STUDY NOTE - Dr. I.

Sridhar

Corporate Law

1. Company – Meaning & Features

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

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

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

- Reduction of membership below the statutory minimum

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

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

Private Company

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

(i). Restricts the right to transfer its shares

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

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

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

Public Company

A public company means a company which

(i). is not a private company

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

Government Company

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

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Foreign Company

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

Holding and Subsidiary Companies

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

Section – 25 Company

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

Producer Company

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

One Person Company

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

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

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4. Promotion of Company

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

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

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

5. Procedure for Registration / Incorporation of a Company

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

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

Preparation of Memorandum and Articles of Association The memorandum of association

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

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

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

Filing of documents for registration and payment of fees.

6. Certificate of Incorporation

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

7. Allotment of Corporate Identity Number ( CIN)

8. Memorandum of Association

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

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

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

Contents

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

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

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

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

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

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

Alteration of Memorandum

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

9. Articles of Association

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

Contents Articles usually contain provisions relating to the following matters:

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

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

10. Meaning of Prospectus

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

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

shall be called a prospectus if it satisfies two things:

- It invites subscription to shares or debentures or invites deposits

- The aforesaid invitation is made to public
Contents of Prospectus

Brief particulars are given below:

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

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

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

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

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

Shelf Prospectus

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

Information Memorandum

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

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

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

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

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

Red-Herring Prospectus

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

Statement in lieu of prospectus

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

- where it does not issue prospectus.

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

Mis-Statement in a Prospectus

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

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

Liability for Mis-statement in a prospectus

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

- rescind the contract to take the shares

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

11. Kinds of Shares

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

(i). equity share capital –

- with voting rights

- with differential rights as to dividend, voting or otherwise

(ii). preference share capital

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

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

12. Raising of Capital

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

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

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

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

13. Book Building

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

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

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

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

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

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

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

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

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

-- Book building inspires investors confidence.

-- Optimal demand based pricing is possible.

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

14. Green Shoe Option

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

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

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

15. Minimum Subscription

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

16. Underwriting

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

17. Buy Back of Shares

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

18. Rights Shares

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

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

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19. Bonus Shares

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

20. Inter Corporate Loans & Investments

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

(a). make any loan to any body corporate

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

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

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

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

21. Company Management

Meaning of Director

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

Qualifications for a Director

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

Disqualifications for Director

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

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

(b). an undischarged insolvent

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

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

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

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

Legal position of Director

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

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

Minimum & Maximum Number of Directors

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

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

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

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

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

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

Woman Director

Independent Director

Removal of Directors

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

Managerial Remuneration

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

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

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

22. Elements of Corporate Governance

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

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

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

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

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

Good corporate governance seeks to the following objectives:

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

20
(ii). The Board is balanced as regards the representation of adequate number of non-executive
and independent directors who will take care of the interests and well – being of all the
stakeholders;

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

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

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

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

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

21
Competition Law

1. Overview of Competition Act, 2002

Purpose

With the globalization of world economy, it became necessary to encourage competition to foster
speedy economic development. The MRTP Act is based on pre-reform scenario, lacks
regulation of combinations, provides for compulsory registration of agreements, complex in
arrangements and based on size as a factor. The govt, therefore thought fit to enact a new law
namely, Competition Act, 2002.

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

- to prevent practices having adverse effect on competition

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

Objectives

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

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

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

barriers to entry

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

22
2. Prohibition of anti-competitive agreements

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

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

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

Therefore, anti-competitive agreement include

(i). Agreement to limit production / supply

(ii). Agreement to allocate markets

(iii). Agreement to fix price

(iv). Bid rigging / Collusive bidding

(v). Tie-in arrangement

(vi). Exclusive supply agreement

(vii). Exclusive distribution agreement

(viii). Refusal to deal

(ix). Resale price maintenance

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

23
3. Prohibition of abuse of dominant position

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

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

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

- imposing unfair conditions or price

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

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

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

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

5. Functions of CCI

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

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

24
(iii). CCI is also mandated to undertake competition advocacy, create public awareness and
impart training on competition issues.

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

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

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

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

(iv). To award compensation

(v). To modify agreement

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

7. Procedure for investigation of combinations

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

25
8. Orders the Commission can pass in case of combinations

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

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

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

-------------------------------------------------------

26
Consumer Protection Law

1. Need for Consumer Protection

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

2. Objects of CPA

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

3. Rights of Consumers

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

27
 - The right to be informed about the quality, quantity, potency, purity, standard and price of
goods or services so as to protect the consumer against unfair trade practice.

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

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

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

- Right to consumer education.

4. Fundamental Terms

Consumer means any person who

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

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

Consumer dispute means dispute where the person against whom a complaint has been made,
denies or disputes the allegation contained in the complaint. The allegation referred to may

28
relate to any unfair trade practice adopted by a trader, or against defect in goods or against any
deficiency in services or against charging of exorbitant price.

Complaint means any allegation in writing made by a complainant that

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

Complainant means

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

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

6. Supreme Court conclusions on medical profession

29
 - Service rendered to patient by a medical practitioner (except where the doctor renders
service free of charge to every patient or under a contract of personal service) by way of
consultation, diagnosis and treatment would fall within the ambit of service under CPA
- The fact that medical practitioners are subject to disciplinary control of the Medical
council of India / State constituted under the provisions of Indian Medical Council Act
would not exclude the services rendered by them from the ambit of the Act
- A contract of personal service has to be distinguished from a contract for personal
service. In the absence of a relationship of master and servant between the patient and
medical practitioner, the service rendered by a medical practitioner to the patient cannot
be regarded as service rendered under a contract of personal service. Such service is
service rendered under a contract for personal service.
- Service rendered free of charge by a medical practitioner to everyone would not be a
service as defined under CPA
- Service rendered at a non-govt hospital / nursing home where no charge is made from
any person availing the service and all patients are given free service is outside the
purview of CPA.
- Service rendered at a non-govt hospital / nursing home where charges are required to be
paid by the persons availing such service falls within the purview of the expression ‘
service ‘.
- Service rendered at a govt hospital / health centre / dispensary where no charge
whatsoever is made from any person availing the services and all patients (rich and poor)
are given free service is outside the purview of the expression service.

7. Redressal Machinery under the Act

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

District Forum

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

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

State Commission

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

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

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

National commission

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

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

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

9. Powers of Redressal Agencies

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

- summoning and enforcing attendance of any defendant or witness

31
 - the production of any document as evidence through affidavit
- issuing commission for the examination of witness
- any other matter as may be prescribed.
10. Nature & Scope of Remedies under the Act

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

Commission may pass one or more of the following orders:

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

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32
STUDY NOTE - Dr. I. Sridhar – Banking Law Insurance law, IP law

Banking Landscape in India

Basic Principles of Banking

Bank performs the following core functions:

- Acceptance of deposits from the public

- Making deposits of customers withdrawal by cheque or otherwise
- Lending or Investing funds collected from customers
The following are the basic principles of banking

(i). Principle of Intermediation

Banks are called financial intermediaries because they invest or lend funds of depositors. Banks
assume credit risk (arising from the default of the borrower) involved in direct lending to those
who need funds (borrowers). They have expertise and abilities to mange such risks. Thus banks
mediate between the depositors (savers of money) and borrowers (users of money) and earn
interest spread as a reward for risk taking.

(ii). Principle of Liquidity

The simultaneous operations of acceptance of deposits and lending these funds to borrowers in a
manner such that the bank would be able to arrange for the funds demanded by its depositors at
any point of time, is called ‘liquidity management’ or ‘asset liability management’. In line with
the liquidity principle, a bank must keep a certain portion of its deposit liabilities in liquid form
so as to be able to repay the same on demand or maturity dates to the depositors. This principle
is reinforced by the regulatory requirements of the RBI, that every bank has to maintain deposits
with RBI as cash reserve ratio (CRR), which currently stands at 4.75% of the bank’s demand and
time liabilities (DTL) and statutory liquidity ratio (SLR), wherein, every bank has to invest in
government and other approved securities (currently at 25% of DTL).

(iii). Principle of Profitability

1
Interest income, which represents the interest differential (spread) between its loans and deposits
rates, is the main source of profit of a bank. The interest earned by a bank on its lending
operations should be higher than the interest paid by it on its deposits operations. The interest
spread, along with the volume of its deposits and loans determines the total net interest income
of a bank.

(iv). Principle of Solvency

A bank’s financial soundness is judged by analyzing its financial graph of a couple of years and
comparing the relevant ratios with other banks (eg., capital adequacy ratio, standard assets ratio
and provisions to non-performing assets ratio, etc). The principle of solvency also encompasses
liquidity and profitability attributes.

(v). Principle of Trust

Trustworthiness is a function of a bank’s good track record over a fairly long period of time, in
terms of liquidity, profitability and financial soundness, and its record in meeting its
commitments to all concerned parties. It also reflects the governance quality of the bank. For
customers and public, trust indicates dependability and safety as they perceive while lodging
their deposits with a bank and it is reflected in the rate of growth of its deposits and profits on a
sustained basis.

