All CL 1-15 Merged With PPT (Vijay)

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JGI JAIN
DEEMED-TO-BE UNIVERSIT Y
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JGI JAINDEEMED-TO-BE UNIVERSIT Y
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Conclusion
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Indian Contract Act,
1872
By,
CS Shruthi Prakash
Title The Indian Contract Act, 1872
DoE 25-04-1872
Extent Whole of India
Object The objective of the Contract Act is to ensure that the rights
and obligations arising out of a contract are honored and that
legal remedies are made available to those who are affected.
ICA, 1872
Sale of
Contracts Partnership
Goods
1872 1930 1932

Definition of a Contract
Section 2(h)
“an agreement enforceable by law"

Agreement Enforceability Contract
Obligations & Rights
of the parties
Obligation Rights
Seller Buyer Seller Buyer
To sell To pay the To receive To receive

car price for the price the car
(O+P) the car of the car (O+P)
Definition of an Agreement
Section 2(e)
"every promise and every set of promises, forming the consideration

for each other."
Promise Consideration Agreement
Offer Acceptance Promise
Offer + Acceptance = Promise
Promise + Consideration = Agreement
Agreement + Enforceabilty = Contract

Essential Elements
of a Valid Contract
Section 10
Types of Contracts
Types of
Contracts
Validity Formation Performance

Validity
Voidable Illegal Unenforceable

Valid Contract Void Contract
Contract Agreement Contract
1. Valid Contract:
An agreement which is binding and enforceable is a valid contract.
All essentials- Section 10

2. Void Contract:
A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable.
VALID----------- VOID
Destruction of a subject
Matter
UNFORESEEN
CHANGE
3. Voidable Contract:
An agreement which is enforceable by law at the option of one or more
parties thereto, but not at the option of the other or others is a voidable
contract.
Agreement by
 coercion,
 undue influence,
 fraud,
 misrepresentation or
 mistake
4. Illegal Agreement:
An agreement which the law forbids to be made.
Agreement Dealing in drugs, kidnap, murder

5. Unenforceable Contract:
Where a contract is good in substance but because of some technical
defect i.e. absence in writing, barred by limitation etc. one or both the
parties cannot sue upon it, it is described as an unenforceable contract .
Not in Writing
Not Registered
Barred By Limitation
Formation
Express Implied Quasi

E-Contract
Contract Contract Contract
1. Express Contract:
A contract would be an express contract if the terms are expressed by
words either in oral or in writing.
2. Implied Contracts:
• Implied contracts come into existence by implication or by conduct of
parties.
• It is not the result of any express promise or promises by the parties
but of their particular acts.
3. Quasi-Contract:
A contract in which there is no intention on part of either party to make
a contract but law imposes a contract upon the parties.
• No Offer
• No Acceptance
• Implied-in-law contract
• An obligation
that the law creates in the abse
nce of an agreement between t
he parties
4. E-Contracts:
A contract is entered into by two or more parties using electronics means,
such as e-mails is known as e-commerce contracts.
Executed
Performa Contract
Unilateral
nce Executory
Contract
Bilateral
1. Executed Contract:
A contract in which both the parties have performed their respective
obligation/promises.
2. Executory Contract:
An executory contract is one where one or both the parties to the contract have to
perform their obligations in future.
a) Unilateral Contract:
A unilateral contract is one in which only one party has to perform his obligation after
formation of the contract and the other party have fulfilled his obligation at the time of
the contract.
2. Executory Contract:
An executory contract is one where one or both the parties to the contract have to
perform their obligations in future.
b) Bilateral Contract:
A bilateral contract is one in which the obligation of both the parties to the contract
is outstanding.
Validity Formation Performance
Express Executed
Valid Contract Contract. Contract
Void Contract Implied Executory

Contract. Contract
Voidable Quasi-contract Unilateral

Contract Contract
Illegal E-contract Bilateral

Agreement Contract
Unenforceable
Contract
THE INDIAN CONTRACT
ACT 1872
Unit – 1
Speaker’s Name : Dr. Manju Priya R
TLEP
Week 1 The Indian Contract Act, 1872
Quadrant 1 3. Before the live session, watch the eLearning content on “L1 The Indian contract Act,
eContent 1872.
4. Read the eLM on “Unit 1: The Indian contract Act, 1872”.
8. Watch this open source video lecture on Indian Contract
https://www.youtube.com/watch?v=JUiRrSTeMoI
Quadrant 2 6. Attend the live session #1 on The Indian Contract Act, 1872.
eTutorial 5. Attempt to answer the questions for Practice #1.
Quadrant 3 1. Take a pre-assessment on “The Indian Contract Act, 1872”.

eAssessment 2. Follow the additional learning plan to improve your understanding, based on the
report of the pre-assessment.
7. After the live session, repeat the Practice #1 for “L1: The Indian Contract Act, 1872”
for self-assessment.
Quadrant 4 9. Participate in collaborative learning by discussing the topics on the discussion forum
Discussions and case studies.
CONTRACT
MEANING
The Indian Contract Act, 1872 defines the term “Contract” under its
section 2 (h) as “An agreement enforceable by law”. In other words,
we can say that a contract is anything that is an agreement and
enforceable by the law of the land.
A contract is a lawful agreement. In other words, an agreement
enforceable by law is a contract.
Contract = Agreement + Legal enforceability
Essentials of a valid contract
A contract that is not a valid contract will have many problems for the parties involved. For this reason, we must be
fully aware of the various elements of a valid contract.
Offer & Intention to Create
Acceptance
Possibility of
Performance Legal Relationship
Lawful
Agreement not declared to Consideration
be Void or Illegal
Competency Of
Legal Formalities the Parties
Certainty of Meaning Free Consent
Lawful Object
Meaning Of Offer
Offer: An offer is a proposal by one party to another to enter into a legally binding
agreement with him.
According Sec.2 (a) of the Indian contract act, Offer is defined as, “When one person
signifies to another his willingness to do or to abstain from doing anything, with a view to
obtaining the assent of that other to such act of abstinence, he is said to make a proposal
Acceptance: Sec.2 (b) - When the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a
promise. Acceptance of offer results in contract. Acceptance must be communicated to the
offeror. It may be express or implied. When communicated by words (spoken or written) or some
specific act, it is express – it is implied by the conduct of the parties or circumstances.
Essentials of valid offer
1. Offer
must be
communic
ated to the
other party
2. Terms of
5. May be the offer
positive or must be
negative clear &
definite
3. Must be
4. Offer must
capable of
be made with
creating
a view to
legal
obtain
relationshi
acceptance
p
Essentials of Valid Acceptance
1. Acceptance must be communicated to the offeror
2. Acceptance must be in the prescribed manner
3. Acceptance must be by the offeree
4. Acceptance must be given before the offer lapse
5. Acceptance may be express or implied

Consideration
Consideration:
According to Sec. 2(d) –Consideration is one of the essential elements
of a valid contract. When at the desire of the promisor, the promisee or
any other person has done/abstained from doing or promises to do or
abstain from doing something - such act or abstinence or promise is
called consideration for the promise.
It means the price for which the promise of the other is bought - a
valuable consideration as a price of the promise – some of value
received by the promisee as an inducement of the promise quid pro
quo ( something in return) – may be of some benefit to the plaintiff or
some detriment to the defendant.
Types of contract
Contracts can further be divided into three major categories.
• I. According to the legal validity
• II. According to the formation
• III. According to the performance
• Void agreement
• Void contract
legal validity •
•
Voidable contract
Unenforceable contract
• Illegal agreement
• Express contract
• Implied contract
Formation: • Quasi contract
• . Executed contract
• Executory contract
Performance •
•
Unilateral contract
Bilateral contract
I. According to legal validity
Void agreement
An agreement not enforceable by law. (from the very Ex: An agreement with minor
beginning)
Void contract
Ex: A promised to marry B. Latter on B died. In this case the
A Contract which is ceases to be enforceable by law
contract becomes void on the death of B.
Voidable contract
Ex: A agreed to sell his car to B for Rs.50,000 where the
Contract is voidable at the option of aggrieved party
consent of B was obtain forcefully.
Unenforceable contract
Which cannot be enforced in court of law Contract must be in writing and registered, stamped,
attested etc.
Illegal agreement
Against law. If it s fraudulent, involves injury to others etc Ex: agreement for smuggling, kidnap, murder
II. According to Formation
Proposal/ any promise made n words is said to Ex: A writes a letter to B that he offers to
Express
be express. Express promise will result in sell his car for Rs.50,000 and B in reply
contract
express contract informs A that he accepts the offer.
Implied
Proposal/ promise made otherwise than in words EX: restaurant
Contract
Certain dealings which are not contracts Ex: X supplied Y a lunatic with
Quasi strictly, though the parties act as if there is a necessaries to his condition. In this
contract contract. It is an obligation which the law case, X is entitled to be reimbursed
creates in the absence of any agreement. from Y’s estate.
III. According to Performance
• Both have completed • Obligation of the parties are to be

their role. performed at a latter time.
• Ex: Cash sales • Ex: A agrees to sell his house to B
for certain amt. Delivery and
1. 2. payment are to be made in following
Executed Executory mth.
contract contract
3. 4.
Unilateral Bilateral
• One fulfilled, one yet to.
contract contract • Both parties obligation are
The obligation is o/s only outstanding at he time of
against one parties at he formation of contract.
time of formation. • EX: Painting
• Ex: Lost son, advt.
Breach of contract
Breach of Contract means non-fulfilment of contractual
obligations. It may be either –
1. Actual breach of contract :-
A) At the time when performance is due
B) During the performance of contract
2. Anticipatory breach of contract
General
• Minor breach: A minor breach happens when you don’t receive an item or
service by the due date.
• For example, you bring a suit to your tailor to be custom fit. The tailor
promises (an oral contract) that they will deliver the adjusted garment in
time for your important presentation but, in fact, they deliver it a day
later.
• Material breach: A material breach is when you receive something
different from what was stated in the agreement. Say, for example, that
your firm contracts with a vendor to deliver 200 copies of a bound manual
for an auto industry conference. But when the boxes arrive at the
conference site, they contain gardening brochures instead.
1. Actual breach of contract
• Actual breach is a failure to perform a contractual obligation when
the agreed-upon time for performance has arrived. In contract law,
an actual breach occurs when one party fails to fulfil their obligations
under the agreement, leaving the other party with no choice but to
seek remedies to compensate for losses incurred as a result of the
breach.
• EX: A contract between a manufacturer and a distributor states

that the manufacturer must deliver 5,000 units of a product by a
specific date. The manufacturer delivers only 1,000 units by the
deadline, resulting in an actual breach of contract.
2. Anticipatory breach of contract
• Anticipatory breach, also known as anticipatory repudiation, is a term

used in contract law to describe a situation where one party to a
contract indicates through words or actions their intent to not perform
their contractual obligations, before the time for performance has
arrived.
• EX: A software development company agrees to deliver a custom
software solution to a client by a specific date. Two weeks before the
deadline, the software company sends an email to the client stating
that they have decided to terminate their services and will not be
delivering the software. This situation is an anticipatory breach, as
the software development company has stated their intention not to
complete their contractual duties before the deadline.
REMEDIES FOR BREACH OF CONTRACT
Parties to a lawful contract are expected to perform their respective
obligations, but whenever there is a breach of contract, the injured or the
aggrieved party can enforce his rights in the court of law. The process of
enforcing the rights is known as remedies for breach of contract.
Types of Remedies for Breach of Contract:
1. SUIT FOR RECESSION
2. SPECIFIC PERFORMANCE
3. SUIT FOR INJUNCTION
4. QUANTUM MERUIT
5. CLAIM FOR DAMAGES
1. Suit for Recession
Ex: Selling car on agreed price on
Recession means cancelling, coming
certain day. A refused, B don’t have
out from contract.
obligation
2. Specific performance
Where the damages are not adequate, can ask for specific performance
3. Suit for injunction

It is an order of court restraining a person from doing a particular act – singer-
agreement for 1 yr
4. Quantum merriut
It means payment in proposition to the amount of work done- as much as earned.
Eg. A contracts with B builder
5. Claim for damages

Claim damage for loss
Kinds of Damages
• Ordinary damages/General or compensatory damages
• Special damages
• Exemplary damages/Punitive damages
• Nominal damages
1. Ordinary damages/General or compensatory damages
• On the breach of a contract, the suffering party may incur some

damages arising naturally, in the usual course of events.
• Ex: Peter agrees to sell and deliver 10 bags of potatoes to John
for Rs 5,000 after two months. On the date of delivery,
the price of potatoes increases and Peter refuses to perform his
promise. John purchases 10 bags of potatoes for Rs 5,500. He
can receive Rs 500 from Peter as ordinary damages arising
directly from the breach.
2. Special damages
• A party to a contract might receive a notice of special circumstances
affecting the contract. In such cases, if he breaches the contract, then he
is liable for the ordinary damages plus the special damages.
• EX: Peter hired the services of John, a goods transporter, to deliver a
machine to his factory urgently. He also informed John that
his business has stopped for want of the machine. However, John delayed
the delivery of the machine by an unreasonable amount of time. Peter
missed out on a huge order since he didn’t have the machine with him.
• In this case, Peter can claim compensation from John. The compensation
amount will include the amount of profit he could have made by running
his factory during the period of delay.
3. Vindictive or Exemplary Damages
• The claim is for mental sufferings or emotional sufferings. Generally

court takes care of such damages. Claim will be more.
• Promise to marry – latter breach.
4. Nominal damages:
No losses , but award for losses.
Claim will be very low.
Ex: A & B car, B done breach.
TLEP
Week 2 Law of Agency
Quadrant 1 2. Watch the eLearning content on “L2: Law of Agency”

eContent 3. Read the eLM on “Unit 2: Law of Agency”
8. Read this blog on Principle agent relationship.
https://blog.ipleaders.in/law-of-agency-what-is-principal-agent-relationship/
Quadrant 2 1. Revise “L1: The Indian Contract Act, 1872” recording of the live Session.
eTutorial 6. Attend the live session #2 on “Law of Agency”
Quadrant 3 7. Repeat the Practice #2 for “L2: Law of Agency” for self-assessment
eAssessment 5. Attempt to answer the questions for Practice #2 on “Law of Agency”
Quadrant 4 9. Participate in collaborative learning by discussing the topics on discussion forum and case studies.
Discussions
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JGI JAIN
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JGI JAIN
JGI JAIN DEEMED-TO-BE UNIVERSIT Y
Conclusion
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JGI JAIN
@
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Law of Agency
Law of Agency
Chapter X of ICA, 1872
Section 182 to 238

Parties
Principal
Agent
An “agent” is a person employed to do any act for another, or

to represent another in dealings with third persons.
The person for whom such act is done, or who is so

represented, is called the “principal”.
Law of Agency
An agent is a person who is employed to bring

his principal into contractual relations with
third parties.
Who may employ
an agent?
Who may be an
agent?
Who may • Any person who is of the age of majority
according to the law to which he is subject,
employ and who is of sound mind, may employ an
agent? agent.
Who may be • any person may become an agent, but no

person who is not of the age of majority
an agent? and of sound mind can become an agent
Authority of an Agent
Express
Implied
Express Agency
The usual form of written contract of agency is the Power of Attorney,
which gives him the authority to act on behalf of his principal in
accordance with the terms and conditions therein.
In an agency created to transfer immovable property, the power of

attorney must be registered.
A power of attorney may be general, giving several powers to the

agent, or special, giving authority to the agent for transacting a single
act.
Power of Attorney
General
Gives several
PoA powers to the agent
Special
Gives authority to
the agent for
transacting a
single act
Implied Agency
A owns a shop in Bangalore, but living himself in Mysore, and visiting

the shop occasionally. The shop is managed by B, and he is in the habit
of ordering goods from C in the name of A for the purposes of the shop,
and of paying for them out of A‟s funds with A‟s knowledge.
B has an implied authority from A to order goods from C in the name of

A for the purposes of the shop.
Classes of Agents
Sub-Agent
Section 191
A “sub-agent” is a person employed by, and acting
under the control of, the original agent in the business
of the agency
Sub-Agent
1. A person who is appointed by the agent and to whom the

principal’s work is delegated to known as sub- agent.
2. So, the sub-agent is the agent of the original agent.

Mercantile Agent
Section 2(9) of the Sale of Goods Act, 1930

Mercantile Agent
“A mercantile agent having in the customary course of business as

such agent authority either to sell goods or consign goods for the
purposes of sale, or to buy goods, or to raise money on the
security of goods”.
This definition covers factors, brokers, auctioneers, commission

agents etc.
Del Credere Agent
Del Credere Agent
A del credere agent is a mercantile agent, who is in consideration of an

extra remuneration guarantees to his principal that the purchasers who
buy on credit will pay for the goods they take.
In the event of a third-party failing to pay, the del credere agent is bound to
pay his principal the sum owned by third party.
Auctioneers
Auctioneer
An auctioneer is an agent who sells goods by auction, i.e., to the highest bidder
in public competition.
He has no authority to warrant his principal’s title to the goods.

Partners
Partners
Partnership” is the relation between persons who have agreed to

share the profits of a business carried on by all or any of them
acting for all.
In a partnership firm, every partner is an agent of the firm and

of his co-partners for the purpose of the business of the firm.
Bankers
Bankers
The relationship between a banker and his customer is primarily
that of debtor and creditor.
In addition, a banker is an agent of his customer when he buys or

sells securities, collects cheques, dividends, bills or promissory
notes on behalf of his customer.
He has a general lien on all securities and goods in his possession

in respect of the general balance due to him by the customer.
Promoters
Directors
Directors as Agents
• Directors are not the agents of the company.
• Company has a Seperate Legal Existence from the time of
Incorporation.
• Though Directors, KMP and other employees exceute the contracts on
behalf of the proposed company, they are not treated as Agents.
Law of Agency
Unit – 2
Speaker’s Name: Dr.R.Manju Priya
TLEP
Week 2 Law of Agency

Quadrant 1 2. Watch the eLearning content on “L2: Law of Agency”
eContent 3. Read the eLM on “Unit 2: Law of Agency”
8. Read this blog on Principle agent relationship.
https://blog.ipleaders.in/law-of-agency-what-is-principal-agent-relationship/
Quadrant 2 1. Revise “L1: The Indian Contract Act, 1872” recording of the live Session.
eTutorial 6. Attend the live session #2 on “Law of Agency”
Quadrant 3 7. Repeat the Practice #2 for “L2: Law of Agency” for self-assessment
eAssessment 5. Attempt to answer the questions for Practice #2 on “Law of Agency”
Quadrant 4 9. Participate in collaborative learning by discussing the topics on discussion forum and case
Discussions studies.
Contract of Agency (sections 182-238)
• Business complexities
• The another person who acts on behalf of a businessman is
known as an agent.
• The person for whom such act is done is called principal
A appoints B to sell his cars oh his behalf. A is the principal and B is the agent. The
relationship between A & B is called contract of agency.
• The function of the agent is to bring about the contractual
relationship between the principal and the third party.
• The agent is mearly a contracting link between principal and
third party.
• The act of the agent bind his principal to the third party.
• The agent has the power to make the principal answerable to
the third parties for his conduct.
Essentials of agency
The Principal must be competent to enter into a valid contract
Any person may become an agent (minor)
There should be an agreement between agent and principal

(express or implied)
Agent must act in representative capacity
No consideration
How Agency relationship is established
Creation of
Agency
1. Agency by 2. Agency by 3. Agency by

4. Agency by
express implied operation of
ratification
agreement agreement law
1. Agency by estoppel
2. Agency by holding out
3. Agency by necessity
1. Express 2. Implied 3. By operation of 4. Ratification
agreement law
Agency contract may be Subsequent acceptance

created by express Inferred by Agency is by the principal in
words,written. circumstance or continues by respect of an act done by
case operation of law the agent without
authority.
Generally power of attorney
will be in written
1.Agency by 2. By holding out:
estoppel: Prevent a Requires some
person from affirmative or positive
denying a fact. act by the principal
3. By Necessity:
Sometimes
circumstances
requires that a
person who is not
an agent should act
as an agent
Examples
• 2A. Agency by Estoppel: Through Estoppel also agency can be created. If a Person Carelessly
Allows Others to Believe that Someone is his Agent, then he Can’t Deny
a. Principal A is taking his servant B to market and introduced the servant to the shopkeeper and
creates a relationship between B and shopkeeper. It will creates a thinking that hereafter B will buy
the goods on behalf of A.
• b. For example, let’s say that a person acts as if he/she were an agent of a real estate agency, so
he/she tries to represent you before third parties. In this case, the real estate agency directive knows
what is going on but does not direct its efforts to put an end to the situation because, in one way or
another, it is making a profit.
• The supposed “agent” has folders with the logo of the real estate agency and business cards that
help other people to trust what he presumes to be.
• In the event of a legal dispute with a third party, it is inevitable that the principal (real estate
agency) will be involved. The third party will sue the agency with which it assumes to have done
business through an “authorized agent”. In this case, a court could determine that the real estate
agency is “estopped” from denying an agency relationship with the “agent”. These is the agency by
estoppel.
• 2B. Agency by holding out: arises when the conduct of a person makes the third person to
believe
• A who is a domestic servant of B, generally purchase goods on credit from C and pays them
regularly. C can assume that A is B’s implied agent. Subsequently A uses B’s authority to
purchase goods for his own use. C files a suit against B to recover the cost of the goods which
were actually consumed by A. In this case, B is bound by his prior conduct in holding out that A
was his agent. C can recover the price from B.
• 2C. Agency by Necessity:
• Where a horse sent by rail was not taken delivery of by the owner, the station master had to feed
the horse. It was held that the station master became an agent of necessity and the owner liable for
the charges incurred by him.
• 3. Operation of law: A partner is the agent of the firm and the act of the partner to carry on the
business of the firm in the usual way binds the firm and its partners.
• 4. Agency by Ratification: A buys certain goods on behalf of B. B did not appoint A as his agent.
B may, upon hearing of the transaction, accept or reject it. If B accepts it, the act is ratified and A
becomes his agent.
Authority of an agent
• authority may be express or implied

1. Actual or • The authority conferred on him by the principal
Real authority • EX: A is employed by B residing in London, to recover at
Bombay a debt, and may give a valid discharge for the same
• Authority of an agent as it appears to others.

2. Ostensible The power of an agent to act on behalf of a
principal, even though not expressly or
Authority impliedly granted.
An agent has authority in emergency to do all such act to protect the principal.
3. Authority in Ex: A consigns provisions to B at Calcutta, with directions to send them
immediately to C at Cuttack, B may sell the provisions at Calcutta, if they will
emergency not bear the journey to Cuttack.
Agent when personally liable?
1. The agent acting for undisclosed principal (a principal person whose
existence is unknown to the third party with whom the agent deals and so, in the
eyes of the third party, the agent is the principal)
2. The agent makes himself expressly liable
3. Principal cannot be sued
4. Agent act beyond his authority
5. Pretended agent (A person untruly representing himself to be the authorized

agent of another, and thereby inducing a third person to deal with him as such
agent)
6. Mistake or fraud
7. Appoints sub agent with out authority

Principal’s Liability
• A. Where the agent contracts for a named principal.

• B. Where the agent contracts for an unnamed principal
• C. Where the agent contracts for an undisclosed principal
A. Where the agent contracts for a named principal.
• 1. When the agent acts within the scope of his authority (sec
226)
• Ex: A, being B’s agent with authority to receive money on his
behalf, receives from C a sum of money due to B. C is
discharged of his obligation to pay the sum in question to B.
• 2. Acts of an agent beyond his authority (sec 227)
• A) Where authority can be separated: When an agent does more than he is authorized to
do.
• EX: A being owner of a ship and cargo authorizes B to procure an insurance for Rs.4000 on
the ship. B procures a policy for Rs.4000 on the ship and another for the like sum on the
cargo. A is bound to pay the premium for the policy on the ship, but not the premium for policy
on the cargo.
• B) Where authority cannot be separated: When an agent does more than he is authorized
to do. Here principal can repudiate the whole transaction.
• EX: A authorizes B to buy 500 sheeps for him. B buys 500 sheeps and 200 lambs for a sum of
Rs.6,000. A may repudiate the whole transaction.
• C) Notice given to agent as notice to principal:
• The knowledge of the agent is the knowledge of the principal
• Ex: A is employed by B to buy from C goods of which C is the apparent owner. A was, before
he was so employed, a servant of C, and then learnt that the goods really belonged to D, but
B is ignorant of the fact. In spite of the knowledge of his agent, B may set-off against the price
of the goods a debt owning to him from C.
• D) Principal’s liability for Unauthorised act of the agent:
• When an agent has, without authority done acts or incurred obligations to third persons on
behalf of his principal, the principal is bound by such acts.
• EX: A consigns goods to B for sale, and gives him instructions not to sell under a fixed price.
C, being ignorant of B’s instructions enters into a contract with B to buy the goods at a lower
than the reserved price. A is bound by the contract.
• E) Misrepresentaiton or fraud by the agent:

• It is presumed that it has been conducted by principal.
• EX: A, being B’S agent for the sale of goods induces C to buy them by a misrepresentation
which he was not authorized by B. The contract is voidable, as between B and C, at the option
of C.
B. Where agent acting for unnamed principal
(existence is known but identity is unknown)
• Where an agent expressly contracts disclosing his representative character, but without
disclosing the identity of his principal, the principal is said to be unnamed. In such case
principal is bound by the contracts made on his behalf.
• C. Agent acting for undisclosed principal: (agent makes the contract on his own
name)
Entering into contract without disclosing the name of the principal. The below are the rights
of the parties incase where the principal is not disclosed.
1. In case where the agent is personally liable, a person dealing with him may hold either
him or his principal or both of them liable.
2. If the principal discloses himself before the contract is completed, the other contracting
party will have the option to refuse to fulfill the contract.
General examples of agency relationship
• 1. Shareholders and Company Executives

• In this relationship, the company executives serve as the agents and the shareholders as the
principal. Investors, in this case, are the shareholders who fund the companies run by company
executives.
• 2. Board of Directors and CEO
• The CEO (agent) serves the board of directors (principal). The board of directors would support the
CEO if he can make profitable decisions. On the other side, the relationship between the board of
directors and the CEO might be problematic if the choice made by the CEO hurts the company’s
financial situation.
Role or Duties of an agent
Duty in conducting principals business
Duty to render accounts
Duty not to make secret profits
Duty to pay sums received for principal
Not to delegate
Adverse title
Types of Agents
Based on nature
Based on Extent
of work
on their authority
performed
1.Based on extent on authority
1. Special Agent – a)To perform a particular act b)Limited
Authority c)When the act is performed the authority comes to an
end
Ex: Mahes employs sachin as his agent to sell his house in
Chennai.
2.General Agent – a) Authority to do all acts connected with a
particular trade or business.
b) Principal is bound by the agent act done within the scope of
his authority. Ex: A owns three business oil, ricemill, tractor. For
each of his he has an agent.
3.Universal agent – Authority to act for the principal is unlimited

provided its legal. Ex personal secretary.
2. Based on nature of work performed
1. Commercial agent – authority to sell either goods or services. To consign goods

only for sale. Ex. This inclues factor, broker, commercial agent
2. Banker – Relationship between banker and customer. (ex opening of Acc)
3. Non mercantile agents – Ex insurance agents, solicitors.

TLEP
Week 3 Company Board of directors and Board
committees
Quadrant 1 2. Watch the eLearning content on “L3: Company Board of directors and Board Committees”
eContent 3. Read the eLM on “Unit 3: Company Board of directors and Board Committees”
”
7. Read this open-source material on Composition of board of directors https://www.toppr.com/guides/business-
law-cs/elements-of-company-law-ii/board-of-directors-
composition/#:~:text=Section%20149%20of%20the%20Companies,assign%20as%20directors%20is%20fifteen.
Quadrant 2 1. Revise “L2: Company Board of directors and Board committees” recording of the live Session
eTutorial 5. Attend the live session #3 on “Company Board of directors and Board committees”
Quadrant 3 4. Attempt to answer the questions for Practice #3 on “Company Board of directors and Board committees”
eAssessment 6. Repeat the Practice #3 for “L3: Company Board of directors and Board committees” for self-assessment
Discussions
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JGI JAIN
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JGI JAIN
JGI JAIN
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JGI JAIN
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JGI JAIN
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JGI JAIN
Conclusion
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JGI JAIN
JGI JAIN
@
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Company Board of Directors and Board Committees
under the Companies Act 2013
Unit – 3
Speaker’s Name : Dr. MANJU PRIYA R
Week 3 Company Board of directors and Board
committees
Quadrant 1 2. Watch the eLearning content on “L3: Company Board of directors and Board Committees”
eContent 3. Read the eLM on “Unit 3: Company Board of directors and Board Committees”
”
7. Read this open-source material on Composition of board of directors
https://www.toppr.com/guides/business-law-cs/elements-of-company-law-ii/board-of-directors-
composition/#:~:text=Section%20149%20of%20the%20Companies,assign%20as%20directors%20is%20fifteen.
eTutorial 5. Attend the live session #3 on “Company Board of directors and Board committees”
Quadrant 3 4. Attempt to answer the questions for Practice #3 on “Company Board of directors and Board
eAssessment committees”
6. Repeat the Practice #3 for “L3: Company Board of directors and Board committees” for self-
assessment
Discussions
What Is Board Composition?
• Board composition refers to the people in an organization’s board of

directors and what they bring to the board table, such as their
management background and skills. Board composition varies widely
depending upon an organization’s goals and industry.
• Diversity in terms of members’ experience, skills, and backgrounds can
improve board performance. It offers deep insights, a wealth of
experience, and the multiple perspectives necessary for an organization
to tackle challenging industry issues.
• Role of the Board of Directors
• The Board of Directors is responsible for overseeing the management of
a company and ensuring that it operates in the best interests of its
shareholders. They are also responsible for setting the company's
strategy and making major decisions that affect the company's future.
• The composition of the Board of Directors varies depending on the
company's size and industry. In general, the Board is made up of a mix of
executive and non-executive directors, with a range of skills and
experiences.
Definition of Board of Directors
• Section 2(34) of Companies Act 2013 defines a director person as

a director appointed to the Board of a company.
• In other words, director is a person, who is responsible for directing,
governing, conducting and controlling the policy and affairs of a
company.
• Board of directors is a supreme authority in the administration and
management of a company.
• A company acts through the directors.
• In fact the ‘Board’ is the policy framing and decision making organ of
a company.
Section 149 of the Companies Act, 2013 states that every company's board of directors
must have at least:
• Public company: Three directors
• Private company: Two directors
• One person company: One director
• Public company: defined as a company that offers a part of its ownership in the form of
shares, debentures, bonds, securities to the general public through stock market. public
companies can generate funds by issuing shares to the public.
• Private company : type of business entity that is privately owned, either by an individual
or a group. Private companies can only issue stock to existing shareholders or current
employers. Private companies can still issue company stock and raise capital from
outside shareholders, but their shares do not trade on a public stock exchange.
• One person company: an OPC is a company established by a single person. A single
individual establishes and manages the company. an OPC is effectively a company that
has only one shareholder as its member. Such companies are generally created when
there is only one founder/promoter for the business. Arkan Diary (OPC) Private Limited
and Truffle House (OPC) Private Limited are examples of one person
• Section 149 of the Companies Act states that every company’s board of directors must
necessarily have a minimum of
• Three directors if it is a public company.
• Two directors if it is a private company and
• one director in a one person company.
• The maximum number of members a company can assign as directors is fifteen.
However, the company can pass a special resolution in a general meeting to allow for
assigning more than fifteen members to the board of directors.
• The maximum number of companies that an individual can become a director of, is 20
companies.
• At least one director, who has lived in India for a minimum of 182 calendar days of the
previous year, shall be appointed by every company’s board. It is a mandatory rule.
• At least, one woman director must be appointed by the company.
• All listed companies must have at least one-third proportion of their board of directors as
independent directors.(For eg 10 directors, 1/3 =4)
Independent directors
• Min 2 or 1/3 which ever is higher.

• The foll co., requires ID:
a) The paid up share capital should be Rs.10 cr or more.
b) Turnover exceeds Rs.100 cr
c) companies with aggregate outstanding loans, debentures, and
deposits, exceeding Rs.50 crore.
Power of Directors
• According to Section 179, CA 2013, the powers of the board of directors are as
follows.
• Board of Directors can exercise all such powers for which the company is
authorised.
• Board of Directors can take all actions on matters in which the company has
authority.
• While using the power vested in the board of directors, the board must adhere to
the rules and provisions of the following –
The Companies Act
The Memorandum of Association
The Articles of Association
Any Regulation, made by the company during general meetings.
Specifically, one can say that the authority of the company is the powers of the
board. However, if necessary the power of the board can be restricted by the
Companies Act, the Memorandum, the Articles. Resolutions passed by
shareholders can also limit the powers of the board.
Understanding on MOA and AOA
• The Memorandum of Association is the principal document of a company. It lays

down the powers and objects of the company as well as the scope of operations at
the company beyond which it cannot operate. A company cannot undertake those
operations which are not listed in its memorandum.
• It is a legal document prepared during a company's formation and registration
process. It defines the company's relationship with shareholders and specifies the
objectives for which the company has been formed.
• When a company is formed, certain rules and regulations are laid down along with
the objectives of the company’s operations and its purpose.
• Articles of Association contain the by-laws that regulate the operations and
functioning of the company like the appointment of directors and handling of
financial records to name a few.
Difference between MOA &
AOA
MOA AOA
The charter of the company indicating the nature They are the rules and regulations for the internal
of business and capital. It also defines the management of the company and are subsidiary
company’s relationship with outside world of memorandum.
It defines the objects and scope of activities of the They are the rules for carrying out the objects of
company, or the area beyond which the actions of the company as set out in memorandum.
the company cannot go.
Clauses of the memorandum cannot be easily Articles of association members have a right to
altered. They can only be altered in accordance alter the articles by a special resolution. Generally
with the mode prescribed by the Act. In some of there is no need to obtain the permission of the
the cases, alteration requires the permission of Court or the Central Government for alteration of
the Central Government or the Court the articles
Any act of the company which is ultra vires the Any act of the company which is ultra vires the
memorandum is wholly void and cannot be articles can be confirmed by the shareholders if it
ratified even by the whole body of shareholders is intra vires the memorandum.
Memorandum of association cannot include any The articles of association are subsidiary both to
clause contrary to the provisions of the the Companies Act and the memorandum of
Companies Act association.
The memorandum generally defines the relation Articles regulate the relationship between the
between the company and the outsiders company and its
Ex for Certificate of Incorporation
• Power Exercised by Company in General Meeting
The board of directors are not allowed to exercise any power or take any decisions, which are specifically to be exercised or a decision
to be taken in a General Meeting.
• Power Exercised by Passing Resolution at Board Meetings
There are also certain powers of the board that those resolutions can only be passed by calling a board meeting. This is done as per
Section 175, Companies Act 2013. Thus, the board of directors can exercise the following powers, only by passing a resolution in the
meetings of the board:
o Make calls on shareholders
o Authorise the buyback of securities and shares
o Issue securities and shares
o Borrow monies
o Investing the funds
o Grant loans
o Approve the financial statement
o Approve amalgamation/merger
o Diversify the business
o Take over a company
• Also, in accordance with Section 117, CA 2013, a copy of every
board resolution must be submitted with the Registrar within 30
days of the passing of the resolution.
• In addition to this, Rule 8 of Companies Rules 2014 has given
certain more powers to the board. Namely, resolutions that can
be passed at board meetings:
Making political contributions
Appointing or removing key managerial personnel.
Appointing internal auditors and secretarial auditors.
The Delegation of Powers of the Board
The Board of Directors may delegate powers such as investing monies,
granting loans, giving guarantee or security by passing a resolution in the
board meeting:
Committee of Directors
Managing Director
Manager
Any other principal officer of the company
The principal officer of a branch office
• Restrictions of Powers of the Board
In accordance with provisions of Section 179, the company can impose
restrictions and conditions on the power of the board of directors. Moreover,
the shareholders are responsible for imposing restrictions and conditions of
the power of the board. Thus, the shareholders pass an ordinary resolution
at a general meeting to do this.
Powers of the Board (Section 179)
• The Board shall exercise the following powers by means of resolutions

passed only at its meetings:
• To make calls on shareholders in respect of money unpaid on their
shares
• To authorise buy-back of securities.
• To issue securities including debentures, whether in India or outside
India
• To borrow monies
• To invest the funds of the company
• To grant loans or give guarantee or provide security in respect of loans*
• To approve financial statement and Board’s report
• To diversify the business of the Company
• To approve amalgamation, merger or reconstruction
• To takeover a company or acquire a controlling or substantial stake in another company
• To make political contributions
• To appoint or remove KMP
• To take note of appointments or removals of any one below KMP
• To appoint Internal Auditors and Secretarial Auditors
• To adopt Common Seal
• To take note of the disclosure of Directors’ interest and shareholding
• To buy, sell investments held by the company (other than trade investments) constituting 5% or more of the paid-up share capital and free
reserves of the investee company
• To invite or accept or renew public deposits and related matters
• To review or change the terms and conditions of public deposits
• To approve quarterly, half-yearly and annual financial statements of financial results
• To fill casual vacancy in the Board [Section 161(4)]
• To enter into contract(s) with related parties (Section 188)
• To appoint MD / WTD / Manager (Section 203)
Board committees
Nomination
Audit and
Committee remuneration
committee
Stakeholder CSR
relationship committee
committee
1. Audit Committee - The primary purpose of this Committee is to
provide supervision of the financial reporting process of the Registered
Company
The audit committee should have a minimum of 3 members.
A total of two-thirds of the committee comprises of independent
directors.
At least one member should have expertise in the field of account
and finance and all audit members must be well in finance.
An independent director will be the chairman of the audit committee.
The company secretary shall be the appointed secretary.
Audit Committee (Section 177)
• The Board of directors of every listed company and every other public company having paid-up capital of Rs.
10 crore or more, or turnover of Rs.100 crore or more or having in aggregate outstanding loans or borrowings
or debentures or deposits exceeding Rs. 50 crore or more shall constitute an audit committee.
• Every audit committee shall act in accordance with the terms of reference specified in writing by the
Board
• The recommendation for appointment, remuneration and terms of appointment of auditors of the company;
• Review and monitor the auditor’s independence and performance, and effectiveness of audit process;
• Examination of the financial statement and the auditors’ report thereon;
• Approval or any subsequent modification of transactions of the company with related parties;
• Scrutiny of inter-corporate loans and investments;
• Valuation of undertakings or assets of the company, wherever it is necessary;
• Evaluation of internal financial controls and risk management systems;
• Monitoring the end use of funds raised through public offers and related matters.
2. Nomination and Remuneration Committee.
 The committee shall comprise of at least three directors.
 All members must be non-executive directors.
 At least 50% of the directors shall be non-executive members.
 Every listed company and every public company having a paid up share capital of Rs.10
crore or more, turnover of Rs.100 crore or more or having in aggregate outstanding loans
or borrowings or debentures or deposits exceeding Rs.50 crore or more, to constitute
Nomination and Remuneration Committee comprising three or more non-executive
directors.
 Terms of reference and duties of the said Committee include:
 To identify persons who are qualified to become directors or who may be appointed in
senior management, recommend to the Board their appointment and removal and shall
carry out evaluation of every director’s performance;
 to formulate the criteria for determining qualifications, positive attributes and
independence of a director;
 to recommend to the board a policy relating to the remuneration for the directors, key
managerial personnel and other employees.
3. Stakeholders Relationship Committee
The Stakeholders Relationship Committee takes care of all
issues related to problems such as grievances of shareholders,
debenture holders and other parties of importance.
This committee looks into such matters and resolve issues
while maintaining a good relationship with shareholders and
other parties.
Thus, the chairman of this committee has to be a non-executive
member director from among the board of directors.
Section 178 of Companies Act, 2013, states that a Company
which holds 1000 number of shareholders, debenture holders,
deposit holders, and any other security holders at any time
during a financial year.
4. Risk management Committee
The members of the board will form the risk management
committee.
A major portion of the Risk Management Committee shall consist of
members of the board.
The chairman of the Risk Management Committee shall be a
member of the board
The risk management committee shall meet at least twice in a year.
The quorum for a meeting of the Risk Management Committee shall
be either two members or one third of the members of the
committee, whichever is higher, including at least one member of the
board of directors in attendance.
5 CSR committee
 by which corporate entities visibly contribute to social good.
every company having a net worth of not less than Rs. 500 crores or more, or
turnover of not less than Rs. 1000 crores or more shall constitute a Corporate
Social Responsibility Committee.
In the case of listed Company at least 3 Directors, out of which one should be an
Independent director
To suggest and devise a CSR Policy according to the Schedule VII of the
Companies Act, 2013 to the Board.
• To recommend the amount of expenditure of the devised policy above.
• To monitor the CSR Policy of Company from time to time and prepare a
transparent monitoring mechanism.
• Institution of a transparent monitoring mechanism for implementation of the CSR
projects or programs or activities undertaken by the Company.
Minimum/ maximum number of directors, number of directorships.
• According to the Companies Act of 2013, the minimum number of directors for a
company depends on the type of company:
• Public company: At least three directors
• Private company: At least two directors
• One person company: At least one director
• The maximum number of directors for any company is 15. A company can
appoint more than 15 directors by passing a special resolution.
• If the number of directors falls below the quorum, the continuing directors
can:
• Appoint a director in the meeting to increase the number of directors to that fixed
for the quorum
• Summon a general meeting of the company to appoint a director
• A person appointed as a director will perform all the duties and
functions of a director as per the provisions of the Companies Act,
2013 (“Act”). A person is appointed as a director for the Board of a
company.
• The Board or Board of Directors of a company means the collective
body of directors of a company.
• The company operates through the Board of Directors. The Board of
Directors is responsible for the management of the company.
They make decisions regarding company affairs.
• The Act lays down the provisions regarding the appointment, rights
and duties of the directors. Any person appointed as a director of a
company has the freedom to be a director in another company.
However, Section 165 of the Act states the provisions relating to the
number of directorships a person can hold at a given time.
Number Of Directorships Of A Director
• Section 165(1) of the Act states that a person can hold the office of director
simultaneously in 20 companies. The number of 20 companies includes
the office of alternate directorship.
• A person cannot be a director in more than 20 companies at a given time.
• However, the maximum number of public companies in which a person
can be a director simultaneously is 10. An individual cannot be appointed
as a director in more than 10 public companies at a given time.
• The purpose of prescribing the number of the office of directorship is that

the person who is appointed as a director can give proper and sufficient
time to a company.
• The Act prohibits a person from holding the office of a director in more than
20 companies to provide quality time to the companies in which he is a
director and discharge his functions as a director in an efficient manner.
Week 4 Company Directors
Quadrant 1 2. Watch the eLearning content on “L4: Company Directors”
eContent 3. Read the eLM on “Unit 4: Company Directors”
7. Read this open-source material on Removal of directors
https://vakilsearch.com/blog/process-removing-director-
board/#:~:text=Overview%20on%20Removing%20a%20Director%20from%20Board&text=Here%20a
re%20a%20few%3A,association%20or%20the%20Companies%20Act.
eTutorial 5. Attend the live session #4 on “Company Directors”
Quadrant 3 4. Attempt to answer the questions for Practice #4 on “Company Directors”

eAssessment 6. After the live session, repeat the Practice #4 for “L4: Company Directors” for self-assessment
Discussions
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JGI JAIN
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JGI JAIN
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JGI JAIN
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JGI JAIN DEEMED-TO-BE UNIVERSIT Y
Conclusion
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JGI JAIN
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JGI JAIN
JGI JAIN
@
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Company Directors
Unit – IV
Week 4 Company Directors
Quadrant 1 2. Watch the eLearning content on “L4: Company Directors”
eContent 3. Read the eLM on “Unit 4: Company Directors”
7. Read this open-source material on Removal of directors
https://vakilsearch.com/blog/process-removing-director-
board/#:~:text=Overview%20on%20Removing%20a%20Director%20from%20Board&text=Here%20are%20a%20few%3
A,association%20or%20the%20Companies%20Act.
eTutorial 5. Attend the live session #4 on “Company Directors”
Quadrant 3 4. Attempt to answer the questions for Practice #4 on “Company Directors”

eAssessment 6. After the live session, repeat the Practice #4 for “L4: Company Directors” for self-assessment
Discussions
Definition
• According to Section 2(34) of Companies Act 2013 defines a director person as a director
appointed to the Board of a company.
• In other words, director is a person, who is responsible for directing, governing,
conducting and controlling the policy and affairs of a company.
• Board of directors is a supreme authority in the administration and management of a
company.
Types of
Directors
1. Residential 4.Women 5. Additional 6.Shadow

directors:sec 3. Small share
2. Independent Director: director director director
149(3) holder
149(6) directors
In india not less Alternate director, other
than 182 days in than a managing
PY director,whole time dire, a. All listed companies
The below co have to Can appoint a single b. Public co having paid up
director in a listed share capital of 100 cr
appoint min 2 ID company c. Turnover of Rs.300 cr or
Notice handover 14 days more
prior to meeting
1. Public companies which 1000 or 1\10th
shareholders
have paid-up share capital
– Rs.10 cr
2. Public co which have
Turoner Rs.100cr or more
Appointment of Directors
• Section 149 (1) of the Companies Act, 2013
• A company may appoint fifteen directors, however, a company may exceed the number of directors’ more
than fifteen directors after a Special Resolution passed at a general company meeting.
• Terms of Appointment:
• The following are the conditions for appointment of directors:
 Only a natural person may be appointed as a Director.
➢ A person may not be appointed as a director unless he or she has a Director Idendification Number
(DIN).
➢ The person will receive a Digital Signature Certificate (DSC) from the accrediting authority for
appointment as director.
➢ Every person nominated for appointment as a director must submit his or her DIN and declaration that he
or she is eligible for appointment as a director under the Companies Act, 2013.
➢ Everyone will give their consent to serve as a director on Form DIR-2 before or after his or her
appointment.
➢ One cannot hold directorship of more than twenty companies at one time including any other directorate
position.
• The director of a company may be appointed in the following
ways:
• 1. By the promotors:
• 2. Subsequent directors:
• 3. By board: a) Casual vacancy
b) Additional director
c) Appointment by central govt
d) Appointment by third party- like deb holders
Reappointment of directors
• The re-appointment of directors will not be automatic. The
board will ensure planned and progressive refreshing of the
Board. A Director who retires at an Annual General Meeting
may, if willing to act, be reappointed.
• The Board shall:
(a) Assess the current Board’s skills and qualities.
(b) Assess the needs of the business currently and going
forward.
(c) Develop criteria required.
(d) Measure each retiring director’s skills against the criteria.
e. Directors discuss and agree whether each retiring director should stand for reelection at
the next Annual General Meeting. Non-executive directors should specifically acknowledge
to the Company that they will have sufficient time to meet what is expected of them.
f. If recommended for re-appointment, each retiring director stands for re-election at the
shareholder meeting in accordance with the Constitution.
The names of candidates submitted for election as directors should be accompanied by the
following information to enable shareholders to make an informed decision:-
(i) biographical details, including competencies and qualifications and information
sufficient to enable an assessment of the independence of the candidate
(ii) details of relationships between the candidate and the company
(iii) details of relationships between the candidate and the directors of the company
(iv) directorships held
(v) particulars of other positions which involve significant time commitments
(vi) the term of office currently served by any directors subject to re-election
(vii) any other particulars required by law.
Rights as a Director of a Company
• The right to access the company’s documents and financial records. As a director, you
can inspect the company’s books and accounts.
• The right to delegate. A director can delegate any of their powers to another person,
provided this is recorded in the company’s minute book and does not violate its
constitution.
• The right to participate in board meetings and decisions. This is usually stated in the
company’s constitution.
• The right to remain in office until that person is removed. A company’s constitution also
states how a director is removed, either by a majority vote of the other directors or by a
resolution.
• Inspection of board meeting minutes is a legal right.
• The ability to claim travel, lodging, and other expenditures.
• The right to call board meetings.
• Right to request an alternate director from the board of directors.
Duties of Directors
1. Duty to good faith
2. Duty to reasonable care, skill and deligence
3. Duty to comply with the act
4. Duty to attend board meeting
5. Duty to maintain confidentaility
6 Duty to prevent fraud
7. Duty to disclose directorship in other companies
8. Duty to exercise independent judgement
9. Duty to ensure timely and accurate financial reporting
Some additional duties and responsibilities
1. Code of conduct
2. Nomination and remuneration comittee
3. Audit committee
4. CSR
5. Risk management
6 AGM
Removal of Directors
1. Prior 14 day notice, to

1. By directors with reason.
shareholders 2. Passing ordinary
resolution can be done
fraud, gross
Removal 2. Central negligence, breach
Government of trust
ground of
3. By company mismanagement,
law board unjust treatment to
investors etc.
Vacation of Office of Directors
• The Office of a director becomes vacant on the following grounds:-

