in the purview of the Act. Services include hiring of marriage hall,
marriage consultancy, tax consultancy and so on are included in the word
‘services’. But the services rendered by a lawyer against payment of
professional fee is a contract of personal services.
Consumer Dispute: Section 2 (1) (e), It refers to a dispute where the

person against to whom a complaint has been made, denies or disputes
the allegations contained in the complaint. Thus it is clear that if a person
against to whom complaint is made agrees to the compliant, there is on
‘Consumer dispute’.
Restrictive Trade Practice: Sec. 2 (1) (nn) – Under this section Restrict
Trade Practice has been defined as any trade practice which requires a
consumer to buy, hire or avail of any goods or, as the case may be,
services as a condition precedent for buying, hiring or availing of any other
goods or services.
Unfair Trade Practice: ‘Unfair Trade Practice’ means a trade practice

which, for the purpose of promoting the sale, use or supply of any goods or
for the provision of any service, adopts any unfair method, or unfair or
deceptive practice including any of the following practices namely:
i. False representation of goods and services.
ii. False representation re-built, second–hand, renovated goods as new

goods.
iii. Representation of goods or services have sponsorship, approval,

performance and so on, in absence of such goods and services.
iv. False or misleading representation of goods and services. (like mis-

leading advertisement)
v. Giving the warranty or guarantee of the performance, efficiency or

length of life of a product to the public without any base or adequate
test.
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Appropriate Laboratories: There is provision for laboratory test of

sample goods also for which parties has to pay a prescribed fee in such a
situation. These tests are conducted by the appropriate laboratories. For
the purpose of the Act, the term appropriate laboratory under Sec. 2 (1)
(a) means:
a. A laboratory or organisation recognised by the Central Government.
b. Recognised by a State Government, subject to such guidelines as may

be prescribed by the Central Government in this behalf.
c. Any such laboratory, or organisation established by or under any law for

the time being in-force which is maintained, financed or aided by the
Central Government or a State Government for carrying out analysis or
test of any goods with a view to determine whether such goods suffer
from any defect.
It also include, laboratories established under the Prevention of Food &

Adulteration Act.
3.5 AUTHORITIES UNDER THE ACT
1. Consumer Protection Councils
i. The Central Consumer Protection Council
Section 4 of the Act provides that
1. The Central Government may, by notification, establish with effect

from such date as it may specify in such notification, a council to be
known as the ‘Central Consumer Protection Council’.
2. The Central Council shall consist of the following members namely;
a. The minister incharge of the ‘Consumer Affairs’ in the Central

Government, who shall be its chairman, and
b. Such number of other official or non - official members representing

such interests as may be prescribed.
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[Note: The word “Consumer affairs” has been substituted by the

“Consumer Protection”and the same is known as The Consumer Protection
(Amendment) Act, 1993 with effect from 18th June 1993.
The Consumer Protection Rules were formulated in the year 1987. It

Provides that the Central Council shall consist of the following 150
members namely:-
i. The minister incharge of Consumer Affairs in the Central Government

who shall be Chairman of the Central Council.
ii. The minister of State or Deputy minister incharge of Consumer Affairs in

the Central Government, who shall be the Vice-Chairman of the Central
Council.
iii. The minister of Food and Civil Supplies or minister incharge of

Consumer Affairs in the State.
iv. Eight members of the Parliament:– Five from Lok Sabha and three from
Rajya Sabha.
v. The Secretary of the National Commission for Scheduled Castes and

Scheduled Tribes.
vi. Representatives of the Central Governmental Departments and

autonomous organisations concerned with consumer interests not
exceeding twenty.
vii.Representatives of women not less than ten.
viii.Representatives of farmers, trade and industries not exceeding twenty.
ix. Persons capable of representing consumer interest not specified above,

not exceeding fifteen.
x. The secretary in the Department of Civil supplies shall be the member

secretary of the Central Council.
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Meeting of The Central Council: The procedure for meeting of the

Central Council is provided under Section 5 of the Act. According to this;
a. The Central Council shall meet as and when necessary, but at least
one meeting of the Council shall be held every year.
b. The Central Council shall meet at such time and place as the
Chairman may think fit and shall observe such procedure in regard to
the transaction of its business as may be prescribed.
Objects of The Central Council: The main objects of the Central Council
is explained under Sec. 6 of the Act. Which is basically to promote and
protect the rights of the consumers. They are as follows:
(Sec. 6). Infact the objects of the central council are the various rights of
consumers recognised under the Act which are to be promoted and
protected by the council. Thus the Act (under Section 6) has enumerated
some rights of consumers which need to be protected by the council. These
rights of consumers are:
(i) Right to Safety
This right has been recognised by Sec. 6(a) as, “the right to be protected
against the marketing of goods and services which are hazardous to life
and property”. The rationale behind this provision is to ensure physical
safety of the consumers. The law seeks to ensure that those responsible
for bringing goods to the market, in particular, manufacturers, distributors,
retailers and the like should ensure that the goods are safe for the users.
In case of dangerous or risky goods, consumer should be informed of the
risk involved in improper use of goods. Vital safety information should be
conveyed to consumers.
Illustration: M bought an insecticide from N. N did not inform M that

touching this insecticide with bare hands can create skin problem. M, while
using the insecticide came in contact with it and suffered from skin
problem consequently. Here can be held liable under the Act.
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ii. Right to Information

Under Section 6(b) this right has been recognised as, “the right to be
informed about the quality, quantity, potency, purity, standard and price of
goods or services, as the case may be, so as to protect the consumer
against unfair trade practices.” Adequate information is very important in
order to make a right choice of goods to be purchased. This right ensures
that the consumer should be made aware of the quality, weight, content
and price of the product at the very pre-purchase stage. The fixing of I.S.I
mark and agmark enables the consumer to know about its quality. Under
some other legislations it is mandatory for the manufactures and packers
to provide information on the package to the consumers about the
contents, weight, purity and potency of the product being sold. Consumers
suffer much on the price front as the prices often printed or tagged in the
product are misleading and no price control is there expect with respect to
essential commodities. Advertisements also often mislead the consumers.
iii. Right to Choose

This right has been recognised by Section 6(c) as, “the right to be assured,
wherever possible, access to a variety of goods and services at
comparative prices.”Fair and effective competition must be encouraged so
as to provide consumers with maximum information about the vide variety
of competing goods available in the market. Shoppers or buyers guide
should be made available to the consumers by the Government or Business
organisations to protect this right of consumers.
iv. Right to be Heard

This right is ensured by Section 6(d) as, “the right to be heard and to be
assured that consumers interests will receive due consideration at
appropriate forums.” The Consumer Protection Act, 1986 has well taken
care of this right by providing three stages redressal machinery to the
consumers, namely, District Forum, State Commission and National
Commission. Every consumer has a right to file complaint and be heard in
that context. Further, with a view to providing better protection of this right
various public and private sector undertakings have provided Consumer
Ombudsman (Complaint cells) to provide redressal to consumer complaints
outside the courts.
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v. Right against exploitation

This right is guaranteed under Section 6(e) of the Act as, “ the right to
seek redressal against unfair trade practices or restrictive trade practices or
unscrupulous exploitation to consumers.” Consumers are the most helpless
lot in our country due to very many factors. When consumers are
exploited, adequate remedy must be made available. The Act has thus
ensured to prevent exploitation of consumers by invoking the jurisdiction of
consumer Forums in cases involving unfair trade practices and restrictive
trade practices.
vi. Right to Education

This right has been recognised under Section 6(f) of the Act as, “the right
to consumer education.” The right to consumer education is a right which
ensures the remedies available to them. Unless the consumers are aware
of their rights and remedies, protection of their interest shall remain a
myth. In this connection the role of Consumer protection Councils is very
vital. The Central Council must ensure to educate the consumers about
their rights and remedies under the Act through out the country and the
State Councils and the District Councils must ensure to educate about
these rights to consumers within their territories. For spreading this
education, media, school curriculum and cultural activities etc. may be
used as a medium.
2. The State Consumer Protection Councils
Section 7 of the Act provides a separate Council,
i. The State Government may, by notification, establish with effect from

such date as it may specify in such notification a council to be known as
the Consumer Protection Council for ….. (E.g. Karnataka), there in after
referred to as the State Council.
ii. The State Council consist of the following members, namely –
a. The minister incharge of consumer affairs in the State Government

who shall be its chairman.
b. Such number of other official or non–official members representing

such interests as may be prescribed by the State Government.
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iii. The State Council shall meet as and when necessary but not less than
two meetings shall be held every year.
iv. The State Council shall meet at such time and place as the chairman
may think fit and shall observe such procedure in regard to the
transaction of the business as may be prescribed by the State
Government.
3.6 OBJECT OF THE STATE COUNCIL
Act provides under Section 8, the objects of the State Council, to promote
and to protect, the rights of the consumers within the state laid down in
clauses (a) to (f) of Section-6.
Consumer Redressal Agencies
The Consumer Protection Act under Chapter III explains about the
Consumer Disputes Redressal Agencies. Section 9 of the Act gives the
provision for establishment of Consumer Disputes Redressal Agencies. In
this the provision is to create a “three–tier remedial machinery” for
inexpensive and expeditions redressal of consumer grievances by way of
an alternative to the ordinary process of instituting actions before a Civil
Court with all its heavy court fees, cost and enormous delay.
Section 9, provides that the following agencies are required to be

established for the purpose of the Act:-
i. The Consumer Disputes Redressal Forum to be known as the ‘District

Forum’. The District Forum is to be established by the State Government
in each state by notification. The State Government, if it deems fit,
establish more than one District Forum.
ii. A Consumer Disputes Redressal Commission to the known as State

Commission. ‘This is also to be established by the State Government by
means of notification.
iii. A National Consumer Disputes Redressal Commission to be established.

This is to be established by the Central Government by means of a
notification.
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The forum exercises quasi-judicial powers for redressal of consumer

dispute. The authorities here should record reasons, how so ever brief, for
their conclusions. (Charan Singh Vs Healing Touch Hospital (2000)).
3. District Forums
The formation of District Forums and other relevance given in the Sec 10 of
the Consumer Protection Act. According to this,
1. Each District Forum shall consist of:
a. a person who is, or has been, or is qualified to be a District Judge,

who shall be its president.
b. two other members shall be persons of ability, integrity and standing,

and have adequate knowledge or experience, or have shown capacity
in dealing with, problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, and one of
whom shall be a women.
Appointment:
Every appointment under Section 10 & sub-section (1) shall be made by

the State Government as the recommendation of a selection committee
consisting of the following, namely;
a. The president of the State Commission – Chairman.
b. Secretary, Law Department of the State – Member
c. Secretary in-charge of the department dealing with consumer affairs

in the State as Member
i. Term of office: Under Sec. 10 and sub-section (2), every member of

the District Forum shall hold office for a term of five years or up to the
age of 65 years, whichever is earlier, and shall not be eligible for re-
appointment.
ii. Resignation: The same Section provides that a member may resign his
office in writing, addressed to the State Government and on such
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resignation being accepted, his office shall become vacant and may be
filled by the appointment of a person possessing any of the qualification
mentioned in Sub-section (i) in relation to the category of the member
who has resigned.
iii. Salary and honorarium: The salary or honorarium and other

allowances payable to, and the other terms and conditions of service of
the members of the District Forum shall be such as may be prescribed
by the State Government.
iv. No effect of Vacancy: According to Section 29 (A), no act or

proceeding of the District Forum, the State Commission or the National
Commission shall be invalid by reason only of the existence of any
vacancy amongst its members or any defect in the constitution there of.
Jurisdiction of the District Forum
Section 11 (1) Provides that District Forum shall have jurisdiction to

entertain complaints where the value of goods or services are the
compensation if any, claimed which does not exceed five lakhs.
(2) A compliant shall be instituted in a District Forum within the local limits
of whose jurisdiction.
a. The opposite party or each of the opposite parties, where there are
more than one, at the time of the institution of the complaint,
actually and voluntarily resides or carries on business or has a branch
office or personally works for gain, or
b. Any of the opposite parties, where there are more than one, at the
time of the institution of the compliant, actually and voluntarily
resides, or carries on business or has a branch office, or personally
works for gain, provided that in such case either the permission of
the District Forum is given, or the opposite parties who do not reside,
or carry on business or have a branch office, or personally work for
gain, as the case may be, acquiesce in such institution; or
c. The cause of action, wholly or in part, arises.
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Manner in which complaint shall be made
Section 12 provides, a complaint, in relation to any goods sold or delivered

or agreed to be sold or delivered or any service provided or agreed to be
provided may be filed in a District Forum by,
a. The consumer to whom such goods are sold or delivered or agreed to be

delivered or such service provided or agreed to be provided;
b. Any recognised consumer association, whether the consumer to whom

the goods sold or delivered or agreed to be sold or delivered or service
provided or agreed to be provided is a member of such association or
not;
c. One or more consumers, where there are numerous consumers having

the same interests, with the permission of the District Forum, on behalf
of, or for the benefit of, all consumers so interested; or
d. The Central or the State Government.
Procedure on receipt of compliant: Section 13 (1) provides that The

District Forum shall, on receipt of a compliant, if it relates to any goods,
a. Refer a copy of the compliant to the opposite party mentioned in the

compliant directing him to give his version of the case within a period of
thirty days or such extended period not exceeding fifteen days as may
be granted by the District Forum;
b. Where the opposite party on receipt of a complaint referred to him

under clause (a) denies or disputes the allegations contained in the
compliant, or omits or fails to take any action to represent his case
within the time given by the District Forum, the District Forum shall
proceed to settle the consumer dispute in the manner specified;
c. Where the compliant alleges a defect in the goods which cannot be

determined without proper analysis or test of the goods, the District
Forum shall obtain a sample of the goods from the complainant, seal it
and authenticate it in the manner prescribed and refer the sample so
sealed to the appropriate laboratory along with a direction that such
laboratory make an analysis or test, whichever may be necessary, with
189
a view to finding out whether such goods suffer from any defect alleged
in the complaint or from any other defect and to report its findings
thereon to the District Forum within a period of forty-five days of the
receipt of the reference or within such extended period as may be
granted by the District Forum;
d. Before any sample of the goods is referred to any appropriate laboratory

under clause (c), the District Forum may require the complainant to
deposit to the credit of the Forum such fees as may be specified, for
payment to the appropriate laboratory for carrying out the necessary
analysis or test in relation to the goods.
e. The District Forum shall remit the amount deposited to its credit under
clause (d) to the appropriate laboratory to enable it to carry out the
analysis or test mentioned in clause (c) and on receipt of the report
from the appropriate laboratory, the District Forum shall forward a copy
of the report along with such remarks as the District Forum may feel
appropriate to the opposite party.
f. If any of the parties disputes the correctness of the findings of the

appropriate laboratory, or disputes the correctness of the methods of
analysis or test adopted by the appropriate laboratory, the District
Forum shall require the opposite party or the complainant to submit in
writing his objections in regard to the report made by the appropriate
laboratory;
g. The District Forum shall thereafter give a reasonable opportunity to the

complainant as well as the opposite party of being heard as to the
correctness or otherwise of the report made by the appropriate
laboratory and also as to the objection made in relation thereto under
clause (f) and issue an appropriate order under section 14.
(2) The District Forum shall, if the compliant received by it under section
12 relates to goods in respect of which the procedure specified in sub-
section (1) cannot be followed, or if the compliant relates to any
services:
a. Refer a copy of such complaint to the opposite party directing him to

give his version of the case within a period of thirty days or such
190
extended period not exceeding fifteen days as may be granted by the

Direct Forum;
b. Where the opposite party, on receipt of a copy of the complaint,

referred to him under clause (a) denies or disputes the allegations
contained in the compliant, or omits or fails to take any action to
represent his case within the time given by the District Forum, the
District Forum shall proceed to settle the consumer dispute,
i. On the basis of evidence brought to its notice by the complainant

and the opposite party, where the opposite party denies or
disputes the allegations contained in the complaint, or
ii. On the basis of evidence brought to its notice by the complainant

where the opposite party omits or fails to take any action to
represent his case within the time given by the Forum.
(3) No proceedings complying with the procedure laid down in sub-

sections (1) and (2) shall be called in question in any court on the
ground that the principles of natural justice have not been complied
with.
(4) For the purposes of this section, the District Forum shall have the
same powers as are vested in a civil court under Code of Civil
Procedure, 1908 while trying a suit in respect of the following matters,
namely:
a. The summoning and enforcing the attendance of any defendant or

witness and examining the witness or oath;
b. The discovery and production of any document or other material

object producible as evidence;
c. The reception of evidence on affidavits;
d. the requisitioning of the report of the concerned analysis or test from

the appropriate laboratory or from any other relevant source;
e. Issuing of any commission for the examination of any witness and
191
f. Any other matter which may be prescribed.
(5) Every proceeding before the District Forum shall be deemed to be a

judicial proceeding within the meaning of sections 193 and 228 of the
Indian Penal Code, and the District Forum shall be deemed to be a civil
court for the purpose of section 195, and Chapter XXVI of the Code of
Criminal Procedure, 1973.
Finding of the District Forum. – Section 14 (1) proceeding conducted

under section 13, the District Forum is satisfied that the goods complained
against suffer from any of the defects specified in the compliant or that any
of the allegations contained in the complaint about the services are proved,
it shall issue an order to the opposite party directing him to one or more of
the following things, namely:
a. To remove the defect pointed out by the appropriate laboratory from the
goods in question;
b. To replace the goods with new goods of similar description which shall
be free from any defect;
c. To return to the complainant the price, or, as the case may be, the
charges paid by the complainant;
d. To pay such amount as may be awarded by it as compensation to the

consumer for any loss or injury suffered by the consumer due to the
negligence of the opposite party.
e. To remove the defects or deficiencies in the services in question;
f. To discontinue the unfair trade practice or the restrictive trade practice

or not to repeat them;
g. Not to offer the hazardous goods for sale;
h. To withdraw the hazardous goods from being offered for sale;
192

i. To provide for adequate costs to parties.
• Every proceeding referred to in sub-section (1) shall be conducted by the

President of the District Forum and at least one member thereof sitting
together.
Provided that where the member, for any reason, is unable to conduct
the proceeding till it is completed, the President and the other member
shall conduct such proceeding de novo.
• Every order made by the District Forum under sub-section (1) shall be
signed by its President and the member or members who conducted the
proceeding.
Provided that where the proceeding is conducted by the President and

one member and they differ on any point or points, they shall state the
point or points on which they differ and refer the same to the other
member for hearing on such point or points and the opinion of the
majority shall be the order of the District Forum.
(3) Subject to the foregoing provisions, the procedure relating to the

conduct of the meeting of the District Forum, its sittings and other matters
shall be such as may be prescribed by the State Government.
Appeal – According to Section 15, any person aggrieved by an order made

by the District Forum may prefer an appeal against such order to the State
Commission within a period of thirty days from the date of the order, in
such form and manner as may be prescribed:
Provided that the State Commission may entertain an appeal after the
expiry of the said period of thirty days if it is satisfied that there was
sufficient cause for not finding it within that period.
State Commission – According to Section 16;
(1) Each State Commission shall consist of:
a. A person who is or has been a Judge of a High Court, appointed by the

State Government, who shall be its President:
193
b. Two other members, who shall be persons of ability, integrity and

standing and have adequate knowledge or experience of, or have shown
capacity in dealing with, problems relating to economics, law,
commerce, accountancy, industry, public affairs or administration, one
of whom shall be a woman:
i. President of the State Commission as Chairman.
ii. Secretary of the Law Department of the State as Member.
iii. Secretary, incharge of Department dealing with consumer affairs in

the State as Member.
(2) The salary or honorarium and other allowances payable to, and the
other terms and conditions of service the members of the State
Commission shall be such as may be prescribed by the State
Government.
Every member of the State Commission shall hold Office for a term of
five years or upto the age of sixty-seven years, whichever is earlier
and shall not be eligible for re- appointment.
(3) Not withstanding anything contained in sub-section (3), a person

appointed as a President or a member before the commencement of
the Consumer Protection (Amendment) Ordinance, 1993, shall
continue to hold such office as President or member, as the case may
be, till the completion of his term.
Jurisdiction of the State Commission: According to Section 17; subject

to the other provisions of this Act, the State Commission shall have
jurisdiction–
a. To entertain:
i. Complaints where the value of the goods or services and

compensation, if any, claimed exceeds rupees five lakhs but does not
exceed rupees twenty lakhs; and
ii. Appeals against the orders of any District Forum within the State;
and
194
b. To 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.
Procedure applicable to State Commissions: According to Section 18,

the provisions of Section 12, 13 and 14 and the rules made there under for
the disposal of complaints by the District Forum shall, with such
modifications as may be necessary, be applicable to the disposal of
disputes by the State Commission.
Vacancy in the office of the President: Section 18A provides that when
the office of the President of the District Forum or of the State
Commission, as the case may be, is vacant or when any such President is,
by reason of absence or otherwise, unable to perform the duties of his
office, the duties of the office shall be performed by such person, who is
qualified to be appointed as President of the District Forum, as the case
may be, of the State Commission, as the State Government may appoint
for the purpose.
Appeals: According to Section 19, any person aggrieved by an order made

by the State Commission in exercise of its powers conferred by sub-clause
(i) of clause (a) of Section 17 may prefer an appeal against such order to
the National Commission within a period of thirty days from the date of the
order in such form and manner as may be prescribed:
Provided that the National Commission may entertain an appeal after the
expiry of the said period of thirty days if it is satisfied that there was
sufficient cause for not filing it within that period.
Composition of the National Commission – Section 20
1. The National Commission shall consist of:
a. A person who is or has been a Judge of the Supreme Court, to be

appointed by the Central Government, who shall be its President;
195

b. Four other members who shall be persons of ability, integrity and

standing and have adequate knowledge or experience of, or have shown
capacity in dealing with, problems relating to economics, law,
commerce, accountancy, industry, public affairs administration, one of
whom shall be a woman:
Provided that every appointment under this clause shall be made by the
Central Government on the recommendation of a selection committee
consisting of the following namely:
i. A person who is a Judge of the Supreme Court, to be nominated by

the Chief Justice of India–Chairman.
ii. The Secretary in the Department of Legal Affairs in the Government

of India–Member.
iii. Secretary of the Department dealing with consumer affairs in the

Government of India–Member.
2. The salary or honorarium and other allowances payable to and the other
terms and conditions of service of the Members of the National
Commission shall be such as may be prescribed by the Central
Government.
Every member of the National Commission shall hold office for a term of
five years or upto the age of seventy years, whichever is earlier and
shall not be eligible for re- appointment.
3. Not withstanding anything contained in Sub-section (3), a person

appointed as a President or a Member before the commencement of the
Consumer Protection (Amendment) Ordinance, 1993, shall continue to
hold such office as President or Member, as the case may be, till the
completion of his term.
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Jurisdiction of the National Commission – Section 2, says, Subject to

the other provisions of this Act, the National Commission shall have
jurisdiction –
a. To entertain:
i. Complaints where the value of the goods or services and

compensation, if any, claimed exceeds rupees twenty lakhs and
ii. Appeals against the orders of any State Commission; and
b. To call for 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.
Power of and procedure applicable to the National Commission: The

National Commission shall, in the disposal of any complaints or any
proceedings before it, have –
a. The powers of a Civil Court as specified in Sub-sections (4), and (6)

of Section 13;
b. The power to issue an order to the opposite party directing him to do

any one or more of the things referred to in clauses (a) to (i) of Sub-
section (1) of Section 14, and follow such procedure as may be
prescribed by the Central Government.
Appeal – According to Section 23, any person, aggrieved by an order

made by the National Commission in exercise of its powers conferred by
Sub-clause (i) of clause (a) of Section 21, may prefer an appeal against
such order to the Supreme Court within a period of thirty days from the
date of the order:
Provided that the Supreme Court may entertain an appeal after the expiry
of the said period of thirty days if it is satisfied that there was sufficient
cause for not filing it within that period.
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Finality of orders – According to Section 24, every order of a District

Forum, the State Commission or the National Commission shall, if no
appeal has been preferred against such order under the provisions of this
Act, be final.
Limitation period – According to Section 24(A),
1. The District Forum, the State Commission or the National Commission

shall not admit a complaint unless it is filed within two years from the
date on which the cause of action has arisen.
2. Not withstanding anything contained in Sub-section (1), a complaint

may be entertained after the period specified in Sub-section (1), if the
complainant satisfies the District Forum, the State Commission or the
National Commission, as the case may be, that he had sufficient cause
for not filing the compliant within such period:
Provided that no such compliant shall be entertained unless the District

Forum, the State Commission or the National Commission, as the case may
be, records its reasons for condoning such delay.
Administrative control – According to Section 24B,
(1) The National Commission shall have administrative control over all the
State Commissions in the following matters, namely:
a. Calling for periodical return regarding the institution, disposal

pendency of cases;
b. Issuance of instructions regarding adoption of uniform procedure in

the hearing of matters, prior service of copies of documents produced
by one party to the opposite parties, furnishing of English translation
of judgments written in any language, speedy grant of copies of
documents;
c. Generally overseeing the functioning of the State Commissions or the

District Forum to ensure that the objects and purposes of the Act are
best served without in any way interfering with their quasi-judicial
freedom.
198
(2) The State Commission shall have administrative control over all the
District Fora within its jurisdiction in all matters referred to in Sub-
section (1).
Enforcement of orders by the Forum, the State Commission or the

National Commission – According to Section 25, every order made by
the District Forum, the State Commission or the National Commission may
be enforced by the District Forum, the State Commission or the National
Commission, as the case may be, in the same manner as if it were decree
or order made by a court in a suit pending therein and it shall be lawful for
the District Forum, the State Commission or the National Commission to
send, in the event of its inability to execute it, such order to the court
within the local limits of whose jurisdiction:
a. In the case of an order against a company, the registered office of the

company is situated, or
b. In the case of an order against any other person, the place where the
person concerned voluntarily resides or carries on business or
personally works for gain, is situated and thereupon, the court to which
the order is so sent, shall execute the order as if it were a decree or
order sent to it for execution.
Dismissal of frivolous or vexatious complaints – According to Section

26, where a complaint instituted before the District Forum the State
Commission or the National Commission, as the case may be, is found to
be frivolous or vexatious, it shall, for reasons to be recorded in writing
dismiss the compliant and make an order that the complainant shall pay to
the opposite party such cost, not exceeding ten thousand rupees, as may
be specified in the order.
Penalties – According to Section 27, where a trader or a person against

whom a compliant is made or the complainant fails or omits to comply with
any order made by the District Forum, the State Commission or the
National Commission, as the case may be, such trader or person or
complainant shall be punishable with imprisonment for a term which shall
not be less than one month but which may extend to three years, or with
fine which shall not be less than two thousands rupees but which may
extend to ten thousand rupees, or with both:
199

Provide that the District Forum, the State Commission or the National
Commission, as the case may be, may, if it is satisfied that the
circumstances of any case so require, impose a sentence of imprisonment
or fine, or both, for a term lesser than the minimum term and the amount
lesser than the minimum amount, specified in this section.
3.7 RECOGNISED CONSUMER ASSOCIATION IN

KARNATAKA
There are 27 recognised Consumer Associations in Karnataka where the

consumers are to contact for the problems and consultation. They are as
follows:
1. Karnataka Consumer Service Society, 32-A, Benson Cross, Benson

Town, Bangalore-560 046.
2. Grahak Jagrati, 20, Market Rd., Basavangudi, Bangalore- 560 004.
3. Jagrath Mandeli, 947, 12th Cross, J.P. Nagar, 1st Stage, Bangalore-560
078
4. Consumer Education Trust of Mangalore, Microwave Station,

Bangalore-575 006.
5. The Citizen’s Forum, Nayan, No.2, Ashokanagar Road, Hubli-581 362.
6. Consumer Guidance Society of India, H Type, 10/56, Bangurnagar,

Dandeli-584 362.
7. Citizens Forum, Near Marathi Vidhayala, Bijapur-586 101.
8. Consumers’ Forum, Upendra Bang, Near Kalpna Talkies, Udupi-576 101.
9. Consumers’ Forum, Near STV Temple, Basrur-576 211.
10.Consumers’ Forum, 8/447, Jhansi Lakshmi Devi Road, Kundapur-576

201.
11.Consumers Forum, Naina Building, Shirya-574 116.
200
12.Gulburga Distt. Consumers’ Forum, E-1-1534, Sahakari Pant’s House,

Venkatesh Nagar, Gulburga-585 102.
13.Consumers’ Forum, Balthangdi, C/o. Dr. D.C. Devdhar, SDM College,

Ujare, Karnataka.
14.Consumers’ Forum, C/o. Gayatri Nursing Home, Sullia-574 239.
15.Jan Jagarithi Trust, Near C.A. Bank, Sullia-574 239.
16.Nagarikarara Vedika, Kotta Post, Udupi, Karnataka.
17.Balakedarara Vedika, Anantha Shayan Road, Karkala, South Kenera-570

014.
18.Balakedara Belaga, C/o. Mahila Kendra Suratkal, Suratkal, Karnataka.
19.Balakedarara Vedika, Puttur, South Kanara, Karnataka.
20.Kalakedara Vediaka, Surrathkal, Mangalore Taluka, Karnataka.
21.Balakedarara Vedika, Jain Temple Road, Mudubidare, South Kanara,

Karnataka.
22.Nagarika Samithi, Parkala, Udupi, Karnataka.
23.Praja Jagrithi Sangh, Bellary, Karnataka.
24.Consumer Welfare Council, Door No. 4/471-C, South Extension,

Kollegal-571 440
25.Jagrathi Balakedarara Vedika, Sanjivayya Compound, Virthur,

Bangalore, Karnataka.
26.The Citizen Forum, Hostel Dharwad, Dharwad, Karnataka.
27.The Bellary Citizens Forum, 33/B, Venkatachalam Street, IInd Ward

Office, Station Road, Bellary-583 101.
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3.8 SUMMARY
The consumer is the king in a free market economy. In order to make the
consumers more powerful, the Consumer Protection Act, 1986 was
enacted. The various consumer’s rights are right to basic needs, right to
safety, right to information, right to choice/choose, right to be heard, right
to redress, right to consumer education and right to a healthy
environment. Consumer Protection Act was enacted in the year 1986 to
provide a better protection of the interests of consumers and encourage
the consumer movements through consumer councils and other authorities
for the settlement of consumer’s disputes and for matters connected
therewith. There are six consumer rights recognised by the Act in form of
its objects which are the right to be protected against marketing of goods
and services, the right to be informed, the right to be assured, the right to
be heard, the right to seek redressal against unfair trade practices or
restrictive trade practice or unscrupulous exploitation and the right to
consumer education.
Conceptual Type
1. Define Consumer.
2. What do you mean by Consumer dispute.
3. What is the meaning of service as per consumer protection Act?
4. Define complaint.
5. What is defect under COPRA?
6. What is deficiency?
7. Define deficiency service.
Analytical Type
1. What are the objects of the Central Consumer Protection Council?
2. What is the need for the COPRA Act 1986?
3. What are the objects of COPRA Act 1986?
4. What are the rights of a consumer?
5. Write a note a consumer redressal agency?
202

Essay Type
1. How is protection of action taken in good faith? What are the powers to
remove difficulties? Explain power to makes rules and laying of rules.
2. Briefly state the constitution, composition and objects of consumer

protection councils.
3. Discuss the constitution, composition, jurisdiction and functions of the

various consumer redressal agencies.
203

REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
204

COMPANY ACT, 2013
Chapter 4
COMPANY ACT, 2013
Objectives
★ Concept, features and types of company

★ Steps involved in the formation of a company
★ Capital and financing of companies
★ Membership of a company
★ Different kinds of meeting, agenda, quorum and resolutions
★ Essentials of a valid meeting
★ Meetings of Board of Directors, Annual General Meeting and Extra-
ordinary Meeting
Structure:
4.1 Company – Overview

4.2 Company Formation
4.3 Prospectus
4.4 Capital and Financing of Companies
4.5 Membership of A Company
4.6 Company Meetings
4.7 Meeting of Board of Directors
4.8 Annual General Meeting
4.9 Extra-ordinary General Meeting
4.10 Summary
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COMPANY ACT, 2013
4.1 COMPANY – OVERVIEW
Meaning
Proprietary and partnership forms of business organisation were unable to
cope with the increased needs of modern industry and commerce. Their
main drawbacks were limited resources, unlimited liability and absence of
continuity. Some other form of organisation which would be free of these
drawbacks was, therefore, needed. Thus, the joint stock type of
organisation was introduced. Now it is the most widely prevalent form and
by far the most important and it would not be an exaggeration to say that
modern industrial and commercial development has been primarily due to
the growth of the company form of business organisation. This form of
organisation placed heavy sums at the disposal of entrepreneurs and at the
same time reduced the business risk through the principle of limited
liability. This form is very well suited for large undertakings requiring huge
capital.
In India, the company form of organisation has attained much importance

in the wake of rapid industrialisation through the Five Year Plans. The
functioning of the joint stock companies in India was regulated by the
Companies Act 1956, as amended to-date. However, the new Companies
Act, 2013 has now replaced Indian Companies Act, 1956.
Company
A Joint Stock Company is an incorporated association formed for the
purpose of carrying on some business. Legally, it is an artificial person
having a distinctive name and a Common Seal. It may be defined as “an
artificial person created by law with a distinctive name and separate legal
entity, Common Seal, a common capital contributed by the members and
comprising transferable shares of a fixed denomination, with limited
liability and with perpetual succession”.
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COMPANY ACT, 2013
Features
An analysis of the above definition reveals many distinctive features of a
joint stock company which are given below:
1. Registration
2. Separate legal entity
3. Common seal
4. Perpetuity
5. Limited liability
6. Transferability of share
Definition
Section 2(20) of the companies Act 2013, defines that ‘a company means a
company formed and registered under this Act or an existing company”.
This definition does not clarify the position. Lord Justice Lindley defined
company as “an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or business
and who share the profit and loss arising there form”.
Henry defines a company ‘as an incorporated association which is an

artificial person created by law, having separate entity with a perpetual
succession and common seal”.
1. Registration
The company is created only when registered under the Companies Act,
2013. It comes into existence from the date mentioned in the certificate of
incorporation. But for the formation of a public company at least seven
persons and for private company at least two persons are necessary. These
persons agree to come together and lend their names to the Memorandum
of Association and other legal requirements of registration for the
incorporation of a company, with or without limited liability.
2. Legal Entity
Legal entity can be divided into (i) Artificial legal entity, and (ii)Separate
legal entity.
i. Artificial legal entity: A company is an artificial person with a legal

entity of its own. It acts through the board of directors, elected by
the shareholders. It is regarded as an entity separate from its
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COMPANY ACT, 2013
shareholders or members. Hence, a shareholder can sue the

company and be sued by it.
The company can acquire and dispose of property, can enter into
contract with third parties in its own name, and can sue and be sued
in its name. This is borne out in Batas V. Standard and Land Co.
ii. Separate legal entity: A company has a legal entity distinct from
and independent of its member [Kathiawar Industries Ltd. V.C.G. of
Evacuee Property ALR (1967 Punj. 337 R.D. Singh V. Bihar State
Small Industries Corporation (1975) 45 Comp. Cas. 527]. This
establishes a claim for its independent corporate existence. The
property of the company is to be used for the benefit of the company
and not for its members or shareholders as individuals. The creditors
can recover their money only from the property of the company. They
cannot sue individual member. Similarly, the company is not liable for
the debts of the individual members. This separate legal entity is also
recognised by the Income Tax Act, whenever a company is required
to pay tax on its profits and the shareholders have to pay the tax in
their individual capacity when they receive the dividend. This
establishes a claim that a company and the shareholders are two
separate legal entities, claiming their own rights. The basic principle
of separate legal entity is more clear in the case of Salomon V.
Salomon & Co. Ltd., 1897. A.c. 22.
Another famous case of separate legal identity was Abdul haq V. Das
Mal, (1910) I.C. 595 where an employee Abdul Haq sued Das Mal,
the Director of a company, for recovery of salary. It was held that
the director cannot be sued. “The remedy lies against the company
and not against the directors or the members of company”.
3. Common Seal (Optional)

The company being an artificial legal entity, or person, it cannot act on its
own. So, it acts through natural persons like the directors or the Secretary
who is authorised. Hence, the need for a common seal of the company for
all contracts entered into by the Directors or the Secretary. The common
seal is like the signature of a company. The seal bears the name of the
company engraved on it. Sec. 9 o f2013 Act was amended in 2014 to adapt
common seal as optional.
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COMPANY ACT, 2013
4. Perpetuity
The company created by law lives in perpetuity unlike a human being. It
never dies with retirement or death of its members as is the case with
partnership. It is created by law and an end to it can be put by the process
of law only. This establishes in law the perpetual succession which means
that once a company is established it exists irrespective of the variation or
the composition of its members This lends stability and long life to a
company form of organisation.
5. Limited Liability
Limited liability of the members is a distinct advantage of the company
form of organisation. A company may be (i) Limited by shares, or (ii)
Limited by guarantee.
i. In a company limited by shares, the liability of members is limited to

the nominal value of the shares held by them. In respect of partly paid
shares, the liability extends up to the balance of the nominal value of
the shares. But if he has paid the full nominal value of the shares held
by him, his liability is nil.
ii. In case of a company whose liability is limited by guarantee, the liability

of the members is limited to such amount as the members may decide
to contribute to the assets of the company, in the event of its being
wound up.
Thus, we find that limited liability has enabled the companies to collect
the small savings of the people into huge share capital for the formation
of capital and utilisation for further production without affecting the
fortunes of the investors in the event of the failure of the company but
given a fair and continuous return in the event of company running
smoothly and profitably.
The importance of limited liability is pointed out in the case of London

and Globe Finance Corporation, Rc (1903) 1 Ch. 728. Where it is said
“The statutes relating to limited liability have probably done more than
any legislation of the last fifty years to further the commercial prosperity
of the country. They have, to the advantage of the investor as well as of
the public, allowed and encouraged the aggregation of small or
comparatively small sums into great capitals, which have been employed
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in undertaking of great public utility, largely increasing the wealth of the

country”.
6. Transferability of Shares
Sec. 44 of the Companies Act, 2013, provides that “the shares or other
interest of any member shall be movable property, transferable in a
manner provided for in the articles of the company”. Therefore, a member
may:
i. sell his shares in the open market, or
ii. transfer his shares to anybody he likes in a public limited company as

per conditions laid down in the articles of the company. However,
there are certain restrictions on the transfer of shares in respect of
private limited companies as the very nature of the company
indicates, namely, private.
Corporate Personality
The legal meaning of Corporate Personality is that “a company recognised

as legal entity distinct from its members. A company with such personality
is an independent legal existence separate from its share holders,
directors, officers and creators”. This definition of Corporate Personality
tells that a corporation has its own name to sue and be sued. This concept
of corporate personality also provides the right to purchase, sell, lease and
mortgage its property on its own name. It also implied that the property
cannot be taken away by any body without following the rules and
procedure related to sale, transfer etc. This restriction is popularly termed
as “Corporate Viel” or viel of incorporation.
Thus, a company on incorporation assumes a legal personality distinct from

its members, but it cannot claim to be citizen of a country under the
Constitution of India or the Citizenship Act, 1955. This is amply proved in
the case of R.D. Sing V. Secretary, Bihar State Small Industries Corporation
(1975) 45, Comp. Cas. 527 (pat). Hence, the company cannot claim the
Fundamental rights guaranteed under the Constitution. However, it has
certain “rights protected under our Constitution” as a legal entity and
which are guaranteed to all persons whether holding the citizenship or not.
The company is a mere abstraction of law”.
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Yet it is essential to note that a company though deprived of citizenship,

has a nationality, domicile and residence. Its domicile is the place of its
registration and it is attached to it as long as it is in existence. This
establishes the residence of a company at that place where central control
and management of its business is located or exercised. This ‘residence’ of
the company gives jurisdiction to the taxation.
Registered Company
A company brought into existence by registration with the Registrar of

Companies under the Companies Act of 2013, is called a Registered
Company.
Under the Companies act two kinds of companies can be registered viz.,
a. Private Company and

b. Public Company
c. One Person Company
Again, registered companies may be of two types: viz.,
a. Ordinary Business Companies, and

b. Government Companies.
Different kinds of companies are shown diagrammatically as follows:
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On the basis of the liability of members, companies can be classified into

three types:
Unlimited Companies
In the case of unlimited companies, the liability of members is unlimited
i.e., members are liable for the debts of the company to an unlimited
extent in the event of its winding up. But this type of company has become
rare.
Companies Limited by Shares

In the case of these companies, liability being limited by shares, the
member is called upon to pay only the unpaid amount on shares held by
him. Most of the companies formed today are of this type and in the
following discussion we will deal mainly with this type of company.
Government Company
Under Section 2(45) of the Companies Act, 2013 a company in which not
less than 51% of the share capital is held by the Central Government and/
or by any State Government or Governments is called a Government
Company. It may be a public company or a private company. Some of the
prominent Government Companies are: Hindustan Machine Tools, Bharat
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Electronics Limited, Indian Telephone Industries and Hindustan Aeronautics

Limited.
Listed Company
Under Sec 2(52) of Companies Act, 2013 “Listed Company” means a
company which has nay of its securities listed or any recognised stock
exchange.
Foreign Company
Under Section 2(42) of the Companies Act, 2013 a Foreign Company is that
company which is incorporated in a foreign country, but which has
established a place of business in India. Although foreign companies are
not registered or incorporated in India, some of the provisions of the
Companies Act, are applicable to them. The Companies Act, has made
several sections of the Act applicable to foreign companies in order to bring
into the ambit of the provisions applicable to Indian companies.
Under Section 380 of the Companies Act, 2013 every foreign company
must, within 30 days of the establishment of its business, file with the
registrar the following documents:
a. A certified copy of its charter, statutes, memorandum and articles or

other instruments defining its constitution.
b. The full address of the registered or principal office of the company.
c. List of the directors and secretary of the company with the required
particulars.
d. The name and address of the person authorised to receive any notice or
document etc., required to be served on the company in India.
e. The full address of the office of the company which is to be deemed its
principal office of business in India.
In case of any alteration in any of the above particulars, Section 380 of the
Act requires the company to file with the registrar a return of such
alteration within the prescribed time.
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Holding and Subsidiary Companies

When Company A has a control over Company B, Company A is known as a
holding company and Company B which is so controlled is known as
Subsidiary Company.
A company is deemed to be subsidiary company if any of the following

conditions are satisfied:
a. where the Board of Directors is controlled by another company,
b. where the controlling company holds more than half in nominal value of
its equity capital,
c. where a company is a subsidiary of another company which is subsidiary

of a holding company, that is Company C is a subsidiary of Company B,
whereas B is a subsidiary of holding Company A.
A holding company, by a resolution may authorise its representatives to

inspect the account books of its subsidiary companies and the books of
account of any such subsidiary shall be open to inspection by their
representatives. Similarly, the members of the holding company have a
right to apply to the Central Government for appointment of inspectors to
investigate the affairs of its subsidiary company. However, each company -
holding and a subsidiary - has its own legal entity, though the corporate
veil may be lifted for determining the relationship between them.
One Person Company
Under Section 2(62) of Companies Act, 2013, “One Person Company”

means a company which has one person as a member.
As the name suggests, under this category, one man holds practically the
entire share capital of the company, but in order to meet the statutory
requirement of minimum number of members, some dummy members,
mostly his relations or obliging friends, hold one or two shares each. This is
done to fulfil the statutory requirement of at least 7 members in case of
public and two in case of private company. Thus, one man controls the
entire company with limited liability.
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Such a company is perfectly valid in the eyes of law. It has its own entity
which is separate from the entity of its members. In Solomon v. Solomon
and Co. Ltd. Mr. Solomon was holding the entire share capital in his name
and to satisfy the statutory conditions, his wife, sons, daughters, etc. held
one share each. It was held that the company was perfectly in order. The
company of Solomon & Co. Ltd. enjoyed a separate entity of its own. It
does not matter even if Mr. Solomon held the entire shares and the rest of
the members were only dummies.
Thus, the basic principle established in Solomon v. solomon & Co. Ltd., is
followed in a number of cases, forming a basic principle of the company
form of organisation.
Private Company [Sec. 2(68)]
Under Sec 2(68) of Companies Act, 2013 “Private Company” means a

company having a minimum paid-up share capital of one- lakh rupees or
such higher paid-up share capital as may be prescribed, and which by its
articles,
a. restricts the right to transfer its shares;
b. except in case of one person company, limits the number of its

members to two hundred;
c. Prohibits any invitatory to the public to subscribe for any securities of

the company.
A private company suits the needs of those who wish to have both the
advantages of limited liability and also keep the business as private as
possible. There are some similarities between a private company and
partnership. In both these forms of organisation, shares are not freely
transferable and membership in both is confined to friends and relatives.
But the advantage of limited liability in the case of a private company
induces many businessmen to resort to this form of organisation rather
than partnership.
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Public Company
In the case of a public company the minimum number of persons required
to form a company is seven and there is no maximum limit. It can invite
the public to subscribe to its shares and it does not impose any of the
conditions necessary in the case of a private company and any person
competent to contract can become a member. To commence its business, it
must have at least three directors and also it should obtain a certificate to
commence business from the Registrar of Companies.
New Definition of Public Company under Companies Act, 2013
Under Sec 2(71) a “Public Company” means a company which —
a. is not a private company;
b. has a minimum share capital of five lakh rupees or such higher paid-up
capital, as may be prescribed.
Difference between A Public Company and A Private Company
The difference between public and private companies can be studied under
the following headings:
1. Formation
In the case of a public company, formation is difficult. Certificate of
Incorporation and also the Certificate to Commence Business will have to
be obtained from the Registrar of Joint Stock Companies. Further, consent
of the directors and a copy of their contract to purchase qualification
shares must also be filed with the Registrar. In the case of a private
company, the formation is not difficult. The company can commence
business immediately after its incorporation and there is no need to obtain
a Certificate to Commence Business. There is also no need to file
documents relating to directors.
2. End-words of the Name

