Business Law

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Dr. C Rani

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0.1 Corporate Social Responsibility (CSR)

Definition:
Corporate Social Responsibility (CSR) refers to a company’s commitment to operate ethically and contribute to economic development while improving the quality of life of its workforce, the community, and society at large. It ensures that businesses act in a socially responsible and environmentally sustainable manner.

Key Aspects of CSR

  1. Legal Framework in India:
    • Governed by Section 135 of the Companies Act, 2013.
    • Applicable to companies with:
      • Net worth of ₹500 crores or more.
      • Turnover of ₹1000 crores or more.
      • Net profit of ₹5 crores or more.
    • Requires companies to spend at least 2% of their average net profits over the last three financial years on CSR activities.
  2. CSR Activities: Companies can undertake activities in the following areas:
    • Eradication of Hunger and Poverty: Food distribution and livelihood programs.
    • Education and Skill Development: Building schools, scholarships, and vocational training.
    • Healthcare and Sanitation: Promoting health camps, building hospitals, and sanitation drives.
    • Environmental Sustainability: Afforestation, renewable energy projects, and waste management.
    • Gender Equality and Women Empowerment: Training and employment for women.
    • Rural Development: Infrastructure and social welfare initiatives in rural areas.
    • Promoting Sports: Supporting training programs for rural and urban youth.
    • Heritage Protection: Preservation of art and culture.
  3. CSR Reporting:
    • Companies must prepare an Annual CSR Report detailing:
      • CSR policy.
      • Approved CSR budget and expenditure.
      • Activities undertaken.
      • Impact assessment for large projects (mandatory for companies with CSR spending of ₹10 crores or more).
  4. Benefits of CSR:
    • Enhances brand reputation and customer loyalty.
    • Improves employee morale and retention.
    • Promotes community development and goodwill.

0.1.1 Corporate Governance in the Present Context

Definition:
Corporate Governance refers to the system by which companies are directed and controlled. It establishes a framework for achieving organizational objectives while ensuring accountability, fairness, and transparency among stakeholders.

Key Features of Corporate Governance

  1. Accountability:
    • Clear roles and responsibilities for the board of directors and management.
  2. Transparency:
    • Open and honest disclosure of financial performance and operational practices.
  3. Fairness:
    • Equitable treatment of all stakeholders, including shareholders, employees, and the public.
  4. Responsibility:
    • Commitment to ethical practices, legal compliance, and social responsibility.
  5. Independence:
    • Inclusion of independent directors on the board to ensure unbiased decision-making.

Principles of Corporate Governance

  1. Protection of Shareholder Rights:
    Safeguarding the interests of minority shareholders and ensuring their participation in major decisions.

  2. Effective Board Oversight:
    Boards should be skilled, diverse, and capable of providing strategic direction.

  3. Timely Disclosures:
    Transparency in financial reporting and communication with stakeholders.

  4. Compliance with Laws and Regulations:
    Adherence to statutory and regulatory requirements.

  5. Ethical Conduct:
    Commitment to ethical decision-making and corporate social responsibility.

Importance of Corporate Governance

  1. Investor Confidence:
    Sound governance attracts investors and enhances access to capital.

  2. Risk Management:
    Ensures robust risk identification and mitigation frameworks.

  3. Long-Term Sustainability:
    Promotes sustainable business practices.

  4. Reputation Management:
    Builds trust among stakeholders and improves public perception.

0.1.2 Effect of Corporate Governance

Corporate Governance has a profound impact on the performance and sustainability of an organization. It influences stakeholder confidence, operational efficiency, and long-term growth.

Positive Effects:

  1. Enhanced Stakeholder Trust:
    • Transparent and ethical practices build trust among shareholders, customers, and employees.
  2. Improved Financial Performance:
    • Effective governance reduces risks, frauds, and inefficiencies, leading to better financial outcomes.
  3. Risk Management:
    • Encourages robust internal controls and risk mitigation strategies, ensuring stability.
  4. Sustainability and Social Responsibility:
    • Focuses on environmental, social, and governance (ESG) practices, aligning business with sustainable goals.
  5. Attracting Investments:
    • Good governance increases investor confidence, facilitating access to capital markets.
  6. Compliance with Regulations:
    • Ensures adherence to laws, reducing legal and reputational risks.