• ➢ If he incurs any disqualification specified in Section 164;
• ➢ If he absents himself from all the meetings of the board of directors held during the
period of 12 months with or without seeking leave of absence of the Board;
• ➢ If he act in contravention of the provisions of Section 184 relating to entering into
contracts and arrangements in which he is directly or indirectly interested;
• ➢ If he fails to disclose his interest in any contract or arrangement in which he is directly
or indirectly interested , in contravention of the provisions of section 184;
• ➢ If he becomes disqualified by an order of a court or the tribunal;
• ➢ If he is convicted by a court of any offence, whether involving moral turpitude or
otherwise and sentenced in respect thereof to imprisonment for not less than 6 months
Disqualification of director
• Section 164 of Companies Act, 2013 specified certain cases where a director is
disqualified from being appointed as director of the company.
• ➢ Person of unsound mind and stands so declared by a competent court;
• ➢ Undischarged insolvent;
• ➢ Person who has applied to be adjudicated as an insolvent and his application is
pending;
• ➢ Any person who has been convicted by a court of any offence, whether involving moral
turpitude or otherwise, and sentenced in respect thereof to imprisonment for 6 months or
more and a period of 5 years has not elapsed from the date of expiry of the sentence.
Therefore, after expiry of sentence, a person is ineligible to be appointed for next 5 years.
• ➢ However, if a person has been convicted of any offense and sentenced to
imprisonment for such office for 7 years or more then he shall not be eligible to be
appointed as a director in any company;
• ➢ Where an order, disqualifying him for appointment as a director, has been passed by a
court or Tribunal and the order is in force;
• ➢ Any person who has not paid any calls in respect of any shares of the company held by
him, whether alone or jointly with others, and 6 months have elapsed from the last day
fixed for the payment of the call;
• ➢ he has been convicted of the offense dealing with related party transactions under
section 188 at any time during the last preceding 5 years; or
• ➢ he has not complied with section 152(3), i.e., DIN has not been allotted to him.
• ➢ he has not complied with the provisions of section 165(1), i.e., a director can’t hold
directorship, including alternate directorship, in more than 20 companies at the same
time.
Disqualification for offenses of company
• Any non-compliance by the company have an impact on the directors as well. As per
Section 164(2) of Companies Act, in following cases, a director shall be disqualified from
being appointed as director due to non-compliance by company:
• 1. Non-filing of Financial statements or Annual return for continuous 3 Financial year:
disqualified from being appointed as director.
• 2. Failure to repay deposits or interest or redeem debentures, etc.:
Consequences of Disqualification
• a. Vacation of Office of Director in Existing Company

➢ Any person who is disqualified shall vacate his office of director.
➢ However, in case of disqualification, the director shall vacate his office in all companies
other than the company which is in default.
b. Disqualified from appointment or re-appointment as director
➢ Any disqualified director can’t be appointed or reappointed as director in any other
company for certain period.
Retirement of Directors
• Directors may be removed either by rotation or for a fixed term. When finalizing
the board, the company must make provisions in the company documents for the
manner of retirement and the directors must be well informed about their
retirement process. Breach of such provision is punishable under Section 172 of
the Companies Act 2013.
• Prohibition on the retirement of directors in case of a Government company or a
subsidiary of a Government company – Provisions relating to the retirement of
directors and filling of vacancies do not apply to
(a) a Government company (other than a listed company) where at least 50% of
the paid-up share capital is held by the Central Government or any State
Government or both the whole of the paid-up capital is held by the Central
Government or a State Government or both, or a subsidiary thereof
(b) (b) a subsidiary of a Government company referred to in clause (a) above
[amendment of MCA Notification No. 463(E) of 13 June 2017]
• Prohibition of retirement of directors in a private company or sole proprietorship –
In the case of a private company or OPC, directors need not retire by rotation or
otherwise as Section 152(6) of the Companies Act, 2013 applies only to public
companies.
Resignation of director u/s
168
(1) A director may resign from his office by giving a notice in writing to the company and the Board shall on
receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within
such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of
directors laid in the immediately following general meeting by the company:
Provided that a director shall also forward director may also forward a copy of his resignation along
with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may
be prescribed.
(2) The resignation of a director shall take effect from the date on which the notice is received by the company or
the date, if any, specified by the director in the notice, whichever is later:
Provided that the director who has resigned shall be liable even after his resignation for the offences which
occurred during his tenure.
(3) Where all the directors of a company resign from their offices, or vacate their offices under section 167,
the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall
hold office till the directors are appointed by the company in general meeting.
Loans to Directors
• Section 185 of the Companies Act, 2013 lays down certain

restrictions with regard to the granting of loans to Directors in order
to monitor their working.
• Loans to the Managing Director or Whole Time Director: The
loans to MD or WTD may be given only if the following conditions are
met with:- – Where it is part of the Policy of Service of the company
to grant loans to all employees.
• Loans to Subsidiary Company: Where the holding company grants
the loan, guarantee or security to its wholly-owned subsidiary
company, which uses the same for its principal activity of business
only
Disclosure of Interest u/s 299
• 1. Every director or company who is in any way whether directly or
indirectly, entered into or to be entered into shall disclose the nature of the
concern in the board meeting.
• 2. Where any Director is not concerned/interested at the time of entering
into a contract/arrangement , but becomes concerned/interested later,
such concern or interest to be disclosed at the first Board meeting held
such concern or interest to be disclosed at the Board meeting held after he
becomes interested.
• A contract/arrangement entered into by the company:
‐ without such disclosure or
‐ with participation of interested director shall be voidable at the
option of the company.
• Penal Provisions: ‐ a Director who contravenes the provisions
to be Punishable with imprisonment for max 1 year term or with
fine of minimum 50,000 and maximum 1 lac or both.
Legal positions of the Directors
• sometimes described as agents, trustees, employees, managing
partners, and so on.
1. Directors as Agent: agents of the company for the conduct of the
business of the company. A company cannot act by itself. It acts only to
throw its directors.
• conduct the business of the company with the care, skill, and diligence
2. Director as Trustees: Act as Fuduciary capacity- They must account
for all the money over which they exercise control. They must exercise their
powers honestly in the interest of the company and all the shareholders and
not their section interest.
• Directors as Employees: A person holding the position of a managing
director or a holding director shall be in full-time employment of the
company and hence can be called an employee.
• Directors as Managing Partners: Director represents the shareholders to
conduct the business of a company on their behalf.
• They enjoy the vast past of the management over the company and
perform many functions that are like proprietary, Allotment of share ,raising
of loans and investment of funds of the company. This gives the
impression of directors being the active partners.
Qualifications
• The Companies Act has not laid down any Academic, Professional or
Technical qualification for directors.
• But, the provisions are made in the articles of a company for share
qualification.
• Every person, who is appointed as a director of a company, must obtain at
least minimum number of qualification shares, prescribed by the
Articles of a company, within the period of two months from his
appointment.
• This provision (of holding qualification shares) does not apply to those
directors, who
• i) Are appointed by the Central Government.
• ii) Represent the interest of special class of investors, like debenture
holders.
• iii) Are appointed in an independent private company.
Week 5 Appointment and remuneration of key
managerial personnel
Quadrant 1 2. Watch the eLearning content on “L5: Appointment and remuneration of key managerial
personnel”
eContent
3. Read the eLM on “Unit 5: Appointment and remuneration of key managerial personnel”
8. Read this open-source material on KMP, roles and responsibilities.
https://cleartax.in/s/key-managerial-personnel-kmp-under-companies-act-2013
Quadrant 2 1. Revise “L4: Company Directors” recording of the live Session

eTutorial 5. Attend the live session #5 on “Appointment and remuneration of key managerial personnel”
Quadrant 3 4. Attempt to answer the questions for Practice #5 on “Appointment and remuneration of key
managerial personnel”
eAssessment
7. After the live session, repeat the Practice #5 for “L5: Appointment and remuneration of key
managerial personnel” for self-assessment
10. Attempt Continuous Internal Assessment 1
Discussions
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JGI JAIN
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JGI JAIN
⚫
JGI JAIN
⚫
JGI JAIN
Conclusion
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JGI JAIN
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JGI JAIN
@
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JGI JAIN
⚫
Appointment and
remuneration of KMP
Unit – V
Week 5 Appointment and remuneration of key
managerial personnel
Quadrant 1 2. Watch the eLearning content on “L5: Appointment and remuneration of key managerial
personnel”
eContent
3. Read the eLM on “Unit 5: Appointment and remuneration of key managerial personnel”
8. Read this open-source material on KMP, roles and responsibilities.
https://cleartax.in/s/key-managerial-personnel-kmp-under-companies-act-2013
Quadrant 2 1. Revise “L4: Company Directors” recording of the live Session

eTutorial 5. Attend the live session #5 on “Appointment and remuneration of key managerial
personnel”
Quadrant 3 4. Attempt to answer the questions for Practice #5 on “Appointment and remuneration of
key managerial personnel”
eAssessment
7. After the live session, repeat the Practice #5 for “L5: Appointment and remuneration of
key managerial personnel” for self-assessment
Quadrant 4 9. Participate in collaborative learning by discussing the topics on discussion forum and
case studies.
Discussions
WHO IS A KEY MANAGERIAL PERSONNEL?
• The definition of the term Key Managerial Personnel is contained in Section 2(51)
of the Companies Act, 2013. The said Section states as under: “key managerial
personnel”, in relation to a company, means—
• (i) the Chief Executive Officer or the managing director or the manager;
• (ii) the company secretary
• (iii) the whole-time director
• (iv) the Chief Financial Officer and
• (v) such other officer as may be prescribed
Chief Financial
Whole Time Director Officer (CFO)
(WTD) Manager
Company secretary
Managing Director
(MD)
Chief Executive
KM Any other officer
as my be
Officer (CEO)
P specified
Why the Key Managerial Personnel came into
being?
1. Better Corporate Governance: (i) maintaining transparency and accountability within the
organization. (ii) ensure that the company’s operations are conducted ethically and in
accordance with the applicable laws
2. Decision Making and Strategy Development: KMPs are responsible for making critical
decisions that impact the company’s growth and profitability.
3. Compliance with Legal Requirements: The Companies Act, 2013, mandates the
appointment of certain Key Managerial Personnel, such as Managing Directors, Whole-
Time Directors, Chief Executive Officers, Chief Financial Officers, and Company
Secretaries. These individuals are responsible for ensuring that the company complies with
various legal requirements and avoids penalties and legal issues.
1.4. Representation of Stakeholder Interests: Key Managerial Personnel act as
a bridge between the company’s management and its stakeholders, including
shareholders, employees, customers, suppliers, and regulators. They ensure that
the interests of all stakeholders are adequately represented and taken into
consideration in the decision-making process.
1.5. Risk Management: KMPs play a crucial role in identifying and managing the
risks associated with the company’s operations. They help develop and implement
risk management strategies to mitigate potential threats to the company’s
performance and reputation.
6. Financial Management and Reporting: KMPs, particularly Chief Financial

Officers (CFOs), are responsible for managing the company’s finances, ensuring
accurate financial reporting, and maintaining investor confidence. They also play a
vital role in strategic financial planning and resource allocation.
Key Managerial Personnel are essential for the efficient functioning and growth of Indian companies.
They play a crucial role in decision-making, strategy development, risk management, financial
management, and ensuring compliance with legal requirements.
1. Chief Executive Officer, Manager or Managing Director
• The Chief Executive Officer and Managing Director are responsible for
running the company. The Managing Director has authority over all
company operations. They are also responsible for growing and innovating
the company to a larger scale.
• Under the Act, the Managing Director is defined as a director having
substantial powers over the company management and its affairs. A
Managing Director is appointed through any of the following means:
• By the Articles of Association
• An agreement with the company
• A resolution passed in a general meeting
• By the company board of directors
• The Act defines a manager as the individual who manages the whole
company affairs, subject to the board of directors’ direction, control and
superintendence.
2. Company Secretary
• A company secretary is responsible for looking after the efficient

administration of the company. They take care of the company’s
compliance and regulatory requirements. They also ensure that the
instructions and targets of the board are implemented.
• As per the Act, a company secretary or secretary means a company
secretary defined under Section 2 of the Company Secretaries Act,
1980. The Company Secretaries Act defines a Company Secretary
as a person who is a member of the Institute of Company
Secretaries of India (ICSI). The company secretary should ensure
that the company complies with secretarial standards.
3. Whole-Time Director
• Under the Act, a Whole-Time Director is defined as a director who is in whole-time employment of
the company. A Whole-Time Director means a director who works during the entire working hours
of the company. They are different from an independent director as they are part of the daily
operation and has a significant stake in the company. A Managing Director can also be a Whole-
Time Director.
4. Chief Financial Officer(CFO)

• A Chief Financial Officer is responsible for handling the company’s financial status. They keep a
tab on cash flow operations, create contingency plans for financial crises and do financial planning.
They lead the treasury and financial functions of the company.
Difference between a Managing Director and a Whole-time Director
Basis Managing director WTD

1. Power A managing director is entrusted with A whole-time director does not
substantial powers of management. have any discretionary power to
take decisions regarding policy
matters.
2. No of A person can be a managing director of A person cannot be in the whole-
companies more than one company. time employment of more than
one company at a time.
Therefore, a person cannot have
more than one whole-time
directorship.
3. Manager Managing director and a manager cannot A company can have a manager
be appointed in one company at the same and whole-time director, both at
time. the same time.
Distinction between a Manager and a Managing Director
Basis Manager Managing director
Power A manager has management over whole A managing director has substantial powers of
or substantially the whole of the affairs of management.
the company
Director A manager may not be a director of the The managing director must be a director of the
company. company
Appointment A manager may be appointed under a A managing director may be appointed by virtue
contract of service or otherwise. of an agreement with the company or resolution
passed by the company in general meeting or by
the board of directors or the articles or the
memorandum of association of the company.
Number There can be only one manager in a A company may have more than one managing
company director.
Remuneration Maximum remuneration payable to a Where there is more than one managing director,
manager cannot exceed 5% of the net the maximum remuneration payable would be
profits. 10% of the net profits.
WHICH COMPANIES ARE MANDATORILY REQUIRED TO APPOINT KEY MANAGERIAL
PERSONNEL
• As per Section 203 of the Companies Act, 2013 read with the
Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014, the following class of Companies, namely,
Every listed company, and Every other public company having paid
up share capital of Rs. 10 Crores or more shall have the following
whole-time key managerial personnel,—
• Managing Director, or Chief Executive Officer or manager and in
their absence, a whole-time director
• Company secretary and
• Chief Financial Officer
PROCEDURE FOR APPOINTMENT OF KMP:
• Convene a Board Meeting as per section 173 of the Companies Act, 2013 and pass the
resolution for the appointment of KMP with the terms and conditions of appointment and
remuneration.
• Issue appointment letter to the KMP containing the details of appointment date, remuneration,
tenure (if specified any) and other terms and conditions.
• Listed Company shall submit the disclosure of such appointment to the Stock Exchange within
24 hours from the date of the Board Meeting and post the same on the website of the
Company within 2 working days as per SEBI Regulations, 2015
• Every Listed Company and every other Public Company shall file a copy of Board Resolution
with the ROC in form MGT-14 within 30 days of passing of such resolution.
• Company shall file the particulars of appointment of KMP to ROC in Form DIR-12 within 30
days of such appointment.
• Company shall file Form MR 1 within 60 days of appointment of Managerial Personnel i.e
Managing Director/ Whole Time Director/ Manger. This form is not applicable to Private
Company and Government Company.
• Company shall make necessary entries in the Register of Director and Key Managerial
Personals.
RESTRICTIONS REGARDING APPOINTMENT OF KEY MANAGERIAL PERSONNEL:
• 1. No company shall appoint or employ at the same time a managing director and a
manager.
• 2. No company shall appoint or re-appoint any person as its managing director, whole-
time director or manager for a term exceeding five years at a time.
• 3. No company shall appoint or continue the employment of any person as managing
director, whole-time director or manager who —
• is below the age of twenty-one years or has attained the age of seventy years: (Provided
that appointment of a person who has attained the age of seventy years may be made by
passing a special resolution;)
• is an undischarged insolvent or has at any time been adjudged as an insolvent;
• has at any time suspended payment to his creditors or makes, or has at any time made, a
composition with them; or
• has at any time been convicted by a court of an offence and sentenced for a period of
more than six months.
• He Has been sentenced to imprisonment or has been fined with
more than Rs.1000 for the Conviction of an offence under
certain acts.
Roles and Responsibilities of Key Management
Personnel
• Key Management Personnel has been vested with a huge responsibility of being
liable for any non-compliance with the provisions of the Companies Act, 2013.
The management function of implementing important decisions comes under the
responsibilities of Key Management Personnel. The future of a company depends
on the effectiveness of its Key Management Personnel and the consequences of
KMP’s errors could impact the company negatively. Some of their main roles and
responsibilities are given below:
• As per Section 170 of the Act, the details of securities held by Key Management
Personnel in the company or its holding, subsidiary, a subsidiary of the company
or associated companies should be disclosed and recorded in the Registrar of
the Books.
• Key Management Personnel has a right to be heard in the meetings of the Audit
Committee while considering the auditor’s report. However, they do not have the
right to vote.
• According to Section 189(2), Key Management Personnel should disclose to the
company, within 30 days of appointment, relating to their concern or interest in
the other associations, which are required to be included in the register.
Key Role & Responsibilities of Managing Director
/Whole time Director/ Manager in a Company
• Managing Director is entrusted with substantial powers to manage the affairs of the
company in accordance with the memorandum and articles of association of the
company.
• To oversee the company’s operations, financial performance, investments, and ventures
and to give strategic guidance and direction to the board to ensure that the company
achieves its mission and objectives.
• Developing and implementing business plans to improve cost-efficiency.
• Maintaining positive and trust-based relations with business partners, shareholders, and
authorities.
• Supervising, guiding, and delegating executives in their duties.
• Assessing, managing, and resolving problematic developments and situations.
• Signing documents/financial-statements/proceedings/contract on behalf of company.
• To discharge such other duties as have been specified under the Companies Act, 2013 or
rules made thereunder.
Key Function & Duties of Company Secretary in a company
• to report to the Board about compliance with the provisions of Companies Act, 2013, the
rules made thereunder and other laws applicable to the company;
• to ensure that the company complies with the applicable secretarial standards;
• to provide to the directors of the company, collectively and individually, such guidance as
they may require, with regard to their duties, responsibilities and powers;
• to facilitate the convening of meetings and attend Board, committee and general meetings
and maintain the minutes of these meetings;
• to obtain approvals from the Board, general meeting, the government and such other
authorities as required under the provisions of the Companies Act, 2013;
• to represent before various regulators, and other authorities under the Companies Act,
2013 in connection with discharge of various duties under the Act;
• to assist the Board in the conduct of the affairs of the company;
• to assist and advise the Board in ensuring good corporate governance and in complying
with the corporate governance requirements and best practices;
• and to discharge such other duties as have been specified under the Companies Act,
2013 or rules made thereunder; and such other duties as may be assigned by the Board
from time to time.
Role & Responsibilities of CFO in a Company
• Financial planning and monitoring cash flow.

• The CFO being an internal person in the organization has responsibility towards
presenting the financial statements truly and fairly which are subsequently
audited by the statutory auditors of the Company.
• CFOs are required to protect the vital assets of the company, ensure compliance
with financial regulations, close the books correctly, and communicate value and
risk issues to investors and boards.
• CFOs have to operate an efficient and effective finance organization providing a
variety of services to the business such as financial planning and analysis,
treasury, tax, and other finance operations.
• To formulate financial strategies and influence the future direction of the company
CFOs are required to stimulate and drive the timely execution of change in the
finance function of the Company
Managerial Remuneration for
KMPs
• Managerial remuneration is considered as the money paid to the
managerial personnel to incentivize them to work more for the benefits and
growth of the company for the best interests of it. These incentives are
required to drive the workforce to perform their task diligently and in good
faith.
• Remuneration of the managerial personnel– Section 197 of the
Companies Act 2013 provides for the remuneration that is to be provided
to the managerial personnel.
• According to the section, the managerial personnel is entitled to receive a
maximum of 11% of the net profit of the company, but this can also be
changed by the consent of the Board.
• If in a financial year a company does not gain any sort of profit or even if
the profit seems inadequate, the company shall not pay the Managerial
Personnel any remuneration except in accordance to the approval of the
• If the managerial personnel draws or receives excess of remuneration
prescribed either directly or indirectly without prior approval of the
central government, then she or he shall return or refund the amount in
the company’s favour.
• Who fixes the remuneration limit?
• Section 200 of the Companies Act, provides that in respect of the cases
where the company has no profits or any sort of inadequate profits, the
Central government or the company any of them may fix the
remuneration limit under the specified limits of the Companies Act 2013.
• They shall make sure they look into the-
• The financial condition of the mentioned company.
• Remuneration or commission drawn by an individual in other capacity
apart from the key managerial personnel capacity.
• Professional qualification and experience of an individual.
Removal of the Key Managerial Personnel
• provisions of the Companies Act 2013 under Section 169

• also the Nomination & Remuneration committee shall
recommend the removal to the board with reasons recorded in
writing.
The key Legalities related to Key Managerial Personnel in the
Indian Companies Act 2013 are
• The key managerial personnel or an officer may sign any document or

proceeding made by or on behalf of the Company.
• Details of the Key Managerial Personnel changes and the remuneration paid
are to be disclosed in the Annual Return.
• Explanatory statement has to disclose the nature of interest or finances of the
key managerial Personnel.
• A person whose relative is employed as a Key Managerial personnel cannot be
appointed as an auditor in the company.
• A person is generally disqualified to be appointed as a director if he or his
relative holds a position in the Key Managerial Personnel of a company.
• Company should maintain a register of the Key Managerial Personnel at its
registered office with all the important particulars and details about the
holdings, subsidiaries etc of the company.
• Recruitment and change in the Key Managerial Personnel should be
filed and recorded within 30 days.
• Key Managerial Personnel are prohibited to make any deal or trading
staking the securities of the company.
• The chairperson of the company shall sign the financial statements of
the company or it may also be signed by the managing director and the
chief executive officer.
Week 6 Meetings of Board and its committees
Quadrant 1 2. Watch the eLearning content on “L6: Meetings of Board and its committees”
eContent 3. Read the eLM on “Unit 6: Meetings of Board and its committees”
7. Read this open-source material on Quorum of meetings
https://www.azeusconvene.com/articles/quorum-in-board-meeting
Quadrant 2 1. Revise “L5: Appointment and remuneration of key managerial personnel” recording of the
live Session
eTutorial
5. Attend the live session #6 on “Meetings of Board and its committees”
Quadrant 3 4. Attempt to answer the questions for Practice #6 on “Meetings of Board and its committees”
eAssessment 6. After the live session, repeat the Practice #6 for “L6: Meetings of Board and its
committees” for self-assessment
studies.
Discussions
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
JGI JAIN
⚫
JGI JAIN
⚫
JGI JAIN
⚫
JGI JAIN
JGI JAIN
JGI JAIN
JGI JAIN
JGI JAIN
Conclusion
⚫
JGI JAIN
⚫
JGI JAIN
@
⚫
⚫
Meetings of Board and its
committees
Unit – VI
Week 6 Meetings of Board and its
committees
Quadrant 1 2. Watch the eLearning content on “L6: Meetings of Board and its committees”
eContent 3. Read the eLM on “Unit 6: Meetings of Board and its committees”
7. Read this open-source material on Quorum of meetings
https://www.azeusconvene.com/articles/quorum-in-board-meeting
Quadrant 2 1. Revise “L5: Appointment and remuneration of key managerial personnel”

eTutorial recording of the live Session
5. Attend the live session #6 on “Meetings of Board and its committees”
Quadrant 3 4. Attempt to answer the questions for Practice #6 on “Meetings of Board and its
eAssessment committees”
6. After the live session, repeat the Practice #6 for “L6: Meetings of Board and its
committees” for self-assessment
Quadrant 4 9. Participate in collaborative learning by discussing the topics on discussion
Discussions forum and case studies.
Meetings of Board and its
committees.
I. Meetings of shareholders or members
The first main type of meeting is a meeting of shareholders or

members of the company. It is further divided into two
categories, namely:
1.General meeting, and
2.Class meeting.
1.General meeting:
A. Statutory Meeting:
A statutory meeting is a type of general meeting that must be
held by every company limited by shares and every company
limited by guarantee with a share capital within not less than a
month and not more than six months from the date it was The following companies do not have any
incorporated. Private companies are exempt from conducting a obligation to conduct a statutory meeting:
statutory meeting. In this meeting, a report known as the 1.Private company,
‘statutory report’ is discussed by the directors of the company. 2.Company limited by guarantee having
no share capital,
3.Unlimited liability company,
4.A public company that was registered as
a private company earlier
• Notice of the meeting:
board of directors of a company- notice of the meeting to all the shareholders or members of the company – 21 days prior - and an
explicit mention of ‘statutory meeting’ of the company has to be made in the notice.
What is statutory report?
The board of directors is obliged to forward a report known as the ‘statutory report’ at least 21 days before the date of the statutory
meeting. A copy of the report has to be forwarded to the registrar for registration.
particulars of a statutory report:
1. The total number of fully paid-up and partly paid-up shares allotted
2. The sum of the amount of cash received by the company with respect to the shares
3. Information on the receipts, distinguishing them on the basis of their sources and mentioning the amount spent for commission,
brokerage, etc.
4. The names of the directors, auditors, managers and secretaries along with their address and occupation, and changes of their names
and addresses, if any.
5. The particulars of agreements that are to be presented in the meeting for approval, with suggested amendments, if any.
6. The justifications in cases where any underwriting agreement was not executed.
7. The arrears due on calls from directors and other individuals.
What is the procedure to carry out a statutory meeting
• The board of directors has to send a statutory report to every member of the company, as
• The members who attend this meeting may carry out discussions on matters relating to the formation of the
company or matters that are incorporated in the statutory report.
• Below are some of the points one must note:
1. While conducting the statutory meeting, no resolution can be taken.
2. The main motive of conducting such a meeting is to familiarise all the members of the company with matters
relating to the development and origination of the company.
3. The shareholders, perhaps, the members of the company, will receive particulars relating to the following:
• Shares taken up,
• Money received,
• Contracts entered into,
• Preliminary expenses incurred, etc
B. AGM
• U/S 96 of Companies Act 2013
• Once in a year
• An AGM provides a chance for the members of the company to review the workings of the
company and express their opinions on the management and workings of the company.
• Purpose of conducting an annual general meeting:
• The main purpose of conducting an AGM is to transact the ordinary business of the company.
Ordinary business includes the following:
1. Consideration of financial statements and reports from the directors and auditors.
2. Making declarations on dividends.
3. Appointing a replacement of director or directors in place of those who have retired.
4. Appointing and setting up the amount of remuneration for the auditors of the company.
5. It also includes annual accounts, crucial reports, and audits.
• Notice of conducting the annual general meeting:
• 21 days’ notice to its members - The notice must mention the day, date, and location of the meeting, along
with the hour – purpose
• A company is obligated to send the AGM notice to the following:
1. All the members of the company, including the legal representatives of a deceased member and the assignee
of an insolvent member.
2. The statutory auditors of the company.
3. All the directors of the company.
• The notice can be sent either by speed or registered mail or even through electronic means like email.
• https://blog.ipleaders.in/types-of-meetings-in-company-law/
C. Extraordinary
GM
• In a company, there are certain matters that are so crucial to be discussed that
they need to be addressed immediately to the members, which is where an
extraordinary general meeting comes into play.
• Such meetings are usually called for matters that are urgent and for those that
cannot be discussed at annual general meetings.
• Extraordinary general meetings are usually called by the following:
1.The directors or the board of directors of the company,
2.The shareholders of the company who hold 1/10th of the paid-up shares.
Calling of extraordinary general meeting:
1. By the board of directors suo moto:
• In cases when the board of directors has some urgent matters to
discuss and such matters cannot be postponed until the next general
meeting, the board of directors may hold an extraordinary general
meeting if needed.
2. By the Board on the requisition of members who own 1/10th of the
paid-up share capital of the company on the date of receipt of the
requisition on the date of exercising the voting rights.
• Further, it is important to note the following pointers.
1. Notice: The notice must specify the date, day, time, and place of holding the meeting,
and must be held in the same city as the registered office and on a working day.
2.Notice to be signed: The notice has to be duly signed by all the requisitionists or on
behalf of those requisitionists who have permission to sign in place of the requisitionists,
provided the permission is in writing.
3.No need of an explanatory statement to be attached to the notice: There is no need for
any explanatory to be attached with the notice of an extraordinary general meeting
4. Notice for extraordinary general meeting:The notice of an extraordinary general
meeting must be served in writing or through an electronic mode in at least 21 days of
conducting such a meeting.
5.Penalty for not holding an extraordinary general meeting properly: In cases where an
extraordinary general meeting is not conducted properly, a fine of ₹10,000 within a
prescribed time can be levied on the defaulters. Moreover, in case the issue persists, a fine
of ₹1000 per day shall be levied.
2. Class Meeting
• are meetings conducted for shareholders of the company that hold a
particular class of shares.
• Such a meeting is conducted to pass a resolution that is binding only on
members of the concerned class.
• Also, only members belonging to that particular class of shares have the
right to attend.
• Such class meetings can be conducted whenever there is a need to alter or
change the rights or privileges of that class as stated in the articles of
association.
II. Meeting of
Directors
1. Board Meetings:
As per Section 173 of the Companies Act, 2013, a company has to hold the
meeting of board of directors in the following manner:
1.The first board meeting has to be conducted within a span of thirty days
from the date of incorporation.
2.In addition to the above meeting, every company has to hold a minimum
of four board meetings annually, and there shall not be a gap of more than
one hundred and twenty days between consecutive two meetings.
• Purpose of holding a board meeting
1.For issuing shares and debentures.
2.For making calls on shares.
3.For forfeiting the shares.
4.For transferring the shares.
5.For fixing the rate of dividend.
6.For taking loans in addition to debentures.
7.For making an investment in the wealth of the company.
8.For pondering over the difficulties of the company.
9.For making decisions of the policies of the company.
• Notice of board meetings
• As per Section 173(3) of the Companies Act, 2013-
1.A notice of not less than seven days must be sent to every director at the address
that is registered with the company.
2.Such notice can be sent either via speed post, by hand delivery, or through any
electronic means.
3.if the company sends the notice by speed post, or registered post, or by courier, an
additional two days shall be added to the notice served period.
4.In situations when the board meeting is called at shorter notice, it has to be
conducted in the presence of at least one independent director.
• Some important pointers on the requirements and procedures for convening and conducting a valid
board meeting
1. Directors can join the meeting-
a. In person,
b. Through video conferencing, or
c. Other audio visual means.
2.While conducting virtual meetings, it is necessary that companies make proper arrangements to avoid
any issues at the last moment.
3.The chairperson and the secretary of the company have to ensure that they take necessary precautions in
matters relating to video conferencing, like proper security, recording the proceedings and preparing the
minutes of the meeting, having proper audio visual equipment, etc.
4. While beginning the meeting, the chairperson has the duty to roll call every director participating
through video conferencing or other such means to record the following:
1. Name of the director;
2. The place from where the director is participating;
3. An affirmation that the director can completely see, listen, and communicate with the other participants
in the meeting;
4. A confirmation that the director has received the agenda and all the relevant material related to the
meeting;
5. A proclamation that no other individual other than the director is attending or has access to the
proceedings of the meeting at the palace mentioned in pointer.
7. After the roll call, the chairperson or the secretary has to inform the board about the names of the
members who are attending the meeting at the request or with the authorization of the chairman and
affirm that the required quorum is complete.
8. There are some matters that must not be dealt with through video conferencing or other audiovisual
means, namely:
1.An approval of the annual financial statements;
2.An approval of the report of the board;
3.An approval of the prospectus;
4.An approval on matters related to the amalgamation, merger,
demerger, acquisition, and takeover.
2. Committee directors
meeting
• The board of directors has the authority to form committees and delegate powers
to such committees; however, it is crucial that such a committee only consist of
directors and no other members.
• Further, it is mandatory for such committees to be authorised by the articles of
association of the company.
• In large companies, the following routine matters are looked after by the sub-
committees of the board of directors:
1.Allotment,
2.Transfer,
3.Finance.
III. Other Meeting
1. Debenture holders meeting:
This meeting is between the board of directors and the debenture holders. These meetings are
usually called to discuss the rights and responsibilities of debenture holders.
• Meetings of debenture holders are conducted in accordance with the provisions laid down in the
debenture trust deed. The rules and regulations mentioned in the trust deed are related to the
following:
1. Notice of the meeting,
2. Appointment of a chairman of the meeting,
3. Passing resolutions,
4. Quorum of the meeting, and
5. Writing and signing of minutes of the meeting.
• Debenture holder meetings are generally conducted from time to time to discuss
matters where the interest of debenture holders is involved, like at the time of:
1.Reconstruction,
2.Reorganisation,
3.Amalgamation, or
4.Winding up of the company.
2. Creditors meeting
• Meetings of creditors is a term used to describe a meeting setup by the company to
conduct a meeting of the company’s creditors.
• That any sort of changes or modifications suggested by the creditors of the
company are approved by the directors of the company before carrying out that
particular change.
• Notice of meetings of creditors
• If a company is voluntarily winding up, a meeting of creditors must be called to
propose a resolution for voluntary winding up.
• Such a meeting has to be called either on the day of taking such a decision or the
subsequent day, and a general meeting must be conducted to propose the
resolution.
• The notice to creditors must either be sent by post along with the notices regarding
the general meeting of the company for winding up. Additionally, with the notice
to the creditors, the company also has to advertise at least once in the official
gazette and once in two newspapers that are circulated in the district where the
company’s registered office or principal place of business is situated.
3. Creditors and contributors meeting
• Creditor and contributor meetings are usually conducted when the company has gone
into liquidation to calculate the total amount due by the company to its creditors.
• The main motive of holding such meetings is to seek the approval of the contributors
to the scheme of compromise or rearrangement to save the company from economic
difficulties.
• At times, even a court can pass an order to conduct such a meeting. It should be noted
that the term “contributory” encompasses every individual who is accountable for
making contributions to the assets of the company at the time of winding up.
• Quorum in case of contributors
• In the case of a meeting of contributors, at least one creditor is entitled to vote, or all
the contributors if their number does not exceed two.
Requisites of a valid company meeting
• The following are the requisites for conducting a valid company meeting:
1.The meeting is convened by proper authority.
2.The announcement of holding the meeting is served through a proper
notice.
3.While holding the meeting, it is crucial that a proper quorum is present.
4.To conduct the meeting, it is important that it must be presided over by a
proper chairman.
5.At the meeting, business must be validly transacted.
6.It is crucial that proper minutes of the meeting must be prepared.
Difference between AGM and EGM
Basis AGM EGM
What is it? An annual general meeting, commonly An extraordinary general meeting
known as an AGM, is a regular meeting (EGM), is a meeting other than an
held annually. AGM.
AGMs are applicable to all the Similarly, EGMs are applicable to all
Applicability
companies. companies.
An AGM has to be held within six
Time of holding
months of the close of the financial An EGM can be held at any time.
the meeting
year.
The board of directors, along with
Who may call such The board of directors has the authority
requisitionists, have the authority to call
a meeting? to call such a meeting.
such a meeting.
Repercussions of Similarly, the tribunal may call and
The tribunal may call and impose a fine
default in impose a fine in case a company errs in
in case a company defaults in holding
conducting such a holding an EGM in the prescribed
an AGM in a requisite manner.
meeting manner.
Agenda
• Meeting Agenda: Meeting agenda is generally
known as ‘orders of the day’, which the
participants hope to discuss during the meeting.
• communicated prior to the meeting
Example of company agenda
Minutes
• are permanent and formal records of business conducted and
resolutions adopted at a meeting of the board of directors or
shareholders.
• What is minutes of the meeting?
• Meeting minutes are the official summary of what happened
during a meeting. They serve as an outline, a written record for
anyone unable to attend, and to use for future reference.
Minutes document what happened and what decisions were
made.
Quorum
• Quorum means the minimum number of persons who being entitled to attend a
meeting must be present at the meeting so that the business of the meeting can be
transacted validly.
• Features of Quorum:
1 What shall be the quorum for different types of meetings of an organisation are
usually mentioned in its bye-laws or in the Articles of Association in case of a
company.
2. A meeting cannot be started if quorum is not present. The quorum might be
continuously present.
3. It is the duty of the chairman to see that the quorum is present.
4. If quorum is not present at the scheduled hour of a meeting already notified, then the
members present will wait for half an hour.
Where Quorum is Strictly not Necessary:
Normally the quorum is necessary for a valid meeting.

But in the following circumstances a less number of persons
may make the quorum:
i. Whenever a meeting is adjourned for want of quorum, any
number of members present at the adjourned meeting shall
make the quorum.
ii. In case of class meetings if one person alone holds all the
shares of that particular class of shares then he alone shall
make the quorum.
Week 7 Compromises, arrangements,
and amalgamation
Quadrant 1 2. Watch the eLearning content on “L7: Compromises, arrangements, and
eContent amalgamation”
3. Read the eLM on “Unit 7: Compromises, arrangements, and
amalgamation”
7. Read this open-source material on Amalgamation
https://www.edupristine.com/blog/amalgamation-explained-detail
Quadrant 2 1. Revise “L6: Meetings of Board and its committees” recording of the live
eTutorial Session
5. Attend the live session #6 on “Compromises, arrangements, and
amalgamation”
Quadrant 3 4. Attempt to answer the questions for Practice #7 on “Compromises,
eAssessment arrangements, and amalgamation”
6. After the live session, repeat the Practice #7 for “L7: Compromises,
arrangements, and amalgamation” for self-assessment
Discussions forum and case studies.
UNIT
07 Compromises, Arrangements
and Amalgamation
Names of Sub-Units
Introduction to Compromise, Power to Compromise or Make Arrangements with Creditors and

Members, Meaning of Arrangements, Meaning of Amalgamation and its Types, Scheme of Fast Track
Mergers, Cross Border Mergers.
Overview
The unit begins by explaining the meaning of compromise and the power to compromise and make
arrangements with creditors and members. It goes on to explain the meaning of arrangements,
amalgamation and types of amalgamations. It then discusses the scheme of fast track mergers and
towards the end, explains cross border mergers.
Learning Objectives
In this unit, you will learn to:

 Explain the meaning of compromise
 Describe the power to compromise and make arrangements with creditors and members
 State the meaning of arrangements and amalgamations
 Express the scheme of fast-track mergers
 Discuss cross border mergers
JGI JAIN UN IVERSIT Y
Corporate Laws
Learning Outcomes
At the end of this unit, you would:

 Assess the meaning of compromise and the power to compromise with creditors
 Appraise arrangements
 Evaluate amalgamations and their types
 Analyse fast-track mergers
 Examine cross border mergers
Pre-Unit Preparatory Material
 http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/law/04._corporate_law/16._
compromises,_arrangements,_reconstruction,_amalgamation_and_mergers_of_companies_/
et/5676_et_16_et.pdf
 https://www.icsi.edu/media/portals/0/CORPORATE%20RESTRUCTURING.pdf
7.1 INTRODUCTION
In the corporate world, organisations undergo restructuring for many reasons. Some of the
reasons include expansion, customer acquisition, gaining additional expertise, scaling up, reducing
competition, specialisation, diversification, operational synergy, revival, supply of raw materials, and
some organisations restructure to reduce costs. Mergers, amalgamations, acquisitions, compromises,
and arrangements are different forms of corporate restructuring. These activities are governed by
regulations specific to a country. Companies are required to seek prior permission from the authorities
to do this exercise. The Corporate restructuring may result in a change in share capital, change of
shareholders, change of operating entities, etc.
The Corporate restructuring may be organic or inorganic. Organic restructuring involves changes
within the organisation over time. These can be managerial, financial, or operational. Inorganic
restructuring involves the use of external forces. These include mergers, acquisitions, amalgamations,
or compromises. Corporate restructuring can be categorised in to various heads such as internal and
external restructuring, debt and capital restructuring or organic and inorganic restructuring. Various
forms of restructuring are a) Expansion – which includes acquisitions, mergers, joint ventures, b) Sell
offs – which include spin-offs, split-ups, divestures, equity carve outs, c) Corporate Control – which
includes buybacks, anti-takeover agreements, proxy contests, d) Change in ownership – which include
exchange offers, going private, share repurchase and leveraged buyouts.
7.2 MEANING OF COMPROMISE

As per Section 230-231 of the Companies Act, 2013 compromise is a scheme of give and take in a dispute
which is of a commercial nature. Compromise comes into existence only if there is a dispute between
two or more corporate entities or with third parties. In a compromise, both parties have to give up
something and gain something which fulfils their needs.
7.2.1 Power to Compromise or Make Arrangements with Creditors and Members

Section 230 of the Companies Act, 2013 provides for the statutory power of a company to compromise or
make arrangements with creditors and members.
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UNIT 07: Compromises, Arrangements and Amalgamation JGI JAIN UN IVERSIT Y
There are certain procedures to be followed by a company as per the Companies Act, 2013.
The company or any of its creditors or members may file an application with the Tribunal or its liquidator.
The company is required to provide certain information to the Tribunal, which includes:
a. All material facts related to the company, including financial statements, auditor reports, any
pending investigations against the company
b. Any reduction or change in share capital of the company
c. Any debt restructuring consented to by minimum 75% of the secured creditors
d. Safeguards protecting other secured and unsecured creditors
e. Valuation report in respect of shares, property, and all assets, whether movable or immovable
f. Creditor’s responsibility statement prescribed format
Upon receipt of the application, the Tribunal may call for a meeting of the creditors.
The notice of this meeting should be sent to each creditor and debenture holder. The notice should be
accompanied by details of the compromise or arrangement, valuation report and effect on creditors,
debenture holders and promoters of the company. This notice should also be placed on the website of
the company. In case the company is listed, a copy needs to be sent to the Securities and Exchange Board
of India (SEBI), Central government, income tax authorities, Reserve Bank of India, Official liquidator,
Competition Commission of India, other regulatory bodies, as well as published in newspapers.
Objection to the compromise may be made only by those individuals who hold more than 10 percent
of the shareholding or 5 percent of the outstanding debt as per the latest audited financial statement.
The Tribunal needs to see that the scheme of compromise or arrangement is fair and reasonable and
neither against the public nor against the interests of the minority. The Tribunal needs to ensure that the
majority of persons who represent 3/4th in value of creditors have agreed to the scheme of compromise
or arrangement. In case a compromise is sanctioned by the Tribunal through an order, it shall be binding
on the company, creditors, shareholders as an order of the High Court. The scheme shall be approved
only after the company auditor has submitted a certificate sanctioning the scheme by the company. In
the case of listed companies, the takeover offer needs to be in line with the SEBI (Takeover Code) 2011.
The role of the Tribunal is not just supervisory; it is also a pragmatic one, which requires the Tribunal
to form an unbiased and independent judgement in this regard. Like the High Court, the Tribunal also
has the power to implement the order of compromise or arrangement. It may give directions to make
modifications in the compromise or arrangement. The Tribunal may also wind up the company if it
assesses that the compromise cannot be implemented satisfactorily and the company is unable to pay
its debts.
Section 232 discusses the procedure of merger or amalgamation of two or more companies. The assets,
liabilities and shareholders of the transferor company stand to be transferred to the transferee company
from the appointed date which the Tribunal sanctions.
An arrangement, as per the Companies Act, 2013 is the reorganisation of a company’s share capital.
This is done by consolidating shares of different classes or by dividing the shares into different classes or
both. There can be two types of arrangements. A) Between a company and its creditors and b) between
a company and its members.
The main difference between a compromise and an arrangement is that a compromise is between a
company and its creditors or class of creditors whereas an arrangement is between a company and its
members or class of members. In a compromise, the presence of a dispute is essential. In an arrangement,
no dispute may exist.
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Corporate Laws
The order of the Tribunal needs to have certain particulars which are:
i. In case the scheme of compromise provides for conversion of preference shares into equity shares,
the preference shareholders to be given the option to obtain arrears of dividend in cash or accept
equity shares equal to the value of dividend payable
ii. Protection of any class of creditors
iii. In case of variation of shareholder’s rights, effect to be given under Section 48
iv. If creditors are bought out, applications under the Sick Industrial Companies (Special Provisions)
Act shall abate
v. Other matters which the Tribunal deems necessary to execute the scheme of compromise or
arrangement
The order of the Tribunal needs to be filed with the Registrar within 30 days of receipt of the order by
the company. The Tribunal may not call for a meeting of the creditors if creditors having more than
90 percent value agree to the proposed compromise by way of an affidavit. No scheme relating to buy
back securities shall be sanctioned by the Tribunal unless such a scheme conforms to the provisions of
Section 68. Any scheme of compromise or arrangement involving a takeover should comply with SEBI
regulations.
7.3 MEANING OF ARRANGEMENTS

An arrangement or scheme or arrangement or scheme of reconstruction is an agreement between
a company and its shareholder or creditors which is approved by the Court. The arrangement may
affect mergers and amalgamations or may change the rights of shareholders or creditors. Schemes
of arrangement are usually adopted when restructuring cannot be achieved by an alternate mode.
Arrangements can be used in takeovers, rescheduling debt, return of capital, changing the capital
structure, changing the share capital, among others. It may also be used to denote alterations in rights
and liabilities. No dispute needs to be existent for an arrangement to occur. It is not a formal insolvency
process.
7.4 MEANING OF AMALGAMATION

Amalgamation and merger are usually considered synonymous with each other. Amalgamation
involves the blending of two or more existing undertakings into one undertaking. The shareholders
of both companies being blended, become the shareholders in the blended company. Transferring two
or more undertakings into a new company or transferring one or more enterprises into an existing
business are both examples of amalgamation. The assets of the blended companies come under the
control of one company which may or may not be one of the original companies being blended. Mergers
and amalgamations are covered in detail in the Companies Act, 2013.
7.4.1 Types of Amalgamation

There are broadly two types of amalgamation:
a. Amalgamation in the Nature of merger: In this type of amalgamation, both the transferor and the
transferee company decide to combine their shareholder interest with their assets and liabilities.
Alterations may be made in the book values of the assets and liabilities. Shareholders of the
transferor company become the shareholders of the transferee company with a minimum of 90
percent shareholding.
b. Amalgamation in the nature of the purchase: This occurs when conditions for amalgamation
like the merger are not satisfied. The transferor company acquires a transferee company and
4
the shareholders of the transferee company do not have any proportionate shareholding in the
amalgamated company.
To explain amalgamation, consider the following examples. When companies A & B are wound up and a
new company C is formed, which takes over the business of A and B, it is known as amalgamation. When
company A takes over the business of another company B and company B is wound up, it is known as
absorption. When a new company C is formed to take over the business from existing company A and
company A is wound up it is known as external reconstruction. All three are forms of amalgamation.
On amalgamation, if the purchase consideration is more than the net value of assets, the additional
amount is recorded as goodwill, whereas if it is less, then it is recorded as capital reserves.
7.5 SCHEME OF FAST TRACk MERGERS

A Merger is the combining of two or more business entities into one company, where one survives, and
the others may lose their corporate existence. The survivor acquires the assets and liabilities of the
merged company or companies. The company, whose assets and liabilities are transferred, is referred
to as the transferor company. The company to whom the assets and liabilities are transferred is referred
to as the transferee company.
A Fast track merger is a faster option for a merger between a holding company and its wholly-owned
subsidiary company or between two small companies only. The Fast track merger does not require any
approval from the National Company Law Tribunal (NCLT). The procedure for a fast-track mergers is
given below. For this purpose, a small company is any company that is not publically listed, does not
have paid-up share capital of more than INR 50 lakhs, the annual turnover is less than INR 2 Crore,
is not a holding or subsidiary company, The Articles of Association of both transferor and transferee
companies need to authorise the merger. The draft scheme of the merger needs to be approved by a
Board meeting of both transferor and transferee companies. Both companies need to file the draft
merger scheme proposal with the Registrar of Companies.
A notice of the proposed scheme is submitted to the Registrar of Companies and official liquidator,
or persons affected by the scheme, to invite suggestions or objections. A general meeting is held of all
shareholders to approve the proposed scheme. Declaration of solvency in Form CAA-10 is filed by both
companies to the Registrar. A meeting of creditors is held to approve the scheme. Then a copy of the
scheme along with the report of meetings is filed with the Regional Director, Registrar of companies
and official liquidator. If the scheme is approved by the Regional Director after considering objections
and suggestions if any, then it is registered by the Registrar of Companies. After registration, all assets
and liabilities of the transferor company are transferred to the transferee company. The benefits of a
fast-track merger include:
i. Approval of NCLT is not mandatory
ii. Issuance of public advertisement is not required
iii. No meeting needs to be convened by the court
iv. The administrative burden is significantly lesser
v. It is lesser expensive
7.6 CROSS BORDER MERGERS

The Companies Act, 2013 permits two-way cross border mergers. Section 234 of the Companies Act, 2013
deals with cross border mergers, whether they are inbound or out-bound. Inbound mergers involve a
foreign company merging with an Indian organisation.
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Corporate Laws
Outbound mergers involve an Indian company merging with a foreign company.