Types of banking groups in India

The Indian Banking system regulated by the RBI comprises scheduled and non-scheduled banks
and these are classified in various sub categories as follows:

(a). Scheduled banks

(b). Non Scheduled banks

Scheduled Banks

These are the banks which are listed in the 2nd Schedule of the RBI Act, 1934. These banks have
paid up capital and reserves of not less than Rs. 5 lakhs and they are successful in convicing the
RBI that their affairs are not conducted in a manner detrimental to their depositors. However,

2
presently to start a commercial bank, the RBI prescribed a minimum capital of Rs. 100 crores.
These banks have to maintain certain amount of reserves with the RBI, against which these
banks enjoy the facility of financial accommodation and remittance facility at concessionary rate
with the RBI. Scheduled banks are classified into:

- Co-operative banks
- Commercial banks (Foreign scheduled banks & Indian scheduled banks)
Indian scheduled banks are further sub classified as (i). Private sector scheduled banks and
(ii). Public sector scheduled banks.

Non Scheduled Banks

Non scheduled banks are those not included in the 2nd Schedule of the RBI Act.

The scheduled banks enjoy several privileges. An account with a scheduled bank carries a
greater assurance of safety and prestige value than an account with a non scheduled banks. In
times of urgent need, it may obtain finance from the RBI to help in tiding over temporary
financial difficulties. Settlement of accounts between scheduled banks is facilitated by the use of
“Bankers Clearing House Procedure”. Further scheduled banks are obliged to comply with the
directions received from the RBI and have to submit several returns with the RBI. The affairs of
the scheduled banks are closely watched by the RBI in order to safeguard the general health of
the banking industry as a whole.

Banking Regulation

The banking system in India is regulated by the RBI, the central banking authority in the country
in keeping with the Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949. It is
essential to exert reasonable regulation on the banking system to remove the possible
imprudence on the point of players. The absence of such regulation presents a danger of
jeopardizing public trust in the banking system. Thus it is necessary to regulate the banking
system in order :

- to generate, maintain and promote confidence and trust of the public in the banking
system

3
 - to protect investors interests through adequate / timely disclosure by the institutions and
access to revenue information by the investors.
- to ensure that the financial markets are both fair and efficient.
- to ensure that the participation measures up to the rules of the market place.
Objectives of RBI

(i). Promoting growth and maintaining price stability in the economy.

(ii). Maintaining monetary stability so that the business and economic life can deliver welfare
gains of a mixed economy.

(iii). Maintaining financial stability and ensuring the sound health of financial institutions so that
economic units can conduct their business with confidence.

(iv). Maintaining a stable payment’s system so that financial transactions can be safely and
efficiently executed.

(v). Ensuring that credit allocation by the financial system broadly reflects the national economic
priorities and social concerns.

(vi). Regulation of the overall volume of money and credit in the economy to ensure a reasonable
degree of price stability.

(vii). Promotion of the development of financial markets and systems to enable to regulate
efficiently.

(viii). Ensure orderly conditions are maintained in the foreign exchange market and the exchange
rate is not subject to excess volatility.

Main Functions of RBI

The functions of RBI can be classified into (i). Traditional, (ii). Promotional, (iii). Supervisory.

Traditional Functions

- Monopoly of note issue

- Banker to the government

4
 - Banker to the banks
- Acts as a national clearing house
- Lender of the last resort
- Acts as a controller of credit
- Custodian of the Foreign Exchange Reserves
- Exchange control
- Maintaining of value of currency
- Publishes the economic statistics
- Fights against economic crisis.
Promotional Functions

- Promotion of banking habits

- Provides refinance for export promotion
- Facilities for Agriculture
- Facilities for Small Scale Industries
- Prescription of minimum statutory requirements for banks
Supervisory Functions

- Granting licenses to banks

- Inspection & Enquiry
- Administers the Deposit Insurance Scheme
- Periodical review of the working of commercial banks in India
- Control of NBFCs.
Tools of Monetary Control

RBI uses its monetary policy for controlling inflationary or deflationary situation in the economy
by using one or more of the following tools of monetary control.

(i). Cash Reserve Ratio (CRR)

CRR refers to the cash that all banks are required to maintain with RBI as a certain percentage of
their demand and time liabilities (DTL). It may vary between 3% to 15% of bank’s DTL. If a
bank fails to maintain the prescribed CRR at prescribed levels, penal interest is levied on the
shortfall by adjustment from interest receivables on balances with RBI. A cut in CRR enhances

5
the loanable funds with banks and reduces the dependence on the call money market. An
increase in CRR reduces the liquidity in the banking system, reduces the lending operations and
tends to increase the call rates.

(ii). Statutory Liquidity Ratio (SLR)

It refers to liquid reserve requirement of banks, in addition to CRR. SLR is maintained by all
banks in the form of government securities. SLR has 3 objectives:

- to restrict expansion of banks credit

- to increase bank’s investment in approved securities
- to ensure solvency of banks.
Increase in SLR results in the reduction of the lending capacity of banks by preempting certain
portion of their DTL for government or approved securities. Therefore it results in reducing the
supply of loanable funds of banks, but also by increasing the lending rates in the face of an
increasing demand for bank credit. The reverse phenomenon happens in case of reduction in
SLR. Currently SLR is at 25% of DTL.

(iii). Bank Rate

Bank Rate is the standard rate at which the RBI is prepared to buy or rediscount bills of
exchange or other eligible commercial papers from banks. Bank Rate is used to vary the cost
and availability of refinance and change the loanable resources of banks. Change in Bank Rate
affects the interest rates on loans and deposits in the banking system across the board in the same
direction.

(iv). Open Market Operations (OMO)

This refers to the sale or the purchase of government securities by the RBI in the open market
with a view to increase or decrease the liquidity in the banking system and thereby affect the
loanable funds with banks.

Role and Functions of Commercial Banks

Commercial Banking system in India can be broadly classified into

6
(i). Public sector - Scheduled

(ii). Private sector - Scheduled and Non Scheduled

Public Sector banks are further subdivided into

- State Bank of India

- Associates of State Bank of India
- Other nationalized banks
Private Sector – Indian banks and Foreign banks.

A Scheduled bank is one which is included in the Second Schedule of the RBI Act. A Non
Scheduled bank is one which is not included in that schedule.

Banks play a vital role in the economic development of the country as mentioned hereunder:

- Banks creates purchasing power

- Promotes capital formation
- Assists in the optimum utilization of resources
- Finances priority sectors
- Promotes balanced regional development
2. Banking markets in changing environment

Banking industry has been witnessing major environmental changes during the last few decades.
The changes have been witnessed in political, economic, policy and regulatory areas and have
dramatically altered bank business strategies, organizational structures, critical management
areas and processes. Banks which have been quick enough to recognize the changing
environment and take appropriate measures have been able to set themselves on the path of
sustained business and profitability growth satisfying the expectations of the various
stakeholders.

The volatility of environment surrounding the banking organizations has made it clear to the
bank management(s) that strategies and systems that were adopted earlier and might effectively
have addressed the organizational concerns could no more be relied upon to provide solutions in
the current environment. The impact of the market is so emphatic that organizations which are

7
seen as not delivering adequate value by the shareholders or institutions in the capital markets
are rated very low in the equity markets. Banks, which are underperforming, thus find it very
difficult to access the equity and debt markets not only in the international markets but even at
the domestic level.

3. New Types of Risks for customers and banks

The risks faced by the corporate sector assume importance from a bank’s point of view. In the
first place, banks sell various loan products to corporate customers and in doing so assume credit
risk. Credit Risk implies failure on the part of the debtor to honour its obligations on the due
date. These failures can be caused by various factors some of which relate to the risk faced by
the debtors themselves in the conduct of their business. Thus, the knowledge of the various risks
faced by a bank’s debtor customers and an evaluation of the debtor’s management of such risks
assumes importance for the lending banker.

While different banks may group / categorise the risks faced by them various ways, a common
grouping of commercial banking risks adopted by the Basel Committee on Banking Supervision
(Basel Committee) as also by the RBI is as under:

- Credit Risk
- Market Risk covering Liquidity risk, Interest risk
- Operational risk
It is true that risk management function is not new to the banking system. Credit risk have been
there since the commencement of the bank lending activity. However, in the recent past the
complexity of risks have been assuming large proportions.

4. Prudential Regulations in a deregulating setting

Regulatory authorities have put in place a broad framework of prudential regulations. Instead of
controlling individual credit transactions or fixing interest or exchange rates, the banks are
required to put in place a framework of rules, regulations, procedures, systems, organizational
structures.

8
The approach of the bank regulators can best be understood by looking at the broad set of
prescriptions made by the Basel Committee on Banking Supervision. The Basel Committee’s
approach rests on three main pillars as under:

First Pillar : Minimum capital requirements to be observed by banks

Second Pillar: Supervisory review process

Third Pillar: Market discipline

Bank managements find themselves in a situation where environmental changes lead to a highly
volatile environment resulting in various types of risks in their activities. Better risk
management thus becomes necessary to ensure that their capital as well as earnings is protected.
Further, the regulators are enjoining bank’s managements to put in place efficient risk
management systems so that risks to the individual bank as well as to the financial system are
under control.