A public company must have only the word ‘Limited’ in its name, whereas a
private company must have the words ‘Private Limited’ in its name.
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3. Membership
In the case of a public company, the minimum number of members
required is seven and there is no maximum limit, while in the case of
private company the minimum is two and the maximum is 200.
4. Prospectus
A public company must file a prospectus or a statement in lieu of prospects
with the Registrar before allotting shares, whereas in the case of a private
company, there is no need to file a prospectus or statement in lieu of the
prospectus.
5. Allotment of Shares
In the case of a public company, there are a number of legal restrictions on
the allotment of shares, but there are no restrictions precedent to
allotment of shares in a private company.
6. Memorandum and Articles of Association

In the case of a public company seven members have to sign the
memorandum and articles of association, but in the case of a private
company it is enough if two members sign.
7. Preparation of Articles
A public company need not prepare articles and it can choose to adopt
Table ‘A’ of the Companies Act, which contains model rules and regulations.
But a private company cannot have Table ‘A’ because, by definition, it must
impose certain restrictions upon itself through relevant provisions in the
articles. Hence, in the case of a private company, compulsorily, articles will
have to be prepared.
8. Public Issue of Capital

A public company can invite the public through its prospectus to contribute
to its shares and debentures, but a private company is prohibited from
inviting the public to subscribe to its capital.
9. Transfer of Shares
Shares of a public company are freely transferable from one person to
another and they can be quoted on the stock exchange. In the case of a
private company transfer of shares is restricted by its articles and its
shares cannot be quoted on the stock exchange.
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10.Directors
Every public company must have at least three directors and they are
subject to retirement by rotation. There is a limit on directorships in a
public company, and there are legal restrictions on the remuneration of
directors of a public company. Further, no loans to directors can be
sanctioned without the approval of the Central Government. In the case of
a private company, there should be at least two directors and they need
not retire by rotation every year. There are no limits on the directorships of
a private company and also there are no restrictions on the remuneration
of directors. Further, directors of private companies can borrow from their
company without the approval of the Central Government.
11.Shares
A public company cannot issue deferred shares and it issues only equity
and preference shares. But there is no such restriction on an independent
private company and it can issue deferred shares even with
disproportionate voting rights.
Privileges of a Private Company

Because of the advantages of limited liability, privacy in business and
simplicity in formation, many people prefer to start private companies
rather than public companies. Moreover, private companies enjoy certain
privileges which are not allowed to a public company and this is also one of
the reasons for its popularity.
Privileges enjoyed by ALL Private Companies

(i.e., both independent private companies and subsidiary private
companies)
1. Only two members are sufficient for a private company at the time of
registration.
2. The company can immediately commence business on obtaining

certificate of incorporation. It need not wait for certificate of
commencement of business.
3. A private company need not file a prospectus with the Registrar of

Companies.
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4. A private company can proceed to allot the shares without observing the
usual restrictions applicable to allotment of shares.
5. Restrictions imposed on public companies regarding further issue of

shares do not apply to a private company.
6. The minimum number of directors is two only.
7. Written consent to act as director need not be filed with the Registrar by
the director of a private company.
8. A private company is not required to maintain a separate index of

members.
9. Only two members will be sufficient to constitute quorum in case of

members meeting of a private company.
Restrictions on a Private Company
Even though private companies enjoy certain privileges, the Companies Act
lays down a number of restrictions on them. Some of the significant
restrictions are as follows:
1. A private limited company must have the words “private limited” as the
last words of its name.
2. It must have articles of its own containing restrictions to transfer its

shares, limiting its membership and prohibiting any invitation to the
public to subscribe to its shares and debentures.
3. A private company must have at least two individuals as directors.
4. Every year a private company must file with the Registrar along with the
annual return, a statement showing:
a. A certificate that no invitation was made to the public for subscribing

to its shares and debentures.
b. That the number of its members did not exceed 200.
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c. That corporate share holding is less than 25% of its paid up capital.
5. Every private company must appoint qualified auditors for auditing its
accounts.
6. Every private company must file every year three copies of profit and
loss account and three copies of balance sheet with the registrar within
30 days of the annual general meeting.
7. Every private company must send a copy of its audited balance sheet
and profit & loss account to all members and debenture holders 21 days
before the annual general meeting.
8. A private company is prohibited from issuing share warrant. This is

because share warrant can be transferred by delivery and the right to
transfer shares in the case of a private company is restricted.
4.2 COMPANY FORMATION
Preliminary Note
The Indian Companies Act, 1956 is repealed. The new Act viz., Companies
Act, 2013, has been introduced. The historic Companies Bill, 2013 was
passed in the Lok Sabha on 18th December 2012 and in Rajya Sabha on
8th August 2013. The Act was assented by the President of India.
The first Companies Bill to replace 1956 Act was introduced in the Lok
sabha on 3rd August 2009 along with salient features of proposed new
companies Act. This new legislation had to be brought about to facilitate
the changed economic scenario of the country and around the world. The
Bill introduced in 2009 was referred to the parliamentary standing
committee on Finance for examination and report. The Committee
submitted its report on 31st August 2010.
Several amendments were proposed to the 2009 Bill and hence this Bill
was withdrawn and a new Bill incorporating all amends was introduced in
the Lok Sabha in 2011. Major and far reaching amendments were
introduced in new Bill (2011) are as follows:
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COMPANY ACT, 2013
i. E-Governance, i.e., maintaining and allowing inspection of documents in

electronic form, are allowed for the first time to have this facility by the
companies registered under old or new Act.
ii. A new type of company called one person company and the concept of
corporate social responsibility have been introduced.
iii. Accountability on the part of the companies has been increased, by

introducing the appointment of independent directors and their roles,
appointment of CSR committee, bringing more independence in board
functioning and to protect the interest of minority share holders.
iv. Introducing provisions avoiding whistle blowing (introduction of vigil

mechanism), encouraging ethical corporate behavior by rewarding
employees for their integrity and providing vital information to the
management about deviant practices.
v. Empowering the Central Government to take decisions on vital issues

which were either to not provided in the old Act.
vi. Introducing new disclosure norms such as CSR policy, developing and
implementing risk management policy, consolidating of accounts etc.
vii.Introducing provisions to facilitate the companies to secure capital more

freely. For ex: Allowing the companies to issue shares with differential
voting rights, allowing Central Government to frame rules regarding the
provision of money to employees to purchase the same company’s
shares, introducing provisions to ensure transparency in private
placement subscriptions etc.
viii.Provisions are introduced to improve the quality of auditing of company

books. These provisions include the rotation of auditors and audit firms,
restriction on the number of companies to be audited by auditors or
audit firms, renaming NACAAS as National Financial Reporting Authority
(NFRA) which monitors accounting and auditing standards and observe
quality of service professionals of the companies.
ix. Further provisions are introduced that NFRA should consider

International Financial Reporting Standards (IFRS) and other
internationally accepted accounting and auditing standards and policies
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COMPANY ACT, 2013
and empowering NFRA with quasi judicial powers to ensure independent

oversight over professionals.
Cost audit has been made compulsory for companies engaged in such
goods or such services as may be prescribed.
x. Provision is introduced to conduct secretarial audit by company

secretary in practice, in prescribed class of companies.
xi. Provision regarding revision of rules regarding managerial

remuneration, facilitating mergers and acquisitions, protection for
minority share holders, invest protection, providing statutory status to
Serious Fraud Investigation Office (SFIO), compulsorily having woman
director on the board of prescribed class of companies, appealing to
National Company Law Tribunal against the order of the Tribunal,
establishing Mediation and conciliation panel to facilitate mediation and
conciliation between parties regarding issues to be solved, according
power to the Central Government to exempt or modify the provisions of
the Act in the public interest, are also introduced in the new Act.
Promotion of Company
The person or persons who undertake the responsibility to bring the
company into existence is are called ‘promoter’. According to Justice
Bowen. “The term promoter is a term, not of law, but of business, usefully
summing up in a single word a number of business operations familiar to
the commercial world, by which a company is generally brought into
existence”.1 Promotion involves discovery of specific business opportunity
and subsequent organisation of the factors of production. According to
Haney, promotion may be defined as the process of organising and
planning the finances of a business enterprise under the corporate form. In
other words, the steps which are taken to persuade a number of persons to
come together for the achievement of a common objective through the
company form of organisation is called promotion.
Promotion may be undertaken either for starting a new business or for

expanding the existing concern or for forming a holding company for a
merger. But whatever the purpose, a thorough investigation is necessary
before taking any step as a part of promotion.
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Steps in Company Promotion
The work of promotion of a company involves four stages viz.
(1) discovery of an idea and preliminary investigation; (2) detailed

investigation, (3) assembling and (4) financing the promotion________
1. Whaley Bridge Printing Co. vs. Green Q.B.D. 109.
a. Discovery of an Idea: The promoter starts out with an idea to start

some business either in a new field which has not been commercially
exploited or in some existing lines of manufacture or business. He
makes a preliminary investigation to find out whether it is worthwhile to
make a detailed investigation. He makes a rough estimate of probable
revenues and expenditure.
b. Detailed Investigation: The promoter needs to make a detailed

investigation of his idea with the assistance of many experts like
engineer, chemist, market analyst, financial expert, management
consultant, etc. On the basis of the reports of these experts, the
promoters would be in a position to know the capital requirements,
place of location, size of the unit, demand condition in the market, price
of product, cost of production, probable return on capital, etc. A detailed
investigation will help the promoter to decide whether the estimated
income will be adequate to take care of the estimated cost of production
and compensation to the owner for risks and services.
c. Assembling: After a detailed investigation, if the promoter is satisfied

with the practicability and profitability of the proposed concern, he
starts assembling the proposition. ‘Assembling’ means getting the
support and consent of some other persons to act as directors or
founders, arranging for patents, a suitable site for the company,
machinery and equipment and making contracts for filling the positions.
d. Financing the Proposition: After assembling the proposition, the

promoter prepares a ‘prospectus’ to present to the public and to
underwriters to persuade them to finance the ‘proposition’. A prospectus
contains complete details of the proposition and also the reports of
various experts who have investigated the proposition. The promoter
also takes steps to incorporate the company, and to secure the
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COMPANY ACT, 2013
certificate to commence the business. For incorporating the company

and also for obtaining the certificate to commence business, the
promoter has to fulfil many legal formalities which are discussed below.
PROMOTERS
Promoters are those persons who conceive the business idea and convert
the business idea into a business reality. Promoters of joint stock
companies conceive the idea of forming a company.
Further, they undertake everything that is required to get the company

incorporated under the Companies Act. They also undertake to provide the
company with the required capital and loan. They also acquire assets and
property for the company they promote.
Position of Promoter
Since a promoter takes all the required initiatives in the formation of a
company, he will be doing the pre-incorporation activities. He is neither an
agent, nor a trustee for, the company since the company is not in
existence. He enjoys a fiduciary position in relation to the company he
promotes and the prospective shareholders. Enjoying this fiduciary position
the promoters will be doing everything in conceiving the business idea and
in getting the company incorporated. While enjoying this fiduciary position,
the promoters will be everything in the best interest of the company they
promote. The promoters may not make, either directly or indirectly, any
secret profit at the expense of the company. In case they make any profit
while promoting the company, they may be compelled to account for the
same and to surrender.
Functions of Promoter
Promoters specialise in promotion activities of a company. Issue Houses,

Investments Banks etc., are examples specialised promotional institutions,
which perform the following functions.
1. Conceives the Business Idea: Promoters are the first people, who
conceive the concept of business idea for establishing a business unit of
any size.
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COMPANY ACT, 2013
2. Investigation: After conceiving the business idea, promoter conducts a

detailed investigation of the proposed business concept to ensure the
feasibility of the proposition. He / they have to prepare a detailed report
about the possibility of establishing the company, required capital outlay
sources of mobilising capital, profit projections, etc.
3. Collecting People: After confirming the viability of forming the

company, promoter has to gather people, who are interested to join him
and share the business responsibilities as per the mutual agreement.
4. Organising the Company: The involves himself with his associates in

selecting the desirable name, preparing statutory documents such as
Memorandum of Association and Articles of Association and other
documents required for registration with RoC, files the application to
RoC for registering the company and paying. The prescribed fees,
receives the certificate of incorporation. Then issues share application
along with prospectus for public subscription towards a portion of
capital. He facilitates various types contracts of the registered company
and finally obtains the certificate of commencement of business.
5. Promoter gets the company going and normally he will be a part of

administration as Chairman or as Director, or in any other capacity as
they (company and promoter) mutually agree upon.
Types of Promoters
Depending upon the types of job they perform, the promoters are classified
as under:
1. Professional Promoters: These are the ones, who conceive the

business idea for others and form this point, they perform upto the
point of obtaining the Certificate to Commence Business and hand over
the company to their clients. Professional promoters are playing a major
role in forming the companies. In India, they are now emerging.
2. Financial Promoters: Some of the recognised financial institutions are

also involving in establishing finance companies for themselves or for
others. When financing environment is favourable in the economy, the
promoters, promote finance companies, to finance the actives of the
economy. They are professional financiers.
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COMPANY ACT, 2013
3. Occasional Promoters: Certain professionals (such as engineers,

advocates, educationists, doctors, etc.) who have flair to establish
business in their line of interest may dwell into promotion of companies
for themselves or for their friends or for third parties. They are not
regular promoters and after promoting the company, they may get back
to their original profession.
There was a specialised institution called “Managing Agents”, who were

professional promoters. It is now extinct. Legal position of promoter is
that he/institution does not have any legal status. As the promotion
business is a non entity before incorporation, it is neither agent or
trustee and it stands in a fiduciary position.
The promoter will have to decide on the type of company to be

incorporated. He then apply to the Registrar of Companies (RoC)for
availability of name for the proposed company. Next, he has to get the
documents like Memorandum of Association and Articles of Associations
of the proposed company ready. This is followed by vetting these
documents and get them printed, stamped and signed. He may be
required to execute power of attorney. He may be required to file
additional documents with the RoC. Another important step the promoter
undertakes is to file the statutory declaration. He will also pay the
required filing fees.
Duties and Liabilities of a Promoter
The importance of the rule which creates a fiduciary relationship between

the promoter and the company he brings into existence, can be seen when
we consider its consequences as discussed below:
1. Duty not to make secret Profit at the cost of the company: A

promoter cannot make either directly or indirectly any profit at the
expense of the company he promotes, without the knowledge and
consent of the company and that if he does so, in disregard of this rule,
company can compel him to account for it. A promoter is not forbidden
to make profit but to make secret profit.
2. Duty to disclose all materials facts: A promoters is not allowed to

derive a profit from the sale of his own property to the company unless
all material facts are disclosed. If a promoter contracts to sell his own
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COMPANY ACT, 2013
property to the company without making a full disclosure, the company

may either repudiate the sale or affirm the contract and recover the
profit made out of it by the promoter. Either way the dishonest promoter
is deprived of his advantage.
Disclosure to be made to whom?

A promoter who wishes to sell his own property to the company must
make a full disclosure of his interest in the transaction. The disclosure
may be made (a) to an independent board of directors, or (b) in the
Articles of association of the company or (c) in the prospectus or (d) to
the existing and intended shareholders directly.
Lord Cairns observed in this regard as follows.
“I do not say that an owner of property may not promote and form a
joint stock company stock company and then sell his property to it but I
do say that if he does he is bound to take care that he sells it to the
company through the medium of a board of directors who can and do
exercise an independent and intelligent judgement on the transaction”
Secret profits on the sale of property can be recovered from a promoter

only where the property was bought and sold to the company while he
was action as a promoter. A promoters can be compelled by the company
to hand over any secret profit which he has made without full disclosures
to the company. The company can also sue for the recision of the
contract of sale by the promoter where the promoter has not disclosed
his interest therein.
3. Liable for False statement, Omission of facts etc. A promoter is subject

to the following liabilities under the various provisions of the Companies
Act.
a. Section lays down matter to be stated and reports to be set out in the
prospectus. He may be held liable for the non-compliance of the
provisions of this section.
b. Under Section, a promoter is liable for any untrue statement in the

prospectus to a person who has subscribed for any shares or
debentures on the faith of the prospectus. Such a person may sue the
promoter for compensation for any loss or damage sustained by him.
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COMPANY ACT, 2013
c. Besides civil liability, the promoters are criminal liable under Section
for the issue of prospectus containing untrue statements. The Act
imposes severe penalty on promotes who make untrue and deceptive
statements in a prospectus with a view to obtaining capital.
d. A promoter may be liable to public examination like any other director

or officer of the company if the court so directs on a liquidators report
alleging fraud in promotion or formation of the company.
e. A company may proceed against a promoter on action for deceit or

breach of duty, where the promoter has misapplied or retained any
property of the company or is guilty of misfeasance or breach of trust
in relation to the company.
Where there are more than one promoters, they are jointly and severally
liable and if one of them is sued and pays damages, he is entitled to claim
contribution from other or others.
The death of a promoter does not relieve his estate from liability arising
out of abuse of his fiduciary position. Liability of promoters for preliminary
contracts: Preliminary contracts are contracts entered into by the
promoters on behalf of the company, before its incorporation, with third
parties.
It is very usual that the promoters enter into some contracts as agents or
trustees of the company, which has not yet come into existence. Such
contracts are legally not binding upon the company even after it comes
into existence. The company can neither ratify those contracts nor sue the
vendors on them after its incorporation because ratification requires
existence of the principal at the time when the contract was entered into.
On the request of the promoters of a company, a solicitor prepared the

Memorandum and Articles of Association of a company, paid the
registration fees and got the company registered. The company was not
held bound to pay for the services and expensed of the solicitor. “The
company could not be sued in law for those expenses in as much as it was
not in existence at the time when the expenses were incurred... and
ratification was impossible.”
A company cannot adopt contracts entered into before its incorporation
even by passing a special resolution or by making adoption of such
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contracts as one of the objects of the company in its memorandum of

association.
Example: The memorandum of association of a proposed company

provided that a particular firm would be appointed as its managing agent.
The firm was appointed as the company’s managing agent after the
company’s incorporation but soon afterward the directors resolved to
dismiss them. The firm field a suit against the company for restraining the
company from committing a breach of the contract. It was held that the
contract was in the nature of a preliminary contract made by the promoters
with the third parties before the company’s formation. The company could
not be held liable for such a contract even if a clause to that effect had
been entered in the company’s memorandum.
Thus, preliminary contracts will either have to be left as mere ‘gentlemen’s

agreement’ or the promoters will have to undertake personal liability, which
of these courses will be adopted depends largely on demands of the other
party.”
The nature of the liability of promoter may be expressly stated in the

Memorandum or otherwise it may have to be ascertained taking into
account the terminology employed in the contract. He can be held
personally liable if he has purported to act as an agent and the non-
existence of the company was known to both the parties. But if the
contract is purported to be made by the company itself, which is not in
existence, the director or promoter signing on behalf of such nonexistent
company does not incur any liability, since there in no contract at all. In
case of personal liability the promoters will continue to be liable until the
company adopts the contracts. This personal liability will continue, even
after the incorporation of the company for those things which they had
started doing before the incorporation of the company. The company will
adopt these contracts by entering into new contracts with the third parties
on the same terms as were embodied in the original contracts. Such a new
agreement of adoption may not be implied by the acts of the company. In
order to avoid their liability, the promoters usually insert a clause in the
original contract to the effect that if the contract is not adopted by the
company after its incorporation within a limited time, both the promoters
and the third party will be exonerated from liability. Some of the promoters
simply agree to the draft contract to be entered into by the vendor and the
company after incorporation.
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However, the principles enunciated above have no application in our

country on account of the provisions of sections 15(h) and 19(e) of the
Specific Relief Act, 1963. These sections provide that a contract entered
into by the promoters on behalf of the company before its incorporation
can be enforced by or against the company, if the following two conditions
are satisfied:
a. If the contract is entered into, for the purposed of the company and
such contract is warranted by the terms of incorporation. The term “for
the purpose of the company” implies that the contract should be for the
working purpose of the company.
b. The company accepts the contract after its incorporation and

communicates such acceptance to the other party to the contract.
Incorporation
After taking all the preliminary steps for registration, an application along
with the necessary documents, stamp duty, registration and filing fees, has
to be made to the Registrar for the issue of the certificate of incorporation.
The Registrar will scrutinise the documents and if satisfied will enter the
name of the company in the register and will issue the company its birth
certificate called the Certificate of Incorporation.
Steps and Formalities for Incorporation of a Company

Promoters have to take certain steps for getting the certificate of
incorporation from the Registrar of Companies. On hearing from the
Registrar about the availability of names for the proposed company, they
have to prepare the following documents and file them with the Registrar
of Companies of the state in which the registered office of the company is
to be situated.
1. Memorandum of Association to which at least seven persons have

subscribed, their names and each one of the them has taken at least
one share. In the case of a private company, the number of persons
required to subscribed their names is only two.
2. “Articles of Association has to contain the regulations for management

of company. It shall be in respective forms specified in Tables F, G, H, I
in schedule I of Companies Act, 2013 as may be applicable to such
company.
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3. The address of the registered office of the company.

This is to be delivered in any case within 30 days of incorporation.
4. A list of directors with their names, addresses and occupations. The

return containing the particulars of the directors should be filed within
30 days of their appointment.
5. Consent in writing of the directors to act as directors.

This document is not required in the formation of a private company.
6. An undertaking by the directors to take and pay for qualification shares,

if any,
This document is not required in the formation of a private company.
7. The statutory declaration by an advocate or an attorney or a chartered

accountant practising in India,2 who is engaged in the formation of a
company or by a person named in the articles as a director, manager, or
secretary of the company.
At the time of filing these documents with the Registrar of Companies,

necessary stamp duty, registration fees and filing fees are to be paid. The
Registrar will examine these documents and if he is satisfied with the
documents, he will enter the name of the company in the Register and will
issue to the company it birth certificate called the “Certificate of
Incorporation”. The certificate of incorporation is a conclusive evidence of
the fact that;
a. All the requirements of the Act have been complied with,
b. The company has come into existence on the date mentioned therein,
The effects of the certificate of incorporation are as under:
i. The subscribers to the memorandum and all those who later become
members of the company will be a body corporate.
2 In the Companies (Amendment) Act, 1988, it is made clear that the chartered
accountant must be in whole time practice in India”. The “Secretary in whole time
practice in India” is also made eligible for signing this declaration.
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ii. The body corporate shall be capable of exercising all the functions of an
incorporated company immediately, with regard to (a) common seal, (b)
perpetual succession and (c) such liability of the members to contribute
to the assets of the company (partly paid shares) in the event of
winding up of the company.
Here it may be noted that once the registration is effected even with the
alterations in the original, it cannot be changed or annulled by the court.
“Once the certificate of incorporation is given nothing is to be inquired into
as to the regularity of the prior proceedings.”3
Capital Subscription
As observed earlier, a private company and a public company not having
any share capital can commence business immediately after obtaining the
Certificate of Incorporation, but a public company having a share capital
can commence business only after obtaining another certificate called the
‘Certificate of Commence Business’ from the Registrar of Companies.
Hence, a public company having a share capital has to undergo two
additional stages, viz, (1) The subscription stage and (2) commencement
of business stage, which have been explained in this chapter.
In the capital subscription stage, the company has to make arrangements

for obtaining the necessary capital for the company. For this purpose,
immediately after getting the certificate of incorporation, the company
convenes a board meeting to deal with the following business:
1. Appointment or confirmation of the appointment of the secretary if one

has already been appointed by the promoters at the promotion stage.
2. Adoption of preliminary contracts.
3. Appointment of bankers, solicitors, legal advisors, brokers, auditors, etc.
4. Adoption of draft prospectus or ‘statement in lieu of prospectus’.
3 Peel’s CAse (1867) L.R. 2, Ch. App. 674
5. Listing of shares on the stock exchange.
6. Adoption of underwriting contracts.
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Generally, the promoters appoint the secretary, banker, solicitor, auditor

and broker in advance and their appointments are confirmed by the board
of directors in its first meeting. Except in the case of appointment of the
secretary all other appointments are generally made up to the date of the
first annual meeting of the shareholders where either their appointments
may be renewed or new appointments made.
Commencement of Business
As already pointed out, a public company cannot commence business
without obtaining from the Registrar a certificate called ‘certificate to
commence business’. To obtain this certificate the following conditions must
be fulfilled:
1. A prospectus or a ‘statement in lieu of prospectus’ has to be filed with

the Registrar of Companies. A statement in lieu of prospectus has to be
prepared by those companies which do not find it necessary to issue a
prospectus for the issue of their shares. The statement must include all
the information which a prospectus must contain under the law.
2. The number of shares allotted is not less than the minimum subscription
mentioned in the prospectus (or a statement in lieu of prospectus).
3. The directors have taken up and paid for their qualification shares. The
amount paid on a share by them is not less than the amount paid by
other members.
4. The declaration that no money is liable to become refundable to

applicants for shares for reason of failure on the part of the company to
apply for, or to obtain permission for, the shares or debentures dealt in
any recognised stock exchange.
5. A declaration by one of the directors or the secretary, or secretary in

whole-time (practice where company had not appointed any secretary)
to the effect that all the conditions regarding the commencement of
business have been complied with.
It may be noted that a public company having a share capital but not
issuing a prospectus to the public has only to file the documents relating to
points 3 and 5 listed above along with a copy of the ‘statement in lieu of
prospectus’.
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Duties of the Secretary before and after Incorporation
In the foregoing chapters we have observed that the secretary has to

perform various duties before and after incorporation of the company.
Duties which are performed before incorporation related to
(1) promotion and (2) incorporation; and duties which are performed after
incorporation related to (1) subscription and (2) commencement.
Now we shall summarize the duties of the secretary in connection with the
company formation under two headings, viz.,
(1) duties before incorporation and (2) duties after incorporation.
Duties before Incorporation
Before incorporation, the secretary has to assist the promoters in

performing preparatory work and in fulfilling many legal formalities. He has
to assist the promoters in convening and conducting meetings, drawing up
preliminary contracts and documents required for registration. At this
stage, he may also take the help of specialists such as a solicitor and a
chartered accountant. The duties to be performed by the secretary before
incorporation are as follows:
1. To help the promoter in making a detailed investigation of the proposed

venture.
2. If necessary, on the advice of the promoters to secure the opinion of the

experts in different fields on the proposed venture.
3. To help the promoters in drawing up the financial plan for the proposed
venture.
4. To attend to all preliminary meetings of the promoters, keep a record of

proceedings of their meetings and to help in the discussion.
5. To secure the approval of the Registrar for the proposed name of the
venture.
6. To help the promoters in the preparation of preliminary contracts.
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7. To help the promoters in the drafting and finalising of documents such

as memorandum, articles of association etc.
8. To follow the guidelines issued by SEBI.
9. To see that all requirements of the Act as to incorporation and

registration are complied with and that documents such as
memorandum, articles, etc., with the required stamp duty, filing fees
and registration charges are duly filed with the Registrar.
10.To collect the certificate of incorporation from the Registrar.
11.To send a notice of the registered address of the company to the

Registrar within 30 days of the date of registration.
Duties of the Secretary after Incorporation

We have already observed that a private company can commence business
immediately after incorporation, but a public company can commence
business only after obtaining the certificate to commence business from
the Registrar. This involves arranging for subscription to the shares of the
company and complying with the legal requirements before applying to the
Registrar for the certificate to commence business. The duties of the
secretary in this connection are as follows:
1. To make himself thoroughly conversant with the contents of the

Memorandum and Articles of Association.
2. To prepare the draft of prospectus or statement in lieu of prospectus.
3. To call the first board meeting and get the draft prospectus, preliminary
contracts etc., approved by the board.
4. To see that his own appointment is made and confirmed at the first
board meeting.
5. To get the necessary resolution passed for the appointment of bankers,
legal advisers and other responsible officers of the company.
6. To arrange for the listing of securities of the company.
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7. to arrange for the opening of a bank account as per the directions of the
board.
8. To secure the necessary forms and stationery and to arrange for the
preparation of the common seal of the company.
9. To see that the prospectus or statement in lieu of prospectus is filed

with the Registrar and to arrange for the issue of the prospectus to the
public.
10.To arrange with the bankers to receive the application money from the
intending investors.
11.To arrange a board meeting as soon as the minimum subscription is

reached and to get the necessary resolution passed for allotment of
shares.
12.To arrange for the refund of application money (where necessary) to

those who have not been allotted shares.
13.To issue letters of allotment/regret to applicants as per the decision of

the board.
14.To see that all the legal requirements for commencement of business
are complied with.
15.To see that a declaration is filed with the Registrar by one of the
directors or the secretary himself, stating that the conditions required to
be fulfilled for getting the certificate to commencement of business have
been complied with.
16.Regarding obtaining certificate of commencement of business, Sec. 11

of 2013 Act is silent. But it is implied that it has to be collected.
Other Aspects of Sec. 62
Besides offering Right shares to existing shareholders U/S 62(1)(a), to

increase the subscribed capital, under the same section, the company can
offer the shares to the following.
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A. ESOS to Employees:
1. U/S 62(i)(6) shares can be issued to increase subscribed capital to

employees under the scheme of “employees stock option” (ESOS). The
issue is subject to the passing a special resolution by the company and
subject to such conditions as may be prescribed.
[Note: Employees’ Stock Option Scheme (ESOS) is defined in Sec.2(27)

of Companies Act, 2013]
2. The issue of Employees Stock Option Scheme has to be approved by the

share holders, by passing a special resolution and subject to such
conditions as prescribed under the rule 12 of the companies (share
capital and debentures) Rules, 2014.
3. The company shall make certain disclosures in the explanatory

statement annexed to the notice for passing special resolution.
[Note: The company issuing ESOS has to strictly follow the provisions of
Companies Act, 2013, regarding the meaning of employee, variation in
terms of ESOS, period of ESOS, forfeiture/refund of amount by the
company and status of ESOS].
4. The companies granting option to its employees as per ESOS, will have
the freedom to determine the “exercise price” in conformity with the
applicable accounting policies, if any.
B. To Debenture Holders:
1. Sec. 62(1)(3) stipulates that debentures issued by the company or loan

raised by the company cannot be converted into shares to increase the
subscribed capital of the company.
2. If the conversion option has been incorporated prior to issue of

debentures and if conversion clause is found while raising the loan with
any Government, such debentures or loan or any part thereof can be
converted into shares in the company by an order of the Government on
such terms and conditions as appear to the Government to be
reasonable in the circumstances of the case [Sec. 61(4)].
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3. The terms and conditions fixed by central government if not acceptable

to the company, can approach tribunal for redressal, within sixty days
from the date of communication of such order.
4. Tribunal, after hearing both Government and the company can pass any
order as it deems fit.
Distinction Between Memorandum and Articles of Association
Both the Memorandum of Association and articles are important documents

of the company. The distinction between the two are as follows:
1. The memorandum is the charter of the company setting out its

constitution. It lays down the conditions of incorporation and defines the
limits and powers of the company. Articles on the other hand, contain
the bye-laws of the company for the conduct of its internal
administration. They define the rights and duties of directors, members,
etc.
2. The Memorandum states the objects for which the company is

established, whereas the Articles state the rules or manner of carrying
out the business as stated in the Memorandum. They cannot provide
anything contrary to the powers and objects set forth in the
Memorandum.
3. A company cannot be incorporated without preparation and filing of the

Memorandum with the Registrar, whereas the preparation of articles is
not compulsory. If the articles are not prepared by any company, Table
F, G, H, I, J as the case may be of the Companies Act 2013 is applied.
4. The Memorandum governs the external relations of the company i.e.,

relations between the company and the public including creditors,
buyers, sellers, debtors, etc. Outsiders dealing with the company know
what its permitted range of business is. The Articles, on the other hand,
define the relationship between the members and the management of
the company. Their main concern is to provide rules and regulations for
the internal working of the company.
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COMPANY ACT, 2013
5. The Memorandum is a primary and fundamental document. It is the

foundation of the company’s structure and is responsible for the
company’s birth. It is unchallenged on statutory matters. Articles of
association are a secondary, subordinate and subsidiary document. They
should be read and understood in the light of the memorandum. They
complement and supplement the memorandum.
6. The Memorandum lays down the scope or area of the company beyond
which the company cannot go. All acts of the company which are
beyond its scope are ultra vires or illegal and they cannot be ratified by
the company.
As Articles are subordinate to Memorandum, their activities should be

confined to the area of scope of the Memorandum. However, all acts
which are ultra vires the articles (beyond the scope of articles), but intra
vires (within) the Memorandum are not void and can be ratified by the
company by a special resolution.
7. The Memorandum can be altered only by a special resolution and

subject to sanction of the court or the Central Government as the case
may be. The articles can be altered by a special resolution and sanction
either from the court or the government is not necessary.
Statutory Declaration
A statutory declaration should be filed with the Registrar by the secretary

or an advocate or an attorney or chartered accountant1 of by a person
named in the Articles as a director to the effect that all the requirements of
the Act as to registration have been complied with.
The declaration should be in Form No. INC-21, which is concerned with the
declaration prior to the commencement of business or exercising borrowing
powers. This Form is pursuant to Sec. 11(1)(a) of the Companies Act, 2013
and Rule 24 of the Companies (Incorporation) Rules 2014.
Skill Development
You have been designated as Company Secretary of proposed Gofast
Chemicals Ltd. Prepare an Articles of Association of the proposed company
with imaginary details for submission to Registrar of Companies to obtain
Certificate of Incorporation.
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4.3 PROSPECTUS
After obtaining the Certificate of Incorporation, promoters normally go in

for public offer. This means that the promoters are willing to raise the
required capital in the form of shares or debentures or both. They will be
entering the capital market for the first time. At the time of entering the
capital market they have to release a document called “Prospectus” which
contains information on various aspects of public offer. This is statutory
information document which tells about Board of management, registered
office, the type and objectives of business to be carried out, the amount of
public issue and its price, names and address of brokers, underwriters,
bankers, the mode of payment of value of shares or debentures, the
names of addresses of auditors and lead managers, rating of the company
by rating agencies, financial information and so on.
Prospectus – Definition
Prospectus is defined in the companies Act, 2013 under Sec. 2(70).
Accordingly, “Prospectus means any document described or issued as a
prospectus and includes a red herring prospectus referred to in sec. 32 or
shelf prospectus referred to in section 31 or any notice, circular,
advertisement or other documents inviting offers from the public for the
subscription or purchase of any securities of a body corporate”.
This document is released to the public, with the following objectives.
1. To inform the public about the company that is incorporated to carryout

a business;
2. To motivate the public to invest in shares or debentures or both of the

newly formed company;
3. To preserve an authentic record of terms and conditions on which the

public have been invited to subscribe; and
4. To make the directors of the company responsible for the statements
contained in the prospectus.
Thus, Prospectus is a statutory document, issued by a company at the time

of entering capital market for public subscription.
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Observations:
1. Section 23 to 40 of the Companies Act, 2013, deal with the issue of

prospectus and the related issues.
2. Sec. 23 of 2013 Act is a new section which tells about public offer and
private placement. Sec. 23(1)(a) prescribes that a public company may
issue securities to public through Prospectus. The issue is called “Public
Offer”. Public offer includes initial public offer (IPO) or further public
offer (FPO) of securities to the public by a company, or an offer for sale
of securities to the public by an existing share holder through issue of
Prospectus.
3. Terms such as Shelf Prospectus and Prospectus shown in 1956 Act are
retained in new Act (2013).
Underwriting Arrangement
The act of ensuring the sale of shares or debentures of a company, even
before offering to the public, is called underwriting and those engaged in
such activities are called underwriters. In other words, underwriters take
upon themselves the responsibility of selling the securities to the public. If
some securities remain unsold, the underwriters will have to buy them. For
this service, they charge a commission which should not exceed 5% of the
issued price of the shares and 2 1/2% of the issued price of debentures.
Underwriting Agreement
The terms and conditions under which the underwriters agree to
underwrite the shares are embodied in a document known as “underwriting
agreement” (or contract). The underwriting agreement should include the
following:
a. The number of shares which the underwriters agree to underwrite and

an undertaking by the underwriters to take up the shares which are not
subscribed by the public.
b. The underwriters undertake that the company will have the minimum
amount of the whole issue of shares within a stipulated period.
c. The underwriting commission shall be payable only on those shares

which have been offered to the public.
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COMPANY ACT, 2013
d. An undertaking by the company, not to alter the terms of the issue

specified in the prospectus without the consent of the underwriters.
e. The rate of commission payable to the underwriters for underwriting the

shares.
f. The mode of payment of commission to underwriters.
Advantages of Underwriting
The advantages of underwriting are as follows:
1. Underwriters render valuable service in the promotion of companies by

guaranteeing the promoter against the sale of the shares and
uncertainty and risk.
2. As the promoter gets from the underwriters a large sum of cash at

once, irrespective of the sale of securities, the company is enabled to
proceed with its projects without waiting for the actual sale of securities.
3. The company gets assurance from the underwriters for subscribing the
entire capital within a definite period and thus escaping the danger of
under capitalisation.
4. Underwriters possess specialised experience and skill and many times

they provide expert advice to the companies regarding the form or price
of the new securities.
5. Underwriters are very often men of financial integrity and established

reputation, the association of whose names with an issue often raises
the issue high in public estimation.
6. As underwriters maintain working arrangements with brokers in other

areas, geographical dispersion of securities is facilitated.
7. Prospective buyers are also benefited by the underwriters. The fact that
the securities of a particular concern are underwritten by a reputed firm,
acts as a guarantee for the soundness of the securities. An investor,
therefore, is in a safer position when he buys securities which have been
underwritten.
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COMPANY ACT, 2013
The underwriter may be an individual or a body corporate. In India now the

function of underwriting is done by private firms, commercial banks
investment trusts, the Unit Trust of India, Life Insurance Corporation and
Special Financial Institutions (e.g., Industrial Finance Corporation and
Industrial Development Bank of India).
Subscription for Shares

After filing a copy of the prospectus with the Registrar, arrangements are
made for issue of the prospectus to the public. Usually an arrangement is
made with the company’s banker to receive applications, and the public is
requested to send applications to this banker along with the application
money. After the close of last day of the application, the banker forwards
the applications to the company. On receipt of applications equal to the
minimum subscription, the board of directors proceed to allot shares after
passing the necessary resolution. The secretary is instructed to issue to the
applicants, letters of allotment or regret, as the case may be.
4.4 CAPITAL AND FINANCING OF COMPANIES
Capital – The Concept
The Companies Act, 2013 does not define the term “Capital” but capital in
business context refers to the money invested in a business by a firm in
land, building, plant, machinery, furniture and in intangible assets such as
goodwill, patent rights, trade marks, etc., are called “Fixed Assets” or
“Fixed Capital”. Money used for buying and Holding Stocks, Generated
Accounts Receivable during the course of business and outstanding and
Bank and Cash Balances held on the date of balance sheet are considered
as working or floating capital. These two types of capital (Fixed and
Working) put together constitute the concept of capital.
The total capital of the business or of a company is mobilised in two forms

viz., ownership securities (kinds of shares issued by the company plus the
retained earnings in case of going companies) and crediutorship securities
(Debentures of different kinds and loan bonds).
Both shares (including different classes and Debentures are discussed) in

the following paragraphs.
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COMPANY ACT, 2013
CAPITAL OF COMPANY
Company form of business organization is best suited to raise funds
compared to sole proprietorship and partnership. There are several reasons
for this. Firstly, the capital of a company is raised through public issue of
shares. A company can appeal to a large number of people to contribute to
the share capital. Different types of shares can be issued to suit to the
requirement of different types of investors. Since there is no limit to the
number of owners, unlike in case of sole proprietorship and partnership, a
public company can issue shares to a large number of shareholders
( however, the maximum is two hundred (200) in a private company).
Naturally, the share capital of a public company will be large. Secondly, a
public company can augment its funds through issue of debenture. Thirdly,
a public limited company can also accept public deposit. Fourthly, public
financial institutions will finance public companies by underwriting shares,
by investing in securities and by direct lending.
Part A: Share Capital
Share Capital
A company raises its capital through issue of shares. Share capital of a
company consists of individual shares of fixed denomination. The shares of
a public limited company are transferable. The share capital of a company
may be nominal, authorized or registered share capital, issued capital,
paid-up capital or reserve capital.
Nominal/Authorized/Registered Share Capital: This refers to the

amount of share capital which a company is incorporated with. It is the
share capital as mentioned in the Memorandum of Association of a
company. The Capital Clause of the Memorandum Association of a company
contains the total capital which a company is proposed to be registered
with the it also contains the It is the share capital which a company is
authorized to issue.
Issued Capital: This refers to that portion of the authorized capital which
a company decides to issue for public subscription. The issued capital can
be less than or equal to the nominal capital. Normally, a company may not
issued the complete nominal capital for public subscription.
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COMPANY ACT, 2013
Subscribed Capital: The entire number of shares which a company issues

to the public may or may not be subscribed by the investing public.
Subscribed capital refers to that portion of the issued capital which the
investing public subscribes to. A good company will be able to achieve good
response to the share issue. In such a case the entire issued capital will be
subscribed. Thus, over-subscription or under-subscription depends on the
confidence reposed by the investing public in the issuing company.
Called-up Capital: This refers to that portion of the issued capital which
the company calls on shares.
Paid-up Capital: This refers to that portion of the called-up capital which
is paid by the shareholders.
Uncalled capital: The remainder of the issued capital which is not called
up is uncalled share capital. The company may call the uncalled capital any
time subject to the stipulated terms of the issue and provisions of its
Articles of Association
Reserve Capital: This refers that portion of the uncalled capital of a

company which can be called only in the event of winding up.
Meaning of Shares
The share capital of a company is divided into certain indivisible units of a
fixed amount. Each such indivisible unit is called a share. A share is one
fractional part of the share capital of a company. As per Sec 2(84) of the
Companies Act, " A share means a share in the share capital of the
company and includes stock,” except where a distinction between stock
and share is expressed or implied." Another way of defining shares, " a
share is a bundle of rights and obligations", in the sense that it carries with
it certain rights and liabilities for the shareholders when the company is a
going concern. The owner of the shares enjoys the right to receive a
proportionate part of other profits, if any, and proportionate part of the
assets of the company upon liquidation. The owner has the obligation to
pay for the full value of the shares.
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COMPANY ACT, 2013
Classes of Shares
Shares of a company can be
1. Equity Shares [(i) with voting rights or (ii) with differential rights as to
dividends, voting or otherwise in accordance with rules as may be
prescribed.]
2. Preference Shares
Equity Shares: Sec. 43 of 2013 Act states that “equity share capital” with
reference to any company limited by shares, means all share capital which
is not preference share capital.
Though the above definition appears vague, it can be said that equity
shares do not carry preferential rights enjoyed by preference shareholders.
In other words, equity shareholders do not enjoy the two important
preferential rights:
a. Preferential right as to payment of dividend
b. Preferential right as to repayment of capital at the time of liquidation of

the company
Preference Shares: According to Sec 43 of 2013 Act, (1) Preference

Shares are those which have
a. Preferential right as to the payment of dividend
b. Preferential right as to the return of capital when the company goes into
liquidation.
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Kinds of Preference Shares
The following gives an idea about the kinds of preference shares:
a. Cumulative preference shares: In a particular year when the

dividend is not paid, it will not lapse. It will get accumulated and paid
out of subsequent year's profits. However, the company need not pay
dividend in case insufficient profits.
b. Non-cumulative preference shares: Under this category the dividend

will not accumulate for the preference shareholders in case inadequate
profits in a year. These preference shareholders cannot claim arrears of
dividend in the subsequent year.
In the absence of specific provision to the contrary in the Articles of

Association of the company preferences shares are presumed to be
cumulative.
c. Participating preference shares: In addition to enjoying a fixed rate

of dividend, these shareholders enjoy a share in the surplus profits of
the company remaining after paying dividend to equity shareholders at
the stipulated rate. The surplus profits will be distributed among the
participating preference shares and equity shareholders in the agreed
ratio.
In the absence of any provision to the contrary in the Articles of