The conditions for cross border mergers are included:
i. Prior approval of Reserve Bank of India (RBI)
ii. Submit valuation of surviving entity to RBI, prepared by a valuer from a recognised professional
body in its jurisdiction
iii. Approvals from SEBI, if required
iv. The merger may provide for the shareholder to be compensated in cash or depository receipts or
partly in cash and partly in depository receipts
v. The foreign company should be incorporated in a permitted jurisdiction. This restriction applies in
the event of outbound mergers, where surviving transferee company is a foreign company.
RBI released the Draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017 (Draft
Regulations) for public consultation. These prescribe guidelines to be followed in case of inbound as well
as outbound mergers.
In outbound mergers, the resulting company is a foreign one. The holding of securities in such an entity
should be as per Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations,
2000. The resultant company can hold any assets in India or acquire or transfer such assets, as per
prescribed limits under FEMA.
Valuation of merging entities to be done as per internationally accepted pricing methodology on an
arm’s length basis, which shall be certified by an authorised Chartered Accountant or Merchant banker.
All transactions in cross border mergers are proposed to be reported to the RBI as required under FEMA.
Cross border mergers are on the rise as the world shrunk on the backbone of technology. Cross border
merger, as the name suggests, involves the merger of two or more business entities that are located in
different nations. The country to which the transferee company belongs is known as the home country
and the country to which the transferor company belongs is known as the host country.
There are many benefits of cross border mergers some of which include market expansion, diversification,
switching technologies, consolidation, tax planning, exponential growth, access to raw materials, and
competitive advantage. The challenges of cross border mergers involve legal issues of different countries,
accounting and taxation difficulties, political interference, complicated human resource issues.
The laws and bodies which govern cross border mergers are:
⚫ Companies Act, 2013
⚫ SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
⚫ Foreign Exchange Management (Cross Border Merger) Regulations, 2018
⚫ Competition Act, 2002
⚫ Insolvency and Bankruptcy Code, 2016
⚫ Income Tax Act, 1961
⚫ Department of Industrial Policy and Promotion (DIPP)
⚫ Transfer of Property At, 1882
⚫ Indian Stamp Act, 1899
⚫ Foreign Exchange Management Act, 1999 (FEMA)
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FEMA regulations define a cross border merger as any merger, amalgamation, or arrangement between
an Indian company and an overseas one according to the Companies (Compromises, Arrangements
and Amalgamation) Rules, 2016 notified under the Companies Act, 2013.
Conclusion 7.7 CONCLUSION
⚫ Mergers, amalgamations, acquisitions, compromises, and arrangements are different forms of

corporate restructuring.
⚫ The Corporate restructuring may be organic or inorganic.
⚫ As per Section 230-231 of the Companies Act, 2013 compromise is a scheme of giving and take in a
dispute which is commercial.
⚫ The role of the Tribunal is not just supervisory it is also a pragmatic one, which requires the Tribunal
to form an unbiased and independent judgement in this regard.
⚫ The Tribunal also has the power to implement the order of compromise or arrangement.
⚫ The order of the Tribunal needs to be filed with the Registrar within 30 days of receipt of the order
by the company.
⚫ An arrangement or scheme or arrangement or scheme of reconstruction is an agreement between
a company and its shareholder or creditors which is approved by the Court.
⚫ Amalgamation involves the blending of two or more existing undertakings into one undertaking.
⚫ Fast track merger does not require any approval from the National Company Law Tribunal (NCLT).
⚫ Section 234 of the Companies Act, 2013 deals with cross-border mergers, whether they are inbound
or out-bound.
7.8 GLOSSARY
⚫ FEMA: Foreign Exchange Management Act, introduced in 1999, replaced earlier Act FERA (Foreign
Exchange Regulation Act)
⚫ Debt: A sum of money that is owed or due
⚫ Valuation: An estimation of the worth of something, especially one carried out by a professional
valuer
⚫ Liquidator: A person appointed to wind up the affairs of a company
⚫ Blended: Combining two entities
7.9 CASE STUDY: VODAFONE IDEA MERGER
Case Objective
This case study highlights the various issues which arise during a cross-border merger in a highly
competitive industry.
UK-based Vodafone Group Plc. Was a multinational telecommunications service provider, having a
footprint across 22 countries as of November 2020. In India, Vodafone is the 3rd largest telecommunication
provider. It started its operations in India in 1992. Vodafone announced its merger with Idea in March
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Corporate Laws
2017 and later became a Vodafone Idea Limited. This merger was the largest in the telecom industry,
with Vodafone holding a 45.2% stake, Aditya Birla holds a 26% stake and the remainder in the public
domain. To understand the merger, we need to understand its reasons.
The main reason was to counter the increasing dominance of Reliance Jio in the telecom industry. By
offering 6 months of free service, Jio captured a large part of the market. Jio’s free services started a
price war. The merger brought confidence in companies with synergistic benefits. It was expected to
hold a strong position in the industry. Since Airtel had acquired Telenor, it had acquired the scope and
business from other smaller companies such as Tikona and Videocon.
When the merger was announced, the share prices of Idea started declining.
The merger gave higher stakes to the Idea promoters. The Chairperson of the new entity was Kumar
Mangalam Birla. Vodafone was represented by the Chief Financial Officer.
In 2016, Mukesh Ambani suddenly announced a major market disruption from Reliance Jio by making
all services free for the first six months. Then they made data and voice call extremely cheap. This
enabled them to capture a significant market share. Since the Indian market is very pricey sensitive, they
switched to Jio in urban as well as rural areas. The merger would help Vodafone and Idea to overcome
their debts and infuse a large amount of credit into the system. The merger would also boost the telecom
sector. There would be a saving of over 60 percent of operational cost which will improve the quality and
performance by investing the savings appropriately. The network infrastructure would be enhanced.
The Revenue market share would also increase for all locations.
In August 2021, the company has requested the Government of India to help save the company.
Source: https://www.thekeepitsimple.com/vodafone-case-study/
Questions
1. Explain the type of merger, which occurred here.
(Hint: Refer section on cross border mergers)
2. Which conditions for cross-border mergers were taken care of in this merger?
(Hint: Refer section on Cross border mergers)
3. Why do you think this merged entity is floundering?
(Hint: Competition)
4. Which laws governed this merger?
(Hint: Refer section on cross border mergers)
5. What were the main reasons for Vodafone to merge with Idea?
(Hint: Advantages of merger)
7.10 SELF-ASSESSMENT QUESTIONS
A. Essay Type Questions

1. State about compromise under Company Law?
2. Write a note on the power to compromise or make arrangements with creditors.
3. Explain the meaning of arrangements.
8
7.11 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS
A. Hints for Essay Type Questions

1. As per Section 230-231 of the Companies Act, 2013 compromise is a scheme of give and take in a
dispute which is of a commercial nature. Refer to Section Meaning of Compromise
2. Section 230 of the Companies Act, 2013 provides for the statutory power of a company to compromise
or make arrangements with creditors and members.
There are certain procedures to be followed by a company as per the Companies Act, 2013.
The company or any of its creditors or members may file an application with the Tribunal or its
liquidator. Refer to Section Meaning of Compromise
3. An arrangement or scheme or arrangement or scheme of reconstruction is an agreement between
a company and its shareholder or creditors which is approved by the Court. The arrangement may
affect mergers and amalgamations or may change the rights of shareholders or creditors. Refer To
Section Meaning of Arrangements
@ 7.12 POST-UNIT READING MATERIAL
⚫ https://www.mca.gov.in/Ministry/notification/pdf/AS_14.pdf
⚫ https://www.freshbooks.com/hub/accounting/balance-sheet
7.13 TOPICS FOR DISCUSSION FORUMS
⚫ Talk to your friends about the latest mergers and acquisitions in the business sector.
9
Compromises, Arrangements and
Amalgamation
Unit – VII
Speaker’s Name: Dr.Manju Priya R
Week 7 Compromises, arrangements, and
amalgamation
Quadrant 1 2. Watch the eLearning content on “L7: Compromises, arrangements, and
eContent amalgamation”
3. Read the eLM on “Unit 7: Compromises, arrangements, and amalgamation”
7. Read this open-source material on Amalgamation
https://www.edupristine.com/blog/amalgamation-explained-detail
Quadrant 2 1. Revise “L6: Meetings of Board and its committees” recording of the live Session
eTutorial 5. Attend the live session #6 on “Compromises, arrangements, and amalgamation”
Quadrant 3 4. Attempt to answer the questions for Practice #7 on “Compromises, arrangements, and
eAssessment amalgamation”
6. After the live session, repeat the Practice #7 for “L7: Compromises, arrangements,
and amalgamation” for self-assessment
Discussions case studies.
Introduction
• Mergers, amalgamations, acquisitions, compromises, or reconstruction
are altogether various types of corporate rebuilding practices in the
corporate world.
• Corporate Restructuring in any structure has turned into a compulsory
action if corporate houses need to endure. Corporate rebuilding may
bring about change commonly like change in share capital or capital
design, change of investors, change of control, the expulsion of a
minority, change of business, change of working elements, and so on.
Merger
• A merger occurs when two or more companies combine and create a
new company. The companies in a merger typically are in the same
industry or do similar things and want to either grow or diversify their
offerings.
Compromise
• Section- 230:The word compromise has nowhere been defined in the Companies Act. It
basically connotes the settlement of a conflict by mutual consent and agreement or
through a scheme of compromise. Thus, for a compromise, there has to be some dispute
or conflict.
• A compromise necessitates the existence of a dispute. The dispute may be resolved by
drawing up a scheme of compromise. It should be agreed by everyone that a
compromise or arrangement which has been sanctioned by the court must be reasonable,
and no arrangement or compromise can be said as reasonable in which there is no motive
of profit and just end up by giving everything.
• It is not that only one person gets targeted and the others should feast upon their
rights. Its purpose is to enable compromises, to be made which are for the common
benefit of creditors or a class of creditors as such.
• Between whom the Compromise & Arrangement can be proposed: According to section
230(1),
• 1) Between a company and its creditors or any class of them or
2) Between a company and its members or any class of them.
Arrangement
• has been defined under section 230(1) of the companies act.
• An Arrangement is similar to a compromise. However, the
difference lies in the fact that an arrangement can be between the
company and any other person or entity. Under the Companies
Act, 2013, an arrangement refers to a reorganization of the
company’s share capital or its business or a merger or acquisition
of the company with another company or entity.
• Arrangement is a kind of Internal reconstruction in which a company-made arrangement in which
adjustments are made (inside the company) to the assets/liabilities of the firm to improve the
company’s profitability. For example, share capital reduction, share conversion to stock or vice
versa, share consolidation, and so on.
• So According to Section 230 of the Companies Act, 2013,
arrangement comprises reorganizing the company’s share
capital through consolidation of distinct classes of shares or
division of shares into separate classes of shares, or both.
• arrangement means re-organizing the right and liabilities of the
shareholders of the company without the existence of some
dispute. A company may enter into a compromise or
arrangement to take itself out from the winding-up proceedings.
• Situations under which a company may call for a
scheme of compromise:
1.If in the normal course of business, it becomes
impossible to pay all the creditors in full.
2.Subsidiaries/Units cannot work without incurring
losses.
3.Where liquidation of the company may prove harsh for
the creditors or members.
•Situation under which a company may enter into
arrangements:
1.For the issue of new shares.
2.For any variation in property.
3.Conversion of one class of share to another.
4.For reorganizing the share capital of the
company.
• Who can file the application for Compromise & Arrangement: An
application for compromise & arrangement can be files with Tribunal
by the following:
• 1) The Company, or
2) Creditor, or
3) Member of the company, or
4) In the case of a company which is being wound up of the
Liquidator.
Amalgamation
• Amalgamation happens when two or more companies are joined to form a
third organization. The effect is to delete the merging companies and to
combine all into the new one. The new company comes into existence
having all the property, rights and powers and subjected to all the duties and
obligations of both the constituent companies. The word amalgamation has
not been defined in the act; but the ordinary dictionary meaning is
combination. Relating to compromises, arrangements and amalgamations,
the primary object of amalgamation of one company with another to
facilitate reconstruction of the amalgamating companies and this decision is
leftover to the shareholders.
• An amalgamation occurs when one company takes over multiple
companies. The combined corporations are then automatically liquidated.
Amalgamations typically happen when larger companies take over smaller,
less financially stable companies.
Power of amalgamation
• There should be power in the company’s memorandum to amalgamate.

If it is not provided then it should be acquired by altering the
memorandum. It is not necessary that the company adopting a scheme
should be in financial difficulties or that it should be an affluent
company.
Types of Mergers and Amalgamations
• There are three types of mergers:

• Horizontal, which is done to eliminate a competing business from the market
• Vertical, where a company gives materials or services to the company it is
acquiring, which concentrates operations and keeps the business moving
seamlessly
• Conglomerate, which is done to diversify a business's reach and products
• There are two types of amalgamations:
• Nature of purchase, which happens when one company acquires a business that is
discontinued and the shareholders of that organization don't have shares in the new
company
• Nature of merger, which combines the assets and liabilities of all companies and
includes all shareholders in the new business.
• Benefits of entering an Amalgamation, Compromise and Arrangement
• There are various benefits for companies in entering into the amalgamation and
mergers:
• For economies of scale.

• To increase the company’s market share.
• To lessen competition.
• To increase the value of shareholders.
• To reduce tax liabilities.
• To create a brand name.
Governing Law for Mergers and
Amalgamation
• There are several laws regarding compromise, arrangements, and
amalgamation which must be investigated before going for the scheme:
• Companies Act, 2013: The Companies Act, 2013 governs the process of
mergers, amalgamations, and arrangements.
• National Company Law Tribunal: In India, the National Company Law
Tribunal (NCLT) is the regulatory authority that approves merger and
amalgamation schemes43. The NCLT verifies that the scheme is in the best
interests of the stakeholders and that the procedure is carried out in
accordance with the Companies Act, 2013.
• The Competition Act, 2002: The Competition Act, 2002, aims to prevent the
abuse of dominant position in the market and protect the interests of smaller
businesses
• The Income Tax Act, 1961: The Income Tax Act, 1961 provides tax benefits
and advantages to corporations who amalgamate or combine.
• Insolvency and Bankruptcy Code, 2016: The Insolvency and
Bankruptcy Code, 2016, consolidates and modifies the laws governing
corporate reorganization and insolvency resolution, as well as
partnership firms and individuals.
• The 2016 Insolvency and Bankruptcy Code establishes a framework
for resolving insolvency and bankruptcy matters, particularly those
involving mergers and amalgamations.
• Indian Stamp Duty Act, 1899.
• SEBI: The function of SEBI in mergers and amalgamation is to ensure
that investors’ interests are protected and that the companies involved
follow the necessary legislation and guidelines.
Cross Border Merger
• A cross-border merger occurs when two companies from different

countries unite. The Foreign Exchange Management (Cross-Border
Merger) Regulations, 2018 govern cross-border mergers in India. The
regulations set the foundation for inward and outbound mergers,
amalgamations, and arrangements between Indian and foreign
companies.
• Cross-border mergers require prior approval from the Reserve Bank of
India (RBI). The RBI guarantees that the cross-border merger
complies with legislation and that stakeholders’ interests are protected.
Procedure for compromise and arrangement under the company law
• After the enactment of the Companies Act, 2013, the procedure for
mergers, acquisitions, amalgamations and restructuring has been
simplified by the new provisions.
• The Act of 2013 has removed all the backdrops of the older legislation
and is aimed to bring more transparency.
• So below is the stepwise procedure for the scheme of compromise and
arrangement:
1. 2. 3. Tribunal 4.
Preliminary Application looks into the Conveyance
Stage to Tribunal application of Meeting
5. 8.
6.
Presentation Registration
Commencem 7. Sanction of
of the of the Scheme
ent of Cases
outcome of with
Hearings
the Meeting Registrar
1.Preliminary Stage (Preparation of Scheme): This is the first
stage, in which a detailed scheme is prepared by the members of the
creditors. This scheme must contain all the matters that are of
substantial interest, it must also explain or show how the scheme is
going to affect the members, creditors and all the other
companies. The scheme must also disclose the material interest of
the director.
2. Application to Tribunal: Any member or a creditor of the
company (in case the company is winding up, its liquidator) can
make an application to the Tribunal i.e. to NCLT proposing the
scheme of merger or acquisition between two or more
companies. The tribunal can also make the application on a suo
moto basis.
3.Tribunal looks into the application: Once an application proposing
the scheme is made, the tribunal will take a look as to whether the
application is within the ambit of Section 230-240. It will also see that
the application is accompanied by an explanatory statement.
4. Conveyance of Meeting: Once the tribunal sees the application, it
issues a notice for the conveyance of the meeting of the creditors and
the members of the company within 21 days. It must be noted that, if
the scheme is not going to have any adverse effect on any party, then the
tribunal can also avoid the call for the meeting. If the meeting is
conveyed then the scheme must be approved by a majority of three
fourth members present and voting.
5.Presentation of the outcome of the Meeting before the Tribunal: Once
the scheme is approved by the members or creditors or the liquidator (in case
of a winding company) in the meeting, the report of the meeting must be
presented before the tribunal within seven days of the meeting. The report
must show the confirmation of the scheme of compromise or arrangement.
6.Commencement of Hearings: After the submission of the report the
tribunal shall fix a date for hearing. Such data must be notified in the
newspaper through advertisement. Such advertisement must be notified
before 10 days of the hearing.
7.Sanction of Cases: The tribunal shall after hearing all the objections and
concerns of all the parties, if it is deemed fair and reasonable to the tribunal
then the tribunal may sanction the compromise or arrangement.
8. Registration of the Scheme with Registrar: Once the scheme is
sanctioned by the Tribunal, a certified copy of the order shall be filed with the
ROC (Registrar of Company) within 14 days from such sanction order.
Reasons which necessitate the sanction of the Tribunal
• There are several reasons which necessitate the sanction of the
Tribunal; a few of them are listed below:
1.Once the scheme is approved by the Tribunal, the company is bound to
abide by it, any avoidance or deviance from the same may bring legal
consequences.
2.If the tribunal won’t have interfered, the majority might have
suppressed the minority’s right; so Tribunal ensures adequate
representation of the minority.
3.Tribunal also has supervisory power, so at any time if NCLT is of the
view that the scheme is not in the interest of the member, it may order
to modify the scheme or may order winding-up.
Powers and duties of the tribunal
• wide range of powers by the virtue of Section 231. The tribunal has the
sole authority either to approve or to reject the scheme of compromise
or arrangement. If the tribunal approves the compromise or
arrangement, in such a case it further has the following powers:
1.To supervise/monitor the carrying out of the proposed scheme.
2.To modify/amend the scheme to achieve the best result.
3.To order winding up of Company, if it is deemed to the tribunal that
the scheme is not workable in the interest of the Company or its
member.
• Apart from the above powers, the tribunal is also bound by certain
duties: So, whenever the tribunal sanctions a scheme, it must make
sure that the following factors had been complied with.
1.That the scheme is within the provisions of the Companies Act.
2.The tribunal must make sure that the class of people, who were to be
adversely affected by the scheme, are fairly being represented in the
meeting.
3.The proposed scheme must be reasonable; it should not have any
adverse effect on society.
Mergers and acquisitions of certain companies – the fast
track merger
• Under the 1956 act, every company has to follow the same lengthy and time-
consuming procedure for compromise and arrangement.
• In order to remove this lacuna, the 2013 act introduced the process of Fast Track
Mergers. So, Section 233 of the Companies Act covers the substantive part and
Rule 25 of the Companies (Compromise, Arrangements, and Amalgamation)
Rules, 2016, covers the procedural aspect for the Fast Tack Mergers. This rule 25
of the CAA Rules, 2016 was notified by the Ministry of Corporate Affairs on
15th December 2016.
• Section 233 of the Companies Act, 2013 allows for fast-track mergers between
two or more small firms or between holding companies and their fully owned
subsidiaries without the need for NCLT approval. Fast track mergers, however, are
not accessible for cross-border mergers.
• As per section 233 of the Companies Act, 2013, there are three classes of
companies who are not required to go through the regular merger process, but can
prefer the fast track method, those companies are:
1.Holding and Subsidiary Companies: The Holding companies are
defined under Section 2(46) of the Companies Act, and Section 2(87) of
the Companies Act, defines a subsidiary company.
2.Small Company: Small company has been defined under Section 2(85) as
a company other than a public company, having a paid-up capital not
exceeding 50 Lakh Rupees or any such amount as prescribed by the
government, but shall not, at any time exceed 10 crores.
3.Other Classes: As prescribed by the Government in the CAA Rules, 2016.
• This fast track merger eliminates the sanction of the NCLT and brings a
more speedy process. The steps involved in Fast track merger are
mentioned below:
1.The proposed scheme is served to the Registrar of Company.
2.Holding of the meeting of Creditors or members.
3.Declaration of solvency must be filed by both the companies to their
respective Registrar.
1.Filing of the report of the meeting with the Registrar of the Companies,
and if the Registrar has no objection then he shall register the company and
must issue a confirmation notice.
2.If, in case there are any objections, then those objections must be presented
before the NCLT, and the tribunal shall decide on it.
• There are a lot of advantages that this fast track merger process has
brought with it, a few of which are: It has simplified the process, no
compulsory requirement of NCLT’s approval, short time, Less expensive,
it has removed all the secondary opportunities to raise objection which
makes the process more expedient, further there are no need to issue public
advertisements, it helps in avoidance of serried of hearings, etc. So now if
a person/company goes through this fast track merger, the entire process
would last for 90-100 days only.
Provisions relating to amalgamation
• Provisions related to amalgamations in the context of corporate law refer to the legal
framework and procedures for two or more companies to combine their assets, liabilities,
and operations into a single entity through a process known as amalgamation.
Amalgamations are typically undertaken to achieve synergies, consolidate resources, or
streamline operations. Here are some key provisions related to amalgamations:
• Definition and Scope: Amalgamation is defined as the process of combining two or more
companies into one entity. It may involve the merger of two or more companies into a
new entity or the absorption of one company by another.
• Approval by Shareholders and Creditors: Any amalgamation requires the approval of
shareholders and creditors of each amalgamating company through special resolutions
passed in meetings convened by the respective companies. The meetings must comply
with the prescribed procedures, including notice requirements, quorum requirements, and
voting rules.
• Scheme of Amalgamation: A scheme of amalgamation is prepared, outlining the terms
and conditions of the amalgamation, including the share exchange ratio, treatment of
assets and liabilities, and other relevant details. The scheme is submitted to the regulatory
authorities, such as Le Registrar of Companies or a specialized tribunal, for their
approval.
• Valuation of Shares: In cases where the amalgamation involves the
exchange of shares, a valuation of shares is typically required to determine
the share exchange ratio. Independent experts may be appointed to value the
shares of the amalgamating companies to ensure fairness and transparency.•
• Protection of Minority Shareholders: Provisions are in place to protect the
interests of minority shareholders of the amalgamating companies. The
court or regulatory authority will assess whether the amalgamation is fair,
reasonable, and in the best interests of the company as a whole. If the court
finds that the amalgamation unfairly prejudices the interests of any class of
shareholders or creditors, it may modify or reject the proposed
amalgamation,
• Approval by the Court: In certain cases, depending on the jurisdiction, the
court's approval may be required for the amalgamation to become effective.
The court will review the scheme of amalgamation, examine compliance
with legal requirements, and consider objections rai y stakeholders before
granting final approval.
• Effectiveness of Amalgamation: Once the amalgamation is approved by the
requisite majority of shareholders, creditors, and the court (if applicable), it
becomes binding on all stakeholders involved, The amalgamation will be
implemented according to the terms and conditions specified in the
approved scheme.
• Transfer of Assets and Liabilities: As part of the amalgamation process, the
assets and liabilities of the amalgamating companies are transferred to the
amalgamated entity. This may include the transfer of contracts, licenses,
intellectual property rights, employees, and other relevant assets and
liabilities.
• Dissenting Shareholders' Rights: Provisions are in place to protect the rights
of dissenting shareholders who do not wish to participate in the
amalgamation. These shareholders may have the right to be bought out by
the amalgamated entity at a fair value or seek appropriate remedies as per
the applicable laws
Week 8 Winding up of companies
Quadrant 1 2. Watch the eLearning content on “L8: Winding up of companies”
eContent 3. Read the eLM on “Unit 8: Winding up of companies”
7. Read this open-source material on Winding up of companies
https://blog.ipleaders.in/winding-up-of-a-company/
Quadrant 2 1. Revise “L7: Compromises, arrangements, and amalgamation”

5. Attend the live session #8 on “Winding up of companies”
Quadrant 3 4. Attempt to answer the questions for Practice #8 on “Winding up of
eAssessment companies”
6. After the live session, repeat the formative assessment for “L8:
Winding up of companies” for self-assessment
Quadrant 4 8. Participate in collaborative learning by discussing the topics on
Discussions discussion forum and case studies.
UNIT
08 Winding up of Companies
Names of Sub-Units
Introduction to the Process of Winding up Companies, Various Modes of Winding up Companies, the
Powers of the Tribunal Concerning Winding up of Companies, Company Liquidators, Effect of Winding
up.
Overview
This unit begins by explaining the process of winding up a company and the modes of winding up. Then
it goes on to explain the powers of the Tribunal concerning the winding up of a company. Towards the
end, it discusses company liquidators and the effect of winding up.
Learning Objectives

 Explain the process of winding up of companies
 Describe the modes of winding up companies
 Discuss the powers of the Tribunal concerning winding up
 State the role of company liquidators
 Describe the effect of winding up
JGI JAIN
Corporate Laws
Learning Outcomes

 Assess the importance of winding up of companies
 Appraise the modes of winding up of companies
 Evaluate the powers of the Tribunal concerning winding up
 Analyse the role of company liquidators
 Explore the effects of winding up
 https://rajdhanicollege.ac.in/admin/ckeditor/ckfinder/userfiles/files/Winding%20up%20of%20
the%20Company%20(1).pdf
 https://www.taxmann.com/bookstore/bookshop/bookfiles/sample%20chapter%2014%20for%20
web.pdf
8.1 INTRODUCTION
Businesses are known to grow, and they can also flounder. Once its financial problems are beyond
salvaging, the business can be closed through a process known as liquidation. How a limited company
is liquidated will be determined by the financial state that the company was in, whether it was solvent
or insolvent.
In case a promoter wishes to close the business, the process begins with a resolution to wind up the
business. This decision of closure is taken by the directors and/or the shareholders of the company. In
the event of compulsory liquidation, the creditors can petition the court for liquidation. The liquidation
of company assets can be done by a licensed insolvency practitioner. The intent can be to repay the
creditors or distribute the money realised to the shareholders.
We first need to understand the concept of winding up a company. This implies that a company can
no longer survive. A company continues to exist till it is dissolved. The winding up of a company is
when it pays off creditors, deals with its assets and distributes the remaining assets and surplus among
the shareholders through liquidation. Winding up can be initiated through two means, voluntary or
compulsory. While compulsory winding up is regulated by the Companies Act, 2013, the voluntary
winding up is now under the Insolvency and Bankruptcy Code, 2013. After the company is liquidated,
it is formally dissolved and the company ceases to exist. These are discussed in detail later in the unit.
8.2 PROCESS OF WINDING UP OF COMPANIES

The process of winding up of companies is a lengthy one which involves the following steps:
1. Petition for winding up of a company: A petition needs to be filed for the winding up of a company.
This petition may be filed on behalf of the company by trade creditors of the company, the company
itself, contributors to the company, a government authority such as central government or state
government, or the registrar of companies. Form WIN1 or WIN 2 need to be submitted while filing the
petition. The petition must be submitted in triplicate and an affidavit must accompany the petition
in Form WIN 3.
2
UNIT 08: Winding up of Companies JGI JAIN
2. Statement of Affairs: The petition needs to be accompanied by a statement of affairs of the company,
as per rule 4 of the Companies (Winding Up) Rules, 2020. This statement must be submitted in Form
WIN 4, as per Section 272(4) or Section 274 (1) of the Act. The information in the statement should not
be more than 30 days old. The statement of affairs should be submitted in duplicate and needs to be
accompanied by an affidavit. The affidavit must be in Form WIN 5.
3. Advertisement: The petition needs to be advertised for 14 days before the date of hearing. The
advertisement should be in the vernacular language as well as in English. The paper in, which the
advertisement appears must be circulated in the state or the Union Territory where the company
has its registered office. The form WIN 6 prescribes the format of the advertisement.
4. Appointment of Provisional Liquidator: The Tribunal will appoint a provisional liquidator after the
petition has been submitted along with the affidavit. The notice of appointment of the provisional
liquidator needs to be sent to the company as per Section 273(1)(c). The notice needs to be in Form WIN
7. Based on the requirements of the company, the responsibilities which the provisional liquidator
needs to carry out, will be mentioned in Form WIN 8.
5. Send notice to provisional liquidator: The registrar of companies should send a notice to the official
liquidator. This notice should be as per Form WIN 9. The notice may be sent by registered speed post,
courier, or electronic means. The notice needs to be sent within 7 days of the order.
6. Winding up Order: The winding up order will be sent to the company liquidator in Form WIN 11. This
order needs to contain the variables in the signed and sealed form. This order should be sent by the
registrar to the company within 7 days. The registrar needs to send this notice in Form WIN 12 and
13.
7. Custody of the property: The assets and documents will be taken by the liquidator. The liquidator
has the power to take custody of all documents, claims, and books of the company. The company
liquidator needs to inform this the Tribunal via a report which should be submitted to the Tribunal
within 60 days of the order.
8. Affairs of the company: The liquidator needs to make an application for the dissolution of the
company to the Tribunal. This stage comes only when the liquidator is convinced that it is reasonable
and just for winding up a company. After the order for winding up a company is passed, a copy of
this order needs to be sent to the registrar, within 30 days of the order of winding up.
9. Dissolving the company: The Tribunal passes an order for dissolution or dissolving the Company.
This order is passed only if the accounts are in order. This order needs to be passed within 60 days
of receiving such an application.
8.3 MODES OF WINDING UP OF COMPANIES

A company is closed when it fails to comply with mandatory compliances or is unable to conduct
business operations or it remains dormant for a certain period and does not expect to get revived.
Closing a company in India, can be possible in the following modes:
8.3.1 Compulsory Winding up of a Company

Section 433 of the Companies Act, 2013 specifies the conditions for the compulsory winding up of a
company. There can be many reasons for the compulsory winding up of a company. These may be:
i. When the company is unable to pay its debts
ii. A special resolution is passed for winding up
iii. Any illegal act by a company or its management
iv. Default in filing annual returns for five consecutive years to the Registrar of Companies
3
JGI JAIN
Corporate Laws
v. If the Tribunal has the view that the company should wind up
vi. If the number of members of a public limited company reduces below seven and in the case of a
private limited company if the number of members reduces below two.
The process for winding up a company, in this case, includes the following steps:
a. A petition needs to be filed with the Tribunal and a statement of affairs of the company needs to
accompany this petition
b. The petition may be filed by the company, or its creditors (whether contingent, prospective,
secured, debenture holders or a trustee for debenture holders) or its contributors (present and past
shareholders of the company) or the Registrar
c. The Tribunal either accepts or rejects the petition based on certain criteria
d. In case an entity or individual other than the company files a petition, the Tribunal may direct the
Company to file its objection. This needs to be responded to along with the statement of affairs
within 30 days
e. The Tribunal appoints a liquidator for winding up the company, in case the petition is accepted
f. The liquidator facilitates the liquidation proceedings which includes taking over of the assets,
examination of books of accounts, sale of assets, if any, and then prepares a draft report for approval
from the winding up committee
g. After the draft is approved, the liquidator submits the final report to the Tribunal
h. Tribunal passes the order for winding up the company
i. A copy of the order should be forwarded to the Registrar of Companies by the liquidator within 30
days.
j. When the Registrar of Companies is satisfied completely, it approves the winding up of the company,
and strikes off the name of the company from the Register of Companies.
k. The Registrar sends a notice to be published in the Official Gazette of India.
8.3.2 Voluntary Winding up

A company can undergo voluntary winding up if a special resolution is passed by the Board of Directors
or a resolution is passed at a general meeting. This winding up can be done without the intervention of
the court. The company and its creditors can mutually settle their matter without going to court. The
reasons for this are as follows:
i. The company can decide on its own to wind up due to any reason
ii. There can be an occurrence of an event as mentioned in the Articles of Association, which provides
for winding up of the company
Section 488 of the Act provides for voluntary winding up which is of two types:
a. Member’s voluntary winding up: This requires a declaration by the director that the company
either has no debt or that it will repay its debts in full within three years of initiation of winding up.
b. Creditor’s voluntary winding up: This occurs when the company becomes insolvent. This requires
the company to hold a creditor’s meeting where a full statement of the company’s affairs is made
along with a detailed list of creditors and their estimated claims. In case the members and creditors
are unable to agree on the liquidator, the creditor’s nominee is appointed as the liquidator. The
Board of Directors ceases to have any power upon the appointment of the liquidator.
4
The process for voluntary winding up a company is given below:

a. A resolution needs to be passed at a general meeting of the members of the company for the events
mentioned in the Articles of Association or a special resolution for voluntary decision and a creditor’s
meeting
b. The company should provide a declaration of solvency for payment of unpaid debts
c. The declaration of solvency should be submitted to the Registrar of Companies along with the
auditor’s report and registered valuer’s report
d. A liquidator needs to be appointed by the company to facilitate the winding up proceedings, which
should ideally start from the date the resolution is passed. The powers of the Board of Directors
cease upon the appointment of the liquidator.
e. The liquidator should prepare a report of winding up and call for a general meeting of the members
of the company for laying the final winding up accounts
f. If the majority of members agree to the plan, a resolution should be passed
g. The Liquidator should send a copy of the statements to ROC and should also apply to the Tribunal
along with the report
h. After considering the facts, the Tribunal should pass an order for winding up of the company
i. The liquidator should forward a copy of the order to the Registrar of Companies within 30 days
j. After being completely satisfied, the Registrar approves winding up of the company and shall strike
the name of the company from the Register of companies
k. The Registrar should then send the notice to be published in the Official Gazette of India
8.3.3 Fast Track Exit Scheme (FTE)

This mode of winding up is applicable to those companies which are already defunct, and their names
need to be struck off from the register of companies. A defunct company does not have any assets or
liabilities; or that company which does not commence its business after being incorporated; or when a
company has not conducted any business activity for a prolonged period, a minimum of one year. The
process for winding up a defunct company is given below.
a. An application needs to be sent to the Registrar of Companies in Form FTE with the appropriate
government fee which can be paid online
b. The application is examined by the Registrar of Companies.
c. The Registrar then sends a notice to the company that the name of the company is going to be struck
off from the Register of Companies. It also specifies that the winding up process shall be initiated in
the absence of any objection within 30 days
d. The application and the name(s) of the applicants are placed on the portal of the Ministry of
Corporate Affairs. It allows stakeholders to raise objections, if any, against wind up, within 30 days
e. The Registrar then informs the Income Tax department about the application for winding up
operations. This is to check if the Income Tax department has any objections to winding up the
company, within 30 days
f. When the Registrar of Companies is completely satisfied, it approves the winding up of the company,
and strikes off the name of the company from the Register of Companies
g. The Registrar then sends a notice regarding this to be published in the Official Gazette of India
5
JGI JAIN
Corporate Laws
Irrespective of the mode of winding up, each document, whether it is an invoice or order or business
letter, issued by or on behalf of the company or the company liquidator or receiver or manager of the
property of the company, shall contain a “statement regarding the winding up of the company”. Non-
compliance to this would result in a penalty.
8.4 POWERS OF THE TRIBUNAL CONCERNING WINDING UP

The Tribunal orders the winding up of the company. When it receives a petition for winding up under
Section 272, it may pass any order as it deems appropriate. These include:
i. Dismiss the petition with or without costs within 90 days of submission of the petition
ii. Provide an opportunity to revive and rehabilitate the company and stay the winding up proceedings
for a maximum of 180 days under certain terms. This is normally done on the application of
promoter, shareholders, creditors, or any interested person.
iii. The application needs to be accompanied by a scheme of rehabilitation
iv. The Tribunal may require the applicant to provide security as it deems appropriate, while passing
the order
v. Make any interim order as deemed appropriate
vi. To the consideration and sanction of the scheme of the revival of the company, if an order under
subsection (1) has been passed by the Tribunal, provisions of Chapter XIX shall be followed
vii. Appoint a provisional liquidator of the company till the making of the winding up order
viii. Before making the winding up order, the Tribunal may require the Company liquidator to submit
a report for any matter which are deemed required for the application.
ix. Make the winding up the order with or without costs
x. After making the winding up order, if the company liquidator makes an application for staying
the winding up proceedings, The Tribunal may do so based on terms as it deems appropriate.
xi. The company liquidator needs to forward a copy of every order to the Registrar of companies who
should endorse the order in their books and records related to the company.
8.5 COMPANY LIQUIDATORS

A liquidator is an entity that manages the complete liquidation process. The liquidator is appointed
when a company initiates liquidation proceedings or is wound up in a compulsory liquidation process
by the court.
A liquidator may have a wide range of powers that enable them to sell the company’s assets and use
the money received to settle the debts. The liquidator takes control of the business, adheres to deadlines
for paperwork, informs the authorities and keeps them updated, settles claims against the company,
interviews the directors and reports reasons for liquidation.
Liquidation results in the closure of the company and mark the end of its business. The assets are sold,
and proceeds are used to settle outstanding claims. It also ends all legal action against the company and
directors. The closure of the company implies negligible or no returns for the shareholders or directors.
The specific responsibilities of a liquidator include:
⚫ Assessment of all debts and taking a decision which needs to be paid in full or part or which claim
to reject.
⚫ End pending legal disputes
6
⚫ Seek asset valuation to maximise creditors returns

⚫ Keep the creditors updated and engaged with the process
⚫ Communicate reasons why the company failed and report to the concerned authorities in case of
misconduct or fraudulent dealings
⚫ Share information about redistribution of assets
⚫ Settle claims of creditors fairly, considering the expenses of liquidation process also
⚫ Dissolve the company
While settling the dues, the fee of the liquidator is paid first, as per the Insolvency Act 1986. These are
followed by payment to secured creditors with a fixed charge such as banks, preferential creditors and
then the shareholders.
Each class of creditors is repaid in full before allocating funds for the next class of creditors. A liquidator
needs to prepare a final statement of accounts showing how much was realised from assets and how
much of that was repaid to creditors.
After winding up the affairs of the company, the liquidator gives notice to the directors, creditors and
the court. Creditors may ask for additional information, or challenge the fee charged by the liquidator.
This needs to be done in writing within 8 weeks after the liquidator has given notice. In case there are no
objections, the liquidator gives the final statement of account to the companies house and gives notice
to the court stating that there is no objection from any creditor. After this, the liquidator is released
from responsibility and vacates the office.
8.6 EFFECT OF WINDING UP

Some of the key consequences of winding up a company are given below.
With regard to the company

⚫ Winding up does not mean the existence of the company goes away completely. It continues to exist
as an entity till it is dissolved. During the process of liquidation, all ongoing business is handled by
the liquidator.
With regard to the shareholders

⚫ A statutory liability comes into effect, and the liquidator needs to approve each transaction of shares
during the liquidation process.
With regard to the Creditors

⚫ The creditors need the consent of the court to file a case against the company, in case the creditors
already have decreed in their possession they cannot proceed with the execution of the decree during
the liquidation process, and they need to justify their claims to the liquidator.
With regard to the management

⚫ As soon as the liquidator is appointed, the directors, chief executive officer and other officers cease
to have any power
Unless the liquidator or court approves, all dispositions of the company’s properties are void.
7
Corporate Laws
The consequences of a winding up petition against a company can be very serious. The company’s bank
accounts are frozen after the petition is presented, and the company is unable to make any payments
from its accounts.
If it is unable to make payments to its employees and suppliers, it will cease to do business. The
presentation of a petition for winding up also harms the commercial reputation of a company. Dealing
with the petition in a legal manner involves costs.
⚫ The way a limited company is liquidated will be determined by the financial state that the company
was in, whether it was solvent or insolvent.
⚫ A company continues to exist till it is dissolved.
⚫ Winding up can be initiated through two means, voluntary or compulsory.
⚫ While compulsory winding up is regulated by the Companies Act, 2013, the voluntary winding up is
now under the Insolvency and Bankruptcy Code, 2013.
⚫ A petition needs to be filed for winding up of a company.
⚫ The petition needs to be advertised for 14 days before the date of hearing.
⚫ The Tribunal will appoint a provisional liquidator after the petition has been submitted along with
the affidavit.
⚫ The liquidator has the power to take custody of all documents, claims, and books of the company.
⚫ The Tribunal can either accept or reject the winding up petition based on certain criteria.
⚫ Fast Track Exit mode of winding up is applicable to those companies which are already defunct, and
their names need to be struck off from the register of companies.
8.8 GLOSSARY
⚫ Flounder: Be in serious difficulty

⚫ Petition: A formal request, in writing, typically signed by multiple persons, which appeals to an
authority for a particular cause
⚫ Triplicate: Make three copies of a document
⚫ Affidavit: A statement in writing, which is by oath, may be used as evidence in court
8.9 CASE STUDY: G.N.S. NIDHI LIMITED
Case Objective
This case study highlights the process of winding up of a public limited Non-Banking Finance Company.
There was a public limited company, called G.N.S. Nidhi Limited. This company was incorporated on
03.01.1979 under the Companies Act, 1956. G.N.S. Nidhi was operating from its registered premises
situated on No.128, Usman Road, T.Nagar, Chennai. It worked as a Non-Banking Finance Company. It
used to accept deposits from the public and advance loans to various parties.
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The Hon’ble High Court, Chennai, appointed a liquidator, which was attached to the court and by order
dated 18.10.1997 made in C.P.No.60 of 1997 attached to the said court as the Provisional Liquidator of the
company. Subsequently, the Hon’ble Court vide order dated 17.12.1999 made the Provisional Liquidator
the Official Liquidator of the company.
The Company had over 55 branches in the Union Territory of Pondicherry, Maharashtra, Tamil Nadu,
Kerala and Karnataka. Many of the branches were operating out of rented premises. It took the Official
Liquidator more than two years commencing 28.06.1999, to ascertain whether the said branches
belonged to the company in liquidation and to take possession of the same.
Under the orders of the Hon’ble High Court dated 31.08.2001 in C.A.Nos.749 and 750 of 2001 the movable
assets lying at various branches were sold and a sum of ` 15,76,035 was realised. Further, by an order of
the Hon’ble High Court dated 31.08.2001 and 17.10.2003 in C.A.No.300 of 2001 the Official Liquidator sold
the immovable assets and a sum of ` 5,40,00,000/- was realised.
It is pertinent to mention that five separate auction sales were carried out in respect of immovable
assets and that the confirmation of sale of immovable assets took place only in the year 2005 due to
third party applications challenging the validity of the auction, and hence the delay.
According to the High Court order dated 1.11.2006 in C.A.No.1896/2006 claims against the company in
liquidation were called for on 12.11.2006 and in response claims totaling ` 27,85,04,711/- was received by
the Official Liquidator. Of the 9300 claims received, over 6000 were defective as they could not produce
the original proof of debt.
This led to a delay in adjudicating the claims against the company. In this connection, two reminders
were sent to the claimants who had preferred defective claims and as of date over 5000 claims have
been adjudicated to proof and the Official Liquidator is taking all possible efforts to declare dividend
within 12 months.
Source: http://www.olchennai.in/downloads/Case%20Studies.pdf
Questions
9
Corporate Laws
1. Which mode of liquidation was adopted in the case of the company given in the case?
(Hint: Refer section on modes of winding up of companies)
2. What were the powers of the Tribunal in this case?
(Hint: Refer section Powers of Tribunal concerning winding up)

1. Describe the Voluntary mode of winding up of companies.
2. write a note on the FTE scheme.
3. Analyse the role of the Liquidator.

1. A company can undergo voluntary winding up if a special resolution is passed by the board of
Directors or a resolution is passed in a general meeting. This winding up can be done without the
intervention of the court. The company and its creditors can mutually settle their matter without
going to court. For more details refer to section Process of winding up of companies
2. This mode of winding up is applicable for those companies which are already defunct, and their
names need to be struck off from the register of companies. A defunct company is one which does
not have any assets or liabilities; or that company which does not commence its business after being
incorporated; or when a company has not conducted any business activity for a prolonged period,
minimum one year. For more details refer to section Modes of winding up of companies
3. A liquidator is the entity which manages the complete liquidation process. The liquidator is appointed
when a company initiates liquidation proceedings or is wound up in a compulsory liquidation
process by the court. For more details refer to section Company liquidators
⚫ http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/law/04._corporate_law/22._winding_
up,_its_need,_grounds_and_effect_on_shareholders,_creditors_and_other_stakeholders_/
et/5680_et_22_et.pdf
⚫ Discuss with your friends the differences between voluntary winding up and compulsory winding
up.
10
Winding up of companies
Unit – VIII
7. Read this open-source material on Winding up of companies https://blog.ipleaders.in/winding-up-
of-a-company/
Quadrant 2 1. Revise “L7: Compromises, arrangements, and amalgamation” recording of the live Session
eTutorial 5. Attend the live session #8 on “Winding up of companies”
Quadrant 3 4. Attempt to answer the questions for Practice #8 on “Winding up of companies”

eAssessment 6. After the live session, repeat the formative assessment for “L8: Winding up of companies” for
self-assessment
studies.
Discussions
Meaning of Winding-
Up
• Winding-up is a process whereby the life of a company is ended
& property is administered for the benefit of shareholders &
creditors.
• Structure of Winding-Up
1. By court ( NCLT)/ Compulsory Winding-up
2. Voluntary Winding-up (provisions related to voluntary winding-up
have been repealed and has now been shifted to Insolvency &
Bankruptcy code).
1. Voluntary Winding-Up
• it is a process where the company becomes insolvent and so it decides
to wind-up the company before the NCLT does and declares itself to
be insolvent. There are two ways by which the company declares
voluntary winding-up:
1. By Ordinary
Resolution
Voluntary winding up
2. By Special
Resolution
1.By Ordinary Resolution: A company may wound up voluntarily if the
given period or duration of the company has expired. Such period should
be mentioned in the articles of the company or if there is any mentioning
in the articles, that company shall dissolve on the occurrence of a
particular event and if such event occurs then the company, by passing
an ordinary resolution can start the process of winding-up.
2.By Special Resolution: A company may wound up voluntarily after
getting 75% majority from its shareholders and board of directors. The
process will only start when the special resolution has been passed. After
the resolution has passed the same has to be published in the Official
Gazette and in leading newspapers of that district/city within 14 days.
2. Compulsory Ground (By court i.e. NCLT)
1.Inability to pay debts:
a. Failure to pay demand: If a company is holding loan of more than 1lakh and
creditor sends notice to pay the amount then in such a case, a formal notice has to be
given by the creditor. If within 21 days of such notice, the company is not able to
pay or doesn’t reply or doesn’t deposit the security, neither it is trying to restructure
the debt then it is known as failure to pay demand.
b. Decreed Debt: Failure to do the execution of the court’s demand. It means the
court has given the order to pay and there is a failure of obeying of the court’s order,
can also be known as contempt of court/violation of court’s order/ failure of
satisfaction of the decree/ company is not able to satisfy the decree of the court.
• Commercial Insolvency: Auditors feel that there is increase in liability and, assets are not
increasing. Therefore, they feel that the company is becoming detrimental to the interest of
the public. The financial structure is such that liability is increasing and assets are not
increasing. There is a likelihood of the happening of the event of insolvency. At this point the
company is not insolvent but before such event happen company thinks to declare insolvency
so that they can pay the shareholder, creditors/ pay their taxes & etc
• 2. Special Resolution Resolved: 75% of majority shareholders pass the resolution for winding
up of the company but execution takes place by NCLT/discretion of NCLT to govern the
winding up.
• 3.When the company acts against the interest of sovereignty of India & integrity of India,
friendly relation with the foreign state, decency, morality, public, security of the state.
• 4. Affairs of the company are conducted in a fraudulent manner.

