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Unit 3 Political and Legal Environment Concept and Nature of political environment Economic or business environment of a nation is dependent on political environment, because it is political parties who frame business or economic policies. Political factors, which constitute political environment, may include political system of the country, nature of Government, political parties and their political ideologies or philosophies towards business. Components of political environment: Political environment of a society is determined by following factors: 1. Political system: There are two systems of political governance: a) Democratic system: People elect government under this system peoples representatives who are elected through elections rule the country. As these people are elected or selected by the people, they understand the needs of people and society. They rule the government in order to satisfy the needs of people. This kind of system provides a suitable environment for business as its policies are based on needs of society. b) Autocratic or authoritarian: This kind of political system is ruled by Monarch, Kings, Queens etc. They derive their power to rule by their heredity or ancestors. Autocratic or authoritarian form of political system may not provide good environment of business as there is no chance to people or business to decide policies. 2. The constitution: The constitution defines powers, privileges, rights and duties available to citizens including business organizations. Constitution of the country is described as mother of all laws. The various laws that will be passed to regulate business activities must be within the limits defined the constitution. 3. Political parties and their ideologies: Ideologies of some political parties are pro labour and rural. Policies of these parties may not help for the growth of business. Some states have seen mush progress in business. This is because ideologies and philosophies of these parties who rule them, favour business. 4. Nature of Government: Government which is strong, i.e. which has clear and independent majority of its own can implement policies of its choice. On the other hand if government has thin majority or it is dependent on other political parties for support, it has to compromise its economic policies with supporting political party.

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Linkage between Political and Business Environment: There is close link between political factors and business environment. Political factors or environment consists of political system, the constitution, political parties and the government. These institutions and system has the task of ensuring economic and social welfare of society. Economic welfare of society is ensured with the help of business. Political environment decides business policies and directs these policies so that necessary goods and services are created to satisfy the needs of society. Political environment has the responsibility to create a healthy business environment in order to satisfy economic needs of society,. Business has the responsibility to co-operate with political system of the country. The economic objectives of profit making by business depends on political objectives of the parties. The political system defines the nature of business that can be undertaken. Procedures and functioning of such business are decided through economic policies that are designed by the government. Business can make profits by conducting its activities as per the policies that are decided by the government. LEGAL ENVIRONMENT Concept and nature: Legal environment applicable to business consists of laws applicable to business, institutions and machineries, which regulate and control functioning of business. Business has to carryout lawful activities and it has legal obligation towards society ot deliver goods required by the society. Legal environment monitors the behavior of business to ensure that business functions within the limitations defined by various laws and provisions. Components of legal environment: Components of legal environment or laws applicable to business are presented in the following table. Legal environment of business Promotion Companies Act 1956 Contract Act 1872 Factories Act 1948 IDR Act 1951 Environment Protection Act 1985 Municipal and Town Planning Act Organization Companies Act 1956 Competition Act 2003 (MRTP) FEMA Regulations SICA 1985 Patients Act 1970 Trade Marks Act 1999 Income tax 1961 Finance Securities Contract Act 1956 SEBI 1992 RBI Act Banking Regulation Act 1948 DFIs Act Marketing Indian Contract Act 1872 Essential commodities Act Consumer Protection Act Drugs Control Act Prevention of Food Adulteration Act Labour Minimum Wages Act Payment of Wages Act Trade Unions Act ESI Act Industrial Disputes Act PF Act

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Provisions of ISOs Sales Tax Act (VAT) Standards, and weights and measures Linkage between Legal environment and Business Business has to be legal. The objectives, activities, performance of the business must be legal and it must satisfy legal provisions laid down by various acts. At every stage of business i.e. promotion, management, marketing, finance, labour etc. laws have been passed to regulate the affairs of business. Specific legal machineries have been created to ensure that business conduct its affairs as per these provisions. Legal environment gives protection to business and the persons who are connected with business. These consumers related acts ensure that people get quality goods at reasonable price. Legal provisions also protect environment, as establishment, as establishment of business must get clearance from environment authorities. The interest of business itself is protected through various Acts. Economic roles of Government: Government has the responsibility to ensure economic welfare of society. The concept of Welfare State i.e. people should live in prosperity is possible when government taxes part and directs economic activity of society. 1. Sates as Regulator: government regulated economic activity and controls functioning of business through various regulations and laws. These legal procedures and provisions are spread from the stage of promotion till the final stage of liquidation. Regulatory system is determined by economic system is strict in case of communist pattern compared to capitalist model. 2. Government as Promoter: Developed or developing economy, the states role as promoter is vital. Government is directly responsible for developing infrastructure that is necessary for development of business. Power, transport, finance, communication, water etc are basic infrastructure facilities which support industrial development and government takes initiative in developing these areas. Government may itself develop these infrastructure facilities or it may invite private investment in these areas by offering incentives. 3. Government as entrepreneur: Government may assume the role of entrepreneur by promoting Public Sector Enterprises. Underdeveloped and developing economies. Which have poor per capita income cannot attract