Securitisation Act, 2002

Securitisation - Concept

Securitisation is an important aspect of corporate finance in the modern world. Basically, it is a

process through which illiquid assets are transferred into a more liquid form of assets and
distributed to a broad range of investors through capital markets. The lending institution’s assets
are removed from its balance sheet and are instead funded by investors through a financial
instrument. The security is backed by expected cash flows from the assets. Securitisation is a
process of transformation of illiquid assets into security, which may be traded later in the open
market.
For banks and financial institutions, securitisation fundamentally involves conversion of long-
term assets into current asset. It is structured transaction whereby the bank transfers or sells
loans of a particular portfolio to a specially created trust which breaks the loan into convenient
amounts and raises money from the investors by selling the instruments which represent the loan
amounts. The illiquid assets such as mortgage loans, loan receivables, cash credit receivables,
etc on the balance sheet of the originator are packaged, underwritten and sold in the form of
securities to investors through a carefully structured process.

9
What is an NPA?

A non performing asset means an asset or account of a borrower, which has been classified by a
bank or financial institution as sub-standard, doubtful or loss asset.
The problem of NPA’s

For years, Indian banking and institutional lenders have had a major complaint; they were
criticized for their inability to control their burgeoning non-performing assets (bad debt lump),
currently estimated to be anywhere around 1lakh crores. Despite strict laws for willful loan
defaulters, red tape in the Indian administration undercut the statute’s usefulness and made sure
that Indian lenders and financial institutions, could’nt bite but just bark.. But all this has gone a
sea change.
To expedite recovery of loans and bring down the non-performing asset level of the Indian
banking and financial sector, the government introduced a new law that promises to make it
much easier to recover bad loans from willful defaulters.
The Securitisation and Reconstruction of Financial assets and Enforcement of Security
interest Act, 2002
The securitisation and reconstruction of financial assets and enforcement of security interest act
has given unprecedented powers to banks, financial institutions and asset reconstruction /
securitisation companies to take over management control of loan defaulter or even capture its
assets under police escort if necessary.

The law does not allow an appeal against seizure in any court or before any authority and the
only leeway a defaulter gets is a 60 day notice period to discharge in full his liabilities before a
seizure is initiated.

Another significant feature of this new law is that it does not allow a defaulter to escape a seizure
by taking resort to the bankruptcy administrator called the Board for Industrial and Financial
Reconstruction (BIFR). Once the defaulter is served a notice, no reference can be made to the
BIFR

10
What is an Asset Reconstruction Company?

An asset reconstruction company is a company that is set up to do exactly what the name
suggests – reconstruct or re-package assets to make them more saleable. The assets in question
here are loans from banks, card companies, financial institutions, etc.
Bad loans are essentially of two types: those that are a consequence of routine banking
operations and those that are a reflection of a greater systematic rot, as in the Indian context
where the bulk of non-performing assets (NPA’s) is due to government interference / loan
waivers / difficulties in recovering dues etc. There are essentially two approaches to tackling
NPAs; one, leave it to the banks to manage their own bad loans, two,do the same thing on a
concerted central level, through a centralized agency. ARCs are centralized agencies for
resolving bad loans created out of a systematic crisis. ARCs buy up distressed assets from bank /
card companies and other financial institutions, repackage them and sell them in the market.

Non-performing assets can be assigned to ARCs by banks at a discounted price, enabling a one-
time clearing of the balance sheet of banks. At the same time, the ARC can float bonds and
recover dues from the borrowers directly. ARCs can have several alternates. Banks are left with
cleaner balance sheets and do not have to deal with problem clients. Because ARCs deal with a
larger portfolio, they can mix up good assets with bad ones and make a sale, which is palatable to
buyers.

Under the guidelines framed by RBI for setting up ARCs, it should have a minimum paid up
capital of 2 crores. As of now there is one ARC set up by ICICI Bank on a pilot basis, but in
time we should be seeing a couple more.
The most crucial question in securitisation of NPA is : does a bad apple, when sliced, becomes
a good apple?

Proper management and speedy disposition of NPAs is one of the most critical tasks of banking
reforms today. The main purpose of active involvement by the government is to remove NPAs
from the banking system quickly so that the banks can resume their normal functions. Further
professionalism at the grass root level is a must to tackle this problem

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Introduction to Intellectual Property Laws

1. What is Intellectual Property

Intellectual property is the property created by the intellect of human mind. Unlike other forms
of property, intellectual property is a nonphysical which stems from, or is identified as, and
whose value is based upon some ideas. Intellectual property insists on some amount of novelty /
originality to gain protection.

IPRs take the form of Patents, Copyrights, Trademarks, Registered Industrial Design,
Geographical Indications, Protection of undisclosed information. IPRs are largely territorial
rights except Copyright which is global in nature in the sense that it is immediately available in
all the member of the Berne Convention. These rights are awarded by the State and are
monopoly rights implying that no one can use these rights without the consent of the right
holder. It is important to know that these rights have to be renewed from time to time for
keeping them in force except in case of copyright and trade secrets. IPRs have fixed term
except trademark and geographical indications, which can have indefinite life provided these are
renewed after stipulated time specified in the law by paying official fees. IPRs can be assigned,
gifted, sold and licensed like any other property.

2. International Background to Intellectual Property

Paris Convention for the protection of industrial property - 1883

The Paris Convention was concluded on 20th March, 1883 at Paris, since then, it has been the
subject of a number of revisions. At Stockholm in 1967, the last revision was made to the Paris
Convention by which an international organization for administering and fostering intellectual
property on an international basis called World Intellectual Property Organization (WIPO) was
established. The Paris Convention establishes a Union for the protection of industrial property
and industrial property has its object patents, utility models, industrial designs, trademarks
service marks, trade names, indication of source or appellations of origin and repression of unfair
competition.

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The Paris Convention for the protection of Industrial Property was an initiative in the sphere of
industrial property, which includes patents for inventions, industrial design rights, trademarks
and names and protection from unfair competition. But the Paris Convention had not referred to
the term “Intellectual Property”. Rather, it treats patents, utility models, industrial designs,
trademarks, service marks, trade names, indications of source or appellation of origin and the
repression of unfair competition as the objects for the protection of industrial property.

Berne Convention for the protection of Literary and Artistic Work - 1886

The printing industry was always accompanied by copying techniques which made piracy to go
on a large scale more than what was anticipated. These circumstances necessitated the evolution
of measures to be taken to curb piracy. The Berne Convention for formulated for the protection
of Literary and Artistic Works in 1886. The basic objective of this convention was to further
greater uniformity in the level of protection by bringing the countries with a lower level of
protection up to the standard of the countries with the higher level of protection.

The Berne Convention for the Protection of Literary and Artistic Works remains as the only
international document consolidating various aspects of the copyrighted works in an
international basis.

Patent Cooperation Treaty (PCT)

The territorial nature of the patent system resulted in the failure of countries to recognize the
inventions made outside its jurisdiction. Very often, it was difficult to patent an invention made
in one country in a foreign country. From an international perspective, a patent application
seeking patent protection in other foreign countries had to face many procedural problems.

PCT has tried to minimize the procedural difficulties in cases where one wishes to obtain patent
protection in various nations. Under PCT, the applicant gets a patent based on the grant from the
individual nations and the applicant is not getting an international patent enforceable in all
nations.

With PCT in 1977, a system of international patent applications was put into effect on a
worldwide basis. One cannot become a member of PCT unless it is a member of Paris
Convention. The basic objective of PCT is to make the acceptance, search and examination

13
stages of the patent procedure to be conducted on an international basis before proceeding to the
grant of the national patents.

The Madrid Agreement concerning the International Registration of Marks, 1891.

The Madrid system of international registration of marks is governed by two treaties: the Madrid
Agreement Concerning the International Registration of Marks, which dates from 1891, and the
Protocol Relating to the Madrid Agreement, which was adopted in 1989. The system is
administered by the International Bureau of WIPO, which maintains the International Register
and publishes the WIPO Gazette of International Marks.

The objectives of the system are twofold. Firstly, it facilitates the obtaining of protection for
marks, both trademarks and service marks. Secondly, since an international registration is
equivalent to bundle of national registrations, the subsequent management of that protection is
made much easier.

3. Patents

A Patent is an exclusive right granted by a country to the owner of an invention to make, use,
manufacture and market the invention, provided the invention satisfies certain conditions
stipulated in the law. Exclusive right implies that no else can make, use, manufacture or market
the invention without the consent of the patent holder. This right is available for a limited period
of time.

A patent in the law is a property right and hence, can be gifted, inherited, assigned, sold or
licensed. As the right is conferred by the State, it can be revoked by the State under very special
circumstances even if the patent has been sold or licensed or manufactured or marketed in the
meantime. The patent regime is territorial in nature and inventor / their assignes will have to file
a separate patent applications in countries of their interest, along with necessary fees, for
obtaining patents in those countries.

The Indian Patent Act, 1970 has now been radically been amended to become fully compliant
with the provisions of TRIPS. The most recent amendment was made in 2005.

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3.1. Invention

Invention means a new product or process involving an inventive step and capable of industrial
application. New invention means any invention or technology which has not been anticipated
by publication in any document or used in the country or elsewhere in the world before the date
of filing of patent application with complete specification, ie., the subject matter has not fallen in
public domain or it does not form part of the state of the art.

Inventive step means a feature of an invention that involves technical advance as compared to
existing knowledge or having economic significance or both and that makes the invention not
obvious to a person skilled in the art.