Association of the company, all preference shares are deemed to be non-
participating in nature.
d. Non-participating preference shares: The holders of these shares

are entitled only for a stipulated rate of dividend. Surplus profits, if any,
will be enjoyed only by the equity shareholders.
e. Convertible preference shares: This kind of shares carry conversion

clause. The holders of these shares enjoy the right to convert them into
equity shares within a stipulated period.
f. Non-convertible preference shares: As the name suggests, the

holders of these shares do not enjoy the right to convert their shares
into equity shares.
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g. Redeemable preference shares: Redeemable preference shares carry

the provision of redemption of capital to the shareholders during the life
time of the company. However, the issue of redeemable preference
shares is subject to the following conditions,
a. The Articles of Association of the company must specifically provide

for the issue of redeemable preference shares
b. Redemption is possible only when the shares are fully paid
c. Redemption is possible only out of the profits of the company which

would otherwise be available for dividend or out of the proceeds of
the fresh issue of shares made for the purpose of redemption.
d. In case where the redemption is made out of profits, a sum

equivalent to trhe nominal value of the shares redeemed must be
transferred to the 'capital redemption reserve account'
e. Any premium payable on redemption is possible only out of the

profits of the company or out of the share premium account
maintained by the company.
Any redemption of preference share capital will not be treated as

reduction of capital. The provisions of the Companies Act relating to
reduction of capital need not be observed for redemption of
preference share capital. Notice of redemption of preference shares,
if any, shall be given to the Registrar within 30 days of the date of
redemption. Contravention of any provision of the Companies Act
relating to redemption shall result in fine which may extend to Rs.
1,000.
h. Irredeemable preference shares: The issue of irredeemable pref-

shares is prohibited. As per Sec 55 of the Companies Act, 2013 all
existing preference shares which are irredeemable or redeemable not
earlier than 10 years are compulsorily redeemed. Further, companies
can issue only such preferences shares if Articles authorises in future as
are redeemable for not more than 20 years. In case of infrastructural
projects, preference shares can be issued for more than twenty years.
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Advantages of Preference Share Capital
a. The company can mobilize funds from such investors who prefer
reasonable safety of their capital and fixed rate of return.
b. Funds can be raised by the company without diluting control.
c. Capital in the form of preference shares can be raised by the comp any
for a longer term without creating charge or mortgage on its assets,
unlike in case of debenture issue.
d. Preference shares provide flexibility in financing arrangement of the

company. By inserting redemption feature management ca keep the
door of the company open for alternative sources of funds for further
financing.
However, in spite of the above advantages for the company, preference

shares are not popular with the investors
Rights Enjoyed by Preference Shareholders:
Preference shares carry certain rights which equity shareholders do not

enjoy. Preference shareholders enjoy priority rights in regard to the
payment of dividend and repayment of capital. Preference shares suit
those investors who are not willing to take risk and at the same time are
interested in receiving steady and higher return than the debenture
holders. The rights enjoyed by the preference share holders can be enlisted
as follows:
i. The preference shareholders enjoy preferential right as to the payment

of dividends. They are paid dividend in preference over equity
shareholders.
ii. The preference share holders may enter into agreement with the issuing
company to participate in surplus profit after paying dividend to equity
shareholders.
iii. Further, the cumulative clause will provide for accumulation of dividend
in a year when dividend is not given because of non-availability of
profits.
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iv. Though the preference share holders do not enjoy normal voting rights,
they can vote on all matters affecting their interest. They cannot on
matters like, (a) When the dividends are in arrears, (b) Creation of prior
charge, (c) Heavy accumulation of debts, (d) Reorganization,
consolidation schemes, etc
v. Right of redemption is an important right, wherein the preference

shareholders will get the repayment of their capital after the stipulated
period of time as per the terms of the issue of shares.
Distinction between Equity Shares and Preference Shares
The actual difference between Equity Shares and Preference Shares can be
understood from the discussion in the previous paragraphs. However, the
specific points to compare the two kinds of shares can be enumerated as
below.
1. Equity shares are called ordinary shares because the equity

shareholders do not enjoy the preferential rights which the preference
shareholders enjoy. The preferential rights enjoyed by the preference
shareholders are, a) preferential right as to payment of dividend, b)
preferential right as to the repayment of capital at the time of winding
up of the company.
2. The rate of dividend on equity shares is not certain. The shareholders

may or may not get dividend during a particular year. The payment of
dividend to equity shareholders is subject to the discretion of the Board
of Directors of the company. However, dividend is pre-fixed in case of
preference share holders. The preference shareholders will receive
dividend as per the stipulated rate fixed at the time of issue of shares.
3. Equity shareholders enjoy normal voting rights, which the preference

shareholders do not enjoy. Equity share holders can vote on all matters
which come before the meeting. On the other hand, preference
shareholders can vote only on those matters which affect their interest
directly.
4. Equity shareholders will have to forgo dividend when it is not declared

during any year. On the contrary, in case of cumulative preference
shareholders the dividend of a year will accumulate when not paid.
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Dividend for such a year will not lapse It will be paid during the
subsequent year.
5. Equity shareholders will not get back their capital from the company
during its life time. In other words, there is no redemption of capital for
the equity shareholders during the life time of the company. However, in
case of redeemable preference shareholders the capital will be
repayable to the shareholders on the expiry of the stipulated period for
which such shares are issued.
6. Though equity shareholders do not enjoy preferential rights, they are

more preferred by the investing public. The listed equity shares enjoy
more liquidity in the stock market. Preference shares are illiquid.
Issue of Shares
The shares can be issued at par, at premium, or at discount.
Now, let us discuss in detail about these issues.
a. Issue of shares at par

Normally, shares are issued at their par value or face value, i.e., at a price
written on the face of share certificates concerned. No legal restrictions are
thereupon the issue of shares at par.
b. Issue of shares at premium

Sometimes, a growth oriented company with good prospects issues shares
at a premium i.e., at a price above the par value. There are no legal
formalities to be observed while issuing shares at the premium and the
company is free to make such an issue whenever it desired so. The
company is also free to charge varying premia in respect of shares of the
same class.
Section 52 of the Companies Act, however, lays down certain restrictions

upon the use of premium amount so collected. The amount collected by
way of premium shall be transferred to the share premium account and
this account is to be treated as share capital for reduction purposes, except
when it is be used for the following purposes:
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★ To issue fully paid bonus shares to members.
★ To write off the preliminary expenses of the company,
★ To write off the expenses of or the commission paid or discount allowed

on, any issue of shares or debentures of the company.
★ To provide the premium payable on the redemption of redeemable

preference shares or debentures.
★ To the purchase of its own shares or other securities under section 68.
Where shares are issued at a premium for consideration other than cash, a
sum equal to the amount of premium must be transferred to share
premium account. The share premium account shall be disclosed in the
balance sheet every year.
c. Issue of shares at Discount

When shares are issued for a consideration less than their par value, it is
called issue of shares at discount. A company is permitted to issue shares
at a discount only if it complies with the following provisions of Section 54
of the Companies Act:
i. The shares must be of a class already issued.
ii. At least one year must have elapsed since the company became
entitled to commence business.
Section 53 of the Companies Act, 2013, restricts the issue of shares at

discount, except Sweat Equity Shares as provided in Section 53. Any share
issued by a company at a discounted price shall be void.
Issue of Sweat Equity shares

For the purposes of Section 54, the sweat equity shares means equity
shares issued by a company to its directors or employees at discount, or
for consideration other than cash for providing their know-how or making
available rights in the nature of intellectual property rights or value
additions by whatever name called.
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For the issue of sweat equity shares the following conditions are to be
fulfilled:
★ Such issue shall be authorised by a special resolution passed by the

company in the general meeting.
★ The resolution shall specify the number of shares, their value and the
class or classes of directors or employees to whom such equity shares
are to be issued.
★ At least one year must have elapsed since the company became entitled
to commence business.
★ The sweat equity shares are to be issued in accordance with the

regulation issued by the Securities Exchange Board of India in this
behalf.
Merits of Shares
Shares here refer to share capital as defined in Sec. 2(84) of companies
Act 2013. Companies raise their capital mainly from shares, as it has
several advantages to the company. When a company issues shares, it is
essentially selling a piece of ownership of the company to investors. Shares
issued by the company can be resold many times. The resale of shares by
holders depends upon the demand for shares in stock market and
perceived value of the company that has issued it. In general following are
the merits a company enjoys by issuing shares.
1. Raising Capital: Companies have many sources of raising capital

including selling shares. Except the share capital source, other sources
are painful. Interest need not be paid on the capital raised through this
source. Equity shares do not create any obligation to pay a fixed rate of
dividend as in case preference shares. Dividend is paid to shareholders
only when sufficient profit is earned by the company. Even after earning
profits, the Board may skip dividend to share holders due to want of
liquidity or for utilisation of profit for working capital or for any other
immediate expenditure.
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2. Source of Long-term Finance: Issue of shares, as a source of capital,

need not be paid back, except on liquidation of the company. Share
capital serves as a long term and permanent source of finance. The
funding (share amount) is committed to the concerned business or
project. But owners of shares (investors) can realise their share money
at any point of time by selling their share holdings. The sale or resale of
shares will not affect the capital position of the company. Hence it is
considered as a strong source of long-term finance to the companies.
3. Credit Worthiness: Raising capital through shares does not affect any
asset position of the company. On the other hand, it enhances the credit
worthiness of the company. This means that company can raise further
capital on the security of these assets. It eases the further flow of
capital to the company.
4. Trading on Equity: Share capital is considered as risk capital. In the

bad period of the company, it can trade on equity. This means it can
vary its debt-equity ratios and find money for its working capital. The
company can take risk of raising more capital through debentures and
other borrowings in good times. In bad period it can lean on equity
shares. Thus, equity shares provide a good playing field to balance good
and bad times of the company.
5. Cost of Capital: Equity share capital is less expensive compared to

borrowed capital. It is considered as ownership security and
shareholders are considered as residual claimants of earnings or of their
own funds. As share holders are the owners of the company, they
cannot claim any interest or dividend on their investments, except
receiving dividend or their portion of profit in good times of the
company. The company will not have any debt servicing charges as in
case of borrowed capital.
6. Growth Advantage: As the burden of cost of capital is almost Zero,

share holders (investors) will be benefited only by the growth of the
organization through good governance. Share holders expect their
business (company’s business) deliver value to them through exploring
and executing growth ideas. Thus, share capital not only reduces cost of
capital, but also provides an opportunity to the companies to grow and
create value for the business it does.
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7. Ownership: Share capital creates ownership to share holders. Share

holders acquire voting rights and will have voice in the management of
the company. Active shareholders do control the operations of the
company through their voting rights. Even small holders can join
together to raise their voice against any misdeed or malpractices of
BOM which hinder the growth of the company. The Indian companies
Act, 2013 has laid down provisions empowering any share holder to sue
against BOM, directors, auditors or any other consultant who has cause
damage through his misdeed or violating any provision of the Act. These
provisions in the 2013 Act has made the share holders as real owners of
the company.
8. Profit and Wealth Maximisation: Raising capital through shares,

reduces certain costs and all the company to grow in terms of increased
profits and increased value of assets. Not all the profits or assets of the
company will be distributed to the share holders. By retaining major
portion of earnings, the company adds value to the asset and creates a
good image to the company. Share holders enjoy all these benefits. That
is why share capital has become a major source of finance to the
company.
9. Voting Rights: Share capital, as a major source of finance, creates

innumerable small holders of share and legally all these small and big
holders are the owners of the company. Every share holder has the
decision-making power, as every issue of the company will be discussed
with share holders in the annual general meeting. BOM will execute all
decisions of AGM and the directors will be delegated with authority to
transact the business of the company. Every share holder, irrespective of
the size of the holding, will have the voting right on every issue
discussed in AGM and exercises his/her right for or against the issues
that come up for discussion.
Thus, companies have been considered as democratic organisations, as

every share holder has the power to participate in the operations of the
company and give his/her decision through voting.
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Demerits
Raising capital through shares has certain demerits
1. Demanding and time consuming: Issue of shares in the capital

market whether it is IPO or FPO, is a time consuming process and it is
demanding too. This will take away the management focus on core
business of the company. Company will be worried till such time the
required finance is subscribed by investors towards share capital. The
cost of issue will also be expensive.
2. Trading on Equity not Possible: If the company relies only on equity

capital, “Trading on Equity” cannot take place and the share holders will
be put to loss during the growth and successful (boom) period of the
company. If they cannot balance the capital position with borrowed
finance, major portion of earnings in boom period will be distributed to
share holders and less or no portion of profit can be retained for future
wealth creation.
3. Over-capitalisation: Issue of more shares to raise capital results in

over-capitalisation. This situation puts down the morale of investors as
the company will pay less dividend to them. It is difficult to overcome
the situation.
4. Inflexibility of Capital Structure: As the shares once issued cannot

be paid back till liquidation or winding up of the company with this,
capital structure of the company will not be flexible. Proper balancing
between equity and debt will not be possible to take advantage of boom
period of business. Inflexible capital structure with more issue of equity,
will hamper the interest of investors and the business of the company
becomes stagnant.
5. Investors’ Anxiety: When more funds are to be raised through share

capital, investors always look out the background of promoters in case
of IPO and study the financial statements of the company for 3 to 4
years in case of FPO. In both the cases, investors weigh too much to
invest and it may cause delay in raising funds for the company. But the
companies will resort more to raise own funds (share capital) rather
than borrowing as it will be expensive. But the problem in this case is to
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satisfy and clarify the doubts of investors through clean analysis of

financial statements, which will be difficult task for companies.
6. Legal Hurdles: The companies will have to pass through various legal
barriers to raise share capital. Companies cannot raise equity capital till
such time they are incorporated as per the provisions of companies Act.
Even issue procedure is more legal-oriented and it will be a strenuous
job for inexperienced promoters.
7. Speculation: Equity shares of good companies are subjected to hectic

speculation in the stock market. Their prices fluctuate frequently, which
are not in the interest of the company.
8. Recession Period Management: During recession period, earnings

will be less and rate of dividend comes down. This results in fall in
market price of such shares and finally investors may lose their capital.
Managing recession time and keeping investors in restful mood is a
tough task for the company.
9. Loss on Liquidation: At the time of liquidation, share holders will be

the last recipients of proceeds of realization of assets. The share holders
may or may not get any money of share value they hold. On many
liquidations, share holder lose their money. Hence the demerit of losing
investment by share holders is a very painful situation. They cannot
bear the brunt of this burden.
Modes of Issue of Securities
Section 23 of the Companies Act, 2013, contains provisions relating to the

mode of issue of securities.
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COMPANY ACT, 2013
Figure: Mode of Issue of Securities
Public offer through Prospectus

This mode of issue of shares is applicable to the initial public offer, further
public offer, or offer for sale by an existing shareholder. Any public
company which intends to make public offer has to obtain permission from
stock exchange to permit listing of shares. Therefore, public offer can be
made only by listed companies.
Private Placement
Private placement means offer of securities or invitation to subscribe to
securities, to a select group of persons through private placement offer
letter. Section 42 (2), limits the number of subscribers in case of private
placement to 50, or such number as may be prescribed [excluding qualified
institutional buyers, and employees of the company being offered securities
under a scheme of employees stock option in a financial year and on such
conditions (including the form and manner of private placement) as may be
prescribed]. This provision of the 2013 Act is in line with the provision of
the 1956 Act.
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COMPANY ACT, 2013
The 2013 Act requires that certain specified conditions are complied with,
in order to make an offer or invitation of offer by way of private placement
or through the issue of a prospectus.
★ The allotments with respect to any earlier offer or invitation may have
been completed.
★ All the money payable towards the subscription of securities shall be paid
through cheque, demand draft or any other banking channels but not by
cash.
★ The offers shall be made only to such persons whose names are recorded
by the company- prior to the invitation to subscribe, and that such
persons shall receive the offer by name.
★ The company offering securities shall not release any advertisements or

utilise any media, marketing or distribution channels, or agents to inform
the public at large about such an offer [section 42 of 2013 Act].
Rights Issue [Section 62]
According to Section 62 of the Companies Act, if a public company wants to

increase its subscribed capital by allotment of further shares after two
years from the date of its formation or one year from the date of its first
allotment, whichever is earlier, should offer share at first to the existing
shareholders in proportion to the shares held by them at the time of offer.
Such an issue is called the ‘Rights Issue’.
The shareholders have no legal binding to accept the offer and they have
the right to renounce the offer in favour of any person. Shares of this type
are called right shares. According to Section 62, the company has to satisfy
certain conditions to make right issue which are as follows:
★ Right shares must be offered to the equity shareholders in proportion to

the capital paid on those shares.
★ A notice should be issued to specify the number of shares issued.
★ The time given to accept the right offer should not be less than 15 days
and not exceeding thirty days from the date of offer.
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COMPANY ACT, 2013
★ The notice also should state the right of the shareholders to renounce the
offer in favour of others.
★ After the expiry of the time given in the notice, the Board of Directors
has the right to dispose the unsubscribed shares in such a manner, as
they think most beneficial to the company.
Issue of Bonus Shares [Section 63]

A company may be following a policy of not distributing all the profits every
year. It may accumulate large reserves over time. If the Articles so permit,
it may convert a part of these reserves into share capital by issuing fully
paid bonus shares to the existing shareholders. “Bonus is something given
in addition to what is usually or strictly due. It is distributed among the
shareholders, in addition to dividend, by making partly paid shares fully
paid free of cost. Thus, the issue of bonus shares helps the company to
capitalize its undistributed profit paving way for increased resources and
earning capacity of the company.
The Companies Act, 2013 has introduced provisions enabling issue of

Bonus Shares to the members, in any manner out of:
★ Its free reserves [The term ‘free reserves’ should not include any change
in carrying amount of an asset or of a liability recognised in equity];
★ The Security Premium Account; or
★ The capital redemption reserve account.
The following conditions are to be complied with for the issue of bonus
shares:
★ The issue of bonus shares must be authorised by the Articles of the

company.
★ It must be recommended by a Board resolution and then approved by

the shareholders in general meeting.
★ It must be in accordance with the guidelines issued by SEBI.
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COMPANY ACT, 2013
Duties of Secretary relating to the issue of Bonus Shares
1. To ensure that Articles permit the issue of bonus shares. If not, the
Articles shall be duly amended.
2. To ensure mat the bonus issue is within the limits of authorised share
capital of the company. If not, proper amendment shall be made in
Memorandum and Articles of the company.
3. To convene a meeting of the Board of directors.
4. To take decision on the bonus issue and to fix the date, time, place and
agenda of the shareholders’ meeting.
5. To inform the stock exchanges of Board’s decision to issue bonus

shares, if the company is enlisted.
6. To issue the notice of the general meeting along with the explanatory
statement.
7. To arrange for convening the meeting and getting the resolution passed
approving the bonus issue.
8. To ensure that the norms laid down by SEBI are strictly adhered to.
9. To give advertisement in newspaper about the close of register of

members and transfer books.
10.To prepare a list of the members entitled to receive bonus shares.
11.To convene Board meeting to decide the manner and proportion in

which the shares are to be allotted.
12.To send allotment letters to the shareholders after the allotment is

approved by the Board.
13.To send circular along with allotment letter explaining how and on what
basis the allotment has been made.
14.To make the share certificate ready for delivery.
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15.To arrange preparation of fractional certificates if the bonus issue

involves issue of fractional certificates.
16.To file a return of allotment with the Registrar within 30 days of the
issue.
Further Issue of Share Capital

A company may require additional funds for financing its expanding
business and for this purpose it may decide to make a subsequent or
further issue of shares under one of the following two conditions:
★ When the share capital already issued is less than the authorised capital
of the company and the proposed further issue of shares is within the
limits of the authorised capital.
★ When the share capital already issued is equal to the authorised capital
of the company and the intended further issue of shares is therefore,
beyond the limits of the authorised capital.
Under both the conditions, further issue of shares is possible only if the
company is authorised by its Articles to do so. If the Article do not provide
for it, then the Articles must first be altered to that effect by passing a
special resolution. In addition to this alteration, Board of directors’
resolution is required when the proposed further issue is within the limits
of authorised capital. If the further issue exceeds the limit of authorised
capital, a sanction of the shareholders by means of an ordinary resolution
must be obtained for increasing the authorised capital after the Board’s
resolution. It must be noted that if the Articles provide that a special
resolution would be required, the company must pass a special resolution
instead of an ordinary resolution.
Receiving of Applications
The following are the steps involved in the issue of prospectus and
receiving of applications:
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COMPANY ACT, 2013
1. Appointment of Bankers
A public company intending to raise share capital from the public has to
appoint a scheduled bank as Banker to the Issue. A special account is to be
opened for this purpose with the banker. The banker to the issue will
receive application money and other payments on allotment and calls on
behalf of the company. The Secretary secures the consent of the bankers
and the company has to fill up a special application form for opening a
special banking account with the bankers. In order to open the bank
account, the following documents are to be supplied to the banker:
★ A copy of Memorandum;
★ A copy of Articles of Association;
★ A certified copy of Certificate of Incorporation;
★ A certified copy of the Board’s resolution authorizing the opening of bank

account;
★ Specimen signatures of the persons authorized to operate the bank

Account on behalf of the company;
★ Duly completed application form for the opening of current account.
The bankers usually open a separate account like share application

account, allotment money account, calls money account in which the
respective amounts when received are credited. A regular current account
for subsequent banking transactions is opened later.
2. Appointment of Underwriters and Brokers

A company which invites the public to subscribe for its shares must ensure
that the whole issue is taken up. For this purpose, the public companies
use to enter into an agreement with an underwriter. The term underwriting
means that a person agrees to take shares specified in the underwriting
agreement, if the public fail to subscribe for them. Consideration for this
contract takes the form of a commission whether or not the underwriters
are called upon to take up any shares. Likewise, a share broker may be
appointed to manage promotion and marketing of shares and debentures.
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COMPANY ACT, 2013
3. Securing of Stock Exchange Quotations

Listing of securities in recognized stock exchange has been made
mandatory for public companies which raise share capital from the public.
Listing means admission of shares in a stock exchange for trading.
Therefore, before issuing shares to the public, the company shall apply for
listing. The company has to complete the formalities for obtaining listing
permission for its shares.
4. Public issue of shares
After completing the above formalities the subsequent procedure of the

issue of share capital will be as follows:
a. Approval and filing of prospectus: The draft copy of the prospectus

dated and duly signed by the directors must be filed with the Registrar.
b. Publicity and issue of prospectus: After filing with the Registrar, the
prospectus can be issued to the public, provided it should be issued
within 90 days from the date of such filing. An advertisement relating to
the issue of prospectus will be given to the press and copies of
prospectus will be made available at the company’s bankers and its
head office. Every application form for shares issued to the public must
have along with it a copy of the prospectus.
c. Receiving of applications: The intending subscribers are requested to

send their applications directly to the company’s banker or through the
authorized brokers along with application money. On receipt of share
applications, the bank issues receipt for the money received to the
applicants and the amount received by way of application money will be
credited to the share application account of the company. The bank will
enter the details of application money received on separate sheets and
send them to the company along with the application forms collected
every day.
d. Scrutiny of applications: After receiving the application forms, the

Secretary shall arrange for their scrutiny. Irregular and incomplete
forms may be rejected. The sheets are checked with the applications
and each entry in the sheet is numbered consecutively in red ink. These
numbers are then entered in red ink on the top right hand corner of
each application which becomes the identifying number of the applicant.
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e. Sorting of applications: After all the applications have been

scrutinized, the same will be sorted either in the alphabetical order of
the names of the applicants or according to the number of shares
applied for.
f. Closure of Application list: The application lists will be closed at the

predetermined time or when the issue is sufficiently ove subscribed.
Public notice will be issued to this effect to the Press and stock
exchange.
g. Recording of Applications:The applications now will be entered in the

‘Share Application and Allotment List’. The list may be prepared in the
form of a bound book or in the loose-leaf form. All entries of the sheet
must be checked with the application forms and with Banker’s List. It is
the usual practice to prepare separate application and allotment lists for
each letter of the alphabet and then compiles a final summary list to
record the totals of separate lists.
Allotment of Shares
The application for shares by intending shareholders is an offer for the

purchase of shares and when accepted by the company is known as an
allotment of shares. Allotment is merely the act of allotting, distributing,
and appropriating shares of a company to particular persons, either in
response to applications or as per contracts already entered into with
regard to them.
A valid allotment must be made in accordance with provisions of the

Companies Act, 2013, and the Indian Contract Act, 1972.
5. Special Provisions
The provisions relating allotment of shares as contained in the Companies

Act are as follows:
a. Registration and issue of prospectus: A copy of the prospectus is to

be filed with the Registrar by the company before making public issue of
shares. Prospectus shall be issued within 90 days from date of such
filing.
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COMPANY ACT, 2013
b. Minimum subscription: The minimum subscription amount as

disclosed in the prospectus must be received within 30 days of the issue
of prospectus, or such other period as may be specified by the
Securities and Exchange Board. The object of this provision is to prevent
any company commencing business with inadequate resources. The
following are the other conditions relating to minimum subscription:
★ Every listed public company, making initial public offer of any security
for a sum of Rs. 10 crores or more, shall issue the same only in
dematerialized form.
★ The provisions of the Depositories Act 1996 are to be complied with in

the above case.
★ A company making any rights or public issue of shares must receive at

least 90 per cent subscription of the entire issue before making the
allotment of shares to the public. If this amount is not received, the
entire amount collected shall be refunded to the applications at the end
of 90 days from the closure of issue.
c. Application money: The company must receive at least 5 per cent

cash, of the nominal value of shares, as application money.
d. Application money to be deposited in a scheduled bank:

Application money must be deposited in a scheduled bank. It cannot be
withdrawn till the company secures the certificate to commence the
business. Where such certificate has already been obtained, it cannot be
withdrawn until the entire amount payable on applications for shares in
respect of minimum subscription has been received by the company.
e. Refund of application money in specific cases: If minimum

subscription is not received by the company within the specified period,
the company has to refund the share application money without interest
to the applicants. If such money is not repaid within 130 days after the
issue of the prospectus, the directors of the company shall be jointly
and severally liable to repay that money with interest from the expiry of
130th day.
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f. Opening of subscription list: No allotment can be made until the

beginning of the fifth day after the publication of the prospectus or such
later time as may be prescribed for the purpose in the prospectus. The
fifth day is to be counted from the day when the prospectus was
published in a newspaper or was otherwise notified to the public.
g. Prospectus to be delivered to the Registrar: A public company

having share capital shall not make any allotment of shares before filing
prospectus with the Registrar.
Compulsory Listing of all Public Issues

It has been made compulsory for every public company, which makes an
issue to the public, to arrange with one or more recognized stock
exchanges to list its shares.
Transfer of Shares
The shares in a company are movable property and they can be transferred
in the manner provided by the Articles of the company. Shares are the
personal property of the shareholder and he has power to transfer his
shares. It is an absolute right which cannot be taken away by any provision
in the Articles. In the absence of any restriction in the Articles of
association the shareholder can transfer his shares to any person even to a
pauper or even if the transfer is made to escape liability provided that the
transfer is real and bonafide in the sense that it is an out and out disposal
of the property without retaining any interest in the shares.
Procedure for Transfer of Shares

The provisions relating to transfer are laid down in the Act. The form of
transfer and the method of transfer are generally prescribed by the
Articles. A transfer must be in writing, duly stamped and executed and
signed both by the transferor and the transferee. The instrument of
transfer must contain the name, address and occupation, if any, of the
transferee. The instrument so executed must be delivered to the company
along with the certificate of shares or the letter of allotment as the case
may be.
Every instrument of transfer of shares must be in the prescribed form and

before it is signed by the transferor and any entry is made therein, it shall
be presented to the prescribed authority who shall stamp thereon the date
of presentation. This form will then be executed by the transferor and the
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COMPANY ACT, 2013
transferee and completed in all other respects and delivered to the

company for registration. where the shares are quoted on or dealt in a
recognised stock exchange, such form shall be delivered to the company
within two months from the date put on the form or before the register of
members of the company is closed for the first time after the date of
presentation, whichever is later. Where the shares are not so dealt in on a
recognised stock exchange, it must be delivered within two months from
the date put on the form.
Application for Transfer: The application for the registration of a transfer

of shares may be made either by the transferor or the transferee. If the
application made by the transferor relates to partly paid-up shares, if no
objection is made within two weeks the transfer must be registered. Where
fully paid shares are proposed to be transferred or where the application is
made by the transferee, such notice is not required.
Transfer of Shares held in Joint Names
In case of shares held in joint names, the transfer form must be signed by
all of them unless a specific authorisation is made in favour of any or some
of them. Thus, is Shanta G. Pommeret v. Sakel Papers (P) Ltd.
(1990) 69Comp. Cas. 65 (Bom.), where though four persons were shown
as transferors of shares, only three had signed the share transfer form and
fourth had not authorised the others to sign on his behalf, it was held that
transfer of shares was not valid.
Who may Transfer: Any person who has properly become member of the
company has a right to transfer his shares. An infant, who is member, has
capacity to transfer his shares. A legal representative can transfer the
shares of a deceased member.
Registration of Transfer
Until the transfer is registered by the company, it is not complete.
Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman

Publishers Ltd. (1992) 73 Comp. Cas. 80 (Ker)] Once the instrument of
transfer is lodged with the company it shall register the transfer without
delay. When a transfer is registered, it relates back to the time when the
transfer was made.
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COMPANY ACT, 2013
Refusal to Register Transfer of Shares
Though a member has an absolute right to transfer shares, a company

may, if authorised by its Articles, refuse to register the transfer of shares.
Where a company refuses to register any transfer, it shall within two
months from the date on which the instrument of transfer was delivered to
the company send notice of the refusal to the transferee and the transferor.
In the case of default the company and officer in default is liable to a fine
upto Rs. 500 per day the default continues. Circumstances in which a
company can Refuse to Register Transfer of Shares
Refusal by the company on the ground that the registration of transfer will
create share certificates of ,less than marketable lot and would be in
contravention of Articles of association shall not be valid. Company Law
Board in Dipak Kumar Jayantilal Shah Vs. The Atul Products Ltd. held
that there is no prohibition under the companies Act or any other Act for
holding share certificates below marketable lots. The provisions of law will
override the provisions of Articles of association.
In this case, the appellant was holding five shares in the respondent
company. He requested the company to transfer one share each in the
names of four groups of joint holders. He submitted all the relevant
documents for the purpose. The company refused registration of transfer
on the ground that it would result in creating share certificates of less than
marketable lot which would be in contravention of the provisions of the
transferability as contemplated by the Articles of association. However
since the appellant had lodged four transfer forms along with share
certificates, the company was directed to register the transfer of shares in
the transfer form first considered by the board.
Transmission of Shares
In Table A, the word “transmission” is put in contradiction to the word

“transfer”. One means a ‘transfer’ by the act of the parties; the. other
means ‘transmission’ by operation of law.
Form the above, it is apparent that the transmission of shares means

transfer of title in shares by ‘operation of law’. In other words, the
transmission of shares signifies involuntary assignment of shares because
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COMPANY ACT, 2013
in this case in property in shares passes ‘not by the act the parties’, but by
‘operation’ operation of law. For instance:
i. on the insolvency of a shareholder, property in shares passes to his

Official Receiver-who shall become entitled to the shares owned by the
insolvent;
ii. on the death of a shareholder, the property in shares passes to his legal
representatives who shall become entitled to shares owned by the
deceased;
iii. on the lunacy of a share holder, the property in shares passes to the
administrator appointed by the court.
A person, who is entitled to any shares on transmission, shall enjoy the

same right as to dividend and other privileges as if he was the original
shareholder. But such a person shall not be entitled to exercise any rights
as a member at the meetings of the company until his name is registered
as a Member in the Register of Members.
The Articles of a company usually contain provisions relating to

transmission of shares. As regards transmission of shares, the legal
representative has two options. He may get himself registered as a
member of the company or he may transfer shares to some other person.
Thus, it is abundantly clear that in all the above mentioned instances i.e.
on the death or lunacy or insolvency of a member the transmission of
share takes place by operation of law.
Distinction between ‘Transfer’ and ‘Transmission of Shares’
1. Nature of Act: Transfer is a ‘deliberate act’ of the shareholder, while

transmission occurs by ‘operation of law’.
2. Introduction of Transfer: Transfer requires an execution of an instrument

of transfer, while the transmission requires an evidence showing the
entitlement such a Succession Certificate etc.
3. Consideration: Transfer of shares is generally against consideration

whereas in transmission, there is no need for consideration.
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COMPANY ACT, 2013
4. Stamp duty: For the ‘execution of transfer’ stamp duty is payable,

whereas no stamp duty is payable in case of transmission.
5. Registration changes: Company charges for ‘registering a transfer’, but

no charges are levied for registering transmission.
6. Liability of the Transferor: In case of transfer the liability of the

transferor cases as soon as transfer is complete, whereas in
transmission the shares continue to be subject to original liabilities.
Lien on Shares
A lien is the right to retain possession of a thing until a claim is satisfied. In

the case of a company lien on a share means that a member would not be
permitted to transfer his shares unless he pays his debt to the company.
The Articles generally provide that the company shall have a first lien of
the shares of each member for this debts and liabilities to the company.
The right of lien is not inherent but must be clearly provided for in the
Articles. The Articles may give the right of lien over shares either for
unpaid calls or for any other debt due by the member to the company. The
company may have lien on fully paid-up shares. The lien also extends to
the dividends payable on the shares.
The death of a shareholder does not destroy the lien. The right of lien can
be exercised even though the claim has become barred by law of
limitation. Where the liability of a shareholder towards the company is
disputed by him, it does not deprive the company of its right of lien on the
shares. But a company will not be able to exercise its right of lien where
the shareholder has mortgaged his shares before he has incurred any
liability to the company and the company has notice of it. Similarly, a
company will loose its lien if it registers a transfer of shares subject to the
lien.
Enforcement of Lien: A company can enforce its lien on shares by the

sale of those shares in case the member defaults in payment of the
amount due against him. In the absence of an express power of sale in the
Articles, the permission shall have to be sought from the Court.
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COMPANY ACT, 2013
In case the amount received on sale of such shares is more than the
amount due, the excess shall be payable to the former owner. Power to sell
should be exercised after a notice has been given to the shareholder
requiring him to pay the debt due to the company within a specified time.
It should be made clear that the company intends to sell the shares in
enforcement of the lien.
But a company cannot enforce the lien by forfeiting the shares. A provision
in the Articles to such effect is void amounting to reduction of capital
without an order of the Court.
But the Articles may provide that the company is not bound to recognise
such interest of third parties. Even there the ordinary rules of law and
equity will be applicable.
Surrender of Shares
The Companies Act does not provide for surrender of shares. Shares are
said to be surrendered when they are voluntarily given up. The Articles of a
company may authorise the directors to accept surrender of shares.
Surrender of shares is valid where it is done to relieve the company from
going through the formality of forfeiture of shares and the shareholder is
willing to surrender the shares. A surrender and a forfeiture have
practically the same effect, the only difference being that the former is
done with the assnt of the shareholder while the latter is done at the
instance of the company.
A surrender of shares will be void if it amount to a purchase of shares by

the company or if it is accepted for the purpose of relieving a member of
this liabilities. Every surrender of shares, whether fully paid-up or not,
involves a reduction of capital which is unlawful except when sanctioned by
the court. But, fully paid shares can be surrendered without leave of the
court provided the surrender does not involve the reduction of capital i.e.,
in exchange for other shares of the same nominal value.
The company, however, cannot recover more than the difference between
the sum due to the company in respect of the shares and the sum received
by the company (Re Belton).
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COMPANY ACT, 2013
A person ceases to be a member of the company on a valid surrender of

shares. But he shall be liable as a contributory as a past member of the
company if it is wound up within twelve months of his surrendering his
shares. Shares which have been validly surrendered can be reissued in the
same way as forfeited shares.
If this is done no reduction in capital occurs. Notice that, no consideration

can be paid by the company in exchange of surrendered shares since it
would amount to purchase of its own shares, which is specifically
prohibited under Section 77 of the Act. Thus, where the surrender was
accepted in consideration of the discharge of the registered holder from his
liability in respect of them, it was held that it amounted to purchase of its
own shares by the company and was thus ineffective.
Forfeiture of Shares
A company has no inherent power to forfeit shares. The power to forfeit

shares must be contained in the Articles. Where as shareholders fails to
pay amount due on call, the directors may, if so authorised by the Articles,
forfeit his shares.
Shares can only be forfeited for non-payment of calls. An attempt to forfeit

shares for other reasons is illegal. Thus, where the shares are declared
forfeited for the purpose of relieving a friend from liability, the forfeiture
may be set aside.
The right to forfeit shares must be pursued with the greatest exactness.
Forfeiture being in the nature of a penal proceeding, the provisions of the
Articles must be strictly followed. It must be exercised by properly
appointed directors at their meeting with requisite quorum. A small or
insignificant irregularity will make the forfeiture void.
Conditions for Forfeiture
A Company can forfeit its shares only when the following conditions are
satisfied:
Before the shares are forfeited the shareholder- must be served with notice
requiring him to pay the money due on the call together with interest; the
notice shall specify a date, not being earlier than the expiry of 14 days
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COMPANY ACT, 2013
from the date of service of notice on or before which the payment is to be

made and must also state that in the event of non-payment within that
date will make the shares liable for forfeiture;
Any irregularity either in contents or in service of notice would invalidate

forfeiture of shares.
Where the notice on which the forfeiture was founded was inaccurate in
requiring payment of interest from the date of the call instead of the date
when the call was payable, the forfeiture was held invalid.
Where a notice for the forfeiture was sent by registered post. A.D. and was
returned unserved, the forfeiture was held invalid.
The forfeiture shall be valid only when the provisions of the Articles are
strictly complied with. There must be a proper resolution of the Board; The
power of forfeiture must be exercised bonafide and for the benefit of the
company.
Effects off Forfeiture: Forfeited shares become the property of the

company. To that extent it involves a reduction of the capital of the
company. The company may sell the forfeited shares for any price they
fetch, i.e., the shares may be re-issued at a discount.
A person, whose shares have been forfeited, ceases to be a member of the

company. But he shall remain liable to pay to the company all moneys
which at the date of forfeiture were payable by his to the company in
respect of the shares. The liability of such person shall cease as and when
the company receives payment in full in respect of the shares.
The company shall specify the total number of shares forfeited in every
annual return submitted to the Registrar under Section 159.
Re-issue of Forfeited Shares
It must be noted that the directors are not bound to sell shares forfeited
for non payment of calls. This reduction of capital would not require
sanction of the National Company Law Tribunal. It can be concluded from
the above decision that if the shares are forfeited for reasons other than
the non-payment of calls, re-issue of such shares should be obligatory.
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Normally a company re-issues forfeited shares. The forfeited shares may

be re-issued at any price provided that the total of sum paid by the former
holder of the shares, together with the amount paid on re-issue and the
amount remaining unpaid on shares is into less than the par (face) value
because if it were, this would amount to an issue at a discount. This means
that the discount on re-issue should not exceed the amount forfeited on
those shares.
If the shares are reissued at a price more than their face value, as is
normally the case, the excess is a premium and must, therefore, be
transferred to the share premium account.
No Return of Allotment of the shares reissued need be filed with the

Registrar [Section 75[5]]. Such re-issue, however, cannot be called
allotment. The word allotment used for such re-issue in Section 75(5)
seems to have its origin in a confusion of thought.
Annulment of Forfeiture
The Board of Directors may, if the former shareholder so requests annul

(cancel) the forfeiture. The directors must, however, act bona fide and
must pass a suitable resolution to that effect. On cancellation of the
forfeiture the former holder is required to pay all calls due with interest and
then his name is restored in the Register of members.
Purchase by a Company of its own Shares [Section 77]: A company

limited by shares or limited by guarantee having a share company cannot
buy its own shares except when the share capital of the company is
reduced in pursuance of Section 100-104 or where shares are to be
purchased for prevention of oppression and mismanagement under
Section 407. of the Companies Act. Buying its own shares by a company
will means a permanent reduction of capital without sanction of the court
which is ultra-vires of the Act.
A company shall not give loan or financial assistance or guarantee directly

or indirectly for acquiring its own shares or the shares of its holding
company. Any guarantee given to secure such a loan is void. This
prohibition does not, however, apply in the following cases:
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COMPANY ACT, 2013
i. The lending of money by banking company in the ordinary course of its

business.
ii. The provision of money by a company for the purchase of fully paid
shares in the company by trustees for and on behalf of the employees of
the company.
iii. Lending money to employees of the company to enable them to

subscribe or purchase the company’s shares to be held as beneficial
owners. The amount of loan cannot exceed the employees’ salary for a
period of six months. Directors and managers are not employees for this
purpose.
This section does not affect in any way the right of a company to redeem
its preference shares under Section 80 of the Act. In case of contravention
of the provisions of this section, the company and every officer of the
company who is in default shall be liable to a fine which may extend to Rs.
1,000.
Purchase by Company of Its Own Shares (Buy-Back of Shares)
The Companies Act provides that a company limited by shares or a

company limited by guarantee having a share capital cannot buy its own
shares. The restriction is applicable to all companies having share capital,
whether public or private.
However, the Companies (Amendment) Act, 1999 vide sections 77A, 77AA
and 77B and the guidelines issued by SEBI in this regard allow companies
to purchase their own shares or other securities subject to certain
conditions. The provisions of the Amendment Act along with related SEBI
guidelines are as follows:
1. Sources to Buy-back: Section 77A, inserted by the Amendment Act,

1999 allows [subject to the provisions of section 77B(2)] a company to
buy its own shares and other specified securities out of:
i. its free reserves; or
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COMPANY ACT, 2013
ii. the securities premium account. Thus, not only share premium
money but debentures or other securities premium money can also
be used; or
iii. the proceeds of any shares or other specified securities.
However, no buy-back shall be made out of the proceeds of an earlier issue

of the same kind of shares or same kind of other specified securities. In
case shares are bought back out of free reserves than Sec. 77AA stipulates
that a sum equal to the nominal value of shares bought back shall be
transferred to a reserve account to be called the ‘Capital Redemption
Reserve Account’ [as referred to in clause (d) of the provision to sub-
section (1) of section 80] and details of such transfer shall be disclosed in
the balance-sheet. This account, as per SEBI Guidelines, shall be allowed
to be used for issue of fully paid bonus shares.
2. Conditions for Buy-back: Section 77A(2) provides that no company

shall purchase its own shares or other specified securities unless:
a. the buy back is authorised by its Articles,
b. a resolution passed by the Board or a special resolution has been

passed in General meeting of the company, authorising the buy-back.
c. the buy-back is less than 10% of the total paid up capital and free
reserves of the company purchasing its own shares or other specified
security. However, as regards buy-back of equity shares, it may be
noted that it cannot exceed 25% of its total paid up equity capital in
that financial year.
d. the ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buy-back. However, the
Central Government may prescribe a higher ratio of the debt for a
class or classes of companies. ‘Debt’ includes all amounts of secured
and unsecured debts.
e. all the shares or other specified securities are fully paid up;
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COMPANY ACT, 2013
f. the buy-back with respect to listed securities is in accordance with

the regulations made by the Securities and Exchange Board of India
in this behalf;
g. separate guidelines shall be issued with respect to unlisted specified

securities1.
3. Notice of Meeting to Pass Special Resolution: The notice of the

meeting at which special resolution is proposed to be passed shall be
accompanied by an explanatory statement stating:
a. a full and complete disclosure of all material facts;

b. the necessity for the buy-back;
c. the class of security intended to be purchased under the buy-back;
d. the amount to be invested under the buy-back; and
e. the time limit for completion of buy-back;
f. the price at which buy-back of securities shall be made;
g. if the promoter intends to offer their shares: (i) the quantum of
shares proposed to be tendered, and (ii) the details of their
transactions and their holdings for the last 6 months prior to the
passing of the special resolution for buy-back including information
on number of shares acquired, the price and the date of acquisition.
4. Time limit to Buy-back: Every buy-back shall be completed within 12

months from the date of passing the special resolution under sub-
section (2) of section 77A. It may be observed that since a buy-back
would take place only for cancellation of the shares, so there is no
necessity for registration of transfer in the books of the company and
also there is no need for affixing stamps in respect of shares bought
back.
5. Buy-Back From Whom?: The buy-back under sub-section
1. may be-
a. from the existing security holders on a proportionate basis; or
b. from the open market; or
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COMPANY ACT, 2013
c. from odd lots, that is to say, where the lot of securities of a public
company, whose shares are listed on a recognised stock exchange, is
smaller than such marketable lot, as may be specified by the stock
exchange; or
d. by purchasing the securities issued to employees of the company

pursuant to a scheme of stock option or sweat equity.
6. Filing a ‘declaration of Solvency’ with Registrar and SEBI: Where

a company has passed a special resolution to buy-back its own shares
or other securities under this section, it shall, before making such
purchases, file with the Registrar and the Securities and Exchange
Board of India a declaration of solvency in the form prescribed, verified
by an affidavit to the effect that the Board has made a full inquiry into
the affairs of the company and is capable of meeting its liabilities and
will not be rendered insolvent within a period of one year of the date of
declaration adopted by the Board. The declaration shall be signed by at
least two directors of the company, one of whom shall be the managing
director, if any.
However, no declaration of solvency shall be filed with the Securities and

Exchange Board of India by a company whose shares are not listed on
any recognised stock exchange. It may be noted that exemption in this
regard shall be available for only those companies whose shares are not
listed irrespective of any of its other security.
7. Physically destroy the securities purchased: Where a company

buys back its own securities, it shall extinguish and physically destroy
the securities so bought back within seven days of the last of completion
of buy-back. SEBI guidelines in this regard stipulate that the share
certificates bought-back shall be destroyed in the presence of a
Registrar or the merchant banker and the statutory auditor. A certificate
to this effect shall be furnished to SEBI duly signed by two whole time
directors including the managing director and verified by the Registrar,
Merchant Banker and statutory auditor.
8. No further issue off same kind of shares: Where a company

completes a buy-back of its shares and other specified securities under
this section, it shall not make further issue of the same kind of shares
including by way of rights or other specified securities within a period of
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COMPANY ACT, 2013
twenty-four months except by way of bonus issue or in the discharge of

subsisting obligations such as conversion of warrants, stock option
scheme, sweat equity or conversion of preference shares or debentures
into equity shares.
9. Maintain Register of Securities Bought: Where a company buys-

back its securities under this section, it shall maintain a register of the
securities so bought, the consideration paid for the securities bought-
back, the date of cancellation of securities, the date of extinguishing
and physically destroying of securities and such other particulars as may
be prescribed.
10.File Return with ROC and SEBI: A company shall after the
completion of the buy-back file with the ROC and SEBI a return
containing such particulars relating to the buy-back within 30 days of
such completion, as may be prescribed. However, the aforesaid return
shall not be required to be filed with SEBI if the company is not a listed
company.
11.Penalty for Default: If a company makes default in complying with

the provisions of this section or any rules made thereunder or any
regulations made under clause (f) of sub-section (2), the company or
any officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to two years, or with fine
which may extend to fifty thousand rupees, or with both.
12.Prohibition of buy-back in certain circumstances - Section 77B -

No company shall directly or indirectly purchase its own shares or other
specified securities-
a. through any subsidiary company including its own subsidiary

companies; or
b. through any investment company or group of investment companies;

or
c. if a default, by the company, in repayable of deposit or interest

payable thereon, redemption of debentures or preference shares or
payment of dividend to any shareholder or repayment of any term
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COMPANY ACT, 2013
loan or interest payable thereon to any financial institutions or bank,

is subsisting.
d. No company shall directly or indirectly purchase its own shares or

other specified securities in case such company has not complied with
provisions of sections 159, 207 and 211.
Employees Stock Option Scheme
What are ESOP?

