Special Contracts

Indemnity, Bailment, Pledge,

Guarantee and Agency
The spread
• Contract of indemnity – (Section 124,125)
• (Definitions and essentials, Rights of indemnity holder, Time of commencement to
indemnifier’s liability)
• Contract of guarantee - (Section 126-147)
• (Definitions and essentials, Distinction between indemnity and guarantee, Kinds of
guarantee, Nature and extent of surety’s liability)
• Contract of bailment - (Section 148-171)
• (Definitions and essentials, Kinds, Rights and duties of Bailor and Bailee)
• Contract of pledge - (Section 172-181)
• (Definitions and essentials, Difference with bailment)
• Contracts of agency – (Section 182-238)
• (Definitions and essentials, Principal agent relationship, Creation of agency, Extent of
agents authority, Liability of principal, Personal liability of agent towards third party)
Contract of Indemnity
• Indemnity Meaning –
• To make good the loss incurred by another person
• To compensate the party who has suffered some loss
• To protect a party from incurring a loss

‘Contract of indemnity’ Definition

• A ‘contract of indemnity’ is made when one party promises to save
the other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person.
• It could be expressed or implied
Essential elements of a contract of indemnity
• All the essentials of a valid contract must also be present in the contract of
indemnity
• X asks Y to beat Z and promises to indemnify Y against the consequences. Y beats Z and is
fined Rs.1,000. Y cannot claim this amount from X because the object of the agreement was
unlawful.
• Loss to one party
• A person can indemnify another person only if such other person incurs some loss or it has
become certain that he will incur some loss.
• Indemnity by the promisor
• The purpose of contract of indemnity is to protect the indemnity holder from any loss that
may be caused to the indemnity holder.
• Reason for loss
• The contract of indemnity must specify that indemnity holder shall be protected from the
loss caused due to –
• Action of the promisor himself; or
• Action of any other person; or
• Any act, event or accident which is not in the control of the parties.
Rights of indemnity holder
• Right to recover damages
• All damages which he is compelled to pay in any suit in respect of any matter
covered by the contract of indemnity.
• Right to recover costs
• All costs which he is compelled to pay in bringing or defending such suit. If the
indemnifier had authorised him to bring or defend the suit; or the indemnity holder
did not contravene the orders of the indemnifier; and acted as it would have been
prudent for him to act in the absence of any contract of indemnity.
• Right to recover from the indemnifier all sums which he may have paid
under the terms of any compromise of any such suit,
• not contrary to the orders of the promisor, and would have been prudent to make in
the absence of any contract of indemnity, or if it was pre-authorized
• Right to sue for specific performance if he has incurred some covered
under the contract.
Commencement of Liability of Promisor/Indemnifier
• Courts in India have held that the Indemnifier is not liable until the
indemnified has suffered the loss and the Indemnified can compel the
indemnifier to make good his loss although he has not discharged his
liability.
• Gajanan Moreshwar vs. Moreshwar Madan(1942), it was observed
that “If the indemnified has incurred a liability and the liability is
absolute, he is entitled to call upon the indemnifier to save him from
the liability and pay it off”.

• What about life insurance – is it a contract of indemnity

Contract of Guarantee
• Contract of Guarantee performs the promises made or discharges the
liabilities of the third person in case of his failure to discharge such
liabilities.
• Such contract has three parties: –
• Surety: A surety is a person giving a guarantee in a contract of guarantee. A person
who takes responsibility to pay a sum of money, perform any duty for another
person in case that person fails to perform such work.
• Principal Debtor: A principal debtor is a person for whom the guarantee is given in a
contract of guarantee.
• Creditor: The person to whom the guarantee is given is known as the creditor.
• X advances a loan of 25000 to Y and Z promise that in case Y fails to repay the loan,
then he will repay the same. In this case of a contract of guarantee, X is a Creditor, Y
is a principal debtor and Z is a Surety.
• A guarantee may be either oral or written.
• Essentials of a contract of guarantee
• Essentials of valid contract, Consideration for guarantee, Competency of the
parties
• Existence of a recoverable debt
• No misrepresentation or concealment of facts
• Conditional liability of surety
• Concurrence of all the three parties
• Mode of creation of contract
• Kinds of Guarantee
• Retrospective or prospective
• Specific or continuing
• Entire or partial debt
• Revocation of continuing guarantee could be by notice
Nature of liability
• Nature of liability in the contract of indemnity is of the indemnifier;
primary liability in a contract of guarantee is of the principal debtor and
secondary liability is of surety.
• Surety carries a joint liability along with the principal debtor. The creditor
has a choice to make recovery from either of them after a default occurs.
• Bank of Bihar v Damodar Prasad - held that the creditor do not have to
exhaust all the remedies against principal debtor before suing the surety. It
is the duty of the surety to pay the debt if the principal debtor does not
pay. The purpose of contract of guarantee is defeated if the creditor is
asked to postpone his remedies against the surety. The liability of surety is
immediate.
Contract of Bailment
• “Bailment” is derived from the French word “ballier” which means
“to deliver”. It etymologically means ‘handing over’ or ‘change of
possession’.

• A "bailment" is the delivery of goods by one person to another for

some purpose, upon a contract, that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the
direction of the person delivering them. The person delivering the
goods is called the "bailor". The person to whom they are delivered is
called the "bailee".
• Giving car for service or cloths for stiching
Essentials of a valid Contract of Bailment (Sec.148)
• Essentials of a Contract
• There must be a contract.
• The contract may be expressed or implied.
• Bailment of goods only.
• There must be delivery of goods by one person to another person.
• The goods must be delivered for some purpose.
• The purpose may be expressed or implied.
• The delivery of goods must be conditional
• The condition shall be that the goods shall be returned (either in original
form or in any altered from); or
• Disposed of according to the directions of the bailor, when the purpose is
accomplished.
Delivery of goods
• It involves the delivery of goods from one person to another for some
purposes. Bailment is only for moveable goods and never for
immovable goods or money. The delivery of the possession of goods
is of the following kinds:
• Actual Delivery: When goods are physically handed over to the Bailee by the
bailor.
• Eg: delivery of a car for repair to workshop
• Constructive Delivery: Where delivery is made by doing anything that has the
effect of putting goods in the possession of the Bailee or of any person
authorized to hold them on his behalf.
• Delivery of the key of a car to a workshop dealer for repair of the car.
Possession
• In bailment, possession of goods changes. Change of possession can
happen by physical delivery or by any action which has the effect of
placing the goods in the possession of Bailee.
• Change of possession does not lead to change of ownership. In
bailment, bailor continues to be the owner of goods as there is no
change of ownership.
• Where a person is in custody without possession he does not became
a Bailee.
• Servants of a master who are in custody of goods of the master do not
become bailees.
• Similarly, depositing ornaments in a bank locker is not bailment, because
ornaments are kept in a locker whose key are still with the owner and not
with the bank. The ornaments are in possession of the owner though kept in
a locker at the bank.
Classification of bailment
• On the basis of benefit derived, bailment can be classified into
• Exclusive benefit of bailor
• Exclusive benefit of bailee
• On the basis of reward, bailment can be classified into Gratuitous and
non Gratuitous bailment
• Gratuitous bailment
• Bailment without any charges or reward, i.e. – No hire charges are paid by
bailee; and No custody charges are paid by bailor.
• Free of charge such bailment would be either for the exclusive benefits of
bailor or bailee.
• Non gratuitous bailment
• Bailment for some charges or reward, i.e.- Hire charges are paid by bailee; or
Custody charges are paid by bailor
• bailment for the benefit of both bailor & bailee
Duties of a bailor
• Disclose faults in goods to Bailee, of which he has knowledge.
• Also disclose such information which materially interferes with the use of
goods, or exposes the Bailee to extraordinary risk.
• Liability for Defects in Goods
• In case of Gratuitous bailment - Bailor is liable only for those losses which arise due
to non – disclosed risks.
• In case of Non Gratuitous Bailment - Bailor is liable for damages whether or not he
was aware of the existence of faults.
• Bear expenses (Sec.158)
• In case of Gratuitous bailment, Bailor to repay to Bailee, all necessary expenses
incurred by him for the purpose of Bailment
• In case of Non Gratuitous bailment, Bailor is liable to repay only extraordinary
expenses, and not the ordinary expenses
Duties of a bailee
• Take reasonable care
• The bailee must take such case of goods as a man of ordinary prudence would
take care of his own goods.
• The bailee shall not be liable for any loss or destruction of goods, if he is not
negligent; or the loss was caused due to an act of God or other unavoidable
reasons.
• Not to make unauthorized use of goods
• The bailee must not make any unauthorized use of the goods. If he does, then
the bailment becomes voidable at the option of the bailor; and the bailee
shall be liable for any loss or damage even if such loss is caused due to an act
of God or other unavoidable reasons.
Duties of a bailee
• Not to mix goods
• If goods are mixed with bailor’s consent The parties shall have a proportionate
interest in such mixture.
• Goods are mixed without bailor’s consent, but the goods are separable. The bailee
shall pay the expenses of separation. The bailee shall pay damage incurred by the
bailor.
• Goods are mixed without bailor’s consent, and goods are not separable The bailee
shall compensate the bailor for any loss caused to him
• Return the goods
• The bailee must return the goods, without waiting for demand from bailor, if the
time specified in the contract has expired; or the purpose specified in the contract is
accomplished. If the goods are not so returned, then the goods shall be at the risk of
the bailee; the bailee shall be liable for any loss or damage, even if such loss is
caused without any fault or negligence of the bailee or due to an act of God or other
unavoidable reasons.
Rights of a bailor
• Terminate the bailment if the bailee does any act inconsistent with
the terms and conditions of the contract of bailment. Bailment
becomes voidable at the option of the bailor.
• Demand back the goods
• if the bailment is gratuitous and for a specific period then the bailor may
compel the bailee to return the goods before expiry of the period of bailment.
• File suit against wrongdoer
• Bailor has the right to sue a third party who does any damages to the goods;
or a third party who deprives the bailee from using the goods
• Sue the bailee to enforce his duties.
Rights of a bailee
• Right to compensation
• The bailee has the right to be indemnified by the bailor, if the bailor has no
title to the goods; and as a consequence, the bailee suffers some loss
• Return the goods
• It is the duty as well as the right of the bailee to return the goods to the
bailor.
• Recover charges incurred
• The bailor is liable to pay the extraordinary expenses
• If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary
expenses,
Contract of Pledge
• The bailment of goods as security for payment of a debt or performance of
a promise is called “pledge”. The bailor is in this case called the “pawnor”.
The bailee is called the “pawnee”.
• Pledge is a variety or specie of bailment.
• It is bailment of goods as security for payment of debt or performance of a
promise. The person who pledges [or bails] is known as pledgor or also as
pawnor, the bailee is known as pledgee or also as pawnee.
• In pledge, there is no change in ownership of the property.
• Under exceptional circumstances, the pledgee has a right to sell the
property pledged.
• Example: A lends money to B against the security of jewellery deposited by B with
him i.e. A. This bailment of jewellery is a pledge as security for lending the money. B
is a pawnor and A is a pawnee.
Contract of Agency (S.182)
• An 'Agent' is a person employed to do any act for another or to
represent another in dealings with third persons. The person for
whom such act is done, or who is so represented, is called the
'principal'.
• Thus, an agent is a connecting link between his principal and third
parties.
• Contracts of agency are based on two important principles, namely:
• Whatever a person can do personally shall also be allowed to be done
through an agent except in case of contracts involving personal services such
as painting, marriage, singing, etc.
• He who does not act through a duly authorized agent does it by himself, i.e.,
the act of the agent are considered the acts of the principal
Essential features of contract of agency
An agency agreement is a legal contract creating a fiduciary relationship whereby
the first party (the principal) agrees that the actions of a second party (the agent)
binds the principal to later agreements made by the agent as if the principal had
himself personally made the later agreements.

• Agreement between agency and principal

• Competency of principal
• Competency not required for an agent
• Contractual relationship
• Creation of legal relations
• Consideration not required
• Intention of the person to act
Agency, Appointment and authority of agents
182. "Agent" and "principal" defined -
An "agent" is a person employed to do any act for another, or to represent another in
dealing with third persons. The person for whom such act is done, or who is so
represented, is called the "principal".
183. Who may employ agent -
Any person who is of the age of majority according to the law to which he is subject, and
who is of sound mind, may employ an agent.
184. Who may be an agent -
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 sound mind can become an agent, so as to be
responsible to the principal according to the provisions in that behalf herein contained.
185. Consideration not necessary -
No consideration is necessary to create an agency;
Agency, Appointment and authority of agents
186. Agent's authority may be expressed or implied -
The authority of an agent may be expressed or implied.
187. Definitions of express and implied -
An authority is said to be express when it is given by words spoken or
written. An authority is said to be implied when it is to be inferred from the
circumstances of the case; and things spoken or written, or the ordinary
course of dealing, may be accounted circumstances of the case.
188. Extent of agent's authority -
An agent, having an authority to do an act, has authority do every lawful
thing which is necessary in order to do such act. An agent having an
authority to carry on a business, has authority to do every lawful thing
necessary for the purpose, or usually done in the course, of conducting such
business.
Agency, Appointment and authority of agents
189. Agent's authority in an emergency -
An agent has authority, in an emergency, to do all such acts for the purpose
of protecting his principal from loss and would be done by a person or
ordinary prudence, in his own case, under similar circumstances.

190. When agent cannot delegate -

An agent cannot lawful employ another to perform acts which he has
expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a sub-agent may, or, from the nature or agency, a
sub-agent must, be employed.
Meaning of ‘agent’
• An ‘agent’ is a person employed to –
• Do any act for another; or
• Represent another in dealings with third persons.
Meaning of ‘principal’
• ‘Principal’ is the person –
• For whom an act is done by the agent; or
• Who is represented by the agent in respect of dealing with third persons.
Test of agency
• Where a person has the capacity to –
• Create contractual relations between the principal and a third party;
• Bind the principal by his own acts, there exists a relationship of agency.
Types of Agents
Based on Authority
• Special Agent - Appointed to perform a particular transaction, has
limited authority and cannot bind Principal for other acts
• Universal Agent - Appointed to do all acts connected with a particular
trade etc., Authority is wide and continues till agency is terminated.
• General Agent - Appointed to do all acts for the Principal. Authority is
unlimited and all acts of Agent bind his Principal provided that his
acts are legal and agreeable as per law of land.
Based on Nature of work
Modes of creation of agency (Sec.187, 189, 196, 214 and 237)
Express agreement
• A person may employ another person as his agent by entering into an express
agreement with him.
• The agreement may be either oral or written.

Implied agreement
• If a person makes a representation (by his words or conduct) to a third person that a
certain person is his agent; and
• the third party believing such representation to be true, enters into a contract with
the pretended agent.
• Then the person making the representation is prevented from denying the truth of
agency. He may be held liable as a principal by such third party.
Salient features of agency
Principal is liable for the acts of agent
• The principal is liable for all the acts of an agent which are lawful and within the
scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the same
legal consequences as if these contracts were made by the principal himself.
• Who may employ an agent?
• Any person may employ an agent if he is of the age of majority; and is of sound
mind.
• Who can be an agent?
• Any person may become an agent.
• Even a minor or a person of unsound mind can become an agent
• Liability of agent
• Generally an agent is liable to the principal
• An agent is not liable to the principal if he is a minor or is of unsound mind.
• Requirement of consideration
• No consideration is necessary for creating an agency
Liability of principal to third parties for the
acts of agent
• Principal is liable for the acts of agent
• The principal is liable for all the acts of an agent which are lawful and within
the scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the
same legal consequences as if these contracts were made by the principal
himself.
• When agent exceeds his authority
• Whether the acts done within the authority are separable from the acts done
beyond authority.
• If yes – The principal is not bound for excess acts done by the agent.
• If no – The principal is not bound by the transaction and the principal can
repudiate the whole transaction.
Vicarious liability of an agent
• Liability of agent to third party
• If the agent has actual or apparent authority, the agent will not be liable for
acts performed within the scope of such authority, so long as the relationship
of the agency and the identity of the principal have been disclosed.
• Liability of agent to principal
• If the agent has acted without actual authority, but the principal is
nevertheless bound because the agent had apparent authority, the agent is
liable to indemnify the principal for any resulting loss or damage.
• Liability of principal to agent
• If the agent has acted within the scope of the actual authority given, the
principal must indemnify the agent for payments made during the course of
the relationship whether the expenditure was expressly authorized or merely
necessary in promoting the principal's business.
Agency by necessity – Conditions
• There was an actual and definite necessity for acting on behalf of the
principal.
• The agent was not in a position to communicate with the principal.
• The act was done for the purpose of protecting the interest of his
principal.
• The agent has exercised such reasonable care as a man of ordinary
prudence would have exercised in his own case.
• The act was done bonafide.
Agency by ratification
• If a person (pretended agent) acts on behalf of another person (the
principal)
• the pretended agent acts without the knowledge or consent of the
principal; and afterwards, the principal accepts such act.
• Then Agency by ratification comes into existence.

Effects of ratification
• The principal is bound by the acts ratified by him as if such acts had been
performed by his authority.
• Ratification relates back to the actual date of the act that is ratified and not
from the date when the act ratified.
Essentials of a valid ratification (Sec. 197 to 200)
• No valid ratification can be made by a person whose knowledge of the facts
of the case is materially defective. In other words, the principal must have
full knowledge of all the material facts.
• It must be done for whole transaction in fact; ratification of the part of a
transaction operates as a ratification of the whole transaction.
• The acts done by a person (i.e. pretended agent) on behalf of another
person (i.e. pretended principal) can only be ratified.
• Ratification can be made by only such person for whom the act was done.
• The principal must be in existence at the time when the act was done in his
name
• The principal must have contractual capacity both at the time of entering
into the contract and at the time of ratification.
Consumer Protection Act
“The interest of the consumer has to be kept in the forefront and the
prime consideration that an essential commodity ought to be made
available to the common man at a fair price must rank in priority over
every other consideration.”