3.2. What can be patented?

Novelty : An invention will be considered novel if it does not form a part of the global state of
the art. Information appearing in magazines, technical journals, books, newspapers etc.
constitute the state of the art. Oral description of the invention in a seminar / conference can also
spoil novelty. Novelty is assessed in a global context.

Inventiveness (Non –obviousness) : A patent application involves an inventive step if the

proposed invention is not obvious to a person skilled in the art, ie., skilled in the subject matter
of the patent application. If there is an inventive step between the proposed patent and the prior
art at that point of time, then an invention has taken place.

Usefulness : An invention must possess utility for the grant of patent. No valid patent can be
granted for an invention devoid of utility. The patent specification should spell out various uses
and manner of practicing them.

3.3. Non Patentable Inventions

An invention may satisfy the conditions of novelty, inventiveness and usefulness but it may not
qualify for a patent under the following situations.

i). an invention which is frivolous or which claims obviously contrary to well established natural
laws.

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ii). an invention whose intended use or exploitation would be contrary to public order or morality
or which causes serious prejudice to human, animal or plant life or health or to the environment.

iii). The mere discovery of a scientific principal or formulation of an abstract theory.

iv). The mere discovery of a new form of a known substance which does not result in
enhancement of the known efficacy of that substance.

v). A substance obtained by a mere admixture resulting only aggregation of the properties of the
components thereof or a process for producing such substance.

vi). The mere arrangement or rearrangement or duplication of features of known devices each
functioning independently of one another in a known way.

vii). A method of agriculture or horticulture

viii). Any process for medical, surgical, curative or diagnostic, therapeutic or other treatment of
human beings, or any process for a similar treatment of animals to render them free of disease or
to increase economic value.

ix). Inventions relating to atomic energy

x). Mathematical or business methods or computer program per se or algorithms.

xi). A presentation of information

xii). Topography of integrated circuits

3.4. Term of the patent

Term of the patent will be 20 yrs from the date of filing of all types of inventions.

3.5. Application

The following are the stages for obtaining patent:

- Filing of an application for a patent accompanied by either a provisional specification or

complete specification.
- Filing request for examination

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 - Examination of application by the examiner
- Replying to adverse report of examiner
- Publication of application with specifications
- Overcoming opposition to the grant of patent
- Grant of patent
In respect of patent applications filed, following aspects will have to kept in mind:

- Claim or claims can now relate to single invention or group of inventions linked so as to
form a single inventive concept.
- Patent application will be published 18 months after the date of filing
- Application has to request for examination 12 months within publication or 48 months
from date of application, whichever is later.
3.6. Provisional Specification

A provisional specification is usually filed to establish priority of the invention in case of the
disclosed invention is only at a conceptual stage and a delay is expected in submitting full and
specific description of the invention. Although a patent application accompanied with
provisional specification does not confer any legal patent rights to an invention. No patent is
granted on the basis of a provisional specification. It has to be followed by a complete
specification for obtaining a patent for the said invention. Complete Specification must be
submitted within 12 months of filing of the provisional specification.

3.7. Complete Specification

It may be noted that a patent document is a techno-legal document and it has to be finalized in
consultation with an attorney. Submission of Complete Specification is necessary to obtain a
patent. Contents of complete specification include the following:

- Tile of the invention

- Field to which the invention belongs
- Background of the invention including prior art giving drawbacks of the known
inventions or practices
- Complete description of the invention along with experimental results
- Drawings etc essential for understanding the invention

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 - Claims, which are statements, related to the invention on which legal proprietorship is
being sought. Therefore claims have to be drafted very carefully.
3.8. Compulsory License

Any time after three years from date of sealing of a patent, application for compulsory license
can be made provided

- Reasonable requirements of public have not been met

- Patented invention is not available to public at a reasonably affordable price
- Patented invention is not worked in India
Among other things, reasonable requirements of public are not satisfied if working of patented
invention in India on a commercial scale is being prevented or hindered by importation of
patented invention.

Trade Marks Act

4.1. What is a Trade Mark

Trade mark is a mark capable of being represented graphically and which is capable of
distinguishing the goods or services of one person from those of others and may include shape of
goods, their packaging and combination of colours. It indicates in relation to goods or services, a
connection in the course of trade between the goods or services and the person having the right
to use the trade mark either as a proprietor or as a permitted user.

4.2. Registration of Trade Mark

Registration of Trade mark is not mandatory. But it may be noted that common law protection is
applicable both to registered as well as unregistered trademarks.

4.3. Procedure for registration of Trade mark

- Any person claiming to be proprietor of trade mark used or proposed to be used can apply
for registration of his trade mark..

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 - Application should be filed with the Office of Registry under whose territorial
jurisdiction the principal place of business is situated.
- Before a trade mark is accepted, it is subjected to a close and through examination to
ensure that it is distinctive, is not deceptive and is free from conflict with registered and
pending marks.
- After application is accepted, an advertisement is issued in Trade mark Journal to give to
third parties an opportunity for opposition.
- Any person can make an application to Registrar for opposition to registration. Such
application has to be made within 3 months from the date of advertisement.
- Copy of the opposition shall be sent to applicant and he has to reply within 2 months with
his counter statement.
- Registrar will scrutinize the evidence, hear the parties and then decide the matter.
- After deciding on opposition and hearing parties, Registrar can register trade mark. Date
of application shall be deemed to be date of registration.
- Registration of Trade mark is valid for 10 years.
4.4. Assignment & Transmission of Trade Mark

Trade mark is assignable as well as transmissible. Assignment of a trade mark is taken to be a

sale or transfer of the trade mark by the owner or proprietor thereof to the third party. By
assignment, the original owner of trade mark is divested of his right, title or interest therein.

Assignment or transmission shall be registered with registrar. If assignment is not registered it

will not be accepted as evidence in any court.

4.5. Certification Trade Mark

Certification trade mark is a mark capable of distinguishing the goods or services in connection
with which it is used in the course of trade, which are certified by the proprietor of the mark in
respect of origin, material, mode of manufacture or performance of service quality, accuracy etc.
Examples of certification trade mark are ISI, AGMARK. Such certification trade mark can be
used by manufacturer or service provider only with the permission of proprietor of the
certification trade mark.

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4.6. Infringement & Passing Off Action

A registered proprietor of a trade mark can prevent other from using an identical or deceptively
similar trade mark in relation to any goods in respect of which mark is registered. Therefore,
unauthorized use of registered trade mark is infringement of trade mark.

In an action for infringement, the plaintiff must make out that use of defendant’s mark is likely to
deceive. When the defendant’s mark is so close either phonetically, visually, structurally or
otherwise, and the court reaches the conclusion that there an imitation, no further evidence is
required to be established.

The relief obtainable in actions for infringement includes an injunction to restrain the threatened
use or the continuance of an existing use and an option of the plaintiff either damages or an
account of profits together with or without an order for the delivery of the infringing labels and
marks for destruction.

Passing Off

Principle of passing off is based on the concept that a person is not to sell his own goods under
the pretence that they are goods of another person. The passing off action is founded on
desirability of preventing commercial immorality. The purpose of an action for passing off is to
protect commercial goodwill; to ensure that people’s business reputations are not exploited.

Whereas infringement action can be only in respect of registered trade mark while passing off
action can be of registered as well as unregistered trade mark.

It is the tendency to mislead or cause confusion that thus forms the gist of passing off action. It
is not necessary for the plaintiff to establish fraud. It is sufficient if the plaintiff proves that the
defendant’s trade mark is likely to cause confusion and deception among the trade and public
enabling unscrupulous traders to pass of the defendant’s goods as that of the plaintiff. The Act
does not lay down any criteria for determining what is likely to deceive or cause confusion.
Therefore every case must depend upon its own particular facts.

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The question has to be approached from the point of view of a man of average intelligence and
imperfect recollection.

4.7. Criminal complaint

In addition to action under Infringement or Passing Off (Civil Suit), action can also be taken by
filing a criminal complaint. In such a case, the court issues an order directing the crime branch
of the police to search and seize offending goods, labels and other materials. Whenever there is
slavish imitation of f trade mark it is advantageous to resort to criminal complaint rather than
undergo the long process of civil suit. The advantage in a criminal complaint is that it has
immediate effect. A criminal complaint can be filed even if a trade mark is not registered.

4.8. Trade Mark Agent

The process of work of registration of trade mark is undertaken by a Trade mark agent. They are
registered as such with the Registrar. They have to appear for an examination and on the
selection and payment of fees they are registered as trade mark agent.

4.9. Specimen Caution Notice

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Trade Marks Act – Cases

1. Cadila Health Care Ltd Vs Cadila Pharamaceuticals Ltd

Most of our laws are modeled on laws enacted by the British Parliament and the enunciation of
laws by our courts is based on the principles of the interpretation laid down by superior courts in
England. The Supreme Court of India in the instant case has struck a warning that courts in
India should be wary of using English principles in their entirety, without regard to Indian
conditions.

This is because in India there is no common language for the whole country, a large majority of
the population is illiterate even in their own mother tongue. Only a small percentage of people
know English. In trade marks and passing off action cases the Supreme Court observed that “ To
apply the principles of English Law regarding dissimilarity of the marks or the customer

22
knowing about the distinguishing characteristics of the plaintiff goods is to over look the ground
realities in India.