Employee Stock Option Plan/Equity Incentive Plan (commonly referred to
as ESOP) is an employee-owner method that provides a Company's
workforce with an ownership interest in the company. ESOPs are one of the
most important tools to attract, encourage and retain Employees. The
option granted under the plan confers a right but not an obligation on the
employee. Stock options are subject to vesting, requiring continued service
over a specified period of time. Upon vesting of options, employees can
exercise the options to subscribe to the Company’s shares, by paying the
predetermined exercise price. Extending benefits through ESOPs is like
creating a win-win situation for both Employer & Employee.
Restructuring modes under ESOP Stock Options (Sharing in the Capital of

the company) Employee Stock Option Scheme (ESOS) Employee Stock
Purchase Plan (ESPP) Restricted Stock Units
(RSUs) Stock Indexed Plans (No sharing in the Capital of the Company)
Stock Appreciation Rights (SARs Phantom Stocks
Scenario under ERSTWHILE Companies Act, 1956, Provisions related to

ESOPs were not documented. Allotment to the Employees was considered
under the ambit of Section 81(1A) related to issuance of shares. There was
no other Regulatory framework for Unlisted companies. However, Listed
Companies were been regulated by SEBI (Employee Stock Option Scheme
and Employee Stock Purchase Scheme) Guidelines, 1999
ESOPs- Now covered under the ambit of Companies Act, 2013 Unlisted
Companies Listed Companies Regulated by Section 62(1)(b) of the Act
read with SEBI (ESOS and ESPS) Guidelines, 1999 Regulated by Section
62(1)(b) of the Act read with Rule 12 of Companies (Share Capital and
Debentures) Rules, 2014. Scenario under New Companies Act, 2013
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COMPANY ACT, 2013
Part B
DEBENTURE
Meaning and Features
According to Sec 2(30) of the Companies Act 2013 "Debenture includes

debenture stock, bonds and any other securities of company whether
constituting a charge on the assets of the company or not" The term
debenture refers to an instrument under the common seal of the company
acknowledging the debt due by the company to the holders of the
debenture. Debenture as an instrument Also contains an undertaking to
repay the debt at a specified date or at the option of the company. The
terms of the issue of debenture stipulates for the payment of interest at
the specified rate payable at specified intervals.
The following can be enumerated as the features of debentures:
a. Debenture is an instrument issued by the company acknowledging the

debt
b. Debenture is issued under the common seal by the company, though it

is not compulsory.
c. Though debenture is one of a series, it is not uncommon to issue a

single debenture.
d. Normally debenture is issued involving a stipulated period of time after

which the repayment is made. Irredeemable debenture also can be
issued by a company.
e. Normally, debenture creates a charge on the assets of the company
f. The debenture holder is treated as a creditor and thus does not enjoy
normal voting right.
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Shares and Debentures - A Comparison
a. Shares constitute ownership securities. On the other hand, debentures

represent creditor ship securities. Share holders are the owners of the
company and debenture holders are the creditors of the company.
b. The return on shares is called dividend. The return on debenture is

called interest.
c. The dividend on shares is not pre-fixed. On the other hand, the interest
on debenture is pre-fixed as per the terms of the issue of debentures.
d. Share holders (equity) may or may not get dividend. Dividend payment
depends on the profitability position of the company. Further, dividend is
at the discretion of the Board of Directors of the company. On the other
hand, payment of interest on debenture is mandatory, notwithstanding
the profitability of the company.
e. Share holders (Equity) do not receive the share amount back from the
company during the life of the company. On the other hand, debenture
amount will be returned to the debenture holders on expiry of the
stipulated period for which the debentures are issued.
Differences between Shares and Debentures

Following are the main differences between shares and debentures:
Basis of Shares Debentures

difference
Ownership The share of a company Debenture-holders are creditors
provides ownership to the of a company who provide loan
shareholders. to the company.
Identity Person holding share is known Person holding debenture is
as shareholder. known as debenture-holder.
Certainty of No certainty of return in case Debenture-holder receives the
Return of loss for the shareholder. interest even if there is no profit.
Convertibility Shares cannot the converted Debentures can be converted
into debentures. into shares.
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Control Shareholders have the right Debenture holders do not

to participate and vote in possess any voting right and
company’s meeting. cannot participate in meeting.
Merits and Demerits of Debentures
Debentures constitute an important source of funds for a company.

Debentures have a great significance as company finance. The following
are the merits of debentures:
1. The company can raise funds through debenture issue without diluting
control.
2. There is certainty of finance for a specified period of time and the

company can adjust its financial plan accordingly.
3. The company will have the distinct advantage of trading on equity.
4. Debentures appeal to cautious investors.
5. The cost of issue of debenture for the company is comparatively low.
6. Debentures may be issued out of necessity as a situation may be

reached in a company where it may be compelled to mortgage its assets
for raising the funds.
7. A company might have already incurred a number of small debts of

short duration which may be costlier and burdensome. These
innumerable debts can be converted into debentures which will prove
less costly.
However, debenture as a source of raising funds is not free from its own
demerits.
1. Slackness in earnings may affect the capacity of the company to pay

interest.
2. Assets of the company are charged in case of debenture issue.
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3. A company may be debt ridden and may find it difficult to face

emergency situation.
4. Care must be exercised with trading on equity. Trading on equity often

magnifies losses.
Listing of Shares
A stock exchange does not deal in the securities of all companies. Only
those securities that are listed can be bought and sold at the stock
exchange. For the purpose of listing of securities, a company has to apply
to the stock exchange. The stock exchange after receiving application from
the company will decide whether to list the securities of the company or
not. If permission is granted by the stock exchange to deal in the securities
therein, then such a company is included in the official, trade list of the
stock exchange and this is known as the ‘listing of securities’.
Advantages of Listing
Some of the advantages of listing are:
1. it provides a continuous market for securities;
2. it enhances the prestige of the company;
3. it provides an indirect check against manipulation by the management.
The company which wants to list its securities in the stock exchange will
have to apply to the stock exchange in a prescribed application form which
is to be accompanied by the following documents as required under the
Securities Contracts (Regulation) Act, 1956:
1. Certified copies of the memorandum and articles of association,

prospectus or statement in lieu of prospectus, Directors’ report, balance
sheet, agreement with the Managing Director, selling agents,
underwriters, etc.
2. Certified copy of the consent of the Controller of Capital Issues.
3. Specimen copies of shares, debenture certificates, and letters of

allotment, acceptance, renunciation, etc.
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4. A short historical account of the company’s growth since its inception (in
the case of established companies).
Further, the company must state in the application complete particulars

regarding:
a. its capital structure - distribution of shares:

b. management pattern;
c. particulars regarding dividends and cash bonuses during the last 10
years (in the case of established companies);
d. particulars about balance sheets during the last five years;
e. particulars about shares or debentures for which permission to deal is
applied for.
Criteria for Listing
The stock exchange will pay special attention to the following points while
scrutinising the application for listing of shares by a company:
1. Whether the articles of association contain the following provisions:
a. A common form of share transfer shall be used.
b. Fully paid shares are free from lien.
c. Calls paid in advance may carry interest, but shall not confer a right
to dividend.
d. Unclaimed dividends shall not be forfeited before the claim becomes

time-barred.
e. Option to call of shares shall be given only after sanction by the

general meeting.
2. Whether at least 49% of each class of securities issued was offered to

the public for subscription through newspapers for not less than three
days.
3. Whether the company is of a fair size and has a broad based capital
structure and there is sufficient public interest in its securities.
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After making a thorough scrutiny of the application and the copies of other
certificates, the stock exchange authority, if satisfied, will agree to the
listing of shares of the company and will direct the company to execute an
agreement with the stock exchange embodying the terms and conditions of
listing.
4.5 MEMBERSHIP OF A COMPANY
Shareholders and Members
A company is composed of members, though it has its own entity distinct

f r o m m e m b e r s . T h e w o r d s ‘ m e m b e r s ’ a n d ‘ s h a r e h o l d e r, a r e
interchangeable in the case of company having a share capital. The word
‘shareholder’ is used in relation to a company having a share capital and
there can be no membership except through the medium of shareholding.
But the term ‘member’ is wider in scope and may be used in relation to all
types of company.
Section 2(55) of Companies Act, 2013, defines the “Member”, in relation to

a company, which means –
a. the subscriber to the memorandum of the company who shall be

deemed to have agreed to become member of the company, and on its
registration, shall be enterd as member in its register of members.
b. every other person who agrees in writing to become a member of the

company and whose name is entered in the register of members of the
company;
c. every person holding shares of the company and whose name is entered
as a beneficial owner in the records of a depository;
The word ‘member’ includes a deceased member so long as his name is on

the Register of Members. But the bearer of a share warrant is a
shareholder but not member, as his name is struck off the Register of
Members. However, if the company so provides by its Articles, the bearer
of a share warrant may be deemed to be a member. Similarly, a
shareholder by transfer i.e., transferee is not a member until his name is
entered in the company’s Register of Members.
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COMPANY ACT, 2013
Eligibility for Membership
The general rule is that any person who is competent to contract may
become a member. A contract to purchase shares is like any other contract
and other contracting parties must be competent to enter into the contract.
The provisions of the Indian Contract Act, 1872, regarding the person who
can contract would apply. The membership rights of some categories of
persons are discussed below:
Minor: A minor in India cannot be a member because a contract with a

minor is absolutely null and void of initio. Neither a minor nor his legal
guardian can be made responsible for the payment of calls. A contract with
a minor is void. A minor in India may apply for and receive an allotment of
shares subject to a right to repudiate liability on them before or within a
reasonable time after attaining full age. In case of fully paid shares,
minor’s name may be entered in the Register of members, if minor
acquires the shares by transfer or transmission. There is no legal bar to a
minor becoming a member of company by acquiring fully paid shares and
without any obligation or liability attached to it. However, a minor cannot
become a member by purchasing shares when initial or subsequent offer is
made in capital market. Even if he is alloted with the shares, it becomes
void and he is cased to be a member. The company can repudiate the
allotment and remove his name from the Register on coming to know of
the minority of the member. The company must repay all moneys received
from him in respect of the allotted shares.
The minor also can repudiate the allotment during his minority and he shall
be returned the amount he paid towards the allotment of shares. If the
name of the minor continues on the Register of members and neither party
repudiates the allotment, the minor does not incur any liability on the
shares during minority and he cannot be held a contributory at the time of
winding up.
Where a minor has been allotted shares and his name has been entered to
the company’s register of members in ignorance of his minority, the
company can remove his name when the fact of his minority comes to its
knowledge. Similarly, the minor can also repudiate the allotment at any
time during his minority. But the position will change after he attains the
majority. He has the option to repudiate his liability on shares within a
reasonable time. But where a minor received dividends on attaining
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COMPANY ACT, 2013
majority, there by intentionally permitting the company to believe him to

be a shareholder, he would now be estopped from denying that he is a
shareholder.
In case of transfer of partly paid shares to a minor, the company may

refuse to register him as a member. In case, the company, in ignorance of
the minority, has permitted the transfer, then the company may remove
the name of the minor and replace it by that of transferor, even though the
latter may have been ignorant of the minority.
In case of a shares holder, who nominates his minor child as nominee and
dies before minor child attains majority, the shares can be transmitted to
minor child by transmission process.
Company: A company can become member of another company if so

authorised by its Articles subject to certain restrictions. But a company
cannot be a member of itself. A company cannot purchase its own shares
because it involves reduction of capital which is not permissible without the
sanction of the National Company Law Tribuinal.
Subsidiary Company: A subsidiary company cannot be a member of its

holding company. Any allotment or transfer of shares in a company to its
subsidiary is void. This provision will not apply where the subsidiary acts as
the legal representative of a deceased member of the holding company or
as a trustee and the holding company is not beneficially interested under
the trust.
Partnership Firm: A partnership firm, being not a person in the eyes of

law, cannot be member of a company. However, a firm can purchase
shares of a company in the individual names of its partners as joint
shareholders.
Foreigners: As per the Law of Contract, a foreigner can enter into

contracts and, therefore, can purchase shares in a company but this is
subject to the provisions of Foreign Exchange Management Act, 1999. Thus
Foreigners can become members of companies registered in India but
permission of the Reserve Bank of India has to be obtained for this
purpose. The right of the foreigner as a member will be suspended if he
becomes an alien enemy.
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COMPANY ACT, 2013
Fictitious Person: A person who takes the shares in the name of a

fictitious person becomes liable as a member. Besides, such a person can
be punished for impersonation under Section 38 of the 2013 Act.
1. Any person who—
a. makes or abets making of an application in a fictitious name to a

company for acquiring, or subscribing for, its securities; or
b. makes or abets making of multiple applications to a company in

different names or in different combinations of his name or surname
for acquiring or subscribing for its securities; or
c. otherwise induces directly or indirectly a company to allot, or register

any transfer of, securities to him, or to any other person in a fictitious
name, shall be liable for action under section 447.
2. The provisions of sub-section (1) shall be prominently reproduced in

every prospectus issued by a company and in every form of application
for securities.
3. Where a person has been convicted under this section, the Court may
also order disgorgement of gain, if any, made by, and seizure and
disposal of the securities in possession of, such person.
4. The amount received through disgorgement or disposal of securities

under subsection (3) shall be credited to the Investor Education and
Protection Fund
Hindu Undivided Family: It can have shares in the name of its karta.
Joint Holders: The shares of a company may also be held jointly by two or
more persons. In a public company, each joint shareholder is counted as a
separate member.
There is no direct provision for joint membership, but there are a few
indirect references. Therefore, Articles of Association of a company provide
for joint membership and sometimes-the maximum number of persons
who can be joint holders of shares is given in the Articles generally not
more than four.
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Provisions Relating to Joint membership.
i. Only one share certificate is issued to them.
ii. All the members are jointly and severally liable to make payment of
calls.
iii. A person whose name appears first in the order in which the names
stand in the Register of members, shall be entitled to vote.
iv. Notice or document may be served by the company on the Joint holders
of a share by serving it on the joint holder named first in the Register of
members in respect of the share.
v. The names of the joint holders may be entered in the Register of

Members in the order in which they appear in the Application form or in
they Share Transfer Form.
vi. Joint holders of shares in a public company are not a single member.
Each of the joint member of shares is a member of the company. For
purposes of determining whether the number of members of a private
company does not exceed fifty as required by and for determining the
numbers of members required for making application under sections
241 and 242, joint holder of shares are counted as one member.
vii.For the purpose of calculating the number of members required for

signing a requisition or notice to call an extraordinary general meeting,
the signature of any one of the joint holders will be sufficient and be
treated as good as the signature of all of them.
viii.In the case of transfer of shares held by joint holders, the transfer will
be effective only if the instrument of transfer is executed by all the joint
shareholders as transferors of shares. Joint members are liable jointly
and severally to pay call on shares held by them.
ix. In the case of transmission of shares by operation fo law, the right

devolves on the representative of the deceased jointly with the survivor
or survivors.
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COMPANY ACT, 2013
x. Where the Articles require any specified share qualification for

appointment as director, shares held jointly with other will be sufficient
qualification unless the Articles require that the shares should be held
exclusively in the director’s own sole name.
xi. As regards rights of the joint shareholders to attend and vote at general
meeting it would seem that in the absence of any provision in the Act
(Sec. 47) relating thereto, a company may make its own provisions in
its Articles provided that such provision is not restrictive of any rights
given to the shareholders under the Act or is otherwise repugnant to
any provision in the Act. In the absence of any such provision in the
articles, joint holders may properly claim to be individually present and
take part in the debate at the meeting and vote on resolution decided
on a show of hands but on a poll, the voting rights can be exercised
only by all of them acting together;
xii.To appoint a proxy only by all of them jointly.
xiii.Joint holders will be counted as only one member for purposes of a

quorum.
xiv.As regards payment of dividend, the company can make the payment
to the first named of joint holders on the register unless instruction in
writing signed by all the joint holders has been given to the company for
making the payment of any other person.
xv.Nomination, in case of joint holding, all joint holding together nominate

in Form SH.13, any person as a “Nominee”. If any one of the joint
holders dies a fresh nomination can be made by applying in form SH-14.
Different nominations cannot be made in case of Joint Holdings.
Bankrupt: A bankrupt (i.e. insolvent) can be a member of the company

although the beneficial interest in his shares will be with Official Receiver/
Assignee.
Registered Society: A registered Society is competent to hold shares in

the company in its own name.
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COMPANY ACT, 2013
Termination of Membership
A person will cease to be a member of the company when his name is
removed from the register of members. It may take place in any of the
following two different ways: namely, (a) act of the Parties and (b)
Operation of Law. The former is effected voluntarily the member in
accordance with the law prescribed for this purpose whereas the latter is
an involuntary act of the party.
Cessation of Membership by act of the Parties
1. When a person transfers his shares. In such a case the transferor

ceases to be a member as soon as the transferee is registered but not
before.
2. When his shares are validly forfeited by the company.
3. When a person makes a valid surrender of his shares to the company.
4. When a company sells the shares in exercise of its right of lien over
them.
Cessation of Membership by the Operation of Law
1. When he dies.
2. When he is declared insolvent and the Official Assignee either disclaims

or transfers the shares.
3. In execution of a decree of court when his shares are purchased either

by another member of the company or by the company itself (by an
order of a Court under Section 242(2)(c));
4. When the company is wound-up. But he remains liable as a

contributory.
5. When he repudiates the contract on the ground of false or misleading

statement in the prospectus of the company.
6. When he is holding redeemable preference shares and such shares are

redeemed.
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COMPANY ACT, 2013
7. When share warrants are issued in exchange of fully paid-up shares and
the articles do not recognise holders of share warrants as members.
Though one ceases to be member, he remains liable as contributory and is

also entitled to share in the surplus, if any.
Explosion of a Member
It cannot be denied that there are some members who, by creating various
kinds of troubles for the management, try to rest undue advantage for
themselves. Can such members be expelled? has expressed the view that
the company cannot by amending the Articles of Association give itself a
power to expel a member. Such an amendment of Articles of association is
opposed to the fundamental principles of the Companies’ jurisprudence and
is ultra vires the company. Such a provision is repugnant to the various
provisions in the Companies Act pertaining to the rights of a member in a
public limited company and cuts across the scheme of the Act as it has the
effect of rendering nugatory the very power of the Central Government
(now the National Company Law Tribuinal). under section 58 of the
Companies Act, 2013 and the powers of the courts under sections 148(3)
and 235(3)(1) of the Act and is, therefore, void by the operation of the
provisions of section 6 of the Act.
However, many authors are in disagreement with the views expressed by

the Department of Company Affairs on the subject. The Department’s view
does not give due weight to the contractual aspect of the Articles of
Association. If the right of expulsion of a member has been obtained in
accordance with the procedure laid down by law of agreement, it can only
be set aside by the court on proof of mala fide exercise of power by the
majority shareholders or the Board of directors. If Articles authorise the
directors to expel a member under certain circumstances such power may
be exercised bona fide and in the general interest of the company. So far
as the property right’ is concerned, the company should arrange that the
expelled member gets appropriate price for his shares.
Similarly, Ramaiya has observed that on a careful consideration of the

subject from another opinion, it would appear that there is nothing illegal
or ultra vires in the exercise of a power of expulsion of the shareholder, if it
is exercised bona fide to protect the interest of the company where the
shareholder’s act or conduct is considered to be detrimental or injurious to
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COMPANY ACT, 2013
the interest of the company. An Article giving such power is not necessarily
invalid or ultra vires.
However, it seems permissible for a company limited by guarantee or a

company governed by section 8(a) of the Companies Act to include a
provision for expulsion of a member from the company (through forfeiting
his shares), if his conduct or action is considered detrimental to the
interest of the company.
Rights and Privileges of a Member
A member of a company has a number of rights vis-a-vis the company.

These are conferred on him either by the companies Act or by the Articles
and Memorandum of Association of the company. Rights of members can
be grouped under three heads viz, (a) Statutory rights, (b) Documentary
rights and (c) Legal rights under the General Law. Statutory rights are
conferred upon the members by the Companies Act, 2013. These rights
cannot be taken away by the Articles or Memorandum. Documentary rights
or conferred by Memorandum and Articles of Association. Legal rights are
conferred by the General Law. For example, a member can see the
company for untrue statements and misrepresentations made in the
prospectus and claim damages under the general law. Some of the most
important rights of a member can also be grouped in two categories,
namely: (a) Individual Rights and (b) Corporate membership rights.
Individual rights or Individual membership rights. Members enjoy certain

rights in their individual capacity. THey can enforce these rights in their
own names. These rights are conferred on the members by the Companies
Act. Such rights cannot be taken away from the members unless. They
give consent. If such a right is in question a single shareholder can defy a
majority consisting of all the other shareholders. Some of these rights are
as follows:
i. To have the certificate of shares held or the certificate of stock issued to

him with the prescribed time (Section 56(4)).
ii. To have his name borne on the register of members as well as to have
the register rectified, and in the case of refusal by the company, to
apply to the Court or National Company Law Tribunal for necessary
relief.
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COMPANY ACT, 2013
iii. To transfer shares subject to any restrictions imposed by the articles

(Section 44).
iv. To attend meetings of shareholders, receive proper notice and to vote at

the meetings.
v. To associate in the declaration of dividends and to apply to the Court for

an injunction restraining the directors from paying dividends on an
ultra-vires declaration or out capital.
vi. To inspect the registers, indexes returns and copies of certificates, etc.
kept by the company and to obtain extracts or copy thereof (Section
13).
vii.To obtain copies of Memorandum and Articles on request and payment

of the prescribed feeds (Section 17).
viii.To have the first option in case of issue of new shares or a further issue
of shares (ie., the right of pre-emption) by the company (Section 62).
ix. To apply to the Court to have any variation or abrogation to his rights
set aside by the Court (Section 48).
x. To have notice of any resolution requiring special notice.
xi. To obtain on request minutes of proceedings at general meeting.
xii.To remove directors by joining with others (Section 169).
xiii.To obtain a copy of the Profit and Loss Account and the Balance Sheet
with the Auditor’s report (Section 129, 136).
xiv.To apply for the appointment of one or more competent inspectors by

the Government to investigate into the affairs of the company as well as
for reporting there on (Section 210, 213)
xv.To participate in the appointment of an auditor or auditors at the Annual

General Meeting (Section 139)
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COMPANY ACT, 2013
xvi.To receive the auditors’s report at the Annual general Meeting of the
Company (Section 145)
xvii.To petition to the Court for prevention of mismanagement and

oppression (Section 244);
xviii.To petition to the Court for an order of injunction restraining the

directors from going ahead with an ultra vires act;
xix.To receive a share in the capital of the company and in the surplus
assets, if any, on the company’s liquidation;
xx.To participate in passing of the special resolution that the company may
be wound up by the Court or voluntarily [Section 433, 484(1)(b)].
xxi.To participate in appointment and in fixation of remuneration of one or

more liquidators in the case of a Members’ Voluntary Winding up and to
fill any vacancy in the office of a liquidator so appointed by him.
Corporate membership rights. Members have also certain rights as a

group. These rights can be exercised only by the majority and not by the
single shareholder or minority shareholders. Corporate membership rights
are rights which the member has agreed to submit to the will of the
majority provided that the will is expressed in accordance with the law and
the articles. Thus, the shareholders in majority determine the policy of the
company or exercise control over the management of the company. With
respect to these rights, the principle of the supremacy of the majority
applies.
However, if and when the majority becomes oppenssive or is accused of

mismanagement of the affairs of the company, section 244 confers right, to
not less than one hundred members of a company or not less than one-
tenth of the total number of its members whichever is less or any member
or members holding not less than one-tenth of the issued share capital of
the company and in the case of a company not having a share capital, not
less than one- fifth of the total number of its members, to apply to court
under section 241 for relief in cases of oppression or for relief in cases of
mismanagement respectively.
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COMPANY ACT, 2013
Section 100 of the Companies Act confers on members holding not less
than one-tenth of the paid up share capital of a company right to
requisition an extra ordinary general meeting of the company. The section
also confers on members having not less than one-tenth of the total voting
power in a company not having a share capital to requisition an
extraordinary general meeting of the company. If the Board of directors of
the company does not within 21 days from the date of deposit of a valid
requisition in heard to any matter proceed to call a meeting for the
consideration of those matters on a day not latter than forty five days from
the date of deposit of the requisition, the meeting may be called by the
requisitionists themselves.
Liabilities, Obligations and Duties of a Member

The liability of the members of a company depends on the nature of a
company.
Company with unlimited liability. Every member of an unlimited company is

liable in full for all the debts of the company contracted during the period
of his membership.
Company limited by guarantee. The liability of the members of a company

limited by guarantee is limited to the amount they undertook to contribute
to the assets of the company in the event of winding up.
Company limited by shares. In the case of a company limited by shares,

the liability of member of company is the amount, if any, unpaid on the
shares subscribed by him.
Contributors are liable to contribute towards the assets of the company in

the event of its being wound up. Partly paid-up share holders are liable to
balance of their unpaid part. However, shares holders who possess fully-
paid shares, are considered as contributories, but they don’s have any
further liability.
A person may be included in the ‘B’ list of contributories, as a past

member, and required to pay to the extend of the amount remaining
unpaid on the shares which he held within one year prior to the
commencement of winding up, if
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COMPANY ACT, 2013
i. on the commencement of winding up, debt exists which were incurred

while he was a member; and
ii. the contributories of the ‘A’ list (i.e., present members) are not able to
satisfy the contribution required from them in respect of their shares.
A member is also subject to certain liabilities and obligations either by the

Act or by the Articles of Association. Some of the important ones are stated
hereunder:
i. To take shares, when they are allotted in due time and compliance with
provisions of the Act, unless the refused to accept the shares has been
sent on the ground of non- compliance with the provisions of the Act as
regards the issue of the prospectus or as regards allotment.
ii. To pay for the shares allotted to him when the allotment is made and
when calls have been made validly and in conformity with the provisions
of the Articles.
iii. To abide by the doing of the majority of members unless the majority
acts vindictively, oppressively, mollified or fraudulently.
iv. To contribute to the assets of the company in the case of winding up

when the shares held are partly paid-up.
v. Members are severally liable for debts of the company contracted,

where its business is carried on beyond the expiry of six months from
the date at which its membership is reduced below the legal minimum
(i.e., seven members in the case of a public company, two members in
the case of a private company and one person under OPC). However,
such members are not liable for debts contracted before the expiry of
six months. No liability will accrue to those members who are not
cognizant of the fact that the business of the company is being carried
on with members fewer than the legal minimum.
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Register of Members
Every company under Sec. 88(a) of the 2013 Act shall keep a register of its
members indicating separately fo reach class of equity and preference
shares held be a member residing in or outside India. Under Sec. 88(4), a
company, if so authorised by its Articles, can maintain a “foreign register”
outside India, containing the names and particulars of the members. There
is no form but the following particulars must appear in the registers.
a. The name, address, and occupation of each member.
b. In the case of company having a share capital, the shares held by each
member with numbers and amount paid or considered to be paid on
them.
c. The date on which each member’s name was entered in the register.
d. The date on which any person ceased to be a member; and
e. If the shares have been converted into stock, and notice of conversion
given to the registrar, it will show the amount of stock held by each
member.
For default in complying with those provisions, the company and every
officer of the company who is in default shall be liable to a fine upto which
shall not be less than Rs. 50,000 but which may extent to Rs. 3 Lakhs
and where the failure is continuing one, with a further fine of Rs. 1,000
per day during which the default continues [Section 88(5)].
Index of Members
Section 88 (Rule 6 of Companies (Management and Administration) Rules,
2014 requires every company having more than fifty members to maintain
a register of members in an index form or a separate index on the names
of the members of the company. All alterations in the register of members
must be carried to the index with fourteen days. The index should enable
the entries relating to a member to be readily found. The index must be
kept at the same place as the register of members. In case of non
compliance, the company and every officer who is in default shall be liable
to a fine which may extend to Rs. 500.
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Annual Return
Section 159 requires every company having a share capital to file with the
Registrar every year a formal return called an annual return containing the
specified particulars relating to the company. It shall be filed within 60
days from the date of the holding of the annual general meeting. Where no
annual general meeting is held, in a particular year then the annual return
has to be filed within sixty days from the last day on which the meeting
should have been held in accordance with the provisions of the Act. The
fact that no annual general meeting was held is not justification for not
complying with the requirements of the section. The directors are under an
obligation to file the annual return even if the company ceased functioning.
The object of filing the annual return is to enable the Registrar to record
the changes that have occurred in the constitution of the company during
the year. At the same time it affords an opportunity of obtaining certain
additional information which would otherwise be available only at the
company’s office, if at all.
The Annual Return should be filed in the form given in Part II of Schedule V
and must contain the particulars specified in Part I of Schedule V,
regarding-
a. its registered office;

b. the register of its members;
c. the register of its debentures holders;
d. its shares and debentures;
e. its indebtedness;
f. its members and debentures-holders, past and present;
g. its directors, managing directors, secretaries and treasures, managers
and secretaries, past and present.
Where the company has converted any of its shares into stock and given
notice to the Register, the amount of stock held by each of the members
concerned should be mentioned instead of the shares so converted.
In the case of a company not having a share capital, an annual return shall
be filed with the Register within sixty days from the date of the annual
general meeting. It shall contain the following particulars regarding.
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i. the address of the registered office of the company.
ii. the names of members with dates on which they became members and
the names of persons who have ceased to be members since the date of
the last annual general meeting with dates;
iii. all such particulars with respect to the persons who, at the date of the
return were the directors of the company, its manager and its secretary;
iv. a statement containing particulars of the total amount of indebtedness

of the company in respect of all charges which are or were required to
be registered with the Registrar. [Section 160].
The annual return filed with the Registrar under Section 159 or 160 shall
be signed by a director and the manager, or secretary, if any, or by two
directors one of whom shall be the managing director where there is one.
The return shall be accompanied by a certificate signed by both the
signatories of the return stating that the return contains the facts as the
that since the date of the last annual return the transfer of all shares and
debentures and the issue of all further certificates of shares and
debentures have been appropriately recorded in the books maintained for
the purpose. In the case of private company, the certificate must further
state that the company has not, during the year, issued any invitation to
the public to subscribe to the shares or debentures of the company and
that the numbers of members does no exceed fifty, excluding the past and
the present employees of the company. [Section 161]. In case of non-
compliance the company and every officer who is in default shall be
punishable with fine upto Rs.500 for every day during which the default
continues [Section 162].
4.6 COMPANY MEETINGS
For the proper functioning of any organisation or association the holding of

meetings periodically to discuss matters of common concern and take
decisions is essential. A meeting may be defined as any gathering,
assembly of two or more persons in a particular place to discuss some
lawful business of common concern and take decisions in the form of
resolution on the basis of opinion expressed by the members present at
the meeting.
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Kinds of Company Meetings

Broadly speaking, company meetings may be classified under the following
headings:
Shareholders’ Meetings
As the name indicates, it is the meeting of shareholders of a company. The
following are the different kinds of meetings of the shareholders:
a. Statutory meetings: It is the first general meeting of the shareholders

which is held just after the commencement of business. Every public
company having a share capital should hold this meeting.
b. Annual general meeting: This is the meeting of shareholders of the

company held once a year. Every company should hold this meeting to
discuss affairs of the company to pass accounts, etc.
c. Extraordinary general meeting: This meeting is held whenever

required to transact special business of an urgent nature which cannot
be postponed to the annual general meeting.
d. Class Meeting: Class meeting refers to meeting of a particular class of

shareholders.
Directors’ Meetings
These meetings are open to the members of the board of directors of the
company. These meetings are of two types:
a. Meetings of board of directors: These meetings are often held to

frame policies and to review the progress of the company.
b. Meetings of committee: These meetings may be held as and when

necessary and send their report or findings to the board of directors.
Creditors’ Meetings
These meetings are held to take decisions on matters affecting their

interests. These meetings may be of the following kinds:
a. Debenture holders’ meetings.
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b. Meetings of the creditors otherwise than in winding up.
c. Meetings of creditors and contributories in a winding up.
The diagram given below shows the different kinds of meetings of a

company.
Provisions of the Companies Act
Essentials of a Valid Meeting
If there are any irregularities in the procedure followed for convening and
conducting a meeting, the proceedings of that meeting are not valid and
the decisions take therein will not be binding. Hence, the meeting should
be validly held. The essentials of a valid meeting are as follows:
1. It must be properly convened as per the provisions of the Companies

Act and the articles of the company concerned.
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2. It should be convened by the proper authority i.e., a person authorised

by the Act or the articles to convene a meeting.
3. Notice regarding the holding of the meeting should be sent to all the
persons entitled to receive the notice and according to the rules and
regulations of the articles of the Company Act, as the case may be.
4. The meeting should be properly constituted, that is:
a. A quorum of members must be present at the commencement of the

meeting according to the Companies Act or the articles.
b. The meeting should be presided over by the person duly elected as

the chairman of the company. If the chairman is not present, the
Deputy Chairman, if any, should preside. If both the chairman and
the deputy chairman are not present the members attending the
meeting may elect one amongst them to take the chair.
5. There should be an agenda for the meeting and the items discussed at
the meeting should be according to the order of the items on the
agenda. Any deviation from the order of the items on agenda however,
can be made with the consent of the members present.
Sections 96 , 97 to 110 of 2013 Act contain provisions relating to the

holding of meeting. However, a company may include in its articles
additional rules for conducting meetings, subject to the provisions of the
Act. If the Act and the articles are silent on any particular problem relating
to the conducting of meetings, the customary rules, conventions and
precedents should be followed. If there is no convention or precedent, the
members present at the meeting may lay down the rules subject to the
provisions of the Act.
Proper Authority to Convene Meeting

A meeting must be convened by a proper authority. Otherwise it will not be
a valid meeting. The proper authority to convene a general meeting of a
company is the board of directors who should pass a resolution to call a
meeting at a validly held board meeting. If the board meeting itself is not
valid, the resolution passed for holding a general meeting, and the
proceedings of that general meeting, are null and void.
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When a requisition is made by the members for convening a general

meeting, the board must convene the meeting within 21 days of the
requisition. Otherwise, the requisitionists themselves may convene such a
meeting within 45 days of the requisition.
If the company fails to hold the annual general meeting as per the Sec 96
of the Act, the Tribunal is empowered to convene such a meeting, if it
receives any application from a member of the company (Sec. 97).
The Tribunal, on the application of any member of the company, call or

direct the calling of, an annual general meeting of the company and give
such ancillary or consequential directions as the Tribunal thinks expedient.
[Sec. 97(1)]. (Such directions may include a direction that one member of
the company present in person or by proxy shall be deemed to constitute a
meeting).
A general meeting held as per directions of Tribunal, be deemed to be an

annual general meeting of the company [Sec.97(2)].
Proper Notice of Meeting

The second requirement of a valid general meeting is that a proper notice
of the meeting should be given by the proper authority to all the members
who are entitled to receive such a notice. The notice must contain
particulars relating to the kind of meeting, place, date and time of the
meeting, and a statement of the business to be transacted at the meeting
i.e., agenda. [Sec 101(2)].
Section 101 provides that in the case of general meetings, a notice of not
less than 21 days must be given either in writing or through electronic
mode. Provision is also made for a shorter notice in certain cases, for
example:
a. In the case of the annual general meeting, if not less than ninety-five
percent of the members entitled to vote give their consent thereto.
b. In the case of any other general meeting, when the company has a
share capital, a shorter notice may be given by the consent of the
members holding not less than 95% paid up share capital of the
company and when the company has no share capital, the consent of at
least 95% voting powers exercisable at that meeting must be obtained.
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In the case of the meeting of the board of directors, every director must be
given notice of the meeting. The Act does not prescribe the length of
notice. However, the same may be prescribed by the Articles.
Further, in case of every meeting, of the company (AGM), notice shall be

given to (i) every member of the company, legal representative of any
deceased member or the assignee of an insolvent member (ii) the auditor/
s of the company and (iii) every director of the company [Sec. 101(3)].
Any accidental omission (the omission must not only be designed, but also
not deliberate) to give notice to, or the non-receipt of such notice by, any
member or other persons, who is entitled to such notice for any meeting
shall not invalidate the proceedings of the meeting [Sec.101(4)].
It may be noted that in the case of holders of share warrants or the

shareholders whose address is not known, public notice in a leading
newspaper regarding the meeting will be sufficient.
Statement to be annexed to notice (Sec. 102)
A statement to be compulsorily attached to the meeting notice.
The material facts to be contained in annexure are as follows:
i. The nature of concern or interest (financial or otherwise), if any, that

every director, manager, every other key managerial personnel and
relatives of these persons, have in special business to be transacted in
the general meeting.
ii. Any other information and facts that may enable members to
understand the meeting, scope and implication of items of business and
to take decision thereon [Sec. 102(1)].
Sec. 102(2) states that every business transacted in general meting

should be considered as special, except (i) consideration of financial
statement and the reports of Board of directors and auditors. The
declaration of any dividend, (iii) The appointment of directors in place of
those retiring and (iv) the appointment of and fixing of remuneration to
the auditors. These four transactions are considered as general
transactions.
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However, in case of any other meeting all business should be deemed to be

special.
The statement annexed to meeting notice should contain sufficient

disclosures by promoters, directors, manager or other key managerial
personnel. In case of non-disclosure or insufficient disclosure in any
statement made by these persons which results into any benefit for
themselves or their relatives shall have to be compensated by such
persons to the company. For any default in compliance of the provisions of
this section (102), every direction, promoter, key managerial personnel at
default is punishable as per Sec. 102(5).
Contents of Notice
Every notice convening the meeting should state the place, day and time of
the meeting and must also contain statement of the business to be
transacted at the meeting. The meeting must be held in the same city or
town where the registered office of the company is situated, the meeting
must be held on a working day unless the company is a non-trading one,
e.g., Chamber of Commerce. The meeting must be held within the working
hours unless the members agree to hold it otherwise.
Business to be transacted at the meeting. As stated above, the notice

must state the nature of the business to be transacted at the meeting. The
agenda, is therefore, written in the notice of the meeting or a copy of it is
attached to the notice. The business to be transacted at a meeting may be
ordinary business or special business. Where a meeting is to transact any
special business, the notice must state so and an explanatory statement
must be attached with the notice. This statement must set out all material
facts concerning each item of special business specifying therein the nature
and extent of interest, if any, of directors, managers, etc. Further, if any
item on the agenda requires the passing of a special resolution, if must be
stated clearly in the notice.
Every member of the company, the auditors of the company and the legal
representatives of the deceased member and insolvent members, if any,
are entitled to received meeting notice.
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If the notice of meeting is not deliberately sent to any single member, the
meeting becomes invalid. But accidental omission will not. In case of those
who hold share warrants and those, whose address is not known, public
notice in news paper regarding the holding of meeting is enough.
Mode of giving notice: A notice convening the meeting may be given to

the person entitled to receive it either personally or by sending it by post
to his registered address. The notice may be sent under postal certificate
or by registered post, if so required by the articles. Notice to share warrant
holders is given through an advertisement in leading newspapers.
Agenda of the Meeting

The word 'agenda' means the programme of business to be transacted at a
meeting. It also means, the items to be discussed or things to be done at a
meeting. The preparation of agenda is considered necessary in order to
conduct the business of the meeting systematically and without omission of
any item of importance. The items in the agenda should be arranged in
order of importance but routine items, like reading the minutes of the
previous meeting etc., are placed first on the agenda. Each item on the
agenda should be serially numbered and generally the meeting discusses
the items on the agenda in the same order.
The agenda is prepared by the secretary in consultation with the chairman

of the company. The items in the agenda should be clearly mentioned but
at the same time, the items should be brief. Any explanation regarding any
item in the agenda should be attached with the agenda so that the
members may come well prepared for the meeting. The copies of agenda
to be used by the directors, chairman and also the secretary should have
sufficient margin on the right hand side for taking notes. These notes will
help the secretary to prepare the minutes of the meeting later on.
Quorum for the Meeting (Sec. 103)

Another requirement of a valid meeting is the presence of a quorum in the
meeting. A quorum is the minimum number of members required to attend
a meeting and transact business validly. According to the Companies Act,
in the case of a private company two members shall form the quorum.
Unless it is provided in the Articles of the company for a larger number, in

case of the public company, the quorum shall be the following.
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i. Five members should be personally present, if the number of members

as on date of meeting is not more than one thousand;
ii. Fifteen members personally present, if the number of members as on

the date of meeting is more than one thousand, but upto five thousand;
and
iii. Thirty members personally present, if the number of members as on the

date of meeting exceeds five thousand.
The following provisions will apply to the meetings of a public or private

company unless the articles provide otherwise.
a. If there is no quorum for half an hour of the scheduled time of the

meeting, both in the case of shareholders' as well as the board of
directors' meeting, the meeting will stand adjourned to the same day in
the next week at the same time and place, or to such other date and
such other place and time as the Board may determine.
b. If at the adjourned meeting also the quorum is not present within half
an hour from the time appointed for the meeting, the members present
will form the quorum and may transact the business which will be valid.
c. In case the meeting was called by the requisition of the members and
there is no quorum within half an hour from the time appointed for the
meeting, it shall stand dissolved
i.e. the meeting cannot be adjourned.
d. In case of adjournment or change of day, place and time, the company

shall give not less than three days’ notice to the members.
Quorum for Board Meetings

In the case of board meetings, if the articles are silent, the quorum shall
be one-third of the total strength of the directors (any fraction being
rounded off as one) or at least two directors, whichever is higher, Directors
who are interested in the subject matter under discussion at the meeting of
the board of directors are excluded for the purpose of forming the quorum.
Further, while counting the total strength of directors of the board, the
number of directors whose places are lying vacant at the time are
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excluded. Directors participating by video conferencing or other audio-

visual means shall be counted for the quorum.
Further, where a meeting of the Board could not be held for want of
quorum, unless the Articles of the company provide otherwise, the meeting
shall automatically stand adjourned to the same day at the same time and
place in the next week or if that day is a national holiday, till the next
succeeding day, which is not a national holiday, at the same time and
place.
Disinterested Quorum
Disinterested quorum means quorum of those directors who are not
interested, directly or indirectly in certain matters before the board
meeting i.e., for the purpose of finding the quorum. Interested directors
are excluded from the quorum or that particular resolution. Further, they
are also disqualified from voting. In the minutes of the meeting, it must be
stated that the directors who were interested in the subject matter, under
discussion were excluded to form the quorum and did not exercise their
vote for or against the motion in which they were interested. The rule of
disinterested quorum, however, does not apply to a general meeting. An
interested director is entitled to vote in the general meeting on the matter
in which he is interested.
Proxies (Sec. 105)

Any member entitled to attend and vote at a meeting can appoint another
person as his proxy to attend and vote on his behalf. A proxy is a person
who is authorised by a member of a company to attend and vote at a
meeting on his behalf. A proxy is also an instrument authorising a person
to attend the meeting and cast vote. The instrument appointing a proxy
must be in writing and must be signed by the appointer.
Section 105 of the Act lays down certain provisions relating to a proxy.
They are:
1. Any member entitled to attend and vote at a meeting can appoint

another person as his proxy to attend and vote on his behalf. The proxy
should be in writing and signed by the concerned member or his
attorney. If the appointer is a company, the authorised officer or
authorised attorney should sign the proxy form.
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2. The proxy may or may not be a member of the company
3. Every notice convening a meeting should state that a member entitled

to attend and vote at a meeting is entitled to appoint a proxy. If default
is made every officer of the company who is in default is liable to a fine
which may extend up to Rs. five thousand.
4. A proxy has no right to speak at a meeting.
5. The proxy form must be in writing duly signed by the appointer.
6. Unless the Articles provide,
a. a proxy cannot vote except on a poll.
b. a member of a company not having a share capital cannot appoint a

proxy,
c. a member of a private company cannot appoint more than one proxy

to attend on the same occasion.
7. The proxy from must have a 20 paise revenue stamp and it should bear
the seal of the company or be signed by a duly authorised agent.
8. The proxy from should be deposited with the company 48 hours before
the meeting. If the Article provides for longer period beyond 48 hours
any proxy or instrument having validity to be proxy shall be have effect
as if a period of forty- eight hours had been specified in for such
deposit.
9. Every member has a right to inspect the proxies within 24 hours before
the time fixed for the meeting and also till the conclusion of the meeting
provided he has given not less than three days' notice to the company
of his intention to do so.
10.If an officer of a company invites a member to appoint a person or any

group of persons as proxies at the expense of the company, such an
officer will be liable to a fine which may extend up to Rs. one lakh. This
means that an officer a company cannot apoint a proxy.
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11.The death of a member who has appointed a proxy revokes the

authority of the proxy to cast vote unless otherwise provided for in the
Articles.
12.A minor cannot be appointed as a proxy.
13.A shareholder may revoke the proxy in accordance with the provisions
of the Articles and attend the meeting and vote personally.
14.In every meeting notice of a company which has share capital, (or the
Articles of which provide for voting by proxy at the meeting), there shall
be a statement that a member entitled to appoint a proxy, can appoint a
proxy. The statement should appear in meeting notice with a reasonable
prominence. The notice should be accompanied with proxy form.
15.A person appointed as proxy shall act on behalf of such member or

number of members not exceeding fifty and such number of shares as
may be prescribed.
16.If an officer of company issued proxy form to any member on request in

writing or providing a list of persons willing to act as proxies and if the
form or list is available on request in writing to every member entitles to
vote at the meeting by proxy, shall not be punishable under any
provision of the Act.
17.The appointment of proxy shall be in Form No. MGT-11.