• 5. Company has failed to file the return with the registrar of the company for 5 consecutive
years.
• 6. When NCLT thinks it’s just and equitable to wind up the company.
POWERS OF TRIBUNAL (SECTION 273)
• The Tribunal, on receipt of a petition for winding up, may pass any of the
following orders, namely—
• dismiss it, with or without costs;
• make any interim order as it think fit;
• appoint a provisional liquidator of the company till the making of a winding
up order;
• make an order for the winding up of the company with or without cost; or
• any other order as it think fit.
• The Tribunal shall make the order within ninety days from the date of
presentation of the petition.
• Before appointing a provisional liquidator, the Tribunal shall give notice to
the company and afford a reasonable opportunity to it to make its
representations. However, for special reasons to be recorded in writing.
Company Liquidator
• When a company goes into insolvency or declares insolvency a
company liquidator is appointed by the NCLT. He is appointed so that
he can understand the current position of the company and take
measures to complete the ongoing projects. He also looks into the
finances of the company so that all the creditors, shareholders,
debenture holders & etc can be paid.
Powers & Duties of Company Liquidator
• The company liquidator has the power & duty to carry on the business.
He has to complete/effort to complete the subsisting contract.
• To do all acts and execute all documents, deeds, receipts & other
documents.
• Deal with the movable/ immovable property.
• Sell the whole undertaking as a going concern. (After the order of
winding up is given the board of directors have no role. All the powers
are given to liquidator and if after notice of winding up somebody wants
to buy the company, the liquidator is in the position/power to sell it
without taking further permission.)
• Prosecution
• Invite and settle the claims of different creditors.
• Inspect the records/ financial statements of the company.
• Negotiable Instrument: cheque, promissory note, bill of exchange. All such
negotiable instrument has to be signed by the liquidator (earlier board of
director used to do it with the seal of the company) i.e. draw, accept endorse
the negotiable instrument.
• Professional assistance: He can call for the help of an expert if he finds
difficulties i.e Lawyers, CA & etc.
• He can take actions related to signature, execution and verification of any
documents, application, bond, petition which are necessary for winding up.
He can also take actions related to the distribution of assets and all such
actions are done under the control of NCLT. The extent of control of NCLT
is different for company liquidator & provisional liquidator. There are some
actions for which company liquidator doesn’t require the permission of
NCLT (except for selling of undertaking) but provisional liquidator can’t
exercise any power & duty without the permission of NCLT.
Consequences of winding
up
• Some important consequences of winding up of company are:
1 As regards the company itself: winding up does not mean that the
• company has ceased to exist. The company exists as a corporate entity with all
• the rights of such entity, with only change that its management and
• administration is to be carried on through liquidator / liquidators till the final
• dissolution of the company.
2 As regards the shareholders: A new statutory liability as
• contributories comes into existence. Every transfer of shares or alteration in the
• status of a shareholder, after the winding up has commenced by the order of the
• Court , shall unless approved by the liquidator , be void.
3 As regards the creditors:
• i. They cannot file or continue suits against the company, except with
• the leave of the Court.
• ii. They cannot proceed with the execution, if they have obtained
• decrees already.
• iii. They must lodge their claim and prove their debt before the
• liquidator.
4 As regards the management, on appointment of liquidator, all the powers of
the directors, chief executive and other officers, shall cease, except for the
purpose of giving notice of resolution to wind up and appointment of
liquidator and filing of consent of liquidator etc.
5 As regards the disposition of company’s property, all such dispositions are
void unless with the leave of the Court or the liquidator.
PROCEDURE FOR VOLUNTARY
WINDING UP
• Step 1. Where it is proposed to wind up a company voluntarily, its directors
make a declaration of solvency on Form 107 prescribed under Rule 269 of the
Rules duly supported by an auditors report and make a decision in their
meeting that the proposal to this effect may be submitted to the shareholders.
They, then, call a general meeting (Annual or Extra Ordinary) of the members
• Step 2. The company, on the recommendations of directors, decides that the
company be wound up voluntarily and passes a Special Resolution, in general
meeting (Annual or Extra Ordinary) appoints a liquidator and fixes his
remuneration. On the appointment of liquidator, the Board of directors ceases
to exist.
• Step 3. Notice of resolution shall be notified in official Gazette within 10 days
and also published in the newspapers simultaneously. A copy of it is to be
filed with registrar also.
Step 4: Notice of appointment or change of liquidator is to be given to
registrar by the company along with his consent within 10 days of the
event.
Step 5: Every liquidator shall, within fourteen days of his appointment,
publish in the official Gazette, and deliver to the registrar for
registration, a notice of his appointment under section 389.
Step 6: If liquidator feels that full claims of the creditors cannot be met,
he must call a meeting of creditors and place before them a statement of
assets and liabilities.
Step 7: A return of convening the creditors meeting together with the
notice of meeting etc. shall be filed by the liquidator with the registrar,
within 10 days of the date of meeting.
Step 8. If the winding up continues beyond one year, the liquidator should
summon a general meeting at the end of each year and make an application to
the Court seeking extension of time.
Step 9. A return of convening of each general meeting together with a copy of
the notice, accounts statement and minutes of meeting should be filed with
the registrar within 10 days of the date of meeting.
Step 10. As soon as affairs of the company are fully wound up, the liquidator
shall make a report and account of winding up, call a final meeting of
members, notice of convening of final meeting on Form 111.
Step 11. A notice of such meeting shall be published in the Gazette and
newspapers at least10 days before the date of meeting.
Step 12. Within a week after the meeting, the liquidator shall send to the
registrar a copy of the report and accounts on Form 112
National Company Law Tribunal
(NCLT)
• It is a quasi-judicial body formed by the central government of India
that adjudicates the matter related to Indian companies. It was
constituted on 1st June 2016. All matters related to companies act
including arbitration, arrangements, winding up, compromise, and
reconstruction is disposed of by the NCLT.
• Constitution of NCLT
• It consists of mainly:
• President
• Judicial Members
• Technical Members
Qualifications of
members
• President: A person who has been a judge of the high court for 5 years.
• Judicial Members: Judge of the high court (time period not
specified)/district judge for five years or an advocate for ten years.
• Technical Members:
• Should have 15 years of practice in Indian Legal Service or has been
joint Secretary, or,
• 15 years of practice as a CA/CS, or,
• Should be a person of high integrity or specialized knowledge for 15
years, or,
• President of labour court for 5 years.
Who may file petition
• An application for the winding up of a company has to be made by way of
petition to the Court. A
• petition may be presented under Section 272 by any of the following
persons:
(a) the company; or
(b) any creditor or creditors;
(c) any contributory or contributories;
(d) all or any of the parties specified above in clauses (a), (b), (c) together
(e) the Registrar;
(f) any person authorized by the Central Government in that behalf;
(g) by the Central Government or State Government in case of company
acting against the interest of the sovereignty and integrity of India
• Who is involved?
• If you file a winding up application, you are the applicant.
• If the application is filed by the company to be wound up, the

company will be the applicant.
• If the application is not filed by the company to be wound up, the
company will be the defendant.
Suggestions
• Winding up of a company by the tribunal under Companies Act, 2013 can
be a complex and challenging process. However, there are certain
suggestions that can be followed to ensure a smoother and more efficient
winding up process. Some of these suggestions are:
• 1. Engage a qualified professional: The process of winding up a company
can be complicated and may involve various legal and financial
complexities. Therefore, it is essential to engage the services of a qualified
professional, such as a chartered accountant or a company secretary, who
has experience in handling such matters.
• 2. Ensure compliance with all legal requirements: The Companies Act, 2013
lays down various legal requirements for winding up of a company, and it is
essential to ensure compliance with all such requirements. Non-compliance
with legal requirements can lead to delays in the winding up process and
can also result in penalties.
• 3. Maintain proper records: It is essential to maintain proper records and
documentation related to the winding up process. This includes maintaining
a record of all transactions, correspondence, and communications related to
the winding up process. Proper documentation can help in resolving any
disputes that may arise during the winding up process.
• 4. Ensure timely payment of liabilities: One of the most important aspects
of winding up a company is the payment of liabilities. It is essential to
ensure that all liabilities of the company are paid off in a timely manner to
avoid any legal or financial repercussions.
• 5. Maintain transparency: It is essential to maintain transparency throughout
the winding up process. This includes keeping all stakeholders informed
about the progress of the winding up process, and providing them with
regular updates on the status of the winding up process.
• 6.Avoid disputes: Disputes can significantly delay the winding up
process, and it is essential to avoid them as much as possible. This can
be done by maintaining proper communication with all stakeholders
and ensuring that all disputes are resolved amicably.
• 7. Ensure compliance with environmental laws: Companies are
required to comply with various environmental laws, and failure to
comply with such laws can result in legal and financial liabilities.
Therefore, it is essential to ensure compliance with all environmental
laws during the winding up process.
7. Read this open-source material on Winding up of companies
https://blog.ipleaders.in/winding-up-of-a-company/
Quadrant 2 1. Revise “L7: Compromises, arrangements, and amalgamation”

5. Attend the live session #8 on “Winding up of companies”
Quadrant 3 4. Attempt to answer the questions for Practice #8 on “Winding up of
eAssessment companies”
Winding up of companies” for self-assessment
Discussions discussion forum and case studies.
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Conclusion
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National Company law Tribunal and
Appellate Tribunal
Unit – IX
Week 9 National company law tribunal and
appellate tribunal
Quadrant 1 2. Watch the eLearning content on “L9: National company law tribunal and appellate
tribunal”
eContent
3. Read the eLM on “Unit 9: National company law tribunal and appellate tribunal”
7. Read this open-source material on NCLT
https://cleartax.in/s/national-company-law-tribunal
Quadrant 2 1. Revise “L8: Winding up of companies” recording of the live Session
eTutorial 5. Attend the live session #9 on “National company law tribunal and appellate
tribunal”
Quadrant 3 4. Attempt to answer the questions for Practice #9 on “National company law tribunal
and appellate tribunal”
eAssessment
6. After the live session, repeat the formative assessment for “L9: National company
law tribunal and appellate tribunal” for self-assessment.
Quadrant 4 8. Participate in collaborative learning by discussing the topics on discussion forum
and case studies.
Discussions
Tribunal
• A ‘tribunal’ is an administrative body established to carry out quasi-
judicial functions. An administrative tribunal isn’t a court or a
government agency. It strikes a balance between a court and a
government agency.
• The creation of tribunals was driven by the necessities of the
circumstances, which demanded the enforcement of new rights in the
wake of growing state activities and the development of justice
demands.
Introduction
• In India, the National Company Law Tribunal is a quasi-judicial

organization. It is tasked with handling cases concerning Indian
businesses. The tribunal was created by the government of India on 1
June 2016 under the Firms Act 2013 and is based on the proposal of
the V. Balakrishna Eradi committee on legislation pertaining to
insolvency and the winding up of companies. The Central government
formed the National Company Law Tribunal in 2016. It was
established under Section 408 of the Companies Act of 2013.
What is National Company Law
Tribunal?
• The National Company Law Tribunal (NCLT) is a specialized quasi-judicial body
in India.
• Under the Companies Act 2013, it was established to handle matters related to
corporate disputes and insolvency proceedings.
• NCLT has jurisdiction over cases involving companies, limited liability
partnerships, and other entities specified under the Companies Act.
• It has benches located in various cities across India to facilitate accessibility.
• NCLT is responsible for resolving disputes related to company law, mergers,
amalgamations, and company winding up. It plays a crucial role in promoting
efficient and timely resolution of corporate disputes and insolvency matters in the
country.
National Company Law Tribunal
(NCLT), 2013
• The National Company Law Tribunal (NCLT) is a quasi-judicial organization established to
oversee businesses formed under the Companies Act of 2013.
• It has jurisdiction over various procedures under the Companies Act, including arbitration,
agreements, compromise, reconstruction, and company winding up.
• NCLT is the successor entity to the Company Law Board and was established based on the
recommendations of the Justice Erandi Committee for insolvency and company winding up.
• Additionally, NCLT serves as the Adjudicating Authority for insolvency proceedings
under the Insolvency and Bankruptcy Code, 2016.
• Civil courts do not have jurisdiction over matters handled by NCLT.
• Once NCLT grants an insolvency petition under the IBC, 2016, the case cannot be dismissed
even if the parties agree to settle, except under the authority of the Supreme Court citing Art.
142.
• NCLT can summon a General Meeting if a company fails to hold an Annual General Meeting
or Extraordinary General Meeting as required by the Companies Act.
Functions of the National Company Law
Tribunal (NCLT)
• The function of NCLT entails jurisdiction over cases previously handled by the Board
for Industrial and Financial Reconstruction (BIFR) and cases under the Sick Industrial
Companies (Special Provisions) Act of 1985.
• It can relieve investors affected by unlawful conduct committed by corporate
management or affiliated consultants and advisers.
• Depositors who have harmed their rights can seek recourse through class lawsuits
against the company.
• NCLT can instruct the company to reopen or modify its financial statements.
• The company's director can apply to the Tribunal to modify financial statements.
• NCLT has the authority to conduct investigations worldwide and assist foreign
investigation agencies and courts.
• Provisions are in place to support the inquiry processes of investigation agencies and
courts from other countries.
Significance of
NCLT
• The NCLT is a quasi-judicial organization established to deal with civil company
disputes originating under the Companies Act.
• NCLT operates along the lines of a normal Court of Law in the country and is
required to fairly and without bias determine the facts of each case.
• Under the Insolvency and Bankruptcy Code of 2016, the NCLT adjudicates the
insolvency resolution process of corporations and limited liability partnerships.
• The NCLT’s decisions can be appealed to the National Company Law Appellate
Tribunal (NCLAT)
• It also decides matters by natural justice principles and offers conclusions from
decisions in the form of orders to continue such decisions.
• Concerning accusations of oppression and mismanagement of a company,
company winding up, and all other rights given by the Companies Act.
Powers of National Company Law
Tribunal
• It can take over the cases pending before the Appellate Authority for Industrial
and Financial Reconstruction.
• It can also take on cases of corporate persecutors and mismanagement.
• It has the authority to request the aid of the Chief Metropolitan Magistrate.
• It can deregister companies.
• It can order de-registration of businesses in specific instances where company
registration is obtained illegally or incorrectly.
• It has the power to hear complaints against businesses’ refusals to transfer
securities and to correct the register of members.
• It gives protection to diverse stakeholders’ interests, particularly non-promoter
shareholders and depositors.
Benefits of the National Company Law
Tribunal
• The NCLT is a specialist court that hears cases involving Corporates or
Indian-registered businesses.
• This will be a Tribunal for Corporate Members.
• The NCLT will minimize the number of lawsuits filed in various forums
and courts.
• NCLT has various branches and may offer justice at a distance.
• When making decisions, the NCLT includes both judicial and technical
experts.
• The time it takes to dissolve a corporation is decreased.
• Cases that are resolved quickly will assist in the number of cases.
• The NCLT and NCLAT have exclusive jurisdiction.
Oppression and mismanagement
• Sec 241 of the companies act, states that any member of the company who has the
right to complain to tribunal as per section 244 of the Act, 2013 shall file a complaint
to tribunal stating that:
• Affairs of the company are conducted in such a manner which is prejudicial to public
interest or oppressive to him or to any member of the company or which is prejudicial
to the company.
• A material change which has been brought by the company which is against the
interest of creditors of the company, debenture holders, shareholders of the company
and it has brought significant change in the management or control of the company
either in:
1.alteration in the board of directors,
2.alteration of managers,
3.alteration of the member, or
4.any other reason.
• For such reasons, the members of the company perceive that affairs of
the company have been conducted in the manner which is prejudicial
to its interest.
• When the Central Government is of opinion that affairs of the
company have been conducted in any one of below manner mentioned
and by that tribunal comes to the conclusion that it has been
prejudicial to public interest or in an oppressive manner:
1.a member of the company is either guilty of fraud, misfeasance,
persistent negligent, breach of trust or is the default in carrying out the
obligations and functions as per law; or
2.management of the company is not been carried out as per the sound
principles or prudent commercial practices; or
3. when a company is being conducted which causes serious injury to
trade, business, industry; or
4. when a company is being managed with the sole motive to defraud
creditors, members, or being managed only for fraudulent or unlawful
purposes which is against the public interest;
• shall file an application to the tribunal for seeking the remedy.
National Company Law Appellate Tribunal
(NCLAT)
• On June 1, 2016, the National Company Law Appellate Tribunal (NCLAT)
was established.
• It was established by Section 410 of the Companies Act of 2013. Its purpose
is to consider appeals from the National Company Law Tribunal(s)
(NCLT) decisions.
• NCLAT also serves as the Appellate Tribunal for appeals against NCLT(s)
decisions. As of December 1, 2016, it was created under Section 61 of the
Insolvency and Bankruptcy Code, 2016. (IBC).
• Section 410 of the Companies Act of 2013 established the NCLAT. Its mission
is to consider appeals from the National Company Law Tribunal (NCLT)
decisions.
• Any individual who is dissatisfied with an NCLAT order may seek an
appeal with the Supreme Court.
Recent Update
• The government has nominated Justice Ashok Bhushan, a former

Supreme Court judge, to lead the National Company Law Appellate
Tribunal (NCLAT).
• The government has nominated 31 persons to the National Company
Law Tribunal (NCLT) and the Income Tax Appellate Tribunal (ITAT)
as judicial, technical, and accounting members (ITAT).
Characteristics of
NCLAT
• Under Sections 202 and 211 of the IBC, the NCLAT also serves as
the Appellate Tribunal for judgments issued by the Insolvency and
Bankruptcy Board of India.
• The NCLAT is also the Appellate Tribunal to hear and dispose of
appeals against any directive issued, judgment, or order passed by
the Competition Commission of India (CCI).
• The Ministry of Corporate Affairs established eleven Benches in the
first phase, one Principal Bench in New Delhi, and 10 Benches in
New Delhi, Ahmadabad, Allahabad, Bengaluru, Chandigarh,
Chennai, Gauhati, Hyderabad, Kolkata, and Mumbai.
• At various locations, NCLT benches were led by the President, 16
Judicial Members, and 9 Technical Members. More members have
joined, and benches have been established in Cuttack, Jaipur, Kochi,
Amravati, and Indore.
Constitution of NCLAT
• By issuing a notification, the central government has the power to

establish an Appellate Tribunal, which is known as the National
Company Law Appellate Tribunal.
• NCLAT consists of a chairperson and a maximum of eleven judicial
and technical members as the central government may deem fit, to be
appointed by notification for hearing appeals against the tribunal or the
National Financial Authority’s orders. It will come into effect from
such date as may be specified in the Companies Act, 2013.
• NCLT Benches: https://testbook.com/ias-preparation/national-
company-law-tribunal
COMPOSITION, QUALIFICATION AND TENURE OF MEMBERS OF TRIBUNAL(NCLT)
Compositi President Judicial Member Technical Member
on
Qualificati A person who is or A person who is or has A person who has member of Indian corporate
on has been the Judge been a Judge of a High law service or Indian legal services or has
of High Court for 5 Court or is a district judge been in practice as Chartered Accountant or
years. for at least 5 years or has Company Secretary or Cost Accountant for at
been an advocate of a least 15 years or presiding officer of Labour
court for at least 10 years. court for at least 5 years or a person of proven
ability, integrity and standing having special
knowledge and professional experience of not
less than 15 years in industrial finance,
industrial management
Tenure Age of 67 years or Age of 65 years or such for Age of 65 years or such for a term of five years
such for a term of five a term of five years from from the date on which he enters upon his
years from the date the date on which he enters office; Whichever is Earlier
on which he enters upon his office; Whichever
upon his office; is Earlier
Whichever is Earlier
COMPOSITION, QUALIFICATION AND TENURE OF MEMBERS OF APPELLATE
TRIBUNAL (NCLAT)
Compositio President Judicial Member Technical Member

n
Qualificatio A person who is or A person who is or A person of proven ability, integrity and
n has been a Judge of has been a Judge of a standing having special knowledge and
the Supreme Court High Court or is a professional experience of not less than
or the Chief Justice Judicial Member of 25 years in industrial finance, industrial
of a High Court. the Tribunal for 5 management & reconstruction,
years. investment and accountancy.
Tenure Age of 70 years or Age of 67 years or Age of 67 years or such for a term of
such for a term of such for a term of five five years from the date on which he
five years from the years from the date enters upon his office; Whichever is
date on which he on which he enters Earlier
enters upon his upon his office;
office; Whichever is Whichever is Earlier
Earlier
Characteristics of NCLAT
• Under Sections 202 and 211 of the IBC, the NCLAT also serves as the Appellate
Tribunal for judgments issued by the Insolvency and Bankruptcy Board of India.
• The NCLAT is also the Appellate Tribunal to hear and dispose of appeals against
any directive issued, judgment, or order passed by the Competition Commission
of India (CCI).
• The Ministry of Corporate Affairs established eleven Benches in the first phase,
one Principal Bench in New Delhi, and 10 Benches in New Delhi, Ahmadabad,
Allahabad, Bengaluru, Chandigarh, Chennai, Gauhati, Hyderabad, Kolkata, and
Mumbai.
• At various locations, these Benches were led by the President, 16 Judicial
Members, and 9 Technical Members. More members have joined, and benches
have been established in Cuttack, Jaipur, Kochi, Amravati, and Indore.
Difference Between NCLT and NCLAT
• Primary jurisdiction is handled by the NCLT, while the NCLAT handles

appeals.
• NCLAT is a relatively higher forum than NCLT. NCLT is usually
presented with evidence and witnesses for decision-making, while
NCLAT evaluates and checks NCLT’s decisions on the point of law or
fact.
• The Tribunal (NCLT) is primarily in charge of fact-finding and evidence
gathering, while the Appellate Tribunal (NCLAT) makes decisions based
on evidence and witnesses already gathered.
BENCH OF APPELLATE TRIBUNAL:
Sl. No. Name of the Bench Location Territorial Jurisdiction
1 NCLAT New Delhi All over India
BENCHES OF TRIBUNAL AND APPELLATE TRIBUNAL: The Central Government has

constituted 15 Tribunal benches in New Delhi, Ahmedabad, Allahabad, Hyderabad, Bengaluru,
Chandigarh, Chennai, Cuttack, Guwahati, Hyderabad, Indore, Jaipur, Kochi, Kolkata, Mumbai and 1
Appellate Tribunal bench in New Delhi.
APPEAL TO SUPREME COURT AGAINST ORDER OF APPELLATE TRIBUNAL AND TO
APPELLATE TRIBUNAL AGAINST ORDER OF TRIBUNAL
Any person aggrieved by the order of NCLT then appeal any order
on Question of Law and Fact within 45 Days to NCLAT and any
person aggrieved by the order of NCLAT then appeal on Question
of Law within 60 Days to Supreme Court.
Board of Industrial and Financial Reconstruction
(BIFR)
• The Board for Industrial and Financial Reconstruction (BIFR) was an agency
of the Government of India and a division of the Department of Financial
Services, Ministry of Finance, created under the BIMARU Industrial
Companies Act (SICA), 1985.
• Its purpose was to reshape and recover sick ventures and to close or eliminate
the potential for ill exposures to increase or occur in the future or over a longer
period.
• The BIFR consists of a chairman and two to fourteen other representatives.
• The pre-requisite for all the members to be elected as judges of the High
Court is that they should otherwise have the necessary professional experience
of at least 15 years.
• The Board organizes and oversees only large or medium-sized sick industrial
enterprises.
Filling of Appeal before the
NCLAT
• As per Sec. 421 of the Companies Act, 2013, any person aggrieved by an order of the
Tribunal may prefer an appeal to the Appellate Tribunal within a period of 45 days
from the date on which a copy of the order of the Tribunal is made available to the
person.
However, the Appellate Tribunal may entertain an appeal after the expiry of the said
period of 45 days from the date aforesaid, but within a further period not exceeding 45
days, if it is satisfied that the appellant was prevented by sufficient cause from filing
the appeal within that period.
• As per Sec. 422 of the Companies Act, 2013 - petition presented before the Tribunal and every appeal
filed before the Appellate Tribunal shall be dealt with and disposed of by it as expeditiously as possible
and every endeavour shall be made by the Tribunal or the Appellate Tribunal, as the case may be, for the
disposal of such application or petition or appeal within 3 months
• petition or appeal is not disposed of within the period specified above -
the Tribunal or, as the case may be, the Appellate Tribunal, shall
record the reasons for not disposing of the application or petition or
the appeal, - the President or the Chairperson, as the case may be, may,
after taking into account the reasons so recorded, extend the period -
period not exceeding 90 days.
Appeal to Supreme Court (Sec. 423)
• Provisions relating to appeal on order of NCLAT:
• Sec. 423 of Companies Act, 2013 provides that any person aggrieved
by any order of the Appellate Tribunal may file an appeal to the
Supreme Court within 60 days from the date of receipt of the order of
the Appellate Tribunal to him on any question of law arising out of
such order.
Week 10 Overview of the securities and exchange board of
India act, 1992
Quadrant 1 2. Watch the eLearning content on “L10: Overview of the securities and
exchange board of India Act, 1992”
eContent
3. Read the eLM on “Unit 10: Overview of the securities and exchange board
of India Act, 1992”
7. Read this open-source material on Powers and functions of SEBI
https://lawdocs.in/blog/powers-and-functions-of-
sebi#:~:text=Protective%20Function%3A%20SEBI%20performs%20these,(iii
)Prevent%20insider%20trading.
Quadrant 2 1. Revise “L9: National company law tribunal and appellate tribunal”
recording of the live Session
eTutorial
5. Attend the live session #10 on “Overview of the securities and exchange
board of India Act, 1992”
Quadrant 3 4. Attempt to answer the questions for Practice #10 on “Overview of the
securities and exchange board of India Act, 1992”
eAssessme
nt 6. After the live session, repeat the Practice #10 for “L10: Overview of the
securities and exchange board of India Act, 1992” for self-assessment
forum and case studies.
Discussion
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JAIN DEEMED-TO-BE UNIVERSIT Y
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JAIN
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Overview of the Securities and Exchange
Board of India Act, 1992
Unit – X
Week 10 Overview of the securities and exchange board of India act, 1992
Quadrant 1 2. Watch the eLearning content on “L10: Overview of the securities and exchange board of India
Act, 1992”
eContent
3. Read the eLM on “Unit 10: Overview of the securities and exchange board of India Act, 1992”
7. Read this open-source material on Powers and functions of SEBI
https://lawdocs.in/blog/powers-and-functions-of-
sebi#:~:text=Protective%20Function%3A%20SEBI%20performs%20these,(iii)Prevent%20inside
r%20trading.
Quadrant 2 1. Revise “L9: National company law tribunal and appellate tribunal” recording of the live
Session
eTutorial
5. Attend the live session #10 on “Overview of the securities and exchange board of India Act,
1992”
Quadrant 3 4. Attempt to answer the questions for Practice #10 on “Overview of the securities and exchange
board of India Act, 1992”
eAssessment
6. After the live session, repeat the Practice #10 for “L10: Overview of the securities and
exchange board of India Act, 1992” for self-assessment
studies.
Discussions
SEBI - Securities and Exchange Board of India
• The Securities and Exchange Board of India (SEBI) was founded as
the regulating authority for the Indian securities market on April 12,
1992, by the SEBI Act 1992.
What is SEBI?
• SEBI is essentially a statutory body of the Indian Government that was
established on the 12th of April in 1992. It was introduced to promote
transparency in the Indian investment market.
• Besides its headquarters in Mumbai, the establishment has several
regional offices nationwide, including New Delhi, Ahmedabad,
Kolkata and Chennai.
History of SEBI
• Before the foundation of SEBI, the securities market was regulated by
several government institutions, resulting in inconsistency and
inefficiency.
• The Indian government awarded SEBI new regulatory powers in 2014,
allowing it to undertake search and seizure operations and apply
harsher punishments for rigging markets and insider trading.
• Today, SEBI is regarded as one of the world's top regulatory
authorities and plays an essential role in the growth and regulation of
the Indian securities market.
Objectives of
SEBI
• SEBI is entrusted with regulating the functioning of the Indian
capital market. The objectives of SEBI as a regulatory body are to
monitor and regulate India's securities market to safeguard
investors' interests.
• It aims to inculcate a safe investment environment by
implementing several rules and regulations and formulating
investment-related guidelines.
• Furthermore, one of the other main objectives was to avoid
malpractices in the Indian stock market.
Organizational Structure of
SEBI
• SEBI India follows a corporate structure. It has a Board of Directors, senior
management, department heads and several crucial departments.
• To be precise, the structure of SEBI comprises over 20 departments, all of
which are supervised by their respective department heads, which in turn
are administered by a hierarchy in general.
• The hierarchical structure comprises the following 9 designated officers –
• The Chairman – Nominated by the Indian Union Government.
• Two members belonging to the Union Finance Ministry of India.
• One member belonging to the Reserve Bank of India or RBI.
• Other five members – Nominated by the Union Government of India.
• The below-mentioned list highlights some of the most critical
departments of SEBI –
• The Information Technology Department.
• The Foreign Portfolio Investors and Custodians.
• Office of International Affairs.
• National Institute of Securities Market.
• Investment Management Department.
• Commodity and Derivative Market Regulation Department.
• Human Resource Department.
• Besides these, other crucial departments take care of legal, financial
and enforcement-related affairs.
Powers of Chairman of SEBI [Section 4(3)]
• Chairman shall also have powers of general superintendence and

direction of the affairs of the SEBI.
• He may exercise all powers and do all acts and things which may be
exercised or done by the SEBI.
Appointment of Chairman & Members [Section 4(4)]
•Chairman and members referred to in Section 4(1)(a) & (d) shall be appointed by the Central
Government.
•Members referred to in Section 4(1)(b) & (c) shall be nominated by both Central Government
and RBI.
Who can be member of SEBI [Section 4(5)]
• Following persons can be appointed as the Chairman and other members of

the SEBI:
• A person having ability, integrity and standing who have shown capacity in dealing
with problems relating to securities market.
• A person having special knowledge or experience of law, finance, economics,
accountancy, administration.
• A person having special knowledge or experience in any discipline which in the
opinion of the Central Government shall be useful to the SEBI.
Functions and Powers of
SEBI
Functions of SEBI
• To protect the interests of Indian investors in the securities market.
• To promote the development and hassle-free functioning of the securities market.
• To regulate the business operations of the securities market.
• To serve as a platform for portfolio managers, bankers, stockbrokers, investment
advisers, merchant bankers, registrars, share transfer agents and others.
• To regulate the tasks entrusted to depositors, credit rating agencies, custodians of
securities, foreign portfolio investors and other participants.
• To educate investors about securities markets and their intermediaries.
• To prohibit fraudulent and unfair trade practices within the securities market and
related to it.
• To monitor company takeovers and acquisition of shares.
• To keep the securities market efficient and up to date through proper research and
developmental tactics.
• Calling for information and record from any bank or any other authority or board or
corporation established or constituted by or under any Central, State or Provincial Act
in respect of any transaction in securities which is under investigation or inquiry by the
SEBI.
• Calling from or furnishing to any such agencies, as may be specified by the SEBI, such
information as may be considered necessary by it for the efficient discharge of its
functions.
Inspection of listed companies by SEBI [Section 11(2A)]
• SEBI may take measures to undertake inspection of any book, register, or other document or
record of:
– Any listed public company.
– A public company which is in process of listing its securities in recognised stock exchange.
• Such inspection can be made by the SEBI if it has reasonable grounds to believe that company
has been indulging in insider trading or fraudulent and unfair trade practices relating to
securities market.
Powers of
SEBI
1. Quasi-Judicial powers:
• In cases of fraud and unethical practices in the securities market, SEBI
India can pass judgements. The said power of SEBI facilitates
transparency, accountability and fairness in the securities market.
2. Quasi-executive Powers
• SEBI can examine the Book of Accounts and other vital documents to
identify or gather evidence against violations. If it finds one violating
the regulations, the regulatory body can impose rules, pass judgements
and take legal actions against violators
3. Quasi legislative powers:
• To protect the interest of investors, the authoritative body has been
entrusted with the power to formulate pertinent rules and regulations.
Such rules tend to encompass listing obligations, insider trading
regulations and essential disclosure requirements.
• The body formulates rules and regulations to eliminate malpractices in
the securities market.
• The Supreme Court of India and the Securities Appellate Tribunal
have the upper hand when it comes to the powers and functions of
SEBI. The two apex bodies must go through all their functions and
related decisions.
Power of SEBI where an inquiry or investigation is ordered [Section 11(4)]
• SEBI can pass following orders, either during or after investigation or inquiry:
• (a) Suspend the trading of any security in a recognised stock exchange.
• (b) Restrain persons from accessing the securities market.
• (c) Prohibit any person associated with securities market to buy, sell or deal in securities.
• (d) Suspend any office-bearer of any stock exchange or self-regulatory organisation from
holding such position.
• (e) Impound and retain the proceeds or securities in any transaction which is under
investigation.
• (h)Direct any intermediary or any person associated with the securities market in any
manner not to dispose of or alienate an asset forming part of any transaction which is under
investigation.
Power to issue directions and levy penalty [Section 11B]
SEBI is empowered to issue directions for the following reasons:

• In the interest of investors.
• Orderly development of securities market.
• To prevent the affairs of any intermediary or stock brokers, sub-brokers, share
transfer agents being conducted in a manner detrimental to the interests of investors
or securities market.
• To secure the proper management of any such intermediary or person.
Such directions can be issued to:
(a) Any stock brokers, sub-brokers, share transfer agents or person associated
with the securities market.
(b) Any company in respect of matters relating to issue of capital, transfer of
securities and other incidental matter appropriate in the interests of investors
in securities and the securities market.
Registrations of Intermediaries
• Following intermediaries are required to obtain a registration certificate from the SEBI
to buy, sell or deal in securities:
• Stock broker
• Share transfer agent
• Banker to an issue
• Trustee of trust deed
• Registrar to an issue
• Merchant banker
• Underwriter
• Portfolio manager
• Investment adviser
• Other intermediary associated with securities market.
• Application: Every application for registration shall be made in prescribed manner along with
prescribed fees as per relevant applicable regulations.
• Suspension or cancellation of registration: SEBI may suspend or cancel a certificate of
registration after giving a reasonable opportunity of being heard to a concerned
person.
Penalties & Adjudication
1. Penalty for failure to furnish information, return etc. [Section 15A]

• A person shall be liable to penalty which shall not be less than ` 1
lakh but which may extend to ` 1 lakh for each day subject to a
maximum of ` 1 Crore, if he fails –
• (a) To furnish any document, return or report to the SEBI.
• (b) To file return or furnish information, books or other documents
within specified time.
• (c) To maintain books of account or records.
2. Penalty for failure to observe rules and regulations by AMC
• Where any Asset Management Company (AMC) of a mutual fund fails to comply
with any of the regulations providing for restrictions on the activities of the
AMCs, such AMC shall be liable to a penalty which shall not be less than ` 1
lakh but which may extend to ` 1 lakh for each day during which such failure
continues subject to a maximum of ` 1 Crore.
3.Penalty for default in case of stock brokers
A registered stock broker shall be liable to penalty which shall not be less than ` 1 lakh but which
may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if it fails –
(a) To issue contract notes in the form and manner specified by the stock exchange;
(b) To deliver any security or fails to make payment of the amount due to the investor in the
manner within the period specified in the regulations;
(c) Charges an amount of brokerage which is in excess of the brokerage specified in the
regulations.
4. Penalty for Investment Adviser and Research Analyst
- fails to comply with the regulations made by the Board - penalty which shall not be
less than ` 1 lakh but which may extend to ` 1 lakh for each day during which such
failure continues subject to a maximum of ` 1 Crore.
5. Penalty for insider trading
• For the following defaults, an insider shall be liable to penalty which shall not be
less than ` 10 lakh but which may extend to ` 25 Crore or 3 times of profits out of
insider trading, whichever is higher:
• (a) Where he deals in securities of a body corporate listed on any stock exchange
on the basis of any unpublished price-sensitive information or
• (b) Where he communicates any unpublished price-sensitive information to any
person except as required in the ordinary course of business or under any law; or
• (c) Where he counsels, or procures for any other person to deal in any securities of
any body corporate on the basis of unpublished price-sensitive information.
Investigation
• In following cases, SEBI may appoint any person (Investigating

Authority) to investigate the affairs of intermediary or persons
associated with the securities market, if the SEBI has reasonable
ground to believe that:
• (a) Transactions in securities are being dealt with in a manner
detrimental to the investors or the securities market.
• (b) Any intermediary or any person associated with the securities
market has violated any of the provisions of the Act or Rules or
Regulations made or directions issued by the SEBI.
• Duty of officers to produce document and records: It shall be the duty of
every manager, managing director, officer and other employee of the
company and every intermediary or every person associated with the
securities market to preserve and to produce to the Investigating Authority,
all the books, registers, other documents and record relating to the company
or relating to the intermediary.
• Duty to furnish information: The Investigating Authority may require any
intermediary or person associated with securities market to furnish
information which is relevant or necessary for the purposes of its
investigation.
• Power of Investigating Authority to take custody of records: The
Investigating Authority may keep in its custody any books, registers, other
documents and record for 6 months and thereafter shall return the same.
However, the Investigating Authority may call again the documents and
records if they are needed.
• Power of Investigating Authority to examine on oath: The Investigating Authority may examine
on oath any manager, managing director, officer and other employee of any intermediary or any
person associated with securities market and for that purpose may require any of those persons to
appear before it personally.
• Penalty: If any person contravenes the provisions relating to oath or fails to appear personally, he
shall be punishable –
• With imprisonment for a term which may extend to 1 year or
• With fine which may extend to ` 1 Crore or
• With both.
• Additional fine can be imposed which may extend to ` 5 lakh for every day after the first during
which the failure or refusal continues.
• Power to take notes on examination: Notes of any examination shall be taken down in writing and
shall be read over to and signed by the person examined. The notes may used as evidence against
such person in the legal proceedings.
Search &
Seizure
• If Investigating Authority has reasonable ground to believe that the records
• destroyed, mutilated, altered, falsified or secreted, he can make application
to the Judicial Magistrate of the first class for order of seizure of records.
• The Investigating Authority may requisition the services of any police
officer to assist him for seizure of records.
• The Magistrate may authorise the Investigating Authority to enter premises,
search and seize records. However, records of listed company or company
intending to be listed can be seized only if it is indulging insider trading or
market manipulation.
• The Investigating Authority shall keep the records till investigation and then
return after placing identification marks.
• Search will be carried out as per provisions of the Code of Criminal
Procedure, 1973 relating to searches and seizures.
Securities appellate tribunal under SEBI
• Securities Appellate Tribunal (SAT) is formed as a statutory and
autonomous body as per the provisions of the SEBI Act, 1992 where orders
passed by the SEBI are appelled, heard and resolved or by an adjudicating
officer under the Act and to exercise jurisdiction, powers and authority
conferred on the Tribunal by or under this Act or any other law for the time
being in force.
Securities Appellate Tribunal hears appeals against the following orders:
• Orders issued by the Insurance Regulatory and Development Authority of
India (IRDAI) in relation to cases filed before it.
• Orders issued by the Pension Fund Regulatory and Development Authority
(PFRDA) in relation to cases filed before it.
• Hear the orders passed by Securities and Exchange Board of India.
• Composition of Securities Appellate Tribunal: SAT consists of the following:
• One Presiding Officer and
• such number of Judicial and Technical Members as the Central Government may
determine.
Qualification & Tenure for appointment as Presiding Officer or Member of Securities
Appellate Tribunal:
• Presiding Officer: The person so appointed as the presiding Officer should meet with the
following requirements:
a)The retired or sitting judge of the supreme Court
b) Chief Justice of the high court
c) Judge of the high court, who has completed at least seven years of service as a judge in a
high court.
Members
Judicial Member: Judge of High Court for atleast five years of service
Technical Member:
• Secretary or an Additional Secretary in the Ministry or Department of the Central
Government or any equivalent post in the Central Government or a State Government; or
• Person of proven ability, integrity and standing having special knowledge and
professional experience, of not less than 15 years, in financial sector including securities
market or pension funds or commodity derivatives or insurance.
• *The Presiding Officer and Judicial Members shall be appointed by the Central
Government in consultation with the Chief Justice of India or its nominee.
Tenure: The tenure for Presiding Officer or the Judicial or Technical Member will be five
years from the date of appointment and shall be eligible for re-appointment for another
term of maximum five years. However, no presiding officer or the Judicial or Technical
Member shall hold office after he has attained the age of 70 years.
Powers of SAT
The Securities Appellate Tribunal shall have the same powers as vested
in a civil court under the code of civil procedure while trying a suit, with
respect of the following matters namely:
• Enforce and summon the attendance of any person
• Require the discovery and production of documents
• Receive evidence on affidavits Issue commissions for the examination
of the documents or witnesses
• Dismiss an application for default or deciding it ex-parte
• Set aside any order or dismissal of any application for default or any
other order passed by it ex-parte
• Any other matter as and when prescribed.
Week 11 Overview of Foreign Exchange
Management Act, 1999
Quadrant 1 2. Watch the eLearning content on “L11: Overview of Foreign Exchange
Management Act, 1999”
eContent
3. Read the eLM on “Unit 11: Overview of Foreign Exchange Management Act,
1999”
7. Watch this video on FEMA https://www.youtube.com/watch?v=592j5UTZdkg
Quadrant 2 1. Revise “L10: Overview of the securities and exchange board of India Act, 1992”
eTutorial
5. Attend the live session #11 on “Overview of Foreign Exchange Management Act,
1999”
Quadrant 3 4. Attempt solving the Problems for Practice #11 on “Overview of Foreign Exchange
eAssessment
6. After the live session, repeat the Practice #11 for “L11: Overview of Foreign
Exchange Management Act, 1999” for self-assessment
and case studies.
Discussions
UNIT
11 Overview of The Foreign Exchange

Names of Sub-Units
Key Features of FEMA, Key Provisions of FEMA, Authorised Persons under FEMA, Residential Status
under FEMA, Regulation and Management of Foreign Exchange under FEMA.
Overview
The unit begins by giving an overview of the key features and provisions of FEMA. Towards the
end, it explains the authorised persons and residential status under FEMA and the regulation and
management of foreign exchange under FEMA.
Learning Objectives

 Explain the key features and provisions of FEMA
 Discuss authorised persons and residential status under FEMA
 Describe regulation and management of foreign exchange under FEMA
Learning Outcomes

 Analyse the key features and provisions of FEMA
 Evaluate authorised persons and residential status under FEMA
 Examine regulation and management of foreign exchange under FEMA
JGI JAIN
Corporate Laws
 https://resource.cdn.icai.org/67333bos54154-m3cp1.pdf
11.1 INTRODUCTION
The Foreign Exchange Regulation Act (FERA) is legislation that was passed by the Indian Parliament in
1973 and came into effect on January 1, 1974. FERA was an act to regulate dealings in foreign exchange
and foreign securities with the objective of conservation of foreign exchange resources of India and its
proper utilization in the economic development of India. It extended to whole of India and applied to all
the citizens of India, outside India as well as in India and to branches and agencies of Indian companies
or body corporates, outside India. FERA imposed strict regulations on transactions involving foreign
exchange and controlled the import and export of currency. Unlike other laws where everything is
permitted unless specifically prohibited, under FERA nothing is permitted unless specifically permitted.
Hence the tenor and tone of the Act was very drastic. It provided for imprisonment for violation of even
a very minor offense. Under this Act, a person was presumed guilty unless he proved himself innocent
whereas under other laws, a person is presumed innocent unless he is proven guilty. Therefore one had
to be very careful while dealing in foreign exchange and ensure that all legal compliances were carried
out.
Eventually, the government realised that FERA rules were perhaps a hindrance to economic liberalisation.
A draft of the Foreign Exchange Management Bill (FEMA) was prepared by the Government of India to
replace FERA keeping in view the liberal spirit of the Indian economy. However, until FEMA was enacted,
the provisions of FERA were applicable. FERA was finally repealed by the government in 1999 by the
Foreign Exchange Management Act (FEMA), which liberalised foreign exchange controls and removed
many restrictions on foreign investment. The need for replacing FERA with FEMA was felt with the
introduction of economic reforms in the country, there was a need to remove the drastic and rigorous
measures of FERA and replace it with a set of liberal foreign exchange management regulations. FEMA
came into existence on June 1, 2000 but FERA was provided a sunset clause of two years to enable
the Enforcement Directorate (ED) to complete investigations into cases already detected by it for FERA
violations before May 31, 2000.
11.2 OVERVIEW OF FOREIGN EXCHANGE MANAGEMENT ACT, 1999

The Foreign Exchange Management Act, 1999 (FEMA) was passed by the Parliament of India on December
29, 1999. This Act was passed with the objective of consolidating and amending the law related to foreign
exchange, facilitating external trade, payments, and promoting the development of foreign exchange
market in India in a systematic manner. This Act replaced the Foreign Exchange Regulation act (FERA).
FEMA prevents offences related to foreign exchange.
FERA was passed in 1973 and it imposed strict regulations on transactions involving foreign exchange.
At that point in time, the foreign exchange reserves of the country were very low, and forex was scarce.
All forex had to be deposited with the Reserve Bank of India (RBI). With India liberalising its stand in the
early 1990s, FERA became redundant and restrictive. It was thus repealed in 1998. Managing foreign
exchange is needed to avoid and mitigate risks. FEMA made trade easier, as RBI’s permission was no
longer required.
2
UNIT 11: Overview of The Foreign Exchange Management Act, 1999 JGI JAIN
11.2.1 Key Features of FEMA

The key features of FEMA are as follows:
 FEMA gives the central government power to impose restrictions on payments made to any person
outside India or receipts from them or on foreign securities.
 Transactions involving foreign exchange and payments from outside India should be made only
through authorised persons
 Indian residents can conduct transactions in foreign exchange or securities or own immovable
property abroad if the currency was owned or acquired when the person was living outside India or
when it was inherited from someone living outside India.
 FEMA empowers RBI to restrict transactions from capital account even if it is conducted through
an authorised person.
11.2.2 Key Provisions of FEMA

FEMA provides for free transaction on current account subject to the guidelines by the RBI. The key
provisions of FEMA can be clubbed under four heads:
1. Regulation for current account transactions: Any person may sell or draw foreign exchange to/
from an authorised forex dealer. RBI approval however is required for certain transactions such as
importers availing supplier’s credit beyond 180 days and buyer’s credit irrespective of the timeframe
for credit. Authorised dealers may remit surplus freight collections by shipping companies or agents,
multimodal transport operators, etc. after verifying supporting documents.
2. Regulations related to capital account transactions: Foreign nationals are not permitted to
invest in any company, partnership or proprietorship concern which is engaged in Chit Fund or
Agriculture or real estate (except township development, residential/commercial premises or roads
and bridges) or trading in transferable development rights (TDRs). The permissible classes of
capital account transaction for a resident Indian are listed in the regulations. Borrowing or lending
in foreign currency by an Indian resident to someone outside India, whether on repatriation or non-
repatriation basis, is governed by certain rules of FEMA. Authorised dealers may grant loans in
INR to NRIs against some security. Authorised dealers or Housing finance companies may also grant
loans in INR to NRIs for acquisition of residential property subject to certain terms. Deposits may be
accepted by companies and firms registered with RBI, from NRIs on repatriation or non-
repatriation subject to certain terms.
3. Regulations related to export of goods and services: Proceeds from exports must be realised within
6 months from the date of shipment. In case the exports are made to a warehouse abroad, the
proceeds must be realised within a period of 15 months from the date of shipment. Export on credit
for more than 6 months needs prior authorisation from RBI.
4. Other regulations: Any Indian, to whom foreign exchange is due, must take steps to realise and
repatriate this forex to India. Any forex due or accrued for services rendered or income on foreign
assets or inheritance or gift to an Indian resident must be sold to an authorised person within 7 days
of its receipt, and in other cases, within 90 days of receipt. Any person who has drawn exchange and
not utilised it, should surrender such forex within 60 days to an authorised person.
In case this forex is in the form of traveller’s cheques, it must be surrendered to an authorised person
within 90 days from date of return of the traveller. Any Indian resident may retain foreign currency
up to a maximum of USD 2000 or its equivalent in the form of currency notes or traveller’s cheques,
acquired by the person from authorised sources. RBI has granted permission to any person to receive
any payment made in INR, on behalf of a person resident outside India during their stay in India, made
3
JGI JAIN
Corporate Laws
by means of cheque or draft drawn on a bank outside India or in foreign currency, provided it is sold
to an authorised person within 7 days of its receipt. RBI has also granted general permission to Indian
residents to make payment in rupees for providing hospitality to a person resident outside India to
another resident outside India for purchase of gold or silver imported by such person as per the Foreign
Trade (Development and Regulation) Act, 1992 or under any law in force.
11.3 AUTHORISED PERSONS UNDER FEMA

An authorised person under FEMA is a person authorised by RBI to deal in foreign exchange. Such
a person has to furnish the relevant documents to support the application to become an authorised
person and has to furnish details to RBI from periodically as required. There are four categories of
authorised persons, which are:
 Category 1: State, commercial, cooperation and urban cooperation banks. They must follow RBI
guidelines for their capital account and current account transactions.
 Category 2: Regional Rural banks, Full Fledged Money Changer (FFMC). FFMCs are permitted
remittances of tour operators, private or business visits abroad, participation in international
conferences, events, remittance of international exam fee such as TOEFL, GRE, Medical treatments
abroad, overseas education, overseas employment, overseas emigration, fee for international visa,
fee for international organisations and so on.
 Category 3: Selective financial institutions come in this category. These entities are permitted
transactions incidental to foreign exchange.
 Category 4: FFMCs and postal department. These entities can purchase foreign exchange securities
for business visits abroad or private purposes.
11.4 RESIDENTIAL STATUS UNDER FEMA

