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Introduction to the regulatory environment in India

The regulatory environment also known as Legal Aspects of Business, Business law,
Commercial Law, Mercantile law is a subject which provides an element of limitation to all the
business strategies regulated through different statutory provisions and rules. It not only
emphasizes on substantive law but also on procedures and compliances thereby prepares the
students of Business for the legal environment they would eventually face in the corporate
The legal environment and its 3 Is- The rule of law is envisaged by the people of any state
and hence in India the preamble of the Constitution starts with the words We, the people..
The term signifies the importance of a persuasive legal regime which has stood the test of We
the people and thereby every provision of law must be declared constitutional. The 3 I of the
legal environment are i. Institutions
ii. Instruments
iii. Individuals with discretionary powers
In short the people of country give the State power to create Institutions, these institutions give
instruments created through different sources of law and in turn these institutions appoint
individuals with discretionary powers. These powers are directly governed, regulated, monitored
and executed through the instruments which legitimate their appointments. The rider being that
the powers will be exercised by being fair and unbiased. The principle of FAT is essential for
the individuals exercising discretionary powers i.e. they have to fair, accountable and
transparent. As every law has to be declared constitutional, thereby the laws for the corporate
are scanned through the same lens.
Constitution of India
The Constitution of India introduces the rule of law enforceable in the country through the
preamble. It highlights the fundamental, guiding and elementary framework of the constitution.
In case of any ambiguity to interpret the Constitutional provisions it declares the freedom of
people, their rights, duties, basis of government policies and sets the limitation for all
transactions commercial or otherwise. In the 1995 case of Union Government Vs LIC of India
the Supreme Court has once again held that Preamble is the integral part of the Constitution.
Originally, the preamble described the state as a "sovereign democratic republic" but after the
Forty-second Amendment (in 1976) it was changed to "sovereign socialist secular democratic
republic". The term socialists implies social and economic equality, meaning the absence of
discrimination on the grounds only of caste, colour, creed, sex, religion, or language. This also

guarantees social equality as equal status and opportunities for all. The government endeavours
to make the distribution of wealth more equal and provide a decent standard of living for all
ensuring economic equality, the commitments of a welfare state. The government has adopted a
mixed economy and the government has framed many laws to achieve the aim.
CONSTITUION IS SUPREME LAW- Clear understanding of concepts is vital for any
discussion on taxation or legal matters as power to levy and collect tax is derived from
Constitution. If it is found that any Act, Rule, Notification or Government orders is not according
to the Constitution, it is illegal and void and it is called ultra vires the Constitution.
INDIA IS UNION OF THE STATES-Our Constitution generally follows British pattern, though
concepts of federal structure are borrowed from American and other Constitutions.
India is a Union of States- The structure of Government is federal in nature, Government of
India (central Government) has certain powers in respect of whole country. India is divided into
various States and Union Territories and each States and Unions like Gujrat, Maharashtra,
Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and Union Territories like Pondicherry,
Chandigarh etc.
Administration of State-President of India is head of the State. (Here, the word State is used
with a different meaning). The States has three organs.
A. LEGISLATIVE ORGAN-Parliament consists of President, Lok Sabha(House of
People) and Rajya Sabha(Council of States). Parliament makes laws for governance of
the country. It also sanctions budgetary expenditure for Government.
B. EXECUTIVE (ADMINISTREATIVE) ORGAN-Administration is looked after by
Government for which Council of Ministers is at its head. The Council of Ministers is
headed by Prime Minister. Government has to implement the laws passed by Parliament.
C. JUDICIAL ORGAN-It has always been found in all the countries that control and check
over executive power s essential. In absence of such control, misuse of power is very
much likely. Our Constitution therefore provides independent judiciary with wide
powers. The highest court in India is Supreme Court. Law declared by Supreme Court is
the law of the land and is binding on all subordinate Courts, tribunals and Executive.
Our Constitution has endeavored to maintain balance among these three organs namely
legislation, administration and judiciary, to ensure proper checks and balances.Parliament to enact the laws, Judiciary to interpret the law and Executive to implement
the law. These three estates have tremendous influence on the public life. [Similarly,
newspapers have tremendous influence on public life and in shaping public opinion.
Hence, newspapers are often called fourth estate]
STATE GOVERNMENT ORGANIZATION- A structure similar to the one at Centre is
provided for each State. Governor (Rajyapal) is the head of the State, State Legislature
(Vidhan Sabha) which is elected body of the peoples representatives; passes various