Y.V. Chandrachud, J. in Prag Ice & Oil Mills v. Union of India, (1978) 3
SCC 459
Role of the UN
• United Nations submitted draft guidelines for consumer protection to the
Economic and Social Counsel (UNESCO) in 1983.
• General Assembly of the United Nations adopted the guidelines for
consumer protection by consensus on 9th April, 1985 (General Assembly
Resolution No. 39/248)
• In pursuance of the above Resolution of the United Nations, in the
following year, i.e., in 1986, Indian Parliament enacted the Consumer
Protection Act, 1986.
• The Act intended to provide for the better protection of the interest of
consumers and for that purpose provides for establishment of Consumer
Councils and other authorities for the settlement of consumer disputes.
Background
• Each one of us a ‘consumer’ from the day we are born
• Variety of consumer goods to cater to the many needs
• Host of services available to the consumers like insurance, transport,
electricity, housing, entertainment, finance, banking, etc.
• A well organized sector of manufacturers and traders with better
knowledge of markets
• Purchaser not as knowledgeable about the product as he is expected
to be.
• Impact of advertisements, some of them misleading
The Indian Consumer
• Granting rights meaningless if the consumers are not aware of them.
• Apart from awareness, the extent to which the Indian consumer is
willing to assert his rights is also doubtful.
• Large majority of cases are filed and defended by lawyers.
• Indicative of the consumers’ lack of confidence.
• This is despite the fact that the procedure established by the Act is
simple, easily understandable and cost-effective.
Acts providing some protection to the
consumer
• Code of Civil Procedure, 1908,
• Indian Contract Act, 1872
• Sale of Goods Act, 1930
• Indian Penal Code, 1860
• Standards of Weights and Measures Act, 1976
• Motor Vehicles Act, 1988
• Monopolies and Restrictive Trade Practices Act, 1969
• Prevention of Food Adulteration Act, 1954
Salient features
• The Legislation allows consumers to file their complaints themselves.
• They don’t require any lawyer.
• If the consumer is not sure about the process then he can take the
help of lawyers.
• The only requirement is that he has to file three copies of complaints
within the local jurisdiction where the damage occurred.
• At the same time he has to prove the product was defective or that
the service was not according to the standard that was promised.
Consumer Protection Act 2019
• Preamble - “An Act to provide for protection of the interests of consumers
and for the said purpose, to establish authorities for timely and effective
administration and settlement of consumers’ disputes and for matters
connected therewith or incidental thereto”
• The Act widens the scope of consumer rights and covers the field of e-
commerce, direct selling, tele-shopping and other multi levels of marketing
in the age of digitization.
• The provisions of this Act shall be in addition to and not in derogation of
the provisions of any other law for the time being in force.
• The Act came into force on 20th July 2020. This act aims at revamping the
settlement and administration process by imposing stricter penalties.
CPA2019
Chapter 1- Preliminary, preamble and definitions
Chapter 2 - Consumer Protection Councils
Chapter 3 - Central Consumer Protection Authority
Chapter 4 - Consumer Disputes Redressal Commission
Chapter 5 – Mediation
Chapter 6 – Product Liability
Chapter 7 – Offences and Penalties
Chapter 8 - Misc
What CPA 2019 aims at
Timely and effective administration and settlement of consumer disputes
with ways and means to solve the consumer grievances speedily
• All e-commerce transactions covered
• product liability provisions
• Central Consumer Protection Authority
• Prohibition and Penalties for misleading advertisements
• Establishment of Consumer Disputes Redressal Commission
• Provision for Alternate Dispute Resolution
• E-Filing of Complaints
Consumer-rights
To safeguard consumer interest, six consumer rights were initially
envisioned by consumer rights activists of the West, namely:

• Right to Safety
• Right to Information
• Right to Choice
• Right to be Heard
• Right to Redress
• Right to consumer education
Consumer rights – S. 2(9) CPA 2019
i. the right to be protected against the marketing of goods, products or
services which are hazardous to life and property;
ii. the right to be informed about the quality, quantity, potency, purity,
standard and price of goods, products or services, as the case may be, so
as to protect the consumer against unfair trade practices;
iii. the right to be assured, wherever possible, access to a variety of goods,
products or services at competitive prices;
iv. the right to be heard and to be assured that consumer's interests will
receive due consideration at appropriate fora;
v. the right to seek redressal against unfair trade practice or restrictive
trade practices or unscrupulous exploitation of consumers; and
vi. the right to consumer awareness
Central Consumer Protection Authority
• The Consumer Protection Act, 2019 establishes the Central Consumer
Protection Authority (CCPA) whose primary objective will be to
promote, protect and enforce the rights of consumers.
• It is empowered to:
• Conduct investigations into violations of consumer rights and
institute complaints/prosecution.
• Order recall of unsafe goods and services.
• Order discontinuance of unfair trade practices and misleading
advertisements.
• Impose penalties on manufacturers/endorsers/publishers of
misleading advertisements.
Consumer Disputes Redressal Commission
• District Consumer Disputes Redressal Commission (District Commission) in each
district. Could be more
• Can entertain complaints within the local limits; value of the goods or services paid as
consideration does not exceed one crore rupees: A complainant can now file a complaint
where he resides or works.
• Reference to mediation, after seeking consent of parties (5 days limit)
• Provision for review and appeal
• State Consumer Disputes Redressal Commission (State Commission)
• Complaints where the value of the goods or services paid as consideration one crore to ten
crore
• Complaints against unfair contracts, where the value of goods or services paid as
consideration does not exceed ten crore rupees;
• Appeals against the orders of any District Commission within the State
• Provision for review and appeal
• National Consumer Disputes Redressal Commission (National Commission)
• Complaints exceeding ten crore, complaints against unfair contracts, value exceeds ten crore
• Appeals against the orders of any State Commission; and appeals against the orders of the
Central Authority;
Consumer
Any person who
(i) buys any goods for a consideration which has been paid or promised or partly paid and
partly promised, or under any system of deferred payment and includes any user of such
goods other than the person who buys such goods for consideration paid or promised or
partly paid or partly promised, or under any system of deferred payment, when such use is
made with the approval of such person, but does not include a person who obtains such
goods for resale or for any commercial purpose; or
(ii) hires or avails of any service for a consideration which has been paid or promised or partly
paid and partly promised, or under any system of deferred payment and includes any
beneficiary of such service other than the person who hires or avails of the services for
consideration paid or promised, or partly paid and partly promised, or under any system of
deferred payment, when such services are availed of with the approval of the first mentioned
person, but does not include a person who avails of such service for any commercial purpose.
Explanation.—For the purposes of this clause,—
(a) the expression "commercial purpose" does not include use by a person of goods bought
and used by him exclusively for the purpose of earning his livelihood, by means of self-
employment;
(b) the expressions "buys any goods" and "hires or avails any services" includes offline or
online transactions through electronic means or by teleshopping or direct selling or multi-
level marketing;
Consumer
Any person who
• buys any goods for a consideration
• includes any user of such goods - with the approval of such person,
• does not include who obtains such goods for resale or for any commercial
purpose; or
• hires or avails of any service for a consideration
• includes any beneficiary of such service with the approval of the first
mentioned person,
• does not include a person who avails of such service for any commercial
purpose.
"commercial purpose" does not include use by a person of goods bought and
used by him exclusively for the purpose of earning his livelihood, by means of
self-employment;
"buys any goods" and "hires or avails any services" includes offline or online
transactions through electronic means or by teleshopping or direct selling or
multi-level marketing;
The intention of the legislature is to exclude big business houses carrying on
business with profit motive from the purview of the Act. At the same time it
is pertinent to save the interests of small consumers who buy goods for self
employment to earn their livelihood, like a rickshaw puller buying rickshaw
for self employment, or a farmer purchasing fertilizer for his crops, or a taxi
driver buying a car to run it as a taxi, etc.
• Example : A was running a small type institute to earn his livelihood. He
purchased a photocopy machine-canon NP 150. It proved defective. He
sued the seller who contended that A is not a consumer under the Act as
he purchased the photocopier for commercial use. The Commission held
that by no stretch of imagination it can be said that the photocopier would
bring large scale profits to A. It was a part of his small scale enterprise. He
was construed as consumer under the Act.
• However, if such a buyer takes assistance of two or more persons to help
him in operating the vehicle or machine, etc., he does not cease to be a
consumer.
• X buys a pressure cooker for his home
• Wife of X (Y) uses the pressure cooker
• X runs a small roadside eatery; buys a pressure cooker for cooking at his eatery
• X also works as a night guard in a residential society
• X runs a small type institute shop and buys a photocopy machine
• X runs a photocopy business and buys a photocopy machine
• X buys a car and runs it as a taxi
• He drives
• He drives, but occasionally his brother drives
• He hires a driver
• A goes to a doctor to get himself treated for a fracture.
• A landlord neglected and refused to provide the agreed amenities to his tenant.
He filed a complaint against the landlord
• a Government official delays payment of PPF
What are Goods and Services
• "goods" means every kind of movable property and includes "food"
as defined in clause (j) of sub-section (1) of section 3 of the Food
Safety and Standards
• “service" means service of any description which is made available to
potential users and includes, but not limited to, the provision of
facilities in connection with banking, financing, insurance, transport,
processing, supply of electrical or other energy, telecom, boarding or
lodging or both, housing construction, entertainment, amusement or
the purveying of news or other information, but does not include the
rendering of any service free of charge or under a contract of
personal service;
Contract of Service and Contract for Service
• Contract of Service – implies the relationship of master and servant
• Contract for Service – implies a contract where there is no master –
servant relationship

I M A v. V P Shantha, [AIR 1996 SC 550] the Court observed:

“It is no doubt true that the relationship between the doctor and a patient carries with
it certain degree of mutual confidence and trust and therefore the services rendered
by the doctor can be regarded as service of personal nature but since there is no
relationship of master and servant between the doctor and the patient, the contract
between them cannot be treated as a contract of personal service but a contract for
service.
"product" means any article or goods or substance or raw material or any extended cycle
of such product, which may be in gaseous, liquid, or solid state possessing intrinsic value
which is capable of delivery either as wholly assembled or as a component part and is
produced for introduction to trade or commerce, but does not include human tissues
etc;

"product liability" means the responsibility of a product manufacturer or seller, of any

product or service, to compensate for any harm caused to a consumer by such defective
product manufactured or sold or by deficiency in services relating thereto;

"product liability action" means a complaint filed by a person before a District

Commission or State Commission or National Commission, as the case may be, for
claiming compensation for the harm caused to him;
Consumer of services
A person is a consumer of services if he satisfy the following criteria :
• Services are hired or availed of - The term ‘hired’ has not been defined under the
Act. Hired is to procure the use of services at a price. Thus the term ‘hire’ has also
been used in the sense of ‘avail’ or ‘use’. Accordingly it may be understood that
consumer means any person who avails or uses any service.
• A goes to a doctor to get himself treated for a fracture. Here A is hiring the services
of the doctor. Thus he is a consumer.
• What constitutes hiring has been an issue to be dealt with in many consumer
disputes. If it is established that a particular act constitutes hiring of service, the
transaction falls within the net of the Consumer Protection Act, and vice-versa.
• A landlord neglected and refused to provide the agreed amenities to his
tenant. He filed a complaint against the landlord
• National Commission dismissed the complaint saying that it was a case of lease of immovable
property and not of hiring services of the landlord. [Smt. Laxmiben Laxmichand Shah v. Smt. Sakerben Kanji
Chandan [1992] 1 Comp. LJ 177 (NCDRC)].
• A presented before the Sub-Registrar a document claiming it to be a
will for registration who sent it to the Collector of Stamps for action.
The matter remain pending for about six years. ‘A’ filed a complaint
under CPA alleging harassment and prayed for compensation. Held ‘A’
not a “consumer” as there was no hiring of services by the
complainant for consideration and because a Government official
doing his duty as functionary of the State under law could not be said
to be rendering a service to the complainant. [S.P. Goel v. Collector of Stamps (1995)
III CPR 684 (SC)].

• When a person hires services, he may hire it for himself or for any
other person. In such cases the beneficiary (or user) of these services
is also a consumer.
• A takes his son B to a doctor for his treatment. Here A is hirer of services of
the doctor and B is beneficiary of these services. For the purpose of the Act,
both A and B are consumers.
Consideration must be paid or payable
• However, its payment need not necessarily be immediate.
• The Direct and Indirect taxes paid to the State by a citizen is not
payment for the services rendered.
• paying property tax to the local corporation, who was responsible for
proper water supply. A consumer dispute over inadequacy of water
supply. National Commission held that it was not a consumer dispute
as water supply was made by the corporation out of its statutory duty
and not by virtue of payment of taxes.
 Consideration must be paid or payable

• H hiring an advocate with a promise to pay fee to the advocate after

settlement of the suit. ‘H’ is a consumer under the Act.
• Goes to a Doctor for treatment; Doctor being a friend charges
nothing. Not a consumer
• B issued an advertisement that a person could enter the contest by
booking a car. S purchased the car, enters the contest and was
declared winner; thus entitled to the two air tickets as promised in
the ad. Tickets were not given.
• Can B file a compliant under the CPA?
Commercial enterprise as a consumer
• Buyer of goods for commercial purpose ceases to be a consumer
under the Act.
• If a commercial enterprise buys a cooler for its staff - is it a consumer
• Also, a consumer of service for commercial purpose remains a
consumer under the Act.
• S applied to Electricity Board for electricity connection for a flour mill.
There was a delay in releasing the connection. S made a complaint for
deficiency in service. He was held a consumer under the Act. –
Shamsher Khan v. Rajasthan State Electricity Board (1993)
Lucknow Development Authority v. M. K. Gupta
• CPA a milestone in the history of socio-economic legislation.
• Government bodies and Development Authorities developing / allotting lands
and / or constructing houses in discharge of their statutory functions are covered
under the Act.
• Complaints regarding use of substandard material or delay in delivery of houses /
flats amount to deficiency of service.
• When a citizen seeks to recover compensation from a public authority in respect
of injuries suffered by him for capricious exercise of power and the National
Commission finds it duly proved then it has a statutory obligation to award the
same. When the Court directs payment of damages or compensation against the
State the ultimate sufferer is the common man. It is the taxpayer’s money which
is paid for inaction of those who are entrusted under the Act to discharge their
duties in accordance with the law.
• Court ordered that amount of compensation of Rs. 10,000/- awarded by the
Commission for mental harassment shall be recovered from the salary of officers
who were negligent in handing over the possession of the plot of land.
What is a complaint
"complaint" means any allegation in writing, made by a complainant for obtaining any
relief provided by or under this Act, that—
(i) an unfair contract or unfair trade practice or a restrictive trade practice has been
adopted by any trader or service provider;
(ii) the goods bought by him or agreed to be bought by him suffer from one or more
defects;
(iii) the services hired or availed of or agreed to be hired or availed of by him suffer from
any deficiency;
(iv) Excess price charged – more than fixed by or under any law or displayed on the goods
or any package or on the price list or agreed between the parties;
(v) Hazardous goods offered for sale either in contravention of required standards or law,
or where the trader knows that the goods so offered are unsafe to the public;
(vi) the services which are hazardous or likely to be hazardous to life and safety of the
public when used, are being offered by a person who provides any service and who knows
it to be injurious to life and safety;
(vii) a claim for product liability action lies against the product manufacturer, product seller
or product service provider, as the case may be;
Defect and Deficiency
"defect" - any fault, imperfection or shortcoming in the quality, quantity,
potency, purity or standard which is required to be maintained or as is
claimed by the trader

"deficiency" means any fault, imperfection, shortcoming or inadequacy in

the quality, nature and manner of performance which is required to be
maintained in relation to any service and includes—
(i) any act of negligence or omission or commission by such person which
causes loss or injury to the consumer; and
(ii) deliberate withholding of relevant information by such person to the
consumer;
Some examples
• A Pressure Cooker burst and causes injury
• Failure to handover registration book along with a car purchased
• Test report showing soft drink not fit for human consumption
• Oil adulterated with toxic substances leading to paralysis
• Electric household appliances not in accordance with the standards
prescribed by ISI, being unsafe
• Gas Cylinder with excessive gas
• Development of cracks in walls and mosaic floor in a flat after taking
possession
• Colour of the marble changing
• Selling a stolen car (?)
“deficiency” in service
• Deficiency in service should occur during the happening of performance.
Thus it is crucial to determine when the performance of a service
commenced.
• Rly compartment in a bad shape
• A Homoeopathic practitioner treating under Allopathic system
• Promised to deliver a car within one month; not delivered even after
four months
• A contract for supply, erect and commission of a rolling mill. Mill is
supplied the mill, but not erected and commissioned (?)
• Negligence is failure to exercise due care. The ingredients are:
• The defendant owes a duty of care to the plaintiff.
• The defendant has breached this duty of care.
• The plaintiff has suffered an injury due to this breach.
Deficiency in service due to circumstances
beyond control
• In abnormal circumstances beyond the control of the person
performing service, provisions of the Act may not apply

• Failing to supply water for irrigation due to power grid failure of the
State; not liable for deficiency in service.

• However, negligence on the part of performer is not excused under

the cover of circumstances beyond control.
Medical negligence
• liability under the consumer protection act
• A deserving need for a two-pronged approach
• Identification of minimum reasonable standards in light of the
social, economical, and cultural context that would facilitate the
adjudicators to decide issues of professional liability on an
objective basis.
• These should enable the medical professionals to internalize such
standards in their day-to-day discharge of professional duties,
which would hopefully prevent to a large extent the scenario of
protection of patient's rights in a litigative atmosphere.
Spring Meadows Hospital vs. Harjot Ahluwalia
(1998) 4 SCC 39
• Patient (minor) admitted, given an injection, collapsed
• Can the parents be held to be consumers; so, as to claim compensation under the
provisions of the Consumer Protection Act?
• Is the commission under the Act is entitled to award compensation to the parents
for mental agony?
• Whether compensation can be awarded in favour of both the consumers; or
compensation can be awarded only to the beneficiary of the services rendered;
who in the present case would be a child who was admitted into the hospital?
• The National Consumer Disputes Redressal Commission held that since the
resident doctor and nurse were employees of the appellant hospital; the latter
was Liable and awarded compensation of Rs. 12.51 Lakh to the child and of Rs.5
lakh to the parents for acute mental agony.
• SC dismissed the appeal
Who should be sued by a consumer -
manufacturer or seller
A consumer finding defect in the goods will sue the person from whom
he bought the goods. Reason being privity of contract.

• If the defect is a manufacturing defect, the consumer may sue the

manufacturer also along with the seller. This is an option with the
consumer. Thus the manufacturer is a possible party, and not a
necessary party.
• A was manufacturer of “X” brand cars and B was a dealer for them. C
bought a car from B and found it defective. Here he may sue B alone,
or A and B both.
'Unfair Trade Practice’ S. 2(47)
• A trade practice which adopts any unfair method or unfair or deceptive practice
• A false statement about standard, quality, quantity, grade, composition, style or model; or falsely
represents any re-built, second-hand, renovated, reconditioned or old goods as new goods;
• False declaration of sponsorship, approval, performance, characteristics, accessories, uses or
benefits; false or misleading representation concerning the need for, or the usefulness of, any
goods or services;
• giving wrong warranty or guarantee of the performance, efficacy or length of life or materially
misleads concerning the price
• gives false or misleading facts disparaging the goods, services or trade of another person.
• permitting the publication of any misleading advertisement
• manufacturing or offering spurious goods for sale or adopting deceptive practices for providing
service,
• not issuing proper cash memo or bill for the services rendered and the good sold,
• refusing to withdraw, take back or discontinue defective goods and services and refund the
consideration taken thereof within the time period stipulated in the bill or within 30 days if there
is no such provision in the bill,
• disclosing personal information of the consumer to any other person not in accordance with the
prevailing laws.
Restrictive trade practice
• A trade practice which tends to bring about manipulation of price or
its conditions of delivery or to affect flow of supplies in the market
relating to goods or services in such a manner as to impose on the
consumers unjustified costs or restrictions and shall include—
• delay beyond the period agreed to by a trader in supply of such goods
or in providing the services which has led or is likely to lead to rise in
the price;
• any trade practice which requires a consumer to buy, hire or avail of
any goods or, as the case may be, services as condition precedent for
buying, hiring or availing of other goods or services
• A gas distributor instead his customers to buy gas stove as a condition to
give gas connection. It was held that it was a restrictive trade practice
• However, where there is no such precondition and the buyer is free to take
either product, no tying arrangement could be alleged even though the
seller may offer both the products as a single unit at a composite price.
• A furniture dealer is selling Sofa at Rs. 20,000 and Bed at Rs. 15,000. He has
an offer that whoever will buy Sofa and Bed both, he will charge Rs. 30,000
only. Here the choice is open to the customer to buy the products single or
composite. This is not a restrictive trade practice.
The term ‘restrictive trade practice’ has a very wide meaning when read in
context of the MRTP Act, 1969. However under Consumer Protection Act,
1986, it has been used in a narrower sense
Unfair contract
• "Unfair contract" means a contract between a manufacturer or trader or service
provider on one hand, and a consumer on the other, having such terms which
cause significant change in the rights of such consumer, including the following,
namely: —
a. requiring manifestly excessive security deposits to be given by a consumer for the
performance of contractual obligations; or
b. imposing any penalty on the consumer, for the breach of contract thereof which is
wholly disproportionate to the loss occurred due to such breach to the other party
to the contract; or
c. refusing to accept early repayment of debts on payment of applicable penalty; or
d. entitling a party to the contract to terminate such contract unilaterally, without
reasonable cause; or
e. permitting or has the effect of permitting one party to assign the contract to the
detriment of the other party who is a consumer, without his consent; or
f. imposing on the consumer any unreasonable charge, obligation or condition which
puts such consumer to disadvantage
Misleading advertisement
• Misleading advertisement" in relation to any product or service, means an
advertisement, which—
a. falsely describes such product or service; or
b. gives a false guarantee to, or is likely to mislead the consumers as to the
nature, substance, quantity or quality of such product or service; or
c. conveys an express or implied representation which, if made by the
manufacturer or seller or service provider thereof, would constitute an unfair
trade practice; or
d. deliberately conceals important information

• Manufacturers, advertising agencies, celebrity endorsers and publishers can be

made liable for a misleading advertisement
Filing of complaints
"complainant" means—
i. a consumer; or
ii. any voluntary consumer association registered under any law; or
iii. the Central Government or any State Government; or
iv. the Central Authority; or
v. one or more consumers, where there are numerous consumers having
the same interest; or
vi. in case of death of a consumer, his legal heir or legal representative; or
vii. in case of a consumer being a minor, his parent or legal guardian;
Where the complaint can be filed
• A complaint can be filed in a District Commission within the local
limits of whose jurisdiction the:
• Place of business or residence of opposite parties, or
• Place of business or residence of complainant, or
• where the cause of action, wholly or in part, arises
Time frame within which a complaint can be
filed
• Section 69(1) of the Act provides that a consumer dispute can be filed
within two years from the date on which the cause of action arises.
• The point of time when cause of action arises is an important factor in
determining the time period available to file a complaint. There are
no set rules to decide such time. It depends on the facts and
circumstances of each case.
• These time frames are not absolute limitations. If the Consumer
Forum is satisfied that there was sufficient cause for not filing the
complaint within the prescribed period, it can entertain a complaint
beyond limitation time.
When a complaint cannot be filed
A complaint on behalf of the public which consists of unidentifiable
consumers cannot be filed under the Act.
• A complaint was filed on the basis of a newspaper report that passengers
travelling by a particular flight were made to stay at the airport and the
flight was delayed by 90 minutes causing great inconvenience to the
passengers. It was held that such a general complaint cannot be
entertained. No passenger who boarded that plane came forward or
authorised the complainant to make the complaint - Consumer Education and
Research Society, Ahmedabad v. Indian Airlines Corporation
• A complaint by an individual on behalf of general public is not permitted -
Commissioner of Transport v. Y.R. Grover 1994 (1) CPJ 199 NC.
• An unregistered association cannot file a complaint under the Act.
Relief to the complainant – S.39
If the complaint is proved the forum shall order

• to remove defect pointed out by the appropriate laboratory from the

goods in question;
• to replace the goods with new goods of similar description which shall be
free from any defect;
• to return to the complainant the price, or , as the case may be, the charges
paid by the complainant;
• 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 negligence
of the opposite party;
• To remove the defect in goods or deficiency in the services in question.
Relief to the complainant
• to discontinue the unfair trade practice or the restrictive trade practice or not to
repeat them;
• not to offer hazardous goods for sale;
• to withdraw the hazardous goods from being offered for sale;
• to cease manufacture of hazardous goods and to desist from offering services
which are hazardous in nature;
• to pay such sum as may be determined by it, if it is of the opinion that loss or
injury has been suffered by a large number of consumers who are not identifiable
conveniently.
• to issue corrective advertisements to neutralize the effect of misleading
advertisement at the cost of the opposite party responsible for issuing such
misleading advertisement;
• To provide for adequate cost to parties.
Appeal – S.73
• Shall be filed within thirty days.

