Economic Business and Commercial Laws

STUDY MATERIAL
EXECUTIVE PROGRAMME
ECONOMIC, BUSINESS
AND COMMERCIAL LAWS
MODULE 2
PAPER 7
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EXECUTIVE PROGRAMME
ECONOMIC, BUSINESS AND COMMERCIAL LAWS
India redrafted its economic policy to usher in a new era of deregulation, liberalisation and global
integration. Since then significant policy initiatives have been introduced, to provide stimulus for
accelerated growth, industrial efficiency and international competitiveness. As part of reform process, the
Government has also initiated legislative reforms in the area of Economic, Business and Commercial
laws. The Government enacted Foreign Exchange Management Act, The Competition Act, 2002, Real
Estate (Regulation and Development) Act, 2016 and amended Benami Transaction Prohibitions Act.
Further, the Prevention of Money Laundering Act to deal with new categories of economic offences, has
also been enacted. Similarly, in the area of consumer protection and business laws, the process of
reforms is going on.
In the light of above developments, this study material has been prepared to provide an
understanding of certain Economic, Business and Commercial legislations which have direct bearing on
the functioning of companies. The study material has been divided into three parts consisting of twenty
four study lessons. Part I dealing with Foreign Exchange Management & NBFCs consists of Study
Lessons I to XI, whereas Part II dealing with Competition Laws consists of Study Lesson XIIand Part III
dealing with Business & Commercial Laws consists of Study Lessons XIII to XXIV.
This study material has been published to aid the students in preparing for the Economic, Business
and Commercial Laws paper of the CS Executive Programme. It has been prepared to provide basic
understanding of some of the Economic, Business and Commercial laws thereunder, which have a
bearing on the conduct of corporate affairs. It is part of the educational kit and takes the students step by
step through each phase of preparation stressing key concepts, principle, pointers and procedures.
Company Secretaryship being a professional course, the examination standards are set very high, with
emphasis on knowledge of concepts, applications, procedures and case laws, for which sole reliance on
the contents of this study material may not be enough. Besides, as per the Company Secretaries
Regulations, 1982, students are expected to be conversant with the amendments to the laws made upto
six months preceding the date of examination. The material may, therefore, be regarded as the basic
material and must be read alongwith the original Bare Acts, Rules, Regulations, Case Law, Chartered
Secretary Journal published by the Institute every month .
The subject of Economic, Business and Commercial Laws is inherently complicated and is subjected
to constant refinement through new primary legislations, rules and regulations made thereunder and court
decisions on specific legal issues. It, therefore becomes necessary for every student to constantly update
himself with the various legislative changes made as well as judicial pronouncements rendered from time
to time by referring to the Institute’s journal ‘Chartered Secretary’ and e-bulletin as well as other
law/professional journals.
In the event of any doubt, students may write to the Directorate of Professional Development,
Perspective Planning & Studies of the Institute for clarification at academics@icsi.edu.
Although care has been taken in publishing this study material yet the possibility of errors, omissions
and/or discrepancies cannot be ruled out. This publication is released with an understanding that the
Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that
behalf.
Should there be any discrepancy, error or omission noted in the study material, the Institute shall be
obliged if the same is brought to its notice for issue of corrigendum in the e-bulletin.
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Part I
Foreign Exchange Management & NBFCs
Legal Framework
Act • Reserve Bank of India Act, 1934

• Foreign Exchange Management
There are Act, 1999
approximately 6 • Special Economic Zones Act,
Rules issued under 2005
Rules • Foreign Contribution
FEMA
(Regulation) Act, 2010
Regulations
There are approximately

23 Regulations notified
• Foreign Direct Policy
Investment Policy by RBI under FEMA
• Foreign Trade
Policy
Direction
RBI Directions
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Part II
Competition Act
Legal
Framework
Competition Laws
Competition Act, 2002
• The Competition Commission of India

(Procedure in regard to the transaction of
business relating to combinations)
Regulations, 2011

Part III
(Manner of Recovery of Monetary Penalty)
Business & Commercial Laws
Regulations, 2011

(Determination of Cost of Production)
Regulations, 2009

(Lesser Penalty) Regulations, 2009

(Meeting for transaction of Business)
Regulations, 2009

(General) Regulations, 2009
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Part III
Business & Commercial Laws
Legal Framework
Consumer Business Laws

Protection Laws
Property Laws Anti-Corruption Laws
• Essential
Commodities Act, • Indian Contracts Act, 1872
1955 • Negotiable Instrument Act,
1881
• Consumer
Protection Act, 1986 • Sale of Goods Act, 1930
• Legal Metrology Act, • Partnership Act, 1932
2009 • Specific Relief Act, 1963
• Transfer of Property Act, 1882 • Benami Transactions

Prohibition Act, 1988
• Real Estate (Regulation and • Prevention of Money
Development) Act, 2016
Laundering Act, 2002
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EXECUTIVE PROGRAMME
Module 2
Paper 7
Economic, Business and Commercial Laws (Max Marks 100)
SYLLABUS
Objectives
Part I : To provide expert knowledge in Foreign Exchange Management and NBFCs.

Part II : To provide expert knowledge in Competition Law.
Part III : To provide working knowledge in Business and Commercial Laws.
Part I: Foreign Exchange Management &NBFCs (40 Marks)

Detailed Contents
1. Reserve Bank of India Act, 1934: Central Banking functions; Monetary policy; Penalties.
2. Foreign Exchange Management Act, 1999 : Introduction
3. Foreign Exchange Transactions & Compliances: Current and Capital Account Transactions;
Acquisition &Transfer ofImmovable Property in India and Abroad; Realization and Repatriation of
Foreign Exchange; Brief information of other FEMA Regulations.
4. Foreign Contribution (Regulation) Act, 2010: Introduction and Object, Eligible Contributor,
Eligible Receiver, Registration,Offences and Penalties.
5. Foreign Direct Investments – Regulations & FDI Policy: Automatic and Approval Route of FDI;
Setting up of Subsidiary/Joint Venture/Liaison Office/ Branch Office by Non-residents; Foreign
Portfolio Investments.
6. Overseas Direct Investment: ODI Policy, foreign currency remittances, Setting up of

Subsidiary/Joint Venture/Branch Office.
7. Liberalized Remittance Scheme: Investment Outside India by Indian Residents.
8. External Commercial Borrowings (ECB): An Overview.
9. Foreign Trade Policy & Procedure: Merchandise Exports from India Scheme (MEIS); Service
Exports from India Scheme(SEIS); Duty exemption / remission schemes; Export oriented units
(EOUS); Electronics Hardware Technology Parks (EHTPS); Software Technology Parks (STPS);
Bio-Technology Parks (BTPS).Imports and related policies.
10. Non-Banking Finance Companies(NBFCs): Definition; Types; Requirement of Registration as

NBFC and exemptions from registration as NBFC; Micro Finance Institutions, Activities of NBFCs;
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Compliances by the NBFCs and requirements of approvals of RBI; Deposit Accepting and Non-
deposit Accepting NBFCs; Deemed NBFC; Core Investment Company and Systemically
Important Core Investment Companies; Peer to Peer Lending; Defaults, Adjudication,
prosecutions and penalties.
11. Special Economic Zones Act, 2005: Establishment of Special Economic Zones; Approval and
Authorization to Operate SEZ; Setting up of Unit; Special Economic Zone Authority.
Case Laws, Case Studies & Practical Aspects
Part II: Competition Law (25 Marks)
12. Competition Act, 2002: Competition Policy ; Anti-Competitive Agreements; Abuse of Dominant
Position; Overview of Combination and Regulation of Combinations; Competition Advocacy;
Competition Commission of India; Appellate Tribunal.
Part III: Business & Commercial Laws (35 Marks)
Consumer Protection
13. Consumer Protection Act, 1986: Consumer Protection in India; Rights of Consumers;
Consumer Dispute Redressal Forums; Nature and Scope of Remedies.
14. Essential Commodities Act, 1955: Essential Commodities; Powers of Central Government;
Authorities responsible to administer the Act; Delegation of powers; Nature of Order passed
under the Act; Seizure and Confiscation of Essential Commodities; Offences by Companies.
15. Legal Metrology Act, 2009: Standard weights and measures; Power of inspection, seizure;
Declarations on pre-packaged commodities; Offences and penalties.
Property Law
16. Transfer of Property Act, 1882: Types of Properties; Properties which cannot be Transferred;
Rule Against Perpetuities; Lis Pendens; Provisions Relating to Sale; Mortgage, Charge, Lease,
Gift and Actionable Claim; Specific Performance.
17. Real Estate (Regulation and Development) Act, 2016: Registration of Real Estate Project;
Real Estate Agents; Real Estate Regulatory Authority; Central Advisory Council; The Real Estate
Appellate Tribunal; Offences, Penalties and Adjudication. Specimen Agreement for Sale between
the Promoter and the Allottee; Due Diligence Reporting.
Anti-Corruption Laws
18. Benami Transaction Prohibitions (Act): Benami Property; Benami Transaction, Prohibition of
Benami Transaction; Authority, Adjudication of Benami property.
19. Prevention of Money Laundering: Problem and adverse effect of money laundering; Methods
of money laundering; Offence of money laundering; Attachment, adjudication and confiscation.
Business Laws
20. Indian Contracts Act, 1872: Essential elements of a Valid Contract; Indemnity and Guarantee;
Bailment and Pledge; Law of Agency; E-Contract; Landmark judgments.
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21. Specific Relief Act, 1963: Specific reliefs and defense; specific performance and defense;
unenforceable contracts; Rescission of Contracts; Cancellation of Instruments; Declaratory
Decrees; Preventive Reliefs.
22. Sale of Goods Act, 1930: Essentials of a Contract of Sale; Sale Distinguished from Agreement
to Sell, Bailment, Contract for Work and Labour and Hire-Purchase; Conditions and Warranties;
Doctrine of Caveat Emptor; Performance of the Contract of Sale; Landmark judgments.
23. Partnership Act, 1932: Rights and Liabilities of Partners; Registration of Firms; Dissolution of
Firms and Partnership; Landmark judgments
24. Negotiable Instrument Act, 1881: Negotiable Instruments and Parties; Material Alteration;
Crossing and bouncing of Cheques; Dishonour of Cheques & its Remedies; Presumption of Law
as to Negotiable Instruments; Landmark judgments.

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LESSON WISE SUMMARY

Economic, Business and Commercial Laws
Part I - Foreign Exchange Management & NBFCs
Lesson 1 - Reserve Bank of India Act, 1934

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the
Reserve Bank of India Act, 1934. The purposes for which the Reserve Bank of India was established
as India's central bank have been spelt out in the preamble to the Reserve Bank of India Act,
which states as follows:
(i) to regulate the issue of banknotes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its
advantage; and
(ii) that it is essential to have a modern monetary policy framework to meet the challenge of an
increasingly complex economy ; the primary objective of the monetary policy is to maintain price
stability while keeping in mind the objective of growth and the monetary policy framework in India shall
be operated by the Reserve Bank of India.
The objective of the lesson is to introduce the students regarding:
• Origins of the Reserve Bank of India;
• Banking Functions;
• Issue bank notes;
• Monetary Policy Functions;
• Public Debt Functions;
• Foreign Exchange Management;
• Banking Regulation & Supervision;
• Regulation and Supervision of NBFCs;
• Regulation & Supervision of Co-operative banks;
• Regulation of Derivatives and Money Market Instruments;
• Payment and Settlement Functions;
• Consumer Protection Functions;
• Financial Inclusion and Development Functions;
Lesson 2 - Foreign Exchange Management Act, 1999 – Introduction

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India to consolidate
and amend the law relating to foreign exchange with the objective of facilitating external trade and
payments and for promoting the orderly development and maintenance of foreign exchange market in
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India. The Act extends to the whole of India and it also applies to all branches, offices and agencies
outside India owned or controlled by a person resident in India and also to any contravention thereunder
committed outside India by any person to whom this Act applies.
It is expected that, at the end of this lesson, students will, inter alia, be in a position to:
• Understand the Concept of FEMA;
• Structure and Overall Schemes of FEMA;
• Rules and Regulations framed by RBI under FEMA;
Lesson 3 - Foreign Exchange Transactions & Compliances

The management of foreign exchange is very important in the present day business. FEMA is a
regulatory mechanism that enables the Reserve Bank of India to pass regulations and the Central
Government to pass rules relating to foreign exchange in tune with the Foreign Trade policy of India. The
Act is more transparent in its application as it lays down the areas requiring specific permissions of the
Reserve Bank/Government of India on acquisition/holding of foreign exchange. It stipulate the strict
compliances in case of import, export, debt funding, equity capital infusion, transfer of shares etc.
The objective of the lesson is to facilitate the students to acquaint with:
• Concept of Current Account Transactions and Capital Account Transactions;
• Compliances of acquisition and transfer of immovable property in India and outside India;
• Provisions of Realisation, Repatriation and Surrender of Foreign Currency;
• Limits for possession or retention of foreign currency or foreign coins; and
• Procedure for Adjudication, Appeal and Compounding.
Lesson 4 - Foreign Contribution (Regulation) Act, 2010

Foreign Contribution (Regulation) Act, 2010 regulate the acceptance and utilisation of foreign contribution
or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and
utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest
and for matters connected therewith or incidental thereto. The Act mandates that every bank or
authorized person in foreign exchange shall report to specified authority, the prescribed amount of foreign
remittance, source and manner in which foreign remittance was received and other particulars.
• Regulation of foreign contribution, foreign Source and foreign hospitality;
• Accounts, Intimation, Audit and Disposal of Assets; and
• Inspection, Search and Seizure.
Lesson 5 - Foreign Direct Investment – Regulation & Policy

Foreign Direct Investment (FDI) is a major source of non-debt financial resource for the economic
development of India. Foreign companies invest in India to take advantage of relatively lower wages,
special investment privileges such as tax exemptions, etc. To promote Foreign Direct Investment (FDI),
the Government has put in place an investor friendly policy, wherein except for a small negative list, most
sectors are open for 100% FDI under the Automatic route.
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The objective of the lesson is to familiarize the students with:
• Eligible Investors under FDI;
• Entry Routes for Investment i.e. Automatic Route, Government Route, Competent authority etc;
• Instruments for Investments i.e. equity shares/fully, compulsorily and mandatorily convertible
debentures/fully, compulsorily and mandatorily convertible preference shares etc;
• Prohibited and Permitted Sectors;
• Conditions of FDI in major sector i.e. E-commence activity, Insurance etc.;
• Conversion of ECB/lump sum fee/royalty etc. into Equity;
• Provisions of FDI with respect to Issue of Rights/Bonus Shares& Employees Stock Option Scheme
(ESOPS)/Sweat Equity;
• Acquisition of Shares under Scheme of Merger/Demerger/Amalgamation;
• Modes of Payment allowed for receiving FDI in an Indian Company;
• Reporting of FDI i.e. Reporting of Inflow/Issue of shares/Transfer of shares etc; and
• Conditions and procedure for establishment of branch office (BO)/ liaison office (LO)/ project Office
(PO) in India.
Lesson 6 - Overseas Direct Investments (ODI)

Overseas Direct Investments (ODI) refers to the investments made in the overseas entities by way of
contribution to their capital or subscription to the Memorandum of Association of a foreign entity or by way
of purchase of existing shares of a foreign entity either by market purchase or private placement or
through stock exchange, but it does not include portfolio investment.
Overseas investments (or financial commitment) in Joint Ventures (JV) and Wholly Owned Subsidiaries
(WOS) have been recognised as important avenues for promoting global business by Indian
entrepreneurs.
The purpose of the lesson is to familiarize the students with:
• Two way approach to the approval of direct investment, i.e. Automatic Route and Approval Route;
• Proposal for making ODI under approval route and Prior RBI approval;
• Financial Commitment;
• Eligibility to make ODI under the Automatic Route;
• Permissible Sources for Funding Overseas Direct Investment;
• Acquisition/Sale of Foreign Securities by Resident Individual in India; and
• Obligations of Indian party which has made direct investment outside India etc.
Lesson 7 - Liberalized Remittance Scheme (LRS)

Liberalised Remittance Scheme was introduced on February 4, 2004 as a liberalization measure to
facilitate resident individuals to remit funds abroad for permitted current or capital account transactions or
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combination of both. The Scheme is available to all resident individuals including minors and not available
to corporates, partnership firms, HUF and trusts.
This lesson is designed to familiarize the students with:
• Overview of Liberalised Remittance Scheme;
• Permissible Capital Account Transactions and Current Account Transactions by an individual under
LRS; and
• Remittance facilities to Persons other than Individuals.
Lesson 8 - External Commercial Borrowings (ECB)

External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised
non-resident entities and should conform to parameters such as minimum maturity, permitted and non-
permitted end-uses, maximum all-in-cost ceiling, etc. Transactions on account of External Commercial
Borrowings (ECB) are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange
Management Act, 1999 (FEMA).However, ECB framework is not applicable in respect of investment in
Non-convertible Debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs).
The objective of the lesson is to familiarize the students with:
• Overview of ECB, Tracks of ECB i.e. Track I, Track II & Track III and kinds of ECB;
• Routes available for raising ECB;
• Provisions of Conversion of ECB into equity;
• Procedure for raising ECB; and
• Reporting Requirements i.e. In case of Changes in terms and conditions of ECB, Conversion of ECB
into equity etc.
Lesson 9 - Foreign Trade Policy and Procedure

The Foreign Trade Policy, 2015-20, is notified by Central Government seeks to provide astable and
sustainable policy environment for foreign trade in merchandise and services.India’s Foreign Trade Policy
(FTP) has, conventionally, been formulated for five years at a time and reviewed annually. The focus of
the FTP has been to provide a framework of rules and procedures for exports and imports and a set of
incentives for promoting exports.
The objective of the lesson is to facilitate the students to acquaint with:
• Provisions regarding Imports and Exports;
• Importer-Exporter Code (IEC) Number/E-IEC;
• Required Documents for Export/Import of Goods From/into India;
• Merchandise Exports from India Scheme (MEIS);
• Service Exports from India Scheme (SEIS);
• Duty exemption / remission schemes;
• Export oriented units (EOUS);

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• Electronics Hardware Technology Parks (EHTPS);
• Software Technology Parks (STPS);
• Bio-Technology Parks (BTPS); and
• Imports and related policies.
Lesson 10 - Non-Banking Finance Companies (NBFCs)

India has financial institutions which are not banks but which accept deposits and extend credit like
banks. These are called Non-Banking Financial Companies (NBFCs) in India. The regulation and
supervision of non-banking financial companies is one of the critical functions that the Reserve Bank of
India (RBI) has been entrusted with. Reserve Bank of India(RBI) Act mandates every non-banking
financial company to obtain a certificate of registration from RBI and to maintain net owned fund as
may be specified by RBI in the Official Gazette, before commencing such non-banking financial
business. Further, as part of regulation and supervision of non-banking financial companies, RBI has
been conferred with the statutory powers to regulate or prohibit issue of prospectus or
advertisements soliciting deposits of money by non-banking financial companies, power to
determine policy and issue directions to non-banking financial companies.
• Types of NBFC;
• Activities of NBFCs;
• Compliances by the NBFCs;
• Deposit Accepting and Non-deposit Accepting NBFCs;
• Core Investment Company;
• Systemically Important Core Investment Companies; and
• Peer to Peer Lending.
Lesson 11 - Special Economic Zones Act, 2005

Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be
foreign territory for the purposes of trade operations and duties and tariffs. Goods and services
going into the SEZ area from Domestic Tariff Area treated as exports and goods coming from the SEZ
area into DTA treated as if these are being imported.
Special Economic Zone Act, 2005 to provide for the establishment, development and management of the
Special Economic Zones for the promotion of exports and for matters connected therewith or incidental
thereto. SEZ Rules, 2006 authorises company secretaries to appear before Board of Approval constituted
under Section 8 of the Act.
The purpose of this lesson is to provide the students with:

• Establishment of Special Economic Zones;
• Approval and Authorization to Operate SEZ;
• Setting up of Unit; and
• Special Economic Zone Authority.
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Part II- Competition Law
Lesson 12-Competition Act, 2002

Economic theory suggests that prices and quantities in a competitive market equilibrate to levels
that generate efficient outcomes at a given point of time. Competition is therefore, beneficial as it
provides to consumers wider choice and provides sellers with stronger incentives to minimize
costs, so eliminating waste. Competition Act, 2002 to provide, keeping in view of the economic
development of the country, for the establishment of a Commission to prevent practices having
adverse effect on competition, to promote and sustain competition in the markets, to protect the
interest of consumers and to ensure freedom of trade carried on by other participant in the markets in
India and for matters connected therewith or incidental thereto. Competition Act, 2002, authorizes a
company secretary holding a certificate of practice to appear before Competition Commission of India.
• Competition Policy;
• Anti-Competitive Agreements;
• Abuse of Dominant Position;
• Overview of Combination and Regulation of Combinations;
• Competition Advocacy;
• Competition Commission of India; and
• Right to legal representation.
Part III - Business & Commercial Laws
CONSUMER PROTECTION
Lesson 13- Consumer Protection Act, 1986

The Consumer Protection Act, 1986 was enacted to provide for better protection of the interests of
consumers and for the purpose of making provision for establishment of consumer protection councils
and other authorities for the settlement of consumer disputes, etc. Consumer markets for goods and
services have undergone drastic transformation since the enactment of the Consumer Protection Act in
1986.
• Consumer Protection in India;
• Rights of Consumers;
• Consumer Dispute Redressal Forums; and
• Nature and Scope of Remedies.
Lesson 14 - Essential Commodities Act, 1955

The Preamble to the Act says that it is an Act to provide in the interest of the general public for the
control of the production, supply and distribution of, and trade and commerce in, certain
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commodities. The dominant object and intendment of the Act is to secure equitable distribution and
availability at fair prices of essential commodities in the interest of the general public.The interest of the
general public necessarily connotes the interest of the consuming public and not the interest of the
dealer.
Necessary powers have been given to the Central Government under the Act to administer the provisions
of the Act by issuing orders/directions notified in the official gazette and by delegating the authority
to State Governments and administrators of Union Territories. The Central Government at its apex
level is responsible for achieving the objectives enshrined by the Parliament under this Act for
the welfare and general well-being of all the citizens.
• Essential Commodities;
• Powers of Central Government;
• Authorities responsible to administer the Act;
• Seizure and Confiscation of Essential Commodities; and
• Offences by Companies.
Lesson 15 - Legal Metrology Act, 2009

The branch of knowledge concerning weights and measures is technically known as legal metrology. In
basic form, metrology is the science of measurement. Legal metrology Act, 2009 intend to establish and
enforce standards of weights and measures, regulate trade and commerce in weights, measures and
other goods which are sold or distributed by weight, measure or number and for matters connected
therewith or incidental thereto.
• Standard weights and measures;
• Power of inspection, seizure;
• Declarations on pre-packaged commodities; and
• Offences and penalties.
PROPERTY LAW
Lesson 16 - Transfer of Property Act, 1882

Property has, always, been on the fundamental elements of socio economic life of an individual.
Transfer of Property means an act by which a living person conveys property in present, or in future,
to one or more other living persons, or to himself and one or more other living persons and "to
transfer property" is to perform such an act. Consequently, the law relating to transfer of property is
not only an important branch of civil law but also one that demands proper elucidation due to its
complexity.
• Understand types of Properties;
• Know Rules relating to Transfer of Property;

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• Properties which cannot be transferred;
• Lis Pendens; and
• Understand Provisions Relating to Sale; Mortgage, Charge, Lease.
Lesson 17 - Real Estate (Regulation and Development) Act, 2016

Parliament enacted the Real Estate (Regulation and Development) Act, 2016 which aims at protecting the
rights and interests of consumers and promotion of uniformity and standardization of business
practices and transactions in the real estate sector. It attempts to balance the interests of consumers and
promoters by imposing certain responsibilities on both. It seeks to establish symmetry of information
between the promoter and purchaser, transparency of contractual conditions, set minimum standards of
accountability and a fast-track dispute resolution mechanism.
As per Section 56 of the Act, the applicant or appellant may either appear in person or authorise one or
more chartered accountants or company secretaries or cost accountants or legal practitioners or
any of its officers to present his or its case before the Appellate Tribunal or the Regulatory Authority
or the adjudicating officer, as the case may be.
• Registration of Real Estate Project;
• Real Estate Agents;
• Real Estate Regulatory Authority;
• The Real Estate Appellate Tribunal; and
• Specimen Agreement for Sale between the Promoter and the Allottee; Due Diligence Reporting.
ANTI-CORRUPTION LAWS
Lesson 18 - Benami Transaction Prohibitions (Act)

Benami Transactions (Prohibition) Act, 1988 defines benami transaction and benami property and also
provides for exclusions and transactions which shall not be construed benami. The legislation is also
intended to effectively prohibit benami transactions and consequently prevent circumvention of law
through unfair practices. It empowers the Government to confiscate benami property by following due
procedure. It therefore promotes equity across all citizens.
• Benami Property;
• Benami Transaction;
• Prohibition of Benami Transaction; and
• Adjudication of Benami property.
Lesson 19 - Prevention of Money Laundering

The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively,
are serious. Organised crime can infiltrate financial institutions, acquire control of large sectors of the
economy through investment, or offer bribes to public officials and indeed governments. The economic
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and political influence of criminal organisations can weaken the social fabric, collective ethical
standards, and ultimately the democratic institutions of society. In countries transitioning to
democratic systems, this criminal influence can undermine the transition. Most fundamentally, money
laundering is inextricably linked to the underlying criminal activity that generated it. Laundering
enables criminal activity to continue.
The Prevention of Money-laundering Act, 2002 enacted to prevent money laundering and to provide for
confiscation of property derived from, or involved in, money laundering and for matters connected
therewith or incidental thereto.
• Problem and adverse effect of money laundering;
• Methods of money laundering;
• Offence of money laundering; and
• Attachment, adjudication and confiscation.
BUSINESS LAWS
Lesson 20 - Indian Contracts Act, 1872

The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It affects
everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation of
the modern world. The Indian Contract Act, 1872 regulates all the transactions of a company.
• It lays down the general principles relating to the formation and enforceability of contracts; rules
governing the provisions of an agreement and offer;
• Various types of contracts including those of indemnity and guarantee, bailment and pledge and
agency; and
• It also contains provisions pertaining to breach of a contract.
Lesson 21 - Specific Relief Act, 1963

The Specific Relief Act, 1963 was enacted to define and amend the law relating to certain kinds of
specific relief. It contains provisions, inter alia, specific performance of contracts, contracts not specifically
enforceable, parties who may obtain and against whom specific performance may be obtained, etc. It also
confers wide discretionary powers upon the courts to decree specific performance and to refuse
injunction, etc.
• Understand specific reliefs and defense;
• Specific performance and defense;
• Unenforceable contracts; and
• Know Decrees and Preventive Reliefs.
Lesson 22-Sale of Goods Act, 1930

The law relating to sale of goods is contained in the Sale of Goods Act, 1930. In a sale, the property in
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the goods sold passes to the buyer at the time of contract so that he becomes the owner of the
goods. In an agreement to sell, the ownership does not pass to the buyer at the time of the contract, but it
passes only when it becomes sale on the expiry of certain time or the fulfillment of some conditions
subject to which the property in the goods is to be transferred.
• Essentials of a Contract of Sale;
• Sale Distinguished from Agreement to Sell;
• Bailment;
• Conditions and Warranties; and
• Doctrine of Caveat Emptor.
Lesson 23 - Partnership Act, 1932

"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. Persons who have entered into partnership with one another are
called individually, "partners" and collectively "a firm", and the name under which their business is carried
on is called the "firm-name”. In determining whether a group of persons is or is not a firm, or whether a
person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as
shown by all relevant facts taken together.
• Understand Rights and Liabilities of Partners;
• Registration of Firms;
• Admission of new partners; and
• Dissolution of Firms and Partnership.
Lesson 24 - Negotiable Instrument Act, 1881

A negotiable instrument may be defined as an instrument, the property in which is acquired by anyone
who takes it bona fide, and for value, notwithstanding any defect of title in the person from whom he took
it, from which it follows that an instrument cannot be negotiable unless it is such and in such a state that
the true owner could transfer the contract or engagement contained therein by simple delivery of
instrument.
• Negotiable Instruments and Parties;
• Effect of Negotiability;
• Crossing and bouncing of Cheques;
• Dishonour of Cheques & its Remedies; and
• Presumption of Law as to Negotiable Instruments.

(xx)
LIST OF RECOMMENDED BOOKS
Paper 7: ECONOMIC, BUSINESS AND COMMERCIAL LAWS
1. Snow White: Foreign Exchange Management Manual.
2. Statutory Manual
3. Statutory Guide for NBFCs with Law Relating to Securitisation and Reconstruction of Financial
Assets- Taxmann (2017)
4. Law & Practice Relating to Special Economic Zones- Taxmann Publications Private Limited
5. T. Ramappa: Competition Law in India – Policies, Issues, and Developments; Oxford University
Press, New Delhi.
6. Guide to Competition Law- Containing Commentary on the Competition Act, 2002; MRTP Act,
1969 & the Consumer Protection Act, 1986 (Set of 2 Volumes)- S.M.Dugar, revised by Arijit
Pasayat, Sudhansu Kumar (2016)
7. S M Dugar's Guide to Competition Act, 2002- Author : S.M.Dugar, revised by Sudhansu

Kumarwith a foreword by Dhanendra Kumar (2018)
8. Consumer Protection Law and Practice- Dr. V.K. Aggarwal
9. Commentary on Consumer Protection Act, 1986- Y.V.Rao, with a Foreword by Justice I.

Venkatanarayana (2017)
10. Essential Commodities Act, 1955 (Act No. 10 of 1955) (Lawmann's) (2017)- Lawmann
11. The Legal Metrology Act, 2009- Virag Gupta & Gaurav Pathak (2018)
12. The Transfer of Property Act, 1882 with Exhaustive Case Law- Universal's Concise Commentary
(2017)
13. Real Estate (Regulation and Development) Act 2016 - Taxmann (2017)
14. Prohibition of Benami Property Transactions Act 1988 (Bare Act) (August 2016 Edition)-
Taxmann
15. Law on Prevention of Money Laundering in India (2017)- M C Mehanathan
16. The Indian Contract & Specific Relief Acts (Set of 2 Volumes) (2017)- Pollock and Sir Dinshaw
Fardunji Mulla
17. Sale of Goods Act, 1930 (Lawmann's)(2017)- Lawmann
18. Indian Partnership Act, 1932 (Lawmann's) (2017)- Lawmann
19. The Negotiable Instruments Act (2016)- Universal Law Series

(xxi)
Journals:
1. e-Bulletin `Student Company : The ICSI, New Delhi-110 003.

Secretary’
2. Chartered Secretary (Monthly) : The ICSI, New Delhi-110 003.
3. All India Reporter : All India Reporter Ltd., Congress Nagar, Nagpur.
Note:
1. Students are advised to read the above journals for updating the knowledge.
2. Students are advised to read/refer the latest editions of the recommended books.
(xxii)
ARRANGEMENT OF STUDY LESSONS
Module-2 Paper-7
ECONOMIC, BUSINESS AND COMMERCIAL LAWS
Sr. No. Lesson Title

Part I: Foreign Exchange Management and NBFCs
1. Reserve Bank of India Act, 1934
2. Foreign Exchange Management Act, 1999
3. Foreign Exchange Transactions & Compliances
4. Foreign Contribution (Regulation) Act, 2010
5. Foreign Direct Investments – Regulations & FDI Policy
6. Overseas Direct Investment
7. Liberalized Remittance Scheme
8. External Commercial Borrowings (ECB)
9. Foreign Trade Policy & Procedure
10. Non-Banking Finance Companies (NBFCs)
11 Special Economic Zones Act, 2005
Part II : Competition Law
12. Competition Act, 2002
Part III : Business & Commercial Laws
Consumer Protection
13. Consumer Protection Act, 1986:
14. Essential Commodities Act, 1955
15. Legal Metrology Act, 2009
Property Law
16. Transfer of Property Act, 1882
17. Real Estate (Regulation and Development) Act, 2016
(xxiii)
Anti-Corruption Laws
18. Benami Transaction Prohibitions (Act)
19. Prevention of Money Laundering
Business Laws
20. Indian Contracts Act, 1872
21. Specific Relief Act, 1963
22. Sale of Goods Act, 1930
23. Partnership Act, 1932
24. Negotiable Instrument Act, 1881
(xxiv)
CONTENTS
LESSON 1
Reserve Bank of India Act, 1934
Page
Introduction … 2
Establishment and incorporation of Reserve Bank … 4
Organisational Structure & Management … 4
Central Board of Directors … 4
Local Boards … 5
Offices and Branches … 5
Functions of the Reserve Bank … 6
Right to issue bank notes … 12
Denominations of notes … 13
Form of bank notes … 13
Legal tender character of notes … 13
Currency Distribution … 13
Combating Counterfeiting … 14
Bank exempt from stamp duty on bank notes … 14
Powers of Central Government to supersede Central Board … 14
Issue of demand bills and notes … 14
Banker to the Central Government & State Governments … 14
Management of Public Debt … 15
Reserve Bank as Banker to Banks … 15
Financial Regulation and Supervision … 15
Prudential Norms for Banks … 16
Foreign Exchange Reserves Management … 16
Transactions in foreign exchange … 17
Market Operations … 17
Payment and Settlement Systems … 17
Monetary Policy Management … 18
Monetary Policy Framework … 18
Instruments of Monetary Policy … 19
Constitution of Monetary Policy Committee … 20
Meetings of Monetary Policy Committee … 20
Power to make rules … 21
Penalties … 22
(xxv)
Page
LESSON ROUND UP … 23
SELF TEST QUESTIONS … 24
Lesson 2
Foreign Exchange Management Act, 1999
Historical Background … 26
Overview of FEMA … 26
Applicability … 27
Overall Scheme … 27
Structure … 28
The Rules under FEMA … 29
The Regulations under FEMA … 29
Lesson 3
Foreign Exchange Transactions and Compliances
Important definition … 32
Regulation and management of Foreign Exchange … 34
Current Account Transactions … 34
Capital account transaction … 37
Acquisition and transfer of immovable property outside India by a
person resident in India … 40
Acquisition and transfer of immovable property in India … 41
Realization, repatriation and surrender of foreign currency … 42
Remittance of assets … 44
Possession and retention of foreign currency or foreign coins … 47
Authorized person … 47
Power of Reserve Bank to issue direction … 48
Adjudication and Appeal … 49
Appeal to High Court … 50
Directorate of Enforcement … 50
Investigation … 50
Contravention by company … 50
Compounding of Contraventions … 51
(xxvi)
Page
Lesson 4
Foreign Contribution (Regulation) Act, 2010
Introduction … 58
Definitions … 58
Regulation of Foreign Contribution and Foreign Hospitality … 61
Prohibition to accept foreign contribution … 61
Person to whom section 3 does not apply … 61
Procedure to notify an organization of a political nature … 62
Restriction on acceptance of foreign hospitality … 62
Prohibition to transfer foreign contribution to other person … 62
Utilization of foreign contribution … 63
Power of Central Government to prohibit receipt of foreign contribution … 63
Power to prohibit payment of currency received in contravention of the Act … 64
Registration of certain persons with Central Government … 64
Grant of certificate of registration … 65
Suspension of certificate … 66
Cancellation of certificate … 67
Renewal of certificate … 67
Application for Renewal … 67
Accounts, intimation, audit and Disposal of Assets … 68
Foreign contribution through scheduled bank … 68
Intimation … 68
Maintenance of accounts … 68
Order for Audit of accounts … 68
Intimation by candidate for election … 69
Disposal of assets created out of foreign contribution … 69
Inspection, Search and Seizure … 69
Seizure of accounts or records … 69
Adjudication of confiscation … 69
Appeal … 69
Penalty and Punishment … 70
Offences by companies … 70
Composition of certain offences … 70
Lesson 5
Foreign Direct Investments - Regulation & FDI Policy
Introduction … 74
Understanding of some key terms … 74
Eligible investee entities … 80
(xxvii)
Page
Entry routes for investment ... 82

Competent Authority ... 83
Instruments for Investments … 85
Prohibited sectors … 86
Permitted sectors … 87
Conditions of FDI in major sector … 94
Types of instruments … 99
Issue/ transfer of shares … 100
Conversion of ECB/lump sum fee/royalty etc. Into equity … 105
Issue of rights/bonus shares … 107
Acquisition of shares under scheme of merger/demerger/amalgamation … 107
Issue of employees stock option scheme (ESOPs) / sweat equity … 107
Pledge of shares … 108
Modes of payment allowed for receiving FDI in an Indian company … 110
Reporting of FDI … 111
Adherence to guidelines/orders … 113
Penalties … 113
Adjudication and appeals … 114
Compounding proceedings … 114
Establishment of branch office (BO)/ liaison office (LO)/ project
office (PO) in India … 114
Branch Office … 115
Liaison Office … 115
Project Office … 115
General criteria … 116
Procedure for Establishment … 117
Opening of bank account by BO/LO/PO … 118
Annual Activity Certificate by BO/LO/PO … 119
Extension of validity period of the approval of LO and PO … 120
Registration with police authorities … 120
Remittance of profit/surplus … 121
Transfer of assets of BO/LO/PO … 123
Checklist for BO/LO/PO … 124
Lesson 6
Overseas Direct Investment
Introduction … 130
Approval Route … 130
(xxviii)
Page
Forward the proposal for making Overseas Direct Investment (ODI) under approval route … 130
ODI transactions that require RBI approval … 131
Eligible to make Overseas Direct Investment under the Automatic Route … 132
Permissible Sources for Funding Overseas Direct Investment … 133
Indian company make investment in a JV/WOS abroad in the financial services sector … 133
Overseas investments by proprietorship concerns and registered Trust/ Society … 134
Proprietorship Concerns … 134
Registered Trusts and Societies … 134
Resident individual in India acquire/sell foreign securities … 135
Resident individual acquire shares of a foreign company in his capacity as Director … 135
Indian Mutual Funds for investment abroad … 135
Obligations of the Indian party which has made direct investment outside India … 136
Lesson 7
Liberalized Remittance Scheme
The permissible capital account transactions by an individual under LRS … 140
The permissible Current Account Transactions by an individual under LRS … 141
Documentation by the remitter … 142
Remittance Facilities to Persons Other Than Individuals … 143
Commission to agents abroad for sale of residential flats or commercial plots in India … 143
Remittances towards consultancy services … 143
Remittances towards re-imbursement of pre-incorporation expenses … 143
Payment of fees in foreign currency - Embassy affiliated educational institutions … 143
Remittance towards payments of collected subscription to overseas TV Media Company … 143
Bids in foreign currency for projects to be executed in India … 144
Remittances for making tour arrangements by agents … 144
Prohibited Transactions … 145
Lesson 8
External Commercial Borrowings (ECB)
Forms of ECB … 148
(xxix)
Page
Available routes for raising ECB … 149

Minimum Average Maturity Period … 149
Eligible Borrowers … 149
Individual Limits of ECB … 150
End-use prescriptions … 152
Conversion of ECB into equity … 154
Exchange rate for conversion of ECB dues into equity … 154
Procedure of raising ECB … 154
Reporting Requirements … 154
Lesson 9
Foreign Trade Policy and Procedures
Focus of the Foreign Trade Policy (FTP) … 159
Legal Basis of the Foreign Trade Policy (FTP) … 159
Amendment to Foreign Trade Policy (FTP) … 159
Transitional Arrangements … 159
Definitions … 159
Importer Exporter Code Number (IEC No) … 164
Principles of Restriction … 168
Export and Import of Restricted Goods/Services … 168
Merchandise Export from India Schemes (MEIS) … 169
Service Exports from India Schemes (SEIS) … 171
Status Holder … 172
Status Category … 172
Duty Exemption/Remission Schemes … 173
Advance Authorisation for Spices … 174
Eligible Applicant/Export/Supply … 174
Value Addition … 175
Domestic sources of Inputs … 176
Currency for Realisation of Export Proceeds … 177
Export Obligation … 177
Export Obligation … 182
Export Oriented Units (EOUs), Electronics Hardware Technology
Parks (EHTPs), Software Technology Parks (STPs) and Bio-Technology
Parks (BTPs), Abroad/Duty Free Shops … 184
Personal Carriage of Import/Export Parcels including through … 194
Proceedings under CQCTD … 197
(xxx)
Page
Procedures to deal with Complaints and Trade Disputes ... 197

Corrective Measures … 197
Lesson 10
Non-Banking Finance Companies (NBFCs)
Registration with RBI … 200
Types/Categories of NBFCs registered with RBI … 201
Asset Finance Company (AFC) … 202
Investment Company (IC) … 202
Loan Company (LC) … 202
Infrastructure Finance Company (IFC) … 202
Systemically Important Core Investment Company (CIC-ND-SI) … 203
Infrastructure Debt Fund-Non- Banking Financial Company (IDF-NBFC) … 203
Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI) … 203
Non-Banking Financial Company – Factors (NBFC-Factors) … 203
Mortgage Guarantee Companies (MGC) … 204
NBFC- Non-Operative Financial Holding Company (NOFHC) … 204
Powers of the Reserve Bank … 204
Prudential Regulations applicable to NBFCs … 204
Salient features of NBFC regulations which the depositor may note at the time of investment … 205
Returns to be submitted by deposit taking NBFCs … 205
Returns to be submitted by NBFCs-ND-SI … 205
Interest rate charge by NBFC … 206
Core Investment Companies (Reserve Bank) Directions, 2016 … 206
Non-Banking Financial Company - Systemically Important Non-Deposit
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 … 209
Non-Banking Financial Company – Peer To Peer Lending Platform
(Reserve Bank) Directions, 2017 … 213
LESSON 11
Special Economic Zones Act, 2005
Definitions … 220
(xxxi)
Page
Establishment of Special Economic Zone … 221

Establishment, Approval and Authorization to Operate … 222
Special Economic Zone … 222
Guidelines for notifying Special Economic Zone … 222
The Processing and Non-Processing areas … 223
Exemption from taxes, duties or cess … 223
Constitution of Board of Approval … 223
Duties, powers and functions of Board of Approval … 223
Suspension of letter of approval and transfer of Special Economic
Zone in certain cases … 224
Development Commissioner … 225
Functions of the Development Commissioner … 225
Constitution of Approval Committee … 226
Powers and Functions of Approval Committee … 226
Setting up of Unit … 226
Cancellation of letter of approval granted to entrepreneur … 227
Setting up and operation of Offshore Banking Unit … 227
Setting up of International Financial Services Centre … 227
Single application form, return, etc. … 227
Agency to inspect … 228
Single enforcement officer or agency for notified offences … 228
Investigation, Inspection, Search or Seizure … 228
Designated Courts to try suits and notified offences … 228
Offences by Companies … 228
Transfer of ownership and removal of goods … 229
Domestic clearance by Units … 229
Special Economic Zone Authority … 230
Functions of Authority … 230
Directions by the Central Government … 230
Returns and reports by the Authority … 230
Power of the Central Government to Supersede Authority … 231
Reference of Dispute and Limitation … 231
Person to whom a communication to be sent … 231
Power of the Central Government to modify provisions of the Act … 232
Power of State Government to grant exemption … 232
SEZ Act to have overriding effect … 232
Special Economic Zones Rules, 2006 … 232
(xxxii)
Page
Lesson 12
Definition of Competition … 237
Competition and Economic Efficiency … 237
Competition Law and Policy … 238
Competition Regime in India … 239
Economic Reforms and Competition … 240
Competition Law—Evaluation and Development … 240
Background to the MRTP Act, 1969 … 240
MRTP (Amendment) Act, 1991 … 242
Scope and Applicability of the MRTP Act … 243
Monopolistic Trade Practices … 244
Restrictive Trade Practices … 245
Unfair Trade Practices … 246
Consumer Protection Law in India … 246
Recommendations of Sachar Committee … 247
Competition Act, 2002 … 248
Definitions … 249
Anti-Competitive Agreements … 253
Prohibition of abuse of Dominant Position … 257
Combinations … 258
Regulation of Combinations … 259
Competition Commission of India … 260
Inquiry into certain agreements and dominant position of enterprise … 264
Inquiry into Combination by Commission … 266
Reference by a statutory authority … 267
Meetings of Commission … 268
Procedure for inquiry on complaints under section 19 … 268
Orders by Commission after inquiry into Agreements or … 269
Abuse of Dominant Position … 269
Division of Enterprise Enjoying Dominant Position … 269
Procedure for investigation of combination … 270
Inquiry into disclosures under Section 6(2) … 270
Orders of Commission on certain combinations ... 271
Appearance before Commission ... 272
Power of Commission to regulate its own procedure … 273
Rectification of orders … 274
Execution of orders of the Commission Imposing Monetary Penalty … 274
Duties of Director General … 275
(xxxiii)
Page
Penalties … 276
Compensation in case of Contravention of Orders of Commission … 276
Contravention by companies … 277
Competition Advocacy … 278
Finance, Accounts and Audit … 278
Competition Appellate Tribunal … 278
Appeal to Supreme Court … 280
Miscellaneous … 280
Lesson 13
Consumer Protection Act, 1986
Genesis of Consumer Protection Laws … 290
Basic Rights of Consumers … 291
Definitions … 291
Consumer Protection Councils … 296
Redressal Machinery under the Act … 297
District Forum … 298
State Commission … 299
National Commission … 301
Complaints before the District Forum and State Commission … 302
Limitation period for filing of complaint … 303
Powers of the Redressal Agencies … 304
Nature and scope of remedies under the Act … 305
Appeal … 306
Penalties … 306
Gist of Important Consumer Cases … 307
Lesson 14
Essential Commodities Act, 1955
Object and scope of the Act … 316
Definitions … 316
(xxxiv)
Page
Essential Commodities … 316

Authorities responsible to administer the Act … 318
Powers of the Central Government to control production,
supply and distribution etc., of essential commodities … 318
Power to issue orders … 318
Fixing the price of essential commodities being sold to
Government … 320
Fixing the price of essential commodities during emergency … 320
Payment of procurement price for food grains and edible oils … 320
Fixing price for sugar to be paid to producer … 321
Power to appoint Authorised Controller … 321
Imposition of duties on State Government … 322
Delegation of powers … 322
Nature of Order passed under the Act … 322
Effect of the Order … 323
Presumption as to Orders … 323
Burden of proof in certain cases … 323
Protection for acts done in pursuance of order … 323
Confiscation of essential commodities … 323
Seizure and confiscation of essential commodities … 323
Sale of the confiscated commodity … 325
Disposal of sale proceeds of confiscated goods … 326
Issue of show cause notice before confiscation of essential commodity … 326
Appeal against confiscation order … 326
Confiscation and punishment … 327
Bar of Jurisdiction in the matters of confiscation … 327
Offences and Penalties … 327
Cognizance of Offences … 327
Prosecution of Public Servants … 327
Penalties … 327
Mens rea (Sections 6A and 7) … 328
Attempt and Abetment … 329
False Statement … 329
Publication of names of convicted companies by Court … 329
Grant of Injunction by Civil Courts … 329
Lesson 15
Legal Metrology Act, 2009
International Organization of Legal Metrology (OIML) … 332
(xxxv)
Page
OIML Certificate System for Measuring Instruments … 332

Definitions … 333
Legal Metrology … 333
Standard weights and measures … 334
Power of inspection, seizure … 337
Forfeiture … 338
Manufacturers etc., to maintain records and registers … 338
Declarations on pre-packaged commodities … 338
Approval of model … 338
Prohibition manufacture, repair or sale of weight or measure without licence … 339
Offences and penalties … 339
Penalty for counterfeiting or seals … 340
Compounding of offence … 341
Offences by companies … 341
Power of the Central Government to make rules … 342
Power of State Government to make rules … 543
Lesson 16
Transfer of Property Act, 1882
Important Definitions … 346
Moveable and Immovable Property … 348
Rules relating to Transfer of Property (Whether moveable or immovable … 351
Who can transfer the Property … 351
Subject Matter of Transfer … 352
Formalities of Transfer … 352
Restraint on Transfers or Rule against Inalienability … 354
Transfer for benefit of Unborn Person … 355
Conditional Transfer … 356
Doctrine of Election … 357
Transfer by Ostensible Owner or Doctrine of Holding Out … 358
Doctrine of Feeding the Grant by Estoppel … 359
Doctrine of Fraudulent Transfer … 360
Doctrine of Part-Performance … 361
Properties which cannot be Transferred … 362
Rule against Perpetuity … 365
Accumulation of Income … 366
(xxxvi)
Page
Doctrine of Lis Pendens … 367

Provisions relating to Specific Transfers … 368
Sale … 368
Exchange … 368
Gift … 369
Leases … 371
Meaning and Nature of Lease … 371
Lease and Licence … 371
Formalities … 371
Types of Tenancies … 371
Requirements of a valid Notice … 372
Determination of Leases … 372
Duties of the Lessor … 273
Duties of the Lessee … 374
Rights of the Lessee … 374
Actionable Claims … 375
Definition … 375
Non-actionable Claims … 376
Mortgages … 376
Definition and nature of Mortgage … 376
Essentials of a Mortgage … 376
Form of a Mortgage Contract … 377
Kinds of Mortgages … 377
Sub-Mortgage … 381
Puisne Mortgage … 381
Rights of Mortgagor … 381
Implied Contract by Mortgagor … 381
Rights of Mortgagee and his Remedies … 382
Charges … 382
Meaning of Charge … 382
Charge by Act of Parties … 382
Charge by Operation of Law Floating Charge … 382
Distinction between Mortgage and Charge … 383
Lesson17
Real Estate (Regulation and Development) Act, 2016
Salient Features of the Real Estate (Regulation and Development) Act, 2016 … 390
(xxxvii)
Page
Advantages of RERA (Real Estate Development and Regulation Act) … 390

Registration of real estate project and
Registration of real estate agents … 395
Prior Registration of Real Estate project with Real Estate Regulatory Authority … 395
Projects exempt from the ambit of the Act … 396
Application for Registration of real estate projects … 396
Granting of Registration by the Authority … 398
Revocation of registration … 399
Registration of real estate agents … 400
Functions of real estate agents … 401
Functions and duties of promoter … 401
Adherence to sanctioned plans and project specifications by the promoter … 404
Obligations of promoter in case of transfer of a real estate project to a third party … 404
Rights and duties of allottees … 410
Establishment and incorporation of Real Estate Regulatory Authority … 412
Responsibilities of the ‘Regulatory Authority’ … 417
Establishment of Central Advisory Council … 418
Functions of Central Advisory Council … 418
Establishment of Real Estate Appellate Tribunal … 418
Powers of Tribunal … 421
Right to legal representation … 421
Role of company secretaries … 423
Offences, penalties and adjudication … 424
Specimen agreement for sale to be executed between the promoter and the allottee … 427
Lesson 18
The Benami Transactions Prohibition Act
Prohibition of benami transactions … 449
Prohibition of the right to recover property held benami … 449
Property held benami liable to confiscation … 450
Prohibition on re-transfer of property by benamidar … 450
Notice and attachment of property involved in benami transaction … 450
Manner of service of notice … 451
(xxxviii)
Page
Adjudication of benami property … 451

Confiscation and vesting of benami property … 452
Management of properties confiscated … 453
Possession of the property … 453
Appellate Tribunal … 453
Special Courts … 454
Offences and Prosecution … 455
Lesson 19
Prevention of Money Laundering
Process of Money Laundering … 458
Impact of Money laundering on the Development … 458
Prevention of Money laundering—Global Initiatives … 459
Prevention of Money laundering—Indian Initiatives … 462
Prevention of Money laundering Act, 2002 … 462
Major Provisions of the Act … 463
Definitions … 463
Adjudicating Authority … 464
Obligation of Banking Companies, Financial Institution and Intermediaries … 465
Summon, Searches and Seizures etc. … 465
Retention of Property … 465
Presumption in inter-connected transactions … 467
Appellate Tribunal … 467
Special Courts … 467
Offences triable by Special Courts … 467
Offences to be cognizable and non-bailable … 467
Power of Central Government to issue directions … 467
Agreement with Foreign Countries … 468
Assistance to a Contracting state in Certain Cases … 468
Reciprocal arrangements for Processes and assistance
for transfer of accused Persons … 468
Know Your Customer Guidelines … 469
Objective of KYC Guidelines … 469
(xxxix)
Page
Lesson 20
Indian Contract Act, 1872
Meaning and Nature of Contract … 474

Essential Elements of a Valid Contract … 476
Offer or Proposal and Acceptance … 476
Intention to Create Legal Relations … 480
Consideration … 480
Whether Gratuitous Promise can be Enforced … 484
Flaws in Contract … 485
Flaw in capacity - Capacity and Persons … 486
Mistake … 490
Misrepresentation … 492
Wilful Misrepresentation or Fraud … 493
Coercion … 494
Undue Influence … 494
Legality of Object … 496
Agreements in Restraint of Trade Void … 498
Wagering Agreements … 499
Void Agreements … 500
Restitution … 501
Contingent Contract … 501
Certain Relations Resembling Those of Contracts (Quasi-Contracts) … 502
Discharge or Termination of Contracts … 504
Performance of Contracts … 504
Discharge by Mutual Agreement or Consent … 506
Discharge by Lapse of Time … 507
Discharge by Operation of the Law … 507
Discharge by Impossibility or Frustration … 507
Discharge by Breach … 509
Remedies for Breach … 510
Contract of Indemnity and Guarantee … 513
Contract of Bailment and Pledge … 516
Bailment … 516
Pledge … 520
Law of Agency … 521
Lesson 21
Specific Relief Act, 1963
Scope of the Act … 532
(xl)
Page
Who May Sue for Specific Performance … 532

Recovery of Possession of Movable and Immovable Property … 537
Persons against whom Specific Performance Available … 538
Persons against whom specific performance cannot be enforced … 539
Discretion of the Court … 540
Rectification of Instruments … 543
Rescission of Contracts … 543
Cancellation of Instruments … 544
Declaratory Decrees … 545
Preventive Reliefs … 547
Lesson 22
Sale of Goods Act, 1930
Contract of Sale of Goods … 554

Distinction between Sale and Agreement to Sell … 554
Sale and Bailment … 555
Sale and Contract for Work and Labour … 555
Sale and Hire Purchase Agreement … 555
Subject matter of Contract of Sale of Goods … 556
Price … 557
Conditions and Warranties … 558
Doctrine of Caveat Emptor … 562
Passing of Property or Transfer of Ownership … 562
Transfer of Title by Person not the Owner … 565
Performance of the Contract of Sale … 566
Unpaid Seller … 568
Auction Sales … 571
Trading Contracts involving Rail or Sea Transit … 571
Lesson 23
Indian Partnership Act, 1932
Definitions … 574
Essentials of a Partnership and True Test of Partnership … 574
(xli)
Page
Formation of Partnership … 575

Partnership Deed … 577
Classification of Partnership … 577
Co-ownership and Partnership … 578
Hindu Joint Family, Firm and Partnership … 579
Company and Partnership … 579
Change in a Firm … 579
Partnership Property … 580
Kinds of Partners … 581
Minor Admitted to the Benefits of Partnership … 583
Rights of Minor … 583
Liabilities of Minor … 583
Relation of Partners to one another … 584
Rights of Partners … 584
Duties of Partners … 585
Relation of Partners to Third Parties … 585
Authority of a Partner … 586
Implied Authority of a Partner … 586
No implied Authority … 586
Extent of Partner Liability … 587
Liability of the Firm for Torts … 587
Liability of an Incoming Partner … 587
Lesson 24
Negotiable Instruments Act, 1881
Definition of a Negotiable Instrument … 596

Important Characteristics of Negotiable Instruments … 597
Classification of Negotiable Instruments … 597
Kinds of Negotiable Instruments … 599
Banker … 605
Customer … 606
Liability of a Banker … 606
When Banker must Refuse Payment … 606
When Banker may Refuse Payment … 607
Protection to Paying Banker … 607
Payment in Due Course … 607
Collecting Banker … 608
(xlii)
Page
Over-due, Stale or Out-of-date Cheques … 609

Liability of Endorser … 609
Rights of Holder against Banker … 609
Crossing of Cheques … 609
Modes of Crossing … 610
Not Negotiable Crossing … 610
Maturity … 612
Holder … 612
Holder in Due Course … 613
Capacity of Parties … 613
Liability of Parties … 613
Negotiation … 615
Negotiability and Assignability Distinguished … 615
Importance of Delivery … 615
Negotiation by Mere Delivery … 615
Endorsement … 616
Negotiation Back … 617
Negotiation of Lost Instrument or that Obtained by Unlawful Means … 617
Forged Endorsement … 618
Acceptance of a Bill of Exchange … 618
Acceptance for Honour … 618
Presentment for Acceptance … 618
Presentment for Acceptance when Excused … 619
Presentment for Payments … 619
Presentment for Payments when Excused … 620
Dishonour by Non-Acceptance … 620
Dishonour by Non-Payment … 620
Notice of Dishonour … 621
Notice of Dishonour Unnecessary … 621
Noting and Protest … 621
Discharge … 622
Material Alteration … 623
Retirement of a Bill under Rebate … 623
Hundis … 624
Presumptions of Law … 625
Payment of interest in case of dishonour … 625
Penalities in case of dishonour of cheques … 625
TEST PAPER … 632
Lesson 1
Reserve Bank of India Act, 1934
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning objectives
The Reserve Bank designs and implements the
• Introduction regulatory policy framework for banking and non-
• Origins of the Reserve Bank of India banking financial institutions with the aim of
providing people access to the banking system,
• Organisational Structure & Management
protecting depositors’ interest, and maintaining the
• Reserve Bank as Banker to Banks overall health of the financial system.
• Foreign Exchange Reserves Management
The rapid pace of growth achieved by financial
• Monetary policy system in the deregulated regime necessitated a
• Instruments of Monetary Policy deepening and widening of access to banking
services. The new millennium has seen the
• Inflation target Reserve Bank play an active role in balancing the
• Monetary Policy Report relationship between banks and customers;
focusing on financial inclusion; setting up
• Penalty
administrative machinery to handle customer
• Lesson Round Up grievances; pursuing clean note policy and ensuring
• Self-Test Questions development and oversight of secure and robust
payment and settlement systems.
The object of the study is to familiarize the students

with the Central Banking functions and Monetary
Policy of the Reserve Bank of India.
The Preamble to the Reserve Bank of India Act, 1934 specifies its objective as “to regulate the issue of Bank notes
and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency
and credit system of the country to its advantage”.
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INTRODUCTION
The origin of the Reserve Bank of India can be traced back to 1926, when the Royal Commission on Indian
Currency and Finance – also known as the Hilton-Young Commission – recommended the creation of a
central bank for India to separate the control of currency and credit from the Government and to augment
banking facilities throughout the country. The Reserve Bank of India Act, 1934 established the Reserve Bank
and set in motion a series of actions culminating in the start of operations in 1935. Since then, the Reserve
Bank’s role and functions have undergone numerous changes, as the nature of Indian economy and financial
sector changed.
Starting as a private shareholders’ bank, the Reserve Bank was nationalized in 1949. It then assumed the
responsibility to meet the aspirations of a newly independent country and its people. The Reserve Bank’s
nationalisation aimed at achieving coordination between the policies of the government and those of central
bank.
The Preamble to the Reserve Bank of India Act, 1934 (the Act), under which it was constituted, specifies its
objective as “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its advantage”.
The objectives outlined in the Preamble hold good. As evident from the multifaceted functions that the
Reserve Bank performs today, its role and priorities have, changed in tandem with national priorities and
global developments. Essentially, the Reserve Bank has demonstrated dynamism and flexibility to meet the
requirements of an evolving economy.
A core function of the Reserve Bank in the past years has been the formulation and implementation of
monetary policy with the objective of maintaining price stability and ensuring adequate flow of credit to
productive sectors of the economy. To these was added, in more recent times, the goal of maintaining
financial stability. The objective of maintaining financial stability has spanned its role from external account
management to oversight of banks and non-banking financial institutions as also of money, government
securities and foreign exchange markets.
The Reserve Bank designs and implements the regulatory policy framework for banking and non-banking
financial institutions with the aim of providing people access to the banking system, protecting depositors’
interest, and maintaining overall health of the financial system. Its function of regulating the commercial
banking sector, which emerged with the enactment of Banking Regulation Act, 1949, has over the time,
expanded to cover other entities. Thus, amendments to Banking Regulation Act, 1949 brought cooperative
banks and regional rural banks under the Reserve Bank’s jurisdiction, while amendments to the Reserve
Bank of India Act saw development finance institutions, non-banking financial companies and primary
dealers coming under its regulation, as these entities became important players in the financial system and
markets.
Similarly, the global economic uncertainties during and after the Second World War warranted conservation
of scarce foreign exchange reserves by sovereign intervention and allocation. Initially, the Reserve Bank
carried out regulation of foreign exchange transactions under the Defence of India Rules, 1939 and later,
under the Foreign Exchange Regulation Act of 1947. Over the years, as the economy matured, the role
shifted from foreign exchange regulation to foreign exchange management.
Post-independence, as the emerging nation tried to meet the aspirations of a large and diversified populace,
the Reserve Bank, with its experience and expertise, was entrusted with a variety of developmental roles,
particularly in the field of credit delivery. With the onset of economic planning in 1950-51, the Reserve Bank
undertook a variety of developmental functions to encourage savings and capital formation and widen and
deepen the agricultural and industrial credit set-up. Institution building was a significant aspect of its role in
the sixties and the seventies. The strategy for nearly four decades placed emphasis on the state-induced or
state-supported developmental efforts. Subsequently, the role of financial sector and financial markets was
Lesson 1 Reserve Bank of India Act, 1934 3
also given an explicit recognition in the development strategy.

The aftermath of 1991 balance of payments and foreign exchange crisis saw a paradigm shift in India’s
economic and financial policies. The approach under the reform era included a thrust towards liberalisation,
privatisation, globalisation and concerted efforts at strengthening the existing and emerging institutions and
market participants. The Reserve Bank adopted international best practices in areas, such as, prudential
regulation, banking technology, variety of monetary policy instruments, external sector management and
currency management to make the new policy framework effective.
The rapid pace of growth achieved by the financial system in deregulated regime necessitated a deepening
and widening of access to banking services. The new millennium has seen the Reserve Bank play an active
role in balancing the relationship between banks and customers; focusing on financial inclusion; setting up
administrative machinery to handle customer grievances; pursuing clean note policy and ensuring
development and oversight of secure and robust payment and settlement systems.
The last two-and-a-half decades have also seen growing integration of national economy and financial
system with the globalising world. While rising global integration has its advantages in terms of expanding
the scope and scale of growth of the Indian economy, it also exposes India to global shocks. Hence,
maintaining financial stability became an important mandate for the Reserve Bank. This, in turn, has brought
forth the need for effective coordination and consultation with other regulators within the country and abroad.
Origin of the Reserve Bank of India at a glance

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ESTABLISHMENT AND INCORPORATION OF RESERVE BANK

Section 3 of the RBI Act states that a bank to be called the Reserve Bank of India shall be constituted for the
purposes of taking over the management of the currency from the Central Government and of carrying on
the business of banking in accordance with the provisions of the Act.
Sub section (2) of this section provides that the Bank shall be a body corporate by the name of Reserve
Bank of India, having perpetual succession and a common seal, and shall by the said name sue and be
sued.
ORGANISATIONAL STRUCTURE & MANAGEMENT
The organizational structure of RBI can be classified under the following designations:
Central Board of Directors
CENTRAL BOARD OF DIRECTORS

The Central Board of Directors is at the top of the Reserve Bank’s organisational structure. Appointed by the
Government under the provisions of Reserve Bank of India Act, 1934, the Central Board has the primary
authority and responsibility for the oversight of Reserve Bank. It delegates specific functions to the Local
Boards and various committees. The Governor is the Reserve Bank’s chief executive.
The Governor supervises and directs the affairs and business of RBI. The management team also includes
Deputy Governors and Executive Directors.
The Central Government nominates fourteen Directors on the Central Board, including one Director each
from the four Local Boards. The other ten Directors represent different sectors of the economy, such as,
agriculture, industry, trade, and professions. All these appointments are made for a period of four years. The
Government also nominates one Government official as a Director representing the Government, who is
usually the Finance Secretary to the Government of India and remains on the Board ‘during the pleasure of
the Central Government’.
The Governor and Deputy Governors devote their whole time to the affairs of the Bank, and receive such
salaries and allowances as may be determined by the Central Board, with the approval of the Central
Government [Section 8(2)]
The Deputy Governor and the Director nominated may attend any meeting of the Central Board and take
part in its deliberations but shall not be entitled to vote. However when the Governor is, for any reason,
unable to attend any such meeting, a Deputy Governor authorized by him in this behalf in writing may vote
for him at that meeting. [Section 8(3)]
The Governor and a Deputy Governor hold the office for such term not exceeding five years as the Central
Government may fix when appointing them, and they are eligible for re-appointment. A Director nominated
holds the office for a period of four years and thereafter until his successor is nominated. [Section 8(4)]
No act or proceeding of the Board can be questioned on the ground merely of the existence of any vacancy
in, or any defect in the constitution, of the board. [Section 8(5)]
A retiring director shall be eligible for re-nomination. [Section 8(7)]
Local Boards
The Reserve Bank Governor and a maximum of four Deputy Governors are also ex officio Directors on the
Central Board. The Reserve Bank also has four Local Boards, constituted by the Central Government under
the RBI Act, one each for the Western, Eastern, Northern and Southern areas of the country, which are
located in Mumbai, Kolkata, New Delhi and Chennai. Each of these Boards has five members appointed by
the Central Government for a term of four years and thereafter until his successor is appointed. They are
eligible for re-appointment [Section 9(3)]. The members of the Local Board shall elect from amongst
themselves one person to be the Chairman of the Board. [Section 9(2)]. These Boards represent territorial
and economic interests of their respective areas, and advise the Central Board on matters, such as, issues
relating to local cooperative and indigenous banks. They also perform other functions that the Central Board
may delegate to them. [Section 9(1)]
Offices and Branches
The Reserve Bank has a network of offices and branches through which it discharges its responsibilities. The
units operating in the four metros — Mumbai, Kolkata, Delhi and Chennai — are known as offices, while the
units located at other cities and towns are called branches. Currently, the Reserve Bank has its offices,
including branches, at 27 locations in India. The offices and larger branches are headed by a senior officer of
the rank of Chief General Manager, designated as Regional Director while smaller branches are headed by a
senior officer of the rank of General Manager.
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FUNCTIONS OF THE RESERVE BANK

The statutes governing the establishment and mandates of central banks play a crucial role in determining
their functions across the world. The RBI has been constituted under the Reserve Bank of India (RBI Act,
1934). The legal backing for the functions of the RBI is not only confined to the provisions of the RBI Act,
but also spread over a number of statutes, such as the Banking Regulation Act, 1949, Foreign Exchange
Management Act, 1999, Government Securities Act, 2006, Payment and Settlement Systems Act, 2007,
etc.
The purposes for which the Reserve Bank of India established as India's central bank have been spelt out in
the preamble to the RBI Act, which states as follows:
(i) to regulate the issue of banknotes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its
advantage; and
(ii) that it is essential to have a modern monetary policy framework to meet the challenge of an
increasingly complex economy: the primary objective of the monetary policy is to maintain price
stability while keeping in mind the objective of growth and the monetary policy framework in India
shall be operated by the Reserve Bank of India .
The functions of the Reserve Bank of India can be summarized as under:
Banking Functions
Issue bank notes
Monetary Policy Functions
Public Debt Functions
Foreign Exchange Management
Banking Regulation & Supervision
Regulation and Supervision of NBFCs
Regulation & Supervision of Co-operative banks
Regulation of Derivatives and Money Market Instruments
Payment and Settlement Functions
Consumer Protection Functions
Financial Inclusion and Development Functions
Banking Functions
The general superintendence and direction of the affairs and business of RBI is entrusted to Central Board
having nominees from the Central Government and Directors appointed under Section 8 of the RBI Act. The
Board of RBI is headed by the Governor and assisted by not more than four Deputy Governors.
The Board exercises all powers and does all acts and things which may be exercised by the RBI.
Section 17 of the RBI Act enables RBI to do banking business, such as accepting deposits, without interest,
from any person. The other businesses, which the RBI may transact, are also mentioned in the said
provision. It states that RBI may transact various businesses such as acceptance of deposits without interest
from Central Government and State Governments, purchase, sale and rediscount of Bills of Exchange, short
term Loans and Advances to banks, annual Contributions to National Rural Credit Funds, dealing in
Derivatives, purchase and sale of Government Securities, purchase and sale of shares of State Bank of
India, National Housing Bank, Deposit Insurance and Credit Guarantee Corporation, etc., keeping of
deposits with SBI for specific purposes, making and issue of Banknotes, etc.
Similarly, Section 18 facilitates the RBI to act as a 'Lender of Last Resort'; whereas Section 19 states the
list of businesses which the RBI may not transact. This apart, the provisions of RBI Act enables the RBI to
act as banker to Central Government and State Governments. Under Sections 20 and 21 the RBI shall have
an obligation and right respectively to accept monies for account of Central Government and to make
payments up to the amount standing to the credit of its account, and to carry out its exchange, remittance
and other banking operations, including the management of public debt of the Union. In the case of State
Governments, the said banking functions may be undertaken by way of an agreement between RBI and the
State Government concerned as provided in Section 21-A of RBI Act. These agreements made between the
RBI and the State Governments are statutory as they are required to be laid before the Parliament as
soon as they are made.
Issue Functions
Right to issue bank notes is one of the key central banking functions of the RBI. Section 22 of RBI Act
confers RBI with sole right to issue bank notes in India. The issue function of bank notes is performed by the
Issue Department, which is separated and kept wholly distinct from Banking Department. The RBI Act
enables the RBI to recommend to Central Government the denomination of bank notes, i.e. two rupees, five
rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand
rupees, two thousand rupees, five thousand rupees and ten thousand rupees or other denominations not
exceeding ten thousand rupees.
The design, form and material of bank notes is approved by Central Government on the recommendations of
Central Board of the RBI. Every bank note is a legal tender at any place in India, however, on
recommendation of the Central Board, the Central Government may declare any series of bank notes of
any denomination as not to be a legal tender. Another important function is exchange of mutilated or torn
notes, which under the RBI Act is not a matter of right, but a matter of grace. The bank notes that are being
issued by RBI are exempt from payment of stamp duty .
Monetary Policy Function
Chapter III-F of the RBI Act provides a statutory basis for Monetary Policy Framework and the Monetary
Policy Committee (MPC). The Central Government, in consultation with the RBI shall determine the inflation
target in terms of the Consumer Price Index, once in every five years, which needs to be notified in the
Official Gazette. Similarly, it is the Central Government that should constitute a Monetary Policy Committee
by notification in the Official Gazette.
The Monetary Policy Committee consists of

(a) the Governor of the RBI;
(b) Deputy Governor of the RBI in charge of Monetary Policy;
(c) one officer of the RBI to be nominated by the Central Board; and
(d) three persons to be appointed by the Central Government .
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The Monetary Policy Committee has been entrusted with the statutory duty to determine the Policy Rate
required to achieve the inflation target. The decision of the Monetary Policy Committee is binding on RBI
and the RBI is required publish a document explaining the steps to be taken to implement the decisions of
the Monetary Policy Committee. The meetings of the MPC are required to be held at least 4 times a year
and its decisions to be published after each meeting.
Public Debt Functions
The Parliament of India enacted the Government Securities Act, 2006 ('GS Act') with an objective to
consolidate and amend the law relating to Government securities and its management by the Reserve Bank
of India. The GS Act applies to Government securities created and issued by the Central Government or a
State Government. The GS Act prescribes the procedure and modalities to be followed by RBI in the
management of public debt and also confers various powers on RBI including the power to determine the
title to a Government security if there exists any doubt in the opinion of RBI. Further, Section 18 of the GS
Act provides that no order made by RBI under this Act shall be called in question by any Court for the
reasons stated therein. Prior to the enactment of GS Act, the said public debt functions of the RBI have been
governed under the provisions of Public Debt Act, 1944. However, the enactment of the GS Act has not fully
repealed the Public Debt Act, 1944. This is evident from Section 31 of the GS Act which states that the
Public Debt Act, 1944, shall cease to apply to the Government securities to which this Act (GS Act) applies.
Foreign Exchange Management
The powers and responsibilities with respect to external trades and payments, development and
maintenance of foreign exchange market in India have been conferred on RBI under the provisions of
Foreign Exchange Management Act, 1999 ('FEMA'). Section 10 of the FEMA empowers the RBI to authorize
any person to be known as authorized person to deal in foreign exchange or in foreign securities, as an
authorized dealer, money changer or off-shore banking unit or in any other manner as it deems fit. Similarly,
FEMA empowers the RBI to revoke an authorization issued to an authorized dealer in public interest, or if
the authorized person has failed to comply with the conditions subject to which the authorization was granted
or has contravened any of the provisions of the FEMA or any rule, regulation, notification, direction or order
issued by the RBI. However, the revocation of an authorization may be done by the RBI after following the
prescribed procedure in FEMA or the Regulations made thereunder. Section 13 of the FEMA details out the
contraventions and penalties, and the RBI has been empowered with the power to compound such
contraventions under Section 15 of the FEMA.
Banking Regulation & Supervision
The power to regulate and supervise banks has been provided to RBI under the provisions of Banking
Regulation Act, 1949 (BR Act, 1949). Although, the preamble to the BR Act, 1949, states that it is an Act to
consolidate and amend the law relating to banking, the powers of RBI to formulate banking policy, regulate
banking business, protect the interests of banking companies, supervision of banking companies, etc., are
spread across the provisions of BR Act, 1949.
Firstly, Section 5(ca) of the BR Act, 1949, states that banking policy means any policy, which is specified
from time to time by the RBI, in the interest of banking system or in the interest of monetary stability or sound
economic growth, having due regard to the interests of the depositors, the volume of deposits and other
resources of the bank and the need for equitable allocation and the efficient use of these deposits and
resources.
Secondly, as a part of RBI's regulatory power, Section 10BB of the BR Act, 1949 empowers RBI to appoint a
Chairman or Managing Director of a banking company for the reasons stated therein. Similarly, as a part of
control over management, Section 36-AB of BR Act, 1949, provides for power to appoint additional directors
on the boards of banking companies. Not only the powers to appoint managerial persons but also the power
to remove them are vested with the RBI under Section 36-AA of the BR Act, 1949. Moreover, the RBI has
been empowered, to supersede the board of banking companies.
Though the business of banking is within the domain of a banking company, the power to control advances
by banking companies is also provided to RBI under Section 21 of the BR Act, 1949. Similarly, Section 22 of
the BR Act, 1949 confers on RBI the power to issue license and also to cancel licenses of banking
companies. Another important regulatory power that has been vested with the RBI is to issue directions to
banking companies. Under Section 35-A of BR Act, 1949, RBI has the power to issue directions to banking
companies in the public interest or in the interest of banking policy or to prevent the affairs of any banking
company being conducted in a manner detrimental to the interests of the depositors or in a manner
prejudicial to the interests of banking company or to secure the proper management of any banking
company.
In this regard, it may be worthwhile to note the observations of the Hon'ble Supreme Court of India in the
case of Joseph Kuruvilla v. Reserve Bank of India {AIR 1962 SC 1373} that in view of history of
establishment of the Reserve Bank, as a Central Bank for India, its position as a banker's bank, its control
over the banking companies and banking in India, its position as an issuing bank, its power to license the
banking companies and cancel their licence and the numerous other powers, it is unanswerable that
between the Court and the Reserve Bank, the momentous decision to wind up a tottering or unsafe banking
company in the interest of the depositors, may reasonably be left to the Reserve Bank.
The provisions of the Banking Regulation (Amendment) Act, 2017, provides for dealing with cases relating to
stressed assets. Stressed assets are loans where the borrower has defaulted in repayment or where the
loan has been restructured, etc. In terms of Sections 35-AA and 35-AB of the BR Act, 1949, the RBI has
been specifically authorized to issue directions to banking companies for resolution of stressed assets. As a
part of the supervisory power, the RBI has been empowered to inspect banking companies on its own or at
the instance of Central Government under the provisions of the BR Act, 1949 .In so far as the regulatory and
supervisory powers of the RBI over the public sector banks including the State Bank of India and the
Regional Rural Banks are concerned, in addition to the provisions available in the respective Special Acts,
the provisions as stated in Section 51 of the BR Act shall also be applicable. Thus an overall responsibility to
find out the well-being of a banking company, in improving monetary stability and economic growth as well
as keeping in view the interests of depositors, has been left with the Reserve Bank of India.
Regulation and Supervision of NBFCs
The regulation and supervision of non-banking financial companies is one of the critical functions that the
RBI has been entrusted with. Section 45-IA of RBI Act mandates every non-banking financial company to
obtain a certificate of registration from the RBI and to maintain net owned fund as may be specified by
the RBI in the Official Gazette, before commencing such non-banking financial business . Further, as part
of regulation and supervision of non-banking financial companies, the RBI has been conferred with the
statutory powers to regulate or prohibit issue of prospectus or advertisements soliciting deposits of
money by non-banking financial companies, power to determine policy and issue directions to non-
banking financial companies, etc. Further, the RBI has been empowered under Section 45-L of the RBI Act
to call for information and issue directions to non-banking financial companies for the reasons stated therein.
As a part of the supervisory control over the non-banking financial companies, the RBI has powers to inspect
them under Section 45-N of RBI Act, 1934. The RBI shall exercise all these powers in the public interest
10 EP-EBCL
or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-
banking financial company being conducted in a manner detrimental to the interest of the depositors or in a
manner prejudicial to he interest of the non-banking financial company. This makes it clear that the power of
RBI to regulate and supervise banking companies emanates from the provisions of BR Act whereas the
powers to regulate and supervise non-banking financial companies has the source from RBI Act.
Regulation & Supervision of Co-operative banks
Regulation and supervision of urban co-operative banks is another area the RBI has been entrusted with. In
terms of Article 246 of the Constitution of India, the exercise of legislative powers of the Union and the State
are given in the Union List and the State List, i.e. List I and II respectively of the VII Schedule to the
Constitution. The entry relating to Cooperative Societies fall in State List whereas the entry relating to
banking falls in the Union List. These results in the duality of jurisdiction over cooperative banks both by the
Reserve Ban of India, in terms of Banking Regulation Act, 1949, and the Registrar of Cooperative Societies,
in terms of the respective State Cooperative Societies Act, of the State concerned. Section 56 of the BR Act,
1949, makes it applicable to co-operative societies involved in the business of banking. As a part of the
regulatory and supervisory regime over co-operative banks, the RBI has been entrusted with the powers to
issue licenses and cancel licenses of co-operative banks, supersede their boards, inspect them and also
issue directions to them in the public interest, interest of banking policy, control over loans and advances,
etc.
In Janata Sahakari Bank Ltd. v. State of Maharashtra (AIR 1993 Bombay 252) Hon'ble Bombay High Court
has held that though the control over management of Co-operative Society where it is Cooperative Banking
Society or otherwise is vested in the Registrar of Co-operative Societies, but insofar as banking is
concerned, by virtue of S.56 of the Banking Regulation Act, 1949, read with S.35A of the Banking Regulation
Act, 1949, it will be a subject with which the Reserve Bank of India has full power.
Regulation of Derivatives and Money Market Instruments
Chapter III-D was inserted in the RBI Act with effect from 9th January 2007 by way of an amendment to the
RBI Act, 1934. In the said chapter, the Parliament of India thought it appropriate to introduce provisions
relating to regulation of transactions relating to derivatives, money market instruments, securities, etc. by the
RBI. Sub-section (a) of Section 45U of RBI Act defines derivative as an instrument to be settled at a future
date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit
index, price of securities (also called 'underlying'), or a combination of more than one of them and includes
interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign
currency options, foreign currency rupee options or such other instruments as may be specified by the RBI
from time to time. Similarly, money market instruments have been defined to include call or notice money,
term money, repo, reverse repo, certificate of deposit, commercial paper and such other debt instrument of
original or initial maturity up to one year as the RBI may specify from time to time. The powers of RBI to
regulate money market instruments have been provided under Section 45W of the RBI Act, which states
that the RBI may specify from time to time, in public interest or to regulate the financial system of the country
to its advantage, determine the policy relating to interest rates or interest rate products and give directions in
that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange,
derivatives, or other instruments of like nature.
Payment and Settlement Functions
The Parliament of India enacted the Payment and Settlement Systems Act, 2007 ('PSS Act, 2007') with an
objective to provide for the regulation and supervision of payment systems in India and to designate
Reserve Bank of India as the authority for that purpose and for matters connected therewith or incidental
thereto. Under Section 4 of the PSS Act, 2007, no person shall commence or operate a payment system
except with an authorization issued by the RBI.
Similarly, under Section 8 of the PSS Act, 2007, RBI has the powers to revoke the authorization granted to
any person if it contravenes any of the provisions of PSS Act or does not comply with the regulations or fails
to comply with the orders or directions issued by the RBI or operates the payment system contrary to the
conditions subject to which the authorization was issued. The regulation and supervision of payment systems
has been conferred on the RBI by virtue of provisions of Chapter IV f PSS Act, 2007. The regulatory and
supervisory controls include the power to determine standards for the functioning of payment systems,
power to call for returns, documents or other information, power to enter and inspect payment systems,
power to carry out audit and inspections , power to issue directions, etc.
Consumer Protection Functions
In India, although the provisions of the BR Act, 1949, requires the RBI to bear in mind the vital issue of
protection of depositors' interests while granting a banking license or cancellation thereof, giving directions
on advances o on any banking matter, applying for suspension, winding up, or amalgamation of banks,
approving appointment of CEOs or additional directors, removal of CEOs, etc., there is no specific provision
under the BR Act, 1949, or any of the other statutes for forming a formal mechanism for redressal of
grievances of depositors. In the absence of a specific provision for the purpose, RBI has resorted to its
powers under Section 35-A of the BR Act, 1949, to formulate the Banking Ombudsman Scheme for the
redressal of grievances of depositors.
Financial Inclusion and Development Functions
The mushrooming of unauthorized and unregulated money lenders in the financial system of the country
necessitated the RBI to do something more than what has been provided in the Rule books. Financial
literacy or financial inclusion, though, not explicitly expressed in the RBI Act, 1934, or the BR Act, 1949, sub-
section (16) of Section 17 of the RBI Act, 1934, enables RBI to do all such matters and things as may be
incidental to or consequential to the exercise of its powers or the discharge of its duties under the Act.
Further, India being a country with significant illiteracy, there remains an obligation on the part of the 'State'
to educate the people and also to include them into the organised financial system of the country to get the
benefits of professional banking system of the country. The amendment to the BR Act, 1949, inserting
Section 26-A is a step towards achieving this objective, which makes it amply clear that the statute casts a
responsibility on the RBI to focus towards achieving financial literacy in the country. Not only the BR Act,
1949, even the RBI Act, 1934 , mandates the RBI to maintain expert staff to study various aspects of rural
credit and development, which emphasizes the premier role to be played by RBI in promoting financial
literacy and financial inclusion among the citizens living even in the remote areas of the country.
Right to Issue Bank Notes
Management of currency is one of the core central banking functions of the Reserve Bank for which it derives
the necessary statutory powers from Section 22 of the RBI Act, 1934. Along with the Government of India, the
Reserve Bank is responsible for the design, production and overall management of the nation’s currency, with
the goal of ensuring an adequate supply of clean and genuine notes. In consultation with the Government, the
Reserve Bank routinely addresses security issues and targets ways to enhance security features to reduce the
risk of counterfeiting or forgery of currency notes.
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The Paper Currency Act of 1861 conferred upon the Government of India the monopoly of issuing note,
thus ending the practice of private and presidency banks issuing currency. Between 1861 and 1935, the
Government of India managed the issue of paper currency. In 1935, when the Reserve Bank began
operations, it took over the function of note issue from the Office of the Controller of Currency,
Government of India.
Denominations of Notes
The Indian Currency is called the Indian Rupee (abbreviated as Re. in singular and Rs. in plural), and its
sub-denomination the Paisa (plural Paise). At present, notes in India are issued in the denomination of `5,
`10, `20, `50, `100, `200, `500 and `2,000. The printing of `1 and `2 denominations has been
discontinued. However, notes in these denominations issued earlier are still valid and in circulation. The
Reserve Bank is also authorised to issue notes in the denominations of five thousand rupees and ten
thousand rupees or any other denomination, but not exceeding ten thousand rupees that the Central
Government may specify. Thus, in terms of Section 24 of RBI Act 1934, notes in denominations higher than
ten thousand rupees cannot be issued. The Central Government may, on the recommendation of the Central
Board, direct the non-issue or the discontinuance of issue of bank notes of such denominational values as it
may specify in this behalf. The Government of India announced the demonetisation of `500 and `1000 bank
notes with effect from midnight of November 8, 2016, making these notes invalid. A newly redesigned series
of `500 banknote, in addition to a new denomination of`2000 banknote is in circulation since 10 November
2016.
Form of Bank Notes
The Department of Currency Management makes recommendations on design of bank notes to the Central
Government, forecasts the demand for notes, and ensures smooth distribution of notes and coins throughout
the country [Section 25]. It arranges to withdraw unfit notes, administers the provisions of the RBI (Note
Refund) Rules, 2009 (these rules deal with the payment of value of the soiled or mutilated notes) and
reviews/rationalises the work systems and procedures at the issue offices on an ongoing basis.
Legal tender character of notes
Section 24 sub-section (1) of the Act states that subject to the provisions of sub-section (2), every bank note
shall be legal tender at any place in India in payment or on account for the amount expressed therein, and
shall be guaranteed by the Central Government.
Sub-section 2 empowers the Central Government, on recommendation of the Central Board, by notification
in the Gazette of India to declare that, with effect from such date as may be specified in the notification, any
series of bank notes of any denomination to cease to be legal tender save at such office or agency of the
Bank and to such extent as may be specified in the notification.
Currency Distribution
The Government of India on the advice of the Reserve Bank decides on the various denominations of the
notes to be printed. The Reserve Bank coordinates with the Government in designing the banknotes,
including their security features.
The printed notes received from Printing Press set up by Government and RBI are issued for circulation both
through remittances to banks as also the Reserve Bank counters.
Coin Distribution
The Indian Coinage Act, 1906 governs the minting of rupee coins, including small coins of the value of less
than one rupee. Coins are legal tender in India for unlimited amounts. Fifty paisa coins are legal tender for
any sum not exceeding ten rupees and smaller coins for any sum not exceeding one rupee. The Reserve
Bank acts as an agent of the Central Government for distribution, issue and handling of the coins and for
withdrawing and remitting them back to Government as may be necessary.
Combating Counterfeiting
The Reserve Bank, in consultation with the Government of India, periodically reviews and upgrades the
security features of the bank notes to deter counterfeiting. It also shares information with various law
enforcement agencies to address the issue of counterfeiting. It has also issued detailed guidelines to banks
and government treasury offices on how to detect and impound counterfeit notes.
Bank exempt from stamp duty on bank notes
The Bank is not liable to the payment of any stamp duty under the Indian Stamp Act, 1899, in respect of
bank notes issued by it {section 29].
Powers of Central Government to supersede Central Board
Section 30 Sub section (1) of the states that if in the opinion of Central Government the Bank fails to carry
out any of the obligations imposed on it by or under the Act, by notification in the Gazette of India, declare
the Central Board to be superseded, and thereafter the general superintendence and direction of the affairs
of the Bank shall be entrusted to such agency at the Central Government may determine, and such agency
may exercise the powers and do all acts and things which may be exercised or done by the Central Board
under the Act.
As per sub section 2 of this section when action is taken under this section the Central Government shall
cause a full report of the circumstances leading to such action and of the action taken to be laid before
Parliament at the earliest possible opportunity and in any case within three months from the issue of the
notification superseding the Board.
Issue of demand bills and notes
Section 31 Sub section (1) of the states that no person in India other than the Bank, or, as expressly
authorized by the Act the Central Government shall draw, accept, make or issue any bill of exchange, hundi,
promissory note or engagement for the payment of money payable to bearer on demand, or borrow, owe or
take up any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such
person: However cheques or drafts, including hundis, payable to bearer on demand or otherwise may be
drawn on a person's account with a banker, shroff or agent.
As per sub section 2 of this section notwithstanding anything contained in the Negotiable Instrument Act,
1881, no person in India other than the Bank or, as expressly authorized by the Act, the Central Government
shall make or issue any promissory note expressed to be payable to the bearer of the instrument.
Banker to the Central Government & State Governments
Reserve Bank acts as banker to all the State Governments in India, except Jammu & Kashmir and Sikkim. It
has limited agreements for the management of the public debt of these two State Governments. As a banker
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to the Government, the Reserve Bank receives and pays money on behalf of the various Government
departments.
The Reserve Bank also undertakes to float loans and manage them on behalf of the Governments. It also
provides Ways and Means Advances – a short-term interest bearing advance – to the Governments, to meet
the temporary mismatches in their receipts and payments. Besides, it arranges for investments of surplus
cash balances of the Governments as a portfolio manager. The Reserve Bank also acts as adviser to
Government, whenever called upon to do so, on monetary and banking related matters.
The banking functions for the governments are carried out by the Public Accounts Departments at the offices
/branches of the Reserve Bank, while management of public debt including floatation of new loans is done at
Public Debt Office at offices/branches of the Reserve Bank and by the Internal Debt Management
Department at the Central Office.
Management of Public Debt
The Reserve Bank manages the public debt and issues new loans on behalf of the Central and State
Governments. It involves issue and retirement of rupee loans, interest payment on the loan and operational
matters about debt certificates and their registration.
The union budget decides the annual borrowing needs of the Central Government. Parameters, such as,
interest rate, timing and manner of raising of loans are influenced by the state of liquidity and the
expectations of the market. The Reserve Bank’s debt management policy aims at minimising the cost of
borrowing, reducing the roll-over risk, smoothening the maturity structure of debt, and improving depth and
liquidity of Government securities markets by developing an active secondary market.
Reserve Bank as Banker to Banks
The Reserve Bank to fulfill this function, opens current accounts of banks with itself, enabling these banks to
maintain cash reserves as well as to carry out inter-bank transactions through these accounts. Inter-bank
accounts can also be settled by transfer of money through electronic fund transfer system, such as, the Real
Time Gross Settlement System (RTGS).
In addition, the Reserve Bank has also introduced the Centralised Funds Management System (CFMS) to
facilitate centralised funds enquiry and transfer of funds across Deposit Accounts Department (DADs). This
helps banks in their fund management as they can access information on their balances maintained across
different DADs from a single location.
As Banker to Banks, the Reserve Bank provides short-term loans and advances to select banks, when
necessary, to facilitate lending to specific sectors and for specific purposes. These loans are provided
against promissory notes and other collateral given by the banks.
The Reserve Bank also acts as the ‘lender of last resort’. It can come to the rescue of a bank that is solvent
but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing
to extend credit to that bank. The Reserve Bank extends this facility to protect the interest of the depositors
of the bank and to prevent possible failure of a bank, which in turn may also affect other banks and
institutions and can have an adverse impact on financial stability and thus on the economy.
Financial Regulation and Supervision
The Reserve Bank’s regulatory and supervisory domain extends not only to the Indian banking system but
also to the development financial institutions (DFIs), non-banking financial companies (NBFCs), primary
dealers, credit information companies and select segments of the financial markets.
As the regulator and the supervisor of the banking system, the Reserve Bank has a critical role to play in
ensuring the system’s safety and soundness on an ongoing basis. The objective of this function is to protect
the interest of depositors through an effective prudential regulatory framework for orderly development and
conduct of banking operations, and to maintain overall financial stability through various policy measures.
Prudential Norms for Banks
In order to strengthen the balance sheets of banks, the Reserve Bank has been prescribing appropriate
prudential norms for them in regard to income recognition, asset classification and provisioning, capital
adequacy, investments portfolio and capital market exposures, to name a few. A brief description of these
norms is furnished below:
Capital Adequacy: The Reserve Bank has instructed banks to maintain adequate capital on a continuous
basis. The adequacy of capital is measured in terms of Capital to Risk-Weighted Assets Ratio (CRAR).
Under the recently revised framework, banks are required to maintain adequate capital for credit risk, market
risk, operational risk and other risks. Basel II standardised approach is applicable with road map drawn up
for advanced approaches.
Loans and Advances: In order to maintain the quality of their loans and advances, the Reserve Bank
requires banks to classify their loan assets as performing and non-performing assets (NPA), primarily based
on the record of recovery from the borrowers. NPAs are further categorised into Sub-standard, Doubtful and
Loss Assets depending upon age of the NPAs and value of available securities. Banks are also required to
make appropriate provisions against each category of NPAs. Banks are also required to have exposure limits
in place to prevent credit concentration risk and limit exposures to sensitive sectors, such as, capital markets
and real estate.
Investments: The Reserve Bank requires banks to classify their investment portfolios into three categories for
the purpose of valuation: Held to Maturity (HTM), Available for Sale (AFS) and Held for Trading (HFT). The
securities held under HFT and AFS categories have to be marked-to-market periodically and depreciation, if
any, needs appropriate provisions by banks. Securities under HTM category must be carried at acquisition /
amortised cost, subject to certain conditions.
Foreign Exchange Reserves Management

The Reserve Bank, as the custodian of the country’s foreign exchange reserves, is vested with the
responsibility of managing their investment. The legal provisions governing management of foreign exchange
reserves are laid down in the Reserve Bank of India Act, 1934.
The Reserve Bank’s reserves management function has in recent years grown both in terms of importance
and sophistication for two main reasons. First, the share of foreign currency assets in the balance sheet of
the Reserve Bank has substantially increased. Second, with the increased volatility in exchange and interest
rates in the global market, the task of preserving the value of reserves and obtaining a reasonable return on
them has become challenging. The basic parameters of the Reserve Bank’s policies for foreign exchange
reserves management are safety, liquidity and returns.
Within this framework, the Reserve Bank focuses on:
(a) Maintaining market’s confidence in monetary and exchange rate policies.