As per FEMA, an individual needs to stay in India for more than 182 days during the preceding financial
year to be treated as a Resident Indian. Any person or corporate body registered or incorporated in
India will also be treated as a person resident in India. This includes a branch or agency in India, even
though it may be controlled by a person resident outside India. It also includes any branch or agency
outside India in case it is owned or controlled by a resident Indian. Students going abroad for further
studies will be treated as non-resident Indians. A non-resident means a person who is not a resident of
India.
The resident status impacts the extent to which a person is regulated for cross-border transactions and
their income tax liability. FEMA regulates inbound and outbound transactions and resident, or non-
resident status affects these transactions. Citizenship is not relevant for determining the resident status
under FEMA. Residence as per FEMA is defined as ‘Person resident in India’ under Section 2(v) and
‘Person resident outside India’ under Section 2(w). Two clauses need to be considered while determining
the residence status, Clause A and Clause B. Clause A states that if any person leaves India for either
taking up employment, carrying on a business or any purpose which indicates an intention to stay
outside India for an uncertain period, he will be considered a non-resident. Clause B states that if any
person comes to India for employment, carrying on a business or for an uncertain period, that person
will be treated as a resident Indian. These clauses are an exception to the condition that a person needs
to reside in India for 182 days to be considered a resident Indian.
11.5 REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE UNDER FEMA

FEMA is applicable across the entire country of India. It also applies to branch offices and agencies
outside India which are either owned or controlled by resident Indians. The term ‘resident’ is defined
4
in Section 2(v)(i) of the Act. FEMA applies to any foreign exchange, foreign security, exports, imports
and securities as defined under Public Debt Act, 1994 and includes sale, purchase of any kind, banking,
financial and insurance services, as well as any overseas company owned by a non-resident Indian
(NRI) or any Indian citizen residing in India or abroad.
The FEMA regulations apply based on whether the transactions are of capital or current account
transactions. Capital account transactions are those transactions which affect the assets or liabilities
of resident Indians outside India or related to assets and liabilities of residents who are outside India,
but their assets and liabilities are in India. Capital transactions impact the balance sheet of an entity.
Capital account transactions may be of following types:
 Transaction where withdrawal is prohibited: These are mentioned in Schedule I. Some examples
include football pools, purchasing lottery tickets, income from lottery, etc.
 Transactions requiring approval of Indian Government for withdrawal of foreign exchange:
These are mentioned in Schedule II. These include cultural tours, remittances of freight vessels
chartered by a public sector undertaking, etc.
 Transactions requiring approval of RBI: Listed under Schedule III, these include donations, gifts,
overseas studies, etc. up to a limit of USD 2,50,000 only.
 Prohibition on drawl of foreign exchange: The drawl of forex in situations mentioned below is
prohibited by FEMA:
 Income from lottery
 Income from winnings on racing, riding, etc.
 Transactions with residents of Nepal or Bhutan
 Travel to Bhutan or Nepal
 Payment for call back services
 Remittance for purchasing lottery ticket, sweepstakes, banned magazines, etc.
 Remittance of dividends
 Payment of commission on exports towards equity investment in Indian companies in Joint
Ventures or wholly owned subsidiaries abroad
 Remittance of interest income on funds held in Non-resident Special Rupees Scheme account
(NRSR account)
Outward Remittances
Outward remittance is the money sent by a person from their home country to another country. The
Liberalised Remittance Scheme (LRS) deals with outward remittances and has the following guidelines:
 Indian citizens can transfer up to USD 2,50,000 per annum to another country for specified purpose.
For amounts exceeding this limit, RBI approval is needed.
 In case a country is considered ‘non-cooperative’ by the Government of India, or it has links to
terrorism, no outward remittance is possible.
 Outward remittances are allowed for studying abroad, living abroad, gift, donation, travel, medical
treatment, and purchase of property or shares abroad.
5
Corporate Laws
Inward Remittances
Inward remittance is the transfer from abroad to a person’s bank account. In case of an inward
remittance from a foreign bank, a Foreign Inward Remittance Certificate (FIRC) is issued by the Bank,
which is to ensure that the remittance is not from an illegitimate source. The RBI proposes 2 routes for
inward remittance:
1. Rupee Drawing Arrangement (RDA): There is no cap of individual transactions in this account. For
business transactions, there is a limit of INR 15 lakhs.
2. Money Transfer Service Scheme (MTSS): Remittances in this scheme can go up to a maximum of
USD 2500 per transaction. Only 30 transactions are allowed per recipient in a year. FEMA has been
successful in empowering the citizens as well as the authorities, by managing the forex rather than
regulating it. FEMA permits individuals to own securities or property overseas.
 The Foreign Exchange Management Act, 1999 (FEMA) was passed by the Parliament of India on
December 29, 1999.
 This Act was passed with the objective of consolidating and amending the law related to foreign
exchange, facilitating external trade, payments, and promoting the development of foreign
exchange market in India in a systematic manner.
 This Act replaced the Foreign Exchange Regulation act (FERA). FEMA prevents offences related to
foreign exchange.
 FEMA gives the central government power to impose restrictions on payments made to any person
outside India or receipts from them or on foreign securities.
 Any Indian, to whom foreign exchange is due, must take steps to realise and repatriate this forex to
India.
 An individual needs to stay in India for more than 182 days during the preceding financial year to
be treated as a Resident Indian.
11.7 GLOSSARY
 Chit fund: A savings or credit product that bears a pre-determined value and is of a fixed duration,
mostly two to three years
 FEMA: An Act to consolidate and amend the law relating to foreign exchange
 FERA: An Act that was promulgated in 1973 to consolidate and amend the law regulating certain
payments, dealing in foreign exchange and securities
 Forex or foreign exchange: A global marketplace for exchanging national currencies
11.8 CASE STUDY: FLIPKART FEMA VIOLATION CASE
Case Objective
This case highlights the applicability of FEMA on an online e-commerce platform.
6
The Enforcement Directorate (ED) found Flipkart, an online e-commerce platform in violation of FEMA
guidelines. Officials told a leading daily that “the probe in the matter is over and the ED has been able
to establish that the company, which had foreign investors on board, was involved in Business-to-
Consumer operations simultaneously during the probe period”, which is not allowed under regulations.
“The matter will now be forwarded to the official adjudicator, who will decide the exact amount of
penalty. It is likely to be around INR 1400 Crore,” said an official.
The Enforcement Directorate has found online retail firm Flipkart in violation of FEMA provisions. A
Flipkart official said, “Flipkart is fully compliant with laws of the land and we will fully cooperate with
the authorities.”
In case any person or entity is in contravention of the Act, after adjudication, the person or entity could
be liable for a penalty of up to three times the amount involved, as per Section 13 of the FEMA. The ED is
responsible for the implementation of FEMA.
The official said that the investigating agency had found that DS retail, a firm incorporated in 2010 to
transact with customers, was allegedly acting as a front for retail operations of Flipkart Online Services,
incorporated in 2009. The ED investigation was started after the RBI had raised the issue.
After the ED probe, DS retail was sold by the company to a group of investors, who were resident Indians.
As per current policy, FDI is not permitted in e-commerce companies conducting B2C transactions while
100 per cent FDI is allowed in B2B (business-to-business) transactions.
As per KPMG-Internet and Mobile Association of India report, India’s e-commerce market in 2013 was
around USD 13 billion.
Source: https://indianexpress.com/article/business/companies/flipkart-case-ed-finds-fema-violation-r1400-cr-fine-likely/
Questions
1. Describe the feature of FEMA which was involved in investigating the case.
(Hint: Refer section on key features of FEMA)
2. Was the above case related to current account or capital account transactions?
(Hint: Refer section on Key provisions of FEMA)
3. What could have been the role of authorised persons in the above case?
(Hint: Refer section on authorised persons under FEMA)
4. How did the resident status impact the purchase of DS retail?
(Hint: Refer section on residential status under FEMA)
5. Explain the applicability of Regulation and Management of Foreign Exchange under FEMA.
(Hint: Refer section Regulation and Management of Foreign Exchange under FEMA)

1. Write a short note on FEMA.
2. What are the key features of FEMA?
3. Explain the key provisions of FEMA.
4. What are the four categories of authorised persons under FEMA?
5. Discuss the residential status under FEMA.
7
Corporate Laws

1. The Foreign Exchange Management Act, 1999 (FEMA) was passed by the Parliament of India on
December 29, 1999. This Act was passed with the objective of consolidating and amending the law
related to foreign exchange. Refer to Section Overview of Foreign Exchange Management Act, 1999
2. FEMA gives the central government power to impose restrictions on payments made to any person
outside India or receipts from them or on foreign securities. Refer to Section Overview of Foreign
Exchange Management Act, 1999
3. The key provisions of FEMA can be clubbed under four heads namely regulation for current
account transactions, regulations related to capital account transactions, regulations related to
export of goods and services and other regulations. Refer to Section Overview of Foreign Exchange
4. An authorised person under FEMA is a person authorised by RBI to deal in foreign exchange. Such
a person has to furnish the relevant documents to support the application to become an authorised
person and has to furnish details to RBI from periodically as required. There are four categories of
authorised persons under FEMA. Refer to Section Authorised Persons under FEMA
5. As per FEMA, an individual needs to stay in India for more than 182 days during the preceding
financial year to be treated as a Resident Indian. Any person or corporate body registered or
incorporated in India will also be treated as a person resident in India. Refer to Section Residential
Status under FEMA
 https://groww.in/p/sebi-securities-and-exchange-board-of-india/
 https://www.sebi.gov.in/acts/act15ac.html
 https://www.drishtiias.com/daily-updates/daily-news-analysis/securities-appellate-tribu%C2
%ADnal
 Find the reasons why FERA was replaced by FEMA.
8
Overview of the Foreign Exchange Management Act, 1999
Unit – XI
Week 11 Overview of Foreign Exchange
Quadrant 1 2. Watch the eLearning content on “L11: Overview of Foreign Exchange

eContent
3. Read the eLM on “Unit 11: Overview of Foreign Exchange Management
Act, 1999”
7. Watch this video on FEMA
https://www.youtube.com/watch?v=592j5UTZdkg
Quadrant 2 1. Revise “L10: Overview of the securities and exchange board of India Act,
1992” recording of the live Session
eTutorial
5. Attend the live session #11 on “Overview of Foreign Exchange Management
Act, 1999”
Quadrant 3 4. Attempt solving the Problems for Practice #11 on “Overview of Foreign
Exchange Management Act, 1999”
eAssessment
6. After the live session, repeat the Practice #11 for “L11: Overview of Foreign
Exchange Management Act, 1999” for self-assessment

Discussions
Introduction
• The Central Government of India formulated an act to encourage

external payments and across the border trades in India known as the
Foreign Exchange Management Act. FEMA (Foreign Exchange
Management Act) was introduced in the year 1999 to replace an earlier
act FERA (Foreign Exchange Regulation Act). FEMA was formulated
to fill all the loopholes and drawback of FERA (Foreign Exchange
Regulation Act) and hence several economic reforms (major reforms)
were introduced under the FEMA act. FEMA was basically introduced
to de-regularize and have a liberal economy in India.
Objectives of FEMA
• The main objective for which FEMA was introduced in India was to facilitate external trade and
payments. In addition to this, FEMA was also formulated to assist orderly development and
maintenance of the Indian forex market.
• FEMA outlines the formalities and procedures for the dealings of all foreign exchange transactions
in India. These foreign exchange transactions have been classified into two categories — Capital
Account Transactions and Current Account Transactions.
• Under the FEMA Act, the balance of payment is the record of dealings between the citizen of
different countries in goods, services and assets. It is mainly divided into two categories, i.e.
Capital Account and Current Account.
• Capital Account comprises all capital transactions whereas Current Account comprises trade of
merchandise. Current Account transactions are those transactions that involve inflow and outflow
of money to and from the country/countries during a year, due to the trading/rendering of
commodity, service, and income.
• The current account is an indicator of an economy’s status. As mentioned above the balance of
payment comprises current and capital accounts, the remainder of the Balance of Payment is
Capital Account, which consists the movement of capital in the economy due to capital receipts
and expenditure. Capital account recognises domestic investment in foreign assets and foreign
investment in domestic.
Applicability of FEMA Act
• FEMA (Foreign Exchange Management Act) is applicable to the whole of India
and equally applicable to the agencies and offices located outside India (which are
owned or managed by an Indian Citizen). The head office of FEMA is situated in
New Delhi and known as Enforcement Directorate. FEMA is applicable to:
• Foreign exchange.
• Foreign security.
• Exportation of any commodity and/or service from India to a country outside
India.
• Importation of any commodity and/or services from outside India.
• Securities as defined under Public Debt Act 1994.
• Purchase, sale and exchange of any kind (i.e. Transfer).
• Banking, financial and insurance services.
• Any overseas company owned by an NRI (Non-Resident Indian) and the owner is
60% or more.
• Any citizen of India, residing in the country or outside (NRI).
Authorities
1.Reserve Bank of India and the Central Government is

the controlling authority- Central Government enacts
the laws and RBI ensures its enforcement.
• The Directorate of Enforcement is the administrative
and managing authority.
Features of FEMA
• FEMA does not apply to the Indian citizens who resides outside India. This
criteria is checked by the number of days a person stays in India for more
than 182 days in the preceding financial year.
• Central Government has the authority given by FEMA to impose
restrictions on and supervise three things which are- payments made to any
person outside India or receipts from them, forex and foreign security deals.
• It specified the areas for holding of forex that required specific permission
of the Reserve Bank of India (RBI) or the government.
• FEMA classified the transaction into a current and capital account.
Main functions of RBI under FEMA
• The main functions of RBI under FEMA are as follows –
• (a) Control over dealings in foreign exchange by giving general or special
permission for dealing in foreign exchange, excluding those cases where
specific provisions have been made in Act, rules or regulations – section 3 of
FEMA
• (b) RBI cannot impose any restrictions on current account transactions.
These can be imposed only by Central Government in consultation with RBI –
section 5 of FEMA.
• (c) Specifying conditions for payment in respect of capital account transaction
involving debt instruments – section 6(2) of FEMA
• (d) Regulate/prohibit/restrict specified transactions in foreign exchange –
section 6(3) of FEMA
• (e) Specify (by regulation) period and manner in which foreign exchange due
from export of goods and services should be received – section 8
• (g) Granting authorisation to ‘Authorised Person’ to deal in foreign
exchange, to give directions to them and to inspect the authorised
person – sections 10, 11 and 12.
• (h) To make regulations – section 47
• (i) Administer FEM (Non-debt Instruments) Rules, 2019
Regulations of FEMA
• While the FEMA contains a list of regulations, some of the most common
and important ones are as follows:
• An individual should not engage in foreign security or foreign exchange for
another unless he is an authorised person.
• An individual should not transfer any money to an NRI.
• An individual should not receive any money transfer on behalf of an NRI
even if an authorised person does the transfer.
• An individual should not interfere in any financial transaction by an NRI in
India.
• An individual residing in India is not allowed to own, hold, transfer or
possess any type of immovable property that is located internationally.
Transactions under FEMA
• Foreign exchange transactions in India can be divided into two

categories. They are described as follows:
Capital Account: Capital account transactions are
those transactions that are capital in nature. For
instance, investments in a foreign asset or an
international investment in India are of a capital
nature and are entered into the capital account.
Transactions
Current Account: current account transactions are
those done in the regular course of business. Such
transactions involve the inflow and outflow of an
international currency in India for international
trade and payment. For example, payment made for
exporting or importing goods would be recorded in
the current account.
Transactions in the current account can be categorised into three distinct
heads. These are as follows:
• Transactions not allowed by FEMA
• Transactions that require the approval of the Central government
• Transactions that require the approval of the Reserve Bank of India
(RBI)
What is Foreign Exchange Regulation Act (FERA), and Why Was it
Replaced with FEMA?
• Before the Foreign Exchange Management Act was passed in 1999,

foreign trade and exchange were governed under another act called the
Foreign Exchange Regulation Act (FERA). The FERA was passed in
1973, and it was implemented on January 1, 1974. This act laid down
strict and rigid rules with respect to foreign trade. However, in 1991,
the liberalisation process started. This process relaxed various rules on
foreign exchange and international trade to promote economic
development. As such, the government abolished FERA and replaced
it with FEMA.
DIFFERENCE BETWEEN FEMA AND FERA
Basic FERA FEMA
Difference FERA - The Foreign Exchange Regulation FEMA - The Foreign Exchange
Act,1973 Management Act,1999
Provisions FERA consisted of 81 sections and was FEMA is much simpler and consists of
more complex. only 49 sections.
Scope The scope of FERA was very wide. It dealt The scope of FEMA is narrow. It only
with all the transactions that were related to deals with specified transactions
foreign exchange. related to foreign exchange i.e.
checking and controlling of only those
transactions which are specifically
mentioned in the act and does not
deal with transactions that are not
specifically mentioned in the act.
Punishment Any offense under FERA was a criminal Under the scope of FEMA, all offences
offense punishable with imprisonment as are considered to as civil offences only
per Code of Criminal Procedure, 1973. punishable with some amount of
money as a penalty. Imprisonment is
prescribed only when one fails to pay
the penalty.
Quantum of Penalty The monetary penalty payable Under the scope of FEMA the
under FERA was nearly 5 times quantum of penalty has been
the amount involved. considerably decreased to 3
times the amount involved.
Prohibition on drawal of foreign exchange
• The FEMA prohibits the drawal of foreign exchange in the following
certain situations:
1.Proceeds out of winning a lottery.
2.Remittances from the income of racing or riding etc.
3.Any remittance for buying of a lottery ticket, football pools, sweepstakes,
banned/prescribed magazines, etc.
4.The commission payment on exports towards equity investment of Indian
Companies in Joint ventures or wholly-owned subsidiaries abroad.
5. Remittance of dividends by any company provided the requirement of
dividend balancing is applicable.
6.Remittance of interest income on funds held in Non-resident Special
Rupees Scheme account (NRSR account).
• Remittance of dividends by any company provided the
requirement of dividend balancing is applicable.
• The commission payment on exportation under Rupees State
Credit Routes except commission up to 10% of the invoice
value of export of tea and tobacco.
• Remittance of interest income on funds held in Non-resident
Special Rupees Scheme account (NRSR account).
Provisions of FEMA Act 1999
• The provisions of FEMA Act 1999 aim to regulate foreign exchange
transactions, restrict certain activities, and promote economic growth. FEMA is
applied to the following situations:
• Foreign exchange;
• Foreign security;
• Any kind of Acquisition, Disposition, or Trade;
• Banking, insurance, and finance are all examples of financial services;
• Any overseas company in which an NRI (Non-Resident Indian) owns 60% or
more;
• For every citizen of India, whether they live in India or anywhere else (NRI);
• Any product or service that India exports to a country outside of India;
• The importation of any good or service from a nation besides India;
• Securities under the Public Debt Act of 1994.
Which Transactions Require Prior Consent?
• The FEMA Act lays down rules and regulations for the conduct of transactions, and any violation of
the provisions of the act can result in penalties or even imprisonment. Transactions requiring prior
approval from the Central Government for the drawl of foreign exchange are as follows:
• Cultural excursions
• Freight remittance from chartered vessels
• Detention charges for containers that are higher than those set by the Director General of Shipping
(DGS)
• Remittance of award money/sponsorship of any sports activity outside India by a person other than
national/international/street level sports bodies if the prize money/sponsorship exceeds $1,000,000
USD
• Remission of transponder rental fees
• Internet Service Providers
• Channels on television
• Reimbursement for P&I Club ministry membership
• Multimodal transport operators remit funds to their overseas agents
Penalty Under FEMA Act
Some of the penalties under the FEMA Act 1999 are:
• Monetary Penalty: The FEMA Act empowers the Adjudicating Authority to
impose a monetary penalty for contraventions of its provisions. The penalty can
range from INR 5,000 to INR 2 lakh or three times the amount of the
contravention, whichever is higher.
• Confiscation: The Adjudicating Authority may order the confiscation of any
property, including currency, that has been used in contravention of the FEMA
provisions.
• Compounding of Contraventions: The Reserve Bank of India (RBI)
may allow the compounding of contraventions under certain
circumstances. The compounding fee is generally lower than the
penalty that would be imposed if the contravention was adjudicated.
• Prosecution: The RBI may initiate prosecution proceedings against
persons who have committed contraventions under the FEMA Act.
If convicted, the person can face imprisonment for a term of up to two
years, along with a fine.
• Imprisonment: In certain cases, the FEMA Act 1999 provides for
imprisonment of up to seven years for offenses such as money
laundering, smuggling, or carrying on a business without
authorization.
Categories of Authorized Persons under FEMA
These authorized persons are classified into three categories:
1. Authorized Dealer Category – I
• It includes banks that are authorized by the RBI to deal in all types of foreign exchange transactions,
such as buying and selling foreign currency notes, traveler’s cheques, and remittances.
2. Authorized Dealer Category – II
• It includes banks that are authorized by the RBI to deal in foreign exchange transactions other than
those covered under AD Category – I. It can also include entities such as full-fledged money changers,
non-banking financial companies, and airports.
3.Full-Fledged Money Changers
• FFMCs are authorized by the RBI to deal in foreign exchange for specified purposes such as
travel, education, and medical treatment. They are not allowed to deal in foreign exchange for
speculative purposes.
Importance of FEMA in India
• The importance of the FEMA Act 1999 can be summarized as follows:
• Facilitates Foreign Exchange Transactions: The FEMA Act 1999
provides a legal framework for foreign exchange transactions in India. It
enables Indian residents and entities to acquire, hold, and transfer foreign
exchange in accordance with the provisions of the act.
• Regulates Foreign Exchange Transactions: The act empowers the
Reserve Bank of India (RBI) to regulate foreign exchange transactions in
India. The RBI monitors and controls the flow of foreign exchange into and
out of the country to maintain stability in the forex market.
• Protects National Interest: The FEMA Act 1999 ensures that foreign
exchange transactions in India are carried out in a manner that protects the
national interest. It prohibits certain transactions that may be detrimental to
the country’s economic and financial stability.
• Provides Penalties for Non-Compliance: The act provides penalties
for non-compliance with its provisions. This acts as a deterrent to
those who may attempt to engage in illegal foreign exchange
transactions.
• Promotes Ease of Doing Business: The FEMA Act 1999 simplifies
the rules and regulations for foreign exchange transactions in India.
This promotes ease of doing business and encourages foreign
investment in the country.
FEMA guidelines and regulations for remittances
• Outward remittances
• Outward remittances are defined as the money sent by any individual, business, or
company from their country to abroad. The outward remittances guidelines and
regulations have been liberal as compared to the previous regulations. Earlier it
was almost impossible to remit money outside India and the amount of money
allowed to be transferred was lower. But under FEMA, the outward remittances
can be easily sent upon with the approval of the RBI or the central government,
depending upon its nature. The part of FEMA that deals with outward remittances
is the Liberalised Remittance Scheme (LRS). The following are the guidelines and
regulations for outward remittances:
• Under LRS, the Indian citizens can transfer money abroad up to $2,50,000 in a
year for specific purposes. No special permission is needed for the same.
However, if the remittance exceeds this amount, RBI’s permission is needed.
1.One cannot transfer the money to the countries and organizations considered
“noncooperative by the Indian government or having links to terrorism”.
2.Under LRS, money can be transferred for the following purposes- living
abroad, studying abroad, travel, gifts, donations, medical treatment abroad,
money transfer to family members living abroad, and purchase of shares or
property abroad.
• Inward remittances
• Foreign Inward remittance is the transfer of funds to a person’s bank account
from a person from abroad. Foreign inward remittances are governed by
FEMA and the Reserve Bank of India (RBI). When there is a transfer of
money from foreign accounts to that of India, a Foreign Inward Remittance
Certificate (FIRC) is issued by the bank, ensuring that the funds do not come
from illegitimate sources.
• The RBI suggests 2 different routes for inward remittances:
1.Rupee Drawing Arrangement (RDA): Under this route, there is no cap
for individual transactions. However, for business transactions, there is
a limit of Rs15 lakh for transactions with regard to trade.
2.Money Transfer Service Scheme (MTSS): under this, the remittances
can go up to $2500 per transaction. There can be only 30 transfers to a
single recipient in a year.
Week 12 Overview of the prevention of Money
laundering Act, 2002
Quadrant 1 2. Watch the eLearning content on “L12: Overview of the prevention of Money
Laundering Act, 2002”
eContent
3. Read the eLM on “Unit 12: Overview of the prevention of Money Laundering Act,
2002”
7. Read this open-source material on Money Laundering and process.
https://economictimes.indiatimes.com/definition/money-laundering
Quadrant 2 1. Revise “L11: Overview of Foreign Exchange Management Act, 1999”
eTutorial ” recording of the live Session
5. Attend the live session #12 on “Overview of the prevention of Money Laundering Act,
2002”
Quadrant 3 4. Attempt to answer the questions for Practice #12 on “Overview of the prevention of
Money Laundering Act, 2002”
eAssessment
6. After the live session, repeat the Practice #12 for “L12: Overview of the prevention of
Money Laundering Act, 2002” for self-assessment
case studies.
Discussions
UNIT
12 Overview of the Prevention of

Money Laundering Act, 2002
Names of Sub-Units
Introduction to Overview of the Prevention of Money Laundering Act, 2002: Overview of the Prevention
of Money Laundering Act, 2002 What is Money Laundering, Process of Money Laundering, Measures
to Control and Prevent Money Laundering, Confiscation and Seizure of Property Obtained from
Laundered Money, Penalties for Money Laundering.
Overview
The unit begins by Overview of the Prevention of Money Laundering Act, 2002 and the meaning of
money laundering. Thereafter, it provides insight into the process of money laundering, measures to
control and prevent money laundering. Towards the end, the unit throws light on the confiscation and
seizure of property obtained from laundered money and penalties for money laundering.
Learning Objectives

 Define the money laundering
 Explain the process of money laundering
 Determine the measures to control and prevent money laundering
 Describe the penalties for money laundering
JGI JAIN
Corporate Laws
Learning Outcomes

 Understand the key provisions of the Prevention of Money Laundering Act, 2002
 Evaluate the consequences of money laundering
 Examine the measures for controlling money laundering activities
 Assess the penalties for money laundering
 https://dea.gov.in/sites/default/files/moneylaunderingact.pdf
 http://www.manupatra.com/roundup/314/Articles/Prevention%20of%20Money%20Laundering.
pdf
12.1 INTRODUCTION
Money laundering is an act of covering up the origin of earnings obtained illegally with an aim to make
them appear to have derived from lawful sources. In other words, it is a process wherein illegal funds
and assets are converted into legitimate ones. To put it simply, money laundering is all about converting
the illegal/black money of an individual with legal or white money. It is of utmost importance for the
government of any nation to prevent money laundering activities as it can corrode a nation’s economy
if left unchecked. Money laundering can adversely affect an economy by:
 Changing the demand for cash
 Making interest and exchange rates more volatile
 Causing high inflation in countries where criminal elements are operating
 Draining huge amounts of money from normal economic growth
To cease such practice, the Prevention of Money Laundering Act, 2002, was enacted by the Government
of India. The Act has been legislated basically to sub-serve a dual purpose, i.e., to prevent money
laundering and provide for confiscation of property derived from or involved in money laundering and
to ensure curbing of the tendency of committing scheduled offenses.
12.2 OVERVIEW OF THE PREVENTION OF MONEY LAUNDERING ACT, 2002

The Parliament of India enacted the Prevention of Money Laundering Act (PMLA), 2002, with an aim of
preventing money laundering and confiscating assets derived from money laundering. This Act came
into force on July 1, 2005, and was amended twice again, in 2009 and 2012. In 2017, the Supreme Court
set aside a clause that made it nearly impossible to get bail for a convicted person, if their term exceeds
3 years and if the public prosecutor does not oppose it. However, this provision violates Articles 14 and
21 of the Indian Constitution. The PMLA was aimed to counter legalising income from an illegal source.
Only earning more money or obtaining property by committing a crime does not tantamount to money
laundering. However, if the money earned illegally is claimed or projected as untainted money, it comes
under the ambit of money laundering.
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UNIT 12: Overview of the Prevention of Money Laundering Act, 2002 JGI JAIN
12.2.1 What is Money Laundering?

Money laundering is the process of converting income from criminal or illegal activities, such as drug
trafficking, insider trading, extortion and illegal gambling, into legitimate income. This is usually done
by engaging in financial transactions to conceal the identity of asource of illegal income. This applies to
any financial transaction which generates a value because of an illegal act and may involve tax evasion
or false accounting. With financial technology becoming more complicated, money laundering becomes
prominent in political, economic and legal debates.
The act generating income in money laundering is almost always illegal. Any participation in the
movement of funds to make the proceeds appear legitimate is also included money laundering. Money
can be laundered through many methods varying in their degree of complexity. It usually involves three
stages. The first is the placement, which involves introducing cash into the financial system. The second
is layering, which involves conducting complex financial transactions to camouflage the illegal source
of cash. The third is integration, which involves getting the wealth generated from the transactions of
the illegal funds. Based on the circumstances, some stages may be bypassed.
For example, A runs a lucrative drug distribution trade. The cash received from this trade cannot be
banked directly since this income is illegal. He invests this money into a pizza shop, for the purchase of
kitchen equipment, décor, food products, supplies, services and manpower. The illegal funds are shown
as revenue from legitimate paying customers. In such a case, it becomes difficult to identify which
expense was made by legal funds and which by illegal funds. To a normal person, the pizza shop may
appear very successful and legal. Only a trained investigator would be able to determine the presence of
illegal funds in the financial system of the pizza shop.
EXHIBIT
Sources of Black Money
Black money is made and laundered with the aim to earn huge profits. This can be done using multiple
methods. Some of them are:
 Cash smuggling
 Structuring (cash is broken down into formal receipts to buy money orders, etc.)
 Laundering via real estate (buying land for money and then selling it making the profits, legal)
 Stock market scams
 Creating bogus companies and booking false incomes
 Hawala
 Drug trafficking
 Bribery and corruption
 Kidnapping and extortion
12.2.2 Process of Money Laundering

The process of money laundering is evolving rapidly with the advancement in technology. The process
of money laundering occurs basically in three steps, which may all be done simultaneously separately
or in a sequence.
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The three steps are explained as follows:

1. Placement: In this step, the ‘dirty’ money is placed in the legal financial system. It may be placed into
offshore accounts. Some of the ways in which placement is done are:
 Fund blending: It is made by mixing legitimate income with illegitimate cash and is typically
done in cash-generating businesses such as casinos and strip clubs.
 Invoice fraud: It includes over invoicing or under invoicing or phantom shipping (where no
items are shipped, but supporting documents describe the products shipped) of items.
 Smurfing: In this act, large sums of money are broken up into small transactions. The funds
may be deposited in small amounts in multiple accounts. These deposits may be done by a single
person over a long time or by many persons. In case many person deposit in these amounts,
these persons are referred to as ‘Smurfs’.
 Offshore accounts: Such accounts are usually used to hide the identity of the real beneficiary
and evade tax in the person’s home country.
 Carrying cash abroad: Some persons carry the authorised amount of cash outside the country,
deposit in foreign banks and then transfer to their home country.
 Aborted transactions: Money is paid to an attorney or accountant to hold until a transaction
is complete. The transaction is then cancelled and money paid back to the person through a
legitimate account.
2. Layering: This involves complex transactions to move the money into the financial system. This
is most frequently done using offshore techniques. The audit trail is obscured through a strategic
layering of financial transactions and fraudulent bookkeeping. This involves intricate planning. The
objective is to conceal the original source and identity of illegal funds. Layering involves moving
money electronically between different countries using loopholes in the legislation. It can also be
done by the conversion of the illegitimate money into stocks. The funds can also be used to invest
in real estate or in ‘shell’ companies with a functional front. Round-tripping involves depositing the
illegal money in a tax haven and then routing it back as Foreign Direct Investment (FDI).
3. Integration: In this step, money is absorbed into the economy. For example, some people use ‘black
money’ as part of the payment in property purchases or luxury cars, purchase expensive artworks
or expensive jewellery. Over-evaluating the value of goods being imported or exported into the
country is another method of integration. The launderers can enjoy their money only after they are
sure that it will not be traced back to them.
In certain circumstances, money laundering may be achieved in less than three steps. Sometimes,
the three steps may occur simultaneously, at some times in rapid succession and at times slowly
over a period of time. The laundering technique and the mechanism and technology available to the
launderers will determine how the basic steps are used.
12.3 MEASURES TO CONTROL AND PREVENT MONEY LAUNDERING

People launder money mainly to evade taxes, make illegal income legitimate or fund illegal activities. Tax
evasion can be overcome by having a simple and transparent taxation system, a culture of supporting
the government, efficient financial institutions and honest tax auditors. The best way to counter illegal
activity is to have reasonable laws and competent and honest staff for enforcement. Fighting money
laundering may be more manpower and capital intensive. Ideally, the aim should be to nip the crime in
the bud and remove the motive to indulge in illegal activities.
4
12.3.1 Confiscation and Seizure of Property Obtained from Laundered Money

The Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds
from Crime and on the Financing of Terrorism (the ‘Warsaw’ convention) opened for signature in 2005.
This is the first international treaty that covers prevention as well as control of money laundering and
financing of terrorism.
It is the only international treaty that gives national authorities the power to halt dubious transactions at
an early stage to prevent their transition through the financial system. This also provides for specialised
Financial Intelligence Units (FIUs) of member states to stop transactions whenever requested by a
foreign FIU partner.
The Prevention of Money Laundering Act (PMLA), 2002, is revolutionary in its conceptualisation. Wide
powers have been granted to the Enforcement Directorate (ED) in this regard. An officer of ED may
freeze or seize any record or property found because of a search. In case it is not possible to seize the
property, the officer may order to freeze the property. After such an order, the property cannot be dealt
with without the consent of the officer. Such an order shall be served upon the concerned individual
under Section 17(1A) of PMLA. A seizure memo as prescribed in form II needs to be prepared. Rule [5] of
the code of criminal procedure will apply to the search and seizure.
A Special Court may issue a letter of request to an authority in a contracting state for execution of
an order of attachment, based on an application by the Director or Administrator appointed under
subsection (1) of Section 10. A Court or an authority in a contracting state may also request attachment,
seizure, freezing or confiscation of property in India obtained illegally by any person, to the Central
Government for doing the needful. The provisions of this Act pertaining to confiscation and the vesting
of property in Central Government as provided in Chapter III and survey, search and seizure provided
in Chapter V, shall apply to the property in respect of which letter of request is received from a court or
contracting state for attachment or confiscation of the property.
Property seized under Section 17 or 18 of PMLA can be retained by the authorised officer, if the officer
believes that it will be needed for adjudication under Section 8 of PMLA. Such a property can be retained
for a period of 180 days from the day on which the asset was seized or frozen as per Section 20(1) of
PMLA. The details of property seized or frozen must be informed to the Adjudicating Authority in the
manner prescribed as per Section 20(2) of PMLA.
The Director of Enforcement has been empowered to retain such property as per notification no. GSR
441(E) dated July 1, 2005, under FEMA. The adjudicating authority can allow retention of this property
beyond 180 days as per Section 20(3) of PMLA, but it should be returned to the person from whom it was
seized after 180 days.
The Director can authorise a person under Section 20(1) of PMLA as ‘authorised officer’, who will prepare
a list of copies of orders of retention of seized property and material. The report will be placed in a sealed
envelope. An authorised person will maintain proper records.
12.3.2 Penalties for Money Laundering

As per Section 4 of the Act, money laundering is punishable with rigorous imprisonment for a minimum
of three years and extendable to seven years, with a fine up to INR 5 lakhs. Money laundering charges
are complex and serious in nature. Usually, such charges are cases where a person is suspected of being
involved in some illegal activity. Those who have played even a small part in the money laundering
process are also involved. The exact penalty is decided based on the quantum of an offense committed. A
person does not become guilty of money laundering if they simply accept the money without knowing it
5
Corporate Laws
was obtained through some criminal activity. A financial transaction involving knowledge of laundered
money needs to be proven beyond a reasonable doubt to convict a person of money laundering.
If a person is found guilty of money laundering charges, he/she is punishable with rigorous imprisonment
for a term of three minimum three years, extendable to seven years, along with a fine of up to INR 5
lakhs.
Provided where proceeds of crime involved in money laundering relate to an offense specified under
paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words
‘which may extend to seven years, the words ‘which may extend to ten years had been substituted.
 The Parliament of India enacted the Prevention of Money Laundering Act (PMLA), 2002, with an aim
of preventing money-laundering and confiscating assets derived from money laundering
 Increase in the transparency of customer identity, sources of money and dubious transactions, by
financial institutions, will help enforcement agencies implement these regulations more effectively.
 The PMLA was aimed to counter legalising income from an illegal source.
 Money laundering is the process of converting income from criminal or illegal activities, such as
drug trafficking, insider trading, extortion and illegal gambling, into legitimate income.
 The process of money laundering is evolving rapidly.
 Layering involves complex transactions to move the money into the financial system.
 Integration involves absorbing the illegal money into the economy.
 People launder money mainly to evade taxes, make illegal income legitimate or fund illegal activities.
 Money laundering charges are complex and serious in nature. Usually, such charges are cases where
a person is suspected of being involved in some illegal activity.
12.5 GLOSSARY
 Black money: Funds earned on which income and other taxes have not been paid
 Hawala: An informal channel for transferring funds from one location to another through service
providers are known as hawaladars
 Money laundering: An act of ensuring that the money has been acquired illegally appears to have
been obtained legitimately
12.6 CASE STUDY: MONEY LAUNDERING THROUGH CAR BUSINESS
Case Objective
This case highlights the responsibility of all those involved in decision making in a business to be wary
of money laundering.
Mr. Anand is a chartered accountant by profession and practices in Dubai. He hired the services of
a Compliance Officer (CO), who qualified as a chartered accountant recently and had limited work
6
experience. Mr. Singal is based in India and owns a used car dealership in Dubai. He approached Mr
Anand for hiring his services for accounting and banking administration. Mr. Anand incorporated a
company with the assistance of a licensed advocate who purchased used cars from Mr. Singal’s company
and resold them in the local market. Mr. Anand approved and processed purchases and salaries off Mr
Singal’s staff. The staff members of Mr. Anand issued invoices of sales deposited receipts from the car
sales and maintained the accounting records. The business was cash-rich and profitable as the used
cars were bought or purchased at a very low prices and resold at a high price in cash.
One of the employees of Mr. Anand became worried about the large percentage of sales, which were
being made in cash. She expressed her concern to the compliance officer. In addition, there were multiple
instances when the cars were registered to a different person, then the person who made the payment.
The compliance officer dismissed her concern and explained that this is how business is done in Dubai
and that many people have a lot of cash at home.
Not long after that, Mr. Singal was found guilty by the court and imprisoned. During the court
proceedings, it emerged that he is a drug distributor who set up the used car sale business in many
countries for laundering the money received from sales and distribution of drugs. As a result, all the
cash received in the used car sales business was seen as illegal proceeds and was subject to confiscation.
Mr. Anand was also arrested and put on trial along with the compliance officer. As per the prosecution,
the setup and management of the company were oriented to hide the trail of illegitimate funds that lead
back to Mr. Singal. The accounting firm should have been suspicious of transactions as the cars that
were sold, were more than 15 years old and obsolete, but still got sold at high prices. The compliance
officer and Mr. Anand claimed that they didn’t know that the cars were in a dilapidated state and
did not have any grounds to suspect Dubai buyers who were using cash to settle their purchases. The
compliance officer was convicted of failure to report end sentence of 12 months imprisonment.
Source: https://www.icpac.org.cy/Portal/WebFiles/SELK/WebDocuments/Members/Specialized%20Technical%20Material%20-%20
GuidesAnti%20Money%20Laundering/Case%20studies%20Pack%202018.pdf
Questions
1. What steps should have been taken by the CA or CO?
(Hint: Verification of client, mandatory reporting and other such measures)
2. How many months in prison was The Compliance Officer sentenced to?
(Hint: The compliance officer was convicted of failure to report end sentence to 12 months
imprisonment.)

1. What do you understand by the term money laundering?
2. Write a short note on PMLA, 2002.
3. Discuss the layering stage of money laundering.
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1. Money laundering is the process of converting income from criminal or illegal activities, such as
drug trafficking, insider trading, extortion and illegal gambling, into legitimate income. Refer to
Section Overview of the Prevention of Money Laundering Act, 2002
2. The Parliament of India enacted the Prevention of Money Laundering Act (PMLA), 2002, with an aim
of preventing money laundering and confiscating assets derived from money laundering. Refer to
Section Overview of the Prevention of Money Laundering Act, 2002
3. Layering involves complex transactions to move the money into the financial system. This is most
frequently done using offshore techniques. Refer to Section Overview of the Prevention of Money
Laundering Act, 2002
 https://www.wirc-icai.org/images/material/Introduction-and-Overview-of-PMLA.pdf
 https://www.indiacode.nic.in/bitstream/123456789/2036/1/A2003-15.pdf
 https://dor.gov.in/sites/default/files/The%20Prevention%20of%20Money -laundering%20
Act%2C%202002.pdf
 Using different sources, find information on the Hawala system.
8
Overview of the Prevention of Money
Laundering Act, 2002
Unit – XII
Week 12 Overview of the prevention of
Money laundering Act, 2002
Quadrant 1 2. Watch the eLearning content on “L12: Overview of the prevention of Money
eContent
3. Read the eLM on “Unit 12: Overview of the prevention of Money Laundering
Act, 2002”
7. Read this open-source material on Money Laundering and process.
https://economictimes.indiatimes.com/definition/money-laundering
Quadrant 2 1. Revise “L11: Overview of Foreign Exchange Management Act, 1999”
eTutorial ” recording of the live Session
5. Attend the live session #12 on “Overview of the prevention of Money
Quadrant 3 4. Attempt to answer the questions for Practice #12 on “Overview of the
prevention of Money Laundering Act, 2002”
eAssessment
6. After the live session, repeat the Practice #12 for “L12: Overview of the
prevention of Money Laundering Act, 2002” for self-assessment
Discussions
What is Money Laundering?
• Money Laundering is actions aiming that the "dirty money" that has
been gathered illegally appears to have been obtained legitimately. In
simpler terms, it is the process of turning the profit of illegal financial
activity into a legitimate income. Money laundering, which is the
process of concealing the proceeds of crime and integrating them into
the legal, financial system, is also a method used to hide the nature,
source, location, situation, and movement of a crime or to give a legal
image to the proceeds of crime.
The Need to Launder Money
• A major business problem of large, organized criminal enterprises – such as
drug smuggling operations – is that they end up with huge amounts of cash
that they need to conceal in order to avoid attracting investigations by legal
authorities. The recipients of such large amounts of cash also do not want to
have to acknowledge it as income, thereby incurring massive income tax
liabilities.
• To deal with the problem of having millions of dollars in cash obtained
from illegal activities, criminal enterprises create ways of “laundering” the
money to obscure the illegal nature of how it is obtained. In short, money
laundering aims to disguise money made illegally by working it into a
legitimate financial system, such as a bank or business.
How Money Laundering Works
• Money laundering typically occurs in three phases:
1.Initial entry or placement is the initial movement of an amount of
money earned from criminal activity into some legitimate financial
network or institution.
2.Layering is the continuing transfer of the money through multiple
transactions, forms, investments, or enterprises, to make it virtually
impossible to trace the money back to its illegal origin.
3.Final integration is when the money is freely used legally without the
necessity to conceal it any further.
• 1. Initial placement
• A criminal or criminal organization owns a legitimate restaurant
business. Money obtained from illegal activities is gradually deposited
into a bank through the restaurant. The restaurant reports daily cash
sales much higher than what it actually takes in.
• Say, for example, that the restaurant takes in $2,000 in cash in one day.
An additional $2,000 – which is money coming from illegal activities
– will be added to that amount, and the restaurant will falsely report
that it took in $4,000 in cash sales for the day. The money has now
been deposited in the restaurant’s legitimate bank account and appears
as an ordinary deposit of restaurant business proceeds.
Other placement methods include:
• False invoicing
• Smurfing, where small amounts of money below the AML reporting
threshold are inserted into bank accounts or credit cards and used to
pay expenses, etc
• 2. Layering the money
• To deal with tax issues – that is, to avoid having the restaurant incur too large a tax
bill as a result of recording more revenue than it generates – and to further
disguise the criminal source of the extra deposited funds, the restaurant may invest
the money in another legitimate business, such as real estate. Things are further
obscured from the authorities by using shell companies or holding companies that
control several business enterprises that the laundered money may be funneled
through.
• The “layering” often involves passing the money through multiple transactions,
accounts, and companies – it may pass through a casino to be disguised as
gambling winnings, go through one or more foreign currency exchanges, be
invested in the financial markets, and ultimately be transferred to accounts in
offshore tax havens where banking transactions are subject to much less scrutiny
and regulation. The multiple pass-throughs from one account, or one enterprise, to
another make it increasingly difficult for the money to be traced and tied back to
its original illegal source.
• Layering tactics to look out for:
• Chain-hopping — converting one cryptocurrency into another and
moving from one blockchain to another
• Mixing or tumbling — the blending of various transactions across
several exchanges, making transactions harder to trace back to a
specific exchange, account, or owner
• Cycling —making deposits of fiat currency from one bank, purchasing
and selling cryptocurrency, and then depositing the proceeds into a
different bank or account
• 3. Final integration
• In the final phase of money laundering – integration – the money is
placed into legitimate business or personal investments. It may be used
to purchase high-end luxury goods, such as jewelry or automobiles. It
may even be used to create yet another business entity through which
future amounts of illegal cash will be laundered.
• At this stage, the money has, ideally, been sufficiently laundered so
that the criminal or criminal enterprise can use it freely without
resorting to any criminal tactics. The money is typically then either
legitimately invested or exchanged for expensive assets such as
property.
• Common Integration tactics include:
• Fake employees – a way of getting the money back out. Usually
paid in cash and collected
• Loans – to directors or shareholders, which will never be repaid
• Dividends – paid to shareholders of companies controlled by
criminals
Methods of Money Laundering
• Terrorist Financing: It is the collection of money with both legal and illegal
ways to finance terrorist group and their activities. Whereas most of money
laundering methods depend on illicit money sources, this is listed here
because of the area of usage of money. This type is generally detected by
scanning names in the lists provided by states globally.
• Corruption: This is one of the most common ways of money laundering,
with its illegal sources of money. Because of its nature, detection is the
hardest step in the AML process of it. In many countries, high-level
government officers, people in the roles of judiciary or legislative bodies,
and police and military forces can be involved in corruption.
• Trafficking: Drug and human trafficking are the ways that have the most
significant impact of money laundering on society. The line generally starts with
third-world countries as suppliers and ends with developed countries. This method
includes international connections and wires between businesses. FinCen states
that 150 billion dollars are laundered via these industries annually. Syrian
and Ukrainian migrations also affected the numbers. The refugees are vulnerable
targets of traffickers.
• Crypto Currency: Digital assets have been involved in our daily and economic
lives for ten years. They came with both advantages of technology and higher
risks. Until the last one or two years, they were an open and attractive source for
money laundering because of a lack of regulation and awareness. However, there
is a global tendency to accelerate the process of including them in the legislative
system. Additionally, some states consider them a beneficial source of
investment. The UK takes steps aiming to be the first jurisdiction for companies
working in this area.
• Cybercrimes: In recent years, sophisticated methods have been applied to
fraud and laundering money. Social Engineering and Synthetic Identity
Fraud are two of the most common methods under this title. Contrary to
other types, cybercrimes are generally conducted by individuals, not by
organizations. Like the cryptocurrency market, cybercrimes have risen by
improvements in technology.
• Importation and Exportation: It is a method frequently used in Europe in
recent years. It refers to the use of exporting or importing to any country on
paper. The transfers of goods never happen, but money is laundered.
• Stock Market: Money can be laundered and displayed as a business by
buying stocks or bonds through brokers. This is a unique type because large
amounts are seen even though it is not an organizational crime.
• Luxury items: Especially antiques or paintings are taken with
money that cannot be transferred. Later, these are sold against
foreign currency, and money is laundered. Trading luxury items
is one of the high-risk fields in terms of money laundering
because of its usage as a cover for sources.
What Should Businesses Do To
Prevent Money Laundering?
• Risk assessment processes are important to identify the risks of the company.
• Tax evasion should be prevented in all steps, from production to consumption.
• Financial transactions should be monitored, especially the anomalies.
• Local governments should be fully authorized in the areas.
• The media should fully support the fight against organized crime and should not
broadcast to legendary mafia members.
• In the private sector, cartels should be prevented.
• KYB and UBO checks must be conducted to detect shell companies.
• The underground economy should be reduced by eliminating tax-free earnings as
much as possible.
• Companies must have a compliance officer or a team.
• All customer transactions must be monitored to detect suspicious activity.
• Businesses can protect themselves from financial crimes and strengthen AML
compliance processes using AML software such as Sanction Scanner.
Measures for prevention of Money laundering
• There are various statutory frameworks to prevent money laundering

such as PMLA, SAFEMA, NDPSA, FEMA, COFEPOSA etc.
Everything will be discussed below.
• Statutory framework
• Before the Prevention of Money Laundering Act of 2002 (PMLA) was
passed in India, the main statutes that included measures to address the
issue of money laundering were
1.The Income Tax Act, 1961
2.The Conservation of Foreign Exchange and Prevention of Smuggling
Activities Act, 1974 (COFEPOSA)
3.The Smugglers and Foreign Exchange Manipulators Act, 1976 (SAFEMA)
4.The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPSA)
5.The Benami Transactions (Prohibition) Act, 1988
6.The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic
Substances Act, 1988
7.The Foreign Exchange Management Act, 2000, (FEMA)
Prevention of Money Laundering Act (PMLA)
2002
• The Prevention of Money Laundering Bill was introduced in 1998
and passed in 2002 in response to the urgent need for the adoption
of comprehensive legislation for the prevention of money laundering
and related activities, confiscation of proceeds of crime, the
establishment of agencies and mechanisms for coordinating
measures for combating money laundering, etc. Taking effect on July
1st, 2005, the Act was put into law.
• The objective of the Act
• To prevent money laundering.
• To provide for confiscation of property derived from, or involved in,
money laundering.
• For matters connected therewith or incidental thereto.
• It forms the core of the legal framework put in place by India to
combat money laundering
Its salient features include:
• Defines Money laundering.
• Expanded the reach of the Act by adding many more crimes under various
legislations: It lists specific offenses that would fall under this Act’s purview
under the IPC, the Narcotic Drugs and Psychotropic Substances Act, the Arms
Act, the Wild Life (Protection) Act, the Immoral Traffic (Prevention) Act, and
the Prevention of Corruption Act.
• In instances of cross-border money laundering, it enables the Central
Government to implement the UN Convention against Corruption’s provisions
by returning the confiscated property to the requesting nation.
• It aims to include certain financial institutions in the Act’s reporting
requirements, including Full Fledged Money Changers, Money Transfer Services,
and Master Card.
Enforcement apparatus
1.Adjudicating Authority: The Act gives the Central Government the
authority to establish an adjudicating authority with a chairman and two
other members and to specify the authority’s mandate and other terms of
service. The Authority has been given independent authority to control its
adjudicating process.
2.Administrator: The property laundered will be taken care of i.e. managed
after confiscation by an Administrator who will act in accordance with the
instructions of the Central Government.
3.Appellate Tribunal: An Appellate Tribunal established by the Central
Government will hear all appeals from decisions made by the Adjudicating
Authority. It will have two members, and the chairman will be in charge.
• Special Courts: An Appellate Tribunal established by the Central
Government will hear all appeals from decisions made by the
Adjudicating Authority. It will have two members, and the chairman
will be in charge.
• Banking companies, financial institutions, and intermediaries are
required by the PMLA and the rules thereunder to confirm the
identity of their clients, keep records, and provide information to
FIU-IND.
Challenges in the prevention of Money
laundering
• Increased use of digital currency: The rise of cryptocurrency allows money
launderers to conceal their illicit funds. Estimates suggest that criminals have
used the hyper-connected cryptocurrency ecosystem to launder more than $2.5
billion in dirty Bitcoin since 2009.
• Preference for cash over digital payments for transactions: The use of cash will
ease the process of “layering”.
• Lack of awareness about the seriousness of crimes of money
laundering: Instead of going through lengthy paperwork transactions in banks,
the poor and illiterate prefer the Hawala system, which has fewer formalities,
little or no documentation, lower rates, and anonymity.
• Lenience from banks: Increasing competition in the financial market is
forcing banks to lower their guards, allowing money launderers to use it
illicitly in furtherance of their crime.
• Collusion by employees of financial institutions: Financial institutions are
supposed to check the source of funds, monitor account activity, and track
irregular transactions, but the involvement of financial institution
employees makes laundering easier.
• The widespread act of smuggling: There are a number of black market
channels in India for the purpose of selling goods, with many imported
consumers buying goods such as food, electronics, and so on. Black
merchants conduct cash transactions and avoid customs duties, allowing
them to offer lower prices than regular merchants.
• Tax Heaven Countries: Strict financial secrecy laws by tax heaven
countries incentivize the creation of anonymous accounts in these countries
by launderers.
Confiscation and seizure of property obtained from laundered money
• 1 Search under the Prevention of Money Laundering Act