0.1.3 Major Structural Issues in Corporate Governance

Corporate Governance systems face several challenges that affect their efficiency and implementation:

  1. Concentration of Ownership:
    • Dominance of majority shareholders may undermine the rights of minority stakeholders.
  2. Ineffective Board Practices:
    • Lack of diversity, independence, and expertise on the board affects decision-making.
  3. Weak Enforcement Mechanisms:
    • Inadequate legal and regulatory enforcement in some regions results in poor compliance.
  4. Conflict of Interest:
    • Directors or executives may prioritize personal gains over organizational welfare.
  5. Lack of Transparency:
    • Insufficient disclosure of financial and operational details erodes trust.
  6. Short-Term Focus:
    • Pressure to deliver immediate returns often overshadows long-term sustainability goals.
  7. Stakeholder Marginalization:
    • Inadequate involvement of stakeholders, including employees and communities, in decision-making processes.

0.1.4 Duties and Responsibilities of Directors

Directors play a critical role in ensuring effective corporate governance. Their responsibilities include:

  1. Fiduciary Duties:
    • Act in the best interests of the company and its stakeholders.
    • Avoid conflicts of interest.
  2. Strategic Oversight:
    • Provide direction on organizational strategy, goals, and policies.
  3. Monitoring Performance:
    • Assess the performance of senior management and ensure accountability.
  4. Risk Management:
    • Oversee the identification, assessment, and mitigation of business risks.
  5. Compliance and Ethics:
    • Ensure adherence to legal and regulatory requirements and promote ethical conduct.
  6. Financial Accountability:
    • Approve budgets, review financial statements, and safeguard company assets.
  7. Stakeholder Engagement:
    • Maintain open communication with shareholders and other stakeholders.
  8. Promoting Diversity:
    • Encourage diversity and inclusion in leadership and workforce policies.

0.1.5 Corporate Governance: A Way Forward

To address existing challenges and enhance governance, organizations should adopt forward-looking strategies:

  1. Strengthening Regulatory Frameworks:
    • Develop comprehensive laws and stricter enforcement mechanisms to ensure compliance.
  2. Enhancing Board Composition:
    • Foster diversity in terms of gender, expertise, and independence on boards.
  3. Encouraging Stakeholder Engagement:
    • Involve stakeholders in key decisions to ensure transparency and inclusivity.
  4. Leveraging Technology:
    • Use digital tools like blockchain and AI for fraud detection, transparency, and data accuracy.
  5. Focusing on ESG Criteria:
    • Align business goals with environmental, social, and governance (ESG) principles.
  6. Promoting Corporate Ethics:
    • Establish strong codes of conduct and whistleblowing mechanisms to encourage accountability.
  7. Periodic Board Evaluations:
    • Conduct regular assessments of board performance to identify areas for improvement.
  8. Capacity Building:
    • Train directors and executives in emerging governance trends and best practices.

0.1.6 Prohibition of Insider Trading (PIT)

Concept:
Insider trading refers to buying, selling, or dealing in securities by individuals who have access to non-public, price-sensitive information about a company. The Prohibition of Insider Trading (PIT) framework aims to curb unfair practices and ensure market integrity and transparency.

The Securities and Exchange Board of India (SEBI) regulates insider trading under the SEBI (Prohibition of Insider Trading) Regulations, 2015, which was last amended in 2020.

0.2 Competition Act, 2002

0.2.1 Concept:

The Competition Act, 2002, was enacted to prevent anti-competitive practices, promote fair competition, and protect consumer interests in India. The Competition Commission of India (CCI) enforces the act.

0.2.2 Scope and Features

  1. Scope:
    • Covers businesses, entities, and individuals engaging in commercial activities.
    • Applies to anti-competitive agreements, abuse of dominant position, and regulation of mergers and acquisitions.
  2. Features:
    • Prohibition of Anti-Competitive Agreements:
      • Prevents price-fixing, bid-rigging, and exclusive supply agreements.
    • Abuse of Dominant Position:
      • Prohibits unfair practices like predatory pricing or denying market access.
    • Combination Regulation:
      • Monitors mergers and acquisitions to prevent the creation of monopolies.
  3. Key Provisions:
    • CCI can impose penalties, order cease-and-desist actions, and regulate market behavior.
  4. Penalties:
    • Severe fines for violations, including up to 10% of average turnover for entities involved in cartels.

0.2.3 Model Code of Conduct for Prohibition of Insider Trading (PIT)

The SEBI (Prohibition of Insider Trading) Regulations, 2015 mandates listed entities to adopt a Model Code of Conduct to ensure compliance and curb insider trading. Key elements include:

1. Objectives and Scope

  • Establish guidelines for dealing with Unpublished Price-Sensitive Information (UPSI).
  • Ensure transparency and maintain investor confidence.
  • Govern trading practices of insiders, including employees, directors, and connected persons.