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(b) Enhancing the Reserve Bank’s intervention capacity to stabilise foreign exchange markets.
(c) Limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks during times
of crisis, including national disasters or emergencies.
(d) Providing confidence to the markets that external obligations can always be met, thus reducing the
costs at which foreign exchange resources are available to market participants.
(e) Adding to the comfort of market participants by demonstrating the backing of domestic currency by
external assets.
While safety and liquidity continue to be the twin-pillars of reserves management, return optimisation has
become an embedded strategy within this framework. The Reserve Bank has framed policy guidelines
stipulating stringent eligibility criteria for issuers, counterparties, and investments to be made with them to
enhance the safety and liquidity of reserves. The Reserve Bank, in consultation with the Government,
continuously reviews the reserves management strategies.
Transactions in foreign exchange
Section 40 of the Act says that the Bank shall sell to or buy from any authorized person who makes a
demand in that behalf at its office in Bombay, Calcutta, Delhi or Madras or at such of its branches as the
Central Government may, by order, determine, foreign exchange at such rates of exchange and on such
conditions as the Central Government may from time to time by general or special order determine, having
regard so far as rates of exchange are concerned to its obligations to the International Monetary Fund:
In this section "authorized person" means a person who is entitled by or under the Foreign Exchange
Regulation Act,to buy, or as the case may be, sell, the foreign exchange to which his demand relates.
Market Operations
The Reserve Bank operationalises its monetary policy through its operations in government securities,
foreign exchange and money markets.
Open Market Operations: Open Market Operations in the form of outright purchase/sale of Government
securities are an important tool of the Reserve Bank’s monetary management. The Bank carries out such
operations in the secondary market on the electronic Negotiated Dealing System – Order Matching (NDS-
OM) platform by placing bids and/or taking the offers for securities.
Liquidity Adjustment Facility Auctions: The liquidity management operations are aimed at modulating liquidity
conditions such that the overnight rates in the money market remains within the informal corridor set by the
repo and reverse repo rates for the liquidity adjustment facility (LAF) operations. In a repo transaction, the
Reserve Bank infuses liquidity into the system by taking securities as collateral, while in a reverse repo
transaction it absorbs liquidity from the system with the Reserve Bank providing securities to the counter
parties.
Market Stabilisation Scheme: The Market Stabilisation Scheme (MSS) was introduced in April 2004 under
which Government of India dated securities/treasury bills could be issued to absorb surplus structural/
durable liquidity created by the Reserve Bank’s foreign exchange operations. MSS operations are a
sterilisation tool used for offsetting the liquidity impact created by intervention in the foreign exchange
markets.
Payment and Settlement Systems
The regulation and supervision of payment systems is being increasingly recognised as a core responsibility
of central banks. Safe and efficient functioning of these systems is an important pre-requisite for proper
functioning of financial system and the efficient transmission of monetary policy.
The Payment and Settlement Systems Act, 2007 provides for regulation and supervision of payment systems
in India and designates the Reserve Bank as the authority for the purpose. As per the Act, only payment
systems authorised by the Reserve Bank can be operated in the country. The Act also provides for the
settlement effected under the rules and procedures of the system provider to be treated as final and
irrevocable
The Reserve Bank has put in place an institutional framework and structure for oversight of the payment
systems. In 2005, it created a Board for Regulation and Supervision of Payment and Settlement Systems
(BPSS) as a Committee of the Central Board. A new department called the Department of Payment and
Settlement Systems (DPSS) was constituted to assist the BPSS in performing its functions.
The Reserve Bank has adopted a three-pronged strategy of consolidation, development and integration to
establish a modern and robust payment and settlement system which is also efficient and secure. The
consolidation revolves around expanding the reach of the existing products by introducing clearing process
in new locations.
The Reserve Bank has also taken steps towards integrating the payment system with the settlement systems
for government securities and foreign exchange. To facilitate settlement of Government securities
transactions, it created the Negotiated Dealing System, a screen-based trading platform.
For settlement of trade in foreign exchange, Government securities and other debt instrument, it has set up
the Clearing Corporation of India Limited (CCIL). This plays the role of a central counter party to transactions
and guarantees settlement of trade, thus managing the counter party risk.
Monetary Policy Management
One of the most important functions of central banks is formulation and execution of monetary policy. In the
Indian context, the basic functions of the Reserve Bank of India as enunciated in the Preamble to the RBI
Act, 1934 are: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the country to its
advantage.” Thus, the Reserve Bank’s mandate for monetary policy flows from its monetary stability
objective. Essentially, monetary policy deals with the use of various policy instruments for influencing the
cost and availability of money in the economy. As macroeconomic conditions change, a central bank may
change the choice of instruments in its monetary policy. The overall goal is to promote economic growth and
ensure price stability.
Monetary Policy
Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under
its control to achieve the goals specified in the Act. The Reserve Bank of India (RBI) is vested with the
responsibility of adopting and implementing monetary policy. This responsibility is explicitly mandated under
the Reserve Bank of India Act, 1934. The primary objective of monetary policy is to maintain price stability
while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable
growth.
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Monetary Policy Framework
The RBI Act explicitly provides empowers the Reserve Bank to operate the monetary policy framework of the
country.
• The framework aims at setting the policy (repo) rate based on an assessment of the current and
evolving macroeconomic situation; and modulation of liquidity conditions to anchor money market
rates at or around the repo rate. Repo rate changes transmit through the money market to the entire
the financial system, which, in turn, influences aggregate demand – a key determinant of inflation and
growth.
• Once the repo rate is announced, the operating framework designed by the Reserve Bank envisages
liquidity management on a day-to-day basis through appropriate actions, which aim at anchoring the
operating target– the Weighted Average Call Rate (WACR) – around the repo rate.
• The operating framework is fine-tuned and revised depending on the evolving financial market and
monetary conditions, while ensuring consistency with the monetary policy stance.
Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.
• Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks
against the collateral of government and other approved securities under the Liquidity Adjustment
Facility (LAF).
• Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an
overnight basis, from banks against the collateral of eligible government securities under the LAF.
• Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions.
Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning
variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank
term money market, which in turn can set market based benchmarks for pricing of loans and
deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts
variable interest rate reverse repo auctions, as necessitated under the market conditions.
• Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow
additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity
Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against
unanticipated liquidity shocks to the banking system.
• Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the
weighted average call money rate.
• Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or
other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India
Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and
when the MSF rate changes alongside policy repo rate changes.
• Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the
Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the
Reserve Bank may notify from time to time in the Gazette of India.
• Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and
liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often
influence the availability of resources in the banking system for lending to the private sector.
• Open Market Operations (OMOs): These include both, outright purchase and sale of government
securities, for injection and absorption of durable liquidity, respectively.
• Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in
2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed
through sale of short-dated government securities and treasury bills. The cash so mobilised is held in
a separate government account with the Reserve Bank.
Constitution of Monetary Policy Committee

Section 45ZB of the Act states that:-
(1) The Central Government may, by notification in the Official Gazette, constitute a Committee to be
called the Monetary Policy Committee of the Bank.
(2) The Monetary Policy Committee shall consist of the following Members, namely:—
(a) the Governor of the Bank—Chairperson, ex officio;
(b) Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio;
(c) one officer of the Bank to be nominated by the Central Board—Member, ex officio; and
(d) three persons to be appointed by the Central Government—Members.
(3) The Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation
target.
(4) The decision of the Monetary Policy Committee shall be binding on the Bank.
Meetings of Monetary Policy Committee

Section 45ZI of the Act states that:-
(1) The Bank shall organise at least four meetings of the Monetary Policy Committee in a year.
20 EP-EBCL
(2) The meeting schedule of the Monetary Policy Committee for a year shall be published by the Bank
at least one week before the first meeting in that year.
(3) The meeting schedule may be changed only––
(a) by way of a decision taken at a prior meeting of the Monetary Policy Committee; or
(b) if, in the opinion of the Governor, an additional meeting is required or a meeting is required to
be rescheduled due to administrative exigencies.
(4) Any change in meeting schedule shall be published by the Bank as soon as practicable.
(5) The quorum for a meeting of the Monetary Policy Committee shall be four Members, at least one of
whom shall be the Governor and in his absence, the Deputy Governor who is the Member of the
Monetary Policy Committee.
(6) The meetings of the Monetary Policy Committee shall be presided over by the Governor, and in his
absence by the Deputy Governor who is a Member of the Monetary Policy Committee.
(7) Each Member of the Monetary Policy Committee shall have one vote.
(8) All questions which come up before any meeting of the Monetary Policy Committee shall be decided
by a majority of votes by the Members present and voting, and in the event of an equality of votes,
the Governor shall have a second or casting vote.
(9) The Central Government may, if it considers necessary, convey its views in writing to the Monetary
Policy Committee from time to time.
(10) The vote of each Member of the Monetary Policy Committee for a proposed resolution shall be
recorded against such Member.
(11) Each Member of the Monetary Policy Committee shall write a statement specifying the reasons for
voting in favour of, or against the proposed resolution.
(12) The procedure, conduct, code of confidentiality and any other incidental matter for the functioning of
the Monetary Policy Committee shall be such as may be specified by the regulations made by the
Central Board.
(13) The proceeding of the Monetary Policy Committee shall be confidential.
Monetary Policy Report

Section 45ZM sub section 1 of the Act provides that the Bank shall, once in every six months, publish a
document to be called the Monetary Policy Report, explaining—
(a) the sources of inflation; and
(b) the forecasts of inflation for the period between six to eighteen months from the date of publication
of the document.
As per sub section 2 of this section the form and contents of the Monetary Policy Report shall be such as
may be specified by the regulations made by the Central Board.
Power to make rules

Section 45ZO sub section (1) of the Act provides that the Central Government may, by notification in the
Official Gazette, make rules for the purpose of carrying out the provisions of this Chapter.
Sub section 2 of this section states that in particular and without prejudice to the generality of the foregoing
power, such rules may provide for––
(a) the procedure of functioning of the Search-cum-Selection Committee under sub-section (3) of
section 45ZC;
(b) the terms and conditions of appointment, (other than the remuneration and other allowances), of
Members of the Monetary Policy Committee under sub-section (2) of section 45ZD; and
(c) any other matter which is to be, or may be, prescribed by the Central Government by rules.
PENALTIES
(1) Whoever in any application, declaration, return, statement, information or particulars made, required or
furnished by or under or for the purposes of any provisions of this Act, or any order, regulation or direction
made or given thereunder or in any prospectus or advertisement issued for or in connection with the
invitation by any person, of deposits of money from the public wilfully makes a statement which is false in
any material particular knowing it to be false or wilfully omits to make a material statement shall be
punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.
(2) If any person fails to produce any book, account or other document or to furnish any statement,
information or particulars which, under this Act or any order, regulation or direction made or given
thereunder, it is his duty to produce or furnish or to answer any question put to him in pursuance of the
provisions of this Act or of any order, regulation or direction made or given thereunder, he shall be
punishable with fine which may extend to two thousand rupees in respect of each offence and if he persists
in such failure or refusal, with further fine which may extend to one hundred rupees for every day, after the
first during which the offence continues.
(3) If any person contravenes the provisions of section 31, he shall be punishable with fine, which may
extend to the amount of the bill of exchange, hundi, promissory note or engagement for payment of money in
respect whereof the offence is committed.
(4) If any person discloses any credit information, the disclosure of which is prohibited under section 45E, he
shall be punishable with imprisonment for a term, which may extend to six months, or with fine, which may
extend to one thousand rupees, or with both.
(4A) If any person contravenes the provisions of sub-section (1) of section 45-IA, he shall be punishable with
imprisonment for a term which shall not be less than one year but which may extend to five years and with
fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
(4AA) If any auditor fails to comply with any direction given or order made by the Bank under section 45MA,
he shall be punishable with fine, which may extend to five thousand rupees.
(4AAA) Whoever fails to comply with any order made by the Company Law Board under sub-section (2) of
section 45QA, shall be punishable with imprisonment for a term which may extend to three years and shall
also be liable to a fine of not less than rupees fifty for every day during which such noncompliance continues.
(5) If any person, other than an auditor-

(a) receives any deposit in contravention of any direction given or order made under Chapter IIIB; or
22 EP-EBCL
(aa) fails to comply with any direction given or order made by the Bankunder any of the provisions
of Chapter IIIB; or
(b) issues any prospectus or advertisement otherwise than in accordance with section 45NA or any
order made under section 45J, as the case may be, he shall be punishable with imprisonment for a
term which may extend to three years and shall also be liable to fine which may extend, –
(i) in the case of a contravention falling under clause (a), to twice the amount of the deposit
received; and
(ii) in the case of a contravention falling under clause (b), to twice the amount of the deposit called
for by the prospectus or advertisement.
(5A) If any person contravenes any provision of section 45S, he shall be punishable with imprisonment for a
term which may extend to two years, or with fine which may extend to twice the amount of deposit received
by such person in contravention of that section, or two thousand rupees, whichever is more, or with both:
Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the
judgement of the court, the imprisonment shall not be less than one year and the fine shall not be less than
one thousand rupees.
(5B) notwithstanding anything contained in section 29 of the Code of Criminal Procedure, 1973, it shall be
lawful for a Metropolitan Magistrate or a Judicial Magistrate of the first class to impose a sentence of fine in
excess of the limit specified in that section on any person convicted under sub-section (5A).
(6) If any other provision of this Act is contravened or if any default is made in complying with any other
requirement of this Act or of any order, regulation or direction made or given or condition imposed
thereunder, any person guilty of such contravention or default shall be punishable with fine which may
extend to two thousand rupees and where a contravention or default is a continuing one, with further fine
which may extend to one hundred rupees for every day after the first, during which the contravention or
default continues. (Section 58B)
LESSON ROUND-UP
• The Preamble to the Reserve Bank of India Act, 1934 under which it was constituted, specifies its objective as to
regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of the country to its advantage.
• The Central Board of Directors is at the top of the Reserve Bank’s organizational structure. Appointed by the
Government under the provisions of the Reserve Bank of India Act, 1934, the Central Board has the primary
authority and responsibility for the oversight of the Reserve Bank. It delegates specific functions to the Local
Boards and various committees. The Governor is the Reserve Bank’s chief executive.
• The Government of India on the advice of the Reserve Bank decides on the various denominations of the notes
to be printed. The Reserve Bank coordinates with the Government in designing the banknotes, including their
security features.
• Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its
Control to achieve the goals specified in the Act.
• The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This
responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of
growth. Price stability is a necessary precondition to sustainable growth.
• Repo Rate is the fixed interest rate at which the Reserve Bank provides overnight liquidity to banks against the
collateral of government and other approved securities under the liquidity adjustment facility (LAF).
• Reverse Repo Rate is the fixed interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis,
from banks against the collateral of eligible government securities under the liquidity adjustment facility (LAF).
SELF-TEST QUESTIONS
(These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation)
1. Discuss the functions of the Reserve Bank of India.
2. Reserve Bank of India as Banker to Banks. Examine.
3. What are the instrument of Monetary Policy?
4. Discuss the Payment and Settlement System of Reserve Bank.
5. Write short notes on:
(i) Cash Reserve Ratio
(ii) Statutory Liquidity Ratio.
24 EP-EBCL
Lesson 2
Foreign Exchange Management Act,
1999-Introduction
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning objectives As per Article 246 of Constitution of India, the
• Historical background Parliament has exclusive power to make laws
with respect to any of the matters enumerated in the
• Overview of Foreign Exchange Union List in the Seventh Schedule. The Foreign
Management Act Exchange Management Act, 1999 can be traced
to various entries in the Union List. Entry 16 of
• Overall scheme of Foreign Exchange
the Union List deals with Foreign jurisdiction. Entry
Management Act
36 of the Union List deals with Currency, coinage
• Structure of the Foreign Exchange and legal tender; foreign exchange. Entry 37 of
Management Act the Union List deals with Foreign loans and
Entry 41 of the Union List deals with Trade and
• Rules framed under the Foreign commerce with foreign countries; import and export
Exchange Management Act across customs frontiers; definition of customs
frontiers.
• Regulations issued by Reserve Bank
issued under the Foreign Exchange The legal framework for administration of foreign
Management Act exchange transactions in India is provided by the
Foreign Exchange Management Act, 1999. Under
• Lesson Round Up the Foreign Exchange Management Act, 1999
• Self-Test Questions (FEMA), which came into force with effect from June
1, 2000, all transactions involving foreign exchange
have been classified either as capital account
transactions or current account transactions.

with the overview of regulatory structure under
Foreign Exchange Management Act, 1999.
“Foreign Exchange Management Act, 1999 is an Act to facilitate external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in India.”
Preamble
26 EP-EBCL
HISTORICAL BACKGROUND
A system of exchange control was first time introduced through a series of rules under the Defence of India
Act, 1939 on temporary basis. As the foreign exchange crisis persisted for a long time Foreign Exchange
Regulation Act, 1947 was enacted initially for a period of ten years. However, 10 years of economic
development did not ease the foreign exchange constraint, FERA permanently entered the statue book in
1957.
Subsequently, this Act was replaced by the Foreign Exchange Regulation Act, 1973 (FERA, 1973), which
came into force with effect from January 1, 1974. In 1974, FERA was completely overhauled with all offences
being considered as criminal offences with mens rea. The Enforcement Directorate was empowered to arrest
any person without even arrest warrant.
In the 1990s, consistent with the general philosophy of economic reforms a sea change relating to the broad
approach to reform in the external sector took place. In 1991 government of India initiated the policy of
economic liberalization. Foreign investments in many sectors were permitted. This resulted in increased flow
of foreign exchange in India and foreign exchange reserves increased substantially.
In 1997, the Tarapore Committee on Capital Account Convertibility (CAC), constituted by the Reserve Bank,
had indicated the preconditions for Capital Account Convertibility. The three crucial preconditions were fiscal
consolidation, a mandated inflation target and, strengthening of the financial system. The Tarapore
Committee had also recommended change in the legislative framework governing foreign exchange
transactions.
A Bill introduced in the Lok Sabha on 4 August, 1998 was referred to the Standing Committee on Finance
which submitted it’s report to the House on 23 December ’98 with suggestion and modifications. As the 12th
Lok Sabha was dissolved before any decision could be taken on the Bill, the Bill lapsed consequently. The
Bill was again introduced in the 13th Lok Sabha on 25th October 1999 and was passed in the winter session
of Parliament in 1999. The President Assent was received on 29th December, 1999.
Finally FEMA came into force w.e.f. 1st June 2000. Accordingly, the Foreign Exchange Regulation Act
(FERA) was repealed and replaced by the new Foreign Exchange Management Act (FEMA) with effect from
June 2000. The philosophical approach was shifted from that of conservation of foreign exchange to one of
facilitating trade and payments as well as developing orderly foreign exchange market.
Overview of FEMA
The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend the law relating to
foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India. In fact it is the central legislation that
deals with inbound investments into India and outbound investments from India and trade and business
between India and the other countries.
Lesson 2 Foreign Exchange Management Act, 1999 27
(FEMA)
Free Transactions on current

account subject to reasonable
restrictions that may be imposed
Capital Account Transactions.

Realization of export proceeds
FEMA
Provides
Dealings in Foreign Exchange
through Authorized Person (e.g.
Authorized Dealer/Money
Changer/Off-shore banking unit
Adjudication of Offences – Appeal

provisions including Special
Director (Appeals) and Appelate
Tribunal
Applicability
Foreign Exchange Management Act, 1999 extends to the whole of India. The Act also applies to all
branches, offices and agencies outside India owned or controlled by a person resident in India and also to
any contravention thereunder committed outside India by any person to whom this Act applies.
FEMA has considerably liberalised provisions in respect of foreign exchange. However, in extraordinary
situations may arise. The Central Government has been empowered to suspend operation of any or all
provisions of FEMA in public interest, by issuing a notification. The Central Government has also been
empowered to relax suspension by issuing a notification.
Overall Scheme of FEMA

FEMA makes provisions for dealings in foreign exchange. Broadly, all Current Account Transactions are
free. However, Central Government can impose reasonable restrictions by issuing rules (Section 3
FEMA).Capital Account Transactions are permitted to the extent specified by RBI by issuing Regulations.
(Section 6 of FEMA)
FEMA envisages that RBI shall have a controlling role in management of foreign exchange. Since RBI
cannot directly handle foreign exchange transactions, it authorizes “Authorised Persons” to deal in foreign
exchange. RBI has been empowered to issue directions to such “Authorised Persons” under Section 11.
FEMA also makes provisions for enforcement, penalties, adjudication and appeal. The FEMA 1999 contains
28 EP-EBCL
only basic legal framework. The practical aspects are covered in Rules made by Central Government and
Regulations made by RBI.
FDI Policy announced by Department of Industrial Policy & Promotion, Ministry of Industries and Commerce
directly relevant to understanding the provisions of FEMA. Instructions/Guidelines etc. of Ministry of Finance
and Securities and Exchange Board of India (SEBI) become relevant when (ECB) /ADR/GDR and capital
market is involved.
FEMA Structure
The legislations, rules and regulations, governing Foreign Exchange Management are as under:
FEMA contains 7 Chapters divided into 49 sections of which 12 sections cover operational part and
the rest deals with contravention, penalties, adjudication, appeals, enforcement directorate, etc.
CHAPTER I – Preliminary (Section 1&2)
CHAPTER II- Regulation and Management of Foreign Exchange (Section 3 –9)
CHAPTER III – Authorised Person (Section 10 –12)
CHAPTER IV – Contravention and Penalties (Section 13-15)
CHAPTER V – Adjudication and Appeal (Section 16- 35)
CHAPTER VI – Directorate of Enforcement (Section 36-38)
CHAPTER VII- Miscellaneous (Section 39 – 49)
Rules made by Ministry of Finance under section 46 of FEMA (Subordinate or delegated

Legislations)
Regulations made by RBI under section 47 of FEMA (Subordinate or delegated Legislations)
Master Direction issued by RBI on every year
Foreign Direct Investment policy issued by Department of Industrial Policy and Promotion.
Notifications and Circulars issued by Reserve Bank of India.
Besides the FEMA, there are Set of Rules, Regulations and Master
Directions under the Act to ensure effective implementation of the Act.
The Rules made under FEMA are as follows:

1. FEM (Encashment of Draft, Cheque, Instrument and Payment of Interest) Rules, 2000
2. FEM (Authentication of Documents) Rules, 2000
Lesson 2 Foreign Exchange Management Act, 1999 29
(FEMA)
3. FEM (Current Account Transaction) Rules, 2000
4. FEM (Adjudication Proceedings and Appeal) Rules, 2000
5. FEM (Compounding Proceedings) Rules, 2000
6. The Appellate Tribunal for Foreign Exchange (Recruitment, Salary and Allowances and Other
Conditions of Service of Chairperson and Members) Rules, 2000.
The Regulations made under FEMA are as follows:
1. FEM (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015
2. FEM (Borrowing and Lending in Rupees) Regulations, 2000
3. FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000
4. FEM (Deposit) Regulations, 2016
5. FEM (Export and Import of Currency) Regulations, 2015
6. FEM (Guarantees) Regulations, 2000
7. FEM (Acquisition and Transfer of Immovable Property in India) Regulations, 2000
8. FEM (Establishment in India of Branch office or a Project office or any other Place of Business)
Regulations, 2016
9. FEM (Export of Goods and Services) Regulations, 2015
10. FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015
11. FEM (Insurance) Regulations, 2015
12. FEM (Investment in Firm or Proprietary Concern in India) Regulations, 2000
13. FEM (Manner of Receipt and Payment) Regulations, 2016
14. FEM (Permissible Capital Account Transactions) Regulations, 2000
15. FEM (Possession and Retention of Foreign Currency) Regulations, 2015
16. FEM (Realization, Repatriation and Surrender of Foreign Exchange) Regulations, 2015
17. FEM (Remittance of Assets) Regulations, 2016
18. FEM (Transfer or Issue of Security by a person Resident outside India) Regulations, 2017
19. FEM (Foreign Exchange Derivative Contracts) Regulations, 2000
20. FEM (Transfer or Issue of any Foreign Security) Regulations, 2004
21. FEM (Crystallization of inoperative Foreign Currency Deposits) Regulations, 2014
22. F.E.M (Transfer or Issue of any foreign Security) Regulations, 2004
23. FEM (International Financial Services Centre) Regulations, 2015
24. FEM (Regularization of Assets Held Abroad by a Person Resident in India) Regulations, 2015
30 EP-EBCL
LESSON ROUND-UP
• The Foreign Exchange Management Act has repealed the FERA.
• The Foreign Exchange Management Act, 1999 is an Act to facilitate external trade and payments
and for promoting the orderly development and maintenance of foreign exchange market in India.
• Foreign Exchange Management Act, 1999 extends to the whole of India. The Act also applies to all
branches, offices and agencies outside India owned or controlled by a person resident in India and also to
any contravention there under committed outside India by any person to whom this Act applies.
• FEMA makes provisions for dealings in foreign exchange. Broadly, all Current Account Transactions are
free. However Central Government can impose reasonable restrictions by issuing Rules.
• Capital Account Transactions are permitted to the extent specified by RBI by issuing Regulations.
SELF-TEST QUESTIONS
(These are meant for re-capitulation only. Answers to these questions are not to be submitted for
evaluation)
1. State the overview of Foreign Exchange Management Act, 1999.
2. Discuss overall scheme of Foreign Exchange Management Act, 1999.
3. Discuss structure of the Foreign Exchange Management Act, 1999.
4. List out the Rules framed under the Foreign Exchange Management Act, 1999.
5. List out the Regulations issued by Reserve Bank issued under the Foreign Exchange Management
Act, 1999.
Lesson 3
Foreign Exchange Transactions &
Compliances
LESSON OUTLINE
LEARNING OBJECTIVES
When a business enterprise imports goods from
• Foreign Exchange other countries, exports its products to them or
• Foreign Securities makes investments abroad, it deals in foreign
exchange.
• Current Account Transactions
• Capital Account Transactions Foreign exchange means 'foreign currency' and
includes deposits, credits and balances payable
• Acquisition & Transfer of immovable
in any foreign currency; drafts, travellers'
property in India
cheques, letters of credit or bills of exchange,
• Acquisition & Transfer of immovable expressed or drawn in Indian currency but
property outside India payable in any foreigncurrency; and drafts,
• Realisation & Repatriation of Foreign travellers' cheques, letters of credit or bills of
Exchange exchange drawn by banks, institutions or persons
outside India, but payable in Indian currency.
• Adjudication The management of foreign exchange is very
• Compounding of contraventions important in the present day business. This
lesson deals with how FEMA facilitates external
• Lesson Round Up
trade and payments and promotes the orderly
• Self-Test Questions development and maintenance of foreign exchange
market. The Act has assigned an important role to
the Reserve Bank of India (RBI) in the
administration of FEMA. The rules, regulations and
norms pertaining to several sections of the Act are
laid down by the Reserve Bank of India, in
consultation with the Central Government.

with the Foreign Exchange Transactions and
compliances thereto.
The Foreign Exchange Management Act, 1999 was enacted by the Parliament, taking into consideration the
developments such as substantial increase in foreign exchanges reserves, growth in foreign trade,
rationalization of tariffs, current account convertibility etc.,
32 EP-EBCL
INTRODUCTION
The Foreign Exchange Regulation Act, 1973, which was enacted to consolidate and amend the law in
several respects encompassing the experience gained over few decades of implementation of the earlier
enactment of 1947, had outlived its purpose in the light of the liberalization policies introduced in 1991.
The Foreign Exchange Regulation Act, since then had been reviewed and amendments were made as part
of ongoing process of economic liberalization relating to foreign investment and foreign trade for closer
interaction with the world economy. During the subsequent period, the Central Government decided further
review of the Foreign Exchange Regulation Act in the light of developments and experience in relation to
foreign trade and investment. It was at that time felt, that a better course would be to repeal the Foreign
Exchange Regulation Act and enact a new legislation.
Accordingly, taking into consideration the developments such as substantial increase in foreign exchanges
reserves, growth in foreign trade, rationalization of tariffs, current account convertibility etc., the Foreign
Exchange Management Bill, to repeal and replace the Foreign Exchange Regulation Act was introduced in
the Lok Sabha. But before the Bill came up for discussion and approval, the Lok Sabha was dissolved.
Subsequently, certain modifications were made to the original Bill and a modified Bill was presented and
passed by both the Houses of Parliament. The Foreign Exchange Management Act received the assent of
st
the President on 9th December, 1999 and brought into force with effect from 1 June, 2000. Foreign
Exchange Management Act, 1999 is an Act to facilitate external trade and payments and for promoting the
orderly development and maintenance of foreign exchange market in India.
IMPORTANT DEFINITIONS
Section 2 of the Foreign Exchange Management Act defines various terms used in the Act, and certain
important definitions are given below:
Adjudicating Authority [Section 2(a)]
According to clause (a) of Section 2 ‘Adjudicating Authority’ means an officer authorised under Sub-section
(1) of Section 16 for the purposes of adjudication in respect of penalties under Section 13. Section 16
empowers the Central Government, to appoint, by an order published in the Official Gazette, as many
officers as it may think fit as the adjudicating authorities for holding an enquiry in the manner prescribed after
giving the person alleged to have committed any contravention, an opportunity of being heard.
Appellate Tribunal [Section 2(b)]
‘Appellate Tribunal’ means Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the
adjudicating authorities and Special Directors (Appeals) under the Act.
Authorised Person [Section 2(c)]
The term authorised person is defined to include an authorised dealer, money changer, offshore banking unit
or any other person for the time being authorised to deal in foreign exchange or foreign securities.
Capital Account Transaction [Section 2(e)]
‘Capital account transaction’ has been defined to mean any transaction which alters the assets or liabilities
including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of person
resident outside India and includes the transactions specified in Sub-section (3) of Section 6 of the Act.
Lesson 3 Foreign Exchange Transactions & Compliances 33
Currency Notes [Section 2(i)]

‘Currency Notes’ means and includes cash in the form of coins and bank notes. In fact, it means money and
such bank notes or other paper money as are authorised by law and circulate from hand to hand as a
medium of exchange.
Current Account Transaction [Section 2(j)]

The term current account transaction has been defined to mean a transaction other than a capital account
transaction and includes payments due in connection with foreign trade, other current business, services and
short term banking and credit facilities in the ordinary course of business; payments due as interest on loan
and as net income from investments; remittances for living expenses of parents, spouse and children
residing abroad and expenses in connection with foreign travel, education and medical care of parents,
spouse and children.
Under the Act freedom has been granted for selling and drawing of foreign exchange to or from an
authorized person for undertaking current account transactions. However, the Central Government has been
vested with powers in consultation with Reserve Bank to impose reasonable restrictions on current account
transactions. The Central Government has framed Foreign Exchange Management (Current Account
Transactions) Rules, 2000 dealing with various aspects of current account transactions.
Foreign Exchange [Section 2(n)]

The term ‘foreign exchange has been defined to mean foreign currency and includes deposits, credits,
balance payable in foreign currency, drafts, travelers cheques, letters of credit, bills of exchange expressed
or drawn in Indian currency but payable in any foreign currency. Any draft, travelers cheque, letters of credit
or bills of exchange drawn by banks, institutions or persons outside India but payable in Indian currency has
also been included in the definition of foreign exchange.
Foreign Security [Section 2(o)]

The term Foreign Security has been defined to mean any security, in the form of shares, stocks, bonds,
debentures or any other instrument denominated or expressed in foreign currency and includes securities
expressed in foreign currency but where redemption or any form of return such as interest or dividend is
payable in Indian currency.
Transfer or issue of a foreign security is a capital account transaction within the meaning of Section 6(3)(a) of
the Act. The Reserve Bank of India has made Foreign Exchange Management (Transfer or Issue of Any
Foreign Security) Regulations, 2000 for regulation, acquisition and transfer of a foreign security by a person
resident in India i.e. investment by Indian entities in overseas joint ventures and wholly owned subsidiaries
as also investment by a person resident in India in shares and securities issued outside India.
Person [Section 2(u)]

The definition of the term ‘person includes, an individual, a Hindu Undivided Family, a company, a firm, an
association of persons or body of individuals whether incorporated or not; any agency, office or branch
owned or controlled by such persons. Even every artificial juridical person not falling within the above
definition has been treated as person as per clause (u) of Section 2.
Person Resident in India [Section 2(v)]

The expression ‘Person resident in India has been defined to mean a person residing in India for more than
182 days during the course of the preceding financial year. However, two categories of persons are excluded
from the purview of definition.
34 EP-EBCL
The first category includes any person who has gone out of India or who stays outside India for or on taking
up employment outside India, or for carrying on outside India a business or vocation. The definition also
includes person who stays outside India for any other purpose in such circumstances as would indicate his
intention to stay outside India for an uncertain period. The second category of persons which have been
excluded from the definition of person resident in India include:
A person who has come to stay or stays in India, in either case otherwise than—
(i) for or taking up employment in India; or
(ii) for carrying on in India a business or vocation in India; or
(iii) for any other purpose, in such circumstances as would indicate his intention to stay in India for an
uncertain period.
REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE

Chapter II of the Act containing Sections 3-9 deals with Regulation and Management of Foreign Exchange.
Section 3 prohibits any person other than an authorised person from dealing in or transferring any foreign
exchange or foreign security to any person or making any payment to or for the credit of any person resident
outside India in any manner or receiving otherwise through an authorised person any payment by order or on
behalf of any person resident outside India in any manner except as provided in the Act, rules or regulations
made thereunder or with the general or special permission of the Reserve Bank of India.
Section 3(d) prohibits a person to enter into any financial transaction in India as consideration for or in
association with acquisition or creation or transfer of a right to acquire, any asset outside India by any
person, except as otherwise provided in the Act and rules or regulations made thereunder. For this purpose,
financial transaction has been defined to mean making any payment to or for the credit of any person or
receiving any payment for, by order or on behalf of any person. Financial transaction also includes drawing,
issuing or negotiating any bill of exchange or promissory note or transferring any security or acknowledging
any debt.
CURRENT ACCOUNT TRANSACTIONS

Section 5 of the Act allows any person to sell or draw foreign exchange to or from an authorised person if
such sale or drawl is a current account transaction as defined under Section 2(j) of the Act. However, the
Central Government may, in the public interest and in consultation with the Reserve Bank impose
reasonable restrictions for current account transactions.
Foreign Exchange Management (Current Account Transactions) Rules, 2000 defines the term ‘Drawal as to
mean drawal of foreign exchange from an authorised person and includes opening of Letter of Credit or use
of International Credit Card or International Debit Card or ATM Card or any other thing by whatever name
called which has the effect of creating foreign exchange liability.
Prohibition on drawal of foreign exchange for certain transactions

Rule 3 prohibits the drawal of foreign exchange for the purposes of transactions specified in the Schedule I
or a travel to Nepal and/or Bhutan or a transaction with a person resident in Nepal or Bhutan. However, in
the case of transaction with a person resident in Nepal and Bhutan, the prohibition may be exempted by RBI
subject to such terms and conditions as it may consider necessary. Schedule I to the Rules enumerate the
situations in which the drawal of foreign exchange is prohibited. These are as follows:
Prior approval of Government of India for certain transactions

Rule 4 requires prior approval of the Government of India for the transactions as specified in Schedule II.
However, this does not apply to the cases where the payment is made out of funds held in Resident Foreign
Currency Account (RFC) of the remitter.
Prior approval of Reserve Bank for certain transaction

Rule 5 of the Foreign Exchange Management (Current Account Transactions) Amendment Rules, 2015,
governs every drawal of foreign exchange for transactions included in Schedule III. However, Rule 5 does
not apply in those where the payment is made out of funds held in Resident Foreign Currency (RFC)
Account of the remitter.
Transactions included in Schedule III

1. Facilities for individuals—
Individuals can avail of foreign exchange facility for the following purposes within the limit of USD 2,50,000
only. Any additional remittance in excess thereof requires prior approval of the Reserve Bank of India.
(i) Private visits to any country (except Nepal and Bhutan)
(ii) Gift or donation.
(iii) Going abroad for employment
(iv) Emigration
(v) Maintenance of close relatives abroad
(vi) Travel for business, or attending a conference or specialised training or for meeting expenses for
36 EP-EBCL
meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient

going abroad for medical treatment/ check-up.
(vii) Expenses in connection with medical treatment abroad
(viii) Studies abroad
(ix) Any other current account transaction
However, the purposes mentioned at item numbers (iv), (vii) and (viii), the individual may avail of exchange
facility for an amount in excess of the limit prescribed under the Liberalised Remittance Scheme as provided
in regulation 4 to FEMA Notification 1/2000-RB, dated the 3rd May, 2000 (Liberalised Remittance Scheme) if
it is so required by a country of emigration, medical institute offering treatment or the university, respectively:
Further, if an individual remits any amount under the said Liberalised Remittance Scheme in a financial year,
then the applicable limit for such individual would be reduced from USD 250,000 (US Dollars Two Hundred
and Fifty Thousand Only) by the amount so remitted:
Further more a person who is resident but not permanently resident in India and
(a) is a citizen of a foreign State other than Pakistan; or
(b) is a citizen of India, who is on deputation to the office or branch of a foreign company or subsidiary
or joint venture in India of such foreign company,
may make remittance up to his net salary (after deduction of taxes, contribution to provident fund and other
deductions).
Explanation: For the purpose of this item, a person resident in India on account of his employment or
deputation of a specified duration (irrespective of length thereof) or for a specific job or assignments, the
duration of which does not exceed three years, is a resident but not permanently resident:
It is to be noted that a person other than an individual may also avail of foreign exchange facility, mutatis
mutandis, within the limit prescribed under the said Liberalised Remittance Scheme for the purposes
mentioned herein above.
2. Facilities for persons other than individual

The following remittances by persons other than individuals require prior approval of the Reserve Bank of
India.
(i) Donations exceeding one per cent. of their foreign exchange earnings during the previous three
financial years or USD 5,000,000, whichever is less, for-
(a) creation of Chairs in reputed educational institutes,
(b) contribution to funds (not being an investment fund) promoted by educational institutes; and
(c) contribution to a technical institution or body or association in the field of activity of the donor
Company.
(ii) Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in
India exceeding USD 25,000 or five percent of the inward remittance whichever is more.
(iii) Remittances exceeding USD 10,000,000 per project for any consultancy services in respect of
infrastructure projects and USD 1,000,000 per project, for other consultancy services procured from
outside India.
(iv) Remittances exceeding five per cent of investment brought into India or USD 100,000 whichever is
higher, by an entity in India by way of reimbursement of pre-incorporation expenses.”
CAPITAL ACCOUNT TRANSACTION

Section 6 of the FEMA allows capital account transactions subject however to certain conditions. This
section empowers the Reserve Bank of India to specify, in consultation with the Central Government, any
class or classes of capital account transactions permissible and the limit up to which foreign exchange shall
be admissible for such transactions. However, Reserve Bank shall not impose any restrictions on the drawal
of foreign exchange for payments due on account of amortization of loans or for depreciation of direct
investments in the ordinary course of business.
The Reserve Bank of India may, by regulations, prohibit, restrict or regulate the transfer or issue of any
foreign security by a person resident in India or by a person resident outside India. Reserve Bank of India
may also regulate, prohibit or restrict transfer or issue of any security or foreign security through any branch
office, or agency in India of a person resident outside India. Any borrowing or lending in foreign exchange in
whatever form or by whatever name called may also be regulated or prohibited by the Reserve Bank.
Similarly, RBI may also prohibit or restrict any borrowing or lending in rupees in whatever form or by
whatever name called between a person resident in India and a person resident outside India. Deposits
between person’s resident in India and person’s resident outside India may be regulated or prohibited by the
Reserve Bank of India. RBI may also regulate the export, import or holding of currency or currency notes.
Acquisition or transfer of immovable property other than on lease not exceeding five years in India by person
resident in India or a person resident outside India may be prohibited or regulated by the Reserve Bank of
India. RBI has also been empowered to prohibit or regulate giving of guarantee or surety in respect of any
debt, obligation or other liability incurred by a person resident in India and owed to a person resident outside
India or by a person resident outside India.
Sub-section (4) allows a person resident in India to hold, own, transfer or invest in foreign currency, foreign
security or any immovable property situated outside India, if such currency, security or property was
acquired, held or owned by such person when he was resident outside India or inherited from a person who
was resident outside India. Similarly, a person resident outside India is permitted to hold, own, transfer or
invest in Indian currency, security, or any immovable property situated in India if such currency, security or
property was acquired, held or owned by such person when he was resident in India or inherited from a
person who was resident in India.
Reserve Bank of India under sub-section (6) has been empowered to regulate, prohibit, restrict
establishment in India of a branch, office or other place of business by a person resident outside India for
carrying on any activity relating to such branch, office or other place of business.
Permissible Capital Account Transactions
Schedule I& II to Foreign Exchange Management (Permissible Capital Account Transactions) Regulations,
2000 classifies the capital account transactions of a person under the following two heads viz.
Classes of Capital Account Transactions
Classes of capital account

transactions of persons
resident in India
Classes of capital account

transactions of persons
resident outside India
38 EP-EBCL
Classes of Capital Account Transactions by Persons Resident in India
Investment by a person resident in in India in foreign securities
Foreign currency loans raised in India and abroad by a person resident in India
Transfer of immovable property outside India by person resident in India
Guarantees issued by a person resident in India in favour of a person resident outside

India
Export, import and holding of currency/currency notes
Loans and overdrafts by a person resident in India from a person resident outside India
Maintenance of foreign currency accounts in India and outside India by a person

resident in India
Taking out of insurance policy by a person resident in India from an insurance

company outside India
Loans and overdrafts by a person resident in India to a person resident outside India
Remittance outside India of capital assets of a person resident in India
Sale and purchase of foreign exchange derivatives in India and abroad and
commodity derivatives abroad by a person resident in India
Classes of Capital Account Transactions by Persons Resident Outside India
Investment in India by a person resident outside India, that is to say:

(a) issue of security by a body corporate or an entity in India and investment therein
by a person resident outside India; and
(b) investment by way of contribution by a person resident outside India to the
capital of a firm or a proprietorship concern or an association of persons in India.
Acquisition and transfer of immovable property in India by a person resident

outside India
Guarantee by a person resident outside India in favour of, or on behalf of a

person resident in India
Import and export of currency/currency notes into/from India by a person

resident outside India.
Deposits between a person resident in India and a person resident outside India
Foreign Currency accounts in India of a person resident outside India
Remittance outside India of capital assets in India of a person resident outside India.
Subject to the provisions of the Act, or rules, or regulations or directions or orders made or issued
thereunder, any person may sell or draw foreign exchange to or from an authorised person for the above
mentioned capital account transactions provided the transactions are within the limit, if any, specified in the
Regulations relevant to the transaction. However, no person is allowed to undertake or sell or draw foreign
exchange to or from an authorised person for any capital account transaction except as provided in the Act,
Rules or regulations made thereunder.
Similarly, except as otherwise provided in the Act, no person resident outside India is entitled to make
investment in India, in any form, in any company or partnership firm or proprietary concern or any entity
whether incorporated or not, which is engaged or proposed to engage in the business of chit funds, or Nidhi
company, or in agricultural or plantation activities, or real estate business, or construction of farm houses, or
trading in Transferable Development Rights (TDRs). For this purpose real estate business includes
development of townships, construction of residential/commercial premises, roads or bridges.
The payment for investment are required to be made by remittance from abroad through normal banking
channels or by debit to an account of the investor maintained with an authorised person in India in
accordance with the regulation made by the Reserve Bank of India. Every person selling or drawing foreign
40 EP-EBCL
exchange to or from an authorised person for a capital account transaction is required to furnish to Reserve
Bank a declaration within the time specified in the regulations relevant to the transactions.
ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY OUTSIDE INDIA BY A

PERSON RESIDENT IN INDIA
Modes of acquiring property outside India by a resident

According to section 6(4) of the FEMA read with Foreign Exchange Management (Acquisition and transfer of
immovable property outside India) Regulations, 2015, a person resident in India can hold, own, transfer or
invest in any immovable property situated outside India if such property was acquired, held or owned by him/
her when he/ she was resident outside India or inherited from a person resident outside India.
1. A resident can acquire immovable property outside India by way of gift or inheritance from:
(a) a person referred to at 3.1 above; or
(b) a person resident in India who had acquired such property on or before July 8, 1947 and
continued to be held by him with the permission of the Reserve Bank.
(c) a person resident in India who has acquired such property in accordance with the foreign
exchange provisions in force at the time of such acquisition.
2. A resident can purchase immovable property outside India out of foreign exchange held in his/ her
Resident Foreign Currency (RFC) account.
3. A resident can acquire immovable property outside India jointly with a relative who is a person
resident outside India, provided there is no outflow of funds from India.
Acquisition under the Liberalised Remittance Scheme (LRS)

A resident individual can send remittances under the Liberalised Remittance Scheme for purchasing
immovable property outside India.
Companies having overseas offices

ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY IN INDIA

As per section 6(5) of FEMA read with Foreign Exchange Management (Acquisition and transfer of
immovable property in India) Regulations, 2000, a person resident outside India can hold, own, transfer or
invest in any immovable property situated in India if such property was acquired, held or owned by him/ her
when he/ she was resident in India or inherited from a person resident in India.
Acquisition/ transfer of immovable property by a Non- Resident Indian (NRI)
It may be noted that:

1. ‘Non-Resident Indian’ (NRI) is a citizen of India resident outside India.
2. ‘Transfer’ includes sale, purchase, mortgage, exchange, pledge, gift, loan or any other form of
transfer of right, title, possession or lien.
Acquisition/ transfer by a Person of Indian Origin (PIO)
‘Person of Indian Origin' means an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or
Afghanistan or China or Iran or Nepal or Bhutan) who at any time, held an Indian Passport or who or either of
whose father or mother or whose grandfather or grandmother was a citizen of India by virtue of the
Constitution of India or the Citizenship Act, 1955.
Purchase of immovable property
A PIO resident outside India can acquire by way of purchase any immovable property (other than agricultural
land/ plantation property / farm house) in India.
Gift/ Inheritance of immovable property
A PIO resident outside India may acquire
42 EP-EBCL
Transfer of immovable property
A PIO resident outside

India can transfer
Payment for Acquisition of Immovable Property in India
A PIO resident outside India can make payment for acquisition of immovable property in India (other than
agricultural land/ farm house/ plantation property) by way of purchase out of funds received by inward
remittance through normal banking channels or by debit to his NRE/ FCNR (B) / NRO account;
Such payments cannot be made either by traveller’s cheque or by foreign currency notes or by other mode
other than those specifically mentioned above.
Acquisition of immovable Property by Foreign Embassies/ Diplomats/ Consulate Generals

Foreign Embassy/ Diplomat/ Consulate General, may purchase/ sell immovable property (other than
agricultural land/ plantation property/ farm house) in India provided ─
(a) Clearance from the Government of India, Ministry of External Affairs is obtained for such
purchase/sale, and
(b) The consideration for acquisition of immovable property in India is paid out of funds remitted from
abroad through the normal banking channels.
REALISATION, REPATRIATION AND SURRENDER OF FOREIGN CURRENCY

Section 8 of the Act requires the person resident in India to make all reasonable efforts to realise and
repatriate the foreign exchange due or accrued as per the directions of the Reserve Bank.
In exercise of the powers conferred by Section 8, sub-section (6) of Section 10, clause (c) of sub-section (2)
of Section 47 of the Foreign Exchange Management Act, 1999, the Reserve Bank issued Foreign Exchange
Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2015 relating to
the manner of, and the period for, realisation of foreign exchange, repatriation of realised foreign exchange
to India and its surrender.
Duty of persons to realise foreign exchange due

A person resident in India to whom any amount of foreign exchange is due or has accrued shall, save as
otherwise provided under the provisions of the Act, or the rules and regulations made thereunder, or with the
general or special permission of the Reserve Bank, take all reasonable steps to realise and repatriate to
India such foreign exchange, and shall in no case do or refrain from doing anything, or take or refrain from
taking any action, which has the effect of securing -
(a) that the receipt by him of the whole or part of that foreign exchange is delayed; or
(b) that the foreign exchange ceases in whole or in part to be receivable by him.
It may be noted that 'Foreign exchange due' means the amount which a person has a right to receive
or claim in foreign exchange.
Manner of Repatriation
On realisation of foreign exchange due, a person shall repatriate the same to India, namely bring into, or
receive in, India and -
(a) sell it to an authorised person in India in exchange for rupees; or
(b) retain or hold it in account with an authorised dealer in India to the extent specified by the Reserve
Bank; or
(c) use it for discharge of a debt or liability denominated in foreign exchange to the extent and in the
manner specified by the Reserve Bank.
A person shall be deemed to have repatriated the realised foreign exchange to India when he receives in
India payment in rupees from the account of a bank or an exchange house situated in any country outside
India, maintained with an authorised dealer.
Period for surrender of realised foreign exchange
A person not being an individual resident in India shall sell the realised foreign exchange to an authorised
person, within the period specified below :-
(i) foreign exchange due or accrued as remuneration for services rendered, whether in or outside
India, or in settlement of any lawful obligation, or an income on assets held outside India, or as
inheritance, settlement or gift, within seven days from the date of its receipt;
(ii) in all other cases within a period of ninety days from the date of its receipt.
Period for surrender in certain cases
Any person not being an individual resident in India who has acquired or purchased foreign exchange for any
purpose mentioned in the declaration made by him to an authorised person under sub-section (5) of Section
10 of the FEMA does not use it for such purpose or for any other purpose for which purchase or acquisition
of foreign exchange is permissible under the provisions of the Act or the rules or regulations or direction or
order made thereunder, shall surrender such foreign exchange or the unused portion thereof to an
authorised person within a period of sixty days from the date of its acquisition or purchase by him.
Where the foreign exchange acquired or purchased by any person not being an individual resident in India
from an authorised person is for the purpose of foreign travel, then, the unspent balance of such foreign
exchange shall, save as otherwise provided in the regulations made under the Act, be surrendered to an
authorised person─
(i) within ninety days from the date of return of the traveller to India, when the unspent foreign
exchange is in the form of currency notes and coins; and
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(ii) within one hundred eighty days from the date of return of the traveller to India, when the unspent
foreign exchange is in the form of travellerscheques.
Period for surrender of received/realised/unspent/unused foreign exchange by Resident

individuals
A person being an individual resident in India shall surrender the received/ realised/ unspent/ unused foreign
exchange whether in the form of currency notes, coins and travelers cheques, etc. to an authorised person
within a period of 180 days from the date of such receipt/ realisation/ purchase/ acquisition or date of his
return to India, as the case may be.
Exemption
The Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange)
Regulations, 2015 does not apply to foreign exchange in the form of currency of Nepal or Bhutan.
REMITTANCE OF ASSETS
In exercise of the powers conferred by Section 47 of the Foreign Exchange Management Act, the Reserve
Bank issued the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 in respect of
remittance outside India by a person whether resident in India or not, of assets in India.
Remittances by individuals not being NRIs/ PIOs
'Remittance of assets' means remittance outside India of funds in a deposit with a bank/ firm/ company,
provident fund balance or superannuation benefits, amount of claim or maturity proceeds of insurance policy,
sale proceeds of shares, securities, immovable property or any other asset held in India in accordance with
the provisions of the Foreign Exchange Management Act, 1999 (FEMA) or rules/ regulations made there
under.
ADs may allow remittance of assets by a foreign national where:
(i) the person has retired from employment in India;
(ii) the person has inherited from a person referred to in section 6(5) of the Act;
(iii) the person is a non-resident widow/widower and has inherited assets from her/his deceased spouse
who was an Indian national resident in India.
The remittance should not exceed USD one million per financial year. This limit, however, will not
cover sale proceeds of assets held on repatriation basis. In case the remittance is made in more
than one instalment, the remittance of all instalments should be made through the same AD on
submission of documentary evidence.
(v) the remittance is in respect of balances held in a bank account by a foreign student who has
completed his/ her studies, provided such balance represents proceeds of remittances received
from abroad through normal banking channels or rupee proceeds of foreign exchange brought by
such person and sold to an authorised dealer or out of stipend/ scholarship received from the
Government or any organisation in India.
These facilities are not available for citizens of Nepal or Bhutan or a PIO.
Remittances by NRIs/ PIOs

‘Non-Resident Indian’ (NRI) means a person resident outside India who is a citizen of India.
A ‘Person of Indian Origin (PIO)’ is a person resident outside India who is a citizen of any country other
than Bangladesh or Pakistan or such other country as may be specified by the Central Government,
satisfying the following conditions:
Who was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or
(i) Who belonged to a territory that became part of India after the 15th day of August, 1947; or
(ii) Who is a child or a grandchild or a great grandchild of a citizen of India or of a person referred to in
clause (a) or (b); or
(iii) Who is a spouse of foreign origin of a citizen of India or spouse of foreign origin of a person referred
to in clause (a) or (b) or (c).
Explanation: PIO will include an ‘Overseas Citizen of India’ cardholder within the meaning of Section 7(A) of
the Citizenship Act, 1955.
ADs may allow NRIs/ PIOs, on submission of documentary evidence, to remit up to USD one million,
per financial year:
(i) out of balances in their non-resident (ordinary) (NRO) accounts/ sale proceeds of assets/ assets
acquired in India by way of inheritance/ legacy;
(ii) in respect of assets acquired under a deed of settlement made by either of his/ her parents or a
relative as defined in Companies Act, 2013. The settlement should take effect on the death of the
settler;
(iii) in case settlement is done without retaining any life interest in the property i.e. during the lifetime of
the owner/ parent, it would tantamount to regular transfer by way of gift and the remittance of sale
proceeds of such property would be guided by the extant instructions on remittance of balance in
the NRO account;
In case the remittance is made in more than one instalment, the remittance of all instalments should be
made through the same AD. Where the remittance is to be made from the balances held in the NRO
account, the Authorised Dealer should obtain an undertaking from the account holder stating that the said
remittance is sought to be made out of the remitter’s balances held in the account arising from his/ her
legitimate receivables in India and not by borrowing from any other person or a transfer from any other NRO
account and if such is found to be the case, the account holder will render himself/ herself liable for penal
action under FEMA.
Remittances by companies/ entities

ADs may allow remittances by Indian companies under liquidation on directions issued by a Court in India/
orders issued by official liquidator in case of voluntary winding up on submission of:
(i) Auditor's certificate confirming that all liabilities in India have been either fully paid or adequately
provided for.
(ii) Auditor's certificate to the effect that the winding up is in accordance with the provisions of the
Companies Act, 1956.
(iii) In case of winding up otherwise than by a court, an auditor's certificate to the effect that there are no
46 EP-EBCL
legal proceedings pending in any court in India against the applicant or the company under
liquidation and there is no legal impediment in permitting the remittance.
ADs may also allow Indian entities to remit their contribution towards the provident fund/ superannuation/
pension fund in respect of their expatriate staff resident but “not permanently resident” in India.
Remittances/ winding up proceeds of branch/ office

ADs may permit remittance of assets on closure or remittance of winding up proceeds of branch office/
liaison office (other than project office) on submission of the following documents:
(i) A copy of the Reserve Bank's permission for establishing the branch/ office in India.
(ii) Auditor’s certificate:
a. indicating the manner in which the remittable amount has been arrived and supported by a
statement of assets and liabilities of the applicant, and indicating the manner of disposal of
assets;
b. confirming that all liabilities in India including arrears of gratuity and other benefits to the
employees etc., of the branch/ office have been either fully met or adequately provided for;
c. confirming that no income accruing from sources outside India (including proceeds of exports)
has remained un-repatriated to India;
d. confirming that the branch/office has complied with all regulatory requirements stipulated by the
Reserve Bank of India from time to time regarding functioning of such offices in India;
(iii) a confirmation from the applicant that no legal proceedings are pending in any Court in India and
there is no legal impediment to the remittance; and
(iv) a report from the Registrar of Companies regarding compliance with the provisions of the
Companies Act, 2013, in case of winding up of the office in India.
Remittance of assets requiring RBI approval

Prior approval of the Reserve Bank is necessary for remittance of assets where:
(a) Remittance is in excess of USD 1,000,000 (US Dollar One million only) per financial year
(i) on account of legacy, bequest or inheritance to a citizen of foreign state, resident outside India;
(ii) by NRIs/ PIOs out of the balances held in NRO accounts/ sale proceeds of assets/ the assets
acquired by way of inheritance/ legacy.
(b) Hardship will be caused to a person if remittance from India is not made to such a person.
Remittance of funds from the sale of assets in India held by a person, whether resident in or outside India,
not covered under the directions stipulated above will require approval of the Reserve Bank.
Income-tax clearance
The remittances are subject to payment of applicable taxes in India. Reserve Bank of India does not issue
any instructions under FEMA clarifying tax issues. It is mandatory on the part of Authorised Dealers to
comply with the requirement of tax laws, as applicable.
Exemption from Realisation or Repatriation

Section 9 of the Act contains exemptions from the application of provisions relating to holding of foreign
currency and realisation and repatriation in certain circumstances, as provided under Sections 4 and 8 of the
Act respectively. Accordingly, possession of foreign currency or coins by any person or class of persons, as
the Reserve Bank may specify is not prohibited. A person or class of persons may hold and operate foreign
currency account within the prescribed limits as may be specified by the Reserve Bank. Foreign exchange
acquired or received before 8th July, 1947, or any income arising or accruing thereon which is held outside
India, in pursuance of a general or special permission of RBI, is also exempted.
Provisions relating to holding of foreign exchange, realisation and repatriation of foreign exchange are not
applicable to person resident in India upto such limit as the Reserve Bank may specify, if such foreign
exchange was acquired by way of gift or inheritance from certain persons mentioned above and any income
arising there from. Reserve Bank may also specify the exemption limit upto which the foreign exchange earned
by a person from employment, business, trade, vocation services, honorarium, gifts, inheritance or other
legitimate means may be possessed. Reserve Bank may also exempt such other receipts as it thinks fit.
POSSESSION AND RETENTION OF FOREIGN CURRENCY OR FOREIGN COINS

Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2015 deals with
limits on possession and retention of foreign currency or foreign coins. Under Regulation 3 the Reserve Bank
has specified following limits for possession or retention of foreign currency or foreign coins, namely:
(i) possession without limit of foreign currency and coins by an authorised person within the scope of
his authority;
(ii) possession without limit of foreign coins by any person;
(iii) retention by a person resident in India of foreign currency notes, bank notes and foreign currency
travelers cheques not exceeding US $ 2000 or its equivalent in aggregate, provided that such
foreign exchange in the form of currency notes, bank notes and travelers cheques acquired during a
visit to any place outside India by way of payment for services not arising from any business in or
anything done in India; or from any person not resident in India and also who is on a visit to India, or
as honorarium or gift or for services rendered or in settlement of any lawful obligation; or as a
honorarium or gift while on a visit to any place outside India; or represents unspent amount of
foreign exchange acquired from an authorised person for travel abroad.
Regulation 4 deals with possession of foreign exchange by a person resident in India but not permanently
resident therein and provides that a person resident in India but not permanently resident therein may
possess without limit foreign currency in the form of currency notes, bank notes and travelers cheques, if
such foreign currency was acquired, held or owned by him when he was resident outside India and, has
been brought into India in accordance with the law for the time being in force. Explanation to regulation 4
defines the term ‘not permanently resident as to mean a person resident in India for employment of a
specified duration (irrespective of length thereof) or for a specific job or assignment, the duration of which
does not exceed three years.
AUTHORISED PERSON
Chapter III of the Act containing Sections 10-12 deals with the provisions relating to authorised person.
Section 10 deals with the procedure of appointing authorised person by the Reserve Bank, Section 11
specifies the powers of the RBI to issue directions to authorised person and Section 12 prescribes the power
of the RBI to inspect authorised person. An Authorised Dealer is any person specifically authorized by the
Reserve Bank under Section 10(1) of FEMA, 1999, to deal in foreign exchange or foreign securities.
Under Section 10, any person who has made an application to the RBI may be authorised by it to act as an
48 EP-EBCL
authorised person to deal in foreign exchange or in foreign securities as an authorised dealer, money
changer or offshore banking unit or in any other manner as the RBI deem fit. This authorisation is in writing
and subject to the conditions laid down by the RBI.
Normally, nationalised banks, leading non nationalized banks and foreign banks are appointed as authorized
persons.
Authorised persons are required to comply with the directions of the Reserve Bank with regard to his dealing
in foreign exchange or foreign security receipt with the previous permission of the Reserve Bank. However
authorised person are required not to engage in any transaction involving any foreign exchange or foreign
security which is not in conformity with the terms of his authorisation.
Reserve Bank of India has been empowered to revoke the authorisation granted to any person at any time in
the public interest. It may also revoke the authorisation after giving an opportunity, if the authorised person
failed to comply with the conditions subject to which the authorisation was granted or contravened any of the
provisions of the Act, rules, notifications or directions.
An authorised person, before undertaking any transaction on behalf of any person shall, require that person
to make such declaration and give such information as will reasonably satisfy the authorised person that the
transaction will not involve or is not intended to violate or contravene any provisions of the Act, rules,
notification or directions. In case, the person refuses to comply with such requirements or makes only
unsatisfactory compliances, the authorised person is duty bound to refuse in writing to act on behalf of such
person in such transaction and report the matter to Reserve Bank.
Any person, other than an authorised person who has acquired or purchased foreign exchange for any
purpose mentioned in the declaration made by him to the authorised person does not use it for such
purpose, or does not surrender it to authorised person within the specified period, or uses the foreign
exchange for any other purpose, which is not permitted under the provisions of the Act, such person shall be
deemed to have committed contravention of the provisions of the Act.
Power of the Reserve Bank to issue directions to authorised person
Section 11 of the Act empowers the RBI to issue directions to the authorised person in regard to making of
payment or doing or desist from doing any act relating to foreign exchange or foreign security. Reserve Bank
has also been empowered to issue directions to the authorised persons to furnish such information in such
manner as it deems fit. If any authorised person contravenes any direction given by the RBI or fails to file the
return as directed by RBI, he may be liable to a fine not exceeding `10,000/- and in the case of continuing
contravention, with an additional penalty which may extend to `2,000 for every day during which such
contravention continues. Power of Reserve Bank to Inspect authorised person
Section 12 of the Act empowers RBI to inspect the business of any authorised person for the purpose of
verifying the correctness of any statement/information or particulars furnished. In case authorised person
fails to furnish the information sought, the RBI can initiate inspection of the authorised person for obtaining
such information. RBI may also inspect the business of an authorised person for securing compliance with
the provisions of the Foreign Exchange Management Act or any of the Rules, Regulations or directions. The
Reserve Bank may make an order in writing authorising any of its officer for this purpose.
When an inspection is initiated by the Reserve Bank, it shall be the duty of every authorised person (where
the authorised person is a company or firm, every director partner or officer of such a company or firm), to
produce before the inspecting officer, such books, accounts and other documents in his custody and to
furnish any statement or information relating to the affairs of such authorised person within the time limit and
the manner in which such inspecting officer may direct.
ADJUDICATION AND APPEAL
Chapter V containing Sections 16-35 deals with the adjudication and appeal.
Appointment of Adjudicating Authority
Section 16 empowers the Central Government to appoint by notification in the Official Gazette as many
Adjudicating Authorities as it may think fit for holding enquiries under Section 13. The Central Government is,
however under obligation to specify the jurisdiction of the Adjudicating Authority. The Adjudicating Authority
has been empowered to hold any enquiry on a complaint made in writing by an officer authorised by a
general or special order by the Central Government.
In case, a complaint has been made in respect of a person alleged to have committed the contravention,
such person shall be given a reasonable opportunity of being heard before imposing any penalty under
Section 13. The Adjudicating Authority has discretion to demand from the persons against whom a complaint
is made a bond or guarantee for any such amount as he thinks fit, if he is of the opinion that such persons
likely to abscond or evade the payment of penalty, if imposed.
Appeal to Special Director (Appeals)
Section 17 of the Act provides for appointment of one or more Special Directors (Appeals) to hear appeals
against the orders of the Adjudicating Authorities. In this context, the Central Government has been
empowered to appoint by notification Special Directors (Appeals) specifying their jurisdiction over matters
and places.
An appeal to the Special Director (Appeals) may be made against the orders of the Assistant Director or
Deputy Director of enforcement, acting as Adjudicating Authority. The appeal against the order of
Adjudicating Authority shall be made in the prescribed form along with requisite fee, within forty five days
from the date of the receipt of the order by aggrieved person. The Special Director (Appeals) has however,
been empowered to entertain appeal after the expiry of the said period of forty five days.
Establishment of Appellate Tribunal
Under Section 18, the Central Government is empowered to establish an Appellate Tribunal, by a
notification in the Official Gazette, to hear appeals against the orders of Adjudication Authorities and
Special Director (Appeals). The Central Government or any person aggrieved by the orders of Adjudicating
Authority or Special Director (Appeals) may prefer an appeal to the Appellate Tribunal under Section 19 of
the Act.
Section 20 of the Act empowers the Central Government to appoint a Chairperson and as many members as
it may deem fit to the Appellate Tribunal. The jurisdiction of the Appellate Tribunal may be exercised by
benches. A bench may be constituted by the Chairperson with one or more member as the Chairperson
deem fit. The Chairperson can also transfer member of one bench to another bench. The Appellate Tribunal
shall sit ordinarily at New Delhi for hearing. The Central Government however may, in consultation with the
Chairperson, notify the sitting of the Tribunal elsewhere as it may deem fit.
A person who is or has been or is qualified to be a judge of a High Court shall be eligible for the appointment
as chairperson of Appellate Tribunal. A person who is or has been or is eligible to be a district judge shall be
50 EP-EBCL
eligible for apointment as a member of Appellate Tribunal. A member of the Indian Legal Service and holding
the post in Grade I of that Services or the member of Indian Revenue Service and holding the post
equivalent to a Joint Secretary to the Government of India, shall be eligible to be appointed as Special
Director (Appeals).
The Chairperson and Members will hold office for a period of 5 years from the date of assuming office.
However, no chairperson or member shall hold office on attaining the age of 65 years and 62 years
respectively.
Appeal to High Court
A right to appeal to High Court lies with the appellant who is aggrieved by the decision of the Tribunal.
Such appeal must be filed within 60 days from the date of communication of the decision or order of the
Tribunal. The appeal to the High Court can be made on any question of law arising out of such order. A
relaxation for a maximum period of sixty days for making an appeal may be granted by the High Court, if
it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the
specified period.
Directorate of Enforcement
Section 36 of the Act empowers the Central Government to establish a Directorate of Enforcement with a
Director and other officers or class of Officers, for the purposes of the enforcement of the Act. The Central
Government has also been empowered to authorise Director, Additional Director, Special Director or Deputy
Director to appoint officers of enforcement below the rank of Assistant Director of Enforcement to exercise
the powers and discharge the duties conferred or imposed on him under the Act.
The Central Government, may, by order and with prescribed conditions and limitations, authorise any officers
of customs or Central Excise or any police officer or officers of Central or State Government to exercise such
powers and discharge such duties of the Director of Enforcement or any other officer of the Enforcement as
stated in the order.
Investigation
Section 37 of the Act empowers the Director of Enforcement and other officers below the rank of an
Assistant Director to take up for investigation the contravention referred to in Section 13 of the Act. In
addition, the Central Government may also authorise any officer or class of officers in the Central
Government, State Government, Reserve Bank of India, not below the rank of Under Secretary to
Government of India, to investigate any contravention under Section 13 of the Act. The officers so appointed
shall exercise the like powers which are conferred on income tax authorities under the Income Tax Act,
1961, subject to such conditions and limitations as laid down under that Act.
Contravention by Companies
Section 42 of the Act deals with contravention of the provisions of the Act by the Companies and provides
that where the person committing the contravention of the Act or Rules happened to be a company, every
person who at the time the contravention was committed, was in charge of and was responsible to the
company for the conduct of the business of the company shall be deemed to be guilty of the contravention
and liable to be proceeded against and punished accordingly. However, no such persons shall be deemed to
be guilty of committing any offence if he proves that such contravention took place without his knowledge or
that he exercised adequate steps to prevent such contravention.
In case the contravention is committed by a company and it is proved that such contravention is committed
with the knowledge, consent and connivance or is attributed to the neglect on the part of any director,
manager or secretary or other officer of the company, they will also be deemed to be guilty of contravention
and liable to be proceeded against and punished accordingly.
COMPOUNDING OF CONTRAVENTIONS
Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and
rules/regulations/notification/orders/directions/circulars issued there under. Compounding refers to the
process of voluntarily admitting the contravention, pleading guilty and seeking redressal. The Reserve Bank
is empowered to compound any contraventions as defined under section 13 of FEMA, 1999 except the
contravention under section 3(a), for a specified sum after offering an opportunity of personal hearing to the
contravener. It is a voluntary process in which an individual or a corporate seeks compounding of an
admitted contravention. It provides comfort to any person who contravenes any provisions of FEMA, 1999
[except section 3(a) of the Act] by minimizing transaction costs. Willful, malafide and fraudulent transactions
are, however, viewed seriously, which will not be compounded by the Reserve Bank.
Any person who contravenes any provision of the FEMA, 1999 [except section 3(a)] or contravenes any rule,
regulation, notification, direction or order issued in exercise of the powers under this Act or contravenes any
condition subject to which an authorization is issued by the Reserve Bank, can apply for compounding to the
Reserve Bank. Applications seeking compounding of contraventions under section 3(a) of FEMA, 1999 may
be submitted to the Directorate of Enforcement.
Power to compound by Reserve Bank
AMOUNT COMPOUNDING AUTHORITY
In case where the sum involved in such Assistant General Manager of the Reserve Bank of
contravention is ten lakhs rupees or below India
In case where the sum involved in such Deputy General Manager of Reserve Bank of India
contravention is more than rupees ten lakhs but
less than rupees forty lakhs,
In case where the sum involved in the General Manager of Reserve Bank of India
contravention is rupees forty lakhs or more but less
than rupees hundred lakhs
In case the sum involved in such contravention is Chief General Manager of the Reserve Bank of
rupees one hundred lakhs or more India
Delegation of Powers to Regional Offices
As a measure of customer service and in order to facilitate the operational convenience, compounding
powers have been delegated to the Regional Offices of the Reserve Bank of India to compound the following
contraventions of FEMA, 1999.
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Brief Description of Contravention Compounding Authority
Delay in reporting inward remittance received for Regional Offices of the Reserve Bank of India
issue of shares.
Delay in filing form FC(GPR) after issue of shares. Regional Offices of the Reserve Bank of India
Delay in filing the Annual Return on Foreign Regional Offices of the Reserve Bank of India
Liabilities and Assets (FLA Return), by all Indian
companies which have received Foreign Direct
Investment in the previous year(s) including the
current year
Delay in issue of shares/refund of share application Regional Offices of the Reserve Bank of India
money beyond 180 days, mode of receipt of funds,
etc.
Violation of pricing guidelines for issue of shares. Regional Offices of the Reserve Bank of India
Issue of ineligible instruments such as non- Regional Offices of the Reserve Bank of India
convertible debentures, partly paid shares, shares
with optionality clause, etc.
Issue of shares without approval of RBI or FIPB Regional Offices of the Reserve Bank of India
respectively, wherever required.
Delay in submission of form FC-TRS on transfer of Regional Offices of the Reserve Bank of India
shares from Resident to Non-Resident.
Delay in submission of form FC-TRS on transfer of Regional Offices of the Reserve Bank of India
shares from Non-Resident to Resident.
Taking on record transfer of shares by investee Regional Offices of the Reserve Bank of India
company, in the absence of certified from FC-TRS.
Brief Description of Contravention Compounding Authority
Contraventions relating to acquisition and transfer FED, CO Cell, New Delhi

of immovable property outside India
Contraventions relating to acquisition and transfer FED, CO Cell, New Delhi

of immovable property in India
Contraventions relating to establishment in India of FED, CO Cell, New Delhi

Branch office, Liaison Office or Project office
Contraventions falling under Foreign Exchange FED, CO Cell, New Delhi

Management (Deposit) Regulations, 2000
Application for Compounding

• All applications for compounding may be submitted together with the prescribed fee of Rs.5000/-
by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at the
concerned Regional Office and by way of a demand draft drawn in favour of “Reserve Bank of
India” and payable at Mumbai for cases submitted to the Compounding Authority, [Cell for
Effective implementation of FEMA (CEFA)], Foreign Exchange Department, Reserve Bank of
India, Central Office, Mumbai.
• Along with the application in the prescribed format, the applicant may also furnish the details
relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct
Investment and Branch Office / Liaison Office, as applicable, a copy of the Memorandum of
Association and latest audited balance sheet along with an undertaking that they are not under
investigation of any agency such as DOE, CBI, etc. in order to complete the compounding
process within the time frame.
• In case the application has to be returned where required approvals are not obtained from the
authorities concerned or in case of incomplete application for any other reason, the application
fees of Rs.5000/- received along with the application will be returned by crediting the same to the
applicant’s account through NEFT as per the ECS mandate and details of their bank account
as furnished along with the application. The application will be treated as incomplete without
these details.
• The applicants are also advised to bring to the notice of the compounding authority change, if
any, in the address/ contact details of the applicant during the pendency of the compounding
application with Reserve Bank.
Pre-requisite for Compounding Process

In respect of a contravention committed by any person within a period of three years from the date on
which a similar contravention committed by him was compounded under the Compounding Rules, such
contraventions would not be compounded and relevant provisions of the FEMA, 1999 shall apply. Any
second or subsequent contravention committed after the expiry of a period of three years from the date
on which the contravention was previously compounded shall be deemed to be a first contravention.
Contraventions relating to any transaction where proper approvals or permission from the Government or
any statutory authority concerned, as the case may be, have not been obtained such contraventions
would not be compounded unless the required approvals are obtained from the concerned authorities.
Cases of contravention such as those having a money laundering angle, national security concerns
and/or involving serious infringements of the regulatory framework or where the contravener fails to pay
the sum for which contravention was compounded within the specified period in terms of the
compounding order, shall be referred to the Directorate of Enforcement for further investigation and
54 EP-EBCL
necessary action under FEMA, 1999 or to the authority instituted for implementation of the Prevention of
Money Laundering Act 2002, or to any other agencies, for necessary action as deemed fit.
In this connection, it is clarified that whenever a contravention is identified by the Reserve Bank or
brought to its notice by the entity involved in contravention by way of a reference other than through the
prescribed application for compounding, the Bank will continue to decide
• whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of
an administrative/ cautionary advice;
• whether it is material and, hence, is required to be compounded for which the necessary compounding
procedure has to be followed or
• whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the
Directorate of Enforcement (DOE). However, once a compounding application is filed by the
concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’
or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of
Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding
Proceedings) Rules, 2000.
Scope and Procedure for Compounding

On receipt of the application for compounding, the Reserve Bank shall examine the application based on
the documents and submissions made in the application and assess whether contravention is
quantifiable and, if so, the amount of contravention.
The Compounding Authority may call for any information, record or any other documents relevant to the
compounding proceedings. In case the contravener fails to submit the additional information/documents
called for within the specified period, the application for compounding will be liable for rejection.
The following factors, which are only indicative, may be taken into consideration for the purpose of
passing compounding order and adjudging the quantum of sum on payment of which contravention shall
be compounded:
• the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;
• the amount of loss caused to any authority/ agency/ exchequer as a result of the contravention;
• economic benefits accruing to the contravener from delayed compliance or compliance avoided;
• the repetitive nature of the contravention, the track record and/or history of non-compliance of the
contravener;
• contravener’s conduct in undertaking the transaction and in disclosure of full facts in the application
and submissions made during the personal hearing; and any other factor as considered relevant and
appropriate.
Issue of the Compounding Order

The Compounding Authority shall pass an order of compounding after affording an opportunity of being
heard to all the concerned as expeditiously as possible as and not later than 180 days from the date of
application on the basis of the averments made in the application as well as other documents and
submissions made in this context by the contravener during the personal hearings.
The time limit for this purpose would be reckoned from the date of receipt of the completed application
for compounding by the Reserve Bank.
If the applicant opts for appearing for the personal hearing, the Reserve Bank would encourage the
applicant to appear directly for it rather than being represented / accompanied by legal experts /
consultants, as compounding is only for admitted contraventions. Appearing for or opting out of personal
hearing does not have any bearing whatsoever on the amount imposed in the compounding order. If the
authorized representative of the applicant is unavailable for the personal hearing, the Compounding
Authority may pass the order based on available information/ documents.
The Compounding Order shall specify the provisions of the FEMA, 1999 or any rule, regulation,
notification, direction or order issued in exercise of the powers under FEMA, 1999 in respect of which
contravention has taken place along with details of the contravention.
One copy of the compounding order issued under sub rule (2) of Rule 8 of Foreign Exchange
(Compounding Proceedings) Rules, 2000 shall be supplied to the applicant (the contravener) and also to
the Adjudicating Authority, where the compounding of any contravention is made after making of a
complaint under sub-section (3) of section 16 of the FEMA, as the case may be.
To ensure more transparency and greater disclosure, it has been decided to host the compounding
orders passed on the Reserve Bank’s website (www.rbi.org.in).
LESSON ROUND-UP
• Foreign exchange means 'foreign currency' and includes:- (i) deposits, credits and balances
payable in any foreign currency; (ii) drafts, travellers' cheques, letters of credit or bills of exchange,
expressed or drawn in Indian currency but payable in any foreign currency; and (iii) drafts, travellers'
cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but
payable in Indian currency.
• Capital Account transactions means any transaction which alters the assets or liabilities including
contingent liabilities, outside India of persons resident in India or assets or liabilities in India of person
resident outside India and includes the transactions specified in Sub-section (3) of Section 6 of the Act.
• Current Account Transaction means a transaction other than a capital account transaction and
includes payments due in connection with foreign trade, other current business, services and short term
banking and credit facilities in the ordinary course of business; payments due as interest on loan and as net
income from investments; remittances for living expenses of parents, spouse and children residing abroad
and expenses in connection with foreign travel, education and medical care of parents, spouse and
children.
• In exercise of the powers conferred by Section 47 of the Foreign Exchange Management Act, the Reserve
Bank issued the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 in respect of
remittance outside India by a person whether resident in India or not, of assets in India.
• Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and
seeking redressal. The Reserve Bank is empowered to compound any contraventions as defined under
section 13 of FEMA, 1999 except the contravention under section 3(a) for a specified sum after offering an
opportunity of personal hearing to the contravener. It is a voluntary process in which an individual or
a corporate seeks compounding of an admitted contravention. It provides comfort to any person who
contravenes any provisions of FEMA, 1999 [except section 3(a) of the Act] by minimizing transaction costs.
56 EP-EBCL
SELF-TEST QUESTIONS
evaluation)
1. Define the Capital Account Transactions and enumerate permissible capital account transactions in
relation to persons resident in India and resident outside India?
2. Discuss the Acquisition and Transfer of Immovable Property in India under FEMA?
3. Discuss the establishment of branch or office or place of business in India under FEMA.
4. Define Authorised person? Briefly discuss the powers of RBI to give directions to Authorised
persons?
5. Write short notes on the following:
(i) Compounding of Contraventions
(ii) Current Account Transactions
(iii) Investigation
Lesson 4
Foreign Contribution (Regulation)
Act, 2010
LESSON OUTLINE
LEARNING OBJECTIVES
Foreign Contribution (Regulation) Act, 2010 is
• Foreign contribution internal security legislation and regulated by Ministry
of Home Affaires which prohibits certain classes of
• Foreign Source
persons from receiving ‘foreign contribution’. It also
• Foreign hospitality restricts certain classes of persons from accepting
foreign hospitality while visiting any country or
• Regulation of foreign contribution and territory outside India, without the prior permission
foreign hospitality of the Central Government.
• Certificate of Registration The Act provides that persons having definite
• Application for Renewal cultural, economic, educational, religious and
social programmes should get themselves registered
• Renewal of Certificate with the Government of India before accepting
any ‘foreign contribution’. “Foreign contribution”
• Cancellation of Certificate
means the donation, delivery or transfer made by
• Management of Foreign Contribution any foreign source of any article, not being an
article given to a person as a gift for his
• Intimation to Government
personal use, if the market value, in India, of such
• Obligation of Banks under FCRA article, on the date of such gift, is not more than such
sum as may be specified from time to time, by the
• Inspection Central Government by the rules made by it in
• Audit this behalf; of any currency, whether Indian or
foreign; any security as defined under Securities
• Confiscation Contracts (Regulation) Act, 1956 and the Foreign
• Adjudication Exchange Management Act, 1999.
• Offences and penalties The Act mandates that every bank or authorized
person in foreign exchange shall report to
• Lesson Round Up specified authority, the prescribed amount of foreign
• Self-Test Questions remittance, source and manner in which foreign
remittance was received and other particulars in
such form and manner as may be prescribed.
The object of the study is to familiarize the
students with the legal requirements stipulated
under the FCRA, 2010.
The object of the Foreign Contribution (Regulation) Act, 2010 is to regulate the acceptance and utilisation of
foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit
acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national
interest and for matters connected therewith or incidental thereto.
58 EP-EBCL
INTRODUCTION
The Foreign Contribution (Regulation) Act, 1976 was enacted to regulate the acceptance and utilization of
foreign contribution or hospitality with a view to ensuring that the Parliamentary institutions, political
associations, academic and other voluntary organizations as well as individuals working in important areas of
national life may function in a manner consistent with the values of sovereign democratic republic. The Act
was amended in 1984 to extend it provisions to cover second and subsequent recipients of foreign
contribution and to the members of higher judiciary, besides introducing the system of grant of registration to
the association receiving foreign contribution.
Significant development have taken place since 1984 such as change in internal security scenario, an
increased influence of voluntary organizations, spread of use of communication and information technology,
quantum jump in the amount of foreign contribution being received, and large scale growth in the number of
registered organizations. This has necessitated large scale changes in the Act of 1976 and therefore, it was
thought appropriate to replace the FCRA, 1976 by a new legislation to regulate the acceptance and
utilization of foreign contribution and foreign hospitality by a person or association.
The Foreign Contribution (Regulation) Act, 2010 has come into effect from May 1, 2011. The Ministry of
Home Affairs has issued the necessary Gazette Notification vide S.O. 999 (E) dated the 29th April, 2011 in
this regard. The Ministry of Home Affairs has also issued a Gazette Notification vide G.S.R. 349 (E) dated
the 29th April, 2011 notifying the Foreign Contribution (Regulation) Rules, 2011 made under section 48 of
FCRA, 2010. The FCR Rules, 2011 have come into force simultaneously with FCRA, 2010.
DEFINITIONS
The definitions of the following terms used in the statute are relevant for understanding the operative
provisions of the Foreign Contribution (Regulation) Act, 2010.
“Association” means an association of individuals, whether incorporated or not, having an office in India
and includes a society, whether registered under the Societies Registration Act, 1860, or not, and any other
organisation, by whatever name called [Section 2(1)(a)]
“Authorised person in foreign exchange” means an authorised person referred to in clause (c) of
section 2 of the Foreign Exchange Management Act, 1999 [Section 2(1)(b)]
“Bank” means a banking company as referred to in clause (c) of section 5 of the Banking Regulation Act,
1949 [Section 2(1)(c)]
“Candidate for election” means a person who has been duly nominated as a candidate for election to any
Legislature [Section 2(1)(d)]
“Certificate” means certificate of registration granted under sub-section (3) of section 12 [Section 2(1)(e)]
“Company” shall have the meaning assigned to it under clause (17) of section 2 of the Income-tax Act,
1961 Section 2(1)(f);
“Foreign company” means any company or association or body of individuals incorporated outside India
and includes—
(i) a foreign company within the meaning of section 591 of the Companies Act, 1956 (1 of 1956);
(ii) a company which is a subsidiary of a foreign company;
(iii) the registered office or principal place of business of a foreign company referred to in sub clause (i)
Lesson 4 Foreign Contribution (Regulation) Act, 2010 59
or company referred to in sub-clause (ii);

(iv) a multi-national corporation.
Explanation.— For the purposes of this sub-clause, a corporation incorporated in a foreign country or
territory shall be deemed to be a multi-national corporation if such corporation, —
(a) has a subsidiary or a branch or a place of business in two or more countries or territories; or
(b) carries on business, or otherwise operates, in two or more countries or territories; [Section 2(1)(g)]
“Foreign contribution” means the donation, delivery or transfer made by any foreign source,—
(i) of 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) of any currency, whether Indian or foreign;
(iii) of any security as defined in clause (h) of section 2 of the Securities Contracts (Regulation)
Act, 1956 and includes any foreign security as defined in clause (o) of section 2 of` the Foreign Exchange
Management Act, 1999.
Explanation 1.— A donation, delivery or transfer of any article, currency or foreign security referred to in this
clause by any person who has received it from any foreign source, either directly or through one or more
persons, shall also be deemed to be foreign contribution within the meaning of this clause.
Explanation 2.— The interest accrued on the foreign contribution deposited in any bank referred to in sub-
section (1) of section 17 or any other income derived from the foreign contribution or interest thereon shall
also be deemed to be foreign contribution within the meaning of this clause.
Explanation 3.— Any amount received, by any person from any foreign source in India, by way of fee
(including fees charged by an educational institution in India from foreign student) or towards cost in lieu of
goods or services rendered by such person in the ordinary course of his business, trade or commerce
whether within India or outside India or any contribution received from an agent of a foreign source towards
such fee or cost shall be excluded from the definition of foreign contribution within the meaning of this clause
[Section 2(1)(h)].
“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 [Section 2(1)(i)].
“Foreign source” includes, —
(i) the Government of any foreign country or territory and any agency of such Government;
(ii) any international agency, not being the United Nations or any of its specialised agencies, the World
Bank, International Monetary Fund or such other agency as the Central Government may, by
notification, specify in this behalf;
(iii) a foreign company;
(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory;
(v) a multi-national corporation referred to in sub-clause (iv) of clause (g);

60 EP-EBCL
(vi) a company within the meaning of the Companies Act, 1956 and more than one-half of the nominal
value of its share capital is held, either singly or in the aggregate, by one or more of the following,
namely:—
(A) the Government of a foreign country or territory;
(B) the citizens of a foreign country or territory;
(C) corporations incorporated in a foreign country or territory;
(D) trusts, societies or other associations of individuals (whether incorporated or not), formed or
registered in a foreign country or territory;
(E) foreign company;
(vii) a trade union in any foreign country or territory, whether or not registered in such foreign country or
territory;
(viii) a foreign trust or a foreign foundation, by whatever name called, or such trust or foundation mainly
financed by a foreign country or territory;
(ix) a society, club or other association of individuals formed or registered outside India;
(x) a citizen of a foreign country[ Section 2(1)(j)]
“Legislature” means —
(A) either House of Parliament;
(B) the Legislative Assembly of a State, or in the case of a State having a Legislative Council, either
House of the Legislature of that State;
(C) Legislative Assembly of a Union territory constituted under the Government of Union Territories Act,
1963;
(D) Legislative Assembly for the National Capital Territory of Delhi referred to in the Government of
National Capital Territory of Delhi Act, 1991;
(E) Municipality as defined in clause (e) of article 243P of the Constitution;
(F) District Councils and Regional Councils in the States of Assam, Meghalaya, Tripura and Mizoram
as provided in the Sixth Schedule to the Constitution [Section 2(1)(k)]
“Person” includes—
(i) an individual;
(ii) a Hindu undivided family;
(iii) an association;
(iv) a company registered under section 25 of the Companies Act, 1956 [Section 2(1)(m)]
“Political party” means—
(i) an association or body of individual citizens of India—
(A) to be registered with the Election Commission of India as a political party under section 29A of
the Representation of the People Act, 1951; or
(B) which has set up candidates for election to any Legislature, but is not so registered or deemed
to be registered under the Election Symbols (Reservation and Allotment) Order, 1968;
(ii) a political party mentioned in column 2 of Table 1 and Table 2 to the notification of the Election
Commission of India No.56/J&K/02, dated the 8th August, 2002, as in force for the time being
[Section 2(1)(n)]
It may be noted that words and expressions used herein and not defined in this Act but defined in the
Representation of the People Act, 1950 or the Representation of the People Act, 1951 or the Foreign
Exchange Management Act, 1999 shall have the meanings respectively assigned to them in those Acts.
REGULATION OF FOREIGN CONTRIBUTION AND FOREIGN HOSPITALITY
Prohibition to accept foreign contribution
Section 3(1) of the Act, imposes restriction on acceptance of foreign contribution by candidate for election;
correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper; 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; organisation of a political
nature as may be specified by the Central Government; association or company engaged in the production
or broadcast of audio news or audio visual news or current affairs programmes through any electronic mode,
or any other electronic form as defined in clause (r) of sub-section (1) of section 2 of the Information
Technology Act, 2000 or any other mode of mass communication; correspondent or columnist, cartoonist,
editor, owner of the association or company. A “corporation” for the above purpose means a corporation
owned or controlled by the Government and includes a Government company as defined in section 617 of
the Companies Act, 1956.
Sub-section (2)(a) of Section 3 provides that no person, resident in India, and no citizen of India resident
outside India, shall accept any foreign contribution, or acquire or agree to acquire any currency from a
foreign source, on behalf of any political party, or any person, prohibited from accepting any foreign
contribution.
Sub-section (2) (b) mandates that no person, resident in India, shall deliver any currency, whether Indian or
foreign, which has been accepted from any foreign source, to any person if he knows or has reasonable
cause to believe that such other person intends, or is likely, to deliver such currency to any political party or
any person, prohibited from accepting any foreign contribution.
Section 3(2)(c) provides that no citizen of India resident outside India shall deliver any currency, whether
Indian or foreign, which has been accepted from any foreign source, to any political party or any person
specified in sub-section (1) of section 3 , or both or any other person, if he knows or has reasonable cause
to believe that such other person intends, or is likely, to deliver such currency to a political party or to any
person specified in sub-section (1) of section 3, or both.
Section 3(3) provides that no person receiving any currency, whether Indian or foreign, from a foreign source
on behalf of any person or class of persons, referred to in section 9, shall deliver such currency to any
person other than a person for which it was received, or to any other person, if he knows or has reasonable
cause to believe that such other person intends, or is likely, to deliver such currency to a person other than
the person for which such currency was received.
Person to whom section 3 does not apply
Section 4 provides that nothing contained in section 3 shall apply to the acceptance, by any person specified
62 EP-EBCL
in that section, of any foreign contribution where such contribution is accepted by him, subject to the
provisions of section 10,—
(a) by way of salary, wages or other remuneration due to him or to any group of persons working under
him, from any foreign source or by way of payment in the ordinary course of business transacted in
India by such foreign source; or
(b) by way of payment, in the course of international trade or commerce, or in the ordinary course of
business transacted by him outside India; or
(c) as an agent of a foreign source in relation to any transaction made by such foreign source with the
Central Government or State Government; or
(d) by way of a gift or presentation made to him as a member of any Indian delegation, provided that
such gift or present was accepted in accordance with the rules made by the Central Government
with regard to the acceptance or retention of such gift or presentation; or
(e) from his relative; or
(f) by way of remittance received, in the ordinary course of business through any official channel, post
office, or any authorised person in foreign exchange under the Foreign Exchange Management Act,
1999; or
(g) by way of any scholarship, stipend or any payment of like nature:
Further in case any foreign contribution received by any person specified under section 3, for any of the
purposes other than those specified under this section, such contribution shall be deemed to have been
accepted in contravention of the provisions of section 3.
Procedure to notify an organization of a political nature

Section 5(1) provides that the Central Government may, having regard to the activities of the organisation or
the ideology propagated by the organisation or the programme of the organisation or the association of the
organisations with the activities of any political party, by an order published in the Official Gazette, specify
such organisation as an organisation of a political nature not being a political party, referred to in clause (f) of
sub-section (1) of section 3. Further, the Central Government may, frame the guidelines specifying the
ground or grounds on which an organisation shall be specified as an organisation of a political nature.
Restriction on acceptance of foreign hospitality

Section 6 prohibits acceptance of foreign hospitality by certain persons except with the prior permission of
Central Government. Accordingly no 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, while visiting any country or territory outside India, accept, except with the prior
permission of the Central Government, any foreign hospitality.
However, 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, but, where such foreign hospitality has been
received, the person receiving such hospitality shall give, within one month from the date of receipt of such
hospitality an intimation to the Central Government as to the receipt of such hospitality, and the source from
which, and the manner in which, such hospitality was received by him.
Prohibition to transfer foreign contribution to other person

Section 7 prohibits the transfer of foreign contribution to other person. Accordingly, no person who is
registered and granted a certificate or has obtained prior permission under the Act; and receives any foreign
contribution, shall transfer such foreign contribution to any other person unless such other person is also
registered and had been granted the certificate or obtained the prior permission under the Act.
However, such person may transfer, with the prior approval of the Central Government, a part of such foreign
contribution to any other person who has not been granted a certificate or obtained permission under the Act
in accordance with the rules made by the Central Government.
Which are the organisations/individuals specifically debarred from receiving foreign contribution?
The following are the persons prohibited from accepting foreign contribution:
(a) Candidate for election;
(b) Correspondent, columnist, cartoonist, editor, owner, printer or
publisher of a registered newspaper;
(c) Judge, government servant or employee of any entity controlled or
owned by the Government;
(d) Member of any Legislature;
(e) Political party or office bearers thereof;
(f) Organisations of a political nature as may be specified;
(g) Associations or companies engaged in the production or broadcast of audio news or audiovisual
news or current affairs programmes through any electronic mode or form or any other mode of
mass communication;
(h) Correspondent or columnist, cartoonist, editor, owner of the association or company referred to in
(g) above.
Utilization of foreign contribution