• Delay in filing appeal may be condoned if there is sufficient cause.

Competition Commission of
India
 Laws for
Empowering Citizens
Principles of Regulation

• Corporate Governance
• Price stability.
• Protecting the common man; the small investor
• Preventing market misconduct.

• The effect of good regulation ought to mean better market outcomes.

Good Regulation would mean

• Using resources in the most efficient way.

• Be “proportionate” in imposing burden on industry.
• Facilitate innovation.
• Think globalisation.
• Do not impede or distort competition.
• Take care of the investor
The Setup
Regulators
• RBI, SEBI, FMC, IRDA, PFRDA, MoF, TRAI, etc.

Who to regulate
• The markets, Commodities, equity, debt, foreign exchange

The players
• Brokers, firms, banks, financial institutions, foreign institutional investors,
mutual fund managers, investors, exchanges, depositories, custodians,
registrars.
Regulators in India

• Ministry of Finance
• Ministry of Corporate Affairs
• RBI
• SEBI
• TRAI, FMC, IRDA, Electricity
• Competition Commission of India
History
• Canada first country to adopt the law in 1889

• US was the second country to adopt the law in 1890

• Finland’s court judgment in 1837 on forest producers

• In France, the initial foundations of a competition law were laid in the

Chapelier Law of 1791

• In 1995, only about 35 countries with a competition law, gone up to nearly

120 countries and counting….
Competition Law in India
• Historical Developments Leading to the Enactment of the MRTP Act

• Enactment of The MRTP Act, 1969

• Economic Reforms and Impact on the MRTP Act

• Experience with the Working of the MRTP Act

• Metamorphosis from MRTP Act, 1969 to Competition Act, 2002

Constitutional Provisions
• The Constitution of India mandates the State to direct its policy towards building
up a just society
• Articles 38 and 39 mandate that the State shall strive to promote the welfare of
the people by securing and protecting as effectively, as it may, a social order in
which justice – social, economic and political – shall inform all the institutions of
the national life, and the State shall, in particular, direct its policy towards
securing
• that the ownership and control of material resources of the community are so distributed as
best to sub-serve the common good; and
• that the operation of the economic system does not result in the concentration of wealth and
means of production to the common detriment.

• The MRTP Act was in consequence of the aforesaid mandate in the Directive
Principles in the Constitution of India, namely, prevention of concentration of
economic power
Development Strategy After Independence
And Its Impact
• Strategy of planned economic development since the early 1950s.
• Industrial Policy commenced with the 1948 Resolution
• It defined the role of the State in industrial development, both as a
business and as a regulator.
• 1956 Resolution emphasised growth, social justice and self-reliance.
• IDA - Industrialisation subject to government intervention and
regulation. Private sector allowed limited licensed capacity in the core
sector
• Public sector made responsible for the development and growth of
core areas like, steel, coal, power etc.
The Impact
• Excessive Government intervention and control
• Neither an easy entry nor an easy exit for enterprises.
• Government determined the plant sizes, their location, prices in a number
of important sectors, and allocation of scarce financial resources.
• The ‘License and Inspector’ raj
• Restricted entry into industry led to concentration of economic power in a
few individuals or groups of business houses.
• This resulted in the emergence of monopolistic industries and
consequently to their indulging in restrictive trade practices
• Detrimental to the consumer and to the economy.
The Early Developments
• Mahalonobis Committee (1964) noted that big business houses were emerging
because of the ‘planned economy’ model practised by the Government in the
country and suggested the need to collect comprehensive information relating to
the various aspects of concentration of economic power.
• Hazari Committee (1965) concluded that working of licensing system had resulted
in disproportionate growth of some of the big business houses in India
• Monopolies Inquiry Commission (MIC) in 1965 observed concentration of
economic power in the form of product-wise and industry-wise concentration
and a few industrial houses were controlling a large number of companies and
there existed in the country large-scale restrictive and monopolistic trade
practices.
• MRTP Act emerged
FCRA
• The Preamble to the MRTP Act says that the statute is enacted to provide
that the operation of the economic system does not result in the
concentration of economic power to the common detriment, for the
control of monopolies, for the prohibition of monopolistic and restrictive
trade practices and for matters connected therewith or incidental thereto.
• Its cousin, the Foreign Exchange Regulation Act was born in 1973 to
regulate, control and grant foreign exchange
• Market suffered from little or no competition resulting in detriment to
economic efficiency and productivity.
• Self- reliance was synonymous with import substitution and consequently,
indigenous availability criteria ensured automatic protection to domestic
producers, regardless of cost, efficiency, and comparative advantage.
Thrust Areas of MRTP Act
• The thrust of the MRTP Act was directed towards:
• the prevention of concentration of economic power to the common detriment;
• the control of monopolies;
• the prohibition of restrictive trade practices;
• the prohibition of monopolistic trade practices; and
• the prohibition of unfair trade practices

• Two views
• The statute prohibited growth.
• Others thought that this was fallacious and erroneous. The statute regulated growth
but did not prohibit it. Even in its regulatory capacity, it controlled growth only if it
was detrimental to the common good.
Further Developments
• MRTP Commission (MRTPC) to encourage fair play and fair dealings in
the market, and to promote healthy competition
• Amendments to the MRTP Act in 1984
• Sachar Committee observed that the MRTP Act contained no
provisions for the protection of consumers against false or misleading
advertisements or other similar unfair trade practices and that they
needed to be protected from practices
• Recommended introducing a clause
1991
• 1991 Economic Reforms of liberalisation and de-regulation
• The LPG regime, an acronym for liberalisation, privatisation, and
globalisation.
• Many changes in industrial licensing, foreign investment etc to make
the market driven by competitive forces
• Size and monopoly not viewed with prejudice any more
• Major amendments effected to the MRTP Act in 1991.
• Two of the five objectives namely: prevention of concentration of
economic power to the common detriment; and control of
monopolies, de-emphasised
After 1991
• MRTP Act Had Outlived Its Utility as it was enacted under the policy
of ‘command-and-control’
• Most process attributes of competition, such as entry, price, scale,
location etc. were regulated. Thus, the MRTP Act had very little
influence over these process attributes of competition, as they were
part of a separate set of decisions and policies of the Government.
• Protection offered to SoEs in the form of price and purchase
preferences distorted competition
• The need for a new law in line with the new LPG paradigm led to the
enactment of Competition Act, 2002.
Economic Reforms-second phase
• 1991: Provisions relating to MRTP companies’ deleted
• Finance Minister’s budget speech,1999: MRTP Act had become
obsolete in certain areas in the light of international economic
developments, and Government has decided to appoint a Committee
to propose a modern competition law
• Following committee’s report, The Competition Act,2002 enacted
January,2003; Competition Commission of India established
October,2003
Competition Commission
of
India
The Competition Act, 2002
• The Competition Act, 2002, as amended by the Competition
(Amendment) Act, 2007, follows the philosophy of modern
competition laws.
• Objectives of the Competition Act are
• to prevent practices having adverse effect on competition,
• to promote and sustain competition in markets,
• to protect the interests of consumers and
• to ensure freedom of trade carried on by other participants in markets, in
India, and for matters connected therewith or incidental thereto.
• The Act prohibits anti-competitive practices which have an
appreciable adverse effect on competition within India.
• It provides for the establishment of a quasi-judicial body, namely, the
Competition Commission of India for administration of the Act.
Competition Commission of India
• A body corporate having perpetual succession and a common seal
with power to acquire, hold and dispose of property, both movable
and immovable, and to contract and shall, by the said name, sue or
be sued. The head office of the Commission is at New Delhi
• Established under the Competition Act, 2002 for administration,
implementation and enforcement of the Act. Chairperson, 6 members
• Preamble of the puts the following objectives.
• To prevent practices having adverse effect on competition.
• To promote and sustain competition in markets.
• To protect the interests of consumers and
• To ensure freedom of trade in markets in India
The Commission
• Established in October, 2003, but due to a legal challenge in the case of
(BrahmDutt vs. Union of India, (Writ Petition (Civil) 490 of 2003), it could become
fully operational in 2007.
• Initially focussed its efforts on advocacy initiatives.
• Based on SC observation Act amended in 2007 and created two separate bodies,
• the Commission as the expert Body to function as a market regulator for
preventing and regulating anti- competitive practices and to carry on the advisory
and advocacy functions in its role as a regulator; and
• The Competition Appellate Tribunal (COMPAT) a quasi-judicial body to hear and
dispose of appeals against any direction issued or decision made or order passed
by the Commission.
• All pending cases of MRTP transferred to COMPAT and CCI respectively from the
MRTP Commission whereas the MRTP Act was repealed.
• The substantive provisions, namely, Anti-competitive agreements (Section 3) and
Abuse of dominant position (Section 4) came into force on 20th May, 2009. The
provisions relating to 'Regulation of Combinations' (sections 5 and 6) came into
force on 1st June, 2011
Organogram
• Anti trust division
• Combination division
• Legal division
• Economic division
• Advocacy division
• Administrative and Coordination division
• HR division
• IT Division
• International Cooperation division
• Secretariat
Various provisions of the Act
• Term of office of Chairperson and other Members
• Resignation, removal and suspension of Chairperson and other members
• Restriction on employment of Chairperson and other Members in certain
cases
• Administrative powers of Chairperson
• Salary and allowances and other terms and conditions of service of
Chairperson and other Members
• Vacancy, etc. not to invalidate proceedings of Commission
• Appointment of Director General, etc.
• Appointment of Secretary, experts, professionals and officers and other
employees of Commission
Duties of Commission
• Subject to the provisions of this Act, it shall be the duty of the
Commission to eliminate practices having adverse effect on
competition, promote and sustain competition, protect the interests
of consumers and ensure freedom of trade carried on by other
participants, in markets in India: Provided that the Commission may,
for the purpose of discharging its duties or performing its functions
under this Act, enter into any memorandum or arrangement with the
prior approval of the Central Government, with any agency of any
foreign country.
Functions of the Commission
• Prohibit anti-competitive agreements and abuse of dominance, and
also regulate combinations (mergers or amalgamations or
acquisitions) through a process of inquiry/investigation.

• Give opinion on competition issues on a reference received from an

authority established under any law (statutory authority)/ Central
Government/ a State Government.

• Mandated to undertake competition advocacy, create public

awareness and impart training on competition issues.
Inquiry into certain agreements and dominant
position of enterprise
• Commission to keep in view
• creation of barriers to new entrants in the market;
• driving existing competitors out of the market;
• foreclosure of competition by hindering entry into the market;
• Accrual of benefits to consumers;
• improvements in production or distribution of goods or provision
of services;
• Promotion of technical, scientific and economic development by
means of production or distribution of goods or provision of
services.
The Competition Act
The Act covers essentially four areas of competition contained in its
substantive provisions, namely:

• Anti - Competitive Agreements (Section 3)

• Abuse of Dominance (Section 4)
• Combinations Regulation (Section 5 and 6)
• Competition Advocacy (Section 49)

The Act is extra-territorial and assumes jurisdiction over acts outside India
that may affect a market within India.
CHAPTER II - Prohibition of certain agreements, abuse of
dominant position and regulation of combinations
Prohibition of agreements
3. Anti-competitive agreements

Prohibition of abuse of dominant position

4. Abuse of dominant position

Regulation of combinations
5. Combination
6. Regulation of combinations
Chapter III - Competition Commission of India
7. Establishment of Commission
8. Composition of Commission
9. Selection Committee for Chairperson and Members of Commission
10. Term of office of Chairperson and other Members
11. Resignation, removal and suspension of Chairperson and other members
12. Restriction on employment of Chairperson and other Members in certain cases
13. Administrative powers of Chairperson
14. Salary allowances and other terms and conditions of service of Chairperson and other
Members
15. Vacancy, etc. not to invalidate proceedings of Commission
16. Appointment of Director General, etc.
17. Appointment of Secretary, experts, professionals and officers and other employees
Chapter iv - Duties, Powers and Functions of Commission
18. Duties of Commission
19. Inquiry into certain agreements and dominant position of enterprise
20. Inquiry into combination by commission
21. Reference by statutory authority, 21A. Reference by Commission
26. Procedure for inquiry under section
27. Orders by Commission after inquiry onto agreements or abuse of dominant position
28. Division of enterprise enjoying dominant position
29. Procedure for investigation of combination
30. Procedure in case of notice under sub-section (2) of section 6
31. Orders of Commission on certain combinations
32. Acts taking place outside India but having an effect on competition in India
33. Power to issue interim orders
35. Appearance before Commission
36. Power of Commission to regulate its own procedure
38. Rectification of orders
39. Execution of orders of Commission imposing monetary penalty
• Chapter V - Duties of Director General
• Chapter VI – Penalties
• Chapter VII - Competition Advocacy
• Chapter VIII - Finance, Accounts And Audit
• Chapter VIIIA - Compétition Appellate Tribunal
• Chapter IX - Miscellaneous
Competition
Competition
• “When the sun rises in Africa, a gazelle wakes up. It knows it must run
faster than the fastest lion, or it will be killed.

• And when the sun rises in Africa, a lion wakes up. It knows it must
outrun the slowest gazelle, or it will starve to death.

• It doesn't matter whether you are a lion or a gazelle. When the sun
comes up, you better start running.”
Competition
• Rivalry among sellers trying to achieve such goals as increasing
profits, market share, and sales volume by varying the elements of
the marketing mix: price, product, distribution, and promotion.
• Merriam-Webster - "effort of two or more parties acting
independently to secure the business of a third party by offering the
most favourable terms“
• Competition results in lower prices and a greater number of goods
delivered to more people.
• Less competition is perceived to result in higher prices with a fewer
number of—and less innovation in—goods delivered to fewer people.
• As a result, many governments use competition laws to promote
competition and regulate against anti-competitive practices.
Benefits of Competition
Excerpts from Select Studies

• “Competition Policy led to large price reductions, innovations, and product

development” - - The Benefits from Competition: Some illustrative UK
Cases, University of East Anglia, May 2004

• “Ensuring fair competition in the market is an essential ingredient for

enhancement and maintenance of competitiveness in the economy” - - EU
White Paper on Competitiveness, 1994