2. Key Provisions

  1. Trading Window:
    • Prohibits trading during periods when UPSI is accessible.
    • Opens after 48 hours of public disclosure of material information (e.g., financial results, mergers).
  2. Trading Plans:
    • Insiders can adopt pre-approved trading plans, ensuring that trades occur in compliance with the code.
  3. Disclosures:
    • Initial Disclosure: Details of holdings by promoters, directors, and key personnel.
    • Continual Disclosure: Reporting changes in holdings and trades above specified thresholds.
  4. Maintenance of Structured Digital Database:
    • Tracks access to UPSI, ensuring data integrity and accountability.
  5. Confidentiality Obligations:
    • Prohibits sharing UPSI unless required for legitimate purposes with safeguards.

0.2.4 Trading Initiatives to Prevent Insider Trading

  1. Digital Surveillance Tools:
    • SEBI employs advanced algorithms and AI to detect suspicious trading patterns.
  2. Whistleblower Mechanism:
    • The Informant Reward Mechanism incentivizes individuals to report violations (up to ₹1 crore reward).
  3. Structured Digital Database (SDD):
    • Mandatory for listed companies to track UPSI access with time-stamped records.
  4. Mandatory Training:
    • Organizations are required to train employees on compliance and reporting protocols.

0.2.5 Examples of Insider Trading

1. Rajat Gupta Case (Global Example):

  • Details: Rajat Gupta, a former Goldman Sachs director, leaked UPSI about Warren Buffett’s investment in Goldman Sachs during the 2008 financial crisis.
  • Outcome: Sentenced to two years in prison and fined $5 million.

2. Hindustan Unilever (HUL) Case (India):

  • Details: Allegations were made against HUL executives for trading shares based on UPSI regarding the merger of HUL and GSK’s consumer business.
  • Outcome: SEBI initiated a probe, but no substantial evidence was found.

3. Manappuram Finance Case (2023):

  • Details: SEBI fined employees for trading on UPSI about upcoming financial results.
  • Outcome: Penalties were imposed for non-compliance with PIT regulations.

0.2.6 Recent Cases in PIT Regulations

1. Infosys Whistleblower Case (2019):

  • Details: Whistleblowers alleged that senior executives were manipulating financial results.
  • SEBI Action: Investigations were launched, and Infosys implemented stricter trading windows.

2. Axis Bank Case (2021):

  • Details: Axis Bank employees traded based on UPSI about quarterly results.
  • SEBI Action: Penalties imposed on violators, and Axis Bank enhanced its compliance framework.

3. Zee Entertainment Insider Trading Case (2023):

  • Details: Allegations of trading on UPSI about Zee’s merger with Sony.
  • Outcome: SEBI imposed fines and mandated corrective actions.

0.2.7 Insider Trading Initiatives

  1. SEBI’s Proactive Measures:
    • Regular audits and surprise inspections of company disclosures and trading activities.
    • Enhancing penalties for repeat offenses.
  2. Awareness Campaigns:
    • Promoting ethical trading practices through industry forums and training sessions.
  3. Global Collaboration:
    • Sharing intelligence with regulators in other countries to track cross-border insider trading.
  4. AI-Driven Monitoring:
    • Using predictive analytics to flag irregular trades linked to UPSI leaks.

0.3 LAW OF CONTRACT

Law of contract is the most important and basic part of Mercantile law. It is not only the merchant or trader but every person who lives in the organised society, consciously or unconsciously enters into contracts from sunrise to sunset. The law of contract is contained in the Indian Contract Act, 1872 which —

  1. Deals with the general principles of law governing all contracts, and

  2. Covers the special provisions relating to special contracts like bailment, pledge,indemnity, guarantee and agency.

When a person buys a computer or hires a taxi or goes to video library to buy a video cassette or takes a credit card from a bank or gives loan to another or he does booking for an orchestra/DJ for marriage party, he enters into and performs a contract though he may be unaware of this fact.Such contracts create legal relations giving rise to certain rights and obligations. The law of contract is designed to enforce rights and obligations in connection with the above activities.

0.4 CONTRACT

A contract is an agreement made between two or more parties which the law will enforce. A contract is an agreement to do or not to do an act. It is a legally binding agreement, which is enforceable at law.