In the case of medicinal preparation, for violation of trade mark in these cases, a stricter
approach is adopted because while confusion in the case of non-medicinal products may only
cause economic loss to the plaintiff, confusion between two medicinal products may have
disastrous effects.

Drugs are poisons not sweets. Confusion between medicinal products may be life threatening. It
is not uncommon that in hospitals drugs can be requested verbally. Many patients may be
elderly or inform or illiterate, may not be in a position to differentiate between one medicine and
another. It is to avoid such situation, the Act enjoins that the authority granting permission to
manufacture a drug should be satisfied that there will be no confusion or deception in the market.

2. Yahoo Inc Vs. Akash Arora

The plaintiff is a global internet media rendering services under the domain name / trade name
‘yahoo’. The plaintiff was amongst the first in the field to have the domain name yahoo
providing search services. The plaintiff had registered trade mark name of yahoo. Its
application for registration of trade mark are pending in 69 countries all over the world. Its
application for registration is also pending in India.

In the plaintiff filed in the High Court the plaintiff stated that the defendant, by adopting the
name of yahoo.india offering services similar to those provided by the plaintiff, had been
passing off services and goods of its own as those of the plaintiff trade mark and that this was
identical to or deceptively similar to the plaintiff trade mark.

The principle underlying action of passing off is that no man is entitled to carry on business of
another or to lead him to believe that he was carrying on or has any connection with the business
being carried on by another person.

In the instant case, both the parties have a common field of activity: operating on the web site
and providing information which is almost similar in nature. Courts in US have held that the

23
domain name serves the same function as the trade mark. In the instant case, yahoo of the
plaintiff and yahoo.india of the defendant are almost similar except for the use of the suffix
‘india’. When both the domain names are considered, it becomes clear that the two being almost
identical or similar in nature, there is every possibility of the user of internet being confused and
deceived into believing that both the domain names belong to one common source and
connection, although the two belong to the two different sources.

3. Rediff Communications Ltd Vs Cyberbooth

The domain name ‘rediff’ was registered by the plaintiff. In the present suit, they alleged that
the domain name ‘radiff.com registered by the defendant was intented to induce members of the
public into believing that the defendants were associated with the plaintiff.

Adoption of the name, according to them was deliberate act on the defendant’s part to pass off
their business services as those of the plaintiff.

Since both the plaintiff and defendant were carrying on business of communication and
providing services through the internet. The domain adopted by the defendant was almost
similar to the one adopted by the plaintiff. Therefore there is every possibility of an internet user
getting confused and deceived into believing that both the domain names belonged to one
common source.

Cease and desist order was passed on the defendant from infringing the name of the plaintiff.

Copyright Act

Copyright is a right, which is available for creating a original literary or dramatic or musical or
artistic work. Cinematographic films including sound track and video films and recordings on
discs, tapes, or other devices are covered by copyrights. Computer programs and software are
covered under literary works and are protected in India under copyrights.

24
Copyright gives protection for the expression of an idea and not for the idea itself. India is a
member of the Berne Convention, an international treaty on copyright. Under this convention,
registration is copyright is not essential requirement for protecting the right. It would, therefore
mean that the copyright on a work created in India would be automatically and simultaneously
protected through copyright in all the member countries of the Berne Convention. The moment
an original work is created, the creator starts enjoying the copyright. However, an undisputable
record of the date on which a work was created must be kept.

When a work is published with the authority of the copyright owner, a notice of copyright may
be placed on publicly distributed copies. The use of copyright notice is optional for the
protection of literary and artistic works. It is however, a good idea to incorporate a copyright
notice. As violation of copyright is a cognizable offence, the matter can be reported to a police
station. It is advised that registration of copyright in India would help in establishing the
ownership of the work. The registration can be done at the Office of the Registrar of Copyrights
in New Delhi. It is also to be noted that the work is open for public inspection once the
copyright is registered.

In the digital era, copyright is assuming a new importance as many works transacted through
networks such as databases, multimedia work, music, information etc are presently the subject
matter of copyright.

5.1. Coverage provided by copyright

(i). Literary, dramatic and musical work. Computer programs / software are covered within the
definition of literary work.

(ii). Artistic work

(iii). Cinematographic films, which include sound track and video films.

(iv). Recording on any disc, tape, perforated roll or other devices.

5.2. Infringement of copyright

Copyright gives the creator of the work the right to reproduce the work, make copies, translate,
adapt, sell or give on hire and communicate the work to public. Any of these activities done

25
without the consent of the author or his assignee is considered infringement of the copyright.
There is one associated right with copyright, which is known as ‘moral right’’, which cannot be
transferred and is not limited by the term. This right is enjoyed by the creator for avoiding
obscene representation of his / her works.

5.3. Transfer of copyright

The owner of the copyright in an existing work or prospective owner of the copyright in a future
work may assign to any person the copyright, either wholly or partially in the following manner:

- For the entire world or for a specific country or territory

- For the full term of copyright or part thereof
- Relating to all the rights comprising the copyright or only part of such rights.
One of the important requirements of copyright is that the work / expression should be fixed in a
tangible medium for copyright protection. Protection attaches automatically to an eligible work
of authorship, the moment the work is sufficiently permanent or stable to permit it to be
perceived, reproduced. A work may be fixed in words, numbers, notes sounds, picture or any
other graphic or symbolic indicia.

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STUDY NOTE ON INSURANCE

Insurance Law

1. The Fundamental Principles of Insurance

An insurance contract is also a commercial contract. In India all contracts are governed by the
Indian Contracts Act. Under this Act, the definition of the term ‘ Contract’ is as follows:

“An agreement enforceable by law is a contract”.

Such an agreement must be entered into by two or more parties, with the intention of creating a
legally binding relationship. Since insurance contracts are commercial contracts, an insurance
contract should fulfill all the essential requirements of a valid contract.

However, an insurance contract is subjected to certain additional principles as under:

Principle of Insurable Interest

Insurable interest exists if the person entering the insurance contract stands to lose financially, if
the event insured against occurs. In the context of life insurance insurable interest exists if the
person entering the contract is likely to benefit financially if the insured continues to live and is
likely to suffer an economic loss, if the insured dies. Thus, the requirement of a life insurance
contract is that the person who gets the benefit of an insurance contract must have an insurable
interest in the life of the insured.

Principle of Utmost Good Faith

Commercial contracts are normally subject to the principle of Caveat Emptor or Buyer Beware.
However, in insurance contracts, the product sold is intangible. Therefore the law imposes a
greater duty on the parties to an insurance contract. This duty is one of Utmost good faith. It is
the duty of the person taking out the insurance policy to make a full disclosure of all material
facts whether requested or not. If the principle of utmost good faith is breached, in any insurance
contract, the insurance contract may be treated as null and void. The breach of utmost good faith
arises due to misrepresentation or non disclosure.

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Principle of Indemnity

This is founded in the common law and it requires that insurance should basically indemnify the
insured, nothing more. That is to say, the insured must not be allowed to make profit from
insurance contracts. The financial position of the insured must be restored to the one he enjoyed
before making the loss. This principle makes sure that the insured neither makes a profit nor a
loss on account of the insurance contract. The reason for following the principle of indemnity is
to prevent the insured from bringing a willful loss upon himself and thereby make profit.

Principle of Subrogation

Subrogation is defined as the automatic transfer of rights and remedies of the insured to the
insurer upon the insured having received the benefits of insurance. So for instance, an insured is
paid the full value of a wrecked car by the insurer and the rights and remedies attached to the
wreckage transfer automatically to the insurer. The insured does not have any rights left in such
car. The principle of subrogation arises from the core principle of indemnity – where the insurer
indemnifies the insured to the extent of his loss, and not more.

Principle of Contribution

This applies if the insured has taken several insurance policies for the same risk from several
insurers. If the insured recovers his loss from several insurers then he may actually be in a
position to profit from insurance. Consequently several insurance contracts include the principle
of contribution expressly. Contribution works in a manner where each insurer pays only that
portion of the risk as is represented by proportion of the sum assured by him to the overall sums
assured by the different insurers. Wherever contribution applies, the insurers make it the
responsibility of the insured to file claims in the correct proportion with the insurers since they
may not be aware of each other’s contracts fully.

2. Insurance Regulatory and Development Authority Act, 1999

Indian insurance is unique in the sense that despite its one billion plus population, it still has a
low insurance penetration of less than 3 %. The insurance sector was opened in 1999 facilitating

28
the entry of private players into the industry. The government formally liberalized the insurance
sector in 2000 with the passage of the IRDA Bill, lifting entry restrictions for private players.
These reforms were aimed at creating an efficient and competitive system considering the recent
economic structural changes and on realizing that insurance can play an important role in the
overall economy of the country.

Consequent to the opening up of the sector, IRDA as per its mission statement, became the
industry watchdog with the following responsibilities:

- protection of the interest of and secure fair treatment to policy holders

- bringing about speedy and orderly growth of the insurance industry for the common man,
and to provide long term funds for accelerating growth of the economy.
- Ensuring that insurance customers receive precise, clear and correct information about
products and services and making them aware of their responsibilities and duties in this
regard.
- Ensuring speedy settlement of genuine claims, to prevent insurance frauds and putting in
place effective grievance redressal machinery
- Promoting fairness, transparency and orderly conduct ini financial markets dealing with
insurance and to build a reliable management information system to enforce high
standards of financial soundness amongst market players
- Bringing about optimum amount of self regulation in day to day working of the industry
consistent with requirements of prudential regulation.
3. Main Life insurance products

There are four main types of insurance policies

Term Insurance

Term insurance pays a death benefit to the legal heirs if the person insured dies during the
term of the policy. Such a policy provides cover for a specified period only and may be
described as temporary insurance. Term insurance plans offer pure risk cover without any
element of saving. The sum assured is payable only if he insured dies during the selected
period. In case the insured does not die during the tenure of insurance, nothing is payable.

