Question No. 1 - MMPC 013 - Business Law - MBA and MBA (Banking & Finance)

Solutions to Assignments

                            MBA and MBA (Banking & Finance)

                            MMPC- 013 - Business Law

Question No. 1. 
What is the significance of ‘Business Law’? Discuss the objectives of Business Law. 

Solution:

All the laws which pertain to how, what and why of how businesses are legally allowed to and supposed to function are encompassed by what is business law. Business law meaning includes contract laws, manufacturing and sales laws, and also hiring practices and ethics. In simple words, it refers to and pertains to the legal laws of business and commerce in the public as well as the private sector. Note that it is also known as commercial law and corporate law, due to its nature of regulating these worlds of business.

Businesses vary in size, as measured by the number of employees or by sales volume etc. But all businesses share one common purpose that is to earn profits. The purposes of business that goes beyond earning profits are -an important institution in society, for the supply of goods and services, creating job opportunities, offering better quality of life, contributing to the economic growth of the country, etc.”

Business law, also commonly known as commercial or mercantile law, is that branch of law that conducts the relationship between the enterprises, companies and individuals engaged in commercial matters. This section of law governs issues in relation to the legal rights, duties and liabilities of the entities engaged in business transactions. 

Business Law has attained a significant position in the current era, due to the formidable position held by the business enterprises and corporations in contributing to the economy and by the supply of abundant job positions boosting the employment sector, thereby contributing towards the generation of revenues. “Business law consists of the enforceable rules of conduct that govern commercial relationships. In other words, buyers and sellers interact in market exchanges within the rules that indicate the boundaries of legal business behavior. Constitutions, legislatures, regulatory bodies, and courts spell out what market participants may or may not legally do. Understanding business law is necessary for future businesspeople because, there simply is no market transaction that occurs outside legal guidelines. All contracts, employment decisions, and payments to a supplier are limited and protected by business law. Each of the six functional areas of business - management, production and transportation, marketing, research and development, accounting and finance, and human resource management - sits on a foundation of business law. 

Business law, also known as mercantile law or commercial law refers to a set of laws that govern the dealings regarding commercial matters, namely business organisations. It encompasses all laws that guide on how to set up a business and then how to run it. This includes all the laws that govern on how to set up, start, manage, run, close or sell a business. It includes contracts, laws of corporations, other business organisations, commercial papers, income tax, secured transactions, intellectual properties, and other transactions and dealings related to the business.
Why is Business Law important?
The prime purpose of business law is to maintain order, resolve disputes, establish generally accepted standards, protect rights and liberties when it comes to business and its relation to other businesses, government authorities, and the customers.

• A Universal set of standards: Earlier, the customer had to suffer a lot due to the absence of a proper law that could safeguard their interests and money invested in a particular business. As there was no such law regarding maintenance of order, rights, and liabilities, etc., the business owners made their own standards and made the customers suffer just because of the greed to make more money. With the establishment of business law, many standards have been established which have to be followed by businesses worldwide.
  
• Maintenance of Equilibrium: This creates a sense of satisfaction among customers. In the absence of the law, different countries had different laws regarding the business dealings which made it difficult for the customers as well as the seller to establish a deal. But now every country has the same standards, and the deal between buyer and seller is easily established. This brings ease in business dealings and transactions all across the globe.
  
• Less chances of frauds: Business law helps the owners itself to get aware of the laws against other businesses and individuals. It also helps the individuals, to be aware of the rights against the businesses so that they can use them in case they fall prey to the frauds and misery of the business.
  
• Presence of Ethical conduct: With the help of business law, business owners may make better decisions, and also know when to seek legal help. Every business has to maintain an ethical conduct but most businesses, in the greed to earn more profits; do not follow such conducts. Business law makes it mandatory for all the businesses to maintain an ethical conduct which in turn pleases the buyers and they form a good image of the business.
  

In a nutshell, business law is of immense importance to both the business as well as consumers in protecting their rights and get a better service.