When proxies are deposited with the company, the secretary has to
scrutinise them to see whether they comply with the provisions of law.
The proxies received after the stipulated time must not be accepted. The
secretary should countersign the proxy forms and enter them in a
register of proxies.
Rule 19(3) of the Companies (Management and Administration) Rules 2014

states that proxy shall be in Form No. MGT-11.
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Chairman of Meetings
A chairman is a person who has been designated or elected to act as a

guide and to preside over and conduct the proceedings of a meeting. He is
the chief authority at a meeting and controls and regulates the speeches of
members at a meeting. He maintains order and decorum in a meeting and
derives his power and authority from the meeting itself.
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Every meeting must have a chairman in order to regulate the proceedings

of the meeting and to conduct its business in an orderly manner and
according to the rules. A meeting is not considered to be duly constituted,
if it is not preside over by a chairman.
Appointment of a Chairman
Generally, the promoters nominate the first chairman of the company. His
name is, therefore, mentioned in the articles. If this step has not been
taken, the directors in their first meeting after incorporation of the
company, may elect one of the directors as a chairman of the company.
The articles usually provide that the chairman shall preside over the
meetings of directors as well as the meetings of shareholders. The board
may decide to elect a new chairman every year at the first board meeting
after the annual general meeting. In addition to the chairman, a company
may have a deputy chairman or vice-chairman who can preside over the
company meetings in the absence of the chairman. If the regular chairman
and the deputy chairman are not present within 15 minutes after the
appointed time for holding the meeting, or they refuse to preside over the
meeting, the members present shall elect one among themselves as the
chairman of the meeting.
A chairman may be elected by a show of hands. If a poll is demanded for

the election, it shall be taken forthwith by a temporary chairman elected by
a show of hands, until some other person is elected as chairman as a result
of the poll. Chairman so elected shall be the chairman for the rest of the
meeting.
Qualities of a Chairman
As the successful conduct of the proceedings of a meeting largely depend

upon the chairman, he should possess certain special qualities. They are:
1. He should have an impressive personality and qualities of leadership.
2. He must be courteous, good natured and impartial.
3. He should be cool and patient and must handle a difficult situation

tactfully.
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4. He should be firm in enforcing the rules of the meeting without being

autocratic.
5. He must be able to address the meeting in the language of the majority

of the members present.
6. He should be a strict disciplinarian.
7. He must have a good knowledge of the law and practice of meetings.
8. He should know the powers and duties of a chairman.
9. He should also know the rules governing the meeting over which he is
presiding.
10.He should have a thorough knowledge of the affairs of the company and
also of the industry.
Powers of a Chairman
The powers of a chairman may be summarised as follows:
1. To decide a point of order: When a member is speaking on some

motion, another member may get up and say 'point of order' if he thinks
that what the members speaking is irrelevant. When the point of order
is raised, the chairman's decision is final and binding on the members.
Point of order may also be raised when the members are talking loudly
or when the discussion on the motion is against the rules and
regulations governing the meeting.
2. To maintain order and decorum: He has the power to maintain order

and decorum at a meeting. He should prevent the use of
unparliamentary language and disorderly behaviour of members. If his
directions are not obeyed, he may ask the offending member to
withdraw from the meeting. If the member refuses to leave the
meeting, the chairman has the power to remove him bodily.
3. To decide priority of speakers: When more than one member wishes to

speak on the same motion, the chairman has the power to decide the
order of priority in which the members will be allowed to speak.
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4. To stop discussion on a matter: If the chairman feels that the discussion

has taken place on any motion for a sufficiently long time and the
discussion seems to be endless, he has the power to stop the discussion
and put that motion to vote.
5. To adjourn meeting: The chairman has the power to adjourn the

meeting under certain circumstances such as when the attendance falls
below quorum or if the majority of the members behave in a disorderly
way.
6. To exercise a casting vote: The chairman has a right to cast vote as a

member of the company and his vote is called a deliberative vote. But if
the articles expressly allow it, the chairman can exercise a second vote
known as casting vote. He can exercise casting vote only when there is
a tie i.e., when the number of votes cast in favour and against the
motion are equal. Generally, the articles of every company provide for
casting vote to the chairman and he must use it judiciously and in the
best interest of the company.
7. To grant a poll: When the members demand a poll, the chairman has
power to grant it. Further, he has the power to regulate the manner in
which it is to be taken.
8. To reject decision: The chairman has the power to reject a decision of

the meeting even if it is arrived at by a majority of the members:
a. if such a decision is against the provisions of the Companies, Act,

b. if any decision arrived at is outside the agenda.
c. if the decision arrived at is unlawful.
Duties of a Chairman
The duties of a chairman are:
1. To see that the meeting is duly convened and properly constituted. That
is, he must see that there is proper notice for the meeting, his
appointment is in order and the required quorum is present.
2. To see that the minutes of the last meeting are read, confirmed and
signed by him.
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COMPANY ACT, 2013
3. To see that the proceedings of the meeting are conducted according to

rules and the business of the meeting is discussed according to the
order set out in the agenda.
4. To see that the motions and amendments are within the scope of the
meeting and they are properly moved and seconded.
5. To see that all members including the minority get equal opportunity to
express their views.
6. To see that the sense of the meeting is properly ascertained on each

and every motion.
7. To see that the persons attending the meeting are prevented from
discussing matters in whispers among themselves and in small groups.
8. To conduct a poll if it is demanded by the prescribed number of

members.
9. To give his ruling when a point of order is raised during the course of
the debate.
10.To exercise his casting vote, if any, judiciously and in the best interest
of the company.
11.To see that order is maintained at the meeting.
12.To see that the minutes of the business conducted at the meeting are
kept and signed by him.
Rules for Discussion or Debate in Meeting
For governing the conduct of discussion or debate at a meeting, the

Chairman should impose certain rules so that the discussion or debate in a
meeting may be held in an orderly manner. Some of these rules are as
follows:-
1. The business of a meeting should be taken up in the same order as

given in the agenda; unless the order of the business is changed by the
Chairman with the approval of the members of the meeting.
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2. In the meeting, when discussion takes place, all remarks related to the
topic under discussion should be addressed to the chair.
3. Only one person should speak at a time and it is the Chairman's

prerogative to decide the order of the speaker.
4. When the Chairman rises to speak, any person speaking at the time
should stop speaking and take his seat. However, he can resume his
speech after the Chairman has finished speaking.
5. Members can speak only on a motion formally moved before the

meeting.
6. Except the mover of the motion, no person is allowed to speak more

than once on the same motion. The mover is usually allowed to speak
second time on the same motion for the purpose of giving reply to the
discussion on the motion before it is put to vote.
7. Discussion should be confined to the motion that is moved in the house

and should be relevant to the subject under debate
8. Motion and amendments should be in writing and signed by the mover

and seconder.
9. A motion, once before the meeting cannot be withdrawn except allowed

to be brought forward again at the same meeting.
10.A motion which is rejected by the meeting should not be allowed to be

brought forward again at the same meeting.
11.During discussion, point of order may be raised by any person and the
Chairman's ruling on the point of order will be final and binding on all.
Voting through Electronics Means
Rule 20 of Companies (Management and Administration) Rules, 2014

speaks about voting through electronic form. Accordingly every listed
company, or a company having not less then one thousand share holders,
shall provide to its members facility to exercise their right to vote at
general meetings by electronic means.
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Voting by electronics means, a secured system-based process of display of

electronic ballots, recording of votes of the members and the number of
votes in favor or against, such that the entire voting exercised by way of
electronics gets registered and counted in an electronic registry in a
centralised server with adequate cyber security.
A company, which provides the facility to its members to exercise their

votes at any general meeting by electronics voting system shall follow the
procedure as stated in Rule 20. The Rule 20(3) contains the procedure in
which the voting process and counting of votes are stipulated. [See Rule 20
of Companies (Management and Administration) Rules 2014, for details].
Skill Development
1. With imaginary details, draft a Proxy form to be presented in AGM of a

Company.
2. Draft a suitable specimen Agenda for an annual general meeting of a

public company.
4.7 MEETING OF BOARD OF DIRECTORS
Meetings of Directors
The directors are the representatives of shareholders and are responsible
for overall supervision of management of the company. They meet at
regular intervals say, once in a fortnight or once in a month, to discuss and
decide matters relating to the company. Usually the articles fix the dates of
board meeting e.g., on the 1st and 16th of every month. The Companies
Act has laid down that the meetings of directors must be held once in three
months or four meetings in a year. However, they may meet very often if
there is a necessity. The directors need to exercise the powers, conferred
on them by the Articles and the Act, only at the duly constituted meetings
of directors. These meetings are commonly termed board meetings.
Usually, the articles empower the board of directors to appoint committees
of directors to investigate and report on various matters relating to the
management and administration of the company e.g., opening of a branch,
introducing a new product by the company, raising of finance, etc.,
Meetings of such committees have also to be held as and when required
and these meetings are known as meetings of committees of directors.
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General Powers of the Board
Subject to the provisions of the Companies Act, the board of directors of a

company is entitled to exercise all such powers and to perform all such acts
as the company is authorised to exercise or do by its Memorandum and
Articles (Section 191).
The usual powers which can be exercised by the Board by passing

resolutions at Board meetings are as follows:
1. Determination of management policy, trading policy, etc.
2. Appointment, promotion and dismissal of staff.
3. Issue of shares and debentures.
4. Allotment of shares, calls on shares and forfeiture and re- issue of

shares.
5. Transfer and transmission of shares.
6. Convening meetings of share holders.
7. Disposal of profits and determination of nature of dividend and also

declaration of interim dividend.
8. Entering into contracts with third parties on behalf of the company.
9. Investment of company’s funds.
10.Exercising borrowing powers on behalf of the company.
11.Filing of statutory returns and statements etc.
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Powers to be Exercised in the Board Meeting by passing Resolution
The Board of Directors shall exercise the following powers on behalf of the
company by means of resolutions passed in the board meeting:
a. To make calls on share holders in respect of money unpaid on their

shares.
b. To issue securities including debentures, whether in or outside India.
c. To authorise buy-back of securities U/S 68.
d. To borrow monies.
e. To invest the funds of the company.
f. To grant loans or give guarantee or provide security in respect of loans.
g. To approve financial statement and the Board’s report.
h. To diversify the business of the company.
i. To approve amalgamation, merger or reconstruction.
j. To take over a company or acquire a controlling or substantial stake in

another company.
k. Any other matter which may be prescribed.
These powers can be exercised only when the company has authorised to
exercise and do, except those that are to be exercised or done by the
company in general meeting.
Further, the Board can delegate the powers specified in (d) to (f) above, by
a resolution passed at a meeting, to the committee of directors, or the
managing director, or the manager, or any other principal officer of the
branch (if any). Powers (d) to (e) can be delegated on such conditions that
the Board may specify.
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It is clarified in this section (179) regarding (d) above i.e., “To borrow
money”, that if any banking company accepts deposits of money from the
public which is repayable after the stipulated time lapses, shall not be
deemed to be borrowing. It is further clarified that the borrowing means
the arrangement made by the company with its bankers for the borrowing
of money.
The right of the company to impose conditions and restrictions on (a) to

(k) items of power of board stated above, in general meeting is retained.
[Sec. 179(4) of 2013 Act].
Restrictions on Powers of Board (Sec 180 of 2013 Act)
Subject to the provision of the Act, Memorandum and Articles, ordinarily

the Board is entitled to exercise all powers and perform all acts on behalf
of the company. Some of these powers can be exercised only by passing
resolutions at Board meeting, some others by passing resolutions by
circulation. However, the Companies Act has imposed certain restrictions
on powers of the Board i.e., the Board of a public limited company or a
subsidiary private company is prohibited from exercising any of the
following powers except with the consent of members in General meeting,
by passing special resolution:
a. Power to invest, otherwise than in trust, securities, the sale proceeds of

the company’s undertakings.
b. Power to Sell, lease or otherwise dispose of the company’s

undertakings.
c. Power to remit or give time for repayment of a debt due by a director.
d. Power to appoint a sole selling agent.
e. Power to borrow money exceeding the aggregate of paid-up capital and

free reserves of the company.
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Notice to Hold the Board Meeting
A notice within the prescribed time (not less than seven days) specifying
the date, time and place of the meeting must be sent to every director by
the secretary, by hand delivery or through electronic means or by post
[Sec 173(3)].
The agenda should also be set along with the notice. If notice is not sent to
some directors who consequently are absent from the meeting, the
proceedings of the meeting will be considered invalid. The Act provides that
if an officer who is responsible for the issue of such notice fails to do so,
shall be punishable with a fine of up to Rs. 25,000. [Sec 173(4)].
It may be stated that the agenda which is sent along with the notice of the
meeting should contain routine items first and the other items later. The
agenda of the first board meeting, which is held with in 30 days after
incorporation, contains items relating to setting up and conducting the
company’s business such as election of chairman, appointment of
managing director, secretary, banker, approval of draft prospectus, fixing
quorum, approval of the company’s seal, etc. The agenda of subsequent
board meetings which are held frequently vary from meeting to meeting.
Generally, the items of business included in the agenda of the subsequent
board meetings relate to transfer and transmission of shares, finance and
accounts, appointment of committees, calls on shares, forfeiture and re-
issue of shares, issue of debentures, dividends, convening of general
meetings, borrowings, investment of the company’s funds, execution of
contracts on behalf of the company, appointment, promotion and dismissal
of staff, filling of a casual vacancy among directors, etc.
The participation of directors in a meeting of the Board may be either in

person or through video conferencing or other audio visual means, as may
be prescribed. The recording and storing of proceedings under video
conferencing should be clear.
The central government, by notification, may specify such matters which

shall not be dealt with video conferencing.
One person company, small company and dormant company can hold
meeting at a shorter notice (within 90 days) and at least one meeting of
Board in each half of a calendar year. [Sec 173(5)].
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4.8 ANNUAL GENERAL MEETING
Annual General Meeting

The Companies Act lays down that every company, public or private, must
hold an annual general meeting of shareholders every year. It is held to
enable the shareholders to get an opportunity to know the position of the
company and also get clarifications on the auditor’s report and on the
annual report of the directors. It is one of the important meetings of
shareholders. It is in this meeting that the shareholders review the
performance of the company for the past year and exercise their right to
appoint directors of the company. This meeting should be held even if the
company has held any other general meeting of shareholders in the same
year (e.g., extraordinary general meeting). The annual general meeting is
held every year. The authority for convening this meeting is the board of
directors by passing a resolution in a properly convened and duly
constituted meeting.
Provisions of 2013 Act

It may be observed from the provisions of 2013 Act, that the concept of
Statutory Meeting is dropped in this Act.
Sec. 96 of 2013 Act deals with Annual General Meeting (AGM) procedure.
As per the provisions of 1956 Act, statutory meeting was held first (which
was for all practical purposes served as the AGM). It is not mentioned
anywhere in the 2013 Act, about statutory meeting. But Sec. 96 of the Act,
stipulates that in case of first AGM, it shall be held within a period of nine
months from the date of closing of the first financial year of the company.
In any other case, AGM has to be conducted within a period of six months,
from the date of closing of the financial year.
Sec. 96(1) says that every company other than One Person Company
(OPC) shall in each year hold, in addition to any other meeting, a general
meeting as its AGM. It should be specified in the meeting notice that
meeting is AGM. Further it states that not more than fifteen months shall
elapse between the date of one AGM of a company and the next one.
As the first general meeting of shareholders has to be held within nine

months of the first financial year, there is no necessity to hold any AGM in
the year of its incorporation. This means that first meeting of shareholder
is construed as statutory meeting. But the term ‘Statutory Meeting” is
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neither defined under Sec. 2 of the Act, nor expressed under Sec. 96. Thus
the concept is dropped.
The Registrar, for any special reason, can extend the time to hold any AGM,
other than first AGM, by a period not exceeding three months.
Sec. 96(2) has prescribed business hours to conduct AGM, which runs
between 9 a.m. and 6 p.m. which was not stipulated in 1956 Act. Further,
AGM can be conducted on any day, other than National Holiday (which is
declared by the central government) at the registered office of the
company or at some other place within the city, town or village in which
the registered office of the company is situated.
Meeting notice for AGM should be served for all members (whose name
found in the name of register of members on the date of sending notice).
Clear twenty one days’ notice, either in writing or through electronic mode,
(as may be prescribed) should be sent to all registered members.
Shorter notice can also be given for AGM, if consent in writing or electronic
mode is given by not less than ninety-five percent of the members entitled
to vote at such meeting [Sec. 101(1)].
As said earlier, the meeting notice should be given to all registered

members, auditors, every director of the company and legal representative
of any deceased member or the assignee of an insolvent member [Sec.
101(3)].
If by accident, any member is not given the meeting notice or to other

person who is entitled to such notice for any meeting, the proceedings of
such meeting shall not be invalidated [Sec.101(4)].
The AGM notice should accompany a copy of audited financial statements

(prepared in accordance with the provisions Sec. 129 and in the format
prescribed for different classes of companies in the schedule III of the Act)
and Annual report of directors as per Sec. 134(3) of the Act.
Other aspects, viz., (i) not holding AGM by the company (ii) and penalty for
not holding AGM, are explained in detail in chapter 7. However, if the
company is not convening AGM as per Sec. 96, the Tribunal can call AGM
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COMPANY ACT, 2013
on the application of any member of the company (Sec. 97). Meeting of

members can also be called as per Sec. 98.
Consequence of Default
Penalty for non convening AGM as per directions of Tribunal is imposed as
per Sec. 99. The defaulting officer is fined upto rupees one lakh and further
fine of rupees five thousand for every day during which such default
continues.
Business Transacted at the Meeting

At the annual general meeting, both ordinary business and special business
are transacted. However, the annual general meeting generally transacts
ordinary business and because of this, meeting is also called the ordinary
meeting.
(a) Ordinary Business

As per the Act, the ordinary business consists of the following items:
i. Appointment of directors in place of those retiring.
ii. Approval of directors’ report.
iii. Approval of annual accounts and auditors’ report.
iv. Appointment of auditors and fixing their remuneration.
v. Declaration of dividend.
For passing a resolution on ordinary business, an ordinary resolution is

required
(b) Special Business

Any business transacted at the annual general meeting other than the
items mentioned above will be deemed to be special business. Special
business may be passed by an ordinary resolution or special resolution.
The Ac lays down that for transacting special business, the notice of the
meeting to the members showing it as special business is necessary.
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Annual Report of Directors
According to Section 134 of the 2013 Act, the annual report of directors
must be attached with the balance sheet and profit and loss account which
has to be sent to the members along with the notice of the meeting. The
report must be dated and signed by at least two directors, one of whom
should be the managing director, if any, The report must contain the
following particulars:
a. A brief statement on the trading results of the company in the past year.
b. The amount proposed to be carried to the reserve fund.
c. The amount proposed to be paid as dividend.
d. Material changes and commitments, if any, affecting the financial

position. The company should consider the changes that have occurred
between the end of the financial year of the company to which the
balance sheet relate and the date of the Report.
e. The conservation of energy, technology absorption, foreign exchange

earnings and outgo in such a manner as may be prescribed.
f. As far as is material for a clear understanding of the state of affairs of

the company by its members and will not in the Board’s opinion be
harmful to the business of the company or its subsidiaries, deal with any
changes which have occurred during the financial year:
i. In the nature of business;
ii. In the company’s subsidiaries or in the nature of the business

carried on by them; and
iii. Generally in the classes of business in which the company has an

interest.
g. The extract of the annual return in such form as may be prescribed as

per Sec. 92(3);
Number of meetings of the board;
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h. Directors’ responsibility statement;
i. A statement on declaration given by independent directors under sub-

section (6) of section 149;
j. In case of a company covered under sub-section (1) of section 178,

company’s policy on directors’ appointment and remuneration including
criteria for determining qualifications, positive attributes independence
of a director and other matters provided under sub-section (3) of
section 178. (See Sec. 178 of the Act for details);
k. Explanations or comments by the Board on every qualification,

reservation or adverse remark or disclaimer made:
i. By the auditor in his report; and
ii. By the company secretary in practice in his secretarial audit report;
l. Particulars of loans, guarantees or investments U/S 186; and
m. Particulars of contents or arrangements with related parties referred to

in sub- section (i) of Section 188, in the prescribed form.
Annual Accounts and Balance Sheet
Under Section 129 of the Act, the board of directors of a company must
place the audited balance sheet and profit and loss account of the company
for the relevant year before the annual general meeting. The Act also
provides that a copy of the balance sheet along with the profit and loss
account and auditors’ report must be sent to every member of the
company and to every debenture holder at least 21 days before the
scheduled date of meeting. The balance sheet and profit and loss account
must be signed by two directors including the managing director (if any) or
the secretary, if authorised by the board. After the annual general meeting
is over, the secretary must file three copies of the balance sheet and profit
and loss account along with other documents annexed thereto with the
Registrar within 30 days from the date of meeting.
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The Companies Act provides that in case the annual general meeting has
not been held, the company must file with the Registrar three copies of
balance sheet and profit and loss account along with other annexed
documents within 30 days from the latest day on or before which the
meeting should have been held under the provisions of the Companies Act.
Chairman’s Speech
The director’s report which is prepared to meet the legal requirements may
not reveal all the details about the state of affairs of the company and its
prospects. Therefore, even though it is not required by law, it has become
customary for the Chairman of the company to make a speech or address
the shareholders at the annual general meeting. In his speech, the
chairman explains the information given in directors’ report in detail, states
the trading result and financial position of the company, reviews the
company’s working and progress during the year, mention the factors that
are favourable or adverse to the business of the company and refers to the
future prospects of the company. In his speech, he also makes reference to
the various economic and political problems and the policies of the
government which affect the industry in general and the company in
particular.
Generally, it is the responsibility of the secretary to prepare the draft of the

chairman’s speech. When it is approved, he gets it printed and circulated
among the members at the time of the meeting. Sec 104 of the Act deals
with the appointment of chairman of the meeting.
Notice and Agenda of the Annual General Meeting

The Board, after taking decision to hold annual general meeting, authorises
the secretary to prepare and issue notice. The notice must specify that the
meeting is an annual general meeting to be held as per Section 96 of the
Companies Act. The notice must contain particulars such as the date, time
and place of the meeting and also must specify the period during which the
transfer books will remain closed. The notice must also state the fact that
members are entitled to appoint proxies to attend and vote on their behalf.
The notice must be accompanied by all relevant documents such as annual
accounts and balance sheet with auditors’ reports, directors’ report, proxy
form, admission card etc. The notice must be sent to each member,
debenture holder and others, entitled to receive notice, at least 21 days
before the date of meeting. A public notice of the meeting is also published
in the leading news papers.
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COMPANY ACT, 2013
The meeting notice can be sent in writing or in electronic mode in such

manner as may be prescribed.
The agenda of the annual general meeting is prepared by the secretary as

per the instructions of the Board and in consultation with the Chairman.
The agenda is annexed to every copy of the notice as part of it or as a
separate sheet. The secretary, in consultation with the Chairman also
prepares a detailed agenda. (e.g., names of the proposer and seconder of
each motion to be moved at the meeting).
Closing of Transfer Books: If the Board of directors decides to

recommend declaration of dividend, it will be necessary to close the
transfer books, in order to facilitate the preparation of dividend lists and
warrants. The Board meeting held just before the annual general meeting
decides the period during which the transfer books are to be closed.
Usually, the transfer books are closed for a period of 14 days ending on the
day of meeting. This fact must be brought to the notice of the stock
exchange and also of the members, who are entitled to attend the annual
general meeting.
Applicability to One Person Company (Sec. 122)

The provisions of Sec. 98 (power of Tribunal to call meetings of members),
calling of extraordinary meeting (Sec. 100) notice of meting (Sec. 101),
statement to be annexed to notice (Sec. 102), quorum of the meeting
(Sec. 103), chairman of the meeting (Sec. 104), Proxies (Sec. 105),
restriction on voting rights (See 106), Noting by show of hands (Sec. 107),
Voting through electronic means (Sec. 108), demand for poll (Sec. 109),
postal ballot (Se.c 110), and Circulation of members’ resolution (Sec. 111)
are not applicable to a one person company (Sec. 122).
One Person Company need not conduct the business of meeting as per
clause (a) of sub-section (2) of Sec. 102. The AGM of this company (OPC)
shall be conducted as per sub-sec (3) of section 122.
Ordinary or special resolution as per Sec.114, required to be passed in

AGM or any other general meeting of the company, and it is sufficient for
OPC that the resolution is communicated by the member to the company
and entered in the minutes book, required U/S. 118 of the Act and signed
and dated by the member. For all purposes, this date shall be deemed to
be the date of meeting under the Act, 2013.
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In case OPC, one member himself/herself is considered as director of the

company. Any Board Meeting will be conducted by him/her on any date as
per requirement and resolution by such director is entered in minutes
book, which is maintained, signed and dated (Sec. 118). Such date shall be
the date of Board meeting for all purposes.
[Note: This is anew section in 2013 Act, and tells about the method of
conducting AGM and Board meeting in case of OPC].
Notice and Agenda of the Annual General Meeting
ABC COMPANY LIMITED
Regd., Office ...............
Notice
Notice is hereby given that the seventh annual general meeting of the
company will be held at the Registered Office of the company on 16th
March 2015 at 2.30 p.m. to transact the following business:
Agenda
1. To read the notice convening the meeting.
2. Chairman’s address.
3. To receive and adopt the Directors’ report and the audited balance sheet
and the profit and loss account.
4. To declare dividend.
5. Election of two directors in place of Mr. X and Mr. Y who retire by

rotation and are eligible for re-election.
6. To appoint auditors and to fix their remuneration.
7. Vote of thanks to the Chairman.
8. Chairman to declare the meeting closed.
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COMPANY ACT, 2013
By Order of the Board,
Sd/-
Secretary
Place ……………….
Date 19..............
Notes:
1. A member entitled to attend and vote may appoint a proxy to attend

and vote instead of himself and a proxy need not be a member.
2. A proxy form is attached.
3. The Transfer books of the company will be closed from ...............

2015................. to................. 2015 ............. both days inclusive.
Minutes of the Annual General Meeting

.................. Limited
Minutes of the Seventh Annual General Meeting held at the Registered
Office of the company at ............. on 20.............
at 2.00 p.m.
Present:
1. Mr................................. Chairman.
2. Mr.................................
3. Mr.................................} Directors.
4. Mr.................................
5. Mr.................................
6. Mr.................................
In attendance;
Mr................................. Auditor.
Mr.................................Secretary.
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COMPANY ACT, 2013
113 Shareholders were present.
1. Note of the meeting: The Secretary read the notice of meeting

dated................20................ convening the meeting
2. Chairman’s speech: The chairman made a speech explaining the

progress made by the company and its future prospects.
3. Directors’ and Auditors’ report: The Chairman presented Directors’

report along with profit and loss account, balance sheet and auditors’
report. He read out directors’ report and auditors’ report. The accounts
were taken as read. Chairman moved a resolution that the report and
accounts be adopted and unanimously passed.
“Resolved that the Directors’ report and accounts as audited and

certified by the company’s auditor now before the meeting showing the
position of company’s affairs as on ................ be approved and
accepted.”
4. Dividend “Resolved that the dividend recommenced by the directors in

their annual report viz., 20% on equity shares for the year
ended ...............20.............. be approved and declared.
5. Re-election of Directors “Resolved that Mr. ................ the director

retiring by rotation and being eligible for re-election, be and is hereby
re-elected a director of the company.”
6. Re-election of Directors “Resolved that Mr. ................ the director

retiring by rotation and being eligible for re-election be and is hereby
re-elected a director of the company.”
7. Auditors “Resolved that Messrs. ................ Chartered Accountants,

Bombay be, and are hereby re-appointed auditors of the company for
the current year at a fee of Rs. 20,000 per year”.
8. Vote of Thanks The meeting terminated with a vote of thanks to the

Chair, to which the Chairman suitably responded and declared the
meeting closed.
Sd/- Sd/-
Secretary. Chairman.
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COMPANY ACT, 2013
Place …………….
Date ................
Specimen of Admission Card
No.................
4.9 EXTRA-ORDINARY GENERAL MEETING
Objectives
Every general meeting other than the annual general meeting is an

extraordinary general meeting. Such a meeting is generally convened for
transacting some special or urgent business which has to be done before
the next annual general meeting. For example, this meeting may be
convened for alteration of the memorandum and articles of association,
alteration of share capital, removal of a director from office before the
expiry of his term. Unlike the annual general meeting which is held once
every year, the extraordinary general meeting may be held whenever there
is urgent business to be transacted. At this meeting, only the special
business for which it is convened can be transacted and all business
transacted at this meeting is special business.
Who can Call an Extraordinary General Meeting?
An extraordinary general meeting may be convened by:
i. The board of directors.
ii. The board of directors on the requisition of the members.
iii. The requisitionists themselves.
iv. The Company Law Board.
a. By the board: The board of directors, if the articles of the company so

provide, shall can an extraordinary general meeting whenever, it thinks
fit, by passing a resolution to that effect at a board meeting. This
meeting may be convened by the directors to consider a resolution, as
for instance to remove the managing director who is guilty of fraud,
misfeasance, etc. (Sec 100(1)).
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COMPANY ACT, 2013
b. By the board on requisition of members: Under Sec 100(2),

members are empowered to demand the convening of an extraordinary
general meeting. The letter of requisition must be signed by:
i. Members holding not less than one-tenth paid up capital of the

company carrying voting power [Sec 100(2)(a)].
ii. If the company has no share capital, members representing not less
than one tenth of the total voting rights [Sec 100(2)(b)].
The requisition must state clearly the object for which the meeting is called
and must be deposited at the registered office of the company. The board
must call within 21days of the deposit of the requisition an extraordinary
general meeting to be held on a day not later than 45 days from the date
of the requisition.
c. By the requisitionists: If the board fails to hold the meeting within 45

days of the deposit of the requisition, the requisitionists themselves may
call the meeting within three months from the date of the requisition.
The meeting may be called:
i. By all of them who signed the requisition, or
ii. Such of them as represent a majority in value of the paid up share

capital held by all of them or those who hold not less than one-tenth
of such paid up capital whichever is less or
iii. such of them (in case the company has no share capital) as represent
not less than one-tenth of the total voting power of all the members.
The meeting called by the requisitionists themselves must be held in the

same manner as is done by the board in calling the meeting e.g., 21 days’
notice and so on. The expenses incurred by the requisitionists for holding
the meeting shall be paid by the company and the company may recover
the same from the directors, who were at default to convene EGM (Sec.
197).
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COMPANY ACT, 2013
d. By the Company Law Board: Under Section 98 of the Act, the

Company Law Board may order the holding of the extraordinary general
meeting either on its own initiative or on the application made by a
director or any member entitled to vote at the meeting. In its order, the
Company Law Board may specify the terms and manner in which the
meeting should be conducted.
Notice of the Meeting
The notice of the extraordinary general meeting specifying the date, time
and place of the meeting must be issued to all the members entitled to
attend and vote at least 21 days before the meeting. In addition, the notice
should be published in newspapers. The notice must state the object of the
meeting and the particulars of the special business which is to be
transacted at the meeting. If a special resolution is to be moved at the
meeting, the text of the resolution proposed to be moved should
accompany the notice.
Explanatory Statement: Section 102 of the Act provides that if a company

intends to transact special business at the meeting, the notice of the
meeting should be accompanied by an explanatory statement giving all
material facts relating to such items of business and the nature of interest
therein of the managing director, director, manager, secretary, etc.
Under Section 102 of the Act, any business transacted at the extraordinary
general meeting is deemed to be special business.
Therefore, every notice of such meeting must be accompanied by an

explanatory statement. The object of such a statement is to impress upon
the members the reasons of passing such a resolution so that they extend
support to the resolution at the meeting.
Procedure for Holding the Meeting
1. If the meeting is covered at the instance of the directors, the secretary

sends notice of the meeting to the members along with an explanatory
statement at least 21 days before the meeting. At the same time the
notice is also published in the newspapers. The secretary then prepares
a detailed agenda in consultation with the chairman.
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COMPANY ACT, 2013
2. If the meeting is to be held on the requisition of shareholders, the

secretary first ascertains whether the requirements of the Act relating to
number of requisitionists etc., have been complied with and then in
consultation with the chairman, will convene a meeting of the directors
to decide the date, time and place, of the meeting. It may be noted
here that the requisitioned meeting should be held within 45 days of the
deposit of the requisition.
3. Then the secretary will send 21 days notice to the members along with
an explanatory statement.
4. At the meeting, the chairman first ascertains whether the meeting is

duly convened and properly constituted. After satisfying himself
regarding these preliminary procedure, he will ask the secretary to read
the notice of the meeting.
5. After reading of the notice of meeting, the chairman will proceed with
the business as per agenda.
6. Before moving any resolution on the matter, the chairman explains the
need and advisability of passing the resolution. Then the moves he
resolution which is put to vote after a thorough discussion and the result
will be declared by the chairman. If there is a demand for poll, he
should arrange for the same. If the resolution is a special resolution, it
must be passed by a three-fourths majority.
7. After the meeting, the secretary must file a duly certified copy of the
special resolution with the Registrar within 30 days of its passing. The
secretary also prepares the minutes of the meeting and will get them
approved by the chairman at the next board meeting. Further, a printed
copy of the special resolution must be embodied or annexed to each of
the articles issued by the company after the meeting.
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Secretarial Work Relating to an Extraordinary General Meeting
1. If the meeting is convened on the board’s initiative, the secretary, in

consultation with the chairman convenes the board meeting to fix the
date, time, place etc., of the meeting.
2. If the members’ requisition for calling an extraordinary general meeting

is received, the secretary, after making a scrutiny of the requisition to
ascertain whether it is in order, has to convene a board meeting in
consultation with the chairman for fixing the date and time of the
extraordinary general meeting.
3. The secretary also prepares the draft resolution, explanatory statement

and after getting them approved by the board, arranges for their
printing.
4. The secretary issues notices to members along with an explanatory

statement and will also advertise the notice in newspapers.
5. He also scrutinises the proxies received, prepares a list of proxies and

arranges for poll, if demanded.
6. He arranges for the seating of members and for recording their

attendance.
7. He has to arrange for checking the admission cards at the entrance.
8. At the meeting, he has to ascertain whether the required quorum is

present. If the quorum is present, he has to read the notice of meeting
if required to do so.
9. He should assist the chairman in conducting the meeting including

supply of necessary information and documents if required by the
meeting, taking of poll, counting of votes, etc.,
10.During the meeting, he has to take notes of the proceedings of the

meeting.
11.After the meeting is over he has to draft the minutes of the meeting
and get them approved by the chairman at the next board meeting.
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12.Further, he should carry out the instructions and decisions of the

meeting.
13.He should also file a certified copy of the special resolution with the
Registrar within 30 days of the passing of the resolution. If he fails to do
so, a fine of Rs. 20 per day will be imposed on the company till the
default continues.
14.If charges have been made in the articles or memorandum, the altered
copies of these documents must be filed with the Registrar within three
months.
After having stated the provisions relating to the extraordinary general

meeting and the secretary’s work in connection with this meeting, we now
give specimen of the requisition by the shareholders for holding this
meeting, notice of the extraordinary general meeting and the minutes of
the meeting.
Requisition by the Shareholders for Holding Extraordinary General

Meeting
The Directors,
........................... Co. Ltd.
....................................
Gentlemen,
We the undersigned being, the holders of more than one-tenth of the paid-
up capital of the company and being entitled to vote, hereby require you
forthwith to proceed to convene an extraordinary general meeting of the
company for the purpose of considering (here set out objects of meeting)
and for the purpose of passing such resolutions in relation thereto as may
be thought fit.
Signatures of requisitionists.
Date ..............
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Notice of Extraordinary General Meeting Convened by the Directors

on Requisition
...................................Co. Ltd.
...................................
Notice is hereby given that in pursuance of the requisition dated

................ 20 .................. an extraordinary general meeting of the
company will be held at the Registered Office of the company at ..............
on.............. 20............. at ……………… for the purpose of considering and if
thought fit for passing the following resolution which will be proposed as a
special resolution.
(State here the text of the resolution)

By order of the Board.
Secretary
Place ...................
Date ...................
Note:
1. A member entitled to attend and vote at the meeting is entitled to

appoint a proxy to attend and vote instead of himself and the proxy
need not be a member.
2. A proxy form is enclosed herewith.
3. An explanatory statement in respect of the above mentioned statement

is annexed herewith.
Meetings of Debenture Holders

The meeting of debenture holders is called by the company to consider
those matters which affects their interest e.g., to vary the rate of interest
or the terms of security or to modify the rights of debentures holders. The
rules and procedure for holding such meetings are usually provided in the
debenture trust deed.
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Meetings of Creditors other than in Winding Up

The meeting of creditors other than debenture holders of the company may
be held when the company proposes to make a scheme of arrangement or
to effect a compromise in a dispute with its creditors. For example, if a
company is in financial difficulty, it may call for a meeting of creditors to
secure their support and approval to any scheme of rearrangement for
saving the company from financial difficulty.
4.10 SUMMARY
Section 2(20) of the companies Act 2013, defines that ‘a company means a
company formed and registered under this Act or an existing company”.
The company is created only when registered under the Companies Act,
2013. This chapter briefly, discusses about the meaning of company, its
types and members, procedure of formation of the company, types of
meetings to be conducted in the company, duties, rights, liabilities of
various members of the company, etc.
Section - A: 20 Marks
1. Trace out the significant development in the history of Company Law in

India.
2. Give an explanatory note on government companies.
3. Briefly explain the duties of Secretary before and after incorporation.
4. Briefly example the functions, rights and duties of a company promoter.
5. Explain different types of preference share.
6. Discuss different types of debentures.
7. Give an explanatory note on eligibility to become member and

termination of membership.
8. Briefly explain the rights, duties and liabilities of a member of a

company.
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9. Explain the procedure of appointing a Chairman of Company meeting,

his qualities and powers and duties he enjoys.
10.Briefly explain the various aspects of AGM as per 2013 Act.
11.Explain the Secretarial work relating to extra-ordinary general meeting.
Section - B: 10 Marks
1. Analyse the chief characteristics of the company.
2. Analyse the statement - “A Company is an artificial person created by

law with a perpetual succession and common seal”.
3. Analyse the stages of Company promotion.
4. Analyse the steps involved in Company formation.
5. Distinguish between Memorandum and Articles of Association.
6. Explain the right enjoyed by preference shareholders.
7. Distinguish between equity shares and preference share.
8. Give an analytical note on: (i) eligibility to become a member and (ii)
termination of membership.
9. What are the essentials of a valid meeting of a company?
10.Write a note on (i) contents of notice and (ii) mode of giving notice.
11.State the usual powers that the Board of Directors can exercise in their
operations.
12.State the powers that can be exercised in Board Meetings by the

Directors.
13.Give a note on the provisions of Companies Act relating to AGM.
14.Give a note on the types of business transacted at the AGM.
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15.Write a note on, “who can call the extra-ordinary meeting”.
16.Write a note on the procedure of holding extra-ordinary meeting.
Section - C: 05 Marks
1. Define Joint Stock Company.
2. What is Public Company?
3. Give the meaning of “Promotion”.
4. What is Incorporation?
5. What is a “Stock”?
6. What “Table - A” of Companies Act contains?
7. Give the meaning of Prospectus.
8. What is share capital?
9. Give the meaning of share.
10.What is the concept of “Member” under section 2(55) of the Companies

Act, 2013?
11.Tell about the legal position of a “Minor” as a member of the company.
12.Name the types of meetings that are conducted in a company.
13.What is an Agenda?
14.What do you mean by AGM?
15.What is “Ordinary Business” of AGM?
16.State the objective of convening extra-ordinary meeting.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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Chapter 5
Cyber Law
Objectives
★ Cyber Laws 1999 and Cyber Law in India
★ Information Technology Act, 2000 and its salient features, objectives and
scope
★ Importance of Cyber Law
★ Legal Aspects of Cyber Crime
★ Implementation of an information security programme
Structure:
5.1 Cyber Laws 1999 and Information Technology Act, 2000

5.2 Cyber Law in India
5.3 The Information Technology Act 2000
5.4 Salient Features of IT Act, 2000
5.5 Importance of Cyber Law
5.6 Piracy
5.7 Legal Aspect of Cyber Crime
5.8 Information Technology (IT)
5.9 Summary
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5.1 CYBER LAWS 1999 AND INFORMATION TECHNOLOGY

ACT, 2000
Introduction
Man has evolved from his original form from the past centuries. He has
come through so many stages, has made so many discoveries, and
invented so many things. But since the discovery of electricity, electronic
devices has been the most fabulous one. In the 20th century Charles
Babbage invented the computer. It is one of the most amazing inventions.
Initially it only made simple calculations. Later it became a multi purpose
machine.
Soon, with the rapid advancement, the computer became a common sight,
because of the decreasing cost and size of it. With the advent of IBM’s
personal computer. (pc), the computer was economical to purchase and
maintain. At present every organisations may be business centres,
corporate office, Institution, even at home, usage of computer has become
compulsory. In 1980 the computers have been captured place in the
society.
Today, there are computers every where. Mobiles, Calculators, PCs, ATMs
etc. are all small computers themselves, which are used for services, data
storage to entertainment. The Internet or World Wide Web (WWW) are the
advanced technology used in the computer. These brings the people closer
and make the world smaller. “World is small”, “World is flat” are all usages
used only because of computers. But this beautiful and great invention has
been mis-used by the some of the criminals. In order to protect and
regularise such crimes the law on International Technology came into force.
Cyber Law is another important law introduced recently covering a wide

variety of legal issues relating to Information and Communication
technology. It includes use of internet as well as other form of computer or
Digital Processing Devices, (DPD), which also covers and includes
Intellectual Property, Privacy, Freedom of expression and
Jurisdiction. It covers rights of citizens of cyber space, who are generally
called as Netizens: It is the regulation of the cyber space for a peaceful
and harmonions existence of Netizens. There is no definite and exhaustive
definition or meaning was given to the term, Cyber Law. However it is new
phenomenon having emerged much after the onset of Internet. Internet or
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Cyber space has no geographical boundaries. It can be referred to all legal

and regulatory aspects of Internet and the World Wide Web. “Anything
related to legal aspects or issues concerning any activity of citizen and
others in cyber space is known as Cyber Law”.
5.2 CYBER LAW IN INDIA
The rapid growth in the information technology brought a sea change in

the communication system and digital technology. Digital technology has
no limit in its geographical boundaries nor the Internet users. Netizens
have physical characteristics of sex, age, colour, nationals and so on. It is
the general practice that the internet users are spending more than their
required times on net. This leads to develop their communication skills,
interactions, sending messages and so on.
A revolutionary change is occurring gradually in life style and

communication system of people and business. Both individual and
Business are using computers to a greater extent for creating, transmitting
and storing the information in the electronic form. E- Commerce and E-
Business are the common usage for the daily usage. In comparison to
traditional print – based media, the accessibility of cyber space has torn
down traditional barriers between an individual and his or her ability to
publish. Any person with an internet connection has the potential to reach
an audience of millions, which is absolutely free of cost. This has been
misused by the internet users by issuing of obscene Internet postings
gambling, child pornography and fraud. These are also raised the question
on Intellectual property and Individual rights. After the Liberalisation Policy
India is Witnessing a sea change in the Information Technology. This also
brought a few issues along with its advantages. Since the Inter-net user
has no boundary, which is accessible by each and every individual at any
time, there need to have some control and regulations. There are different
Acts to regulate the various activities in connection with banking, business,
society, economics and so on. Some of activities appearing in the net is
against to our culture. Hence there need to have a code of conduct to
regulate. The following is the Act enacted to regulate the activities on the
cyber space:-
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5.3 THE INFORMATION TECHNOLOGY ACT 2000
Cyber Law in India is incorporated in the Information Technology Act 2000