• The Director or any person authorised by him can further authorise
any officer subordinate to him for search under section 17(1) of the
Prevention of Money Laundering Act.
• The authorisation shall be in prescribed form I. Search can be
conducted only after a report is forwarded to a magistrate or a
complaint is filed before the Magistrate or Court.
• Search will be before two local persons as ‘panchas’. The authority
can obtain entry be breaking locks or door etc. He can stop any
vehicle, vessel or aircraft to be stopped.
2 Procedure Relating to Seizure and
Freezing
• Officer or Authority may freeze or seize any record or property found
as a result of the search.
• If it is not practicable to seize any record or property, the officer may
make an order to freeze the property. The order shall be served on the
person concerned – section 17(1 A) of Prevention of Money
Laundering Act.
• Seizure memo will be in prescribed form II.
• 3. Forwarding Copies of Report of Search, Seizure and
Freezing:
• The authority will prepare an index of copy of reasons recorded for
search, along with the ‘material’ in his possession and send it to
Adjudicating Authority in sealed envelope.
• ‘Material’ means material in possession of authority after search and
seizure.
2. Retention of Seized Property
• Property seized under section 17 or 18 of Prevention of Money
Laundering Act or frozen under section 17(1A) of the Prevention of
Money Laundering Act can be retained by the authorised officer, if he
has reason to believe that such property is required to be retained for
adjudication under section 8. The property can be retained for a period
of 180 days from the day on which the asset was seized or frozen.
• 3. Arrest of a Person
• Director, Deputy Director or any other officer authorised by Central
Government can arrest a person, if he has reason to believe that he is
guilty of offense punishable under the Act.
• Officers under the Prevention of Money Laundering Act can arrest a
person without warrant.
• Person arrested is required to be produced before Judicial Magistrate
of Metropolitan Magistrate within 24 hours.
• Forwarding a Copy of Order of Arrest of a Person along with the
Material to the Adjudicating Authority and its Period of Retention)
Rules, 2005.
Punishments against money laundering in
India.
• Section 4 of the POCA provides for penalties for money
laundering.
• A person guilty of money laundering is sentenced to up to three
years in prison, which can be extended up to seven years, and
fines are also imposed.
• Also, detention must be strict. However, it should be noted that
if you are involved in an offence under the Narcotic Drugs and
Psychotropic Substances Act 1985, you may face a harsh
prison term that can be extended to 10 years instead of 7 years.
Section 5 of APLA provides for seizure of money laundering
assets.
• When property is confiscated for money laundering offences, it
becomes the property of the central government under Article 9
of the PMLA. Therefore, after forfeiture, all rights and ownership
of the property pass to the government.
Week 13 Overview of the Foreign
Contribution(Regulation)
Act, 2010
Quadrant 1 2. Watch the eLearning content on “L13: Overview of the Foreign
contribution(Regulation) Act, 2010”
eContent
3. Read the eLM on “Unit 13: Overview of the Foreign contribution(Regulation) Act,
2010”
7. Watch this video on FCRA https://www.youtube.com/watch?v=6SrAX7v1960
Quadrant 2 1. Revise “L12: Overview of the prevention of Money Laundering Act, 2002”
eTutorial
5. Attend the live session #13 on “Overview of the Foreign contribution(Regulation)
Act, 2010”
Quadrant 3 4. Attempt to answer the questions for Practice #13 on “Overview of the Foreign
eAssessment
6. After the live session, repeat the formative assessment for “L13: Overview of the
Foreign contribution(Regulation) Act, 2010”
for self-assessment
and case studies.
Discussions
13 Overview of the Foreign Contribution
(Regulation) Act, 2010
Names of Sub-Units
Introduction to Overview of the Foreign Contribution (Regulation) Act, 2010, Overview of the Foreign
Contribution (Regulation) Act, 2010 Meaning of Foreign Contribution, Foreign Source [Section 2(1) (j)]
and Foreign Hospitality [Section 2(1)(i)], Procedure for Registration of Persons to be Regulated bythe
Act.
Overview
The unit begins by explaining the Foreign Contribution (Regulation) Act, 2010. Further, it discusses the
foreign contribution, foreign source and foreign hospitality. Thereafter, the unit explains who can and
cannot accept foreign contributions and foreign hospitality. Towards the end, the unit discusses the
procedure for the registration of persons to be regulated by the Act.
Learning Objectives

 Explain the Foreign Contribution (Regulation) Act, 2010
 Define the foreign contribution
 Discuss the meaning of foreign source and foreign hospitality
 Describe the procedure for registration of persons to be regulated by the Act
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Learning Outcomes

 Evaluate the key provisions of the Foreign Contribution (Regulation) Act, 2010
 Assess who can accept foreign contribution and foreign hospitality
 Examine who are prohibited from accepting foreign contributions and foreign hospitality
 http://kenyalaw.org/kl/fileadmin/pdfdownloads/Acts/RegistrationofPersonsActCap.%20107.pdf
 http://dcmsme.gov.in/forms/foreign%20hospitality.pdf
 http://citizenslanka.org/wp-content/uploads/2016/02/Registration-of-Persons-Act-No-32-of- 1971-
E.pdf
 https://www.mca.gov.in/Ministry/actsbills/pdf/Societies_Registration_Act_1860.pdf
 https://www.taxmann.com/bookstore/bookshop/bookfiles/9789387702370chapter2.pdf
13.1 INTRODUCTION
India is regarded as a sovereign country in the Preamble to the Indian constitution. This implies that
India has its own supreme law and is not a dominion or province of any other nation. In addition, the
country is free from any type of external intervention in its domestic operations. Thus, no other country
or international body can invade India’s sovereignty. However, the transfer of funds from foreign
sources as a foreign contribution for any activities detrimental to the national interest can be a major
threat to the sovereignty of India.
To curb such activities, the Government of India introduced Foreign Contribution (Regulation) Act, 2010,
together with the Foreign Contribution (Regulation) Rules, 2011. Through this, the government regulates
the flow of foreign contributions into India from time to time and ensures that such contributions do
not have any adverse effect on national security. The Act was first enacted in 1976 and was amended
in 2010 when new measures were adopted to regulate foreign contributions. The Foreign Contribution
(Regulation) Act, 2010, was again amended through the Foreign Contribution (Regulation) Amendment
Act, 2020, with effect from 28th September 2020. The FCRA is administered by the Ministry of Home
Affairs.
13.2 OVERVIEW OF THE FOREIGN CONTRIBUTION (REGULATION) ACT, 2010

The Foreign Contribution (Regulation) Act, 2010 (FCRA), regulates donations from abroad to ensure that
they do not affect the internal security of the country adversely. The FCRA was first enacted in 1976
and amended in 2010. The FCRA is applicable to all NGOs, groups and associations which receive
donations from abroad. All organisations such as NGOs, receiving money as donations from abroad,
need to register themselves under the FCRA. This monetary inflow or foreign contribution may be for the
purpose of education, social upliftment, economic or cultural development. The initial registrationis
valid for 5 years and can be renewed. Annual returns need to be filed by entities to stay compliant. The
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UNIT 13: Overview of the Foreign Contribution (Regulation) Act, 2010 JGI JAIN
Ministry of Home Affairs has prescribed that all NGOs need to submit an undertaking stating that the
acceptance of foreign funds is not likely to prejudicially affect the integrity and sovereignty of India or
impact friendly foreign relations and nor disrupt communal harmony. The accounts of such NGOs will
need to be maintained in the public sector or private banks which permit access to security agencies.
Political party members, officials of the government, judges and media persons are prohibited from
receiving any foreign contribution. The Ministry of Home Affairs, in 2017 amended the FCRA lawallowing
political parties to receive money from an Indian subsidiary of a foreign company in which an Indian
holds minimum of 50 percent shares.
A public interest litigation petition was filed in 2013, by a public advocacy group at the Delhi High Court,
against the Congress and the Bhartiya Janata Party, for violating FCRA norms by receiving foreign
funds from Vedanta Group, based in the UK, from 2012 to 2014. Both parties challenged the High Court
Order. After the FCRA was amended retrospectively, the parties withdrew their petitions.
Another way to source foreign contributions is by applying for formal, prior permission. Permission may
be granted for receipt of a specific amount from a specified donor for the purpose of specific activities.
The association/NGO is asking for permission needs to be registered under the Society Registration Act,
1860 or the Indian Trust Act, 1882 or Section 25 of the Companies Act. The application for permission
needs to be accompanied by a letter of commitment specifying the amount and purpose for which the
funds are required.
When the Ministry of Home Affairs (MHA) receives any input against the functioning of an association
it can suspend the FCRA registration for a period of 180 days. Till such time, the matter is resolved, the
association cannot receive any further donations and cannot utilise more than 25 percent of the amount
available in that bank account. If it needs to utilise more, it needs to take approval from the MHA.
The MHA can also cancel the registration of an organisation. Since 2011, the MHA has cancelled the
registration of 20,664 associations for misuse of foreign contributions, diversion of foreign funds and
non-submission of mandatory annual returns. Foreign donors such as Ford Foundation, Compassion
International, Open Society Foundation, World Movement for Democracy and National Endowment for
Democracy has been put on a ‘watch-list’ or in the ‘prior-permission’ category, which has barred them
from sending money to associations within India without the clearance of the MHA.
The Foreign Contribution (Regulations) Bill, 2020 has replaced the FCRA, 2010. It regulates the acceptance
and utilisation of foreign contributions. The applicability of this Act is as follows:
 Prohibition to accept foreign contribution: Candidates standing for election, members and
legislature, political parties, judges, editor or publisher of a newspaper and government servants
are prohibited from accepting any foreign contribution.
 Transfer of foreign contribution: Foreign contribution cannot be transferred to any person who is
not registered under FCRA.
 Aadhaar for registration: Any person or association seeking registration or renewal of registration
or prior permission for receiving foreign contribution must apply in the prescribed form and must
provide the Aadhaar number of its office bearers, directors and key functionaries. Foreigners must
provide a copy of their passport or the Overseas Citizen of India Card for identification.
 Bank account: The registered person must accept the foreign contribution in a single branch of
a schedule bank specified by them. This account must be labelled as “FCRA account”. No funds
other than foreign contribution must be accepted on this account. They may, however, open more
accounts in other banks for utilisation of these funds.
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 Utilisation restriction: In case the recipient violates any provision of the Act, the unutilised amount
may be utilised only with the approval of the Central government.
 Renewal: The Certificate of Registration must be renewed within six months of expiry of the same.
Before renewing, the government may conduct an inquiry that the application is not fictitious, there
has been no incidence of diversion of funds and other reasons which may bar the association from
renewal.
 Utilisation for administrative expenses: The recipient should not use more than 20 percent of the
contribution received for administrative expenses.
 Surrender: The Certificate of Registration may be surrendered by the registered person if there is no
contravention of any provision of the Act.
 Suspension: The registration of a person can be suspended for 180 days by the government based
on sufficient reason to do so.
13.2.1 Meaning of Foreign Contribution

Foreign contribution is the money or article beyond a specified value, received as a donation from a
foreign source. It is the transfer or donation made by any foreign source of:
 Any foreign or Indian currency
 Any foreign or Indian security
 Any article, except personal gifts, which have a market value below the amount specified by the
central government
Note that foreign contribution also includes contributions received from any person who, in turn,has
received the contribution from a foreign source. It also includes any interest accrued on foreign currency
deposited in the bank. It is applicable to all citizens within India, all citizens of India who are outside India
and branches or subsidiaries located abroad, of companies which are registered in India.
The Foreign contribution does not include a fee charged by an educational institution in India or cost of
goods and services rendered during business within or outside India.
Foreign contribution exceeding INR 1 crore shall maintain data of receipt and utilisation of foreign
contribution related to the year of receipt and the subsequent year in the public domain.
13.2.2 Foreign Source [Section 2(1)(j)]

Foreign source, includes:
 Government or agency of the government of any foreign country
 Any international agency, except notifying agencies such as World Bank or International Monetary
Fund
 Any foreign company
 Any multinational corporation
 Any company where more than 50% share capital is held by a foreign entity
 Any foreign trust
 Any foreign citizen
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Any amount received from a non-resident Indian citizen in a foreign currency will not be treated as a
foreign source. A gift received from a relative which is more than INR 1 lakh per year, requires intimation
to the Central Government in Form FC-1, within 30 days from the date of receipt of such a gift.
13.2.3 Foreign Hospitality [Section 2(1)(i)]

Foreign Hospitality means any offer, not being a purely casual one, made in cash or kind of a foreign
source for providing a person with the costs of travel to any foreign country or territory or free boarding,
lodging, transportation or medical treatment.
Any judge, government servant, political party office bearer, member of any legislature, is prohibited
from accepting hospitality while visiting any foreign country, except with the permission of the Central
Government in Form FC 2.
Though such permission is not required in case of any medical emergency, the Central Government
needs to be informed within 60 days of receiving such hospitality. Hospitality in this context means any
offer made by a foreign source for providing a person with the costs of travel to any foreign country,
with free boarding, lodging, transportation or medical treatment.
Who Can and Who Cannot Accept Foreign Contributions?

Those who can receive foreign contributions include:
 Individuals
 Any Hindu Undivided Family
 Association or NGO
 Company registered under the Companies Act
Provided it has a definite economic, religious, cultural, educational or social programme. It should be
registered with FCRA or have prior permission from the Central government. It should not be prohibited
under Section 3 of the FCRA, 2010.
Prohibited to receive foreign contribution:
 Candidate stands for election
 Editor, printer, publisher, columnist, cartoonist, correspondent of a registered newspaper
 Government servant
 Judge
 Member of any legislature
 Office bearer of the political party
 Association involved in the broadcast of news in audio or electronic form
 Individuals or associations prohibited from receiving foreign contribution
 Any organisation of political nature, such as trade unions, the student’s union organisation of
farmers, etc.
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Who Can and Who Cannot Accept Foreign Hospitality?

Entities prohibited from accepting foreign hospitality without the permission of the Central Government:
 Judge
 Member of the legislature
 Government servant
 Political party office-bearer
Permission needs to be applied in Form FC-2, two weeks before the date of the journey by the above
mentioned entities. No permission is required for any medical emergency due to illness contracted while
outside India. However, the receipt of hospitality received must be informed of the Central government
at the earliest. In case the value of such hospitality is up to INR 1 lakh, no intimation needs to be given.
13.2.4 Procedure for Registration of Persons to be Regulated by the Act

There are some prerequisites to be eligible for registration under the FCRA. These include:
 An applicant should be registered under the Societies Registration Act, 1860 or Indian Trusts Act,
1882 or as Section 8 Company under the Companies Act
 Should have made reasonable contributions by undertaking activities in its chosen field for the
benefit of society
 Must have spent a minimum of INR 10 lakh towards its objectives, excluding administrative costs
 Last 3-year financial statements need to be submitted, audited by a qualified Chartered Accountant
 A newly registered entity may apply for approval for a specific purpose from MHA via the Prior
Permission (PP) method.
To apply for registration, the following steps needs to be followed:
1. Access the online portal of the FCRA
2. Fill form FC-3A (Application for FCRA Registration) or Form FC-3B (Application for FCRA Prior
Permission)
3. Add details of key functionaries
4. Fill in Bank details
5. Upload documents in PDF format
6. Make payment for registration
The application for FCRA registration must be accompanied by:
 Self-certified copy of relevant pages of Memorandum of Association/Articles of Association showing
aims and objectives of the association
 Self-certified copy of Registration Certificate/Trust deed of the association
 Report of activities during last three years
 An Audited statement of accounts for past three years (Assets, liabilities, receipts, payment, income
and expenses).
6
The FCRA registration is valid for 5 years. It may be renewed within 6 months of the date of expiry. Once
the application is filed, the following parameters are checked, before granting the registration. It is
verified that the person applying for registration:
 Is not fictitious
 Has not been prosecuted or convicted for conversion of people from one faith to another
 Has not been prosecuted or convicted for creating communal tension
 Has not been found guilty of diversion or misuse of funds
 Is not likely to advocate violence
 Has not contravened any provision of the Act
 Has not been prohibited from accepting foreign contribution
 Will did not affect the friendly relations with any foreign state
 Will did not affect the integrity and sovereignty of India
 Will did not affect the economic, strategic, scientific or security of the state
 Will did not affect the public interest
 Will did not affect harmony between social, regional, religious, racial groups or communities
In addition, the acceptance of foreign contribution should not incite any offense or endanger the safety of
any person.
 The Foreign Contribution (Regulation) Act, 2010 (FCRA), regulates donations from abroad to ensure
that they do not affect the internal security of the country adversely. The FCRA was first enacted in
1976 and amended in 2010.
 Foreign contribution is the money or article beyond a specified value, received as a donation from
a foreign source.
 Political party members, officials of the government, judges and media persons are prohibited from
receiving any foreign contribution.
 Foreign contribution does not include a fee charged by an educational institution in India or the cost
of goods and services rendered during business within or outside India.
 Foreign hospitality means any offer, not being a purely casual one, made in cash or kind of a foreign
source for providing a person with the costs of travel to any foreign country or territory or free
boarding, lodging, transportation or medical treatment.
 Those who can receive foreign contributions include individuals, any Hindu Undivided Family,
association or NGO or a company registered under the Companies Act.
 A candidate standing for election, Editor, Printer, Publisher, Columnist, Cartoonist, Correspondent
of a registered newspaper, Government servant, Judge, etc., is prohibited from accepting foreign
contribution.
 To apply for registration of persons to be regulated by the Act, certain steps need to be followed.
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13.4 GLOSSARY
 Form FC-2: Application for seeking prior permission of the Central Government to accept foreign
hospitality
 Foreign contribution: Any amount received from ‘foreign source’ in Indian rupees or foreign
currency
 Foreign Contribution (Regulation) Act: The law regulating the acceptance and utilisation of foreign
contribution or foreign hospitality
13.5 CASE STUDY: THE FCRA VIOLATION CASE AGAINST INDIRA JAISING’S NGO
Case Objective
The case explains the violation of the FCRA.
In June 2020, the Central Bureau of Investigation (CBI) registered a case against Lawyers Collective,
an NGO run by senior lawyers Indira Jaising and Anand Grover, for alleged violations of Foreign
Contributions Regulation Act (FCRA) on a complaint from the Ministry of Home Affairs.
The complaint pertains to discrepancies in foreign contributions cited by the association in its returns
filed with the MHA. In 2016, the MHA had cancelled the FCRA license of the NGO for allegedly using
foreign contributions for “political purposes”.
In June 2020 again, the Ministry had suspended Lawyers Collective’s (LC) FCRA account for six months
and issued a notice asking why the NGO’s account should not be cancelled.
In May 2020, the NGO was issued notice from the Supreme Court for alleged violations of FCRA based on
a petition filed by another organisation called Lawyers Voice.
The MHA order states that Jaising, who was the Additional Solicitor General (ASG) of India under
the previous UPA government, had violated FCRA norms by receiving foreign funds when she was a
government servant.
“Large amounts of foreign contributions were found to have been spent on air travel, boarding and
lodging and local travel of Anand Grover and various contractual employees from different parts of the
country for draft legislation meetings, dharnas and advocacy with MPs,” the MHA probe reveals. These
meetings, according to MHA, were conducted in connection with draft legislation of the HIV/AIDS Bill.
Lawyers Collective, according to MHA, used ` 13 lakh out of foreign contribution in advocacy with MPs
or the media to organise rallies/dharnas, draft legislation meetings in 2009, 2011 and 2014.
The MHA probe also held the use of foreign contribution for the travels of Grover after he was appointed
United Nations Special Rapporteur for Health in 2008 as a violation of FCRA. It also mentioned a charity
dinner organised by Lawyers Collecting in New York in 2013, which was attended by Grover. MHA said
all these were a violation of the FCRA.
Questions
1. Why was Indira Jaising not allowed to receive foreign contributions?
8
(Hint: Indira Jaising was the Additional Solicitor General (ASG) of India under the previous UPA
government, had violated FCRA norms by receiving foreign funds when she was a government
servant.)
2. How were the funds received misused?
(Hint: Spent on air travel, boarding and lodging and local travel)

1. Write a short note on the Foreign Contribution (Regulation) Act, 2010.
2. What do you understand by the term foreign contribution?
3. What is foreign hospitality?
4. What are the pre-requisites to be eligible for registration by FCRA?
5. Discuss the process of registration of persons to be regulated by the Act.
13.7

1. The Foreign Contribution (Regulation) Act, 2010 (FCRA), regulates donations from abroad to ensure
that they do not affect the internal security of the country adversely. Refer to Section Overview of the
Foreign Contribution (Regulation) Act, 2010
2. Foreign contribution is the money or article beyond a specified value, received as a donation from a
foreign source. Refer to Section Overview of the Foreign Contribution (Regulation) Act, 2010
3. Foreign hospitality means any offer, not being a purely casual one, made in cash or kind of a foreign
source for providing a person with the costs of travel to any foreign country or territory or free
boarding, lodging, transportation or medical treatment. Refer to Section Overview of the Foreign
Contribution (Regulation) Act, 2010
4. There are some prerequisites to be eligible for registration under the FCRA. These include:
 An applicant should be registered under the Societies Registration Act, 1860 or Indian Trusts
Act, 1882 or as Section 8 Company under the Companies Act
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 Should have made reasonable contributions by undertaking activities in its chosen field for the
benefit of society
Refer to Section Overview of the Foreign Contribution (Regulation) Act, 2010
5. There are six steps to be followed for the registration of persons to be regulated by the Act. To apply
for registration, the following steps need to be followed:
1. Access the online portal of FCRA
2. Fill form FC-3A (Application for FCRA Registration) or Form FC-3B (Application for FCRA Prior
Permission)
Refer to Section Overview of the Foreign Contribution (Regulation) Act, 2010
@ 13.8
 https://fcraonline.nic.in/home/PDF_Doc/fc_amend_07102020_1.pdf
 Critically review the Foreign Contribution Regulation Act (Amendment) Act, 2020.
10
Overview of the Foreign Contribution (Regulation) Act, 2010
Unit – XIII
Week 13 Overview of the Foreign
Contribution(Regulation)
Act, 2010
Quadrant 1 2. Watch the eLearning content on “L13: Overview of the Foreign
eContent
3. Read the eLM on “Unit 13: Overview of the Foreign
7. Watch this video on FCRA
https://www.youtube.com/watch?v=6SrAX7v1960
Quadrant 2 1. Revise “L12: Overview of the prevention of Money Laundering
Act, 2002” recording of the live Session
eTutorial
5. Attend the live session #13 on “Overview of the Foreign
Quadrant 3 4. Attempt to answer the questions for Practice #13 on “Overview
of the Foreign contribution(Regulation) Act, 2010”
eAssessment
Overview of the Foreign contribution(Regulation) Act, 2010”
for self-assessment
discussion forum and case studies.
Discussions
Introduction
• About:
• FCRA was enacted during the Emergency in 1976 amid apprehensions that
foreign powers were interfering in India’s affairs by pumping money into
the country through independent organisations.
• The law sought to regulate foreign donations to individuals and associations
so that they functioned in a manner consistent with the values of a sovereign
democratic republic.
• Amendments:
• An amended FCRA was enacted in 2010 to “consolidate the law” on utilisation of
foreign funds, and “to prohibit” their use for “any activities detrimental to national
interest”.
• The law was amended again in 2020, giving the government tighter control and
scrutiny over the receipt and utilisation of foreign funds by NGOs.
• Criteria:
• The FCRA requires every person or NGO seeking to receive foreign donations to be:
• registered under the Act
• to open a bank account for the receipt of the foreign funds in State Bank of India, Delhi
• to utilize those funds only for the purpose for which they have been received and as stipulated
in the Act.
• FCRA registrations are granted to individuals or associations that have definite
cultural, economic, educational, religious, and social programmes.
•
• Exceptions:
• Under the FCRA, the applicant should not be fictitious and should not
have been prosecuted or convicted for indulging in activities aimed at
conversion through inducement or force, either directly or indirectly, from
one religious faith to another.
• The applicant should also not have been prosecuted for or convicted of
creating communal tension or disharmony.
• Also, should not be engaged or likely to be engaged in the propagation of sedition.
• The Act prohibits the receipt of foreign funds by candidates for elections,
journalists or newspaper and media broadcast companies, judges and
government servants, members of legislature and political parties or their
office-bearers, and organisations of a political nature.
• Validity:
• FCRA registration is valid for 5 years, and NGOs are expected to apply for
renewal within six months of the date of expiry of registration.
• The government can also cancel the FCRA registration of any NGO if it
finds that the NGO is in violation of the Act, if it has not been engaged in
any reasonable activity in its chosen field for the benefit of society for two
consecutive years, or if it has become defunct.
• Once the registration of an NGO is cancelled, it is not eligible for re-
registration for three years.
• FCRA 2022 Rules:
• In July 2022, the MHA effected changes to FCRA rules which increased
the number of compoundable offences under the Act from 7 to 12.
• The other key changes were exemption from intimation to the government for
contributions less than Rs 10 lakh – the earlier limit was Rs 1 lakh —
received from relatives abroad, and increase in time limit for intimation of
opening of bank accounts.
APPLICABILITY
•The Act shall apply toWhole of India

•Citizens of India outside India
•Associate branches or subsidiaries, outside India, of
companies or bodies corporate, registered or incorporated in
India
Salient features of FCRA 2010
• Here is a brief introduction to the provisions of the FCRA 2010:
• A provision was made for the cancellation of registrations of NGOs if the Home
Ministry believes that the organisation is political and not neutral.
• The registration certificate granted to the NGOs under the 2010 act came with
five-year validity.
• A provision was inserted stating that the assets of the person who has become
defunct needs to be disposed of in a manner stated by the government.
• A separate account needs to be maintained by the organisations to deposit the
Foreign Contributions received and no other funds except for Foreign
Contributions shall be deposited in that account.
• Every bank would be obligated to report to the prescribed authority, the amount of
foreign remittances received and other related details such as the source, manner
of receipt etc.
• “Foreign Contribution” means the donation, delivery or transfer
made by any foreign source of ,—
• (i) any article, not being an article given to a person as a gift for
his personal use, if the market value, in India, of such article, on
the date of such gift, is not more than such sum as may be
specified from time to time, by the Central Government by the
rules made by it in this behalf;
• (ii) any currency, whether Indian or foreign;
• (iii) any security as defined in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956) and
includes any foreign security as defined in clause (o) of section
2 of the Foreign Exchange Management Act, 1999 (42 of 1999).
• “foreign source” includes,—
• the Government of any foreign country or territory and any agency of such Government;
• any international agency, not being the United Nations or any of its specialized agencies,
the World Bank, International Monetary Fund or such other agency as the Central
Government may, by notification, specify in this behalf;
• a foreign company;
• a corporation, not being a foreign company, incorporated in a foreign country or territory;
• a multi-national corporation referred to in sub-clause (iv) of clause (g);
• a trade union in any foreign country or territory, whether or not registered in such foreign
country or territory;
• a foreign trust or foundation, by whatever name called, or such trust or foundation mainly
financed by a foreign country or territory;
• a society, club or other association of individuals formed or registered outside India;
• a citizen of a foreign country;
Who can accept Foreign Contribution?
• Organizations working for definite cultural, social, economic,

educational or religious programs, if and only if they are
1.Registered with the Home Ministry
2.Maintaining a separate account listing the donations received from
foreigners, getting it audited by a Chartered Accountant and
submitting it to the Home Ministry, every year.
• Who are debarred from receiving Foreign Contribution?
• A candidate contesting an election
• Cartoonist, editor, publishers of a registered newspaper
• Judge
• Government servants or employee of any corporation
• Member of any legislature
• Political parties
• Judge, Government servant or employee of any corporation or
any other body controlled or owned by the Government;
• member of any Legislature;
• political party or office-bearer thereof;
• Foreign Contribution (Regulation) Amendment Bill 2020
• The foreign inflow has almost doubled in the last decade, however, as
per the government, the entities receiving the funds aren’t using it for
the declared purpose. In FCRA 2020, only 20% of the foreign funds
can be used for administrative purposes, while the limit was 50% in
FCRA 2010. This might hamper the workings of several small NGOs
that depend on such funds.
• The new provisions aim to enhance transparency and accountability in
the matter of foreign funds inflow and utilisation. The bill also makes
the Aadhaar number mandatory for recipients (passport or OCI card
will be used as the identification document in case of foreigners).
REGISTRATION AND PRIOR PERMISSION
1. Registration
The applicant must apply for registration through online portal of FCRA, in
Form FC – 3A (Application for FCRA Registration) and comply with the
following requirementsshall have an FCRA Account
• be registered under the Societies Registration Act, 1860 or the Indian Trusts
Act, 1882 or registered as Section 8 Company as per the Companies Act,
2013 or any such Act as may be required
• has undertaken reasonable activity in its chosen field for the benefit of the
society
• spent a minimum of Rs. 10,00,000 in the last 3 years towards achieving its
objectives (Excludes administrative expenditure)
• submit the copies of the financial statements of the last 3 years that are duly
audited by qualified Chartered Accountants
2.Prior Permission Registration
The Prior Permission route is ideally suited for those organizations that are
not eligible for registration and for those organizations which are newly
registered and would like to receive foreign contributions. The applicant must
apply for registration through online portal of FCRA, in Form FC – 3B
(Application for FCRA).
The prior permission granted for receipt of a specific amount from a specific
donor for carrying out specific activities/projects. For prior permission the
organization mustBe registered under the Societies Registration Act, 1860 or
the Indian Trusts Act, 1882 or registered as Section 8 Company as per the
Companies Act, 2013 or any such Act as may be required
• Submit a specific commitment letter from the donor to the Ministry of
Home Affairs which indicates
• Amount of contribution given
• Purpose for which it is proposed to be given.
• Where the Indian recipient organization and foreign donor
organization have common members, Prior Permission shall be
granted to the Indian recipient organizations subject to following
conditions
• The Chief Functionary of the Indian organization can’t be part of the donor
organization
• At least 51% of the members/office-bearers of the governing body of the
Indian recipient organization should not be employees/members of the foreign
donor organization
• Where the foreign donor is an individual
• He cannot be the Chief Functionary of the Indian organization.
• At least 51% office bearers/members of the governing body of the recipient organization
should not be the family members and close relatives of the donor.
• VALIDITY AND RENEWAL OF CERTIFICATE OF
REGISTRATION
• The Certificate of Registration shall be valid for 5 years from the date
of the grant of certificate
• The Certificate of Registration shall be renewed within six months
before the expiry of the period of the certificate, in electronic form in
Form FC-3C accompanied with an affidavit executed by each office
bearer, key functionary, and member in Performa ‘AA’.
• OTHER COMPLIANCES
• Every Registration holder shall intimate to the Central Government, and
authority specified by the Central Government, as to the amount of each
foreign contribution received by it, the source from which and how such
foreign contribution was received, and the purposes for which, and how he
utilized such foreign contribution.
• Every person receiving foreign contribution shall submit a copy of a
statement indicating therein the particulars of foreign contribution received
duly certified by an officer of the bank or authorized person in foreign
exchange and furnish the same to the Central Government along with the
intimation above point.
• Every Registration holder shall maintain
• an account of any foreign contribution received
• a record on the way during which such contribution has been utilized by him
• PENALTY
• The penalties under FCRA are usually Monetary or Imprisonment.
• While the monetary values are high, but the risk of closure notice
always hangs under various non-compliance
• Foreign hospitality – Section 2(1)(i) “Foreign hospitality” means
any offer, not being a purely casual one, made in cash or kind
by a foreign source for providing a person with the costs of
travel to any foreign country or territory or with free boarding,
lodging, transport or medical treatment
RESTRICTION ON ACCEPTANCE OF FOREIGN HOSPITALITY
• Member of a Legislature or;

• Office-bearer of a political party or;
• Judge or Government servant or;
• Employee of any corporation or;
• any other body owned or controlled by the Government. Shall not accept
any foreign hospitality except with the permission of the Central
Government.
• Provided that it shall not be necessary to obtain any such permission for an
emergent medical aid needed on account of sudden illness contracted during
a visit outside India, if the same is intimated to the Central Government
within one month of receipt of such hospitality.
Week 14 Overview of the
Arbitration and
Conciliation Act, 1996
Quadrant 2. Watch the eLearning content on “L14: Overview of
1 the Arbitration and Conciliation Act, 1996”
eContent 3. Read the eLM on “Unit 14: Overview of the

Arbitration and Conciliation Act, 1996”
7. Read this open-source material on Arbitration.

https://blog.ipleaders.in/arbitration-type-significance/
Quadrant 1. Revise “L13: Overview of the Foreign
2 contribution(Regulation) Act, 2010” recording of the
live Session
eTutorial
5. Attend the live session #13 on “Overview of the
Quadrant 4. Attempt to answer the questions for Practice #14
3 on “Overview of the Arbitration and Conciliation Act,
1996”
eAssessm
ent 6. After the live session, repeat the Practice #14 for
“L14: Overview of the Arbitration and Conciliation
Act, 1996” for self-assessment.
Quadrant 8. Participate in collaborative learning by discussing
4 the topics on discussion forum and case studies.
Discussio
ns
UNIT
Overview of the Arbitration and

Names of Sub-Units
Introduction to the Concept of Arbitration, Types of Arbitration, Features of an Arbitration Agreement,

Arbitration Tribunal, Meaning and Features of Conciliation and the Role of Conciliators.
Overview
The unit begins by explaining the concept of arbitration and its types. Then, it describes the features
of the arbitration agreement. It goes on to explain the arbitration tribunal, the meaning, and features of
conciliation. Towards the end, it talks about the role of conciliators.
Learning Objectives

 Describe the concept of arbitration and its types
 Explain the features of the arbitration agreement
 Discuss about the arbitration tribunal
 State the meaning and give the features of conciliation
 Explain the role of conciliators
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Corporate Laws
Learning Outcomes

 Examine the concept of arbitration and its types
 List the features of an arbitration agreement
 Describe about the arbitration tribunal
 Assess the meaning and features of conciliation
 Summarise the role of conciliators
 http://lawfaculty.du.ac.in/files/course_material/VI_Term/LB -602-%20Alternative%20
Dispute%20Resolution%20-%20OK%20(1).pdf
 https://www.icsi.edu/media/portals/70/bg1605.pdf
14.1 INTRODUCTION
Arbitration is a method of resolving disputes outside the judiciary courts. Such disputes are normally
resolved by a 3rd party which may be one or more persons. In case the dispute is resolved by more than
one person it is also referred to as the arbitral tribunal. The decision given by the arbitral tribunal is
referred to as the arbitration award. The decision of arbitration is legally binding on both parties,
and it is enforceable in courts, unless the parties in world stipulate that the arbitration process and
decision are non-binding. Usually, arbitration is used to resolve disputes of commercial nature. In
certain countries, arbitration is also used to resolve consumer and employment matters. This can be
seen in United States of America. The arbitration here may be mandated by the terms of employment
end also may include a waiver of the right to bring a class action claim. Arbitration is not the same as
judicial proceedings. The arbitration and conciliation act 1996 is based on international commercial
arbitration and conciliation model also known as UNCITRAL model law. This act ushered an era of
private arbitration and conciliation in India.
14.2 CONCEPT OF ARBITRATION

The Arbitration and Conciliation Act 1996 seeks to amend and consolidate various laws related to
domestic and international arbitration and repeals the Arbitration Act 1940, the Arbitration (Protocol
and Convention) Act 1937, and the Foreign Awards (Recognition and Enforcement) Act 1961.
The arbitration and conciliation act 1996 can be viewed in three components which are:
i. Reproduction of Model Law: This deals with rules related to procedure before the arbitral tribunal.
ii. Recognition of foreign awards: This deals with awards made as per agreements under the New
York Convention and enforcement of foreign awards under the Geneva Convention.
iii. Conciliation proceedings: The third component deals with conciliation proceedings.
In arbitration the parties involved in the dispute agree to make a third person or persons the deciding
authority for the arbitrator who will decide about the dispute after considering the evidence and hearing
the parties in world the neutral arbitrator has the authority to make a decision to resolve the dispute.
2
UNIT 14: Overview of the Arbitration and Conciliation Act, 1996 JGI JAIN
The process of arbitration is similar to the trial in court. In this process, both parties make opening
statements and present the evidence they have to the arbitrator. Compared to court proceedings
arbitration can be completed in lesser time and requires lesser formalities. After hearing both sides and
considering the evidence, the arbitrator issues the award, which is the decision to resolve the dispute.
Some awards may only give the decision, while other awards may also give the reasons behind the award.
This arbitration process maybe binding or may not be binding on both parties. In case the arbitration
is binding, the decision can be enforced by a court. In case the arbitration is not binding on the parties,
the award is considered as an advisory, and is considered final only when it is accepted by the parties
involved.
14.2.1 Types of Arbitration

There are various types of arbitrations in India. The arbitrations classified on the basis of jurisdiction are:
i. Domestic: In such arbitrations the parties involved must be Indian citizens. The dispute is settled
in accordance with the law of the country. When reading section 2(2)(7) of the Act, it is implied that
domestic arbitration implies that the proceedings of the arbitration are conducted in India, and
as per Indian law. The cause of action for the dispute should have also been initiated in India. All
the parties involved should be subject to jurisdiction of India.
ii. International: Such arbitrations are conducted either within India or abroad and may comprise of
elements which originate abroad, in relation to the parties involved in the dispute. The applicable
law maybe either Indian or foreign, based on the circumstances of the case. In such arbitrations
at least one party involved in the dispute should be domiciled outside India, or the subject matter
of the dispute should be located abroad.
iii. International Commercial arbitration: International arbitration is considered to be commercial
in nature, if it relates to disputes arising out of legal relations and are considered commercial as
per Indian law. In such disputes, at least one party involved in the dispute should be a national or
resident of any other country except India, or the company should have been incorporated abroad,
or an association whose management and control is in a non-Indian country, or the government
of a country other than India. In such disputes the arbitral tribunal decides on the dispute based
on the law of the country, as chosen by the parties.
The arbitrations classified on the basis of procedure are:
i. Institutional arbitration: If an arbitration is conducted by an arbitral institution, it is known as
institutional arbitration. Here, the parties may choose to refer to the differences as per the rules
of the arbitral institution. The arbitrators may be selected from a panel by the governing body
of such an institution. The disputing parties may also select their panel of arbitrators available
at the institution. Some institutions may not allow parties to designate the arbitrator. They may,
however, allow the parties to choose from a list of arbitrators which the institution provides. Some
arbitral institutions may give the parties complete freedom to select the arbitrators of their choice.
The rules of arbitral institutions generally follow a similar pattern which is specifically created for
arbitrations.
ii. Ad hoc arbitration: When the parties agree among themselves without having any institutional
proceeding, and arrange for arbitrators to resolve the disputes, it is referred to as ad hoc
arbitration. Such an arbitration maybe domestic, international, or foreign arbitration. Ad hoc
arbitration implies that such an arbitration will not be conducted as per the rules of any arbitral
3
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institute. The parties involved are under no obligation to submit their arbitration to any arbitrary
institution’s rules. They are free to have their own rules of procedure for resolving the dispute.
The arbitration laws of the country in which the arbitration occurs determines the number
of arbitrators as well as the party which may appoint them. For instance, if the arbitration is
conducted in India, then it will be conducted as per the Arbitration and Conciliation Act 1996. In
such a case, if the parties are unable to determine the number of arbitrators, the Arbitral Tribunal
shall comprise of one arbitrator who will be appointed by the Chief Justice of the Supreme Court
of India or Chief Justice High Court of India. Ad hoc arbitration is, therefore, an arbitration which
is arranged by the parties involved in the dispute themselves. Ad hoc arbitration may be either
domestic or international commercial arbitration.
iii. Fast track arbitration: The other normal processes of arbitration may take time and be lengthy.
The fast-track arbitration increases the speed of arbitration. In this method, time is of the essence in
providing the arbitration award. This procedure abandons all methods which are time consuming
and makes the procedure simple which is originally the intent behind such arbitration.
14.2.2 Features of the Arbitration Agreement

The arbitration agreement is defined as an agreement between parties, to refer some or all disputes have
already arisen or those which may arise, in reference to a defined legal relationship, as per Section 7 of
the Arbitration and Conciliation Act 1996. A relationship of a patient with his doctor, and a client with his
advocate, are examples of relations which are legal in nature but not necessarily contractual.
The arbitration agreement is made by parties who entered into a contract, when they decide that
should any dispute arise between them, it may be resolved without going to the court. The agreement
should mention who will select the arbitrator, the place of arbitration, etc. When the parties involved sign
the arbitration agreement, it becomes binding on them. An arbitration agreement is like similarto a
contingent contract, which means that such an agreement becomes enforceable only if a dispute occurs
between the parties. The existence of a dispute is an essential condition for arbitration.
Section 7 of the Arbitration and Conciliation Act 1996 specifies that an arbitration agreement may
either be a separate agreement, or an arbitration clause embedded in the contract.
An arbitration agreement must be put in writing. As per section 7 (4) of the Act, an arbitration
agreement is considered to be in writing, if it is a document signed by the parties, or an exchange of
communication in physical or electronic form which provides a record of the agreement, or an exchange
of statements in which one party alleges the existence of such an agreement. The intent of the parties
is very important; there is no prescribed format for an arbitration agreement. It is also not defined
that terms like arbitration or arbitrators are essential components of an arbitration agreement. The
arbitration agreement should clearly state the intent of the parties to refer the dispute for arbitration.
The arbitration agreement should be necessarily signed by the involved parties and should contain all
terms. It will also be sufficient if one party signs it and the other party accepts it.
The Hon’ble ball Supreme Court, in the landmark case judgment, held that certain attributes need to be
present in and at arbitration agreement. These are:
i. The arbitration agreement should consider that the decision of the arbitrary tribunal will be final
and binding on the parties to the agreement
ii. The jurisdiction of the tribunal will be derived from the consent of the parties or from a court
order, or from a statute
iii. The rights of the parties will be determined by the tribunal in an impartial and judicial manner
4
iv. The parties must agree to refer their disputes to the tribunal and the decision of the tribunal must
be intended to be enforceable by law
v. The tribunal will decide upon the dispute already formulated at the time of referring it to the
tribunal
While drafting the Arbitration agreement, certain points need to be kept in mind. These include:
a. Seat of arbitration: This clause of the agreement prescribes the place of arbitration. The seat of
arbitration will determine the laws which will govern the procedure of arbitration. The hearings
may take place in a separate location than the seat of arbitration The place of hearings does not
affect the chosen seat of arbitration in any manner.
b. Appointing arbitrator: Appointing arbitrators is provided for in Section 11 of the Arbitration
and Conciliation Act. This section provides that a person of any nationality may be appointed as
arbitrator. The process for appointing the arbitrator should be agreed upon by the parties. In case
the parties are unable to reach an agreement on appointment of arbitrators, each party shall
appoint one arbitrator each, and these two arbitrators shall appoint a 3rd one, who shall be the
presiding arbitrator. In case of an international commercial transaction, the arbitrator should
not be of the same nationality as parties involved in the dispute.
c. Language: Deciding on the language of arbitration is very important, as it may affect the cost of
arbitration for instance paying fees to translators.
d. Number and qualification of arbitrators: The involved parties may determine the number of
arbitrators to resolve the dispute, as per section 10 of the Arbitration and Conciliation Act, 1996. In
case the parties are unable to decide on the number of arbitrators, the arbitral tribunal shall
comprise of a single arbitrator.
e. Type of arbitration: The parties involved may choose the type of arbitration. They may choose
between ad hoc or institutional arbitration.
f. Governing law: The law that governs the key point of dispute is known as substantive law. The
parties need to mention which law they want to be governed by, in the agreement.
g. Name and address of the arbitration institution: In case the parties refer the dispute to an
arbitration institution, it is important that they should specify the name and address of the
arbitration institute clearly. Inadvertent mistakes may nullify the arbitration clause.
The design of the arbitration agreement may at times make or break the arbitration. It should ideally
include the subject matter of dispute, time of conflict, name, number and qualification of arbitrators
and the jurisdiction of the arbitration institution. This can be done through telegram, documents,
letters, etc.
14.3 ARBITRATION TRIBUNAL

In case of a dispute between parties, they may choose to resolve the dispute through an arbitraltribunal.
The tribunal comprises one or more arbitrators. The arbitral tribunal will resolve the dispute. Certain
rules of arbitration have been given by the Indian council of arbitration these rules need to be abided by
the arbitrators as well as the parties involved. Rule 2 of these regulations specify the arbitral tribunal as
‘an arbitrator or arbitrators appointed for determining a particular dispute’. Section 2(d) of the
Arbitration and Conciliation Act, 1996 mentions that an arbitral tribunal may comprise of a single
arbitrator or a panel of arbitrators.
The composition of an arbitral tribunal has been laid down in Chapter III of the Arbitration and
Conciliation Act. Rule 22 of the rules of arbitration state that, when an application for arbitration is
5
JGI JAIN
Corporate Laws
received, the Indian Council of Arbitration will take required steps for constituting an arbitral tribunal.
This tribunal will adjudicate the disputes between parties.
The number of arbitrators which may be a part of the arbitral tribunal are specified in Section 10 of the
Act. The parties involved in the dispute may mutually choose the number of arbitrators to comprise the
arbitrary tribunal for adjudicating the dispute. The number of arbitrators who are appointed should
be an odd number, to ensure fairness. In case the parties involved are unable to choose the number
of arbitrators, then Section 10 of the Act states that a single arbitrator will be appointed. Incase the
value of claim made under arbitration is less than ` one crore, then a single arbitrator may resolve the
dispute if the parties agree. This is as per Rule 22 of Rules of Arbitration. In case the claim in the dispute
exceeds ` 1 crore, 3 arbitrators, in agreement with the parties, shall comprise of the arbitral tribunal.
14.4 MEANING OF CONCILIATION

Conciliation is a form of alternate dispute settlement. It helps to settle the dispute outside the courts. This
helps the parties to settle the dispute with the help of an unbiased conciliator. Conciliation is a
confidential process where parties volunteer to apply the apt laws, as per their requirement. Conciliation
is referred to in Part III of the Arbitration and Conciliation Act, 1996. The conciliator helps the parties
arrive at a solution to the dispute and once the dispute is settled, the dispute settlement is agreed upon
by the involved parties. An agreement of settlement is signed, and this agreement is treated the same
as an arbitration award.
Conciliation may be defined as a process of persuading the parties to reach an agreement, as per
Halsbury’s Laws of England. Arbitration is less formal than litigation. Conciliation is even more informal
than arbitration. Conciliation is voluntary. Here the conciliator facilitates negotiations between
disputing parties and helps them to understand their conflicts. He/she helps them to agree on their
interests to arrive at a mutually acceptable agreement. Conciliation involves discussion among the
parties to explore a resolution by targeting existing issues leading to the dispute and creating options for
a settlement which may be acceptable to all involved parties. The conciliator attempts to supportthe
parties, in generating options, so that a compatible solution may be found. The processes is free of any
risk and is also not binding on the parties, till they sign the agreement. When a solution between
disputing parties, is arrived at in front of a conciliator, the agreement is equivalent to an arbitration
award, and is legally tenable in any court of the country.
Most commercial disputes are amenable to conciliation, especially when the parties involved want to
maintain their commercial relationships. The type of disputes which are conducive for consolidation
includes commercial, financial, employment, insurance, family, intellectual property, real estate,
partnerships, product liability, service, and environment related. Proceedings for conciliation get
initiated when the other party agrees to conciliation in writing. The conciliator may need the parties
involved to submit a brief about the nature of conflict and points of dispute in writing to the conciliator,
with a copy to be opposing party. The party which initiates the conciliation sends an invitation to the
other party, in which the subject matter of the conflict is described. In case the other party does not accept
the invitation within 30 days, or within the time frame mentioned in the invitation. No conciliation can
be conducted.
The appointment of the conciliators is provided for in Section 64 of the Act. The parties have to agree on
the component composition of the conciliation tribunal. In case there is no agreement on the composition
of the conciliation tribunal, there shall be only one conciliator. The parties involved may agree to enlist
the assistance of an institution or a person of their choice to appoint the conciliator. The conciliator has
to be independent and impartial.
6
14.4.1 Features of Conciliation

The features of conciliation include:
a. Flexibility: The parties involved have the flexibility to choose the language procedure place and
time for the conciliation.
b. Confidentiality: The parties involved would like to keep the proceedings of the conciliation
confidential.
c. Cost effective: Since conciliation is flexible, it ensures efficiency of time and cost, especially since the
parties involved can decide the time frame for the settlement.
d. Conciliator: The parties involved in the dispute have the freedom to choose the conciliator. The
conciliator may be chosen based on experience, language, profession, or any other relatable aspect.
The main attribute of the conciliator is unbiased and independent.
The key features of conciliation include non-adversarial and voluntary nature, flexibility, and
recommendatory decisions, settled by mutual agreement and not imposed by anyone.
14.4.2 Role of Conciliators

The role of a conciliator is provided for in Section 67 of the Act. Some of the roles are given below:
a. The conciliator shall be independent and impartial in its attempt to resolve the dispute in an amicable
manner.
b. The conciliator shall be objective fair consider it and keep the rights and obligations of the parties
and circumstances of the dispute as well as previous business conducted between parties in mind
while considering the dispute.
c. The conciliator may conduct the proceedings considering the wishes of the parties, any oral
statements and the need for quick settlement of the dispute.
d. The conciliator will have the flexibility to propose settlement of the dispute at any stage of the
conciliation proceedings. Such proposals may not be in writing and may not be accompanied by
any reasons thereof.
e. The conciliator shall not act as representative of a party in any judicial proceeding.
f. A conciliator should initiate positive dialogue, clarify misunderstandings, create faith, and generate
a congenial atmosphere needed for cooperative problem solving.
g. The ultimate role of a conciliator is to help the parties in arriving at amicable settlement.
 The decision given by the arbitral tribunal is referred to as the arbitration award.
 Arbitration is not the same as judicial proceedings.
 Compared to court proceedings arbitration can be completed in lesser time and requires lesser
formalities.
 In domestic arbitrations, the parties involved must be Indian citizens.
 If an arbitration is conducted by an arbitral institution, it is known as institutional arbitration.
 Some arbitral institutions may give the parties complete freedom to select the arbitrators of their
choice.
7
JGI JAIN
Corporate Laws
 The arbitration agreement is defined as an agreement between parties, to refer some or all disputes
already arisen or those which may arise, in reference to a defined legal relationship, as per Section
7 of the Arbitration and Conciliation Act 1996.
 An arbitration agreement must be put in writing.
 Appointing arbitrators is provided for in Section 11 of the Arbitration and Conciliation Act.
 The conciliator helps the parties arrive at a solution to the dispute and once the dispute is settled, the
dispute settlement is agreed upon by the involved parties.
14.6 GLOSSARY
 UNCITRAL: An acronym that stands for United Nations Commission in International Trade Law
 Domicile: The territory that a person treats as their home
 Non-adversarial: The thing that does not oppose or disagree
 Imposed: A condition or thing that has been forced on someone
14.7 CASE STUDY: RESOLUTION OF ISSUE USING AGREEMENT
Case Objective
This case highlights simplicity of dispute resolution using conciliation proceedings.
Amar purchased a treadmill from a local fitness equipment shop.