Objectives Of Business Law

We enter into contracts every day. Some of these contracts are made consciously, for example, for the purchase or sale of any goods, purchase of a share of a company or a plot of land. Entering into contracts determines the legal rights of each party giving rise to legal obligations as well. People who are engaged in business activities such as business owners enter into a contract on a daily basis to further the business transactions. All business activities include a variety of transactions which give rise to contracts on a daily basis. Some of these contracts are as simple as purchasing goods from a shop thus giving rise to a legal right and legal obligation. 

Business law serves a variety of purposes some of which are listed below:

i) A comprehensive set of standards established universally: Business laws are comprehensive and uniform set of standards that are applicable to all business entities. Uniformity in laws helps in maintaining smooth relations between the businesses and its various stakeholders including consumers, suppliers, etc. It provides an environment where the businesses can function smoothly and efficiently as the same rule shall be applicable to all the business organisations falling in a particular category. However, there can be different compliances for different kinds of business organisations depending upon the size, nature of business activity or certain threshold limits. It also helps in identifying and establishing the rights and liabilities of the various parties interacting with each other. It provides a framework for reducing the harm caused to either party due to fraudulent or unethical activities. Business law also provides for steps that needs to be followed while conducting due diligence before engaging with a particular company. 

ii) Promoting industrial growth: Business laws not only provides different provisions for compliance for the business but also facilitate industrial growth by protecting and promoting the rights of businesses. Adherence to the rules prescribed by the range of laws falling under the domain of business facilitates businesses to achieve growth and success. Thus, business laws enable; capital formation, promote industrial relations, facilitation of licensing, ease of doing business, financial inclusion, etc. which promote economic growth. 

iii) Laying down the procedure for the establishment of business: The laws dealing with business provide the necessary framework required for the commencement of a business corporation along with building of a strong foundation for the business entity to thrive in the market. The formal process provided under the laws also facilitates successful conduct throughout the life-cycle of the business. For instance, Companies Act, 2013 lays out the steps involved in the incorporation of a company, and provisions related to the Articles of Association and the Memorandum of Association in detail. 

iv) Enforcement of Rights: Business laws provide provisions for judicially enforcing the rights of all the parties involved in a business transaction. Thus, the businesses can approach the court to enforce the claims against the debtors or right to a patent or copyright or the right to hold property, etc. Businesses also have a right to defend themselves in case actions are filed by the central, state and local bodies. Thus, businesses have been given the power of initiating legal action in case any legal compliance are breached by any outside party and also allowed to defend themselves against the litigation filed by the government for the various stakeholders. Various provisions aiding in carrying out the enforcement action have been provided in statutes for effective regulation of the business practices. 

v) Contributes to the building of healthy business relationships: Laws dealing with business matters are extremely significant in the establishment of secure and effective business relationships amongst the concerned entities as the formation of strong business ties is an absolute must for building a strong economy of a country. For instance, the Partnership Act lists out the rights, duties, and obligations of the partners in a firm for carrying out a successful venture. Business Law also plays an extremely important role in facilitating Mergers and Acquisitions (M&As) between enterprises looking to collaborate and expand their business. Cross-Border M&AS transactions also contribute immensely to the economy of a country by playing a significant role in increasing the revenues generated through the means of Foreign Direct Investment. Cross border M&A occurs between companies situated in two different jurisdictions. If the resulting company is an Indian company, it qualifies as an inbound merger, and if the resulting company is a foreign company, it is christened as an outbound merger. 

vi) Reduced possibilities of fraud: A robust and effective business law framework helps in reducing the possibility of fraud as the parties entering into contracts or dealing with each other are well aware of their rights and liabilities which would prevent them in falling prey to the illegal or fraudulent activities by the other party. The laws associated with Business Law also provides for a highly effective enforcement mechanism, which are further lined with stringent measures that could minimize the possibility of perpetuating fraud. 

vii) Business laws help maintain equilibrium: Business laws help in bringing about uniformity and maintaining equilibrium as there are set rules which have to be followed by each entity. Different forms of business organisations are regulated by different laws. This helps in the ease of dealing and conducting business as the same standards are followed throughout the country. It helps in making the business transactions easier and smoother across the country. 