(IT Act, 2000).
The IT Act 2000 chiefly covers:
a. E-Commerce in India.
b. E-Governance in India.
c. Cyber Contraventions.
d. Cyber Crimes.
Objectives of IT Acts
The following are the objectives of Information Technology Act 2000:
★ To provide for legal recognition of electronic records and digital

signatures.
★ To prevent the possible mis-use arising out of transactions and other

dealings concluded over the electronic medium.
★ To create civil and criminal liabilities for contravention of the provisions of

the proposed legislation.
★ To provide for the use and acceptance of electronic records and digital
signatures in the Government offices and its agencies.
★ To facilitate electronic storage of information and data.
★ To facilitate electronic fund transfers between financial Institutions and

banks.
★ To give legal sanctity for books of account maintained in the electronic

form by the banks.
Scope of the Act: This is given under chapter 1 Sec. 1. as: The Act
extend to the whole of India, and unless other wise provided in the Act, it
applies also to any offence or contravention there under committed out
side India by any person.
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The Act shall not apply to the following:
1. A negotiable instrument (other than a cheque) as defined in section 13

of the Negotiate Instrument Act 1881.
2. A power of attorney defined in section 1–A of the Power of Attorney Act

1882.
3. A trust as defined in section 3 of the Indian Trusts Act 1882.
4. A will as defined in clause (h) of section (2) of the Indian succession Act
1925.
5. Any contract for the sale or conveyance of immovable property or any

interest in such property.
6. Any such class of documents or transactions as may be notified by the

Central Government in the official Gazette.
Definitions
According to the section 2 of the Act the following are the definitions to the
various words used in I.T. Internet, Cyber Space:-
Sec 2. d(a)“Access” with its grammatical variations and cognate

expressions, means gaining entry into, instructing or communicating with
the logical, arithmetical or memory function resources of a computer,
computer system or computer network;
(b)“Addressee” means a person who is intended by the originator to

receive the electronic record but does not include any intermediary;
(c)“Adjudicating officer” means an adjudicating officer appointed under

sub-section (1) of section 46;
(d)“Affixing digital signature”, with its grammatical variations and

cognate expressions, means adoption of any methodology or procedure
by a person for the purpose of authenticating an electronic record by
means of digital signature;
(e)“Appropriate Government” means as respects any matter:
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a. Enumerated in List II of the Seventh Schedule to the Constitution;
b. Relating to any State Law enacted under List III of the Seventh
Schedule to the Constitution, the State Government and in any other
case, the Central Government.
(f) “asymmetric crypto system” means a system of a secure key pair

consisting of a private key for creating a digital signature and a public
key to verify the digital signature,
(g)“Certifying Authority” means a person who has been granted a

licence to issue a Digital Signature Certificate under section 24;
(h)“Certification practice statement” means a statement issued by a

Certifying Authority to specify the practices that the certifying Authority
employs in issuing Digital Signature Certificates;
(i) “Computer” means any electronic, magnetic, optical or other high-

speed data processing device or system which performs logical,
arithmetic and memory functions by manipulations of electronic,
magnetic or optical impulses, and includes all input, output, processing,
storage, computer software or communication facilities which are
connected or related to the computer in a computer system or computer
network;
(j) “Computer network” means the interconnection of one or more

computers through:
i. The use of satellite, microwave, terrestrial line or other

communication media; and
ii. Terminals or a complex consisting of two or more interconnected

computers whether or not the interconnection is continuously
maintained;
k. “Computer resource” means computer, computer system, computer

network, data, computer database or software;
l. “Computer system” means a device or collection of devices, including

input and output support devices and excluding calculators which are
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not programmable and capable of being used in conjunction with

external files,
which contain computer programmes, electronic instructions, input data

and output data, that performs logic, arithmetic, data storage and
retrieval, communication control and other functions;
m. “Controller” means the Controller of Certifying Authorities appointed

under sub-section (1) of section 17;
n. “Cyber Appellate Tribunal” means the Cyber Regulations Appellate

Tribunal established under sub-section (1) of section 48;
o. “Data” means a representation of information, knowledge, facts,

concepts or instructions which are being prepared or have been
prepared in a formalised manner, and is intended to be processed, is
being processed or has been processed in a computer system or
computer network, and may be in any form (including computer
printouts magnetic or optical storage media, punched cards, punched
tapes) or stored internally in the memory of the computer;
p. “Digital signature” means authentication for any electronic record by

a subscriber by means of an electronic method or procedure in
accordance with the provisions of section 3;
q. “Digital Signature Certificate” means a Digital Signature Certificate

issued under sub-section (4) of section 35;
r. “Electronic form”, with reference to information, means any

information generated, sent, received or stored in media, magnetic,
optical, computer memory, micro film, computer generate micro fiche or
similar device;
s. “Electronic Gazette” means the Official Gazette published in the

electronic form;
t. “Electronic record” means data, record or data generated, image or

sound stored, received or send in an electronic form or micro film or
computer generated micro fiche;
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u. “Function”, in relation to a computer, includes logic, control,

arithmetical process, deletion, storage and retrieval and communication
or telecommunication from or within a computer;
v. “Information” includes data, text, images, sound, voice, codes,

computer programmes, software and database or micro film or
computer generated micro fiche;
w. “Intermediary”, with respect to any particular electronic message,

means any person who on behalf of another person receives, stores or
transmits that message or provides any service with respect to that
message;
x. “Key pair”, in a asymmetric crypto system, means a private key and

its mathematically related public key, which are so related that the
public key can verify a digital signature created by the private key;
y. “Law” includes any Act of Parliament or of a State Legislature,

Ordinances promulgated by the President or a Governor, as the case
may be, Regulations made by the President under article 240, Bills
enacted as President’s Act under sub-clause (a) of clause (1) of article
357 of the Constitution and includes rules, regulations, bye-laws and
order issued or made thereunder;
z. “Licence” means a licence granted to a Certifying Authority under

section 24;
(z c) “Private key” means the key of a pair used to create a digital

signature.
(z d) “public key” means the key of a key pair used to verify a digital
signature and listed in the Digital Signature Certificate.
(z e) “Secure system” means computer hardware, software procedure

that:
a. are reasonably secure from unauthorised access or misuse.
b. Provide a reasonable level of reliability and correct operation.
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c. are reasonably suited to performing the intended functions and.
d. adhere to generally accepted security procedures.
5.4 SALIENT FEATURES OF IT ACT, 2000
The salient features of information technology act, 2000 are as follows:
1. Extends to the whole of India (Section 1).
2. Authentication of electronic records (Section 3).
3. Legal Framework for affixing Digital signature by use of asymmetric

crypto system and hash function (Section 3).
4. Legal recognition of electronic records (Section 4).
5. Legal recognition of digital signatures (Section 5).
6. Retention of electronic record (Section 7).
7. Publication of Official Gazette in electronic form (Section 8).
8. Security procedure for electronic records and digital signature (Sections

14, 15, 16).
9. Licensing and Regulation of Certifying authorities for issuing digital

signature certificates (Sections 17-42).
10.Functions of Controller (Section 18).
11.Appointment of Certifying Authorities and Controller of Certifying

Authorities, including recognition of foreign Certifying Authorities
(Section 19).
12.Controller to act as repository of all digital signature certificates

(Section 20).
13.Data Protection (Sections 43 & 66).
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14.Various types of computer crimes defined and stringent penalties

provided under the Act (Section 43 and Sections 66, 67, 72).
15.Appointment of adjudicating officer for holding inquiries under the Act

(Sections 46 & 47).
16.Establishment of Cyber Appellate Tribunal under the Act (Sections

48-56).
17.Appeal from order of Adjudicating Officer to Cyber Appellate Tribunal

and not to any Civil Court (Section 57).
18.Appeal from order of Cyber Appellate Tribunal to High Court (Section

62).
19.Interception of information from computer to computer (Section 69).
20.Protection System (Section 70).
21.Act to apply for offences or contraventions committed outside India

(Section 75).
22.Investigation of computer crimes to be investigated by officer at the

DSP (Deputy Superintendent of Police) level.
23.Network service providers not to be liable in certain cases (Section 79).
24.Power of police officers and other officers to enter into any public place
and search and arrest without warrant (Section 80).
25.Offences by the Companies (Section 85).
26.Constitution of Cyber Regulations Advisory Committee who will advise

the Central Government and Controller (Section 88).
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5.5 IMPORTANCE OF CYBER LAW
Cyber law is important because it touches almost all aspects of

transactions and activities on and concerning the Internet, the World Wide
Web and Cyberspace. Initially it may seem that Cyber laws are a very
technical field and that it does not have any bearing to most activities in
Cyber space. But the actual truth is that nothing could be further than the
truth. Whether we realize it or not, every action and every reaction in
Cyberspace has some legal and Cyber legal perspectives. When Internet
was developed, the founding fathers of Internet hardly had any inclination
that Internet could transform itself into an all pervading revolution which
could be misused for criminal activities and which required regulation.
Today, there are many disturbing things happening in cyberspace. Due to
the anonymous nature of the Internet, it is possible to engage into a
variety of criminal activities with impunity and people with intelligence,
have been grossly misusing this aspect of the Internet to perpetuate
criminal activities in cyberspace. The growth of Electronic Commerce has
propelled the need for vibrant and effective regulatory mechanisms which
would further strengthen the legal infrastructure, so crucial to the success
of Electronic Commerce. All these regulatory mechanisms and legal
infrastructures come within the domain of Cyber law. It is important
because it touches almost all aspects of transactions and activities on and
involving the internet, World Wide Web and cyberspace. Every action and
reaction in cyberspace has some legal and cyber legal perspectives.
Cyber law encompasses laws relating to:
a. Cyber-crimes.
b. Electronic and digital signatures.
c. Intellectual property.
d. Data protection and privacy.
In India, cyber laws are contained in the Information Technology Act, 2000
("IT Act") which came into force on October 17, 2000. The main purpose of
the Act is to provide legal recognition to electronic commerce and to
facilitate filing of electronic records with the Government. The information
Technology Act is an outcome of the resolution dated 30th January 1997 of
the General Assembly of the United Nations, which adopted the Model Law
on Electronic Commerce, adopted the Model Law on Electronic Commerce
on International Trade Law. This resolution recommended, inter alia, that
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all states give favourable consideration to the said Model Law while revising
enacting new law, so that uniformity may be observed in the laws, of the
various cyber-nations, applicable to alternatives to paper based methods of
communication and storage of information. The Department of Electronics
(DoE) in July 1998 drafted the bill. However, it could only be introduced in
the House on December 16, 1999 (after a gap of almost one and a half
years) when the new IT Ministry was formed. It underwent substantial
alteration, with the Commerce Ministry making suggestions related to e-
commerce and matters pertaining to World Trade Organization (WTO)
obligations. The Ministry of Law and Company Affairs then vetted this joint
draft. After its introduction in the House, the bill was referred to the 42-
member Parliamentary Standing Committee following demands from the
Members. The Standing Committee made several suggestions to be
incorporated into the bill. However, only those suggestions that were
approved by the Ministry of Information Technology were incorporated.
One of the suggestions that was highly debated upon was that a cyber café
owner must maintain a register to record the names and addresses of all
people visiting his café and also a list of the websites that they surfed. This
suggestion was made as an attempt to curb cybercrime and to facilitate
speedy locating of a cyber-criminal. However, at the same time it was
ridiculed, as it would invade upon a net surfer’s privacy and would not be
economically viable. Finally, this suggestion was dropped by the IT Ministry
in its final draft. The Union Cabinet approved the bill on May 13, 2000 and
on May 17, 2000; both the houses of the Indian Parliament passed the
Information Technology Bill. The Bill received the assent of the President on
9th June 2000 and came to be known as the Information Technology Act,
2000. The Act came into force on 17th October 2000. With the passage of
time, as technology developed further and new methods of committing
crime using Internet & computers surfaced, the need was felt to amend the
IT Act, 2000 to insert new kinds of cyber offences and plug in other
loopholes that posed hurdles in the effective enforcement of the IT Act,
2000. This led to the passage of the Information Technology (Amendment)
Act, 2008 which was made effective from 27 October 2009. The IT
(Amendment) Act, 2008 has brought marked changes in the IT Act, 2000
on several counts. The Union Cabinet has recently in September 2012,
approved the National Policy on Information Technology 2012. The Policy
aims to leverage Information & Communication Technology (ICT) to
address the country’s economic and developmental challenges. The vision
of the Policy is “To strengthen and enhance India’s position as the Global IT
hub and to use IT and cyber space as an engine for rapid, inclusive and
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substantial growth in the national economy”. The Policy envisages among

other objectives, to increase revenues of IT and ITES Industry from 100
Billion USD at present to 300 Billion USD by 2020 and expand exports from
69 Billion USD at present to 200 Billion USD by 2020.
The thrust areas of the policy include:
1. To gain significant global market-share in emerging technologies and

Services.
2. To provide fiscal benefits to SMEs and Startups for adoption of IT in

value creation
3. To create a pool of 10 million additional skilled manpower in ICT.
4. To make at least one individual in every household e-literate.
5. To leverage ICT for expanding the workforce and enabling life-long

learning.
6. To adopt Open standards and promote open source and open

technologies.
7. To provide for mandatory delivery of and affordable access to all public

services in electronic mode.
8. To enhance transparency, accountability, efficiency, reliability and

decentralization in Government and in particular, in delivery of public
services.
9. To promote innovation and R&D in cutting edge technologies and

development of applications and solutions in areas like localization,
location based services, mobile value added services, Cloud Computing,
Social Media and Utility models.
10.To increase revenues of IT and ITES (Information Technology Enabled

Services) Industry from 100 Billion USD currently to 300 Billion USD by
2020 and expand exports from 69 Billion USD currently to 200 Billion
USD by 2020.
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11.To encourage adoption of ICTs in key economic and strategic sectors to

improve their competitiveness and productivity.
12.To leverage ICT for key Social Sector initiatives like Education, Health,
Rural Development and Financial Services to promote equity and quality.
13.To make India the global hub for development of language technologies,
to encourage and facilitate development of content accessible in all
Indian languages and thereby help bridge the digital divide.
14.To enable access of content and ICT applications by differently-abled

people to foster inclusive development.
15.To strengthen the Regulatory and Security Framework for ensuring a

Secure and legally compliant Cyberspace ecosystem.
5.6 PIRACY
Piracy means illegally copying, using or reproducing material which is

protected by way, of copy writing. The software is also recorded (stored)
on different types of storage media like floppies, CDs, hard disks etc. The
copy right holder of the software has the exclusive right granted by law to
protect his software by means of copy write. Pirate is a person who illegally
copies the original software prepares its multiple copies.
Why Piracy takes place
Piracy of software take place due to high cost of software products. The
users mainly the individuals or small business houses cannot afford to pay
high cost of software or sometimes they do not want to purchase legal
software which cost them heavily. Instead they go for the pirated software.
Due to piracy, the software industry bear loss of revenue of million of

copies of the software.
a. Provision for Software Patent

The Act gives provisions to protect the original creator of intellectual
property through software patent is a grant of special power of monopoly.
The persons to whom a software patent is granted may prevent others
from manufacturing or selling that software or similar software. However
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the patent holder, himself may grant a license to the others for limited use
of the patent. A patent right gives the owner exclusive right to use, sell,
produce the patented item. The main reason of granting the patent right to
the developer of software is that his own researches money; time may be
used by the others. The developers prepares special software after putting
in a great labour personnel skill, money time and when this software is
created after such great efforts, which should not misused by others.
The rights of patent granted are not absolute. These rights are limited to a
certain number of years and the other developer can design a close
product.
b. Software copy write

A software copy right is an exclusive property right granted by law to the
owner or producer or author of a work to exploit or authorise the
exploitation of the work which is protected by means of copy right. The
creator of the work get exclusive right to protect his creation or work from
being reproduced by any other person.
The software companies have copy right on their products.
c. Infringerment of copy rights

Once the copy right is registered, following rights are given to the persons
who have been given the copy rights. Doing any of the acts mentioned in
copy right by any other person shall be termed as infringerment of copy
rights.
I. a. To reproduce the work in any material form including the storing of it

in any medium by electronic means.
b. To issue copies of the work to the public not being the copies already
in circulation.
c. To, perform the work in public or communicate it to the public,

excluding for education.
d. To make any cinematography film, a sound recording in respect of

work.
e. To make any translation of the work
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f. To make any adaptations of the work.
g. To sell or give an commercial rental or offer for sale or for commercial

rental any copy of the compliers program.
The law also gives the provisions for the following acts shall not
constitute an infringement of copy right:
II. a. Making of copies or adoption of a computer program by the lawful

possessor of a copy of such computer programme, bean such copy:
i. In order to utilise the computer program for the purpose for which it
was supplied or
ii. To make back up copies purely as a temporary protection against

loss, destructive or damage in order to utilise the computer program
for the purpose for which it was supplied.
Other related provisions under the Act
i. Privacy: Software privacy is a concept which is applied to an individual.

It is absolute right of an individual to decide what information or
software or program a person or company wishes to share with the
others or in willing to accept from others.
ii. Security: Software security refers to the protection of software,

programs and applications against accidental or intentional destruction,
disclosure or modification. Computer software security refers to
procedure which can be applied to procedure which can be applied to
software and data to ensure that individual privacy is protected.
iii. Symantec: Symantec license the enclosed software to an individual

only upon the condition that an individual accept all of the terms
contained in the license agreement.
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Related Offences under the Act
a. Cyber crime: Cyber crime is a crime in the online environment. The

internet is wide open be exploitation. Cyber crime is any illegal ask that
involves a computer, its system or its application. Cyber Space is
considered a type of community or massive neighbourhood made up of
net worked computer users around the globe. As is typical in a
traditional society there are crime males in cyberspace, there are cyber
criminals committing cyber crimes.
5.7 LEGAL ASPECT OF CYBER CRIME
The Law is to protect the cyber crime for the computer users theft of or
destruction of informations stored or passed by computers may be the goal
of a cyber criminal, while others may use the computer as a tool to
accompanist more abominable acts. For this the stake or local law
enforcement officials and prosecutors must be specially trained to combat
these well equipped criminals, As the law enforcement community is facing
these new challenges, a new discipline of cyber crime Investigation has
emerged. As such agencies will look favourably upon those into
technological training in cyber crime.
Other related Crimes
a. Hacking:
Its means entering some place on the networks like Internet, Intranet, LAN
and WAN where one is not permitted to enter and see those things one is
not supposed to see. Hackers are computer experts who can break the
privacy or confidential area of the computer. They can steal important data
and merge the same break the privacy or confidential area of the computer
and merge the same with other. They may add any wrong information into
any other data, which cause loss and destruction of data. The above said
crime is hacking is defined in section 66 of the information Technology
2000.
Under section section 66(2) it gives the punishment for this crime with
imprisonment up to three years or with fine which may extend up to two
lakh rupees or with both.
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b. Cracking:
It means an illegal access. Access includes the entering of another
computer, system, where it is connected Via public telecommunication
networks or to a computer system on the same network, such as a LAN
(local area network) or Internet with in an organisation.
c. Fraud on the Internet:

Internet fraud is a common type of crime whose growth has been
proportionate to the growth of internet itself. It is referred to a form of
white collar crime. Generally the internet provides companies and
individual with the opportunity of marketing their produce on the net. It is
easy for people with fraudulent intention to make their messages look real
and credible. There are innumerable scams and frauds most of them
relating to investment schemes. The following are some of them:
d. Bulletin Boards:
Sharing investor information and often fraud is occurred causing loss of
millions who bank on them.
e. Credit card fraud:

If is the another fraud committed with fast growth of E- commerce.
Frequent fraud reports involve undelivered and on-line services; damaged,
defective mis-represented or under delivered communications, auction
sales, pyramid schemes and multi level marketing and most common them
are credit card fraud.
f. E-mail scans:
If is used to spread bogus investment schemes or to spread false
information about the company.
g. Publicity of false digital signature:

Section 73 of the I.T. Act 2000 gives a detail provisions the Digital
signature certificate which are false.
Offences under Information Technology Act 2000
The following are offences and crimes under chapter XI of the

Act:
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Section 65: Tampering with computer source documents -
Whoever knowingly or intentionally conceals, destroys or alters or

intentionally or knowingly causes another to conceal, destroy, or alter any
computer source code used for a computer, computer programme,
computer system or computer net-work when the computer source code is
required to be kept or maintained by law for the time being in force, shall
be punishable with imprisonment up to three years, or with fine which may
extend up to two lakh rupees, or with both.
Section 66: Hacking with computer system -
1. Whoever with the intent to cause or knowing that he is likely to cause

wrongful loss or damage to the public or any person destroys or
deletes or alters any information residing in a computer resource or
diminishes its value or utility or affects it injuriously by any means,
commits hacking.
2. Whoever commits hacking shall be punished with imprisonment up to

three years, or with fine which may extend up to two lakh rupees, or
with both.
Section 67: Publishing of information which is obscene in electronic

form -
Whoever publishes or transmits or causes to be published in the electronic
form, any material which is lascivious or appeals to the prurient interest or
if its effect is such as to tend to deprave and corrupt persons who are
likely, having regard to all relevant circumstances, to read, see or hear the
matter contained or embodied in it, shall be punished on first conviction
with imprisonment of either description for a term which may extend to
five years and with fine which may extend to one lakh rupees and in the
event of a second or subsequent conviction with imprisonment of either
description for a term which may extend to ten years and also with fine
which may extend to two lakh rupees.
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Section 68: Power of controller to give directions -
1. The controller may, by order, direct a Certifying Authority or any

employee of such Authority to take such measures or cease carrying on
such activities as specified in the order if those are necessary to ensure
compliance with the provisions of this Act, rules or any regulations
made there under.
2. Any person who fails to comply with any order under sub- section (1)
shall be guilty of an offence and shall be liable on conviction to
imprisonment for a term not exceeding three years or to a fine not
exceeding two lakh rupees or to both.
Section 69: Directions of Controller to subscriber to extend

facilities to decrypt information -
1. If the Controller is satisfied that it is necessary or expedient so to do in

the interest of the sovereignty or integrity of India, the security of she
state, friendly relations with foreign States or public order or for reasons
to be recorded in writhing, by order, direct any agency of the
Government to intercept any information transmitted through any
computer resource.
2. The subscriber or any person in change of the computer resources shall,

when called upon by any agency which has been directed under sub-
section (1), extend all facilities and technical assistance to decrypt the
information.
3. The subscriber or any person who fails to assist the agency referred to
in sub-section (2) shall be punished with an imprisonment for a term
which may extend to seven years.
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Section 70: Protected system -
1. The appropriate Government may, by notification in the Official Gazette,

declare that any computer, computer system or computer network to be
a protected system.
2. The appropriate Government may, by order in writing, authorise the

persons who are authorised to access protected systems notified under
sub section (1).
3. Any person who secures access or attempts to secure access to a

protected system in contravention of the provisions of this section shall
be punished with imprisonment of either description for a term which
may extend to ten years and shall also be liable to fine.
Section 71: Penalty for misrepresentation -
Whoever makes any misrepresentation to, or suppresses any material fact

from, the Controller or the Certifying. Authority for obtaining any licence or
Digital Signature Certificate, as the case may be, shall be punished with
fine which may extend to one lakh rupees, or wise both.
Section 72: Penalty for breach of confidentiality and privacy -
Save as otherwise provided in this Act or any other law for the time being
in force, any person who, in pursuance of any of the powers conferred
under this Act, rules or regulations made there under, has secured access
to any electronic record book, register, correspondence, information,
document or other material without the consent of the person concerned
discloses such electronic record book, register, correspondence,
information, document or other material to any other person shall be
punished with imprisonment for a term which may extend to two years, or
with fine which may extend to one lakh rupees, or with both.
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Section 73: Penalty for publishing Digital Signature Certificate false

in certain particulars -
1. No person shall publish a Digital Signature Certificate or otherwise make

it available to any other person with the knowledge that:
a. The Certifying Authority listed in the certificate has not issued it; or
b. The subscriber listed in the certificate has not accepted it; or
c. The certificate has been revoked or suspended, unless such

publication is for the purpose of verifying a digital signature created
prior to such suspension or revocation.
2. Any person who contravener the provisions of sub-section (1)shall be

punished with imprisonment for a term which may extend to two years,
or with fine which may extend to one lakh rupees or with both.
Section 74: Publication for fraudulent purpose -
Who ever knowingly creates publishes or otherwise makes available a

Digital Signature Certificate for any fraudulent or unlawful purpose shall be
punished with imprisonment for a term which may extend to two years, or
with fine which may extend to one lakh rupees, or with both.
Section 75: Act to apply for offence or contravention committed

outside India -
1. Subject to the provisions of sub-section
2. The provisions of this Act shall apply also to any offence or

contravention committed outside India by any person irrespective of his
nationality.
3. For the purposes of sib-section (1),this Act shall apply to an offence or

contravention committed outside India by any person if the act or
conduct constituting the offence or contravention involves a computer,
computer system or computer network located in India.
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Section 76: Confiscation -
Any computer, computer system, floppier, compact disks, tape drives or

any other accessories related thereto, in respect of which any provision of
this Act, rules, orders of regulations made there under has been or is being
contravened, shall be liable to confiscation:
Provided that where it is established to the satisfaction of the Court

adjudicating the confiscation that the person in whose possession, power
or control of any such computer, computer system, floppies, compact disks,
tape driver or any other accessories relation thereto is found is not
responsible for the contravention of the provision of this Act, rules, orders
or regulations made there under, the Court may, instead of making an
order for confiscation of such computer, computer system, floppies,
compact disks, tape drives or any other accessories related thereto, make
such other order authorised by this Act against the person contravening of
the provisions of this Act, rules, orders or regulations made there under as
it may think fit.
Section 77: Penalties or confiscation not to interfere with other

punishments -
No penalty imposed or confiscation made under this Act shall prevent the
imposition of any other punishment to which the person affected thereby is
liable under any other law for the time being in force.
Section 78: Power to investigate offences -

Notwithstanding anything contained in the Code of Criminal Procedure,
1973 (2 of 1974), a police officer not below the rank of Deputy
Superintendent of police shall investigate any offence under this Act.
Section 79: Network service providers not to be liable in certain

cases -
For the removal of doubts, if is hereby declared that no person providing
any service as a network service provider shall be liable under this Act,
rules or regulations made there under for any third party information or
data made available by him if he proves that the offence or contravention
was committed without his knowledge or that he had exercised all due
diligence to prevent the commission of such offence or contravention.
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For the purposes of this section -
a. “Network service provider” means an intermediary;
b. “Third party information” means any information dealt with by a

network service provider in his capacity as an intermediary.
5.8 INFORMATION TECHNOLOGY (IT)
Security Guidelines
This document provides guidelines for the implementation and
management of Information Technology Security. Due to the inherent
dynamism of the security requirements, this document dose not provide an
exact template for the organizations to follow. However, appropriate
suitable samples of security process are provided for guidelines. It is the
responsibility of the recognizations to develop internal processes that meet
the guidelines set forth in this document.
The following words used in the Information Technology security guidelines

shall be interpreted as follows:
★ Shall: The guideline defined is a mandatory requirement, and therefore

must be complied with.
★ Should: The guideline defined is a recommended requirement. Non-

compliance shall be documented and approved by the management.
Where appropriate, compensating controls shall be implemented.
★ Must: The guideline defined is a mandatory requirement, and therefore

must be complied with.
★ May: The guideline defined is an optional requirement. The

implementation of this guideline is determined by the organisation’s
requirement.
Implementation of an information security programme: Successful

implementation of a meaningful information Security Programme rests with
the supports of the top management. Until and unless the senior managers
of the organization understand and concur with the objectives of the
information security programme its ultimate success is in question.
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The information Security programme should be broken down into specific

stages as follows:
a. Adoption of a security policy;
b. Security risk analysis,
c. Development and implementation of a information classification system;
d. Development and implementation of the security standards manual;
e. Implementation of the management security self-assessment process;
f. On-going security programme maintenance and enforcement; and
g. Training,
The principal task of the security implementation is to define the

responsibilities of persons within the organization. The implementation
should be based on the general principle that the person who is generating
the information is also responsible for its security. However, in order to
enable him to carry out his responsibilities in this regard, proper tools, and
environment need to be established.
When different pieces of information at one level are integrated to form

higher value information, the responsibility for its security need also should
go up in the hierarchy to the integrator and should require higher level of
authority for its access. It should be absolutely clear with respect to each
information as to who is its owner, its custodian, and its users. It is the
duty of the owner to assign the right classification to the information so
that the required level of security can be enforced. The custodian of
information is responsible for the proper implementation of security
guidelines and making the information available to the users on a need to
know basis.
Information Classification – Information assets must be classified

according to their sensitivity and their importance to the organization.
Since it is unrealistic to expect managers and employees to maintain
absolute control over all information within the boundaries of the
organization, it is necessary to advise them on which types of information
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are considered more sensitive, and how the organization would like the
sensitive information handled and protected. Classification, declassification,
labelling, storage access, destruction and reproduction of classified data
and the administrative overhead this process will create must be
considered. Failure to maintain a balance between the value of the
information classified and the administrative burden the classification
system places on the organization will result in long-term difficulties in
achieving success.
Confidential is that classification of information of which unauthorized

disclosure/ use could serious damage to the organization, Example:
strategic planning documents.
Restricted is that classification of information of which authorized

disclosure/use would not be in the best interest of the organization and/or
its customers, Example: design details, reconstitute and reconfigure these
applications must be tested as part of the business continuity/disaster
recovery plan.
Fire Protection:
1. Combustible materials shall not be stored within hundred meters of the

operational site.
2. Automatic fire detection, fire suppression systems and audible alarms as

prescribed by the Fire Brigade or any other agency of the Central or
State Government shall be installed at the operational site.
3. Fire extinguishers shall be installed at the operational site and their

locations clearly marked with appropriate signs.
4. Periodic testing, inspection and maintenance of the fire equipment and

fire suppression systems shall be carried out.
5. Procedures for the safe evacuation of personnel in an emergency shall

be visibly pasted/displayed at prominent places at the operational site.
Periodic training and fire drills shall be conduced.
6. There shall be no eating, drinking or smoking in the operational site.

The work areas shall be kept clean at all times.
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Environmental Protection:
1. Water detectors shall be installed under the raised floors throughout the
operational site and shall be connected to audible alarms.
2. The temperature and humidity condition in the operational site shall be

monitored and controlled periodically.
3. Personnel at the operational site shall be trained to monitor and control

the various equipment and devices installed at the operational site for
the purpose of fire and environment protection.
4. Periodic inspection, testing and maintenance of the equipment and

systems shall be scheduled.
Physical Access:
1. Responsibilities round the clock, seven days a week, three hundred

sixty-five days a year for physical security of the systems used for
operation and also actual physical layout at the site of operation shall be
defined and assigned to named individuals.
2. Biometric physical access security of the systems shall be installed to

control and audit access to the operational site.
3. Physical access to the operational site at all times shall be controlled

and restricted to authorised personnel only. Personnel authorized for
limited physical access shall not be allowed to gain unauthorized access
to restricted area within operational site.
4. Dual control over the inventory and issue of access cards/keys during
normal business hours to the Data Centre shall be in place. An up-to-
date list of personnel who possess the cards/keys shall be regularly
maintained and archived for a period of three years.
5. Loss of access cards/keys must be immediately reported to the security

supervisor of the operational site who shall take appropriate action to
prevent unauthorised access.
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6. All individuals, other than operations staff, shall sign in and sign out of
the operational site and shall be accompanied by operations staff.
7. Emergency exits shall be tested periodically to ensure that the access

security systems are operational.
8. All opening of the Data Centre should be monitored round the clock by
surveillance video cameras.
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5.9 SUMMARY
Cyber crime is a crime in the online environment. Cyber law encompasses

laws relating to cyber crimes, electronic and digital signatures, intellectual
property and data protection and privacy. Hacking, cracking and internet
fraud on the Internet are the other related cyber crimes. There are
innumerable scams and frauds most of them relating to investment
schemes such as bulletin boards, credit card fraud, e-mail scans and
publicity of false digital signature are the other related cyber crimes. In
India, cyber laws are contained in the Information Technology Act, 2000
("IT Act") which came into force on October 17, 2000. The main purpose of
the Act is to provide legal recognition to electronic commerce and to
facilitate filing of electronic records with the Government.
Conceptual Type
1. What is information technology Act 2000?

2. What do you mean by information?
3. What are cyber laws?
4. What are cyber crime?
5. What is computer network?
6. What is digital signature?
7. What is electronic form?
8. What is access?
9. Give the meaning of appropriate government.
10.What is affixing digital signature?
11.What is private key?
12.What is hacking?
13.Who may authenticate an electronic record?
14.What does right to information maen?
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Analytical Type
1. Explain scope of IT act 2000?

2. What are the objectives of IT act 2000?
3. What is the need for the IT act 2000?
4. State the instruments to which IT act is not applicable.
5. Explain scope of cyber laws act 1999.
6. Explain the salient features of cyber laws act 1999.
7. Explain the importance of digital signature.
8. Discuss objectives of RTI act.
9. How do you get information under right of information act?
10.Who may authenticate an electronic record?
11.How controller of certifying authorities is appointed?
12.State briefly the power of the adjudicating officer.
Essay Type
1. Write a short note under the IT act: (i) computer system

(ii) digital signature (iii) electronic records.
2. E x p l a i n t h e p r o v i s i o n s o f t h e a c t r e l a t i o n t o a t t r i b u t i o n ,
acknowledgement and dispatch of electronic records.
3. Discuss the functions of the controller.
4. Explain the scope and objectives of cyber laws.
5. Explain the types of cyber crimes.
6. Who can grant a license to issues digital signature certificates?
7. Explain penalties and adjudication under IT act 2000.
8. What are the offences committed under the act?
9. Explain scope of RTI act.
10.What is not open to disclosure under right to information act?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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E-COMMERCE REGULATIONS
Chapter 6
Objectives
★ Procedure for obtaining license and contract for setting up e- commerce

business in India
★ Steps to be taken for setting up market for e-commerce business in India
★ Documents to be submitted for payment banks in India
★ Strategy of success for e-commerce business in India
★ Standard terms and condition for e-commerce in India
Structure:
6.1 License and Contract
6.2 E-retailing Laws and Regulations in India
6.3 Conduct and Regulation
6.4 Summary
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6.1 LICENSE AND CONTRACT
Online payment and receipt of money is essential for the successful

establishment of a digital society. In a digital economy payments are
managed in an online environment with minimum human interaction. At
the same time, digital currency management requires compliance with
certain techno legal requirements that include compliance with cyber law,
e-commerce law, foreign exchange management and export and import
regulations. An online payment platform is also required to be made secure
from cyber- attacks and cyber crimes that are very common these days.
Take the example of the recent Bangladesh bank cyber heist that costed
the bank great amount of money. While Bangladesh is blaming the SWIFT
for this loss yet SWIFT has pointed that this happened due to inadequate
cyber security on the part of the bank. Only a detailed cyber forensics and
cybercrime investigation report can ascertain the truth in this regard.
Unfortunately, banks across the world are vulnerable to malware and

sophisticated cyber-attacks. Even Indian banks lack cyber security
infrastructure and this has made them vulnerable to sophisticated cyber-
attacks. Additionally, zero day vulnerabilities are there that cannot be
detected in advance in all cases. In some cases, such zero day
vulnerabilities are detected after many years of compromise of the
computer systems. Cyber security of banks in India is not at all satisfactory
and bank related cyber crimes and financial frauds are increasing in India.
Even the decision of Reserve Bank of India (RBI) to establish an IT
subsidiary to manage cyber security related issues of banks in India has
failed to materialize. As a result the cyber security due diligence and cyber
law due diligence (pdf) are not complied with by banks operating in India.
India has launched projects like Digital India and Aadhar. These projects
collect sensitive and personal information and data of the netizens and
Indian citizens. Unfortunately, India has failed to enact dedicated cyber
security laws, privacy laws and data protection laws (pdf) to safeguard the
information and data collected from Indian citizens and people. In these
circumstances, online payment companies and businesses of India must be
very cautious in their online dealings and businesses in India. This is more
so when the directors of Indian companies can be held liable for cyber law
and cyber security related non compliances in India. As on date most of
the directors are not complying with cyber law and cyber security related
legal obligations.
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In some cases, the business model itself is legally questionable. For

instance, recently a panel has been formed by the Competition Commission
of India (CCI) that is studying the cashback model being used by online
payment platforms, e-commerce companies and also several banks. This
would include cashbacks given by online payment platforms like Paytm and
Mobikwik. The CCI is ascertaining whether the cashback incentives offered
by digital wallets and e- tailers on recharges, bill payments or purchase of
other products constitute predatory pricing. Further, such cash backs may
also violate the norms recently formulated under the FDI policy of India for
e-commerce industry of India.
Online payment legal compliances in India are diverse and complicated in

nature. For instance, although mobile payment market in India is booming
yet regulatory compliance are ignored by various stakeholders. There are
handful of e-commerce players and entrepreneurs that are complying with
cyber law due diligence requirements of Indian laws. The payment gateway
and POS terminal services cyber law due diligence In India is also ignored
by businesses and entrepreneurs.
Mobile cyber security in India is another area of concern.. Absence of

encryption laws in India has further made the mobile security very weak in
India. The ever-evolving mobile malware are further increasing the woes of
mobile users’ worldwide. As on date the malware are defeating cyber
security products and services with ease.
It would be relevant to mention that India must be managed by both e-

commerce entrepreneurs and Indian government. For instance, healthcare
related e-commerce platforms and businesses need to make their cyber
security infrastructure robust and resilient. Similarly telemedicine and
online pharmacies must also comply with techno legal regulations along
with making their websites cyber secure. Use of crypto currency like Bitcoin
is another area that needs regulatory clarification from RBI and Indian
government.
If Indian government really wants Digital India and online payment system
to be successful, it must think out of the box and use novel methods that
are techno legal in nature. Similarly, businesses house and entrepreneurs
dealing with financial business ventures in general and online payment
system in particular must comply with techno legal requirements of Indian
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laws. Perry4Law Law Firm wishes all the best to Indian government and
online payment entrepreneurs for their initiatives, ventures and projects.
E-commerce has generated tremendous interest among various

stakeholders and entrepreneurs in India. Indian government is also
interested in helping the e-commerce entrepreneurs and stakeholders in
having a trouble-free environment. Indian government is also committed to
protect the socio-economic interests of India. As a result, the government
is bringing policy reforms but in a bit by bit fashion. However, policy clarity,
especially a good techno legal framework, in India is still missing.
Nevertheless, foreign direct investment (FDI) aspects of e-commerce are
witnessing consolidation and are frequently clarified by Indian government.
As per the FDI policy, contained in the “Consolidated FDI Policy Circular
2015” (pdf) (FDI Policy) as amended from time to time, FDI up to 100%
under automatic route is permitted in Business to Business (B2B) e-
commerce. No FDI is permitted in Business to Consumer (B2C) e-
commerce. However, FDI in B2C e-commerce is permitted in following
circumstances:
i. A manufacturer is permitted to sell its products manufactured in India

through e-commerce retail.
ii. A single brand retail trading entity operating through brick and mortar
stores, is permitted to undertake retail trading through e-commerce.
iii. An Indian manufacturer is permitted to sell its own single brand

products through e-commerce retail. Indian manufacturer would be the
investee company, which is the owner of the Indian brand and which
manufactures in India, in terms of value, at least 70% of its products in
house, and sources, at most 30% from Indian manufacturers.
In order to provide clarity to the extant policy, guidelines for foreign direct
investment on e-commerce sector have been formulated and are
enumerated below:
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Definitions
i. E-commerce: E-commerce means buying and selling of goods and

services including digital products over digital & electronic network.
ii. E-commerce entity: E-commerce entity means a company

incorporated under the Companies Act 1956 or the Companies Act 2013
or a foreign company covered under section 2 of the Companies Act,
2013 or an office, branch or agency in India as provided in section 2 (v)
(iii) of FEMA 1999, owned or controlled by a person resident outside
India and conducting the e-commerce business.
iii. Inventory based model of e-commerce: Inventory based model of

e-commerce means an e-commerce activity where inventory of goods
and services is owned by e-commerce entity and is sold to the
consumers directly.
iv. Marketplace based model of e-commerce: Marketplace based model

of e-commerce means providing of an information technology platform
by an e-commerce entity on a digital & electronic network to act as a
facilitator between buyer and seller.
Guidelines for Foreign Direct Investment on e-commerce Sector
i. 100% FDI under automatic route is permitted in marketplace model of

e-commerce.
ii. FDI is not permitted in inventory based model of e-commerce.
Other Conditions
i. Digital & electronic network will include network of computers, television

channels and any other internet application used in automated manner
such as web pages, extranets, mobiles etc.
ii. Marketplace e-commerce entity will be permitted to enter into

transactions with sellers registered on its platform on B2B basis.
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iii. E-commerce marketplace may provide support services to sellers in

respect of warehousing, logistics, order fulfillment, call center, payment
collection and other services.
iv. E-commerce entity providing a marketplace will not exercise ownership

over the inventory i.e. goods purported to be sold. Such an ownership
over the inventory will render the business into inventory based model.
v. An e-commerce entity will not permit more than 25% of the sales
affected through its marketplace from one vendor or their group
companies.
vi. In marketplace model goods/services made available for sale

electronically on website should clearly provide name, address and other
contact details of the seller. Post sales, delivery of goods to the
customers and customer satisfaction will be responsibility of the seller.
vii.In marketplace model, payments for sale may be facilitated by the e-

commerce entity in conformity with the guidelines of the Reserve Bank
of India.
viii.In marketplace model, any warrantee/guarantee of goods and services

sold will be responsibility of the seller.
ix. E-commerce entities providing marketplace will not directly or indirectly

influence the sale price of goods or services and shall maintain level
playing field.
x. Guidelines on cash and carry wholesale trading as will apply on B2B e-

commerce.
Subject to the conditions of FDI policy on services sector and applicable

laws/regulations, security and other conditionality’s, sale of services
through e-commerce will be under automatic route.
Indian government has been streamlining e-commerce and activities

related to the same for the past one year. Initially an e- commerce friendly
foreign direct investment policy was formulated by Indian government.
Then guidelines were issued to further clarify the e-commerce related
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business activities in India. The same can be accessed at Guidelines For