Acts. Some States also have Vidhan Parishad (similar to Rajya Sabha). The state
Government is administered under a Council of Ministers of which Chief Minister is the
head. Each State has a High Court having wide judicial powers.
Judicial Organ- Independent judiciary is biggest safety of a citizen.
SUPREME COURT- Supreme Court has wide powers of writ jurisdiction under Article
32 in respect of enforcement of fundamental rights. Article 136 grants discretion to
Supreme Court to grant special leave to appeal (called Special Leave Petition-SLP) from
any judgment, decree, determination, sentence or order in any cause or matter passed or
made by any court or tribunal in India. Article 141 of constitution provides that law
declared by Supreme Court is binding on all courts within India.
HIGH COURTS-Each State has a High Court. High Courts have been granted powers to
issue writs. The Writ is an order or process issued by court or judicial officers, asking
any person to perform or refrain from performing the Act. Article 226 grants powers to
High Courts to issue writs not only in respect of fundamental rights but for any other
purpose. This is a very powerful right and is very useful in case Government or other
authorities do not give justice to a person. Application made to High Court for this
purpose is called writ petition. Since this power is given under Constitution, this cannot
be limited by any State (Act) or Government rules.
Legislative Organ- Various Laws can be passed (and amended) by Parliament within the
framework prescribed by the Constitution.
MODE OF PASSING ACT-First, a bill is presented to Parliament. The bill is a draft of
the law proposed to be passed. Often the bill is presented on the basis of
recommendations of some Committee. Sometimes, the bill is studied by a Parliamentary
Committee after it is presented in Parliament. The bill is discussed and it is then passed
with or without amendments. After it is passed by both Houses of Parliament, it is sent to
President for his assent. The bill becomes a statute (Act) on the date on which President
gives his assent. The Act generally provides the date on which the Act comes into effect.
Sometimes, it comes into effect immediately, while sometimes powers are delegated to
Government to decide the date/s on which the Act will come into force. Often, powers
are given to bring the Act into force in parts, i.e. various provisions of the Act can be
brought into force in stages on different dates. Similar procedure is adopted to amend
(modify) an existing Act.
ORDINANCES-Act can be passed only when Parliament is in session. (General
Sessions are Budget session, Monsoon session, winter session etc.) However, need may
arise to take immediate action and it may not be possible to wait till Parliament session
starts. In such cases, President has been empowered under Article 123 of Constitution to