The treadmill stopped working after 10 days. Amar called the shop and ask them to collect the machine
and do the repairs. The staff from the shop took the treadmill from Amar’s residence and brought it to
the shop for repairs.
After one month, Amar called the shop and asked them for status on repairs of the treadmill. He was
told by the shop that they were waiting for a replacement part. Amar called them regularly every couple
of days to check on the progress of repairs. After some weeks, the shop stopped returning his calls. Amar
then applied at the consumer court, for refund of the money that he paid for the treadmill.
When the matter arrived in front of the authorities, Amar and the shop owner were asked to attempt
conciliation. The shop owner told Amar that the replacement part had finally arrived and that we could
repair the treadmill now. Amar refused, insisting that there had been too many promises, broken over
a long period of time. He now wanted his money back, so he could purchase another treadmill from
another shop.
After a short discussion, the conciliator realised that the dispute was about poor customer service. He felt
that there had been no communication from the shop and the repairs of the treadmill had taken along
time. The shop owner apologised to Amar for poor customer service and acknowledged that they could
have done better. Amar agreed to allow the shop to repair the treadmill and give the same piece tohim on
the condition that they give him a 12-month warranty on the machine, from the date of repairs. The shop
owner agreed to this. They reached a settlement and consent orders were made formalising their
agreement.
Source:https://ncat.nsw.gov.au/ncat/how-ncat-works/resolve-a-case-by-agreement/conciliation/conciliation-case-studies.html
8
Questions
1. Which features of conciliation do you notice in the case?
(Hint: Refer section on features of conciliation)
2. What was the role of the conciliator in this case?
(Hint: Refer section on role of conciliators)
3. In what other way could the dispute have been resolved?
(Hint: Refer case)
4. What was the key point of dispute in the case?
(Hint: Refer to the thought process of the conciliator)
5. In what manner was this dispute resolution a conciliation?
(Hint: Refer section meaning of conciliation)

1. Explain the concept of arbitration.
2. Describe the types of arbitrations categorised on the basis of procedure.
3. Enumerate the features of a robust arbitration agreement.
4. What do you understand by conciliation?
5. Describe the role of a conciliator.

1. In arbitration the parties involved in the dispute agree to make a third person or persons the deciding
authority for the arbitrator who will decide about the dispute after considering the evidence and
hearing the parties in world the neutral arbitrator has the authority to make a decision to resolve
the dispute. Refer to Section Concept of Arbitration.
2. The arbitrations classified on the basis of procedure are: Institutional arbitration, Ad hoc arbitration,
and fast track arbitration. Refer to Section Concept of Arbitration.
3. The arbitration agreement is defined as an agreement between parties, to refer some or all disputes
have already arisen or those which may arise, in reference to a defined legal relationship, as per
Section 7 of the Arbitration and Conciliation Act 1996. While drafting the Arbitration agreement,
certain points need to be kept in mind. These include: Seat of arbitration, appointing arbitrator,
language, number and qualification of arbitrators, type of arbitration, governing law and name
and address of the arbitration institution. Refer to Section Concept of Arbitration.
4. Conciliation is a form of alternate dispute settlement. It helps to settle the dispute outside the courts.
This helps the parties to settle the dispute with the help of an unbiased conciliator. Conciliation
is a confidential process where parties volunteer to apply the apt laws, as per their requirement.
9
Corporate Laws
Conciliation is referred to in Part III of the Arbitration and Conciliation Act, 1996. Refer to Section
Meaning of Conciliation.
5. The role of a conciliator is provided for in Section 67 of the Act. Some of the roles are:
 The conciliator shall be independent and impartial in its attempt to resolve the dispute in an
amicable manner.
 The conciliator shall be objective fair consider it and keep the rights and obligations of the parties
and circumstances of the dispute as well as previous business conducted between parties in mind
while considering the dispute.
Refer to Section Meaning of Conciliation.
 https://www.youtube.com/watch?v=ANkmEdlvXNU
 https://www.youtube.com/watch?v=RH14Ocd7mi0
 Discuss the difference between arbitration and conciliation among your classmates.
10
Overview of the Arbitration and Conciliation
Act, 1996
Unit – XIV
Arbitration and
Quadrant 2. Watch the eLearning content on “L14: Overview of
1 the Arbitration and Conciliation Act, 1996”
eContent 3. Read the eLM on “Unit 14: Overview of the

Arbitration and Conciliation Act, 1996”
7. Read this open-source material on Arbitration.

https://blog.ipleaders.in/arbitration-type-significance/
Quadrant 1. Revise “L13: Overview of the Foreign
2 contribution(Regulation) Act, 2010” recording of the
live Session
eTutorial
Quadrant 4. Attempt to answer the questions for Practice #14
3 on “Overview of the Arbitration and Conciliation Act,
1996”
eAssessm
ent 6. After the live session, repeat the Practice #14 for
“L14: Overview of the Arbitration and Conciliation
Act, 1996” for self-assessment.
Quadrant 8. Participate in collaborative learning by discussing
4 the topics on discussion forum and case studies.
Discussio
ns
Introduction
• In earlier days, even before the establishment of courts, people used to
resolve their issues with the help of a third party when a dispute arises
between them. Later, courts were established and a proper procedure was
followed for resolving the disputes. Eventually, population was increased
and a lot of cases were pending before the court and also the cases were
piled up and the justice was served after so many days of filing a case. This
resulted in the delay of justice to the people.
• Due to raise in the population, industries also developed significantly and as
a result of it, commercial disputes also increased. To balance this, different
techniques were developed to solve the disputes outside the courts. This
method of resolving the disputes outside the court or without the court’s
involvement is called as Alternate Dispute Resolution (ADR). There are
various techniques in Alternate Dispute Resolution. They are:
• Arbitration
• Mediation
• Conciliation
• Mini trial
• Mediation-arbitration etc.
• Due to the delay in justice by the court, some of these techniques developed
significantly. One of the techniques that developed rapidly is Arbitration.
The main purpose of arbitration is to provide a speedy justice to the parties.
Arbitration and Conciliation Act, 1996 and its preamble
• The Arbitration and Conciliation Act, 1996 contains the law relating to
arbitration. This Act came into force on January 25th 1996. This act gives
the provisions for International Commercial arbitration, domestic arbitration
and also enforcement of foreign Arbitral awards. It is based on the UN
model law so as to equate with the law adopted by the United Nations
Commission on International Trade Law (UNCITRAL).
• The preamble of the Act is interpreted as follows:
• It is an act to integrate and amend the law relating to:
• Domestic arbitration.
• International commercial arbitration.
• Enforcement of foreign arbitral award.
• Law relating to conciliation and related to the matters connected therewith.
Disputes that are not arbitrable in India
• Usually all the disputes in which the civil rights of a citizen are infringed and the disputes
falling within the jurisdiction of civil court can be referred to arbitration. But, the disputes
which are related to morality, public policy, status and religious rights are not arbitrable in
India. The agreements which call for the adjudication of the following matters cannot be
executed validly:
• Disputes related to industries.
• Revenue matters.
• The proceedings which are of criminal in nature.
• Matters relating to the determination of guardianship or wards.
• Matters related to the testament or will under the Succession Act.
• The matters related to Indian Trust Act, trusteeship of charitable institutions, public charity.
• Matters within the purview of Restrictive Trade Practices Act and Monopolies.
• Issues related to Companies Act like Insolvency, dissolution and winding up proceedings
Types of arbitration proceedings
1. Domestic arbitration:
• The domestic arbitration is a type of arbitration where the subject matter of an
agreement or a contract is governed wholly by the Indian Law or when the cause of
action of a dispute wholly arises in India or when the parties opt for an Indian
jurisdiction.
• In a domestic arbitration the whole procedure is governed by the Indian law.
• In domestic arbitration:
• The parties should not be from any nationality or a resident in any country other than
India;
• A body corporate should not be incorporated in any country other than India;
• The Government should not be of a foreign country;
2) In International arbitration:
• The international arbitration may result in the application of different
set of rules. In this type of arbitration, the law governed for the
resolution of disputes can either be Indian law or a foreign law. The
arbitration proceedings can take place in India or outside India. the
arbitration is considered to be an international commercial arbitration
where:
• At least one of the parties is an individual who is a resident from
another country other than India.
• A corporate body which is not incorporated in India.
• The government should be of a foreign country.
3)Institutional arbitration
• In institutional arbitration, parties take the help of an institute for
deciding the procedures of arbitration. Such institution takes care of all
the procedures like appointing an arbitrator, timetable for filing the
documents etc. institutional arbitration lessens the burden of the
parties by giving administrative assistance. This timely assistance
helps move the arbitration process smoothly. The institutions will
charge the parties a certain amount of money as fee for assisting them
through the arbitration process.
Applicability of the Arbitration and Conciliation Act, 1996
• The Act applies to the whole of India but Part I, Part II, Part
III and Part IV will extend to Jammu and Kashmir only if they relate
to international commercial arbitration or conciliation. The Act was
enforced on 22nd August 1996 but the ordinance was promulgated by
the President on 16th January 1996. The other two ordinances i.e.,
Arbitration and Conciliation ordinances were passed on 26th March
and 21st June 1996 respectively.
Objectives of the Arbitration and Conciliation Act, 1996
• The various objectives of the Act are:

• Cover international and domestic commercial arbitration and conciliation comprehensively.
• Make a procedure which is fair, efficient and capable of meeting the needs of the society for arbitration
and conciliation.
• Provides reasons by the tribunal for granting any arbitral award.
• Ensure that the tribunal does not exercise its jurisdiction beyond the limits.
• Minimise the role of courts and reduce the burden on the judiciary.
• It permits the tribunal to opt for arbitration and conciliation as a method of dispute settlement.
• It makes sure that every award is enforced in the same manner as the decree of the court.
• It provides that the conciliation agreement reached by the parties has the same effect as the award
granted by an arbitral tribunal.
• It also works on the enforcement of foreign awards.
• Scheme of the Arbitration and Conciliation Act, 1996
• The Act is divided into four parts:
• Part I (Sections 2-43) – Applies to the place of arbitration in India. The
award granted is treated as a domestic award.
• Part II (Sections 44-60) – Enforcement of foreign awards.
• Part III (Sections 61-81) – Conciliation
• Part IV (Sections 82-86) – Supplementary provisions
• It contains three schedules:
• Schedule I – Convention on the recognition of foreign awards of
arbitration.
• Schedule II – Protocol to be followed on arbitration clauses.
• Schedule III – Convention for the execution of foreign arbitral awards.
Definitions under the Arbitration and Conciliation Act, 1996
• Section 2 of the Act gives various definitions of some important terms given in the Act. These
are:
1. Arbitration – Section 2 (1)(a) of the Act defines arbitration as to any arbitration which is
either administered or not by a permanent arbitral institution.
2. Arbitration agreement – Section 2(1)(b) of the Act says that for arbitration agreement Section
7 of the Act must be referred.
3. Arbitral award – this has not been defined clearly in Section 2(1)(c) but mentions that it
includes interim award.
4. Arbitral tribunal – it means a sole arbitrator or panel of arbitrators who help in arbitration.
(Section 2(1)(d))
5. Courts – Section 2(1)(e) defines courts. It includes civil courts having original jurisdiction in a
district and the High Court having jurisdiction to decide issues related to the subject matter of
the arbitration.
Types of Arbitration
1.Domestic arbitration – It means that the proceedings of arbitration will
take place as per Indian laws and be subject to Indian jurisdiction.
2.International and commercial arbitration – This is done in cases
involving disputes out of a legal relationship where one of the parties is a
foreign national, body corporated in some other country, a company or
group which is under the control of some other country and government of a
foreign country.
3.Institutional arbitration – It is administered by arbitration institutions like
the Indian Council of Arbitration, the International Centre for Alternative
Dispute Resolution (ICADR) etc.
4.Statutory arbitration – some acts provide for the resolution of disputes by
arbitration. In case there is any inconsistency between any Act and Part I of
the Arbitration Act then the provisions given in that Act will prevail.
5.Ad hoc arbitration – It means an arbitration where parties agree without
any assistance from the Arbitral tribunal.
6.Fast track arbitration – It is also called documentary arbitration. The
arbitration proceedings are very fast and time-saving. It is solely based on the
claim statement by one party and its written reply by another.
7.Look–sniff arbitration – It is a combination of an arbitral process and the
opinion of an expert. There are no formal submissions and hearings under
this.
8.Flip–flop arbitration – It is also called pendulum arbitration. The parties in
this type of arbitration create the cases before and then invite the arbitrator to
decide any one of the two options.
Advantages of arbitration
• A person appointed as arbitrator is based on the whims of the parties.
• If parties agree only then an arbitral tribunal is taken into matter.
• It is inexpensive and saves time.
• It ensures a fair trial.
• Gives freedom to the parties from judicial intervention.
• Parties choose the place of arbitration themselves (Section 20).
• The proceedings are kept private and confidentiality is maintained.
• The arbitral award is enforced in the same way a decree of the court is
enforced.
• Disadvantages of arbitration
• It does not always guarantee an expeditious resolution.
• The procedure is at times uncertain.
• It cannot give remedies like punishment, imprisonment, injunction,
etc. which are given in courts.
• Due to flexibility, it is ineffective.
• The method cannot be easily used in disputes involving multiple
parties.
Arbitral tribunals
• Composition of tribunals
• It is the creation of an agreement which conforms with the
law. Section 10 of the Act enables the parties to determine freely the
number of arbitrators to settle their dispute. The only restriction is that
the number of such arbitrators must not be even. If the parties are not
able to decide then there will be only 1 arbitrator. But if there are even
number of arbitrators then the agreement cannot be held invalid
merely on this ground.
• Procedure for appointment of arbitrators
• Further, Section 11 of the Act provides the procedure for the appointment of
arbitrators. The valid requirements for any such appointment are:
• Party must give proper notice of appointment to the other party. If it does not do
so, the appointment is held invalid.
• A person appointed as an arbitrator must be duly informed and his consent must be
taken.
• The consent must be obtained before finalising his appointment.
• It also says that if the parties fail to appoint an arbitrator within 30 days of the
request or if two arbitrators are appointed and not the third one, then the
appointment will be made by Chief Justice or any person on his behalf designated
by him but with the prior request of the parties.
Conciliation
• It is a process in which a third party helps the parties in dispute to
resolve it by way of agreement. The person authorised to do so is
called a Conciliator. He may do it by giving his opinion regarding the
dispute to help parties reach a settlement. In other words, it is a
compromise settlement between the parties.
Features of conciliation
• The person assisting the parties to come to a compromise is called a conciliator.
• Conciliators give their opinion regarding the dispute.
• The process of conciliation is voluntary.
• It is a non-binding process.
• The main difference between arbitration and conciliation is that, unlike arbitration, the
parties in this process control the whole procedure and the outcome.
• It is a consensual party and the desired outcome is the final settlement between the
parties based on their wishes, terms and conditions.
• A conciliator can become an arbitrator on the wish of the parties if no compromise
could be reached by the process of conciliation. This is known as Hybrid
Conciliation.
• The settlement agreement will have the same importance and status as the arbitration
award.
• Proceedings of Conciliation under the Act
• Section 62 of the Act provides that in order to initiate the conciliation
proceedings one party to the dispute has to invite the other party in writing
for conciliation. However, there will be no proceedings if the other to whom
notice/invitation is sent, reject it or does not reply.
• The general rule states that there must be one conciliator but in the case of
more than one conciliator they have to function together with each other as
per Section 63 of the Act.
• The appointment of the conciliator like an arbitrator will be done by the
parties themselves under Section 64 of the Act.
• A party according to Section 65 of the Act is under an obligation to
submit in writing the nature of the dispute and all the necessary
information related to it to the conciliator.
• The proceeding can be terminated following any of the procedures
given under Section 78 of the Act.
• Role of conciliator
• It is mentioned under Section 67 of the Act:
• He must be independent and impartial.
• He must assist the parties to come to a settlement.
• He is not bound by the procedure given under the Code of Civil
Procedure, 1908.
• He must adhere to the principles of fairness and justice.
Arbitral award
• It is a final determination of a claim or a part of it or a counter-claim

awarded by the arbitral tribunal. It must be written and duly signed by the
members of the arbitral tribunal as given under Section 31 of the Act. The
Section further gives the power to the tribunal to make interim awards for
any matter. In case of payment of money, it can award the interest which
seems reasonable, just and fair to the tribunal.
• Section 32 of the Act empowers the arbitral tribunal to terminate the
proceedings by making a final arbitral award. The procedure for any
correction in the award or its interpretation is given under Section 33 of the
Act. It also gives the power to the tribunal or the arbitrator to amend, correct
or remove any errors of any kind within 30 days but is silent on judicial
review. The tribunals cannot exercise their jurisdiction beyond whatever has
been mentioned in this section.
• Types of arbitral awards
1.Interim award – It is the determination of any issue arising out of the main
dispute. It is a temporary arrangement to satisfy a party and is subject to the final
award.
2.Additional award – According to Section 33 of the Act, if the parties find that
certain claims have been missed out by the arbitral tribunal and they were present
in the proceedings then it can after notifying other parties, make a request to the
arbitral tribunal to make an additional award and cover the claims which have
been left.
3.Settlement awards – It is made if the parties agree on certain terms of the
settlement. As per Section 30 of the Act, the arbitral tribunal may use any method
of dispute resolution like mediation, conciliation or negotiation to bring a
settlement between the parties.
4.Final award – It is an award which finally determines all the issues in a dispute. It
is conclusive unless set aside by courts and binding on the parties.
Process of arbitration in India
• The arbitration arises due to a dispute between the two parties. So, to start an
arbitration procedure, the contract or the agreement that is executed between the
parties must have an arbitration clause. The arbitration procedure will be carried
on in the following manner:
1) Arbitration clause:
• A contract or agreement that was entered by the parties must contain an arbitration
clause in order to resolve the disputes through arbitration. An arbitration clause
can be a separate agreement or an agreement in an agreement. That means the
arbitration clause may be in the form of a separate agreement or in a contract. An
arbitration clause says that when a dispute arises between the parties, it must be
resolved through the process of arbitration. The parties shall also mention the seat
and venue of the proceedings in the arbitration clause itself.
2)Notice for commencement of arbitration:
• The provision for notice for commencement of arbitration was given in section 21 of the 1996 Act.
When the dispute arises and the party has opted for arbitration, the aggrieved party will send a notice to
the other party for invoking the arbitration proceedings. It contains the names of the parties and their
representatives, a brief description of the dispute, a statement of relief sought etc.
3)Appointment of arbitrator:
• After the respondent receives the notice from the applicant about commencement of arbitration, both the
parties will appoint an arbitrator in a manner that is described in the arbitration clause. This provision is
given under section 11 of the 1996 Act.
• 4) Statement of claim and defence:
• This provision is given under section 23 of the arbitration and conciliation Act, 1996. After the
commencement of arbitration and appointment of arbitrator by the parties, the claimant drafts a
statement of claims which contains all the documents which they think are relevant to the case and also
all the evidences proving their statements.
• The respondent may also submit a counter claim or a statement of defense in support of his case which
shall be examined before the arbitral tribunal.
5)Hearings and written proceedings:
• The arbitral tribunal will hear both the parties and examine the evidences. The Tribunal will
decide whether the documents or the evidences produced are valid or not and proceed the case
further. This provision is given under section 24 of the 1996 Act.
6)Arbitral award:
• After hearing the parties and examining all the issues a final award will be given by the
arbitrator. This award shall be made in writing and shall be signed by all the members of the
Tribunal. This award shall be final and binding on both the parties. However, an appeal cannot
be filed before the Arbitral tribunal but the parties can appeal against the arbitral award before
the court. Form and contents of the arbitral award are described under section 31 of the Act.
7)Enforcement of arbitral award:
• After the award is passed by the arbitral tribunal it has to be executed. The provision related to
the finality and enforcement of arbitral award is given under sections 35 and 36 respectively.
Week 15 Overview of the insolvency
and Bankruptcy code, 2016
Quadrant 1 2. Watch the eLearning content on “L15: Overview of the Insolvency

and Bankruptcy Code, 2016”
eContent
3. Read the eLM on “Unit 15: Overview of the Insolvency and
Bankruptcy Code, 2016”
7. Read this open-source material on Insolvency and Bankruptcy code
https://www.drishtiias.com/paper3/insolvency-and-bankruptcy-code-3
Quadrant 2 1. Revise “L14: Overview of the Arbitration and Conciliation Act, 1996”
eTutorial
5. Attend the live session #15 on “Overview of the Insolvency and
Bankruptcy Code, 2016”
Quadrant 3 4. Attempt to answer the questions for Practice #15 on “Overview of
the Insolvency and Bankruptcy Code, 2016”
eAssessment
6. After the live session, repeat the formative assessment for “L15
Overview of the Insolvency and Bankruptcy Code, 2016” for self-
assessment
discussion forum and case studies.
Discussions
UNIT
Overview of the Insolvency and
Bankruptcy Code, 2016
Names of Sub-Units
Objectives of the Insolvency and Bankruptcy Code, Important Terminologies used in the Code,
Corporate Insolvency Resolution Process, Fast Track Process, Voluntary Liquidation Process.
Overview
The unit begins with explaining the objectives of the insolvency and bankruptcy code and the important
terminologies used in the code. Then it goes on to describe the corporate insolvency resolution process,
and the fast-track process. Towards the end, it explains the voluntary liquidation process.
Learning Objectives

 Describe the objectives of the insolvency and bankruptcy code
 Discuss the important terminologies used in the code
 State the corporate insolvency resolution process
 Explain the Fast-track process
 Describe the voluntary liquidation process
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Learning Outcomes

 Examine the objectives of the insolvency and bankruptcy code
 Appraise the important terminologies used in the code
 Assess the corporate insolvency resolution process
 Evaluate the fast-track process
 Analyse the voluntary liquidation process
 https://www.jkshahclasses.com/revision/law-part9.pdf
 https://cleartax.in/s/insolvency-and-bankruptcy-code-2016
15.1 INTRODUCTION
Insolvency is a state of a company or individual when it or they are unable to pay back their dues
or debts. When an organisation becomes insolvent, it implies that its liabilities have become more
than the value of its income and assets. In case the assets are not able to be converted to cash easily, a
business can still become insolvent even if their assets have a higher value than their liabilities. When
an individual becomes insolvent, the phenomenon is referred to as bankruptcy. This phenomenon is
covered by a different set of rules and regulations.
A company can become insolvent in many circumstances. The few common reasons are:
 The business became outdated as compared to contemporary practices
 Rapid and over ambitious growth depletes the company’s financial resources
 Fraudulent or illegal practices
 Unqualified management
 Lack of accurate accounting and financial management
 Inability to meet changing customer demands
 Lawsuits
 Competition
 Increasing costs
As a single person or small business, almost any of these can lead to insolvency. Two tests exist, which
can reveal whether a company is at risk of becoming insolvent or as already become insolvent.
a. Balance sheet test: It is verified through the balance sheet whether the liabilities are bigger than
the assets currently or are likely to be n the near future, considering expected as well as unforeseen
expenses.
b. Cash flow test: This test examines the company’s budget to identify if there is sufficient cash to
cover existing and forthcoming debts.
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UNIT 15: Overview of the Insolvency and Bankruptcy Code, 2016 JGI JAIN
When a business fails these tests, it is either heading towards insolvency or is likely to become insolvent
in the near future.
The Insolvency Process

When a business is declared insolvent, it becomes necessary to avoid further depletion of cash and
depreciation of assets. The aim of managing insolvency is to ensure that as much money is returned to
investors and creditors as possible. In certain cases, it may be possible to bring back the company into
profitability and avoid insolvency. To move a company from a state of current or impending insolvency
to a solvent state, an insolvency practitioner is required.
In insolvency, the directors and shareholders can request the following out of court:
i. Liquidation: of all cash and assets
ii. Administration: involving restructuring the business to save it
iii. Receivership: when a creditor such as the bank appoints an insolvency practitioner to manage
assets to pay off the maximum possible debt
iv. Company voluntary arrangement: here an agreement is made between the company and its
creditors, and a contract made to document payment of debt.
Certain insolvency cases do land in court and in such cases, there are multiple further proceedings
to manage payment of debt with the objective of compulsory liquidation. The best manner in which
insolvency can be prevented is to have realistic budgets, track finances and stay updated as per the
market.
Insolvency can be of the following types:
a. Cash-flow insolvency: when theoretically, the assets of the company are of sufficient value to pay
the creditors, but it is not the appropriate form of payment. The debtor may have assets of high value
but no cash in hand. Such a situation can normally be solved by negotiations. The creditormay be
willing to wait for payment with additional conditions or interest.
b. Balance sheet insolvency: In such a case the individual does not have sufficient funds nor assets to
pay the debt. The probability of bankruptcy increases in such a case.
Modern insolvency laws focus on remodeling the financial structure of debtors to enable continuation
of business instead of eliminating insolvent entities. Debt restructuring allows companies to renegotiate
their debts and restore liquidity so that they can continue operations. This is a better and less expensive
alternative to bankruptcy.
Filing for bankruptcy permits an individual who faces overwhelming financial troubles to clear their
debts and begin anew. This is a legal process which involves meeting a licensed insolvency trustee (LIT),
filing the documentation, sale of assets as needed, contacting creditors, and meeting them attend credit
counseling services and have the debts discharged from the appropriate authority. When the individual
is discharged from bankruptcy, he or she becomes solvent again. In certain countries like Spain, it is
not possible to get the complete debt discharged. There the maximum reduction in debt is half of the
outstanding amount. In India, filing for bankruptcy implies that the individual may find it very difficult to
secure a new loan. The Insolvency and bankruptcy Code 2016 is the latest law on bankruptcy in India.
Rather than dismiss debts, it is important to understand the root cause of the problem.
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15.2 OBjECTIVES OF THE INSOLVENCy AND BANkRUPTCy CODE

The provisions of the Insolvency and bankruptcy Code 2016 apply for insolvency, liquidation, or
bankruptcy to:
i. Any company incorporated under the Companies Act, 2013 or any previous law
ii. Any Limited Liability Partnership under the LLP Act 2008.
iii. Partnership firms and individuals.
This code would be applicable if the amount of default is a minimum of Rs. 1 lakh. This code shall not
apply to corporates who are regulated financial service providers such as Banks, financial institutions,
and insurance companies.
The objectives of the Code are given below:
1. Better conflict management between creditors and debtors by reducing information asymmetry
2. Provide a justified balance between the interest of the stakeholders of the company to avail credit
and loss that a creditor may have to bear on account of default
3. To consolidate and amend laws related to resolving insolvency
4. To establish fixed time limits for settlement of insolvency
5. To maximise value of assets of interested persons
6. To promote entrepreneurship
7. To increase availability of credit
8. To ensure that Insolvency and Bankruptcy Board of India is established for regulating insolvency
and bankruptcy law
9. To provide a painless revival mechanism for entities
10. To resolve the bad debt problem in India by creating a database of defaulters
The insolvency Code is a consolidating act, which is complete in matters dealt therein.
15.3 IMPORTANT TERMINOLOGIES USED IN THE CODE

The Code comprises certain terminologies which need to be familiarised with, to understand this subject
better.
i. Insolvency: This is a state of an individual or business where they are unable to pay their debts.
ii. Bankruptcy: This relates to the insolvency of a natural person, not a company. The bankruptcy is
permanently recorded in the credit record of that person.
iii. Creditor: This is someone who is owed a payment. A secured creditor is one who holds security
over specified assets of the company or person, and this provides them with priority to secure their
payments.
iv. Creditors Voluntary Liquidation (CVL): Here a resolution by the shareholders is passed to appoint
a liquidator instead of going to the court, after receiving a creditor’s statutory demand for paying
the debt.
v. Voluntary Administration: This occurs when the company’s board of directors resolve to appoint
an administrator for liquidation proceedings.
vi. Deed of Company Arrangement (DOCA): Here, the creditors agree to the company entering a
deed to restructure a viable business.
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vii. Phoenix activity: Here a new company acquires an existing business at lower than market value
prices which have been liquidated to avoid paying outstanding dues.
viii. Adjudicating authority: For corporates it is the National Company Law Tribunal (NCLT) and for
individuals and partnership firms it is the Debt Recovery Tribunal (DRT)
ix. Bench: Bench of adjudicating authority
x. Charge: Interest of lien created on assets of any person as security, and it includes mortgage
xi. Claim: Right to payment or remedy for breach of contract
xii. Constitutional documents: For corporates it includes the Memorandum of Association and
Articles of Association; for LLP it includes the incorporation documents
xiii. Debt: Liability in respect of claim
xiv. Default: is the non-payment of debt which is due either in part or in whole
xv. Insolvency Professional: a person who is enrolled with the insolvency professional agency as a
member and registered with the board as an insolvency professional
15.4 CORPORATE INSOLVENCy RESOLUTION PROCESS

The Insolvency and bankruptcy Code 2016 was enacted with the objective of consolidating and amending
the laws pertaining to reorganisation and resolution of insolvency of corporate persons, partnership
firms, and individuals in a timely manner, to maximise value of assets, promote entrepreneurship,
availability of credit, balance interests of stakeholders and establish an Insolvency and Bankruptcy Board
of India.
The Corporate Insolvency Resolution Process (CIRP) relates to the proceedings for insolvency and is a
mechanism for recovery for creditors which allows a creditor or the debtor to initiate CIRP in respect of
such a debtor. CIRP can be initiated by Section 7 (by financial creditor), Section 8 and 9 (by operational
creditor), Section 10 (by corporate applicant).
 Initiation by financial creditor: Financial creditor as per Section 5(7) of the Code means any person
to whom a financial debt is owed, including persons to whom the debt has been legally transferred.
This money could have been borrowed by the debtor as a loan or interest against credit e.g., Banks,
NBFCs and other financial institutions. The process to be followed by a financial creditor includes:
a. Filing an application before the Adjudicating Authority such as NCLT
b. The application should include record of default, name of interim resolution professional
proposed, any other information as required by the Board.
c. The Adjudicating Authority shall accept or reject the application within 14 days
d. If accepted, the insolvency proceedings shall be initiated, and order sent to financial creditor
and corporate debtor within 7 days
e. If rejected, notice to be sent to applicant to rectify the defect within 7 days.
 Initiation by operational creditors: Operational creditor as per Section 5(20) of the Code means
a person to whom operational debt is owed including such person to whom the debt is legally
transferred. Operational creditors may be employed with the company or are owed debt in lieu
of goods and services provided such as employees, vendors, etc. The process to be followed by an
operational creditor includes:
a. Sending a demand notice to the corporate debtor for repayment
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b. The corporate debtor to give proof of payment or existence of dispute against such sum owed,
within 10 days
c. In case the operational creditor does not receive any payment or notice of dispute within 10 days,
the corporate debtor may file an application with the Adjudicating Authority such as the NCLT to
initiate corporate insolvency resolution proceedings.
d. Application for initiating CIRP should include a copy of the invoice(s) demanding payment or
demand notice, an affidavit that no notice has been given by the corporate debtor relating to
dispute of unpaid debt, a copy of certificate from financial institutions maintaining accounts
of operational creditor confirming there is no payment of unpaid operational debt, copy of any
record confirming there is no payment of an unpaid operational debt by the corporate debtor,
and any other proof that may be specified.
e. The Adjudicating Authority shall either accept or reject the application within 14 days.
f. If rejected, a notice is to be sent to applicant to rectify the defect in application within 7 days of
receipt of such notice.
 Initiation by Corporate applicant: A corporate applicant may include a corporate debtor, a member
or partner of corporate debtor authorised to make an application, an individual who oversees
managing operations and resources of corporate debtor, a person who controls and supervises
the financial affairs of the corporate debtor, as per Section 5(5). The process to be followed by an
operational creditor includes:
a. Application to be filed by corporate debtor to initiate corporate insolvency proceedings, with the
Adjudicating Authority
b. Application for initiating CIRP to include books of accounts, resolution professional proposed as
interim resolution professional, special resolution passed by shareholders of corporate debtor
c. The Adjudicating Authority shall either accept or reject the application within 14 days.
d. If rejected, a notice is to be sent to applicant to rectify the defect in application within 7 days of
receipt of such notice.
The Insolvency and Bankruptcy Code 2016 provides for application of insolvency by startups,
individuals, partnership firms, limited liability partnerships and companies. When a corporate debtor
is admitted into the CIRP, the Board of Directors of the company is suspended, and management
is placed under an independent interim resolution professional. A moratorium is imposed which
prohibits continuation of any legal proceedings against the corporate debtor, transfer of its assets,
recovery of any property from it by an owner, suspension of supply of essential goods and services.
The moratorium does not extend to any key business contracts entered into by the corporate debtor.
The interim resolution professional verifies all claims made by creditors, forms a Committee of
Creditors (CoC) within 30 days, ensures that the CoC appoints a resolution professional within 7 days,
approves a resolution plan within 180 days from the commencement of CIRP by creditors.If
approved by NCLT, the approved plan becomes binding on the creditors, guarantors, and other
stakeholders. If the resolution plan in not approved, then NCLT is obliged to order liquidation, appoint
a liquidator to sell assets and share among stakeholders, as per Section 53 of the Code.
15.5 FAST TRACk PROCESS

The objective of the fast-track CIRP was to enhance the ease of doing business ranking of India. The fast-
track proceedings aim to eliminate the excess delay which is caused due to insolvency process of a small-
scale company. Under the Insolvency and Bankruptcy Code 2016, the resolution process must be
completed within 270 days. For small companies, the cases were less complex in nature and did not need
6
so many days. Section 55 to 58 were incorporated under the Code to resolve this. Under Section 55, the
application for fast-track process can be made by:
a. Small sized companies as defined in Companies Act, 2013
b. Start up companies other than a partnership firm
c. An unlisted company with total assets less than one crore rupees as reported in the books of the
preceding year
The application for fast-track insolvency resolution process can be filed by either a creditor or a
corporate debtor. The application needs to be accompanied by proof of existence of default along with
any other document required by the Insolvency and Bankruptcy Board.
The procedure for fast-track insolvency resolution is given below.
1. Appointment of interim resolution professional. This professional should not have any relation with
the corporate debtor.
2. Public announcement within 3 days of appointment of interim resolution professional, in English and
one vernacular language, mentioning last date for submission of claims. The expenses for this are
borne by the applicant, which can later be requested for reimbursement from the Committee of
Creditors.
3. Submission and verification of claims by operational and financial creditors, with proof, within
10 days, along with supporting documents. These need to be verified by the interim resolution
professional within 7 days of receipt
4. Forming Committee of Creditors
5. Meeting of Committee of Creditors, conducted by the interim resolution professional, within 7 days,
where either the interim resolution professional is appointed as Resolution professional or CoC
suggests another resolution professional.
6. Appointment of Registered Valuer within 7 days, to determine fair value and liquidation value of
the debtor’s assets. The registered valuer cannot be a relative of the resolution professional or a
related party or an auditor of the corporate debtor in the past 5 years, or a director of the insolvency
resolution entity
7. Draft an Information Memorandum and convey it to Committee of Creditors
8. Formation of resolution plan, under Section 35-A, specifying all sources of funds to be used for
payment of costs incurred and payment due to creditors
9. Approval of resolution plan by Committee of Creditors
10. Submission of approval of plan to the adjudicating authority. The adjudicating authority may pass
an order by approving or rejecting the plan.
The timeframe for completion of fast-track insolvency proceedings as per provisions of the Code is 90
days. This can be extended for a period of 45 days, but such an extension can be granted only one time.
15.6 VOLUNTARy LIQUIDATION PROCESS

Voluntary liquidation process is when a company chooses to undergo liquidation with the approval of
its members. This is usually done when the members of a company decide not to continue its business
operations
Voluntary Liquidation or Voluntary Winding up of a company in India is administered under Insolvency
and Bankruptcy Code, 2016 is applicable to ‘a corporate person’. Voluntary Liquidation is the process
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of liquidating the company with the approval of its members. A company usually goes for a voluntary
liquidation when its members decide not to continue its business operations. The main objective is to
discontinue the operations and distribute its assets while also paying its debts. The following steps need
to be followed when opting for voluntary liquidation process.
1. The directors of the company need to make an affidavit, in the form of a Declaration of Solvency
stating that the company has not committed any default of repayment of debt, that the company
is solvent and will be able to repay the debts from proceeds of the assets, and that the company is
not being liquidated to defraud any persons. The declaration will contain all debts of the corporate
person on that date, and be submitted along with audited financial statements, business operations
records for preceding two years, and valuation report of assets by a registered valuer. The declaration
of solvency should be filed in GNL-2 Form with the Registrar of Companies.
2. Identify and appoint an interim insolvency professional as liquidator. This professional must be
registered with the Insolvency and Bankruptcy Board of India (IBBI) to conduct such a process.
3. Convene Board Meeting to decide approval of voluntary liquidation process, appointment of
insolvency professional as liquidator
4. Fix day, date, time for general meeting and issue notice of EGM containing proposed resolution
5. Convene General Meeting of shareholders, within 4 weeks of declaration of solvency and pass
resolutions for liquidating the company voluntarily and for appointing liquidator. In case the
company has any creditors, the resolution should also be passed by creditors holding 2/3rd of the debt,
within 7 days of resolution. With the appointment of liquidator, all powers of board of directorscease
and are vested in the liquidator
6. File resolution with Registrar of Companies and IBBI by the liquidator
7. Liquidator takes charge of the company and begins process of realisation of assets and settling
dues.
8. The liquidator makes a public announcement within 5 days of being appointed, inviting stakeholders
to submit their claims within 30 days from the date of announcement of liquidation. This should be
printed in English and a local vernacular language. The liquidator verifies the claims within 30 days
from last date of receipt of claims and either rejects or accepts them. Then the liquidator prepares
a list of claimants with the amount of claim, whether they are secured or not, details of claimants/
stakeholders and proofs admitted or rejected.
9. A preliminary report is prepared and submitted to the company within 45 days of initiation of
liquidation proceedings. This report states the capital structure of the corporate person, estimates
of assets and liabilities as on date of liquidation, proposed action plan for conducting the liquidation
process, its time frame and costs.
10. A Bank Account is opened by the liquidator in the company’s name followed by the words ‘in
voluntary liquidation’. This account is meant to receive all payments which are due and to meet
the cost of liquidation. All payments above Rs. 5000 from this account are done by cheque or online
transaction only.
11. Liquidator needs to obtain a No Objection Letter from the Tax authorities, where the registered
office is located.
12. Liquidator recovers and realises the assets of the company in a specified timeframe.
13. The money realised from the proceeds is distributed to stakeholders within 6 months after deducting
the liquidation costs.
14. The liquidator has to complete the liquidation process within 12 months from liquidation
commencement date.
8
15. In case liquidation extends beyond 12 months, liquidator needs to conduct meeting of contributories
within 15 days from end of 12 months. He will present an annual report showing settlement of list of
stakeholders, details of unsold assets, distribution to stakeholders, and distribution of unsold assets
to stakeholders.
16. Final Report is to be prepared by the liquidator after the process is complete. This report should
contain audited accounts of liquidation, statement reflecting disposed assets, discharged debts, nil
litigation, statement of sale of assets, their mode of sale and shortfall if any.
17. Liquidator files report with Registrar and IBBI
18. Adjudicating Authority, NCLT passes order that company stands dissolved from date of order
19. The copy of the order shall be forwarded to the Registrar
20. Liquidator has to preserve records, registers, and books of accounts for a period of 8 years after
dissolution of company.
 When an organisation becomes insolvent, it implies that its liabilities have become more than the
value of its income and assets.
 Modern insolvency laws focus on remodeling the financial structure of debtors to enable continuation
of business instead of eliminating insolvent entities.
 Filing for bankruptcy permits an individual who faces overwhelming financial troubles to clear
their debts and begin anew.
 The insolvency Code is a consolidating act, which is complete in matters dealt therein.
 The Corporate Insolvency Resolution Process (CIRP) relates to the proceedings for insolvency and
is a mechanism for recovery for creditors which allows a creditor or the debtor to initiate CIRP in
respect of such a debtor.
 Operational creditors may be employed with the company or are owed debt in lieu of goods and
services provided such as employees, vendors, etc.
 When a corporate debtor is admitted into the CIRP, the Board of Directors of the company are
suspended, and management is placed under an independent interim resolution professional.
 The fast-track proceedings aim to eliminate the excess delay which is caused due to insolvency
process of a small-scale company.
 The application for fast-track insolvency resolution process can be filed by either a creditor or a
corporate debtor.
 Voluntary liquidation process is when a company chooses to undergo liquidation with the approval
of its members.
15.8 GLOSSARy
 Fraudulent: A practice that involves deception or criminal intent

 Insolvency: A situation when a company cannot pay debts when they are due
 Remodeling: An act that changes the structure or form of something
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 Voluntary: An act that is done out of one’s own free will

 Liquidation: The process of bringing a business to an end and distributing its assets to its claimants
15.9 CASE STUDy: LIQUIDATION AT ESSEX
Case Objective
This case study shows how Essex Retailer was looking for a way to shut the business down and repay
its creditors following a formal liquidation process.
The directors of Essex Retailer sat in the meeting room to discuss the company’s financial position.
The company was incorporated 5 years ago by 6 directors all of whom were family and friends. The
company traded from a retail premises in Indore.
The company traded at a small profit. Driving the business to maximise its potential was not the main
focus, it was to cover its overheads. The main reason for the company to become insolvent was due to the
change in the structure of a retail center in Indore as a new one opened in the area. This meant that many
of the local retail businesses relocated to the new shopping center and the footfall of customers was
reduced to a large extent.
The company employed a small number of part time and full-time staff. One of the directors was a full-
time shop manager. These staff had been employed since the company’s incorporation 5 years ago. The
company could not afford to make the staff redundant as a means of cutting costs.
During this time, the authorities had agreed to an informal ‘tax holiday’ with the company 4 years ago
and didn’t chase the company for tax returns from this point. The directors calculated that the tax owed
till date would be ` 4 Crore and the trade creditor arrears including the landlord of ` 70 lakhs. This
prompted the directors to seek professional insolvency advise.
When the advisors met the directors, the directors sought a way to shut down the business and repay the
creditors while avoiding a formal liquidation process. The business was failing, and the directors no
longer wished to carry on and make the creditors position worse. They felt that they could have a closing
down sale and raise as much cash as possible to offer a full and final settlement to the creditors and
staff alike. A solution letter outlining the options available to the company was issued to the directors
shortly after the meeting.
The directors contacted the advisors again after realising the company was not going to be able to avoid
terminal insolvency and appointed the advisors to liaise with and produce the full and final statement
of affairs for the company’s creditors.
A meeting of creditors was called, and licensed insolvency practitioners were appointed joint liquidators
by the company’s creditors shortly thereafter.
Source: Adapted from https://www.companyrescue.co.uk/rescue-stories/liquidation-case-study-essex-retailer-3632/
Questions
1. What steps were required to be followed as per the Code?
(Hint: Refer section on corporate insolvency resolution process)
2. Which objectives of the Code were being met in the case study above?
(Hint: Refer section on objectives of the Insolvency and Bankruptcy Code)
10
3. Which type of CIRP was followed in the case study? Explain

(Hint: Refer section on Corporate Insolvency Resolution Process)
4. Could the insolvency process have been fast tracked? Justify.
(Hint: Refer fast track process)
5. Which steps of the Voluntary liquidation process were common in the case study?
(Hint: Refer section on voluntary liquidation process)

1. What are the circumstances in which a company can become insolvent?
2. Describe the tests which can reveal whether a company is at risk of becoming insolvent.
3. Enumerate the objectives of the Code.
4. Mention any five terminologies important in the Code.
5. How can CIRP be initiated by the operational creditors?