Section 8 (1)(a) provides that every person, who is registered and granted a certificate or given prior
permission under the Act and receives any foreign contribution, shall utilise such contribution for the
purposes for which the contribution has been received. Further any foreign contribution or any income arising
out of it shall not be used for speculative business and that the Central Government shall, by rules, specify
the activities or business which shall be construed as speculative business for the purpose of this section.
Section 8 (1) (b) provides that every person, who is registered and granted a certificate or given prior
permission under this Act and receives any foreign contribution, shall not defray as far as possible such sum,
not exceeding fifty per cent of such contribution, received in a financial year, to meet administrative
expenses. Further administrative expenses exceeding fifty per cent of such contribution may be defrayed
with prior approval of the Central Government.
The Central Government prescribes the elements which shall be included in the administrative expenses and
the manner in which the administrative expenses shall be calculated.
Power of Central Government to prohibit receipt of foreign contribution

Section 9 deals with power of Central Government to prohibit receipt of foreign contribution, etc., in certain
cases. Accordingly, the Central Government has been empowered to -
(a) prohibit any person or organisation not specified in section 3, from accepting any foreign
contribution;
64 EP-EBCL
(b) require any person or class of persons, not specified in section 6, to obtain prior permission of the
Central Government before accepting any foreign hospitality;
(c) require any person or class of persons not specified in section 11, to furnish intimation within such
time and in such manner as may be prescribed as to the amount of any foreign contribution
received by such person or class of persons as the case may be, and the source from which and
the manner in which such contribution was received and the purpose for which and the manner in
which such foreign contribution was utilised;
(d) without prejudice to the provisions of sub-section (1) of section 11, require any person or class of
persons specified in that sub-section to obtain prior permission of the Central Government before
accepting any foreign contribution;
(e) require any person or class of persons, not specified in section 6, to furnish intimation, within such
time and in such manner as may be prescribed, as to the receipt of any foreign hospitality, the
source from which and the manner in which such hospitality was received.
However, no such prohibition or requirement shall be made unless the Central Government is satisfied that
the acceptance of foreign contribution by such person or class of persons, as the case may be, or the
acceptance of foreign hospitality by such person, is likely to affect prejudicially the sovereignty and integrity
of India; or public interest; or freedom or fairness of election to any Legislature; or friendly relations with any
foreign State; or harmony between religious, racial, social, linguistic or regional groups, castes or
communities.
Power to prohibit payment of currency received in contravention of the Act

Section 10 provides that where the Central Government is satisfied, after making such inquiry as it may
deem fit, that any person has in his custody or control any article or currency or security, whether Indian or
foreign, which has been accepted by such person in contravention of any of the provisions of this Act, it may,
by order in writing, prohibit such person from paying, delivering, transferring or otherwise dealing with, in any
manner whatsoever, such article or currency or security save in accordance with the written orders of the
Central Government and a copy of such order shall be served upon the person so prohibited in the
prescribed manner.
Who can receive foreign contribution?
An association having a definite cultural, economic, educational, religious or social programme shall accept
foreign contribution unless such person obtains a certificate of registration / prior permission from the
Central Government.
Registration of certain persons with Central Government

Section 11(1) requires that person having a definite cultural, economic, educational, religious or social
programme shall accept foreign contribution if such person obtains a certificate of registration from the
Central Government.
It may be noted that any association registered with the Central Government under section 6 or granted prior
permission under that section of the Foreign Contribution (Regulation) Act, 1976, as it stood immediately
before the commencement of this Act, shall be deemed to have been registered or granted prior permission,
as the case may be, under this Act and such registration shall be valid for a period of five years from the date
on which this section comes into force.
Sub-section (2) of Section 11 provides that every person referred to in sub-section (1) may, if it is not
registered with the Central Government under that sub-section, accept any foreign contribution only after
obtaining the prior permission of the Central Government and such prior permission shall be valid for the
specific purpose for which it is obtained and from the specific source. Further if the person referred to in sub-
sections (1) and (2) has been found guilty of violation of any of the provisions of this Act or the Foreign
Contribution (Regulation) Act, 1976, the unutilised or unreceived amount of foreign contribution shall not be
utilised or received, as the case may be, without the prior approval of the Central Government.
Sub-section (3) of Section 11 provides that the Central Government may, by notification in the Official
Gazette, specify the person or class of persons who shall obtain its prior permission before accepting the
foreign contribution; or the area or areas in which the foreign contribution shall be accepted and utilised with
the prior permission of the Central Government; or the purpose or purposes for which the foreign contribution
shall be utilised with the prior permission of the Central Government; or the source or sources from which the
foreign contribution shall be accepted with the prior permission of the Central Government.
Grant of certificate of registration

Section 12(1) provides that an application by a person for grant of certificate or giving prior permission, shall
be made to the Central Government in such form and manner and alongwith such fee, as may be prescribed.
On receipt of an application, the Central Government shall, by an order, if the application is not in the
prescribed form or does not contain any of the particulars specified in that form, reject the application. If on
receipt of an application for grant of certificate or giving prior permission and after making such inquiry as the
Central Government deems fit, it is of the opinion that the conditions specified in sub-section (4) are satisfied,
it may, ordinarily within ninety days from the date of receipt of application, register such person and grant him
a certificate or give him prior permission, as the case may be, subject to such terms and conditions as may
be prescribed. In case the Central Government does not grant, within the said period of ninety days, a
certificate or give prior permission, it shall communicate the reasons therefor to the applicant and that a
person shall not be eligible for grant of certificate or giving prior permission, if his certificate has been
suspended and such suspension of certificate continues on the date of making application.
Sub-section (4) of Section 12 provides following conditions for granting certificate of registration :—
(a) the person making an application for registration or grant of prior permission under sub-section
(1),—
(i) is not fictitious or benami;
(ii) has not 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;
(iii) has not been prosecuted or convicted for creating communal tension or disharmony in any
specified district or any other part of the country;
(iv) has not been found guilty or diversion or mis-utilisation of its funds;
(v) is not engaged or likely to engage in propagation of sedition or advocate violent methods to
achieve its ends;
(vi) is not likely to use the foreign contribution for personal gains or divert it for undesirable
purposes;
(vii) has not contravened any of the provisions of this Act;
(viii) has not been prohibited from accepting foreign contribution;
66 EP-EBCL
(b) the person making an application for registration under sub-section (1) has undertaken reasonable
activity in its chosen filed for the benefit of the society for which the foreign contribution is proposed
to be utilised;
(c) the person making an application for giving prior permission under sub-section (1) has prepared a
reasonable project for the benefit of the society for which the foreign contribution is proposed to be
utilised;
(d) in case the person being an individual, such individual has neither been convicted under any law for
the time being in force nor any prosecution for any offence pending against him;
(e) in case the person being other than an individual, any of its directors or office bearers has neither
been convicted under any law for the time being in force nor any prosecution for any offence is
pending against him;
(f) the acceptance of foreign contribution by the person referred to in sub- section (1) is not likely to
affect prejudicially—
(i) the sovereignty and integrity of India; or
(ii) the security, strategic, scientific or economic interest of the State; or
(iii) the public interest; or
(iv) freedom or fairness of election to any Legislature; or
(v) friendly relation with any foreign State; or
(vi) harmony between religious, racial, social, linguistic, regional groups, castes or communities;
(g) the acceptance of foreign contribution referred to in sub-section (1),—
(i) shall not lead to incitement of an offence;
(ii) shall not endanger the life or physical safety of any person.
Where the Central Government refuses the grant of certificate or does not give prior permission, it shall
record in its order the reasons therefore and furnish a copy thereof to the applicant. The Central
Government may not communicate the reasons for refusal for grant of certificate or for not giving prior
permission to the applicant under this section in cases where is no obligation to give any information or
documents or records or papers under the Right to Information Act, 2005.
It may be noted that the certificate granted shall be valid for a period of five years and the prior permission
shall be valid for the specific purpose or specific amount of foreign contribution proposed to be received, as
the case may be.
Suspension of certificate
Section 13 (1) provides that where the Central Government, for reasons to be recorded in writing, is satisfied
that pending consideration of the question of cancelling the certificate on any of the grounds mentioned in
sub-section (1) of section 14, it is necessary so to do, it may, by order in writing, suspend the certificate for
such period not exceeding one hundred and eighty days as may be specified in the order.
Further every person whose certificate has been suspended shall not receive any foreign contribution during
the period of suspension of certificate. However, the Central Government, on an application made by such
person, if it considers appropriate, allow receipt of any foreign contribution by such person on such terms
and conditions as it may specify.
Every person whose certificate has been suspended shall utilise, in the prescribed manner, the foreign
contribution in his custody with the prior approval of the Central Government.
Cancellation of certificate
Section 14 empowers the Central Government to cancel the certificate. Accordingly, the Central Government
may, if it is satisfied after making such inquiry as it may deem fit, by an order, cancel the certificate if —
Before passing an order of cancellation of certificate, the person concerned would be given a reasonable
opportunity of being heard. Any person, whose certificate has been cancelled, shall not be eligible for
registration or grant of prior permission for a period of three years from the date of cancellation of such
certificate.
Management of foreign contribution of person whose certificate has been cancelled

Section 15 provides that the foreign contribution and assets created out of the foreign contribution in the
custody of every person whose certificate has been cancelled under section 14 shall vest in such authority
as may be prescribed.
The authority may, if it considers necessary and in public interest, manage the activities of the person
referred to in that sub-section for such period and in such manner, as the Central Government may direct.
Such authority may utilise the foreign contribution or dispose of the assets created out of it in case adequate
funds are not available for running such activity. The authority shall return the foreign contribution and the
assets vested upon it to the person, if such person is subsequently registered under this Act.
Renewal of certificate
Every person who has been granted a certificate under section 12 shall have such certificate renewed within
six months before the expiry of the period of the certificate [Section 16].
Application for Renewal

The application for renewal of the certificate shall be made to the Central Government in such form and
68 EP-EBCL
manner and accompanied by such fee as may be prescribed. The Central Government shall renew the
certificate, ordinarily within ninety days from the date of receipt of application for renewal of certificate subject
to such terms and conditions as it may deem fit and grant a certificate of renewal for a period of five years. In
case the Central Government does not renew the certificate within the said period of ninety days, it shall
communicate the reasons therefor to the applicant. The Central Government may refuse to renew the
certificate in case where a person has violated any of the provisions of this Act or rules made thereunder.
ACCOUNTS, INTIMATION, AUDIT AND DISPOSAL OF ASSETS

Foreign contribution through scheduled bank
Section 17 provides that every person who has been granted a certificate or given prior permission shall
receive foreign contribution in a single account only through such one of the branches of a bank as he may
specify in his application for grant of certificate.
However, such person may open one or more accounts in one or more banks for utilising the foreign
contribution received by him. Further no funds other than foreign contribution shall be received or deposited
in such account or accounts.
Every bank or authorised person in foreign exchange shall report to such authority as may be specified
amount of foreign remittance; the source and manner in which the foreign remittance was received; and
other particulars, in such form and manner as may be prescribed.
Intimation
Section 18 requires every person who has been granted a certificate or given prior approval to provide
within such time and in such manner as may be prescribed, an intimation to the Central Government, and
such other authority as may be specified by the Central Government, as to the amount of each foreign
contribution received by it, the source from which and the manner in which such foreign contribution was
received, and the purposes for which, and the manner in which such foreign contribution was utilised by him.
Every person receiving foreign contribution is required to submit a copy of a statement indicating therein the
particulars of foreign contribution received duly certified by officer of the bank or authorised person in foreign
exchange and furnish the same to the Central Government along with the intimation.
Maintenance of accounts
Section 19 requires every person who has been granted a certificate or given prior approval to maintain, in
such form and manner as may be prescribed, an account of any foreign contribution received by him; and a
record as to the manner in which such contribution has been utilised by him.
Order for Audit of accounts

Section 20 provides that where any person who has been granted a certificate or given prior permission, fails
to furnish any intimation within the time specified therefore or the intimation so furnished is not in accordance
with law or if, after inspection of such intimation, the Central Government has any reasonable cause to
believe that any provision of Act has been, or is being, contravened, the Central Government may, by
general or special order, authorise such gazetted officer, holding a Group A post under the Central
Government or any other officer or authority or organisation, as it may think fit, to audit any books of account
kept or maintained by such person and thereupon every such officer shall have the right to enter in or upon
any premises at any reasonable hour, before sunset and after sunrise, for the purpose of auditing the said
books of account and any information obtained from such audit shall be kept confidential and shall not be
disclosed except for the purposes of the Act.
Intimation by candidate for election

Section 21 requires every candidate for election, who had received any foreign contribution, at any time
within one hundred and eighty days immediately preceding the date on which he is duly nominated as such
candidate, shall give, within such time and in such manner as may be prescribed, an intimation to the Central
Government or prescribed authority or both as to the amount of foreign contribution received by him, the
source from which, and the manner in which, such foreign contribution was received and the purposes for
which and the manner in which such foreign contribution was utilised by him.
Disposal of assets created out of foreign contribution

Section 22 provides that where any person who was permitted to accept foreign contribution under this Act,
ceases to exist or has become defunct, all the assets of such person shall be disposed of in accordance with
the provisions contained in any law for the time being in force under which the person was registered or
incorporated. In the absence of any such law, the Central Government may, having regard to the nature of
assets created out of foreign contribution received under this Act, by notification, specify that all such assets
shall be disposed off by such authority, as it may specify, in such manner and procedure as may be prescribed.
INSPECTION, SEARCH AND SEIZURE

Section 23 provides that if the Central Government has, for any reason, to be recorded in writing, any ground
to suspect that any provision of this Act has been or is being, contravened by any political party; or any
person; or any organisation; or any association, it may, by general or special order, authorise such gazetted
officer, holding a Group A post under the Central Government or such other officer or authority or
organisation, as it may think fit, to inspect any account or record maintained by such political party, person,
organisation or association, as the case may be, and thereupon every such inspecting officer shall have the
right to enter in or upon any premises at any reasonable hour, before sunset and after sunrise, for the
purpose of inspecting the said account or record.
Seizure of accounts or records

Section 24 provides that if, after inspection of an account or record, the inspecting officer has any reasonable
cause to believe that any provision of the Act or of any other law relating to foreign exchange has been, or is
being, contravened, he may seize such account or record and produce the same before the court, authority
or tribunal in which any proceeding is brought for such contravention. Further, the authorised officer shall
return such account or record to the person from whom it was seized if no proceeding is brought within six
months from the date of such seizure for the contravention disclosed by such account or record.
Adjudication of confiscation
Section 29 dealing with adjudication of confiscation, provides that any confiscation of article or currency or
security, which is seized, may be adjudged without limit, by the Court of Session within the local limits of
whose jurisdiction the seizure was made; and subject to such limits as may be prescribed, by such officer,
not below the rank of an Assistant Sessions Judge, as the Central Government may, by notification in the
Official Gazette.
Section 30 provides that no order of adjudication of confiscation shall be made unless a reasonable
opportunity of making a representation against such confiscation has been given to the person from whom
any article or currency or security has been seized.
Appeal
Section 31 deals with appeals and provides that any person aggrieved by any order made under section 29
70 EP-EBCL
may prefer an appeal, where the order has been made by the Court of Session, to the High Court to which
such Court is subordinate; or where the order has been made by any officer specified, to the Court of
Session within the local limits of whose jurisdiction such order of adjudication of confiscation was made,
within one month from the date of communication to such person of the order.
Further the appellate court may, if it is satisfied that the appellant was prevented by sufficient cause from
preferring the appeal within the said period of one month, allow such appeal to be preferred within a further
period of one month, but not thereafter.
Every appeal preferred under this section shall be deemed to be an appeal from an original decree and the
provisions of Order XLI of the First Schedule to the Code of Civil Procedure, 1908, shall, as far as may be,
apply thereto as they apply to an appeal from an original decree.
Penalty and Punishment

Section 34 prescribes for penalty on any person, on whom any prohibitory order has been served under
section 10, pays, delivers, transfers or otherwise deals with, in any manner whatsoever, any article or
currency or security, whether Indian or foreign, in contravention of such prohibitory order, he shall be
punished with imprisonment for a term which may extend to three years, or with fine, or with both.
The court trying such contravention may also impose on the person convicted an additional fine equivalent to
the market value of the article or the amount of the currency or security in respect of which the prohibitory
order has been contravened by him or such part thereof as the court may deem fit.
Section 35 provides for punishment with imprisonment for a term which may extend to five years, or with fine,
or with both for accepting, or assisting any person, political party or organisation in accepting, any foreign
contribution or any currency or security from a foreign source, in contravention of any provision of this Act or
any rule or order made thereunder.
Offences by companies
Section 39 deals with offences by companies and provides that where an offence has been committed by a
company, every person who, at the time the offence was committed, was in charge of, and was responsible
to, the company for the conduct of the business of the company, as well as the company, shall be deemed to
be guilty of the offence and shall be liable to be proceeded against and punished accordingly. However, such
person shall not liable to any punishment if he proves that the offence was committed without his knowledge
or that he had exercised all due diligence to prevent the commission of such offence.
Further in the case an offence has been committed by a company and it is proved that the offence has been
committed with the consent or connivance of, or is attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also
be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Composition of certain offences

Section 41 (1) provides that any offence punishable under this Act (whether committed by an individual or
association or any officer or employee thereof), not being an offence punishable with imprisonment only,
may, before the institution of any prosecution, be compounded by such officers or authorities and for such
sums as the Central Government may, by notification in the Official Gazette, specify in this behalf.
Section 41(2) provides that any second or subsequent offence committed after the expiry of a period of three
years from the date on which the offence was previously compounded, shall be deemed to be a first offence.
Every officer or authority shall exercise the powers to compound an offence, subject to the direction, control
and supervision of the Central Government. Every application for the compounding of an offence shall be
made to the officer or authority referred to in sub-section (1) in such form and manner alongwith such fee as
may be prescribed. Where any offence is compounded before the institution of any prosecution, no
prosecution shall be instituted in relation to such offence, against the offender in relation to whom the offence
is so compounded.
Every officer or authority while dealing with an application for the compounding of an offence for a default in
compliance with any provision of this Act which requires by an individual or association or its officer or other
employee to obtain permission or file or register with, or deliver or send to, the Central Government or any
prescribed authority any return, account or other document, may, direct, by order, if he or it thinks fit to do so,
any individual or association or its officer or other employee to file or register with, such return, account or
other document within such time as may be specified in the order.
LESSON ROUND-UP
• FCRA, 2010 regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain
individuals or associations or companies and to prohibit acceptance and utilisation of foreign contribution or
foreign hospitality for any activities detrimental to the national interest and for matters connected therewith
or incidental thereto.
• The Act provides that persons having definite cultural, economic, educational, religious and social
programmes should get themselves registered with the Government of India before accepting any ‘foreign
contribution’. In case a person falling in the above category is not registered with the Central Government, it
can accept foreign contribution only after obtaining prior permission of the Central Government.
• Central Government is empowered to prohibit any person or organisation not specified in the Act from
accepting any foreign contribution and to require any person or class of persons, not specified in it to obtain
prior permission of the Central Government before accepting any foreign hospitality.
• Associations which were granted certificates of registration, such registration shall be valid for a period of
five years.
• Any offence punishable under this act (whether committed by an individual or association or any officer or
employee thereof), not being an offence punishable with imprisonment only, may, before the institution of
any prosecution, be compounded by such officers or authorities and for such sums as the central
government may, by notification in the official gazette, specify in this behalf.
SELF-TEST QUESTIONS
evaluation)
1. How does the FCRA, 2010 seeks to regulate the receipt of foreign contribution and foreign
hospitality?
2. Define ‘foreign contribution” and ‘foreign source’.
3. Discuss the provisions of FCRA relevant to exemptions from acceptance of foreign contribution.
4. Explain the concept of ‘organisation of a political nature’ under the Foreign Contribution (Regulation)
Act, 2010.
5. Discuss the powers of Central Government under FCRA to prohibit receipt of foreign contribution.
72 EP-EBCL
Lesson 5
Foreign Direct Investment –
Regulation & Policy
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning objectives Foreign Direct Investment (FDI) provides a situation
• Foreign Direct Investment where in both the host and the home nations derive
some benefit. The home countries want to take the
• Foreign Direct Investment Route
advantage of the vast markets opened by industrial
• Permitted Sectors/Activities growth. Whereas the host countries get to acquire
• Prohibited sectors /Activities resources ranging from financial, capital,
entrepreneurship, technological know-how and
• Foreign Direct Investment in major sectors managerial skills which assist it in supplementing its
• Reporting requirements domestic savings and foreign exchange.
• Penalty India’s Foreign Direct Investment (FDI) is an

• Lesson Round Up endorsement of its status as a preferred investment
destination amongst global investors. India’s steady
• Self-Test Questions
economic liberalization and its embrace of the
global economy have been key factors in attracting
FDI. To promote Foreign Direct Investment (FDI),
the Government has put in place an investor-
friendly policy, wherein except for a small negative
list, most sectors are open for 100% FDI under the
Automatic route.

students with the legal requirements stipulated
under the Foreign Direct Investment (FDI) Policy.
The Government has put in place a policy framework on Foreign Direct Investment, which is transparent, predictable
and easily comprehensible. This framework is embodied in the Circular on Consolidated FDI Policy.
74 EP-EBCL
INTRODUCTION
To promote Foreign Direct Investment (FDI), the Government has put in place an investor-friendly policy,
wherein except for a small negative list, most sectors are open for 100% FDI under the Automatic route.
Further, the policy on FDI is reviewed on an ongoing basis, to ensure that India remains attractive & investor
friendly destination. Changes are made in the policy after having intensive consultations with stakeholders
including apex industry chambers, associations, representatives of industries/groups and other organizations
taking into consideration their views/comments. The FDI policy is applicable across the sectors/ industries
and equally applies to SME sector.
UNDERSTANDING OF SOME KEY TERMS

‘AD Category-I Bank’ means a bank(Scheduled Commercial, State or Urban Cooperative) which is
authorized under Section 10(1) of FEMA to undertake all current and capital account transactions according
to the directions issued by the RBI from time to time.
‘Authorized Bank’ means a bank including a co-operative bank (other than an authorized dealer) authorized
by the Reserve Bank to maintain an account of a person resident outside India.
‘Authorized Dealer’ means a person authorized as an authorized dealer under sub-section (1) of section 10
of FEMA.
‘Authorized Person’ means an authorized dealer, money changer, offshore banking unit or any other
person for the time being authorized under sub-section (a) of section 10 of FEMA to deal in foreign exchange
or foreign securities.
‘Capital’ means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully,
compulsorily & mandatorily convertible debentures and warrants.
The equity shares issued in accordance with the provisions of the Companies Act, as applicable, shall
include equity shares that have been partly paid. Preference shares and convertible debentures shall be
required to be fully paid, and should be mandatorily and fully convertible. Further, ‘warrant’ includes Share
Warrant issued by an Indian Company in accordance to provisions of the Companies Act, as applicable.
‘Capital account transaction’ means a transaction which alters the assets or liabilities, including contingent
liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside
India, and includes transactions referred to in sub-section (3) of section 6 of FEMA.
‘Competent Authority’ means the concerned Administrative Ministry/Department empowered to grant

government approval for foreign investment under the extant FDI Policy and FEMA Regulations.
‘Control’ shall include the right to appoint a majority of the directors or to control the management or policy
decisions including by virtue of their shareholding or management rights or shareholders agreements or
voting agreements. For the purposes of Limited Liability Partnership, ‘control’ will mean right to appoint
majority of the designated partners, where such designated partners, with specific exclusion to others, have
control over all the policies of the LLP.
‘Convertible Note’ means an instrument issued by a startup company evidencing receipt of money initially
as debt, which is repayable at the option of the holder, or which is convertible into such number of equity
shares of such startup company, within a period not exceeding five years from the date of issue of the
convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and
indicated in the instrument.
Lesson 5 Foreign Direct Investment – Regulation & Policy 75
‘Depository Receipt’ (DR) means a negotiable security issued outside India by a Depository bank, on
behalf of an Indian company, which represent the local Rupee denominated equity shares of the company
held as deposit by a Custodian bank in India. DRs are traded on Stock Exchanges in the US, Singapore,
Luxembourg, etc. DRs listed and traded in the US markets are known as American Depository Receipts
(ADRs) and those listed and traded anywhere/elsewhere are known as Global Depository Receipts (GDRs).
DRs are governed by Notification No. FEMA 330/ 2014-RB, issued by Reserve Bank of India.
“Employees’ Stock Option” means the option given to the directors, officers or employees of a company or
of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries, if any, which gives
such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the
company at a future date at a pre-determined price.
‘Erstwhile Overseas Corporate Body’(OCB) means a company, partnership firm, society and other
corporate body owned directly or indirectly to the extent of at least sixty percent by non-resident Indians and
includes overseas trust in which not less than sixty percent beneficial interest is held by non-resident Indians
directly or indirectly but irrevocably and which was in existence on the date of commencement of the Foreign
Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs) )
Regulations, 2003 (the Regulations) and immediately prior to such commencement was eligible to undertake
transactions pursuant to the general permission granted under the Regulations.
‘Foreign Currency Convertible Bond’ (FCCB) means a bond issued by an Indian company expressed in
foreign currency, the principal and interest of which is payable in foreign currency. FCCBs are issued in
accordance with the Foreign Currency Convertible Bonds and ordinary shares (through depository receipt
mechanism) Scheme, 1993 and subscribed by a non-resident entity in foreign currency and convertible into
Ordinary Shares of the issuing company in any manner, either in whole, or in part.
‘FDI’ means investment by non-resident entity/person resident outside India in the capital of an Indian
company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) Regulations.
‘FDI linked performance conditions’ means the sector specific conditions for companies receiving foreign
investment.
‘FEMA’ means the Foreign Exchange Management Act, 1999 (42 of 1999).
‘Foreign Institutional Investor’(FII) means an entity established or incorporated outside India which
proposes to make investment in India and which is registered as a FII in accordance with the Securities and
Exchange Board of India (SEBI) (Foreign Institutional Investor) Regulations 1995.
‘Foreign Portfolio Investor’(FPI) means a person registered in accordance with the provisions of Securities
and Exchange Board of India (SEBI) (Foreign Portfolio Investors) Regulations, 2014, as amended from time
to time.
‘Foreign Venture Capital Investor’ (FVCI) means an investor incorporated and established outside India,
which is registered under the Securities and Exchange Board of India (Foreign Venture Capital Investor)
Regulations, 2000 {SEBI(FVCI) Regulations} and proposes to make investment in accordance with the
regulations.
‘Government route’ means that investment in the capital of resident entities by non-resident entities can be
made only with the prior approval of Government (Competent Ministry/Department for grant of approval).
‘Group Company’ means two or more enterprises which, directly or indirectly, are in a position to:
(i) exercise twenty-six percent or more of voting rights in other enterprise; or
76 EP-EBCL
(ii) appoint more than fifty percent of members of board of directors in the other enterprise.
‘Holding Company’ would have the same meaning as defined in Companies Act, as applicable.
‘Indian Company’ means a company incorporated in India under the Companies Act, as applicable.
‘Indian Venture Capital Undertaking’ (IVCU) means an Indian company:

(i) whose shares are not listed in a recognised stock exchange in India;
(ii) which is engaged in the business of providing services, production or manufacture of articles or
things, but does not include such activities or sectors which are specified in the negative list by the
SEBI, with approval of Central Government, by notification in the Official Gazette in this behalf.
‘Investment Vehicle’ shall mean an entity registered and regulated under relevant regulations framed by
SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts
(REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed
by the SEBI (InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by the SEBI (AIFs)
Regulations, 2012.
‘Investing Company’ means an Indian Company holding only investments in other Indian company/(ies),
directly or indirectly, other than for trading of such holdings/securities.
‘Investment on repatriable basis’ means investment, the sale proceeds of which, net of taxes, are eligible
to be repatriated out of India and the expression ‘investment on non-repatriable basis’ shall be construed
accordingly.
‘Joint Venture’ (JV) means an Indian entity incorporated in accordance with the laws and regulations in
India in whose capital a non-resident entity makes an investment.
‘Limited Liability Partnership’ means a Limited Liability Partnership firm, formed and registered under the
Limited Liability Partnership Act, 2008.
‘Manufacture’, with its grammatical variations, means a change in a non-living physical object or article or
thing- (a) resulting in transformation of the object or article or thing into a new and distinct object or article or
thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or
article or thing with a different chemical composition or integral structure.
‘Non-resident entity’ means a ‘person resident outside India’ as defined under FEMA.
‘Non-Resident Indian’ (NRI) means an individual resident outside India who is a citizen of India or is an
‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955.
‘Persons of Indian Origin’ cardholders registered as such under Notification No. 26011/4/98 F.I. dated
19.8.2002 issued by the Central Government are deemed to be ‘Overseas Citizen of India’ cardholders’
A company is considered as ‘Owned’ by resident Indian citizens if more than 50% of the capital in it is
beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and
controlled by resident Indian citizens. A Limited Liability Partnership will be considered as owned by resident
Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens
and/or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident
Indian citizens and entities have majority of the profit share.
‘Person’ includes-
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(v) any agency, office, or branch owned or controlled by such person.
‘Person of Indian Origin’ (PIO) means a citizen of any country other than Bangladesh or Pakistan, if
(i) he at any time held Indian Passport; or
(ii) he or either of his parents or any of his grandparents was a citizen of India by virtue of the
Constitution of India or the Citizenship Act, 1955 (57 of 1955); or
(iii) the person is a spouse of an Indian citizen or a person referred to in sub-clause (i) or (ii).
‘Person resident in India’ means-
(i) a person residing in India for more than one hundred and eighty-two days during the course of the
preceding financial year but does not include-
A. A person who has gone out of India or who stays outside India, in either case-
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside
India for an uncertain period;
B. A person who has come to or stays in India, in either case, otherwise than-
a. for or on taking up employment in India; or
b. for carrying on in India a business or vocation in India, or
c. for any other purpose, in such circumstances as would indicate his intention to stay in India for
an uncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident outside India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in India.
‘Person resident outside India’ means a person who is not a Person resident in India.
‘Portfolio Investment Scheme’ means the Portfolio Investment Scheme referred to in Schedules 2, 2A& 3
of FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.
‘RBI’ means the Reserve Bank of India established under the Reserve Bank of India Act, 1934.
‘Resident Entity’ means ‘Person resident in India’ excluding an individual.

78 EP-EBCL
‘Resident Indian Citizen’ shall be interpreted in line with the definition of ‘person resident in India’ as per
FEMA, 1999, read in conjunction with the Indian Citizenship Act, 1955.
‘SEBI’ means the Securities and Exchange Board of India established under the Securities and Exchange
Board of India Act, 1992.
‘SEZ’ means a Special Economic Zone as defined in Special Economic Zone Act, 2005.
‘SIA’ means Secretariat of Industrial Assistance in DIPP, Ministry of Commerce & Industry, and Government
of India.
‘Sweat Equity Shares’ means such equity shares as issued by a company to its directors or employees at a
discount or for consideration other than cash, for providing their know-how or making available rights in the
nature of intellectual property rights or value additions, by whatever name called.
‘Transferable Development Rights’ (TDR) means certificates issued in respect of category of land
acquired for public purposes either by the Central or State Government in consideration of surrender of land
by the owner without monetary compensation, which are transferable in part or whole.
‘Unit’ shall mean beneficial interest of an investor in the Investment Vehicle and shall include shares or
partnership interests.
‘Venture Capital Fund’ (VCF) means a Fund registered as a ‘venture capital fund’ under SEBI (Venture
Capital Funds) Regulations, 1996.
ELIGIBLE INVESTORS UNDER FDI
Erstwhile Foreign
Institutiona
OCBs that l Investor
are (FII) and
incorpo- Foreign
A non- rated Portfolio A non-
resident outside Investors resident
entity India (FPIs) entity
A company, A SEBI
NRIs trust and registered
resident in
partnership Foreign
Nepal and
firm Venture
Bhutan as incorporated Capital
well as
outside India Investor
citizens of
and owned (FVCI)
Nepal and and controlled
Bhutan
by NRIs
A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which
are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only
under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest,
only under the Government route, in sectors/activities other than defence, space, atomic energy and
sectors/activities prohibited for foreign investment.
NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the
capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for
such investment shall be paid only by way of inward remittance in free foreign exchange through normal
banking channels.
OCBs have been derecognized as a class of investors in India with effect from September 16, 2003.
Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make
fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of
Government of India if the investment is through Government route; and with the prior approval of RBI if the
investment is through Automatic route.
A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs
can invest in India with the special dispensation as available to NRIs under the FDI Policy.
Foreign Institutional Investor (FII) and Foreign Portfolio Investors (FPI) may in terms of Schedule 2 and
2A of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, as the case may
be, respectively, invest in the capital of an Indian company under the Portfolio Investment Scheme which
limits the individual holding of an FII/FPI below 10% of the capital of the company and the aggregate limit for
FII/FPI investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the
sectoral cap/statutory ceiling, as applicable, by the Indian company concerned through a resolution by its
Board of Directors followed by a special resolution to that effect by its General Body and subject to prior
intimation to RBI. The aggregate FII/FPI investment, individually or in conjunction with other kinds of foreign
investment, will not exceed sectoral/statutory cap.
Only registered FIIs/FPIs and NRIs as per Schedules 2,2A and 3 respectively of Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, can
invest/trade through a registered broker in the capital of Indian Companies on recognised Indian Stock
Exchanges.
A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to 100% of the capital of an
Indian company engaged in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000,
including startups irrespective of the sector in which it is engaged, under the automatic route. A SEBI
registered FVCI can invest in a domestic venture capital fund registered under the SEBI (Venture Capital
Fund) Regulations, 1996 or a Category- I Alternative Investment Fund registered under the SEBI (Alternative
Investment Fund) Regulations, 2012. Such investments shall also be subject to the extant FEMA regulations
and extant FDI policy including sectoral caps, etc. The investment can be made in equities or equity linked
instruments or debt instruments issued by the company (including start-ups and if a startup is organised as a
partnership firm or an LLP, the investment can be made in the capital or through any profit-sharing
arrangement) or units issued by a VCF or by a Category-I AIF either through purchase by private
arrangement either from the issuer of the security or from any other person holding the security or on a
recognised stock exchange. It may also set up a domestic asset management company to manage its
investments. SEBI registered FVCIs are also allowed to invest under the FDI Scheme, as non-resident
80 EP-EBCL
entities, in other companies, subject to FDI Policy and FEMA regulations.
A Non- Resident Indian may subscribe to National Pension System governed and administered by Pension
Fund Regulatory and Development Authority (PFRDA), provided such subscriptions are made through
normal banking channels and the person is eligible to invest as per the provisions of the PFRDA Act. The
annuity/ accumulated saving will be repatriable.
ELIGIBLE INVESTEE ENTITIES

FDI in an Indian Company
Indian companies can issue capital against FDI.
FDI in Partnership Firm/Proprietary Concern

(i) A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in
the capital of a firm or a proprietary concern in India on non-repatriation basis provided;
○ Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with
Authorized Dealers/Authorized banks.
○ The firm or proprietary concern is not engaged in any agricultural/plantation or real estate
business or print media sector.
○ Amount invested shall not be eligible for repatriation outside India.
(ii) Investments with repatriation option: NRIs/PIO may seek prior permission of Reserve Bank for
investment in sole proprietorship concerns/partnership firms with repatriation option. The application
will be decided in consultation with the Government of India.
(iii) Investment by non-residents other than NRIs/PIO:A person resident outside India other than
NRIs/PIO may make an application and seek prior approval of Reserve Bank for making investment
in the capital of a firm or a proprietorship concern or any association of persons in India. The
application will be decided in consultation with the Government of India.
(iv) Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in
any agricultural/plantation activity or real estate business or print media.
FDI in Trusts
FDI is not permitted in Trusts other than in Venture Capital Fund (VCF) registered and regulated by SEBI
and ‘Investment vehicle’.
FDI in Limited Liability Partnerships (LLPs)

(i) FDI in LLPs is permitted subject to the following conditions:
(ii) FDI is permitted under the automatic route in Limited Liability Partnership (LLPs) operating in
sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-
linked performance conditions.
(iii) An Indian company or an LLP having foreign investment, is also permitted to make downstream
investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic
route and there are no FDI-linked performance conditions.
Conversion of an LLP having foreign investment and operating in sectors/activities where 100% FDI is
allowed through the automatic route and there are no FDI-linked performance conditions into a company is
permitted under automatic route. Similarly, conversion of a company having foreign investment and
operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-
linked performance conditions, into an LLP is permitted under automatic route. FDI in LLP is subject to the
compliance of the conditions of LLP Act, 2008.
FDI in Investment Vehicle

An entity being ‘investment vehicle’ registered and regulated under relevant regulations framed by SEBI or
any other authority designated for the purpose including Real Estate Investment Trusts (REITs) governed by
the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts)
Regulations, 2014, Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations,2012 and
notified under Schedule 11 of Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) Regulations, 2000 is permitted to receive foreign investment from a person resident
outside India (other than an individual who is citizen of or any other entity which is registered / incorporated
in Pakistan or Bangladesh), including a Registered Foreign Portfolio Investor (RFPI) or a non-resident Indian
(NRI).
FDI in Startup Companies

Start-ups can issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign
remittance, as per the FEMA Regulation. In addition, start-ups can issue convertible notes to person resident
outside India subject to the following conditions:
82 EP-EBCL
1. A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or
an entity which is registered/incorporated in Pakistan or Bangladesh), may purchase convertible
notes issued by an Indian startup company for an amount of twenty five lakh rupees or more in a
single tranche.
‘Startup Company’ means a private company incorporated under the Companies Act, 2013 or
Companies Act, 1956 and recognised as such in accordance with notification issued by the
Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, and as
amended from time to time.
2. A startup company engaged in a sector where foreign investment requires Government approval
may issue convertible notes to a non-resident only with approval of the Government.
3. A startup company issuing convertible notes to a person resident outside India shall receive the
amount of consideration by inward remittance through banking channels or by debit to the NRE /
FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign
Exchange Management (Deposit) Regulations, 2016, as amended from time to time.
However an escrow account for the above purpose shall be closed immediately after the
requirements are completed or within a period of six months, whichever is earlier. However, in no
case continuance of such escrow account shall be permitted beyond a period of six months.
4. NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the
Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India)
Regulations, 2000.
5 A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or
to, a person resident in or outside India, provided the transfer takes place in accordance with the
pricing guidelines as prescribed by RBI. Prior approval from the Government shall be obtained for
such transfers in case the startup company is engaged in a sector which requires Government
approval.
6 The startup company issuing convertible notes shall be required to furnish reports as prescribed by
Reserve Bank of India.
ENTRY ROUTES FOR INVESTMENT
An Indian company may receive Foreign Direct Investment under the two routes as given under:
Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve
Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of
India from time to time.
Government Route
FDI in activities not covered under the automatic route requires prior approval of the Government. Proposals
for foreign investment under Government route, are considered by respective Administrative
Ministry/Department.
Foreign investment in sectors/activities under government approval route will be subject to government
approval where:
(i) An Indian company is being established with foreign investment and is not owned by a resident
entity or
(ii) An Indian company is being established with foreign investment and is not controlled by a resident
entity or
(iii) The control of an existing Indian company, currently owned or controlled by resident Indian citizens
and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being
transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh
issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc. or
(iv) The ownership of an existing Indian company, currently owned or controlled by resident Indian
citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is
being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or
fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition
etc.
(v) It is clarified that Foreign investment shall include all types of foreign investments, direct and
indirect, regardless of whether the said investments have been made under Schedule 1 (FDI), 2
(FII), 2A (FPI), 3 (NRI), 6 (FVCI), 9 (LLPs), 10 (DRs) and 11(Investment Vehicles) of FEMA
(Transfer or Issue of Security by Persons Resident Outside India) Regulations. FCCBs and DRs
having underlying of instruments which can be issued under Schedule 5, being in the nature of debt,
shall not be treated as foreign investment. However, any equity holding by a person resident outside
India resulting from conversion of any debt instrument under any arrangement shall be reckoned as
foreign investment.
(vi) Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident
Outside India) Regulations will be deemed to be domestic investment at par with the investment
made by residents.
(vii) A company, trust and partnership firm incorporated outside India and owned and controlled by non-
resident Indians will be eligible for investments under Schedule 4 of FEMA (Transfer or issue of
Security by Persons Resident Outside India) Regulations and such investment will also be deemed
domestic investment at par with the investment made by residents.
Competent Authority
Following are the Competent Authorities for grant of approval for foreign investment for sectors/activities
requiring Government approval:
S. No. Activity/ sector Administrative Ministry/

Department
(i) Mining Ministry of Mines
84 EP-EBCL
(ii) Defence
a) Items requiring Industrial Licence under the Department of Defence

Industries (Development & Regulation) Act, 1951, Production, Ministry of Defence
and/or Arms Act, 1959 for which the powers have
been delegated by Ministry of Home Affairs to DIPP
b) Manufacturing of Small Arms and Ammunitions Ministry of Home Affairs
covered under Arms Act 1959
(iii) Broadcasting Ministry of Information &
(iv) Print Media Broadcasting
(v) Civil Aviation Ministry of Civil Aviation
(vi) Satellites Department of Space
(vii) Telecommunication Department of
Telecommunications
(viii) Private Security Agencies Ministry of Home Affairs
(ix) Applications involving investments from Countries of
Concern which presently include Pakistan and
Bangladesh, requiring security clearance as per the
extant FEMA 20, FDI Policy and security guidelines,
amended from time to time
(x) Trading (Single brand, Multi brand and Food Product Department of Industrial Policy
retail trading) & Promotion
(xi) FDI proposals by Non-Resident Indians (NRIs)/
Export Oriented Units requiring approval of the
Government
(xii) Applications relating to issue of equity shares under
the FDI policy under the Government route for import
of capital goods/machinery/equipment (excluding
second-hand machinery)
(xiii) Applications relating to issue of equity shares for pre-
operative/pre-incorporation expenses (including
payments of rent etc.)
(xiv) Financial services activity which are not regulated by Department of Economic Affairs
any Financial Sector Regulator or where only part of
the financial services activity is regulated or where
there is doubt regarding the regulatory oversight
(xv) Applications for foreign investment into a Core
Investment Company or an Indian company engaged
only in the activity of investing in the capital of other
India Company/ies
(xvi) Banking (Public and Private) Department of Financial
Services
(xvii) Pharmaceuticals Department of Pharmaceuticals
Instruments for Investments
Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily
convertible debentures/fully, compulsorily and mandatorily convertible preference shares of an Indian
company, through the Automatic Route or the Government Route.
The Indian company having received FDI either under the Automatic route or the Government route is
required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank
Caps on Investments
Investments can be made by non-residents in the capital of a resident entity only to the extent of the
percentage of the total capital as specified in the FDI policy.
Entry Conditions on Investment
Investments by non-residents can be permitted in the capital of a resident entity in certain sectors/activity
with entry conditions. Such conditions may include norms for:
Other Conditions on Investment besides Entry Conditions

Besides the entry conditions on foreign investment, the investment/investors are required to comply with all
86 EP-EBCL
relevant:
PROHIBITED SECTORS
FDI is prohibited in:
Note*:- ‘Real estate business’ shall not include development of townships, construction of residential
/commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated
under the SEBI (REITs) Regulations 2014.
PERMITTED SECTORS
FDI Permitted in:
Sector/Activity % of Equity/FDI Cap Entry Route
Floriculture, Horticulture, and 100% Automatic

Cultivation of Vegetables &
Mushrooms under controlled
conditions;
Development and Production of 100% Automatic

seeds and planting material;
Animal Husbandry (including 100% Automatic

breeding of dogs), Pisciculture,
Aquaculture, Apiculture;
Services related to agro and 100% Automatic

allied sectors
Note: Besides the above, FDI is

not allowed in any other
agricultural sector/activity
Tea sector including tea 100% Automatic

plantations
Coffee plantations 100% Automatic
Rubber plantations 100% Automatic
Cardamom plantations 100% Automatic
Palm oil tree plantations 100% Automatic
Olive oil tree plantations 100% Automatic
Note: Besides the above, FDI is

not allowed in any other
plantation sector/activity.
Mining and Exploration of metal 100% Automatic

and non-metal ores including
diamond, gold, silver and
precious ores but excluding
titanium bearing minerals and its
ores; subject to the Mines and
Minerals (Development &
Regulation) Act, 1957.
88 EP-EBCL
Coal & Lignite mining for captive 100% Automatic

consumption by power projects,
iron & steel and cement units and
other eligible activities permitted
under and subject to the
provisions of Coal Mines
(Nationalization) Act, 1973.
Setting up coal processing plants 100% Automatic

like washeries subject to the
condition that the company shall
not do coal mining and shall not
sell washed coal or sized coal
from its coal processing plants in
the open market and shall supply
the washed or sized coal to those
parties who are supplying raw
coal to coal processing plants for
washing or sizing.
Mining and mineral separation of 100% Government

titanium bearing minerals and
ores, its value addition and
integrated activities
Mining and mineral separation of

titanium bearing minerals & ores,
its value addition and integrated
activities subject to sectoral
regulations and the Mines and
Minerals (Development and
Regulation Act 1957).
Exploration activities of oil and 100% Automatic

natural gas fields, infrastructure
related to marketing of petroleum
products and natural gas,
marketing of natural gas and
petroleum products, petroleum
product pipelines, natural
gas/pipelines, LNG
Regasification infrastructure,
market study and formulation and
Petroleum refining in the private
sector, subject to the existing
sectoral policy and regulatory
framework in the oil marketing

sector and the policy of the
Government on private
participation in exploration of oil
and the discovered fields of
national oil companies.
Petroleum refining by the Public 49% Automatic

Sector Undertakings (PSU),
without any disinvestment or
dilution of domestic equity in the
existing PSUs.
Defence Industry subject to 100% Automatic up to 49%

Industrial license under the
Government route beyond 49%
Industries (Development &
wherever it is likely to result in
Regulation) Act, 1951; and
access to modern technology or
Manufacturing of small arms and for other reasons to be recorded
ammunition under the Arms Act,
1959
Teleports(setting up of up-linking 100% Automatic

HUBs/Teleports);
Direct to Home (DTH); 100% Automatic
Cable Networks (Multi System 100% Automatic

operators (MSOs) operating at
National or State or District level
and undertaking upgradation of
networks towards digitalization
and addressability);
Mobile TV; 100% Automatic
Headend-in-the Sky Broadcasting 100% Automatic

Service(HITS)
Cable Networks(Other MSOs not 100% Automatic

undertaking upgradation of
networks towards digitalization
and addressability and Local
Cable Operators (LCOs))
Terrestrial Broadcasting FM(FM 49% Government

Radio), subject to such terms and
conditions, as specified from time
to time, by Ministry of Information
& Broadcasting, for grant of
90 EP-EBCL
permission for setting up of FM

Radio stations
Up-linking of ‘News & Current 49% Government

Affairs’ TV Channels
Up-linking of Non-‘News & 100% Automatic

Current Affairs’ TV Channels/
Down-linking of TV Channels
Publishing of newspaper and 26% Government

periodicals dealing with news and
current affairs
Publication of Indian editions of 26% Government

foreign magazines dealing with
news and current affairs
Publishing/printing of scientific 100% Government

and technical
magazines/specialty journals/
periodicals, subject to compliance
with the legal framework as
applicable and guidelines issued
in this regard from time to time by
Ministry of Information and
Broadcasting.
Publication of facsimile edition of 100% Government

foreign newspapers
Airport (Greenfield projects) 100% Automatic
Airport (Existing projects) 100% Automatic
Scheduled Air Transport Service/ 100% Automatic up to 49%

Domestic Scheduled Passenger
(Automatic up to 100% for NRIs)
Airline
Regional Air Transport Service 100% Automatic up to 49%
(Automatic up to 100% for NRIs)

Non-Scheduled Air Transport 100% Automatic

Services
Helicopter services/seaplane 100% Automatic

services requiring DGCA
approval
Ground Handling Services 100% Automatic

subject to sectoral regulations
and security clearance.
Maintenance and Repair 100% Automatic

organizations; flying training
institutes; and technical training
institutions.
Construction-development 100% Automatic

projects (which would include
development of townships,
construction of
residential/commercial premises,
roads or bridges, hotels, resorts,
hospitals, educational institutions,
recreational facilities, city and
regional level infrastructure,
townships)
Industrial Parks -new and existing 100% Automatic
Satellites- establishment and 100% Government

operation, subject to the sectoral
guidelines of Department of
Space/ISRO
Private Security Agencies 74% Automatic up to 49%

and up to 74%
Telecom Services 100% Automatic up to 49%

(including Telecom Infrastructure
Providers Category-I)
All telecom services including

Telecom Infrastructure Providers
Category-I, viz. Basic, Cellular,
United Access Services, Unified
License (Access Services),
Unified License, National/
International Long Distance,
Commercial V-Sat, Public Mobile
Radio Trunked Services
(PMRTS), Global Mobile
Personal Communications
Services (GMPCS), All types of
ISP licenses, Voice Mail/
Audiotex/UMS, Resale of IPLC,
92 EP-EBCL
Mobile Number Portability

Services, Infrastructure Provider
Category-I (providing dark fibre,
right of way, duct space, tower)
except Other Service Providers.
Cash & Carry Wholesale 100% Automatic

Trading/Wholesale Trading
(including sourcing from MSEs)
E-commerce activities 100% Automatic
Single Brand product retail 100% Automatic up to 49%

trading
Multi Brand Retail Trading 51% Government
Duty Free Shops 100% Automatic
Railway Infrastructure 100% Automatic
Construction, operation and

maintenance of the following:
(i) Suburban corridor projects

through PPP, (ii) High speed train
projects, (iii) Dedicated freight
lines, (iv) Rolling stock including
train sets, and locomotives/
coaches manufacturing and
maintenance facilities, (v) Railway
Electrification, (vi) Signaling
systems, (vii) Freight terminals,
(viii) Passenger terminals, (ix)
Infrastructure in industrial park
pertaining to railway line/sidings
including electrified railway lines
and connectivities to main railway
line and (x) Mass Rapid
Transport Systems.
Asset Reconstruction Company 100% Automatic
Banking- Private Sector 74% Automatic up to 49%

and up to 74%.
Banking- Public Sector subject to 20% Government

Banking Companies (Acquisition
& Transfer of Undertakings) Acts
1970/80. This ceiling (20%) is

also applicable to the State Bank
of India and its associate Banks.
Credit Information Companies 100% Automatic
Infrastructure companies in 49% Automatic

Securities Markets, namely, stock
exchanges, commodity
exchanges, depositories and
clearing corporations, in
compliance with SEBI
Regulations
Insurance Company 49% Automatic
Insurance Brokers 49% Automatic
Third Party Administrators 49% Automatic
Surveyors and Loss Assessors 49% Automatic
Other Insurance Intermediaries 49% Automatic

appointed under the provisions of
Insurance Regulatory and
Development Authority Act, 1999
(41 of 1999)
Pension Sector 49% Automatic
Power Exchanges registered 49% Automatic

under the Central Electricity
Regulatory Commission (Power
Market) Regulations, 2010.
White Label ATM Operations 100% Automatic
Financial Services activities 100% Automatic

regulated by financial sector
regulators, viz., RBI, SEBI, IRDA,
PFRDA, NHB or any other
financial sector regulator as may
be notified by the Government of
India.
Pharmaceutical (Greenfield) 100% Automatic
Pharmaceutical(Brownfield ) 100% Automatic up to 74%

94 EP-EBCL
CONDITIONS OF FDI IN MAJOR SECTOR
FDI in E-Commerce Activities

Subject to provisions of FDI Policy, e-commerce entities would engage only in Business to Business (B2B) e-
commerce and not in Business to Consumer (B2C) e-commerce.
E-commerce means buying and selling of goods and services including digital products over digital &
electronic network.
E-commerce entity means a company incorporated under the Companies Act 1956 or the Companies Act
2013 or a foreign company covered under section 2 of the Companies Act, 2013 or an office, branch or
agency in India as provided in section 2(v) (iii) of FEMA 1999, owned or controlled by a person resident
outside India and conducting the e-commerce business.
Inventory based model of e-commerce means an e-commerce activity where inventory of goods and
services is owned by e-commerce entity and is sold to the consumers directly.
Marketplace based model of e-commerce means providing of an information technology platform by an e-

commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.
Other Conditions of Investment

100% FDI under automatic route is permitted in marketplace model of e-commerce.
FDI is not permitted in inventory based model of e-commerce.
Digital & electronic network will include network of computers, television channels and any other internet
application used in automated manner such as web pages, extranets, mobiles etc.
Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its
platform on B2B basis.
E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics,
order fulfillment, call centre, payment collection and other services.
E-commerce entity providing a marketplace will not exercise ownership over the inventory i.e. goods
purported to be sold. Such an ownership over the inventory will render the business into inventory based
model.
An e-commerce entity will not permit more than 25% of the sales value on financial year basis affected
through its marketplace from one vendor or their group companies.
In marketplace model goods/services made available for sale electronically on website should clearly
provide name, address and other contact details of the seller. Post sales, delivery of goods to the
customers and customer satisfaction will be responsibility of the seller.
In marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with
the guidelines of the Reserve Bank of India.
In marketplace model, any warrantee/ guarantee of goods and services sold will be responsibility of the
seller.
E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods
or services and shall maintain level playing field.
Guidelines on cash and carry wholesale trading of FDI Policy will apply on B2B e-commerce.
Subject to the conditions of FDI policy on services sector and applicable laws/regulations, security and
other conditionalities, sale of services through e-commerce will be under automatic route.
FDI in Single Brand Product Retail Trading

In Single Brand product retail trading, 49% FDI is allowed under Automatic route and beyond 49% under
Government route.
(1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in
production and marketing, improving the availability of such goods for the consumer, encouraging
increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises
through access to global designs, technologies and management practices.
(2) FDI in Single Brand product retail trading would be subject to the following conditions:
(a) Products to be sold should be of a ‘Single Brand’ only.
(b) Products should be sold under the same brand internationally i.e. products should be sold under
the same brand in one or more countries other than India.
(c) ‘Single Brand’ product-retail trading would cover only products which are branded during
manufacturing.
(d) A non-resident entity or entities, whether owner of the brand or otherwise, shall be permitted to
undertake ‘single brand’ product retail trading in the country for the specific brand, directly or
through a legally tenable agreement with the brand owner for undertaking single brand product
retail trading. The onus for ensuring compliance with this condition will rest with the Indian entity
carrying out single-brand product retail trading in India. The investing entity shall provide
evidence to this effect at the time of seeking approval, including a copy of the
licensing/franchise/sub-licence agreement, specifically indicating compliance with the above
96 EP-EBCL
condition. The requisite evidence should be filed with the RBI for the automatic route and to
competent authority for cases involving approval.
(e) In respect of proposals involving foreign investment beyond 51%, sourcing of 30% of the value
of goods purchased, will be done from India, preferably from MSMEs, village and cottage
industries, artisans and craftsmen, in all sectors. The quantum of domestic sourcing will be self-
certified by the company, to be subsequently checked, by statutory auditors, from the duly
certified accounts which the company will be required to maintain. This procurement
requirement would have to be met, in the first instance, as an average of five years’ total value
of the goods purchased, beginning 1st April of the year of the commencement of the business
i.e. opening of the first store. Thereafter, it would have to be met on an annual basis. For the
purpose of ascertaining the sourcing requirement, the relevant entity would be the company,
incorporated in India, which is the recipient of foreign investment for the purpose of carrying out
single-brand product retail trading.
(f) Subject to the conditions, a single brand retail trading entity operating through brick and mortar
stores, is permitted to undertake retail trading through e-commerce.
(3) Application seeking permission of the Government for FDI exceeding 49% in a company which
proposes to undertake single brand retail trading in India would be made to the Secretariat for
Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The applications
would specifically indicate the product/product categories which are proposed to be sold under a
‘Single Brand’. Any addition to the product/product categories to be sold under ‘Single Brand’ would
require a fresh approval of the Government. In case of FDI up to 49%, the list of products/product
categories proposed to be sold except food products would be provided to the RBI.
FDI in Multi Brand Retail Trading

In Multi Brand Retail Trading,51% FDI allowed under Government route.
(1) FDI in multi brand retail trading, in all products, will be permitted, subject to the following conditions:
(i) Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery
and meat products, may be unbranded.
(ii) Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.
(iii) At least 50% of total FDI brought in the first tranche of US $ 100 million, shall be invested in 'back-
end infrastructure' within three years, where ‘back-end infrastructure’ will include capital expenditure
on all activities, excluding that on front-end units; for instance, back-end infrastructure will include
investment made towards processing, manufacturing, distribution, design improvement, quality
control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc.
Expenditure on land cost and rentals, if any, will not be counted for purposes of backend
infrastructure. Subsequent investment in backend infrastructure would be made by the MBRT
retailer as needed, depending upon its business requirements.
(iv) At least 30% of the value of procurement of manufactured/processed products purchased shall be
sourced from Indian micro, small and medium industries, which have a total investment in plant &
machinery not exceeding US $ 2.00 million. This valuation refers to the value at the time of
installation, without providing for depreciation. The ‘small industry’ status would be reckoned only at
the time of first engagement with the retailer, and such industry shall continue to qualify as a ‘small
industry’ for this purpose, even if it outgrows the said investment of US $ 2.00 million during the
course of its relationship with the said retailer. Sourcing from agricultural co-operatives and farmers
co-operatives would also be considered in this category. The procurement requirement would have
to be met, in the first instance, as an average of five years’ total value of the
manufactured/processed products purchased, beginning 1st April of the year during which the first
tranche of FDI is received. Thereafter, it would have to be met on an annual basis.
(v) Self-certification by the company, to ensure compliance of the conditions at serial nos. (ii), (iii) and
(iv) above, which could be cross-checked, as and when required. Accordingly, the investors shall
maintain accounts, duly certified by statutory auditors.
(vi) Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011
Census or any other cities as per the decision of the respective State Governments, and may also
cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail
locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned
cities and provision will be made for requisite facilities such as transport connectivity and parking.
(vii) Government will have the first right to procurement of agricultural products.
(viii) The above policy is an enabling policy only and the State Governments/Union Territories would be
free to take their own decisions in regard to implementation of the policy. Therefore, retail sales
outlets may be set up in those States/Union Territories which have agreed, or agree in future, to
allow FDI in MBRT under this policy. The list of States/Union Territories which have conveyed their
agreement is at (2) below. Such agreement, in future, to permit establishment of retail outlets under
this policy, would be conveyed to the Government of India through the Department of Industrial
Policy & Promotion and additions would be made to the list at (2) below accordingly. The
establishment of the retail sales outlets will be in compliance of applicable State/Union Territory
laws/ regulations, such as the Shops and Establishments Act etc.
(ix) Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with
FDI, engaged in the activity of multi-brand retail trading.
(2) List of States/Union Territories is:

1. Andhra Pradesh
2. Assam
3. Delhi
4. Haryana
5. Himachal Pradesh
6. Jammu & Kashmir
7. Karnataka
8. Maharashtra
9. Manipur
10. Rajasthan
11. Uttarakhand
12. Daman & Diu and Dadra and Nagar Haveli (Union Territories)
FDI in Asset Reconstruction Companies

100 % FDI allowed in ‘Asset Reconstruction Company’ (ARC). ‘Asset Reconstruction Company’ (ARC) means
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a company registered with the Reserve Bank of India under Section 3 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
Conditions for Investment in ARC:

Persons resident outside India can invest in the capital of Asset Reconstruction Companies (ARCs)
registered with Reserve Bank of India, up to 100% on the automatic route.
Investment limit of a sponsor in the shareholding of an ARC will be governed by the provisions of
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, as
amended from time to time. Similarly, investment by institutional / non-institutional investors will also be
governed by the said Act, as amended from time to time.
The total shareholding of an individual FII/FPI shall be below 10% of the total paid-up capital.
FIIs/FPIs can invest in the Security Receipts (SRs) issued by ARCs. FIIs/FPIs may be allowed to invest up to
100 per cent of each tranche in SRs issued by ARCs, subject to directions/guidelines of Reserve Bank of
India. Such investment should be within the relevant regulatory cap as applicable.
All investments would be subject to provisions of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, as amended from time to time.
FDI in Insurance
49% FDI is allowed in (i) Insurance Company (ii) Insurance Brokers (iii) Third Party Administrators (iv)
Surveyors and Loss Assessors (v)Other Insurance Intermediaries appointed under the provisions of
Insurance Regulatory and Development authority Act, 1999 (41 of 1999) under Automatic route .
Conditions of Investment
(a) No Indian Insurance company shall allow the aggregate holdings by way of total foreign investment
in its equity shares by foreign investors, including portfolio investors, to exceed forty-nine percent of
the paid up equity capital of such Indian Insurance company.
(b) The foreign investment up to forty-nine percent of the total paid-up equity of the Indian Insurance
Company shall be allowed on the automatic route subject to approval/verification by the Insurance
Regulatory and Development Authority of India.
(c) Foreign investment in this sector shall be subject to compliance with the provisions of the Insurance
Act, 1938 and the condition that Companies receiving FDI shall obtain necessary license /approval
from the Insurance Regulatory & Development Authority of India for undertaking insurance and
related activities.
(d) An Indian Insurance company shall ensure that its ownership and control remains at all times in the
hands of resident Indian entities as determined by Department of Financial Services/ Insurance
Regulatory and Development Authority of India as per the rules/regulations issued by them from
time to time.
(e) Foreign portfolio investment in an Indian Insurance company shall be governed by the provisions
contained in sub-regulations (2), (2A), (3) and (8) of Regulation 5 of FEMA Regulations, 2000 and
provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations,
2014.
(f) Any increase in foreign investment in an Indian Insurance company shall be in accordance with the
pricing guidelines specified by Reserve Bank of India under the FEMA Regulations.
(g) The foreign equity investment cap of 49 percent shall apply on the same terms as above to
Insurance Brokers, Third Party Administrators, Surveyors and Loss Assessors and Other Insurance
Intermediaries appointed under the provisions of the Insurance Regulatory and Development
Authority Act,1999
(h) Provided that where an entity like a bank, whose primary business is outside the insurance area, is
allowed by the Insurance Regulatory and Development Authority of India to function as an
insurance intermediary, the foreign equity investment caps applicable in that sector shall continue to
apply, subject to the condition that the revenues of such entities from their primary (i.e., non-
insurance related) business must remain above 50 percent of their total revenues in any financial
year.
(i) The certain provisions relating to ‘Banking-PrivateSector’, shall be applicable in respect of bank
promoted insurance companies.
TYPES OF INSTRUMENTS THAT CAN BE USED UNDER FDI

1. Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and
fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation
norms prescribed under FEMA Regulations. The price/conversion formula of convertible capital instruments
should be determined upfront at the time of issue of the instruments. The price at the time of conversion
should not in any case be lower than the fair value worked out, at the time of issuance of such instruments,
in accordance with the extant FEMA regulations [as per any internationally accepted pricing methodology on
arm’s length basis for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the
listed companies].
Optionality clauses are allowed in equity shares, fully, compulsorily and mandatorily convertible debentures
and fully, compulsorily and mandatorily convertible preference shares under FDI scheme, subject to the
following conditions:
(a) There is a minimum lock-in period of one year which shall be effective from the date of allotment of
such capital instruments.
(b) After the lock-in period and subject to FDI Policy provisions, if any, the non-resident investor
exercising option/right shall be eligible to exit without any assured return, as per pricing/valuation
guidelines issued by RBI from time to time.
2. Other types of Preference shares/Debentures i.e. non-convertible, optionally convertible or partially

convertible for issue of which funds have been received on or after May 1, 2007 are considered as debt.
Accordingly all norms applicable for ECBs relating to eligible borrowers, recognized lenders, amount and
maturity, end-use stipulations, etc. shall apply. Since these instruments would be denominated in rupees, the
rupee interest rate will be based on the swap equivalent of London Interbank Offered Rate (LIBOR) plus the
spread as permissible for ECBs of corresponding maturity.
3. The inward remittance received by the Indian company vide issuance of DRs and FCCBs are treated as
FDI and counted towards FDI.
4. Acquisition of Warrants and Partly Paid Shares - An Indian Company may issue warrants and partly paid
shares to a person resident outside India subject to terms and conditions as stipulated by the Reserve Bank
of India in this behalf, from time to time.
5. Issue of Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts (DRs)
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(a) FCCBs/DRs may be issued in accordance with the Scheme for issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993
and DR Scheme 2014 respectively, as per the guidelines issued by the Government of India there
under from time to time.
(b) DRs are foreign currency denominated instruments issued by a foreign depository in a permissible
jurisdiction against a pool of permissible securities issued or transferred to that foreign depository
and deposited with a domestic custodian.
(c) A person will be eligible to issue or transfer eligible securities to a foreign depository for the purpose
of converting the securities so purchased into depository receipts in terms of Depository Receipts
Scheme, 2014 and guidelines issued by the Government of India there under from time to time.
(d) A person can issue DRs, if it is eligible to issue eligible instruments to person resident outside India
under Schedules 1, 2, 2A, 3, 5 and 8 of the FEM (Transfer or Issue of Security by a person
Resident outside India) Regulations, 2000, as amended from time to time.
(e) The aggregate of eligible securities which may be issued or transferred to foreign depositories,
along with eligible securities already held by persons resident outside India, shall not exceed the
limit on foreign holding of such eligible securities under the relevant regulations framed under
FEMA, 1999.
(f) The pricing of eligible securities to be issued or transferred to a foreign depository for the purpose of
issuing depository receipts should not be at a price less than the price applicable to a corresponding
mode of issue or transfer of such securities to domestic investors under the relevant regulations
framed under FEMA, 1999.
(g) The issue of depository receipts as per DR Scheme 2014 shall be reported to the Reserve Bank by
the domestic custodian as per the reporting guidelines for DR Scheme 2014.
6. (i) Two-way Fungibility Scheme: A limited two-way Fungibility scheme has been put in place by the
Government of India for ADRs/GDRs. Under this Scheme, a stock broker in India, registered with SEBI, can
purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on
instructions received from overseas investors. Re-issuance of ADRs/GDRs would be permitted to the extent
of ADRs/GDRs which have been redeemed into underlying shares and sold in the Indian market.
(ii) Sponsored ADR/GDR issue: An Indian Company can also sponsor an issue of ADR/GDR. Under this
mechanism, the company offers its resident shareholders a choice to submit their shares back to the
company so that on the basis of such shares, ADRs/GDRs can be issued abroad. The proceeds of the
ADR/GDR issue are remitted back to India and distributed among the resident investors who had offered
their Rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency
(Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion
into ADRs/GDRs.
ISSUE/TRANSFER OF SHARES
The capital instruments should be issued within 180 days from the date of receipt of the inward
remittance received through normal banking channels including escrow account opened and maintained
for the purpose or by debit to the NRE/FCNR (B) account of the non-resident investor.
In case, the capital instruments are not issued within 180 days from the date of receipt of the inward
remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received
should be refunded immediately to the non-resident investor by outward remittance through normal
banking channels or by credit to the NRE/FCNR (B) account, as the case may be.
Non-compliance with the above provision would be reckoned as a contravention under FEMA and would
attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond
a period of 180 days from the date of receipt may be considered by the RBI, on the merits of the case.
Issue price of shares

Price of shares issued to persons resident outside India under the FDI Policy, shall not be less than –
a. the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the
company are listed on any recognised stock exchange in India;
b. the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant
as per any internationally accepted pricing methodology on arm’s length basis, where the shares of
the company are not listed on any recognised stock exchange in India; and
c. the price as applicable to transfer of shares from resident to non-resident as per the pricing
guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on
preferential allotment.
However, where non-residents (including NRIs) are making investments in an Indian company in compliance
with the provisions of the Companies Act, as applicable, by way of subscription to its Memorandum of
Association, such investments may be made at face value subject to their eligibility to invest under the FDI
scheme.
Foreign Currency Account

Indian companies which are eligible to issue shares to person’s resident outside India under the FDI Policy
may be allowed to retain the share subscription amount in a Foreign Currency Account, with the prior
approval of RBI.
Transfer of shares and convertible debentures

Subject to FDI sectoral policy (relating to sectoral caps and entry routes), applicable laws and other
conditionality including security conditions, non-resident investors can also invest in Indian companies by
purchasing/acquiring existing shares from Indian shareholders or from other non-resident shareholders.
General permission has been granted to non-residents/NRIs for acquisition of shares by way of transfer
subject to the following:
(a) A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or
gift, the shares or convertible debentures to any person resident outside India (including NRIs).
Government approval is not required for transfer of shares in the investee company from one non-
resident to another non-resident in sectors which are under automatic route. In addition, approval of
Government will be required for transfer of stake from one non-resident to another non-resident in
sectors which are under Government approval route.
(b) NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to
another NRI.
(c) A person resident outside India can transfer any security to a person resident in India by way of gift.
(d) A person resident outside India can sell the shares and convertible debentures of an Indian
company on a recognized Stock Exchange in India through a stock broker registered with stock
exchange or a merchant banker registered with SEBI.
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(e) A person resident in India can transfer by way of sale, shares/ convertible debentures (including
transfer of subscriber’s shares), of an Indian company under private arrangement to a person
resident outside India, subject to the guidelines.
(f) General permission is also available for transfer of shares/convertible debentures, by way of sale
under private arrangement by a person resident outside India to a person resident in India, subject
to the guidelines.
(g) The above general permission also covers transfer by a resident to a non-resident of
shares/convertible debentures of an Indian company, engaged in an activity earlier covered under
the Government Route but now falling under Automatic Route, as well as transfer of shares by a
non-resident to an Indian company under buyback and/or capital reduction scheme of the company.
(h) The Form FC-TRS should be submitted to the AD Category-I Bank, within 60 days from the date of
receipt of the amount of consideration. The onus of submission of the Form FC-TRS within the
given timeframe would be on the transferor/transferee resident in India. However, in cases where
the NR investor, including an NRI, acquires shares on the stock exchanges under the FDI scheme,
the investee company would have to file form FC-TRS with the AD Category-I bank.
The sale consideration in respect of equity instruments purchased by a person resident outside India,
remitted into India through normal banking channels, shall be subjected to a Know Your Customer (KYC)
check by the remittance receiving AD Category-I bank at the time of receipt of funds. In case, the remittance
receiving AD Category-I bank is different from the AD Category-I bank handling the transfer transaction, the
KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the
customer to the AD Category-I bank carrying out the transaction along with the Form FC-TRS.
A person resident outside India including a Non-Resident Indian investor who has already acquired and
continues to hold the control in accordance with the SEBI (Substantial Acquisition of Shares and Takeover)
Regulations can acquire shares of a listed Indian company on the stock exchange through a registered
broker under FDI scheme provided that the original and resultant investments are in line with the extant FDI
policy and FEMA regulations in respect of sectoral cap, entry route, mode of payment, reporting requirement,
documentation, etc.
Escrow: AD Category-I banks have been given general permission to open escrow account and special
account of non-resident corporate for open offers/exit offers and delisting of shares. The relevant SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST) Regulations or any other
applicable SEBI Regulations/provisions of the Companies Act, as applicable will be applicable. AD Category-
I banks have also been permitted to open and maintain, without prior approval of RBI, non-interest bearing
escrow accounts in Indian Rupees in India on behalf of residents and/or non-residents, towards payment of
share purchase consideration and/or provide Escrow facilities for keeping securities to facilitate FDI
transactions subject to the terms and conditions specified by RBI. SEBI authorised Depository Participants
have also been permitted to open and maintain, without prior approval of RBI, escrow accounts for securities
subject to the terms and conditions as specified by RBI. In both cases, the escrow agent shall necessarily be
an AD Category-I bank or SEBI authorised Depository Participant (in case of securities accounts). These
facilities will be applicable for both issue of fresh shares to the non- residents as well as transfer of shares
from/to the non- residents.
In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than
twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within a period not
exceeding eighteen months from the date of the transfer agreement. For this purpose, if so agreed between the
buyer and the seller, an escrow arrangement may be made between the buyer and the seller for an amount not
more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the
date of the transfer agreement or if the total consideration is paid by the buyer to the seller, the seller may
furnish an indemnity for an amount not more than twenty five per cent of the total consideration for a period not
exceeding eighteen months from the date of the payment of the full consideration.
However the total consideration finally paid for the shares must be compliant with the applicable pricing
guidelines.
Prior Permission of RBI in Certain Cases for Transfer of Capital Instruments
In the following cases, prior approval of RBI is required:
• Transfer of capital instruments from resident to non-residents by way of sale
• Transfer of any capital instrument by way of gift by a person resident in India to a person resident
outside India. While forwarding applications to Reserve bank for approval for transfer of capital
instruments by way of gift, the documents should be enclosed
• Transfer of shares from NRI to Non-resident
(i) Transfer of capital instruments from resident to non-residents by way of sale where:
(a) Transfer is at a price which falls outside the pricing guidelines specified by the Reserve Bank from
time to time.
(b) Transfer of capital instruments by the non-resident acquirer involving deferment of payment of the
amount of consideration. Further, in case approval is granted for a transaction, the same should be
reported in Form FC-TRS, to an AD Category-I bank for necessary due diligence, within 60 days
from the date of receipt of the full and final amount of consideration.
(ii) Transfer of any capital instrument, by way of gift by a person resident in India to a person resident outside
India. While forwarding applications to Reserve Bank for approval for transfer of capital instruments by way
of gift, the documents should be enclosed. Reserve Bank considers the following factors while processing
such applications:
(a) The proposed transferee (donee) is eligible to hold such capital instruments under Schedules 1, 4
and 5 of Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.
(b) The gift does not exceed 5 per cent of the paid-up capital of the Indian company/each series of
debentures/each mutual fund scheme.
(c) The applicable sectoral cap limit in the Indian company is not breached.
(d) The transferor (donor) and the proposed transferee (donee) are close relatives as defined in Section
2 (77) of Companies Act, 2013, as amended from time to time.
(e) The value of capital instruments to be transferred together with any capital instruments already
transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee
equivalent of USD 50,000 during the financial year.
(f) Such other conditions as stipulated by Reserve Bank in public interest from time to time.
(iii) Transfer of shares from NRI to non-resident.

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In the Following Cases, Approval of RBI Is Not Required
A. Transfer of shares from a Non-Resident to Resident under the FDI scheme where the pricing
guidelines under FEMA, 1999 are not met provided that:
i. The original and resultant investment are in line with the extant FDI policy and FEMA regulations in
terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting
requirements, documentation, etc.;
ii. The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI
regulations/guidelines (such as IPO, Book building, block deals, delisting, exit, open
offer/substantial acquisition/SEBI SAST, buy back); and
iii. Chartered Accountants Certificate to the effect that compliance with the relevant SEBI
regulations/guidelines as indicated above is attached to the form FC-TRS to be filed with the AD
bank.
B. Transfer of shares from Resident to Non-Resident:

(i) where the transfer of shares requires the prior approval of the Government as per the extant FDI
policy provided that:
(a) the requisite approval of the Government has been obtained; and
(b) the transfer of shares adheres with the pricing guidelines and documentation requirements as
specified by the Reserve Bank of India from time to time.
(ii) where the transfer of shares attract SEBI (SAST) Regulations subject to the adherence with the
pricing guidelines and documentation requirements as specified by Reserve Bank of India from time
to time.
(iii) where the transfer of shares does not meet the pricing guidelines under the FEMA, 1999 provided
that:
(a) The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of
sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements,
documentation etc.;
(b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI
regulations/guidelines (such as IPO, Book building, block deals, delisting, exit, open
offer/substantial acquisition/SEBI SAST); and
(c) Chartered Accountants Certificate to the effect that compliance with the relevant SEBI
regulations/guidelines as indicated above is attached to the form FC-TRS to be filed with the AD
bank.
(iv) where the investee company is in the financial sector provided that:
(a) Any ‘fit and proper/due diligence’ requirements as regards the non-resident investor as
stipulated by the respective financial sector regulator, from time to time, have been complied
with; and
(b) The FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as
minimum capitalization, pricing, etc.), reporting requirements, documentation etc., are complied
with.
CONVERSION OF ECB/LUMP SUM FEE/ROYALTY ETC. INTO EQUITY
(I) Indian companies have been granted general permission for conversion of External Commercial
Borrowings (ECB) (excluding those deemed as ECB) in convertible foreign currency into equity shares/fully
compulsorily and mandatorily convertible preference shares, subject to the following conditions and reporting
requirements:
(a) The activity of the company is covered under the Automatic Route for FDI or the company has
obtained Government approval for foreign equity in the company;
(b) The foreign equity after conversion of ECB into equity is within the sectoral cap, if any;
(c) Pricing of shares is as per the issue price of shares;
(d) Compliance with the requirements prescribed under any other statute and regulation in force; and
(e) The conversion facility is available for ECBs availed under the Automatic or Government Route and
is applicable to ECBs, due for payment or not, as well as secured/unsecured loans availed from
non-resident collaborators.
(II) General permission is also available for issue of shares/preference shares against lump sum technical
know-how fee, royalty due for payment, subject to entry route, sectoral cap and pricing guidelines (as per the
issue price of shares)and compliance with applicable tax laws. Further, issue of equity shares against any
other funds payable by the investee company, remittance of which does not require prior permission of the
Government of India or Reserve Bank of India under FEMA, 1999 or any rules/ regulations framed or
directions issued there under, or has been permitted by the Reserve Bank under the Act or the rules and
regulations framed or directions issued there under is permitted, provided that:
(a) The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps,
pricing guidelines etc. as amended by Reserve bank of India, from time to time;
(b) The issue of equity shares under this provision shall be subject to tax laws as applicable to the
funds payable and the conversion to equity should be net of applicable taxes.
(III) A wholly owned subsidiary set up in India by a non-resident entity, operating in a sector where 100
percent foreign investment is allowed in the automatic route and there are no FDI linked conditionalities, may
issue equity shares or preference shares or convertible debentures or warrants to the said non-resident
106 EP-EBCL
entity against pre-incorporation/ pre-operative expenses incurred by the said non-resident entity up to a limit
of five percent of its capital or USD 500,000 whichever is less, subject to the conditions laid down below:
a. Within thirty days from the date of issue of equity shares or preference shares or convertible
debentures or warrants but not later than one year from the date of incorporation or such time as
Reserve Bank of India or Government of India permits, the Indian company shall report the
transaction in the Form FC-GPR to the Reserve Bank.
b. The valuation of the equity shares or preference shares or convertible debentures or warrants shall
be subject to the provisions of Schedule 1 of the FEM (Transferor Issue of Security by a person
resident outside India) Regulations.
c. A certificate issued by the statutory auditor of the Indian company that the amount of pre-
incorporation/pre-operative expenses against which equity shares or preference shares or
convertible debentures or warrants have been issued has been utilized for the purpose for which it
was received should be submitted with the FC-GPR form.
Explanation: Pre-incorporation/pre-operative expenses shall include amounts remitted to Investee

Company’s account, to the investor’s account in India if it exists, to any consultant, attorney or to any other
material/service provider for expenditure relating to incorporation or necessary for commencement of
operations.
(IV) Issue of equity shares under the FDI policy is allowed under the Government route for the following:
(i) import of capital goods/ machinery/ equipment (excluding second-hand machinery), subject to
compliance with the following conditions:
(a) Any import of capital goods/machinery etc., made by a resident in India, has to be in
accordance with the Export/Import Policy issued by Government of India/as defined by
DGFT/FEMA provisions relating to imports.
(b) The application clearly indicating the beneficial ownership and identity of the Importer Company
as well as overseas entity.
(c) Applications complete in all respects, for conversions of import payables for capital goods into
FDI being made within 180 days from the date of shipment of goods.
(ii) Pre-operative/pre-incorporation expenses (including payments of rent etc.), subject to compliance

with the following conditions:
(a) Submission of FIRC for remittance of funds by the overseas promoters for the expenditure
incurred.
(b) Verification and certification of the pre-incorporation/pre-operative expenses by the statutory
auditor.
(c) Payments should be made by the foreign investor to the company directly or through the bank
account opened by the foreign investor as provided under FEMA Regulations.
(d) The applications, complete in all respects, for capitalization being made within the period of 180
days from the date of incorporation of the company.
General conditions:
(i) All requests for conversion should be accompanied by a special resolution of the company.
(ii) Government’s approval would be subject to pricing guidelines of RBI and appropriate tax clearance.
ISSUE OF RIGHTS/BONUS SHARES
FEMA provisions allow Indian companies to freely issue Rights/Bonus shares to existing non-resident
shareholders, subject to adherence to sectoral cap, if any.
Such issue of bonus/rights shares has to be in accordance with other laws/statutes like the Companies Act,
as applicable, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (in case of listed
companies), etc.
The offer on right basis to the person’s resident outside India shall be:
(a) in the case of shares of a company listed on a recognized stock exchange in India, at a price as
determined by the company;
(b) in the case of shares of a company not listed on a recognized stock exchange in India, at a price
which is not less than the price at which the offer on right basis is made to resident shareholders.
Additional allocation of rights share by residents to non-residents

(i) Existing non-resident shareholders are allowed to apply for issue of additional shares/fully,
compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily convertible
preference shares over and above their rights share entitlements.
(ii) The investee company can allot the additional rights share out of unsubscribed portion, subject to
the condition that the overall issue of shares to non-residents in the total paid-up capital of the
company does not exceed the sectoral cap.
ACQUISITION OF SHARES UNDER SCHEME OF MERGER/DEMERGER/AMALGAMATION
(I) Mergers/demergers/amalgamations of companies in India are usually governed by an order issued by a

competent Court on the basis of the Scheme submitted by the companies undergoing merger/
demerger/amalgamation.
(II) Once the scheme of merger or demerger or amalgamation of two or more Indian companies has been
approved by a Court in India, the transferee company or new company is allowed to issue shares to the
shareholders of the transferor company resident outside India, subject to the conditions that:
(i) the percentage of shareholding of persons resident outside India in the transferee or new company
does not exceed the sectoral cap, and
(ii) the transferor company or the transferee or the new company is not engaged in activities which are
prohibited under the FDI policy.
Note: Government approval would not be required in case of mergers and acquisitions taking place in
sectors under automatic route.
ISSUE OF EMPLOYEES STOCK OPTION SCHEME (ESOPS) / SWEAT EQUITY
An Indian company may issue “employees’ stock option” and/or “sweat equity shares” to its employees/
directors or employees/directors of its holding company or joint venture or wholly owned overseas
108 EP-EBCL
subsidiary/subsidiaries who are resident outside India, provided that :

a. The scheme has been drawn either in terms of regulations issued under the Securities Exchange
Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 notified by
the Central Government under the Companies Act 2013, as the case may be.
b. The “employee’s stock option”/ “sweat equity shares” issued to non-resident employees/directors
under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said
company.
c. Issue of “employee’s stock option”/ “sweat equity shares” by a company where foreign investment is
under the approval route shall require prior approval of Government of India.
d. Issue of “employee’s stock option”/ “sweat equity shares” under the applicable rules/regulations to
an employee/director who is a citizen of Bangladesh/Pakistan shall require prior approval of the
Government of India.
e. The issuing company shall furnish to the Regional Office concerned of the Reserve Bank of India
under whose jurisdiction the registered office of the company operates, within 30 days from the date
of issue of employees’ stock option or sweat equity shares, a return as per the Form-ESOP.
SHARE SWAP
(i) In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares
will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside
India registered with the appropriate regulatory authority in the host country.
(ii) Approval of the Government will also be a prerequisite for investment by swap of shares for sector
under Government approval route.
(iii) No approval of the Government is required for investment in automatic route sectors by way of
swap of shares.
PLEDGE OF SHARES
(A) A person being a promoter of a company registered in India (borrowing company), which has
raised external commercial borrowings, may pledge the shares of the borrowing company or that of its
associate resident companies for the purpose of securing the ECB raised by the borrowing company,
provided that a no objection for the same is obtained from a bank which is an authorised dealer.
The authorized dealer, shall issue the no objection for such a pledge after having satisfied itself that the
external commercial borrowing is in line with the extant FEMA regulations for ECBs and that:
(i) the loan agreement has been signed by both the lender and the borrower,
(ii) there exists a security clause in the Loan Agreement requiring the borrower to create charge on
financial securities, and
(iii) the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank; and the said
pledge would be subject to the following conditions:
(a) the period of such pledge shall be co-terminus with the maturity of the underlying ECB;
(b) in case of invocation of pledge, transfer shall be in accordance with the extant FDI Policy and
directions issued by the Reserve Bank;
(c) the Statutory Auditor has certified that the borrowing company will utilized/has utilized the
proceeds of the ECB for the permitted end use/s only.
(B) Non-residents holding shares of an Indian company, can pledge these shares in favour of the AD
bank in India to secure credit facilities being extended to the resident investee company for bonafide
business purpose, subject to the following conditions:
(i) in case of invocation of pledge, transfer of shares should be in accordance with the FDI policy in
vogue at the time of creation of pledge;
(ii) submission of a declaration/ annual certificate from the statutory auditor of the investee company
that the loan proceeds will be / have been utilized for the declared purpose;
(iii) the Indian company has to follow the relevant SEBI disclosure norms; and
(iv) pledge of shares in favour of the lender (bank) would be subject to Section 19 of the Banking
Regulation Act, 1949.
(C) Non-residents holding shares of an Indian company, can pledge these shares in favour of an
overseas bank to secure the credit facilities being extended to the non-resident investor/non-resident
promoter of the Indian company or its overseas group company, subject to the following:
(i) loan is availed of only from an overseas bank;
(ii) loan is utilized for genuine business purposes overseas and not for any investments either directly
or indirectly in India;
(iii) overseas investment should not result in any capital inflow into India;
(iv) in case of invocation of pledge, transfer should be in accordance with the FDI policy in vogue at the
time of creation of pledge; and
(v) submission of a declaration/annual certificate from a Chartered Accountant/ Certified Public
Accountant of the non-resident borrower that the loan proceeds will be / have been utilized for the
declared purpose.
REMITTANCE AND REPATRIATION

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Remittance of sale proceeds

(i) Sale proceeds of shares and securities and their remittance is ‘remittance of asset’ governed by
The Foreign Exchange Management (Remittance of Assets) Regulations, 2000 under FEMA.
(ii) AD Category-I bank can allow the remittance of sale proceeds of a security (net of applicable taxes)
to the seller of shares resident outside India, provided the security has been held on repatriation
basis, the sale of security has been made in accordance with the prescribed guidelines and
NOC/tax clearance certificate from the Income Tax Department has been produced.
Remittance on Winding Up/Liquidation of Companies

AD Category-I banks have been allowed to remit winding up proceeds of companies in India, which are
under liquidation, subject to payment of applicable taxes. Liquidation may be subject to any order issued by
the court winding up the company or the official liquidator in case of voluntary winding up under the
provisions of the Companies Act, as applicable.
AD Category-I banks shall allow the remittance provided the applicant submits:
a. No objection or Tax clearance certificate from Income Tax Department for the remittance.
b. Auditor's certificate confirming that all liabilities in India have been either fully paid or adequately
provided for.
c. Auditor's certificate to the effect that the winding up is in accordance with the provisions of the
Companies Act, as applicable.
d. In case of winding up otherwise than by a court, an auditor's certificate to the effect that there are no
legal proceeding spending in any court in India against the applicant or the company under
liquidation and there is no legal impediment in permitting the remittance.
Repatriation of Dividend
(i) Dividends are freely repatriable without any restrictions (net after Tax deduction at source or
Dividend Distribution Tax, if any, as the case may be).
(ii) The repatriation is governed by the provisions of the Foreign Exchange Management (Current
Account Transactions) Rules, 2000, as amended from time to time.
Repatriation of Interest
(i) Interest on fully, mandatorily & compulsorily convertible debentures is also freely repatriable without
any restrictions (net of applicable taxes).
(ii) The repatriation is governed by the provisions of the Foreign Exchange Management (Current
Account Transactions) Rules, 2000, as amended from time to time.
MODES OF PAYMENT ALLOWED FOR RECEIVING FDI IN AN INDIAN COMPANY

An Indian company issuing shares/ convertible debentures to a person resident outside India shall receive
the amount of consideration by:
(a) inward remittance through normal banking channels;
(b) debit to NRE/ FCNR (B) account of a person concerned maintained with an AD Category I bank;
(c) debit to non-interest bearing escrow account in Indian Rupees in India which is opened with the
approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of
residents and non-residents towards payment of share purchase consideration;

(d) conversion of royalty/ lump sum/ technical know-how fee due for payment or conversion of ECB;
(e) conversion of pre-incorporation/ pre-operative expenses incurred by the a non-resident entity up to
a limit of five percent of its capital or USD 500,000 whichever is less;
(f) conversion of import payables/ pre incorporation expenses/ can be treated as consideration for
issue of shares with the approval of FIPB;
(g) against any other funds payable to a person resident outside India, the remittance of which does not
require the prior approval of the Reserve Bank or the Government of India: and
(h) Swap of capital instruments, provided where the Indian investee company is engaged in a
Government route sector, prior Government approval shall be required
If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward
remittance or date of debit to NRE/ FCNR (B)/ escrow account, the amount shall be refunded.
Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company
to refund/ allot shares for the amount of consideration received towards issue of security if such amount is
outstanding beyond the period of 180 days from the date of receipt.
REPORTING OF FDI
Reporting of Inflow
(i) An Indian company receiving investment from outside India for issuing shares/convertible
debentures/preference shares under the FDI Scheme, should report the details of the amount of
consideration to the Regional Office concerned of the Reserve Bank not later than 30 days from the
date of receipt in the Advance Reporting Form.
(ii) Indian companies are required to report the details of the receipt of the amount of consideration for
issue of shares/convertible debentures, through an AD Category-I bank, together with a copy/ies of
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the FIRC/s evidencing the receipt of the remittance along with the KYC report on the non-resident
investor from the overseas bank remitting the amount. The report would be acknowledged by the
Regional Office concerned, which will allot a Unique Identification Number (UIN) for the amount
reported.
(iii) An Indian company issuing partly paid equity shares, shall furnish a report not later than 30 days
from the date of receipt of each call payment.
Reporting of issue of shares

(i) After issue of shares (including bonus and shares issued on rights basis and shares issued under
ESOP and against Convertible Notes)/fully, mandatorily & compulsorily convertible debentures/fully,
mandatorily & compulsorily convertible preference shares, the Indian company has to file Form FC-
GPR, not later than 30 days from the date of issue of shares.
(ii) Form FC-GPR has to be duly filled up and signed by Managing Director/Director/Secretary of the
Company and submitted to the Authorized Dealer of the company, who will forward it to the Reserve
Bank. The following documents have to be submitted along with the form:
(a) Acertificate from the Company Secretary of the company certifying that:
(A) all the requirements of the Companies Act, as applicable, have been complied with;
(B) terms and conditions of the Government of India approval, if any, have been complied with;
(C) the company is eligible to issue shares; and
(D) the company has all original certificates issued by authorized dealers in India evidencing receipt of
amount of consideration.
Note: For companies with paid up capital with less than Rs.5 crore, the above mentioned certificate
can be given by a practicing company secretary.
(b) A certificate from SEBI registered Merchant Banker or Chartered Accountant indicating the manner of
arriving at the price of the shares issued to the persons resident outside India.
(c) The report of receipt of consideration as well as Form FC-GPR have to be submitted by the AD Category-
I bank to the Regional Office concerned of the Reserve Bank under whose jurisdiction the registered office of
the company is situated.
Note: An Indian company issuing partly paid equity shares shall file a report in form FC-GPR to the extent
they become paid up.
(d) Annual return on Foreign Liabilities and Assets should be filed on an annual basis by the Indian company,
directly with the Reserve Bank. This is an annual return to be submitted by 15th of July every year, pertaining
to all investments by way of direct/portfolio investments/reinvested earnings/other capital in the Indian
company made during the previous years (i.e. the information submitted by 15th July will pertain to all the
investments made in the previous years up to March 31). The details of the investments to be reported would
include all foreign investments made into the company which is outstanding as on the balance sheet date.
The details of overseas investments in the company both under direct/portfolio investment may be separately
indicated.
(e) Issue of bonus/rights shares or stock options to persons resident outside India directly or on
amalgamation/merger/demerger with an existing Indian company, as well as issue of shares on conversion
of ECB/royalty/lumpsum technical know-how fee/import of capital goods by units in SEZs, has to be reported
in Form FC-GPR.
Reporting of transfer of shares

(i) Reporting of transfer of shares between residents and non-residents and vice- versa is to be done
in Form FC-TRS.
(ii) The Form FC-TRS should be submitted to the AD Category-I bank, within 60 days from the date of
receipt of the amount of consideration.
(iii) The onus of submission of the Form FC-TRS within the given timeframe would be on the
transferor/transferee, resident in India.
(iv) In cases where the NR investor, including an NRI, acquires shares on the stock exchanges under
the FDI scheme, the investee company would have to file form FC-TRS with the AD Category-I
bank. The AD Category-I bank, would forward the same to its link office. The link office would
consolidate the Form FC-TRS and submit a monthly report to the Reserve Bank.
Reporting of Non-Cash
Details of issue of shares against conversion of ECB have to be reported to the Regional Office concerned of
the RBI, as indicated below:
(i) In case of full conversion of ECB into equity, the company shall report the conversion in Form FC-
GPR to the Regional Office concerned of the Reserve Bank as well as in Form ECB-2 to the
Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla
Complex, Mumbai- 400 051, within seven working days from the close of month to which it relates.
The words "ECB wholly converted to equity" shall be clearly indicated on top of the Form ECB-2.
Once reported, filing of Form ECB-2 in the subsequent months is not necessary.
(ii) In case of partial conversion of ECB, the company shall report the converted portion in Form FC-
GPR to the Regional Office concerned as well as in Form ECB-2 clearly differentiating the
converted portion from the non-converted portion.”The words "ECB partially converted to equity"
shall be indicated on top of the Form ECB-2. In the subsequent months, the outstanding balance of
ECB shall be reported in Form ECB-2 to DSIM.
Reporting of FCCB/DR Issues