• “Strong competition policy is not just a luxury to be enjoyed by rich

countries, but a real necessity for those striving to create democratic
market economies” - - Joseph Stiglitz, Project Syndicate, August 2001
Competition Law
• An economic system based on lack of government intervention, means of
production owned by private firms and the prices of goods and services
determined by market forces
• Too much of regulation takes away the economic freedom of the players and
therefore state intervention needs to be as minimal as possible.
• Competition is fundamental to a flexible and dynamic market economy.
• better products at lower prices,
• competing producers, suppliers or service providers encouraged to innovate,
• lower their costs by reducing slack and increase productivity.
• benefits accrue to the society at large.
• Competition beneficial to all, be it the consumers, the businesses and the
economy.
Competition Law and Policy
• Alone, any competition law…
• Cannot curb market distortions emanating from policies and practices of government (central
as well as states)
• Examples: government procurement policy and rules, anti-dumping measures, public sector policy, etc
• Cannot facilitate ex-ante assessment of government policies to check market-distortionary
elements
• Competition Policy is also needed to address the policy-induced competition distortions
• Competition law and policy is defined as those Government measures that affect
the behaviour of enterprises and structure of the industry with a view to promote
efficiency and maximize welfare.
• Two elements of such measures:-
• Competition Policy: Set of policies, such as liberalized trade policy, relaxed FDI
policy, de-regulation, etc., that enhances competition in the markets.
• (Industrial Policy, Disinvestment Policy, Fiscal and Monetary Policy, Labour Policy, Procurement
Policy)
• Competition Law: To prevent anti-competitive practices with minimal
intervention.
Anti-competitive agreements
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment or provision of services;
(c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods
or services, or number of customers in the market or any other similar way;
(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition:
Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement
increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
Explanation.—For the purposes of this sub-section, “bid rigging” means any agreement, between enterprises or persons referred to in sub-
section (3) engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or
reducing competition for bids or adversely affecting or manipulating the process for bidding
 Anti-competitive agreements
3. (1) No enterprise or association of enterprises or person or association of persons shall enter into any
agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of
services, which causes or is likely to cause an appreciable adverse effect on competition within India.
(2) Any agreement entered into in contravention of the provisions contained in subsection (1) shall be void.
(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of
persons or between any person and enterprise or practice carried on, or decision taken by, any association of
enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision
of services, which—
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment or provision of services;
(c) shares the market or source of production or provision of services by way of allocation of geographical area of
market, or type of goods or services, or number of customers in the market or any other similar way;
(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable
adverse effect on competition:
Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint
ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control
of goods or provision of services.
Explanation.—For the purposes of this sub-section, “bid rigging” means any agreement, between enterprises or
persons referred to in sub-section (3) engaged in identical or similar production or trading of goods or provision of
services, which has the effect of eliminating or reducing competition for bids or adversely affecting or
manipulating the process for bidding
 Anti-competitive agreements
(4) Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of
production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, including—
(a) tie-in arrangement;
(b) exclusive supply agreement;
(c) exclusive distribution agreement;
(d) refusal to deal;
(e) resale price maintenance,
shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on
competition in India.
Explanation.—For the purposes of this sub-section,—
(a) “tie-in arrangement” includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods;
(b) “exclusive supply agreement” includes any agreement restricting in any manner the purchaser in the course of his trade from acquiring or
otherwise dealing in any goods other than those of the seller or any other person;
(c) “exclusive distribution agreement” includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area
or market for the disposal or sale of the goods;
(d) “refusal to deal” includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom
goods are sold or from whom goods are bought;
(e) “resale price maintenance” includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser
shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.
 Anti-competitive agreements
(5) Nothing contained in this section shall restrict—
(i) the right of any person to restrain any infringement of, or to impose
reasonable conditions, as may be necessary for protecting any of his rights
which have been or may be conferred upon him under—
(a) the Copyright Act, 1957 (14 of 1957);
(b) the Patents Act, 1970 (39 of 1970);
(c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade
Marks Act, 1999 (47 of 1999);
(d) the Geographical Indications of Goods (Registration and Protection)
Act, 1999 (48 of 1999);
(e) the Designs Act, 2000 (16 of 2000);
(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of
2000);
Anti-competitive agreements
Anti-competitive agreements include, but are not limited to:-
• agreement to limit production and/or supply;
• agreement to allocate markets;
• agreement to fix price;
• bid rigging or collusive bidding;
• conditional purchase/ sale (tie-in arrangement);
• exclusive supply / distribution arrangement;
• resale price maintenance; and
• refusal to deal.
Horizontal and Vertical Agreements
• Horizontal agreements (Section 3(3)) means an agreement between
enterprises, each of which operates at the same level in the production or
distribution chain. which:
• Directly or indirectly determine purchase or sale prices: Fixing of prices is serious
anti-competitive conduct under the Competition Law
• Limit or control output, technical development, services etc
• Share or divide markets:
• Indulge in bid-rigging or collusive bidding
• Vertical Agreements are agreements between firms at different levels of
the manufacturing or distribution processes. E.g., an agreement between
the manufacturer and a distributor is a vertical agreement. S 3(4)
• Tie-in arrangements
• Exclusive distribution agreements
• Refusal to deal
• Resale price maintenance
Horizontal and Vertical Agreements
• Horizontal and vertical agreements are treated differently
• Horizontal agreements are presumed to have adverse effect on competition
which is similar to per se rule; they are per se illegal.
• Burden of proof on the defendant to prove that the agreement in question is not
causing an appreciable adverse effect on competition.
• Such presumptive rule is not applicable to vertical agreements which are subject
to the rule of reason analysis
• The positive as well as the negative impact of such agreements on competition
will have to be taken into account before coming to any conclusion.
• This also applies to agreements entered into by way of joint ventures that
increase efficiency in production, supply, distribution, storage etc.
• Section 3(5) recognizes and protects intellectual property rights, permitting
imposition of reasonable restrictions by their owners.
• Also agreements relating to exports to the extent to which they relate exclusively
to the production, supply, distribution or control of goods or services are
exempted.
Factors determining whether an agreement has an
appreciable adverse effect on competition
• To determine whether an agreement has an appreciable adverse effect on
competition under section 3, due regard to be given to all or any of the
following factors, namely:-
• creation of barriers to new entrants in the market;
• driving existing competitors out of the market;
• foreclosure of competition by hindering entry into the market;
• accrual of benefits to consumers;
• improvements in production or distribution of goods or provision of
services;
• promotion of technical, scientific and economic development by means
of production or distribution of goods or provision of services
CCI
Enterprise
• “enterprise” means a person or a department of the Government, who or
which is, or has been, engaged in any activity, relating to the production,
storage, supply, distribution, acquisition or control of articles or goods, or
the provision of services, of any kind, or in investment, or in the business of
acquiring, holding, underwriting or dealing with shares, debentures or
other securities of any other body corporate, either directly or through one
or more of its units or divisions or subsidiaries, whether such unit or
division or subsidiary is located at the same place where the enterprise is
located or at a different place or at different places, but does not include
any activity of the Government relatable to the sovereign functions of the
Government including all activities carried on by the departments of the
Central Government dealing with atomic energy, currency, defence and
space.
Bid Rigging
• Any agreement, between enterprises or persons referred to in S. 3(3)
engaged in identical or similar production or trading of goods or provision
of services, which has the effect of eliminating or reducing competition for
bids or adversely affecting or manipulating the process for bidding.”
• Bid rigging takes place when bidders collude and keep the bid amount at a
pre-determined level. Pre-determination is by way of intentional
manipulation by the members of the bidding group. Bidders could be
actual or potential ones, but they collude and act in concert.
• Bid Rigging is Anti-Competitive
• Bidding is intended to enable procurement of goods or services on the most
favourable terms and conditions.
• Invitation of bids is resorted to both by Government and private bodies
• Objective of securing most favourable prices and conditions may be negated if the
prospective bidders collude or act in concert. Such collusive bidding or bid rigging
contravenes the very purpose of inviting tenders and is inherently anti-competitive.
Commonly adopted ways of bid rigging
• Agreements to submit identical bids
• Agreements as to who shall submit the lowest bid,
• Agreements for the submission of cover bids (voluntarily inflated bids)
• Agreements not to bid against each other,
• Agreements on common norms to calculate prices or terms of bids
• Agreements to squeeze out outside bidders
• Agreements designating bid winners in advance on a rotational basis, or on a
geographical or customer allocation basis
• Agreement as to the bids which any of the parties may offer at an auction for the sale of
goods or any agreement through which any party agrees to abstain from bidding for any
auction for the sale of goods, which eliminates or distorts competition
Inherent in some of these agreements, is a compensation system to the unsuccessful
bidders by dividing a certain percentage of profits of successful bidders.
Bid rigging or collusive bidding is treated with severity in the law. The presumptive
approach reflects the severe treatment.
 Forms of Bid Rigging
• Bid Suppression
• Competitors agree to refrain from bidding or withdraw a previously submitted bid so that the designated
winning competitor’s bid will be accepted.
• Complementary Bidding (also known as ‘cover’ or ‘courtesy’ bidding)
• Competitors agree to submit bids that are either too high to be accepted or contain special terms that
will not be acceptable to the buyer. Such bids are not intended to secure the buyer’s acceptance, but are
merely designed to give the appearance of genuine competitive bidding. Frequently occurring forms,
defraud purchasers by creating the appearance of competition to conceal secretly inflated prices.
• Bid Rotation
• All conspirators submit bids but take turns to be the lowest bidder. Terms of the rotation may vary; for
example, competitors may take turns on contracts according to the size of the contract, allocating equal
amounts to each conspirator or allocating volumes that correspond to the size of each conspirator. A
strict bid rotation pattern defies the law of chance and suggests that collusion is taking place.
• Subcontracting
• Competitors, who agree not to bid or to submit a losing bid, frequently receive subcontracts or supply
contracts in exchange from the successful bidder. In some schemes, a low bidder will agree to withdraw
its bid in favour of the next low bidder in exchange for a lucrative subcontract that divides the illegally
obtained higher price between them.
• Almost all forms of bid rigging schemes have an agreement among some or all of the
bidders, which predetermines the winning bidder and limits or eliminates competition
among the conspiring vendors.
Warning Signals of Bid Rigging - in Bids
• The same supplier is often the lowest bidder.
• There is a geographic allocation of winning tenders. Some firms submit tenders that win
in only certain geographic areas.
• Regular suppliers fail to bid on a tender they would normally be expected to bid for, but
have continued to bid for other tenders.
• Some suppliers unexpectedly withdraw from bidding.
• Certain companies always submit bids but never win.
• Each company seems to take a turn being the winning bidder.
• Two or more businesses submit a joint bid even though at least one of them could have
bid on its own.
• The winning bidder repeatedly sub-contracts work to unsuccessful bidders.
• The winning bidder does not accept the contract and is later found to be a subcontractor.
• Competitors regularly socialize or hold meetings shortly before the tender deadline
Warning Signals of Bid Rigging - in Documents
• Carefully compare all documents for evidence that suggests that bids were prepared by
the same person or were prepared jointly.
• Identical mistakes/corrections in the bid documents or letters submitted by different
companies, such as spelling errors.
• Bids from different companies contain similar handwriting or typeface or use identical
forms or stationery.
• Bid documents from one company make express reference to competitors bids or use
another bidder’s letterhead or fax number.
• Bids from different companies contain identical miscalculations.
• Bids from different companies contain a significant number of identical estimates of the
cost of certain items.
• The packaging from different companies has similar postmarks or post metering machine
marks.
• Bid documents from different companies indicate numerous last minute adjustments,
such as the use of erasures or other physical alterations.
• Bid documents submitted by different companies contain less detail that would be
necessary or expected, or give other indications of not being genuine.
Warning Signals of Bid Rigging - in Bid Pricing
Bid prices can be used to help uncover collusion. When other bids are much
higher than the winner’s bid, bidders may be using a cover bidding scheme.
Bid prices that are higher than the engineering cost estimates or higher than
prior bids for similar tenders may also indicate collusion. Following may be
considered suspicious:
• Sudden and identical increases in price or price ranges by bidders.
• Anticipated discounts or rebates disappear unexpectedly.
• Identical pricing can raise concerns.
• A large difference between the price of a winning bid and other bids.
• A certain supplier’s bid is much higher for a particular contract than that
supplier’s bid for another similar contract.
• There are significant reductions from past price levels after a bid from a
new or infrequent supplier e.g. the new supplier may have disrupted an
existing bidding cartel.
 Warning Signals of Bid Rigging - in Bid Pricing
• Local suppliers are bidding higher prices for local delivery than for delivery
to destinations farther away.
• Similar transportation costs are specified by local and non-local companies.
• Only one bidder contacts wholesalers for pricing information prior to a bid
submission.
• Unexpected features of public bids in an auction, electronic or otherwise
such as offers including unusual numbers where one would expect a
rounded number of hundreds or thousands may indicate that bidders are
using the bids themselves as a vehicle to collude by communicating
information or signalling preferences.
• In the Statements of Bidders - When working with vendors watch carefully
for suspicious statements that suggest that companies may have reached
an agreement or coordinated their prices or selling practices.
Warning Signals of Bid Rigging - In the Behaviour of Bidders
Look for references to meetings or events at which suppliers may have an
opportunity to discuss prices, or behaviour that suggests a company is taking
certain actions that only benefit other firms. These could include:
• Suppliers meet privately before submitting bids, sometimes in the vicinity of the
location where bids are to be submitted.
• Suppliers regularly socialize together or appear to hold regular meetings.
• A company requests a bid package for itself and a competitor.
• A company submits both its own and a competitor’s bid and bidding documents.
• A bid is submitted by a company that is incapable of successfully completing the
contract.
• A company brings multiple bids to a bid opening and chooses which bid to submit
after determining (or trying to determine) who else is bidding.
• Several bidders make similar enquiries to the procurement agency or submit
similar requests or materials.
Powers of the Commission
• After the inquiry, the Commission may pass inter- alia any or all of the
following orders under section 27 of the Act:
• direct the parties to discontinue and not to re-enter such agreement;
• direct the enterprise concerned to modify the agreement.
• direct the enterprises concerned to abide by such other orders as the
Commission may pass and comply with the directions, including
payment of costs, if any; and
• pass such other orders or issue such directions as it may deem fit.
• The Commission may impose such penalty as it deems fit. Penalty can be
up to 10% of the average turnover for the last three preceding financial
years upon each of such persons or enterprises which are parties to bid-
rigging or collusive bidding.
Case of bid-rigging by manufacturers of Aluminium Phosphide Tablet
• Three companies participating in the tender process floated by FCI
quoted an identical bid price.
• This was in spite of a marked difference in each company’s cost of
production.
• Entries in the visitors’ register at the offices of FCI showed that all
three participants entered the premises at the same time, with one
signing in for the group.
• CCI inferred the bidders had the opportunity to discuss the prices,
and when combined with the other factors listed above, was
sufficient to prove the existence of an agreement to maintain prices
at a certain level.
Supply and installation of medical equipment to Sports Injury Centre, Safdarjung
Hospital
• CCI identified a cartel on the basis of evidence from the bid documents
themselves.
• Three firms participated in the tender process and the contract was awarded to
MDD Medical Systems Pvt. Ltd. as the lowest bidder. Initial estimated cost was
INR 100 million but MDD was awarded the work for INR 160 million.
• CCI discovered many common typographical errors in the separate bids
submitted by the three companies (PSE, MDD and MPS), who tried to explain the
identical errors by claiming they all visited the same cyber café.
• CCI did not accept this explanation and analysed the bidding patterns of these
three companies and found that PSE won a contract for similar work at JPNA
Hospital with MDD and MPS submitting complementary, i.e. higher bids.
• This indicated a typical case of rotating bids when all firms, except one, quote
artificially inflated prices, and this process is repeated with different bidders
winning each time.
Bid Rigging by Insurance Companies, Case. No. 02 of 2014
• CCI imposed a Rs. 671 crore penalty on four state-run insurance companies—
National Insurance, New India Assurance, Oriental Insurance and United India
Insurance for cartelisation and indulging in anti-competitive practices. It was
observed that the four companies colluded with each other and manipulated the
tendering process initiated by the Kerala government by forming a cartel and
quoting higher premium rates.

Bid Rigging in LPG Cylinder, Case No. 03 of 2011

• The Commission initiated suo moto proceedings against LPG cylinder
manufactures who were found to be involved in bid rigging in supplying LPG
cylinders to M/s Indian Oil Corporation Ltd. pursuant to a tender floated by it. It
was noted by the Commission that the identical price quotations submitted by
the opposite parties therein pursuant to the impugned tender were actuated by
mutual understanding/ arrangements. The Commission apart from issuing a
cease and desist order imposed a penalty upon each of the contravening party @
7% of the average turnover of the company. In COMPAT's 2013 judgment, the
CCI's order was upheld on its merits and CCI was directed to reconsider the
penalties it had imposed on the manufacturers
Cartel - S. 2 (c)
• “Cartel” includes an association of producers, sellers, distributors, traders or service
providers who, by agreement amongst themselves, limit, control or attempt to control
the production, distribution, sale or price of, or, trade in goods or provision of services;’
• Cartels are agreements between enterprises (including a person, a government
department and association of persons / enterprises) not to compete on price, product
(including goods and services) or customers.
• To raise price above competitive levels, resulting in injury to consumers and to the
economy.
• For the consumers, cartelisation results in higher prices, poor quality and less or no
choice for goods or/and services.
• An important dimension in the definition of a cartel is that it requires an agreement
between competing enterprises not to compete or to restrict competition.
• International cartel - not all of the enterprises in a cartel based in the same country or
when the cartel affects markets of more than one country.
• Import cartel - comprises enterprises that get together for the purpose of imports into
the country.
• Export cartel - made up of enterprises based in one country with an agreement to
cartelize markets in other countries. Cartels meant exclusively for exports from India
have been excluded from the provisions relating to anti-competitive agreements.
Cartels - Presumed Injurious
• Anti-competitive activities, including cartels, taking place outside India but having
effect on competition in India fall within the ambit of the Act and can be inquired
into by the Commission. The Act thus has extra territorial reach (section 32).
• Agreements between enterprises engaged in identical or similar trade of goods or
provision of services (commonly known as horizontal agreements) including
cartels, of four types specified in the Act are presumed to have appreciable
adverse effect on competition and, therefore, are anti-competitive and void.
• However, horizontal agreements entered into by way of joint ventures are not
presumed to have appreciable adverse effect on competition and are excluded if
they increase efficiency in production, supply, distribution, storage, acquisition or
control of goods or provision of services.
• Other agreements, including a tie-in arrangement, exclusive supply arrangement,
exclusive distribution agreement, refusal to deal, resale price maintenance are
‘vertical agreements’ and would not be presumed to have appreciable adverse
effect on competition, and would be evaluated by the Commission based on facts
using the ‘rule of reason’ approach.
Common Characteristics of Cartels
• Usually function in secrecy.
• Members of a cartel, by and large, seek to camouflage their activities
to avoid detection by the Commission.
• Perpetuation of cartels is ensured through retaliation threats. If any
member cheats, the cartel members retaliate through temporary
price cuts to take business away or can isolate the cheating member.
• Another method, known as compensation scheme, is resorted to in
order to discourage cheating. Under this scheme, if a member of a
cartel is found to have sold more than its allocated share, it would
have to compensate the other members.
Conditions Conducive to Formation of Cartels
• If there is effective competition in the market, cartels would find it
difficult to be formed and sustained. Some of the conditions that are
conducive to cartelization are:
• high concentration - few competitors
• high entry and exit barriers
• homogeneity of the products (similar products)
• similar production costs
• excess capacity
• high dependence of the consumers on the product
• history of collusion
• active trade association
Powers of the Commission
• Commission has the power to pass inter alia any or all of the following
orders (section 27):
• direct the parties to a cartel agreement to discontinue and not to re-
enter such agreement;
• direct the enterprises concerned to modify the agreement.
• direct the enterprises concerned to abide by such other orders as the
Commission may pass and comply with the directions, including
payment of costs, if any; and
• pass such other order or issue such directions as it may deem fit.
Leniency Scheme
• Section 46 of the Act empowers the Commission to grant leniency by
levying a lesser penalty on a member of the cartel who provides full, true
and vital information regarding the cartel. The scheme is designed to
induce members to help in detection and investigation of cartels.
• This scheme is grounded on the premise that successful prosecution of
cartels requires evidence supplied by a member of the cartel. Similar
leniency schemes have proved very helpful to competition authorities of
foreign jurisdictions in successfully proceeding against cartels.
• The Commission has notified the Competition Commission of India (Lesser
Penalty) Regulations, 2009 laying the process, procedure and methodology
for granting leniency to the cartel members who break the ranks of the
cartel and become helpful to the Commission and instrumental in busting
the alleged cartel.
Vertical arrangements
▪ "tie-in arrangement" includes any agreement requiring a purchaser of goods, as a
condition of such purchase, to purchase some other goods;
▪ "exclusive supply agreement" includes any agreement restricting in any manner
the purchaser in the course of his trade from acquiring or otherwise dealing in
any goods other than those of the seller or any other person;
▪ "exclusive distribution agreement" includes any agreement to limit, restrict or
withhold the output or supply of any goods or allocate any area or market for the
disposal or sale of the goods;
▪ "refusal to deal" includes any agreement which restricts, or is likely to restrict, by
any method the persons or classes of persons to whom goods are sold or from
whom goods are bought;
▪ "resale price maintenance" includes any agreement to sell goods on condition
that the prices to be charged on the resale by the purchaser shall be the prices
stipulated by the seller unless it is clearly stated that prices lower than those
prices may be charged.
Dominance
• A position of strength which enables an enterprise to operate
independently of competitive forces or to affect its competitors or
consumers or the relevant market in its favour.
• It is the ability of the enterprise to behave/act independently of the
market forces that determines its dominant position.
• In a perfectly competitive market no enterprise has control over the
market, especially in the determination of price of the product.
• Perfect market conditions are more of an economic “ideal” than
reality.
• Act specifies a number of factors that should be taken into account
while determining whether an enterprise is dominant or not.
Relevant Market
• Dominance significant only when the relevant market has been defined.
• Relevant market to be determined by the Commission with reference to
the relevant product market or the relevant geographic market or wrt
both.
• Act lays down several factors of which any one or all shall be taken into
account by the Commission while defining the relevant market.
• Relevant product market is defined in terms of substitutability. It is the
smallest set of products (both goods and services) which are substitutable
among themselves, given a small but significant non-transitory increase in
price (SSNIP). The market for cars, for example, may consist of separate
‘relevant product markets’ for small cars, mid size cars, luxury cars etc. as
these are not substitutable for each other on a small change in price.
• Relevant geographic market is defined in terms of “the area in which the
conditions of competition for supply of goods or provision of services or
demand of goods or services are distinctly homogenous and can be
distinguished from the conditions prevailing in the neighbouring areas”.
• Breadth of relevant market definition - important factor in establishing
dominance.
• Belaire Owner's Association and DLFLimited: Case No. 19 of 2010. DLF abused
its dominant position in the market of 'high-end' residential accommodation, in
Gurgaon by imposing unfair and one-sided conditions in agreement. These
includes unilateral changes can be made by the builder without the buyers'
consent, builder has the right to change the layout plan without buyer consent,
can unilaterally change inter se areas for different uses like residential,
commercial, etc, without informing anyone etc.
• CCI defined relevant market extremely narrowly to be the market for ‘high-end
residential apartments in the city of Gurgaon’. By restricting the product scope
and the geography of the relevant market to a particular suburb, the CCI’s
decision that DLF was dominant in the relevant market. SC upheld the decision.
• In contrast, in the Coca-Cola cases (which dealt with the alleged abuse of
dominance in relation to the sale of its aerated drinks and bottled water at high
prices by Coca-Cola in multiplex theatres), the CCI held that Coca-Cola was not
dominant, by defining the market to be all multiplex theatres in India, as opposed
to any single multiplex theatre, which would no doubt have led to the obvious
conclusion that Coca-Cola was dominant.
• A complaint by an individual had alleged that Parsvnath Developers
ltd imposed unfair terms in 'Builder Buyer Agreement’ in one of their
residential projects.
• CCI said that "no prima facie case of contravention of section 4 of the
Act is made out against the opposite parties in the instant matter".
• The Commission observed that there were many other large real
estate developers operating in Gurgaon.
• "The presence of these renowned builders in the relevant market
indicates that the informant was not dependent on opposite party
(Parsvanath Hessa) for booking a residential unit in Gurgaon," CCI
said. "Therefore...opposite party does not appear to be in a dominant
position in the relevant market," it added.
• CCI reviewed the conduct of BCCI in organising IPL, specifically in relation to
the manner in which media rights, franchise rights and other rights were
awarded by the BCCI at the time of establishing the IPL.
• CCI (in the majority order) held that the BCCI has allegedly denied access to
the market for organisation of private professional cricket in India by
undertaking to third parties (by virtue of a clause in the media rights
agreement for IPL) to not organise, sanction or support any other
professional domestic Indian Twenty-20 league, and it imposed a penalty for
abuse of dominance by the BCCI.
• However, the CCI order did not throw light on whether the grant of various
rights by the BCCI resulted in abuse of dominant position.
• One member wrote a separate dissent order wherein the BCCI was found not
guilty of abuse of a dominant position.
• Competition Appellate Tribunal set aside the CCI order against cricket
governing body BCCI for alleged abuse of dominance, saying the regulator
relied on “legally unsustainable” information downloaded from internet for
nailing the Board.
• Dhanraj Pillai v Hockey India (Hockey India case) on substantially similar
facts, CCI absolved Hockey India of abuse of dominance. CCI examined
Hockey India’s conduct with respect to,
• precluding other competing private professional hockey leagues from entering the
market, on account of its rules relating to the sanctioning of events;
• secondly, restricting hockey players from participating in unsanctioned hockey
events, which included disqualification from the national team for such participation.
• CCI determined Hockey India was dominant in the relevant market for ‘the
organisation of private professional hockey leagues in India’, but used an
effects-based approach to absolve Hockey India of having abused its
dominance, as there was no substantive evidence to demonstrate that
Hockey India was, in fact, restricting both hockey players and rival hockey
leagues (especially given that the rival hockey league in question had never
approached it for sanction).The CCI also went so far as to state that the
restrictive conditions imposed on hockey players were ‘intrinsic and
proportionate’ to Hockey India’s objectives and therefore did not amount
to an abuse of dominance. The BCCI case, though decided prior to the
Hockey India case by a few months lacked such analysis and balancing of
rights.
Dominance – factors
Dominance traditionally defined in terms of market share of the enterprise or group of
enterprises concerned. Many other factors also play a role. These include:
• Market share,
• The size and resources of the enterprise;
• Size and importance of competitors;
• Economic power of the enterprise;
• Vertical integration;
• Dependence of consumers on the enterprise;
• Extent of entry and exit barriers in the market; countervailing buying power;
• Market structure and size of the market;
• Source of dominant position viz. Whether obtained due to statute etc.;
• Social costs and obligations and contribution of enterprise enjoying dominant position to
economic development.
Commission is authorized to take into account any other factor which it may consider
relevant for the determination of dominance.
Abuse of dominance
• Dominance is not considered bad per se but its abuse is. Abuse is
stated to occur when an enterprise or a group of enterprises uses its
dominant position in the relevant market in an exclusionary or/and an
exploitative manner.