1. A company can become insolvent in many circumstances. The few common reasons are: business
became outdated as compared to contemporary practices, rapid and over ambitious growth depletes
the company’s financial resources, fraudulent or illegal practices, unqualified management, etc.
Refer to Section Introduction
2. As a single person or small business, almost any of these can lead to insolvency. Two tests exist, which
can reveal whether a company is at risk of becoming insolvent or as already become insolvent.
a. Balance sheet test: It is verified through the balance sheet whether the liabilities are bigger
than the assets currently or are likely to be n the near future, considering expected as well as
unforeseen expenses.
b. Cash flow test: This test examines the company’s budget to identify if there is sufficient cash to
cover existing and forthcoming debts.
Refer to Section Introduction
3. The objectives of the Code are: better conflict management between creditors and debtors by
reducing information asymmetry, provide a justified balance between the interest of the stakeholders
of the company to avail credit and loss that a creditor may have to bear on account of default, to
consolidate and amend laws related to resolving insolvency, etc. Refer to Section Objectives of the
Insolvency and Bankruptcy Code
4. The Code comprises certain terminologies which need to be familiarised with, to understand this
subject better such as insolvency, bankruptcy, creditor, Creditors Voluntary Liquidation (CVL), etc.
Refer to Section Important Terminologies used in the Code
5. The Corporate Insolvency Resolution Process (CIRP) relates to the proceedings for insolvency and
is a mechanism for recovery for creditors which allows a creditor or the debtor to initiate CIRP in
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respect of such a debtor. CIRP can be initiated by Section 7 (by financial creditor), Section 8 and 9 (by
operational creditor), Section 10 (by corporate applicant). Refer to Section Corporate Insolvency
Resolution Process
 https://www.drishtiias.com/to-the-points/paper3/insolvency-and-bankruptcy-code-3
 https://www.trcconsulting.org/blog/voluntary-liquidation-under-ibc-how-it-works
 Discuss with your classmates how the insolvency process may be fast-tracked.
12
Overview of the insolvency and Bankruptcy Code,
2016
Unit – XV
insolvency and
Bankruptcy code, 2016
Quadrant 1 2. Watch the eLearning content on “L15: Overview of
the Insolvency and Bankruptcy Code, 2016”
eContent
3. Read the eLM on “Unit 15: Overview of the
Insolvency and Bankruptcy Code, 2016”
7. Read this open-source material on Insolvency and
Bankruptcy code
https://www.drishtiias.com/paper3/insolvency-and-
bankruptcy-code-3
Quadrant 2 1. Revise “L14: Overview of the Arbitration and
Conciliation Act, 1996” recording of the live Session
eTutorial
Insolvency and Bankruptcy Code, 2016”
Quadrant 3 4. Attempt to answer the questions for Practice #15 on
“Overview of the Insolvency and Bankruptcy Code,
eAssessmen
2016”
t
6. After the live session, repeat the formative assessment
for “L15 Overview of the Insolvency and Bankruptcy
Code, 2016” for self-assessment
Quadrant 4 8. Participate in collaborative learning by discussing the
topics on discussion forum and case studies.
Discussions
Introduction
• The Union Cabinet has approved the proposal to make amendments in

the Insolvency and Bankruptcy Code (IBC), 2016, through the
Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019.
The amendments aim to remove certain difficulties being faced during
insolvency resolution process to realise the objects of the code and to
further ease doing of business.
• Insolvency and Bankruptcy Code, 2016
• Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving
insolvency in companies and among individuals.
• Insolvency is a situation where individuals or companies are unable to repay their
outstanding debt.
• Bankruptcy, on the other hand, is a situation whereby a court of competent jurisdiction
has declared a person or other entity insolvent, having passed appropriate orders to
resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability
to pay off debts.
• The Government implemented the Insolvency and Bankruptcy Code (IBC) to consolidate
all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets
(NPA), a problem that has been pulling the Indian economy down for years.
• The Code is quite different from the earlier resolution systems as it shifts the
responsibility to the creditor to initiate the insolvency resolution process against the
corporate debtor.
• The recently proposed amendments aim to remove bottlenecks, streamline the corporate insolvency
resolution process, and protect the last mile funding in order to boost investment in financially
distressed sectors.
• Objectives of IBC
• To consolidate and amend all existing insolvency laws in India.
• To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
• To protect the interest of creditors including stakeholders in a company.
• To revive the company in a time-bound manner.
• To promote entrepreneurship.
• To get the necessary relief to the creditors and consequently increase the credit supply in the
economy.
• To work out a new and timely recovery procedure to be adopted by the banks, financial institutions
or individuals.
• To set up an Insolvency and Bankruptcy Board of India.
• Maximization of the value of assets of corporate persons.
• Salient features of the Insolvency and Bankruptcy Code, 2016
• Covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership
firms.
• Adjudicating authority:
• National Company Law Tribunal (NCLT) for companies and LLPs

• Debt Recovery Tribunal (DRT) for individuals and partnership firms
• Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory
oversight over insolvency professionals, insolvency professional agencies and
information utilities.
• Insolvency professionals handle the commercial aspects of insolvency resolution
process.
• Insolvency professional agencies develop professional standards,
code of ethics and be first level regulator for insolvency professionals
members leading to development of a competitive industry for such
professionals.
• Information utilities collect, collate, authenticate and disseminate
financial information to be used in insolvency, liquidation and
bankruptcy proceedings.
• Enabling provisions to deal with cross border insolvency.
Achievements of the IBC
• IBC is a vast improvement on the two earlier laws legislated to recover bad loans —
the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB).
• Speedier Resolution: Before IBC, resolution processes took an average of 4-6 years,
after the enactment of IBC, they came down to 317 days.
• Higher Recoveries: Recoveries are also higher: 43% after the IBC, against 22%
before it.
• Due to the institution of IBC, we have seen that many business entities are paying up
front before being declared insolvent. The success of the Act lies in the fact that many
cases have been resolved even before it was referred to NCLT.
• A steady increase in the number of admitted corporate insolvency resolution process
(CIRP) cases.
Challenges for IBC
• Lack of operational NCLT benches: Though the government had, in July
2019, announced setting up of 25 additional single and division benches of
NCLT at various places including Delhi, Jaipur, Kochi, Chandigarh, and
Amravati, most of these remain non-operational or partly operational on
account of lack of proper infrastructure or adequate support staff.
• low approval rate of resolution plans: According to the data from the
Insolvency and Bankruptcy Board of India (IBBI), of the 2,542 corporate
insolvency cases filed between December 1, 2016 and September 30, 2019,
about 156 have ended in approval of resolution plans — a mere 15%.
• High number of liquidations is a cause for major worry as it violates IBC’s
principal objective of resolving bankruptcy.
Key components of IBC in resolution process
1)Adjudicating authority
• NCLT and DRT are judicially constituted special bodies for adjudicating
resolution of matters related to insolvency and bankruptcy. NCLT appeals
lies to National Company Law Appellate Tribunal (NCLAT) and after
NCLAT, the party can appeal to the Supreme court of India. Similarly, for
DRT, appeals lie to the Debt Recovery Appellate Tribunal and then to the
supreme court of India. NCLT and DRT are separate tribunals. NCLT is for
companies and limited liability partnerships and DRT is for unlimited
liability partnerships and sole proprietors.
2)Committee of creditors
• Committee of Creditors (COC) is given under section 21 of the Insolvency
and Bankruptcy Code, 2016. COC consists only of financial creditors. The
role of the COC is to approve and disapprove the resolution plan proposed
by the resolution professional in Corporate Insolvency Resolution Process
(CIRP). The minimum vote required to approve the resolution plan is 75%
in a meeting of COC. Operational creditors are allowed to take part in the
meeting of the committee of creditors but they don’t have the voting rights.
3)Insolvency professionals
• Insolvency professionals are of two types one is interim insolvency
professional and the other is insolvency professionals. Interim insolvency
professionals are appointed by the adjudicating authority within 7 days from
the day the application has been admitted by the adjudicating authority and
insolvency professionals are appointed by a committee of creditors by a
majority vote of 75% in the first meeting of the COC.
4)Insolvency and Bankruptcy Board of India
• Insolvency and Bankruptcy Board of India (IBBI) came into existence on 1st of
Oct 2016 to regulate and counter various Insolvency and Bankruptcy cases
reported by financial and operational creditors, which especially involved banks in
India, home buyers and etc. The IBBI falls under the Insolvency and Bankruptcy
Code, 2016.
• IBBI plays the role of governing body for all such as insolvency resolution
process, insolvency professional agencies and information utilities. Approving the
list of resolution professionals is done by IBBI. It also enacts rules as well as
enforce them to resolve corporate insolvency, corporate liquidation, individual
insolvency and individual bankruptcy as per the insolvency and bankruptcy code,
2016. IBBI also takes part in making new amendments to the code.
Who can file application for corporate insolvency resolution
and how
• A) Financial creditor
• Under sec. 5(7) of IBC 2016, financial creditors are basically creditors who give
money to the promoters. Banks, home buyers, etc are considered as the
promotional creditors. The following steps are followed by the debtors in case of
any default.
1.The financial creditors can file an application before the adjudicating authority.
2.After furnishing the information, within 14 days the adjudicating authority has to
ascertain the default and if default has occurred then the application is admitted.
3.If default has not occurred then the application is rejected.
4.Adjudicating authority has to communicate the admission of the application to the
financial creditors within 7 days of the admission and after that corporate
insolvency resolution process takes place.
B) Operational creditor
• Under sec. 5(20) of IBC 2016, operational creditors are those creditors who do not give money or cash
to the promoters but they provide goods and services to the promoters. For example, there is a company
‘X’ who manufacture cars and there is a company ‘Y’ who provide machines to company ‘X’ for
manufacturing cars. Both companies make an agreement that once the machines are delivered to the
company ‘X’, then the company ‘X’ will transfer the money to the company ‘Y’ within 20 days. So, in
this case company ‘Y’ is the operational creditor and the company ‘X’ is the debtor. The process is as
follows:
1. The operational creditor sends demand notice to corporate debtor on occurrence of default.
2. Debtor intimates the creditor within 10 days of notice of repayment of the unpaid operational or notice
of existence of disputes.
3. If the payment of dispute is not paid within 10 days then file an application before the adjudicating
authority.
4. Then operational creditors proposed for resolution professional and within 14 days the adjudicating
authority has to admit or reject the application.
5. Commencement of insolvency resolution process.
c)Corporate debtor
• Under sec. 5(a) of IBC 2016, corporate debtors are the promoters who take
loans or money from financial creditors or take goods or services from
operational creditors as a debt. The process is as follows:
1.On commission of default, the corporate debtor files an application before
the adjudicating authority.
2.After furnishing of information the adjudicating authority passes an order
within 14 days to admit or reject the application.
3.If the application is admitted, then the commencement of insolvency
resolution process takes place whereas in case if the application gets
rejected, notice will be sent by the adjudicating authority to rectify the
defects.
• Moratorium
• After the commencement of corporate insolvency resolution the NCLT
orders a moratorium on the debtor’s operations for the period of 180
days. This is termed as a ‘calm period’ during which no judicial
proceedings for recovery, enforcement of security interest, sale or
transfer of assets, or termination of essential contracts can take place
against the debtor.
Achievements of Insolvency and Bankruptcy Code
• Ease of doing business – due to the faster insolvency resolution process.
• Deepening of bond markets to increase confidence among the creditors of getting the money back from the
debtors.
• Stronger institutional framework such as Insolvency and Bankruptcy board of India (IBBI), National
Company Law Tribunal (NCLT) etc.
• Reduction in Non Performing Assets (NPAs) is one of the biggest achievements of insolvency and bankruptcy
code,2016.
• The professionalisation of process with the help resolution professional.
• In 2 years of insolvency and bankruptcy code 2016, 1332 cases have been admitted before the NCLT and
4452 cases have been disposed of at pre-admission stage. This ultimately helped recover and settle around Rs.
2.2 lakh crore.
• 66 cases resolved after adjudication and realisation of creditors around Rs 80,000 crore in resolution cases.
• Helped to resolve and cure 12 big companies like Electrosteel Steels, Bhushan Steel, Monnet Ispat &
Energy, Amtek Auto and few companies have been referred for liquidation because nobody came to buy
them and a total 260 cases have been ordered for liquidation.
IMPORTANT
TERMINOLOGY
• 1. Corporate Person means (a) a company as defined under section 2(20) of
the Companies Act, 2013;
• (b) a Limited Liability Partnership as defined in 2(1)(n) of Limited Liability
Act, 2008; or, (c) any other person incorporated with limited liability under
any law for the time being in force but shall not include any financial
service provider. [ Section 3(7)]
• 2. Corporate Debtor means a corporate person who owes a debt to any
person. [ Section 3(8)]
• 3. Creditor means any person to whom a debt is owed and includes a
financial creditor, an operational creditor, a secured creditor, an unsecured
creditor and a decree holder. [Section 3(10)]
• 4. Debt means a liability or obligation in respect of a claim which is due
from any person and includes a financial debt and operational debt. [Section
3(11)]
• 5. Claim means a right to payment or right to remedy for breach of contract
if such breach gives rise to a right to payment whether or not such right is
reduced to judgment, fixed, matured, unmatured, disputed, undisputed,
legal, equitable, secured or unsecured. [Section 3(6)]
• 6. Default means non-payment of debt when whole or any part or instalment
of the amount of debt has become due and payable and is not repaid by the
debtor or the corporate debtor, as the case may be. [Section 3(12)]
• 7. Financial information, in relation to a person, means one or more of the
following categories of information, namely:—
• (a) records of the debt of the person;
• (b) records of liabilities when the person is solvent;
• (c) records of assets of person over which security interest has been created;
(d) records, if any, of instances of default by the person against any debt;
• (e) records of the balance sheet and cash-flow statements of the person; and
(f) such other information as may be specified. [ Section 3(13)]
• 8. A person includes:- (a) an individual (b) a Hindu Undivided Family
(c) a company (d) a trust (e) a partnership (f) A limited liability
partnership, and (g) any other entity established under a Statute. And
includes a person resident outside India [Section 3(23)]
• 9. Secured creditor means a creditor in favour of whom security
interest is created; [Section 3(30)]
• 10. Security Interest means right, title or interest or a claim to
property, created in favour of, or provided for a secured creditor by a
transaction which secures payment or performance of an obligation
and includes mortgage, charge, hypothecation, assignment and
encumbrance or any other agreement or arrangement securing
payment or performance of any obligation of any person.[Section
3(31)]
• 11. A transaction includes an agreement or arrangement in writing for transfer of assets,
or funds, goods or services, from or to the corporate debtor. [ Section 3(33)]
• 12. Transfer includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other
form of transfer of right, title, possession or lien. In case of property- transfer of property
means transfer of any property. [ Section 3(34)]
• 13. Transfer of property means transfer of any property and includes a transfer of any
interest in the property and creation of any charge upon such property; [ Section 3(35)]
• 14. Adjudicating Authority, for the purposes of this Part II (Insolvency Resolution and
Liquidation for corporate persons), means National Company Law Tribunal constituted
under section 408 of the Companies Act, 2013. [ Section 5(1)]
• https://tnkpsc.com/image/Insolvency_bankruptcy_code_2016.pdf
• https://taxguru.in/corporate-law/fast-track-corporate-insolvency-resolution-process-ibc-
2016.html
Fast track corporate
insolvency
• Introduction: The Ministry of Corporate Affairs vide notification dated
14th June, 2017 notified the provisions of Fast Track Corporate
Insolvency Resolution Process under the Insolvency and Bankruptcy
Code, 2016 (the “Code”) which talks about insolvency resolution of a
company on a speedy basis.
• Eligibility:
• a small company as defined under clause (85) of section 2 of Companies Act, 2013;
• a startup (other than the partnership firm) as defined by Ministry of Commerce and Industry;
• an unlisted company with total assets, as reported in the financial statement of the immediately
preceding financial year, not exceeding rupees one crore;
• a corporate debtor with assets and income below a level as may be notified by the Central
Government;
• a corporate debtor with such class of creditors or such amount of debt as may be notified by the
Central Government;
• such other category of corporate persons as may be notified by the Central Government.
Time Period:
Fast Track CIRP is completed within 90 days as compared to 180 days in the standard
procedure. Although, extension can be granted of further 45 days by the National Company
Law Tribunal (NCLT) by a vote of 75% of Committee of Creditors.
Eligibility of Resolution Professional
The Code provides for Insolvency Professionals (IP) to act as intermediary in
the insolvency resolution process and they are considered to be a class of
regulated but private professionals having minimum standards of professional
and ethical conduct. Section 3(19) of the Code defines an “insolvency
professional” as a person enrolled under section 206 with an insolvency
professional agency as its member and registered with the Board as an
insolvency professional under section 207. “Insolvency Professional Entity”
means an entity recognised as such under the Insolvency and Bankruptcy
Board of India (Insolvency Professionals) Regulations, 2016.
• An IP is eligible to be appointed as Resolution Professional when: IP or all
partners and directors of the insolvency professional entity of which he is a
partner or director are independent of the corporate debtor; IP or the
insolvency professional entity of which he is a partner or director, is not
under a restraint order of the Board. IP makes disclosures at the time of his
appointment and thereafter in accordance with the Code of Conduct. IP is
not a director or a partner, or any other partner or director of such
insolvency professional entity represents any other stakeholders in the same
fast track process.
Approval of Resolution Plan
• A resolution applicant shall submit resolution plan prepared in accordance with the Code and these
regulations to the Resolution Professional.
• The Resolution Professional shall submit to the committee all resolution plans which comply with
the requirements of the Code and regulations made thereunder.
• The committee may approve any resolution plan with such modifications as it deems fit.
• The Resolution Professional shall submit the resolution plan approved by the committee to the
NCLT at least fifteen days before the expiry of the maximum period permitted.
• The Resolution Professional shall send a copy of the order of the NCLT approving or rejecting a
resolution plan to the participants and the resolution applicant. No proceedings shall be initiated
against the Resolution Professional, as the case may be, for any actions of the corporate debtor,
prior to the fast track commencement date. A person in charge of the management or control of the
business and operations of the corporate debtor after a resolution plan is approved by the
adjudicating authority, may make an application to the adjudicating authority for an order seeking
the assistance of the local district administration in implementing the terms of a resolution plan.
Voluntary liquidation process
• Voluntary liquidation under IBC, 2016 allows corporate entities to
liquidate themselves at will. Voluntary Liquidation provided under
IBC, 2016, is a quick, efficient, a prescribed timely process which
ensures that the assets of the Corporate Persons does not lose its
value and involves speedy realization to the stakeholders.
• Laws Governing Voluntary Liquidation Of A Company
• Section 255 in conjunction with Schedule XI of Insolvency and Bankruptcy
Code, 2016 eliminates the need for Section 304 to 325 of The Companies
Act, 2013. As a result, the Insolvency and Bankruptcy Board of India
(Voluntary Liquidation Process) Regulations, 2017 were notified on 1st
April 2017. Finally, Section 59 under Chapter V in IBC covers “Voluntary
Liquidation procedures for Corporate Persons”.
• This process is available to companies that have not committed any default
and want to liquidate themselves. The Voluntary Liquidation provided under
the Insolvency and Bankruptcy Code, 2016, is a quick, efficient, a
prescribed timely process which ensures that the assets of the Corporate
Persons does not lose its value and involves speedy realization to the
stakeholders.
• What Is Voluntary Liquidation Under IBC, 2016
• The Code mandates 3 (three) major conditions for a Corporate Person which
intends to liquidate itself voluntarily:
• The Corporate Person has not committed any default
• Declaration from majority of Directors verified by an Affidavit that the Corporate
Person has no debts or will be able to pay its debts in full from the proceeds of
assets to be sold in the liquidation process and lastly,
• That the Corporate Person is not being liquidated to defraud any person.
• Within 4 (four) weeks of the declaration specified in Point No. b hereinabove,
majority of the Directors or Partners, as the case may be, shall pass a special
resolution (SR) liquidating the Corporate Person and appoint an Insolvency
Professional to act as the Liquidator.
• Where the Corporate Person owes any debt to any person, creditors representing
two-third (2/3rd) in value of the debts of the Corporate Person shall approve the
special resolution (SR) passed by the Directors, Partners for liquidation of the
Corporate Person.
• Voluntary Liquidation Process & Steps In A Nutshell
• Public Announcement by the Liquidation calling claims from creditors of the Corporate
Persons
• Collation, Verification of the claims and thereby preparation of the list of Stakeholders by
the Liquidator
• Liquidator to value and sell the assets of the Corporate Persons
• Liquidator to realize uncalled capital or unpaid capital contribution from any contributory
to Corporate Person
• Liquidator to open a bank account in the name of Corporate Person followed by “in
voluntary liquidation” for receipt of all monies due to the Corporate Person.
• Liquidator to distribute the proceeds from realization within 30 days from the receipt of
the amount to the Stakeholders
• Liquidator to deduct the Liquidation Cost before distribution of the proceeds to
Stakeholders
• An asset that cannot be sold readily due to its peculiar nature shall be distributed amongst
the Stakeholders
• Various Reporting to National Company Law Tribunal by the
Liquidator as per the prescribed timelines provided under the
Liquidation Regulations: Preliminary Report
• List of Stakeholders
• Annual Status Report
• Minutes of consultations with Stakeholder
• Maintenance of Registers and Books of Accounts
• Maintenance of Receipts and Payments Account
• Final Report
• Liquidator to endeavor completion of Liquidation Process within 270
days from the Liquidation Commencement Date
• Once the affairs of the Corporate Person have been completely wound
up and its assets are fully liquidated, then the Liquidator shall make an
application along with the Final Report to the National Company Law
Tribunal for dissolution of the Corporate Person.
• When the Hon’ble NCLT passes an order for Dissolution, the
Corporate Person shall stand dissolved.
B.COM – BANKING AND INSURANCE
18 UBI 308 - BUSINESS LAW
K1 - LEVEL
UNIT – 1
SECTION - A
MULTIPLE CHOICE QUESTIONS – K1 LEVEL
1. Law of contract in India is contained in

a) The Indian Contract Act 1872
b) The Indian Contract Act 1972
c) The Indian Contract Act 1930
d) The Indian Contract Act 1932
2. The Indian Contract Act applies to :
a) Whole of Indian expect the State of Jammu and Kashmir
b) Whole of India including the State of Jammu and Kashmir.
c) Whole of India except Goa, Daman, Diu
d) Whole of India including Goa, Daman, Diu
3. The Indian Contract Act came into force on
a) 1 st September 1972
b) 1 st July 1932
c) 1 st September 1872
d) 1 st July 1930
4. A jus in personam means a right against
a) A specific person
b) The public at large
c) A specific thing
d) None of these
5. An offer is
a) a suggestion by one person to another
b) expression of willingness by a person to another to do something in order to obtain
assent of the other person
c) communication of willingness of a person to another person
d) an intention of a person to do or to abstain from doing an act
6. A proposal when accepted becomes a
a) Promise
b) Contract
c) Offer
d) Acceptance
7. Cross offers by two parties to each other
a) amount to acceptance of one’s offer by the other
b) do not amount to acceptance of one’s offer by the other
c) amount to an agreement
d) amount to a contract
a) General offer
b) Cross offer
c) Counter offer
d) Special offer
8. When a proposal is accepted, it becomes
a) promise
b) contract
c) Legal promise
d) tentative agreement
9. A person to whom proposal is made is called
a) promisee
b) acceptor
c) offeree
d) promisor
10. A promise is
a) a valid offer
b) a contract
c) an accepted offer
d) a valid agreement
UNIT – II
1. Consideration means
a) doing or abstaining from doing something at the desire of the promisor
b) doing or abstaining from doing something voluntarily
c) doing or abstaining from doing something which he promisee is already under a duty to do
d) all of the above
2. Consideration is
a) something in return
b) something of value
c) something invaluable
d) doing something voluntarily
3. An agreement made without consideration is
a) valid
b) voidable
c) illegal
d) void
4. Consideration
a) need not be adequate
b) need not be real
c) need not have monetary value
d) need not be certain
5. Which of the following persons do not fall under the category of persons of unsound mind?
a) Alien b) Idiot c) Lunatics d) Drunken persons
6. Minor’s agreement is
a)void from beginning b) voidable c) void when court declares it void d)
valid
7. Consent means parties agreeing on
a) the terms of contract b) something about a contract c) the something in the
same sense d) the method of performance of contract
8. Free consent means
a) parties agreeing on the same thing in the same sense
b) parties agree to do something
c) parties willfully agree on the same thing in the same sense
d) either a) or b)
9. Undue influence involves
a) use of physical pressure
b) use of position to obtain an unfair advantage over the other
c) none of these
d) a threat.
10. Fraud means
a) a false representation of fact made innocently with a view to deceive the other party
b) a false representation of fact made willfully without any intention to receive the other party
c) a false representation of fact made willfully with a view to deceive the other party
d) none of these.
UNIT- III - MULTIPLE CHOICE QUESTIONS – K1 LEVEL
1. A contract based on happening or non-happening of some event which is collateral to contract

is called
a) Wagering contract b) Contingent contract c) Uncertain contract
d) Illegal contract
2. A contingent contract may be ____________
a) Void from beginning b) Void subsequently when event becomes impossible to
happen c) Voidable d) Unlawful
3. Performance of contract means:
a) Fulfilling all the obligations by a party
b) Fulfilling all the obligations by the promisor
c) Performing all the promises and fulfilling all the obligations by all the parties
d) Both a) and b)
4. When a party to a contract transfers his contractual rights to another, it is :
a) rescission of contract b) discharge of contract c) waiver of contract
d) assignment of contract
5. When a valid tender of goods is not accepted, it is called
a) actual performance b) attempted performance c) no performance
d) discharge of contract
6. Quantum meruit means:
a)A non-graduations promise b) As much as is earned
c) An implied promise d) As much as is paid
7. A contract is discharged:
a) When all the parties perform their promises.
b) When performance of contract becomes impossible
c) When one party makes a breach of contract
d) In all the above cases
8. A contract is discharged by remission:
a) When a party waives all his rights under a contract
b) When a party cancels an existing contract
c) When a party accepts lesser performance in discharge of a whole obligation
d) When a party makes novation of a contract.
9. Anticipatory breach of a contract takes place:
a) During the performance of the contract b) At the time when the performance is due
c) Before the performance is due d) At the time when the contract is entered
into.
10. The damages which can be claimed only when the special circumstances are communicated to
the promisor are called:
a) Ordinary damages b) Exemplary damages c) Special damages d) Nominal
damages
UNIT – IV
SECTION – C
1. The person who gives the indemnity is known as

a) Indemnity-holder b) Surety c) Indemnifier d) Principal debtor
2. A contract of Indemnity is a
a) Contingent contract b) Wagering contract c) Quasi-contract d)Void agreement
3. A contract to perform the promise or discharge the liability of a third person is case of
his default is called _______________
a) Guarantee b) Indemnity c) Agency d) consideration
4. In a contract of guarantee, a person who promises to discharge another’s liability, is known as
a) Principal debtor b) Creditor c) Surety d) Indemnifier
5. The right of subrogation in a contract of guarantee is available to the:
a) Creditor b) Principal debtor c) Surety d) Indemnifier
6. The delivery of goods by one person to another for some specific purpose is known as:
a) Bailment b) Hypothecation c) Pledge d) Mortgage
7. A bailee has:
a) a right of particular lien over the goods bailed.
b) a right of general lien
c) a right of both particular and general lien
d) no lien at all over the goods bailed
8. A gratuitous bailment is one which is :
a) supported by consideration b) not supported by consideration
c) not enforceable by law d) void
9. The delivery of goods by one person to another as security for the repayment of a debt, is
known as:
a) Bailment b) Hypothecation c) Pledge d) Mortgage
10. The position of the finder of lost goods is that of a :
a) Bailor b) Bailee c) Surety d) Principal debtor
UNIT- V - MULTIPLE CHOICE QUESTIONS – K1 LEVEL
1. A person appointed to contract on behalf of another person, is known as:

a) Principal b) Agent c) Servant d) Contractor
2. A mercantile agent to whom the possession of the goods is given for the purpose of
selling the same, is known as:
a) Broker b) Factor c) Commission agent d) Insurance agent
3. A person appointed by the original agent to act in the business of agency, but under
the control of original agent, is known as:
a) Agent b) Del credere agent c) Substituted agent d) Sub-agent
4. Where one person allows another person to assume an appearance of authority to act
on his behalf, such a position is known as
a) Express authority b) Implied authority c) Ostensible authority d) None of
these
5. Where the agent contracts for a principal who is not competent to contract, in such a
case, the agent is
a) Personally liable b) Not personally liable c) Exceeding authority
d) None of these
6. Sale of goods Act was passed in the year ________.
a)1930 b)1935 c)1932 d)1872
7. The sale of goods act extends to
a) Whole of India
b) Whole of India except Jammu and Kashmir
c) Whole of India except /Jammu and Kashmir and Dadra and Nagar Haveli
d) Whole of India except Lakshadweep
8. A contract of sale of contingent goods is
a) Sale b) Agreement to sell c) Unlawful d) All of the above
9. Agreement to sell is
a) Executed contract b) Executory contract c) Sale d) Implied contract
10. A contract of sale of goods includes
a) Sale only b) Agreement to sell only c) Both a) and b) d) Barter
K2 – LEVEL
UNIT – I - SHORT ANSWERS – K2 LEVEL
1. Define Contract.
An agreement which creates legal obligations is a contract. The obligation is an undertaking
to do or abstain from doing some definite act or acts. Section 2(h) of the Indian Contract Act
1872 defines a contract as “ An agreement enforceable by law is a contract”.
2. What is mean by express contract?
Sec 9 Provides that “ In so far as the proposal or acceptance of any promise is made in words
the promise is said to be implied”. Such contract comes into existence on account of act or
conduct of the parties.
3. Write the difference between uni lateral and bi lateral contract?
In certain contracts one party has to fulfill his obligations, whereas the other party has already
performed his obligations. Such a contract is called ‘unilateral’ or ‘one sided contract’ or
‘contract with executed consideration’. Bilateral contract is one in which the obligation on the
part of both the parties to the contract are outstanding at the time of formation of the contract.
It also known as contracts with executor consideration.
4. What is mean by implied offer?
An offer which is expressed by conduct is called implied offer. In simple words, it is inferred
from the conduct of the person or the circumstances of the particular case.
5. What is mean by cross offer?
When two person make identical offers, that is, similar in terms, conditions etc, to each other
without having knowledge of each other’s offer, are known as cross offers. Such offers do not
constitute a contract even though both the parties intend to do or not to do the same thing. It
also important to note that one’s offer cannot be treated as acceptance of other’s offer.
6. What is mean by counter offer?
When an offer is accepted on the terms and conditions other than set out by the offerer, it not
an acceptance but a counter offer. A counter offer is, in fact, not only a rejection of the
original offer but is also a new offer by the original offeree.
7. Write the difference between general offer and specific offer?
An offer which can be accepted by anyone is called general offer. When an offer is made to a
definite person, it is known as specific offer.
8. Define acceptance.
Sec. 2 (b) defines acceptance as “When one person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted. A proposal, when accepted becomes a
promise.
9. Who can acceptance the offer?
An offer can be accepted only by the person or persons for whom the offer is intended. An
offer made to a particular person can only be accepted by him because he is the only person
intended to accept. But, an offer made to the world at large can be accepted by any person
whatsoever. To constitute a valid acceptance the assent must be communicated to the offeror.
10. What is mean by revocation of acceptance?
“An acceptance may be revoked at any time before the communication of the acceptance is
complete as against the acceptor but not afterwards” (Sec. 5). In fact, revocation of
acceptance amounts to withdrawal of the acceptance to a proposal by the offeree himself.
UNIT – II - SHORT ANSWERS - K2 LEVEL

1. Define consideration.
In Currie Vs Misa (1875), consideration was defined as “a valuable consideration in the sense
of the law may consist either in some right, interest, profit or benefit accruing to one party, or
some forbearance, detriment, loss or responsibility given suffered or undertaken by the other”.
2. What do you mean by capacity of contract?
The term capacity to contract is defined in sec 11 of the Indian contract which reads as under:
“Every person is competent to contract who is of the age of the majority according to the law
to which he is subject , and who is of sound.
3. What do you mean by alien enemies?
All persons other than Indian citizens are aliens. An alien is a person who is a foreigner to the
land. He may be either an ‘alien friend’ or an ‘alien enemy. ‘Alien friend can contract but an
alien enemy can’t contract.
4. What do you mean by ‘coercion’?
Coercion means forcibly compelling a person to enter into a contact. Coercion is threat or
force used by one party against the other for making him to enter into an agreement.
5. Define free consent.
Free consent defined in section 14 reads as follows: consent is said to be free when it is not
caused by coercion, undue influence, fraud, misrepresentation and mistake.
6. What do you mean by Undue influence?
The term ‘undue influence’ means the unfair use of one’s superior power in order to obtain
the consent of a person who is in a weaker position.
7. What do you mean by “Uberrimae Fidei” contracts?
Uberrimaefidei contracts are contracts where law imposes upon the parties the duty of making
a full disclosure upon the parties the duty of making a full disclosure of all material facts. In
such contracts, if one of the parties has any information concerning the subject matter of the
transaction which is likely to affect the willingness of the other party to enter into the
transaction, he is bound to disclose the information.
8. Write the difference between bilateral and unilateral mistake?
Mistakes may be defined as an erroneous belief concerning something. Bilateral mistake may
be defined as a mistake in which both the parties to an agreement are confused about the facts
which are essential to the agreement. Unilateral mistake may be defined as a mistake in which
only one of the parties to an agreement is confused about the facts which are essential to the
agreement.
9. What do you mean by ‘Misrepresentation’?
A representation which is false or misleading is known as misrepresentation. A false
representation may be made by a person either (a) innocently or (b) intentionally. (i.e
willfully or deliberately)
10. Who are all the persons disqualified by law for entering into a contract?
Alien enemies, Foreign sovereigns and ambassadors, Convicts, Insolvents, Married women,
Professional persons, Corporations and companies.
UNIT – III - SHORT ANSWERS - K2 LEVEL
1. Define contingent contract.

Section 31 of the Indian Contract Act defines a contingent contract as “A contingent contract
is a contract to do or not to do something, if some event collateral to such contract does or
does not happen”. Thus it is a contract the performance of which is dependent upon the
happening or non-happening of uncertain event collateral to such contract.
2. Write any two differences between contingent contract and wagering agreement?
Contingent contract is perfectly valid and can be enforced in a court of law where as wagering
agreement is absolutely void and cannot be enforced in a court of law. A contingent contractis
not of a wagering nature. A wagering agreement is essentially of a contingent nature.
3. What do you mean by Quasi-Contract?
Quasi-contract is a kind of contract by which one party is bound to pay money in
consideration of something done or suffered by the other party. These contracts are based on
the maxim. i.e. no man must grow rich out of another person’s cost.
4. Name the persons who should perform the contract.
The promisor himself
The Agent
The legal representative
The third person
The joint promisors
5. What do you mean by attempted performance?
Attempted performance is also known as offer to performance or tender. A contract need not
be actually performed. A valid offer of performance is considered to be performance itself.
Sometimes the party who is bound to perform a promise under a contract is ready and willing
to perform it at the proper time and place. Thus willingness of the pary is known as
“Attempted performance” or “Offer to perform” or “Tender”.
6. What is mean by performance of contract?
Performance of contract means fulfilling of their respective legal obligations created under
the contract by both the promisor and promise.
7. Name the two modes of performance of contract.
The contracts may be performed by anyone of these modes.
Ø Actual performance
Ø Attempted performance or Tender or Offer to perform
8. Define reciprocal promises?
Under Section 2(f), “Promises which form the consideration or a part of consideration for
each other are called reciprocal promises”.
9. List out the various modes of discharge of contract.
Following are the various modes in which a contract may be discharged
By Performance
By Agreement
By Impossibility of performance
By Lapse of time
By Operation of Law
By Breach of Contract
10. Name the various remedial methods followed for breach of contract.
In case of breach, the aggrieved or injured party has one or more of the following remedies:
Suit for Rescission
Suit for Damages
Suit for Quantum Meruit
Suit for Specific performance
Suit for Injunction
UNIT – IV - SHORT ANSWERS - K2 LEVEL

1. What is Contract of Indemnity?
“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
indeminity”.
2. Name the parties in contract of Indemnity.
A contract of Indemnity has two parties, viz., the promisor or the indemnifier and the promise
or the indemnified or the indemnity – holder. A person who promises to make good the loss,
that is, the promisor is called the indemnifier and the person whose loss is to be made good,
that is , the promise is called the indemnity – holder
3. Name the parties in contract of Guarantee.
In contract of guarantee there are three parties – the principal debtor, the creditor and the
surety.
Principal debtor – The person for whom the guarantee is given is called the principal debtor.
Surety - The person who gives the guarantee is called the surety.
Creditor - The person to whom the guarantee is given is called the creditor.
4. Name the two types of Guarantee.
Mainly there are two types of contract of guarantee.
They are i) Simple or Specific guarantee and ii) Continuing guarantee
Simple guarantee is one in which guarantee is given for a single specific debt or transaction. It
comes to an end as soon as the liability under that transaction ends. A guarantee which
extends to a series of transactions is called a continuing guarantee.
5. What do you mean by Quiatimet action?
The surety has a right at any time after the guaranteed debt has become due and before he is
called upon to pay, to require the creditor to sue for and recover the guaranteed debt. This is
called the right to quiatimet action.
6. Write the difference between bailor and bailee?
The person delivering the goods is called the Bailor. The person to whom they are delivered is
called the Bailee. The transaction is called Bailment.
7. What do you mean by Gratuitous Bailment?
On the basis of reward, bailment is classified into two:
Gratuitous Bailment, Non-gratuitous Bailment.
Gratuitous bailment is one in which neither the bailor nor the bailee is entitled to any
remuneration, for example, A gives his book to B for reading.
8. List out any four duties of Bailor.
To disclose known defects
To bear expenses (gratuitous)
To bear extra – ordinary expenses ( Non – gratuitous)
To receive back the goods
To indemnify the bailee
9. What do you mean by Pledge or Pawn?
Pledge or pawn is a special kind of bailment where a thing is delivered as security for the
repayment of a debt. “The bailment of goods as security for payment of a debt or for
performance of a promise, is called pledge. The bailor in this case is called the pawnor. The
bailee is called the pawnee”.
10. Write the difference between pledge and bailment?
In case of default, the pawnee may retain the goods. He can sell the goods. The bailee can
retain the goods bailed but he cannot sell it. pawnee has no right to use the goods but bailee
may use the goods bailed as per the terms of the contract.
UNIT- V - SHORT ANSWERS - K2 LEVEL
1. Define agent.
Section 182 of the Act defines that “an agent is a person employed to do any act for another,
or to represent another in dealings with third person. The person for whom such act is done,
or who is so represented, is called the principal.
2. Who can appoint an Agent? or Who may be a Principal?
According to Section 183, “Any person who is the age of majority according to the law to
which he is subject, and who is of sound mind, may employ an agent”. Thus , it is essential
that a principal must have contractual capacity. A minor or a person of unsound mind cannot
be a principal. The agent is employed mainly to bring about a contractual relationship
between the principal and third person.
3. What are the essentials to create an agency?
The principal must be competent to enter into a valid contract
Any person may become an agent.
There should be an agreement between the principal and the agent.
The agent must act in representative capacity.
4. List out aspects in creation of agency.
Agency by express agreement
Agency by implied agreement
Agency by estoppels
Agency by holding out
Agency by necessity
Agency by operation of law
Agency by ratification
5. Write the classification of agent according to the extent of their authority?
General agent – general agent is one who represents the principal in all matters concerning a
particular business.
Special agent – special agent is one who is appointed for a particular purpose. He has limited
authority.
Universal agent – a universal agent is one who is authorized to transact all the business of his
principal of every kind and to do all the acts which the principal can lawfully do and can
delegate.
6. Write the classification of agent according to the nature of work performed?
On the basis of the nature of work performed the agent is classified into
Mercantile agent and
Non-mercantile agents.
7. What do you mean by del credere agent?
He is an agent who guarantees the solvency of the buyer. He occupies the position of a
guarantor as well as an agent. a del credere agent is not dropped out after establishing the link
between the principal and the third person. If the other party fails to pay the price or otherwise
causes damage to the principal, the del credere agent must pay compensation to the principal.
8. Write about contract of Sale of goods act 1930.
The law relating to the sale of goods or movables in India is contained in the Sale of Goods
Act 1930. Prior to the enactment of this act, the law relating to sale of goods was embodied in
the Indian Contract Act 1872. But the provision were found inadequate to meet the
complexities of growing mercantile transaction, the Sale of goods act 1930 took birth.
9. Write the essentials of a contract of sale?
Existence of two persons – buyer and seller
Goods – the subject matter of contract
Price – the consideration for sale of goods.
Transfer of property (ownership)
Contracts – all essential must be present.
10. Write the major classification of goods?
Goods which from the subject matter of a contract of sale may be divided as:
i) Existing Goods – Specific Goods
- Ascertained Goods
- Unascertained Goods
ii) Future Goods
iii) Contingent Goods
K3- LEVEL
UNIT – I
SECTION – B
ANSWER THE FOLLOWING QUESTIONS – K3 LEVEL
1. Write the short notes on Indian Contract Act 1872?

2. What are the sources of Commercial law in India?
3. Explain the classification of contract according to English law.
4. “An agreement enforceable by law is a contract” Discuss the definition.
5. Distinguish between void and voidable contract.
6. Explain the different types of an offer.
7. What are the circumstances in which an offer is terminated?
8. What is mean by communication of offer? Give the example for various modes.
9. “An acceptance to be valid must be communicated”. – Explain.
10. Explain the modes of revocation of offer.
UNIT – II
SECTION – B
1. ”Consideration may be past, present or future” Explain with examples.

2. “Insufficiency of consideration is immaterial; but an agreement without consideration
is void” – Comment.
3. Consider the doctrine of privity of contract and give an account of the exceptions to
the doctrine.
4. What do you understand by capacity to contract?
5. What are the persons incompetent to make a contract by status?
6. State the law relating to the competence of the parties giving suitable examples.
7. Define consent. When is consent said to be free?
8. Define the term ‘coercion’ as used in Indian Contract Act. What are the essentials for
coercion?
9. Define fraud. Differentiate fraud and misrepresentation.
10. Discuss the law relating to the effect of mistake on contract.
UNIT – III -ANSWER THE FOLLOWING QUESTIONS – K3 LEVEL
1. What do you understand by a contingent contract? What are the characteristics of a

contingent contract?
2. Distinguish between contingent contract and a wagering agreement.
3. Explain the requisites of a valid tender.
4. Explain about the modes of performance of contract.
5. State the difference between contract and quasi contract.
6. Write short note on Breach of contract.
7. What are the circumstances under which a contract may be discharged by supervening
impossibility?
8. Explain the different ways in which a contract may be discharged by mutual consent.
9. What do you understand by impossibility of performance?
10. Discuss the effect of supervening impossibility on the performance of contract.
UNIT – IV
SECTION – B
1. Define a contract of indemnity. What are the rights of an indemnity holder when
sued?
2. Write about the essentials of a valid contract of indemnity.
3. Define a contract of Guarantee. What are the essentials of a contract of guarantee?
4. What are the various kinds of a guarantee?
5. Distinguish between indemnity and guarantee.
6. Define a contract of bailment. What are its essentials?
7. Write the distinction between gratuitous and non-gratuitous bailment.
8. Write about various kinds of bailment on the basis of benefit and reward.
9. Define pledge. What are the essentials of valid pledge?
10. Write the similarities and differences between pledge and bailment.
UNIT – V
SECTION – B
1. Define agent. What are the rules or principles of agency?

2. What are the essential features of agency?
3. Classify and explain types of agents.
4. Distinguish between sub-agent and substituted agent.
5. Explain about the duties of the principal towards his agent.
6. Explain about the rights of the principal..
7. Explain the extent of the authority of an agent?
8. When can agent be held personally liable for the acts done by him on behalf of the
principal?
9. Define contract of sale. What are its essentials?
10. What the different types of goods used in a contact of sale?
K4, K5 LEVEL
UNIT – I
SECTION – C
ANSWER THE FOLLOWING QUESTIONS – K4, K5 LEVEL
1. Discuss the essential elements of a valid contract.

2. “All contracts are agreements, but all agreements are not contracts” – Discuss.
3. Explain about the various classification of contract.
4. Explain the legal rules regarding a valid offer.
5. Define acceptance, and state the legal rules governing valid acceptance.
UNIT – II
SECTION – C
1. Define Consideration. Critically discuss the essential of valid consideration.

2. “A stranger to a consideration cannot sue.” - Are there any exceptions to this rule?
3. Discuss the provisions of law relating to contracts by minors.
4. Explain the persons disqualified by law to enter in to the contract.
5. Give the comparison between coercion and undue influence.
UNIT – III
SECTION – B
1. Discuss the lawrelating to the enforcement of contingent contract.

2. What do you understand by performance of a contract? State who can demand
theperformance and by whom contracts must be performed.
3. Explain the various modes in which a contract may be said to be discharged.
4. Distinguish between actual breach and anticipatory breach of contract.
5. Discuss the remedies available to an aggrieved party in case of breach of contract.
UNIT – IV
SECTION – C
1. Briefly discuss the rights of a surety against

a) Creditor b) Principal debtor and c) Co-sureties
2. When a surety is discharged from liability.
3. Explain about the various duties of bailor and bailee.

4. Discuss the rights of bailor and bailee.
5. Explain the rights and duties of the pawner and pawnee?
UNIT – V
SECTION – C
1. Write the short notes on creation of an agency.
2. What are the rights of agent towards the principal?

3. What are the duties of agent towards the principal?
4. Discuss the different modes in which the authority of an agent may terminate.
5. Explain the differences between sale and agreement to sell.
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Extent Whole of India

1872 1930 1932

“an agreement enforceable by law"

Seller Buyer Seller Buyer

To sell To pay the To receive To receive

"every promise and every set of promises, forming the consideration

Promise + Consideration = Agreement

Agreement + Enforceabilty = Contract

Validity Formation Performance

Voidable Illegal Unenforceable

An agreement which is binding and enforceable is a valid contract.

All essentials- Section 10

Agreement Dealing in drugs, kidnap, murder

Express Implied Quasi

Void Contract Implied Executory

Voidable Quasi-contract Unilateral

Illegal E-contract Bilateral

Week 1 The Indian Contract Act, 1872

Quadrant 3 1. Take a pre-assessment on “The Indian Contract Act, 1872”.

Certainty of Meaning Free Consent

1. Acceptance must be communicated to the offeror

2. Acceptance must be in the prescribed manner

3. Acceptance must be by the offeree

4. Acceptance must be given before the offer lapse

5. Acceptance may be express or implied

• Both have completed • Obligation of the parties are to be

• EX: A contract between a manufacturer and a distributor states

• Anticipatory breach, also known as anticipatory repudiation, is a term

3. Suit for injunction

5. Claim for damages

• On the breach of a contract, the suffering party may incur some

• The claim is for mental sufferings or emotional sufferings. Generally

Week 2 Law of Agency

Quadrant 1 2. Watch the eLearning content on “L2: Law of Agency”

Section 182 to 238

An “agent” is a person employed to do any act for another, or

The person for whom such act is done, or who is so

An agent is a person who is employed to bring

Who may be • any person may become an agent, but no

In an agency created to transfer immovable property, the power of

A power of attorney may be general, giving several powers to the

A owns a shop in Bangalore, but living himself in Mysore, and visiting

B has an implied authority from A to order goods from C in the name of

1. A person who is appointed by the agent and to whom the

2. So, the sub-agent is the agent of the original agent.

Section 2(9) of the Sale of Goods Act, 1930

“A mercantile agent having in the customary course of business as

This definition covers factors, brokers, auctioneers, commission

A del credere agent is a mercantile agent, who is in consideration of an

He has no authority to warrant his principal’s title to the goods.

Partnership” is the relation between persons who have agreed to

In a partnership firm, every partner is an agent of the firm and

In addition, a banker is an agent of his customer when he buys or

He has a general lien on all securities and goods in his possession

Week 2 Law of Agency

The Principal must be competent to enter into a valid contract

Any person may become an agent (minor)

There should be an agreement between agent and principal

Agent must act in representative capacity

1. Agency by 2. Agency by 3. Agency by

Agency contract may be Subsequent acceptance

• authority may be express or implied

• Authority of an agent as it appears to others.