Foreign Direct Investment (FDI) On e- commerce 2016 Series .
Now Indian government is testing a software that intends to capture crucial

data related to export of e-commerce related goods and services in India.
Indian government has already indicated that it would impose tax on online
transactions happening in India for certain cases. For instance, according
to the Budget announcement, any person or entity that makes a payment
exceeding Rs 1 lakh in a financial year to a non-resident technology
company will now need to withhold 6% tax on the gross amount being paid
as an equalization levy. The said rule is applicable when the payment is
made to companies that don’t have a permanent establishment in India.
This tax, however, is only applicable when the payment has been made to
avail certain B2B services from these technology companies. Specified
services include online and digital advertising or any other services for
using the digital advertising space. This list, however, may be expanded
soon.
Indian government now plans to tap data on overseas online sales as part
of efforts to boost outbound shipments through e- commerce platforms
and channel benefits to these dedicated exporters. Indian government has
made a software for e-commerce exports that would capture data for
further action and policy decisions. This would benefit small exporters as
customized solutions can be then provided to them by Indian government.
Presently the value of items shipped through couriers is often not captured
in export data because they are categorized as samples or gifts. These are
labelled as samples because under the normal export channel exporters
have to file shipping bills and are subject to checks by custom officials,
which is cumbersome, especially for small exporters with low-value
shipments. The software intends to mitigate these rigours and further help
in claiming duty drawbacks for e-commerce exports. To give benefits to
small exporters, the director general of Foreign Trade has defined “e-
commerce” as the buying and selling of goods and services, including
digital products, conducted over digital and electronic networks.
These steps are being introduced a year after the government provided
export incentives to the shipment of goods through couriers or foreign post
offices using e-commerce in the Foreign Trade Policy of 2015-2020. At
present, exports that can avail of these sops are capped at Rs. 25,000 per
consignment, a value considered small for such purchases. Moreover, only
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six product categories i.e. handicrafts, handlooms, toys, customized

fashion garments, books and leather footwear are entitled to these
incentives under the Merchandise Exports from India Scheme (MEIS).
Maharashtra’s FDA Orders Filing of FIRs Against Snap deal, Its CEO Kunal
Bahl, Directors and Distributors for Online Sale of Prescription Drugs.
Indian government has been very lax regarding regulating e- commerce

functions in India. Although there is dire need for e- commerce laws in
India yet Indian government has failed to address this crucial requirement.
There were also some speculations that Telecom Regulatory Authority of
India (TRAI) would regulate e- commerce in India. However, till now there
are no sign that Indian government would properly regulate this much-
needed field. One area that is grossly neglected by Indian government
pertains to regulation of online pharmacies in India that are openly
ignoring the regulatory compliances in India. We at Perry4Law believe that
online pharmacies laws are urgently needed in India. Even there is no
synergy between Digital India, online pharmacies and healthcare laws of
India.
A dominant majority of the online pharmacies functioning in India are

being run in an illegal and unregulated manner. Many of such online
pharmacies are already under regulatory scanner. FDA Maharashtra has
recently raided 27 online pharmacies located in Mumbai. Maharashtra FDA
has also approached DCGI for regulating illegal online pharmacies
operating in India. Surprisingly, many online pharmacies websites in India
are controlled by underworld and organized criminal networks. We at
Perry4Law have been consistently suggesting that illegal online pharmacies
and healthcare websites in India need to be curbed urgently.
In a recent move, the Maharashtra’s Food and Drug Administration (FDA)

has ordered filing of FIRs against Snapdeal.com as well as against its CEO
Kunal Bahl, directors and distributors for online sale of prescription drugs in
derogation of Indian laws. FDA Commissioner Harshadeep Kamble said
investigations into other e-commerce giants like Flipkart and Amazon are
also under progress to ascertain if they are also involved in such sales. As
on date most of the e-commerce portals are selling prescribed drugs in an
illegal and unauthorized manner. Meanwhile Snapdeal has claimed that it is
assisting the FDA team in this investigation. Snapdeal has also informed
that it has already delisted the products and said sellers and also stopped
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payment. However, this does not absolve Snapdeal of its legal obligations
and liabilities under various healthcare laws of India. Further, Snapdeal has
also failed to observe cyber law due diligence that isvery common in India
these days.
“Despite written commitment, it was found that Snapdeal continued to

offer, exhibit for sale and sale of drugs, namely, I-pill and ‘Unwanted 72′,
emergency contraceptive drugs, through its website”.
Online pharmacies are double edge swords. On the one hand, they are
beneficial to the masses as they provide easy and affordable medicines to
the patients and those who are in need of them. On the other hand, they
are potential source of spurious and dangerous substances passed as
medicines that could prove fatal in many cases.
Recently Indian government has launched technology driven projects and

initiatives like Digital India, Internet of Things (IoT) (PDF), etc. The aim of
Indian government is to utilize the benefits of technology to render various
services to Indian population. Healthcare is one of the segments that have
been targeted by these projects.
However, projects like Digital India are suffering from many shortcomings
and this has made the Digital India project vulnerable to judicial
interventions. Just like the Supreme Court of India had to interfere in the
Aadhar and section 66A cases, the Supreme Court of India may also have
to interfere with the implementation of Digital India project. This is
because the digital India project is not supported by a well drafted and
analyzed plan and policy decision of Indian government. Further, Digital
India is also relying upon illegal and problematic platforms and technology
like Aadhar itself that makes the Digital India project itself vulnerable to
judicial attacks. So, from the present position one can easily deduce that
there is no correlation and synergy between Digital India and the
healthcare initiatives of Indian government. The healthcare laws of India
are simply outdated, irrelevant and ill-suited to meet the objective of
Digital India. Fields like e-health, m-health, telemedicine, etc. require
dedicated techno legal framework that is missing in India. As a result,
healthcare industry and healthcare entrepreneurs of India are presently
acting more on the side of violation than compliances.
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Similarly, online pharmacies operating in India must conduct a proper

cyber law due diligence exercise to make it sure that they are on the right
side of the law. As on date most of the online pharmacies operating form
India are not complying with the techno legal requirement as prescribed by
Indian laws. It is for Indian government to punish such illegal online
pharmacies so that health hazards can be prevented at the earliest stages.
E-commerce has introduced significant choices for Indian consumers and

customers. However, e-commerce in India has also given rise to many
disputes by the consumers purchasing the products from e-commerce
websites. There is no formal e-commerce dispute resolution regulatory
mechanism in India as we have no dedicated e-commerce laws in India. In
fact, many e-commerce websites are not following Indian laws at all and
they are also not very fair while dealing with their consumers. Allegations
of predatory pricing, tax avoidance, anti competitive practices, etc have
been levelled against big e-commerce players of India. As a result,
disputes are common in India that are not satisfactorily redressed. This
reduces the confidence in the e-commerce segment and the unsatisfied
consumers have little choice against the big e-commerce players. At a time
when we are moving toward global norms for e- commerce business
activities, the present e-commerce environment of India needs fine tuning
and regulatory scrutiny. In fact, India is exploring the possibility of
regulation of e-commerce through either Telecom Regulatory Authority of
India (TRAI) or through different Ministries/Departments of Central
Government in a collective manner.
It is obvious that e-commerce related issues are not easy to manage. E-

commerce disputes resolution is even more difficult and challenging
especially when Indian Courts are already overburdened with court cases.
Of course, establishment of e-courts in India and use of Online Dispute
Resolution (ODR) in India are very viable and convincing options before the
Indian Government.
To make ODR a success in India, Techno Legal Centre of Excellence for

Online Dispute Resolution (ODR) in India (TLCEODRI) has been providing
its techno legal ODR services to national and international stakeholders.
TLCEODRI has now decided to manage e-commerce disputes resolution in
India through its techno legal ODR platform. To implement this initiative in
a smooth manner, an ODR Discussion Forum has been started by
TLCEODRI.
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The access and registration to this Board is allowed to e- commerce

websites alone that have already been established and are operating in
India. Our existing e-commerce clients and other clients can contact us for
immediate activation of their accounts while the registration request of
other e-commerce websites would be duly approved/disapproved by our
moderators/administrators. If an e- commerce websites is engaging us for
our techno legal services, it would be granted immediate access to this
segment at its request.
Will TRAI Regulate E-commerce in India?
E-commerce has really flourished in India but there is no dedicated India

till date. Meanwhile, United States is seeking trade rules at WTO for e-
commerce and cloud computing. There are also some hints that foreign
companies and e-commerce portals would be required to register in India
and comply with Indian laws. Many Indian stakeholders have raised
objections about the way e-commerce websites are operating in India.
These websites are providing deep discounts that have been labelled as
predatory pricing by offline traders and businesses. Further, Myntra,
Flipkart, Amazon, Uber, etc. have already been questioned by the
regulatory authorities of India for violating Indian laws. A techno legal
framework is long due and Indian Government has failed to provide the
same so far. There is no doubt that e-commerce websites must be suitably
regulated by Indian Government. According to Business Standard, an inter-
ministerial panel has requested the Telecom Regulatory Authority of India
(TRAI) to take up the role of e-commerce regulator in India or suggest if
there is a need for a separate regulator for e-commerce. At present, TRAI
regulates telecommunications, media and broadcasting industries. The
inter-ministerial panel will prepare a paper on imposing restrictions on the
location of servers and on getting companies like Google and Amazon to
set up data centres in India. Similarly, Internet telephony and VOIP service
providers are already under pressure to establish their servers in India.
The telecom related trends and development in India 2014 by P4LO have
also outlines server location related issues for India.
The General Agreement on Trade in Services (GATS) may be discussed

once again at the World Trade Organization (WTO) level. This is partly due
to the fact that Information and Communication Technology (ICT) has
changed the way services are delivered today in a cross border
environment. This is also due to the reason that United States (U.S.) is
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planning to use the WTO platform for securing strong trade rules for the
electronic commerce and cloud computing industry. Both of these
industries are dominantly controlled by U.S. based companies and this
would definitely help U.S and its technology companies. This proposition of
U.S. is troublesome and not acceptable to many nations of the world. Even
India would not be happy with this arrangement especially at a time when
India is reviving her electronic industry. India has already justified its
Preferential Market Access (PMA) policy for domestic telecom equipment
manufacturers. India has also formulated the merger and acquisitions
(M&A) policy and guidelines 2014 for telecom sector of India. Similarly,
Electronic System Design and Manufacturing (ESDM) policy and regulations
in India 2014 have also been enacted by India.
On the other hand, U.S. is planning to spearhead a robust work

programme to frame trade rules to allow cross-border information flows,
remove localization requirements for protecting personal data within
national borders, and agree to a proper coverage of cloud computing as
part of computer and related services. Regulations in some countries
consider cloud computing as a telecommunications service and U.S. is
anxious to get a reversal notification on this issue.
U.S. is already negotiating about these fields at Trans-Pacific Partnership

(TPP) regional trade liberalization talks and Trade in Services Agreement
(TISA) talks with selective countries in Geneva.
However, nothing can give U.S. more leverage than a binding international
treaty of WTO in this regard as almost all of the countries are Member of
WTO. This also means that countries like China, India, Brazil, South Africa,
Indonesia and other developing countries would be forced to align their
respective laws in terms of proposed agreement.
In a restricted proposal circulated at the WTO’s Council for Trade in

Services last Thursday, the U.S. has expressed its intentions to facilitate e-
commerce, an area in which WTO members have remained unsuccessful in
arriving at an agreement since 1998. The U.S. wants complete freedom for
cross-border information flows. It says “governments should not prevent
services suppliers of other countries or customers of those suppliers, from
electronically transferring information internally or across borders,
accessing publicly available information, or accessing their own information
stored in other countries”.
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More importantly, governments should not insist that “ICT service suppliers
use local infrastructure, or establish a local presence, as a condition of
supplying services”. Further, governments must not give priority or
preferential treatment to national suppliers of ICT services in the use of
local infrastructure, national spectrum or orbital resources. As far as India
is concerned, all these issues are bound to be agitated against and rejected
by her as they are in conflict with existing policies of India in this regard.
The Digital India project by Indian government has short listed areas like
education, judiciary, healthcare, etc. to be taken up for development and
implementation. All these fields would be strengthened by using
Information and Communication Technologies (ICT) for effective and
transparent delivery of public services in India. For instance, India would
strengthen and rejuvenate Indian Judiciary by trying to establish e-courts
under the Digital India project. Unfortunately, the e-courts project of India
has recently face a major setback when the e-committee refused to record
proceeding in courts in electronic manner.
On the positive side, the e-books project of Indian government under the
Digital India project has shown some affirmative developments. Digitization
of books is also undergoing in some of the libraries of India. We have a
national digital preservation policy of India that can be helpful in the
digitization drive in general and digital preservation in India in particular.
However, while performing the digitization of traditional books and other

academic materials, Indian government must keep in mind the legal
mandates of Public records Act, 1993 and Information Technology Act,
2000. Similarly, there are certain legal requirements while converting,
selling, distributing, uploading and making available e-books to the end
users. This is more so where international users are involved as that would
require compliance with laws of multiple jurisdictions.
Needless to mention, e-commerce laws of India would also be required to

be followed by various stakeholders where commercial interests are
involved. For instance, if an e-commerce website is selling e-books to
international end users there are complicated set of laws that are
applicable in such circumstances.
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Further, conflict of laws in cyberspace has added its own set of problems
while dealing with e-books at international and national levels. Intellectual
property rights protection at the international level is really tedious when
Internet and cyberspace is involved. Even a simple demand for basic
electronic details of the accused offender may take months to materialize
when foreign technology companies are involved.
In the international market, regulations of and litigation in the field of

books publication and e-books are fast increasing. For instance, Apple was
fined in Beijing court for unauthorized e-books sale. Similarly, publishers
entered into a settlement with European Union for e-books price fixation.
The Penguin Group also settled an e-book price escalation lawsuit recently.
Amazon has also settled its dispute with Hachette recently involving e-
books.
As far as India is concerned, e-commerce players like Amazon, Flipkart,

etc. are already engaged in selling of e-books in India. However, predatory
pricing and taxation issues are still not clear in India. In fact, the
Federation of Publishers’ and Booksellers’ Associations in India (FPBAI) has
questioned the predatory pricing tactics adopted by Indian e-commerce
players selling the books.
There would be much more disputes and controversies when e-books

would be involved as there is no settled law in India in this regard.
There are also great chances that the terms and conditions and other legal
documents of various e-commerce players are not drafted as per Indian
laws and this would create legal problems to parties dealing with the
website. In some cases, these legal documents may be drafted in an anti-
competitive manner and may also be detrimental to the interests of the
consumers. Indian government is planning to amend the consumer
protection law of India to protect consumers’ rights in the e-commerce era.
The book’s publication industry of India is passing through a crucial and
highly competitive phase. The growing popularity of e- books and sale of
paper books at e-commerce websites have changed the way books were
published, distributed and sold in India so far.
In the international market, regulations of and litigation in the field of

books publication and e-books are fast increasing. For instance, Apple was
fined in Beijing court for unauthorized e-books sale. Similarly, publishers
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entered into a settlement with European Union for e-books price fixation.
The Penguin Group also settled an e-book price escalation lawsuit recently.
Back in India, the books distribution and wholesale channels have been
severely hit by the burgeoning e-commerce business of India. While
healthy competition is always welcome and is good or the consumers yet
unreasonable and unethical business practices must be curbed at the very
inception.
Unfortunately, Indian e-commerce websites are operating in an

unregulated manner and they need to be suitably regulated as soon as
possible. E-commerce websites in India are also engaging in violation of
various Indian laws including taxation laws, foreign exchange laws,
consumer laws and contractual laws. E-commerce websites in India are
also engaging in predatory pricing thereby pushing the small business
houses and businessmen out of business.
Books publishers in India have now decided to seek policy as well as legal
intervention against the predatory pricing tactics of Indian e-commerce
websites. The Federation of Publishers’ and Booksellers’ Associations in
India (FPBAI) had recently written to Prime Minister Narendra Modi and the
Ministries of Finance, Commerce, and Human Resource Development,
complaining about the “questionable trade practices” adopted by e-
commerce websites like Flipkart and Amazon. In fact, Myntra, Flipkart,
Amazon, Uber, etc. have already been questioned by the regulatory
authorities of India for violating Indian laws.
S. Chand, a well-known publisher of text books, had also served a legal

notice to Flipkart six months ago, accusing it of modifying discount
structures, violating the clause, and retailing only their fast- selling titles.
S. Chand has also snapped all ties with Flipkart and stopped providing its
books to FlipKart since then. However, Flipkart continues to sell S. Chand’s
books by sourcing them from wholesalers.
The FPBAI letter also seeks action to protect the publishing trade. E-
commerce websites are purchasing books at lower discounts from
publishers and distributors and sell the same at higher discounts, making a
loss in each transaction. It is indeed a questionable activity as it smacks of
the act of predatory pricing. In fact, bookstores such as Capital Book Depot
in Chandigarh, Teksons and New Book Depot in Delhi have already shut
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their shops and many others are struggling for survival due to predatory
pricing activities of e-commerce websites in India.
There is an urgent need on the part of Indian government to step in and

come out with a dedicated e-commerce law of India to regulate the e-
commerce activities in best possible manner. A techno legal framework is
long due and Indian government has failed to provide the same so far.
Legal Validity of Electronic Transactions in India
There are various legal issues relating to formation and validity of

electronic transactions such as online contracts and enforcement issues
which are dealt hereinafter.
(A) Formation of an E-Contract
The most common forms of e-contracts are click wrap, browse wrap and
shrink- wrap contracts. The terms and conditions in such contracts are
made available to the contracting party in a form that is considerably
different from the standard paper contracts. In click wrap contract, the
party's affirmative acceptance is taken by means of checking on an 'I
accept' tab with the scroll box that allows accepting party to view the
terms and conditions.
In case of browse wrap agreement, the mere use (or browse) of the
website makes the terms binding on the contracting party.
In case of Shink wrap agreement, the contracting party can read the terms
and conditions only after opening the box within which the product
(commonly a license) is packed. Such agreements are relevant in the
context of e-commerce mostly because of the kind of goods associate with
shrink-wrap agreements.
(B) Online Contracts Validity
The Indian Contract Act, 1872 governs all the e-contracts in India which
inter alia mandate certain pre-requisites for a valid contract such as free
consent and a lawful consideration. The question which needs to be
examined is how the requirements of Indian Contract Act would be fulfilled
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in relation to e-contracts. Further, the Information Technology Act, 2000

('IT Act') provides fortification of the validity of e-contracts.
As per Indian Contract Act, 1872 some of the important requirements of a

valid contract are as follows:
i. The contract should be entered with the free consent of the parties;
ii. There should be lawful consideration for the contract;
iii. The parties should be competent to contract;
iv. The object of the contract should be lawful.
The terms and conditions associated with e-commerce platform are of

utmost importance in ensuring and deciding that e-commerce transaction
meet with requirements of a valid contract. Unless expressly prohibited
click wrap agreements would be enforceable and valid if the requirements
of valid contract as per Indian Contract Act, 1872 are fulfilled.
There is no requirement under the Indian Contract Act to have written

contracts physically signed. However, specific statues do contain signature
requirements. Further, the very nature of e- commerce is that it is
practically impossible to check the age of anyone who is transacting online
and which pose problems and liabilities for e-commerce platforms because
the position under Indian Law is that the minor is not competent to enter
into contract and such a contract entered is not enforceable against the
minor.
In India, every instrument under which rights are created or transferred

needs to be stamped and stamping of the instrument further depends on
specific stamp duty legislations enacted by different states in India.
(C) Standard Form of Online Contracts are Unconscionable

In India, there is no well-developed jurisprudence on the question of
whether standard form of online agreements is unconscionable. Though,
the courts of India as per Indian Laws previously dealt with instances
where contract terms including standard form contracts were negotiated
between parties in unequal bargaining positions. Certain provisions of
Contract Act deal with unconscionable contracts such as when the
consideration in the contract or object of the contract is opposed to public
policy. In such cases the contract itself cannot be valid.
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The courts can put the burden on the person in the leading position to
prove that the contract was not induced by the undue influence.
In the case of "LIC India Vs. Consumer Education & Research

Center" the Hon'ble Apex Court of India interpreted an insurance policy
issued by Life insurance corporation of India by bringing in certain
elements of public purpose. The court noted that, “in dotted line contracts
there would be no occasion for weaker party to bargain as to assume to
have equal bargaining power. He has either to accept or leave the service
or goods in terms of the dotted line contract. His option would be either to
accept the unreasonable or unfair terms or forgo the service forever.”
It is highly important to have a well thought out terms which form online
contracts in order to make sure that sufficient opportunity is provided to
the customers to familiarize themselves with the terms thereof. Besides the
above there are also various other legal, tax and regulatory issues more
specifically Security Issues, Consumer Protection Issues, Intellectual
Property Issues, Content Regulation, Intermediary Liability, Jurisdictional
Issues and issues relating to taxation which need to be taken in mind while
dealing with e- commerce transactions.
Conclusion
The growth of the e-commerce industry is not only indicative of the

increasing openness of the public but has also brought to the front the
issues that the legal system of the country has been faced within. The legal
system has constantly tried to be updated especially with the enactment of
IT Act to deal with lots of issues emerging from the use of internet.
6.2 E-RETAILING LAWS AND REGULATIONS IN INDIA
Legal Issues in E-commerce in India
Establishment of a successful e-commerce business is not limited to merely

putting an idea onto a website. There are many more issues that must be
addressed by an e-commerce entrepreneur before his/her e-commerce
venture becomes a successful one. These include legal issues as well that
range from e-commerce compliances to brand promotion and protection.
Even the domain name protection strategy is an essential part of successful
e- commerce venture.
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E-commerce is one of the most profitable business ventures in India these

days. Not only its present growth is good but even its future and projected
growth is tremendous. However, e-commerce in India is also required to be
conducted in a legally permissible manner.
A dominant majority of e-commerce venture never survive the second year

of their establishment. Further, many e-commerce websites are shut down
due to legal violations. For instance, many Bitcoins exchanges in India have
temporarily suspended their services due to legal uncertainty in this field.
Some of them have even been targeted by law enforcement agencies of
India for possible violation of Indian laws.
E-commerce websites operating in India are required to follow many laws

of India including the Information Technology Act, 2000 (IT Act 2000). As
per the IT Act, 2000 these e-commerce websites operating in India are
Internet intermediaries and they are required to comply with cyber law due
diligence requirements (PDF) as well.
The legal requirements for undertaking e-commerce in India also involve

compliance with other laws like contract law, Indian penal code, etc.
Further, online shopping in India also involves compliance with the banking
and financial norms applicable in India. For instance, take the example of
PayPal in this regard. If PayPal has to allow online payments receipt and
disbursements for its existing or proposed e-commerce activities, it has to
take a license from Reserve Bank of India (RBI) in this regard. Further,
cyber due diligence for PayPal and other online payment transferors in
India is also required to be observed. M-health laws and regulations in
India must be followed by those who wish to explore this upcoming and
remunerative field.
With the active use of electronic commerce in India the electronic

commerce dispute resolution in India is also required to be strengthened.
The present litigation system of India is not conducive for the growth of e-
commerce in India and online dispute resolution in India is more
appropriate for such purposes.
Finally, for those who wish to engage in cloud computing, virtualization and
other Internet based services in India, they comply with techno legal
regulations of India. Cloud computing legal and regulatory requirements in
India for businesses and entrepreneurs are still evolving. Nevertheless,
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they must be followed by the cloud computing business community of

India. Virtualization and cloud computing service providers in India must
not only follow the encryption laws of India but they must also ensure
cyber law due diligence in India. This is more so when the cyber law due
diligence for companies in India has become very stringent and foreign
companies and websites are frequently prosecuted in India for non-
exercise of cyber due diligence.
In short, the highly profitable e-commerce segment of India must be

explored only after complying with the laws governing the respective e-
commerce segment. There is no single set of laws and regulations that
govern all e-commerce segments and every e- commerce segment is
governed by different laws.
E-commerce business is flourishing at a great speed in India. Most of the

e-commerce entrepreneurs are concentrating upon commercial aspects
with an eye upon profit motive. In this race, they are ignoring techno legal
requirements that may affect their rights in the long run.
For instance, e-commerce laws in India are spread across multiple legal
frameworks and they are seldom followed by Indian e- commerce
stakeholders. Even foreign e-commerce players and portals are required to
be registered in India and comply with Indian laws.
Similarly, e-commerce players are required to comply with cyber law and
cyber security regulatory compliances in India. A dedicated law for cyber
security breaches disclosures is also in pipeline that would impose stringent
obligations upon e-commerce players operating in India. Companies that
would fail to comply with the cyber law due diligence requirements in India
may be punished according to Indian laws.
The cyber security challenges for Indian companies are very difficult to
manage in the absence of proper planning and management. Directors of
Indian companies and e-commerce websites can be held liable for improper
cyber security dealings in India.
Thus, cyber security issues of e-commerce businesses in India cannot be

ignored by various stakeholders except at the risk of litigations and heavy
monetary compensations.
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An ineffective cyber law of India and lack of cyber law skills among the law
enforcement agencies of India is resulting in increased cybercrimes and
offences through the medium of e- commerce websites in India. Further,
cyber law awareness in India is also missing that is resulting in increased
e-commerce frauds in India.
In these circumstances, e-commerce websites frauds, offences and crimes

in India have increased a lot. For instance, the e- commerce sites selling
adult merchandise in India are openly violating the laws of India. Similarly,
e-commerce websites in India are engaging in punishable soft porn
publication and Indian government is sleeping over the matter.
There are well recognized legal requirements to start an e- commerce

website in India and the legal formalities required for starting e-commerce
business in India. As on date, the e-commerce websites are not following
such techno legal requirements. They are also not following the cyber law
due diligence requirements of India and are liable for Internet intermediary
liability in India.
E- commerce websites dealing with online pharmacies, online gaming and

gambling, online selling of adult merchandise, etc. are openly and
continuously violating the laws of India, including the cyber law of India.
However, India government has yet to take action against these offending
e-commerce websites of India.
Fortunately, the Supreme Court of India is taking some action in this

regard. Recently, the Supreme Court of India has sought response from
central government over blocking of porn website sin India. Similarly, the
Supreme Court of India has entertained a public interest litigation seeking
regulations and guidelines for effective investigation of cyber crimes in
India.
The cyber law of India is too weak to tackle cyber criminals effectively. In
fact, cyber law of India should be repealed and an effective cyber law must
be formulated as soon as possible. The cyber criminals are becoming
innovative day by day and our laws are grossly inadequate to deal with the
same.
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For instance, numerous websites, both Indian and foreign, are violating the
cyber law of India by operating illegal e-commerce websites in India. These
websites are engaging in illegal trade in wildlife, promising home delivery
of live animals, prized animal parts and rare medicinal plants from across
nations through simple internet banking formats.
These are transnational crimes where the authorship attribution for

cybercrimes is very difficult to establish. Realizing this reality, the India's
Wildlife Crime Control Bureau (WCCB) is utilizing the services of cybercrime
experts to trace such cyber criminals. A preliminary inquiry by WCCB
bureau's cybercrime specialists has indicated that nearly a thousand
websites are advertising sale and delivery of live animals and animal
products protected under the Wildlife Protection Act, 1972 of India and the
global Convention on International Trade in Endangered Species (CITES).
Surprisingly, most of these websites are popular shopping websites, online

classifieds and free ad posting websites, etc. They are clearly violating the
cyber law and other laws of India and Indian government is not taking any
action against these websites. It is high time to take strict penal action
against such illegal e-commerce websites in India.
Electronic Commerce is the trading or facilitating the trading of products or

services through computer networks, such as the Internet.
What are the steps that one needs to go through for the
registration of the firm?
1. Structuring your business
As an e-commerce business, there are 5 options to register your firm which

are as follows:
a. Proprietorship firm registration: It is the simplest form of

registration which requires tax registration like VAT or service tax.
b. Partnership firm registration: Minimum 2 persons with unlimited

liability.
c. Private Limited Company: It is the most popular business form.
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d. LLP (Limited Liability Partnership): It is a mixture of Pvt Ltd

Company and Partnership firm and enjoys many benefits.
e. One person company: It is similar to PVT LTD Company and

requires only one person.
After deciding the Structure of business one like to choose for e-
commerce business one needs to follow the following steps –
2. Registration of the Domain name

To attain the security for the domain name under the Intellectual Property
Rights, one need to choose a unique name and preferably it has to be
separately trademark protected from an appropriate national registry which
gives the exclusive right to use that particular name.
3. Attain a privacy policy

Attaining a well drafted privacy policy is a must for every e- commerce
portal to prevent itself from being sued under Section 43A of the
Information Technology Act, 2000 where penalty can reach up to 5 crores.
4. Draft the Website Terms and Conditions

For any website to work it is very essential to draft the terms and
conditions agreement which would usually cover all the user covenants and
company covenants in order to restrict the liability of e-commerce website
in every way possible.
5. Make a Vendors Agreement

Making an agreement for vendor with well-defined clauses and terms to
deal with problems like default in product, late delivery, lack in quality etc.
and many other provisions which can be included keeping in mind the
business model.
One also needs to obtain the Payment gateway and Logistics for e-
commerce business
In India, we basically have 2 types of Payment Gateways:
a. With no setup fees: Popular but have higher TDRs (examples are
PayUMoney, PayPal etc.)
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b. With setup fees: Less TDRs and faster processing (examples are
Payu, Ccavnue)
The documents that need to submitted for obtaining a payment gateway:
1. Bank account in the name of the business

2. PAN Card of the business
3. Certificate of Incorporation
4. Memorandum of Association
5. Articles of Association
6. Identity Proof
7. Address Proof
8. Website Terms of Use
9. Website Privacy Policy
Pay the VAT/Service tax to avoid legal embroil to the government.
6. User agreement and Data Security
We have been seeing that most companies do not feel any significance to
invest in Cyber Security in the beginning of their venture but after running
the business for some time and facing the pros and cons of online business
eventually do turn investing in cyber security to save itself from penalties
or fines.
Apart from all this a User Agreement also needs to be drafted in such a
manner that it proves to be beneficial both for the user and e- commerce
company. It should be able to preserve the user rights and restrict the e-
commerce portal as it serves as an Intermediary.
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6.3 CONDUCT AND REGULATION
The explosive growth in internet usage has more recently led to a

corresponding growth in online business and e-commerce. This growth
presents both great opportunities as well as some unique challenges.
Market Size
In 1998 India had only 1.4 million internet users representing a mere 0.1%
of the total population. Over the last 15 years this number has grown
rapidly due to growth in the IT and Telecom sectors. Today India has over
137 million internet users representing about 11% of its population, and it
ranks third in the world behind only China and USA. It is also among the
three fastest growing markets for internet usage worldwide, according to a
study conducted by the Associated Chambers of Commerce and Industry of
India (ASSOCHAM) and Comscore in October 2012.
The total size of India’s consumer retail market was about $470 billion in
2011 and is expected to grow to $675 billion by 2016 and to $850 billion
by 2020, with a cumulative-annual-growth rate (CAGR) of 7%. In
comparison, India’s total e-commerce market was worth about $2.5 billion
in 2009 and grew to $6.3 billion in 2011 and more than doubled to $14
billion in 2012. The percentage of internet users shopping online is less
than 10% at approx 10 million users. But this number is growing at a rate
of 30% annually versus the global average growth rate of 8-10%.
E- commerce Segments
E- commerce in India can be broadly divided into the Business- to-Business
(B2B) and the Business-to-consumer (B2C) segments. In this post we will
be focusing on the trends, opportunities and challenges in the B2C
segment. According to Forrester, the Business to Consumer (B2C) e-
commerce market in India is set to grow at the fastest rate within the Asia-
Pacific region at a CAGR of 57% between 2012-16. So far about 75-80% of
all e-commerce transactions in India are travel related, comprising mainly
of online booking of airline tickets, railway tickets and hotel bookings. The
biggest players in the travel category are MakeMytrip.com, Yatra.com and
the Indian Railways’ IRCTC website for railway bookings.
Non-travel related online commerce comprises 20-25% of the B2C e-

commerce market and includes:
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★ E-tailing or online sales of durable goods
★ Financial services such as insurance and online bill payment
★ Online classified, matrimonial, dating and job websites as well as

marketplaces
★ Digital downloads including music, ebooks and paid content subscriptions
Of these e-tailing is the largest and fastest growing segment. The most
popular categories here are similar to those in other markets and include
consumer electronics, computer hardware, mobile phones, books and
apparel. This list is rapidly expanding to include new categories such as
appliances, furniture, pet care, organic foods, health care, cosmetics and
beauty products. In many ways, India’s e-commerce market is at the same
stage of growth as the US was at in the late nineties and China was at
about 6 to 7 years ago.
Key Drivers
In 2011 the non-travel e-commerce market size was about $600 million
and it is estimated to touch $9 billion in 2016 and $70 billion by 2020 –
with an impressive CAGR of 61%. By all accounts it appears that the
growth of e-commerce in India is at an inflection point. There are multiple
drivers to this growth including:
★ Increasing broadband Internet (growing at 20% MoM) and 3G

penetration.
★ Rising standards of living and a burgeoning, upwardly mobile middle

class with high disposable incomes.
★ Availability of much wider product range (including long tail and Direct
Imports) compared to what is available at brick and mortar retailers.
★ Busy lifestyles, urban traffic congestion and lack of time for physical
shopping
★ Lower prices compared to brick and mortar retail, driven by

disintermediation and reduced inventory and real estate costs.
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MARKET PARTICIPANTS
The opportunity to tap into this exploding new market of online shoppers
has predictably led to a gold-rush among Indian entrepreneurs and venture
capitalists. It is no surprise therefore that more than $700 million was
invested in 2012 into Indian e-commerce companies. Of the 379
technology product start-ups launched as of October 2012, 193 were e-
commerce companies. Flipkart which was founded in 2007 has quickly
emerged as a leader in this space and received an investment of $150
million in venture capital in 2012 – one of the largest to date in any Indian
internet company. It reported $100 million in e-commerce revenues last
year and is targeting $1 billion in revenues by 2015.
Amazon.com the world’s leading e-commerce site also entered the Indian
market last year with the launch of Junglee.com – a product and price
comparison website that aggregates information from different e-
commerce websites. Amazon is following a different model by bringing
sellers and buyers together and not directly handling the transaction. Other
established players include eBay which also offers a marketplace for buyers
and sellers.
As with any young and emerging market, there is a lot of fragmentation. In

addition to e-tailers such as Flipkart, and marketplace sites such as Ebay
and Junglee, there are also niche websites such as Caratlane (jewelry),
online stores of established brick-and-mortar companies such as Shoppers
Stop, and deal aggregator sites such as Snapdeal and Crazeal.
Local Challenges
In spite of the huge opportunity due to the size and growth of the market,
e-commerce in India has its own set of unique challenges. E- commerce in
most mature markets such as the USA works because of certain efficiencies
in payment and delivery mechanisms which are missing or underdeveloped
in India.
The first challenge for e-commerce retailers in India is collecting payment.

Less than 2% of Indian consumers own credit cards and 90% of all retail
transactions are conducted in cash. As a result most e-commerce sites are
forced to offer a Cash-on-Delivery (COD) option. Eight out of ten online
transactions are conducted on a COD basis. However, as per one estimate
45% of all COD orders are rejected at the point of delivery by the
customer. This is clearly expensive and not a very sustainable business
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model. The problem is compounded by the fact that most e-tailers also
offer free shipping to acquire and retain customers.
The second challenge is dealing with the actual logistics and delivery of
goods ordered online. This is both inefficient and unreliable due to poor
roads, traffic congestion and an overall weak transportation infrastructure
coupled with India’s vast size. In fact much of the investment into e-
commerce companies is going into logistics. Many e-tailers are setting up
their own warehouses and delivery centers to extend their reach and
streamline operations.
Other factors that are making it harder for e-commerce companies to

survive include razor thin gross margins due to deep discounts and intense
price competition. In fact many items are sold at a loss to attract
customers. Profitability is also negatively impacted by high customer
acquisition costs, free shipping and the high rejection rate of COD orders.
It is no wonder then that most e-tailers are losing money and are being
propped up with investor capital. The largest player Flipkart is yet to turn a
profit. All of this has inevitably led to a high mortality rate and
consolidation in the segment. Of the 193 e-commerce companies that were
launched, almost half or 87 have ceased to exist, having either been
acquired or shut down as investors cut their losses and trimmed their
portfolios.
Strategies for Success
In order to improve their chances for success companies are learning and
adopting certain strategies. The successful companies in India are focusing
on strong customer service and establishing trust with buyers. This leads
to repeat buyers, lowers the customer acquisition and retention costs and
improved profitability. In addition, some companies are differentiating
themselves by focusing on niche product categories and market segments.
To outlast their competition companies will also need to build a strong
brand. This is what Amazon was able to do in the USA, and probably what
Flipkart and some of the other larger players are emulating and trying to
do in India. There are bound to be further acquisitions and consolidations
and many more brutal shakeouts as the market matures.
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Companies that hope to take advantage of these opportunities will need to

do everything possible to reduce costs, remain financially viable and adopt
smart strategies to outlast their competition and survive. It is clear though
that the growth of the internet and online e- commerce is on a fast track to
transform India’s economy in the 21st century. With the great potential and
opportunities, there are many pitfalls and challenges along the way.
E-commerce Legals and Law
E-commerce transactions should be legally straightforward. You get money

up front for the sale, in return for delivery of a product as described within
the time frame specified. A standard set of terms and conditions should
cover the vast majority of transactions.
Your terms and conditions should outline that buyers are entering into a
contract to when they purchase goods from your website. Outline the
terms of delivery, shipping, refunds and payments, exclusions of liability
and terms of use for your website. Finally, specify the choice of law and
jurisdiction of wherever you’re based – this will shift the case to your own
legal system, so you don’t find yourself negotiating some unknown foreign
law interpreting your terms in the event of legal issues.
While most transactions will be fine, a not insignificant percentage of

transactions will be fraudulent. Fraud occurs when a buyer uses false
details or someone else’s payment information to make a purchase. By the
time they are found out, they’ve already disappeared with your product,
and you could be left footing the bill. Some fraudsters also order products,
say they never arrived and demand a refund, or charge back their credit
cards once the receive the products they’ve bought.
This can be extremely damaging for your business, especially given the
often slim operating margins. You can protect yourself from fraud to a
certain extent, but you probably won’t be able to avoid being targeted if
you reach any scale. Your best option is to keep a record of all transactions
and refund behaviour, and attempt to identify patterns that might give you
a case against a particular customer. While expensive and uncertain legal
routes are available, most e-commerce operators just take the hit and
move on.
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Choosing a reliable payment processor can help weed out the fringes of
fraudulent activity, but you also need to remain vigilant and monitor what’s
going on in your business if you want to stay one step ahead.
Shipping and Delivery Policy
A clear, defined delivery policy is a must-have, so that customers know

when to expect their products and how their packages will be delivered.
You will need to specify the expected delivery time frames and costs, as
well as detailed terms on any shipping promotions. A number of merchants
use shipping discounts and promotions to encourage a higher average
spend – for example, free shipping on orders over £200. Policies like this
can help squeeze extra revenue into the bargain.
By making your shipping information clear on your product pages, and

within your terms and conditions, you can prevent any problems from
arising with disgruntled customers. This means customers are more likely
to understand the shipping terms you offer, with the security of their
agreement to your terms in the event of disputes.
Refunds Policy
Refunds are an important part of building trust with customers, and you
will hamper conversions if you don’t recognise that refunds will sometimes
be required. It is wise to be liberal in your refunds policy, and you must
refund can celled purchases within the statutory ‘cooling off’ period – 14
days. You can ask the customer to pay the cost of returns, and you are
entitled to expect goods to be returned to you in a merchantable condition.
Accepting that refunds are a natural part of the business, and responding
promptly in handling refund requests will help assure customers that you
care, while ensuring you don’t end up shy of consumer selling regulation.
Include your refunds policy prominently on your website, and certainly

within your terms and conditions so that buyers can see what they are
getting into. By getting the customer to read agree to these terms and
conditions before their purchase, you can be sure they understand and
accept the terms of refunds beyond their statutory rights.
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You can keep refunds low by using better photos on your product pages,
improving the accuracy of your descriptions, and making sure your
products are well packages and promptly despatched. Try to make it easy
for your customers to keep your product, by limiting the potential reasons
they could request a refund.
Ultimately, refunds can hit your bottom line, and this can become a
problem as you try to scale your shop if you don’t keep a grip on the
reasons your customers are refunding. Track refund activity and the
reasons for refund requests, so you can work on getting the percentage
down.
Protecting your Interests

Terms and conditions are essential for protecting your business, and
possibly your personal, interests when selling online. In an ideal world, you
would never encounter disputes or difficulties in e- commerce. In the real
world, it’s an absolute guarantee with scale. By taking care over drafting
your terms and conditions, and consulting a lawyer where the budget
allows, you can clearly set out the terms of business, and secure
agreement from your customers at the point the contract of sale is created.
Standard E-commerce Terms and Conditions

There are a number of clauses that can be found in most terms and
conditions, either by virtue of legal necessity or to protect the merchant in
the selling process. The following is a non-exhaustive list of some of the
things you might want to include within your e- commerce terms and
conditions:
1. Information Commensurate with latest Consumer Contract

Regulations: The latest Consumer Contract Regulations stipulate
information that must be made clear to consumers purchasing online via
your terms and conditions. These include your contact details, including
clarification of your business identity, the products you sell, and how
you can be contacted by your customers. This is not optional, so it pays
to do your homework on what must be included when drafting up your
terms and conditions.
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2. Liability Limitations: Limited liability is a standard practice across

most contracts, in a bid to limit any future claims that may arise from
the transaction. There are some claims to liability you can’t contract
away from – such as those causing death or personal injury – but broad
exclusions of other types of damages can be effective in reducing your
future obligations (and keeping legal costs to an absolute minimum).
3. What Happens And Who Pays For Returns?: Returns are a fact of
life in e-commerce, and it’s useful to be upfront about how your returns
process works, and who bares the costs of return shipping. Specify this
within your terms and conditions, even if you have an external refunds
policy in place.
4. Jurisdiction/Choice of Law: Under which laws will the contract of sale

be interpreted? This matters particularly in e- commerce, where you
may end up resorting to the lottery of legal systems when selling across
the EU, or indeed the world, if you don’t seize the initiative.
5. Delivery Terms: It’s also useful to take into account your delivery
terms, or to directly reference your shipping policy if you have one in
place. When your customers accept these terms, you can solve so many
support issues or refund requests, simply by referring to the terms and
processes laid down in your delivery terms. Provided they are fair and
reasonable, as you must be at all times in drafting terms relating to
consumers, you will likely cover your back for more situations.
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Protecting Your Customer’s Privacy Online
Online privacy is a big issue as many e-commerce sites collect and retain
personal information about customers. Some of the personal data you will
likely obtain would include a customer’s name, address, email address, and
possibly their credit card and other types of financial information. As the e-
commerce site owner it is your responsibility to ensure this personally
identifiable information is protected, and that when you collect such data
you comply with federal and state privacy laws.
E-commerce site owners should provide a privacy policy and post it on the
e-commerce website. This policy should clearly identify what kinds of
personal information you will collect from users visiting your website, who
you will share the information you collect with, and how you will use and
store that information
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6.4 SUMMARY
E-commerce players are banking on the Indian internet growth story. The
fact that an average online user is spending more time online gives these
players the opportunity to draw more users to their websites through
innovative marketing strategies such as those revolving around social
media. Furthermore, to fully utilize the opportunity, players need to
leverage the growing number of mobile devices in the country. They should
focus on developing mobile- compatible websites and applications. This
would allow customers to log on to easy-to-access platforms and browse e-
commerce websites on their mobile devices. e-commerce players also need
to focus on innovation to tackle challenges arising from low credit and debit
card penetration. They could consider working with financial intermediaries
to develop payment systems, such as escrow services, for resolving issues
around security and product delivery. The RBI could step in and reduce the
number of online transaction failures by defining service metric quality and
monitoring it at regular intervals. This would enable it keep a close eye on
the performance of financial intermediaries and plug gaps as soon as they
occur.
Online retail not only focuses on web capabilities but also on how well the
peripheral aspects of online retail are taken care of. Online retail players
pay as much attention to inventory management, logistics and warehouse
management as they do to their online platforms. They need to invest time
and money on all these, since customer experience is a function of how
well they work in sync. There is significant scope for online retail players to
focus on new product delivery models and payment mechanisms, since
customers are facing problems with the options available. The online retail
market presents an attractive opportunity for entrepreneurs, since it is
growing rapidly and still forms only a miniscule portion of organized retail.
Moreover, there are a number of under penetrated segments such as online
groceries in online retail. Players also have opportunities in sectors
impacted by online retail, e.g., logistics, in which last-mile reach is a
problem. While organized retail players are attracted by opportunities
presented by the online retail sector, they have critical questions pertaining
to modes of entry, pricing decisions and customer segmentation.
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1. Discuss the procedure for obtaining License for setting up e- commerce

business in India
2. Discuss case law of SnapDeal Vs FDA.
3. What are the steps to be taken for setting up market for e- commerce
business in India.
4. Which are the documents to be submitted for Payment Banks In India
5. Explain Strategy of success for e-commerce business in India.
6. Which are the standard terms and condition for e-commerce in India.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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INTELLECTUAL PROPERTY LEGISLATIONS
Chapter 7
Objectives
★ Meaning and scope of Intellectual Property Rights

★ Kinds of Intellectual Property
★ Kinds of Patent
★ Rights of Patentees
★ Administration of Patent System in India
★ Working of Patents
Structure:
7.1 Introduction
7.2 The Patent Act, 1970
7.3 Kinds of Patents
7.4 Administration of Patent System in India
7.5 Working of Patents, Compulsory Licences and Revocation
7.6 Compulsory Licences (Section 84)
7.7 Register of Patent Agents
7.8 Penalties [Section 118-124]
7.9 Summary
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Overview
★ Intellectual Property, “a property created by human brain or human

intellect”.
★ It includes literary & other works like inventions, design, trademarks,

computer programs etc.
★ Concept of intellectual property started gaining important since 1992

when the new industrial policies were reformed which gave scope for
liberalization and globalization for trade.
★ Meaning of Patent: The creative work of an individual initiative is

granted the “status of property” which can be hired, licensed, purchased
or sold. It encourages inventions and reduces the risk of pirating and
copying.
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1. Invention: “Means a new product or process involving an inventive

step and capable of industrial application.” [Sec. 1 (j)]
2. Patentee: “Means the person for the time being entered on the register
as the grantee or proprietor of the patent.” [Sec. 2(1) (p)]
3. True and First Inventor: “Does not include either the first importer of
an invention into India, or a person to whom an invention is first
communicated from outside India.” [Sec 2(1) (y)]
7.1 INTRODUCTION
Man is a wonderful being with great imagination, marvellous creation and

highly skillful. In some of the situations man is beyond the nature. With the
emerging and fast growing business and market environments, computers
and information technology, man’s contributions and creations are
wonderful. These creations are to be protected. In order to protect
inventions and creations a separate legislation has been enacted, which is
known as Intellectual Property Legislation – Patents Act 1970.
Intellectual Property Legislation – Patents Act 1970

Intellectual Property means “a property created by human brain or human
intellect.” The subject matter of Intellectual Property (I.P) is very wide
which includes literary and other works like inventions, designs, trade
marks, computer programs etc. Earlier I.P were collectively known as
“Industrial property”.
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Scope of Intellectual Property Rights
The convention establishing World Intellectual Property Organization