• The Act gives an exhaustive list of practices that shall constitute abuse
of dominant position and, therefore, are prohibited. Such practices
shall constitute abuse only when adopted by an enterprise enjoying
dominant position in the relevant market in India.
Abuse of Dominance - Impact
• Abuse of dominant position impedes fair competition between firms,
exploits consumers and makes it difficult for the other players to
compete with the dominant undertaking on merit. Abuse of
dominant position includes:
• imposing unfair conditions or price, predatory pricing,
• limiting production/market or technical development ,
• creating barriers to entry,
• applying dissimilar conditions to similar transactions,
• denying market access, and
• using dominant position in one market to gain advantages in another
market.
Section 4 (2) of the Act - practices qualifying as abuses:
• directly or indirectly imposing unfair or discriminatory condition in
purchase or sale of goods or service;
• directly or indirectly imposing unfair or discriminatory price in purchase or
sale (including predatory price) of goods or service;
• limiting or restricting production of goods or provision of services or
market;
• limiting or restricting technical or scientific development relating to goods
or services to the prejudice of consumers;
• denying market access in any manner;
• making conclusion of contracts subject to acceptance by other parties of
supplementary obligations which, by their nature or according to
commercial usage, have no connection with the subject of such contracts;
Exploitative and Exclusionary Behaviour
• Abuses as specified in the Act fall into two broad categories -exploitative
(excessive or discriminatory pricing) and exclusionary (for example, denial of
market access).
• “Predatory price” means “the sale of goods or provision of services, at a price
which is below the cost, as may be determined by regulations, of production of
goods or provision of services, with a view to reduce competition or eliminate the
competitors”
• Predation is exclusionary behaviour and can be indulged in only by enterprises(s)
having dominant position in the concerned relevant market.
• The major elements involved in the determination of predatory behaviour are:
• Establishment of dominant position of the enterprise in the relevant market
• Pricing below cost for the relevant product in the relevant market by the
dominant enterprise
• Intention to reduce competition or eliminate competitors This is traditionally
known as the predatory intent test
Essential Facility Doctrine (EFD)
• Barrier to entry of new enterprises into the relevant market is a major
restraint on the dynamics of competition.
• When a dominant enterprise in the relevant market controls an
infrastructure or a facility that is necessary for accessing the market and
which is neither easily reproducible at a reasonable cost in the short term
nor interchangeable with other products/services, the enterprise may not
without sound justification refuse to share it with its competitors at
reasonable cost. This has come to be known as the essential facility
doctrine (EFD). It has been recognized that any application of the EFD
should satisfy the following:
• The facility must be controlled by a dominant firm in the relevant market
• Competing enterprises/persons should lack a realistic ability to reproduce the facility
• Access to the facility is necessary in order to compete in the relevant market; and
• It must be feasible to provide access to the facility.
Combination
• S.5 talks about ‘combinations’ and S.6 is about ‘regulation of combinations’
• Combination means acquisition of control, shares, voting rights or assets,
acquisition of control by a person over an enterprise where such person
has direct or indirect control over another enterprise engaged in
competing businesses, and mergers and amalgamations between or
amongst enterprises when the combining parties exceed the thresholds set
in the Act.
• The acquisition of one or more enterprises by one or more persons or
merger or amalgamation of enterprises shall be a combination of such
enterprises and persons or enterprises, if it exceeds the thresholds as
specified in terms of assets or turnover in India and abroad.
• Entering into a combination which causes or is likely to cause an
appreciable adverse effect on competition within the relevant market in
India is prohibited and such combination shall be void.
Current Threshold
• Combined assets of the enterprises more than (INR) 1,500 crores in India or the
combined turnover of the enterprise is more than (INR) 4,500 crores in India.
• If assets/turnover outside India also, combined assets more than US$ 750
millions, including at least (INR) 750 crores in India, or turnover more than US$
2250 millions, including at least (INR) 2,250 crores in India.
• Group: The group to which the enterprise whose control, shares, assets or voting
rights are being acquired would belong after the acquisition or the group to
which the enterprise remaining the merger or amalgamation would belong has
either assets of value of more than (INR) 6000 crores in India or turnover more
than (INR) 18000 crores in India. Where the group has presence in India as well as
outside India then the group has assets more than US$ 3 billion including at least
INR 750 crores in India or turnover more than US$ 9 billion including at least INR
2250 crores in India.
• The term Group has been explained in the Act. Two enterprises belong to a
“Group” if one is in position to exercise at least 26 per cent voting rights or
appoint at least 50 per cent of the directors or controls the management or
affairs in the other Vide notification
Regulation of Combinations
'Prevention is better than cure'
• Combinations should not be permitted to create, enhance, or entrench market
power or to facilitate its exercise
• Combinations enhances market power if it is likely to encourage one or more
firms to raise price, reduce output, diminish innovation, or otherwise harm
consumers as a result of diminished competitive constraints or incentives
• Unilateral effects - Firms can enhance market power simply because of
elimination of competition through merger or acquisition.
• Coordinated effects - merger can also result in increased risk of joint dominance
through coordinated, accommodating, or concerted behaviour among remaining
market players in relevant market
• Post-combination, unscrambling a merger may also involve high socio-economic
costs.
• Regulation of combination provides legal certainty to business, had the
combining enterprises taken clearance after filing notification
Mandatory filing
• Mandatory filing of notice regarding the combination
• Mergers or amalgamations require a notice [6(2)(a)] to be filed with CCI within 30 days of the
board resolution
• In the case of an acquisition, a notice [6(2)(b)] is required to be filed within 30 days of the
execution of any agreement
• Failure to notify and obtain required approval attracts penalties (up to 1% of total
turnover or the assets, whichever is higher) (S.43A)
• Commission empowered to take suo-moto action by calling for notice from
parties to the mergers, which do not comply with the mandatory filing
requirements.
• The transaction would be rendered void, if the CCI subsequently determines that
the combination has an ‘Appreciable Adverse Effect on Competition’ (AAEC) in
India’.
• 'Regulation of Combinations' intend to ensure that firms do not acquire such a
degree of market power in the market so as to harm the interest of consumers,
the economy and society as a whole
Timelines and Framework for Assessment
Act provides a timeline of 210 days to CCI to take a decision on a Combination
filing.
• Pre-Investigation phase: Commission to form a prima facie opinion within 30 days
as to whether the combination is likely to cause an appreciable adverse effect on
competition. Most filings likely to be approved in this shorter time frame. Only
few filings with serious competition concerns may go beyond this period to the
second stage of investigation. These will be deemed cleared at the end of 210
days, if no order is passed.
• Investigation phase: If Prima-facie opinion is that the combination is likely to
cause or has caused AAEC within the relevant market in India and investigation in
terms of Section 29 of the Act then the Commission by its order can either
• Approve the Combination if there is No likelihood of AAEC
• Approve with modifications - Structural (divestiture) and/or Behavioural
remedies (price ceiling etc.) if the AAEC concerns are addressed through such
remedies
• Not approve, in case the Commission considers that there is sufficient
likelihood of AAEC and the same can't be addressed through modifications
Factors considered for Inquiring into Combination
• Actual and potential level of competition through imports in the market
• Extent of barriers to entry into the market;
• Level of combination in the market;
• Degree of countervailing power in the market;
• Likelihood that the combination would result in the parties to the combination being able to significantly
and sustainably increase prices or profit margins;
• Extent of effective competition likely to sustain in a market;
• Extent to which substitutes are available or arc likely to be available in the market;
• Market share, in the relevant market, of the persons or enterprise in a combination, individually and as a
combination;
• Likelihood that the combination would result in the removal of a vigorous and effective competitor or
competitors in the market;
• Nature and extent of vertical integration in the market;
• Possibility of a failing business;
• Nature and extent of innovation;
• Relative advantage, by way of the contribution to the economic development, by any combination having or
likely to have
• Whether the benefits of the combination outweigh the adverse impact of the combination, if any.
Green Channel
• As part of its ongoing and regular efforts to make M&A filings approval
faster, the CCI has introduced an automatic system of approval for
combinations under Green Channel. (Aug 19)
• Under this process, the combination is deemed to have been approved
upon filing the notice in the prescribed format. This system would
significantly reduce time and cost of transactions.
• Simultaneously, CCI has also revised its pre-filing consultation guidance
note to extend its scope to include consultation to assist the parties to
determine whether their combination is eligible for Green Channel.
• The parties filing combination notice can also meet the case team on any
day.
• Green Channel is aimed to sustain and promote a speedy, transparent and
accountable review of combination cases, strike a balance between
facilitation and enforcement functions, create a culture of compliance and
support economic growth.
Acquisition of Bina Power Supply Limited (BINA/SPV) by
JSW Energy Limited (JSWEL)
• The Proposed Transaction relates to an acquisition of a 100% stake
(i.e. all securities including equity shares and non-convertible
debentures) in the SPV by JSWEL.
• The Proposed Transaction is, therefore, in the nature of an acquisition
of shares within the meaning of Section 5(a) of the Act.
• Relevant market in relation to the Proposed Transaction is “the
market for generation of power in India” However, currently the SPV
is not involved in any business operation.
• The combination was approved by the commission under section
31(1) of the Act
Google Inc. vs. CCI W.P. (C) No. 7084/ 2014
• Complaint filed that Google Inc. has abused its dominant position in the internet advertising
space by promoting its vertical search services like Youtube, Google News, Google Maps, etc.
• Under S 26(1) CCI ordered DG to investigate. At this stage, the Act does not provide any right of
being heard to the parties.
• Google filed an application before the CCI for recall of its order dated April 15th, 2014.
• Rejected on the ground that CCI lacked jurisdiction to entertain any such application.
• The appellants filed the writ petition
• Main issue was whether an administrative body like CCI had inherent powers to review or recall
its order passed under section 26(1) in the absence of any specific provisions in the Act?
• Delhi HC held that CCI order directing investigation in exercise of its power under Section 26(1) of
the Act is capable of review/ recall even in absence of specific power/provision under the Act and
is passed in exercise of its administrative powers based following reasons.
• The Act does not provide any remedy to a party in these situations but to subject itself and
participate in the investigation as hearing is not mandatory at that stage;
• Orders under Section 26 (1) of the Act are not appealable;
M/s Fast Track Call Cab Private Limited vs. M/s ANI
Technologies Pvt. Ltd. Case No.6 & 74 of 2015
• It was alleged that Ola has beeb abusing dominance through
predatory pricing
• First issue was determining the relevant market
• It was argued that the radio taxi services and non - radio taxi services
do not form separate 'relevant product market' but are merely
different channels of transportation, which are substitutable.
• Another issue was whether Ola was dominant
• DG reported that Ola was not dominant
M/S Voltas Limited, Bombay vs. Union Of India SC 1995
• Case under MRTP Act
• Involving restrictive trade practices
• The decision whether trade practice is restrictive or not has to be
arrived at by applying the rule of reason and not on the doctrine that
any restriction as to area or price will per se be a restrictive trade
practice.
• Test to be applied – whether any practice which has been held to be
restrictive trade practice does not directly or indirectly restrict or
discourage competition to any material degree in any relevant trade
or industry
Different Types
of
Business Entities
• Different Types of Business Entities and Companies Act 2013
• Sole proprietorship, Family Owned Business, Partnership firms, LLP, and
types of companies
• Characteristics of Companies
• Doctrine of Lifting of Corporate Veil
• Formation of Companies
• Memorandum of Association, Articles of Association, Registration
• Doctrine of Constructive Notice
• Doctrine of Ultra Vires
• Doctrines of Indoor Management
• Directors of Company
• Share capital, buy back
• Company Meetings
• Resolution
• Winding Up of a Company
• IBC, 2016
Starting a business – key decision areas

• Whose business is it?

• What formation is preferred
• Where the money will come from?
• What product/services to deal with?
• Where to locate the business?
• What all clearances are required?
• Where can help be found?
Business – structure of the organisation

• The size and scope of the business, and its anticipated management
and ownership.
• Smaller business more flexible,
• Larger businesses (wider ownership or more formal structures)
usually organized as partnerships or corporations.
• A business, wishing to raise money on a stock market or to be owned
by a wide range of people required to adopt a specific legal form to
do so.
• Concept of accountability
Business – structure of the organisation
• A single person who owns and runs a business is commonly known as
a sole proprietor, whether he or she owns it directly or through a
formally organized entity.
• Family Owned Business,
• Partnership firms,
• LLP, and
• Companies
Partnership as a form of Contract
• Indian Partnership Act is complimentary to Contract Act.
• Basic provisions of Contract Act apply to contract of partnership also.
• Basic requirements of contract i.e. legally enforceable agreement, mutual
consent, parties competent to contract, free consent, lawful object,
consideration etc apply.
• Partnership Contract is a ‘concurrent subject’ - ‘Contract, including
partnership contract’ is a ‘concurrent subject, covered in Entry 7 of List III
(Seventh Schedule to Constitution).
• Indian Partnership Act is a Central Act, but State Government can also pass
legislation on this issue.
• Though Partnership Act is a Central Act, it is administered by State
Governments, i.e. work of registration of firms and related matters is
looked after by each State Government.
Partnership, partner, firm and firm name
• “Partnership” is the relation between persons who have agreed to share
the profits of business carried on by all or any to them acting for all. - -
Persons who have entered into partnership with one another are called
individually “partners” and collectively “a firm”, and the name under which
their business is carried on is called the “firm name”. [section 4].
• “Business” includes every trade, occupation and profession. [S2(b)]. A
‘partnership’ can be formed only with intention to share profits of
business. People coming together for some social or philanthropic or
religious purposes do not constitute ‘partnership’.
• S5: Partnership not created by status - The relation of partnership arises
from contract and not from status; and, in particular, the members of a
Hindu undivided family carrying on a family business as such, or a Burmese
Buddhist husband and wife carrying on business as such are not partners in
such business.
• S.7: Partnership-at-will - Where no provision is made by contract between
the partners for the duration of their partnership, or for the determination
of their partnership, the partnership is "partnership-at-will".
General duties of partners
• S.9 - Partners are bound to carry on the business of the firm to greatest
common advantage, to be just and faithful to each other, and to render
true accounts and full information of all things affecting the firm to any
partner, his heir or legal representative.
• S.10: Duty to indemnify for loss caused by fraud - Every partner shall
indemnify the firm for any loss caused to it by his fraud in the conduct of
the business of the firm.
• S.11(1): Determination of rights and duties of partners by contract
between the partners - Subject to the provisions of this Act, the mutual
rights and duties of the partners of a firm may be determined by contract
between the partners, and such contract may be express or may be implied
by a course of dealing. Such contract may be varied by consent of all the
partners, and such consent may be express or may be implied by a course
of dealing.
Conduct of Business
Section12 - Subject to contract between the partners –
a. Every partner has a right to take part in the conduct of the business;
b. Every partner is bound to attend diligently to his duties in the conduct of
the business;
c. Any difference arising as to ordinary matters connected with the
business may be decided by a majority of the partners, and every partner
shall have the right to express his opinion before the matter is decided,
but no change may be made in the nature of the business without the
consent of all the partners;
d. Every partner has a right to have access to and to inspect and copy any of
the books of the firm;
e. In the event of the death of a partner, his heirs or legal representatives or
their duly authorised agents shall have a right of access to and to inspect
and copy any of the books of the firm.
 Mutual Right and Liabilities of Partners S.13
Subject to contract between the partners -
a. Partners not entitled to receive remuneration for taking part in the conduct of the
business;
b. Partners entitled to share equally in the profits earned, and to contribute equally to
the losses sustained by the firm;
c. Where a partner is entitled to interest on the capital subscribed by him, such interest
shall be payable only out of profits;
d. A partner making, for the purposes of the business, any payment or advance beyond
the amount of capital he has agreed to subscribe, is entitled to interest thereon at
the rate of six per cent. Per annum;
e. Firm to indemnify a partner in respect of payments made and liabilities incurred by
him
i. In the ordinary and proper conduct of the business; and
ii. In doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be
done by a person of ordinary prudence, in his own case, under similar circumstances; and
f. A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the
conduct of the business of the firm.
Property of the firm S.14
Subject to contract between the partners,