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private investment particularly in core industries. Government itself has to take initiative in promoting such ventures. These PSEs are established to achieve economic growth and also avoid consumer exploitation. State as Planner: Government can play an active role by undertaking economic planning for entire nation. These economic plans determine economic objectives, policies, goals, investment priorities, strategies etc. Through these plan documents, government gives directions to the business in Public and Private sector as to what should be the economic agenda of society. Economic planning by state has following benefits: Market forces cannot address major economic issues like growth in GDP, PCI and standard of living etc. Socio-economic problems faced by society like food, shelter, education and poverty can be systematically handled through a national economic plan. It will help to make efficient use of natural resources of country to the best use and purpose of entire community. The gap between rich and poor can be reduced by diverting resources to those areas, which help to uplift poor in the society.

State intervention in business Irrespective of nature of government, system of economy and political ideologies every kind of business has to satisfy rules, regulations conditions, provisions etc. that are laid out by various acts and laws. From the stage of promotion to the final stage of liquidation business has to undertake activities as defined by these regulations. State intervention in business means regulations, restrictions, provisions, procedures, controls etc. laid by through various acts and machineries by the government to control the behavior and performance of business in order to meet social and economic objectives defined by the government. Pros or Benefits of Intervention: State intervention in business has following benefits: 1. Planned economic development: Economic policies of the government, which give direction to business activities, are framed looking into requirement of the nation. Policies are famed and regulations are laid down to endure development of all sectors. 2. To ensure growth and development: Economic growth is measured in terms of GDP i.e. volume of goods and services produced in a year. Development is measured in terms of development in all sectors of economy.
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Government will intervene through necessary policies and legislations to ensure that every sector of economy will receive adequate importance. Development of Core-industries: The development of a nation depends on core industries like steel, cement, power, transport etc. These industries require heavy investment and they have long gestation period. Government may itself promote such enterprise. It may also give necessary incentives and support to private entrepreneurs who want to start such industries. Control over monopoly and unfair trade practices: Monopoly nature of business is detriment to the interest of society. They may charge high price, control supply and exploit consumers and workers. Business i.e. not controlled may undertake unfair trade practices like hoarding, false advertisement, charging high prices etc. Control over these aspects in India is ensured through government Acts. Protection of environment: Every business, particularly industrial activity exploits natural resources. Unrestricted business activity may disturb ecological balance, which will result in natural calamities like flood, earthquake, drought etc. Market failures: Market is always imperfect; particularly market will not meet the requirement of poor in the society. Market need to be regulated. Government can regulate the market through fixing of prices, control over supply and other provisions. These measures can meet requirements of all people in society. Safeguarding the interest of workers: Workers should get adequate wages, better working conditions and other incentives. Government by passing legislations can safeguard the interest of workers.

Limitations or Cons of Intervention: Too much intervention of has got its own limitations. Some of the drawbacks of intervention are as follows. 1. Red Tapism: Laws prescribe procedures and formality to be fulfilled by business establishment which are monitored by government machinery. Government machinery may take unreasonable time to give permissions, licenses etc. Files will not be cleared quickly. These aspects may escalate the cost of business and it will cause unnecessary inconvenience to the owners of business and also users i.e. consumers. 2. Corruption: Bureaucrats and Politicians always misuse the power in their hands. To sanction permits, give license and clear files they charge fees in the form of corruption. Corrupt practices are harmful for the growth of business and development of society.