(WIPO) has given a wider definition of IPRs. According to this definition the
IPRs shall include the rights relating to:
i. Literary, artistic and scientific work;
ii. Performances of performing artists, phonograms and broadcasts;
iii. Inventions in all fields of human endeavour;
iv. Scientific discoveries;
v. Industrial designs;
vi. Trade marks, service marks and commercial names and designations;
vii.Protection against unfair competition and; all other rights resulting from
intellectual activity in the industrial, scientific, literacy or artistic fields.
Kinds of Intellectual Property
Industrial Property and Intellectual Property
a. Patents, designs and trademarks are considered as “Industrial Property”
b. Copyright and Confidential information are considered as “Intellectual

Property”
According to World Intellectual Property Organisation (WIPO) intellectual

property includes rights relating to:
a. Industrial designs
b. Literary, artistic and Scientific works
c. Protection against unfair competition
d. Scientific discoveries
e. Performances of artists and programmes etc.
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The concept of ‘intellectual property’ started gaining its importance since

1992 when the new industrial policies were reformed which gave scope for
liberalization and globalisation of trade.
GATT, WTO and TRIPS “GATT“ (General Agreement on Trade and Tariff) was
established in 1947, with a 22 member state. Since 1947- 1993,8 rounds of
discussion took place between the member states to formulate rules and
regulations relating to international trade. The object of GATT was to reduce the
interference of the governments throughout the globe and to develop trade and
commerce, especially to develop underdeveloped countries and to protect their
rights to do their business without any condition by the developed nations.
For the first time “Intellectual Property” rights were included in the Uruguay
Round in 1986.
The last and eight URUGUAY Round held in 1993. During this round the most
conflicted “DUNKEL DRAFT” was born.
Sir Arthur Dunkel was the Director General of GATT, who retired on 20-6-1993.
The Uruguay Rounds, which was ended on 15-12-93 incorporated the Dunkel
Draft. Where three countries signed, including India. P.V Narasimha Rao’s
government, signed Dunkel Draft along with other countries for which the
opposition parties and other persons opposed it. This round was recognized as
the biggest negotiation mandate on trade ever agreed. Later GATT was changed
into WTO (World Trade Organisations) in 1995. WTO was established in Geneva
on a permanent basis.
In connection with intellectual property, the specialized council for Trade Related
Aspects of Intellectual Property Rights (TRIPS) came into existence on a
permanent basis. w.e.f. form 1.1.95 “TRIP AGREEMENT’ has become very
popular in relation to the Intellectual property rights throughout the world.
The council of TRIP is an independent body within the WTO. The council
implements and monitors the progress of the TRIP’s agreement by co-operating
with WTO, World Intellectual property organization (WIPO), UNESCO, as well as
other International organizations.
The TRIP contains all necessary legal provisions relationed to copy rights, trade
marks, Industrial designs, patents, protection of un-disclosed information etc.
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7.2 THE PATENT ACT, 1970
Meaning of Patent: A patent generally speaking, is a grant from

government, which confers on the grantee, for a limited period of time, the
exclusive privilege of making, selling and using the invention for which a
patent has been granted and also of authorizing others to do so.
Thus “Creative work” based on individual initiative is granted the ‘Status of

Property’ which can be hired, licensed, purchased or sold. Thus, Patent
Acts encourages inventions and reduces the risk of pirating or copying.
History of Patent Law

Regarding the original development of all intellectual property rights
including patent, England has been considered as an important place in the
world history. It has set the base for patent rights internationally. Patents
played an important role in the development of Industries in the western
countries.
In India, the British Rulers enacted the Patents and Designs Act, 1911 after
several amendments since 1856, the first Patent Act in India was passed
which gave exclusive rights to the patentees for a period of 14 years. There
was no further development of Patent Laws in India as we were under the
clutches of British Rule. Then, after independence, the parliament
appointed two expert committees headed by Justice Bakshi Teak Chand in
1950 and Justice Raja Gopal Iyangar in 1959. These committees found that
the foreign companies misused the Patent Laws of India. This led to a
debate in Parliament and finally the bill was passed on 19th Sept 1970 and
was notified as the Patent Act 1970. Thereafter the Patent and Design Act
1911 was split into two. Namely: (1) The Design Act 1911 and (2) The
Patent Act, 1970.
The Patent Act, 1970 has incorporated several new provisions preventing
the misuse of patents, which was further amended in 1999 and in 2002.
India is a member State of World Intellectual Property Organisation (WIPO)
an International Organisation, responsible for the promotion, protection of
Intellectual property throughout the world.
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Objective of the Patent Act
The object of Patent Act is to encourage new technology, scientific

inventions and research:
i. Industrial progress,
ii. Grant of right to own,
iii. Use or sell the method or the product patented for a limited period of
time.
Definitions: See 2 (1) of the Act defines the various terms used in the Act:
1. “Appellate Board” means the Appellate Board referred to in section 116.
[Section 2(1) (a)]
2. “Assignee” includes an assignee of the assignee and the legal

representative of a deceased assignee and references to the assignee of any
person include references to the assignee of the legal representative or
assignee of that person. [Section 2(1) (ab)]
3. “Capable of Industrial application” in relation to an invention, means

that the invention is capable of being made or used in an industry. [Section
2(1) (ac)]
4. “Controller” means the Controller General of Patents, Designs and Trade

Marks referred to in section 73. [Section 2(1) (b)]
5. “Convention Application” means an application for a patent made by

virtue of section 135. [Section 2(1) (c)]
6. “Convention Country” means a country or a country which is member of a

group of countries or a union of counties or an Inter-Government
organization notified as such under sub- section (1) if section 133. [Section
2(1) (d)]
7. “Exclusive license” means a licence from a patentee which confers on the

licensee, or on the license and persons authorized by him, to the exclusion of
all other persons (including the patentee), any right in respect of the
patented invention, and exclusive license shall be construed accordingly.
[Section 2(1) (f)]
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8. “Food” means any article of nourishment and includes any substance

intended for the use of babies, invalids or convalescents as an article of food
or drink. [Section 2(1) (g)]
9. “Government undertaking” means any industrial undertaking carried on:
i. By a department of the Government, or
ii. By a corporation established by a Central, Provincial or State Act, which is

owned or controlled by the Government, or
By a Government company as defined in section 617 of the Companies
Act, 1956 and includes the Council of Scientific and Industrial Research
and any other institution which is financed wholly or for the major part by
the said Council. [Section 2(1) (h)]
10. “Medicine or Drug” includes:
i. All medicines for internal or external use of human beings or animals;

ii. All substances intended to be used for or in the diagnosis, treatment
mitigation or prevention of diseases in human beings or animals;
iii. All substances intended to be used for or in the maintenance of public
health, or the prevention or control of any epidemic disease among
human beings or animals;
iv. Insecticides, germicides, fungicides, weedicides and all other substances
intended to be used for the protection or preservation of plants;
v. All chemical substances which are ordinarily used as intermediates in the
preparation or manufacture of any of the medicines or substances above
referred to. [Section 2(1) (l)]
11.“Patents” means a patent granted under this Act and includes for the
purposes of specified sections and chapters of this Act, a patent granted and
the Indian Patents and Designs Act 1911. [Section 2(1) (m)]
Generally speaking ‘Patent’ is a grant from the government, conferring on the

granter, for a limited period of time, the exclusive privilege of making, selling
and using the invention for which a patent has been granted and also of
authorizing others to do so.
Thus, ‘creative work’ based on private initiative is granted the status of

‘property’ which can be sold, hired, licensed or purchased. Thus, patent
protection encourages invention by reducing the risk of pirating or copying.
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12.“Patent Agent” means a person for the time being registered under this
Act as a patent agent. [Section 2(1) (n)]
13.“Patented Article” and “Patented Process” means respectively an article

or process in respect of which a patent is in force. [Section 2(1) (o)]
14.“Patentee” means the person for the time being entered on the register as
the grantee or proprietor of the patent. [Section 2(1) (p)]
15.“Patent of addition” means a patent granted in accordance with section 54

[section 2(1) (q)]
16.“Person interested” includes a person engaged in, or in promoting,

research in the same field as that to which the invention relates. [Section
2(1) (t)]
17.“True and First Inventor” does not include either the first importer of an
invention into India, or a person to whom an invention is first communicated
from outside India. [Section 2(1) (y)]
18.“Invention” means a new product or process involving an inventive step

and capable of industrial application. [Section (1) (j)]
Meaning of Inventions
Patent is granted to inventions. The invention should satisfy the following

three tests to get patent:
1. Test of Novelty: The subject matter should be new.
2. Test of Utility: It should be useful.
3. Test of Durability: The subject matter should be capable of being

marketed for communication purpose.
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What are not inventions: As per section 3 (as amended in 2002), the
following are not inventions within the meaning of this Act::
a. An invention which is frivolous or which claims anything obviously contrary to

well established natural laws;
b. An invention the primary or intended use or commercial exploitation of which

could be contrary to public order or morality or which causes serious
prejudice to human, animal or plant life or health or to the environment;
c. The mere discovery of a scientific principle or the formulation of an abstract;

theory or discovery of any living thing or non-living substance occurring in
nature;
d. The mere discovery of any new property or new use for a known substance
or of the mere use of known process, machine or apparatus unless such
known process results in a new product or employs at least one new
reactant;
e. A substance obtained by a mere admixture resulting only in the aggregation

of the properties of the components thereof or a process for producing such
substance.
f. The mere arrangement or re-arrangement or duplication of known devices

each functioning independently on one another in a known way;
g. A method of agriculture or horticulture;
h. Any process for the medicinal, surgical, curative, prophylactic diagnostic,

therapeutic or other treatment of human beings or any process for a similar
treatment of animals to render them free of disease or to increase their
economic value or that of their products.
i. Plants and animals in whole or any part thereof other than micro-organisms
but including seeds, varieties and species and essentially biological processes
for production or propagation of plants and animals;
j. A mathematical or business method or a computer program per se or

algorithms;
k. A literary, dramatic, musical or artistic work or any other aesthetic creation

whatsoever including cinematographic works and television production;
424
l. A mere scheme or rule or method of performing mental act or method of

playing game;
m. A presentation of information;
n. Topography of integrated circuits;
o. An invention which, in effect, is traditional knowledge or which is an

aggregation or duplication of known properties of traditionally known
component or components.
7.3 KINDS OF PATENTS
Three kinds of patents are granted under different provisions of the Act.
These are:
1. Ordinary Patent: Is a “Patent” normally obtained by filing application

under Sec. 6(1) of the Patent Act 1970.
2. Patent of Addition: It is a patent for improvement in or modification of

an invention for which a patent application has already been made or it
has been granted Sec. 54 to 56 of this Act containing provisions
regarding application, sealing of patent, renewal fees, terms of patent
and validity period of patent of addition.
A patent of addition remains in force only as long as the patent for the
original invention remains in force.
3. A patent granted in respect of a convention: Application filed u/s

135 of the Act under reciprocity arrangements the convention
application has to be made within one year from the date of the first
application made in a convention country in respect of that invention.
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7.4 ADMINISTRATION OF PATENT SYSTEM IN INDIA
Under the Patents Act – 1970 – The Head Office is located at Calcutta and
has branches at Delhi, Mumbai, and Chennai having jurisdiction over the
North, West and South Zones respectively.
Jurisdiction for filing a patent application is decided depending upon where

the applicant for patent resides or his place of business or domicile.
Who is a Patentee?
A patentee is a person who enjoys the right of “Patent”.
When a person invents and applies for patent and fulfills all the conditions,
he gets a patent from the government. According to Sec. 48 of Patent Act
1970, a patentee or his licensee enjoys the following rights.
A patentee shall have exclusive right by himself, his agent or licensee to:
a. Make, use, exercise, sell or distribute the patented article or substance

and
b. Use or exercise the patented method or processes in India.
Exclusive Marketing Rights
Under WTO agreement India had to provide “Product Patent” to MNCs for
inventions relating to pharmaceutical and agro-chemical products from
1-1-95 and the grant of such patents providers exclusive Marketing Rights
for 5 years after attaining marketing approval or grant of patent which ever
is earlier.
This applies to inventions for which patent applications are filed on or after
1-1-95 in India or abroad. Thus, “Product Patent” and Exclusive marketing
Rights are not available for products developed and patented abroad before
1-1-95.
In order to meet these obligations under Article 70(8) and (a) of TRIP
agreement of WTO, the Patent Amendment Act, 1999 in a new chapter IV
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A on exclusive Marketing Right and the provisions are contained in Sec.

24A to 24E. w.e.f. 1-1-95.
1. Applications for grant of Exclusive Rights (Sec. 24A)

2. Grant of Exclusive Rights (Sec. 24B)
3. Compulsory Licenses (Sec. 24C)
4. Special Provision under public Invent (24D)
5. Suits relating to infringements (24E)
6. Central Govt. and its officers not to be liable (24F)
Procedure for Grant of Patent
Following are the steps for grant of a patent under this Act.
1. Filing an application for a patent.

2. Examination of application.
3. Acceptance of the application and advertisement of such acceptance in
the official gazettee.
4. Over coming opposition, if any to the grant of patent and
5. Grant and sealing of patents
Filing an Application for a Patent
Any person interested in obtaining a patent has to make an application:
1. An application for a patent for an invention may be made:
a. By any person who claims to be the true and first inventor of the
invention.
b. By any person being the assignee of the person claiming to be the

true and first inventor in respect of the right to make such an
application.
c. By the legal representatives of the deceased person who immediately

before his death was entitled to make such an application.
2. An application under Sub Sec. (1) may be made by any of the person
referred to there in either alone or jointly with any other person (Sec.
6):
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a. Applicant need not be citizen of India, it can be made by any person

claiming to be the true of first inventor of the invention.
b. A joint stock company or a partnership firm or a corporation can

apply for a patent only as an assignee of the inventor. This so
because, such bodies cannot invent anything and cannot, therefore,
be called “inventors”.
c. Government Servants are at liberty to apply for grant of patent

directly to patent office subject to any special conditions of service
applicable to employees of any particular department.
d. Defence Employees are not eligible to apply for patents except in the
manners laid down in special regulations applicable to them.
e. Railway and Research Establishment employees are not eligible to

apply for patents or permit other person to apply for patent except
with the permission of the govt. and in accordance with the
regulations.
3. u/s 54(1) an application for a patent of addition may be made only by

the applicant for the original patent to which it is an addition, if the
application for the original patent is pending or by the registered
Proprietor of such original patent, if it has been granted.
4. A convention application may be made by any person who has made an

application for a patent in respect of that invention in a convention
country or by his assignee or his legal representative.
Application For Patents [Sec. 7]
1. Every application for a patent shall be for one invention only and shall
be made in the prescribed form and filed in the patent office.
(1A) Every international application under the Patent Co- operation

Treaty for a patent, as may be filed designating India shall be deemed to
be an application under this Act, if a corresponding application has also
been filed before the Controller in India.
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2. Where the applications are made by virtue of an assignment there shall

be furnished with the application, or within such period as may be
prescribed after the filing of the application, proof of the right to make
the application.
3. It shall state that the applicant is in possession of the invention and

shall name the owner claiming to be the true and first inventor, and
where the person so claiming is not the applicant or one of the
applicants, the application shall contain a declaration that the applicant
believes the person so named to be the true and first inventor.
4. Every such application (not being a convention application) shall be

accompanied by a provisional or a complete specification.
Form and Effect of Patent
a. A patent shall be the prescribed form and shall have effect throughout
India.
b. A patent shall be granted for one invention only.
c. Every patent shall be dated as of the date on which the complete

specification was filed.
d. The date of every patent shall be entered in the register.
Grant of Patents Subject to Conditions [Sec. 47]
The grant of patent shall be subject to the condition that:
1. Any machine, apparatus or other article in respect of which the patent is

granted or any article made by using a process in respect of which the
patent is granted, may be imported or made by or on behalf of the
Government for the purpose merely of its own use;
2. Any process in respect of which the patent is granted may be used by or

on behalf of the Government for purpose merely of its own use;
3. Any machine, apparatus or other article in respect of which the patent is

granted or any article made by the use of the process in respect of
429
which the patent is granted, may be made or used, and any process in
respect of which the patent is granted may be used, by any person, for
the purpose merely of experiment or research including the imparting of
instructions to pupils; and
4. In the case of a patent in respect of any medicine or drug, the medicine

or drug may be imported by the Government for the purpose merely of
its own use or for distribution among specific institutions described
under this section.
So, use of any patented machine, product or process by the government or

for research is allowed without payment of any license fee.
Term of Patent and Renewal Fees (Section 53 as amended in 2002)
1. Subject to the provisions of this Act, the term of every patent granted,
after the commencement of the Patents (Amendment) Act, 2002, and
the term of every patent which has not expired and has not ceased to
have effect, on the date of such commencement, under this Act, shall
be twenty years from the date of filing of the applicant for the
patent.
This is a major change in term of patents. Prior to this amendment, the

position was, subject to the provision of this Act, the term of every
patent shall:
a. In relation an invention claiming the method or process of

manufacture of a substance, were the substance is intended for use,
or is capable of being used, as food or as a medicine or drug, be five
years from the date of sealing of the patent, or seven years from the
date of the patent whichever period is shorter; and
b. In respect of any invention be 14 years from the date of patent.
2. A patent shall cease to have effect if renewal fee is not paid within the
prescribed period extended period under this section.
3. The period shall be extended to such period, not being more than six
months longer than the prescribed period, as may be specified in a
request made to the Controller if the request is made and the renewal
430
fee and the prescribed additional fee paid before the expiration of the
period so specified.
4. Notwithstanding anything contained in any other law for the time being
in force, on cessation of the patent right due to non- payment of
renewal fee or on expiry of the term of patent, the subject matter
covered by the said patent shall not be entitled to any protection.
Loss or destruction of patents (Section 154) If a patent is lost or

destroyed or its non-production is accounted for to the satisfaction of the
Controller, the Controller may at any time, on application made in the
prescribed manner and on payment of the prescribed fee, cause a duplicate
thereof to be sealed and delivered to the applicant.
Rights of Patentees (Section 48) Subject to the other provisions

contained in this Act and the conditions specified in section 47, a patent
granted under this Act shall confer upon the patentee:
a. Where the subject matter of the patent is a product, the exclusive

right to prevent third parties, who do not have his consent, from the
act of making, using, offering for sale, selling or importing for those
purpose that product in India;
b. Where the subject matter of the patent is a process, the exclusive

right to prevent third parties, who do not have his consent, from the
act of using that process, and from the act of using, offering for sale,
selling or importing for those purposes the product obtained directly
by that process in India:
Provided that the product obtained is not a product in respect of which no

patent shall be granted under this Act.
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Surrender of Patents (Section 63)
1. A patentee may, at any time by giving notice in the prescribed manner

to the Controller, offer to surrender this patent.
2. Where such an offers is made, the Controller shall advertise the offer in
the prescribed manner and also notify every person other than the
patentee whose name appears in the register as having an interest in
the patent.
3. Any person interested may, give notice to the Controllers of opposition

to the surrender.
4. If the Controller is satisfied after hearing the patentee and any

opponent, that the patent may properly be surrendered, he may accept
the offer and by order, revoke the patent.
Revocation of Patents [Section 64-66]

A patent confers exclusive rights to the first and true inventor. There is
elaborate procedure for grant of patent under this Act and Patent Office will
take all possible precautions before granting a ‘patent’. Under the
provisions of this Act it is open to any person to challenge the validity of
patent. If the grounds challenging the grant of patent are valid or the
Government in public interest deems it fit, the exclusive rights granted to
inventor shall be withdrawn. Any such withdrawal of rights granted to
patentee is termed revocation of patent.
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Section 64 provides for revocation of patents as follows:
1. Subject to the provisions contained in this Act, a patent, whether granted

before or after the commencement of this Act, may, on the petition of any
person interested or of the Central Government or on a counter- claim in a
suit for infringements of the patent, be revoked by the High Court on any of
the following grounds:
a. The invention, was claimed in a valid claim of earlier priority date contained
in the complete specification of another patent granted in India.
b. [omitted];
c. Patent was obtained wrongfully in contravention of the rights of the petitioner

or any person under or through whom he claims;
d. That claim is not an invention within the meaning of this Act; [e, f omitted]
e. Invention is not useful;
f. The complete specification does not sufficiently and fairly describe the
invention and the method by which it is to be performed;
g. That the scope of any claim of the complete specification is not sufficiently
and clearly defined;
h. That the patent was obtained on a false suggestion or representation;
i. That the subject of any claim is not patentable under this act.
j. The invention was secretly used in India, otherwise than as mentioned in

subsection (3) before the priority date of the claim;
k. Applicant for the patent has failed to disclose to the Controller the
information required by section 8 or has furnished information which in any
material particular was false to his knowledge;
l. Applicant contravened any direction for secrecy passed under section 35 or

made or caused to be made an application for the grant of a patent outside
India in contravention of section 39.
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m. Leave to amend the completed specification under section 57 or section 58

was obtained by fraud.
n. That the complete specification does not disclose or wrongly mention the
source or geographical origin of biological material used for the invention.
o. That the invention so far as claimed in any claim of the complete

specification was anticipated having regard to the knowledge, oral or
otherwise, available within any local or indigenous community in India or
elsewhere.
Without prejudice to the provisions contained in sub-section (1) a patent

may be revoked by the High Court on the petition of the Central
Government, if the High court is satisfied that the patentee has without
reasonable cause dialed to comply with the request of the Central
Government within the meaning of section 99 upon reasonable terms.
Revocation of patent in public interest: Where the Central Government

is of opinion that a patent or the mode in which it is exercised is
mischievous to the State or generally prejudicial to the public, it may, after
giving the patentee an opportunity to be heard, make a declaration to that
effect in the Official Gazette and thereupon the patent shall be deemed to
be revoked.
Register of Patents (Sections 67-72)
Sealing of Patent is done at patent office at Calcutta. The Controller shall

enter in Register of Patent relevant details in respect of patents such as:
i. Names, addresses and nationality of the patentees,

ii. Title of the invention,
iii. Date of the patent, the date of sealing etc.
iv. Renewal fees and date of renewal
v. Change of in patentee’s address, if any
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According to Section 67
1. There shall be kept at the patent office a register of patents, wherein

shall be entered:
a. The names and addresses of grantees of patents;
b. Notification of assignments and of transmissions of patents, of

licenses under patents, and of amendments, extension, and
revocations of patents; and
c. Particulars of such other matters affecting the validity or

proprietorship of patents as may be prescribed.
2. No notice of any trust, whether express, implied or constructive, shall

be entered in the register, and the controller shall not be affected by
any such notice.
3. The register shall be kept under the control and management of the
Controller.
4. Notwithstanding anything contained in sub-section (1), it shall be lawful

for the controller to keep the register of patents or any part thereof in
computer floppies, diskettes or any other electronic form subject to such
safeguards as may be prescribed.
5. In the event the register is kept wholly or partly in computer floppies,

diskettes or any other electronic form:
a. References in this Act to an entry particulars in the register shall be

deemed to include reference to a record of particulars kept in computer
floppies, diskettes or any other electronic form and comprising the
register or part of the register and references to the rectification of the
register are to be read as including references to the rectification of the
record of particulars kept in computer floppies, diskettes or any other
electronic form and comprising the register or part of the register.
A patent is not valid unless it is in writing and registered with the

controller within 6 months. Without registration, there will not be
accepted by the court or controller as evidence.
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7.5 WORKING OF PATENTS, COMPULSORY LICENCES AND

REVOCATION
Working of Patents: The general principle is that patents for inventions

are granted for being used and not for hoarding. It is essential to secure:
a. That patents are granted to encourage inventions and to secure that the
inventions are worked in India on a commercial scale and to the fullest
extent that is reasonably practicable without undue delay; and
b. That they are not granted merely to enable patentees to enjoy a

monopoly for the importation of the patented article.
c. That the protection and enforcement of patent rights contribute to the

promotion of technological innovation and to the transfer and
dissemination of technology, to the mutual advantage of producers and
users of technological knowledge and in a manner conducive to social
and economic welfare, and to a balance of rights and obligations;
d. That patents granted do not impede protection of public health and

nutrition and should act as instrument to promote public interest
specially in sectors of vital importance for socio-economic and
technological development of India;
e. That patents granted do not in any way prohibit Central Government in

taking measures to protect public health.
f. That the patent right is not abused by the patentee or person deriving
title or interest on patent from the patentee, and the patentee or a
person deriving title or interest on patent from the patentee does not
resort to practices which unreasonably restrain trade or adversely affect
the international transfer of technology; and
g. That patents are granted to make the benefit of the patented invention
available at reasonably affordable prices to the public.
Surrender of Patent: Sec. 63 dealing with surrender of Patents entitles

the patentee to surrender the patent, at any time by giving notice in the
prescribed manner to the controller.
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7.6 COMPULSORY LICENCES (SECTION 84)
At any time after the expiration of 3 years from the date of the sealing of
patent, any person interested may make an application to the Controller
alleging that the reasonable requirements of public are not satisfied and
patented invention is not available to the public at a reasonable price and
praying for the grant of a compulsory licence to work the patented
invention.
1. Such application may be made by any person who is already a licensee.
2. That the patented invention is not worked in the territory of India.
3. The Controller, if satisfied that the reasonable requirements of the public

with respect to the patented invention have not been satisfied or that
the patented invention is not worked in the territory of India or that the
patented invention is not available to the public at a reasonably
affordable price, may grant a licence upon such terms as he may deem
fit.
Revocation of patents by the Controller for non-working [Section

85]
1. Where, in respect of a patent, a compulsory licence has been granted,

the Central Government or any person interested may, after the
expiration of two years from the date of the order granting the first
compulsory license, apply to the Controller for an order revoking the
patent on the ground that the patented invention has not been worked
in the territory of India or that reasonable requirements of the public
with respect to the patented invention has not been satisfied or that the
patented invention is not available to the public at a reasonably
affordable price.
2. Such application shall contain such particulars as may be prescribed, the

facts upon which the application is based, and in the case of an
application other than by the Central Government, shall also set out the
nature of the applicant’s interest.
3. The Controller, if satisfied may make an order revoking the patent.
437
4. Such application shall ordinarily be decided within one year of its being
presented to the controller.
Powers of Controller in granting Compulsory Licences (Section 88)
Where the Controller, is satisfied on applications made under Section 84,

he may, subject to the provisions of that sections, order the grant of
licenses under the patent to such customers of the applicant as he thinks
fit as well as to the applicant.
Where an applicant is the holder of a licence under the patent, the

Controller may, if he makes an order for the grant of a licence to the
applicant, order the existing licence to the cancelled, or may, if he thinks
fit, instead of making an order for the grant of a licence to the applicant,
order the existing licence to be amended.
The controller while ordering the grant of a licence, may, direct that the
licence shall operate:
a. To deprive the patentee of any right which he may have as patentee to

make, use, exercise or vend the invention or to grant licences under the
patent;
b. To revoke all existing licences in respect of the invention.
Where two or more patents are held by the same patentee and an
applicant for a compulsory license establishes that the reasonable
requirements of the public have not been satisfied with respect to some
only of the said patents, then if the Controller is satisfied that the applicant
cannot efficiently or satisfactory work the licence granted to him under
those patents without infringing the other patents held by the patentee, he
may, by order, direct the grant of a licence in respect of the other patents
also to enable the licensee to work the patent or patents in regard to which
a licence is granted under section 84.
Where the terms and conditions of a licence been settled by the controller,
the licensee may, at any time after he has worked the invention on a
commercial scale for not less then twelve months, make an application for
the revision of the terms and conditions on the ground that these have
proved to be more onerous than originally expected and the licensee is
438
unable to work the invention except at a loss: Provided that no such

application shall be entertained a second time.
General Purpose for Granting Compulsory Licences (Section 89)
The powers under section 84 shall be exercised to secure:
a. That patented inventions are worked on a commercial scale in India

without undue delay and to the fullest extent that is reasonably
practicable;
b. That the interests of any person for the time being working or
developing an invention in India under the protection of a patent are not
unfairly prejudiced.
Terms and Conditions of Compulsory Licences [Section 90]
1. In settling the terms and conditions of a licence under section 84, the
Controller shall endeavour to secure:
i. That the royalty and other remuneration, is reasonable, having regard

to the nature of the invention, the expenditure incurred by the patentee
in making the invention or in developing it and obtaining a patent and
keeping it in force and other relevant factors;
ii. That the patented invention is worked to the fullest extent by the
licensee and with reasonable profit to him;
iii. That the patented articles are made available to the public at reasonable
prices.
iv. That the licence granted is a non-exclusive licence;
v. That the right of the licensee is non-assignable;
vi. That the licence is for the balance term of the patent unless a shorter
term is consistent with public interest;
vii.That the licence is granted with a predominant purpose of supplying in

Indian market and in the case of semi-conductor technology, the licence
granted is to work the invention for public non-commercial use and in
439
the case, the licence granted to remedy a practice determined after

judicial or administrative process to be anti-competitive, licensee shall
be permitted to export the patented product.
2. No licence granted by the Controller shall authorize the licensee to

import the patented article or an article or substance made by a
patented process from abroad where such importation would, but for
such authorization, constitute an infringement of the right of the
patentee.
3. Notwithstanding anything contained in sub-section (2), the Central

Government may, if in its opinion it is necessary so to do, in the public
interest, direct the Controller at any time to authorize any licensee in
respect of a patent to import the patented article or an article or
substance made by a patented process from abroad (subject to such
conditions as it considers necessary to impose relating among other
matters to the royalty and other remuneration, if any, payable to the
patentee, the quantum of import, the sale price of the imported article
and the period of importation), and thereupon the Controller shall give
effect to the directions.
4. The provisions of sections (83, 87, 88, 89 and 90) shall apply in relation
to the grant of licenses under this section as they apply in relation to
the grant of licenses under section 84.
5. Notwithstanding anything contained in sub-section (2), where the

Controller is satisfied on consideration of the application referred to in
clause (i) of sub-section (1) that it is necessary in:
a. A circumstance of national emergency; or

b. A circumstance of extreme urgency; or
c. A case of public non-commercial use,
Which may arise or is required, as the case may be, including public health
crises, relating to AIDA, HIV, tuberculosis, malaria or other epidemics, he
shall not apply any procedure specified in section 87 in relation to grant of
licence.
440
Termination of Compulsory Licence [Section 94]
1. On an application made by the patentee or any other person deriving

title or interest in the patent, a compulsory licence granted under
section 84 may be terminated by the Controller, if and when the
circumstances that gave rise to the grant thereof no longer exist and
such circumstances are unlikely to recur:
Provided that the holder of the compulsory licence shall have the right
to object to such termination.
2. While considering an application under sub-section (1), the Controller

shall take into account that the interest of the person who had
previously been granted the licence is not unduly prejudiced.
Infringement of Patents [Sec. 104-117]

This Act grants statutory rights to patentee, his agents alone to work or
exploit the invention. If some other persons violates or encroaches upon
the statutory right, the patent is said to be infringement. The Patent Act
1970 does not specify infringement but provides for Rights and Exclusive
Licence, u/s 84, to take legal action against infringements.
Burden of Proof in cCase of Suits Concerning Infringement
1. In any suit for infringement of a patent, where the subject matter of

patent is a process for obtaining a product, the court may direct the
defendant to prove that the process used by him to obtain the product,
identical to the product of the patented process, is different from the
patented process if:
a. The subject matter of the patent is a process for obtaining a new

product; or
b. There is a substantial likelihood that the identical product is made by

the process, and the patentee or a person deriving title or interest in
the patent from him, has been unable through reasonable efforts to
determine the process actually used:
441

Provided that the patentee or a person deriving title or interest in the

patent from him, first proves that the product is identical to the product
directly obtained by the patented process.
2. In considering whether a party has discharged the burden imposed upon

him by sub-section (1), the court shall not require him to disclose any
manufacturing or commercial secrets, if it appears to the courts that it
would be unreasonable to do so. [Section 104A inserted by amendment
in 2002].
Certain acts not to be considered as infringement: For the purpose of

this Act:
a. Any act of making, constructing, using or selling a patented invention

solely for uses reasonably related to the development and submission of
information required under any law for the time being in force, in India,
or in a country other than India, that regulates the manufacture,
construction, use or sale of any product;
b. Importation of patented products by any person from a person who is

duly authorised by the patentee to sell or distribute the product, shall
not be considered as a infringement of patent rights. [Section 107A]
Relief’s in suit for infringement: (1) The relief’s which a court may
grant in any suit for infringement include an injunction (subject to such
terms, if any, as the court thinks fit) and, at the option of the plaintiff,
either damages or an account of profits. [Section 108(1)]
Section 108 as amended provides additional relief’s to the patentee in case

of infringement of the patent by giving power to the courts for destruction
of goods and implements used for production of such goods.
(2) The court may also order that the goods which are found to be
infringing and materials and implement, the predominant use of which is in
the creation of infringing goods shall be seized, forfeited or destroyed, as
the court deems fit under the circumstances of the case without payment
of any compensation. [Section 108(2)]
Main provisions relating to Rights against infringement are as follows:
442
Right of exclusive licensee to take proceedings against

infringement: The holder of an exclusive licence shall have right as the
patentee to institute a suit in respect of any infringement of the patent
committed after the date of the licence. (Section 109)
Right of licensee under section 84 to take proceedings against

infringement: Any person to whom a licence has been granted under
section 84 shall be entitled to call upon the patentee to take proceedings to
prevent any infringement of the patent, and, if the patentee refuses or
neglects to do so within two months after being so called upon, the
licensee may institute proceedings for the infringement in his own name as
though he were the patentee, (Section 110).
Restriction on power of court to grant damages or account of

profits for infringement: (1) In a suit for infringement of patent,
damages or an account of profits shall not be granted against the
defendant who proves that at the date of the infringement he was not
aware and had no reasonable grounds for believing that the patent existed.
(Section 111)
Drawings: If the invention can be explained with the help of the drawings,
such drawings should be prepared as per the rules of 16 to 19 of the
Patent Rules 1972 and should be filed:
1. The drawings also form a part of the specification whether provisional or

complete.
2. Due care should between to file the drawings wherever necessary.
3. It should be filed in triplicate.
Original copy of the drawings should be prepared on or tracing cloth or

transparent sheet of A4 size with a margin of 1.5cm all around. There
should be no descriptive matter. Numbers or letters may be used to
indicate the part of the drawings. It should be in black ink. [drawing should
bear-]
a. In left hand top corner, the name of the applicant.
b. In the right hand corner, the no. of sheets and sheet number.
443
c. In the right hand, bottom corner the signature of the applicant or his
agent.
Patent Agent: The work relating to drafting of specifications, applying for

a patent, follow-up with the patent office, representing applicants care at
the hearings filing opposition and defending application against opposition
etc. is entrusted to a qualified Agent.
7.7 REGISTER OF PATENT AGENTS
As per sec. 125 as per patent (Amendment) Act 2002 requires the
controller shall maintain “register” of patents in which shall be entered,
the names and addresses of all persons qualified to have their names so
entered u/s 126. The rule also makes the controller should keep the
register of patents in electronic force.
Qualification for Registration as a Patent Agent: Sec. 126 says that a

person shall be qualified to have his name entered with register of patent
agents if he fulfills the following conditions, namely:
1. a. He is a Citizen of India
b. He has completed the age of years.
c. He has obtained a degree from any university of India.
d. Paid fees as may be prescribed
2. A person who has been registered as a patent agent before the

commencement of the Patent Act 2002, shall be entitled to continue to
be, or when required to be re-registered, as a patent agent, on payment
of the fee as may be prescribed [Sec. – 126]
Rights of Patent Agents [Sec. 127]
Sec. 127 says that subject to the provisions contained in this Act and to
any rules made, there under every patent agent whose name is entered in
the register shall be entitled.
a. To practice before the controller and
444
b. To prepare all documents, transact all business and discharge such

other functions as may be prescribed in connection with any
proceedings before the controller under this Act.
The Patent Office: The H.O. is of the Patent Office is located in

Kolkata and the Branch offices at Mumbai, Chennai and Delhi.
Appellate Board (Sec. 116)
The Patent (amendmend) Act, 2002 has replaced the old XIX chapter
dealing with appeals to new chapter XIX titled “Appeals to the Appellate
Board”
Appellate Board
1. Subject to the provisions of this Act, the Appellate Board established

under section 83 of the Trade Marks Act, 1999 shall be the Appellate
Board for the purpose of this Act and the said Appellate Board shall
exercise the jurisdiction, power and authority conferred on it by or
under this Act.
2. A person shall not be qualified for appointment as a Technical Member

for the purpose of this Act unless he:
a. Has at held the post of Controller or has exercised the functions of

the Controller under this Act for at least five years; or
b. Has been for at least ten years functioned as a Registered Patent

Agent and possesses a degree in engineering or technology or a
masters degree in science from any University established under law
for the time being in force or equivalent; or
c. Has, for at least ten years, been an advocate of a proven specialized

experience in practicing law relating to patents and designs.
445
Appeals to Appellate Board [Section 117A]
1. No appeal shall lie from any decision, order or direction made or issued
under this Act by the Central Government, or from any act or order of
the Controller.
2. An appeal shall lie to the Appellate Board from any decision, order or
direction of the Controller of Central Government under section 15, 16,
17, 18, 19, 20, 25, 27, 28, 51, 54, 57, 60, 61, 63, 66, 69, 78, 84, 85,
88, 91, 92 and section 94.
3. Every appeal shall be in the prescribed from and shall be verified in such
manner as may be prescribed and shall be accompanied by a copy of
the decision, order or direction appealed against and by such fees as
may be prescribed.
4. It shall be made within three months from the date of the decision,
order or direction, as the case may be, or within such further time as
the Appellate Board may, allow.
Procedure and Powers of Appellate Board [Section 117B]: The

provisions of section 84, 87, 92, 95 and 96 of the Trade Marks Act, 1999
shall apply to the Appellate Board in the discharge of its function under this
Act as they apply to it in the discharge of its functions under the Trade
Marks Act, 1999.
Bar of jurisdiction of courts, etc. [Section 117C]: No court or other

authority shall have or, be entitled to, exercise any jurisdiction, powers or
authority in relation to the matters referred to in sub-section
(2) of section 117A or section 117D.
Procedure for application for rectification, etc., before Appellate

Board [Section 117D]:
1. An application for rectification of the register made to the Appellate

Board under section 71 shall be in such form as may be prescribed.
2. A certified copy of every order or judgment of the Appellate Board

relating to a patent under this Act shall be communicated to the
Controller by the Board and the Controller shall give effect to the order
446

of the Board and shall, when so directed, amend the entries in, or
rectify, the register in accordance with such order.
Transfer of pending proceedings to Appellate Board [Section

117G]: All cases of appeals against any order or decision of the Controller
and all cases pertaining to rectification of register, pending before any High
Court, shall be transferred to the Appellate Board.
Power of Appellate Board to make rules [Section 117H]: The

Appellate Board may make rules consistent with this Act as to the conduct
and procedure in respect of all proceedings before it under this Act.
7.8 PENALTIES [SECTION 118-124]
The Patents Act 1970 provides penalties in respect of following violations of

the Act:
1. Contravention of secrecy relating to inventions relevant for defence

purposes-imprisonment upto 2 years or fine or both.
2. Falsification of entries in Register etc.-imprisonment upto 2 years or fine

or both.
3. Unauthorised claim of patent Rights-fine upto Rs. 10,000.
4. Wrongful use of words patent office-imprisonment upto 6 months or fine

or both.
5. Refusal or failure to supply information to Central Government or the

Controller-imprisonment upto 6 months or fine or both.
6. Practising by Non-Registered Patent Agent-fine upto Rs. 10,000 for the
first offence and Rs. 40,000 for subsequent offences
7. In case of offences by companies. Any person responsible for the

conduct of the business shall be prosecuted and punished in accordance
with the law.
447
Advantage of Obtaining Patents
1. By obtaining the patent right, the patentee would have the exclusive
right to use his invention and it makes no difference if his invention is
known to others from the date of patent.
2. The patentee would be able to file a suit for infringement of patent

against a person who infringes his patent.
3. If the patentee is not in a position to work the invention patented

commercially, he can sell his patent and grant licenses to other persons
to exploit the patent and thereby earn money.
4. A patentee can make improvement or modification of earlier invention

and obtain the grant of a patent for the improvement as “Patent of
Addition.”
International Arrangements [Sec. 133-139]
Notification as to convention countries. (1) With a view to the fulfillment of

a treaty, convention or arrangement with any country outside India which
affords to applicants for patents in India or to citizens of India similar
privileges are granted to its own citizens in respect of the grant of patents
and the protection of patent rights, the Central Government may, by
notification in the Official Gazette, declare such country to be a conventions
country for the purposes of this Act. (Section 133)
448
Notification as to countries not providing for reciprocity: Where any

country specified by the Central Government in this behalf by notification in
the Official Gazatte does not accord to citizens of India the same rights in
respect of the grant of patents and the protection of patent rights as it
accords to its own nationals, no national of such country shall be entitled,
either, solely or jointly with any other person:
a. To apply for the grant of a patent or be registered as the proprietor of a

patent;
b. To be registered as the assignee of the proprietor of a patent; or
c. To apply for a licence or hold any licence under a patent granted under
this Act. (Section 134)
449
7.9 SUMMARY
Intellectual Property means “a property created by human brain or human

intellect.” The scope of Intellectual Property includes literary and other
works like inventions, designs, trade marks, computer programs, etc. The
objectives of Patent Act is to encourage new technology, scientific
inventions and research, industrial progress, grant of right to own and use
or sell the method or the product patented for a limited period of time.
Patent is granted to inventions. The invention should satisfy the test of
novelty, utility and durability.
7.10 SELF ASSESSMENT QUESTION
Conceptual Type
1. Give the meaning of Intellectual Property.

2. What is patent?
3. What are IPRs?
4. What are TRIMs?
5. What are TRIPS?
6. What is WIPO?
7. Define Controller.
8. What is exclusive license?
9. Define Invention.
10.Define True and first inventor.
11.What is Revocation of patent in public interest?
Analytical Type
1. Explain different kind of patent.
2. What are the applications for restoration or renewal of a lapsed patent?
3. What is impact of WTO on the local and state regulations?
4. Describe the settlement rules of WTO.
5. State the provisions relating to patent agents.
6. Write a note on “patent for a new substance” under the patents Act
1970.
450
Essay Type
1. What is meant by opposition for grant of patent? What are the rules/
procedure in this regard?
2. What are the grounds for opposition for grant of patent?
3. What is the contribution of WTO on the public health and environment?
4. State the functions of WTO. Has India benefited by joining WTO

discussed.
5. Write a note on (a) Surrender of patents and (b) Revocation of patents.
6. What is meant by infringement of a patent? What are the remedies

available to a patentee in case of infringement of his patent?
451

REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
452

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Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Mr. Smitesh Bhosale

Prof. Dr. V.H. Iyer Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Course Editor

Prof. Dr. Swapna Pradhan Course Coordinators

Prof. Bijoy B. Bhattacharyya Ms. Kirti Sampat

Mr. P.M. Bendre Mr. Kishor Tamhankar

Mr. Ajay Prabhu

Mr. A.S. Pillai

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition, December 2016 2nd Edition, December 2020

Chapter No. Chapter Name Page No.

1 Introduction to Law of Contract 4-140

2 Sale of Goods Act, 1930 141-166

3 Consumer Protection Act, 1986 167-204

4 Company Act, 2013 205-346

5 Cyber Law 347-378

6 E-Commerce Regulations 379-414

7 Intellectual Property Legislations 412-452

INTRODUCTION TO LAW OF CONTRACT

After studying this Chapter, you should be able to:

• Meaning and Scope of Business Laws;

• Indian Contract Act, 1872 - Meaning,

• Definition and Types of Contract,

• Acceptance and Consideration,

• Remedies for Breach of Contract, and

INTRODUCTION TO LAW OF CONTRACT

INTRODUCTION TO LAW OF CONTRACT

Need for Law

“Ignorantia Juris non-exusat” [Ignorance of law is no excuse]

1. To know the rules & regulations by which the individual is governed.

INTRODUCTION TO LAW OF CONTRACT

It deals with contractual situations rights and obligations arising out of

Scope of law: It includes the law relating to contracts, sale of goods,

INTRODUCTION TO LAW OF CONTRACT

of the business is vigilantly watched by the public and law. In economics is

INTRODUCTION TO LAW OF CONTRACT

The Role of a man in the society given is below:

INTRODUCTION TO LAW OF CONTRACT

• A citizen A set of rules which he must obey.

It is the duty of the state to regulate the conduct of people by a Notes

The meaning of law can be justified with some of the following

• Woodrow Wilson, “ Law is that portion of the established habit and

• Austin, “A law is a rule of conduct imposed and enforced by the

INTRODUCTION TO LAW OF CONTRACT

• Scotland, “ Law as rules of external human action enforced by the

• Oxford Dictionary, “Law is rule made by authority for the proper

1. Body of rules which includes Statute Law like;

a. The Indian Contract Act 1872,

2. Guide to human conduct.

3. Imposed by some authority in whom special power is vested,

4. Enforcement, which is main characteristic of law, carried by the state.

INTRODUCTION TO LAW OF CONTRACT

1.3 OBJECT OF LAW

1. To incorporate uniformity and social security among all category of

2. To establish socio-economic justice and remove the existing imbalances

3. To impose social justice on the basis of social change by considering all

4. To create awareness of law among the citizen, its contents, purpose,

5. To make a strong government or state to implement the law positively