• Property of the firm includes all property and rights and interest in
property originally brought into the stock of the firm, or
• acquired, by purchase or otherwise, by or for the firm for the
purposes and in the course of the business of the firm, and
• includes also the goodwill of the business.
• Unless the contrary intention appears, property and rights and
interest in property acquired with money belonging to the firm are
deemed to have been acquired for the firm.
Partner to be agent of the firm
• S.18 - Subject to the provisions of this Act, a partner is the agent of the firm
for the purposes of the business of the firm.
Implied authority of partner as agent of the firm
• S.19(1) - Subject to the provisions of section 22, act of a partner which is
done to carry on, in the usual way, business of the kind carried on by the
firm, binds the firm. The authority of a partner to bind the firm conferred
by this section is called his "implied authority".
• S.22 - In order to bind a firm, an act or instrument done or executed by a
partner or other person on behalf of the firm shall be done or executed in
the firm-name, or in any other manner expressing or implying an intention
to bind the firm.
• S.2(a) - An "act of a firm" means any act or omission by all the partners, or
by any partner or agent of the firm which gives rise to a right enforceable
by or against the firm;
Implied Authority – Exceptions S.19(2)
In the absence of any usage or custom of trade to the contrary, the implied
authority of a partner does not empower him to –
a. Submit a dispute relating to the business of the firm to arbitration,
b. Open a banking account on behalf of the firm in his own name,
c. Compromise or relinquish any claim or portion of a claim by the firm,
d. Withdraw a suit or proceeding filed on behalf of the firm,
e. Admit any liability in a suit or proceeding against the firm,
f. Acquire immovable property on behalf of the firm,
g. Transfer immovable property belonging to the firm, or
h. Enter into partnership on behalf of the firm.
Unlimited liability
The major disadvantage of partnership is the unlimited liability of
partners for the debts and liabilities of the firm. Any partner can bind
the firm and the firm is liable for all liabilities incurred by any firm on
behalf of the firm. If property of partnership firm is insufficient to
meet liabilities, personal property of any partner can be attached to
pay the debts of the firm.
Minor’s position – S.30
• A person who is a minor according to the law to which he is subject may
not be a partner in a firm, but, with the consent of all the partners for the
time being, he may be admitted to the benefits of partnership.
• Such minor has a right to such share of the property and of the profits of
the firm as may be agreed upon, and he may have access to and inspect
and copy any of the accounts of the firm.
• Such minor's share is liable for the acts of the firm but the minor is not
personally liable for any such act.
• Such minor may not sue the partners for an account or payment of his
share of the property or profits of the firm, save when severing his
connection with the firm, and in such case the amount of his share shall be
determined by a valuation
Indian Partnership Act - Essentials
• Partners are ‘mutual agents’. It is a contract to carry on a business
• Written agreement not essential, but is required to get the firm registered.
• Registration not necessary
• A minor can be a partner
• Sharing of profits necessary. If a member gets fixed remuneration
(irrespective of profits) or one who gets only interest and no profit share at
all, is not a ‘partner’
• Sharing of losses not an essential condition for partnership.
• Contribution of capital not essential to become partner.
• There must be minimum two partners.
• The real test of ‘partnership firm’ is ‘mutual agency’, i.e. whether a partner
can bind the firm by his act
Definition of a Company
• A voluntary association formed and organized to carry on a business.
• An association or collection of individuals, whether natural persons, legal
persons, or a mixture of both. Company members share a common
purpose and unite in order to focus their various talents and organize their
collectively available skills or resources to achieve specific, declared goals.
• It is an "artificial person", invisible, intangible, created by or under law,
with a discrete legal entity, perpetual succession and a common seal. It is
not affected by the death, insanity or insolvency of an individual member.
• Also characterized by Limited Liability
• “Company” means a company incorporated under this Act or under any
previous company law; (as per the Companies Act 2013).
Types of Companies
• By the nature of its members
• Public, Private or One man company
• By its objectives
• Government Company, Banking Company, Not for profit company (S.8)
• By nature of limitations
• Limited or unlimited
• Limited by shares
• Limited by guarantee
• By its Size (Medium or small scale)
• Companies formed under an Act
• Holding and Subsidiary Companies
• Foreign Company
Limited Liability Partnership Act, 2008
• Defines "limited liability partnership" as a partnership formed and
registered under this Act;
• "limited liability partnership agreement" as any written agreement
between the partners of the limited liability partnership or between the
limited liability partnership and its partners which determines the mutual
rights and duties of the partners and their rights and duties in relation to
that limited liability partnership;
• "partner", in relation to a limited liability partnership, means any person
who becomes a partner in the limited liability partnership in accordance
with the limited liability partnership agreement;
• "foreign limited liability partnership" means a limited liability partnership
formed, incorporated or registered outside India which establishes a place
of business within India;
• Amended in 2021 brought in a concept of “small limited liability
partnership
Limited Liability Partnership
• LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership.
• It can continue its existence irrespective of changes in partners.
• Capable of entering into contracts and holding property in its own name.
• A separate legal entity, is liable to the full extent of its assets but liability of the
partners is limited to their agreed contribution in the LLP.
• No partner liable on account of the independent or un-authorized actions of other
partners, thus individual partners are shielded from joint liability created by another
partner’s wrongful business decisions or misconduct.
• Mutual rights and duties of the partners within a LLP are governed by an agreement
between the partners or between the partners and the LLP as the case may be.
• The LLP, however, is not relieved of the liability for its other obligations as a separate
entity.
• Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership
firm structure’ LLP is called a hybrid between a company and a partnership.
• LLP is a body corporate and a legal entity separate from its partners with perpetual
succession.
• As a form of business model, LLP
• is organized and operates on the basis of an agreement.
• provides flexibility without imposing detailed legal and procedural requirements
• enables professional/technical expertise and initiative to combine with financial risk taking capacity
in an innovative and efficient manner
• Differs from a ‘traditional partnership firm’ where every partner is liable, jointly with all
the other partners and also severally for all acts of the firm done while he is a partner.
Under LLP structure, liability of partner limited to his agreed contribution.
• No partner is liable on account of the independent or un-authorized acts of other
partners, thus allowing individual partners to be shielded from joint liability created by
another partner’s wrongful acts or misconduct.
• Difference between an LLP and a company lies in that the internal governance
structure of a company is regulated by statute whereas for an LLP it would be by a
contractual agreement between partners.
• The management-ownership divide inherent in a company is not there in a limited
liability partnership.
• LLP will have more flexibility as compared to a company.
• LLP will have lesser compliance requirements as compared to a company.
Family Owned Business
• Backbone of any country's prosperity and economy.
• Keeping business ownership within a family is a deeply-rooted practice since ages
• It was also confined to certain communities, notably the Gujarati and Marwari’s
especially in the western and northern India. Today, family business almost
contributes around 80 percent of national GDP annually. According to various
estimates, more than 80% of the companies in India are family owned.
• Many successful family businesses operating for more than 100 years, even
globally
• Tata Group – Founded in 1868 by Jamsetji Tata
• TVS Group – Founded in 1911 by T V Sundaram Iyengar
• Aditya Birla Group – Founded in 1857 by Shiv Narayan Birla
• Kiroloskar Group – Founded in 1911 by Laxmanrao Kirloskar
• Godrej Group – Founded in 1897 by Ardeshir Godrej and Pirojsha Burjorji Godrej
• Shapoorji Pallonji – Founded in 1865 by Pallonji Mistry
• Reliance Group – Founded in 1966 by Dhirubhai Ambani
Family Owned Business - characteristics
• Stability
• Leadership
• Commitment
• Trust
• Flexibility
• Family conflicts
• Unstructured governance
• Nepotism
• No proper succession planning
• Family values
The Companies Act 2013
A brief history
• Regulating Act of 1773 passed by the British Government to overhaul the
rules of East India Company
• 1884: East India Company transformed into a management agency for
extension and control of British rule in India. Granted monopoly powers
• Companies act 1913 to Consolidate and Amend the law relating to Trading
Companies and other Associations.
• Called the Indian Companies Act, 1913.
• Came into force on the first day of April 1911;
• Extends to the whole of British India including British Baluchistan and the Sambhal
Parganas
• The Companies Act 1956 was enacted on the recommendations of the
Bhaba Committee set up in 1950 with the object to consolidate the existing
corporate laws and to provide a new basis for corporate operation in
independent India.
• With enactment of this legislation in 1956, the Companies Act 1913 was
repealed.
 Companies Act 2013
• Liberalization during the 1990s
• SEBI - India's securities market regulator - formed in 1992
• First voluntary code of corporate governance in 1998 by CII
• Kumar Mangalam Birla Committee to promote and raise the standards of good corporate
governance. 1999
• SEBI acquired a mandatory status in early 2000s
• Naresh Chandra committee was appointed in 2002
• Narayana Murthy Committee by SEBI
• Committee under Dr. J.J. Irani in 2004 to offer advice on a new Companies Bill
• Ministry of Corporate Affairs released a set of voluntary guidelines 2009
• GoI introduced the Companies Bill, 2008, which resulted in the Company Act 2013
• Companies (1st amendment) Act 2015
• Companies (2nd amendment) Act 2017
• Companies ( 3rd amendment) Act 2019
• Companies (4th amendment) Act 2020
• Budget 2021
• NCLT and NFRA
Rules under the Company Act 2013
• The Companies (Specification of Definitions Details) Rules, 2014
• The Companies (Restriction on Number of Layers) Rules, 2017
• The Companies (Incorporation) Rules, 2014
• Part I The Companies (Prospectus and Allotment of Securities) Rules, 2014
• The Companies (Issue of Global Depository Receipts) Rules, 2014
• The Companies (Share Capital and Debentures) Rules, 2014
• The Companies (Acceptance of Deposits) Rules, 2014
• The Companies (Registration of Charges) Rules, 2014
• The Companies (Management and Administration) Rules, 2014
• The Companies (Significant Beneficial Owners) Rules,20l8
• VIII The Companies (Declaration and Payment of Dividend) Rules, 2014
• The Investor Education and Protection Fund Authority (Appointment of Chairperson and
Members, Holding Meetings and Provision for Offices and Officers) Rules 2016
• Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules,
2016
• The Companies (Accounts) Rules, 2014
Rules under the Company Act 2013
• The National Financial Reporting Authority Rules 2018
• The National Financial Reporting Authority (Meeting for Transaction of Business) Rules, 2019
• The National Financial Reporting Authority (Manner of Appointment and other Terms and Conditions of Service of Chairperson and
Members) Rules, 2018
• The Companies (Corporate Social Responsibility Policy) Rules, 2014
• The Companies (Indian Accounting Standards) Rules, 2015
• The Companies (Audit and Auditors) Rules, 2014
• The Companies (Cost Records and Audit) Rules, 2014
• Companies (Filing of Documents and Forms in XBRL) Rules, 2015
• The Companies (Appointment and Qualifications of Directors) Rules, 2014
• The Companies (Meetings of Board and its Powers) Rules, 2014
• The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014
• The Companies (Inspection, Investigation and Inquiry) Rules, 2014
• Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017
• The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
• The Companies (Mediation and Conciliation) Rules, 2016
• The Companies (Registered Valuers and Valuation) Rules, 2017
Definition of a Company
• A voluntary association formed and organized to carry on a business.
• A company is an association or collection of individuals, whether
natural persons, legal persons, or a mixture of both. Company
members share a common purpose and unite in order to focus their
various talents and organize their collectively available skills or
resources to achieve specific, declared goals.
• A company can be defined as an "artificial person", invisible,
intangible, created by or under law, with a discrete legal entity,
perpetual succession and a common seal.[citation needed] It is not
affected by the death, insanity or insolvency of an individual member.
• “Company” means a company incorporated under this Act or under
any previous company law; (as per the Companies Act 2013)
Characteristics of a Company
• Separate Legal Entity
• The company is distinct and different from its members in law. It has its own seal and its own
name, its assets and liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, and borrowing money, employing people, having
a bank account, entering into contracts and suing and being sued separately.
• Limited Liability:
• The liability of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay only the
uncalled money due on shares held by him.
• Perpetual Succession:
• A company does not cease to exist unless it is specifically wound up or the task for which it
was formed has been completed. Membership of a company may keep on changing from
time to time but that does not affect life of the company. Insolvency or Death of member
does not affect the existence of the company.
• Separate Property:
• A company is a distinct legal entity. The company's property is its own. A member cannot
claim to be owner of the company's property during the existence of the company.
 Characteristics of a Company
• Transferability of Shares:
• Shares in a company are freely transferable, subject to certain conditions, such that no share-
holder is permanently or necessarily wedded to a company. When a member transfers his
shares to another person, the transferee steps into the shoes of the transferor and acquires
all the rights of the transferor in respect of those shares.
• Common Seal:
• A company is an artificial person and does not have a physical presence. It acts through its
Board of Directors for carrying out its activities and entering into various agreements. Such
contracts must be under the seal of the company.
• Capacity to sue and being sued:
• A company can sue or be sued in its own name as distinct from its members.
• Separate Management:
• A company is administered and managed by its managerial personnel i.e. the Board of
Directors. The shareholders are simply the holders of the shares in the company and need
not be necessarily the managers of the company.
• One Share-One Vote:
• The principle of voting in a company is one share-one vote i.e. if a person has 10 shares, he
has 10 votes in the company. This is in direct distinction to the voting principle of a co-
operative society where the "One Member - One Vote" principle applies i.e. irrespective of
the number of shares held, one member has only one vote.
S.1 Whom does the Act applies
• Companies incorporated under this Act or under any previous company
law;
• Insurance companies, except in so far as the said provisions are
inconsistent with the provisions of the Insurance Act, 1938 or the IRDA Act,
1999;
• Banking companies, except in so far as the said provisions are inconsistent
with the provisions of the Banking Regulation Act, 1949;
• Companies engaged in generation or supply of electricity, except in so far
as the said provisions are inconsistent with the provisions of the Electricity
Act, 2003;
• Any other company governed by any special Act in force, except in so far as
the said provisions are inconsistent with the provisions of such special Act;
and
• Such body corporate, incorporated by any Act for the time being in force,
as the Central Government may, by notification, specify in this behalf,
subject to such exceptions, modifications or adaptation, as may be
specified in the notification.
Types of Companies
• By the nature of its members
• Public, Private or One man company
• By its objectives
• Government Company, Banking Company, Not for profit company (S.8)
• By nature of limitations
• Limited or unlimited
• Limited by shares
• Limited by guarantee
• By its Size (Medium or small scale)
• Companies formed under an Act
• Holding and Subsidiary Companies
• Foreign Company
Some Definitions
• 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 restricts the right to transfer its shares
and limits the number of its members to two hundred
• One Person Company means a company which has only one person as a
member
• Public company means a company which is not a private company, and has
a minimum paid-up share capital of five lakh rupees or such higher paid-up
capital, as may be prescribed:
• Provided that a company which is a subsidiary of a company, not being a private
company, shall be deemed to be public company for the purposes of this Act even
where such subsidiary company continues to be a private company in its articles ;
• A Public Limited Company is a company that has limited liability and offers
shares to the general public. Its stock can be acquired by anyone, either
privately through (IPO) initial public offering or via trades on the stock
market.
 Some Definitions
• Limited Companies
• Company limited by guarantee means a company having the liability
of its members limited by the memorandum to such amount as the
members may respectively undertake to contribute to the assets of
the company in the event of its being wound up;
• Company limited by shares means a company having the liability of
its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them;
• It may be further divided in public companies (public limited companies) and
private companies (private limited companies).
• Unlimited company means a company not having any limit on the
liability of its members;
Some Definitions
• Small company (2-85) means a company, other than a public company,
• paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as
may be prescribed which shall not be more than five crore rupees; or
• turnover of which as per its last profit and loss account does not exceed two crore rupees or
such higher amount as may be prescribed which shall not be more than twenty crore rupees:
• This definition of a small company is not applicable to the following:
• A public company
• A holding company or a subsidiary company
• A company registered under Section 8
• A company or body corporate that is governed by any Special Act
• Status of a small company may change from year to year depending upon the
range of paid-up share capital and turnover. If a company crosses any of the
thresholds provided (either for paid-up capital or turnover), the benefits that are
available during a given year may be removed in the following year and may be
made available again in the subsequent years.
• A small company can be a listed company if it meets the eligibility criteria of the
BSE and the NSE.
 Some Definitions
• banking company means a banking company as defined in clause (c) of
section 5 of the Banking Regulation Act, 1949;
• According to Sec. 5 of the Banking Regulation Act, 1949, a banking company means
the accepting, for the purpose of lending or investment, of deposits of money from
the public, repayable on demand or otherwise and withdrawn by Cheque, Draft,
Order, or otherwise.
• foreign company means any company incorporated outside India which
has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and conducts any business activity
in India in any other manner.
• Government company means any company in which not less than fifty one
per cent. of the paid-up share capital is held by the Central Government, or
by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a
company which is a subsidiary company of such a Government company;
 Some Definitions
• holding company, in relation to one or more other companies, means a
company of which such companies are subsidiary companies;
• associate company, in relation to another company, means a company in
which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a
joint venture company.
• Dormant company: Where a company is formed and registered under this
Act for a future project or to hold an asset or intellectual property and has
no significant accounting transaction, such a company or an inactive
company may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
• Inactive company: means a company which has not been carrying on any
business or operation, or has not made any significant accounting
transaction during the last two financial years, or has not filed financial
statements and annual returns during the last two financial years
Formation of a Company
Minimum Requirement of a Private Company:
• Minimum 2 Shareholders
• Minimum 2 Directors (The directors and shareholders can be same person)
• Minimum Authorised Share Capital to be Rs. 100,000
• DSC (Digital Signature Certificate) for all the Directors (for applying of DIN)
• DIN (Director Identification Number) for all the Directors
Minimum Requirement of a Public Company:
• Minimum 7 Shareholders
• Minimum 3 Directors (The directors and shareholders can be same person)
• Minimum Authorised Share Capital shall be Rs. 500,000 (INR Five Lac)
• DIN (Director Identification Number) for all the Directors
• DSC (Digital Signature Certificate) for one of the Directors
Formation of a company - stages
• A complex activity involving completion of legal formalities and
procedures. It may have four distinct stages, Promotion; Incorporation;
Subscription of capital and Commencement of Business.
• A promoter is a firm or person who does the preliminary work related to
the formation of a company, including its promotion, incorporation, and
flotation, and solicits people to invest money in the company, usually when
it is being formed.
• Promotion stage
• Developing an idea, setting objectives
• Planning
• Investigation and feasibility study
• Market study
• Technical feasibility
• Search for professionals
• Estimating and identifying source of funding
Formation of company – incorporation
• S.3 A company may be formed for any lawful purpose by—
a. seven or more persons, where the company to be formed is to be a public company;
b. two or more persons, where the company to be formed is to be a private company; or
c. one person, where the company to be formed is to be One Person Company that is to say, a
private company,
• by subscribing their names or his name to a memorandum and complying with
the requirements of this Act in respect of registration:
• A company thus formed may be either a company limited by shares; or limited by
guarantee; or an unlimited company.
• Documents required
• Proof of address no older than three months.
• Latest 3-month bank statement.
• Proof of Identification.
• Directors proof of identification.
• PAN, GST etc.
One Person Company
• Memorandum of One Person Company to indicate the name of the other
person, with his prior written consent, who shall, in the event of the
subscriber’s death or his incapacity to contract become the member of the
company
• Written consent of such person to be filed with the Registrar at the time of
incorporation of the One Person Company along with its memorandum and
articles:
• Such other person may withdraw his consent in such manner as may be
prescribed:
• Member of One Person Company may at any time change the name of
such other person by giving notice in such manner as may be prescribed:
• It is a duty of the member of One Person Company to intimate the
company the change, if any, in the name of the other person nominated by
him, and the company to intimate the Registrar
• Provided also that any such change in the name of the person shall not be
deemed to be an alteration of the memorandum.
Formation of companies with charitable
objects
• S.8 Companies registered as a limited company for promotion of
commerce, art, science, sports, education, research, social welfare,
religion, charity, protection of environment or any such other object and
• intends to apply its profits or other income in promoting its objects; and
• intends to prohibit the payment of any dividend to its members,
• A company registered under this section shall enjoy all the privileges and
be subject to all the obligations of limited companies.
• A firm may be a member of the company registered under this section.
• A company registered under this section shall not alter the provisions of its
memorandum or articles except with the previous approval of the Central
Government.
Effect of registration
• S.9 From the date of incorporation mentioned in the certificate of
incorporation, such subscribers to the memorandum and all other persons,
as may, from time to time, become members of the company, shall be a
body corporate by the name contained in the memorandum, capable of
exercising all the functions of an incorporated company under this Act and
having perpetual succession and a common seal with power to acquire,
hold and dispose of property, both movable and immovable, tangible and
intangible, to contract and to sue and be sued, by the said name.
• A registered company can exercise all functions of a company incorporated
under the Act. Also, the company has perpetual succession with power to
acquire, hold, and dispose of property of all forms. Also, it can contract,
sue and be sued by the said name.
• After registration, the company must within two months issue each
shareholder with a Share certificate. A share certificate is evidence of each
shareholder's title to their shares. Shareholders can use their certificate as
evidence if their name is deleted from the company's internal Register of
Members.
What is a Body Corporate
• Corporate Personality
• The distinct status of a business organization that has complied with law for its
recognition as a legal entity
• The independent legal existence from that of its officers, directors and shareholders
• It encompasses the capacity of a company to have a name of its own, to sue and to
be sued, and to have the right to purchase, sell, lease and mortgage its property in its
own name.
• Property cannot be taken away from a company without due process of law
• This is a fiction created by law and enables an organisation of multiple owners to
function as a single identity.
• It also enables company longevity – by having its own distinct personality, it can far
outlive its body of owners.
• This legal fiction is integral to the functioning of companies and is the fundamental
basis or rationale for incorporation.
• Salomon vs. Salomon & Co. Ltd
• Lee vs. Lee Air Farming Limited
• Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43
Who’s and who in a company (2013 Act)
• Promoter is a person who is engaged in promoting the formation and incorporation of
the Company. He conceives the idea of setting up the business and took the steps for the
formation of the Company.
• (69) “promoter” means a person—
• (a) who has been named as such in a prospectus or is identified by the company in the annual
return referred to in section 92; or
• (b) who has control over the affairs of the company, directly or in directly whether as a share
holder, director or otherwise; or
• (c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act:
• Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity;
• Shareholder (also stockholder), is a person, company, or institution that owns at least
one share of a company's stock. A shareholder is an owner of a company as determined
by the number of shares they own. A stakeholder does not own part of the company but
does have some interest in the performance of a company
• Directors
• KMPs
Who’s and who in a company (2013 Act)
• Board of Directors or Board, in relation to a company, means the collective body of the
directors of the company;
• Directors are effectively the agents of the company, appointed by the shareholders to
manage its day-to-day affairs. The basic rule is that the directors should act together as a
board but typically the board may also delegate certain powers to individual directors or
to a committee of the board.
• Key Managerial Personnel (KMP) refers to the employees of a company who are vested
with the most important roles and functionalities. They are the first point of contact
between the company and its stakeholders and are responsible for the formulation of
strategies and its implementation.
• KMP in relation to a company, means
i. the Chief Executive Officer or the managing director or the manager;
ii. the company secretary;
iii. the whole-time director;
iv. the Chief Financial Officer;
v. such other officer, not more than one level below the directors who is in whole-time
employment, designated as key managerial personnel by the Board; and
vi. such other officer as may be prescribed;
Salomon vs. Salomon & Co. Ltd (1897)
• Salomon, a sole proprietor, was a boot and shoe manufacturer. Sound
business, surplus
• Incorporated a company named Saloman & Co. Ltd for the purpose of taking
over and carrying on his business.
• Seven subscribers were Saloman, his wife, his daughter and four sons
• Saloman and two of his sons, constituted the Board of Directors of the
company.
• The business was transferred to the company for £ 40000.
• Saloman took 20000 shares of £ 1 each and secured debentures worth £
10,000 creating a charge on the company's assets.
• One share each was given to each remaining member of his family.
• The company went into liquidation within a year.
• Its assets amounting to £ 6,000 were insufficient to pay the debentures in
full and the ordinary creditors received nothing.
 Salomon vs. Salomon & Co. Ltd (1897)
• The liquidator sought to have the debentures cancelled on the ground that the
company was only an agent of Salomon.
• The unsecured creditors, on their part contended that though the company was
incorporated under the Act, the Salomon & Co. Ltd. had no independent existence
and it was in fact only Salomon who was the sole person behind it, he was the
managing director, the other directors being his sons were under his control.
• Thus, in effect the company was one man show and its existence was contrary to
the spirit and meaning of the Company Law.
• The Salomon and Company Ltd. was incorporated complying with all the
formalities which were necessary to corporate a company having a personality
separated from that of its members and since Salomon was one of its members or
share holders he was under no obligation to meet liabilities of the company.
• The House of Lords refused these arguments on the ground that after
incorporation the Salomon and Co. Ltd. became in law a different person
altogether from its members with its own rights and liabilities.
• So, the House of Lords has made it clear that after incorporation a company is
conferred on a legal entity different from the motives or conduct of its members
and promoters.
 Lee vs. Lee Air Farming Limited (1960)
• Judicial Committee of the Privy Council reasserted that a company is a separate legal
entity, so that a director could still be under a contract of employment with the company
he solely owned.
• Lee formed the company to spread fertilisers on farmland from air - top dressing.
• Lee held 2999 of 3000 shares, was the sole director and employed as the chief pilot.
• He was killed in a plane crash.
• Mrs Lee wished to claim damages of 2,430 pounds under the Workers’ Compensation Act
• The company was insured (as required) for worker compensation.
• Court of Appeal of New Zealand said Lee could not be a worker when he was in effect also
the employer. Relationship of master-servant was not created.
• Privy Council advised that Mrs Lee was entitled to compensation, since it was perfectly
possible for Mr Lee to have a contract with the company he owned. The company was a
separate legal person.
• There appears to be no great difficulty in holding that a man acting in one capacity can
make a contract with himself in another capacity.
• The company and the deceased were separate legal entities.
 Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43
• A group of people had sold their tea estate to a company that was
incorporated by them itself. They tried to avoid the ad valorem duty stating
that they were themselves the shareholder of the company. Therefore it
would be a transfer by them to themselves in another name.
• The Calcutta High court refused this observation and held that the company
is separate person distinct from member shareholders promoters etc. The
duty is to be paid by the shareholders to the company that itself is a
separate legal entity.
• “This is the only thing that I think it necessary for us to say in giving
judgment, namely, that, in my opinion, the Kondoli Tea Company, Limited, is
a separate body; and for the purpose of seeing what their transactions are, I
do not think it is possible to look at the Register of Shareholders to ascertain
who the shareholders were; and, consequently, although the conveying
parties here were the shareholders of the Company, there was just as much
a sale and transfer of the property and a change of ownership as there
would have been if the shareholders had been different persons.
Doctrine of Lifting the Corporate Veil
• Disregarding the corporate personality and looking behind the real person who are in
control of the company.
• Where a fraudulent and dishonest use is made of the legal entity, the individuals
concerned will not be allowed to take shelter behind the corporate personality. In this
regards the court will break through the corporate veil.
• It is a judicial act of imposing liability on otherwise immune corporate officers, Directors
and shareholders for the corporation's wrongful acts.
• A process whereby the corporate is disregarded and the incorporation conferred by
statute is overridden other than the corporate entity an act of the entity.
• Individual hiding behind the corporation is liable to discharge the obligations ignoring the
concept of corporation as a legal entity.
• The concept of corporate entity was evolved to encourage and promote trade and
commerce but not to commit illegalities or to defraud people.
• The corporate veil indisputably can be pierced when the corporate personality is found
to be opposed to justice, convenience and interest of the revenue or workman or against
public interest.
• DDA v. Skipper Construction Co. Pvt. Ltd. (96) The Supreme Court referred to the
principle of lifting corporate veil.
Lifting the Veil of Incorporation
• Courts in general consider themselves bound by veil of incorporation
• There is a fictional veil between the company and its members
• In some cases, the Court will pierce the corporate veil or will ignore
the corporate veil to reach the person behind the veil or to reveal the
true form and character of the concerned company.
• Rationale behind this is that the law will not allow the corporate form
to be misused or abused. In those circumstances in which the Court
feels that the corporate form is being misused it will rip through the
corporate veil and expose its true character and nature
LIC v Escorts Ltd. (1986) 1SCC 264
• One of the first Indian cases that dealt with the issue of a company as an
independent juristic personality and the lifting of the veil
• A non-resident portfolio investment scheme (erstwhile FERA) allowed non-
resident companies, which were owned by or in which the beneficial
interest vested in non-resident individuals of Indian nationality / origin was
at least 60%, to invest in the shares of Indian companies.
• Investment was allowed to the extent of 1% of the paid-up equity capital of
such Indian companies, and could not exceed a ceiling of 5%.
• Under the scheme, 13 companies, all owned by Caparo Group Limited,
invested in Escorts Limited – an Indian company. Importantly, 60% of the
shares of Caparo Group Limited were held by a trust, whose beneficiaries
were Swraj Paul and members of his family (all non-resident individuals of
Indian origin).
• The investment by the 13 Caparo Group companies was challenged on the
ground that it was an attempt at circumventing the prescribed ceiling of
investment of 1% under the Scheme, and that, “One had only to pierce the
corporate veil to discover Mr. Swraj Paul lurking behind.”
LIC v Escorts Ltd. (1986) 1SCC 264
• SC noted the judgment in Salomon, and that it was firmly established that a company
once incorporated, has an independent and legal personality distinct from the individuals
who are its members. It also noted that only in certain exceptional circumstances may
the corporate veil be lifted, the corporate personality ignored and the individual
members recognised for who they are.
• SC ruled that in the facts of this case, and only for the purposes of ascertaining the
ownership in the investment, lifting of the veil would be necessary to a limited extent,
i.e. to ascertain the nationality or origin of the shareholders. It was not necessary to
ascertain the individual identity of each of them. Merely because more than 60% of the
shares of the foreign investor companies were held by a trust of which Mr. Swraj Paul
and the members of his family were beneficiaries, could not deny the companies the
facility of the scheme on the basis that the permission granted was illegal. As such, the
Court ignored that the identity of the shareholders may be common, thus recognising
that each company was an independent juristic entity, looking only at nationality for
compliance with the requirements of the scheme.
• The Supreme Court also took the opportunity to set out the basic conditions and
principles to be applied and the various circumstances under which the corporate veil of
a company could be pierced, i.e. to cast responsibility or liability for an act carried out by
the company. Such acts would include fraud or improper conduct, the evasion of a taxing
or a beneficent statute or where associated companies are inextricably connected as to
be, in reality, part of one concern and should therefore, be treated as such.
Lifting the Veil of Incorporation