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3. Lack of initiative: Innovativeness and initiative can grow in business when there is freedom to think and act on the business idea. State intervention will bring too many restrictions through laws and acts and business initiative is lost due to procedural hurdles. 4. Manipulation of laws and planning: Law makers and policy makers in an economy are the politicians and top bureaucrats. But these people come under the pressure of some lobby i.e. big industrialists and traders such lobby may influence these people to manipulate policies and laws to suit vested interest in society. 5. Lack of Co-ordination: State will pass too much legislation, creates too many government bodies, prescribe many procedures to monitor the promotion and management of business. There may not be proper co-ordination between these agencies. Unless a person gets permission from these entire government establishments he cannot start business. 6. Market knows it better: There is argument that market knows it better as to what are the requirements of people. If freedom is given to market, it will determine goods and services to be produced and distributed. 7. Wastage of Resources: Many PSUs are making losses, as they are located in backward areas, where adequate facilities of business are not available. Continuous loss of such units results in wastage of resources invested in those businesses. 8. Poor planning mechanism: Planning machinery and its implementation is in the hands of bureaucrats and other government officers. These people may not be well versed either in economic or political aspects. They are administrator not expert planners. Further the tools and resources available in their hands are limited, due to this planning process and its implementation will not be perfect. An overview of important pieces of legislation I. Securities Contract Act 1956 The act came into force on Feb. 20 1957. The act was passed to monitor transactions in company securities. The act has following objectives. a. To promote healthy and orderly development of sector market in India. b. To protect the interest of investors by preventing unhealthy speculation in stock exchanges in India. c. To empower the central government to regulate functioning of stock exchanges in India. The act contains following provisions. 1. Grant of regulation: The act says that only recognized stock exchanges can function in India. The exchange authorities have to submit required information to get recognition.

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2. Submission of returns: Stock exchange has to periodically send records and returns of information as prescribed by the act. 3. Power to give directions: The act has given powers to central government to direct stock exchange regarding: a) Management of Stock Exchanges. b) To prescribe duties and powers for management of stock exchange. 4. Powers to suspend business of stock exchange: In case of any emergency situation central government has the power to suspend business in stock exchange for a period not exceeding seven days. 5. Power to make listing compulsory: Central government has power make listing compulsory for Public ltd., Companies. 6. Power to supersede governing body: If governing body is not functioning properly the central government has authority to direct reconstitution of governing body or it may supersede the management stock exchanges. 7. Approval of Bye-laws: The act says that the byelaws of exchange and any modification in that are to be approved by SEBI. 8. Power to obtain information and conduct inquiry: Central government and SEBI have power to call any information regarding functioning of exchange. SEBI 1992 Securities and Exchange Board of India was established by central government. It is created to monitor and regulate activities of capital market in India. Objectives: As per the SEBI act, the objectives of SEBI are to protect the interests of and investors in securities and to promote the development of and to regulate, the securities market for matters connected there with or incidental there with.

Management: The Board of Management of SEBI consists of a chairman: i) ii) One member each form Ministry of Finance and Law of Central government. Two members appointed by Central Government, who are professional in Stock Market,

Powers and functions:

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SEBI following powers and functions: 1. Registering and regulating the functioning of people connected with security trading i.e. brokers, transfer agents, bankers, underwriters, investment advisers etc. 2. Registering and regulating the working of collective investment schemes, including mutual funds. 3. Prohibiting fraudulent and unfair trade practices in securities market. 4. Prohibiting insider trading in securities. 5. Promoting investor education and training of intermediaries in securities market. 6. Regulating substantial acquisition of shares and takeover of companies. 7. Calling for information, undertaking inspection, conducting inquiries and audit of stock exchanges and intermediaries in stock market. 8. Performing such functi8ons and powers as delegated by Central Government or by securities Contract Act. 9. Conducting research in the above matters. 10. Levying fees and other charges in discharge of above functions. III. Consumer Protection Act 1985 The act was passed to protect consumer rights and interests. The act is passed to curb the consumers, exploitation through: 1) high price 2) low quantity 3) poor quantity 4) misleading advertisement 5) hazardous production 6) alteration 7) poor services etc. The act has identified rights of consumers and seeks to protect him through various legislative measures. These are: 1) 2) 3) 4) The right to protect against goods and services that are hazardous to life and property. The right to be informed about quantity, potency, purity, standard and price of goods and services so as to protect consumer against unfair trade practices. The right to seek redressal against unfair trade practices or unscrupulous exploitation of consumers. The right to consumer education.