0.4.1 Definition

Section 2(h) of the Indian Contract Act, 1872 defines contract as an agreement enforceable by law. According to Salmond, “contract is an agreement creating and defining obligations between the parties”. In the words of William Anson, “a legally binding agreement made between two or more persons by which rights are acquired by one or more to acts or forbearances (abstaining from doing something) on the part of other or others”. Halsbury defines contract as, an agreement between two or more persons which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or to abstain from doing some act. Sir Fredrick Pollock says, “Every agreement and promise enforceable at law is a contract”.

CONTRACT - According to sec.2(h), a contract is defined as an agreement enforceable before the law.

AGREEMENT - According to sec.2(e), every promise or set of promises forming consideration for each other.

PROMISE - According to sec.2(b), when a person made a proposal to another to whom proposal is made, if proposal is assented there to.

An agreement involves a proposal or offer by one party and acceptance of the same by the other party. It requires existence of two or more persons i.e., plurality of persons because a person cannot enter into an agreement with himself. It also implies that the parties have a common intention about the subject matter of their agreement. Two parties should be thinking of the same thing in the same sense at the same time. Thus, an agreement is the outcome of two consenting minds i.e., consensus ad idem.

Contract consists of two essential elements:

  1. Agreement and

  2. Its enforceability at law.

  1. Agreement: An agreement is defined in Section 2 (e) as every promise or every set of promises forming the consideration for each other. A promise is defined in Section 2 (b) as a proposal when accepted becomes a promise. An agreement involves a proposal or offer by one party and acceptance of the same by the other party. It requires existence of two or more persons i.e., plurality of persons because a person cannot enter into an agreement with himself. It also implies that the parties have a common intention about the subject matter of their agreement. Two parties should be thinking of the same thing in the same sense at the same time. Thus, an agreement is the outcome of two consenting minds i.e., consensus ad idem.

Thus, Agreement = Offer + Acceptance

  1. Enforceable at Law: An agreement to become a contract must give rise to a legal obligation. The common acceptance formed and communicated between the two parties must create legal relations and not merely the relations which are purely social or domestic in nature.

If the parties specify or the circumstances indicate that the parties intend to create legal relationship through it-even an agreement between husband and wife will be legally enforceable. On the other hand, if the two parties rule out legal obligation expressly the agreement will not be enforceable though it may be a trade agreement.

Thus, Contract = Agreement + Enforceability at Law

Therefore, all contracts are agreements but all agreements are not contracts.

0.4.2 ESSENTIAL ELEMENTS OF A VALID CONTRACT (Sec.10)

Offer and Acceptance: There must be a clear and definite offer made by one party, and the other party must accept that offer. The terms of the offer and acceptance should be specific and unambiguous.

Intention to Create Legal Relations: The parties involved must intend for the agreement to be legally binding. Certain social or domestic agreements may not be presumed to have this intention.

Legal Capacity: Both parties must have the legal capacity to enter into a contract. This means they must be of sound mind, not minors, and not under the influence of substances that impair their judgment.

Legality of Purpose The purpose of the contract must be legal. Contracts with illegal objectives or that involve illegal activities are generally unenforceable.

Certainty and Possibility of Performance: The terms of the contract must be clear and specific, and it must be possible to perform the obligations outlined in the agreement.

Consideration Each party must receive something of value (consideration) from the other party. This is what distinguishes a contract from a gift.

Mutual Consent (Consensus ad Idem): There must be a meeting of the minds, meaning that both parties understand and agree on the essential terms of the contract.

Writing, where required by law: Some contracts, depending on the nature of the agreement, must be in writing to be enforceable. Examples include contracts for the sale of real estate or contracts that cannot be performed within a certain timeframe.

1 CONSIDERATION

2 Consideration in Contract Law

Consideration is a fundamental concept in contract law, representing something of value that is exchanged between parties to a contract. Here’s an explanation:

2.1 Meaning of “Quid Pro Quo”

  • “Quid Pro Quo” is a Latin phrase meaning “something in return.” In the context of contracts, it signifies that a party to an agreement who promises to do something must gain something in return.

2.2 Definition According to Section 2(d)

  • According to Section 2(d) of relevant legal code or legislation, consideration refers to something of value that is exchanged between parties to a contract.

2.3 Example

  • Consideration can take various forms, such as money, goods, services, promises to act, promises to refrain from acting, etc.
  • For instance, if A promises to sell their car to B for $10,000, and B promises to pay $10,000 to A, the consideration for A’s promise is the payment of $10,000, and the consideration for B’s promise is the transfer of the car.