• Broadly there are two types of provisions for the lifting of the
Corporate Veil - Judicial Provisions and Statutory Provisions.

• Judicial Provisions include Fraud, Character of Company, Protection

of revenue, Single Economic Entity etc.
• Statutory Provisions include Reduction in membership, mis-
description of name, Fraudulent conduct of business, Failure to
refund application money, etc.
Officer in default
• Section 2(60) of the Companies Act defines 'Officer who is in default' and it
mentions officers such as whole-time director, KMP, directors, etc. who shall be
liable to any penalty or punishment in case of default committed by the company.
• “officer who is in default”, for the purpose of any provision in this Act which
enacts that an officer of the company who is in default shall be liable to any
penalty or punishment by way of imprisonment, fine or otherwise, means any of
the following officers of a company, namely:—
• whole-time director;
• key managerial personnel;
• where there is no key managerial personnel, such director or directors as specified by the
Board in this behalf and who has or have given his or their consent in writing to the Board to
such specification, or all the directors, if no director is so specified;
• any person who, under the immediate authority of the Board or any key managerial
personnel, is charged with any responsibility including maintenance, filing or distribution of
accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails
to take active steps to prevent, any default;
• any person in accordance with whose advice, directions or instructions the Board of Directors
of the company is accustomed to act, other than a person who gives advice to the Board in a
professional capacity;
Memorandum and Article of a Company
• Memorandum of association is the charter of the company and defines the
scope of its activities. An article of association of the company is a
document which regulates the internal management of the company.
• Memorandum of association defines the relation of the company with the
rights of the members of the company interest and also establishes the
relationship of the company with the members.
• As per Section 2(56) of the Companies Act, 2013 “memorandum” means
the memorandum of association of a company as originally framed or as
altered from time to time in pursuance of any previous company law or of
this Act.
• “articles” means the articles of association of a company as originally
framed or as altered from time to time or applied in pursuance of any
previous company law or of this Act;
• Vision and Mission
Memorandum of a Company
• Name Clause: The name of the company with the last word “Limited” in the case
of a public limited company, or the last words “Private Limited” in the case of a
private limited company.
• Situation Clause: The State in which the registered office of the company is to be
situated.
• Object Clause: The objects for which the company is proposed to be incorporated
and any matter considered necessary in furtherance thereof.
• Liability Clause: The liability of members of the company, whether limited or
unlimited, and also state,
• in the case of a company limited by shares– liability of its members is limited to
the amount unpaid, if any, on the shares held by them; and
• in the case of a company limited by guarantee
• the amount up to which each member undertakes to contribute to the assets of the company
in the event of its being wound-up while he is a member or within one year after he ceases
to be a member, for payment of the debts and liabilities of the company or of such debts and
liabilities as may have been contracted before he ceases to be a member, as the case may be;
and
• to the costs, charges and expenses of winding-up and for adjustment of the rights of the
contributories among themselves;
 Memorandum of a Company

• Capital Clause:
• the amount of share capital with which the company is to be registered
and the division thereof into shares of a fixed amount and the number of
shares which the subscribers to the memorandum agree to subscribe
which shall not be less than one share; and
• the number of shares each subscriber to the memorandum intends to take,
indicated opposite his name;

• In the case of One Person Company, the name of the person who, in the
event of death of the subscriber, shall become the member of the
company.
Name stated in the memorandum
Name stated in the memorandum shall not
• be identical with or resemble too nearly to the name of an existing
company;
• be such that its use by the company will constitute an offence under any
law; or is undesirable in the opinion of the Central Government.

• A company shall not be registered with a name which contains any word or
expression which is likely to give the impression that the company is in any
way connected with, or having the patronage of, the Central Government,
etc. or such word or expression, as prescribed in the Companies
(Incorporation) Rules, 2014, unless the previous approval of the Central
Government has been obtained for the use of any such word or expression.
Reservation of name
• A person may make an application along with the fee as provided in
the Companies (Registration offices and fees) Rules, 2014 to the
registrar for the reservation of a name set out in the application as –
• the name of the proposed company; or
• the name to which the company proposes to change its name

• The Registrar may, on the basis of information and documents

furnished along with the application, reserve the name for a period of
sixty days from the date of the application.
Articles of a company
• As per Section 2(5) of the Companies Act,2013 “articles” means the
articles of association of a company as originally framed or as altered
from time to time or applied in pursuance of any previous company
law or of this Act.
• Section 5 of the Companies Act,2013 deals with AOA.
• The articles of a company shall contain the regulations for
management of the company.
• The articles shall also contain such matters, as may be prescribed.
• It shall not prevent a company from including such additional matters
in its articles as may be considered necessary for its management.
Act to override memorandum, articles, etc.
S.6 Save as otherwise expressly provided in this Act—
a. the provisions of this Act shall have effect notwithstanding anything to the
contrary contained in the memorandum or articles of a company, or in any
agreement executed by it, or in any resolution passed by the company in
general meeting or by its Board of Directors, whether the same be registered,
executed or passed, as the case may be, before or after the commencement of
this Act; and
b. any provision contained in the memorandum, articles, agreement or resolution
shall, to the extent to which it is repugnant to the provisions of this Act,
become or be void, as the case may be.

• A company registered under this section may convert itself into company of any
other kind only after complying with such conditions as may be prescribed.
• Characteristics of Companies
• Doctrine of Lifting of Corporate Veil
• Formation of Companies
• Memorandum of Association, Articles of Association, Registration
• Doctrine of Constructive Notice
• Doctrine of Ultra Vires
• Doctrines of Indoor Management
• Directors of Company
• Share capital, buy back
• Company Meetings
• Resolution
• Winding Up of a Company
• IBC, 2016
The Companies Act 2013
What we have covered
• Different Types of Business Entities - Sole proprietorship, Family
Owned Business, Partnership firms, LLP, Companies Act 2013
• Characteristics of Companies – separate legal identity
• Salomon, Lee, Kondoli
• Types of companies
• Formation of Companies – promotor, shareholder, directors,
management, Effect of registration
• Doctrine of Lifting of Corporate Veil – an exception to the rule of
separate legal identity
• LIC v Escorts, Skipper
Doctrine of Lifting the Corporate Veil
• Disregarding the corporate personality and looking behind the real person who are in
control of the company.
• Where a fraudulent and dishonest use is made of the legal entity, the individuals
concerned will not be allowed to take shelter behind the corporate personality. In this
regards the court will break through the corporate veil.
• It is a judicial act of imposing liability on otherwise immune corporate officers, Directors
and shareholders for the corporation's wrongful acts.
• A process whereby the corporate is disregarded and the incorporation conferred by
statute is overridden other than the corporate entity an act of the entity.
• Individual hiding behind the corporation is liable to discharge the obligations ignoring the
concept of corporation as a legal entity.
• The concept of corporate entity was evolved to encourage and promote trade and
commerce but not to commit illegalities or to defraud people.
• The corporate veil indisputably can be pierced when the corporate personality is found
to be opposed to justice, convenience and interest of the revenue or workman or against
public interest.
• DDA v. Skipper Construction Co. Pvt. Ltd. (96) The Supreme Court referred to the
principle of lifting corporate veil.
Lifting the Veil of Incorporation
• Courts in general consider themselves bound by veil of incorporation
• There is a fictional veil between the company and its members
• In some cases, the Court will pierce the corporate veil or will ignore
the corporate veil to reach the person behind the veil or to reveal the
true form and character of the concerned company.
• Rationale behind this is that the law will not allow the corporate form
to be misused or abused. In those circumstances in which the Court
feels that the corporate form is being misused it will rip through the
corporate veil and expose its true character and nature
Lifting the Veil of Incorporation

• Broadly there are two types of provisions for the lifting of the
Corporate Veil - Judicial Provisions and Statutory Provisions.

• Judicial Provisions include Fraud, Character of Company, Protection

of revenue, Single Economic Entity etc.
• Statutory Provisions include Reduction in membership, mis-
description of name, Fraudulent conduct of business, Failure to
refund application money, etc.
When can the veil be lifted

• Commission of fraud or improper conduct

• Company is an agency instrumentality only
• Conduct conflicts with public policy
• Company formed to evade taxes
• Avoidance of welfare legislation by incorporating a new company
• Using it for an unjust and inequitable purpose
• Company commits crime – company is not a citizen
Officer in default
• Section 2(60) of the Companies Act defines 'Officer who is in default' and it
mentions officers such as whole-time director, KMP, directors, etc. who shall be
liable to any penalty or punishment in case of default committed by the company.
• “officer who is in default”, for the purpose of any provision in this Act which
enacts that an officer of the company who is in default shall be liable to any
penalty or punishment by way of imprisonment, fine or otherwise, means any of
the following officers of a company, namely:—
• whole-time director;
• key managerial personnel;
• where there is no key managerial personnel, such director or directors as specified by the
Board in this behalf and who has or have given his or their consent in writing to the Board to
such specification, or all the directors, if no director is so specified;
• any person who, under the immediate authority of the Board or any key managerial
personnel, is charged with any responsibility including maintenance, filing or distribution of
accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails
to take active steps to prevent, any default;
• any person in accordance with whose advice, directions or instructions the Board of Directors
of the company is accustomed to act, other than a person who gives advice to the Board in a
professional capacity;
Memorandum and Article of a Company
• Memorandum of association is the charter of the company and defines the
scope of its activities. An article of association of the company is a
document which regulates the internal management of the company.
• Memorandum of association defines the relation of the company with the
rights of the members of the company interest and also establishes the
relationship of the company with the members.
• As per Section 2(56) of the Companies Act, 2013 “memorandum” means
the memorandum of association of a company as originally framed or as
altered from time to time in pursuance of any previous company law or of
this Act.
• “articles” means the articles of association of a company as originally
framed or as altered from time to time or applied in pursuance of any
previous company law or of this Act;
• Vision and Mission
Memorandum of a Company
• Name Clause: Name of the company with the last word “Limited” in the
case of a public limited company, or the last words “Private Limited” in the
case of a private limited company. 4(1)(a)
• Name not to be identical with or resemble too nearly to the name of an existing
company; also not offensive or undesirable
• name not to give any impression of connection or patronage with the Central
Government, etc., unless the previous approval is there
• To reserve a name application with fee submitted to the registrar indicating the
name of the proposed company; or the name to which the company proposes to
change its name
• Registrar may reserve the name for 60days from the date of the application.
• Situation (Registered office) Clause: The State in which the registered
office of the company is to be situated. 4(1)(b)
• Object Clause: Objects for which the company is proposed to be
incorporated and any matter considered necessary in furtherance thereof.
4(1)(c)
• Doctrine of Ultra Vires
Memorandum of a Company
• Liability Clause 4(1)(d) : Liability of members whether limited or unlimited, and also
state,
• company limited by shares– liability limited to the amount unpaid, if any, on the shares
held by them; and
• company limited by guarantee
• amount up to which each member undertakes to contribute to the assets of the company in the
event of its being wound-up while he is a member or within one year after he ceases to be a
member, for payment of the debts and liabilities of the company or of such debts and liabilities as
may have been contracted before he ceases to be a member, as the case may be; and
• to the costs, charges and expenses of winding-up and for adjustment of the rights of the
contributories among themselves;
• Capital Clause: 4(1)(e) : amount of share capital with which the company is to be
registered and the division thereof into shares of a fixed amount and the number of
shares which the subscribers to the memorandum agree to subscribe which shall not be
less than one share; and
• the number of shares each subscriber to the memorandum intends to take, indicated opposite his
name;
• Capital could be nominal, authorized or registered
• In the case of One Person Company, the name of the person who, in the event of death
of the subscriber, shall become the member of the company. 4(1)(f)
Memorandum of a Company
• Capital Clause: 4(1)(e)
• the amount of share capital with which the company is to be
registered and the division thereof into shares of a fixed amount and
the number of shares which the subscribers to the memorandum
agree to subscribe which shall not be less than one share; and
• the number of shares each subscriber to the memorandum intends to
take, indicated opposite his name;
• Capital could be nominal, authorized or registered

• In the case of One Person Company, the name of the person who, in
the event of death of the subscriber, shall become the member of the
company. 4(1)(f)
Articles of a company
• S.2(5) “articles” means the articles of association of a company as
originally framed or as altered from time to time or applied in
pursuance of any previous company law or of this Act.
• Articles contain the regulations for management of the company.
• Articles can be altered by a special resolution
• Articles can also be changed having the effect of conversion of
a. a private company into a public company; or
b. a public company into a private company:
• Doctrine of Constructive Notice
• Doctrine of Indoor Management
Act to override memorandum, articles, etc.
S.6 - Save as otherwise expressly provided in this Act—
a. the provisions of this Act shall have effect notwithstanding anything to
the contrary contained in the memorandum or articles of a company, or
in any agreement executed by it, or in any resolution passed by the
company in general meeting or by its Board of Directors, whether the
same be registered, executed or passed, as the case may be, before or
after the commencement of this Act; and
b. any provision contained in the memorandum, articles, agreement or
resolution shall, to the extent to which it is repugnant to the provisions
of this Act, become or be void, as the case may be.