The domestic custodian shall report the issue/transfer of sponsored/unsponsored depository receipts as per
DR Scheme 2014 in ‘Form DRR’ within 30 days of close of the issue/ program.
ADHERENCE TO GUIDELINES/ORDERS
(i) FDI is a capital account transaction and thus any violation of FDI regulations are covered by the
penal provisions of the FEMA.
(ii) Reserve Bank of India administers the FEMA and Directorate of Enforcement under the Ministry of
Finance is the authority for the enforcement of FEMA. The Directorate takes up investigation in any
contravention of FEMA.
PENALTIES
If a person violates/contravenes any FDI Regulations, by way of breach/non-adherence/non-
compliance/contravention of any rule, regulation, notification, press note, press release, circular, direction or
order issued in exercise of the powers under FEMA or contravenes any conditions subject to which an
authorization is issued by the Government of India/ Reserve Bank of India, he shall, upon adjudication, be
liable to a penalty up to thrice the sum involved in such contraventions where such amount is quantifiable, or
114 EP-EBCL
up to two lakh Rupees where the amount is not quantifiable, and where such contraventions is a continuing
one, further penalty which may extend to five thousand Rupees for every day after the first day during which
the contraventions continues.
Where a person committing a contravention of any provisions of this Act or of any rule, direction or order
made there under is a company (company means any body corporate and includes a firm or other
association of individuals as defined in the Companies Act), every person who, at the time the contravention
was committed, was in charge of, and was responsible to, the company for the conduct of the business of
the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to
be proceeded against and punished accordingly.
Any Adjudicating Authority adjudging any contraventions under 3.1(i) above, may, if he thinks fit in addition to
any penalty which he may impose for such contravention direct that any currency, security or any other
money or property in respect of which the contravention has taken place shall be confiscated to the Central
Government.
ADJUDICATION AND APPEALS

For the purpose of adjudication of any contravention of FEMA, the Ministry of Finance as per the provisions
contained in the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000
appoints officers of the Central Government as the Adjudicating Authorities for holding an enquiry in the
manner prescribed. A reasonable opportunity has to be given to the person alleged to have committed
contraventions against whom a complaint has been made for being heard before imposing any penalty.
The Central Government may appoint as per the provisions contained in the Foreign Exchange Management
(Adjudication Proceedings and Appeal) Rules, 2000, an Appellate Authority/ Appellate Tribunal to hear
appeals against the orders of the adjudicating authority.
COMPOUNDING PROCEEDINGS
Under the Foreign Exchange (Compounding Proceedings) Rules 2000, the Central Government may appoint
‘Compounding Authority’ an officer either from Enforcement Directorate or Reserve Bank of India for any
person contravening any provisions of the FEMA. The Compounding Authorities are authorized to compound
the amount involved in the contravention to the Act made by the person. No contravention shall be
compounded unless the amount involved in such contravention is quantifiable. Any second or subsequent
contravention committed after the expiry of a period of three years from the date on which the contravention
was previously compounded shall be deemed to be a first contravention. The Compounding Authority may
call for any information, record or any other documents relevant to the compounding proceedings. The
Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to
all the concerns as expeditiously as and not later than 180 days from the date of application made to the
Compounding Authority. Compounding Authority shall issue order specifying the provisions of the Act or of
the rules, directions, requisitions or orders made there under in respect of which contravention has taken
place along with details of the alleged contraventions.
ESTABLISHMENT OF BRANCH OFFICE (BO)/ LIAISON OFFICE (LO)/ PROJECT

OFFICE (PO) IN INDIA
Establishment of branch office/ liaison office / project office or any other place of business in India by foreign
entities is regulated in terms of Section 6(6) of Foreign Exchange Management Act, 1999 read with Foreign
Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any
other place of business) Regulations, 2016 and amended from time to time.
Branch Office
Branch office in relation to a company, means any establishment described as such by the company.
Permitted activities for a branch office in India of a person resident outside India
Normally, the branch office should be engaged in the activity in which the parent company is engaged.
(i) Export/import of goods.
(ii) Rendering professional or consultancy services.
(iii) Carrying out research work in which the parent company is engaged.
(iv) Promoting technical or financial collaborations between Indian companies and parent or overseas
group company.
(v) Representing the parent company in India and acting as buying/ selling agent in India.
(vi) Rendering services in Information Technology and development of software in India.
(vii) Rendering technical support to the products supplied by parent/group companies.
(viii) Representing a foreign airline/shipping company.
Liaison Office
Liaison Office means a place of business to act as a channel of communication between the principal place
of business or Head Office or by whatever name called and entities in India but which does not undertake
any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances
received from abroad through normal banking channel.
Permitted activities for a liaison office in India of a person resident outside India
(i) Representing the parent company / group companies in India.
(ii) Promoting export / import from / to India.
(iii) Promoting technical/ financial collaborations between parent / group companies and companies in
India.
(iv) Acting as a communication channel between the parent company and Indian companies.
Project Office
Project office means a place of business in India to represent the interests of the foreign company executing
a project in India but excludes a Liaison Office.
Parameters of project office
A foreign company may open project office/s in India provided it has secured from an Indian company, a
contract to execute a project in India, and
(i) the project is funded directly by inward remittance from abroad; or
(ii) the project is funded by a bilateral or multilateral International Financing Agency; or
(iii) the project has been cleared by an appropriate authority; or
(iv) a company or entity in India awarding the contract has been granted term loan by a Public Financial
Institution or a bank in India for the Project.
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The Hon’ble Supreme Court vide its interim orders dated July 4, 2012 and September 14, 2015, passed in
the case of the Bar Council of India vs A.K. Balaji & Ors., has directed RBI not to grant any permission to
any foreign law firm, on or after the date of the said interim order, for opening of LO in India. Hence, no
foreign law firm shall be permitted to open any LO in India till further orders/notification in this regard.
However, foreign law firms which have been granted permission prior to the date of interim order for opening
LOs in India may be allowed to continue provided such permission is still in force. No fresh permissions/
renewal of permission shall be granted by the Reserve Bank/AD Category-I banks respectively till the policy
is reviewed based on, among others, final disposal of the matter by the Hon’ble Supreme Court.
General criteria
i. Applications from foreign companies (a body corporate incorporated outside India, including a firm or other
association of individuals) for establishing BO/ LO/ PO in India shall be considered by the AD Category-I
bank as per the guidelines given by Reserve Bank of India (RBI). If the principal business of the entity
resident outside India falls under sectors where 100 percent Foreign Direct Investment (FDI) is allowed in
terms Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India)
Regulations, 2000, as amended from time to time, and the entity seeks to open a BO/LO/PO, the AD
Category-I bank may consider such applications under the delegated powers.
ii. An application from a person resident outside India for opening of a BO/LO/PO in India shall require prior
approval of Reserve Bank of India in the following cases:
* In the case of proposal for opening a PO relating to defence sector, no separate reference or approval of
Government of India shall be required if the said non-resident applicant has been awarded a contract by/
entered into an agreement with Ministry of Defence or Service Headquarters or Defence Public Sector
Undertakings. No separate approval is required from Reserve Bank of India for such cases only.
** Such applications may be forwarded by the AD Category-I bank to the General Manager, Reserve Bank of
India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi - 110 001 who shall
process the applications in consultation with the Government of India.
iii. The non-resident entity applying for a BO/LO in India should have a financially sound track record viz:
Branch Office A profit making track record during the immediately preceding five
financial years in the home country and net worth of not less than USD
100,000 or its equivalent.
Net Worth [total of paid-up capital and free reserves, less intangible
assets as per the latest Audited Balance Sheet or Account Statement
certified by a Certified Public Accountant or any Registered Accounts
Practitioner by whatever name called].
Liaison Office A profit making track record during the immediately preceding three
financial years in the home country and net worth of not less than USD
50,000 or its equivalent.
An applicant that is not May submit a Letter of Comfort (LOC) from its parent/ group company,
financially sound and is a subject to the condition that the parent/ group company satisfies the
subsidiary of another prescribed criteria for net worth and profit.
company
Procedure for Establishment

i. The application for establishing BO / LO/ PO in India may be submitted by the non-resident entity in
Form FNC to a designated AD Category - I bank (i.e. an AD Category – I bank identified by the
applicant with whom they intend to pursue banking relations) along with the prescribed documents
and the LOC, wherever applicable.
Following are the prescribed documents:
(a) Copy of the Certificate of Incorporation / Registration; Memorandum of Association and Articles
of Association attested by the Notary Public in the country of registration.
[If the original Certificate is in a language other than in English, the same may be translated into
English and notarized as above and cross verified/attested by the Indian Embassy/ Consulate in
the home country].
(b) Audited Balance sheet of the applicant company for the last three/ five years in case of branch
office/liaison office respectively.
[If the applicants’ home country laws/regulations do not insist on auditing of accounts, an
Account Statement certified by a Certified Public Accountant (CPA) or any Registered Accounts
Practitioner by any name, clearly showing the net worth may be submitted]
(c) Bankers' Report from the applicant’s banker in the host country / country of registration showing
the number of years the applicant has had banking relations with that bank.
(d) Power of Attorney in favour of signatory of Form FNC in case the Head of the overseas entity is
not signing the Form FNC.
The AD Category-I bank shall after exercising due diligence in respect of the applicant’s
background, and satisfying itself as regards adherence to the eligibility criteria for establishing
BO/LO/PO, antecedents of the promoter, nature and location of activity of the applicant, sources
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of funds, etc., and compliance with the extant KYC norms grant approval to the foreign entity for
establishing BO/LO/PO in India.
ii. However, before issuing the approval letter to the applicant, the AD Category-I bank shall forward a
copy of the Form FNC along with the details of the approval proposed to be granted by it to the
General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification
Number (UIN) to each BO/LO.
After receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval
letter to the non-resident entity for establishing BO/LO in India. This is in order to enable the
Reserve Bank to keep, maintain and upload up-to-date list of all foreign entities which have been
granted permission for establishing BO/LO in India, on its website.
iii. The validity period of an LO is generally for three years, except in the case of Non-Banking Finance
Companies (NBFCs) and those entities engaged in construction and development sectors, for
whom the validity period is two years only.
The validity period of the project office is for the tenure of the project.
iv. An applicant that has received permission for setting up of a BO/LO/PO shall inform the designated
AD Category I bank as to the date on which the BO/LO/PO has been set up. The AD Category I
bank in turn shall inform Reserve Bank accordingly. In case an approval granted by the AD bank
has either been surrendered by the applicant or has expired without any BO/LO/PO being set up,
the AD Category I bank shall inform RBI accordingly.
v. The approval granted by the AD Category I bank should include a proviso to the effect that in case
the BO/LO/PO for which approval has been granted is not opened within six months from the date
of the approval letter, the approval shall lapse. In cases where the non-resident entity is not able to
open the office within the stipulated time frame due to reasons beyond its control, the AD Category-I
bank may consider granting extension of time for a further period of six months for setting up the
office. Any further extension of time shall require the prior approval of Reserve Bank of India in this
regard.
vi. All applications for establishing a BO/LO in India by foreign banks and insurance companies will be
directly received and examined by the Department of Banking Regulation (DBR), Reserve Bank of
India, Central Office and the Insurance Regulatory and Development Authority (IRDA), respectively.
No UIN for such representative offices is required from the Foreign Exchange Department, Reserve
Bank of India.
vii. There is a general permission to non-resident companies for establishing BO in the Special
Economic Zones (SEZs) to undertake manufacturing and service activities subject to the conditions
that:
(a) such BOs are functioning in those sectors where 100% FDI is permitted;
(b) such BOs comply with Chapter XXII of the Companies Act, 2013; and
(c) such BOs function on a stand-alone basis.
Opening of bank account by BO/LO/PO

i. An LO may approach the designated AD Category I Bank in India to open an account to receive
remittances from its Head Office outside India. It may be noted that an LO shall not maintain more than one
bank account at any given time without the prior permission of Reserve Bank of India. The permitted Credits
and Debits to the account shall be:

a. Credits
1. Funds received from Head Office through normal banking channels for meeting the expenses of
the office.
2. Refund of security deposits paid from LO’s account or directly by the Head Office through
normal banking channels.
3. Refund of taxes, duties etc., received from tax authorities, paid from LO’s bank account.
4. Sale proceeds of assets of the LO.
b. Debits
Only for meeting the local expenses of the office.
ii. A BO may approach any AD Category-I Bank in India to open an account for its operations in India.
Credits to the account should represent the funds received from Head Office through normal banking
channels for meeting the expenses of the office and any legitimate receivables arising in the process of its
business operations. Debits to this account shall be for the expenses incurred by the BO and towards
remittance of profit/winding up proceeds.
iii. Any foreign entity except an entity from Pakistan who has been awarded a contract for a project by the
Government authority/Public Sector Undertakings or are permitted by the AD to operate in India may open a
bank account without any prior approval of the Reserve Bank. An entity from Pakistan shall need prior
approval of Reserve Bank of India to open a bank account for its project office in India.
iv. AD Category – I banks can open non-interest bearing foreign currency account for POs in India subject to
the following:
(a) The PO has been established in India, with the general / specific permission of Reserve Bank of
India, having the requisite approval from the concerned Project Sanctioning Authority concerned as
per FEM (Establishment in India of Branch Office or a Project Office or any other Place of Business
Regulations, 2016).
(b) The contract governing the project specifically provides for payment in foreign currency.
(c) Each PO can open two foreign currency accounts, usually one denominated in USD and other in
home currency of the project awardee, provided both are maintained with the same AD Category–I
bank.
(d) The permissible debits to the account shall be payment of project related expenditure and credits
shall be foreign currency receipts from the Project Sanctioning Authority and remittances from
parent/group company abroad or bilateral / multilateral international financing agency.
(e) The responsibility of ensuring that only the approved debits and credits are allowed in the foreign
currency account shall rest solely with the AD Category–I bank. Further, the accounts shall be
subject to 100 per cent scrutiny by the Concurrent Auditor of the respective AD Category–I bank.
The foreign currency accounts have to be closed at the completion of the project.
Annual Activity Certificate by BO/LO/PO

(i) The Annual Activity Certificate (AAC) as at the end of March 31 each year along with the required
documents needs to be submitted by the following:
120 EP-EBCL
In case of a sole BO/ LO/PO, by the BO/LO/PO concerned;

In case of multiple BOs / LOs, a combined AAC in respect of all the offices in India by the nodal
office of the BOs / LOs.
The LO/BO needs to submit the AAC to the designated AD Category -I bank as well as Director
General of Income Tax (International Taxation), New Delhi whereas the PO needs to submit the
AAC only to the designated AD Category -I bank.
(ii) The designated AD Category - I bank shall scrutinize the AACs and ensure that the activities
undertaken by the BO/LO are being carried out in accordance with the terms and conditions of the
approval given.
In the event of any adverse findings reported by the auditor or noticed by the designated AD Category -I
bank, the same should immediately be reported to the General Manager, Reserve Bank of India, CO Cell,
New Delhi, along with the copy of the AAC and their comments thereon.
Extension of validity period of the approval of LO and PO

i. Requests for extension of time for LOs may be submitted before the expiry of the validity of the
approval, to the AD Category-I bank concerned under whose jurisdiction the LO/nodal office is
located. The designated AD Category - I bank may extend the validity period of LO/s for a period of
3 years from the date of expiry of the original approval / extension granted if the applicant has
complied with the following conditions and the application is otherwise in order:
(a) The LO should have submitted the Annual Activity Certificates for the previous years and
(b) The account of the LO maintained with the designated AD Category – I bank is being operated
in accordance with the terms and conditions stipulated in the approval letter.
Such extension has to be granted, as expeditiously as possible as and in any case not later than
one month from the receipt of the request under intimation to the General Manager, Reserve Bank
of India, CO Cell, New Delhi quoting the reference number of the original approval letter and the
UIN. Reserve Bank shall update the information on its website immediately.
ii. Further, entities engaged in construction and development sectors and Non-Banking Finance
Companies are permitted to open a liaison office for two years only. No further extension would be
considered for liaison offices of entities which are Non-Banking Finance Companies and those
engaged in construction and development sectors (excluding infrastructure development
companies). Upon expiry of the validity period, the offices shall have to either close down or be
converted into a Joint Venture / Wholly Owned Subsidiary in conformity with the extant Foreign
Direct Investment policy.
Registration with police authorities

Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of
opening BO/LO/PO in India shall have to register with the state police authorities. Copy of approval letter for
‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs,
Internal Security Division-I, Government of India, New Delhi for necessary action and record.
Application for additional offices and activities

i. Requests for establishing additional BOs / LOs may be submitted to the AD Category-I bank in a fresh
FNC form. However, the documents mentioned in form FNC need not be resubmitted, if there are no
changes to the documents already submitted earlier.
(a) If the number of offices exceeds 4 (i.e. one BO / LO in each zone viz; East, West, North and South),
the applicant has to justify the need for additional office/s and it shall require prior approval of RBI.
(b) The applicant may identify one of its offices in India as the Nodal Office, which will coordinate the
activities of all of its offices in India.
(c) Whenever the existing BO/LO is shifting to another city in India, prior approval from the AD
Category-I bank is required. However, no permission is required if the LO/BO is shifted to another
place in the same city subject to the condition that the new address is intimated to the designated
AD Category-I bank. Changes in the postal address may be intimated to the CO Cell, New Delhi by
the AD Category-I bank at the earliest.
ii. Requests for undertaking activities in addition to what has been permitted initially (Annex C) by Reserve
Bank of India/ AD Category-I bank may be submitted by the applicant to the Reserve Bank through the
designated AD Category -I bank justifying the need.
Extension of fund and non-fund based facilities

AD Category-I bank may based on their business prudence, Board approved policy and compliance to extant
rules/regulations stipulated by DBR, RBI extend fund/non-fund based facilities to BOs/POs only.
Remittance of profit/surplus
1. A certified copy of the audited 1. Submits an Auditors/ Chartered Accountants’

Balance Sheet and Profit and Loss Certificate to the effect that sufficient provisions
account for the relevant year ; and have been made to meet the liabilities in India
2. A Chartered Accountant’s including Income Tax etc;
certificate. 2. An undertaking from the PO that the
remittance will not, in any way, affect the
completion of the project in India and that any
shortfall of funds for meeting any liability in India
will be met by inward remittance from abroad
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i. BOs are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of
the following documents to the satisfaction of the AD Category-I bank through whom the remittance is
effected:
a. A certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year.
b. A Chartered Accountant’s certificate certifying
(i) the manner of arriving at the remittable profit;
(ii) that the entire remittable profit has been earned by undertaking the permitted activities; and
(iii) that the profit does not include any profit on revaluation of the assets of the branch.
ii. AD Category – I bank can permit intermittent remittances by POs pending winding up / completion of the
project provided they are satisfied with the bonafides of the transaction, subject to the following:
(a) The PO submits an Auditors’ / Chartered Accountants’ Certificate to the effect that sufficient
provisions have been made to meet the liabilities in India including Income Tax, etc.
(b) An undertaking from the PO that the remittance will not, in any way, affect the completion of the
project in India and that any shortfall of funds for meeting any liability in India will be met by inward
remittance from abroad.
1.
2.
Closure of BO/LO/PO
(i) Requests for closure of the BO / LO/ PO and allowing the remittance of winding up proceeds of BO / LO/
PO may be submitted to the designated AD Category - I bank by the BO/ LO/ PO or their nodal office, as the
case may be. The application for winding up may be submitted along with the following documents:
a. Copy of the Reserve Bank's/AD Category-I bank’s approval for establishing the BO/ LO/ PO.
b. Auditor's certificate:
(i) indicating the manner in which the remittable amount has been arrived at and supported by a
statement of assets and liabilities of the applicant and indicating the manner of disposal of
assets;
(ii) confirming that all liabilities in India including arrears of gratuity and other benefits to
employees, etc. of the office have been either fully met or adequately provided for; and
(iii) confirming that no income accruing from sources outside India (including proceeds of exports)
has remained unrepatriated to India.
c. Confirmation from the applicant/parent company that no legal proceedings in any Court in India are
pending against the BO / LO/ PO and there is no legal impediment to the remittance.
d. A report from the Registrar of Companies regarding compliance with the provisions of the
Companies Act, 2013, in case of winding up of the BO /LO in India, wherever applicable.
e. The designated AD Category - I banks has to ensure that the BO / LO/ PO had filed their respective
AACs.
f. Any other document/s, specified by Reserve Bank of India/AD Category-I bank while granting
approval.
(ii) Designated AD Category-I bank may allow remittance of winding up proceeds in respect of offices of
banks and insurance companies, after obtaining copies of permission of closure from the sectoral regulators
along with the documents mentioned above.
Transfer of assets of BO/LO/PO

Proposals for transfer of assets may be considered by the AD Category-I bank only from BOs/LOs/POs who
are adhering to the operational guidelines such as submission of AACs (up to the current financial year) at
regular annual intervals with copies endorsed to DGIT (International Taxation); have obtained PAN from IT
Authorities and have got registered with ROC under the Companies Act 2013, if necessary. Also,
(i) Transfer of assets by way of sale to the JV/WoS be allowed by AD Category-I bank only when the
non-resident entity intends to close their BO/LO/PO operations in India.
(ii) A certificate is to be submitted from the Statutory Auditor furnishing details of assets to be
transferred indicating their date of acquisition, original price, depreciation till date, present book
value or written down value (WDV) and sale consideration to be obtained. Statutory Auditor should
also confirm that the assets were not re-valued after their initial acquisition. The sale consideration
should not be more than the book value in each case.
(iii) The assets should have been acquired by the BO/LO/PO from inward remittances and no intangible
assets such as good will, pre-operative expenses should be included. No revenue expenses such
as lease hold improvements incurred by the BO/LO can be capitalised and transferred to JV/WOS.
(iv) AD Category-I bank must ensure payment of all applicable taxes while permitting transfer of assets.
(v) Credits to the bank accounts of BO/LO/PO on account of such transfer of assets will be treated as
permissible credits.
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(vi) Donation by BO/LO/PO of old furniture, vehicles, computers and other office items etc. to NGOs or
other not-for-profit organisations may be permitted by the AD category-I banks after satisfying itself
about the bonafide of the transaction.
Checklist for BO/LO/PO
1 Register with the A BO/LO/PO or any other place of business by whatever name
Registrar of Companies called is required to register with the Registrar of Companies (ROCs)
(ROC) once it establishes a place of business in India if such registration is
required under the Companies Act, 2013.
2 Application to an A person resident outside India desiring to establish a branch office

Authorised Dealer or a liaison office or a project office or any other place of business in
Category-I bank ( Form India shall submit an application in Form FNC to an Authorised
FNC) Dealer Category-I bank.
3 Profit Making Track A branch office or a liaison office or a project office need to meet the
Record profit making track record.
4 Permissible Activities A branch office or a liaison office or a project office shall undertake
or carry on permissible activities and shall not undertake or carry on
any other activity unless otherwise specifically permitted by the
Reserve Bank.
5 Obtain Permanent The BOs / LOs shall obtain Permanent Account Number (PAN) from
Account Number (PAN) the Income Tax Authorities on setting up of their office in India and
report the same in the AACs.
6 LO upgrade into a BO The existing PAN and bank accounts can be continued when an LO
is permitted to upgrade into a BO.
7 Transaction Each BO/ LO/PO are required to transact through one designated
AD Category-I bank only who shall be responsible for the due
diligence and KYC norms of the BO/LO/PO. BO /LO/PO, present in
multiple locations, are required to transact through their designated
AD.
8 Annual Activity The branch office/liaison office shall submit the Annual Activity
Certificate(AAC) Certificate as at the end of March 31 along with the audited financial
statements including receipt and payment account on or before
September 30 of that year.
9 BO/LO/PO change their BO/LO/PO can change their existing AD Category-I bank subject to
existing AD Category-I both the AD banks giving consent in writing for the transfer and the
bank transferring AD bank confirming submission of all AACs and absence
of any adverse features in conducting the account by the BO/LO/PO.
10 Acquisition of property by Acquisition of property by BO/PO shall be governed by the

BO/PO guidelines issued under Foreign Exchange Management (Acquisition
and transfer of immovable property outside India) Regulations.
11 Carry out permitted/ As per section 6 (3) (h) of the Foreign Exchange Management Act,
incidental activities from 1999, BOs/LOs/POs have general permission to carry out permitted/
leased property incidental activities from leased property subject to lease period not
exceeding five years.
12 Term Deposit Account AD Category-I bank can allow term deposit account for a period not
exceeding 6 months in favour of a BO/LO/PO of a person resident
outside India provided the bank is satisfied that the term deposit is
out of temporary surplus funds and the BO/LO/PO furnishes an
undertaking that the maturity proceeds of the term deposit will be
utilised for their business in India within 3 months of maturity.
However, such facility may not be extended to shipping/airline
companies.
13 The foreign entities who In case a BO/LO has been established and continues to exist without
may have established LO approval of the Reserve Bank, such BO/LO may approach their AD
or BO in the pre-FEMA Category-I bank to regularise their offices under FEMA 1999, even if
period permission of Reserve Bank was not required as per the regulations
existing at the time of setting up of the office. Such cases may be
brought to the notice of Reserve Bank immediately for allotment of
UIN. The foreign entities who may have established LO or BO with
the permission from the Government of India in the pre-FEMA period
shall also approach their AD Category–I bank with a copy of the said
approval for allotment of a UIN by the Reserve Bank.
14 Change in the name of Change in the name of the existing LO/BO may be permitted by the
the existing LO/BO AD Category-I bank only if the non-resident entity changes its name
without change in ownership and if the application to this effect is
received with the Board resolution for change of name and
documents/certificate from ROC India showing change of name. The
change in name of the BO/LO should be reported to FED, CO Cell,
New Delhi. Where change in name is requested on account of
acquisitions or mergers of foreign entities involving change in
ownership, the acquired entity or new entity is required to apply
afresh by closing the existing entity. Foreign entities should note that
the approvals are given by the Reserve Bank/AD Category-I bank
after detailed scrutiny as per laid down guidelines and FDI policies
and hence the approvals given to one foreign entity is not
transferrable to another foreign entity.
15 Change in the Top Change in the Top Management or CEO/MD/CMD etc. of the BO/LO
Management does not require prior approval from the Reserve Bank/AD Category-
I bank. However, AD Category-I bank should be intimated about the
same.
16 Closure of the Branch Requests for closure of the branch office/liaison office may be
office/Liaison office submitted to the Authorised Dealer Category - I bank along with the
copy of the Reserve Bank's/Authorised Dealer Category-I bank’s
approval for establishing the office; Auditor's certificate; Confirmation
from the applicant/parent company that no legal proceedings in any
126 EP-EBCL
Court in India are pending against the office and there is no legal
impediment to the remittance; A report from the Registrar of
Companies regarding compliance with the provisions of the
Companies Act, 2013, in case of winding up of the branch
office/liaison in India and any other document/s specified by the
Reserve Bank/Authorised Dealer Category-I bank while granting
approval.
17 Remittance of winding up Remittance of winding up proceeds of branch or liaison office

proceeds established in India shall be governed by the guidelines issued under
Foreign Exchange Management (Remittance of Assets) Regulations
LESSON ROUND-UP
• Foreign Direct Investment means investment by non-resident entity/person resident outside India in the
capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations.
• A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which
are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only
under the Government route.
• A citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in
sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign
investment.
• Indian companies can issue capital against Foreign Direct Investment.

• Indian companies which are eligible to issue shares to person’s resident outside India under the FDI Policy
may be allowed to retain the share subscription amount in a Foreign Currency Account, with the prior
approval of RBI.
• FDI is permitted under the automatic route in Limited Liability Partnership (LLPs) operating in
sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked
performance conditions.
• FDI is allowed under the automatic route without prior approval either of the Government or the Reserve
Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government
of India from time to time.
• FDI in activities not covered under the automatic route requires prior approval of the Government.
Proposals for foreign investment under Government route, are considered by respective Administrative
Ministry/Department.
• If a person violates/contravenes any FDI Regulations, by way of breach/non-adherence/non-

compliance/contravention of any rule, regulation, notification, press note, press release, circular, direction
or order issued in exercise of the powers under FEMA or contravenes any conditions subject to which an
authorization is issued by the Government of India/ Reserve Bank of India, he shall, upon adjudication, be
liable to a penalty.
SELF-TEST QUESTIONS
evaluation)
1. Define Foreign Direct Investment.
2. List out the sectors/activities where Foreign Direct Investment is permitted.
3. List out the sectors/activities where Foreign Direct Investment is prohibited.
4. Discuss conditions of Foreign Direct Investment in E-Commerce activities.
5. Write short notes on: (i) Automatic Route (ii) Government Route.
128 EP-EBCL
Lesson 6
Overseas Direct Investments (ODI)
LESSON OUTLINE
LEARNING OBJECTIVES
Joint Ventures/Wholly Owned Subsidiaries abroad
• Introduction promote economic co-operation between India and
• Approval Route the host countries. They result in transfer of
technology and skills, sharing the results of
• Proposal for making Overseas Direct
Research & Development, access to global market,
Investment
promotion of brand image, generation of
• Overseas Direct Investment transactions employment and utilization of raw materials
require prior approval available in India and the host country,
• Financial commitment increased exports of plant and machinery and
goods and services from India, foreign exchange
• Permissible source of funding
earnings through dividend, royalty, technical know-
• Overseas investment by Trust how fee, etc. Since globalization of trade is a two-
• Overseas investment by Societies way process, integration of Indian economy with
rest of the world with all its attendant benefits
• Lesson Round Up is achieved through overseas investment.
students with the regulatory and procedural
aspect of investment in Joint Ventures (JV) and
Wholly Owned Subsidiaries (WOS), abroad.
Direct investment outside India means investment by way of contribution to the capital or subscription to the
Memorandum of Association of a foreign entity, signifying a long term interest (setting up a Joint Venture (JV) or
a Wholly Owned Subsidiary (WOS)) overseas and thus does not include portfolio investment.
130 EP-EBCL
INTRODUCTION
Overseas investments (or financial commitment) in Joint Ventures (JV) and Wholly Owned Subsidiaries
(WOS) have been recognised as important avenues for promoting global reach of Indian entrepreneurs. Joint
Ventures are perceived as a medium of economic and business co-operation between India and other
countries.
"Financial Commitment" means the amount of direct investment by way of contribution to equity, loan and
100 per cent of the amount of guarantees and 50 per cent of the performance guarantees issued by an
Indian Party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary.
Direct investment outside India means investments, either under the Automatic Route or the Approval Route,
by way of contribution to the capital or subscription to the Memorandum of a foreign entity or by way of
purchase of existing shares of a foreign entity either by market purchase or private placement or through
stock exchange, signifying a long-term interest in the foreign entity (JV or WOS).
A foreign entity is termed as JV of the Indian Party when there are other foreign promoters holding the stake
along with the Indian Party. In case of WOS entire capital is held by the one or more Indian Company.
It may be noted that the Indian party/ Resident Individual is required to route all transactions in respect of a
particular overseas JV/WOS only through one branch of an Authorized Dealer. This branch would be the
‘designated Authorised Dealer’ in respect of that JV/WOS and all transactions and communications relating
to the investment in that particular JV/WOS are to be reported only through this ‘designated’ branch of an
Authorized Dealer.
"Joint Venture (JV)"/ "Wholly Owned Subsidiary (WOS)" means a foreign entity formed, registered or
incorporated in accordance with the laws and regulations of the host country in which the Indian party makes
a direct investment.
Approval Route
The Government has adopted two way approach to the approval of direct investment, i.e. Automatic Route
and Approval Route.
Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for
making direct investments in a JV/WOS abroad. The Indian Party should approach an Authorized Dealer
Category – I bank with an application in Form ODI and the prescribed enclosures / documents for effecting
the remittances towards such investments. However, in case of investment in the financial services sector,
prior approval is required from the regulatory authority concerned, both in India and abroad.
Proposals not covered by the conditions under the automatic route require prior approval of the Reserve
Bank for which a specific application in Form ODI with the documents prescribed therein is required to be
made through Authorized Dealer Category – I banks.
Proposal for making Overseas Direct Investment (ODI) under approval route
The applicant should approach their designated Authorized Dealer (AD) with the proposal which is submitted
to Reserve Bank after due scrutiny and with the specific recommendations of the designated AD bank along
with supporting documents.
The designated Authorised Dealer, before forwarding the proposal is reuired to submit the Form ODI in the
on-line OID application under approval route and the transaction number generated by the application should
be mentioned in the letter. In case the proposal is approved, the AD bank should effect the remittance under
advice to Reserve Bank so that the Unique Identification Number (UIN) is allotted.
Lesson 6 Overseas Direct Investments (ODI) 131
For approval by Reserve Bank, following documents need to be submitted along with Section D and Section
E of From ODI - Part I by the designated Authorized Dealer:
(a) A letter from the designated Authorised Dealer’ of the Indian party in a sealed cover mentioning the
following details:
• Transaction number generated by the OID application.
• Brief details of the Indian entity.
• Brief details of the overseas entity.
• Background of the proposal, if any.
• Brief details of the transaction.
• Reason/s for seeking approval mentioning the extant FEMA provisions.
• Observations of the designated AD bank with respect to the following:
• Prima facie viability of the JV/ WOS outside India;
• Contribution to external trade and other benefits which will accrue to India through such
investment;
• Financial position and business track record of the Indian Party (IP) and the foreign entity;
• Expertise and experience of the IP in the same or related line of activity of the JV/ WOS outside
India.
• Recommendations of the designated AD bank.
(b) A letter from the IP addressed to the designated AD bank.
(c) Board resolution for the proposed transaction/s.
(d) Diagrammatic representation of the organisational structure indicating all the subsidiaries of the IP
horizontally and vertically with their stake (direct & indirect) and status (whether operating company
or SPV).
(e) Incorporation certificate and the valuation certificate for the overseas entity (if applicable).
(f) Other relevant documents properly numbered, indexed and flagged.
It may be noted that the Indian party/ Resident Individual is required to route all transactions in respect of a
particular overseas JV/WOS only through one branch of an Authorized Dealer. This branch would be the
‘designated Authorised Dealer’ in respect of that JV/WOS and all transactions and communications relating
to the investment in that particular JV/WOS are to be reported only through this ‘designated’ branch of an
Authorized Dealer.
ODI transactions that require RBI approval
Some of the proposals which require prior approval are:
(i) Overseas Investments in the energy and natural resources sector exceeding the prescribed limit of
net worth of Indian companies as on the date of the last audited balance sheet;
(ii) Investments in Overseas Unincorporated entities in the oil sector by resident corporates exceeding
the prescribed limit of their net worth as on the date of last audited balance sheet, provided the
proposal has been approved by the competent authority and is duly supported by a certified copy of
Board Resolution approving such investment. However, Navaratna Public Sector Undertakings,
ONGC Videsh Ltd and Oil India Ltd are allowed to invest in overseas unincorporated / incorporated
entities in oil sector (i.e. for exploration and drilling for oil and natural gas, etc.), which are duly
approved by the Government of India, without any limits, under the automatic route;
132 EP-EBCL
(iii) Overseas Investments by proprietorship concerns and unregistered partnership firms satisfying
certain eligibility criteria;
(iv) Investments by Registered Trusts / Societies (satisfying certain eligibility criteria) engaged in the
manufacturing / educational / hospital sector in the same sector in a JV / WOS outside India;
(v) Corporate guarantee by the Indian Party to second and subsequent level of Step Down Subsidiary
(SDS);
(vi) All other forms of guarantees which are offered by the Indian Party to its first and subsequent level
of SDS;
(vii) Restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables in the
books of listed/ unlisted Indian Company satisfying certain eligibility;
(viii) Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization
to require prior approval of the Reserve Bank; and
(ix) Proposals from the Indian party for undertaking financial commitment without equity contribution in
JV / WOS may be considered by the Reserve Bank under the approval route based on the business
requirement of Indian Party and legal requirement of host country in which JV/WOS is located.
Financial Commitment
Financial commitment is the amount of direct investments outside India by an Indian Party -
As loans to its JV/

WOS abroad
Eligibility to make Overseas Direct Investment under the Automatic Route

An Indian Party is eligible to make overseas direct investment under the Automatic Route.
An Indian Party is a company incorporated in India or a body created under an Act of Parliament or a
partnership firm registered under the Indian Partnership Act 1932 or a Limited Liability Partnership (LLP)
incorporated under the Limited Liability Partnership Act, 2008 and any other entity in India as may be notified
by the Reserve Bank. When more than one such company, body or entity makes investment in the foreign
JV / WOS, such combination will also form an “Indian Party”.
Permissible Sources for Funding Overseas Direct Investment

Funding for overseas direct investment can be made by one or more of the following sources:
__________________________________________________________________
Drawal of foreign exchange from an AD bank in India
__________________________________________________________________
Swap of shares (refers to the acquisition of the shares of an overseas JV/WOS by
way of exchange of the shares of the Indian party).
__________________________________________________________________
Capitalization of exports and other dues and entitlements
__________________________________________________________________
Proceeds of External Commercial Borrowings/Foreign Currency Convertible
Bonds.
__________________________________________________________________
In exchange of ADRs/GDRs issued in accordance with the Scheme for issue of
Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1993 and the guidelines issued by Government of
India in the matter.
__________________________________________________________________
Balance held in Exchange Earners Foreign Currency account of te Indian Party
maintained with an Authorized Dealer
__________________________________________________________________
Proceeds of foreign currency funds raised through ADR/GDR issues
Indian company making investment in a JV/WOS abroad in the financial services sector
Only an Indian company engaged in financial services sector activities can make investment in a JV/WOS
abroad in the financial services sector, provided it fulfills the following additional conditions:
i. has earned net profit during the preceding three financial years from the financial services activities;
ii. is registered with the appropriate regulatory authority in India for conducting financial services
activities;
iii. has obtained approval for undertaking such activities from the concerned regulatory authorities both
in India and abroad before venturing into such financial activity;
iv. has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned
regulatory authority in India;
134 EP-EBCL
Overseas investments by proprietorship concerns and registered Trust/ Society

Proprietorship Concerns
The proposal for overseas direct investment (or financial commitment), by a proprietorship concern /
unregistered partnership firm in India are to be considered by the Reserve Bank under the approval route are
subject to following terms and conditions:
(a) The proprietorship concern / unregistered partnership firm in India is classified as ‘Status Holder’ as
per the Foreign Trade Policy issued by the Ministry of Commerce and Industry, Government of India
from time to time;
(b) The proprietorship concern / unregistered partnership firm in India has a proven track record, i.e.,
the export outstanding does not exceed 10% of the average export realisation of preceding three
years and a consistently high export performance;
(c) The Authorised Dealer bank is satisfied that the proprietorship concern / unregistered partnership
firm in India is KYC (Know Your Customer) compliant, engaged in the proposed business and has
turnover as indicated;
(d) The proprietorship concern / unregistered partnership firm in India has not come under the adverse
notice of any Government agency like the Directorate of Enforcement, Central Bureau of
Investigation, Income Tax Department, etc. and does not appear in the exporters' caution list of the
Reserve Bank or in the list of defaulters to the banking system in India; and
(e) The amount of proposed investment (or financial commitment) outside India does not exceed 10 per
cent of the average of last three years’ export realisation or 200 per cent of the net owned funds of
the proprietorship concern/ unregistered partnership firm in India, whichever is lower.
Registered Trusts and Societies

Registered Trusts and Societies engaged in manufacturing/ educational/ hospital sector are allowed to make
investment (or financial commitment) in the same sector(s) in a JV/WOS outside India, with the prior
approval of the Reserve Bank.
Eligibility Criteria for Trust

(i) The Trust should be registered under the Indian Trust Act, 1882;
(ii) The Trust deed permits the proposed investment overseas;
(iii) The proposed investment should be approved by the trustee/s;
(iv) The AD Category – I bank is satisfied that the Trust is KYC (Know Your Customer) compliant and is
engaged in a bonafide activity;
(v) The Trust has been in existence at least for a period of three years;
(vi) The Trust has not come under the adverse notice of any Regulatory / Enforcement agency like the
Directorate of Enforcement, Central Bureau of Investigation (CBI), etc.
Eligibility Criteria for Society

(i) The Society should be registered under the Societies Registration Act, 1860.
(ii) The Memorandum of Association and rules and regulations permit the Society to make the
proposed investment which should also be approved by the governing body/council or a managing/
executive committee.
(iii) The AD Category - I bank is satisfied that the Society is KYC (Know Your Customer) compliant and
is engaged in a bonafide activity;
(iv) The Society has been in existence at least for a period of three years;
(v) The Society has not come under the adverse notice of any Regulatory / Enforcement agency like
the Directorate of Enforcement, CBI etc.
In addition to registration, the AD Category – I bank should ensure that the special license / permission has
been obtained by the applicant in case the activities require special license / permission either from the
Ministry of Home Affairs, Government of India or from the relevant local authority, as the case may be.
An application in form ODI may be made to the Chief General Manager, Reserve Bank of India, Foreign
Exchange Department, Overseas Investment Division, through the AD Category - I bank. AD Category - I
banks may forward the application to the Reserve Bank, after ensuring the above terms and conditions along
with their comments and recommendations, for consideration.
Acquisition/Sale of Foreign Securities by Resident Individual in India

Resident individuals can acquire/sell foreign securities without prior approval in the following cases:─
i. As a gift from a person resident outside India;
ii. By way of ESOPs issued by a company incorporated outside India under Cashless Employees
Stock Option Scheme which does not involve any remittance from India;
iii. By way of ESOPs issued to an employee or a director of Indian office or branch of a foreign
company or of a subsidiary in India of a foreign company or of an Indian company irrespective of the
percentage of the direct or indirect equity stake in the Indian company;
iv. As inheritance from a person whether resident in or outside India;
v. By purchase of foreign securities out of funds held in the Resident Foreign Currency Account
maintained in accordance with the Foreign Exchange Management (Foreign Currency Account)
Regulations, 2000; and
vi. By way of bonus/rights shares on the foreign securities already held by them.
Resident individual acquiring shares of a foreign company in the capacity as Director

Reserve Bank has given general permission to a resident individual to acquire foreign securities to the extent
of the minimum number of qualification shares required to be held for holding the post of Director.
Accordingly, resident individuals are permitted to remit funds under general permission for acquiring
qualification shares for holding the post of a Director in the overseas company to the extent prescribed as
per the law of the host country where the company is located and the limit of remittance for acquiring such
qualification shares shall be within the overall ceiling prescribed for the resident individuals under the
Liberalized Remittance Scheme (LRS) in force at the time of acquisition.
Indian Mutual Funds for investment abroad

Indian Mutual Funds registered with SEBI are permitted to invest within the overall cap of USD 7 billion in:
a. ADRs / GDRs of the Indian and foreign companies;
136 EP-EBCL
b. Equity of overseas companies listed on recognized overseas stock exchanges; initial and follow on
public offerings for listing at recognized overseas stock exchanges;
c. Foreign debt securities- short term as well as long term with rating not below investment grade - in
the countries with fully convertible currencies;
d. Money market investments not below investment grade; repos where the counter party is not below
investment grade;
e. Government securities where countries are not rated below investment grade;
f. Derivatives traded on recognized stock exchanges overseas only for hedging and portfolio
balancing with underlying as securities;
g. Short term deposits with banks overseas where the issuer is rated not below investment grade; and
h. Units / securities issued by overseas Mutual Funds or Unit Trusts registered with overseas
regulators.
Obligations of Indian party which has made direct investment outside India
An Indian Party which has made direct investment outside India is required to comply with the following:-
(i) Receive share certificates or any other documentary evidence of investment in the foreign JV /
WOS as an evidence of investment and submit the same to the designated AD within 6 months;
(ii) Repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical
fees etc.;
(iii) Submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual
Performance Report in Part III of Form ODI in respect of each JV or WOS outside India set up or
acquired by the Indian party..
(iv) Report the details of the decisions taken by a JV/WOS regarding diversification of its activities
/setting up of step down subsidiaries/alteration in its share holding pattern within 30 days of the
approval of those decisions by the competent authority concerned of such JV/WOS in terms of the
local laws of the host country. These are also to be included in the relevant Annual Performance
Report; and
(v) In case of disinvestment, sale proceeds of shares/securities are to be repatriated to India
immediately on receipt thereof and in any case not later than 90 days from the date of sale of the
shares /securities and documentary evidence to this effect is to be submitted to the Reserve Bank
through the designated Authorised Dealer.
(vi) Submit an Annual Performance Report (APR) in Form ODI Part III to the Reserve Bank by 30th of
June every year in respect of each Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside
India set up or acquired by the Indian Party/Resident Individual .
LESSON ROUND-UP
• Overseas investments (or financial commitment) in Joint Ventures (JV) and Wholly Owned Subsidiaries
(WOS) have been recognised as important avenues for promoting global business by Indian entrepreneurs.
• "Financial Commitment" means the amount of direct investment by way of contribution to equity, loan and
100 per cent of the amount of guarantees and 50 per cent of the performance guarantees issued by an
Indian Party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary.
• Indian party/ Resident Individual is required to route all transactions in respect of a particular overseas
JV/WOS only through one branch of an Authorized Dealer. This branch would be the ‘designated
Authorised Dealer’ in respect of that JV/WOS and all transactions and communications relating to the
investment in that particular JV/WOS are to be reported only through this ‘designated’ branch of an
Authorized Dealer.
• An Indian Party is a company incorporated in India or a body created under an Act of Parliament or a
partnership firm registered under the Indian Partnership Act 1932 or a Limited Liability Partnership (LLP)
incorporated under the LLP Act, 2008 and any other entity in India as may be notified by the Reserve Bank.
When more than one such company, body or entity makes investment in the foreign JV / WOS, such
combination will also form an “Indian Party”.
• An Indian Party receive share certificates or any other documentary evidence of investment in the foreign
JV / WOS as an evidence of investment and submit the same to the designated AD within 6 months and
repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.
SELF-TEST QUESTIONS
evaluation)
1. What is direct investment outside India?
2. What is financial commitment under Overseas Direct Investment?
3. State Permissible source of funding under Overseas Direct Investment.
4. Discuss the eligibility criteria for overseas investment by Trust.
5. Discuss the eligibility criteria for overseas investment by Society.
138 EP-EBCL
Lesson 7
Liberalized Remittance Scheme (LRS)
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning objectives In terms of Section 5 of the FEMA, persons resident
• Introduction in India are free to buy or sell foreign exchange for
any current account transaction except for those
• permissible capital account transactions
transactions for which drawal of foreign exchange
• permissible current account transactions has been prohibited by Central Government.
• Documentation by the remitter As liberalization measure to facilitate resident
• Prohibited Transactions individuals to remit funds abroad for permitted
current or capital account transactions or
• Lesson Round Up
combination of both, Reserve Bank of India issues
• Self-Test Questions Liberalised Remittance Scheme.

students regulatory framework and procedure
relating to remittance of funds abroad under
Liberalized Remittance Scheme.
The Liberalized Remittance Scheme was introduced on February 4, 2004. The Liberalized Remittance Scheme has
been revised in stages consistent with prevailing macro and micro economic conditions.
140 EP-EBCL
INTRODUCTION
The Reserve Bank of India as part of its liberalization measure to facilitate resident individuals to remit funds
abroad for permitted current or capital account transactions or combination of both issues Liberalised
Remittance Scheme.
Liberalised Remittance Scheme permits the Authorised Dealers to freely allow remittances by resident
individuals up to USD 2,50,000 per Financial Year (April-March) for any permitted current or capital account
transaction or a combination of both. The Scheme is available to all resident individuals including minors. In
case of remitter being a minor, the Form A2 must be countersigned by the minor’s natural guardian. The
Scheme is not available to corporates, partnership firms, HUF, Trusts etc.
The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions.
During the period from February 4, 2004 till date, the LRS limit has been revised as under:
(Amount in USD)
Feb 4, Dec 20, May 8, Sep 26, Aug 14, Jun 3, May 26,
2004 2006 2007 2007 2013 2014 2015
LRS limit 25,000 50,000 1,00,000 2,00,000 75,000 1,25,000 2,50,000
(USD)
Remittances under the Scheme can be consolidated in respect of family members subject to individual family
members complying with its terms and conditions. However, clubbing is not permitted by other family
members for capital account transactions such as opening a bank account/investment/purchase of property,
if they are not the co-owners/co-partners of the overseas bank account/ investment/property. Further, a
resident cannot gift to another resident, in foreign currency, for the credit of the latter’s foreign currency
account held abroad under LRS.
All other transactions which are otherwise not permissible under FEMA and those in the nature of remittance
for margins or margin calls to overseas exchanges/ overseas counterparty are not allowed under the
Scheme.
Permissible capital account transactions by an individual under LRS
The permissible capital account transactions by an individual under LRS are:
Setting up Wholly Owned Subsidiaries and Joint Ventures outside India for bonafide
business subject to the stipulated terms & conditions
Extending loans including loans in Indian Rupees to Non-Resident Indians (NRIs) who
are relatives as defined in Companies Act, 1956.
Lesson 7 Liberalized Remittance Scheme (LRS) 141
Permissible Current Account Transactions by an individual under LRS

The limit of USD 2,50,000 per Financial Year (FY) under the Scheme also includes/subsumes
remittances for current account transactions such as:
Private visit
Gift/Donation
Going abroad on employment
Emigration
Maintenance of closed relatives
abroad
Business trip
Medical treatment abroad
Studies abroad
It may be noted that release of foreign exchange in excess of USD 2, 50,000, requires prior permission from
the Reserve Bank of India.
a. Private visits
For private visits abroad, other than visit to Nepal and Bhutan, resident individual can obtain foreign
exchange up to an aggregate amount of USD 2,50,000, from an Authorised Dealer, in any one financial year,
irrespective of the number of visits undertaken during the year.
Further, all tour related expenses including cost of rail/road/water transportation; cost of Euro Rail;
passes/tickets, etc. outside India; and overseas hotel/lodging expenses are to be subsumed under the LRS
limit. The tour operator can collect this amount either in Indian rupees or in foreign currency from the resident
traveller.
b. Gift/donation
Any resident individual may remit up-to USD 2,50,000 in one Financial Year as gift to a person residing
outside India or as donation to an organization outside India.
c. Going abroad on employment
A person going abroad for employment can draw foreign exchange up to USD 2,50,000 per Financial Year
from any Authorised Dealer in India.
d. Emigration
A person wanting to emigrate can draw foreign exchange from AD Category I bank and AD Category II up to
the amount prescribed by the country of emigration or USD 250,000. Remittance of any amount of foreign
142 EP-EBCL
exchange outside India in excess of this limit may be allowed only towards meeting incidental expenses in
the country of immigration and not for earning points or credits to become eligible for immigration by way of
overseas investments in government bonds; land; commercial enterprise; etc.
e. Maintenance of close relatives abroad
A resident individual can remit up-to USD 2,50,000 per Financial Year towards maintenance of close
relatives.
f. Business trip
Visits by individuals in connection with attending of an international conference, seminar, specialised training,
apprentice training, etc., are treated as business visits. For business trips to foreign countries, resident
individuals can avail of foreign exchange up to USD 2,50,000 in a Financial Year irrespective of the number
of visits undertaken during the year.
However, if an employee is being deputed by an entity for any of the above and the expenses are borne by
the latter, such expenses are to be treated as residual current account transactions outside LRS and may be
permitted by the AD without any limit, subject to verifying the bonafides of the transaction.
g. Medical treatment abroad
Authorised Dealers may release foreign exchange up to an amount of USD 2,50,000 or its equivalent per
Financial Year without insisting on any estimate from a hospital/doctor. For amount exceeding the above
limit, Authorised Dealers may release foreign exchange under general permission based on the estimate
from the doctor in India or hospital/ doctor abroad. A person who has fallen sick after proceeding abroad may
also be released foreign exchange by an Authorised Dealer (without seeking prior approval of the Reserve
Bank of India) for medical treatment outside India.
In addition to the above, an amount up to USD 250,000 per financial year is allowed to a person for
accompanying as attendant to a patient going abroad for medical treatment/check-up.
h. Facilities available to students for pursuing their studies abroad
AD Category I banks and AD Category II, may release foreign exchange up to USD 2,50,000 or its
equivalent to resident individuals for studies abroad without insisting on any estimate from the foreign
University. However, AD Category I bank and AD Category II may allow remittances (without seeking prior
approval of the Reserve Bank of India) exceeding USD 2,50,000 based on the estimate received from the
institution abroad.
Documentation by the remitter

The resident individual is required to compulsorily designate a branch of an AD through which all the
remittances under the Scheme will be made.The resident individual seeking to make the remittance
should furnish Form A2 for purchase of foreign exchange under LRS.
It is mandatory to have PAN card to make remittances under the Scheme for capital account
transactions. However, PAN card need not be insisted upon for remittances made towards permissible
current account transactions up to USD 25,000.
Investor, who has remitted funds under LRS can retain, reinvest the income earned on the investments.
At present, the resident individual is not required to repatriate the funds or income generated out of
investments made under the Scheme. However, a resident individual who has made overseas direct
investment in the equity shares; compulsorily convertible preference shares of a JV/WoS outside India or
ESOPs, within the LRS limit, is required to comply with the terms and conditions prescribed by the
overseas investment guidelines under Foreign Exchange Management (Transfer or Issue of any Foreign
Security) (Amendment) Regulations, 2013.
REMITTANCE FACILITIES TO PERSONS OTHER THAN INDIVIDUALS

Gift/donation
General permission has been granted to persons other than individuals to remit towards donations up-to one
per cent of their foreign exchange earnings during the previous three financial years or USD 5,000,000,
whichever is less, for creation of Chairs in reputed educational institutes,
(a) contribution to funds (not being an investment fund) promoted by educational institutes; and
(b) contribution to a technical institution or body or association in the field of activity of the donor
Company.
(c) Any additional remittance in excess of the same shall require prior approval of the Reserve Bank of
India.
Procedure for remittance:

Applications for remittances for purposes other than those specified above may be forwarded to the Reserve
Bank of India together with
(a) details of their foreign exchange earnings during the last 3 years,
(b) brief background of the company’s activities,
(c) purpose of the donation.
Commission to agents abroad for sale of residential flats or commercial plots in India
Remittances by persons other than individuals is subject to prior approval of the Reserve Bank of India if
commission per transaction to agents abroad for sale of residential flats or commercial plots in India exceeds
USD 25,000 or five percent of the inward remittance whichever is more.
Remittances towards consultancy services

Remittances by persons other than individuals is subject to prior approval of the Reserve Bank of India, if
remittance exceeds USD 10,000,000 per project for any consultancy services in respect of infrastructure
projects and USD 1,000,000 per project, for other consultancy services procured from outside India.
Remittances towards re-imbursement of pre-incorporation expenses

Remittances by persons other than individuals are subject to prior approval of the Reserve Bank of India if
remittance exceed five per cent of investment brought into India or USD 100,000 whichever is higher, by an
entity in India by way of reimbursement of pre-incorporation expenses.
Payment of fees in foreign currency - Embassy affiliated educational institutions

Authorised Dealers may sell foreign exchange towards payment of fees to schools/educational institutions
under the administrative control of foreign embassies.
Remittance towards payments of collected subscription to overseas TV media company

Authorised dealers may allow cable operators or collection agents in India of overseas TV media companies,
144 EP-EBCL
to remit subscription collected from subscribers in India/advertisement charges collected from the advertisers
who are eligible to advertise on overseas TV channels without any prior permission from the Reserve Bank.
Bids in foreign currency for projects to be executed in India

Persons resident in India are permitted to incur liability in foreign exchange and to make or to receive
payments in foreign exchange, in respect of global bids where the Central Government has authorised such
projects to be executed in India.
In such cases, authorised dealers may sell foreign exchange to the concerned resident Indian company
which has been awarded the contract.
Sale of overseas telephone cards

Authorised Dealers may allow agents in India of the overseas organisations issuing pre-paid telephone cards
to remit the sale proceeds of such cards, net of their commission, to the issuers of the telephone cards.
Liberalization of foreign technical collaboration agreements

AD Category-I banks may permit drawal of foreign exchange by persons for payment of royalty and lump-
sum payment under technical collaboration agreements without the approval of Ministry of Commerce and
Industry, Government of India.
Drawal of foreign exchange for remittance for purchase of trademark or franchise in India
AD Category-I banks may permit drawal of foreign exchange by person for purchase of trademark or
franchise in India without approval of the Reserve Bank.
Remittances for making tour arrangements by agents

Authorised Dealers may effect remittances at the request of agents in India who have tie-up
arrangements with hotels/ agents etc., abroad for providing hotel accommodation or making other tour
arrangements for travel from India, provided the Authorised Dealer is satisfied that the remittance is
being made out of the foreign exchange purchased by the traveller concerned from an Authorised
Person (including exchange drawn for private travel abroad) in accordance with the Rules, Regulations
and Direction in force.
Authorised Dealer may open foreign currency accounts in the name of agents in India who have tie up
arrangements with hotels/ agents, etc., abroad for providing hotel accommodation or making other tour
arrangements for travellers from India provided:-
(i) the credits to the account are by way of depositing:-
(a) collections made in foreign exchange from travellers; and
(b) refunds received from outside India on account of cancellation of bookings/tour arrangements
etc., and
(ii) the debits in foreign exchange are for making payments towards hotel accommodation, tour
arrangements etc., outside India.
Authorised Dealer may also allow tour operators to remit the cost of rail/ road/ water/transportation
charges outside India without any prior approval from Reserve Bank, net of commission/ mark up due to
the agent. The sale of passes/ ticket in India can be made either against the payment in Indian Rupees
or in foreign exchange released for visits abroad.
In respect of consolidated tours arranged by travel agents in India for foreign tourists visiting India and
neighbouring countries like Nepal, Bangladesh, Sri Lanka etc., against advance payments/
reimbursement through an Authorised Dealer, part of the foreign exchange received in India against
such consolidated tour arrangement, may require to be remitted from India to these neighbouring
countries for services rendered by travel agents and hoteliers in these countries. Authorised Dealer may
allow such remittances after verifying that the amount being remitted to the neighbouring countries
(inclusive of remittances, if any, already made against the tour) does not exceed the amount actually
remitted to India and the country of residence of the beneficiary is not Pakistan.
Prohibited Transactions
LESSON ROUND-UP
• As liberalization measure to facilitate resident individuals to remit funds abroad for permitted current or
capital account transactions or combination of both Reserve Bank of India issues Liberalised Remittance
Scheme.
• The Scheme is available to all resident individuals including minors.
• Remittances under the Scheme can be consolidated in respect of family members subject to individual
family members complying with its terms and conditions.
• For private visits abroad, other than to Nepal and Bhutan, any resident individual can obtain foreign
exchange up to an aggregate amount of USD 2,50,000, from an Authorised Dealer in any one financial
year, irrespective of the number of visits undertaken during the year.
• The individual will have to designate a branch of an AD through which all the remittances under the
Scheme will be made. The resident individual seeking to make the remittance should furnish Form A2 for
purchase of foreign exchange under LRS.
146 EP-EBCL
SELF-TEST QUESTIONS
evaluation)
1. Enumerate the Prohibited Transactions under Liberalized Remittance Scheme.
2. Discuss remittance facilities to persons other than individuals under Liberalized Remittance
Scheme.
3. State the Facilities available to students for pursuing their studies abroad under Liberalized
Remittance Scheme.
4. Discuss the permissible Current Account Transactions by an individual under Liberalized
Remittance Scheme.
5. Discuss the permissible capital account transactions by an individual under Liberalized Remittance
Scheme.
Lesson 8
External Commercial Borrowings (ECB)
LESSON OUTLINE
LEARNING OBJECTIVES
Transactions on account of External Commercial
• Introduction Borrowings (ECB) are governed by clause (d) of
• Available routes for raising ECB sub-section 3 of section 6 of the Foreign Exchange
Management Act, 1999 (FEMA). Various provisions
• Minimum Average Maturity Period
in respect of borrowings from overseas are included
• Eligible Borrowers in the Foreign Exchange Management (Borrowing
• Recognised Lenders/Investors or Lending in Foreign Exchange) Regulations,
Foreign Exchange Management (Transfer or Issue
• End-use prescriptions
of any Foreign Security) Regulations framed under
• Conversion of ECB into equity FEMA. Within the contours of the Regulations,
• Reporting Requirements Reserve Bank of India also issues directions to
Authorised Persons.
• Lesson Round Up
students with the regulatory framework and
procedural aspects regarding External Commercial
Borrowings.
The External Commercial Borrowings Framework enables permitted resident entities to borrow from recognized non-
resident entities.
148 EP-EBCL
Introduction
ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and
should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum
all-in-cost ceiling, etc. These parameters apply in totality and not on a standalone basis.
The framework for raising loans through ECB comprises the following three tracks:
Kinds of ECB
The ECB Framework enables permitted resident entities to borrow from recognized non-resident entities in
the following forms:
E.g. floating rate notes and

Loans fixed rate bonds, non-
including bank convertible, optionally
loans convertible or partially
convertible preference shares
Foreign / debentures
Currency Suppliers’
Exchangeable Credit
Bonds
(FCEBs)
Financial Lease Buyers’ Credit
Foreign
Currency Securitized
Convertible instruments
Bonds
(FCCBs)
Lesson 8 External Commercial Borrowings (ECB) 149
However, ECB framework is not applicable in respect of investment in Non-convertible Debentures (NCDs)
in India made by Registered Foreign Portfolio Investors (RFPIs)
Available routes for raising ECB

Under the ECB framework, ECBs can be raised either under the automatic route or under the approval route.
The cases are examined by

the Authorised Dealer
Category-I (AD Category-I)
banks.
The prospective borrowers are required to send

their requests to the RBI through their ADs for
examination.
Minimum Average Maturity Period

The minimum average maturities for the three tracks are set out as under:
Track I:
Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
3 years for ECB upto USD 50 million or its equivalent.
5 years for ECB beyond USD 50 million or its equivalent.
5 years for eligible borrowers under Companies in infrastructure sector, Non-Banking Financial
Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-
AFCs), Holding Companies and Core Investment Companies (CICs)., irrespective of the amount of
borrowing.
5 years for Foreign Currency Convertible Bonds (FCCBs)/ Foreign Currency Exchangeable Bonds
(FCEBs) irrespective of the amount of borrowing. The call and put option, if any, for FCCBs shall not be
exercisable prior to 5 years
Track II:
Long term foreign currency denominated ECB with minimum average maturity of 10 years.
Track III:
Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.
Eligible Borrowers
The list of entities eligible to raise ECB under the three tracks is set out below:
150 EP-EBCL
Track I:
Companies in manufacturing and software development sectors.
Shipping and airlines companies.
Small Industries Development Bank of India (SIDBI).
Units in Special Economic Zones (SEZs).
Export Import Bank of India (Exim Bank) (only under the approval route).
Companies in infrastructure sector, Non-Banking Financial Companies -Infrastructure Finance

Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and
Core Investment Companies (CICs).
Track II:
(i) All entities listed under Track I above.
(ii) Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) coming under
the regulatory framework of the Securities and Exchange Board of India (SEBI).
Track III:
(i) All entities listed under Track II above.
(ii) All Non-Banking Financial Companies (NBFCs) coming under the regulatory purview of the Reserve
Bank.
(iii) NBFCs-Micro Finance Institutions (NBFCs-MFIs), Not for Profit companies registered under the
Companies Act, 1956/2013, Societies, trusts and cooperatives (registered under the Societies
Registration Act, 1860, Indian Trust Act, 1882 and State-level Cooperative Acts/Multi-level
Cooperative Act/State-level mutually aided Cooperative Acts respectively), Non-Government
Organisations (NGOs) which are engaged in micro finance activities.
(iv) Companies engaged in miscellaneous services viz. research and development (R&D), training
(other than educational institutes), companies supporting infrastructure, companies providing
logistics services.
(v) Developers of Special Economic Zones (SEZs)/ National Manufacturing and Investment Zones
(NMIZs).
It may be noted that entities engaged in micro-finance activities to be eligible to raise ECB:
(i) should have a satisfactory borrowing relationship for at least three years with an AD Category I
bank in India, and
(ii) should have a certificate of due diligence on ‘fit and proper’ status from the AD Category I bank.
Recognised Lenders/Investors
The list of recognized lenders / investors are as follows:
(i) International banks.
(ii) International capital markets.
(iii) Multilateral financial institutions (such as, IFC, ADB, etc.) / regional financial institutions and
Government owned (either wholly or partially) financial institutions.
(iv) Export credit agencies.
(v) Suppliers of equipment.
(vi) Foreign equity holders.
(vii) Overseas long term investors such as:
(a) Prudentially regulated financial entities;
(b) Pension funds;
(c) Insurance companies;
(d) Sovereign Wealth Funds;
(e) Financial institutions located in International Financial Services Centres in India
(viii) Overseas branches / subsidiaries of Indian banks
Overseas branches / subsidiaries of Indian banks can be lenders only under Track I. Further, their
participation under track I is subject to the prudential norms issued by Department of Banking Regulation,
RBI. Indian banks are not permitted to participate in refinancing of existing ECBs.
Overseas Organizations proposing to lend ECB are required to furnish to the authorised dealer bank of the
borrower a certificate of due diligence from an overseas bank, which, in turn, is subject to regulation of host-
country and such host country adheres to the Financial Action Task Force (FATF) guidelines on Anti-Money
Laundering (AML)/ Combating the Financing of Terrorism (CFT).
The certificate of due diligence should comprise the following:

(i) The lender maintains an account with the bank at least for a period of two years,
(ii) The lending entity is organised as per the local laws and held in good esteem by the business/local
community, and
(iii) There is no criminal action pending against it.
Individual lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender
maintains an account with the bank for at least a period of two years. Other evidence /documents such as
audited statement of account and income tax return, which the overseas lender may furnish, need to be
certified and forwarded by the overseas bank. Individual lenders from countries which do not adhere to FATF
guidelines on Anti-Money Laundering (AML)/ Combating the Financing of Terrorism (CFT) are not eligible to
extend ECB.
Individual Limits of ECB

The individual limits refer to the amount of ECB that can be raised in a financial year under the automatic
route.
i. The individual limits of ECB that can be raised by eligible entities under the automatic route per
152 EP-EBCL
financial year for all the three tracks are set out as under:
(a) Up to USD 750 million or equivalent for the companies in infrastructure and manufacturing
sectors, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs),
NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment
Companies;
(b) Up to USD 200 million or equivalent for companies in software development sector;
(c) Up to USD 100 million or equivalent for entities engaged in micro finance activities; and
(d) Up to USD 500 million or equivalent for remaining entities.
ii. ECB proposals beyond aforesaid limits come under the approval route. For computation of
individual limits under Track III, exchange rate prevailing on the date of agreement is to be taken
into account.
iii. In case the ECB is raised from direct equity holder, aforesaid individual ECB limits will also subject
to ECB liability: equity ratio requirement. For ECB raised under the automatic route, the ECB liability
of the borrower (including all outstanding ECBs and the proposed one) towards the foreign equity
holder should not be more than four times of the equity contributed by the latter. For ECB raised
under the approval route, this ratio should not be more than 7:1. This ratio will not be applicable if
total of all ECBs raised by an entity is up to USD 5 million or equivalent.
It may be noted that for the purpose of ECB liability: equity ratio, the paid-up capital, free reserves (including
the share premium received in foreign currency) as per the latest audited balance sheet can be reckoned for
calculating the ‘equity’ of the foreign equity holder. Where there are more than one foreign equity holders in
the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s)
concerned shall only be considered for calculating the ratio.
End-use prescriptions
The end-use prescriptions for ECB raised under the three tracks are as under:
Track I:
(i) ECB proceeds can be utilised for capital expenditure in the form of:
(a) Import of capital goods including payment towards import of services, technical know-how and
license fees, provided the same are part of these capital goods;
(b) Local sourcing of capital goods;
(c) New project;
(d) Modernisation /expansion of existing units;
(e) Overseas direct investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS);
(f) Acquisition of shares of public sector undertakings at any stage of disinvestment under the
disinvestment programme of the Government of India;
(g) Refinancing of existing trade credit raised for import of capital goods;
(h) Payment of capital goods already shipped / imported but unpaid;
(i) Refinancing of existing ECB provided the residual maturity is not reduced.
(ii) SIDBI can raise ECB only for the purpose of on-lending to the borrowers in the Micro, Small and
Medium Enterprises (MSME sector), where MSME sector is as defined under the MSME
.
Development Act, 2006, as amended from time to time
(iii) Units of SEZs can raise ECB only for their own requirements.
(iv) Shipping and airlines companies can raise ECB only for import of vessels and aircrafts respectively.
(v) ECB proceeds can be used for general corporate purpose (including working capital) provided the
ECB is raised from the direct / indirect equity holder or from a group company for a minimum
average maturity of 5 years.
(vi) NBFC-Infrastructure Finance Compant and NBFCs-Asset Finance Company can raise ECB only for
financing infrastructure.
(vii) Holding Companies and Core Investment Company are to use ECB proceeds only for on-lending to
infrastructure Special Purpose Vehicles (SPVs).
.
(viii) ECBs for the following purposes are to be considered only under the approval route
(a) Import of second hand goods as per the Director General of Foreign Trade (DGFT) guidelines;
(b) On-lending by Exim Bank.
Track II:
The ECB proceeds can be used for all purposes excluding the following:
(i) Real estate activities
(ii) Investing in capital market
(iii) Using the proceeds for equity investment domestically;
(iv) On-lending to other entities with any of the above objectives;
(v) Purchase of land
Track III:
NBFCs can use ECB proceeds only for:
(i) On-lending for any activities, including infrastructure sector as permitted by the concerned
regulatory department of RBI;
(ii) providing hypothecated loans to domestic entities for acquisition of capital goods/equipment;
and
(iii) providing capital goods/equipment to domestic entities by way of lease and hire-purchases
2. Developers of SEZs/ NMIZs can raise ECB only for providing infrastructure facilities within SEZ/
NMIZ.
3. NBFCs-Micro Finance Institution (MFI), other eligible Micro Finance Institution (MFI), NGOs and not
for profit companies registered under the Companies Act, 1956/2013 can raise ECB only for on-
lending to self-help groups or for micro-credit or for bonafide micro finance activity including
capacity building.
4. For other eligible entities under track III, the ECB proceeds can be used for all purposes excluding
the following:
(i) Real estate activities
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(ii) Investing in capital market

(iii) Using the proceeds for equity investment domestically;
(iv) On-lending to other entities with any of the above objectives;
(v) Purchase of land
Conversion of ECB into equity

Conversion of ECBs, including those which are matured but unpaid, into equity is permitted subject to the
following conditions:
(i) The activity of the borrowing company is covered under the automatic route for Foreign Direct
Investment (FDI) or approval route wherever applicable, for foreign equity participation which has
been obtained as per the extant FDI policy;
(ii) The conversion, which should be with the lender’s consent and without any additional cost, will not
result in breach of applicable sector cap on the foreign equity holding;
(iii) Applicable pricing guidelines for shares are complied with;
(iv) Reporting requirements under ECB framework are complied with;
(v) If the borrower concerned has availed of other credit facilities from the Indian banking system,
including overseas branches/subsidiaries, the applicable prudential guidelines issued by the
Department of Banking Regulation of RBI, including guidelines on restructuring are complied
with; and
(vi) Consent of other lenders, if any, to the same borrower is available or atleast information regarding
conversions is exchanged with other lenders of the borrower.
Exchange rate for conversion of ECB dues into equity

For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between
the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with
the ECB lender.
It may be noted that the fair value of the equity shares to be issued is tol be worked out with reference to the
date of conversion only.
Procedure for raising ECB

The procedure for raising ECB under approval route requirs the borrowers to approach the RBI with an
application in prescribed format Form ECB for examination through their AD Category I bank. Such cases
are considered keeping in view the overall guidelines, macroeconomic situation and merits of the specific
proposals. ECB proposals received in the Reserve Bank above certain threshold limit (refixed from time to
time) are placed before the Empowered Committee set up by the Reserve Bank. The Reserve Bank takes a
final decision taking into account recommendation of the Empowered Committee.
Entities desirous to raise ECB under the automatic route may approach an AD Category I bank with their
proposal along with duly filled in Form 83.
Reporting Requirements
Borrowings under ECB Framework are subject to following reporting requirements:
1. Loan Registration Number (LRN): Any draw-down in respect of an ECB as well as payment of any fees /
charges for raising an ECB should happen only after obtaining the LRN from RBI. To obtain the LRN,
borrowers are required to submit duly certified Form 83, which also contains terms and conditions of the
ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one
copy to the Director, Balance of Payments Statistics Division, Department of Statistics and Information
Management (DSIM), Reserve Bank of India. Copies of loan agreement for raising ECB are not required to
be submitted to the Reserve Bank.
2. Changes in terms and conditions of ECB: Permitted changes in ECB parameters should be reported to the
DSIM by submitting revised Form 83 at the earliest, in any case not later than 7 days from the changes
effected. While submitting revised Form 83 the changes should be specifically mentioned in the
communication.
3. Reporting of actual transactions: The borrowers are required to report actual ECB transactions through
ECB 2 Return through the AD Category I bank on monthly basis so as to reach DSIM within seven working
days from the close of the month to which it relates. Changes, if any, in ECB parameters should also be
incorporated in ECB 2 Return.
4. Reporting on account of conversion of ECB into equity: In case of partial or full conversion of ECB into
equity, the reporting to the RBI will be as under:
(i) For partial conversion, the converted portion is to be reported to the concerned Regional Office of
the Foreign Exchange Department of RBI in Form FC-GPR prescribed for reporting of FDI flows,
while monthly reporting to DSIM in ECB 2 Return will be with suitable remarks "ECB partially
converted to equity".
(ii) For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in
ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of
ECB 2 Return is not required.
(iii) For conversion of ECB into equity in phases, reporting through ECB 2 Return will also be in phases.
LESSON ROUND-UP
• External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised
non-resident entities and should conform to parameters such as minimum maturity, permitted and non-
permitted end-uses, maximum all-in-cost ceiling, etc.
• External Commercial Borrowings Framework enables permitted resident entities to borrow from recognized
non-resident entities.
• ECBs can be raised either under the automatic route or under the approval route.
• The minimum average maturities for the three tracks.
• For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement
between the parties concerned for such conversion or any lesser rate can be applied with a mutual
agreement with the ECB lender.
• Under External Commercial Borrowings Framework, borrowers may approach the RBI with an application
in prescribed format Form ECB for examination through their AD Category I bank. Such cases shall be
considered keeping in view the overall guidelines, macroeconomic situation and merits of the specific
proposals.
• Borrowings under ECB Framework are subject to reporting requirements Loan Registration Number,
Changes in terms and conditions of ECB and Reporting of actual transactions.
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SELF-TEST QUESTIONS
evaluation)
1. What are the various types of ECB?
2. What precautions have to be taken before raising loan from overseas?
3. Whose responsibility is to ensure compliance with ECB guidelines?
4. Discuss the eligibility for raising ECB.
5. Enumerate the reporting requirements in respect of ECB.
Lesson 9
Foreign Trade Policy and Procedure
LESSON OUTLINE
LEARNING OBJECTIVES
India’s Foreign Trade Policy (FTP) has,
• Introduction conventionally, been formulated for five years at
• Focus of the Foreign Trade Policy a time and reviewed annually. The focus of the FTP
has been to provide a framework of rules and
• Legal Basis of Foreign Trade Policy procedures for exports and imports and a set of
• Transitional Arrangements incentives for promoting exports. The Foreign
Trade Policy for 2015-2020 seeks to provide a
• Importer-Exporter Code (IEC) number/e-
stable and sustainable policy environment for foreign
IEC
trade in merchandise and services.
• Merchandise Exports from India Scheme
There is a symbiotic relationship between the
(MEIS)
Foreign Trade Policy (FTP) and the Government’s
• Service Exports from India Scheme (SEIS) “Make in India” initiative. Foreign Trade Policy
2015-20 contemplates increasing export of goods
• Status Holder
and services as well as generation of employment
• Duty Exemption/Remission Schemes which support the “Make in India” initiative of the
• Duty Free Import Authorisation Scheme Government. Further, Online filing of documents/
applications, paperless trade in 24x7 environment
(DFIA)
and simplification of procedures/processes,
• Schemes for Exporters of Gems and digitization, e-governance initiatives under FTP
Jewellery definitely improve the ease of doing business in
• Export Promotion Capital Goods (EPCG) India.
Scheme
• Export Oriented Units (EOUs),

Electronics Hardware, Technology Parks
(EHTPs), Software Technology Parks,
(STPs) and Bio-Technology Parks (BTPs)
• Lesson Round Up
The Foreign Trade Policy 2015-20, is notified by Central Government, in exercise of powers conferred under Section 5
of the Foreign Trade (Development & Regulation) Act, 1992, as amended. The Foreign Trade Policy, 2015-20 came
into force with effect from 01.04.2015
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INTRODUCTION
India’s Foreign Trade Policy (FTP) has, conventionally, been formulated for five years at a time and reviewed
annually. The focus of the FTP has been to provide a framework of rules and procedures for exports and
imports and a set of incentives for promoting exports. The FTP for 2015-2020 seeks to achieve the following
objectives:
To provide a stable and sustainable policy environment for foreign trade in merchandise and services
To link rules, procedures and incentives for exports and imports with other initiatives such as “Make in
India”, “Digital India” and “Skills India” to create an “Export Promotion Mission” for India
To promote the diversification of India’s export basket by helping various sectors of the Indian economy
to gain global competitiveness with a view to promoting exports
To create an architecture for India’s global trade engagement with a view to expanding its markets and
better integrating with major regions, thereby increasing the demand for India’s products and
contributing to the government’s flagship “Make in India” initiative
To provide a mechanism for regular appraisal in order to rationalize imports and reduce the trade
imbalance
Exports should not merely be a function of marketable surplus but should also reflect an enhancement of
economic capacity and development. Foreign Trade Policy envisages:
Foreign Trade Policy envisages:-

Lesson 9 Foreign Trade Policy and Procedure 159
Focus of the Foreign Trade Policy (FTP)

The Foreign Trade Policy is primarily focused on accelerating exports. This is sought to be implemented
through various schemes intended to exempt and remit indirect taxes on inputs physically incorporated in the
export product, import capital goods at concessional duty, stimulate services exports and focus on specific
markets and products. The Policy attempts to dovetail these schemes with the specific market access
openings that India has achieved through negotiations with its trading partners for various bilateral and
regional trading arrangements.
Legal Basis of Foreign Trade Policy (FTP)
The Foreign Trade Policy 2015-20, is notified by Central Government, in exercise of powers conferred under
Section 5 of the Foreign Trade (Development & Regulation) Act, 1992, as amended. The Foreign Trade
Policy, 2015-20 came into force with effect from 01.04.2015
Amendment to Foreign Trade Policy (FTP)
Central Government, in exercise of powers conferred by Section 5 of FT (D&R) Act, 1992, as amended from
time to time, reserves the right to make any amendment to the FTP, by means of notification, in public
interest.
Duration of Foreign Trade Policy (FTP)
The Foreign Trade Policy (FTP), 2015-2020, incorporating provisions relating to export and import of goods
and services, shall come into force with effect from the date of notification and shall remain in force up to
31st March, 2020, unless otherwise specified. All exports and imports made upto the date of notification
shall, accordingly, be governed by the relevant FTP, unless otherwise specified.
Transitional Arrangements
Any License/Authorisation/Certificate/Scrip/any instrument bestowing financial or fiscal benefit issued before

commencement of FTP 2015-20 shall continue to be valid for the purpose and duration for which such
License/Authorisation/Certificate/Scrip/any instrument bestowing financial or fiscal benefit Authorisation was
issued, unless otherwise stipulated.
In case an export or import that is permitted freely under FTP is subsequently subjected to any restriction or
regulation, such export or import will ordinarily be permitted, notwithstanding such restriction or regulation,
unless otherwise stipulated. This is subject to the condition that the shipment of export or import is made
within the original validity period of an irrevocable commercial letter of credit, established before the date of
imposition of such restriction and it shall be restricted to the balance value and quantity available and time
period of such irrevocable letter of credit. For operationalising such irrevocable letter of credit, the applicant
shall have to register the Letter of Credit with jurisdictional Regional Authority (RA) against computerized
receipt, within 15 days of the imposition of any such restriction or regulation.
DEFINITIONS
For purpose of Foreign Trade Policy, unless context otherwise requires, the following words and expressions
shall have the following meanings attached to them:-
"Accessory" or "Attachment" means a part, sub-assembly or assembly that contributes to efficiency or

effectiveness of a piece of equipment without changing its basic functions.
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"Act" means Foreign Trade (Development and Regulation) Act, 1992 (No.22 of 1992) [FT (D&R) Act] as
amended from time to time.
“Actual User” is a person (either natural or legal) who is authorized to use imported goods in his/its own
premise which has a definitive postal address.
(a) "Actual User (Industrial)" is a person (either natural & legal) who utilizes imported goods for
manufacturing in his own industrial unit or manufacturing for his own use in another unit including a
jobbing unit which has a definitive postal address.
(b) "Actual User (Non-Industrial)" is a person (either natural & legal) who utilizes the imported goods for
his own use in:
(i) any commercial establishment, carrying on any business, trade or profession, which has a
definitive postal address; or
(ii) any laboratory, Scientific or Research and Development (R&D) institution, university or other
educational institution or hospital which has a definitive postal address; or
(iii) any service industry which has a definitive postal address.
"AEZ" means Agricultural Export Zones notified by Director General of Foreign Trade (DGFA) in Appendix
2V of Appendices and Aayat Niryat Forms of FTP 2015.
“Appeal” is an application filed under section 15 of the Act and includes such applications preferred by
DGFT officials in government interest against decision by designated adjudicating/appellate authorities.
"Applicant" means person on whose behalf an application is made and shall, wherever context so requires,
includes person signing the application.
“Authorization” means permission as included in Section 2 (g) of the Act to import or export as per
provisions of FTP.
"Capital Goods" means any plant, machinery, equipment or accessories required for manufacture or
production, either directly or indirectly, of goods or for rendering services, including those required for
replacement, modernisation, technological up-gradation or expansion. It includes packaging machinery and
equipment, refrigeration equipment, power generating sets, machine tools, equipment and instruments for
testing, research and development, quality and pollution control. Capital goods may be for use in
manufacturing, mining, agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture,
poultry, sericulture and viticulture as well as for use in services sector.
"Competent Authority" means an authority competent to exercise any power or to discharge any duty or
function under the Act or the Rules and Orders made there under or under FTP.
"Component" means one of the parts of a sub-assembly or assembly of which a manufactured product is
made up and into which it may be resolved. A component includes an accessory or attachment to another
component.
"Consumables" means any item, which participates in or is required for a manufacturing process, but does
not necessarily form part of end-product. Items, which are substantially or totally consumed during a
manufacturing process, will be deemed to be consumables.
"Consumer Goods" means any consumption goods, which can directly satisfy human needs without further
processing and includes consumer durables and accessories thereof.
"Counter Trade" means any arrangement under which exports/imports from /to India are balanced either by
direct imports/exports from importing/exporting country or through a third country under a Trade Agreement
or otherwise. Exports/ Imports under Counter Trade may be carried out through Escrow Account, Buy Back
arrangements, Barter trade or any similar arrangement. Balancing of exports and imports could wholly or
partly be in cash, goods and/or services.
"Developer" means a person or body of persons, company, firm and such other private or government
undertaking, who develops, builds, designs, organises, promotes, finances, operates, maintains or manages
a part or whole of infrastructure and other facilities in SEZ as approved by Central Government and also
includes a co- developer.
"Development Commissioner" means Development Commissioner of Special Economic Zone (SEZ).
"Domestic Tariff Area (DTA)" means area within India which is outside SEZs and Export Oriented
Undertaking (EOU)/Electronic Hardware Technology Park (EHTP)/Software Technology Park (STP)
Biotechnology Park (BTP).
"Drawback on deemed export” in relation to any goods manufactured in India and supplied as deemed
exports, means the rebate of duty or tax, as the case may be, chargeable on any imported materials or
excisable materials used or taxable services used as input services in the manufacture of such goods.
"EOU" means Export Oriented Unit for which a letter of permit has been issued by Development
Commissioner.
"Excisable goods" means any goods produced or manufactured in India and subject to duty of excise
under Central Excise and Salt Act 1944 (1 of 1944).
“Export” is as defined in FT (D&R) Act, 1992, as amended from time to time.
"Exporter" means a person who exports or intends to export and holds an IEC number, unless otherwise
specifically exempted.
"Export Obligation" means obligation to export product or products covered by Authorisation or permission
in terms of quantity, value or both, as may be prescribed or specified by Regional or competent authority.
“Free” as appearing in context of import/export policy for items means goods which do not need any
‘Authorisation’/ License or permission for being imported into the country or exported out.
“FTP” means the Foreign Trade Policy which specifies policy for exports and imports under Section 5 of the
Act.
“Import” is as defined in FT (D&R) Act, 1992 as amended from time to time.
"Importer" means a person who imports or intends to import and holds an Import Export Number (IEC)
number, unless otherwise specifically exempted.
ITC (HS) refers to Indian Trade Classification (Harmonized System) at 8 digits.
"Jobbing" means processing or working upon of raw materials or semi-finished goods supplied to job
worker, so as to complete a part of process resulting in manufacture or finishing of an article or any operation
which is essential for aforesaid process.
"Licensing Year" means period beginning on the 1st April of a year and ending on the 31st March of the
following year.
162 EP-EBCL
"Managed Hotel" means hotels managed by a three star or above hotel/ hotel chain under an operating
management contract for a duration of at least three years between operating hotel/ hotel chain and hotel
being managed. Management contract must necessarily cover the entire gamut of operations/ management
of managed hotel.
"Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by
machine, a new product having a distinctive name, character or use and shall include processes such as
refrigeration, re-packing, polishing, labelling, Re-conditioning repair, remaking, refurbishing, testing,
calibration, re-engineering.
Manufacture, for the purpose of FTP, shall also include agriculture, aquaculture, animal husbandry,
floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining.
"Manufacturer Exporter" means a person who exports goods manufactured by him or intends to export
such goods.
“Merchant Exporter” means a person engaged in trading activity and exporting or intending to export
goods.
“NC” means the Norms Committee in the Directorate General of Foreign Trade for approval of adhoc input –
output norms in cases where SION does not exist and recommend SION to be notified in DGFT.
"Notification" means a notification published in Official Gazette.
"Order" means an Order made by Central Government under the Act.
"Part" means an element of a sub-assembly or assembly not normally useful by itself, and not amenable to
further disassembly for maintenance purposes. A part may be a component, spare or an accessory.
"Person" means both natural and legal and includes an individual, firm, society, company, corporation or
any other legal person including the DGFT officials.
"Policy" means Foreign Trade Policy (2015-2020) as amended from time to time.
"Prescribed" means prescribed under the Act or the Rules or Orders made there under or under FTP.
“Prohibited” indicates the import/export policy of an item, as appearing in ITC (HS) or elsewhere, whose
import or export is not permitted.
"Public Notice" means a notice published under provisions of paragraph 2.04 of FTP.
“Quota” means the quantity of goods of a specific kind that is permitted to be imported without restriction or
imposition of additional Duties.
"Raw material" means input(s) needed for manufacturing of goods. These inputs may either be in a
raw/natural/ unrefined/ unmanufactured or manufactured state.
"Regional Authority" means authority competent to grant an Authorisation under the Act/Order.
"Registration-Cum-Membership Certificate" (RCMC) means certificate of registration and membership

granted by an Export Promotion Council/Commodity Board/Development Authority or other competent
authority as prescribed in FTP or Handbook of Procedures.
“Restricted” is a term indicating the import or export policy of an item, which can be imported into the
country or exported outside, only after obtaining an authorization from the offices of DGFT.
"Rules" means Rules made by Central Government under Section 19 of the FT (D&R) Act.
“SCOMET” is the nomenclature for dual use items of Special Chemicals, Organisms, Materials, Equipment
and Technologies (SCOMET). Export of dual-use items and technologies under India’s Foreign Trade Policy
is regulated. It is either prohibited or is permitted under an authorization.
"Services" include all tradable services covered under General Agreement on Trade in Services (GATS)
and earning free foreign exchange. "Service Provider" means a person providing:
(i) Supply of a ‘service’ from India to any other country; (Mode1- Cross border trade)
(ii) Supply of a ‘service’ from India to service consumer(s) of any other country; (Mode 2-Consumption
abroad)
(iii) Supply of a ‘service’ from India through commercial presence in any other country. (Mode 3 –
Commercial Presence.)
(iv) Supply of a ‘service’ from India through the presence of natural persons in any other country (Mode
4- Presence of natural persons.)
"Ships" mean all types of vessels used for sea borne trade or coastal trade, and shall include second hand
vessels.
"SION" means Standard Input Output Norms notified by DGFT.
"Spares” means a part or a sub-assembly or assembly for substitution that is ready to replace an identical or
similar part or sub- assembly or assembly. Spares include a component or an accessory.
"Specified" means specified by or under the provisions of this Policy through Notification/Public Notice.
"Status holder" means an exporter recognized as One Star Export House/ Two Star Export House/Three
Star Export House/Four Star Export House/ Five Star Export House by DGFT/ Development Commissioner.
“Stores” means goods for use in a vessel or aircraft and includes fuel and spares and other articles of
equipment, whether or not for immediate fitting.
(a) "Supporting Manufacturer" is one who manufactures goods/products or any

part/accessories/components of a good/product for a merchant exporter or a manufacturer exporter
under a specific authorization.
(b) “Supporting Manufacturer” for the EPCG Scheme shall be one in whose premises/factory Capital
Goods imported/ procured under EPCG authorization is installed.
State Trading Enterprises (STEs), for the purpose of this FTP, are those entities which are granted
exclusive right/privileges export and/or import as per FTP.
"Third-party exports" means exports made by an exporter or manufacturer on behalf of another

exporter(s).
In such cases, export documents such as shipping bills shall indicate name of manufacturing exporter/
manufacturer and third party exporter(s). Bank Realisation Certificate, Self Declaration Form (SDF), export
order and invoice should be in the name of third party exporter.
164 EP-EBCL
"Transaction Value” is as defined in Customs Valuation Rules of Department of Revenue.
GENERAL PROVISIONS REGARDING IMPORTS AND EXPORTS
Exports and Imports – ‘Free’, unless regulated

(a) Exports and Imports shall be ‘Free’ except when regulated by way of ‘prohibition’, ‘restriction’ or
‘exclusive trading through State Trading Enterprises (STEs)’ as laid down in Indian Trade
Classification (Harmonised System) [ITC (HS)] of Exports and Imports.
(b) Further, there are some items which are ‘free’ for import/export, but subject to conditions stipulated
in other Acts or in law for the time being in force.
Indian Trade Classification (Harmonised System) [ITC (HS)] of Exports and Imports
(a) ITC (HS) is a compilation of codes for all merchandise/goods for export/ import. Goods are
classified based on their group or sub-group at 2/4/6/8 digits.
(b) ITC (HS) is aligned at 6 digit level with international Harmonized System goods nomenclature
maintained by World Customs Organization (http://www. wcoomd.org). However, India maintains
national Harmonized System of goods at 8 digit level which may be viewed by clicking on
‘Downloads’ at http://dgft.gov.in.
(c) The import/export policies for all goods are indicated against each item in ITC (HS). Schedule 1 of
ITC (HS) lays down the Import Policy regime while Schedule 2 of ITC (HS) details the Export Policy
regime.
(d) Except where it is clearly specified, Schedule 1 of ITC (HS), Import Policy is for new goods and not
for the Second Hand goods. For Second Hand goods, the Import Policy regime is given in Para 2.31
in this FTP.
Compliance of Imports with Domestic Laws

(a) Domestic Laws/ Rules/ Orders/ Regulations/Technical specifications/ environmental/ safety and
health norms applicable to domestically produced goods shall apply, mutatis mutandis, to imports,
unless specifically exempted.
(b) However, goods to be utilized/ consumed in manufacture of export products, as notified by DGFT,
may be exempted from domestic standards/quality specifications.
Authority to specify Procedures

Director General of Foreign Trade (DGFT) may specify procedure to be followed by an exporter or importer
or by any licensing/Regional Authority (RA) or by any other authority for purposes of implementing provisions
of FT (D&R) Act, the Rules and the Orders made there under and FTP. Such procedure, or amendments, if
any, shall be published by means of a Public Notice.
IMPORTER-EXPORTER CODE (IEC) NUMBER/E-IEC