29
Whole Life Insurance

Whole life insurance guarantees a death benefit cover throughout the course of life, provided
the required premiums are paid.. The advantage of whole life insurance is that the policy, if
kept current covers over entire life as opposed to term insurance that covers only for a certain
term of years. Whole life insurance policies pay out on the death of the assured whenever it
occurs.

Endowment Insurance

Pure endowment is a plan where the benefit is payable to the insured only on survival of the
specified term. Combing the features of the term assurance and pure endowment are
endowment policies which pay out either on the death of the assured, whenever it occurs, or
after a fixed number of years. Should the insured person survive the term of the policy, the
policy is said to mature. Hence the claim, under an endowment policy, may arise either by
death or by maturity.

Annuities

Annuities are a form of pension in which an insurance company makes a series of periodic
payments to a person over a number of years in return for the money paid to the insurance
company either in a lump sum or in instalments. Annuities start where life insurance ends. It
is called the reverse of the life insurance. Annuity stops on death of a person, whereas
theoretically, life insurance starts on the death of the assured.

Unit Linked Policies

A unit linked policies is a life insurance policy in which the benefits depend on the
performance of a portfolio of shares. Each premium paid by the insured person is split. A
part is used to provide life insurance cover, while the balance is used to buy units of mutual
funds. In this way a small investor can benefit from investment in a managed fund without

30
 making a large financial commitment. The unit linked policies can go up or down in value as
they are linked to the value of the shares.

4. What is a Contract of Insurance? - Legal Issues.

Contract of insurance is a contract whereby one person called the ‘ Insurer’ undertakes, in return
for the agreed consideration called the ‘Premium’ to pay to another person called the ‘Assured’ a
sum of money, or its equivalent on the happening of ‘ a specified event’.

The landmark decision which clarifies the entire legal position regarding the scope of a contract
of insurance is that of “Prudential Insurance Co Vs IRC”, a decision of English Court. It is to be
remembered that insurance law developed in England and its principles have been accepted in
India.

The first test to be applied to determine whether a contact of insurance is a contract or not is to
find out what is the thing insured.

Where you insure a ship or a house, you cannot insure that the ship shall not be lost or the house
burned, but what you do insure is that a sum of money shall be paid on the happening of a certain
event. This is the first requirement of a contract of insurance. It must be a contract whereby for
some consideration, usually but not necessarily, the payment of a sum of money called premium
you secure to yourself some benefit on the happening of some event.

The Second test was that the “specified event” must have some element of uncertainty about it.
There must be either some uncertainty whether the event will ever happen or not, or if the event
is one which must happen at some time or another there must be uncertainty as to the time at
which it will happen. There are also circumstances that in fact the happening of the event
depends upon accidental causes and the event, therefore, may never happen at all. This is called
“Accident”.

The Third test is that the specified event must further be of a character more or less adverse to
the interest of the assured.

In brief, therefore an insurance agreement to be a valid contract must be :

31
a). a contract between an “insurer” and “assured”.

b). the contract is based on the loss due to happening or not happening a future incident;

c). a consideration in the form of payment of an amount of the insured and

d). the insurer promises to make good the loss in so far money can do it, in case the loss occurs
on the happening of the contingency.

5. Agency Function in Life Insurance

Generally, an agent means a person who acts for and on behalf of another. The expression agent
is not defined in the Insurance Act or the Life Insurance Corporation Act.. Therefore, the
attributes of an agent under the general principles of contract law have to be taken consideration
for the definition and meaning of an agent.

Whereas the general principles of Contracts of Agency are equally applicable to all kinds of
agency contracts, the expression has a limited connotation in the field of insurance law and here
an agent is go earned by the terms and conditions of contract of agency between him and the
insurer. An agent in the field of insurance cannot bind his principal insurer unless has been so
authorized to do under the express terms of the contract, or has an implied authority to do such
acts or he has been held out by the insurer of being vested with such authority.

In India an agent has no authority to complete the contract in the name of the insurer. He can
only canvass for proposals and submit them o the insurer for consideration. Similarly, they are
not authorized to collect money, accept risks or bind the insurer in any way other than collect
deposit towards first premium and initial expenses.

6. Legal Status of the Policy

The document that contains the terms, conditions and the basic features of the contract between
the insurer and insured is known as “the Policy”. This document, therefore, is the contractual
law between the parties. Both the parties are bound by the stipulated terms in the policy paper.
Though the life insurance is not an indemnity contract but it is also bound to be in writing and
requires to be adequately tamped. The policy is binding against both the parties. Courts in India

32
take a liberal view and interpret the conditions liberally to ensure ‘public policy’ and justice and
justice.

7. Assignment of a Policy

A policy of life insurance may be assigned by the assured in favor of any person whom he
wishes to assign. Assignment means the transfer of real rights in the policy from one person to
another. The transferor is called the ‘assignor’ and the transferee is called the ‘assignee’. The
assignment of a policy means an assignment of a contract with the insurance company, the
passing of the rights and liabilities of the insured to the third party.

8. Nomination

Nomination does not amount to a transfer but, it merely enables the nominees to receive the sum
assured in the event of death of the life assured. It creates no interest in the nominees in respect
of the title to the insurance policy.

9. Settlement of Claims

Insurance contract is an indemnity contract expecting the life insurance. So, the insurer is found
to indemnify the loss sustained in hazards generally issued against. Life insurance is not an
indemnity contract. Claim on life insurance policy may be on i) maturity or ii) death of the
assured. The insurer has to satisfy himself that conditions stipulated in the policy must be
fulfilled before claim is made payable.

10. General Insurance

Conventionally, the concept of general insurance covered the following categories:

i). Fire Insurance : This branch covered the insurance of property against the risk of fire, riot,
flood, earthquake, etc. It also extends itself to the loss of profit due to the damage caused by any
of these perils.

33
ii). Marine Insurance : This covered two main types of risks, ie., risks of loss or damage to cargo
(known as cargo insurance) carried by sea, rail, air, road, etc and hull insurance that insured
damage to ships, vessels, boats, launches, etc.

iii). Accident Insurance : This covered all types of risks that were not covered in any of the
above two.

Today, the concept of general insurance offers highly evolved and sophisticated forms of
business and personal risk mitigation. The main groups under which general insurance is
practices is as follows:

a). Insurance of property : This group represents the bulk of general insurance practice. It
covers buildings, motor vehicles, aircraft, machinery, factories, ships, livestock, homes,
furniture, cash, securities, etc.

b). Insurance of persons : This group covers personal accident, disability and health related
risks.

c). Insurance of interest : This group covers fidelity guarantee insurance.

d). Insurance of liability : Public liability, product liability and professional indemnities etc fall
in this group.

Best Wishes

34
Contract Act

1. What is a Contract

Contract is an agreement enforceable by law. For the formation of contract, there must

be an agreement and its enforceability at law.

Agreement An agreement is a promise or a set of promises. It is a definite

understanding between two or more persons as to what each party is to do.

How an agreement becomes legally enforceable Whether an agreement is legally

enforceable or not would depend upon two factors:

- Intention of parties to enforce it legally

- Presence of all the essential elements of a contract.

2. Essential elements of a valid Contract

All agreements are contracts if they are made by the free consent of the parties competent

to contract, for a lawful consideration and with a lawful object, and are not hereby

expressly declared to be void. Thus to form a contract, there must be

- an agreement

- which is legally enforceable

- where parties are competent to contract

- with a free consent

- for a lawful consideration

- for a lawful object

- which are not expressly declared to be void.

3. Classification of Contracts

- Valid contracts

- Void contracts

- Voidable contracts
 - Illegal contracts

- Express contracts

- Implied contracts

- Quasi contracts

4. What is an Offer

An offer is a statement of terms which it appears that you are willing to standby.

5. Essential elements of an Offer

- offer must be communicated to the offeree

- offer constitutes a willingness to do some act or abstinence

- offer must be made to some other person

- offer must be made with a view to obtaining the assent of the other

- offer may be express or implied

- offer may be conditional

- offer must be capable of creating legal relationship

- terms of the offer must be certain

- offer must not thrust the burden of acceptance on the offeree

6. Acceptance of an Offer
Once the existence of an offer has been proved, a valid acceptance is required to form a

contract. An acceptance is an expression, by words, conduct which clearly indicates that

the person making it agrees to be bound by the terms of the offer. The acceptance must

be unqualified and must correspond to all the terms of the offer.

7. Essential elements of an Acceptance

- acceptance must be made by the party to whom the offer is made

- acceptance must be absolute and unqualified

- acceptance must be expressed in some usual or reasonable manner

- acceptance must be given within reasonable time

- acceptance cannot be made in ignorance of offer

- acceptance must be given before the offer lapses or revoked

- acceptance must be communicated to the offeror

8. What is Consideration

Consideration means something in exchange. The concept of consideration requires that

both the parties to a contract shall have given and have received something as the price of

their respective promises.