• A company registered under this section may convert itself into company of
any other kind only after complying with such conditions as may be
prescribed.
Alteration of Memorandum of Association
• Company can change its name at any time by passing a special resolution and by
obtaining the approval of the Central Government.
• Change not allowed if the company has defaulted in filing its annual returns or Financial
Statements or any other document due for filing with Registrar.
• A special resolution must be passed for change of object clause, details made public.
Registrar must certify
• Alteration of the Registered Office Clause within local limits, pass Board resolution and
special resolution. If outside the state, approval of government required
• No employee to be retrenched as a result of the transfer of the registered office
• Change in capital to be authorised by AoA
• Alteration of the Capital Clause
• An increase of its share capital by issue of new shares.
• Consolidation of existing shares into shares of larger amounts.
• Conversion of fully paid shares into stock or vice versa.
• Cancellation of unissued shares.
• Alteration of the Liability Clause
• The alteration of the Liability Clause restricts the liability of the Directors. The liability clause can
be unlimited by passing a special resolution which should be filed with the Registrar within a
period of 30 days.
Doctrine of Ultra Vires
• Defines limits of powers conferred on the company by its MoA.
• A fundamental law of the Companies Act. If any act of the company or any
contract entered into by the directors, on behalf of the company, is beyond
the powers vested in the directors and company by the object clause of the
MOA, it is considered null and void.
• According to this doctrine, the vires (power) of a company to enter into a
contract or transaction is limited by the ambit of the Objects Clause of the
Memorandum and the provisions of the Companies Act.
• A company has powers to engage in only such activities or enter into such
transactions:
• Which are essential to the attainment of the objects specified in the Memorandum;
• Which are reasonably and fairly incidental to the main objects; and
• Which are permitted by the provisions of the Companies Act.
 Ashbury Railway Carriage and Iron Co. Ltd vs. Riches (1875)
• Object clause stated - ‘to make or sell, or lend, or hire, railway carriages, waggons etc.’
• Entered into a contract for financing construction of a railway line; outside object
clause
• Special resolution required; contract ratified by all the members of the company.
• Later, company reneged on their side of the deal repudiating the contract
• Riches sued the company for the breach of the contract and claimed damages.
• Whether the company can enter into a contract which is beyond the scope of the
object clause in the MOA of the company?
• The House of Lords held that the objectives of the company as mentioned in the object
clause of the company’s MOA were absolute.
• Held that the transaction concerned here was invalid, and thus, consequentially held
that the contract shall have no legal effect for the company or the Riches.
• The judgment resulted in a defeat for Riches to have the contract enforced since there
could not be any breach. This was due to the fact that there could not have been any
contract to be breached in the first place.
Lakshminarayan Mudaliar v. L.I.C.
• Directors were permitted “to make payments towards any charitable or any
benevolent object or for any general public or useful object”.
• As per the shareholders’ resolution, the directors paid Rs 2 lakhs to a trust which
was set up with the object to promote technical and business knowledge.
• However, LIC having taken over the company’s business contended that the
charitable donation was beyond the scope of the object clause of the MOA.
• SC ruled that the payment made by directors was ultra vires the company.
• Directors were not capable to spend the company’s money on charitable or
general objects.
• They could spend for the promotion of only such charitable purposes as would
enable the company to attain its own objects.
• The court held that charity is allowed only to the extent it is integral to effectively
manage the company’s internal affairs.
• Applying the rule in Asbury’s case, the court also held that any ultra vires act of
the company will be considered to be void and cannot be ratified even by all the
shareholders of the company.
Effects of Ultra Vires Transactions
• Injunction: Whenever a company goes beyond the scope of the object clause,
any of its members can get an injunction from the court to restrain the company
from undertaking the ultra vires act.
• Personal Liability of Directors: If the transaction is ultra vires, for instance, if the
funds of the company are misapplied, the directors will be held personally liable.
• Ultra Vires Contracts: Contracts entered into by a company, which are ultra vires,
are void ab initio and unenforceable.
• Property Acquired Ultra Vires: If a company acquires any property under an ultra
vires transaction, it has the right to hold the property and protect it against
damage by other persons.
• Ultra vires borrowings does not create the relationship of creditors and debtors.
• Ultra Vires Torts: A company is not liable for torts committed by its agents or
employees in the course of ultra vires transactions.
• This does not apply to S.8 companies
Summing up
• An act, legal in itself, but not authorized by the object clause of the
Memorandum of Association of a company or statute, is Ultra Vires the company.
Hence, it is null and void.
• An act ultra vires the company cannot be ratified even by the unanimous consent
of all shareholders.
• If an act is ultra vires the directors of a company, but intra vires the company
itself, then the members of the company can pass a resolution to ratify it.
• If an act is Ultra Vires the Articles of Association of a company, then the same can
be ratified by a special resolution at a general meeting.
The Flip-side
• While it protects shareholders and creditors, it has disadvantages too. This
doctrine prevents the company from changing its activities in a direction agreed
by all members. Further, a special resolution can alter the object clause of the
Memorandum. This defeats the core purpose of the doctrine.
• Companies can use unlimited objects in the clause thus defeating the doctrine
Doctrine of Constructive Notice
• The doctrine of constructive notice protects the company from the actions of
outsider person.
• This doctrine reduces the complicity in the rules and regulations of the business
and functions as a safety to the company while dealing with the outsider party.
• Memorandum and Articles, on registration, assume the character of public
documents. Office of the Registrar is a public office and documents registered
there are open and accessible to the public at large.
• Every outsider dealing with the company is deemed to have notice of the
contents of the Memorandum and Articles.
• Section 399 of the Companies Act, 2013 gives the legal foundation for this
doctrine. As per this section, the Companies Act allows the outsider person to
inspect and go through the records of the Company which are available with
registrar of the Company. This section also provides the right of inspection of the
documents of the company.
• This is known as Constructive Notice of Memorandum and Articles.
Doctrine of Constructive Notice
• Every person dealing with the company is deemed to have constructive
notice of the contents of its Memorandum and Articles.
• Whether he actually reads them or not, it is presumed that he has read
these documents and has ascertained the exact powers of the company to
enter into contract, the extent to which these powers have been delegated
to the directors and the limitations to such powers.
• He is presumed not only to have read them, but to have understood them
properly.
• Consequently, if a person enters into a contract which is ultra vires the
Memorandum, or beyond the authority of the directors conferred by the
Articles, then the contract becomes invalid and he cannot enforce it, not-
withstanding the fact that he acted in good faith and money was applied
for the purposes of the company.
Doctrine of Indoor Management
• The doctrine of constructive notice protects the company from the actions
of outsider person and the doctrine of indoor management protects the
outsider person from the actions of the company. The interest of the
company and the outsider person has been protected.
• Both doctrines make sure that no party gets unfair gain out of any
contractual operation.
• Hardships caused to outsiders dealing with a company by the rule of
‘constructive notice’ gets softened under the principle of ‘indoor
management’.
• It affords some protection to the outsiders against the company.
• According to this doctrine, after satisfying themselves that the proposed
transaction is intra vires the memorandum and articles, persons dealing
with the company are not bound to enquire whether the internal
proceedings were correctly followed
Doctrine of Indoor Management
• An outsider is presumed to have knowledge of the provisions of
memorandum and articles, but he is not required to go beyond that and to
enquire whether the internal proceedings required by these documents
have been regularly followed by the company.
• The principle of the constructive extends to operation that there shall no
need to deliver actual notice. Doctrine of Indoor Management sets the
principle that the persons involving into contract with the company cannot
be compelled to obtain the knowledge of the internal functioning and the
proceeding of the company in relation with the contract.
• The doctrine of Indoor Management is exception to the rule established by
the Doctrine of constructive notice. This doctrine of indoor management is
derived on the concept that the person getting into the contract with the
company operates in good faith and he shall not suffer by the illegal actions
of the company.
• Royal British Bank vs. Turquand.
Exceptions to the Doctrine of Indoor
Management
No benefit under this doctrine can be claimed by a person
• Where a person dealing with the company has actual or constructive
notice of any irregularity in the internal proceedings of the company.
• Where a person did not in fact consult the Memorandum and Articles of
the company and consequently did not act on knowledge of these
documents.
• Where a person dealing with the company was negligent and, had he not
been negligent, could have discovered the irregularity by proper enquiries.
• Where a person dealing with the company relies upon a forged document
or the act done by the company is void.
• Where a person enters into a contract with an agent or officer of the
company and the act of the agent/officer is beyond the authority granted
to him
Directors of Company
Some definitions
• 2(34) - “director” means a director appointed to the Board of a company;
• 2(10) “Board of Directors” or “Board”, in relation to a company, means the collective
body of the directors of the company;
• (54) “managing director” means a director who, by virtue of the articles of a company or
an agreement with the company or a resolution passed in its general meeting, or by its
Board of Directors, is entrusted with substantial powers of management of the affairs of
the company and includes a director occupying the position of managing director, by
whatever name called.
• (94) “whole-time director” includes a director in the whole-time employment of the
company;
• (51) “key managerial personnel”, in relation to a company, means—
i. the Chief Executive Officer or the managing director or the manager;
ii. the company secretary;
iii. the whole-time director;
iv. the Chief Financial Officer;
v. such other officer, not more than one level below the directors who is in whole-time
employment, designated as key managerial personnel by the Board; and
vi. such other officer as may be prescribed;
 Directors of Company
Board of Directors
• Company is an artificial person, no physical existence. Persons, in charge of management of the
affairs of a company are termed as directors. Collectively known as Board of Directors or the Board.
• Directors are the brain of a company. They occupy a pivotal position in the structure of the company.
• Directors take the decision regarding the management of a company collectively in their meetings
known as Board Meetings or at the meetings of their committees constituted for certain specific
purposes.
Minimum/Maximum Number of Directors in a Company- Section 149(1)
• Public Company: Minimum 3, maximum 15
• Private Company: Minimum 2,
• One man company: one
• May appoint more after passing a special resolution in general meeting
Number of directorships- Section 165
• Maximum number of directorships, including any alternate directorship a person can hold is 20.
Residence of a director in India Section 149 (3)
• Every company to have at least one director who has stayed in India for a total period of not less than
182 days in the previous calendar year.
Directors of Company
• At least one Woman Director in the board of every listed company or every other public
company having paid up share capital of Rs. 100 crores or more or turnover of Rs. 300
crore or more
• Independent Directors Section 2(47)
• Every listed public company to have at least one-third of the total number of directors as
independent directors.
• Definition of an Independent Director – Section 149 (6)
• An independent director means a director other than a managing director or a whole-
time director or a nominee director who does not have any material or pecuniary
relationship with the company/directors.
• Section 149(6) of the Act prescribes the criteria for independent directors which are as
follows:
a. A person of integrity and possesses relevant industrial expertise and experience;
b. Not be a promoter or related to promoter (including holding, subsidiary or associate
company);
c. Not having any material or pecuniary relationship during the two immediately preceding
financial years or during the current financial year
d. The relatives of such person should not have had any pecuniary relationship with the company,
e. He must not be a KMP or an employee of the company etc. in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed.
Directors of Company
• Director elected by Small Shareholders- Section 151
• Every listed company may have one director elected by such small
shareholders.
• “small shareholder” means a shareholder holding shares of nominal value of
not more than twenty thousand rupees or such other sum as may be
prescribed.
• First Director: These are named in their articles. If not then
subscribers to the memorandum who are individuals to be deemed to
be the first directors of the company until the directors are duly
appointed.
• In the case of a One Person Company, an individual being a member
deemed to be its first director
• Appointment of Additional Director- Section 161 (1)
• Board can appoint additional directors, if such power is conferred on
them by the articles of association.
Appointment of Alternate Director- Section 161 (2)
• Board must be authorised by its articles or by a resolution passed by the company in
general meeting for appointment of alternate director.
• The person in whose place the Alternate Director is being appointed should be absent for
a period of not less than 3 months from India.
• The person to be appointed as the Alternate Director shall be the person other than the
person holding any alternate directorship for any other Director in the Company.
• Alternate Director in place of an Independent Director, must satisfy the criteria for ID.
• An alternate director not to hold office for a period longer than that permissible to the
director.

• Vacation of office of director- Section 167

• Resignation of director- Section 168
• Removal of directors- Section 169
Disqualifications for appointment of director - S 164
Not eligible if
a. he is of unsound mind and stands so declared by a competent court;
b. he is an undischarged insolvent;
c. he has applied to be adjudicated as an insolvent and his application is pending;
d. he has been convicted by a court of any offence, whether involving moral turpitude or
otherwise, and sentenced in respect thereof to imprisonment for not less than six months and
a period of five years has not elapsed from the date of expiry of the sentence. If a person has
been convicted of any offence and sentenced in respect thereof to imprisonment for a period
of seven years or more, he shall not be eligible to be appointed as a director in any company;
e. an order disqualifying him for appointment as a director has been passed by a court or Tribunal
and the order is in force;
f. he has not paid any calls in respect of any shares of the company held by him, whether alone
or jointly with others, and six months have elapsed from the last day fixed for the payment of
the call;
g. he has been convicted of the offence dealing with related party transactions under section 188
at any time during the last preceding five years; or
h. he has not got the DIN.
Duties of directors- Section 166
• Act in accordance with the articles of the company.
• Act in good faith in order to promote the objects of the company for the benefit
of its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and for the protection of
environment.
• Exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.
• Not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
• Not achieve or attempt to achieve any undue gain or advantage either to himself
or to his relatives, partners, or associates and if such director is found guilty of
making any undue gain, he shall be liable to pay an amount equal to that gain to
the company.
• Not assign his office and any assignment so made shall be void.
• If a director of the company contravenes the provisions of this section such
director shall be punishable with fine which shall not be less than Rs. 1,00,000
but which may extend to Rs. 5,00,000.
Committees of the Board
• Statutory Committees
• Audit Committee
• Corporate Social Responsibility Committee
• Nomination and Remuneration Committee
• Stakeholder Relationship Committee
• Other Committees
• Human Resources Committee
• Sustainability Development Committee
• Finance Committee
• Project Appraisal Committee
• Business Management Committee
• Stakeholder Grievances Committee
• Share allotment Committee
Meetings
• Meeting not expressly defined under any provisions of the Act.
• A ‘Company Meeting’ is basically coming together of at least two
persons to either transact any ordinary or special business for lawful
purposes.
• Can be broadly classifies as follows:
• Shareholders Meeting:
• Directors Meeting
• Committee Meetings
• Other Meetings
• Quorum S.174 - A quorum is the minimum number of people needed
to hold meetings or make decisions during certain company meetings.
Shareholders Meeting
• Annual General Meeting (AGM) – S.96, every company, whether public or private,
except One Person Company, is required to convene first AGM within 9 months from the
end of first Financial Year to decide the overall progress of the company as well as to plan
future courses of action.
• Such meeting is called at Registered Office of the Company. In case of Public Company: 5
if members are less than 1000, 15 if between 1000-5000, 30 if more than 5000 members.
• Extraordinary General Meeting: Certain matters are so much important that they
require an immediate attention of the members, and that’s where the Board has been
granted to call for such EGM S. 100.
• It can be called through the following ways:
• By Board, on suo-moto basis, and the same can be held at any parts of the country.
• By requisition of eligible members,
• Class Meeting: Such meeting is convened by a particular class of shareholders only and
only if they think that their rights are being altered or if they want to vary their attached
rights, as mentioned u/s 48 of CA’13, and u/s 232 also, if under Mergers and
Amalgamation scheme, meetings of particular shareholders and creditors can be
convened if their rights/privileges are being varied to their interests in such company.
Meetings
• Board of Directors Meeting: As per Sec. 173, every company needs to
convene first board meeting within 30 days of its incorporation, and
then minimum four meetings in each calendar year, with time gap of
not more than 120 days between two board meetings
• In case of OPC, Dormant Company, Small Company, Sec. 8 Company
or any private company( Start-Up), then required to hold two board
meetings in each half of calendar year with time gap of at least 90
days.
• Committee Meetings
• Other Meetings:
• Creditors Meeting (Sec. 230) / Debenture Holders Meeting with the Board of
Directors
Resolution
• Resolution is a decision of the company to do or not to do something. It
can be broadly a Board Resolution or the Shareholders Resolution.
• A document in writing that is normally created by the board of directors
certifying a binding corporate action is called a resolution.
• Board Resolution:- Any important decisions taken by the Board of Directors
of the Company in Board Meeting and in writing is known as Board
Resolution. It’s a Formal and a Legal document binding on the Company.
• Shareholder’s Resolution:- Any important decisions taken by the
Shareholders of the Company in General. It refers to the proposals
submitted by the shareholders, to the management of the publicly listed
company, whereby the decision for the outcome of such resolution is
arrived at by voting at the annual general meeting. Typically, the process
followed is that shareholder propose a recommendation, a resolution to
that effect is presented at the annual general meeting and then it is voted
upon.
• Resolution requiring special notice S.115
Ordinary and special resolutions S.114
• Ordinary resolution is when the notice required under this Act has been
duly given and it is required to be passed by the votes cast, whether on a
show of hands, or electronically or on a poll, as the case may be, in favour
of the resolution, including the casting vote, if any, of the Chairman, by
members who, being entitled so to do, vote in person, or where proxies are
allowed, by proxy or by postal ballot, exceed the votes, if any, cast against
the resolution by members, so entitled and voting.
• Special resolution is when:
a. the intention to propose the resolution as a special resolution has been duly
specified in the notice calling the general meeting or other intimation given to the
members of the resolution;
b. the notice required under this Act has been duly given; and
c. the votes cast in favour of the resolution, whether on a show of hands, or
electronically or on a poll, as the case may be, by members who, being entitled so
to do, vote in person or by proxy or by postal ballot, are required to be not less
than three times the number of the votes, if any, cast against the resolution by
members so entitled and voting.