An IEC is a 10-digit number allotted to a person that is mandatory for undertaking any export/import
activities. Now the facility for IEC in electronic form or e-IEC has also been operationalised.
(a) Application for obtaining IEC can be filed manually and submitting the form in the office of Regional
Authority (RA) of DGFT. Alternatively, Exporters/Importers shall file an application in ANF 2A
format for grant of e-IEC. Those who have digital signatures can sign and submit the application
online along with the requisite documents. Others may take a printout of the application, sign the
undertaking/declaration, upload the same with other requisite documents and thereafter submit the
signed copy of the online application form to concerned jurisdictional Regional Authorities (RA)
either through post or by hand.
(b) Deficiency in the application form has to be removed by re-loging onto “Online IEC application” on
DGFT website and filling the form again by paying the requisite application processing charges.
(c) When an e-IEC is approved by the competent authority, applicant is informed through e-mail that a
computer generated e-IEC is available on the DGFT website. By clicking on “Application Status”
after having filled and submitted the requisite details in “Online IEC Application” webpage, applicant
can view and print his e-IEC.
Briefly, following are the requisite details/documents (scanned copies) to be submitted/ uploaded
along with the application for IEC:
(i) Details of the entity seeking the IEC:
(1) PAN of the business entity in whose name Import/Export would be done (Applicant
individual in case of Proprietorship firms).
(2) Address Proof of the applicant entity.
(3) LLPIN /CIN/ Registration Certification Number (whichever is applicable).
(4) Bank account details of the entity. Cancelled Cheque bearing entity’s pre-printed name or
Bank certificate in prescribed format ANF2A(I).
(ii) Details of the Proprietor/ Partners/ Directors/ Secretary or Chief Executive of the Society/
Managing Trustee of the entity:
(1) PAN (for all categories)
(2) DIN/DPIN (in case of Company /LLP firm)
(iii) Details of the signatory applicant:
(1) Identity proof
(2) PAN
(3) Digital photograph
(d) In case the applicant has digital signature, the application can also be submitted online and no
physical application or document is required. In case the applicant does not possess digital
signature, a print out of the application filed online duly signed by the applicant has to be submitted
to the concerned jurisdictional RA, in person or by post.
No Export/Import without IEC:

No export or import shall be made by any person without obtaining an IEC number unless specifically
exempted.
(a) The following categories of importers or exporters are exempted from obtaining IEC.
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IEC Number Exempted Categories:
Sl. No. Categories Exempted from obtaining IEC
(i) Importers covered by clause 3(1) [except sub- clauses (e) and (l)] and exporters
covered by clause 3(2) [except sub-clauses (i) and (k)] of Foreign Trade (Exemption
from application of Rules in certain cases) Order, 1993.
(ii) Ministries /Departments of Central or State Government
(iii) Persons importing or exporting goods for personal use not connected with trade or
manufacture or agriculture.
(iv) Persons importing/exporting goods from/to Nepal, Myanmar through Indo-Myanmar

border areas and China (through Gunji, Namgaya Shipkila and Nathula ports), provided
CIF value of a single consignment does not exceed Indian Rs.25,000. In case of
Nathula port, the applicable value ceiling will be Rs. 1,00,000/-
Further, exemption from obtaining IEC shall not be applicable for export of Special Chemicals, Organisms,
Materials, Equipments and Technologies (SCOMET) as listed in Appendix - 3, Schedule 2 of ITC (HS)
except in case of exports by category (ii) above.
(b) Following permanent IEC numbers shall be used by non – commercial Public Sector Undertaking (PSUs)
and categories or importers/exporters mentioned against them for import/export purposes:
Sr. No. Permanent IEC Categories of Importer/Exporter

1 0100000011 All Ministries/Departments of Central Government and agencies
wholly or partially owned by them.
2 0100000029 All Ministries/Departments of any State Government and
agencies wholly or partially owned by them.
3 0100000037 Diplomatic personnel, Counsellor officers in India and officials
of UNO and its specialised agencies.
4 0100000045 Indians returning from/going abroad and claiming benefit under
Baggage Rules.
5 0100000053 Persons/Institutions/Hospitals importing or exporting goods for
personal use, not connected with trade or manufacture or
agriculture.
6 0100000061 Persons importing/exporting goods from /to Nepal
7 0100000070 Persons importing/exporting goods from/to Myanmar through
Indo-Myanmar border areas
8 0100000088 Ford Foundation.
9 0100000096 Importers importing goods for display or use in fairs/exhibitions
or similar events under provisions of ATA carnet. This IEC
number can also be used by importers importing for
exhibitions/fairs as per Paragraph 2.63 of Handbook of
Procedures
10 0100000100 Director, National Blood Group

11 0100000126 Individuals/Charitable Institution/Registered NGOs importing
goods, which have been exempted from Customs duty under
Notification issued by Ministry of Finance for bonafide use by
victims affected by natural calamity.
12 0100000134 Persons importing/exporting permissible goods as notified from
time to time, from /to China through Gunji, Namgaya Shipkila
and Nathula ports, subject to value ceilings of single
consignment as given in a (iv) above.
13 0100000169 Non-commercial imports and exports by entities who have been

authorised by Reserve Bank of India.
Only one IEC against one Permanent Account Number (PAN)

Only one IEC is permitted against on Permanent Account Number (PAN). If any PAN card holder has more
than one IEC, the extra IECs shall be disabled.
MANDATORY DOCUMENTS FOR EXPORT/IMPORT OF GOODS FROM/INTO INDIA

(a) Mandatory documents required for export of goods from India:
[Note: *(i) As per CBEC Circular No. 01/15-Customs dated

12/01/2015. (ii) Separate Commercial Invoice and Packing List
would also be accepted.]
(b) Mandatory documents required for import of goods into India
[Note: *(i) As per CBEC Circular No. 01/15-Customs dated

12/01/2015. (ii) Separate Commercial Invoice and Packing List
would also be accepted.]
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(c) For export or import of specific goods or category of goods, which are subject to any
restrictions/policy conditions or require NOC or product specific compliances under any statute, the
regulatory authority concerned may notify additional documents for purposes of export or import.
(d) In specific cases of export or import, the regulatory authority concerned may electronically or in
writing seek additional documents or information, as deemed necessary to ensure legal compliance.
PRINCIPLES OF RESTRICTIONS
DGFT may, through a Notification, impose restrictions on export and import, necessary for: -
Protection of public morals
Protection of human, animal or plant life or health
Protection of patents, trademarks and copyrights, and the

prevention of deceptive practices
Prevention of use of prison labour
Protection of national treasures of artistic, historic or archaeological

value
Conservation of exhaustible natural resources
Protection of trade of fissionable material or material from which they are

derived
Prevention of traffic in arms, ammunition and implements of war
EXPORT/IMPORT OF RESTRICTED GOODS/SERVICES

Any goods/service, the export or import of which is ‘Restricted’ may be exported or imported only in
accordance with an Authorisation/Permission or in accordance with the procedure prescribed in a
Notification/Public Notice issued in this regard.
EXPORTS FROM INDIA SCHEMES

The objective of the Export from India Schemes is to provide rewards to exporters to offset infrastructural
inefficiencies and associated costs involved and to provide exporters a level playing field.
There shall be following two schemes for exports of Merchandise and Services respectively:
Two schemes for exports of Merchandise and Services:
Merchandise Exports
from India Scheme Service Exports from India
Scheme (SEIS)
Nature of Rewards
Duty Credit Scrips shall be granted as rewards under MEIS and SEIS. The Duty Credit Scrips and goods
imported/domestically procured against them shall be freely transferable. The Duty Credit Scrips can be
used for:
(i) Payment of Customs Duties for import of inputs or goods, except items listed in Appendix 3A of
Appendices and Aayat Niryat Forms of FTP 2015-2020.
(ii) Payment of excise duties on domestic procurement of inputs or goods, including capital goods as
per Department of Revenue (DoR) notification.
(iii) Payment of service tax on procurement of services as per DoR notification.
(iv) Payment of Customs Duty and fee as per Foreign Trade Policy.
Merchandise Exports from India Scheme (MEIS)

The objective of Merchandise Exports from India Scheme (MEIS) is to offset infrastructural inefficiencies and
associated costs involved in export of goods/products, which are produced/manufactured in India, especially
those having high export intensity, employment potential and thereby enhancing India’s export
competitiveness.
Entitlement under MEIS:

Exports of notified goods/products with ITC[HS] code, to notified markets as listed in Appendix 3B of
Appendices and Aayat Niryat Forms of FTP 2015-2020, shall be rewarded under MEIS. Appendix 3B also
lists the rate(s) of rewards on various notified products [ITC (HS) code wise]. The basis of calculation of
reward would be on realised FOB value of exports in free foreign exchange, or on FOB value of exports as
given in the Shipping Bills in free foreign exchange, whichever is less, unless otherwise specified.
Export of goods through courier or foreign post offices using e-Commerce:

(i) Exports of goods through courier or foreign post office using e-commerce, as notified in Appendix
3C of Appendices and Aayat Niryat Forms) of FTP 2015-2020, of FOB value upto Rs. 25000 per
consignment shall be entitled for rewards under MEIS.
(ii) If the value of exports using e-commerce platform is more than Rs 25000 per consignment then
MEIS reward would be limited to FOB value of Rs.25000 only.
(iii) Such goods can be exported in manual mode through Foreign Post Offices at New Delhi, Mumbai
and Chennai.
(iv) Export of such goods under Courier Regulations shall be allowed manually on pilot basis through
Airports at Delhi, Mumbai and Chennai as per appropriate amendments in regulations to be made
by Department of Revenue. Department of Revenue shall fast track the implementation of
Electronic Data Interchange (EDI) mode at courier terminals.
Ineligible categories under MEIS:

The following exports categories /sectors shall be ineligible for Duty Credit Scrip entitlement under MEIS:
(i) EOUs/EHTPs/BTPs/ STPs who are availing direct tax benefits/exemption.
(ii) Supplies made from DTA units to SEZ units
(iii) Export of imported goods covered;
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(iv) Exports through trans-shipment, meaning thereby exports that are originating in third country but
trans-shipped through India;
(v) Deemed Exports;
(vi) SEZ/EOU/EHTP/BPT/FTWZ products exported through DTA units;
(vii) Items, which are restricted or prohibited for export under Schedule-2 of Export Policy in ITC (HS),
unless specifically notified in Appendix 3B.
(viii) Service Export.
(ix) Red sanders and beach sand.
(x) Export products which are subject to Minimum export price or export duty.
(xi) Diamond Gold, Silver, Platinum, other precious metal in any form including plain and studded
jewellery and other precious and semi-precious stones.
(xii) Ores and concentrates of all types and in all formations.
(xiii) Cereals of all types.
(xiv) Sugar of all types and all forms.
(xv) Crude/petroleum oil and crude/primary and base products of all types and all formulations.
(xvi) Export of milk and milk products.
(xvii) Export of Meat and Meat Products.
(xviii) Products wherein precious metal/diamond are used or Articles which are studded with precious
stones.
(xix) Exports made by units in Free Trade and Warehousing Zone( FTWZ) .
Service Exports from India Scheme (SEIS)
The objective of Service Exports from India Scheme (SEIS) is to encourage export of notified Services from
India.
Eligibility:
(a) Service Providers of notified services, located in India, shall be rewarded under SEIS, subject to
conditions as may be notified. The notified services and rates of rewards are listed in Appendix 3D
of Appendices and Aayat Niryat Forms of FTP 2015-2020. Following Services shall be eligible:
(i) Supply of a ‘service’ from India to any other country; (Mode1- Cross border trade)
(ii) Supply of a ‘service’ from India to service consumer(s) of any other country; (Mode 2-
Consumption abroad).
(b) Such service provider should have minimum net free foreign exchange earnings of US$15,000 in
preceding financial year to be eligible for Duty Credit Scrip. For Individual Service Providers and sole
proprietorship, such minimum net free foreign exchange earnings criteria would be US$10,000 in
preceding financial year.
(c) Payment in Indian Rupees for service charges earned on specified services, shall be treated as
receipt in deemed foreign exchange as per guidelines of Reserve Bank of India. The list of such
services is indicated in Appendix 3E of Appendices and Aayat Niryat Forms of FTP 2015-2020.
(d) Net Foreign exchange earnings for the scheme are defined as under:
Net Foreign Exchange = Gross Earnings of Foreign Exchange minus Total expenses/payment/
remittances of Foreign Exchange by the IEC holder, relating to service sector in the Financial year.
(e) If the IEC holder is a manufacturer of goods as well as service provider, then the foreign exchange
earnings and Total expenses/payment/remittances shall be taken into account for service sector
only.
(f) In order to claim reward under the scheme, Service provider shall have to have an active IEC at the
time of rendering such services for which rewards are claimed.
Ineligible categories under SEIS:

(1) Foreign exchange remittances other than those earned for rendering of notified services would not
be counted for entitlement. Thus, other sources of foreign exchange earnings such as equity or debt
participation, donations, receipts of repayment of loans etc. and any other inflow of foreign
exchange, unrelated to rendering of service, would be ineligible.
(2) Following shall not be taken into account for calculation of entitlement under the scheme
(a) Foreign Exchange remittances:
I. Related to Financial Services Sector
(i) Raising of all types of foreign currency Loans;
(ii) Export proceeds realization of clients;
(iii) Issuance of Foreign Equity through ADRs/GDRs or other similar instruments;
(iv) Issuance of foreign currency Bonds;
(v) Sale of securities and other financial instruments;
(vi) Other receivables not connected with services rendered by financial institutions; and
II. Earned through contract/regular employment abroad (e.g. labour remittances);
(b) Payments for services received from EEFC Account;
(c) Foreign exchange turnover by Healthcare Institutions like equity participation, donations etc.
(d) Foreign exchange turnover by Educational Institutions like equity participation, donations etc.
(e) Export turnover relating to services of units operating under SEZ/EOU/EHTP/STPI/BTP
Schemes or supplies of services made to such units;
(f) Clubbing of turnover of services rendered by SEZ/EOU /EHTP/STPI/BTP units with turnover of
DTA Service Providers;
(g) Exports of Goods.
(h) Foreign Exchange earnings for services provided by Airlines, Shipping lines service providers
plying from any foreign country X to any foreign country Y routes not touching India at all.
(i) Service providers in Telecom Sector.
Entitlement under SEIS:

Service Providers of eligible services shall be entitled to Duty Credit Scrip at notified rates on net foreign
exchange earned.
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STATUS HOLDER
(a) Status Holders are business leaders who have excelled in international trade and have successfully
contributed to country’s foreign trade. Status Holders are expected to not only contribute towards
India’s exports but also provide guidance and handholding to new entrepreneurs.
(b) All exporters of goods, services and technology having an import-export code (IEC) number shall be
eligible for recognition as a status holder. Status recognition depends upon export performance. An
applicant shall be categorized as status holder upon achieving export performance during current
and previous two financial years, as indicated in Foreign Trade Policy. The export performance will
be counted on the basis of FOB value of export earnings in free foreign exchange.
(c) For deemed export, FOR value of exports in Indian Rupees shall be converted in US$ at the
exchange rate notified by CBEC, as applicable on 1st April of each Financial Year.
(d) For granting status, export performance is necessary in at least two out of three years.
Status Category
Status Category Export Performance

FOB/FOR (as converted) Value
(in US $ million)
One Star Export House 3
Two Star Export House 25
Three Star Export House 100
Four Star Export House 500
Five Star Export House 2000
Grant of double weightage

(a) The exports by IEC holders under the following categories shall be granted double weightage for
calculation of export performance for grant of status.
(i) Micro, Small & Medium Enterprises (MSME) as defined in Micro, Small & Medium Enterprises
Development (MSMED) Act 2006.
(ii) Manufacturing units having International Organisation for Standardisation (ISO)/Bureau of
Indian Standards (BIS).
(iii) Units located in North Eastern States including Sikkim and Jammu & Kashmir.
(iv) Units located in Agri Export Zones.
(b) Double Weightage shall be available for grant of One Star Export House Status category only. Such
benefit of double weightage shall not be admissible for grant of status recognition of other
categories namely Two Star Export House, Three Star Export House, Four Star export House and
Five Star Export House.
(c) A shipment can get double weightage only once in any one of above categories.
Other conditions for grant of status

(a) Export performance of one IEC holder shall not be permitted to be transferred to another IEC
holder. Hence, calculation of exports performance based on disclaimer shall not be allowed.
(b) Exports made on re-export basis shall not be counted for recognition.
(c) Export of items under authorization, including SCOMET items, would be included for calculation of
export performance.
Privileges of Status Holders

A Status Holder shall be eligible for privileges as under:
(a) Authorisation and Customs Clearances for both imports and exports may be granted on self-
declaration basis;
(b) Input-Output norms may be fixed on priority within 60 days by the Norms Committee;
(c) Exemption from furnishing of Bank Guarantee for Schemes under FTP, unless specified otherwise
anywhere in FTP or Hand Book of Procedure (HBP);
(d) Exemption from compulsory negotiation of documents through banks. Remittance/receipts,
however, would be received through banking channels;
(e) Two star and above Export houses shall be permitted to establish Export Warehouses as per
Department of Revenue guidelines.
(f) Three Star and above Export House shall be entitled to get benefit of Accredited Clients Programme
(ACP) as per the guidelines of CBEC (website: http://cbec.gov.in).
(g) The status holders would be entitled to preferential treatment and priority in handling of their
consignments by the concerned agencies.
(h) Manufacturers who are also status holders (Three Star/Four Star/Five Star) will be enabled to self-
certify their manufactured goods (as per their Industrial Entrepreneurial Memorandum (IEM)/
Industrial Licensing (IL)/ Letter of Intent (LOI) as originating from India with a view to qualify for
preferential treatment under different preferential trading agreements (PTA), Free Trade
Agreements (FTAs), Comprehensive Economic Cooperation Agreements (CECA) and
Comprehensive Economic Partnership Agreements (CEPA). Subsequently, the scheme may be
extended to remaining Status Holders.
(i) Manufacturer exporters who are also Status Holders shall be eligible to self-certify their goods as
originating from India as per Hand Book of Procedures.
(j) Status holders shall be entitled to export freely exportable items on free of cost basis for export
promotion subject to an annual limit of Rs 10 lakh or 2% of average annual export realization during
preceding three licencing years whichever is higher.
DUTY EXEMPTION/REMISSION SCHEMES

Duty Exemption/Remission Schemes enable duty free import of inputs for export production, including
replenishment of input or duty remission.
Schemes:
(a) Duty Exemption Schemes.
The Duty Exemption schemes consist of the following:

(i) Advance Authorisation (AA) (which will include Advance Authorisation for Annual Requirement).
(ii) Duty Free Import Authorisation (DFIA).
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(b) Duty Remission Scheme.
Duty Drawback (DBK) Scheme, administered by Department of Revenue.
ADVANCE AUTHORISATION
(a) Advance Authorisation is issued to allow duty free import of input, which is physically incorporated in
export product (making normal allowance for wastage). In addition, fuel, oil, catalyst which is
consumed/utilised in the process of production of export product, may also be allowed.
(b) Advance Authorisation is issued for inputs in relation to resultant product, on the following basis:
(i) As per Standard Input Output Norms (SION) notified (available in Hand Book of Procedures);
OR
(ii) On the basis of self declaration as per Handbook of Procedures.
Advance Authorisation for Spices

Duty free import of spices covered under Chapter-9 of ITC (HS) shall be permitted only for activities like
crushing/grinding/sterilization/manufacture of oils or oleoresins. Authorisation shall not be available for simply
cleaning, grading, re-packing etc.
Eligible Applicant/Export/Supply
(a) Advance Authorisation can be issued either to a manufacturer exporter or merchant exporter tied to
supporting manufacturer.
(b) Advance Authorisation for pharmaceutical products manufactured through Non-Infringing (NI) process
(as indicated in Handbook of Procedures) shall be issued to manufacturer exporter only.
(c) Advance Authorisation shall be issued for:
(i) Physical export (including export to SEZ);
(ii) Intermediate supply; and/or
(iii) Supply of goods to the categories mentioned in paragraph 7.02 (b), (c), (e), (f), (g) and (h) of
this FTP (Category of Supply under Deemed Exports).
(iv) Supply of ‘stores’ on board of foreign going vessel/aircraft, subject to condition that there is
specific Standard Input Output Norms in respect of item supplied.
Advance Authorisation for Annual Requirement

(i) Advance Authorisation for Annual Requirement shall only be issued for items notified in Standard
Input Output Norms (SION), and it shall not be available in case of adhoc norms under FTP.
(ii) Advance Authorisation for Annual Requirement shall also not be available in respect of SION where
any item of input appears in Appendix 4-J of Appendices and Aayat Niryat Forms of FTP 2015-
2020.
Eligibility Condition to obtain Advance Authorisation for Annual Requirement

(i) Exporters having past export performance (in at least preceding two financial years) shall be entitled
for Advance Authorisation for Annual requirement.
(ii) Entitlement in terms of CIF value of imports shall be upto 300% of the FOB value of physical export
and/or FOR value of deemed export in preceding financial year or Rs 1 crore, whichever is higher.
Value Addition
Value Addition for the Duty Exemption/Remission Schemes (except for Gems and Jewellery sector for which
value addition is prescribed in FTP) shall be:-
A −B
VA = × 100, where
B
A = FOB value of export realized/FOR value of supply received.
B = CIF value of inputs covered by Authorisation, plus value of any other input used on which benefit of DBK
is claimed or intended to be claimed.
Minimum Value Addition

(i) Minimum value addition required to be achieved under Advance Authorisation is 15%.
(ii) Export Products where value addition could be less than 15% are given in Appendix 4D of
Appendices and Aayat Niryat Forms of FTP 2015-2020.
(iii) For physical exports for which payments are not received in freely convertible currency, value
addition shall be as specified in Appendix 4C of Appendices and Aayat Niryat Forms of FTP 2015-
2020.
(iv) Minimum value addition for Gems & Jewellery Sector is given in paragraph 4.61 of Handbook of
Procedures.
(v) In case of Tea, minimum value addition shall be 50%.
Details of Duties exempted

Imports under Advance Authorisation are exempted from payment of Basic Customs Duty, Additional
Customs Duty, Education Cess, Anti-dumping Duty, Safeguard Duty and Transition Product Specific
Safeguard Duty, wherever applicable. However, Import against supplies covered under certain category of
supply under Deemed Exports of FTP will not be exempted from payment of applicable Anti-dumping Duty,
Safeguard Duty and Transition Product Specific Safeguard Duty, if any.
Admissibility of Drawback
Drawback as per rate determined and fixed by Central Excise authority shall be available for duty paid
imported or indigenous inputs (not specified in the norms) used in the export product. For this purpose,
applicant shall indicate clearly details of duty paid input in the application for Advance Authorisation. As per
details mentioned in the application, Regional Authority shall also clearly endorse details of such duty paid
inputs in the condition sheet of the Advance Authorisation.
Actual User Condition for Advance Authorisation

(i) Advance Authorisation and/or material imported under Advance Authorisation shall be subject to
‘Actual User’ condition. The same shall not be transferable even after completion of export
obligation. However, Authorisation holder will have option to dispose of product manufactured out of
duty free input once export obligation is completed.
(ii) In case where CENVAT credit facility on input has been availed for the exported goods, even after
completion of export obligation, the goods imported against such Advance Authorisation shall be
utilized only in the manufacture of dutiable goods whether within the same factory or outside (by a
supporting manufacturer). For this, the Authorisation holder shall produce a certificate from either
176 EP-EBCL
the jurisdictional Central Excise Authority or Chartered Accountant, at the option of the exporter, at
the time of filing application for Export Obligation Discharge Certificate to Regional Authority
concerned.
(iii) Waste/scrap arising out of manufacturing process, as allowed, can be disposed off on payment of
applicable duty even before fulfillment of export obligation.
Validity Period for Import

(i) Validity period for import of Advance Authorisation shall be 12 months from the date of issue of
Authorisation.
(ii) Advance Authorisation for Deemed Export shall be co-terminus with contracted duration of project
execution or 12 months from the date of issue of Authorisation, whichever is more.
Importability/Exportability of items that are Prohibited/Restricted/ State Trading Enterprise

(STE)
(i) No export or import of an item shall be allowed under Advance Authorisation/DFIA if the item is
prohibited for exports or imports respectively. Export of a prohibited item may be allowed under
Advance Authorisation provided it is separately so notified, subject to the conditions given therein.
(ii) Items reserved for imports by STEs cannot be imported against Advance Authorisation/DFIA.
However those items can be procured from STEs against ARO or Invalidation letter. STEs are also
allowed to sell goods on High Sea Sale basis to holders of Advance Authorisation/DFIA holder.
STEs are also permitted to issue “No Objection Certificate (NOC)” for import by Advance
Authorisation/DFIA holder. Authorisation Holder would be required to file Quarterly Returns of
imports effected against such NOC to concerned STE and STE would submit half-yearly import
figures of such imports to concerned administrative Department for monitoring with a copy endorsed
to DGFT.
(iii) Items reserved for export by STE can be exported under Advance Authorisation /Duty Free Import
Authorisation (DFIA) only after obtaining a ‘No Objection Certificate’ from the concerned STE.
(iv) Import of restricted items shall be allowed under Advance Authorisation/ Duty Free Import
Authorisation (DFIA).
(v) Export of restricted/Special Chemicals, Organisms, Materials, Equipment and Technology
(SCOMET) items however, shall be subject to all conditionalities or requirements of export
authorisation or permission, as may be required, under Schedule 2 of ITC (HS).
Free of Cost Supply by Foreign Buyer

Advance Authorisation shall also be available where some or all inputs are supplied free of cost to exporter
by foreign buyer. In such cases, notional value of free of cost input shall be added in the CIF value of import
and FOB value of export for the purpose of computation of value addition. However, realization of export
proceeds will be equivalent to an amount excluding notional value of such input.
Domestic Sourcing of Inputs

(i) Holder of an Advance Authorisation/Duty Free Import Authorisation can procure inputs from
indigenous supplier/ State Trading Enterprise in lieu of direct import. Such procurement can be against
Advance Release Order (ARO), Invalidation Letter, and Back-to-Back Inland Letter of Credit.
(ii) When domestic supplier intends to obtain duty free material for inputs through Advance
Authorisation for supplying resultant product to another Advance Authorisation/Duty Free Import
Authorisation (DFIA)/Export Promotion Capital Goods (EPCG) Authorisation, Regional Authority
shall issue Invalidation Letter.
(iii) Regional Authority shall issue Advance Release Order if the domestic supplier intends to seek
refund of duty through Deemed Exports mechanism of FTP.
(iv) Regional Authority may issue Advance Release Order or Invalidation Letter at the time of issue of
Authorisation simultaneously or subsequently.
(v) Advance Authorisation holder under Domestic Tariff Area (DTA) can procure inputs from
EOU/EHTP/BTP/STP/SEZ units without obtaining Advance Release Order or Invalidation Letter.
(vi) Duty Free Import Authorisation holder shall also be eligible for Advance Release Order/Invalidation
Letter facility.
(vii) Validity of Advance Release Order/Invalidation Letter shall be co-terminous with validity of
Authorisation.
Currency for Realisation of Export Proceeds

(i) Export proceeds shall be realized in freely convertible currency except otherwise specified.
(ii) Export to Rupee Payment Area (RPA) (for which payments are not received in freely convertible
currency) shall be subject to minimum value addition as specified in Appendix-4C.
(iii) Export to SEZ Units shall be taken into account for discharge of export obligation provided payment
is realised from Foreign Currency Account of the SEZ unit.
(iv) Export to SEZ Developers/Co-developers can also be taken into account for discharge of export
obligation even if payment is realised in Indian Rupees.
(v) Authorisation holder needs to file Bill of Export for export to SEZ unit/developer/co-developer in
accordance with the procedures given in SEZ Rules, 2006.
Export Obligation
178 EP-EBCL
Export Obligation Period (EOP) Extension for units under Board of Industrial and Financial
Reconstruction (BIFR)/ Rehabilitation
A company holding Advance Authorisation and registered with BIFR/Rehabilitation Department of State
Government or any firm/company acquiring a unit holding Advance Authorisation which is under
BIFR/Rehabilitation, may be permitted export obligation extension for the Advance Authorisation(s) held by
the acquired unit, as per rehabilitation package prepared by operating agency and approved by
BIFR/Rehabilitation Department of State Government. If time-period upto which Export Obligation (EO)
extension is to be granted is not specifically mentioned in the BIFR order, EO extension of two years from
the date of expiry of Export Obligation Period( EOP) (including extended period) or the date of BIFR order,
whichever is later, shall be granted without payment of composition fee.
Re-import of exported goods under Duty Exemption/Remission Scheme

Goods exported under Advance Authorisation/Duty Free Import Authorisation may be re-imported in same or
substantially same form subject to such conditions as may be specified by Department of Revenue.
Authorisation holder shall also inform about such re-importation to the Regional Authority which had issued
the Authorisation within one month from date of re-import.
DUTY FREE IMPORT AUTHORISATION SCHEME (DFIA)
Duty Free Import Authorisation is issued to allow duty free import of inputs.
In addition, import of oil and catalyst which is consumed/utilized in the
process of production of export products, may also be allowed
(a)
Provisions of Accounting Imputes, Importability/Exportability of items that

are Prohibited/Restricted/STE, Domestic Sourcing of Inputs, Currency for
Realisation of Export Proceeds and re-import of exported goods under Duty
Exemption/Remission Scheme of FTP shall be applicable to DFIA also
(b)
Duties Exempted and Admissibility of CENVAT and Drawback

(i) Duty Free Import Authorisation shall be exempted only from payment of Basic Customs Duty.
(ii) Additional customs duty/excise duty, being not exempt, shall be adjusted as CENVAT credit as per
DoR rules.
(iii) Drawback as per rate determined and fixed by Central Excise authority shall be available for duty
paid inputs, whether imported or indigenous, used in the export product. However, in case such
drawback is claimed for inputs not specified in SION, the applicant should have indicated clearly
details of such duty paid inputs also in the application for Duty Free Import Authorization, and as per
the details mentioned in the application, the Regional Authority should also have clearly endorsed
details of such duty paid inputs in the condition sheet of the Duty Free Import Authorization.
Eligibility
Eligibility of DFIA
Minimum Value Addition

Minimum value addition of 20% shall be required to be achieved. For items where higher value addition has
been prescribed under Advance Authorisation in Appendix 4C of Appendices and Aayat Niryat Forms of FTP
2015, the same value addition shall be applicable for Duty Free Import Authorisation also.
Validity & Transferability of DFIA

(i) Applicant shall file online application to Regional Authority concerned before starting export under
DFIA.
(ii) Export shall be completed within 12 months from the date of online filing of application and
generation of file number.
(iii) While doing export/supply, applicant shall indicate file number on the export documents viz.
Shipping Bill/Airway Bill/ Bill of Export/ARE-1/ARE-3, Central Excise certified Invoice.
(iv) After completion of exports and realization of proceeds, request for issuance of transferable Duty
Free Import Authorisation may be made to concerned Regional Authority within a period of twelve
months from the date of export or six months (or additional time allowed by RBI for realization) from
the date of realization of export proceeds, whichever is later.
(v) Applicant shall be allowed to file application beyond 24 months from the date of generation of file
number as per paragraph 9.03 of Hand Book of Procedures.
(vi) Separate DFIA shall be issued for each SION and each port.
(vii) Exports under DFIA shall be made from a single port as mentioned in paragraph 4.37 of Handbook
of Procedures.
180 EP-EBCL
(viii) No Duty Free Import Authorisation shall be issued for an export product where SION prescribes
‘Actual User’ condition for any input.
(ix) Regional Authority shall issue transferable DFIA with a validity of 12 months from the date of issue.
No further revalidation shall be granted by Regional Authority.
Sensitive Items under Duty Free Import Authorisation

(a) In respect of resultant products requiring following inputs, exporter shall be required to provide
declaration with regard to technical characteristics, quality and specification in Shipping Bill:
“Alloy steel including Stainless Steel, Copper Alloy, Synthetic Rubber, Bearings, Solvent,
Perfumes/Essential Oil/ Aromatic Chemicals, Surfactants, Relevant Fabrics, marble, Articles made
of polypropylene, Articles made of Paper and Paper Board, Insecticides, Lead Ingots, Zinc Ingots,
Citric Acid, Relevant Glass fibre reinforcement (Glass fibre, Chopped/Stranded Mat, Roving Woven
Surfacing Mat), Relevant Synthetic Resin (unsaturated polyester resin, Epoxy Resin, Vinyl Ester
Resin, Hydroxy Ethyl Cellulose), Lining Material”.
(b) While issuing Duty Free Import Authorisation, Regional Authority shall mention technical
characteristics, quality and specification in respect of above inputs in the Authorisation.
SCHEMES FOR EXPORTERS OF GEMS AND JEWELLERY

Import of Input
Exporters of gems and Jewellery can import/procure duty free input for manufacture of export product.
Items of Export
Following items, if exported, would be eligible:
(i) Gold jewellery, including partly processed jewellery and articles including medallions and coins
(excluding legal tender coins), whether plain or studded, containing gold of 8 carats and above;
(ii) Silver jewellery including partly processed jewellery, silverware, silver strips and articles including
medallions and coins (excluding legal tender coins and any engineering goods) containing more
than 50% silver by weight;
(iii) Platinum jewellery including partly processed jewellery and articles including medallions and coins
(excluding legal tender coins and any engineering goods) containing more than 50% platinum by
weight.
Schemes
The schemes are as follows:
(i) Advance Procurement/Replenishment of Precious Metals from Nominated Agencies;
(ii) Replenishment Authorisation for Gems;
(iii) Replenishment Authorisation for Consumables;
(iv) Advance Authorisation for Precious Metals.
Value Addition
Minimum Value Addition norms for gems and jewellery sector would be calculated as under:
A −B
VA = × 100, where
B
A = FOB value of the export realised/FOR value of supply received.
B = Value of inputs (including domestically procured) such as gold/silver/platinum content in export product
plus admissible wastage along with value of other items such as gemstone etc. Wherever gold has been
obtained on loan basis, value shall also include interest paid in free foreign exchange to foreign supplier.
DFIA not available

Duty Free Import Authorisation scheme shall not be available for Gems and Jewellery sector.
EXPORT PROMOTION CAPITAL GOODS (EPCG) SCHEME

Objective
The objective of the Export Promotion Capital Goods(EPCG) Scheme is to facilitate import of capital goods
for producing quality goods and services to enhance India’s export competitiveness.
EPCG Scheme
(a) EPCG Scheme allows import of capital goods for pre-production, production and post-production at
Zero customs duty. Alternatively, the Authorisation holder may also procure Capital Goods from
indigenous sources. Capital goods for the purpose of the EPCG scheme shall include:
(i) Capital Goods including in Completely Knocked down (CKD)/ Semi- Knocked Down (SKD)
condition thereof;
(ii) Computer software systems;
(iii) Spares, moulds, dies, jigs, fixtures, tools & refractories for initial lining and spare refractories;
and
(iv) Catalysts for initial charge plus one subsequent charge.
(b) Import of capital goods for Project Imports notified by Central Board of Excise and Customs is also
permitted under EPCG Scheme.
(c) Import under EPCG Scheme shall be subject to an export obligation equivalent to 6 times of duty
saved on capital goods, to be fulfilled in 6 years reckoned from date of issue of Authorisation.
(d) Authorisation shall be valid for import for 18 months from the date of issue of Authorisation.
Revalidation of EPCG Authorisation shall not be permitted.
(e) In case countervailing duty (CVD) is paid in cash on imports under EPCG, incidence of CVD would
not be taken for computation of net duty saved, provided CENVAT is not availed.
(f) Second hand capital goods shall not be permitted to be imported under EPCG Scheme.
(g) Authorisation under EPCG Scheme shall not be issued for import of any Capital Goods (including
Captive plants and Power Generator Sets of any kind) for
(i) Export of electrical energy (power)
(ii) Supply of electrical energy (power) under deemed exports
182 EP-EBCL
(iii) Use of power (energy) in their own unit, and

(iv) Supply/export of electricity transmission services
(h) Import of items which are restricted for import shall be permitted under EPCG Scheme only after
approval from Exim Facilitation Committee (EFC) at DGFT Headquarters.
(i) If the goods proposed to be exported under EPCG authorisation are restricted for export, the EPCG
authorisation shall be issued only after approval for issuance of export authorisation from Exim
Facilitation Committee at DGFT Headquarters.
Coverage of the Scheme

(a) EPCG scheme covers manufacturer exporters with or without supporting manufacturer(s), merchant
exporters tied to supporting manufacturer(s) and service providers. Name of supporting
manufacturer(s) shall be endorsed on the EPCG authorisation before installation of the capital
goods in the factory/premises of the supporting manufacturer (s). In case of any change in
supporting manufacturer (s) the RA shall intimate such change to jurisdictional Central Excise
Authority of existing as well as changed supporting manufacturer (s) and the Customs at port of
registration of Authorisation.
(b) Export Promotion Capital Goods (EPCG) Scheme also covers a service provider who is
designated/certified as a Common Service Provider (CSP) by the DGFT, Department of Commerce
or State Industrial Infrastructural Corporation in a Town of Export Excellence subject to provisions of
Foreign Trade Policy/Handbook of Procedures with the following conditions:-
(i) Export by users of the common service, to be counted towards fulfilment of EO of the Common
Service Provider shall contain the EPCG authorisation details of the Common Service Provider
in the respective Shipping bills and concerned RA must be informed about the details of the
Users prior to such export;
(ii) Such export will not count towards fulfilment of specific export obligations in respect of other EPCG
authorisations (of the CSP/User);
(iii) Authorisation holder shall be required to submit Bank Guarantee (BG) which shall be equivalent
to the duty saved. BG can be given by Common Service Provider or by any one of the users or
a combination thereof, at the option of the Common Service Provider.
Actual User Condition

Import of capital goods shall be subject to Actual User condition till export obligation is completed.
Export Obligation (EO)

Following conditions shall apply to the fulfillment of EO:-
(a) Export Obligation shall be fulfilled by the authorisation holder through export of goods which are
manufactured by him or his supporting manufacturer/services rendered by him, for which the EPCG
authorisation has been granted.
(b) Export Obligation under the scheme shall be, over and above, the average level of exports achieved
by the applicant in the preceding three licensing years for the same and similar products within the
overall EO period including extended period, if any; except for categories mentioned in paragraph
5.13(a) of Hand Book of Procedures (HBP). Such average would be the arithmetic mean of export
performance in the preceding three licensing years for same and similar products.
(c) In case of indigenous sourcing of Capital Goods, specific EO shall be 25% less than the EO
stipulated in EPCG scheme.

(d) Shipments under Advance Authorisation, DFIA, Drawback scheme or reward schemes under FTP;
would also count for fulfillment of EO under EPCG Scheme.
(e) Export shall be physical export. However, deemed exports as specified FTP shall also be counted
towards fulfillment of export obligation, alongwith usual benefits available under Actual user
condition of EPCG scheme.
(f) Export Obligation can also be fulfilled by the supply of ITA-I items to DTA, provided realization is in
free foreign exchange.
(g) Royalty payments received by the Authorisation holder in freely convertible currency and foreign
exchange received for R&D services shall also be counted for discharge under EPCG.
(h) Payment received in rupee terms for such Services as notified in Appendix 3E of Appendices and
Aayat Niryat Forms of FTP 2015 shall also be counted towards discharge of export obligation under
the EPCG scheme.
Legal Undertaking (LUT)/Bond/ Bank Guarantee (BG)in case of Agro units

Legal Undertaking /Bond or 15% Bank Guarantee, as applicable, may be furnished for EPCG authorisation
granted to units in Agri-Export Zones provided EPCG authorisation is taken for export of primary agricultural
product(s) notified or their value added variants.
Indigenous Sourcing of Capital Goods and benefits to Domestic Supplier

A person holding an EPCG authorisation may source capital goods from a domestic manufacturer. Such
domestic manufacturer shall be eligible for deemed export benefit under FTP. Such domestic sourcing shall
also be permitted from EOUs and these supplies shall be counted for purpose of fulfilment of positive Net
Foreign Exchange (NFE) by said EOU as provided in FTP.
Calculation of Export Obligation

In case of direct imports, Export Obligation shall be reckoned with reference to actual duty saved amount. In
case of domestic sourcing, Export Obligation shall be reckoned with reference to notional Customs duties
saved on FOR value.
Incentive for early EO fulfilment

With a view to accelerating exports, in cases where Authorisation holder has fulfilled 75% or more of specific
export obligation and 100% of Average Export Obligation till date, if any, in half or less than half the original
export obligation period specified, remaining export obligation shall be condoned and the Authorisation
redeemed by Regional Authority(RA) concerned. However no benefit under Hand Book of Procedure (HBP)
shall be permitted where incentive for early EO fulfilment has been availed.
Reduced Export Obligation for Green Technology Products

For exporters of Green Technology Products, Specific Export Obligation shall be 75% of Export Obligation.
The list of Green Technology Products is given in Para 5.29 of Hand Book of Procedure (HBP).
Reduced Export Obligation for North East Region and Jammu & Kashmir
For units located in Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura
and Jammu & Kashmir, specific Export Obligation shall be 25% of the Export Obligation.
184 EP-EBCL
Post Export EPCG Duty Credit Scrip(s)

(a) Post Export EPCG Duty Credit Scrip(s) shall be available to exporters who intend to import capital
goods on full payment of applicable duties in cash and choose to opt for this scheme.
(b) Basic Customs duty paid on Capital Goods shall be remitted in the form of freely transferable duty
credit scrip(s).
(c) Specific Export Obligation shall be 85% of the applicable specific EO under the EPCG Scheme.
However, average Export Obligation shall remain unchanged.
(d) Duty remission shall be in proportion to the EO fulfilled.
(e) All provisions for utilization of scrips issued under FTP shall also be applicable to Post Export EPCG
Duty Credit Scrip (s).
(f) All provisions of the existing EPCG Scheme shall apply insofar as they are not inconsistent with this
scheme.
EXPORT ORIENTED UNITS (EOUs), ELECTRONICS HARDWARE TECHNOLOGY PARKS

(EHTPs), SOFTWARE TECHNOLOGY PARKS (STPs) AND BIO-TECHNOLOGY PARKS
(BTPs)
Introduction and Objective
(a) Units undertaking to export their entire production of goods and services (except permissible sales
in DTA), may be set up under the Export Oriented Unit (EOU) Scheme, Electronics Hardware
Technology Park (EHTP) Scheme, Software Technology Park (STP) Scheme or Bio-Technology
Park (BTP) Scheme for manufacture of goods, including repair, re-making, reconditioning, re-
engineering, rendering of services, development of software, agriculture including agro-processing,
aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisciculture, viticulture,
poultry and sericulture. Trading units are not covered under these schemes.
(b) Objectives of these schemes are to promote exports, enhance foreign exchange earnings, attract
investment for export production and employment generation.
Export and Import of Goods

(a) An EOU/EHTP/STP/BTP unit may export all kinds of goods and services except items that are
prohibited in ITC (HS).
(b) Export of Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) shall
be subject to fulfilment of the conditions indicated in ITC (HS). In respect of an EOU, permission to
export a prohibited item may be considered, by Board of Approval (BOA), on a case to case basis,
provided such raw materials are imported and there is no procurement of such raw material from
Domestic Tariff Area (DTA).
(c) Procurement and supply of export promotion material like brochure/literature, pamphlets, hoardings,
catalogues, posters etc up to a maximum value limit of 1.5% of FOB value of previous years exports
shall also be allowed.
(d) An EOU/EHTP/STP/BTP unit may import and/or procure, from Domestic Tariff Area or bonded
warehouses in Domestic Tariff Area/international exhibition held in India, without payment of duty,
all types of goods, including capital goods, required for its activities, provided they are not prohibited
items of import in the ITC (HS). Any permission required for import under any other law shall be
applicable. Units shall also be permitted to import goods including capital goods required for
approved activity, free of cost or on loan/lease from clients. Import of capital goods will be on a self-
certification basis. Goods imported by a unit shall be with actual user condition and shall be utilized
for export production.
(e) State Trading regime shall not apply to EOU manufacturing units. However, in respect of Chrome
Ore/Chrome concentrate, State Trading Regime as stipulated in export policy of these items, will be
applicable to EOUs.
(f) EOU/EHTP/STP/BTP units may import/procure from Domestic Tariff Area, without payment of duty,
certain specified goods for creating a central facility. Software EOU/DTA units may use such facility
for export of software.
(g) An EOU engaged in agriculture, animal husbandry, aquaculture, floriculture, horticulture,
pisciculture, viticulture, poultry or sericulture may be permitted to remove specified goods in
connection with its activities for use outside bonded area.
(h) Gems and jewellery EOUs may source gold/silver/platinum through nominated agencies on
loan/outright purchase basis. Units obtaining gold/silver/platinum from nominated agencies, either
on loan basis or outright purchase basis shall export gold/silver/platinum within 90 days from date of
release.
(i) EOU/EHTP/STP/BTP units, other than service units, may export to Russian Federation in Indian
Rupees against repayment of State Credit/ Escrow Rupee Account of buyer subject to RBI
clearance, if any.
(j) Procurement and export of spares/components, upto 5% of FOB value of exports, may be allowed
to same consignee/buyer of the export article, subject to the condition that it shall not count for Net
Foreign Exchange (NFE) and direct tax benefits.
(k) BOA may allow, on a case to case basis, requests of EOU/EHTP/STP/ BTP units in sectors other
than Gems & Jewellery, for consolidation of goods related to manufactured articles and export
thereof along with manufactured article. Such goods may be allowed to be imported/procured from
DTA by EOU without payment of duty, to the extent of 5% FOB value of such manufactured articles
exported by the unit in preceding financial year. Details of procured/imported goods and articles
manufactured by the EOU will be listed separately in the export documents. In such cases, value of
procured/imported goods will not be taken into account for calculation of NFE and DTA sale
entitlement. Such procured/imported goods shall not be allowed to be sold in DTA. BOA may also
specify any other conditions.
Second hand Capital goods

Second hand capital goods, without any age limit, may also be imported duty free.
Leasing of Capital Goods

(a) An EOU/EHTP/STP/BTP unit may, on the basis of a firm contract between parties, source capital
goods from a domestic/foreign leasing company without payment of customs/excise duty. In such a
case, EOU/EHTP/STP/BTP unit and domestic/foreign leasing company shall jointly file documents
to enable import/procurement of capital goods without payment of duty.
(b) An EOU/EHTP/BTP/STP unit may sell capital goods and lease back the same from a Non Banking
Financial Company (NBFC), subject to the following conditions:
(i) The unit should obtain permission from the jurisdictional Deputy/Assistant Commissioner of
Customs or Central Excise, for entering into transaction of ‘Sale and Lease Back of Assets’, and
186 EP-EBCL
submit full details of the goods to be sold and leased back and the details of NBFC;
(ii) The goods sold and leased back shall not be removed from the unit’s premises;
(iii) The unit should be NFE positive at the time when it enters into sale and lease back transaction
with NBFC;
(iv) A joint undertaking by the unit and NBFC should be given to pay duty on goods in case of
violation or contravention of any provision of the notification under which these goods were
imported or procured, read with Customs Act, 1962 or Central Excise Act, 1944, and that the
lien on the goods shall remain with the Customs/Central Excise Department, which will have
first charge over the said goods for recovery of sum due from the unit to Government under
provision of Section 142(b) of the Customs Act, 1962 read with the Customs (Attachment of
Property of Defaulters for Recovery of Govt. Dues) Rules, 1995.
Net Foreign Exchange Earnings

EOU/EHTP/STP/BTP unit shall be a positive net foreign exchange earner except for sector specific provision of
Appendix 6 B of Appendices & ANFs, where a higher value addition shall be required. Net Foreign Exchange
(NFE) Earnings shall be calculated cumulatively in blocks of five years, starting from commencement of
production. Whenever a unit is unable to achieve NFE due to prohibition/restriction imposed on export of any
product mentioned in Letter of Permit (LoP), the five year block period for calculation of Net Foreign Exchange
(NFE) earnings may be suitably extended by Board of Approval. Further, wherever a unit is unable to achieve
NFE due to adverse market condition or any grounds of genuine hardship having adverse impact on functioning
of the unit, the five year block period for calculation of NFE earnings may be extended by Board of Approval for
a period of upto one year, on a case to case basis.
Letter of Permission/Letter of Intent and Legal Undertaking

(a) On approval, a Letter of Permission (LoP)/Letter of Intent (LoI) shall be issued by DC/designated
officer to EOU/ EHTP/STP/BTP unit. LoP/LoI shall have an initial validity of 2 years to enable the
Unit to construct the plant & install the machinery and by this time the unit should have commenced
production. In case the unit is not able to commence production in initial validity of 2 years, an
extension of one year may be given by the DC for valid reasons to be recorded in writing.
Subsequent extension of one year may be given by the Unit Approval Committee subject to
condition that two-thirds of activities including construction, relating to the setting up of the Unit are
complete and Chartered Engineer’s certificate to this effect is submitted by the Unit. Further
extension, if necessary, will be granted by the Board of Approval. Once unit commences production,
LoP/LoI issued shall be valid for a period of 5 years for its activities. This period may be extended
further by DC for a period of 5 years at a time.
(b) LoP/LoI issued to EOU/EHTP/STP/BTP units by concerned authority, subject to compliance of
provision pertaining to export and import of goods under EOU/EHTP/STP/BTP Scheme above,
would be construed as an Authorisation for all purposes.
(c) Unit shall execute an LUT with DC concerned. Failure to ensure positive NFE or to abide by any of
the terms and conditions of LoP/LoI/IL/LUT shall render the unit liable to penal action under
provisions of the FT (D&R) Act, as amended, and Rules and Orders made thereunder, without
prejudice to action under any other law/rules and cancellation or revocation of LoP/LoI/IL.
Investment Criteria
Only projects having a minimum investment of Rs. 1 Crore in plant & machinery shall be considered for
establishment as EOUs. However, this shall not apply to existing units, units in EHTP/STP/BTP, and EOUs
in Handicrafts/Agriculture/Floriculture/Aquaculture/Animal Husbandry/Information Technology, Services,
Brass Hardware and Handmade jewellery sectors. BOA may allow establishment of EOUs with a lower
investment criteria.
Applications & Approvals

(a) Applications for setting up of units under EOU scheme shall be approved or rejected by the Units
Approval Committee within 15 days as per criteria indicated in Handbook of Procedures (HBP).
(b) In other cases, approval may be granted by BOA set up for this purpose as indicated in HBP.
(c) Proposals for setting up EOU requiring industrial licence may be granted approval by DC after
clearance of proposal by BOA and Department of Industrial Policy & Promotion( DIPP) within 45
days.
(d) Applications for conversion into an EOU/EHTP/STP/BTP unit from existing DTA units, having an
investment of Rs. 50 crores and above in plant and machinery or exporting Rs. 50 crores and above
annually, shall be placed before BOA for a decision.
DTA Sale of Finished Products/Rejects/Waste/ Scrap/Remnants and By-products

Entire production of EOU/EHTP/STP/BTP units shall be exported subject to following:
(a) Units, other than gems and jewellery units, may sell goods upto 50% of FOB value of exports,
subject to fulfilment of positive NFE, on payment of concessional duties. Within entitlement of DTA
sale, unit may sell in DTA, its products similar to goods which are exported or expected to be
exported from units.
However, units which are manufacturing and exporting more than one product can sell any of these
products into DTA, upto 90% of FOB value of export of the specific products, subject to the
condition that total DTA sale does not exceed the overall entitlement of 50% of FOB value of
exports for the unit, as stipulated above. No DTA sale at concessional duty shall be permissible in
respect of motor cars, alcoholic liquors, books, tea (except instant tea), pepper & pepper products,
marble and such other items as may be notified from time to time. Such DTA sale shall also not be
permissible to units engaged in activities of packaging/ labelling/ segregation/ refrigeration/
compacting/ micronisation/ pulverization/ granulation/ conversion of monohydrate form of chemical
to anhydrous form or vice-versa.
Sales made to a unit in SEZ shall also be taken into account for purpose of arriving at FOB value of
export by EOU provided payment for such sales are made from Foreign Currency Account of SEZ
unit. Sale to DTA would also be subject to mandatory requirement of registration of pharmaceutical
products (including bulk drugs). An amount equal to Anti Dumping duty under section 9A of the
Customs Tariff Act, 1975 leviable at the time of import, shall be payable on the goods used for the
purpose of manufacture or processing of the goods cleared into DTA from the unit.
(b) For services, including software units, sale in DTA in any mode, including on line data
communication, shall also be permissible up to 50% of FOB value of exports and /or 50% of foreign
exchange earned, where payment of such services is received in foreign exchange.
(c) Gems and jewellery units may sell upto 10% of FOB value of exports of the preceding year in DTA,
subject to fulfilment of positive NFE. In respect of sale of plain jewellery, recipient shall pay
concessional rate of duty as applicable to sale from nominated agencies. In respect of studded
jewellery, duty shall be payable as applicable.
188 EP-EBCL
(d) Unless specifically prohibited in LoP, rejects within an overall limit of 50% may be sold in DTA on
payment of duties as applicable to sale under Sub - para 6.08 (a) on prior intimation to Customs
authorities. Such sales shall be counted against DTA sale entitlement. Sale of rejects upto 5% of
FOB value of exports shall not be subject to achievement of NFE.
(e) Scrap/waste/remnants arising out of production process or in connection therewith may be sold in
DTA, as per SION notified under Duty Exemption Scheme, on payment of concessional duties as
applicable, within overall ceiling of 50% of FOB value of exports. Such sales of
scrap/waste/remnants shall not be subject to achievement of positive NFE. In respect of items not
covered by norms, DC may fix adhoc norms for a period of six months and within this period,
norms should be fixed by Norms Committee. Ad-hoc norms will continue till such time norms are
fixed by Norms Committee. Sale of waste/scrap/remnants by units not entitled to DTA sale, or sales
beyond DTA sale entitlement, shall be on payment of full duties. Scrap/waste/remnants may also
be exported.
(f) There shall be no duties/taxes on scrap/waste/remnants, in case same are destroyed with
permission of Customs authorities.
(g) By-products included in LoP may also be sold in DTA subject to achievement of positive NFE, on
payment of applicable duties, within the overall entitlement of Sub - para 6.08 (a). Sale of by-
products by units not entitled to DTA sales, or beyond entitlements of Sub-para 6.08 (a), shall also
be permissible on payment of full duties.
(h) EOU/EHTP/STP/BTP units may sell finished products, except pepper and pepper products and
marble, which are freely importable under FTP in DTA, under intimation to DC, against payment of
full duties, provided they have achieved positive NFE. An amount equal to Anti Dumping duty under
section 9A of the Customs Tariff Act, 1975 leviable at the time of import, shall be payable on the
goods used for the purpose of manufacture or processing of the goods cleared into DTA from the
unit.
(i) In case of units manufacturing electronics hardware and software, NFE and DTA sale entitlement
shall be reckoned separately for hardware and software.
(j) In case of DTA sale of goods manufactured by EOU/EHTP/STP/BTP, where basic duty and CVD is
nil, such goods may be considered as non-excisable for payment of duty.
(k) In case of new EOUs, advance DTA sale will be allowed not exceeding 50% of its estimated exports
for first year, except pharmaceutical units where this will be based on its estimated exports for first
two years.
(l) Units in Textile and Granite sectors shall have an option to sell goods into DTA , on payment of an
amount equal to aggregate of duties of excise leviable under section 3 of the Central Excise Act,
1944 or under any other law for the time being in force, on like goods produced or manufactured in
India other than in an EOU, subject to the condition that they have not used duty paid imported
inputs in excess of 3% of the FOB value of exports of the preceding year and they have achieved
positive NFE. Once this option is exercised, the unit will not be allowed to import any duty free
inputs for any purpose.
(m) Procurement of spares/components, up to 2% of the value of manufactured articles, cleared into

DTA, during the preceding year, may be allowed for supply to the same consignee/buyer for the
purpose of after-sale-service. The same can be cleared in DTA on payment of applicable duty but
such clearances shall be within the overall entitlement of the unit for DTA sale at concessional rate
of duty as prescribed under DTA Sale of Finished Products/Rejects/Waste/ Scrap/Remnants and

By-products of EOU/EHTP/STP/BTP Scheme.
Other Supplies
Following supplies effected from EOU/EHTP/STP/BTP units will be counted for fulfilment of positive NFE.
Such supplies shall not include “marble”, except if such supply of marble is an inter unit supply as provided at
Sub - para (c) below:
(a) Supplies effected in DTA to holders of Advance Authorisation/Advance Authorisation for annual
requirement/DFIA under duty exemption/remission scheme/EPCG scheme. However, printing
sector EOUs (or any other sector that may be notified in HBP), can’t supply goods, where basic
customs duty and CVD is nil or exempted otherwise, to holders of Advance Authorisation/Advance
Authorization for annual requirement.
(b) Supplies affected in DTA against foreign exchange remittance received from overseas.
(c) Supplies to other EOU/EHTP/STP/BTP/SEZ units, provided that such goods are permissible for
procurement in terms of Export and Imports of Goods under EOU/EHTP/STP/BTP Scheme of FTP.
(d) Supplies made to bonded warehouses set up under FTP and/or under section 65 of Customs Act
and free trade and warehousing zones, where payment is received in foreign exchange.
(e) Supplies of goods and services to such organizations which are entitled for duty free import of such
items in terms of general exemption notification issued by MoF, as may be provided in HBP.
(f) Supplies of Information Technology Agreement (ITA-1) items and notified zero duty
telecom/electronics items.
(g) Supplies of items like tags, labels, printed bags, stickers, belts, buttons or hangers to DTA unit for
export.
(h) Supply of LPG produced in an EOU refinery to Public Sector domestic oil companies for being
supplied to household domestic consumers at subsidized prices under the Public Distribution
System (PDS) Kerosene and Domestic LPG Subsidy Scheme, 2002, as notified by the Ministry of
Petroleum and Natural Gas vide notification No. E-20029/18/2001-PP dated 28.01.2003 (hereinafter
referred to as PDS Scheme) subject to the following conditions:-
(i) Only supply of such quantity of LPG would be eligible for which Ministry of Petroleum and
Natural Gas declines permission for export and requires the LPG to be cleared in DTA; and
(ii) The Ministry of Finance by a notification has permitted duty free imports of LPG for supply
under the aforesaid PDS Scheme.
Export through others

An EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through another
exporter or any other EOU/EHTP/STP/SEZ unit subject to conditions mentioned in Para 6.19 of Hand Book
of Procedure.
Entitlement for Supplies from the DTA

(a) Supplies from DTA to EOU/EHTP/STP/BTP units will be regarded as “deemed exports” and DTA
supplier shall be eligible for relevant entitlements under chapter 7 of FTP, besides discharge of
export obligation, if any, on the supplier. Notwithstanding the above, EOU/EHTP/STP/BTP units
shall, on production of a suitable disclaimer from DTA supplier, be eligible for obtaining entitlements
190 EP-EBCL
specified in chapter 7 of FTP. For claiming deemed export duty drawback, they shall get brand rates
fixed by DC wherever All Industry Rates of Drawback are not available.
(b) Suppliers of precious and semi-precious stones, synthetic stones and processed pearls from DTA to
EOU shall be eligible for grant of Replenishment Authorisations at rates and for items mentioned in
HBP.
(c) In addition, EOU/EHTP/STP/BTP units shall be entitled to following:-
(i) Reimbursement of Central Sales Tax (CST) on goods manufactured in India. Simple interest @
6% per annum will be payable on delay in refund of CST, if the case is not settled within 30
days of receipt of complete application (as in Para 9.10 (b) of HBP).
(ii) Exemption from payment of Central Excise Duty on goods procured from DTA on goods
manufactured in India.
(iii) Reimbursement of duty paid on fuel procured from Domestic Oil Companies/Depots of
Domestic Oil Public Sector Undertakings as per drawback rate notified by DGFT from time to
time. Reimbursement of additional duty of excise levied on fuel under the Finance Acts would
also be admissible.
(iv) CENVAT Credit on service tax paid.
Other Entitlements
Other entitlements of EOU/EHTP/STP/BTP units are as under:
(a) Exemption from industrial licensing for manufacture of items reserved for SSI sector.
(b) Export proceeds will be realized within nine months.
(c) Units will be allowed to retain 100% of its export earnings in the EEFC account.
(d) Unit will not be required to furnish bank guarantee at the time of import or going for job work in DTA,
where:
(i) the unit has turnover of Rs. 5 crore or above;
(ii) the unit is in existence for at least three years; and
(iii) the unit:
(1) has achieved positive NFE/export obligation wherever applicable;
(2) has not been issued a show cause notice or a confirmed demand, during the preceding 3
years, on grounds other than procedural violations, under the penal provision of the
Customs Act, the Central Excise Act, the Foreign Trade (Development & Regulation) Act,
the Foreign Exchange Management Act, the Finance Act, 1994 covering Service Tax or
any allied Acts or the rules made thereunder, on account of fraud/collusion/wilful mis-
statement/suppression of facts or contravention of any of the provisions thereof;
(e) 100% FDI investment permitted through automatic route similar to SEZ units.
(f) Units shall pay duty on the goods produced or manufactured and cleared into DTA on monthly basis in
the manner prescribed in the Central Excise Rules.
(g) The Units Approval Committee may consider on a case-to-case basis request for sharing of
infrastructural facilities among EOUs and it shall forward its recommendation to the Board of Approval for
its consideration. While accepting such proposals, the NFE obligations of the Units shall not be altered.
Such facilities will be available to Units in EHTP/STP after getting approval from IMSC. However, sharing
of facilities between EOUs and SEZ Units shall not be permitted.
Inter Unit Transfer

(a) Transfer of manufactured goods from one EOU/EHTP/STP/BTP unit to another
EOU/EHTP/STP/BTP unit is allowed with prior intimation to concerned Development
Commissioners of the transferor and transferee units as well as concerned Customs authorities,
following procedure of in-bond movement of goods. Transfer of manufactured goods shall also be
allowed from EOU/EHTP/STP/BTP unit to a SEZ developer or unit as per procedure prescribed in
SEZ Rules, 2006.
(b) Capital goods may be transferred or given on loan to other EOU/EHTP/STP/BTP/SEZ units, with
prior intimation to concerned DC and Customs authorities.
Such transferred goods may also be returned by the second unit to the original unit in case of
rejection or for any reason without payment of duty.
(c) Goods supplied by one unit of EOU/EHTP/STP/BTP to another unit shall be treated as imported
goods for second unit for payment of duty, on DTA sale by second unit.
(d) In respect of a group of EOUs/EHTPs/STPs/BTP Units which source inputs centrally in order to
obtain bulk discount and/or reduce cost of transportation and other logistics cost and/or to maintain
effective supply chain, inter unit transfer of goods and services may be permitted on a case-to-case
basis by the Unit Approval Committee. In case inputs so sourced are imported and then transferred
to another unit, then value of the goods so transferred shall be taken as inflow for the unit
transferring these goods and as outflow for the unit receiving these goods, for the purpose of
calculation of NFE.
Sub – Contracting
(a) (i) EOU/EHTP/STP/BTP units, including gems and jewellery units, may on the basis of annual
permission from Customs authorities, sub - contract production processes to DTA through job
work which may also involve change of form or nature of goods, through job work by units in
DTA.
(ii) These units may sub - contract upto 50% of overall production of previous year in value terms in
DTA with permission of Customs authorities.
(b) (i) EOU may, with annual permission from Customs authorities, undertake job work for export, on
behalf of DTA exporter, provided that goods are exported directly from EOU and export
document shall jointly be in name of DTA/EOU. For such exports, DTA units will be entitled for
refund of duty paid on inputs by way of brand rate of duty drawback.
(ii) Duty free import of goods for execution of export order placed on EOU by foreign supplier on
job work basis, would be allowed subject to condition that no DTA clearance shall be allowed.
(iii) Sub - contracting of both production and production processes may also be undertaken without
any limit through other EOU/EHTP/STP/ BTP/SEZ units, on the basis of records maintained in
unit.
(iv) EOU/EHTP/STP/BTP units may sub - contract part of production process abroad and send
intermediate products abroad as mentioned in LoP. No permission would be required when
goods are sought to be exported from sub - contractor premises abroad. When goods are
192 EP-EBCL
sought to be brought back, prior intimation to concerned DC and Customs authorities shall be
given.
(c) Scrap/waste/remnants generated through job work may either be cleared from job worker’s
premises on payment of applicable duty on transaction value or destroyed in presence of
Customs/Central Excise authorities or returned to unit. Destruction shall not apply to gold, silver,
platinum, diamond, precious and semi-precious stones.
(d) Sub - contracting/exchange by gems and jewellery EOUs through other EOUs or SEZ units or units
in DTA, shall be as per procedure indicated in Hand Book of Procedure.
Sale of Unutilized Material

(a) In case an EOU/EHTP/STP/BTP unit is unable to utilize goods and services, imported or procured
from DTA, it may be:
(i) Transferred to another EOU/EHTP/STP/BTP/SEZ unit; or
(ii) Disposed of in DTA with approval of Customs authorities on payment of applicable duties and
submission of import authorization; or
(iii) Exported.
Such transfer from EOU/EHTP/STP/BTP unit to another such unit would be treated as import
for receiving unit.
(b) Capital goods and spares that have become obsolete/surplus, may either be exported, transferred
to another EOU/EHTP/STP/BTP/SEZ unit or disposed of in DTA on payment of applicable duties.
Benefit of depreciation, as applicable, will be available in case of disposal in DTA only when the unit
has achieved positive NFE taking into consideration the depreciation allowed. No duty shall be
payable in case capital goods, raw material, consumables, spares, goods manufactured, processed
or packaged, and scrap/waste/remnants/rejects are destroyed within unit after intimation to
Customs authorities or destroyed outside unit with permission of Customs authorities. Destruction
as stated above shall not apply to gold, silver, platinum, diamond, precious and semi-precious
stones.
(c) In case of textile sector, disposal of left over material/fabrics upto 2% of CIF value or quantity of
import, whichever is lower, on payment of duty on transaction value, may be allowed, subject to
certification of Central Excise/Customs officers that these are leftover items.
(d) Disposal of used packing material will be allowed on payment of duty on transaction value.
Reconditioning/Repair and Re - engineering

(a) EOUs shall be set up with approval of UAC to carry out reconditioning, repair, remaking, testing,
calibration, quality improvement, upgradation of technology and re-engineering activities for export
in foreign currency.
(b) EHTP/STP/BTP units shall be set up with approval of IMSC to carry out reconditioning, repair,
remaking, testing, calibration, quality improvement, upgradation of technology and re-engineering
activities for export in foreign currency.
Replacement/Repair of Imported/Indigenous Goods

(a) General provisions of FTP relating to export/import of replacement/repair of goods would also apply
equally to EOU/EHTP/STP/BTP units. Cases not covered by these provisions shall be considered
on merits by Development Commissioner (DC).
(b) Goods sold in DTA and not accepted for any reasons, may be brought back for repair/replacement,
under intimation to concerned jurisdictional Customs/Central Excise authorities.
(c) Goods or parts thereof, on being imported/indigenously procured and found defective or otherwise
unfit for use or which have been damaged or become defective subsequently, may be returned and
replacement obtained or destroyed. In the event of replacement, goods may be brought back from
foreign suppliers or their authorized agents in India or indigenous suppliers. The unit can take free
of cost replacement (duty paid) from the authorized agents in India of foreign suppliers, provided the
defective part is re - exported or destroyed. However, destruction shall not apply to precious and
semi-precious stones and precious metals.
Exit from EOU Scheme

(a) With approval of Development Commissioner, an EOU may opt out of scheme. Such exit shall be
subject to payment of Excise and Customs duties and industrial policy in force.
(b) If unit has not achieved obligations, it shall also be liable to penalty at the time of exit.
(c) In the event of a gems and jewellery unit ceasing its operation, gold and other precious metals,
alloys, gems and other materials available for manufacture of jewellery, shall be handed over to an
agency nominated by Department of Commerce (DoC), at price to be determined by that agency.
(d) An EOU/EHTP/STP/BTP unit may also be permitted by Development Commissioner to exit from the
scheme at any time on payment of duty on capital goods under the prevailing EPCG Scheme for
DTA Units. This will be subject to fulfilment of positive NFE criteria under EOU scheme, eligibility
criteria under EPCG scheme and standard conditions indicated in Hand Book of Procedure.
(e) Unit proposing to exit out of EOU scheme shall intimate DC and Customs and Central Excise
authorities in writing. Unit shall assess duty liability arising out of de-bonding and submit details of
such assessment to Customs and Central Excise authorities. Customs and Central Excise
authorities shall confirm duty liabilities on priority basis, subject to the condition that the unit has
achieved positive NFE, taking into consideration the depreciation allowed. After payment of duty
and clearance of all dues, unit shall obtain “No Dues Certificate” from Customs and Central Excise
authorities.
On the basis of “No Dues Certificate” so issued by the Customs and Central Excise authorities, unit
shall apply to Development Commissioner for final de-bonding. In case there is no proceeding
pending under FT(D&R) Act, as amended, Development Commissioner shall issue final de-bonding
order within a period of 7 working days. Between “No Dues Certificate” issued by Customs and
Central Excise authorities and final de-bonding order by DC, unit shall not be entitled to claim any
exemption for procurement of capital goods or inputs. However, unit can claim Advance
Authorisation/DFIA/Duty Drawback. Since the duty calculations and dues are disputed and take a
long time, a BG/Bond/Instalment processes backed by BG shall be provided for expediting the exit
process.
(f) In cases where a unit is initially established as DTA unit with machines procured from abroad after
payment of applicable import duty, or from domestic market after payment of excise duty, and unit is
subsequently converted to EOU, in such cases removal of such capital goods to DTA after de-
bonding would be without payment of duty. Similarly, in cases where a DTA unit imported capital
goods under EPCG Scheme and after completely fulfilling export obligation gets converted into
EOU, unit would not be charged customs duty on capital goods at the time of removal of such
capital goods in DTA when de-bonding.
194 EP-EBCL
(g) An EOU/EHTP/STP/BTP unit may also be permitted by DC to exit under Advance Authorization as
one time option. This will be subject to fulfilment of positive NFE criteria.
(h) A simplified procedure may be provided to fast track the De-bonding/ Exit of the STP/EHTP Unit
which has not availed any duty benefit on procurement of raw material, capital goods etc.
Conversion
(a) Existing DTA units may also apply for conversion into an EOU/EHTP/STP/BTP unit.
(b) Existing EHTP/STP units may also apply for conversion/merger to EOU unit and vice-versa. In such
cases, units will remain in bond and avail exemptions in duties and taxes as applicable.
Monitoring of NFE
Performance of EOU/EHTP/STP/BTP units shall be monitored by Units Approval Committee as per
guidelines in HBP.
Export through Exhibitions/Export Promotion Tours/Showrooms Abroad/Duty Free Shops

EOU/EHTP/STP/BTP are permitted to:
Personal Carriage of Import/Export Parcels including through Foreign Bound Passengers

Import/export through personal carriage of gems and jewellery items may be undertaken as per Customs
procedure. However, export proceeds shall be realized through normal banking channel. Import/export
through personal carriage by units, other than gems and jewellery units, shall be allowed provided goods are
not in commercial quantity. An authorized person of Gems & Jewellery EOU may also import gold in primary
form, upto 10 Kgs in a financial year through personal carriage, as per guidelines prescribed by Reserve
Bank Of India and Department of Revenue.
Export/Import by Post/Courier
Goods including free samples, may be exported/imported by air freight or through foreign post office or
through courier, as per Customs procedure.
Revival of Sick Units
Subject to a unit being declared sick by appropriate authority, proposals for revival of the unit or its take over
may be considered by Board of Approval.

Approval of EHTP/STP
In case of units under EHTP/STP schemes, necessary approval/permission under relevant paras of this
Chapter shall be granted by officer designated by Ministry of Communication and Information Technology,
Department of Electronics & Information Technology, instead of Development Commissioner, and by Inter-
Ministerial Standing Committee (IMSC) instead of Board of Approval.
Approval of BTP
Bio-Technology Parks (BTP) would be notified by DGFT on recommendations of Department of
Biotechnology. In case of units in BTP, necessary approval/permission under relevant provisions of this
chapter will be granted by designated officer of Department of Biotechnology.
Warehousing Facilities
An EOU which intends to set up warehousing facilities outside the EOU premises and outside the jurisdiction of
Development Commissioner, at a place near to the port of export, to reduce lead time for delivery of goods
overseas and to address unpredictability of supply orders, is permitted to do so subject to the provisions related
to export warehousing as per terms and conditions of Notifications issued by the Department of Revenue.
QUALITY COMPLAINTS AND TRADE DISPUTES
Objective
Exporters need to project a good image of the country abroad to promote exports. Maintaining an enduring
relationship with foreign buyers is of utmost importance, and complaints or trade disputes, whenever they
arise, need to be settled amicably as soon as possible. Importers too may have grievances as well.
In an endeavour to resolve such complaints or trade disputes and to create confidence in the business
environment of the country, a mechanism is being laid down to address such complaints and disputes in an
amicable way.
Quality Complaints/ Trade Disputes

The following type of complaints may be considered:
Complaints received from foreign buyers in respect of poor

quality of the products supplied by exporters from India
Complaints of importers against foreign suppliers in respect

of quality of the products supplied
Complaints of unethical commercial dealings categorized

mainly as non-supply/partial supply of goods after confirmation
of order; supplying goods other than the ones as agreed upon;
non-payment; non-adherence to delivery schedules, etc.
196 EP-EBCL
Obligation on the part of importer/ exporter

(a) Rule 11 of the Foreign Trade (Regulation) Rules, 1993, requires that on the importation into, or
exportation out of, any customs ports of any goods, whether liable to duty or not, the owner of such
goods shall in the Bill of Entry or the Shipping Bill or any other documents prescribed under the
Customs Act, 1962 (52 of 1962), state the value, quality and description of such goods to the best of
his knowledge and belief and in case of exportation of goods, certify that the quality and
specification of the goods as stated in those documents, are in accordance with the terms of the
export contract entered into with the buyer or consignee in pursuance of which the goods are being
exported and shall subscribe a declaration of the truth of such statement at the foot of such Bill of
Entry or Shipping Bill or any other documents. Violation of this provision renders the exporter liable
for penal action.
(b) Certain export commodities have been notified for Compulsory Quality Control & Pre-shipment
Inspection prior to their export. Penal action can be taken under the Export (Quality Control &
Inspection) Act, 1963 as amended in 1984, against exporters who do not conform to these
standards and/ or provisions of the Act as laid down for such products.
Provisions in FT (D&R) Act & FT (Regulation) Rules for necessary action against erring
exporters/importers
Action against erring exporters can be taken under the Foreign Trade (Development and Regulation) Act,
1992, as amended and under Foreign Trade (Regulation) Rules, 1993, as follows:-
(a) Section 8 of the Act empowers the Director General of Foreign Trade or any other person
authorized by him to suspend or cancel the Importer Exporter Code Number for the reasons as
given therein.
(b) Section 9 (2) of the Act empowers the Director General of Foreign Trade or an officer authorised by
him to refuse to grant or renew a license, certificate, scrip or any other instrument bestowing
financial or fiscal benefit granted under the Act.
(c) Section 9(4) empowers the Director General of Foreign Trade or the officer authorized by him to
suspend or cancel any License, certificate, scrip or any instrument bestowing financial or fiscal
benefit granted under the Act.
(d) Section 11(2) of the Act provides for imposition of fiscal penalty in cases where a person makes or
abets or attempts to make any import or export in contravention of any provision of the Act, any
Rules or Orders made there under or the Foreign Trade Policy.
Mechanism for handling of Complaints/ Disputes

(a) Committee on Quality complaints and Trade Disputes (CQCTD)
To deal effectively with the increasing number of complaints and disputes, a ‘Committee on Quality
Complaints and Trade Disputes’ (CQCTD) will be constituted in the 22 offices of the Regional Authority(RA’s)
of DGFT.
(b) Composition of the CQCTD
The CQCTD would be constituted under the Chairpersonship of the Head of Office. The CQCTD may
comprise of the following members:
1. Additional DGFT/Joint DGFT/ (H.O.O): Chairperson
2. Representative of Bureau of India Standard (BIS): Member
3. Representative of Agricultural and Processed Food Products Export Development Authority:

Member
4. Representative of the Branch Manager of the concerned Bank: Member
5. Representative of Federation of Indian Exporter Organisation/and OR Export Promotion Council:
Member
6. Representative of Export Inspection Agency: Member
7. Nominee of Director of Industries of State Government: Member
8. Nominee of Development Commissioner of MSME: Member
9. Officer as nominated by Chairperson: Member Secretary
10. Any other agency, as co-opted by Chairperson: Member.
(c) Functions of CQCTD
The Committee (CQCTD) will be responsible for enquiring and investigating into all Quality related
complaints and other trade related complaints falling under the jurisdiction of the respective RAs. It will take
prompt and effective steps to redress and resolve the grievances of the importers, exporters and overseas
buyers, preferably within three months of receipt of the complaint. Wherever required, the Committee
(CQCTD) may take the assistance of the Export Promotion Councils/FIEO/Commodity Boards or any other
agency as considered appropriate for settlement of these disputes.
Proceedings under CQCTD
CQCTD proceedings are only reconciliatory in nature and the aggrieved party, whether the foreign buyer or
the Indian importer, is free to pursue any legal recourse against the other erring party.
Procedures to deal with complaints and trade disputes
The procedure for making an application for such complaints or trade disputes and the procedure to deal
with such quality complaints and disputes is given in the Handbook of Procedures.
Corrective Measures
The Committee at RA level can authorize the Export Inspection Agency or any technical authority to assess
whether there has been any technical failure of not meeting the standards, manufacturing/ design defects,
etc. for which complaints have been received.
Nodal Officer
Director General of Foreign Trade would appoint an officer, not below the rank of Joint Director General, in
the Headquarters, to function as the ‘Nodal Officer’ for coordinating with various Regional Authorities of
DGFT.
LESSON ROUND-UP
• India’s Foreign Trade Policy (FTP) has, conventionally, been formulated for five years at a time and
reviewed annually. The focus of the FTP has been to provide a framework of rules and
procedures for exports and imports and a set of incentives for promoting exports.
• The Foreign Trade Policy is primarily focused on accelerating exports. This is sought to be
implemented through various schemes intended to exempt and remit indirect taxes on inputs physically
incorporated in the export product, import capital goods at concessional duty, stimulate services
exports and focus on specific markets and products.
• The Foreign Trade Policy, 2015-20, is notified by Central Government, in exercise of powers conferred
198 EP-EBCL
under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992 (No. 22 of 1992) [FT (D&R)
Act], as amended. The Foreign Trade Policy, 2015-20 came into force with effect from 01.04.2015.
• Capital Goods means any plant, machinery, equipment or accessories required for manufacture or
production, either directly or indirectly, of goods or for rendering services, including those required
for replacement, modernisation, technological up-gradation or expansion. It includes packaging
machinery and equipment, refrigeration equipment, power generating sets, machine tools, equipment and
instruments for testing, research and development, quality and pollution control.
• An Importer-Exporter Code (IEC) Number is a 10-digit number allotted to a person that is

mandatory for undertaking any export/import activities. Now the facility for IEC in electronic form or
e-IEC has also been operationalised.
• The objective of the Export from India Schemes is to provide rewards to exporters to offset
infrastructural inefficiencies and associated costs involved and to provide exporters a level playing field.
• Status Holders are business leaders who have excelled in international trade and have successfully
contributed to country’s foreign trade. Status Holders are expected to not only contribute towards India’s
exports but also provide guidance and handholding to new entrepreneurs.
• The objective of the Export Promotion Capital Goods(EPCG) Scheme is to facilitate import of capital goods
for producing quality goods and services to enhance India’s export competitiveness.
• Units undertaking to export their entire production of goods and services (except permissible sales in DTA),
may be set up under the Export Oriented Unit (EOU) Scheme, Electronics Hardware Technology Park
(EHTP) Scheme, Software Technology Park (STP) Scheme or Bio-Technology Park (BTP) Scheme for
manufacture of goods, including repair, re-making, reconditioning, re-engineering, rendering of
services, development of software, agriculture including agro-processing, aquaculture, animal
husbandry, bio-technology, floriculture, horticulture, pisciculture, viticulture, poultry and sericulture.
Trading units are not covered under these schemes.
SELF-TEST QUESTIONS
evaluation)
1. What are the objectives of foreign trade policy?
2. Discuss briefly the Export Oriented Unit (EOU) Scheme under FTP 2015-20.
3. What do you mean by IEC Number/e-IEC?
4. Distinguish between Merchandise Exports from India Scheme (MEIS) and Service Exports
from India Scheme (SEIS).
• Status Holder
• Quality Complaints and Trade Disputes
Lesson 10
Non-Banking Financial
Companies (NBFCs)
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning Objectives
The NBFC (Non-Banking Finance Company) sector
• Types of NBFCs has grown in size and complexity over the years. The
• Registration as NBFC Reserve Bank of India is entrusted with the
responsibility of regulating and supervising the Non-
• Prudential Regulation Banking Financial Companies by virtue of powers
• Micro Finance Institutions vested in Chapter III B of the Reserve Bank of India
Act, 1934.
• Deposit Accepting and Non-deposit
Accepting NBFCs The object of the study is to familiarize the
students with the Non-Banking Financial Company
• Corporate Governance
(NBFC) engaged in the business of loans and
• Systemically Important Core Investment advances, acquisition of shares/stocks/ bonds/
Companies debentures/securities issued by Government or local
• Peer to Peer Lending authority or other marketable securities of a like
nature, leasing, hire-purchase, insurance business,
• Lesson Round up
chit business etc.
200 EP-EBCL
INTRODUCTION
The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking
Financial Companies by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934. The
regulatory and supervisory objective, is to:
Ensure healthy growth of financial companies

financial companies
Ensure that these companies function as a part of the financial system within the
policy framework, in such a manner that their existence and functioning do not lead
to systemic aberrations
The quality of surveillance and supervision exercised by the Bank over the NBFC’s is
sustained by keeping pace with the developments that take place in this sector of the
financial system.
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, engaged in
the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable securities of a like nature, leasing, hire-purchase,
insurance business, chit business but does not include any institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any
services and sale/purchase/construction of immovable property
A non-banking institution which is a company and has principal business of receiving deposits under any
scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is
also a non-banking financial company (Residuary non-banking company).
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are
few differences such as:
NBFC cannot accept demand deposits
NBFC’s do not form part of the payment and settlement system and
cannot issue cheques drawn on itself
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation

is not available to depositors of NBFC’s, unlike in the case of banks
Registration with RBI

A company incorporated under the Companies Act and desirous of commencing business of non-banking
Lesson 10 Non-Banking Financial Companies 201
financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply with the following:
i. it should be a company registered under the Companies Act, and
ii. It should have a minimum net owned fund.
It may be noted that ‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares which
are compulsorily convertible into equity, free reserves, balance in share premium account and capital
reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by
revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue expenditure
and other intangible assets.
'Net Owned Fund' is the amount as arrived at above, minus the amount of investments of such company in
shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of
debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and
deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned
fund.
In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry
on business of a non-banking financial institution without obtaining a certificate of registration from the
Reserve Bank.
However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs
which are regulated by other regulators are exempted from the requirement of registration with RBI viz.
Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI,
Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified
under the Companies Act, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act,
1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit
company.
Categories of NBFCs registered with RBI
NBFCs are categorized:
● In terms of type
of
202 EP-EBCL
Types of NBFCs
Asset Finance Company (AFC)

An AFC is a company which is a financial institution carrying on as its principal business the financing of
physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines,
generator sets, earth moving and material handling equipments, moving on own power and general purpose
industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical
assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and
total income respectively.
Investment Company (IC)

IC means any company which is a financial institution carrying on as its principal business the acquisition of
securities,
Loan Company (LC)

LC means any company which is a financial institution carrying on as its principal business the providing of
finance whether by making loans or advances or otherwise for any activity other than its own but does not
include an Asset Finance Company.
Infrastructure Finance Company (IFC)

IFC is a non-banking finance company
(a) which deploys at least 75 per cent of its total assets in infrastructure loans,
(b) has a minimum Net Owned Funds of `300 crore,
(c) has a minimum credit rating of ‘A ‘or equivalent,

( d) a CRAR of 15%.
Systemically Important Core Investment Company (CIC-ND-SI)

CIC-ND-SI is a NBFC carrying on the business of acquisition of shares and securities which satisfies the
following conditions:-
(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference
shares, debt or loans in group companies;
(b) its investments in the equity shares (including instruments compulsorily convertible into equity
shares within a period not exceeding 10 years from the date of issue) in group companies
constitutes not less than 60% of its Total Assets;
(c) it does not trade in its investments in shares, debt or loans in group companies except through
block sale for the purpose of dilution or disinvestment;
(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act,
1934 except investment in bank deposits, money market instruments, government securities, loans
to and investments in debt issuances of group companies or guarantees issued on behalf of group
companies;
(e) Its asset size is `100 crore or above, and
(f) It accepts public funds.
Infrastructure Debt Fund-Non- Banking Financial Company (IDF-NBFC)

IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure
projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year
maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)

NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying
assets which satisfy the following criteria:
a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding
`1,00,000 or urban and semi-urban household income not exceeding `1,60,000;
b. loan amount does not exceed `50,000 in the first cycle and `1,00,000 in subsequent cycles;
c. total indebtedness of the borrower does not exceed `1,00,000;
d. tenure of the loan not to be less than 24 months for loan amount in excess of `15,000 with
prepayment without penalty;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total
loans given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower.
Non-Banking Financial Company – Factors (NBFC-Factors)

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NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial
assets in the factoring business should constitute at least 50 percent of its total assets and its income
derived from factoring business should not be less than 50 percent of its gross income.
Mortgage Guarantee Companies (MGC)

MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee
business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is
Rs. 100 crore.
NBFC- Non-Operative Financial Holding Company (NOFHC)

NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter /
promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding
Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by
RBI or other financial sector regulators, to the extent permissible under the applicable regulatory
prescriptions.
Powers of the Reserve Bank

The Reserve Bank has been given the powers under the RBI Act, 1934 to register, lay down policy, issue
directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of
principal business.
The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders
issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of
Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or
filing a winding up petition.
Prudential Regulations applicable to NBFCs

The Reserve Bank has issued detailed directions on prudential norms:
Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking

Company (Reserve Bank) Directions, 2016
Non-Banking Financial Company – Systemically Important Non-Deposit taking

Company and Deposit taking Company (Reserve Bank) Directions, 2016
Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)

Directions, 2016
Core Investment Companies (Reserve Bank) Directions, 2016
Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank)

Directions, 2017
The directions inter- alia, prescribe guidelines on income recognition, asset classification and provisioning
requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital
adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for
NBFCs predominantly engaged in business of lending against gold jewellery, besides others.
Deposit accepting NBFCs have also to comply with the statutory liquidity requirements.
Salient features of NBFC regulations which the depositor may note at the time of investment
Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and
maximum period of 60 months. They cannot accept deposits repayable on demand.
NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The
present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter
than monthly rests.
NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
NBFCs should have minimum investment grade credit rating.
The deposits with NBFCs are not insured.
The repayment of deposits by NBFCs is not guaranteed by RBI.
Certain mandatory disclosures are to be made about the company in the Application Form issued by the
company soliciting deposits.
Returns to be submitted by deposit taking NBFCs

NBS-1 Quarterly Returns on deposits in First Schedule.
NBS-2 Quarterly return on Prudential Norms is required to be submitted by NBFC accepting public
deposits.
NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.
NBS-4 Annual return of critical parameters by a rejected company holding public deposits.
NBS-5 stands withdrawn as submission of NBS 1 has been made quarterly.)
NBS-6 Monthly return on exposure to capital market by deposit taking NBFC with total assets of `100
crore and above.
Half-yearly ALM return by NBFC holding public deposits of more than `20 crore or asset size of more
than `100 crore
Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
Branch Information Return.
Returns to be submitted by NBFCs-ND-SI

NBS-7 Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for NBFC-ND-SI.
Monthly Return on Important Financial Parameters of NBFCs-ND-SI.