9. Essential elements of Consideration

- consideration must move at the desire of the promisor

- consideration may move from the promise or any other person

- consideration is an act, abstinence, forbearance or detriment

 10. Capacity of parties

Minor

Status of the contracts entered into by a Minor

Minor is a person who is not competent to contract. Although it is not clearly stated in

the Contract Act that the agreements entered into by a minor are void, it can be inferred

that an agreement entered into by a minor does not qualify to become a contract, and

hence is void ab initio.

- No ratification on attaining the age of majority

- No specific performance except in certain cases

- The doctrine of estoppel does not apply to a minor

- No Restitution except in certain cases

- Agreements where minor is a beneficiary are enforceable

- Minor’s liability in case of tort

- Minor’s liability for necessaries

Persons of Unsound Mind

Effect of the agreement entered into by the persons of unsound mind

- a contract entered into by a person of unsound mind is absolutely void

- a contract for his benefit is valid and enforceable

- his property is however, always liable for the necessaries supplied to him.

Disqualified Persons

Law specifically disqualifies some persons to enter into contract in order to protect the

public from the possible consequences.

- Alien enemies
 - Foreign Ambassadors

- Convict

- Insolvent

11. Free Consent

Two or more parties are said to consent when they agree upon the same thing in the same

sense.

Coercion

Coercion means forcibly compelling a person to enter into a contract

Acts amounting to Coercion

- Committing any act forbidden by the Indian Penal Code

- Threatening to commit any act forbidden by IPC

- Unlawful detaining of property

- Threatening to detain any property

- Threat to commit suicide

- Threat to prosecution

Undue Influence

Undue influence is an influence by which the exercise of free will and judgement of the

other is prevented.

Fraud

Fraud is the intentional misleading of one person by another.

Misrepresentation

Misrepresentation is a false representation of a statement of fact made innocently,

without any intention to deceive the other party.

Mistake

Mistake may be defined as an erroneous belief about something. Two parties cannot

believe same thing in the same sense when they are under a mistake.

12. Void Agreements

- Agreement in restraint of marriage

- Agreement in restraint of trade

- Uncertain agreements

- Agreements in restraint of legal proceedings

13. Quasi Contracts

Quasi contracts are the contracts which are not founded on actual promises. These

contracts are created by the circumstances, where one person has done something for

another and the other person has enjoyed the benefit of the same. Thus some legal rights

and obligations are created between the concerned parties even in the absence of real

contract. Such kind of contractual relations are known as ‘quasi contracts’.

14. Performance of Contracts

Performance of contract means fulfillment of the legal obligations created by a contract.

Essentials of a valid performance

- It should be unconditional
 - It must be entire and not of a part only

- It must be made at proper time and place

- The person making the tender must be able and willing to perform it

- The tender must be made to the proper person.

When law excuses non-performance of contract

- When the contract is discharged by any mode (other than performance)

- When promise neglects to afford reasonable facilities for performance to the

promisor.

15. Discharge of Contract

A contract is discharged when rights and obligations created by it come to an end, i.e.,

contracting parties no more owes any responsibility or liability to each other.

- Discharge by performance

- Discharge by impossibility of performance

- Discharge by mutual agreement

- Discharge by lapse of time

- Discharge by operation of law

- Discharge by breach of contract

16. Remedies for Breach of contract

The law provides various remedies which can be availed in different circumstances. An

aggrieved party can –

- cancel the contract which relieves him of all contractual obligations (Rescission)
 - recover damages

- demand for specific performance

- demand injunction

- recover any consideration already paid to the breaching party

17. Contract of Indemnity

The term indemnity literally means security against loss. In a contract of

indemnity one party viz., the indemnifier promises to compensate the other

party viz., indemnified against loss suffered by the latter. According to

Indian contract act, a contract by which 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, is called a contract of indemnity. Eg:

Every contract of insurance, other than life insurance is a contract of

indemnity.

18. Contract of Guarantee

The basic function of a contract of guarantee is to enable a person to get a

loan, or goods or an employment. Some person to whom we may call

guarantor comes forward and promises the lender, or the supplier or the

employer that he be trusted and in case of his default, he (guarantor)

undertakes to be responsible. The person who gives the guarantee is called

the ‘surety’; the person in respect of whose default the guarantee is given is

called the ‘principal debtor’, and the person to whom the guarantee is given

is called the ‘creditor’. A guarantee may be written or oral. Contract act

 specifically indicates that the contract of guarantee postulates concurrence

of three persons, ie., the surety, the principal debtor and the creditor.

Introduction to Environmental Laws

1. Background of Environmental Control Legislation

Environment is perhaps the most important variables affecting everyday human existence.
Though its importance has long been undermined by human beings resulting in over
exploitation and deterioration over the years, however, of late the importance of preservation
of environment has been realized and steps taken to correct the damage done and to curb
damage in future.

World over the governments and other organizations have become alive to the need to preserve
environment and various legislations and policy measures are been taken in the endeavor to
regain ecological balance. In India the genesis of environmental legislation can be tracked
back to the constitution of India. For instance “Protection and improvement of environment
and safeguarding of forests and wild life shall be one of the Directive Principles of State Policy.
As we know the Directive Principles unlike Fundamental Rights are not enforceable by any
court but there nevertheless fundamental in the governance of the country and it shall be the
duty of the state to apply them in making laws. The Environment Protection Act, 1986 and
plethora of other Acts and Rules framed there under are among the steps taken under the Article
48 –A.

The Constitutional provisions provide the bed-rock for framing of environmental legislation in
the country. Most of the environment related laws enacted by the Parliament have been based
on Article 252 and 253 of the Constitution. Over the years, some of the major environmental
laws have been enacted by the Parliament are as follows:

- the Water (Prevention & Control of Pollution) Act, 1974

- The Air (Prevention & Control of Pollution) Act, 1977
- The Environment Protection Act, 1986
 - The Public Liability Insurance Act, 1991
- The National Environmental Tribunal Act, 1995
- The National Environmental Appellate Authority Act, 1997

The powers of Environment Protection Act are being exercised by the Central Government
through the Ministry of Environment and Forests.

2. International Agreements

The Stockholm Conference opted for a non-binding declaration of principles, reflecting

commitments of a political and moral, rather than legal nature, a document embodying the
aspirations of world’s people for a better environment, rather imposing specific obligations on
governments in order to fulfill those aspirations. Yet notwithstanding its non-binding
character, the Stockholm Declaration is generally regarded as the foundation of modern
international environment law. Moreover, Stockholm Declaration has served as a basis for the
subsequent development of international environmental law in the form of numerous bilateral
and multilateral conventions and other legally binding instruments.

3. Concept of Sustainable Development

The concept of sustainable development has been accepted in Rio-declaration in Earth Summit,
1992. It is a policy change or strategy which approaches and guarantees that economic growth
should not proceed in way that it reduces the ability of future generations to live well. In
Vellore citizens Welfare Forum Vs UOI, Supreme Court has said that the traditional concept
that development and ecology are opposed to each other is no longer acceptable. Sustainable
development is the answer. Sustainable development means development that meets the needs
of the present generations without comprising the ability of the future generations to meet their
own needs. Sustainable development is a balancing concept between ecology and development
the view that precautionary principle and polluter pays principle are essential features of
sustainable development.

4. Principles of International Environmental Law

In the sphere of environment, scientific theorems are not seldom accurate. It therefore
necessitates the World Conferences to innovate legal theories of common application. They
form part of International Environment Law. Its aims to guide behavior of mankind, as well,
in relation to acceptable technical and operational devices. Currently IEL has mostly been a
compendium of Treaties, Conventions, Declarations, and Protocols etc.

It desires to build up a Creative World Environmental Order. It attempts to settle common

principles and norms. In a relationship between the nations, by the International Law, the
private law right needs to yield to the international obligations. As a result certain legal theories
as evolved on global level, viz., Sustainable development, Environment Impact Assessment,
Conservation of Bio-Diversity, Polluters Pays, Environmental Insurance Policy have entered
into municipal laws of several countries thus to some extent there exists a rhythm.

5. Law & Procedure under Environment Protection Act, 1986

The Act aims at protecting and improving the environment and prevention of hazards to human
beings, other living creatures, plants and property. The main provisions in the Act envisage
taking all such measures as the Government deems necessary or expedient for the purpose of
protecting and improving the quality of the environment and preventing, controlling and
abating environmental pollution.

Central Government has been given powers to take following measures under Section – 3 of
the Act:

- co-ordination of actions of State Govt and officers and other authorities

- planning & execution of a nation wide programme for the prevention, control and
abatement of environmental pollution
- laying down standards for the quality of environment in its various aspects.
- Laying down standards for emission or discharge of environmental pollutants from
various sources
- Laying down procedures and safeguards faor prevention of accidents which may cause
environmental pollution and remedial measures for such accidents
- Laying down procedures and safeguards for the handling of hazardous substances
- Examination of manufacturing process, materials and substances as are likely to cause
environmental pollution
- Carrying out and sponsoring investigations and research relating to problems of
environmental pollution
 - Inspection of premises, plant, equipment, manufacturing or process necessary for the
prevention, control and abatement of environmental pollution
- Establishment and recognizing environmental laboratories.
- Collection and dissemination of information in respect of matters relating to
environmental pollution
- Such other matters as the Central Government deems necessary or expedient for the
purpose or securing the effective implementation of the provisions of the Act.
Further the Act confers following powers on Central Government

- Power to issue directions

- Power of entry and inspection
- Power of search & seizure
- Power to take samples and analyze the same
- Power to make rules

6. Penalties under EPA

Any person failing to comply with provisions of the Act or rules or directions made under the
Act is punishable with imprisonment upto 5 years and fine upto Rs. 1 lakh or both. In case the
offence continues, additional fine upto Rs. 5000 per day of continuance of default can be levied.