viii) Ethical conduct: Business laws also help in improving the conduct of the business as the laws have to be followed in letter and spirit. Therefore, the business organisations have a responsibility of maintaining ethical conduct Introduction to Business Law while functioning in the society. As businesses survive in the society and use its resources, there is a responsibility on the businesses to give back by dealing ethically with all its stakeholders. For instance, the multi-billion-dollar scam orchestrated by the promoters of Satyam Computer Services, also referred to as “Satyam Scam”, made the regulators across the country re-examine the then-existing corporate governance standards and the fallacies therein. The scam resulted in the violation of multiple provisions of various statutes, such as, Companies Act, 1956 (Sections 209, 233 and 628), Securities (Contract) Regulation Act 1956 (Sections 23A, 23E), SEBI Act (Sections 15HA and 24, and Criminal law. Under the Companies Act, 1956, the resulting violations included failure to maintain proper books of account, penalty for false statements and noncompliance of auditor duties. However, after this incident, sweeping changes were brought forth in the Companies Act, 2013 to combat any unforeseen deviations that may be resorted by the corporate enterprises. The new Companies Act, 2013 mandated at least one-third of the Board to be comprised of Independent Directors, and that they shall not be eligible to receive any stock options and be remunerated only in fee. The new Act also imposed strict norms on any related party transactions along with providing for class action suit options against the company and auditors, for protecting minority shareholders’ interests. It also brough forth provisions clearly defined demarcating the accountability of auditors.

ix) Social Responsibility: Business laws also lay down the criteria for business to function in a society as the business utilize the resources of the society there arises a responsibility of the business to give back to the various stakeholders. This enables social justice and social responsibility in the form of good employment practices, non-discrimination, sustainable utilization of resources, prevention of environmental damage etc. Thus, it prohibits businesses from entering into practices that are harmful to the society at large. 

x) Laying down law in accordance with the evolving standards: The business environment is ever-changing and dynamic in nature. The laws have to be enacted taking into account the economic and business environment of the country. These laws not only provide uniformity in business operations but also provide clarity to unforeseen situations. Legislative changes in the form of amendments are made to address the occurrence of unforeseen situations. An example for this would be the Indian Competition Act, which handles and regulates antitrust issues in the country. The Competition Act, 2002 is concerned with keeping a check on the prevailing anti-competitive acts in the relevant market being governed. The Act encompasses horizontal and vertical agreements, cases related to abuse of dominance, and regulation of combinations. It must be noted that until now Competition Act only focused on price parameters such as unreasonable increase in prices or reduced output in the supply of the goods. However, the advent of digital technology has ushered an era demanding a change in the traditional methods employed to gauge anti-competitive practices. The Indian Competition regulatory authorities have also initiated investigation into degradation of non-price parameters such as quality, privacy and innovation keeping pace with the changing needs of the society in an era of online platform markets. The Competition Commission of India, which until recently investigated anticompetitive conduct solely based on monetary price increase, has acknowledged the importance of data as a currency in the current business scenario and initiated investigation against data monopolies. 

xi) Providing penalties for violation of laws: Business law serves an extremely important purpose of enlisting the various penalties that may be employed by the regulatory bodies to ensure that the conduct of business activities conforms to the prescribed standards set by the concerned branch of law. The legislations dealing with the various aspects of the business have provided the penalties that may be incurred by the wrongdoers on contravention of the law and the rules provided therein. For instance, chapter VI under the Competition Act, provides for various penalties for contravention of the orders of the Commission or for non-compliance of the directions of the Director-general or the Commission. Similarly, Chapter VII of the Insolvency and Bankruptcy code (IBC) provides for punishment of offences, penalties for acts including falsification of books of corporate debtor, false representations to creditors and transactions for defrauding creditors, etc. 

xii) Insurance against Risks: Every business involves inherent risks that may be related to operations of business, movement or transit of goods, and financial risks, etc. Insurance laws provide mechanisms for insuring against such unforeseen circumstances for the business. Directors and officers of the companies can also take D & O insurance policies for protection against future liabilities.