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ALM returns such as:

(i) Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,
(ii) Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly,
(iii) Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearly
Branch Information return
Interest rate charge by NBFC

Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial institutions
(other than NBFC- Micro Finance Institution). The rate of interest to be charged by the company is governed
by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs.
However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of
interest to different categories of borrowers should be disclosed to the borrower or customer in the
application form and communicated explicitly in the sanction letter etc.
CORE INVESTMENT COMPANIES (RESERVE BANK) DIRECTIONS, 2016

Registration
Every CIC-ND-SI is required to apply to the Reserve Bank for grant of Certificate of Registration, irrespective
of any advice in the past, issued by the Bank, to the contrary, within a period of three months from the date
of becoming a CIC-ND-SI.
Every CIC exempted from registration requirement with Bank shall pass a Board Resolution to the effect that
it will not, in future, access public funds. However CICs may be required to issue guarantees or take on other
contingent liabilities on behalf of their group entities. Before doing so, all CICs must ensure that they can
meet the obligations thereunder, as and when they arise. In particular, CICs which are exempt from
registration requirement must be in a position to do so without recourse to public funds in the event the
liability devolves, else they should approach the Bank for registration before accessing public funds. If
unregistered CICs with asset size above `100 crore access public funds without obtaining a Certificate of
Registration (CoR) from the Bank, they shall liable for violating Core Investment Companies (Reserve Bank)
Directions, 2016.
Capital Requirements
Adjusted Net Worth of a CIC-ND-SI should at no point of time be less than 30% of its aggregate risk
weighted assets on balance sheet and risk adjusted value of off-balance sheet items as on the date of the
last audited balance sheet as at the end of the financial year prescribed under the Core Investment
Companies (Reserve Bank) Directions, 2016.
Leverage Ratio
The outside liabilities of a CIC-ND-SI should at no point of time exceed 2.5 times of its Adjusted Net Worth
as on the date of the last audited balance sheet as at the end of the financial year.
It may be noted that “adjusted net worth” means –

(a) the aggregate, as appearing in the last audited balance sheet as at the end of the financial year, of
Owned Funds.
(b) as increased by:-
(A) 50% of the unrealized appreciation in the book value of quoted investments as at the date of the
last audited balance sheet as at the end of the financial year (such appreciation being
calculated, as excess of aggregate market value of such investments over the book value of
such investments); and
(B) the increase, if any, in the equity share capital since the date of last audited balance sheet.
(c) as reduced by:-
(A) the amount of diminution in the aggregate book value of quoted investments (such diminution
being calculated as excess of the book value of such investments over the aggregate market
value of such investments); and
(B) the reduction, if any, in the equity share capital since the date of last audited balance sheet.
Accounting of investments
(1) (a) The Board of Directors of every CIC-ND-SI should frame investment policy for the company and
shall implement the same;
(b) The criteria to classify the investments into current and long term investments shall be spelt out
by the Board of the company in the investment policy;
(c) Investments in securities should be classified into current and long term, at the time of making
each investment;
(d) In case of inter-class transfer –
(i) There should be no such transfer on ad-hoc basis;
(ii) Such transfer, if warranted, should be effected only at the beginning of each half year, on April 1
or October 1, with the approval of the Board;
(iii) The investments should be transferred scrip-wise, from current to long-term or vice-versa, at
book value or market value, whichever is lower;
(iv) The depreciation, if any, in each scrip should be fully provided for and appreciation, if any, shall
be ignored;
(v) The depreciation in one scrip should not be set off against appreciation in another scrip, at the
time of such inter-class transfer, even in respect of the scrips of the same category.
(2) Quoted current investments should, for the purposes of valuation, be grouped into the following
categories, viz.
(i) equity shares,
(ii) preference shares,
(iii) debentures and bonds,
(iv) Government securities including treasury bills,
(v) units of mutual fund, and
(vi) others.
(3) Unquoted equity shares in the nature of current investments should be valued at cost or breakup
value, whichever is lower. However, CICs-ND-SI may substitute fair value for the breakup value of
the shares, if considered necessary. Where the balance sheet of the investee company is not
available for two years, such shares are to be valued at one Rupee only.
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(4) Unquoted preference shares in the nature of current investments should be valued at cost or face
value, whichever is lower.
(5) Investments in unquoted Government securities or Government guaranteed bonds should be

valued at carrying cost.
(6) Unquoted investments in the units of mutual funds in the nature of current investments should be
valued at the net asset value declared by the mutual fund in respect of each particular scheme.
(7) Commercial papers should be valued at carrying cost.
(8) A long term investment should be valued in accordance with the Accounting Standard issued by
ICAI.
Note: Unquoted debentures should be treated as term loans or other type of credit facilities depending upon
the tenure of such debentures for the purpose of income recognition and asset classification.
Need for policy on demand/ call loans

(1) The Board of Directors of every CIC-ND-SI granting/intending to grant demand/call loans should
frame a policy and implement for the company.
(2) Such policy shall, inter alia, stipulate the following,-
(i) A cut-off date within which the repayment of demand or call loan be demanded or called up;
(ii) The sanctioning authority is required to record specific reasons in writing at the time of
sanctioning demand or call loan, if the cut-off date for demanding or calling up such loan is
stipulated beyond a period of one year from the date of sanction;
(iii) The rate of interest to be payable on such loans;
(iv) Interest on such loans, as stipulated shall be payable either at monthly or quarterly rests;
(v) The sanctioning authority to record specific reasons in writing at the time of sanctioning demand
or call loan, if no interest is stipulated or a moratorium is granted for any period;
(vi) A cut-off date, for review of performance of the loan, not exceeding six months commencing
from the date of sanction;
(vii) Such demand or call loans need not be renewed unless the periodical review has shown
satisfactory compliance with the terms of sanction.
Acquisition / Transfer of Control of Systemically important CICs

A systemically important CIC, shall require prior written permission of the Reserve Bank for the following:
(a) any takeover or acquisition of control of CIC, which may or may not result in change of
management;
(b) any change in the shareholding of CIC, including progressive increases over time, which results
in acquisition / transfer of shareholding of 26 per cent or more of the paid up equity capital of the
CIC.
Provided that, prior approval shall not be required in case of any shareholding going beyond 26%
due to buyback of shares / reduction in capital where it has approval of a competent Court. The
same is to be reported to the Bank not later than one month from its occurrence;
(c) any change in the management of the CIC which results in change in more than 30 per cent of
the directors, excluding independent directors.
Provided that, prior approval need not be required in case of directors who get re-elected on
retirement by rotation.
Notwithstanding anything as above, CICs are required to continue to inform the Bank regarding any
change in their directors / management not later than one month from the occurrence of any
change.
Requirement of Prior Public Notice about change in control / management
(i) A public notice of at least 30 days is to be given before effecting the sale of, or transfer of the
ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such
public notice be given by the CIC and also by the other party or jointly by the parties concerned,
after obtaining prior permission of the Bank.
(ii) The public notice should indicate the intention to sell or transfer ownership / control, the particulars
of transferee and the reasons for such sale or transfer of ownership / control. The notice be
published in at least one leading national and in one leading local (covering the place of registered
office) vernacular newspaper.
The reporting requirements in respect of CIC-ND-SIs as prescribed by Department of Non-Banking
Supervision are required to be complied with.
Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and

Deposit taking Company (Reserve Bank) Directions, 2016
Applicability
The provisions of Non-Banking Financial Company - Systemically Important Non-Deposit taking Company
and Deposit taking Company (Reserve Bank) Directions, 2016 shall apply to the following:
(i) Every Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND-SI)
registered with the Bank under the provisions of RBI Act, 1934;
(ii) Every Deposit taking Non-Banking Financial Company (NBFC-D) registered with the Bank under
the provisions of RBI Act, 1934;
(iii) Every NBFC-Factor registered with the Bank under section 3 of the Factoring Regulation Act, 2011
and having an asset size of Rs. 500 crore and above;
(iv) Every Infrastructure Debt Fund – Non-Banking Finance Company (IDF-NBFC) registered with the
Bank under the provisions of RBI Act, 1934;
(v) Every Non-Banking Finance Company – Micro Finance Institutions (NBFC-MFIs) registered with the
Bank under the provisions of RBI Act, 1934 and having an asset size of Rs.500 crore and above;
(vi) Every Non-Banking Finance Company - Infrastructure Finance Company (NBFC-IFC) registered
with the Bank under the provisions of RBI Act, 1934 and having an asset size of `500 crore and
above.
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Registration
In exercise of the powers conferred under clause (b) of sub-section (1) of section 45 –IA of the Reserve Bank
of India Act, 1934 and all the powers enabling it in that behalf, the Reserve Bank, specifies two hundred
lakhs rupees as the Net Owned Fund (NOF) required for a non-banking financial company to commence or
carry on the business of non-banking financial institution, except wherever otherwise a specific requirement
as to NOF is prescribed by the Bank.
Provided that a non-banking financial company holding a Certificate of Registration (CoR) issued by the
Bank and having net owned fund of less than two hundred lakhs of rupees, may continue to carry on the
business of non-banking financial institution, if such company achieves net owned fund of two hundred lakhs
of rupees before April 1, 2017.
It will be incumbent upon such NBFCs, the NOF of which currently falls below Rs. 200 lakh, to submit a
statutory auditor's certificate certifying compliance with the prescribed levels by the end of the period as
given above.
NBFCs failing to achieve the prescribed level within the stipulated period shall not be eligible to hold the CoR
as NBFCs.
Capital Requirements
Every applicable NBFC shall maintain a minimum capital ratio consisting of Tier I and Tier II capital which
shall not be less than 15 percent of its aggregate risk weighted assets on-balance sheet and of risk adjusted
value of off-balance sheet items.
The Tier I capital in respect of applicable NBFCs (other than NBFC-MFI and IDFNBFC), at any point of time,
shall not be less than 8.5% by March 31, 2016 and10% by March 31, 2017.
Applicable NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 percent or
more of their financial assets) shall maintain a minimum Tier l capital of 12 percent.
Prudential Regulations
Every applicable NBFC shall comply with prudential regulations such as:
Income recognition
Income from investments
Accounting standards
Accounting of investments
Need for policy on demand/ call loans
Asset classification
Provisioning requirements
Standard asset provisioning
Disclosure in the balance sheet
Accounting year
Information with respect to change of address, directors, auditors, etc. to be submitted
Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries etc.
Fair Practices Code for applicable NBFC

Applicable NBFCs having customer interface shall adopt the following guidelines:
Disburseme
Loan nt of loans
Applications appraisal including
for loans and changes in Grievance
and their terms/condi terms and Redressal
processing tions conditions etc.
CORPORATE GOVERNANCE
Constitution of Committees of the Board
(1) Audit Committee
(i) All applicable NBFCs shall constitute an Audit Committee, consisting of not less than three members of its
Board of Directors.
Explanation I: The Audit Committee constituted by an applicable NBFC as required under section 177 of the
Companies Act, 2013 shall be the Audit Committee.
Explanation II: The Audit Committee constituted under this paragraph shall have the same powers, functions
and duties as laid down in section 177 of the Companies Act, 2013.
(ii) The Audit Committee must ensure that an Information System Audit of the internal systems and
processes is conducted at least once in two years to assess operational risks faced by the applicable
NBFCs.
(2) Nomination Committee
All applicable NBFCs shall form a Nomination Committee to ensure 'fit and proper' status of proposed/
existing directors.
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Explanation I: The Nomination Committee constituted under this paragraph shall have the same powers,
functions and duties as laid down in section 178 of the Companies Act, 2013.
(3) Risk Management Committee
To manage the integrated risk, all applicable NBFCs shall form a Risk Management Committee, besides the
Asset Liability Management Committee.
Fit and Proper Criteria

(1) All applicable NBFCs shall-
(i) ensure that a policy is put in place with the approval of the Board of Directors for ascertaining the fit
and proper criteria of the directors at the time of appointment, and on a continuing basis.
(ii) obtain a declaration and undertaking from the directors giving additional information on the
directors.
(iii) obtain a Deed of Covenant signed by the directors.
(iv) furnish to the Bank a quarterly statement on change of directors, and a certificate from the
Managing Director of the applicable NBFC that fit and proper criteria in selection of the directors has
been followed. The statement must reach the Regional Office of the Department of Non-Banking
Supervision of the Bank where the company is registered, within 15 days of the close of the
respective quarter. The statement submitted by applicable NBFC for the quarter ending March 31,
shall be certified by the auditors.
Provided that the Bank, if it deems fit and in public interest, reserves the right to examine the fit and
proper criteria of directors of any NBFC irrespective of the asset size of such NBFC.
Disclosure and transparency

(1) All applicable NBFCs shall put up to the Board of Directors, at regular intervals, as may be prescribed by
the Board in this regard, the following:
(i) the progress made in putting in place a progressive risk management system and risk management
policy and strategy followed by the applicable NBFC;
(ii) conformity with corporate governance standards viz., in composition of various committees, their
role and functions, periodicity of the meetings and compliance with coverage and review functions,
etc.
(2) All applicable NBFCs shall also disclose the following in their Annual Financial Statements:
(i) registration/ licence/ authorisation, by whatever name called, obtained from other financial sector
regulators;
(ii) ratings assigned by credit rating agencies and migration of ratings during the year;
(iii) penalties, if any, levied by any regulator;
(iv) information namely, area, country of operation and joint venture partners with regard to joint
ventures and overseas subsidiaries and
(v) Asset-Liability profile, extent of financing of parent company products, NPAs and movement of
NPAs, details of all off-balance sheet exposures, structured products issued by them as also
securitization/ assignment transactions and other disclosures.
Rotation of partners of the Statutory Auditors Audit Firm

All applicable NBFCs shall rotate the partner/s of the Chartered Accountant firm conducting the audit, every
three years so that same partner shall not conduct audit of the company continuously for more than a period
of three years.
However, the partner so rotated shall be eligible for conducting the audit of the applicable NBFC after an
interval of three years, if the applicable NBFC, so decides. The applicable NBFC shall incorporate
appropriate terms in the letter of appointment of the firm of auditors and ensure its compliance.
Framing of Internal Guidelines

All applicable NBFCs shall frame their internal guidelines on corporate governance with the approval of the
Board of Directors, enhancing the scope of the guidelines without sacrificing the spirit underlying the above
guidelines and it shall be published on the company's web-site, if any, for the information of various
stakeholders.
Applicability of Know Your Customer (KYC) Direction, 2016

All applicable NBFCs having customer interface shall follow the Know Your Customer (KYC) Direction, 2016,
issued by the Department of Banking Regulation as amended from time to time.
Need for public notice before Closure of the Branch / Office by applicable NBFC
Applicable NBFCs shall give at least three months public notice prior to the date of closure of any of its
branches / offices in, at least, one leading national newspaper and a leading local (covering the place of
branch / office) vernacular newspaper indicating therein the purpose and arrangements being made to
service the depositors etc.
All applicable NBFCs are required to comply with the reporting requirements as prescribed by Department of
Non-Banking Supervision.
NON-BANKING FINANCIAL COMPANY – PEER TO PEER LENDING PLATFORM (RESERVE

BANK) DIRECTIONS, 2017
Non-banking financial company - Peer to Peer Lending Platform” (NBFC-P2P) means a non-banking
institution which carries on the business of a Peer to Peer Lending Platform.
”Peer to Peer Lending Platform” is an intermediary providing services of loan facilitation via online medium or
otherwise, to person who has entered into an arrangement with NBFC-P2P to lend on it or to avail of loan
facilitation services provided by it.
Eligibility Criteria
(i) No non-banking institution other than a company can undertake the business of Peer to Peer
Lending Platform.
(ii) No NBFC-P2P can commence or carry on the business of a Peer to Peer Lending Platform without
obtaining a Certificate of Registration (hereinafter referred to as “CoR”) from the Bank. However, an
entity carrying on the business of a Peer-to-Peer Lending Platform as on the effective date of these
directions, can continue to do so, subject to the conditions laid down in this directions.
(iii) Every company seeking registration with the Bank as an NBFC-P2P is required to have a net
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owned fund of not less than rupees twenty million or such higher amount as the Bank may specify.
Scope of Activities
The scope of activities of a Non-banking financial company - Peer to Peer Lending Platform” (NBFC-P2P)
are as follows:
act as an intermediary providing an online marketplace or platform to the participants involved in Peer to
Peer lending;
not to raise deposits as defined by or under Section 45I(bb) of the Act or the Companies Act, 2013;
not to lend on its own;
not to provide or arrange any credit enhancement or credit guarantee;
not to facilitate or permit any secured lending linked to its platform; i.e. only clean loans will be permitted;
not to hold, on its own balance sheet, funds received from lenders for lending, or funds received from
borrowers for servicing loans; or such funds as stipulated Fund Transfer Mechanism
not to cross sell any product except for loan specific insurance products;
not to permit international flow of funds;
ensure adherence to legal requirements applicable to the participants as prescribed under relevant laws.
store and process all data relating to its activities and participants on hardware located within India.
Further, NBFC-P2P shall-

undertake due diligence on the participants;
undertake credit assessment and risk profiling of the borrowers and disclose the same to their
prospective lenders;
require prior and explicit consent of the participant to access its credit information;
undertake documentation of loan agreements and other related documents;
provide assistance in disbursement and repayments of loan amount;
render services for recovery of loans originated on the platform.
Process of Registration
(i) Every existing and prospective NBFC-P2P is required to make an application for registration to the
Department of Non-Banking Regulation, Mumbai of the Bank, in the form which will be specified by
the Bank for the purpose.
(ii) The Bank, for the purpose of considering the application for registration, shall require the following
conditions, among others, to be fulfilled:
• The company is incorporated in India;
• The company has the necessary technological, entrepreneurial and managerial resources to offer
such services to the participants;
• The company has the adequate capital structure to undertake the business of Peer to Peer
Lending Platform;
• The promoters and the Directors of the company are fit and proper;
• The general character of the management of the company is not prejudicial to the public interest;
• The company has submitted a plan for, or implemented, a robust and secure Information
Technology system;
• The company has submitted a viable business plan for conducting the business of Peer to Peer
Lending Platform;
• Public interest shall be served by the grant of CoR;
• Any other condition as may be specified by the Bank, fulfillment of which, in the opinion of the
Bank, is necessary to ensure that the commencement of or carrying on the business in India shall
not be prejudicial to the public interest.
Prudential Norms
(1) NBFC-P2P shall maintain a Leverage Ratio not exceeding 2.
(2) The aggregate exposure of a lender to all borrowers at any point of time, across all P2Ps, shall be
subject to a cap of Rs. 10,00,000/-.
(3) The aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a
cap of Rs. 10,00,000/-.
(4) The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs.
50,000/-.
(5) The maturity of the loans shall not exceed 36 months.
(6) P2Ps shall obtain a certificate from the borrower or lender, as applicable, that the limits prescribed
above are being adhered to.
Operational Guidelines
(1) NBFC-P2P shall have a Board approved policy in place -
• Setting out the eligibility criteria for participants on it.
• Determining the pricing of services provided by it.
• Setting out the rules for matching lenders with borrowers in an equitable and non-discriminatory
manner.
(2) The outsourcing of any activity by NBFC-P2P does not diminish its obligations and it shall be
responsible for the actions of its service providers including recovery agents and the confidentiality
of information pertaining to the participant that is available with the service providers.
(3) No loan shall be disbursed unless the individual lender/s have approved the individual recipient/s of
the loan and all concerned participants have signed the loan contract.
Transparency and Disclosure Requirements

(1) NBFC-P2P shall be required to disclose the following:
(i) to the lender
• details about the borrower/s including personal identity, required amount, interest rate sought
and credit score as arrived by the NBFC-P2P.
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• details about all the terms and conditions of the loan, including likely return, fees and taxes;
(ii) to the borrower - details about the lender/s including proposed amount, interest rate offered but
excluding personal identity and contact details;
(iii) publicly disclose on its website:
• overview of credit assessment/score methodology and factors considered;
• disclosures on usage/protection of data;
• grievance redressal mechanism;
• portfolio performance including share of non-performing assets on a monthly basis and
segregation by age; and
• its broad business model.
(2) NBFC-P2P shall ensure that the providing of services to a participant, who has applied for availing of
such services, is backed by appropriate agreements between the participants and the NBFC-P2P. The
agreements shall categorically specify all the terms and conditions among the borrower, the lender and the
NBFC-P2P.
(3) The interest rates displayed on the platform shall be in Annualized Percentage Rate (APR) format.
(1) The Bank may, from time to time, prescribe return/s to be submitted by NBFC-P2P, as it deems fit.
(2) The following quarterly statements shall be submitted to the aforesaid Regional Office within 15 days
after the quarter to which these relate.
(i) A statement, showing the number and amount in respect of loans;
disbursed during the quarter;
closed during the quarter; and
outstanding at the beginning and at the end of the quarter, including the number of lenders and
borrowers outstanding as at the end of the quarter
(ii) The amount of funds held in the Escrow Account, bifurcated into funds received from lenders and
funds received from borrowers, with credit and debit summations for the quarter.
(iii) Number of complaints outstanding at beginning and at end of quarter, and disposed of during the
quarter, bifurcated as received from lenders and borrowers.
(iv) The Leverage Ratio, with details of its numerator and denominator.
LESSON ROUND-UP
• The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking
Financial Companies by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934.
• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, engaged in the
business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance
business, chit business but does not include any institution whose principal business is that of agriculture
activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and
sale/purchase/construction of immovable property.
• The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue
directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of
principal business.
• The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders
issued by RBI under RBI Act.
• Non-banking financial company - Peer to Peer Lending Platform” (NBFC-P2P) means a non-banking institution
which carries on the business of a Peer to Peer Lending Platform.
SELF-TEST QUESTIONS
evaluation)
1. What is a Non-Banking Financial Company (NBFC)?
2. State the Types/Categories of NBFCs registered with RBI.
3. Is it necessary that every NBFC should be registered with RBI?
4. What are the requirements for registration with RBI?
5. Discuss peer to peer lending.
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Lesson 11
Special Economic Zones Act, 2005
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning Objectives Special Economic Zones (SEZ) are growth
engines that can boost manufacturing, augment
• Objective of SEZ Act, 2005
exports and generate employment. The SEZs
• Salient Features of the SEZ Act, 2005 require special fiscal and regulatory regime in order
to impart a hassle free operational regime
• Developers
encompassing the state of the art infrastructure and
• • Infrastructure Facilities support services.
• International Financial Service Centre Special Economic Zone (SEZ) is a specifically
delineated duty free enclave and shall be deemed to
• Establishment of SEZ
be foreign territory for the purposes of trade
• Guidelines for notifying SEZ operations and duties and tariffs. Goods and services
• Board of Approval going into the SEZ area from Domestic Tariff
Area treated as exports and goods coming from
• Development Commissioner the SEZ area into DTA treated as if these are being
• Setting of Unit imported.
• Offshore Banking Unit SEZ units may be set up for manufacture of

goods and rendering of services. The Government
• SEZ Authority of India had announced a Special Economic Zone
• Lesson Round Up scheme in April, 2000 with a view to provide an
internationally competitive environment for exports.
To instil confidence in investors and signal the
Government's commitment to a stable SEZ policy
regime and with a view to impart stability to the SEZ
regime thereby generating greater economic
activity and employment through the establishment of
SEZs, the Special Economic Zones Act, 2005,
was passed by Parliament in 2005.
students, how Special Economic Zones Act provides
single window approval mechanism, establishment
of Authority, Off-Shore Banking Units and Special
Court for Special Economic Zones.
SEZ Act, 2005 to provide for the establishment, development and management of the Special Economic
Zones for the promotion of exports and for matters connected therewith or incidental thereto.
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INTRODUCTION
While the policy relating to the Special Economic Zones is contained in the Foreign Trade Policy, incentives
and other facilities offered to the Special Economic Zone developer and units are implemented through
various notifications and circulars issued by the concerned Ministries/Departments. The system, therefore,
did not lend enough confidence for investors to commit substantial funds for development of infrastructure
and for setting up of the units in the Zones for export of goods and services. In order to give a long term and
stable policy framework with minimum regulatory regime and to provide expeditious and single window
clearance mechanism, the Government enacted Special Economic Zones Act, 2005.
The salient features of the Act are as under:—
(i) matters relating to establishment of Special Economic Zone and for setting up of units therein,
including requirements, obligations and entitlements;
(ii) matters relating to requirements for setting up of off-shore banking units and units in International
Financial Service Center in Special Economic Zone, including fiscal regime governing the operation
of such units;
(iii) the fiscal regime for developers of Special Economic Zones and units set up therein;
(iv) single window clearance mechanism at the Zone level;
(v) establishment of an Authority for each Special Economic Zone set up by the Central Government to
impart greater administrative autonomy; and
(vi) designation of special courts and single enforcement agency to ensure speedy trial and
investigation of notified offences committed in Special Economic Zones.
DEFINITIONS
Section 2 of the Act contains definitions of the terms used in the Act.
“Co-Developer” means a person who, or a State Government which, has been granted by the Central
Government a letter of approval under sub-section (12) of Section 3. [Section 2(f)]
“Developer”means a person who, or a State Government which, has been granted by the Central
Government a letter of approval under sub-section (10) of Section 3 and includes an Authority and a Co-
Developer. [Section 2(g)]
“Export” means—
(i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air
or by any other mode, whether physical or otherwise; or
(ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or
(iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or
different Special Economic Zone. [Section 2(m)]
“Import” means—
(i) bringing goods or receiving services, in a Special Economic Zone, by a Unit or Developer from a
place outside India by land, sea or air or by any other mode, whether physical or otherwise; or
Lesson 11 Special Economic Zones Act, 2005 221
(ii) receiving goods, or services by a Unit or Developer from another Unit or Developer of the same
Special Economic Zone or a different Special Economic Zone. [Section 2(o)]
“Infrastructure facilities” means industrial, commercial or social infrastructure or other facilities necessary
for the development of a Special Economic Zone or such other facilities which may be prescribed. [Section
2(p)]
“International Financial Services Centre” means an International Financial Services Centre which has
been approved by the Central Government under sub-section (1) of Section 18. [Section 2(q)]
“Manufacture” means to make, produce, fabricate, assemble, process or bring into existence, by hand or by
machine, a new product having a distinctive name, character or use and shall include processes such as
refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture,
aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and
mining. [Section 2(r)]
“Offshore Banking Unit” means a branch of a bank located in a Special Economic Zone and which has
obtained the permission under clause (a) of sub-section (1) of Section 23 of the Banking Regulation Act,
1949. [Section 2(u)]
“person”includes an individual, whether resident in India or outside India, a Hindu undivided family, co-
operative society, a company, whether incorporated in India or outside India, a firm, proprietary concern, or
an association of persons or body of individuals, whether incorporated or not, local authority and any agency,
office or branch owned or controlled by such individual, Hindu undivided family, co-operative, association,
body, authority or company. [Section 2(v)]
“Services” means such tradable services which.—

(i) are covered under the General Agreement on Trade in Services annexed as IB to the Agreement
establishing the World Trade Organisation concluded at Marrakesh on the 15th day of April, 1994;
(ii) may be prescribed by the Central Government for the purposes of this Act; and
(iii) earn foreign exchange.[Section 2(z)]
What is Special Economic Zone?
Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be
foreign territory for the purposes of trade operations and duties and tariffs.
Establishment of Special Economic Zone

Section 3 of the Act provides that the Central Government, State Government, or any other person, jointly or
severally, may establish a Special Economic Zone. Any person who, intends to set up a Special Economic
Zone, may, after identifying the area, make a proposal to the State Government concerned for the purposes
of setting up a Special Economic Zone. It also allows a person, at his option to make a proposal directly to
the Board for the purpose of setting up Special Economic Zone. In cases where such proposal has been
received directly from a person, the Board may grant approval and after receipt of such approval, the person
concerned, is required to obtain the concurrence of the State Government within prescribed time.
In case a State Government intends to set up the Special Economic Zone, it may after identifying the area,
forward the proposal directly to the Board of Approval for setting up of Special Economic Zone. However, the
Central Government has been empowered to set up and notify the Special Economic Zone without
222 EP-EBCL
consulting the State Government concerned; without referring the proposal to the Board.
The State Government may, on receipt of the proposal for setting up a Special Economic Zone forward the
proposal together with its recommendations to the Board of Approval within the specified time. The Board of
Approval may, after receipt of the proposal for setting up a Special Economic Zone either approve the
proposal or, approve the proposal subject to such terms and conditions as it may deem fit to impose. It can
also modify or reject the proposal for setting up a Special Economic Zone.
The Central Government has been empowered to specify the minimum area of land for setting up a Special
Economic Zone and other terms and conditions subject to which the Board may approve, modify or reject
any such proposal received by it. Section 3(9) further provides that if the Board approves the proposal
without any modification, it shall communicate the same to the Central Government. If it approves the
proposal with modification, it shall, communicate the same to the person or the State Government concerned
if the modifications are accepted by the person or State Government, the Board of Approval shall
communicate the approval to the Central Government. If it rejects the proposal, it shall record the reasons
therefor and communicate the rejection to the person or the State Government concerned.
Section 3(10) requires the Central Government to grant on receipt of communication from the Board of
Approval, a letter of approval on such terms and conditions and obligations and entitlements, as approved by
Board of Approval, to the person or the State Government concerned. However the Central Government
may, on the basis of approval of the Board, approve more than one developer in one Special Economic Zone
in cases where one Developer does not have in his possession the minimum area of contiguous land, as
may be prescribed, for setting up a Special Economic Zone. In all such cases, each Developer is considered
as a Developer in respect of the land in his possession.
This section also provides that any person or a State Government, who intends to provide any infrastructure
facilities in the identified area or undertaken any authorised operations may, after entering into an agreement
with the Developer, make a proposal for the same to the Board of Approval, for its approval. Every such
person or State Government, whose proposal has been approved by the Board and who, or which, has been
granted letter of approval by the Central Government, shall be considered a Co-Developer of the Special
Economic Zone.
Who can set up SEZs?
Any private/public/joint sector or State Government or its agencies can set up Special Economic
Zone (SEZ)
Establishment, Approval and Authorization to Operate Special Economic Zone

Section 4 of the SEZ Act requires the Developer to submit, after the grant of letter of approval, the exact
particulars of the identified area to the Central Government which after satisfying that the specified
requirements are fulfilled, notify the specifically identified area in the State as a Special Economic
Zone.However, the Central Government has been empowered to notify any additional area as a part of a
Special Economic Zone. This section empowers the Central Government to authorise the Developer to
undertake such operations in a Special Economic Zone, as it may prescribe.
Guidelines for notifying Special Economic Zone
Section 5 stipulates broader guidelines to be considered by the Central Government, while notifying any
area as a Special Economic Zone or an area to be included in the SEZ and in discharging its functions
under the Act. These include:
(a) generation of additional economic activity;

(b) promotion of exports of goods and services;
(c) promotion of investment from domestic and foreign sources;
(d) creation of employment opportunities;
(e) development of infrastructure facilities; and
(f) maintenance of sovereignty and integrity of India, the security of the State and friendly relations
with foreign States
The Processing and Non-Processing areas

Section 6 empowers the Central Government or any specified authority to demarcate the areas falling within
the Special Economic Zones as –
The processing area for setting up Units for activities, being the manufacture of
goods, or rendering of services
(a)
The area exclusively for trading or warehousing purposes

(b)
The non-processing areas for activities other than those specified under (a) or (b)
above
(c)
Exemption from taxes, duties or cess

Section 7 exempts all goods or services exported out of, or imported into, or procured from the Domestic
Tariff Area, by a Unit or Developer in a Special Economic Zone from the payment of taxes, duties or cess
under all enactments specified in the First Schedule. The enactments specified in the First Schedule
generally relate to levy and payment of cess.
Constitution of Board of Approval

Section 8 empowers the Central Government to constitute, by notification, the Board of Approval within
fifteen days of the commencement of the Act. This section also provides for composition of Board, term of
office of Members, co-option of certain persons as Members of the Board, its meetings and quorum, etc.
Duties, powers and functions of Board of Approval

Section 9 casts upon the Board the duty to promote and ensure orderly development of the Special
Economic Zones. The powers and functions of the Board, inter alia, include:
(a) granting of approval or rejecting proposal or modifying such proposals for establishment of the
Special Economic Zones;
(b) granting approval of authorised operations to be carried out in the Special Economic Zones by the
224 EP-EBCL
Developer;
(c) granting of approval to the Developers or Units (other than the Developers or the Units which are
exempt from obtaining approval under any law or by the Central Government) for foreign
collaborations and foreign direct investments (including investments by a person resident outside
India) in the Special Economic Zone for its development, operation and maintenance;
(d) granting of approval or rejecting proposal for providing infrastructure facilities in a Special Economic
Zone or modifying such proposals;
(e) granting, a licence to an industrial undertaking referred to in section 3(d) of IDR Act, if such
undertaking is established, as a whole or part thereof, or proposed to be established, in a Special
Economic Zone;
(f) suspension of the letter of approval granted to a Developer and appointment of an Administrator
under Section 10(1) of the Act;
(g) disposing of appeals preferred under Section 15(4) and Section 16(4) of the Act;
(h) performing such other functions as may be assigned to it by the Central Government.
Section 9(3) empowers the Board of Approval to delegate such powers and functions as it may deem fit to
one or more Development Commissioners for effective and proper discharge of the functions of the Board.
Section 9(5) stipulates that the Board in exercise of its powers and performance of its functions be bound by
such directions on questions of policy, as the Central Government may give in writing to it from time to time.
Suspension of letter of approval and transfer of Special Economic Zone in certain cases
Section 10 empowers the Board to suspend the letter of approval granted to the Developer for a whole or
part of his area established as Special Economic Zone for a period not exceeding one year and appoint an
Administrator to discharge the functions of the developer in accordance with the terms and conditions of the
letter of approval and manage the Special Economic Zone accordingly. The suspension may be ordered by
the Board, if in its opinion following circumstances exist:
The developer is unable to discharge the functions or perform

the duties imposed on him
The developer has persistently defaulted in complying with

the directions of the Board
The developer has violated the terms and conditions of the

letter
The financial position of the developer is such that he is

unable to fully and efficiently discharge the duties and
obligations imposed on him by the letter of approval
However, no letter of approval can be suspended unless the Board has given to the Developer not less than
three months’ notice, in writing, stating the grounds on which it proposes to suspend the letter of approval,
and has considered any cause shown by the Developer within the period of that notice, against the proposed
suspension.
It has been further provided that the Board may, instead of suspending the letter of approval permit it to
remain in force subject to such further terms and conditions as it thinks fit to impose. Section 10(4) makes
any further terms or conditions so imposed binding upon the Developer. These terms and conditions have
the force and effect as if they were contained in the letter of approval.
In case the Board suspends a letter of approval, it has been put under obligation to serve a notice of
suspension upon the Developer and fix a date for suspension to take effect. Upon suspension of the letter of
approval, the Special Economic Zone of the Developer vests in the Administrator for a period not exceeding
one year or up to the date on which the letter of approval for such Special Economic Zone is transferred,
whichever is earlier. This section also contains provisions for transfer of the Special Economic Zone of a
Developer whose licence has been suspended and take other actions consequent upon the suspension of
the letter of approval. The Board of Approval has been empowered to issue such directions or formulate
such scheme as it may consider necessary for operation of such Special Economic Zone.
Development Commissioner
Section 11 empowers the Central Government to appoint the Development Commissioner for one or more
Special Economic Zones and such Officers and other employees as it considers necessary to assist every
Development Commissioner. It also contains provisions for salary and allowances and other terms and
conditions of service in respect of leave, pension, provident fund and other matters of the Development
Commissioner, officers and other employees.
Functions of the Development Commissioner

Section 12 dealing with the functions of the Development Commissioner requires every Development
Commissioner to take steps in order to discharge his functions to ensure speedy development of the Special
Economic Zone and promotion of exports therefrom.
The functions of the Development Commissioner include :
(a) guide the entrepreneurs for setting up of Units in the Special Economic Zone;
(b) ensure and take suitable steps for effective promotion of exports from the Special Economic Zone;
(c) ensure proper coordination with the Central Government or State Government Departments
concerned or agencies with respect to, or for above purposes;
(d) monitor the performance of the Developer and the Units in SEZ;
(e) discharge such other functions as may be assigned to him by the Central Government under this
Act or any other law for the time being in force; and
(f) any other functions as may be delegated to him by the Board of approval.
This section entitles the Development Commissioner to be overall in charge of the Special Economic Zone
and to exercise administrative control and supervision over the officers and employees. Every Development
Commissioner is also required to discharge such functions and exercise such powers as may be delegated
226 EP-EBCL
to him by a general or special order by the Central Government or the State Government concerned, as the
case may be. The section further empowers the Development Commissioner to call for such information
from a Developer or Unit from time to time as may be necessary to monitor the performance of the
Developer and the Unit. The Development Commissioner has been authorised to delegate any or all of his
powers or functions to any of the officers employed under him.
Constitution of Approval Committee

Section 13 empowers the Central Government to constitute by notification, a Committee for every Special
Economic Zone, to be called the Approval Committee to exercise the powers and perform the functions as
specified. In the case of existing Special Economic Zones, the Approval Committee is required to be
constituted within six months from the date of commencement of the Act and in case of other Special
Economic Zones established after the commencement of the Act within six months from the date of
establishment of such Special Economic Zone. This section also contains provisions relating to composition
of meetings and its quorum and requires all orders and decisions and instructions of the Approval Committee
to be authenticated by the signature of the Chairperson or any other Member as may be authorised by the
Approval Committee.
Powers and Functions of Approval Committee

Section 14 empowers every Approval Committee to discharge the functions and exercise the powers in
respect of the following matters:
(a) approve, the import or procurement of goods from the Domestic Tariff Area, for carrying on the
authorised operations by a Developer in the Special Economic Zone;
(b) approve providing of services by a service provider from outside India or from the Domestic Tariff
Area for carrying on the authorised operations by the Developer, in the Special Economic Zone;
(c) monitor the utilisation of goods or services or warehousing or trading in the Special Economic Zone;
(d) approve, modify or reject proposals for setting up Units for manufacturing or rendering of services or
warehousing or trading in SEZ in accordance with the provisions of Section 15(8) of the Act;
(e) allow on receipt of approval foreign collaborations and foreign direct investments, including
investments by a person outside India for setting up a Unit;
(f) monitor and supervise compliance of conditions subject to which the letter of approval or
permission, if any, is granted to the Developer or entrepreneur; and
(g) perform any other functions as may be entrusted to it by the Central Government or the State
Government concerned, as the case may be.
In case the developer is Central Government, the approval committee has been empowered to exercise all
powers of the approval committee, until the constitution of Approval Committee.
Setting up of Unit
Section 15 entitles any person, who intends to set up a Unit for carrying on the authorised operations in a
Special Economic Zone, to submit a proposal to the Development Commissioner concerned. The
Development Commissioner in turn place the proposal before the Approval Committee for its approval. The
Approval Committee may, approve the proposal with or without modification, and subject to such terms and
conditions as it may deem fit, or reject the same. In case of modification or rejection of a proposal, the
Approval Committee has been put under obligation to afford a reasonable opportunity of being heard to the
person concerned and after recording the reasons therefor, either modify or reject the proposal. Sub-section
(4) entitles a person aggrieved by an order of the Approval Committee, to make an appeal to the Board of
Approvals, within the prescribed time and specified manner. Sub-section (8) empowers the Central
Government to prescribe the requirements (including the period for which a unit may be set up) subject to
which the Approval Committee may approve, modify or reject the proposal. The Development Commissioner
may, after the approval of the proposal, grant a letter of approval to the person concerned to set up a Unit
and undertake in the Unit such operations which the Development Commissioner may authorise and every
such operation so authorised is mentioned in the letter of approval.
Cancellation of letter of approval granted to entrepreneur

Section 16 empowers the Approval Committee to cancel the letter of approval of an entrepreneur after
reasonable opportunity of being heard has been afforded to the entrepreneur. The Approval Committee may, at
any time, cancel the letter of approval if it has any reason or cause to believe that the entrepreneur has
persistently contravened any of the terms and conditions or its obligation subject to which the letter of approval
was granted to the entrepreneur. It further provides that where the letter of approval has been cancelled, the
Unit shall not, from the date of such cancellation, be entitled to any exemption, concession, benefit or deduction
available to it as such and such Unit shall remit the exemption, concession, drawback and any other benefit
availed by the entrepreneur in respect of the capital goods, finished goods lying in the stock and unutilised raw
materials in the prescribed manner. Sub-section (4) entitles any person aggrieved from an order of the
Approval Committee to make an appeal to the Board of Approval within the prescribed time.
Setting up and operation of Offshore Banking Unit

Section 17 dealing with setting up and operation of offshore Banking Unit provides that an application for
setting up and operation of an Offshore Banking Unit in a Special Economic Zone may be made to the
Reserve Bank, in the prescribed form and manner. The Reserve Bank of India may, on being satisfied that
the applicant fulfills all the specified conditions, grant permission to such applicant for setting up and
operation of an Offshore Banking Unit in a Special Economic Zone. Sub-section (3) empowers the Reserve
Bank to specify, by notification, the terms and conditions subject to which an Offshore Banking Unit may be
set up and operated in the Special Economic Zone.
What do you mean by Offshore Banking Unit?
“Offshore Banking Unit” means a branch of a bank located in a Special Economic Zone and which
has obtained the permission under clause (a) of sub-section (1) of Section 23 of the Banking
Regulation Act, 1949.
Setting up of International Financial Services Centre

Section 18 empowers the Central Government to approve setting up of an International Financial Services
Centre in a Special Economic Zone and to specify requirements for setting up the operation of such Centre.
However, the Central Government may approve only one international Financial Services Centre in a Special
Economic Zone. The Central Government may subject to the guidelines as may be framed by the Reserve
Bank, the Security and Exchange Board of India, the Insurance Regulatory and Development Authority and
such other authority as it may deem fit, prescribe the requirement for setting up and terms and conditions of
the operation of International Financial Services Center.
Single application form, return, etc.

Section 19 empowers the Central Government to prescribe single application form for obtaining any licence,
228 EP-EBCL
permission or registration or approval by a Developer or an entrepreneur under one or more Central Acts.
Section 19(b) empowers the Central Government to authorise the Board, the Development Commissioner
and the approval Committee to exercise its powers on matters relating to the development of SEZ or setting
up or operation of units. Section 19(c) empowers the Central Government to prescribe single form for
furnishing returns or information by a developer or an entrepreneur under one or more Central Acts.
Agency to inspect
Section 20 empowers the Central Government to specify, by notification, any officer or agency for carrying
out surveys or inspections for securing the compliance with the provisions of any Central Act by a Developer
or an entrepreneur, as the case may be, and such officer or agency is required to submit verification or
compliance report, in such manner and within such time as may be specified in the said notification.
Single enforcement officer or agency for notified offences

Section 21 empowers the Central Government to specify by notification, any act or omission made
punishable under any Central Act, as notified offence for purposes of the proposed legislation. It further
empowers the Central Government to authorise any officer or agency to be the enforcement officer or
agency in respect of any notified offence committed in a Special Economic Zone. Every officer or agency so
authorised has been granted all the corresponding powers of investigation, inspection, search or seizure as
provided under the relevant Central Act in respect of the notified offences.
Investigation, Inspection, Search or Seizure

Section 22 empowers the agency or officer, with prior intimation to the Development Commissioner
concerned to carry out the investigation, inspection, search or seizure in the Special Economic Zone or in a
Unit if such agency or officer has reason to believe (reasons to be recorded in writing) that a notified offence
has been committed or is likely to be committed in the Special Economic Zone. However, no investigation,
inspection, search or seizure is allowed to be carried out in a SEZ by any agency or officer other than those
referred to in Section 21(2) or (3), without prior intimation or approval of the concerned Development
Commissioner. It is further provided that an officer or agency, if so authorised by the Central Government,
may carry out the investigation, inspection, search or seizure in the Special Economic Zone or Unit without
prior intimation or approval of the Development Commissioner.
Designated Courts to try suits and notified offences

Section 23 empowers the concerned State Government, in which SEZ is situated, to designate, with the
concurrence of the Chief Justice of the High Court of that State, one or more Courts to try all suits of a civil
nature arising out of offences committed in the Special Economic Zone. Section 23(2) provides that no court,
other than the designated court shall try any suit or conduct the trial of any notified offence.

Section 24 entitles any person aggrieved by any decision or order of the designated Court to file an appeal to
the High Court within sixty days from the date of communication of the decision or order of the said court to
him on any question of fact or law arising out of such orders. However the High Court can, if it is satisfied
that the appellant was prevented by sufficient cause from filing an appeal within the prescribed period of sixty
days allow it to be filed within a further period not exceeding sixty days.
Offences by Companies
Section 25 dealing with offences by companies provides that where an offence has been committed by a
company, every person who at the time the offence was committed was in charge of and was responsible to,
the company for the conduct of the business of the company, as well as the company, shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished accordingly. However such
person shall not be liable to any punishment if he proves that the offence was committed without his
knowledge or that he had exercised all due diligence to prevent the commission of such offence.
Section 25(2) provides that where an offence has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is attributable to any neglect on the part
of, any director, manager, secretary or other officer of the company, such director, manager, secretary or
other officer shall, also be deemed to be guilty of the offence and shall be liable to be proceeded against and
punished accordingly.
Exemptions, drawbacks and concessions to every Developer and entrepreneur

Section 26 contains provisions relating to exemptions, drawbacks and concessions to Developer and
entrepreneur from any duty of customs under the Customs Act, 1962, the Customs Tariff Act, 1975, the
Central Excise Act, 1944 or the Central Excise Tariff Act, 1985 or any other law for the time being in force,
exemption from the service tax under Chapter V of the Finance Act, 1994 and exemption from levy of taxes
on sale or purchase of goods other than newspapers under the Central Sales Tax Act, 1956 if such goods
are meant to carrying on authorised operations by the developer or entrepreneur. The developer or
entrepreneur has also been entitled to drawback or such other benefits as may be admissible from time to
time on goods brought or services provided from DTA into SEZ or unit or services provided in SEZ or unit by
service providers located outside India to carry on the authorised operations by the Developer or
entrepreneur. The Central Government has also been empowered to specify the manner in which and the
terms and conditions subject to which, the exemptions, concessions, drawbacks or other benefits are to be
granted to developer or entrepeneur.
Application of the provisions of the Income Tax Act, 1961 with certain modifications in
relation to Developers and entrepreneurs
Section 27 provides for application of the provisions of the Income Tax Act, 1961 to the Developer and
entrepreneur for carrying on the authorised operations in the Special Economic Zones or Unit subject to
modifications specified in the second schedule.
Duration of goods & services in Special Economic Zones

Section 28 empowers the Central Government to specify, the period during which any goods brought into, or
services provided in, any Unit or Special Economic Zone without payment of taxes, duties, levies or cess,
shall remain or continue to be provided in such Unit or Special Economic Zone.
Transfer of ownership and removal of goods

Section 29 allows the transfer of ownership in any goods brought into, or produced or manufactured in, any
Unit or Special Economic Zone or removal thereof from such Unit or Zone, subject to such terms and
conditions as specified by the Central Government.
Domestic clearance by Units

Section 30 provides that any goods removed from a Special Economic Zone to the Domestic Tariff Area be
chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the
Customs Tariff Act, 1975, where applicable, as leviable on such goods when imported. This section further
provides that the rate of duty and tariff valuation, if any, applicable to goods removed from a Special
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Economic Zone shall be at the rate and tariff valuation in force as on the date of such removal, and where
such date is not ascertainable, on the date of payment of duty. This section empowers the Central
Government to make rules specifying conditions in this regard.
Special Economic Zone Authority

Section 31 dealing with the Constitution of Authority empowers the Central Government to constitute by
notification in the Official Gazette, an Authority for every SEZ to exercise powers conferred on and discharge
the functions assigned to it.
In the case of an existing SEZ established by the Central Government the Central Government has been
empowered to establish such authority within six months from the date of commencement of the Act. It is
further provided that the person or authority (including Development Commissioner) which is exercising
control over an existing SEZ, shall continue to do so till the authority is constituted. Section 31(2) provides
that every authority shall be a body corporate by name as assigned, having perpetual succession and a
common seal, with power to acquire, hold and dispose of property, both movable and immovable and to
contract and shall sue and be sued. Section 31(9) stipulates that no act or proceedings of an authority shall
be invalidated merely by reason of:
(i) any vacancy in or any defect;
(ii) any defect in the appointment of a person as its member; or
(iii) any irregularity in the procedure of the authority not affecting the merits of the case.
Functions of Authority
Section 34 casts upon the Authority a duty to undertake such measures as it thinks fit for the development,
operation and management of the respective Special Economic Zone. Section 34(2) provides for following
measures :
(a) the development of infrastructure in the Special Economic Zone;
(b) promoting exports from the Special Economic Zone;
(c) reviewing the functioning and performance of the Special Economic Zone;
(d) levy user or service charges or fees or rent for the use of properties belonging to the Authority;
(e) performing such other functions as may be prescribed.
Directions by the Central Government

Section 38 empowers the Central Government to give directions to the authority and makes it binding for
every Authority of the Special Economic Zone to carry out the directions issued from time to time in this
regard.
Returns and reports by the Authority

Section 39 casts upon every Authority of the Special Economic Zone a duty to furnish to the Central
Government such returns and statements and such particulars in regard to the promotion and development
of exports and the operation and maintenance of the Special Economic Zone and Units as it may require
from time to time. This section further requires every authority to submit to the Central Government after the
end of each financial year a report in form and before specified date, giving a true and full account of its
activities, policy and programmes during the previous financial year. Section 39(3) requires a copy of every
such report to be laid before each House of Parliament, soon after its receipt
Power of the Central Government to Supersede Authority

Section 40 empowers the Central Government to supersede an Authority for a maximum period of six
months if at any time, it is of the opinion that an Authority is unable to perform, or has persistently made
default in the performance of the duty imposed on it or has exceeded or abused its powers, or has wilfully or
without sufficient cause, failed to comply with any direction issued by it. However, before issuing a
notification superseding an authority, the Central Government is required to give reasonable time to that
Authority to make representation against the proposed suppression and consider the representations, if any,
of the Authority. Section 40(2) dealing with the consequences of publication of the notification superseding
the Authority, provides that,
(a) the Chairperson and other Members of the Authority shall, notwithstanding that their term of office
has not expired as from the date of supersession, vacate their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of the Act, be exercised
or discharged by or on behalf of the Authority shall, during the period of supersession, be exercised
and performed by such person or persons as the Central Government may direct;
(c) all property vested in the Authority shall, during the period of supersession, vest in the Central
Government.
Section 40(3) also provides that on the expiration of the period of supersession specified in the notification,
the Central Government may extend the period of supersession for such further period not exceeding six
months or reconstitute the Authority in the prescribed manner.
Reference of Dispute and Limitation

Section 42 requires any dispute of civil nature arising among two or more entrepreneurs or two or more
Developers or between the entrepreneur and Developer in the Special Economic Zone to be referred to
arbitration provided, the court or the courts to try suits in respect of such dispute had not been designated.
However no dispute should be referred to the arbitration on or after the date of the designation of court or
courts under section 23(1). It further provides that where a dispute has been referred to arbitration, the same
shall be settled or decided by the arbitrator to be appointed by the Central Government and the provisions of
the Arbitration and Conciliation Act, 1996 shall apply to all arbitrations.
Section 43 stipulates that the period of limitation in the case of any dispute which is required to be referred to
arbitration shall be regulated by the provisions of the Limitation Act, 1963, as if the dispute was a suit and the
arbitrator is civil court. Section 43(2), however, empowers the arbitrator to admit, a dispute after the expiry of
the period of limitation, if the arbitrator is satisfied that the applicant had sufficient cause for not referring the
dispute within specified period.
Person to whom a communication to be sent

Section 45 provides that a communication by any competent authority or person may be sent to the person
who has the ultimate control over the affairs of the Special Economic Zone or Unit or where the said affairs
are entrusted to a manager, director, chairperson, or managing director, or to any other officer, by whatever
name called, such communication may be sent to such manager, director, chairperson, or managing director
or any other officer.
Identity card
Section 46 requires that every person whether employed or residing or required to be present in a
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Special Economic Zone be provided an identity card by every Development Commissioner in

prescribed form and containing specified particulars.
Power of the Central Government to modify provisions of the Act or other enactments in
relation to Special Economic Zones
Section 49 empowers the Central Government to direct, by notification in the Official Gazette, that any of the
provision of the Act or any other Central Act, any rules or regulations made thereunder or any notification or
order issued or direction given thereunder specified in the notification shall not apply to a Special Economic
Zone or a class of Special Economic Zones or all Special Economic Zones; or shall apply to a Special
Economic Zone or a class of Special Economic Zones or all Special Economic Zones only with such
exceptions, modification and adaptation, as may be specified in the notification. Sub section (2) requires a
copy of every notification proposed to be issued to be laid in draft before each House of Parliament. The
notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be
agreed upon by both the Houses of Parliament.
Power of State Government to grant exemption

Section 50 empowers the State Government to notify policies for Developers and Units and to take suitable
steps for enactment of any law -
(a) granting exemption from the State taxes, levies and duties to the Developer or the entrepreneur;
(b) delegating the powers conferred upon any person or authority under any State Act to the
Development Commissioner in relation to the Developer or the entrepreneur.
SEZ Act to have overriding effect
Section 51 giving overriding effect to this Act provides that the provisions of this Act shall have effect
notwithstanding anything inconsistent therewith contained in any other law for the time being in force
or in any instrument having effect by virtue of any law other than this Act.
Special Economic Zones to be ports, airports inland container depots, land stations etc. in
certain cases
Section 53 provides that a Special Economic Zone, on and from the appointed day, be deemed to be a
territory outside the customs territory of India for the purposes of undertaking the authorised operations. This
section further provides that a Special Economic Zone shall, with effect from such date as the Central
Government may notify, be deemed to be a port, airport, inland container depot, land station and land
customs stations under section 7 of the Customs Act, 1962. The Central Government has been empowered
to notify different dates for different Special Economic Zones.
Special Economic Zones Rules, 2006
Section 55 empowers the Central Government to make rules in respect of specified matters and requires that
the same be published in the Official Gazette and be laid before each House of Parliament. In this context,
the Central Government has notified the Special Economic Zones Rules, 2006 on February 10, 2006.
LESSON ROUND-UP
• Special Economic Zones (SEZ) are growth engines that can boost manufacturing, augment exports and
generate employment. The SEZs require special fiscal and regulatory regime in order to impart a
hassle free operational regime encompassing the state of the art infrastructure and support services.
• Special Economic Zone (SEZ) is a specifically delineated duty free enclave and is deemed to be foreign
territory for the purposes of trade operations and duties and tariffs.
• SEZ units are governed by Special Economic Zones Act, 2005.

• Central Government, State Government, or any other person, jointly or severally, may establish a Special
Economic Zone. Any person who, intends to set up a Special Economic Zone, may, after identifying the
area, make a proposal to the State Government concerned for the purposes of setting up a Special
Economic Zone.
• Board of Approval granting of approval or rejecting proposal or modifying such proposals for establishment
of the Special Economic Zones.
• Every Development Commissioner to take steps in order to discharge his functions to ensure speedy
development of the Special Economic Zone and promotion of exports there from.
• The Central Government to constitute by notification, a Committee for every Special Economic Zone, to be
called the Approval Committee to exercise the powers and perform the functions as specified.
• Any person, who intends to set up a Unit for carrying on the authorised operations in a Special Economic
Zone, to submit a proposal to the Development Commissioner concerned.
• An application for setting up and operation of an Offshore Banking Unit in a Special Economic Zone may be
made to the Reserve Bank of India.
• SEZ Act casts upon the SEZ Authority a duty to undertake such measures as it thinks fit for the
development, operation and management of the respective Special Economic Zone.
• Every person whether employed or residing or required to be present in a Special Economic Zone shall be
provided an identity card by every Development Commissioner in prescribed form and containing specified
particulars.
• Provisions of the SEZ Act shall have effect notwithstanding anything inconsistent therewith contained in any
other law for the time being in force or in any instrument having effect by virtue of any law other than this
Act.
• Any person aggrieved by any decision or order of the designated Court to file an appeal to the High Court
within sixty days from the date of communication of the decision or order of the said court to him on any
question of fact or law arising out of such orders.
SELF-TEST QUESTIONS
evaluation)
1. Special Economic Zones are growth engines. Discuss.
2. Discuss in detail the salient features of SEZ Act, 2005.
3. Explain the procedure for establishment of SEZ.
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4. Briefly discuss the duties, powers and functions of Board of Approval in respect of Special
Economic Zones.
5. What are the functions of Approval Committee under SEZ Act, 2005?
Lesson 12
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning Objectives
Competition refers to a situation in a market place in
• Competition and Economic efficiency which firms/ entities or sellers independently strive
for the patronage of buyers in order to achieve a
• Competition Law and Policy
particular business objective, such as profits, sales,
• Competition Regime in India market share etc. Competition is not an end unto
• Anti-Competitive Agreement itself, rather a means to achieve economic efficiency
and welfare objectives. Free and fair competition is
• Abuse of Dominant Position
one of the pillars of an efficient market economy.
• Combination Therefore, competition has become a driving force in
• Director General the global economy.
• Enquiry into certain agreements and Indian economy is on a high growth path. In the
dominant position of enterprise recent years the Indian economy has been one of the
• Enquiry into Combination by Commission strongest performers in the world. However, the full
growth potential of the economy remains yet to be
• Competition Commission of India
realised. Infusion of greater degree of competition
• Competition Advocacy can play a catalytic role in unlocking the fuller growth
• Offences and penalties potential in many critical areas of the economy,
which hitherto has been held back by restriction on
• Appeal to Supreme Court competition in various forms.
• Lesson Round Up
• Self-Test Questions regarding anti-competitive agreements, abuse of
dominance, Combination, competition Advocacy,
Competition Commission of India.
The Competition Act, 2002 to provide, keeping in view of the economic development of the country, for the
establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain
competition in the markets, to protect the interest of consumers and to ensure freedom of trade carried on by other
participant in the markets in India and for matters connected therewith or incidental thereto.
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INTRODUCTION
There is a growing recognition that a flexible, dynamic and competitive private sector is essential to fostering
sustained economic development. Promoting effective competition spurs firms to focus on efficiency and
improves consumer welfare by offering greater choice of higher-quality products and services at lower prices.
It also promotes greater accountability and transparency in government-business relations and decision
making, helps reduce corruption, lobbying, and rent seeking. In addition, it provides opportunities for broadly
based participation in the economy and for sharing in the benefits of economic growth.
The idea of competition has had, for two centuries or more, a powerful influence on the way we think about
our society, the way we organise things and the way we conduct our own economic and personal lives. The
competition being an essential element in the efficient working of markets encourages enterprise and
efficiency and widens choice. By encouraging efficiency in industry, competition in the domestic market
whether between domestic companies alone or between those and overseas companies also contribute to
international competitiveness. The full benefits of competition are, however, felt in markets that are open to
trade and investment.
Economic theory suggests that prices and quantities in a competitive market equilibrate to levels that
generate efficient outcomes at a given point of time. Competition is therefore, beneficial as it provides to
consumers wider choice and provides sellers with stronger incentives to minimize costs, so eliminating
waste. Competition increases the likelihood that cost savings resulting from efficiency gains will be passed
on to a firm's customers, who may be either final consumers or intermediary customers (in which case costs
of those firms are also lowered). Ample empirical evidence supports these arguments. The importance of
competition for achieving a higher rate of innovation and adoption of new technologies over time is critical for
sustaining rapid growth. Yet it is not automatic and is not the same as laissez faire.
In fact, there are reasons to believe that less mature markets tend to be more, rather than less, vulnerable to
anti-competitive practices than the markets of developed countries. Reasons include: (a) high "natural" entry
barriers due to inadequate business infrastructure, including distribution channels, and (sometimes) intrusive
regulatory regimes; (b) asymmetries of information in both product and credit markets; and (c) a greater
proportion of local (non-tradable) markets. Competition also serves to diffuse socio-economic power,
broadening participation in economic, social, and political advances while ensuring opportunities for new
entrepreneurs. Moreover, it can facilitate realization of the benefits for the domestic economy of integrating
into international trade and investment patterns.
Several studies have demonstrated the stimulating effects of competitive markets in terms of growth and
prosperity. William Lewis in his book, The Power of Productivity underlines this point forcefully with his
observations on the growth of productivity in the late 1990s in the United States. The author has argued that
more than technology and other factors, what matters above all is competition. Similarly, economist Paul
London in his book, The Competition Solution concludes that heightened competition in the US over-
shadowed tax cuts or new technologies in explaining the prosperity of the 1990s. Competitive pressures
helped suppress inflation and raise living standards through improved productivity. The author noted that
competition from imports forced the steel and auto industry, among other manufacturers, to streamline,
thereby pushing manufacturing productivity up by 4% a year. Competition has brought down real air fares,
telephone rates and several other costs. Where jobs have been lost in one industry, these have been more
than compensated by jobs created elsewhere; thus employment has not suffered but has shifted from losers
to winners. This argument underlines across the board, the benefits of competition to a wide sections of
society, including consumers, workers and many others.
Lesson 12 Competition Act, 2002 237
Definition of Competition
Competition is a complex and technical subject which does not lend itself to easy summary or concise
clarification. Of late, with globalisation and opening of the markets worldwide, it has become a subject of
great practical importance. It involves the establishment and development of concepts, legal principles and
policies for the benefit of consumer interest. The principles and policies are applied to a wide range of private
agreements and arrangements, which commercial undertakings enter into for themselves or with each other.
In addition, they also apply to the policies and directions of the Government.
In the absence of a generally accepted definition of the phenomenon of competition, it has to be regarded as
the object fostered and protected by competition policy and law. The World Bank and OECD in its Report A
Framework for the Design and Implementation of Competition Law and Policy, broadly defines the
competition is “a situation in a market in which firms or sellers independently strive for the buyers’ patronage
in order to achieve a particular business objective, for example, profits, sales or market share.”
Competition can also be defined as a process of economic rivalry between market players to attract
customers. These market players can be multinational or domestic companies, wholesalers, retailers, or
even the neighborhood shopkeeper. In their pursuit to outdo rival enterprises, market players either adopt fair
means (producing quality goods, being cost efficient, adopting appropriate technologies, etc.) or indulge in
unfair measures (carrying out restrictive business practices – such as predatory pricing, exclusive dealing,
tied selling, collusion, cartelisation, abuse of dominant position, etc.). However, in the interest of consumers,
and the economy as a whole, it is necessary to promote an environment that facilitates fair competitive
outcomes in the market, curb anti-competitive behaviour and discourage market players from adopting unfair
measures.
What is competition in the market?
In common parlance, competition in the market means sellers striving independently

for buyers’ patronage to maximize profit (or other business objectives).A buyer
prefers to buy a product at a price that maximizes his benefits whereas the seller
prefers to sell the product at a price that maximizes his profit.
Competition and Economic Efficiency

A number of empirical studies found a positive relationship between competition and innovation, productivity
and economic growth. P. Aghion and P. Howitt in Endogenous Growth Theory offered several theoretical
situations where competition is conducive to innovation – Intensified product market competition could force
managers to speed up the adoption of new technologies; Intensive product market competition with
incumbent firms engaged in step by step innovative activities could enhance each firms incentive to acquire
or increase its technological lead over its rivals and, if labour markets are flexible, competition will induce
skilled workers to move to opportunities employing best practices and technologies. Competition also
reduces slack by providing more incentives for managers and workers to increase efforts and improve
efficiency. Therefore, the product market competition disciplines firms into efficient operation.
Nickel et. al. in his article Competition and Corporate Performance suggested three different channels of
incentives – competition creates greater opportunities for comparing performance; a more competitive
environment where price elasticity of demand tends to be higher, induces greater efforts among workers and
managers for cost reducing improvements in productivity since improvements could generate larger increase
in revenue and profits; and a more competitive environment forces managers to improve efficiency, because
more intense the competition, greater the chances for inefficient to be extinguished.
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UK White Paper on World Class Competition Regime clearly brings out the importance of competition in an
increasingly innovative and globalised economy. Vigorous competition between firms is the lifeblood of
strong and effective markets. Competition helps consumers get a good deal. It encourages firms to innovate
by reducing slack, putting downward pressure on costs and providing incentives for the efficient organisation
of production.
Empirical evidences show that strong competition is closely linked to dynamic and efficient markets. The
benefits of competitive forces for economic growth and consumer welfare are widely recognized and
evidenced by several studies. Recently, an empirical study in the U.K. by the Centre for Competition Policy,
University of East Anglia showed that prices were more than halved through competition in international
telephony and airfares, and were significantly reduced in other areas. The survey also brought home the
point that competition is not just about prices but is typically multi-faceted, bringing new ways of doing
business and leading to technological and other advances.
Michel Porter in his recent work Can Japan Compete? shows that in Japan only those sectors characterized
by strong domestic competition remain internationally competitive following the country's recent economic
downturn, examples include cameras, automobiles and audio equipment. Many leading competition experts
believe in the premise that, in the presence of competition, the market will achieve the objective of
maximising welfare.
Competition Law and Policy

The World Bank and OECD in its Report A Framework for the Design and Implementation of Competition
Law and Policypointed out that a dynamic and competitive environment, underpinned by sound competition
law and policy, is an essential characteristic of a successful market economy. Effective enforcement of
competition law and active competition advocacy can also be powerful catalysts for successful economic
restructuring. This in turn fosters flexibility and mobility of resources, which in the current global business
environment are critical elements for the competitiveness of firms and industries across nations. Although the
field of competition law and policy is evolving rapidly and includes many different viewpoints on specific
issues, recognition is growing that effective competition law is important in shaping business culture and that
its proper implementation needs to allow for the education of business people, government officials, the
judiciary, and the interested public.
The basic purpose of Competition Policy and law is to preserve and promote
competition as a means of ensuring efficient allocation of resources in an economy.
Competition policy typically has two elements: one is a set of policies that enhance
competition in local and national markets. The second element is legislation
designed to prevent anti-competitive business practices with minimal Government intervention, i.e.,
a competition law. Competition law by itself cannot produce or ensure competition in the market
unless this is facilitated by appropriate Government policies. On the other hand, Government
policies without a law to enforce such policies and prevent competition malpractices would also be
incomplete.
Competition policies cover a much broader set of instruments than competition law and typically include all
policies aimed at increasing the intensity of competition or rivalry in local and national markets by lowering
entry barriers and opportunities for harmful coordination, to ensure that markets work effectively and serve
the interests of all citizens. Competition law is only a subset of a nation's competition policies. Competition
policies typically include pro-competition approaches to trade, investment, sectoral regulation, and consumer
protection. The barriers to international or interregional trade, restrictions on Foreign Direct Investment (FDI)
and technology transfers, restrictions on entry in regulated network utility industries, regulations affecting the
registration of new enterprises and the taxation and corporate governance of existing enterprises and rules
on marketing practices all influence the extent of competitive pressures in markets and so are appropriate
concerns of competition policies. In many countries, competition authorities have become the focal point for
consultations and putting forward pro-competition viewpoints across a broad range of policy areas.
Asian Development Bank in “During economic transition or reforms”, observed that “the benefits of an open
market economy cannot be fully realized unless restrictions on competition are removed. Opening markets is
not enough by itself for countries to begin reaping the benefits of competition; firms will still find incentives to
engage in anti-competitive practices. Thus, the intended benefits of trade reforms may not be realized
without active enforcement of competition law. This highlights the importance of having faith in the benefits of
competition from an early stage of economic growth and of incorporating competition policy into the broader
economic policy framework.”
Prof. Paul Geroski, former Chairman, Competition Commission of the United Kingdom observed that
“Competition policy is about ensuring that markets are, and remain, competitive. This brings benefits to
consumers eventually in all the ways. However, eliminating anti-competitive practices and dismantling
monopoly positions that lead to abuses also benefit firms whose business suffers from these practices and
abuses. It is worth emphasizing that many of the benefits that emanate from proper application of
competition policy are felt in the first instance by firms. This is important for those who seem to think of
competition policy as an added and unnecessary burden on business. Competition policy is sometimes a
burden on business, but only on those businesses that try to unfairly disadvantage their rivals in ways that
reduce their competitive abilities or incentives to compete vigorously”.
Hence, competition policy and competition law need to be distinguished. The former can be regarded as a
genus, of which, the latter is specie.
COMPETITION REGIME IN INDIA

Historical Perspective
The Indian economy remained subject to controls and regulations for several decades, such as industrial
licensing, foreign exchange restrictions, small scale industry protection, control on foreign investment and
technologies, quantitative restrictions on imports, administered prices, and control on capital issues. The
domestic industry was thus insulated from competition.
The economic consequences of this policy regime, though initially beneficial, were reflected in a poor rate of
economic growth, low levels of productivity and efficiency, absence of international competitiveness, sub-
optimal size of businesses, and outdated and inefficient technologies in various sectors.
India has therefore witnessed two phases of development process with different policy regimes and
institutional frameworks. In the first phase, since independence, the transformation and development of the
Indian economy took place within a planned, rigidly regulated and relatively closed economic framework. In
the second phase, since 1991, when the country embarked upon reform process and embraced market
oriented policies.
In the late 1980s and early 1990s, need for liberalization policies was recognized and a range of policy and
regulatory reforms were initiated, such as delicensing of industry, shrinking the monopoly of the public sector
industries (other than those where strategic and security concerns dominated), removal of quantitative
restrictions on imports, market determined exchange rate, liberalization of foreign direct investment, capital
market reforms, liberalizing the financial markets, reduction in small scale industry reservations, and a much
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greater role for the private sector in infrastructure industries such as power, port, transport and
communications.
Economic Reforms and Competition

The world economy has been experiencing a progressive international economic integration for the last half
a century. There has been a marked acceleration in this process of globalisation and also liberalisation
during the last three decades.
Since 1991, the Government of India has introduced a series of economic reforms, including policies of
liberalisation, deregulation, disinvestment and privatisation. The seriousness of macroeconomic imbalances
and unanimity towards reform rendered this possible. The broad thrust of the new policies was a move away
from the centralised allocation of resources in some key sectors by the government to allocation by market
forces. Private participation in economic development has emerged as an alternative to the state-oriented
development strategy in the reform period.
After a decade of reforms, restraints to competition such as state monopolies and protective measures and
controls have been replaced by relatively more competitive and de-regulated open market policies. In the
post reform period, the private sector participation in production and supply of utility services has increased
substantially. Independent regulators have been established for many sectors such as road, power,
telecommunications and insurance. These sectoral regulators have been empowered to determine sector
specific entry conditions and eventually the level of competition. In nutshell, post reforms period witnessed
an open market orientation in industrial policy, foreign trade policy, foreign investment policy and financial
sector policy, infrastructure policy, etc.
Competition Law-Evolution and Development

The first Indian competition law was enacted in 1969 and was christened as the Monopolies and Restrictive
Trade Practices Act, 1969 (MRTP Act). The genesis of the MRTP Act, 1969 is traceable to Articles 38 and 39
of the Constitution of India. The Directive Principle of State Policy in those Articles lays down, inter-alia that
the State shall strive to promote the welfare of the people by securing and protecting as effectively, as it may,
a social order in which justice - social, economic and political- shall inform all the institutions of the national
life, and the State shall, in particular, direct its policy towards securing:
1. that the ownership and control of material resources of the community are so distributed as best to
subserve the common good; and
2. that the operation of the economic system does not result in the concentration of wealth and means
of production to the common detriment.
Legal framework dealing with competition in India spread over other legislations, besides the Monopolies and
Restrictive Trade Practices Act, 1969, other legislations dealing with competition include Consumer
Protection Act, 1986, the Patents Act 1970 etc.
Background to the MRTP Act, 1969

India, when it became free from the colonial power was industrially very backward. In fact, it inherited an
economy in a ravaged condition. Under development of the economy in many respects led the successor
Government to adopt a system of planning. In the interest of transformation of the backward industrial
economy into an advanced industrial economy, the planners thought it fit to allow the then established
industries to develop and grow further. Alongside, mixed economy was also developed as a concept of
economic planning. No doubt, there was perceptible growth in industrialisation. However, this also brought
on its trails, concentration of wealth and economic power. This led to widening of the difference between the
haves and have nots in the society. The Government of India therefore set up the Monopolies Inquiry
Commission in 1964 with a view to finding out the causes, the nature and the extent of concentration of
economic power in the country and to suggest remedial measures therefor.
The Monopolies Inquiry Commission submitted a detailed report in October 1965 which was well
documented and revelatory of many facets of concentration of economic power. Many of the trade practices
which were designed to stifle competition in the market and to promote monopolistic tendency were also
noticed by the Commission in the course of its inquiry. The Commission observed that there was no need to
strike at the concentration of economic power as such but to do so only when it became a menace to the
best production in quality and quantity or to fair distribution. Monopolistic conditions in any industrial sphere
should be discouraged without injury to the interests of the general public and monopolistic and restrictive
trade practices should be curbed except when they were conducive to the common good. The Commission
pointed out that on the one hand over the years certain business houses had built vast industrial empires
and on the other hand they were trying to accentuate and enlarge the empires by adopting certain trade
practices which were intended to distort competition in the market and promote a set of near monopoly
conditions. The Commission felt that such tendencies seemed to destroy the basic concept of socio-
economic justice enshrined in the Constitution. The Commission also framed a draft Bill as a part of its
recommendations.
The Monopolies and Restrictive Trade Practices Bill was introduced in Parliament in 1967 which after being
referred to the Joint Select Committee became an Act and finally came into force w.e.f. 1st June, 1970.
The enactment was based on the socio-economic philosophy enshrined in the Directive Principles of State
Policy contained in the Constitution which provides that the State shall direct its policy towards securing that
the ownership and control of material resources of the community are distributed as best to subserve the
common good and that the operation of the economic system does not result in the concentration of wealth
and means of production to the common detriment.
The principal objectives of the Act, as spelt out in the preamble were:
(i) prevention of concentration of economic power to the common detriment;
(ii) control of monopolies;
(iii) prohibition of monopolistic trade practice;
(iv) prohibition of restrictive trade practices.
The MRTP Act, 1969 underwent amendments in 1974, 1980, 1982, 1984, 1986, 1988 and 1991. Major
changes introduced in the 1982 and 1984 Amendment Acts were based on the recommendations of the
Sachar Committee. The 1984 amendment introduced the concept of unfair trade practice under the Act. Far-
reaching changes have been brought about by the 1991 amendment and these were made in the wake of
new industrial policy of July, 1991 which is wedded to liberalisation, globalisation and de-regulation.
Scheme of the MRTP Act

Prevention of undesirable concentration of economic power was sought to be achieved essentially through
the regulation of growth of undertakings of particular size, viz. undertakings having assets of the value of
`100 crores. These business houses were officially designated as large business houses. Undertakings
having a sizable share of the market, or licensed production capacity of more than 1/4th of the total
production or installed capacity in India were described as dominant undertakings. These companies were
declared large business houses if their assets were of the value of `1 crore or more.
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These undertakings were referred to as MRTP undertakings. Such undertakings had to obtain approval of
the Central Government to undertake substantial expansion of production, establishment of new
undertakings, amalgamate with or takeover any other undertaking. Appointment of persons who were
directors in such undertakings as director in any other undertaking needed the approval of the Central
Government. The Central Government also had the power to order for division of such undertakings or for
severance of interconnection under certain circumstances. Restrictions were placed on the acquisition and
transfer of shares of, or by, bodies corporate owning such undertakings.
However, the MRTP (Amendment) Act, 1991 sought to liberalise these restrictions by removing the concept
of MRTP undertakings and provisions relating to their substantial expansion, amalgamation etc., and
acquisition of shares of, or by, such undertakings etc. The provisions relating to Central Governments power
to direct division of undertakings or severance of interconnection have been modified such that they apply to
all undertakings (hitherto, they applied only to MRTP undertakings).
Chapter IV deals with monopolistic trade practices indulged in by any undertaking. The Act defines the
concept of monopolistic trade practices in terms of unreasonableness of the prices charged,
unreasonableness in preventing or lessening competition in the market, unreasonably increasing prices,
profits and limiting technical development to the common detriment etc. The remedy for dealing with
monopolistic trade practice is an inquiry at the instance of the Central Government by the M.R.T.P.
Commission or suo motu by the Commission and suitable orders being passed by the Central Government
thereafter to prevent the mischief resulting from such practices.
The Act also deals with matters relating to restrictive trade practices. Briefly stated, a restrictive trade
practice is one which prevents, distorts or restricts competition for goods and services in any manner. While
unreasonableness is the test for monopolistic trade practices, even a small distortion in competition is
sufficient to bring a case under restrictive trade practices. The provisions relating to restrictive trade practices
are therefore intended to promote fair and free competition in the market. The Act provides for a scheme of
registration of certain agreements relating to restrictive trade practices. The MRTP (Amendment) Act, 1984
introduced new provisions relating to unfair trade practices with a view to promoting the interest of
consumers. It is essential to note that the M.R.T.P. Commission has been given full powers to regulate
restrictive and unfair trade practices by means of an inquiry and pass final orders thereon. The MRTP
Commission may inquire into restrictive and unfair trade practices at the instance of the Central Government,
State Government, Director General of Investigation and Registration, registered consumer associations,
individual consumer and on its own. The Commission has also powers to grant temporary injunctions and
award compensation and punish for contempt under Sections 12A, 12B and 13B of the Act respectively.
The Commission is an independent quasi-judicial body and has powers similar to a Civil Court under the
Code of Civil Procedure, 1908 on some matters. The Director General of Investigation and Registration and
the Secretary of the Commission assist in the inquiry in respect of monopolistic, restrictive and unfair trade
practices. The Commission conducts enquiries and other businesses in accordance with MRTPC
Regulations, 1991.
The Central Government has framed the Monopolies and Restrictive Trade Practices Rules, 1970, the
Monopolies and Restrictive Trade Practices (Classification of Goods) Rules, 1971, and the M.R.T.P.
(Information) Rules, 1971 in exercise of the powers conferred under the Act. However these Rules have lost
much of their significance in view of deletion of Sections 21 to 26 of the Act w.e.f. 27.9.91.
MRTP (Amendment) Act, 1991

The new industrial policy announced by the Government in Parliament on July 24, 1991 sought to amend the
MRTP Act, 1969 by removing all pre-entry restrictions and placing more emphasis on controlling and
regulating monopolistic, restrictive and unfair trade practices.
The ‘Statement of Objects and Reasons to the MRTP (Amendment) Act, 1991 reiterates that the basic
philosophy behind the MRTP Act, 1969 was not to inhibit industrial growth but to ensure that industrial
growth was channelised for public good and growth did not perpetuate concentration of economic power to
the common detriment. To quote,
1. With the growing complexity of industrial structure and the need for achieving economies of scale
for ensuring higher productivity and competitive advantage in the international market, the thrust of
the industrial policy has shifted to controlling and regulating the monopolistic, restrictive and unfair
trade practices rather than making it necessary for certain undertakings to obtain prior approval of
the Central Government for expansion, establishment of new undertakings, merger, amalgamation,
take over and appointment of directors. It has been the experience of the Government that pre-entry
restrictions under the MRTP Act on the investment decision of the corporate sector has outlived its
utility and has become a hindrance to the speedy implementation of industrial projects. By
eliminating the requirement of time-consuming procedures and prior approval of the Government, it
would be possible for all productive sections of the society to participate in efforts for maximisation
of production. It is, therefore, proposed to re-structure the MRTP Act by omitting the provisions of
Sections 20 to 26 and transfer the provisions contained in Chapter III-A regarding restrictions on
acquisition and transfer of shares to the Companies Act, 1956. The Schedule to the MRTP Act is
also consequently to be transferred with modification to the Companies Act, 1956.
2. It is also proposed to enlarge the scope of inquiry by the MRTP Commission with a view to taking
effective steps to curb and regulate monopolistic, restrictive and unfair trade practices which are
prejudicial to public interest. It is also proposed to provide for deterrent punishment for
contravention of the orders passed by the MRTP Commission and the Central Government and
empower the Commission to punish for its contempt. Certain other consequential changes are also
found necessary in the MRTP Act.
Scope and Applicability of the MRTP Act

Section 3 of the MRTP Act, 1969 provides that unless the Central Government, by notification in the Official
Gazette otherwise directs, the Act shall not apply to:
(a) undertakings owned or controlled by the Government, a government company, a corporation, a
registered cooperative society and undertakings, the management of which has been taken over by
the Central Government;
(b) trade unions and other associations of workmen;
(c) financial institutions.
However, vide notification dated 27.9.1991, the Government has directed that the provisions of the MRTP
Act shall apply to all undertakings and financial institutions specified in Section 3 which were hitherto outside
the purview of the Act, except undertakings owned or controlled by a Government company, or the
Government and engaged in the production of arms and ammunition and allied items of defence equipment,
defence aircraft and warships, atomic energy, minerals specified in the schedule to the Atomic Energy
(Control of Production and Use) Order, 1953 and industrial units under the Currency and Coinage Division,
Ministry of Finance, Department of Economic Affairs. Thus, the hitherto anomaly which used to exist prior to
27.9.91 about applicability of provisions of Act between private sector enterprises and public sector
undertakings and those stated in sub-clause (a) to (g) of Section 3, has been removed.
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But trade unions and other associations of workmen or employees formed for their own reasonable
protection as such workmen or employees continue to be exempt from the applicability of the MRTP Act.
However, Truck owners or operators Unions/Associations being not of workmen have been held to be
subject to the jurisdiction of MRTP Commission by Supreme Court in the case of Bharatpur Truck Operators
Union.
In effect, all public sector companies, except those engaged in the production of arms and ammunition etc.
and industries under the Currency and Coinage Division, have been brought within the scope of the MRTP
Act in respect of monopolistic, restrictive and unfair trade practices.
MONOPOLISTIC TRADE PRACTICES

Prohibition of monopolistic trade practices is one of the objects of the MRTP Act, 1969. The word ‘monopoly’
has not been defined in the MRTP Act. But it is common knowledge that a pure monopoly as well as
‘monopolistic’ position leads to distortion of competition in the market, besides endangering in the normal
circumstances concerted action to fix prices, supplies of commodities, etc. The result of such action is no
doubt detrimental to the consuming public.
The Monopolies Inquiry Commission made copious analysis of this aspect in its report. It is worth quoting the
following passages from Chapter V of the report:
Our study of product-wise concentration brings out prominently the fact that in a large number of industries, a
single undertaking is the only supplier or at least has to its credit a very large portion of the market as
compared with its competitors. Such an undertaking has the power to dictate the price of the commodity or
services it supplies and to regulate its volume of production in such a manner as to maximize its profits. This
power is what is generally understood by the words “monopoly power" Though in the strict etymological
sense of the word, and in strict economic theory, monopoly exists when there is only one single supplier,
there is no reason why an enterprise enjoying the power to dictate the price and thus to control the market
even though it is not the single supplier should not be considered a monopoly. What happens in such cases
is that the price decided upon by the dominant producer (or distributor) is followed by others who are in a
position to compete. This price leadership phenomenon is in essence a manifestation of the price leaders
power to dictate the price in the market. We think it proper therefore to include within the word monopoly not
only the single supplier in a market but also the one dominant supplier who has the power to dictate the price
in the market."
“The question that next arises is : When such a power is shared by a few enterprises being the dominant
sellers, should they be considered to be holding a monopolistic position? We see no reason to exclude such
dominant sellers from our understanding of monopoly. For, the essence of monopoly is the ability to dictate
the price and control the market without being materially influenced by other competing concerns.”
One important difference between the situation when a single seller dominates the market and a few
independent sellers together enjoy a dominating position cannot be overlooked. In the former case,
monopoly power is inevitably present, in the latter it may or not be present. The effect on the market of a few
dominant sellers has been widely discussed by economists, specially in recent years; but their opinions are
by no means the same. We do not propose to try to resolve this controversy. It is sufficient for our purpose to
notice that it is generally agreed that when a few big sellers dominate the market there will ordinarily be a
high probability of their coming to some kind of agreement or understanding whether formal or not, about the
price and output, by which a monopolistic power is shared between themselves. Even in the absence of such
agreement or understanding it frequently happens that each has a healthy fear of the other big producers or
distributors and ultimately a policy of live and let live comes into operation. Some economists point out that
when a few large sellers dominate the market, each of them is able to calculate fairly and accurately the
probable effect on the market of his action in increasing or decreasing his output. So, it is said that each will
try to regulate the output in such a way that the marginal costs remain well below the price. Each such seller
will also be well aware that any attempt of his to reduce the price is likely to be met immediately by similar
action by his competitors. The matter is succinctly put by Stocking in Monopoly and Free Enterprise at p. 90
thus:
“In markets where sellers are few, each in trying to determine his most profitable volume of output must, as
would a monopolist, consider the probable effects of various possible rates of production not only on costs
but also on prices. Indeed each seller will ordinarily decide on the price at which he will sell and adjust his
output accordingly, just as a monopolist does. Each oligopolist however in determining his price must
consider not merely his own cost-price relationships but also how his rivals will react to his prices. Anyone of
a few sellers, if fully informed and perfectly rational, when selling a completely standardised product will
realise that if he reduces his prices his rivals will meet the lower price promptly.
For all these reasons, we are convinced that when the market is dominated by a few sellers, monopolistic
conditions will sometimes prevail. At the same time, we are conscious that even in a market of a few sellers,
there will sometimes be keen competition. This is likely to happen apart from the effect of the mutual
jealousies which sometimes characterise the relations between big business houses when one or more of
the few sellers feel confident that due to superior managerial ability and technical skill and financial
resources they will be able to capture a larger share of the market at the expense of their rivals. Even so,
there is no gainsaying the fact that in a market of a few dominating sellers, there is real risk of the
emergence of monopolistic power and consequently of monopolistic practices. To ascertain the extent to
which monopolistic practices prevail, we must examine not only the cases where a single enterprise is the
sole or dominant producer of the goods or services but also the cases where a few enterprises between
themselves share such dominating position.”
RESTRICTIVE TRADE PRACTICES

The Monopolies and Restrictive Trade Practices Act, 1969, has as one of its objects the prohibition of
restrictive trade practices. In order to ensure that the benefits of free and fair competition in a market reach
the ultimate consumer, it is essential that the process of competition should not be distorted by any trade
practice, either by a single manufacturer or a group of manufacturers or dealers. For instance, if a
manufacturer stipulates a condition that the wholesale purchaser shall sell only his products and not of
others or shall resell the goods only at the prices stipulated by him or forces the wholesale purchaser to
procure the entire line of manufacture from him, the result may be a distortion of competition in the market.
The MRTP Act is concerned with promoting fair and free competition in the market, the securing of consumer
interest being the ultimate goal.
The Monopolies Inquiry Commission in its report observed that a restrictive trade practice means a practice
which obstructs the free play of competitive forces or impedes the free flow of capital or resources into the
stream of production or of the finished goods in the stream of distribution at any point before they reach the
hands of the ultimate consumer. The Commision list out the following types of restrictive trade practices
pursued not only in India but also in many other countries. These include(i) horizontal fixation of price (ii)
vertical fixation of price and re-sale price maintenance; (iii) allocation of markets between purchasers; (iv)
discrimination between purchasers; (v) boycott; (vi) exclusive dealing contracts; and (vii) tie-up
arrangements.
The Monopolies Inquiry Commission made a wee-bit of distinction between a monopolistic trade practice and
a restrictive trade practice. It observed every monopolistic trade practice is on the face of it a restrictive trade
246 EP-EBCL
practice. Indeed, sometimes the two words are used indiscriminately. Thus the report of Macquarrie
Committee which was set up to study Canadian Combines Legislation treats all combines or common policy
among several firms designed to strengthen the market position of a group of firms as monopolistic
practices. In our opinion, every practice whether it is by action or understanding or agreement, formal or
informal, to which persons enjoying monopoly power resort in exercise of the same to reap the benefits of
that power and every action, understanding or agreement tended to or calculated to preserve, increase or
consolidate such power should properly be designated as monopolistic trade practice.
UNFAIR TRADE PRACTICES

Unfair trade practices in trade and commerce were prevalent even in older days. Priests in Sumaria and
Babylon are on record to have lent money to the needy at high rates of interest. During the period of Tudors,
practices of forestalling (meaning pushing up prices by buying up supplies before they reached market),
regrating (buying up supplies in the market), and engrossing (buying up supplies wherever available) were
prevalent. Thus exploitation at market place is not a new phenomena of modern civilisation. At present
various types of unfair trade practices are prevalent at National as well as at International markets. The
legislative history of countries the world over bears redeeming testimony to the endeavours of the National
Governments to enact suitable legislations to curb such unfair trade practices.
The underlying objective of such legislative endeavours has been to make the behaviour at market place
conducive to righteous dealings so that the ultimate consumer gets a fair deal. Senator Murphy, the then
Australian Attorney General, introducing the Restrictive Trade Practices Bill of the Commonwealth of
Australia in the Senate said: In consumer transactions, unfair practices are widespread. The existing law is
still founded on the principle known as ‘Caveat Emptor meaning ‘let the buyer beware. That principle may
have been appropriate for transactions conducted in village markets, it has ceased to be appropriate as a
general rule. Now the marketing of goods and services is conducted on organised basis and by the trained
business executives. The untrained consumer is no match for the businessman who attempts to persuade
the consumer to buy goods or services on terms and conditions suitable to the vendor. The consumer needs
protection by the law and this Bill will provide such protection.
It is often said that consumers need no special protection; all can be safely left to the market. But the concept
of perfect market is an economists dream and consumers sovereignty a myth. In real life products are
complex and of great variety and consumers and retailers have imperfect knowledge. Suppliers may often
have a dominant buying position. As a consequence bargaining power in the market is generally weighed
against the consumer. Thus consumers have felt the need to create organisations to identify their interests
and to supply information and advice.
The Federal Trade Commission of US is stated to have labelled under the Federal Trade Commission Act,
1914 numerous practices not known before. It was because a need was felt to ensure that the public was
prevented from being made victims of false claims of products blatantly advertised even though it may not
have an adverse effect on the competition. The effort was to shift the emphasis on detention and eradication
of fraud against the consumers, particularly those belonging to the weaker sections of the society.
Consumer Protection Law in India

The Government enacted various laws to safeguard the interest of the consumers. The Essential
Commodities Act, The Trade Marks Act, The Specific Relief Act, The Drugs Control Act, The Drugs and
Cosmetics Act, The Drugs and Magic Remedies (Objectionable Advertisements) Act, The Emblems and
Names (Prevention of Improper Use) Act, The Indian Standard Institution (Certification Marks) Act, The
Agricultural Produce (Grading and Marketing) Act, The Standards of Weights and Measures Act, etc. are a
few of the many laws intended to protect the interest of the consumer. Some of these laws alongwith the
delegated legislation framed thereunder protect both the pecuniary interest as well as other interests of the
consumer. Even the Indian Contract Act 1872 and the Sale of Goods Act, 1930 contain provisions for breach
of contracts and remedies therefor. The Indian Penal Code provides for stringent punishment for certain
offences.
In the year 1986, the Government enacted the Consumer Protection Act, 1986 and framed necessary rules
thereunder, for facilitating the formation of Consumer Protection Councils in all states and setting up of
Consumer Forums at district level, State Commission at state level and National Commission at national
level for redressing the grievances of consumers. The Government also framed the MRTP (Recognition of
Consumer Association) Rules and amended a number of economic legislations like the Essential
Commodities Act, 1955; Standards of Weights and Measures Act, 1976; Prevention of Food Adulteration Act,
1954; Drugs and Cosmetics Act, 1940 etc. to provide better protection to consumers.
However, the passing of the MRTP Act, 1969, could be said to be the beginning of the Governments concern
for consumer interest. Till the amendment of the Act in the year 1984, even the MRTP Act did not contain
provisions directly aimed at protecting the interests of consumer, but they were intended to regulate
competition in the hope that it would generate fair conduct, the effect of which would percolate to the ultimate
consumer, the terminal point in the distributive line.
Recommendations of Sachar Committee

The Government of India appointed a Committee in August, 1977 under the Chairmanship of Justice
Rajinder Sachar to look into the simplification of the working of the companies and the MRTP Act. The
Committee submitted its report in the year 1978 and as far as recommendations pertaining to the MRTP Act
are concerned, far reaching changes were suggested by the Committee. For the first time, the Committee
highlighted the need for introduction of suitable provisions to curb unfair trade practices.
In its view, the assumption that curbing monopolistic and restrictive trade practices and thereby preventing
distortion of competition automatically results in the consumers getting a fair deal was only partly true. It was felt
necessary to protect the consumers from practices adopted by trade and industry to mislead or dupe them.
The Committee pointed out that advertisements and sales promotion having become well established modes
of modern business techniques, representations through such advertisements to the consumer should not
become deceptive. If a consumer was falsely induced to enter into buying goods which do not possess the
quality and did not have the cure for the ailment advertised, it was apparent that the consumer was being
made to pay for quality of things on false representation. Such a situation could not be accepted.
Therefore, an obligation is to be cast on the seller to speak the truth when he advertises and also to avoid
half truths, the purpose being preventing false or misleading advertisements.
The Committee also noted that fictitious bargain was another common form of deception and many devices
were used to lure buyers into believing that they were getting something for nothing or at a nominal value for
their money. The Committee observed: Prices may be advertised as greatly reduced and cut when in reality
the goods may be sold at sellers regular prices. Advertised statements that could have two meanings, one of
which is false, are also considered misleading. In America, it was held that statement that a tooth paste fights
decay could be interpreted as a promise of complete protection and was thus deceptive. Mock-ups on
television put up by companies including Colgate Palmolive had also received the attention of the
Enforcement Agencies in America and have been held to be deceptive.
We cannot say that the type of misleading and deceptive practices which are to be found in other countries
248 EP-EBCL
are not being practised in our country. Unfortunately our Act is totally silent on this aspect. The result is that
the consumer has no protection against false or deceptive advertisements. Any misrepresentation about the
quality of a commodity or the potency of a drug or medicine can be projected without much risk. This has
created a situation of a very safe heaven for the suppliers and a position of frustration and uncertainty for the
consumers. It should be the function of any consumers legislation to meet this challenge specifically.
Consumer protection must have a positive and active role.
Accordingly, the Committee specified certain unfair trade practices which were notorious and suggested
prohibition of such practices. The main category of unfair trade practices recommended for prohibition by the
Sachar Committee were: (a) misleading advertisements and false representations (b) bargain sale, bait and
switch selling; (c) offering gifts or prizes with the intention of not providing them and conducting promotional
contests; (d) supplying goods not conforming to safety standards; and (e) hoarding and destruction of goods.
In India, by an amendment to the MRTP Act in the year 1984 Part B Unfair Trade Practices was added to
Chapter V. It may be recalled that Part A of Chapter V deals with registration of agreements relating to
restrictive trade practices. Section 36A, 36B, 36C, 36D and 36E are relevant for the purposes of
understanding the main provisions relating to unfair trade practices.
Scheme of the Act with respect to Unfair Trade Practices

The term ‘Unfair Trade Practices’ is defined in Section 36A which enlists a number of practices as unfair
trade practices. This definition has been amended vide the MRTP (Amendment) Act, 1991 making its scope
wider in application. Section 36B provides for an enquiry into unfair trade practices by the MRTP
Commission. Section 36C contains provision for preliminary investigation by the Director General in certain
cases. Section 36D deals with the powers of the Commission to inquire into unfair trade practice and pass
remedial orders. Section 36E empowers the Commission to exercise same powers in respect of unfair trade
practices as it exercises in respect of restrictive trade practices.
Why do we need competition in the market?
Competition is now universally acknowledged as the best means of ensuring that

consumers have access to the broadest range of services at the most competitive
prices. Producers will have maximum incentive to innovate, reduce their costs and
meet consumer demand. Competition thus promotes allocative and productive
efficiency. But all this requires healthy market conditions and governments across
the globe are increasingly trying to remove market imperfections through appropriate
regulations to promote competition.
COMPETITION ACT, 2002

Short title, extent and commencement
Section 1 of the Act provides that it shall come into force on such date as the Central Government may notify
in the Official Gazette. However, an enabling provision empowering the Government to appoint different
dates for different provisions of the Act have been incorporated. The scope of the Act extends to whole of
India except the State of Jammu and Kashmir.
Scheme of the Act