3 Capacity to contract

Capacity to contract refers to the legal ability of an individual to enter into a valid contract. In other words, it involves assessing whether a person has the mental and legal competence to understand the terms of a contract, make decisions, and be bound by the contractual obligations. The capacity to contract is a fundamental principle of contract law and is crucial for ensuring that contracts are fair, voluntary, and enforceable.

3.1 Disqualified persons to enter into a contract

  1. Minor
  2. Persons of unsound mind c)Persons disqualified by any law to which they are subject

4 Age of Majority in India

According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years. Here are the key points regarding the age of majority and its implications in contracts:

  • Definition: The age of majority, as defined by the Indian Majority Act, is 18 years. This means that individuals attain full legal rights and responsibilities upon reaching this age.

  • Contractual Capacity: For the purpose of entering into a contract, even being a day less than 18 years disqualifies the person from being a party to the contract. Any person domiciled in India who has not attained the age of 18 years is termed as a minor.

  • Implications: Minors are generally not bound by contracts they enter into, and contracts with minors are voidable at the option of the minor. However, there are exceptions and certain types of contracts that minors may enter into, such as contracts for necessaries.

4.0.1 Example:

  • If an individual is 17 years and 364 days old, they are still considered a minor and cannot enter into a contract in India. Only upon reaching the age of 18 years do they attain the status of majority and gain full contractual capacity.

This legal framework ensures protection for minors in contractual matters and recognizes their limited capacity to understand and undertake legal obligations until they reach the age of majority.

Here is an overview of major issues related to contracts and the law of insurance:

4.0.2 Contract Law Issues

  1. Formation of Contracts:
    • Ambiguity in the terms and conditions.
    • Lack of proper offer and acceptance, leading to disputes.
    • Misrepresentation or fraud in contract negotiation.
  2. Enforceability:
    • Lack of consideration or valid agreement.
    • Non-compliance with legal formalities such as written documentation (if required).
    • Violation of public policy or illegal objectives.
  3. Performance and Breach:
    • Non-performance or delayed performance.
    • Breach of contract conditions or warranties.
    • Remedies and compensation for breach (specific performance, damages, rescission).
  4. Termination:
    • Disputes regarding valid grounds for termination.
    • Issues arising from termination clauses, including penalties or forfeitures.
  5. Third-Party Rights and Obligations:
    • Disputes over privity of contract and third-party beneficiaries.
    • Assignments and delegation of contract duties.

4.1 Law of Insurance

Definition:
The law of insurance refers to the legal principles and regulations governing the contractual relationship between an insurer (insurance company) and the insured (policyholder). It ensures fairness, compliance, and protection for all parties involved.

4.1.1 Key Elements of Insurance Law

  1. Insurance Contract:
    • A legally binding agreement where the insurer promises to compensate the insured for specific losses in return for premium payments.
    • Essential components: Offer, acceptance, consideration, legal capacity, and lawful object.
  2. Principles of Insurance:
    • Utmost Good Faith (Uberrima Fides): Both parties must disclose all material facts honestly.
    • Insurable Interest: The insured must have a financial or legal interest in the subject of insurance.
    • Indemnity: Insurance restores the insured to the financial position they were in before the loss, without profit.
    • Proximate Cause: Claims are paid for losses directly caused by an insured peril.
    • Subrogation: After paying a claim, the insurer can recover costs from third parties responsible for the loss.
    • Contribution: If multiple policies cover the same risk, insurers share the loss proportionately.

4.1.2 Types of Insurance

  1. Life Insurance: Provides financial security to beneficiaries in case of the insured’s death or upon maturity of the policy.
  2. General Insurance: Covers non-life risks like property, health, motor, fire, and liability.
  3. Health Insurance: Covers medical expenses due to illness or injury.
  4. Marine Insurance: Protects against losses during sea transport.
  5. Fire Insurance: Provides coverage against fire damage.
  6. Liability Insurance: Covers legal liabilities arising from negligence or accidents.

4.1.3 Regulation of Insurance

  1. Regulatory Authorities:
    • In India: Insurance Regulatory and Development Authority of India (IRDAI).
    • Globally: Varies by country (e.g., NAIC in the USA).
  2. Purpose of Regulation:
    • Protect policyholders.
    • Ensure financial stability of insurers.
    • Promote fair competition.
    • Prevent fraudulent practices.