issue Ordinance. Such Ordinance has the same force as Act of Parliament, except that
the Ordinance is valid only for a limited period. If Parliament approves the Bill
pertaining to the matter contained in the Ordinance, it is converted into an Act.
Otherwise, the Ordinance automatically lapses at the expiration of 6 weeks from the date
when Parliament assembles. (In case of States, the Ordinance can be issued by Governor
under Article 213 of Constitution and other provisions regarding its lapse etc. Ordinance
is really an emergency provision and is expected to be used sparingly. However, some
States (and even Central Government) have re-promulgated the same Ordinances again
and again, instead of getting them passed in Parliament/State Legislature.
DELEGATED LEGISLATION-Parliament is mainly concerned with policies of law. It
is not interested in routine procedures etc. Moreover, since the situations are constantly
changing, changes are inevitable. It is not practicable to approach Parliament and seek its
approval for every minor change. Parliament, therefore, delegates some powers to other
Authorities (Usually Government or some Board) to make rules, regulations and issue
notifications. This is called delegated legislation. Often these are required to be
published in Official Gazette. If the rules or regulations are made or notifications are
issued under the power granted in the Act. They have the same force as the main act.
TRADE CIRCULARS AND TRADE NOTICES-It is normal for Government to issue
trade circulars, trade notices and clarifications from time to time. These are issued to
clarify the view of the Government in respect of any Act, rules or notifications or to give
some information, etc. Such trade circulars/trade notices do not have any legal force and
they are not binding on taxpayers. If such trade circular or trade notice is beyond the
provisions of Act or Rules, such trade notice cannot be binding on Government also, as
there are no estoppels against a statute. The circulars/trade notices are not binding on
quasi-judicial authorities or courts.
Administrative Organ-Administration is looked after by Government for which Council
of Minister is at its head. The Council of Ministers is headed by Prime Minister. Prime
Minister can head the administration till he enjoys the confidence of Parliament. Each
minister is assigned a particular ministry. Government deals with the matters through
various departments and generally head of the department who is a senior Govt. officer is
called Secretary. Further, various senior and junior officers are appointed by
Government (additional Secretary, Joint Secretary, Deputy Secretary, Commissioner,
Assistant Commissioners etc.) for administration. Powers are delegated to these officers
for execution of Government orders/ policies.

Business Law- Business law also known as mercantile or commercial laws are civil laws that
cover the rights, duties, compliances, procedures, conduct of person or entities in business
carrying the work of trade, commerce including transactions of sale, services, formations of
separate legal entities and their mandate as per the statutory provisions. A study of business law
covers following Acts:4

The Indian Contract Act 1872

Special Contracts
The Sale of Goods Act, 1930
The Negotiable Instruments Act, 1881
The Indian Partnership Act, 1932
The Companies Act, 1956
The Consumer Protection Act, 1986
The Information Technology Act, 2000

Corporate and Commercial legislation under Constitution-In the basis scheme of

constitution, broadly, aspects of law and order, agriculture, public health etc. are looked
after by State Governments.
Article 246 of our Constitution indicates bifurcation of powers to make laws, between
Union Government and State Governments. Parliament has exclusive powers to make
laws in respect of matters given in list I of the Seventh Schedule to the Constitution
(Called Union List). List II (State List) contains items under jurisdiction of States.
List III (concurrent list) contains items where both Unions and State Governments can
exercise power.
UNION LIST- List I, called Union List, contains items like Defense of India, Foreign
affairs, War and Peace, Banking etc. Items in this relevant to topics covered in this book
are as follows:
ENTRY 43-Incorporation, regulation and winding up of trading corporations, including
banking, insurance and financial corporations but not including cooperative societies
ENTRY 44 Incorporation, regulation and winding up of corporations, weather trading or
not, with objects not confined to one State, but not including Universities
ENTRY 45-Banking
ENTRY 46- Bills of Exchange, cheques, promissory notes and other like instruments
ENTRY 48-Stock exchanges and future market.
ENTRY 97 Any other matter not included in List II, list III and any tax not mentioned in
list II or list III.(These are called Residual Powers.)
STATE LIST-State Government has exclusive powers to make laws in respect of matters
in list II of Seventh Schedule to our Constitution. These items include Police, Public
Health, Agriculture, Land etc. Relevant entries are as followsENTRY 32- Incorporation, regulation and winding up of corporations, other than those
specified in List I, and universities; unincorporated trading, literary, scientific, religious
and other societies and associations; cooperative societies.
CONCURRENT LIST-List III of Seventh Schedule, called concurrent list, includes
matters where both Central Government and State Governments can make laws. This list

includes items like Criminal law and Procedure, Trust and Trustees, Civil procedures,
economic and social planning trade unions, charitable institutions, price control, factories,
etc. Important entries for our discussion are as followsENTRY 7-Contracts including partnership, agency, contracts of carriage, and other
special forms of contracts, but not including contracts relating to agricultural land.
ENTRY 24- Welfare of labour including condition of work, provident funds, employers
liability, workmens compensation, invalidity and old age pensions and maternity