The Scheme of the Act has been split into nine chapters indicated hereunder: Chapter I contains preliminary
provisions viz. Short title, extent and Definition clauses; Chapter II provides for substantive laws i.e. Anti
Competitive Agreements, Abuse of Dominance and Regulation of Combinations; Chapter III contains
provisions relating to Establishment of Commission, Composition of Commission, Selection of Committee for
Chairperson and other Members, Term of Office of Chairperson etc. Chapter IV elaborately provides the
Duties, Powers and Functions of the Commission; Chapter V provides for the Duties of Director General;
Chapter VI stipulates Penalties for Contravention of Orders of Commission, Failure to Comply with Directions
of Commission and Director-General, Making False Statement or Omission to Furnish Material Information
etc; Chapter VII deals with Competition Advocacy; Chapter VIII contains provisions relating to Finance,
Accounts and Audit, Chapter VIII A contains provisions relating to “Competition Appellate Tribunal” [inserted
by the Competition (Amendment) Act, 2007] and Chapter IX contains Miscellaneous provisions.
DEFINITIONS
The important concepts incorporated in the Competition Act, 2002 have been defined under Section 2 of the
Act. These have been discussed herein below:
Acquisition
This term has been specifically defined. It means – directly or indirectly, acquiring or agreeing to acquire: (i)
shares, voting rights or assets of any enterprise; (ii) control over management or control over assets of any
enterprise. [(Section 2(a)]
The terms ‘acquiring’ or ‘acquisition’ are relevant for “Regulation of Combinations”.
Agreement
The term includes any arrangement or understanding or action in concert
(i) whether or not, such arrangement, understanding or concert is in formal or in writing; or
(ii) whether or not such arrangement, understanding or concert is intended to be enforceable by legal
proceedings.
It implies that an arrangement need not necessarily be in writing. The term is relevant in the context of
Section 3, which envisages that anti-competitive agreements shall be void and thereby prohibited by the law.
[Section 2(b)]
The term “Competition” is not defined in the Act. However, in the corporate world, the term is generally
understood as a process whereby the economic enterprises compete with each other to secure customers
for their product. In the process, the enterprises compete to outsmart their competitors, sometimes to
eliminate their rivals. Competition in the sense of economic rivalry is unstable and has a natural tendency to
give way to a monopoly. Thus, competition kills competition.
Cartel
“Cartel” includes an association of producers, sellers or distributors, traders or service providers who, by
agreement amongst themselves, limit control or attempt to control the production, distribution, sale or price of
or, trade in goods or provision of services. [Section 2(c)]
The nature of a cartel is to raise price above competitive levels, resulting in injury to consumers and to the
economy. For the consumers, cartelisation results in higher prices, poor quality and less or no choice for
goods or/and services.
An international cartel is said to exist, when not all of the enterprises in a cartel are based in the same
country or when the cartel affects markets of more than one country.
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An import cartel comprises enterprises (including an association of enterprises) that get together for the
purpose of imports into the country.
An export cartel is made up of enterprises based in one country with an agreement to cartelize markets in
other countries. In the Competition Act, cartels meant exclusively for exports have been excluded from the
provisions relating to anti-competitive agreements. This is because such cartels do not adversely affect
markets in India and are hence outside the purview of the Competition Act.
If there is effective competition in the market, cartels would find it difficult to be formed and sustained.
Some of the conditions that are conducive to cartelization are:
high concentration - few competitors

high entry and exit barriers
homogeneity of the products (similar products)
similar production costs
excess capacity
high dependence of the consumers on the product
history of collusion
Chairperson
Chairperson means the Chairperson of Competition Commission of India appointed under Sub-section (1) of
Section 8. [Section 2(d)]
Commission
Commission means Competition Commission of India established under Section 7(1). [Section 2(e)]
Consumer
Under that Act, the Consumer includes only such purchasers or buyers who make purchases for their own
consumption or to earn their livelihood. This deficiency has now been made good – by defining “Consumer”
under the Act. Consumer means any person who
(i) buys any goods for a consideration which has been paid or promised or partly paid and partly
promised, or under any system of deferred payment and includes any user of such goods other than
the person who buys such goods for consideration paid or promised or under any system of
deferred payment when such use is made with the approval of such person, whether such purchase
of goods is for resale or for any commercial purpose or for personal use.
(ii) hires or avails of any services for a consideration which has been paid or promised or partly paid
and partly promised, or under any system of deferred payment when such services are availed of
with the approval of the first mentioned person whether such hiring or availing of services is for any
commercial purpose or for personal use. [Section 2(f)]
It may be noted that under the Competition Act even if a person purchases goods or avails of services for
commercial purpose, he will be a Consumer, whereas for purposes of Consumer Protection Act, a person
purchasing goods/availing services for commercial purposes is not a “Consumer” and can not seek relief
under that Act.
Director General
Director General means the Director General appointed under Section 16(1) and includes Additional, Joint or
Deputy or Assistant Director Generals. [Section 2(g)]
Enterprise
Enterprise means a person or a department of the Government, who or which is, engaged in any activity,
relating to production, control of goods or articles or provision of services, of any kind, or in investment, or in
the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities
whether such unit or division or subsidiary is located at the same place where the enterprise is located or at
different place(s).
However, it does not include any activity of the Central Government relating to sovereign functions of
Government including all activities carried on by the Government Departments dealing with atomic energy,
currency, defence and space.
‘Activity’ includes profession or occupation. ‘A unit or division’ includes a plant or factory established for
production, supply, distribution, acquisition or control of any goods or any branch or office established for
provision of any service. [Section 2(h)]
It may thus be noted that sovereign function of Government are excluded from definition of enterprise but
Government Departments performing non-sovereign functions for consideration are subject to jurisdiction of
Commission.
Goods
Goods means goods as defined in Sale of Goods Act, 1930 and includes
(a) products manufactured, processed or mined;
(b) debentures, shares and stocks after allotment;
(c) in relation to ‘goods supplied’, goods imported into India. [Section 2(i)]
Member
Member means a Member of the Commission appointed under Section 8(1) of the Act and includes a
Chairperson. [Section 2(j)]
Notification
Notification means notification published in the Official Gazette. [Section 2(k)]
Person
Person includes (i) an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an association
of persons; (vi) a corporation established under Central, State Act or a Government Company (vii) a body
corporate incorporated by or under a law of a foreign country; (viii) a co-operative society registered under
any Law (ix) local authority (x) every artificial juridical person.
‘Government Company’ for this Section will be same as defined under Section 617 of Companies Act, 1956.
[Section 2(p)]
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Practice
Practice includes any practice relating to carrying on of any trade by a person or enterprise. [Section 2(p)]
Prescribed
Prescribed means prescribed by rules made under the Act by Central Government. [Section 2(n)]
Price
Price, in relation to sale of goods or supply of services, includes every valuable consideration, whether direct
or indirect, or deferred, and includes any consideration, which relates to sale of any goods or to performance
of any services although ostensibly relating to any other matter or thing. [Section 2(o)]
Public Financial Institution

Public Financial Institution means a Public Financial Institution as defined in Section 4A of Companies Act,
1956 and includes a State Financial, Industrial or Investment corporation. [Section 2(p)]
Regulations
Regulations means the regulations made by the Competition Commission of India. [Section 2(q)]
Relevant Market
Relevant market means the market, which may be determined by the Commission with reference to ‘relevant
product market’ or ‘relevant geographic market’ or with reference to both the markets. [Section 2(r)]
Relevant Geographic Market

Relevant Geographic Market means a market comprising the area in which the conditions of competition for
supply of goods or provision of services or demand of goods or services are distinctly homogenous and can
be distinguished from conditions prevailing in neighbouring areas. [Section 2(s)]
Relevant Product Market

Relevant Product Market means a market comprising of all those products or services which are regarded as
interchangeable or substitutable by the consumer, by reasons of characteristics of products or services, their
prices and intended use. [Section 2(t)]
The terms ‘relevant market’, ‘relevant geographical market’ and ‘relevant product market’ have relevance in
determination of the agreements being anti competitive, in evaluating combinations and dominance of an
enterprise or group. An agreement in the nature of cartel which limits or controls production, supply, market,
technical development, investments etc. need to be looked as being anti competitive with reference to
relevant market. Similarly agreement to share the market or sources of production by way of allocation of
geographical area of market, types of goods or services or number of customers in the market or by any
similar way and these need to be interpreted in the context of the definition of relevant geographical market
under Section 2(s).
Service
Service means service of any description which is made available to potential users and includes the
provision of services in connection with business of any industrial or commercial matters such as banking,
communication, education, financing, insurance, chit funds, real estate, transport, storage, material
treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement,
construction, repair, conveying of news or information and advertising. [Section 2(u)]

It may be noted that under the Competition Act, the services of industrial or commercial nature also fall within
the scope of the Act whereas under the Consumer Protection Act, the services of commercial nature or for
business or industrial purposes are excluded for interpreting deficiency in the supply thereof and for
determining compensation, if any, payable to them. To this extent, the relief claimable under the Consumer
Protection Act, 1986 is limited in scope. It may also be noted that “education” has been specifically included
in ambit of “Service” to set at rest the dispute, if any, about the jurisdiction of Commission in such matters.
Shares
Shares means shares in the share capital of a company carrying voting rights and includes, –
(i) any security which entitles the holder to receive shares with voting rights;
(ii) stock except where a distinction between stock and share is expressed or implied. [Section 2(v)]
This definition of shares is much wider than what is provided under the Companies Act. It implies that not
only shares in the share capital of a company e.g. equity or preference shares are included in the definition
of shares but ‘debentures convertible into shares with voting rights’ are also included.
Statutory Authority
Statutory authority means any authority, board, corporation, council, institute, university or any other body
corporate, established by or under any Central, State or Provincial Act for the purposes of regulating
production or supply of goods or provision of any services or markets therefor or any matter connected
therewith or incidental thereto. [Section 2(w)]
It implies that this definition widens the scope of type of bodies, which are empowered to make a reference
for enquiring into anti-competitive agreement or abuse of dominant position or make a reference for opinion
on a competition issue.
Trade
Trade means any ‘trade’, business, industry, profession or occupation relating to production, supplies,
distribution, storage or control of goods and includes the provision of any services.
The definition of the term ‘trade’ is relevant, inter-alia, to the interpretation of any of the type of agreement listed
in Section 4 (a), (b), (c), (d) and (e) in relation to the trading goods and provisions of services. [Section 2(x)]
Turnover
Turnover includes value of sale of goods or services. [Section 2(y)]
The definition of the term ’turnover’, inter-alia, is relevant and significant in determining whether the
combination of merging entities exceeds the threshold limit of the turnover specified in Section 5 of the Act. It
is also relevant for the purpose of imposition of fines by the Commission.
Section 2 further provides that the words and expression used but not defined in the Competition Act, 2002
and defined in the Companies Act, 1956 [(1) of 1956] shall have the same meaning respectively assigned to
them in the Companies Act, 1956 (1 of 1956).
Chapter II of the Competition Act, 2002 stipulates provisions relating to Prohibition of Certain Agreements,
Abuse of Dominant Position and Regulations of Combinations.
Anti Competitive Agreements
It is provided under Section 3(1) of the Competition Act that no enterprise or association of enterprises or
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person or association of persons shall enter into any agreement in respect of production, supply,
distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to
cause an appreciable adverse effect on competition. Section 3(2) further declares that any anti competitive
agreement within the meaning of sub-section 3(1) shall be void. Under the law, the whole agreement is
construed as ‘void’ if it contains anti-competitive clauses having appreciable adverse effect on competition.
Section 3(3) provides that following kinds of agreements entered into between enterprises or association
of enterprises or persons or associations of persons or person or enterprise or practice carried on, or
decision taken by any association of enterprises or association of persons, including “cartels”, engaged in
identical or similar goods or services which –
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment or provision of
services;
(c) shares the market or source of production or provision of services by way of allocation of
geographical area of market, or type of goods or services, or number of customers in the market or
any other similar way; and
(d) directly or indirectly results in bid rigging or collusive bidding;
shall be presumed to have an appreciable adverse effect on the competition and onus to prove otherwise lies
on the defendant.
The explanation appended to the Section 3 defines the term ‘bid rigging’ as any agreement between
enterprises or persons which has the effect of eliminating or reducing competition for bids or adversely
affecting or manipulating the process for bidding. Efficiency enhancing joint ventures entered into by parties
engaged in identical or similar goods or services, shall not be presumed to have appreciable adverse effect
on competition but judged by rule of reason. The term “cartel” used in the Section is the most severe form of
entering into ‘anti competitive agreements’ and has been defined in Section 2(c).
Bid rigging takes place when bidders collude and keep the bid amount at a pre-determined level. Such pre-
determination is by way of intentional manipulation by the members of the bidding group. Bidders could be
actual or potential ones, but they collude and act in concert.
Bid rigging is anti-competitive
Bidding, as a practice, is intended to enable the procurement of goods or services on the most favourable
terms and conditions. Invitation of bids is resorted to both by Government (and Government entities) and
private bodies (companies, corporations, etc.). But the objective of securing the most favourable prices and
conditions may be negated if the prospective bidders collude or act in concert. Such collusive bidding or bid
rigging contravenes the very purpose of inviting tenders and is inherently anti-competitive.
Some of the most commonly adopted ways in which collusive bidding or bid rigging may occur are:
• agreements to submit identical bids

• agreements as to who shall submit the lowest bid, agreements for the submission of cover bids
(voluntarily inflated bids)
• agreements not to bid against each other,
• agreements on common norms to calculate prices or terms of bids

• agreements to squeeze out outside bidders
• agreements designating bid winners in advance on a rotational basis, or on a geographical or
customer allocation basis
If bid rigging takes place in Government tenders, it is likely to have severe adverse effects on its purchases
and on public spending. Bid rigging or collusive bidding is treated with severity in the law. The presumptive
approach reflects the severe treatment.
Section 3(4) provides that any agreement amongst enterprises or persons at different stages or levels of the
production chain in different markets, in respect of production, supply, distribution, storage, sale or price of,
or trade in goods or provision of services, including 
Tie-in agreement
Resale price Exclusive

maintenance supply
agreement
Refusal to Exclusive
deal distribution
agreement
shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an
appreciable adverse effect on competition in India.
The term “tie-in agreement” includes any agreement requiring a purchaser of goods, as a condition of such
purchase, to purchase some other goods. A good example of tie-in agreement is where a gas distributor
requires a consumer to buy a gas stove as a pre condition to obtain connection of domestic cooking gas.
[Chanakaya and Siddharth Gas company, In-re RTP 11/1985 decided by (MRTP Commission on 27.1.1985)]
“Exclusive supply agreement” includes any agreement restricting in any manner from acquiring or
otherwise dealing in any goods other than those of the seller or any other person. Thus, where a
manufacturer asks a dealer not to deal in similar products of its competitor directly or indirectly and
discontinues the supply on the ground that dealer also deals in product of suppliers’ competitor’s goods is an
illustration of exclusive dealing agreement. [Bhartia Curtec Hammer Ltd. In-re (1997) 24 CLA 104 (MRTPC)]
“Exclusive distribution agreement” includes any agreement to limit, restrict or withhold the output or
supply of any goods or allocate any area or market for the disposal or sale of the goods.
Requiring a distributor not to sell the goods of the manufacturer beyond the prescribed territory is a good
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example of exclusive distribution agreement. Vadilal Enterprise Ltd. In-re (1998 (91) COMP CAS 824 is a
good example of exclusive distribution agreement.
“Refusal to deal” includes any agreement, which restricts, or is likely to restrict, by any method the persons
or classes of persons to whom goods are sold or from whom goods are bought. For eg. an agreement which
provides that the franchisees will not deal in products or goods of similar nature for a period of three years
from the date of determination of agreement within a radius of five kms from showroom amounts to exclusive
dealing agreement. DGIR v. Titan industries (2001) 43 CLA 293 MRTPC.
“Resale price maintenance” includes any agreement to sell goods on condition that the prices to be
charged on resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that
prices lower than those prices may be charged.
Any stipulation that the cement dealer should not sell below the stipulated price is a ‘resale price
maintenance’ practice and is an anti competitive practice. (In re-India Cement Ltd. RTP Inquiry 48 /1985).
The agreements falling in Section 3(3) shall be presumed to have appreciable adverse affect on competition
and thereby they are construed as deemed restrictive agreements. The agreements falling in Section 3(4)
shall be judged by rule of reason and the onus lies on the prosecutor to prove its appreciable adverse effect
on competition. The definition of all restrictive concepts covered under Section 3(4) is inclusive one.
Moreover, Section 3 does not restrict the right of any person to restrain any infringement of or to impose
reasonable conditions, as may be necessary for protecting any of his rights which have been or may be
conferred upon him under
(a) the Copyright Act, 1957;
(b) the Patents Act, 1970;
(c) the Trade and Merchandise Marks Act, 1958 or the Trade Marks Act, 1999;
(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999;
(e) the Designs Act, 2000;
(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000.
That apart, the Act does not restrict any person’s right to export from India goods under an agreement which
requires him to exclusively supply, distribute or control goods or provision of services for fulfilling export
contracts. The exclusion of ‘export business’ is in view of ‘effect theory’, and doctrine of ‘relevant market’.
WHAT IS AN ANTI-COMPETITIVE AGREEMENT?
An anti-competitive agreement is an agreement having appreciable adverse effect on

competition. Anti-competitive agreements include, but are not limited to:-
• agreement to limit production and/or supply;
• agreement to allocate markets;
• agreement to fix price;
• bid rigging or collusive bidding;
• conditional purchase/ sale (tie-in arrangement);
• exclusive supply / distribution arrangement;
• resale price maintenance; and
• refusal to deal.
Prohibition of abuse of dominant position

Section 4 of the Competition Act, 2002 expressly prohibits any enterprise or group from abusing its dominant
position, meaning thereby a position of strength, enjoyed by an enterprise or group, in the relevant market, in
India, which enables it to–
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market in its favour”.
In line with the latest global trend, the dominance shall not be determined with reference to “assets”,
“turnover” or “market share”.
As per Section 2(r) ‘relevant market’ means the market, which may be determined by the Commission with
reference to the relevant ‘product market’ or ‘relevant geographic market’ or with reference to both the
markets. Thus, for determining dominance, these are relevant concepts.
The term “enterprise” means a person or a department of the Government, who or which is, or has been,
engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of
articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring,
holding, underwriting or dealing with shares, debentures or other securities of any other body corporate,
either directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or
subsidiary is located at the same place where the enterprise is located or at a different place or at different
places, but does not include any activity of the Government relatable to the sovereign functions of the
Government including all activities carried on by the departments of the Central Government dealing with
atomic energy, currency, defence and space.
For the purposes of this clause, “activity” includes profession or occupation; “article” includes a new article
and “service” includes a new service; “unit” or “division”, in relation to an enterprise, includes—
(i) a plant or factory established for the production, storage, supply, distribution, acquisition or control
of any article or goods;
(ii) any branch or office established for the provision of any service.
Section 4(2) states that there shall be abuse of dominant position, if an enterprise or group 
(a) directly or indirectly imposes unfair or discriminatory;
(i) condition in purchase or sale of goods or services; or
(ii) price in purchase or sale (including predatory price) of goods or service.
Explanation appended to Section 4 (2) clarifies that the unfair or discriminatory condition in purchase or sale
of goods or services shall not include any discriminatory condition or price which may be adopted to meet the
competition.
Section 4(2)(b) includes in abuse of dominant position an enterprise or group limiting or restricting
(i) production of goods or provision of services or market therefore; or
(ii) technical or scientific development relating to goods or services to the prejudice of consumers.
Similarly Section 4 (2) (c), (d) and (e) specify three other forms of abuses namely, if any person indulges in
practice or practices resulting in denial of market access in any manner; or makes conclusion of contracts
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subject to acceptance by other parties of supplementary obligations which, by their nature or according to
commercial usage, have no connection with the subject of such contracts and also, if any person uses
dominant position in one relevant market to enter into, or protect, other relevant market.
The term “predatory price” has been defined as the sale of goods or provision of services, at a price which is
below the cost, as may be determined by regulations, of production of goods or provision of services, with a
view to reduce competition or eliminate the competitors. Thus, the two conditions precedent to bring a case
with the ambit of predatory pricing are:
(i) selling goods or provision of service at a price which is below its cost of production and
(ii) that practice is resorted to eliminate the competitors or to reduce competition.
The Competition Commission of India has been empowered under Section 19(4) of the Act to determine
whether any enterprise or group enjoys a dominant position or not, in the ‘relevant market’ and also to decide
whether or not there has been an abuse of dominant position. It may be noted that mere existence of
dominance is not to be frowned upon unless the dominance is abused.
WHAT CONSTITUTES ABUSE OF DOMINANCE?
Dominance refers to a position of strength which enables an enterprise to operate

independently of competitive forces or to affect its competitors or consumers or the
market in its favour. Abuse of dominant position impedes fair competition between
firms, exploits consumers and makes it difficult for the other players to compete with
the dominant undertaking on merit. Abuse of dominant position includes:
• imposing unfair conditions or price,
• predatory pricing,
• limiting production/market or technical development ,
• creating barriers to entry,
• applying dissimilar conditions to similar transactions,
• denying market access, and
• using dominant position in one market to gain advantages in another market.
Combinations
Combination has broad coverage and includes acquisition of control, shares, voting rights, assets, merger or
amalgamation.
WHAT IS COMBINATION?
Broadly, combination under the Act means acquisition of control, shares, voting rights
or assets, acquisition of control by a person over an enterprise where such person
has direct or indirect control over another enterprise engaged in competing
businesses, and mergers and amalgamations between or amongst enterprises when
the combining parties exceed the thresholds set in the Act. The thresholds are
specified in the Act in terms of assets or turnover in India and outside India. Entering
into a combination which causes or is likely to cause an appreciable adverse effect
on competition within the relevant market in India is prohibited and such combination shall be void.
Threshold of Combination specified under section 5 of the Act in tabular form given below:
On March 4, 2016, the Central Government issued notifications pertaining to the statutory thresholds for the
purposes of “combinations” under Section 5 of the Competition Act, 2002(“Act”).
1. Increase in thresholds: Pursuant to Notification No. S.O. 675(E) dated March 4, 2016, the value of
assets and the value of turnover has been enhanced by 100% for the purposes of Section 5 of the
Act. Accordingly, the revised thresholds for notification to the Competition Commission of India
(“Commission”) are:
THRESHOLDS FOR FILING NOTICE
Assets Turnover
Enterprise Level India >2000 INR crore >6000 INR crore
Worldwide with >USD 1 bn with at OR >USD 3 bn with at least

India Leg least > 1000 INR crore > 3000 INR crore in
in India India
OR
Group Level India >8000 INR crore >24000 INR crore
Worldwide with >USD 4 bn with at OR >USD 12 bn with at

India leg least >1000 INR crore least > 3000 INR crore
in India in India
1. Increase in thresholds of De Minimis Exemption: Pursuant to Notification No. S.O. 674 (E)dated
March 4, 2016, acquisitions where enterprises whose control, shares, voting rights or assets are
being acquired have assets of not more than Rs. 350 crore in India or turnover of not more than Rs.
1000 crore in India, are exempt from Section 5 of the Act for a period of 5 years. Accordingly, the
revised threshold for availing of the De Minimis exemption for acquisitions are:
THRESHOLDS FOR AVAILING OF DE MINIMIS EXEMPTION FOR ACQUISITIONS
Assets Turnover
Target In India < 350 INR crore OR < 1000 INR crore
Enterprise
1. Definition of Group: As per Notification No. S.O. 673 (E) dated March 4, 2016, the exemption to
the “group” exercising less than fifty per cent of voting rights in other enterprise from the provisions
of Section 5 of the Act under Notification No. S.O. 481 (E) dated March4, 2011, has been continued
for a further period of 5 years.
Regulation of Combinations
Section 6 of the Competition Act prohibits any person or enterprise from entering into a combination which
causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India
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and if such a combination is formed, it shall be void. Section 6(2) envisages that any person or enterprise,
who or which proposes to enter into any combination, shall give a notice to the Commission disclosing
details of the proposed combination, in the form, prescribed and submit the form together with the fee
prescribed by regulations. Such intimation should be submitted within 30 days of
(a) approval of the proposal relating to merger or amalgamation, referred to in Section 5(c), by the board
of directors of the enterprise concerned with such merger or amalgamation, as the case may be;
(b) execution of any agreement or other document for acquisition referred to in Section 5(a) or
acquiring of control referred to in Section 5(b).
A newly inserted sub-section (2A) envisages that no combination shall come into effect until 210 days have
passed from the day of notice or the Commission has passed orders, whichever is earlier.
The Competition Commission of India (CCI) has been empowered to deal with such notice in accordance
with provisions of Sections 29, 30 and 31 of the Act. Section 29 prescribes procedure for investigation of
combinations. Section 30 empowers the Commission to determine whether the disclosure made to it under
Section 6(2) is correct and whether the combination has, or is likely to have, an appreciable adverse effect
on the competition. Section 31 provides that the Commission may allow the combination if it will not have any
appreciable adverse effect on competition or pass an order that the combination shall not take effect, if in its
opinion, such a combination has or is likely to have an appreciable adverse effect on competition.
The provisions of Section 6 do not apply to share subscription or financing facility or any acquisition, by a
public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to any
covenant of a loan agreement or investment agreement. This exemption appears to have been provided in
the Act to facilitate raising of funds by an enterprise in the course of its normal business. Under Section 6(5),
the public financial institution, foreign institutional investor, bank or venture capital fund, are required to file in
prescribed form, details of the control, the circumstances for exercise of such control and the consequences
of default arising out of loan agreement or investment agreement, within seven days from the date of such
acquisition or entering into such agreement, as the case may be.
As per the explanation appended to Section 6(5)
(a) “foreign institutional investor” has the same meaning as assigned to it in clause (a) of the
Explanation to Section 115AD of the Income-tax Act, 1961;
(b) “venture capital fund” has the same meaning as assigned to it in clause (b) of the Explanation to
clause (23 FB) of Section 10 of the Income-tax Act, 1961.
It may be noted that under the law, the combinations are only regulated whereas anti-competitive
agreements and abuse of dominance are prohibited. Further, under the MRTP Act prior to 27.9.91,
undertakings of certain size were required to be registered and such undertakings were required to seek
prior approval of the Central Government before embarking upon expansion plans. In the present Act, there
is no requirement of registration of an undertaking and further, there is no need to have prior approval of the
Central Government but CCI will only examine as to whether or not combination is or is likely to have an
appreciable adverse effect on competition.
The Competition Act with many innovative concepts coupled with power to impose fine is likely to let in harsh
glare of sunlight to disinfect pernicious anti-competitive practices.
Competition Commission of India
Establishment of Commission
The Central Government under Section 7 has been empowered to establish a Commission to be called
“Competition Commission of India” by issue of a Notification. The Commission is a body corporate having
perpetual succession and a common seal. The Commission has power to acquire, hold movable or
immovable property and to enter into contract in its name and by the said name, sue or be sued. In the
premises, the set up of Commission corresponds to that of Securities & Exchange Board of India constituted
under the SEBI Act, 1992.
The Head Office of the Commission shall be at such place as the Central Government may decide from time
th
to time. Vide Notification: SO 1198(E) dated 14 Oct., 2003, the Central Government established the
Competition Commission of India having its Head Office at New Delhi.
The Commission has also been authorized to establish its office at other places in India. Thus, the law
provides for setting up of CCI’s offices at places other than that of its Headquarter.
Composition of Commission
The composition of the Commission as spelled out under Section 8 of the Act consists of a Chairperson and not
less than two and not more than six other Members. The Chairperson and the Members are to be appointed by
the Central Government. Regarding the qualifications of the Chairman and other Members, Section 8(2)
provides that they shall be person of ability, integrity and standing and who has special knowledge of and such
professional experience of not less than fifteen years in international trade, economics, business, commerce,
law, finance, accountancy, management, industry, public affairs or competition matters including competition
law and policy which in the opinion of the Central Government, may be useful to the Commission. The
Chairperson and other Members are to be appointed on whole time basis.
Selection of Chairperson and Members of Commission

Section 9(1) envisages that the Chairperson and other Members of the Commission shall be appointed by
the Central Government from a panel of names recommended by a Selection Committee consisting of the
Chief Justice of India or his nominee, as Chairperson; and the Secretary in the Ministry of Corporate Affairs,
Member; the Secretary in the Ministry of Law and Justice, Member; and two experts of repute who have
special knowledge of, and professional experience in international trade, economics, business, commerce,
law, finance, accountancy, management, industry, public affairs or competition matters including competition
law and policy, as member.
Term of office of Chairperson and other Members

The Act stipulates that the Chairperson and every other Member shall hold office as such for a term of
five years from the date on which he enters upon his office and shall be eligible for re-appointment.
However, the Chairperson or other Members shall not hold office as such after he has attained the age
of sixty-five years.
A vacancy caused by the resignation or removal of the Chairperson or any other Member under section 11 or
by death or otherwise shall be filled by fresh appointment in accordance with the provisions of sections 8 and
9. The Chairperson and every other Member shall, before entering upon his office, make and subscribe to an
oath of office and of secrecy in such form, manner and before such authority, as may be prescribed.
In the event of the occurrence of a vacancy in the office of the Chairperson by reason of his death,
resignation or otherwise, the senior-most Member shall act as the Chairperson, until the date on which a new
Chairperson, appointed in accordance with the provisions of this Act to fill such vacancy, enters upon his
office. When the Chairperson is unable to discharge his functions owing to absence, illness or any other
cause, the senior-most Member shall discharge the functions of the Chairperson until the date on which the
Chairperson resumes the charge of his functions.
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Resignation of Chairperson etc.

It has been provided under section 11 that the Chairperson or any other Member may resign his office by
notice in writing under his hand addressed to the Central Government. However, until the Chairperson or a
Member is permitted by the Central Government to relinquish his office, he will continue to hold his office
until the expiry of three months from the date of receipt of such notice or until a person duly appointed as a
successor enters into his office or until the expiry of his term, which ever is the earliest. Under Section 11(2),
it is provided that in the following circumstances the Central Government may, by order, remove the
Chairperson or any Member from his office if such Chairman or Member as the case may be, -
(a) is, or at any time has been, adjudged as an insolvent; or
(b) has engaged at any time, during his term of office, in any paid employment; or
(c) has been convicted of an offence which, in the opinion of the Central Government, involves moral
turpitude; or
(d) has acquired such financial or other interest as it likely to affect prejudicially his functions as a
Member; or
(e) has so abused his position as to render his continuance in office prejudicial to the public interest; or
(f) has become physically or mentally incapable of acting as a Member.
However, no Member shall be removed from his office on the ground that he has acquired such financial or
other interest as is likely to affect prejudicially his function as a Member or has so abused his position as to
render his continuance in public office prejudicial to the public interest unless the Supreme Court, on a
reference being made to it in this behalf by the Central Government, has on an inquiry as prescribed
reported that the Member ought on such ground or grounds to be removed.
Section 12 provides that for a period of two years from the date on which the Chairperson and other Member
cease to hold office shall not accept any appointment in or connected with the management or administration
of, any enterprise which has been a party to the proceeding before the Commission. This restriction,
however, shall not apply to any employment under the Central Government or a State Government or local
authority or any corporation established by or under any Central, State or Provincial Act or a Government
company as defined in Section 617 of the Companies Act, 1956 (10 of 1956).
Financial and Administrative Powers of Member Administration

A Member of the Commission as per Section 13 may be designated by the Central Government as Member
Administration who shall exercise such financial and administrative powers as may be vested in him under
the rules made by the Central Government. However, the Member Administration shall have authority to
delegate such of his financial and administrative powers to any other officer of the Commission as he may
deem fit subject to the condition that, while exercising delegated powers such official shall continue to act
under the direction, superintendence and control of the Member Administration.
Salary and Terms and Conditions of Service

The salary allowances and other terms and conditions of service of the Chairman and other member including
travel expenses, house rent allowance, conveyance facility, sumptuary allowance and medical facilities shall be
such as may be prescribed. Further, to ensure freedom in the functioning of the Chairperson and the Member,
Section 14(2) provides that the salary allowance and other terms and conditions of service of the Chairperson
or Member shall not be varied to his disadvantage after his appointment.
No act or proceedings of the Commission shall be invalid merely because there is any vacancy in the
Commission or defect in the constitution of the Commission; or any defect in the appointment of Chairperson
or a Member; or any irregularity in the procedure of the Commission not affecting the merits of the case.
Appointment of Director General
Director General is an important functionary under the Act. He is to assist the Commission in conducting
inquiry into contravention of any of the provisions of the Act and for performing such other functions as are,
or may be, provided by or under the Act.
Section 16 (1) empowers the Central Government to appoint a Director General and such number of
additional, joint, deputy or assistant Director Generals or other advisers, consultants or officers for the
purposes of assisting the Commission in conducting inquiry into the contravention of any provision of the Act.
Additional, joint, deputy and assistant Director Generals, other advisors, consultants and officers shall
however, exercise powers and discharge functions subject to the general control, supervision and directions
of the Director General.
The salary, allowances and other terms and conditions and service of Director General, consultants, advisors
or other officers assisting him shall be such as may be prescribed by the Central Government. The Director
General, advisers, consultants and officers assisting him are to be appointed from amongst the persons of
integrity and outstanding ability and who have experience in investigation, and knowledge of accountancy,
management, business, public administration, international trade, law or economics and such other
qualifications as may be prescribed.
The Commission may appoint a Secretary and such officers and other employees, as it considers necessary
for the efficient performance of his functions under the Act. The Commission may engage, in accordance
with the procedure specified by regulations, such number of experts and professionals of integrity and
outstanding ability, who have special knowledge of, and experience in, economics, law, business or such
other disciplines related to competition, as it deems necessary to assist the Commission in the discharge of
its functions under the Act.
Duties, Powers and Functions of Commission
As per Section 18 of the Act, duties of the CCI are:
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Section 18 empowers the Commission to enter into any memorandum or arrangement, with the prior
approval of the Central Government, for the purpose of discharging the duties and functions under this Act
with any agency of any foreign country. This will enable the CCI to have extra territorial reach and shall
facilitate exchange of information and enforcement of its order.
Inquiry into certain agreements and dominant position of enterprise
The Commission may inquire into any alleged contravention of Section 3(1) or 4(1) on its own motion or on
(a) receipt of any information in such manner and accompanied by such fee, from any person,
consumer or consumer association or trade association; or
(b) a reference made to it by the Central Government or State Government or a statutory authority.
The Director General is not vested with a right to move an application for institution of an enquiry relating to
anti-competitive agreements or abuse of dominance.
The terms ‘person’ and ‘statutory authority’ have been defined under Sections 2(l) and 2(w) respectively. The
term ‘person’ has been given wide connotation and it includes an individual, a HUF, a company, a firm, an
association of persons, any corporation established under any Central, State or Provincial Act or a
Government company, a co-operative society, a local authority and every artificial juridical person.
Section 19(3) provides that while determining whether an agreement has appreciable adverse effect on
competition, the Commission shall give due regard to all or any of the following factors, namely–
(a) creation of barriers to new entrants in the market;
(b) driving existing competitors out of the market;
(c) foreclosure of competition by hindering entry into the market;
(d) accrual of benefits to consumers;
(e) improvements in production or distribution of goods or provision of services;
(f) promotion of technical, scientific and economic development by means of production or

distribution of goods or provision of services.
The first three factors are anti-competitive, while the latter three factors deal with benign effects.
“Adverse appreciable affect on competition” is a key factor while enquiring into anti-competitive agreement.
The touch stone of appreciable adverse effect on competition need not be proved while enquiring into abuse
of dominance.
For the purpose of determining whether an enterprise enjoys dominant position or not under Section 4, the
Commission shall have due regard to all or any of the following factors, namely –
(a) market share of the enterprise;

(b) size and resources of the enterprise;
(c) size and importance of the competitors;
(d) economic power of the enterprise including commercial advantages over competitors;
(e) vertical integration of the enterprises or sale or service network of such enterprises;
(f) dependence of consumers on the enterprise;
(g) monopoly or dominant position whether acquired as a result of any statute or by virtue of being a
Government company or a public sector undertaking or otherwise;
(h) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of
entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of
substitutable goods or service for consumers;
(i) countervailing buying power;
(j) market structure and size of market;
(k) social obligations and social costs;
(l) relative advantage, by way of the contribution to the economic development, by the enterprise
enjoying a dominant position having or likely to have an appreciable adverse effect on
competition;
(m) any other factor which the Commission may consider relevant for the inquiry.
The present law makes explicit the issues and the parameters which will be considered while deciding
“abuse of dominance”. The Commission shall have due regard to the, “relevant geographic market” and
“relevant product market” for determining as to what constitutes a “relevant market”.
The terms ‘relevant market’ and “relevant geographic market” have been defined in Sections 2 (r) and 2(s) of
the Act. For determining the “relevant geographic market”, the Commission shall have due regard to
all or any of the following factors, namely;─
(a) regulatory trade barriers;
(b) local specification requirements;
(c) national procurement policies;

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(d) adequate distribution facilities;
(e) transport costs;
(f) language;
(g) consumer preferences;
(h) need for secure, regular supplies or rapid after-sales service.
Similarly, while determining ‘relevant product market’ the Commission shall have due regard to all or any of
the following factors namely;
(a) physical characteristics or end-use of goods;
(b) price of goods or service;
(c) consumer preferences;
(d) exclusion of in-house production;
(e) existence of specialized producers;
(f) classification of industrial products.
The prescription of parameters for determining “appreciable adverse effect” on competition of agreement,
“dominant position”, within “relevant market”, are intended to bring consistency and certainty in the working
of the Commission which has to consider all or any of the applicable factors, as the case may be. It is quite
apparent that any inquiry by the CCI will be a detailed exercise, which will not only involve gathering of
information in regard to technological or marketing factors but also the government policy which relate to the
trade or business in which the enterprise is involved beside global scenario especially with regard to
regulatory trade barriers including import-export policy, tariff and subsidy issues will also be taken into
account by the Commission.
Inquiry into Combination by Commission

The Commission under Section 20 of the Competition Act may inquire into the appreciable adverse
effect caused or likely to be caused on competition in India as a result of combination either upon its
own knowledge or information (suo motu) or upon receipt of notice under Section 6(2) relating to
acquisition referred to in Section 5(a) or acquiring of control referred to in Section 5(b) or merger or
amalgamation referred to in Section 5(c) of the Act. It has also been provided that an enquiry shall be
initiated by the Commission within one year from the date on which such combination has taken effect.
Thus, the law has provided a time limit within which suo moto inquiry into combinations can be initiated.
This provision dispels the fear of enquiry into combination between merging entities after the expiry of
stipulated period.
On receipt of the notice under Section 6(2) from the person or an enterprise which proposes to enter into a
combination, it is mandatory for the Commission to inquire whether the combination referred to in that notice,
has caused or is likely to cause an appreciable adverse effect on competition in India.
The Commission shall have due regard to all or any of the factors for the purposes of determining whether
the combination would have the effect of or is likely to have an appreciable adverse effect on competition in
the relevant market, namely
(a) actual and potential level of competition through imports in the market;
(b) extent of barriers to entry into the market;
(c) level of combination in the market;
(d) degree of countervailing power in the market;
(e) likelihood that the combination would result in the parties to the combination being able to
significantly and sustainably increase prices or profit margins;
(f) extent of effective competition likely to sustain in a market;
(g) extent to which substitutes are available or are likely to be available in the market;
(h) market share, in the relevant market, of the persons or enterprise in a combination, individually
and as a combination;
(i) likelihood that the combination would result in the removal of a vigorous and effective competitor
or competitors in the market;
(j) nature and extent of vertical integration in the market;
(k) possibility of a failing business;
(l) nature and extent of innovation;
(m) relative advantage, by way of the contribution to the economic development, by any combination
having or likely to have appreciable adverse effect on competition;
(n) whether the benefits of the combination outweigh the adverse impact of the combination, if any.
The above yardsticks are to be taken into account irrespective of fact whether an inquiry is instituted, on
receipt of notice under Section 6(2) upon its own knowledge. The scope of assessment of adverse effect on
competition will be confined to the “relevant market”. Most of the facts enumerated in Section 20 (4) are
external to an enterprise. It is noteworthy that sub clause (n) of Section 20 (4) requires to invoke principles of
a “balancing”. It requires the Commission to evaluate whether the benefits of the combination outweigh the
adverse impact of the combination, if any. In other words if the benefits of the combination outweigh the
adverse effect of the combination, the Commission will approve the combination. Conversely, the
Commission may declare such a combination as void.
Reference by statutory authority

The term “statutory authority” has been defined in Section 2(w). If in the course of a proceeding before any
statutory authority, an issue is raised by any party that any decision which such authority has taken or
proposes to take, is or would be, contrary to the provisions of the Competition Act 2002, it may make a
reference in respect of such issue to the Commission and seek its opinion. The Commission shall, on receipt
of the reference, after hearing the parties to the proceedings, give its opinion within 60 days of receipt of
such reference to such authority on the issues referred to it. The statutory authority shall thereafter pass
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such order on the issues referred to the Commission as it deems fit. The statutory authority may, suo motu
make such reference in respect of such issue to the Commission. Likewise, the Commission either in the
course of proceedings before it or suo motu may make a reference for opinion to a statutory authority and
the latter has to render its opinion within 60 days of making a reference.
Meetings of Commission
Section 22 provides that the Commission shall meet at such times and places, and shall observe such rules
and procedure in regard to the transaction of business at its meetings as may be provided by regulations.
The Chairperson, if for any reason, is unable to attend a meeting of the Commission, the senior-most
Member present at the meeting, shall preside at the meeting. All questions which come up before any
meeting of the Commission shall be decided by a majority of the Members present and voting, and in the
event of an equality of votes, the Chairperson or in his absence, the Member presiding, shall have a second
or/casting vote. However, the quorum for such meeting shall be three Members.
Procedure for inquiry on complaints under Section 19

If the Commission is of the opinion that there exists a prima facie case, on receipt of an information from any
person, consumer, their association or trade association or on a reference from Central Government or State
Government or of a statutory authority or on its knowledge or information under Section 19, it shall direct the
Director General to cause an investigation to be made into the matter. The Director General shall investigate
into the matter and submit a report of its findings within the period as may be specified by the Commission. It
is, however, not binding on the Commission to accept the report of the Director General.
Where upon receipt of a reference or information, the Commission is of the opinion that there is no prima-
facie case, it shall pass an order dismissing the reference/information, as it deems fit and necessary.
Upon receipt of a report from the Director General, the Commission shall forward a copy thereof to (a) the
parties concerned or (b) Central Government or (c) State Government or (d) statutory authority as the case
may be. If the Director General, in relation to a matter referred to it, recommends that there is no
contravention of any of the provisions of the Act, the Commission shall give an opportunity of hearing to the
informant and after hearing, if the Commission agrees with the recommendation of the Director General, it
shall dismiss the information. According to Section 26(7) if, after hearing information provider, the
Commission is of the opinion that further inquiry is called for, it shall direct the enquiry to proceed further.
Where the report of the Director General relates to matter referred to Commission by the Central
Government or a State Government or a statutory authority and the report contains recommendation that
there is no contravention of the provisions of the Act, the Commission shall invite the comments of the
Central Government or the State Government or statutory authority, as the case may be, on such report. On
receipt of the comments, if there is no prima-facie case, in the opinion of the Commission the Commission
shall return the reference. However, if the Commission feels that there is a prima-facie case it shall proceed
with a reference.
Section 26(9) provides that the Commission on receipt of recommendation of Director General that there is
contravention of any of the provisions of the Act, and a further inquiry is called for, shall inquire into such
contravention in accordance with the provisions of the Act.
The provisions of the Section indicate that it is mandatory that information or reference received or a matter
which comes to the knowledge of the Commission regarding alleged violation of the provisions of the Act,
must be referred to the Director General for an investigation in the matter. A copy of the report of the Director
General is required to be sent to the information provider or to the Central Government or State Government
or a statutory authority, as the case may be, for their comments and an opportunity of hearing is required to
be given to the parties as this is warranted by the principles of natural justice. Where the Director General
recommends that there is contravention of any of the provisions of the Act, and that the Commission is of
opinion that further inquiry is called for, it shall institute an inquiry into the matter and pass a reasoned order.
The Commission may or may not subscribe to the recommendations of the Director General.
Orders by Commission after inquiry into agreements or abuse of dominant position

Section 27 envisages that the Commission after any inquiry into agreement entered into by any enterprise or
association of enterprises or person or association of persons, or an inquiry into abuse of dominant position
may pass all or any of the following orders, namely,
(i) direct that such agreement, or abuse of dominant position shall be discontinued and such
agreement, which is in contravention of Section 3 shall not be re-entered or the abuse of dominant
position in contravention of Section 4 shall be discontinued, as the case may be. The direction to
discontinue and not to recur is commonly known as “Cease & desist” order.
(ii) the Commission may impose penalty not exceeding ten percent of the average turnover of last three
preceding financial years, upon each of person or enterprises which are parties to such agreement
in contravention of Section 3 or are abusing dominant position within meaning of Section 4.
In case any agreement which is prohibited by Section 3 has been entered into by any cartel, the
Commission may impose upon each producer, seller, distributor, trader or service provider
participating in that cartel, a penalty up to three times of its profits for each year of the continuance
of such agreement whichever is higher.
(iii) The Commission may direct that the agreements shall stand modified to the extent and in the
manner as specified in the order.
(iv) The Commission may direct the enterprises concerned to comply with such other orders and
directions, including payment of cost, if any, as it deems fit.
(v) to pass such order or issue such directions as it may deem fit.
Division of enterprise enjoying dominant position

The Commission may, notwithstanding anything contained in any other law for the time being in force, by
order in writing, direct division of an enterprise enjoying dominant position to ensure that such enterprise or
group does not abuse its dominant position.
The order of the Commission referred to above may provide for all or any of the following matters, namely
(a) the transfer or vesting of property, rights, liabilities or obligations;
(b) the adjustment of contracts either by discharge or reduction of any liability or obligation or otherwise;
(c) the creation, allotment, surrender or cancellation of any shares, stocks or securities;
(d) the formation or winding up of an enterprise or the amendment of the memorandum of association
or articles of association or any other instruments regulating the business of any enterprise;
(e) the extent to which, and the circumstances in which, provisions of the order affecting an enterprise
may be altered by the enterprise and the registration thereof;
(f) any other matter which may be necessary to give effect to the division of the enterprise or group.
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Procedure for investigation of combination

The procedure for investigation by the Commission has been stipulated under Section 29 of the Act. It
involves following stages -
(i) The Commission first has to form a prima facie opinion that a combination is likely to cause, or has
caused an appreciable adverse effect on competition within the relevant market in India. Further,
when the Commission has come to such a conclusion then it shall proceed to issue a notice to the
parties to the combination, calling upon them to show cause why an investigation in respect of such
combination should not be conducted;
(ii) After receipt of the response of the parties to the combination Commission may call for the report of
the Director General.
(iii) When pursuant to response of parties or on receipt of report of the Director General whichever is
later, the Commission prima-facie is of the opinion that the Combination is likely to cause an
appreciable adverse effect on competition in relevant market, it shall, within seven days direct the
parties to the combination to publish within ten working days, the details of the combination, in such
manner as it thinks appropriate so as, to bring to the information of public and persons likely to be
affected by such combination.
(iv) The Commission may invite any person affected or likely to be affected by the said combination, to
file his written objections within fifteen working days of the publishing of the public notice, with the
Commission for its consideration.
(v) The Commission may, within fifteen working days of the filing of written objections, call for such
additional or other information as it deem fit from the parties to the said combination and the
information shall be furnished by the parties above referred within fifteen days from the expiry of the
period notified by the Commission.
(vi) After receipt of all the information and within forty-five days from expiry of period for filing further
information, the Commission shall proceed to deal with the case, in accordance with provisions
contained in Section 31 of the Act.
Thus, the provisions of Section 29 provide for a specified timetable within which the parties to the
combination or parties likely to be affected by the combination are required to submit the information or
further information to the Commission to ensure prompt and timely conduct of the investigation. It further
imposes on Commission a time limit of forty-five working days from the receipt of additional or other
information called for by it under sub-Section (4) of Section 29 for dealing with the case of investigation into a
combination, which may have an adverse effect of the competition.
Inquiry into disclosures under Section 6(2)

Section 6(2) casts an obligation on any person or enterprise, who or which proposes to enter into
combination, shall give notice to the Commission, in the form as may be specified, and the fee which may be
determined, by regulations, disclosing the details of the proposed combination within thirty days of—
(i) approval of the proposal relating to merger or amalgamation by the board of directors of the
enterprises concerned with such merger or amalgamation;
(ii) execution of any agreement or other document for acquisition referred to in Section 5(a) or
acquiring of control referred to in Section 5(b).
Non-filing of notice attracts penalty in terms of Section 43A of the Act.
The newly inserted section 6(2A) envisages that no combination shall come into effect until two hundred and
ten days have passed from the day on which notice has been given to Commission or the Commission has
passed orders, whichever is earlier.
Upon receipt of such notice, the Commission shall examine such notice and form its prima facie opinion as to
whether the combination has, or is likely to have, an appreciable adverse effect on the competition in the
relevant market in India.
Orders of Commission on Certain Combinations

The Commission, after consideration of the relevant facts and circumstances of the case under investigation,
by it under Sections 28 or 30 and assessing the effect of any combination on the relevant market in India,
may pass any of the written orders indicated herein below. Where the Commission comes to a conclusion
that any combination does not, or is not likely to, have an appreciable adverse effect on the Competition in
relevant market in India, it may, approve that Combination.
(i) In the case where the Commission is of the opinion that the combination has, or is likely to have an
adverse effect on competition, it shall direct that the combination shall not take effect.
(ii) Where the Commission is of the opinion that adverse effect which has been caused or is likely to be
caused on competition can be eliminated by modifying such Combination then it shall direct the
parties to such combination to carry out necessary modifications to the Combination.
(iii) The parties accepting the proposed modification shall carry out such modification within the period
specified by the Commission.
(iv) Where the parties who have accepted the modification, fail to carry out such modification within the
period specified by the Commission, such combination shall be deemed to have an appreciable
adverse effect on competition and shall be dealt with by the Commission in accordance with the
provisions of the Act.
(v) If the parties to the Combination do not accept the proposed modification such parties may within thirty
days of modification proposed by the Commission, submit amendment to the modification proposed
by the Commission.
(vi) If the Commission agrees with the agreement submitted by the parties it shall, by an order approve
the combination.
(vii) If the Commission does not accept the amendment then, parties shall be allowed a further period of
thirty days for accepting the amendment proposed by the Commission.
(viii) Where the parties to the combination fail to accept the modification within thirty days, then it shall be
deemed that the combination has an appreciable adverse effect on Competition and will be dealt
with in accordance with the provisions of the Act.
(ix) Where the Commission directs under Section 31 (2) that the combination shall not take effect or it
has, or is likely to have an appreciable adverse effect, it may order that,
(a) the acquisition referred to in Section 5 (a); or
(b) the acquiring of control referred to in Section 5(b); or
(c) the merger or the amalgamation referred to in Section 5(c) shall not be given effect to by the
parties.
As per proviso the Commission may, if it considers appropriate, frame a scheme to implement its
order in regard to the above matters under Section 31(10).
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(x) A deeming provision has been introduced by Section 31(11). It provides that, if the Commission
does not, on expiry of a period of two hundred ten days from the date of filing of notice under
Section 6(2) pass an order or issue any direction in accordance with the provisions of Section 29(1)
or Section 29(2) or Section 29(7), the combination shall be deemed to have been approved by the
Commission. In reckoning the period of two hundred ten days, the period of thirty days specified in
Section 29(6) and further period of thirty working days specified in Section 29(8) granted by
Commission shall be excluded.
(xi) Further more where extension of time is granted on the request of parties the period of two hundred
ten days shall be reckoned after deducting extended time granted at the request of the parties.
(xii) Where the Commission has ordered that a combination is void, as it has an appreciable adverse
effect on competition, the acquisition or acquiring of control or merger or amalgamation referred to
in Section 5, shall be dealt with by other concerned authorities under any other law for the time
being in force as if such acquisition or acquiring of control or merger or amalgamation had not taken
place and the parties to the combination shall be dealt with accordingly.
(xiii) Section 29(14) makes it clear that nothing contained in Chapter IV of the Act shall affect any
proceeding initiated or may be initiated under any other law for the time being in force. It implies that
provisions of this Act are in addition to and not in derogation of provisions of other Acts.
Thus, approval under one law does not make out a case for approval under another law.
Acts taking place outside India but having an effect on Competition in India
Section 32 extends the jurisdiction of Competition Commission of India to inquire and pass orders in
accordance with the provisions of the Act into an agreement or dominant position or combination, which is
likely to have, an appreciable adverse effect on competition in relevant market in India, notwithstanding that,
(a) an agreement referred to in Section 3 has been entered into outside India; or
(b) any party to such agreement is outside India; or
(c) any enterprise abusing the dominant position is outside India; or
(d) a combination has taken place outside India; or
(e) any party to combination is outside India; or
(f) any other matter or practice or action arising out of such agreement or dominant position or
combination is outside India.
The above clearly demonstrates that acts taking place outside India but having an effect on competition in
India will be subject to the jurisdiction of Commission. The Competition Commission of India will have
jurisdiction even if both the parties to an agreement are outside India but only if the agreement, dominant
position or combination entered into by them has an appreciable adverse effect on competition in the
relevant market of India.
Appearance before Commission

As per Section 35 of the Act, following persons are entitled to appear before the Commission
(i) a complainant; or
(ii) a defendant; or
(iii) the Director General
They may either appear in person or authorise any of the following:

(a) a chartered accountant as defined in Section 2(1)(b) of Chartered Accountants Act, 1949 (38 of
1949) who has obtained a certificate of practice; or
(b) a company secretary as defined in Section 2(1)(c) of the Company Secretaries Act, 1980 (56 of
1980) and who has obtained a certificate of practice;
(c) a cost accountant as defined in Section 2(1)(b) of the Cost and Works Accountants Act, 1959 (23 of
1959) and who has obtained a certificate of practice;
(d) a legal practitioner that is an advocate, vakil or an attorney of any High Court including a pleader in
practice.
The above provisions unambiguously state that a ‘Company Secretary in Practice’ is

entitled to represent an informant or a defendant or Director General. A Company
Secretary in Practice can also get himself empanelled with the Director General to
prosecute his cases before the Commission.
Power of Commission to regulate its own procedure

The Competition Commission of India has been empowered to lay down its own procedure and regulations.
It is not bound by the procedure laid down by the Code of Civil Procedure, 1908 but shall have to observe
the principles of natural justice and subject to the provisions of the Act. The Competition Commission of India
shall also be subject to the rules made by the Central Government. Section 36(2) makes it clear that the
Commission shall have the same powers as are vested in a civil court under the Code of Civil Procedure,
1908 while trying the suit, in respect of the following matters, namely:
Summoning and enforcing the attendance of any person and examining him on oath
Requiring the discovery and production of documents
Receiving evidence on affidavits
Issuing commissions for the examination of witnesses or documents
Subject to the provisions of Sections 123 and 124 of the Indian Evidence Act, 1872,
requisitioning any public record or document or copy of such record or document from
any office.
In terms of Section 36(3), the Commission may call upon such experts, from the field of economics,
commerce, accountancy, international trade or from any discipline as it deems necessary to assist the
Commission in the conduct of any enquiry by it.
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In terms of Section 36(4), the Commission may direct any person –

(a) to produce before the Director General or the Secretary or an officer authorized by it, such books, or
other documents in the custody or under the control of such person so directed as may be specified
or described in the direction, being documents relating to any trade, the examination of which may
be required for the purposes of the Act;
(b) to furnish to the Director General or the Secretary or any other officer authorized by it, as respects
the trade or such other information as may be in his possession in relation to the trade carried on by
such person, as may be required for the purposes of the Act.
The Competition Commission in thus empowered to appoint experts, from the fields of economics,
commerce, accountancy, international trade or from any other discipline as it deems necessary, to assist in
the conduct of any inquiry or proceeding before it.
As stated earlier, Director General is an important functionary assisting the Commission and the Commission
may ask the Director General to investigate into any trade practice and for the purpose of examination of
books, or account and other document of the parties concerned. The Director General is also vested with all
the powers as are conferred upon the Commission under Section 36(2) of Act.
Ratification of orders
The Commission may amend any order passed by it under the provisions of this Act with a view to rectifying
any mistake apparent from the record. Section 38(2) provides that subject to other provisions of this Act, the
Commission may make –
(a) an amendment of an order of its own motion;
(b) an amendment for rectifying any mistake apparent from record, which has been brought to its notice
by any party to the order.
An explanation below the Section clarifies that while rectifying any mistake apparent from the record, the
Commission shall not amend substantive part of the order passed by it under the provisions of this Act.
Execution of Orders of the Commission Imposing Monetary penalty

Section 39 provides that if a person fails to pay any monetary penalty imposed on him under the Act, the
Commission shall proceed to recover such penalty, in such manner as may be specified by the regulations.
In a case where the Commission is of the opinion that it would be expedient to recover the penalty imposed
under the Act in accordance with the provisions of the Income-tax Act, 1961, it may make a reference to this
effect to the concerned income-tax authority under that Act for recovery of the penalty as tax due under the
said Act.
Where a reference has been made by the Commission under sub-section (2) for recovery of penalty, the
person upon whom the penalty has been imposed shall be deemed to be the assessee in default under the
Income Tax Act, 1961 and the provisions contained in sections 221 to 227, 228A, 229, 231 and 232 of the
said Act and the Second Schedule to that Act and any rules made there under shall, in so far as may be,
apply as if the said provisions were the provisions of this Act and referred to sums by way of penalty imposed
under this Act instead of to income-tax and sums imposed by way of penalty, fine, and interest under the
Income–tax Act, 1961 and to the Commission instead of the Assessing Officer.
Explanation 1 – Any reference to sub-section (2) or sub-section (6) of section 220 of the income-tax Act,
1961 (43 of 1961), in the said provisions of that Act or the rules made thereunder shall be construed as
references to sections 43 to 45 of this Act.
Explanation 2 – The Tax Recovery Commissioner and the Tax Recovery Officer referred to in the Income-tax
Act, 1961 shall be deemed to be the Tax Recovery Commissioner and the Tax Recovery Officer for the
purposes of recovery of sums imposed by way of penalty under this Act and reference made by the
Commission under sub-section (2) would amount to drawing of a certificate by the Tax Recovery Officer as
far as demand relating to penalty under this Act.
Explanation 3– Any reference to appeal in Chapter XVIID and the Second Schedule to the Income-tax Act,
1961 shall be construed as a reference to appeal before the Competition Appellate Tribunal under section
53B of this Act.
It would be noted that Commission may by its Regulations has been empowered to evolve procedure of
recovering monetary penalty. It may also make reference to Income Tax Authority for recovering of penalty
as tax due under the said Act.
As per Section 39, every order passed by the Commission under this Act shall be executed in the same
manner as if it were a decree or order made by the High Court or the Principal Civil Court in any suit pending
therein.
It shall be lawful for the Commission to send, in event of its inability to execute it such order to the High Court
or to the Principal Civil Court, as the case may be, within the limits of whose jurisdiction—
(a) in the case of an order passed against any company or firm; the registered office or the sole or
principal office of the business of company in India or where a company also has a subordinate
office, that subordinate office, is situated;
(b) in the case of an order passed against any other person, the place, where he voluntarily resides of
carries on business or personally works for gain, is situated.
There upon the court to which the order is so sent shall execute the order as if it were a decree or order sent
to it for execution.
Duties of Director General

The Act provides that the Director General when so directed by the Commission, is to assist the Commission
in investigation into any contravention of the provisions of this Act. The Director General is bound to comply
with such a direction to render requisite assistance to the Commission.
The Director General, in order to effectively discharge his functions, has been given the same powers as are
conferred upon the Commission under section 36(2). Under section 36(2) the Commission is having same
powers as are vested in Civil Court under the Code of Civil Procedure (1908) while trying a suit, in respect of
the following matters, namely;
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) subject to the provisions of Sections 123 and 124 of the Indian Evidence Act, 1872, requisitioning
any public record or document or copy of such record or document from any office;
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Without prejudice to the above powers, the provisions of Sections 240 and 240A of the Companies Act,
1956, so far as may be, shall apply to an investigation made by the Director General or by a person
authorised by him, as they apply to an inspector under the Companies Act 1956. This power includes search
and seizure of the record of any person in respect of which an investigation has been directed by the
Commission. It has been provided that wherever the approval of the Central Government is required, the
same shall be given by the Commission and the word ‘magistrate’ appearing in Section 240A shall be
construed as the Chief Metropolitan Magistrate.
Penalties
The Competition Act prescribes penalties for contravention of orders of the Commission. As per Section 42,
the Commission may cause an inquiry to be made into compliance of its orders or directions and 
(a) if any person, without any reasonable cause, fails to comply with any order of the Commission, or
condition or restriction subject to which any approval, sanction, direction or exemption in relation to
any matter has been accorded, given, made or granted under this Act; or
(b) if any person fails to pay the penalty imposed under the Act,
he shall be punishable with imprisonment for a term which may extend to three years or with fine which may
extend to rupees twenty five crores or with both, as the Chief Metropolitan Magistrate may deem fit. The
Chief Metropolitan Magistrate, Delhi, however, shall not take cognizance of any offence save as a complaint
filed by Commission or any of its officers authorized by it.
Compensation in case of Contravention of Orders of commission

Section 42A provides that without prejudice to the provisions of this Act, any person may make an
application to the Appellate Tribunal for an order for the recovery of compensation from any enterprise for
any loss or damage shown to have been suffered, by such person as a result of the said enterprise
violating directions issued by the Commission or contravening, without any reasonable ground, any
decision or order of the Commission issued under sections 27, 28, 31, 32 and 33 or any condition or
restriction subject to which any approval, sanction, direction or exemption in relation to any matter has
been accorded, given, made or granted under this Act or delaying in carrying out such orders or directions
of the Commission.
Penalty for failure to comply with directions of Commission and Director General
Section 43 of the Act provides that if any person fails to comply, without reasonable cause, with a direction
given by the Commission under Sub-sections (2) and (4) of section 36; or the Director General while
exercising powers referred to in sub-section (2) of section 41, such person shall be punishable with fine
which may extend to rupees one lakh for each day during which such failure continues subject to a maximum
of rupees one crore, as may be determined by the Commission
Power to impose penalty for non-furnishing of information on combination

Section 43A provides that if any person or enterprise who fails to give notice to the Commission under sub-
section(2) of section 6, the Commission shall impose on such person or enterprise a penalty which may
extend to one per cent of the total turnover or the assets, whichever is higher, of such a combination.
Thus, failure to file notice of combination falling under Section 5 attract deterrent penalty.
Penalty for making false statement

Section 44 provides that If any person, being a party to a combination, makes a statement which is false in
any material particular, or knowing it to be false; or omits to state any material particular knowing it to be
material, such person shall be liable to a penalty which shall not be less than rupees fifty lakhs but which
may extend to rupees one crore, as may be determined by the Commission.
Power to impose lesser penalty

If any producer, seller, distributor, trader or service provider included in any cartel, which is alleged to have
violated Section 3, has made a full and true disclosure in respect of alleged violations and such a disclosure
is vital, the Commission may impose upon him a lesser penalty than as prescribed under the Act or rules or
regulations.
However, the lesser penalty shall not be imposed where before making such disclosure, the report of
Director General under Section 26 has been received in the Commission. Further, the lesser penalty shall be
imposed only in respect of the producer, seller, distributor, trader or service provider included in the cartel,
who has made a full, true and vital disclosures under this Section. Any producer, seller, trader or service
provider included in the cartel shall also be liable to imposition of penalty, if in the course of proceedings,
had,
(a) not complied with the condition on which the lesser penalty was imposed by the Commission; or
(b) given false evidence; or
(c) the disclosure made is not vital.
The lesser penalty is for a member of a ring who breaks the rank. There is no provision to provide any
protection or incentive to a whistle blower, which is conferred upon Authorities in contemporary legislations
abroad.
The Act does not vest power in the Commission to compound an offence as was the position under the
MRTP Act. It is viewed that long drawn investigation and enquiries could be arrested by provision such as
compounding which allows an offence to be settled quickly. The Commission is also not vested with power to
contempt.
Contravention by Companies
A company means a body corporate and includes a firm or other association of individuals; director, in
relation to a firm, means a partner in the firm for the purposes of penalties in connection with contravention of
the provisions of the Act by companies.
Where any rule, regulation, order made by the Commission or any direction issued thereunder is
contravened by a company, every person who, at the time the contravention was committed, was in charge,
and was responsible to the company for conducting business of the company, as well as the company, shall
be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished.
However it will be a good defence by a person liable to any punishment if he proves that the contravention
was committed without his knowledge or that he has exercised all due diligence to prevent the commission of
an offence.
Where a contravention of any of the provisions of this Act or any rule, regulation, order made or direction issued
thereunder has been committed by a company and it is proved that contravention has taken place with the
consent or connivance of, or it is attributable to any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer shall also be deemed to be
guilty of the contravention and shall be liable to be proceeded against and punished accordingly.
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The word company in this Section, has been used in a wider sense and also includes a ‘firm’ or an ‘association
of persons’. Though the word ‘director’ is normally used in a company, in the light of the wider definition, the
term director is interpreted to include a partner of the firm. The company being a legal person, its affairs are
conducted by a board of directors, manager, secretary or other officer, therefore, according to Section 48 (2)
such director, manager, secretary or other officer, in addition to the company itself shall be deemed to be liable
to be proceeded against for contravention of any provisions of this Act or any rule, regulation, order made or
direction issued thereunder by the Commission or the Director General of Investigation.
Competition Advocacy
Under Section 49 the Central Government/State Government may seek the opinion of the CCI on the
possible effects of the policy on competition or any other matter. In this context, Section 49 envisages that
while formulating a policy on the competition, the Government may make a reference to the Commission for
its opinion on possible effect of such a policy on the competition, or any other matter.
On receipt of such a reference, the Commission shall, give its opinion on it to the Central Government/State
Government, within sixty days of making such a reference and the latter may formulate the policy as it
deems fit. The role of the Commission is advisory and the opinion given by the Commission shall not be
binding upon the Central Government/State Government in formulating such a policy. The Commission is
also empowered to take suitable measures for the
(a) promotion of competition advocacy;
(b) creating awareness about the competition; and
(c) imparting training about competition issues.
The creating awareness about benefits of competition and imparting training in competition issues is
expected to generate conducive environment to promote and foster competition, which is sine-qua non for
accelerating economic growth.
Finance, Accounts and Audit

Grants by Central Government
The Central Government may make to the Commission grants of such sums of money as it may think fit for
being utilised for the purposes of the Act. Such grant is to be made after due appropriation made by the
Parliament.
Constitution of Fund
The Act provides for the constitution of a fund called the “Competition Fund” for meeting the establishment
and other expenses of the Competition Commission in connection with the discharge of its functions and for
the purposes of this Act. The following shall be credited to the “Competition Fund”, -
(a) all government grants received by the commission;
(b) Omitted
(c) the fees received under the Act;
(d) the interest on the amounts accrued on the monies referred under clauses (a) to (c).
Fee realized alongwith notice disclosing combination shall form part of ‘Competition Fund’.
The Fund shall be administered by a Committee of such Members of the Commission, as may be
determined by the Chairperson and the Committee so appointed, shall spend monies out of the Fund only for
the objects for which the Fund has been constituted.
Accounts and Audit

Proper accounts and other relevant records shall be maintained by the Commission and an annual statement
of accounts shall be prepared by it in prescribed form in consultation with the Comptroller and Auditor
General of India (CAG).The CAG shall specify the intervals within which the accounts of the Commission
shall be audited by him.
Explanation to Section 52(2) clarifies that the orders passed by the Commission, being matters appealable to
the Supreme Court, shall not be subject to audit by the CAG. The expenses, if any, incurred in connection
with such audit shall be payable by the Commission to the CAG.
The CAG or any person appointed by him in connection with the audit of the accounts of the Commission
shall have same rights, privileges and authority in connection with such audit as CAG has in connection with
the audit of Government accounts and, shall have the right to demand the production of books, accounts,
connected vouchers and other documents and papers and to inspect any of the offices of the Commission.
Only accounts as certified by the CAG and any other person authorised by him in this behalf together with
the audit report thereon shall be forwarded to the Central Government and the Government shall cause it to
be laid before each House of Parliament.
Furnishing of Returns, etc., to Central Government

The Commission shall furnish to the Central Government such returns and statements and such particulars
in regard to any proposed or existing measures for promotion of competition advocacy, creating awareness
and imparting training about competition issues, in such form and such manner as the Central Government
may prescribe. An annual report giving a true and full account of activities of the Commission during the
previous year shall be prepared once in every year by the Commission and submitted to the Central
Government.
A copy of the annual report of the Commission received by the Government shall cause to be laid by the
Central Government before each House of Parliament.
Right to legal representation

A person preferring an appeal to the Appellate Tribunal may either appear in person or authorize one or
more chartered accountants or company secretaries or cost accountants or legal practitioners or any of its
officers to present his or its case before the Appellate Tribunal.
The Central Government or a State Government or a local authority or any enterprise preferring an appeal to
the Appellate Tribunal may authorize one or more chartered accountants or company secretaries or cost
accountants or legal practitioners or any of its officers to act as presenting officers and every person so
authorized may present the case with respect to any appeal before the Appellate Tribunal.
The Commission may authorize one or more chartered accountants or company secretaries or cost
accountants or legal practitioners or any of its officers to act as presenting officers and every person so
authorized may present the case with respect to any appeal before the Appellate Tribunal.
Explanation – The expressions “chartered accountant” or “company secretary” or “cost accountant” or “legal
practitioner” shall have the meanings respectively assigned to them in the Explanation to section 35.
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Appeal to Supreme Court
The Central Government or any State Government or the Commission or any statutory authority or any local
authority or any enterprise or any person aggrieved by any decision or order of the Appellate Tribunal may
file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order
of the Appellate Tribunal to them. The Supreme court may, if it is satisfied that the applicant was prevented
by sufficient cause from filing the appeal within the said period, allow it to be filed after the expiry of the said
period of sixty days.
Power to Punish for contempt
The Appellate Tribunal shall have, and exercise, the same jurisdiction, powers and authority in respect of
contempt of itself as a High Court has and may exercise and, for this purpose, the provisions of the
Contempt of Courts Act, 1971 (70 of 1971) shall have effect subject to modifications that,—
(a) the reference therein to a High Court shall be construed as including a reference to the Appellate
Tribunal;
(b) the references to the Advocate-General in section 15 of the said Act shall be construed as a
reference to such Law Officer as the Central Government may, by notification, specify in this behalf.
MISCELLANEOUS
Power to exempt
The Central Government may, by notification exempt from the application of the Act, or any provision
thereof—
(a) any class of enterprises if such exemption is necessary in the interest of security of the State or
public interest;
(b) any practice or agreement arising out of and in accordance with any obligation assumed by India
under any treaty, agreement or convention with any other country or countries;
(c) any enterprise, which performs a sovereign function on behalf of the Central Government or a State
Government.
Thus, the power to grant exemption can be invoked by the Central Government in specified circumstances
and conditions.
Where any enterprise is engaged in activities, which includes any activity relatable to the sovereign functions
of the Government, exemption may be granted by the Central Government only in respect of the activity
relatable to the sovereign functions.
Power of Central Government to issue directions
The Central Government may give in writing to the Commission such directions on questions of policy, other
than those relating to technical and administrative matters and the Commission shall be bound by such
directions. The Commission shall be given an opportunity to express its views to the Central Government
before any direction is given by the Government to the Commission. The decision of the Central Government
as to whether the question is of one of policy or not, shall be final.
Power of Central Government to supersede Commission
It is stipulated under section 56 of the Act that if at any time the Central Government is of the opinion, -
(a) that the Commission, on account of circumstances beyond its control is unable to discharge the
functions or perform the duties imposed on it by or under the provisions of the Act; or
(b) that the commission has persistently made default in complying with any direction given by the
Central Government under this Act or in discharge of functions or performance of duties imposed on
it by or under the provisions of the Act and as a result of such default the financial position or the
administration of the Commission has suffered; or
(c) that the circumstances exist which render it necessary in the public interest to do so, the Central
Government may, by notification and for the reasons stated therein, supersede the Commission for
such period, not exceeding six months, as may be specified in the notification.
Thus, power to supersede CCI vests in the Central Government. However before issuing any such
notification, the Central Government shall give to the Commission a reasonable opportunity to make
representations against the proposed supersession for its consideration. Upon publication of a notification
superseding the Commission
(a) the Chairperson and other members shall vacate the office from the date of supersession;
(b) until Commission is reconstituted, all powers functions and duties of the Commission shall be
discharged by the Central Government or by an authority specified by the Central Government in
this behalf;
(c) until the Commission is reconstituted all of its properties shall vest in the Central Government.
The Central Government shall reconstitute the Commission by a fresh appointment of its Chairman and other
Members on or before the expiration of six months from the date of order of the Central Government
superseding the Commission. Any Chairperson or Member who vacates the office because the Commission
is unable to discharge its functions or perform duties imposed on it by or under the provisions of this Act on
account of circumstance beyond its control shall not be deemed to be disqualified for re-appointment upon
re-constitution of the Commission by the Government.
The Central Government shall cause a notification superseding the Commission and a full report of any
action taken under this Section and circumstances leading to such action, be laid before each House of the
Parliament at the earliest.
Restriction on disclosure of information
The Commission from time to time may require any enterprise to submit information for the purposes of the
Act. The information may relate to sensitive business secrets and patents of such an enterprise. In order to
ensure complete secrecy of such information, Section 57 provides that no information relating to an
enterprise obtained by or on behalf of the Commission for the purposes of the Act shall be disclosed except
with the previous permission of the enterprise in writing otherwise than in compliance with or for the
purposes of the Act or any other law for the time being in force.
Protection of action taken in good faith

While acting or purporting to act in pursuance of any of the provisions of this Act, the Chairperson and other
Members and the Director General, Additional, Joint, Deputy or Assistant Directors General and Registrar
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and officers and other employees shall be deemed to be public servants within the meaning of Section 21 of
the Indian Penal Code. However the Act provides for protection of action taken in good faith. As per
Section 59 no suit or legal proceedings shall lie against the Central Government or Commission or any
Chairperson or any Member or Director General or Registrar or other officers or employees of the
Commission for anything, which is done or intended to be done in good faith under the Act or rules or
regulations, made thereunder.
Exclusion of jurisdiction of Civil Courts

A civil court is precluded to exercise jurisdiction in respect of any matter, which the Commission is
empowered by or under the Act to determine and no injunction shall be granted by any court or other
authority in respect of any action taken or to be taken in pursuance of any power conferred by or under the
Act.
Application of other laws not barred

The provisions of the Act are in addition to, and not in derogation of, the provisions of any other law for the
time being in force.
Power to make rules

The Central Government may, by notification, make rules to carry out provisions of this Act. In particular, the
Central Government may make rules to provide for all or any of the following matters; namely-
(a) the term of the Selection Committee and the manner of selection of panel of names under sub-
section (2) of Section 9;
(b) the form and manner in which and the authority before whom the oath of office and of secrecy shall
be made and subscribed to under Sub-section (3) of Section 10;
(c) Omitted by the Competition (Amendment) Act, 2007;
(d) the salary and the other terms and conditions of service including travelling expenses, house rent
allowance and conveyance facilities, sumptuary allowance and medical facilities to be provided to
the Chairperson and other Members under Sub-section (1) of Section 14;
(da) the number of Additional, Joint, Deputy or Assistant Director General or such officers or other
employees in the office of DG and the manner in which such Additional, Joint, Deputy or Assistant
Director Generals or such officers or other employees may be appointed under sub-section (1A) of
Section 16.
(e) the salary, allowances and other terms and conditions of service of the Director General, Additional,
Joint, Deputy or Assistant Directors General or such officers or other employees under Sub-section
(3) of Section 16;
(f) the qualifications for appointment of the Director General, Additional, Joint, Deputy or Assistant
Directors General or such officers or other employees under Sub-section (4) of Section 16;
(g) the salaries and allowances and other terms and conditions of service of the Secretary and officers
and other employees payable, and the number of such officers and employees under Sub-section
(2) of Section 17;
(h) for securing any case or matter which requires to be decided by a Bench composed of more than
two Members under Sub-section (4) of Section 23; (Omitted by the Competition (Amendment) Act,
2007)
(i) any other matter in respect o which the Commission shall have power under clause (g) of Sub-
section (2) of Section 36; (Omitted by the Competition (Amendment) Act, 2007)
(j) the promotion of competition advocacy, creating awareness and imparting training about
competition issues under Sub-section (3) of Section 49; (Omitted by the Competition (Amendment)
Act, 2007)
(k) the form in which the annual statement of accounts shall be prepared under Sub-section (1) of
Section 52;
(l) the time within which and the form and manner in which the Commission may furnish returns,
statements & such particulars as the Central Government may require under Sub-section (1) of
Section 53;
(m) the form in which and the time within which the annual report shall be prepared under Sub-section
(2) of Section 53;
(ma) the form in which an appeal may be filed before the Appellate Tribunal under sub-section (2) of
section 53B and the fees payable in respect of such appeal;
(mb) the term of the Selection Committee and the manner of selection of panel of names under sub-
section(2) of section 53E;
(mc) the salaries and allowances and other terms and conditions of service of the Chairperson and other
Members of the Appellate Tribunal under sub-section (1) of section 53G;
(md) the salaries and allowances and other conditions of service of the officers and other employees of
the Appellate Tribunal under sub-section (3) of section 53M;
(me) the fee which shall be accompanied with every application made under sub-section (2) of section
53N;
(mf) the other matters under clause (i) of sub-section(2) of section 53O in respect of which the Appellate
Tribunal shall have powers under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit;
(n) the manner in which the monies transferred to the Central Government shall be dealt with by that
Government under the fourth proviso to Sub-section (2) of Section 66;
(o) any other matter which is to be, or may be, prescribed, or in respect of which provision is to be, or
may be, made by rules.
Every notification for making such rules shall be laid before each House of Parliament, while it is in session, for
a total period of thirty days which may be comprised in one session, or in two or more successive sessions. If
both Houses agree that notification is not be issued or rule should not be made, then rule shall not be made or
if the House decides that notification or rules should have effect in such modified form then the rule or
notification shall be enforced in modified form. However, any such modification or annulment shall be without
prejudice to the validity of anything previously done under the notification or rule, as the case may be.
Power to make Regulations

The Commission may, by notification, make regulations, which are consistent with the Act. Without prejudice
to the generality of the foregoing provision, such regulations may provide for all or any of the following
matters, namely, -
(a) the cost of production to be determined under clause (b) of the Explanation to Section 4;
(b) the form of notice as may be specified and the fee which may be determined under Sub-section (2)
284 EP-EBCL
of Section 6;
(c) the form in which details of acquisition shall be filed under Sub-section (5) of Section 6;
(d) the procedure to be followed for engaging the experts and the professionals under sub-section (3)
of Section 17;
(e) the fee which may be determined under clause (a) of Sub-section (1) of Section 19;
(f) the rules of procedure in regard to transaction of business at the meetings of the Commission under
sub-section (1) of Section 22;
(g) the manner in which penalty shall be recovered under sub-section (1) of Section 39;
(h) any other matter in respect of which provision is to be, or may be made by regulations.
Every regulation shall be laid before both the Houses of Parliament, while it is in session, for a total period of
thirty days which may be comprised in one session or in two or more successive sessions, and if before the
expiry of the session immediately following the session or the successive sessions aforesaid, both Houses
agree in making any modification in the regulation, or both Houses agree that the regulation should not be
made, the regulation shall thereafter have effect only in such modified form or be of no effect, as the case
may be. However, any such modification or annulment shall be without prejudice to the validity of anything
previously done under that regulation.
Power to remove difficulties

The Central government may, by order published in the Official Gazette, make such provisions, not
inconsistent with the provisions of the Act as may appear to be necessary to remove difficulties which may
arise in giving effect to the provisions of the Act. However, no such order shall be made after expiry of a
period of two years from the commencement of the Act. Every order made under this Section shall be laid
before both the Houses of Parliament as soon as may be, after it is made.
Repeal and Saving

Section 66 provides that the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) is hereby
repealed and the Monopolies and Restrictive Trade Practices Commission established under sub-section (1)
of section 5 of the said Act (hereinafter referred to as the repealed Act) shall stand dissolved.
(1A)The repeal of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) shall, however, not
affect,-
(a) the previous operation of the Act so repealed or anything duly done or suffered there under; or
(b) any right, privilege, obligation or liability acquired, accrued or incurred under the Act so repealed; or
(c) any penalty, confiscation or punishment incurred in respect of any contravention under the Act so
repealed; or
(d) any proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty,
confiscation or punishment as aforesaid, and any such proceeding or remedy may be instituted,
continued or enforced, and any such penalty, confiscation or punishment may be imposed or made
as if that Act had not been repealed.
(2) On the dissolution of the Monopolies and Restrictive Trade Practices Commission, the person appointed
as the Chairman of the Monopolies and Restrictive Trade Practices Commission and every other person
appointed as Member and Director General of Investigation and Registration, Additional, Joint, Deputy, or
Assistant Directors General of Investigation and Registration and any officer and other employee of that
Commission and holding office as such immediately before such dissolution shall vacate their respective
offices and such Chairman and other Members shall be entitled to claim compensation not exceeding three
months' pay and allowances for the premature termination of term of their office or of any contract of service:
Provided that the Director General of Investigation and Registration, Additional, Joint, Deputy or Assistant
Directors General of Investigation and Registration or any officer or other employee who has been,
immediately before the dissolution of the Monopolies and Restrictive Trade Practices Commission appointed
on deputation basis to the Monopolies and Restrictive Trade Practices Commission, shall, on such
dissolution, stand reverted to his parent cadre, Ministry or Department, as the case may be:
Provided further that the Director-General of Investigation and Registration, Additional, Joint, Deputy or
Assistant Directors General of Investigation and Registration or any officer or other employee who has been,
immediately before the dissolution of the Monopolies and Restrictive Trade Practices Commission, employed
on regular basis by the Monopolies and Restrictive Trade Practices Commission, shall become, on and from
such dissolution, the officer and employee, respectively, of the Competition Commission of India or the
Appellate Tribunal, in such manner as may be specified by the Central Government, with the same rights
and privileges as to pension, gratuity and other like matters as would have been admissible to him if the
rights in relation to such Monopolies and Restrictive Trade Practices Commission had not been transferred
to, and vested in, the Competition Commission of India or the Appellate Tribunal, as the case may be, and
shall continue to do so unless and until his employment in the Competition Commission of India or the
Appellate Tribunal, as the case may be, is duly terminated or until his remuneration, terms and conditions of
employment are duly altered by the Competition Commission of India or the Appellate Tribunal, as the case
may be.
Provided also that notwithstanding anything contained in the Industrial Disputes Act, 1947(14 of 1947), or in
any other law for the time being in force, the transfer of the services of any Director General of Investigation
and Registration, Additional, Joint, Deputy or Assistant Directors General of Investigation and Registration or
any officer or other employee, employed in the Monopolies and Restrictive Trade Practices Commission, to
the Competition Commission of India or the Appellate Tribunal, as the case may be, shall not entitle such
Director General of Investigation and Registration, Additional, Joint, Deputy or Assistant Directors General of
Investigation and Registration or any officer or other employee any compensation under this Act or any other
law for the time being in force and no such claim shall be entertained by any court, tribunal or other authority:
Provided also that where the Monopolies and Restrictive Trade Practices Commission has established a
provident fund, superannuation, welfare or other fund for the benefit of the Director General of Investigation
and Registration, Additional, Joint, Deputy or Assistant Directors General of Investigation and Registration or
the officers and other employees employed in the Monopolies and Restrictive Trade Practices Commission,
the monies relatable to the officers and other employees whose services have been transferred by or under
this Act to the Competition Commission of India or the Appellate Tribunal, as the case may be, shall, out of
the monies standing on the dissolution of the Monopolies and Restrictive Trade Practices Commission to the
credit of such provident fund, superannuation, welfare or other fund, stand transferred to, and vest in ,the
Competition Commission of India or the Appellate Tribunal as the case may be, and such monies which
stand so transferred shall be dealt with by the said Commission or the Tribunal, as the case may be, in such
manner as may be prescribed.
(3) All cases pertaining to monopolistic trade practices or restrictive trade practices pending (including such
cases, in which any unfair trade practice has also been alleged), before the Monopolies and Restrictive
Trade Practices Commission shall, on the commencement of the Competition (Amendment) Act, 2009 stand
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transferred to the Appellate Tribunal and shall be adjudicated by the Appellate Tribunal in accordance with
the provisions of the repealed Act as if that Act had not been repealed.
“Explanation.— For the removal of doubts, it is hereby declared that all cases referred to in this sub-section,
sub-section (4) and subsection (5) shall be deemed to include all applications made for the losses or
damages under section 12B of the Monopolies and Restrictive Trade Practices Act, 1969 as it stood before
its repeal;
(4) Subject to the provisions of sub-section(3), all cases pertaining to unfair trade practices other than those
referred to in clause (x) of sub-section(1) of section 36A of the Monopolies and Restrictive Trade Practices
Act, 1969 (54 of 1969) and pending before the Monopolies and Restrictive Trade Practices Commission
immediately before the commencement of the Competition (Amendment) Act, 2009, shall, stand transferred
to the National Commission constituted under the Consumer Protection Act, 1986 (68 of 1986) and the
National Commission shall dispose of such cases as if they were cases filed under that Act:
Provided that the National Commission may, if it considers appropriate, transfer any case transferred
to it under this sub-section, to the concerned State Commission established under section 9 of the
Consumer Protection Act, 1986 (68 of 1986) and that State Commission shall dispose of such case
as if it was filed under that Act.
“Provided further that all the cases relating to the unfair trade practices pending, before the National
Commission under this sub-section, on or before the date on which the Competition (Amendment)
Act, 2009 receives the assent of the President, shall, on and from that date, stand transferred to the
Appellate Tribunal and be adjudicated by the Appellate Tribunal in accordance with the provisions of
the repealed Act as if that Act had not been repealed.”
(5) All cases pertaining to unfair trade practices referred to in clause (x) of subsection (1) of section 36A of
the Monopolies and Restrictive Trade Practices Act, 1969 and pending before the Monopolies and
Restrictive Trade Practices Commission shall, on the commencement of the Competition (Amendment) Act,
2009 stand transferred to the Appellate Tribunal and the Appellate Tribunal shall dispose of such cases as if
they were cases filed under that Act.
(6) All investigations or proceedings, other than those relating to unfair trade practices, pending before the
Director General of Investigation and Registration on or before the commencement of this Act shall, on such
commencement, stand transferred to the Competition Commission of India, and the Competition
Commission of India may conduct or order for conduct of such investigation or proceedings in the manner as
it deems fit.
(7) All investigations or proceedings, relating to unfair trade practices, other than those referred to in clause
(x) of sub-section (1) of section 36A of the Monopolies and Restrictive Trade Practices Act, 1969(54 of 1969)
and pending before the Director General of Investigation and Registration on or before the commencement
of this Act shall, on such commencement, stand transferred to the National Commission constituted under
the Consumer Protection Act, 1986 (68 of 1986) and the National Commission may conduct or order for
conduct of such investigation or proceedings in the manner as it deems fit.
“Provided that all investigations or proceedings, relating to unfair trade practices pending before the
National Commission, on or before the date on which the Competition (Amendment) Bill, 2009 receives
the assent of the President shall, on and from that date, stand transferred to the Appellate Tribunal and
the Appellate Tribunal may conduct or order for conduct of such investigation or proceedings in the
manner as it deems fit.”
(8) All investigations or proceedings relating to unfair trade practices referred to in clause (x) of subsection
(1) of section 36A of the Monopolies and Restrictive Trade Practices Act, 1969(54 of 1969), and pending
before the Director General of Investigation and Registration on or before the commencement of this Act
shall, on such commencement, stand transferred to the Competition Commission of India and the
Competition Commission of India may conduct or order for conduct of such investigation in the manner as it
deems fit.
(9) Save as otherwise provided under sub-sections (3) to (8), all cases or proceedings pending before the
Monopolies and Restrictive Trade Practices Commission shall abate.
(10) The mention of the particular matters referred to in sub-sections (3) to (8) shall not be held to prejudice
or affect the general application of section 6 of the General Clauses Act, 1897 (10 of 1897) with regard to the
effect of repeal.
LESSON ROUND-UP
• Competition Act, 2002 seeks to provide, keeping in view the economic development of the country, for the
establishment of Competition Commission to prevent practices having adverse effect on competition, to
promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of
trade carried on by other participants in markets in India and for matters connected therewith or incidental
thereto besides repeal of MRTP Act and the dissolution of the MRTP Commission.
• No enterprise or association of enterprises or person or association of persons shall enter into any
agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision
of services, which causes or is likely to cause an appreciable adverse effect on competition.
• Competition Act expressly prohibits any enterprise or group from abusing its dominant position. Dominant
Position meaning thereby a position of strength, enjoyed by an enterprise or group, in the relevant market,
in India, which enables it to operate independently of competitive forces prevailing in the relevant market; or
affect its competitors or consumers or the relevant market in its favour.
• Competition Act prohibits any person or enterprise from entering into a combination which causes or is
likely to cause an appreciable adverse effect on competition within the relevant market in India and if such a
combination is formed it shall be void.
• While formulating a policy on the competition the Central/State Government may make a reference to the
Commission for its opinion on possible effect of such a policy on the competition.
• Competition Appellate Tribunal to hear and dispose of appeals against the direction issued or decision
made or orders passed by the Commission under the Act, and to adjudicate on claim of compensation.
• The Central Government or any State Government or the Commission or any statutory authority or any
local authority or any enterprise or any person aggrieved by any decision or order of the Appellate Tribunal
may file an appeal to the Supreme Court.
SELF-TEST QUESTIONS
evaluation)
1. Define and discuss the Relevant Market, Relevant Geographic Market, and Relevant Product
Market.
2. What are anti-competitive agreements? Discuss the procedure for enquiry into anti-competitive
agreements.
288 EP-EBCL
3. The Competition Act does not prohibit dominance, but the abuse of dominant position. Explain.
4. Discuss the composition and functions of Competition Commission of India.
(i) Combinations.
(ii) Competition Advocacy.
Lesson 13
Consumer Protection Act, 1986
LESSON OUTLINE
LEARNING OBJECTIVES
Every individual is a consumer, regardless of
• Genesis of Consumer Protection Laws
occupation, age, gender, community, cast, creed,
• Object and scope of the Consumer Protection religion or race. Consumer rights and welfare are an
Act, 1986 integral part of the life of an individual and we all
have made use of them at some or the other point in
• Consumer Rights
our daily routine. Consumer is the real deciding
• Meaning of Consumer factor for all economic activities. It is now universally
• Commercial purpose accepted that the extent of consumer protection is a
true indicator of the level of progress in a nation.
• Defect in Goods Taking into account the interests and needs of
• Deficiency in Service consumers in all countries, particularly those in
developing countries, recognizing that consumers
• Contract of Service
often face imbalances in economic terms,
• Contract for Service educational level and bargaining power, and bearing
in mind that consumer should have the right of
• District Forum
access to non-hazardous products, as well as
• State Consumer Protection Council importance of promoting just, equitable and
• Central Consumer Protection Council sustainable economic and social development, the
Secretary General, United Nations submitted draft
• Jurisdiction of Protection Council guidelines for consumer protection to the Economic
• Limitation Period for Filing Complaint and Social Council in 1983. Thereupon on an
extensive discussions and negotiations among
• Administrative Control
various countries on the scope and content of such
• Appeal impending legislation certain guidelines were arrived
• Nature and Scope of Remedies at.
• Lesson Round Up In line with the international development on

• Self-Test Questions consumer protection, the Parliament enacted
Consumer Protection Act, 1986 provides a forum for
speedy and simple redressal of consumer disputes.
The rights under the consumer protection flow from
the rights enshrined in Articles 14 to 19 of the
Constitution of India.
According to the preamble, the Consumer Protection Act, 1986 to provide for better protection of the interests of
consumers and for that purpose to make provision for the establishment of consumer councils and other authorities for
the settlement of consumer’s disputes and for matters connected therewith.
290 EP-EBCL
INTRODUCTION
A consumer is a user of goods and services, therefore, every producer is also a consumer. However,
conflicting interests have categorised them, inevitably, into two different groups. The industrial revolution
brought in the concept of standardisation and mass production and over the years, the type of goods and the
nature of services available grew manifold. The doctrine of ‘Caveat Emptor’ or ‘let the buyer beware’ which
came into existence in the middle ages had been replaced by the principle of ‘Consumer Sovereignty or
‘Consumer is the King’. But, with tremendous increase in the world population, the growing markets were
unable to meet the rising demand which created a gap between the general ‘demand’ and ‘supply’ levels in
the markets. This to some extent watered down the concept of ‘Consumer Sovereignty’, what with
consumers being forced to accept whatever was offered to them. On the other hand, the expanding markets
necessitated the introduction of various intermediaries between the producer and the ultimate consumer.
‘Advertising’, though ostensibly directed at informing potential consumers about the availability and uses of a
product began to be resorted to as a medium for exaggerating the uses of ones products or disparaging
others products so as to have an edge over competitors. Unfair and deceptive practices such as selling of
defective or sub-standard goods, charging exhorbitant prices, misrepresenting the efficacy or usefulness of
goods, negligence as to safety standards, etc. became rampant. It, therefore, became necessary to evolve
statutory measures, even in developed countries, to make producers/traders more accountable to
consumers. It also became inevitable for consumers to unite on a common platform to deal with issues of
common concern and having their grievances redressed satisfactorily.
Genesis of Consumer Protection Laws

The need to ensure the basic rights to health, safety, etc. of consumers has long been recognised the world
over and various general legislations were enacted in India and abroad in this direction. In India, the general
enactments other than the law of torts which ultimately aimed at protection of consumers interests are the
Indian Contract Act, 1872, the Sale of Goods Act, 1930, the Dangerous Drugs Act, 1930, the Agricultural
Produce (Grading and Marketing) Act, 1937, the Drugs and Cosmetics Act, 1940, the Indian Standards
Institution (Certification Marks) Act, 1952, the Prevention of Food Adulteration Act, 1954, the Drugs and
Magic Remedies (Objectionable Advertisements) Act, 1954, the Essential Commodities Act, 1955, the
Standards of Weights and Measures Act, 1976 (Now Legal Metrology Act, 2009), the Trade and
Merchandise Marks Act, 1958, (Now Trade Marks Act, 1999), the Patents Act, 1970, the Hire Purchases Act,
1972 and the Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act,
1980.
These legislations contained regulatory provisions and contravention of these provisions attracted civil
liability. This meant that an ordinary consumer had no other remedy but to initiate action by way of a civil suit
which involved lengthy legal process proving to be too expensive and time consuming for lay consumers. In
fact, at times, the time and cost involved in the legal process was disproportionate to the compensation
claimed and granted to an individual consumer. Though the MRTP Commission proved to be far more
accessible and less time-consuming than the Civil Courts, its single central location at New Delhi did not
make the redressal agency accessible to all consumers, especially those located in the remote towns and
villages of the country. Therefore, it became necessary to evolve laws directed at protecting the consumers
and at the same time, providing for remedies which are simpler, more accessible, quicker and less
expensive.
This paved the way for enactment of the Consumer Protection Act in 1986 providing for simple, quick and
easy remedy to consumers under a three-tier quasi-judicial redressal agency at the District, State and
National levels. To make the Act more effective and meaningful, necessary changes have been brought by
Consumer Protection (Amendment) Act, 2002, which came into force w.e.f. March 15, 2003.
Lesson 13 Consumer Protection Act, 1986 291
The Basic Rights of Consumers

The basic rights of consumers that are sought to be promoted and protected are:
• the right to be protected against marketing of goods and services which are hazardous to life and
property;
• the right to be informed about the quality, quantity, potency, purity, standard and price of goods, or
services so as to protect the consumer against unfair trade practices;
• the right to be assured, wherever possible, access to variety of goods and services at competitive
prices;
• the right to be heard and to be assured that consumers interests will receive due consideration at
appropriate forums;
• the right to seek redressal against unfair trade practices or restrictive trade practices or unscrupulous
exploitation of consumers; and
• right to consumer education.
This is based on the basic rights of consumers as defined by the International Organisation of Consumers
(IOCU) viz., the Rights to Safety, to Information, of Choice, to be Heard, to Redressal, to Consumer
Education, to Healthy Environment and to Basic Needs.
SCOPE OF THE ACT