7. Environment Audit

Environment Audit is the basic management tool comprising a systematic, documented

periodic and objective evaluation of how will environmental organization, management
systems and equipment are performing. The aim of the audit is to facilitate management control
of environmental practices and to enable the company to assess compliance with company
policies including meeting regulatory requirements. Environment Audit is made mandatory by
the Central Govt and covers all industries which fall under Water Act, Air Act, Hazardous
Waste Rules. Every industry has to submit environment audit report in prescribed form every
year on or before 15th May every year. The audit report should be signed by the industry itself
and not by any outside auditors.

Eco Labelling: In order to encourage industries to use environmental friendly policies, a

scheme of Eco mark or Eco labeling has been introduced. This mark will be permitted to be
put on products made by industries which follow eco-friendly policies and the product is also
eco-friendly.

8. Environment Impact Assessment

With the enactment of multifarious laws to control and prevent pollution and protect
environment from further degradation, those setting up new industries have to obtain
environmental clearance to ensure that adequate measures are taken to protect the environment.
In order to assess the environmental impact of developmental projects, Ministry of
Environment and Forests, Government of India, has issued a Gazette notification wherein 30
categories of projects are required to obtain environmental clearance. The Environment Impact
Assessment notification is the first statutory legislation where by developmental activity
requires to be assessessd from the point of view of its associated impacts on the society and
environment. EIA in its simplest form is a systematic examination of the likely but significant
impacts of development proposals on the environment prior to the beginning of any activity.
EIA is the most valuable inter disciplinary , objective decision making tool with respect to
alternate routes for development, process, technologies and project sites. A good EIA report
prepared by a competent consultant, therefore forms the basis of the success of the entire
process.. EIA should be organized and effectively communicated and present clear options for
the mitigation of impacts and sound environmental management.

10. MC Mehta case law series

Supreme Court has consistently taken a tough view in respect of pollution. Many spirited
citizens have approached Courts for protection of environment by filing Public Interest
Litigation. PIL have obtained orders from the court for protection of environment.

In MC Mehta Vs UOI, Supreme Court massive awareness about environmental pollution

should be created by slides, films, etc environment should be a compulsory subject in school.
. It has ordered closure of 168 pollution industries in Delhi.
In MC Mehta Vs UOI (1987) (Ganga water pollution case) it was observed – the financial
capacity of the industry should be considered as irrelevant while requiring them to establish
primary treatment plants,. Just like an industry which cannot pay minimum wages to its
workers cannot be allowed to be exist an industry (tannery in this case) which cannot set up
primary treatment plant cannot be permitted to continue to be in existences for the adverse
effects on the public.

In MC Mehta Vs UOI, 1987, (Oleum Gas leak case), Supreme Court appreciated the
difficulties. It was observed – It is not possible to totally eliminate hazard or risk inherent in
the very use of science and technology. Otherwise it would mean end of all the progress and
development.

The principles of sustainable development was approved in MC Mehta Vs UOI 1997, in this
case, further building construction in sensitive areas i.e area upto 5 kms from the bird sanctuary
was stopped .

12. Public Liability Insurance Act, 1991

The emergence of the new principles of absolute liability coupled with the duty to compensate
to the extent of the capacity of the enterprise has led to the passing of the Public Liability
Insurance Act, 1991. The Act provides that the owner of a hazardous industry is liable to
compensate persons, other than the workmen, affected by accidents occurring in the industry.
The occupier of the enterprise under law is expected to take out an insurance policy to cover
the above mentioned liability.

The enactment of this legislation could be traced directly to Hon’ble Justice Bhagwati’s
Judgement in the Shriram gas leak case and the enshrinment of a new jurisprudence.

This Act was enacted to provide, for public liability insurance for the purpose of providing
immediate relief to the persons affected by accident occufring while handling any hazardous
susbstance and for matters connected there with or incidental thereto.
Section – 3 stipulates that when there3is death or injury to any person (other than a workman)
or damage to any property has resulted from an accident, the owner shall be liable to give such
relief as will be specified without pleading the defense of negligence or default or wrongful act
of any third party.

Every owner of an industry shall take out, before he starts handling any hazardous substance,
one or more insurance policies, providing for Contract of Insurance whereby he is insured
against liability to give relief. Any failure to comply with the provision will make the individual
as well the company liable for prosecution.

13. The Principle of Sustainable Development

The term “Sustainable Development” means development that meets the needs of the present
without compromising the ability of the future generations to meet their own needs. The
inherent idea behind the principle is that of limitations imposed by the state of technology and
social organization, on the environment’s ability to meet present and future needs. This
concept of living off nature’s income rather than squandering its capital is a key tenet of the
principle of sustainable development.

There are four recurring elements which comprise the legal elements of the concept of
sustainable development as reflected in international agreements.

- first, the need to preserve natural resources for the benefit of future generations
- second, the aim of exploiting natural resources in a manner which is prudent and
sustainable
- third, the equitable use of natural resources, which implies that use by one State must
take into account the need of other States.
- Fourth, the need to ensure that environmental considerations are integrated into
economic and other development plans, programmes and projects, and that
development needs are taken into account in applying environmental objectives.

14. The Precautionary Principle

The precautionary principle is based on the self – evident truth that an ounce of prevention is
better than a pound of cure. The core essence of the principle is that – where there are threats
of serious or irreversible damage, lack of full scientific certainty shall not be used as reason
for postponing cost – effective measure to prevent environmental degradation.

15. Polluter – Pays Principle

The polluter –pays principle requires that the cost of pollution should be borne by the person
responsible for causing the pollution and consequential costs. The meaning of the principle
and its application to particular cases and situations remains open to interpretation,
particularly in relation to the nature and extent of costs included. The practical effects of the
principle are in its allocation of economic obligations in relation to environmentally damaging
activities, particularly in relation to liability, the application of rules pertaining to competition
and subsidy. Principle 16 of the Rio Declaration provides that “National authorities should
endeavor to promote the internalization of environmental costs and the use of economic
instruments, taking into account the approach that the polluter should, in principle, bear the
costs of pollution, with due regard to the public interests and without distorting international
trade and investment.”

16. Carbon Credits

Emissions Trading

Emissions Trading, a market-based instrument used for environmental protection, has been
adopted as one of the primary tools for international cooperation to reduce greenhouse gas
emissions under the Kyoto Protocol. As a result, many countries will implement emissions
trading programmes for the first time. However, Emissions Trading is not new—tradable rights
for pollution control were first proposed in 1968—and trading programmes have been
implemented to reduce emissions of SOx, NOx , CO2 and other pollutants.
Emissions Trading allows sources flexibility to determine how and where to meet an overall
limit on the amount of emissions. This compliance flexibility reduces the cost of meeting the
overall emissions limit. To ensure that the environmental goal is achieved, an emissions trading
programme requires accurate monitoring, effective enforcement and, in the case of
conventional pollutants, provisions to protect local air quality.

Since its inclusion in the Kyoto Protocol—as one of three market-based mechanisms to reduce
greenhouse gas (GHG) emissions—the prospect of an international emissions trading system
has attracted wide interest among policy makers, industrialists and others. In principle,
emissions trading is simple. However, in practice, applying the concept effectively to different
pollutants can become quite complex and the term emissions trading applies to a fairly broad
spectrum of systems of different design.

Carbon Credits
The Credits, or Certified Emission Reductions (CERs), are products of the Kyoto Protocol.

One credit is equivalent to 1 tonne of CO2 emission reduced

Exchanges where Carbon Trading is done

i). Chicago Climate Exchange, North America’s first and only multi-sector marketplace for
reducing and trading greenhouse gas (GHG) emissions

ii). European Climate Exchange

iii). Multi-Commodity Exchange (MCX), India’s leading commodity exchange.

Business Opportunity for India

i). Developed countries have to spend nearly $300 to $500 for every tonne reduction in CO2.
This is against $10 to $25 to be spent by developing countries

ii). In developing countries like India, the emission levels are much below the target fixed by
the Kyoto Protocol. So, they are excluded from reduction of GHG emission, on the contrary,
they are entitled to sell surplus credits to developed countries

iv). The European countries and Japan are the major buyers of carbon credits. Foreign
companies which cannot fulfill the protocol norms can buy the surplus credit from companies
in other countries. This lead to a flourishing trade in Credit Emission Reduction
v). India is considered as the largest beneficiary, claiming about 31 per cent of the total world
carbon trade through the Clean Development Mechanism (CDM)

vi). India is expected to rake in at least $5 billion (Rs 22,500 crore) over the next several years

Best Wishes - Tirumala Sridhar