Features of the Act: 1. The act applies to the whole of India (except J&K) and to as goods and services except those, which are debarred by government.

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2. It is basically compensation in character i.e. it provides compensation to the consumer for the damage caused or loss suffered. 3. If a consumers dispute in already pending in a civil court. It cannot be adjudicated by a consumer forum. 4. It seeks to provide cheap and speedy redressal mechanism to the consumer disputes. Consumer disputed redressal system: The act provides for a three-tier system for redressal of consumer disputes. These are: i) ii) iii) District Forum State Commission and National Commission. The following table explains the features of these forums:

Comparative study of district, state and national consumer forums Features Members 3 Rank/status of president Appointment Term Jurisdiction Appeal District 1 president 2 members Judge of district court By state government 5 years up to 65 years of age District and amount up to Rs. 20 lakhs Judgment can be referred to state forum In each district State 1 president 2 members Judge of high court By state government 5 years up to 65 years of age State and amount up to Rs. 1 crore Judgment can be referred national forum In each state National 1 president 2 members Judge of supreme court By central government 5 years up to 70 years of age National Judgment can be referred to supreme court One forum

Location Amendments to the Act in 2003

In order to remove various weaknesses in the Act, following amendments are introduced to the act in 2003.

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1. A case for hearing has to be admitted within days, the decision is to be given within 3 months and additional two months can be taken if it involves product testing. 2. During the hearing of the case adjournment is prohibits. 3. If the numbers of cases are large, additional benches may be provided. These measures have been undertaken to ensure speedy justice. 4. The court can issue interim orders. Under the new law court can award punitive damages. 5. If persons fail to pay compensation, the court can order recovery in the same manner as arrears of land revenue. IV. The company Act 1956 The companies Act 1956 is adopted to regulate functioning of joint stock companies in India. It is the biggest legislation with 658 sections. 13 schedules, 32 rules and 107 forms with several guidelines and classifications, which are issued by the government from time to time. The act was passed to achieve following objectives. 1. 2. 3. 4. 5. To ensure healthy promotion and management companies in India. To ensure full and fair disclosure of all reasonable information of the company. Effective participation and control by shareholders in the affairs of company. Protection of investors interest. Power to undertake investigation of the affairs of company if not managed in the interest of company.

Administration of company has to be according to the provisions laid down in the act. A three-layer system has been created to ensure effective company law administration. At the top is company law board (CLB), which has the overall responsibility of administration of companies act. The CLB has following powers: 1. 2. 3. 4. Alteration in Memorandum of Association (M/A). Power to issue shares at discount. Power to order meeting. Power to accord approval, wherever it is required under the provisions of the act.

Next to CLB there are four Regional Directors at Calcutta, Mumbai, Chennai and Kanpur. They act as link between Registrars and government. They inform all relevant matters to CLB.

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Registrar of companies is in the third layer. Each state has a office of registrar. Every company in the state has to register its name with the Registrar. The registrar has authority and power to ensure that companies in his state are managed as per the provisions of the act. The registrar has following functions: 1. Collect necessary documents from the companies, keeping and preserving them for inspection. 2. Ensure prompt functioning of company by insisting on prompt submission of reports and returns. 3. Scrutinize the returns submitted by companies to ensure its legality compliances. Consult the CLB or Regional Director in the matter of investigation. Companies Act 1956 with its amendment from time to time includes detailed provisions regarding various aspects of company and its management. The main provisions of the act concentrate on following aspects: 1. 2. 3. 4. Definition of company. Registration, formalities and documents necessary for registration. Issue of capital: Procedure and formulation, of issue of prospectus. Management of company: Board of Directors, managing director secretary auditors etc. their appointment qualification, powers, duties and remuneration. 5. Restriction on powers of directors and acts of ultra vires. 6. Meetings and resolutions: Types, procedures and formalities. 7. Accounts and Audit: Methods of maintaining accounts and audit of accounts etc.

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THE END
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