The Act extends to the whole of India except the State of Jammu and Kashmir and applies to all goods and
services unless otherwise notified by the Central Government. The Act received the Presidents assent on
24.12.1986. However, all provisions of the Act except those relating to establishment, composition,
jurisdiction, etc. of the Consumer Disputes Agencies (which came into force on 1.7.1987) came into force on
15.4.1987.
DEFINITIONS
Section 2(1) of the Act defines various terms used in the Act. Some of the definitions are given hereunder:
Complainant means
(i) a consumer, or
(ii) any voluntary consumer association registered under the Companies Act, 1956, or under any other
law for the time being in force; or
(iii) the Central Government or any State Government, who or which makes a complaint; or
(iv) one or more consumers where there are numerous consumers having the same interest;
(v) in case of death of a consumer, his legal heir or representative; who or which makes a complaint
[Section 2(1)(b)].
An association of persons, to have locus standi as consumer, it is necessary that all the individual persons
forming the association must be consumers under Section 2(1)(d) of the Act having purchased the same
goods/hired the same service from the same party i.e. they should have a common cause of action. Thus,
unlike MRTP Act, 1969, the Redressal Machinery under Consumer Protection Act, 1986 has no power to
initiate cases suo-moto.
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Complaint means any allegation in writing made, with a view to obtaining any relief, by a complainant that
(i) an unfair trade practice or a restrictive trade practice has been adopted by any trader or service
provider;
(ii) the goods bought by him or agreed to be bought by him suffer from one or more defects;
(iii) the services hired or availed of or agreed to be hired or availed of by him suffer from deficiency in
any respect;
(iv) a trader or the service provider, as the case may be, has charged for the goods or for the services
mentioned in the complaint, a price in excess of the price—
— fixed by or under any law for the time being in force;
— displayed on the goods or any package containing such goods;
— displayed on the price list exhibited by him by or under any law for the time being in force
— agreed between the parties.
(v) goods which will be hazardous to life and safety when used are being offered for sale to the
public,—
— in contravention of any standards relating to safety of such goods as required to be complied
with, by or under any law for the time being in force;
— if the trader could have known with due diligence that the goods so offered are unsafe to the
public.
(vi) services which are hazardous or likely to be hazardous to life and safety of the public when used,
are being offered by the service provider which such person could have known with due diligence to
be injurious to life and safety. [Section 2(1)(c)].
Consumer means any person who

(a) buys any goods for a consideration which has been paid or promised or partly paid and partly
promised, or under any system of deferred payment and includes any user of such goods other than
the person who buys such goods for consideration paid or promised or partly paid or partly
promised, or under any system of deferred payment when such use is made with the approval of
such person, but does not include a person who obtains such goods for resale or for any
commercial purpose; or
(b) hires or avails of any services for a consideration which has been paid or promised or partly paid
and partly promised, or under any system of deferred payment and includes any beneficiary of such
services other than the person who hires or avails of the services for consideration paid or
promised, or partly paid and partly promised, or under any system of deferred payment, when such
services are availed of with the approval of the first mentioned person but does not include a person
who avails of such services for any commercial purpose. [Section 2(1)(d)].
It has been clarified that the term commercial purpose does not include use by a consumer of goods bought
and used by him exclusively for the purpose of earning his livelihood by means of self-employment.
Therefore, to be a ‘consumer’ under the Act:

(i) the goods or services must have been purchased or hired or availed of for consideration which has
been paid in full or in part or under any system of deferred payment, i.e. in respect of hire purchase
transactions;
(ii) goods purchased should not be meant for re-sale or for a commercial purpose. Goods purchased
by a dealer in the ordinary course of his business and those which are in the course of his business
to supply would be deemed to be for re-sale; and
(iii) in addition to the purchaser(s) of goods, or hirer(s) or users of services, any beneficiary of such
services, using the goods/services with the approval of the purchaser or hirer or user would also be
deemed a ‘consumer under the Act.
A purchase of goods can be said to be for a ‘commercial purpose only if the goods have been purchased for
being used in some profit making activity on a large-scale, and there is close and direct nexus between the
purchase of goods and the profit-making activity. In Laxmi Engineering Works v. P.S.G. Industrial Institute,
Supreme Court held that the explanation to Section 2(1)(d) is clarificatory in nature. It observed that whether
the purpose for which a person has bought goods is a ‘commercial purpose’ is always a question of facts and
to be decided in the facts and circumstances of each case. If the commercial use is by the purchaser himself
for the purpose of earning his livelihood by means of self employment such purchaser of goods would yet be
a consumer. The Supreme Court further observed that if a person purchased a machine to operate it himself
for earning his livelihood, he would be a consumer. If such person took the assistance of one or two persons
to assist him in operating the machine, he would still be a consumer. But if a person purchases a machine
and appoint or engage another person exclusively to operate the machine, then such person would not be a
consumer.
In Bhupendra Jang Bahadur Guna v. Regional Manager and Others (II 1995 CPJ 139), the National
Commission held that a tractor purchased primarily to till the land of the purchaser and let out on hire during
the idle time to till the lands of others would not amount to commercial use.
The question as to whether the widow of the deceased policy holder was a ‘consumer’ under the Act was
decided in the affirmative by the State Commission in Andhra Pradesh in the case of A Narasamma v. LIC of
India. The State Commission held that as the term ‘consumer’ includes any beneficiary of service other than
the person who hires the services for consideration, the widow being the beneficiary of services is a
‘consumer’ under the Act entitled to be compensated for the loss suffered by her due to negligence of the
LIC.
In Laxmiben Laxmichand Shah v. Sakerben Kanji Chandan and others 2001 CTJ 401 (Supreme Court) (CP),
the Supreme Court held that the tenant entering into lease agreement with the landlord cannot be
consideredas consumer under Section 2(1)(d) of the Act. Where there was no provision in the lease
agreement inrespect of cleaning, repairing and maintaining the building, the rent paid by tenant is not the
consideration foravailing these services and therefore, no question of deficiency in service.
Goods, in terms of Section 2(1)(i) has been defined to mean goods as defined in the Sale of Goods
Act,1930. As per Section 2(7) of the Sale of Goods Act, 1930 Goods means every kind of movable property
other than actionable claims and money; and includes stock and shares, growing crops, grass and things
attached to or forming part of the land, which are agreed to be severed before sale or under the contract of
sale. Therefore, most consumer products come under the purview of this definition.
In Morgan Stanley Mutual Fund v. Kartik Das (1994) 3 CLJ 27, the Supreme Court held that an application
for allotment of shares cannot constitute goods. It is after allotment, rights may arise as per the articles of
association of the company. At the stage of application there is no purchase of goods for consideration and
again the purchaser cannot be called the hirer of services for consideration.
294 EP-EBCL
Service: The term ‘service’ is defined under Section 2(1)(o) as to mean service of any description which is
made available to potential users and includes, but not limited to the provision of facilities in connection with
banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or
both, housing construction, entertainment, amusement or the purveying of news or other information, but
does not include the rendering of any service free of charge or under a contract of personal service.
Passengers travelling by trains on payment of the stipulated fare charged for the ticket are ‘consumers’ and
the facility of transportation by rail provided by the railway administration is a ‘service’ rendered for
consideration as defined in the Act Subscribers of telephones would also be ‘consumer’ under the Act.
Contract of Service and Contract for Service
The Supreme Court in the case of Indian Merchants Association v. V P Shantha, (CA No. 688 of 1993
decided on 13th November 1995) observed that a contract for service implies a contract whereby one party
undertakes to render services e.g. professional or technical services to or for another in the performance of
which he is not subject to detailed direction and control but exercises professional or technical skill and uses
his own knowledge and discretion. A contract of service on the other hand implies relationship of master and
servant and involves an obligation to obey orders in the work to be performed and as to its mode and
manner of performance. The Parliamentary draftsman was well aware of this well-accepted distinction
between ‘contract of service’ and ‘contract for services’ and had deliberately chosen the expression ‘contract
of service’ instead of the expression ‘contract for service’ in the exclusionary part of the definition of ‘service’,
this being the reason being that an employer could not be regarded as a consumer in respect of the services
rendered by his employee in pursuance of contract of employment. By affixing the adjective ‘personal’ to the
word ‘service’ the nature of the contracts which were excluded were not altered. The adjective only
emphasised that what was sought to be excluded was personal service only. The expression contract of
personal service in the exclusionary part of Section 2(1)(o) must, therefore, be construed as excluding the
services rendered by an employee to his employer under the contract of personal service free from the ambit
of the expression service.
Service Rendered under Medicare Insurance Scheme: Service rendered by a medical practitioner or
hospital/nursing home can not be regarded as service rendered free of charge, if the person availing the
service has taken an insurance policy for medical care whereunder the charges for consultation, diagnosis
and medical treatment are borne by the insurance company and such service would fall within the ambit of
‘service’ as defined in Section 2(1)(o). Similarly, where as a part of the conditions of service, the employer
bears the expenses of medical treatment of an employee and his family members dependent on him, service
rendered to such an employee and his family members would not be free of charge and would constitute
‘service’ under Section 2(1)(o) of the Act.
In State of Haryana v. Santra [2000(3) SCALE 417], the Supreme Court held that in a country where the
population has been increasing rapidly and the Government has taken up the family planning as an
important programme, the medical officer as also the State Government must be held responsible in
damages if the family planning operation is a failure on account of the medical officers negligence because
this has created additional burden on the parents of the child.
In the case of Alex J. Rebello v. Vice Chancellor, Banglore University and others, 2003 CTJ 575 (CP)
(NCDRC) the National Commission has held that the University in conducting examination, evaluating
answer sheets and publishing the result was not performing any service for consideration and a candidate
who appeared for the examination cannot be regared as a consumer.
Consumer Dispute means a dispute where the person against whom a complaint has been made, denies or
disputes the allegation contained in the complaint [Section 2(1)(e)].
Restrictive Trade Practice means a trade practice which tends to bring about manipulation of price or its
conditions of delivery or to affect flow of supplies in the market relating to goods or services in such a
manner as to impose on the consumers unjustified costs or restrictions and shall include—
(a) delay beyond the period agreed to by a trader in supply of such goods or in providing the services
which has led or is likely to lead to rise in the price;
(b) any trade practice which requires a consumer to buy, hire or avail of any goods or, as the case may
be, services as condition precedent to buying, hiring or availing of other goods or services.[Section
2(1)(nn)].
Defect means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard
which is required to be maintained by or under any law for the time being in force or under any contract,
express or implied, or as is claimed by the trader in any manner whatsoever in relation to any goods [Section
2(1)(f)].
It is clear from the above definition that non-fulfilment of any of the standards or requirements laid down
under any law for the time being in force or as claimed by the trader in relation to any goods fall under the
ambit of defect. Therefore, contravention of any of the provisions of enactments such as the Drugs &
Cosmetics Act, 1950, , the Prevention of Food Adulteration Act, 1955, the Indian Standards Institution
(Certification Marks) Act, 1952 etc. or any rules framed under any such enactment or contravention of the
conditions or implied warranties under the Sale of Goods Act, 1930 in relation to any goods have also been
treated as a defect under the Act. Fault, imperfection or shortcoming in quality, quantity, potency, purity or
standard as claimed by the trader in any manner whatsoever in relation to goods is to be determined with
reference to the warranties or guarantees expressly given by a trader.
Deficiency means any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of
performance which is required to be maintained by or under any law for the time being in force or has been
undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service
[Section 2(1)(g)].
Failure to maintain the quality of performance required by the law or failure to provide services as per
warranties given, by the provider of the service would amount to ‘deficiency’.
In Divisional Manager, LIC of India v. Bhavanam Srinivas Reddy, the National Commission observed that
default or negligence in regard to settlement of an insurance claim (on allegation of suppression of material
facts, in this particular case) would constitute a deficiency in service on the part of the insurance company
and it will be perfectly open for the aggrieved consumer to approach the Redressal Forums to seek
appropriate relief.
In Jaipur Metals and Electrical Ltd. v. Laxmi Industries, the National Commission held that a reading of
Section 2(1)(g) of the Act shows that deficiency must pertain to the ‘performance’ in terms of quality, nature
and manner to be maintained or had been undertaken to be performed in pursuance of a contract.
In Punjab National Bank v. K.B. Shetty (First Appeal No. 7 of 1991 decided on 6th August, 1991), ornaments
kept in the banks locker were found lost though the certificate recorded by the custodian of the bank on the
day the customer operated the locker stated that all lockers operated during the day have been checked and
found properly locked. The National Commission upholding the decision of the State Commission, held the
bank guilty of negligence and therefore, liable to make good the loss.
However, failure to provide nursing and financing facilities to a small scale industry which consequently
became sick cannot be said to constitute ‘deficiency in service’ as in matters of grant or withholding of further
296 EP-EBCL
advances and insisting on margin money, banks may exercise their discretion and act in accordance with
their best judgement after taking into account various relevant factors. Therefore, the proper forum to agitate
such grievances is a civil court (Special Machines v. Punjab National Bank, Original Petition No. 32/1989
decided on 22.12.1989; M.L. Joseph v. SBI: O.P. No. 2/1989 decided on 31.8.1989). It has also been held by
National Commission in the case of Mrs. Anumati v. Punjab National Bank (2003 CTJ 921 (CP) (NCDRC)
that the financial institutions have every right to protect their interests by taking conscious decisions. There
shall be no deficiency in service where the bank takes conscious decision to adjust the fixed deposit of the
joint holders against the loan taken by a third party when the FDR has been mortgaged as guarantee for
loan.
Failure of a Housing Board to give possession of the flat after receiving the price and after registering it in
favour of the allottee was held to be ‘deficiency in service’ in the case of Lucknow Development Authority
v.Roop Kishore Tandon F.N. No. 54/1990 decided on 10.10.1990.
Cancellation of train services by the railways due to disturbance involving violence so as to safeguard the
passengers as well as its own property was held by the National Commission as not constituting ‘deficiency
in service’ on the part of the Railway. [Dainik Rail Yatri Sangh (Regd.) v. The General Manager,
NorthernRailway - I (1992) CPJ 218 (NC)]. Failure of the Railways to provide cushioned seats in the first
class compartments as per specifications laid down by the Railway Board and to check unauthorised
persons from entering and occupying first class compartments was held to be ‘deficiency’ [N. Prabhakaran v.
GeneralManager, Southern Railway, Madras - I (1992) CPJ 323 (NC).
In Union Bank of India v. Seppo Rally OY (1999) 35 CLA 203, the Supreme Court held that delay in payment
of an unconditionally guaranteed amount by a bank in India to a non-resident in Finland in foreign currency
can not be attributed to any deficiency in the service of the bank when the banks stand is that the delay is
caused by the failure of a bank in Finland, to which the remittance was to have been made under the
nonresidents instructions to reply to the Indian Banks valid query in this connection and the RBI took time to
grant the necessary permission to make the remittance.
CONSUMER PROTECTION COUNCILS

The interests of consumers are sought to be promoted and protected under the Act inter alia by
establishment of Consumer Protection Councils at the Central, State and District Levels. Chapter II of the
Consumer Protection Act, 1986 comprising Sections 4 to 8 deals with Consumer Protection Councils.
Central Consumer Protection Council

Section 4 empowers the Central Government to establish a Council to be known as the Central Consumer
Protection Council (hereinafter referred to as the Central Council), consisting of the Minister in charge of
Consumer Affairs in the Central Government, as its Chairman, and such number of other official or non
official members representing such interests as may be prescribed. However, the Consumer Protection
Rules, 1987 restrict the number of members of the Central Council to 150 members. Section 5 of the Act
requires the Central Council to meet as and when necessary, but atleast once in every year. The procedure
in regard to transaction of its business at the meeting is given in Rule 4 of the Rules.
State Consumer Protection Council

Section 7 provides for the establishment of State Consumer Protection Councils by any State Government
(by notification) to be known as Consumer Protection Council for (name of the State). The State Council shall
consist of a Minister in charge of Consumer Affairs in the State Government as its Chairman and such
number of other official or non-official members representing such interests as may be prescribed by the
State Government and such number of other official or non official members, not exceeding ten, as may be
nominated by the Central Government. The State Council shall meet as and when necessary but not less
than two meetings shall be held every year. The procedure to be observed in regard to the transaction of its
business at such meetings shall be prescribed by the State Government.
District Consumer Protection Council

In order to promote and protect the rights of the consumers within the district, section 8A provides for
establishment in every district of a council to be known as the District Consumer Protection Council .It shall
consist of the Collector of the district (by whatever name called), who shall be its Chairman and such number
of other official and non-official members representing such interests as may be prescribed by the State
Government. The District Council shall meet as and when necessary but not less than two meetings shall be
held every year. The District Council shall meet at such time and place within the district as the Chairman
may think fit and shall observe such procedure in regard to the transaction of its business as may be
prescribed by the State Government.
REDRESSAL MACHINERY UNDER THE ACT

The Act provides for a three-tier quasi-judicial redressal machinery at the District, State and National level for
redressal of consumer disputes and grievances. The District Forum has jurisdiction to entertain complaints
where the value of goods/services complained against and the compensation, if any claimed, does not
exceed `20 lakhs, the State Commission for claims exceeding `20 lakhs but not exceeding Rs. 1 crore; and
the National Commission for claims exceeding Rs.1 crore.
National
Commission
State
Commission
District Forum
298 EP-EBCL
District Forum
Section 9 of the Act provides for the establishment of a District Forum by the State Government in
eachdistrict of the State. However, the State Government may establish more than one District Forum in a
district if it deems fit to do so. Section 10(1) provides that each District Forum shall consist of:
(a) Person who is, or who has been, or is qualified to be, a District Judge, who shall be its President;
(b) Two other members one of whom shall be a woman, who shall have the following qualifications,
namely:
i) be not less than thirty-five years of age,
ii) possess a bachelor’s degree from a recognised university,
iii) be persons of ability, integrity and standing, and have adequate knowledge and experience of at
least ten years in dealing with problems relating to economics, law, commerce, accountancy,
industry, public affairs or administration:
Provided that a person shall be disqualified for appointment as a member if he—

(a) has been convicted and sentenced to imprisonment for an offence, which, in the opinion of theState
Government involves moral turpitude; or
(b) is an undischarged insolvent; or
(c) is of unsound mind and stands so declared by a competent court; or
(d) has been removed or dismissed from the service of the Government or a body corporate owned or
controlled by the Government; or
(e) has, in the opinion of the State Government, such financial or other interest as is likely to affect
prejudicially the discharge by him of his functions as a member; or
(f) has such other disqualification as may be prescribed by the State Government.
Every member of the District Forum shall hold office for a term of 5 years or upto the age of 65 years,
whichever is earlier, and shall be eligible for reappointment for another term of five years or upto the age of
sixty-five years, whichever is earlier, subject to the condition that he fulfills the qualifications and other
conditions for appointment mentioned in Section 10(1)(b) and such re-appointment is also made on the basis
of the recommendation of the Selection Committee. A member may resign his office in writing under his hand
addressed to the State Government.
Jurisdiction of District Forum

Section 11 provides for the jurisdiction of the District Forum under two criteria pecuniary and territorial.
Pecuniary limits
Section 11(1) empowers the District Forum to entertain complaints where the value of goods or services and
the compensation, if any, claimed does not exceed rupees twenty lakhs.
Territorial limits
Section 11(2) requires a complaint to be instituted in the District Forum within the local limits of whose
jurisdiction the opposite party or the defendant actually and voluntarily resides or carries on business or has
a branch office or personally works for gain, at the time of institution of the complaint; or any one of the
opposite parties (where there are more than one) actually and voluntarily resides or carries on business or
has a branch office or personally works for gain, at the time of institution of the complaint, provided that the
other opposite party/parties acquiesce in such institution or the permission of the Forum is obtained in
respect of such opposite parties; or the cause of action arises, wholly or in part.
In the case of Dynavox Electronic Pvt. Ltd. v. B.J.S. Rampuria Jain College, Bikaner (Appeal No. 4/89 before
the Rajasthan CDRC), it was held that where in a contract, the machinery was supplied and installed at a
particular place, a part of cause of action would be deemed to have arisen at that place, therefore, the
complaint could be instituted in the District Forum within whose jurisdiction that place falls.
State Commission
Section 16 of the Act empowers the State Government to establish the State Consumer Disputes Redressal
Commission consisting of:
(a) a person who is or has been a judge of a High Court appointed by the State Government (in
consultation with the Chief Justice of the High Court) who shall be its President.
(b) not less than two and not more than such number of members, as may be prescribed, one of whom
shall be a woman, who shall have the following qualifications, namely:
(i) be not less than thirty-five years of age,
(ii) possess a bachelor’s degree from a recognised university, and
(iii) be persons of ability, integrity and standing, and have adequate knowledge and experience of at
It is required that not more than fifty per cent of the members be from amongst persons having a judicial
background. “Persons having judicial background” shall mean persons having knowledge and experience for
at least a period of ten years as a presiding officer at the district level court or any tribunal at equivalent level.
A person shall be disqualified for appointment as a member if he
(a) has been convicted and sentenced to imprisonment for an offence, which, in the opinion of the State
Government involves moral turpitude; or
(e) has in the opinion of the State Government, such financial or other interest, as is likely to affect
(f) has such other disqualification as may be prescribed by the State Government.
Every appointment shall be made by the State Government on the recommendation of a Selection
Committee consisting of the President of the State Commission, Secretary Law Department of the State and
Secretary in charge of Consumer Affairs in the State. The proviso to this clause states that where the
President of the State Commission is, by reason of absence or otherwise, unable to act as Chairman of the
Selection Committee, the State Government may refer the matter to the Chief Justice of the High Court for
nominating a sitting Judge of that High Court to act as Chairman. Section 16(2) empowers the State
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Government to decide on the salary or honorarium and other allowances payable to the members of the
State Commission and the other terms and conditions of service.
Every member of the State Commission shall hold office for a term of five years or upto the age of sixty
seven years, whichever is earlier and shall be eligible for reappointment for another term of five years or upto
the age of sixty-seven years, whichever is earlier, subject to the condition that he fulfills the qualifications and
other conditions for appointment mentioned in Section 16(1)(b) and such re-appointment is made on the
basis of the recommendation of the Selection Committee.
Jurisdiction of State Commission

Section 17 of the Act provides for the jurisdiction of the Commission as follows:
(a) the State Commission can entertain complaints where the value of the goods or services and the
compensation, if any claimed exceed rupees twenty lakhs but does not exceed rupees one crore;
(b) the State Commission also has the jurisdiction to entertain appeals against the orders of any District
Forum within the State. However, under second proviso to Section 15 no appeal by a person, who
is required to pay any amount in terms of an order of the District Forum, shall be entertained by the
State Commission unless the appellant has deposited in the prescribed manner fifty percent of the
amount or rupees twenty-five thousand, whichever is less;
(c) the State Commission also has the power to call for the records and pass appropriate orders in any
consumer dispute which is pending before or has been decided by any District Forum within the
State, if it appears to it that such District Forum has exercised any power not vested in it by law or
has failed to exercise a power rightfully vested in it by law or has acted illegally or with material
irregularity.
A complaint shall be instituted in a State Commission within the limits of whose jurisdiction, -
(a) the opposite party or each of the opposite parties, where there are more than one, at the time of the
institution of the complaint, actually and voluntarily resides or carries on business or has a branch
office or personally works for gain; or
(b) any of the opposite parties, where there are more than one, at the time of the institution of the
complaint, actually and voluntarily resides, or carries on business or has a branch office or
personally works for gain, provided that in such case either the permission of the State Commission
is given or the opposite parties who do not reside or carry on business or have a branch office or
personally work for gain, as the case may be, acquiesce in such institution; or
(c) the cause of action, wholly or in part, arises
The State Commission’s jurisdiction may be original, appellate or revisional. In respect of (c)above, the State
Commission may reverse the orders passed by the District Forum on anyquestion of fact or law or correct
any error of fact or of law made by the Forum.
The National Commission in Indian Airlines v. Consumer Education and Research Society (1992) CPR
4(NC) held that in respect of the original jurisdiction of the State Commission, Section 17 only prescribes
pecuniary limits. No territorial limits have been fixed for the exercise of original jurisdiction under the Act
though the provision contained in Section 11(2) of the Act apply mutatis mutandis in the matter of
entertaining original complaints by the State Commission. The territorial jurisdiction of the State Commission
therefore extends to the territorial limit of the State. In the exercise of its appellate jurisdiction, the State
Commission may entertain appeals only against the orders of any District Forum within the State. Similar
condition also applies in respect of the State Commissions power to revise orders of the District Forums -
only orders of the District Forum within the State may be subject to revision by the State Commission.
Transfer of Cases
Section 17A empowers the State Commission on the application of the complainant or of its own motion to
transfer, at any stage of the proceeding any complaint pending before the District Forum to another District
Forum within the State if the interest of justice so requires.
National Commission
Section 9 empowers the Central Government to establish the National Consumer Disputes Redressal
Commission, by notification in the Official Gazette. Section 20(1) provides that the National Commission
shall consist of—
(a) a person who is or has been a judge of the Supreme Court, to be appointed by the Central
Government (in consultation with the Chief Justice of India), who shall be its President;
(b) not less than four and not more than such number of members as may be prescribed one of whom
shall be a woman, who shall have the following qualifications, namely:-
(i) be not less than thrity-five years of age;
(ii) possess a bachelor’s degree from a recognized university; and
(iii) be persons of ability, integrity and standing and have adequate knowledge and experience of at
Provided that not more than fifty percent of the members shall be from amongst the persons having judicial
background. “Persons having judicial background” shall mean persons having knowledge and experience for
at least a period of ten years as a presiding officer at the district level court or any tribunal at equivalent level:
A person shall be disqualified for appointment if he-
(a) has been convicted and sentenced to imprisonment for an offence, which, in the opinion of the
Central Government involves moral turpitude; or
(e) has in the opinion of the Central Government such financial or other interest as is likely to affect
(f) has such other disqualification as may be prescribed by the Central Government
Every appointment by the Central Government is required to be made on the recommendation of a Selection
Committee consisting of a Judge of the Supreme Court to be nominated by the Chief Justice of India, the
Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer Affairs in the
Government of India. Section 20(2) empowers the Central Government to fix the salary/ honorarium and
other allowances payable to the members as well as the other terms and conditions of their service. Every
member of the National Commission shall hold office for a term of five years or upto seventy years of age,
whichever is earlier and shall be eligible for reappointment for another term of five years or upto the age of
seventy years, whichever is earlier, subject to the condition that he fulfills the qualifications and other
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conditions for appointment mentioned in Section 20(1)(b) and such re-appointment is made on the basis of
the recommendation of the Selection Committee.
Jurisdiction of National Commission

Section 21 provides that the National Commission shall have jurisdiction:
(a) to entertain complaints where the value of the goods or services and the compensation, if any,
claimed exceeds rupees one crore;
(b) to entertain appeals against the orders of any State Commission. However, under second proviso to
Section 19 no appeal by a person, who is required to pay any amount in terms of an order of the
State Commission, shall be entertained by the National Commission unless the appellant has
deposited in the prescribed manner fifty percent of the amount or rupees thirty-five thousands,
whichever is less; and
(c) to call for the records and pass appropriate orders in any consumer dispute which is pending
before, or has been decided by any State Commission where it appears to the National Commission
that such State Commission has exercised a jurisdiction not vested in it by law, or has failed to
exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with
material irregularity.
Complaints before the District Forum and State Commission

Section 12 provides that a complaint, in relation to any goods sold or delivered or agreed to be sold or
delivered or any service provided or agreed to be provided may be filed with the District Forum by—
(a) the consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such
service provided or agreed to be provided;
(b) any recognised consumer association, whether the consumer to whom the goods sold or delivered
or agreed to be sold or delivered or service provided or agreed to be provided, is a member of such
association or not; or
(c) one or more consumers, where there are numerous consumers having the same interest with the
permission of the District Forum, on behalf of, or for the benefit of, all consumers so interested; or
(d) the Central or the State Government as the case may be, either in its individual capacity or as a
representative of interests of the consumers in general.
Every complaint filed under this section is required to be accompanied with such amount of fee and payable
in such manner as may be prescribed. On receipt of a complaint, the District Forum may, by order, allow the
complaint to be proceeded with or rejected. However, a complaint shall not be rejected unless an opportunity
of being heard has been given to the complainant. It is also to be noted that the admissibility of the complaint
shall ordinarily be decided within twenty-one days from the date on which the complaint was received. Where
a complaint is allowed to be proceeded, the District Forum may proceed with the complaint in the manner
provided under this Act. Where a complaint has been admitted by the District Forum, it shall not be
transferred to any other court or tribunal or any authority set up by or under any other law for the time being
in force.
The explanation defines the term ‘recognised consumer association’ as to mean any voluntary consumer
association registered under the Companies Act, 1956 or any other law for the time being in force.
Thus, in case the affected consumer is unable to file the complaint due to ignorance, illiteracy or poverty, any
recognised consumer association may file the complaint. The rule of ‘privity of contract' or locus standi which
permits only the aggrieved party to take action has very rightly been set aside in the spirit of public interest
litigation. Section 13 states the procedure to be followed by the District Forum or the State Commission on
receipt of a complaint. On receipt of a complaint, a copy of the complaint is to be referred to the opposite
party (or each of the opposite parties, where there are more than one) within twenty-one days from the date
of its admission, directing him to give his version of the case within a period of 30 days. This period may be
extended by another period of 15 days. If the opposite party admits the allegations contained in the
complaint, the complaint will be decided on the basis of materials on the record. Where the opposite party
denies or disputes the allegations contained in the complaint, or omits or fails to take any action to represent
his case within the stipulated time, the dispute will be settled in the following manner:
(i) In case of dispute relating to any goods
Where the complaint alleges a defect in the goods which cannot be determined without proper analysis or
test of the goods, a sample of the goods shall be obtained from the complainant, sealed and authenticated in
the prescribed manner, for referring to the appropriate laboratory for the purpose of any analysis or test
whichever may be necessary, so as to find out whether such goods suffer from any such defect. The
‘appropriate laboratory’ would be required to report its finding to the referring authority, i.e. the District Forum
or the State Commission within a period of forty-five days from the receipt of the reference or within such
extended period as may be granted by these agencies [Section 13(1)(c)].
The term ‘Appropriate laboratory’ has been defined to mean a laboratory or organisation recognised by the
Central Government or a State Government, subject to such guidelines as may be prescribed by the Central
Government in this behalf; or any such laboratory or organisation established by or under any law for the
time being in force, which is maintained, financed or aided by the Central Government or a State
Government for carrying out analysis or test of any goods with a view to determining whether such goods
suffer from any defect.
Section 13 empowers the District Forum/State Commission to require the complainant to deposit such
amount as may be specified, towards payment of fees to the ‘appropriate laboratory for the purpose of
carrying out the necessary analysis or tests. The amount so deposited shall be remitted to the appropriate
laboratory to enable it to carry out the analysis and send the report. On receipt of the report, a copy thereof is
to be sent by District Forum/State Commission to the opposite party along with its own remarks. In case any
of the parties i.e. opposite party or the complainant, disputes the correctness of the methods of analysis/test
adopted by the appropriate laboratory, the concerned party will be required to submit his objections in writing
in regard to the report.
After giving both the parties a reasonable opportunity of being heard and to present their objections, if any,
the District Forum/State Commission shall pass appropriate orders under Section 14 of the Act.
(ii) In case of dispute relating to goods not requiring testing or analysis or relating to services Section
13(2)(b) provides that where the opposite party denies or disputes the allegations contained in the complaint
within the time given by the District/State Commission, the Agency concerned shall dispose of the complaint
on the basis of evidence tendered by the parties. In case of failure by the opposite party to represent his
case within the prescribed time, the complaint shall be disposed of on the basis of evidence tendered by the
complainant.
Limitation Period for Filing of Complaintl

Section 24A provides that the District Forum, the State Commission, or the National Commission shall not
admit a complaint unless it is filed within two years from the date on which the cause of action has arisen.
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However, where the complainant satisfies the Forum/Commission as the case may be, that he had sufficient
cause for not filing the complaint within two years, such complaint may be entertained by it after recording
the reasons for condoning the delay.
Administrative Control
Section 24B authorises the National Commission to exercise administrative control over the State
Commissions in the matter of calling for periodical returns regarding the institution, pendency and disposal of
cases, issuance of instructions regarding adopting of uniform procedure in hearing of matters, serving copies
of documents, translation of judgements etc. and generally overseeing the functioning of the State
Commission/District forum to ensure that the objects and purposes of the Act are served in the best possible
manner.
Similarly, the State Commission has been authorised to exercise administrative control over all the District
forum within its jurisdiction in all the above matters.
Powers of the Redressal Agencies

The District Forum, State Commission and the National Commission have been vested with the powers of a
civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of the following matters:
(i) the summoning and enforcing attendance of any defendant or witness and examining the witness
on oath;
(ii) the discovery and production of any document or other material object producible as evidence;
(iii) the reception of evidence on affidavits;
(iv) the requisitioning of the report of the concerned analysis or test from the appropriate laboratory or
from any other relevant source;
(v) issuing of any commission for the examination of any witness; and
(vi) any other matter which may be prescribed.
Under the Consumer Protection Rules, 1987, the District Forum, the State Commission and the National
Commission have the power to require any person:
(i) to produce before and allow to be examined by an officer of any of these agencies, such books of
accounts, documents or commodities as may be required and to keep such book, documents etc.
under his custody for the purposes of the Act;
(ii) to furnish such information which may be required for the purposes of the Act to any officer so
specified.
These redressal agencies have also been empowered to pass written orders authorising any officer to
exercise the power of entry and search of any premises where the books, papers, commodities or
documents are kept if there is any ground to believe that these may be destroyed, mutilated, altered, falsified
or secreted. Such authorised officer may also seize books, papers, documents or commodities if they are
required for the purposes of the Act, provided the seizure is communicated to the District Forum/State
Commission/National Commission within 72 hours. On examination of such documents or commodities, the
agency concerned may order the retention thereof or may return it to the party concerned.
The District forum, the State Commission and the National Commission have the power to issue remedial
orders to the opposite party directing him to do any one or more of the things referred to in Section14(1)(a) to
(i) as discussed herein below. The redressal agencies have also been empowered to dismiss frivolous and
vexatious complaints under Section 26 of the Act and to order the complainant to make payment of costs,
not exceeding `10,000 to the opposite party.
COMPLAINTS TO BE REGISTERED
District Consumer Forum for a claim of compensation up to `20 lakhs
State Commission for a claim of compensation above `20 lakhs and

up to `1 crore
National Commission for a claim of compensation above Rs.1 crore
Nature and Scope of Remedies under the Act

In terms of Section 14(1) of the Act, where the goods complained against suffer from any of the
defects specified in the complaint or any of the allegations contained in the complaint about the
services are proved, the District Forum/State Commission/National Commission may pass one or
more of the following orders:
(a) to remove the defects pointed out by the appropriate laboratory from the goods in question;
(b) to replace the goods with new goods of similar description which shall be free from any defect;
(c) to return to the complainant the price, or, as the case may be, the charges paid by the complainant;
(d) to pay such amount as may be awarded by it as compensation to the consumer for any loss or
injury suffered by the consumer due to the negligence of the opposite party;
(e) to remove the defects in goods or deficiencies in the services in question;
(f) to discontinue the unfair trade practice or the restrictive trade practice or not to repeat them;
(g) not to offer the hazardous goods for sale;
(h) to withdraw the hazardous goods from being offered for sale;
(ha) to cease manufacture of hazardous goods and to desist from offering services which are hazardous
in nature;
(hb) to pay such sum as may be determined by it if it is of the opinion that loss or injury has been
suffered by a large number of consumers who are not identifiable conveniently:
It is to be noted that the minimum amount of sum so payable shall not be less than five percent of the
value of such defective goods sold or service provided, as the case may be, to such consumers.
Further, the amount so obtained shall be credited in favour of such person and utilized in such manner
as may be prescribed.
(hc) to issue corrective advertisement to neutralize the effect of misleading advertisement at the cost of
the opposite party responsible for issuing such misleading advertisement;
(i) to provide for adequate costs to parties.
The remedies that can be granted by the redressal agencies are therefore, wide enough to cover removal of
defects/deficiency in goods/services, replacing defective goods with new goods, refunding price/charges paid
by the complainant, payment of compensation for loss or damage suffered, providing costs to parties and
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issuing prohibitory orders directing the discontinuance of unfair trade practice, sale of hazardous goods etc.
However, the redressal agencies have not been granted power to order injunctions. Section 14(1)(d)
provides that the redressal agency may order payment of compensation only in the event of negligence of
the opposite party which resulted in loss or damage and not otherwise, i.e. even though the complainant has
suffered loss or damage, he may not be entitled for compensation if he cannot prove negligence.
Appeal
Section 15 entitles a person aggrieved by an order of the District Forum to prefer an appeal to the State
Commission. Similarly any person aggrieved by any original order of the State Commission may prefer an
appeal to the National Commission under Section 19. Likewise, any person aggrieved by any original order
of the National Commission may prefer an appeal to the Supreme Court, under Section 23.
All such appeals are to be made within thirty days from the date of the order. However, the concerned
Appellate authority may entertain an appeal after the said period of thirty days if it is satisfied that there was
sufficient cause for not filling it within the prescribed period. The period of 30 days would be computed from
the date of receipt of the order by the appellant.
It may be noted that no appeal by a person, who is required to pay any amount in terms of an order of the
District Forum/State Commission, shall be entertained by the State Commission/National Commission
respectively unless the appellant has deposited in the prescribed manner fifty percent of that amount or
twenty five thousand rupees/thirty-five thousand respectively, whichever is less. It may be observed that
appeals are allowable only against the original orders passed by the concerned redressal agency. Appellate
orders passed by the State Commission or National Commission (i.e. on appeal against the orders of the
District Forum or State Commission) cannot be further appealed against though on questions of law revision
petitions may be filed. So also, the revisional orders passed by the State Commission or the National
Commission are not appealable.
APPEAL
Aggrieved by the orders issued by the District Consumer Redressal Forum, appeal petition may be filed
before State Consumer Dispute Redressal Commission within 30 days from the date of receipt of orders.
Aggrieved by the orders issued by the State Consumer Dispute Redressal Commission, appeal petition may
be filed before National Consumer Dispute Redressal Commission within 30 days from the date of receipt of
orders.
Aggrieved by the orders issued by the National Consumer Dispute Redressal Commission, appeal petition
may be filed before Supreme Court of India within 30 days from the date of receipt of orders
Penalties
Section 27 of the Act deals with penalties and provides that failure or omission by a trader or other person
against whom a complaint is made or the complainant to comply with any order of the District Forum, State
Commission or the National Commission shall be punishable with imprisonment for a term which shall not be
less than one month but which may extend to three years, or with fine of not less than Rs. 2,000 but which
may extend to Rs. 10,000, or with both.
However, on being satisfied that the circumstances of any case so require, the District Forum or the State
Commission or the National Commission may impose a lesser fine or a shorter term of imprisonment.
Section 27(3) prescribes that all offences under the Act to be tried summarily.
GIST OF IMPORTANT CONSUMER CASES

Gist of some of the important rulings rendered by Supreme Court, National Commission and State
Commissions, are given hereunder:
Failure to provide basic safeguards in the swimming pool – deficiency in service

In the case of Sashikant Krishnaji Dole v. Shitshan Prasarak Mandali [F.A. No. 134 of 1993 decided on
27.9.1995 (NCDRC)] the school owned a swimming pool and offered swimming facilities to the public on
payment of a fee. The school conducted winter and summer training camps to train boys in swimming and
for this purpose engaged a trainer/coach. The complainants had enrolled their son for learning swimming
under the guidance of the coach. It was alleged that due to the negligence of the coach the boy was drowned
and met with his death. The school denied that it had engaged the services of a coach and also denied any
responsibility on its part. The coach claimed that he was a person with considerable experience in coaching
young boys in swimming and that as in other cases he taught the deceased boy also the way in which he
should swim and take all precautions while swimming. When the deceased was found to have been drowned
the coach immediately took him out of the water and removed the water from his stomach and gave him
artificial respiration and thereafter took him to a doctor, where he died.
The State Commission held the school and the coach deficient in rendering service to the deceased, that the
coach was not fully trained, did not exercise even the basic commonsense needed to counter an accident in
swimming. He was so casual in his behaviour that he did not attempt to take prompt action to save the life of
the deceased and so far as the school was concerned it did not even provide basic facilities nor did it provide
any safeguards to prevent accidents.
Dismissing the appeal the National Commission observed that the State Commission had given cogent
reasons for holding the school and the coach responsible for death of the deceased. A detailed examination
of the depositions of eye witnesses showed that the Commission had correctly appreciated the evidence and
come to the conclusion that the coach was negligent and the school did not provide the necessary life saving
mechanism to save the lives of trainee students in cases of accidents.
So far as the compensation was concerned the State Commission had taken all relevant factors into
accountand fixed the amount at Rs. 1.50 lakhs which was reasonable.
Removal of ladder of an aircraft while disembarking by the passenger— deficiency inservice

In Station Manager, Indian Airlines v. Dr. Jiteswar Ahir [First Appeal No. 270 of 1994 decided on 28.2.1996
(NCDRC)] when the complainant-passenger occupied his seat in the aircraft, an announcement was made
that his luggage was lying on the ground unidentified and that he should disembark to identify his luggage.
According to the complainant he moved towards the rear door, and finding that the step ladder was attached
to the aircraft door, he stepped out on to the staircase but before he could actually put his entire body weight
on the staircase the ladder was suddenly removed as a result of which he fell down on the ground and
sustained bodily injuries which was reported to be about 10 percent. As against the complainant’s claim of
`10 lakhs the airlines was willing to pay `40,000 as compensation which according to them was the
maximum statutory liability of the Corporation under the Carriage by Air Act, 1972.
The State Commission, after examining witnesses and the medical boards report held that there was
dangerous deficiency in service and having regard to the expert opinion and other medical reports, it ordered
payment of compensation of `4 lakhs and `1 lakh for mental agony and distress plus costs.
In appeal by the Corporation, the National Commission, upholding the State Commissions order, held that in
terms of regulations relied upon by the appellant Corporation, if it was proved that the accident caused to the
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complainant had resulted in a permanent disablement, incapacitating him from engaging in or being
occupied with his usual duties or his business or occupation, the liability could not exceed Rs. 5 lakhs. This
case related to the incapacity and permanent disability to the extent of 10 per cent and, therefore, the
compensation could not exceed Rs. 5 lakhs. The State Commissions assessment of compensation of Rs. 4
lakhs was justified, considering the age of the complainant (37 years) at the time of accident and his having
lost earning capacity. The State Commission was also right in awarding compensation of rupees one lakh for
the complainants mental suffering and agony as well as feeling of inferiority in social relations. Deficiency in
service cannot be alleged without attributing fault, imperfection, shortcoming or in adequacy in the quality,
nature and manner of performance which is required to be performed by a person in pursuance of a contract
or otherwise in relation to any service. The burden of proving deficiency in service is upon the person who
alleged it. When the complainant has not established any willful fault, imperfection, shortcoming or
inadequacy in the service of the respondent, there can be no deficiency in service.
In Ravneet Singh Bagga v. KLM Royal Dutch Fintimes [1999(7) SCALE 43], the complainant booked a ticked
from Delhi to New York by a KLM plane. The airport authorities in New Delhi did not find any fault in his visa
and other documents. However at Amsterdam, the airport authorities instituted proceedings of verification
because of which the appellant missed his flight to New York. After reaching New York, the airlines tendered
apology to the appellant for the inconvenience and paid as a goodwill gesture a sum of Rs. 2,500. The
appellant made a complaint to the National Commission under the Consumer Protection Act which was
rejected.
The Supreme Court held that the respondent could not be held to be guilty of deficiency in service. The staff
of the airline acted fairly and in a bona fide manner, keeping in mind security and safety of passengers and
the Aircraft. The photograph on visa documents was a photo copy and not the original which was unusual. In
the circumstances, the staff took some time to ascertain the truth and helped the appellant to reach New
York the same day.
A doctor qualified to practice homoeopathic system of medicines treating a patient with

allopathic medicines and patient dies - guilty of negligence
In Poonam Verma v. Ashwin Patel [1996(4) SCALE 364] the respondent was a qualified medical practitioner
in homoeopathic system of medicine. The appellant, was the widow of a person who, it was alleged, had
died because of the negligence of the respondent in administering allopathic medicines in which he was not
qualified to practise. It was alleged that the deceased was treated to begin with, for viral fever on allopathic
medicines and since his condition had not improved antibiotics were used without conducting proper tests.
When his condition further deteriorated he was removed to a nursing home and after four days he was
removed to a hospital in an unconscious state. Within a few hours thereafter he died.
Her complaint to the National Consumer Disputes Redressal Commission for damages for the negligence
and carelessness of respondent in treating her husband was dismissed. Allowing the appeal the Supreme
Court held that the respondent who had practised in allopathy without being qualified in that system was
guilty of negligence per se. A person is liable at law for the consequences of his negligence. Jurisdiction of
the Commission: The Supreme Court observed that it is beyond doubt now that disputes regarding
applicability of the Act to persons engaged in medical profession either as private practitioners or as
Government doctors working in hospitals or Government dispensaries come within the purview of the
Consumer Protection Act, 1986. It is also settled that a patient who is a consumer has to be awarded
compensation for loss or injury suffered by him due to negligence of the doctor by applying the same tests as
are applied in an action for damages for negligence.
In Gopi Ram Goyal and others v. National Heart Institute and others, 2001 CTJ 405 (CP) (NCDRC), the
National Commission held that where the record and evidence shows that the conduct of the opposite parties
i.e. doctors was more than reasonable and the level of care was as could be expected from professional in
exercising reasonable degree of skill and knowledge. The complainant however failed to prove any case of
negligence on the part of doctors, therefore the doctor cannot be held liable for death of patient.
Fall from a running train while passing through vestibule passage – deficiency in service
In Union of India v. Nathmal Hansaria [First Appeal No. 692 of 1993 decided on 24.1.1997 (NCDRC)] the
daughter of the respondent, travelling by a train, fell down from the running train while she was passing
through the inter-connecting passage between two compartments and died as a result of crush injuries on
her head. In the respondents petition for compensation, the Railways contended that the Consumer
Redressal agencies had no jurisdiction to consider a complaint of this nature in view of Section 15 of the
Railway Claims Tribunal Act read with Section 13 of that Act.
The State Commission held that a railway passenger travelling in a train on payment of consideration was a
consumer within the meaning of the Consumer Protection Act, 1986. Section 82A of the Railways Act
referred to in Section 13 of the Railway Claims Tribunal Act, 1987 and the rules made thereunder provided
compensation for railway accidents and not for accidental death of this nature.
Dismissing the appeal the National Commission held that the death of the passenger could not be described
as resulting from railway accident but an accidental death caused by the absence of safety devices in the
vestibule passage way.
Although the railway administration had claimed that the coach was a new coach and that all coaches had
been thoroughly checked at the starting point of the train and that no defect was reported, the railways had
not contended that this particular coach was checked at the time of commencement of the journey. The
general statement of practice and procedure was not conclusive proof that this particular coach was checked
and no evidence had been produced in support of their contention. Thus, the State Commission was right in
holding that the deceased passenger was a consumer. On the basis of similar facts, the MRTP Commission
has recently awarded a compensation of Rs. 18 lakhs with 9% interest to the parents of deceased. The
above compensation appears to be the highest award in commission’s history.
Repudiation of Insurance claim because the driver did not have a valid license
In the case of Jitendra Kumar v. Oriental Insurance Company Ltd. and another the Supreme Court has held
that where the fire has occurred due to mechanical failure and not due to any act or omission of the driver,
the insurance company cannot repudiate the claim because of lack of valid driving license.
Premium paid to the agent of the LIC but the agent did not deposit the premium, death of
the insured - No deficiency of service on the part of the LIC
In Harshad J. Shah v. Life Insurance Corporation of India [1997(3) SCALE 423 (SC)] the insured (since
deceased) took out four life policies with double accident benefits, premium payable half-yearly. When the
third premium fell due, the general agent of the Corporation met the person and took a bearer cheque
towards the premium payable by him in respect of the policies. Although the cheque was encashed
immediately thereafter, it was not deposited with the Corporation for another three months. In the meantime,
the insured met with a fatal accident and died. The Corporation rejected the widows claim for payment of the
sum assured on the ground that the policies had lapsed for non-payment of premium within the grace period.
In the widows complaint to the State Commission under the Consumer Protection Act the Corporation
pleaded that the amount of premium allegedly collected by the general agent could not be said to have been
310 EP-EBCL
received by the Corporation, that the agent was not authorised to collect the premium amount. The State
Commission held that in order to collect more business, agents of the Corporation collected premiums from
policyholders either in cash or by cheque and then deposited the money so collected with the Corporation
and that this practice had been going on directly within the knowledge of the Corporations administration,
notwithstanding the departmental instructions that the agent was not authorised to collect the premiums.
When the practice of the agent collecting the premiums from policyholders was in existence and the money
was collected by the agent in his capacity and authority, the reasonable inference was that the Corporation
was negligent in its service towards the policyholder.
The National Commission, in appeal, was of the view that the insurance agent in receiving a bearer cheque
from the insured towards payment of insurance premium was not acting as agent of the Corporation nor
could it be said that the Corporation had received the premium on the date the bearer cheque was received
by the agent, even though he deposited the sum with the Corporation a day after the death of the insured.
Dismissing the appeal the Supreme Court held that the agent had no express authority to receive the
premium on behalf of the Corporation. In his letter of appointment there was a condition expressly prohibiting
him from collecting the premium. Nor could it be said that he had an implied authority to collect the premium,
as regulation 8(4) expressly prohibited the agents from collecting premiums. Therefore, no case had been
set up by the complainant before the State Commission that the Corporation by its conduct had induced the
policyholders, including the insured, to believe that the agents were authorised to receive premiums on
behalf of the Corporation. Nor was there any material on record that lent support to this contention. In the
facts of this case there was no room to invoke the doctrine of apparent authority underlying Section 237 of
the Indian Contract Act.
In National Insurance Co. Ltd. v. Seema Malhotra [2001(2) SCALE 140] (Supreme Court) a cheque was
issued under a contract of insurance of motor car by the insured for payment of premium to the policy.
However, cheque was dishonoured for want of funds in the account. Meanwhile, the car met with an accident
and badly damaged, killing the insured owner. The claim for insured amount was repudiated by the company.
The Supreme Court held that applying the principles envisaged under Section 51, 52 and 54 of Indian
Contract Act, relating to reciprocal promises, insurer need not to perform his part of promise when the other
party fails to perform his part and thus not liable to pay the insured amount.
Educational Institutions
In Sreedharan Nair N. v. Registrar, University of Kerala [2001 CTJ 561 (CP) (NCDRC)], the University
refused to provide LL.B. degree certificate on completion of course on the ground that the qualifying
examination on the basis of which student was admitted in LL.B. course in Kerala law college has not been
recognised by it. The National Commission held that this is a clear case of deficiency on part of University. A
compensation of Rs. 50,000 was awarded to complainant.
In Isabella Thoburn College v. Ms. Fatima Effendi [2001 CTJ 386 (CP) (SCDRC)], the State Commission
held that non-refund of admission fee is not a deficiency of service on the part of the university because
admission fee is consideration for admission and respondent herself voluntarily withdrawing admission from
one university to join another institute cannot claim refund of admission fee.
Medical Negligence
In Kusum Sharma & Others Versus Batra Hospital & Medical Research Centre & Others 2010 CTJ 242
Supreme Court (CP) Supreme Court held that while deciding whether the medical professional is guilty of
medical negligence following well known principles must be kept in view:-

I. Negligence is the breach of a duty exercised by omission to do something which a reasonable man,
guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or
doing something which a prudent and reasonable man would not do.
II. Negligence is an essential ingredient of the offence. The negligence to be established by the
prosecution must be culpable or gross and not the negligence merely based upon an error of
judgment.
III. The medical professional is expected to bring a reasonable degree of skill and knowledge and must
exercise a reasonable degree of care. Neither the very highest nor a very low degree of care and
competence judged in the light of the particular circumstances of each case is what the law
requires.
IV. A medical practitioner would be liable only where his conduct fell below that of the standards of a
reasonably competent practitioner in his field.
V. In the realm of diagnosis and treatment there is scope for genuine difference of opinion and one
professional doctor is clearly not negligent merely because his conclusion differs from that of other
professional doctor.
VI. The medical professional is often called upon to adopt a procedure which involves higher element of
risk, but which he honestly believes as providing greater chances of success for the patient rather
than a procedure involving lesser risk but higher chances of failure. Just because a professional
looking to the gravity of illness has taken higher element of risk to redeem the patient out of his/her
suffering which did not yield the desired result may not amount to negligence.
VII. Negligence cannot be attributed to a doctor so long as he performs his duties with reasonable skill
and competence. Merely because the doctor chooses one course of action in preference to the
other one available, he would not be liable if the course of action chosen by him was acceptable to
the medical profession.
VIII. It would not be conducive to the efficiency of the medical profession if no Doctor could administer
medicine without a halter round his neck.
IX. It is our bounden duty and obligation of the civil society to ensure that the medical professionals are
not unnecessary harassed or humiliated so that they can perform their professional duties without
fear and apprehension.
X. The medical practitioners at times also have to be saved from such a class of complainants who
use criminal process as a tool for pressurizing the medical professionals/hospitals particularly
private hospitals or clinics for extracting uncalled for compensation. Such malicious proceedings
deserve to be discarded against the medical practitioners.
XI. The medical professionals are entitled to get protection so long as they perform their duties with
reasonable skill and competence and in the interest of the patients. The interest and welfare of the
patients have to be paramount for the medical professionals.
The aforementioned principles must be kept in view while deciding the cases of medical negligence. We
should not be understood to have held that doctors can never be prosecuted for medical negligence. As long
as the doctors have performed their duties and exercised an ordinary degree of professional skill and
competence, they cannot be held guilty of medical negligence. It is imperative that the doctors must be able
to perform their professional duties with free mind.
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LESSON ROUND-UP
• The Consumer Protection Act, 1986 is the most important legislation enacted to provide for better protection of
the interests of consumers and for that purpose to make provision for the establishment of consumer councils
and other authorities for the settlement of consumer’s disputes and for matters connected therewith.
• Consumer means any person who buys any goods for a consideration which has been paid or promised or
partly paid and partly promised, or under any system of deferred payment and includes any user of such goods
other than the person who buys such goods for consideration paid or promised or partly paid or partly
promised, or under any system of deferred payment when such use is made with the approval of such person,
but does not include a person who obtains such goods for resale or for any commercial purpose; or hires or
avails of any services for a consideration which has been paid or promised or partly paid and partly promised,
or under any system of deferred payment and includes any beneficiary of such services other than the person
who hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or
under any system of deferred payment, when such services are availed of with the approval of the first
mentioned person but does not include a person who avails of such services for any commercial purpose.
• Defect means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which
is required to be maintained by or under any law for the time being in force or under any contract, express or
implied, or as is claimed by the trader in any manner whatsoever in relation to any goods.
• Deficiency means any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of
performance which is required to be maintained by or under any law for the time being in force or has been
undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service.
• Commercial purpose does not include use by a consumer of goods bought and used by him exclusively for the
purpose of earning his livelihood by means of self-employment.
• A contract for service implies a contract whereby one party undertakes to render services e.g. professional or
technical services to or for another in the performance of which he is not subject to detailed direction and
control but exercises professional or technical skill and uses his own knowledge and discretion.
• A contract of service on the other hand implies relationship of master and servant and involves an obligation to
obey orders in the work to be performed and as to its mode and manner of performance.
• The Act has set up three-tier quasi-judicial consumer disputes redressal machinery at the National, State and
District levels, for expeditious and inexpensive settlement of consumer disputes. It also postulates
establishment of Consumer Protection Councils at the Central and State levels for the purpose of spreading
consumer awareness.
• District Forum has jurisdiction to entertain complaints where the value of goods/services complained against
and the compensation, if any claimed, is not exceeding `20 lakhs, the State Commission for claims exceeding
`20 lakhs but not exceeding `1 crore; and the National Commission for claims exceeding Rs. 1 crore.
• The District Forum, the State Commission or the National Commission shall not admit a complaint unless it is
filed within two years from the date on which the cause of action has arisen.
• The District Forum, State Commission and the National Commission have been vested with the powers of a
civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of the certain matters.
SELF TEST QUESTIONS

evaluation)
1. Discuss in detail the objects of Consumer Protection Act, 1986.
2. Briefly discuss the jurisdiction of the various Forums/Commissions under the Consumer Protection
Act, 1986?
3. Explain the nature and scope of the remedies under the Act?
4. Write short note on the following:
(i) Complainant
(ii) Deficiency in service
(iii) Power of redressal agencies
(iv) Consumer.
5. Discuss consumers rights under Consumer Protection Act, 1986.
314 EP-EBCL
Lesson 14
Essential Commodities Act, 1955
LESSON OUTLINE
LEARNING OBJECTIVES
The Essential Commodities Act, 1955 was enacted
• Object and Scope of the Act to ensure easy availability of essential commodities
to the consumers and to protect them from
• Essential Commodities exploitation by unscrupulous traders. The Act
• Powers of Central Government to control provides for regulation and control of production,
production, supply and distribution etc., of distribution and pricing of commodities, which are
declared as essential for maintaining or increasing
essential commodities
supplies or for securing their equitable distribution
• Fixing of price for essential commodities and availability at fair prices.
• Seizure of Essential Commodities The Essential Commodities Act is being implemented

by the State Governments/UT Administrations by
• Confiscation of Essential Commodities availing of the delegated powers under the Act. The
• Appeal against Confiscation State Governments/ UT Administrations have issued
various Control Orders for regulation, production and
• Orders passed under Essential distribution of Essential Commodities such as food
Commodities Act, 1955 grains, edible oils, pulses kerosene, sugar etc. The
Central Government regularly monitors the action
• Offences and penalties
taken by State Governments/UT Administrations to
• Grant of Injunction by Civil Court implement the provisions of the Essential
Commodities Act, 1955.
• Culpable Mental State
The items declared as essential commodities under
• Offences by companies
the Essential Commodities Act, 1955 are reviewed
• Publication of names of convicted from time to time in the light of liberalized economic
companies policies in consultation with the Ministries/
Departments administering the essential
• Attempt and abetment commodities and particularly with regard to their
production, demand, and supply.
• Lesson Round Up
The preamble to the Act says that it is an Act to provide in the Interest of the general Public for the control of
production, supply and distribution of, and trade and commerce in, certain commodities.
316 EP-EBCL
INTRODUCTION
In 1939 the Government of India made certain rules to control the production, supply and distribution of
certain commodities under the Defence of India Act which ceased to have force in September, 1946. It was
however considered necessary that control in respect of certain commodities essential for human beings
should continue in the interest of the general public. Therefore, the Essential Supplies (Temporary Powers)
Ordinance, XVIII of 1946 was promulgated by which certain provisions of the Defence of India Rules
continued to have force. This Ordinance was subsequently replaced by the Essential Supplies (Temporary
Powers) Act, 1946 (Act No. XXIV of 1946).
The operation of the Act was prolonged upto 1st April, 1948, by virtue of a Notification published in the
Gazette of India, dated March 8, 1947. Under certain resolution of the Constituent Assembly passed in 1948
and 1949 and by the Adaptation of Laws Act, 1950, the operation of the Act was further extended to different
periods from time to time.
Since in public interest it was considered necessary that the Centre should continue to control production,
supply and distribution of certain essential commodities, the need for a permanent measure on the subject
was felt. For this purpose, certain amendments were required to be made in the Constitution. The
Constitution (Third Amendment) Act made the required amendments in Entry 33 of List 3 of the Seventh
Schedule to the Constitution to enable the Parliament to enact the required legislation. The Essential
Commodities Ordinance No. 1 of 1955, was therefore, promulgated which came into force on 26th January,
1955. This Ordinance was subsequently replaced by the present Act namely, the Essential Commodities Act,
1955 (Act No. 1 of 1955) w.e.f 1st April, 1955.
OBJECT AND SCOPE OF THE ACT
The Preamble to the Act says that it is an Act to provide in the interest of the general
public for the control of the production, supply and distribution of, and trade and
commerce in, certain commodities. The dominant object and intendment of the Act is
to secure equitable distribution and availability at fair prices of essential commodities
in the interest of the general public. The interest of the general public necessarily connotes the
interest of the consuming public and not the interest of the dealer (1958 Andh. LT587).
DEFINITIONS (SECTION 2)
The Act contains definitions of five important terms, namely:
Collector
“Collector” includes an Additional Collector, and such other officer not below the rank of Sub-Divisional
Officer as may be authorised to perform the functions and exercise the powers of the Collector under the Act
[Section 2(ia)].
Essential Commodities
Section 2A dealing with Essential commodities declaration, etc. defines the "essential commodity" as to
mean a commodity specified in the Schedule.
Lesson 14 Essential Commodities Act, 1955 317
Schedule to the Act lists out following commodities:
(1) drugs: The explanation clarifies that for the purposes of this Schedule, "drugs" has the meaning
assigned to it in clause (b) of Section 3 of the Drugs and Cosmetics Act, 1940 (23 of 1940);
(2) fertilizer, whether inorganic, organic or mixed;
(3) foodstuffs, including edible oilseeds and oils;
(4) hank yarn made wholly from cotton;
(5) petroleum and petroleum products;
(6) raw jute and jute textiles;
(7) (i) seeds of food-crops and seeds of fruits and vegetables;
(ii) seeds of cattle fodder; and
(iii) jute seeds.
Sub-section (2) empowers the Central Government to amend, if it is satisfied that it is necessary so to do in
the public interest and for reasons to be specified in the notification published in the Official Gazette, the
Schedule so as to (a) add a commodity to the said Schedule; and (b) remove any commodity from the said
Schedule, in consultation with the State Governments.
In terms of Sub-section (3) any notification issued under Sub-section (2) may also direct that an entry shall
be made against such commodity in the said Schedule declaring that such commodity shall be deemed to be
an essential commodity for such period not exceeding six months to be specified in the notification. However,
Central Government may, in the public interest and for reasons to be specified, by notification in the Official
Gazette, extend such period beyond the said six months.
The Central Government may exercise its powers under Sub-section (2) in respect of the commodity to
which Parliament has power to make laws by virtue of Entry 33 in List III in the Seventh Schedule to the
Constitution. Every notification issued under sub-section (2) is required to be laid, as soon as may be after it
is issued, before both Houses of Parliament.
In addition to the items included in the list given in the said clause, such other items which may be so
declared by the Central Government by notified orders would also be included in the list of essential
commodities, but in any case, such commodities would not be outside the scope of Entry 33 in List III in the
Seventh Schedule to the Constitution. The Central Government has time and again, notified various
commodities to be essential commodities. The term ‘essential commodities’ is defined in Rule 35(3) of the
Defence of India Rules, 1962, to mean “food, water, fuel, light, power or any other thing notified by the
Central Government in this behalf as essential for the existence of the community”. Of course, the definition
in the Essential Commodities Act is more comprehensive than that in the Defence of India Rules, but both
definitions enumerate certain things or articles and have scope for addition to the list of other articles notified
in that behalf by the Central Government. As such, the articles not expressly mentioned in the definition
given in the Defence of India Rules, can become essential commodities within the meaning of the expression
used in the Rules by a simple government notification and the slight difference in the definition of essential
commodity in the Act from that given in the Rules does not make one repugnant to the other [Nathuni Lai
Gupta v. The State (1964 Cr. LJ 662)].
318 EP-EBCL
IN S. Samuel, MD. Harrisons Malayava v. Union of India, AIR 2004 SC 218,

Supreme Court held that Tea is not foodstuff. Even in a wider sense, foodstuffs
will not include tea as tea either in the form of the leaves or in the form of
beverage, does not go into the preparation of food proper to make it more
palatable and digestible. Tea leaves are not eaten. Tea is a beverage produced
by steeping tea leaves or buds of the tea plants in the boiled water. Such tea is consumed hot or
cold for its flavour, taste and its quality as a stimulant. The stimulating effect is caused by the
presence of caffeine therein. Tea neither nourishes the body nor sustains nor promotes its growth.
It does not have any nutritional value. It does not help formation of enzymes nor does it enable
anabolism. Tea or its beverage does not go into the preparation of any foodstuff. In common
parlance, any one who has taken tea would not say that he has taken or eaten food. Thus tea is not
a food.
Order: “Order” includes a direction issued thereunder [Section 2(c)].
State Government: “State Government”, in relation to a Union territory means the administrator of such
territory [Section 2(d)].
Sugar: “Sugar” means: (i) any form of sugar containing more than 90 per cent of sucrose, including sugar
candy; (ii) Khandsari sugar or bura sugar or crushedsugar, or any sugar in crystalline or powdered form; or
(iii) sugar in process in vacuum pan sugar factory, or raw sugar [Section 2(e)].
Authorities responsible to administer the Act

Necessary powers have been given to the Central Government under the Act to administer the provisions of
the Act by issuing orders/directions notified in the official gazette and by delegating the authority to State
Governments and administrators of Union Territories. The Central Government at its apex level is
responsible for achieving the objectives enshrined by the Parliament under this Act for the welfare and
general well-being of all the citizens.
Powers of Central Government to control production, supply and distribution etc., of essential
commodities [Section 3]
Power to Issue Orders
The Central Government having been vested with power under Section 3(1) can issue
order in the following circumstances providing for regulating or prohibiting the
production, supply and distribution of essential commodities and trade and commerce
therein:
(i) when it is necessary or expedient for maintaining or increasing supplies of any essential
commodity;
(ii) for securing the equitable distribution and availability of essential commodities at fair price; or
(iii) for securing any essential commodity for the defence of India or the efficient conduct of military
operations.
Contents of the Order

Notwithstanding the above and without prejudice to the generality of the powers contained in Sub-section (1)
above, Sub-section (2) of Section 3 provides that the Central Government may issue an order which may
provide for all or any of the following matters:

(a) for regulating by licences, permits or otherwise the production or manufacture of any essential
commodity;
(b) for bringing under cultivation any waste or arable land, whether appurtenant to a building or not, for
growing thereon of food crops generally or of specified food crops and for otherwise maintaining or
increasing the cultivation of food crops generally, or of specified foodcrops;
(c) for controlling the price at which any essential commodity may be bought or sold.
(d) for regulating by licences, permits or otherwise the storage, transport, distribution, disposal,
acquisition, use or consumption of any essential commodity;
(e) for prohibiting the withholding from sale of any essential commodity ordinarily kept for sale;
(f) for requiring any person holding in stock, or engaged in the production, or in the business of buying
or selling, of any essential commodity—(a) to sell the whole or a specified part of the quantity held
in stock or produced or received by him, or (b) in the case of any such commodity which is likely to
be produced or received by him, to sell the whole or a specified part of such commodity when
produced or received by him, to the Central Government or a State Government or to an officer or
agent of such Government or to a Corporation owned or controlled by such Government or to such
other person or class of persons and in such circumstances as may be specified in the order.
Explanation I provides that an order made under this clause in relation to foodgrains, edible oilseeds
or edible oils may, having regard to the estimated production, In the concerned area, of such
foodgrains, edible oilseeds and edible oils, fix the quantity to be sold by the producers in such area
and may also fix, or provide for the fixation of such quantity on a graded basis, having regard to the
aggregate of the area held by, or under the cultivation of the producers.
Explanation II provides that “production” for the purposes of this clause includes manufacture of
edible oils and sugar with its grammatical variation and cognate expressions;
(g) for regulating or prohibiting any class of commercial or financial transactions relating to foodstuffs
which in the opinion of the authority making the order, are, or if unregulated, are likely to be
detrimental to the public interest;
(h) for collecting any information or statistics with a view to regulating or prohibiting any of the aforesaid
matters;
(i) for requiring persons engaged in the production of, or trade and commerce in, any essential
commodity to maintain and produce for inspection such books, accounts and record relating to their
business and to furnish such information relating thereto as may be specified in the order;
(j) for the grant or issue of licences, permits or other documents, the charging of fees therefor, the
deposit of such sum, if any, as may be specified in the order as security for the due performance of
the conditions of any such licence, permit or other document, the forfeiture of the sum so deposited
or any part thereof for contravention of any such conditions and the adjudication of such forfeiture
by such authority as may be specified in the order;
(k) for any incidental and supplementary matters, including in particular, the entry, search or
examination of premises, aircraft, vessels, vehicles or other conveyances and animals and the
seizure by a person authorised to make such entry, search or examination of any article in respect
of which such person has reason to believe that a contravention of the order has been, is being or is
about to be, committed and any packages, coverings, or receptacles in which such articles are
320 EP-EBCL
found; (ii) of any aircraft, vessel, vehicle or other conveyance or animal used in carrying such
articles, if such a person has reason to believe that such aircraft, vessel, vehicle or other
conveyance or animal is liable to be forfeited under the provisions of this Act; (iii) of any books of
account and documents which in the opinion of such person, may be useful to, or relevant to any
proceeding under this Act and the person from whose custody such books of account or documents
are seized shall be entitled to make copies thereof or to take extracts therefrom in the presence of
an officer having the custody of such books of account or documents.
Fixing the Price of Essential Commodities being sold to Government

Section 3(3) vests powers in Central Government to deal with the pricing of the essential commodities
particularly when the commodities are being sold to Central/State Government in compliance of order under
clause (f) of Sub-section (2) of Section 3. In such a case, the price shall be paid as provided hereunder:
(a) the agreed price, where the price can be agreed upon consistently with the controlled price fixed
under this section;
(b) controlled price: where no such agreement can be reached, the price calculated with reference to
controlled price;
(c) the price calculated at the market rate prevailing in the locality on the date of sale, where neither
clause (a) nor clause (b) applies.
Fixing the Price of Essential commodities during Emergency

Section 3(3A)(i) is in the nature of an emergency provision and can be resorted to meet a situation arising at
a particular locality. It empowers the Central Government to direct the price at which the foodstuffs in any
locality will be sold to general public. This direction will be issued only when the Central Government is of the
opinion that takings such step is necessary for controlling price rise or preventing the hoarding of any
foodstuff in any locality. The notification issued by the Government to the above effect shall be in force for 3
months only as may be specified therein as per Sub-section (3A)(ii). Further, for selling specified foodstuffs
in the specified locality, the seller shall be paid price therefor as follows:
(a) agreed price, when the price can be agreed upon consistently with the controlled price fixed under
this sub-section; or
(b) the controlled price, when no such agreement can be reached at as stated above; or
(c) the market rate price as per the prevailing market rate in the locality at the date of sale where
neither of the above clause (a) or (b) apply.
Payment of Procurement Price for Foodgrains and Edible Oil

The Essential Commodities (Amendment) Act, 1976, inserted Sub-section (3B) in substitution of the then
existing section providing for payment of procurement price of such foodgrains, edible oils or oilseeds as
may be specified by State Government with the prior approval of Central Government. Therefore, as per
Section 3(3B) where any person is required in terms of an order under Sub-section (2)(f) to sell to the Central
Government or a State Government or any officer or agent of such Government or to a Corporation owned or
controlled by such Government any grade or variety of foodgrains, edible oil and oilseeds in relation to which
no notification has been issued Under Section 3(3A) or such notification, having been issued, has ceased to
be in force, procurement price shall be paid irrespective of the provisions of Sub-section (3) having regard to
the following facts:
(a) the controlled price, if any, fixed under this section or by or under any other law for the time being in
force for such grade or variety of foodgrains, edible oils and oilseeds;
(b) the general crop prospects;
(c) the need for making such grade or variety of foodgrains, edible oils and seeds available at
reasonable prices to the consumers, particularly the vulnerable sections of the consumers; and
(d) the recommendations, if any, of the Agricultural Prices Commission with regard to the price of the
concerned grade or variety of foodgrains, edible oils and oilseeds.
Fixing Price for Sugar to be Paid to Producer

Sub-section (3C) of Section 3 provides that where any producer of sugar is required by an order made under
Sub-section (2)(f) to sell any kind of sugar to the Central or State Government/officer or agent of such
government or to any person/class of persons, whether notification in this regard under Sub-section (3A) is
issued or not or ceased to be in force and notwithstanding anything contained in Sub-section (3), the
producer shall be paid such price for sugar as the Central Government may, by order, determine having
regard to (a) the minimum price, if any fixed for sugar cane by the Central Government under this section; (b)
the manufacturing cost of sugar; (c) the duty or tax, if any, paid or payable thereon; and (d) the securing of a
reasonable return on the capital employed in the business of manufacturing sugar.
Further, the Central Government may determine different prices for different areas from time to time or for
different factories or for different kinds of sugar. It is explained in the sub-section that producers for the
purposes of this sub-section shall include persons carrying on business of manufacturing sugar.
Price fixation under Section 3(2) and 3(3B) is different from price fixation in the case of sugar under Sub-
section (3C). In the former, the dominant purpose in fixing price is to ensure that goods are available to
consumers at a reasonable price. In the latter, price fixed must also give a reasonable return on investment
to the producer.
Sub-section (3D) of the Act empowers the Central Government to direct that no producer, importer or exporter
to sell or otherwise dispose of or deliver any kind of sugar or remove any kind of sugar from the bonded
godowns of the factory in which it is produced, whether such godowns are situated within the premises of the
factory or outside or from the warehouses of the importers or exporters, as the case may be, except under and
in accordance with its direction. However, this provision does not affect the pledging of such sugar by any
producer or importer in favour of any scheduled bank as defined in clause (e) of Section 2 of the Reserve Bank
of India Act, 1934 or any corresponding new bank constituted under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970, so, however, that no such bank sells the sugar pledged to
it except under and in accordance with a direction issued by the Central Government.
In terms of Sub-section 3(E) the Central Government has been empowered to direct from time to time, by
general or special order, any producer or importer or exporter or recognised dealer or any class of producers
or recognised dealers, to take action regarding production, maintenance of stocks, storage, sale, grading,
packing, marking, weighment, disposal, delivery and distribution of any kind of sugar in the manner specified
in the direction.
Power to Appoint Authorised Controller

The Central Government has been vested with necessary powers under Sub-section (4) of Section 3 to
authorise any person (known as authorised controller) when it is considered necessary for maintaining or
increasing the production and supply of essential commodities. The authorised controller shall exercise such
functions of control as may be provided in the order with respect to the whole or any part of any such
322 EP-EBCL
undertaking engaged in the production and supply of the commodity. The authorised controller shall exercise
his functions in accordance with any instructions given to him by the Central Government. He shall not have
any power to give any direction inconsistent with the provisions of any enactment or any instrument
determining the functions of the person in charge of the management of the undertaking except in so far as
may be specifically provided by the order. The undertaking shall be carried on in accordance with any
directions, given by the authorised controller under the provisions of the order. The person who is
responsible to function as a manager of the undertaking or part of it shall comply with such directions.
Issuance and Service of Order

An order made under Section 3 of the Act shall be issued and served in the manner as provided under
Section 3(5) i.e. in the following manner:
(a) in the case of an order of general nature or affecting a class of persons be notified in the official
gazette; and
(b) in the case of an order directed to a specified individual be served on such individual (i) by
delivering or tendering it to that individual, or (ii) if it cannot be so delivered or tendered, by affixing it
on the outer door or some other conspicuous part of the premises in which that individual lives, and
a written report thereof shall be prepared and witnessed by two persons living in the neighbourhood.
Laying the Order before Parliament
Sub-section (6) provides that every order made under Section 3 by the Central Government or by any officer
or authority of Central Government shall be laid before both Houses of Parliament as soon as may be, after it
is made.
Imposition of Duties on State Government
Section 4 of the Act provides that an order made under Section 3 may confer powers and impose duties
upon the Central Government or the State Government or officers and authorities of the Central Government
or State Government and may contain directions to any, State Government or to officers or authorities
thereof as to the exercise of any such powers or discharge of any such duties.
Delegation of powers
In terms of Section 5, the Central Government may, by notified order direct that the power to make orders or
issue notifications under Section 3 shall in relation to such matters and subject to such conditions, if any, as
may be specified in the direction be exercisable also by (a) such officer or authority subordinate to Central
Government, (b) such State Government or such officer or authority subordinate to a State Government as
may be specified in the direction.
NATURE OF ORDER PASSED UNDER THE ACT
It may be noted from the foregoing paragraphs that the order notified by the Government under Section 3(2)
specifies the various aspects which may be covered under the order while ensuring the production,
procurement and distribution of the essential commodities. Further, Sub-sections (3), (3A), (3B), (3C) provide
for issuance of order for fixation of prices of the essential commodities. Order may be passed for appointing
Controlling Authority under this Act which is of different nature being administrative in kind and effect. Sub-
section (5) provides for the issuance and service of the order. The order notified by the Government is such
an important document that the Act provides, under Sub-section (6) of Section 3, for it to placed before both
Houses of Parliament. Thus, the order in its nature, is a medium of administering the Act and a proper
course of communication to and from the Government, exercising and delegating the powers vested in the
Government under the Act.
Effect of the Order

Section 6 provides that the order made under Section 3 shall have effect notwithstanding anything
inconsistent therewith contained in any enactment other than this Act or any instrument having effect by
virtue of any enactment other than this Act.
It could be seen that this section does not either expressly or by implication, repeal any of the provisions of
the pre-existing laws, nor does it abrogate such laws. The object of Section 6 is simply to by-pass them.
Thus, for example, an order made under Section 3 would be operative in regard to the essential commodities
covered by the Textile Control Order, wherever there is any repugnancy in that order with any existing law
and to that extent the existing law with regard to those commodities will not operate.
The Calcutta High Court had observed that the ultimate effect of Section 6 is that an order under Section 3
will override existing laws, only on the ground that these are orders validly made under Section 3 of the Act
(Ramananda Agrawala v. State AIR 1951 Calcutta 120).
As rightly pointed out by the Patna High Court, Section 6 is a saving section which affords protection to the
orders made under Section 3 of the Act as against the onslaught of any law, merely by reason of
inconsistency (Mohammad Anwar Hussi v. State of Bihar, AIR 1955 Patna 220).
Presumption as to Orders
Section 13 provides that where an order purports to have been made and sign by an authority in exercise of
any powers conferred by or under this Act, a court so presume that such order was so made by that authority
within the meaning of Indian Evidence Act, 1972.
Burden of Proof in certain cases

Section 14 provides that on being prosecuted for contravention of any order made under Section 3 which
prohibits him from doing any act or being in possession of a thing without lawful authority or without a permit,
licence or other document such person shall have to prove that he has such authority, permit, licence or
other document as the burden of proof lies upon him.
Protection for Acts done in Pursuance of Order

Section 15 provides immunity against action taken in good faith under the Act and lays down that no suit,
prosecution or other legal proceedings can be taken against any person for anything which is in good faith
done, or intended to be done, in pursuance of any order made under Section 3 of the Act. Likewise, no suit
or other legal proceedings can lie against the Government, for any damage caused or likely to be caused, by
any thing which is in good faith done, or intended to be done, in pursuance of any order made under Section
3 of the Act.
It may be noted that immunity can be claimed by the Government or by its officers, only if it is shown that an
order was issued under Section 3 of the Act, and the liability which the plaintiff is seeking to enforce arises
from the fact that action was taken in pursuance of the order of the government under that section.
CONFISCATION OF ESSENTIAL COMMODITIES

Seizure and Confiscation of Essential Commodities
The Essential Commodities Act envisages two independent proceedings against a person charged with
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contravention of the provisions of the Act. Under Section 6A, the Collector can confiscate the seized
commodity and under Section 7, the contravention would be punishable. Confiscation of essential
commodities is a sharp weapon which the Act has provided to the Central Government under Section 6A of
the Act.
Section 6A provides that where any essential commodity is seized in pursuance of an order made under
Section 3, a report of such seizure shall be made, without any unreasonable delay, to the Collector of the
district or the Presidency town in which such essential commodity is seized. The Collector at his discretion,
may direct for the production of the seized commodity before him and if he is satisfied that there has been
contravention of the order he may pass order for confiscation of (a) the essential commodity so seized, (b)
any package, covering or receptacle in which such essential commodity is found, and (c) any animal, vehicle,
vessel or other conveyance used in carrying such essential commodity. Provided that without prejudice to
any action which may be taken under any other provision of this Act, no foodgrains or edible oilseeds seized
in pursuance of an order made under Section 3 in relation thereto from a producer shall, if the seized
foodgrains or edible oilseeds have been produced by him, be confiscated under this section. Provided further
that in the case of any animal, vehicle, vessel or other conveyance the owner of such animal, vehicle etc.,
shall be given an option to pay in lieu of its confiscation, a fine not exceeding the market price at the date of
seizure of the essential commodity sought to be carried by such animal, vehicle, vessel, or other
conveyance.
The Act uses the expressions ‘confiscation’ and ‘seizure’ in Section 6A and under this section a commodity
which has been seized in pursuance of an order under Section 3 can be confiscated under the
circumstances mentioned in Section 6A. Therefore, it is essential to-know in brief the distinction between
seizure and confiscation.
‘Seizure’
The expression ‘seize’ means to take possession contrary to the wishes of the owner of the
property and that such action is unilateral action of the person seizing. The person from whom
anything is seized loses, from the moment of seizure, the right or power to control or regulate the
use of that thing. The dictionary meaning of the word ‘seize’ means to lay hold of suddenly or
forcible, to take hold of, to reach and grasp, to clutch’. It also means ‘to take possession of or
appropriate in order to subject to the force or operation of a warrant, order of Court or other legal
processes. A reference to some provisions of the Codes of Criminal Procedure shows that the term
seizure had been used therein in connection with the taking of actual physical possession of
moveable property.
‘Confiscation’
‘Confiscation’ according to Wharton’s Law Lexicon, is condemnation and adjudication of property

to the public treasury as of goods seized under the Customs Act. Confiscation, according to
Strouds judicial Dictionary, must be an act done in some way on the part of the Government of the
country where it takes place and in some way beneficial to that Government, though the proceeds
may not strictly speaking be brought into its treasury. In State of Kerala v. Mathai (1961 K.L.T. 169)
it was pointed out that confiscation is not to be considered part of the sentence for an offence but
is only a mode by which Courts can dispose of property which comes before it in criminal trials.
That being the general distinction between confiscation and seizure, in the context of the Essential
Commodities Act, it could be seen that an essential commodity which has been seized, could be confiscated.
Therefore, confiscation is an action posterior to the seizure of the essential commodity. A commodity that
has not been seized cannot be confiscated. Seizure itself does not imply confiscation. The seizure should
have been made by virtue of an order passed under Section 3 of the Act. Clause (j) of Section 3 empowers
the Government to make an order for seizure of any essential commodity if an order made by the Central
Government controlling production, supply, distribution etc. of essential commodities has been or is about to
be contravened. Therefore, any contravention or intended contravention of an order passed by the
Government under the Act may lead to seizure, and under the circumstances mentioned in Section 6A such
seized commodity could be confiscated.
Power is conferred on the Collector to confiscate any animal, vehicle, vessel or other conveyance if used in
carrying the essential commodities. Where it was clear from the report of the Sub-Inspector of Police that the
jeep in question was not found or used for carrying any essential commodity, it was found moving in front of
the lorry which was loaded with paddy, it was held that, that by itself was no ground for its seizure. Unless
the vehicle was used for carrying the essential commodities, the Deputy Commissioner had no jurisdiction to
initiate proceedings for its confiscation, much less the police to seize it. [Ramchandra v. Sub-Inspector of
Police (1976) 1 Kar. LJ. 126]
The Collector has no jurisdiction to go into the validity of the seizure; he could only confiscate goods, out of
those seized, in respect of which contravention is established. Only if the seizure is valid could the Collector
have jurisdiction to go on into the question whether there has been any contravention of the control order in
respect of the whole or part of the goods, seized at this is entirely different from saying that the Collector
could go on with the enquiry, postulated in Sections 6A and 6B, when the seizure itself, on which alone his
jurisdiction to make an enquiry depends, is found to be illegal. [Hindustan Aluminium v. Controller of
Aluminium, AIR (1976) DeWii225]
In S. Seetharamayya Gupta v. Distt. Revenue Officer, Chittoor (AIR 1977 AP 103) it was held that delegation
of power of the Collector under Section 6A to Distt. Officer is competent and valid. Even though Section 6A
authorizes confiscation of seized goods it does not say that the entire seized quantity should be directed to
be confiscated. It is left to the discretion of the Distt. Revenue Officer land the appellate authority to decide
whether the entire seized stock should be confiscated or only a portion of it. That, however, is a judicial
discretion and must be exercised judicially having regard to the circumstances of the case, the gravity of the
matter and other relevant and pertinent factors. The Act provides for enquiry and total absence of adequate
opportunity to the party to make representation and consequently passing order of confiscation must be held
bad.
Sale of the Confiscated Commodity

Ssection 6A(2) provides that where the Collector, on receiving a report of seizure or on inspection of any
essential commodity under Sub-section (1) above, is of the opinion that the essential commodity is subject to
speedy and natural decay or it is otherwise expedient in the public interest so to do he may (i) order the
same to be sold at the controlled price, if any, fixed for such essential commodity under this Act or under any
other law for the time being in force; (ii) where no such price is fixed, order the same to be sold by public
auction. Provided that in case of foodgrains, the collector may, for its equitable distribution and availability at
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fair prices, order the same to be sold through fair price shops at the price fixed by the Central Government or
by the State Government as the case may be, for the retail sale of such foodgrains to the public.
Disposal of Sale Proceeds of Confiscated Goods
In terms of Section 6A(3), the sale proceeds of the essential commodity sold, after deduction of the
expenses of any such sale or auction or other incidental expenses relating thereto shall be paid to the owner
or person from whom it is seized in the following circumstances: (a) where no order of confiscation is
ultimately passed by the Collector; (b) where an order passed on appeal under Sub-section (1) of Section 6C
so requires, or (c) where in a prosecution instituted for the contravention of the order in respect of which an
order of confiscation has been made under this section, the person concerned is acquitted.
Issue of Show Cause Notice before Confiscation of Essential Commodity
Before passing an order for confiscation under Section 6A, in terms of Sub-section (1) of Section 6B of the
Act, the owner of the essential commodity, package, covering, receptacle, animal, vehicle, vessel or other
conveyance or the person from whom it is seized is required to be given a notice in writing informing him of
the grounds on which it is proposed to confiscate the above goods to provide him an opportunity of making a
representation in writing within a reasonable time and give him a reasonable opportunity of being heard in
the matter.
It is also provided in Sub-section (2) that no order of confiscation can be made if the owner of the confiscated
animal, vehicle, vessel or other conveyance proves to the satisfaction of the Collector that the said modes of
transport owned by him were used in carrying the essential commodity without his knowledge or connivance
of himself or his agent, if any, and each of them had taken the necessary precautions against such use.
It is not sufficient for the owner to prove that the vehicle carried the essential commodity without his
knowledge or concurrence. He must also prove that the vehicle was used without the knowledge, or
concurrence of the person in charge of the vehicle. In addition, he must prove that not only he but also the
person incharge of the vehicle had taken all reasonable and necessary precautions against such use [Shai
Rahhim v. State of Andhra (1976) LT 357].
However, once an order confiscating the goods of above description has been passed it shall not be held
invalid in terms of Sub-section (3) merely by reason of any defect or irregularity in the notice given under
clause (a) of Sub-section (1) if in giving such notice the provisions of that clause have been substantially
complied with.
Appeal against Confiscation Order
In terms of Sub-section (1) of Section 6C, any person aggrieved by an order of confiscation under Section 6A
may appeal to the State Government concerned within one month from the date of passing the order. The
State Government shall give an opportunity to the appellant to be heard and pass such order as it may think
fit, confirming, modifying or annulling the order appealed against. In terms of Sub-section (2) of Section 6C, if
the appeal has been decided in favour of appellant, he is entitled to the possession of the confiscated goods
and if it is not possible for any reason to return the essential commodity seized from him, such person shall
be paid the price therefor as if the essential commodity had been sold to the Government with reasonable
interest calculated from the day of seizure of essential commodity and such price shall be determined in
accordance with: (i) Sub-section (3B) of Section 3 in case of foodgrains, edible oils and oilseeds; (ii) Sub-
section (3C) of Section 3 in case of sugar; and (iii) Sub-section (3) of Section 3 in case of any other essential
commodity.
Confiscation and punishment

Section 6D provides that the award of any confiscation under this Act by the Collector shall not prevent the
infliction of any punishment to which the person affected thereby is liable under this Act.
Bar of Jurisdiction in Matters of Confiscation
The 1976 Amendment Act has inserted Section 6-E in the Act which provides that no court, tribunal or
authority shall have any jurisdiction to make an order with regard to the matters falling within the purview
of this Act particularly wherever any essential commodity is seized in pursuance of an order made under
Section 3 when the Collector or the judicial authority appointed under Section 6C shall have the
jurisdiction.
OFFENCES AND PENALTIES

Cognizance of offences
Section 10A of the Act declares that notwithstanding anything contained in the Criminal Procedure Code,
1971, every offence punishable under the Act shall be cognizable.
A cognizable offence is one, where, under the Criminal Procedure Code or any other law in force, a police
officer may arrest a person without a warrant.
Section 11 lays down that before a Court can take cognizance of any offence punishable under the Act, the
following three conditions must be satisfied, viz. (i) there must be a report in writing, (ii) the report must be
made by a public servant, as defined in Section 21 of Indian Penal Code, or any aggrieved person or any
recognised consumer association.
Prosecution of Public Servants (Section 15A)

If any public servant is accused of any offence alleged to have been committed by him while acting, or
purporting to act, in the discharge of his duties, in pursuance of any order made under Section 3, no court
can take cognizance of such an offence except with the previous sanction—(a) of the Central Government in
the case of a person who is employed in connection with the affairs of the Union; and (b) of the State
Government in the case of a person who is employed in connection with the affairs of the State.
Penalties
Section 7 of the Act deals with penalties. Contravention of an order passed by the Central Government under
Section 3 with reference to clause (h) or (i) of Sub-section (2) thereof is punishable with imprisonment for a
term which may extend to one year and also with fine [Section 7(1)(a)(i)]. For the contravention of an order
with reference to other clauses of Sub-section (2) of Section 3 the punishment is imprisonment for a term
ranging from three months to seven years and in addition fine is also leviable.
Further if any person contravenes any order made under Section 3, any property in respect of which the
order has been contravened shall be forfeited to the Government and any package, covering, receptacle in
which the property is found and any animal, vehicle, vessel or other conveyance used in carrying the
property, could also be forfeited if the court so orders.
If any person to whom a direction is given under Section 3(4) (b) fails to comply with it, he shall be
punishable with imprisonment for a term which shall not be less than three months but which may extend to
seven years and shall also be liable to fine.
If any person convicted of an offence under Section 7(1)(a)(ii) or 7(2) is again convicted of an offence under
328 EP-EBCL
the same provision he shall be punishable with imprisonment for the second and for every subsequent
offence for a term which shall not be less than six months but which may extend to seven years besides fine.
For adequate and sufficient reasons the court can award imprisonment for a term less than six months.
Where an offence is committed for a second time, besides the above punishment, the Court can also order
that the person shall not carry on any business of that essential commodity for such period not being less
than six months as may be specified by the Court.
Mens rea (Sections 6A and 7)
In Nathulal v. State of Madhya Pradesh (AIR 1966 S.C. 43) it was held by the Supreme
Court that mens rea or guilty mind is an ingredient of the offence punishable under
Section 7 of the Essential Commodities Act, 1955 i.e., an intentional contravention of
an order made under Section 3, is an essential ingredient of an offence under Section 7. In other words, if
the dealer did believe bona fide that he could store the foodgrains for instance, without infringing any order
under Section 3, there could be no contravention under Section 7.
It was observed by the Supreme Court in this case that mens rea is an essential ingredient of any criminal
offence. Mens rea by necessary implication may be excluded from a statute only where it is absolutely
clear that the implementation of the object of the Statute would otherwise be defeated. The nature of mens
rea that would be implied in a Statute creating an offence depends on the object of the Act and the
provisions thereof.
In Hariprasad Rao v. State (AIR 1951 SC 264), it was observed that unless a Statute either clearly or by
necessary implication rules out mens rea as a constituent part of a crime, an accused cannot be found
guilty of an offence against the criminal law unless he has got a guilty mind. Therefore, mens rea is an
essential ingredient of an offence under Section 7 of the Act.
It is to be noted that the contravention under Section 6A is also of the same character. Section 6A in brief
provides for seizure and confiscation based on ‘contravention’ of an order under Section 3. Therefore, the
Collector before exercising his powers under the section would be entitled to take into consideration the
question whether there was an intentional contravention of the order or whether the conduct of the dealer
was bona fide under the belief that he was acting legally. But it should be remembered that the orders of the
Collector are provisional in the sense that the Court is entitled, on appeal by the dealer, to look into whole
matter to see whether there were reasons to confiscate the goods under Section 6A. It can be concluded that
the provisions as regard ‘contravention’ under Section 6A or 7 are in pari materia—the contravention which
details confiscation is of the same kind as that for which a dealer can be punished.
An interesting question is whether the doctrine of mens rea applies to cases of vicarious liability, as for
instance, in the case of a master and servant It is well accepted that the legislature cannot introduce the
principles of vicarious liability and make the master liable for the act of his servants, although the master
himself had no mens rea. Thus, in one case the charge against the respondents was that they sold some
cloth in excess of the controlled price, and thus contravened the provisions of the Madhya Bharat Cotton
Control Order; one of the respondents, Gangaram Saboo was not present in the shop at the time the cloth
was alleged to have been sold, and it was, therefore, held that he could not be held vicariously liable for the
act of his munim who had actually sold the cloth (State v. Gangaram AIR 1935 H.B. 244).
Culpable Mental State
Section 10-C provides for a presumption of culpable mental state, which

includes intention, motive, knowledge of a fact and the belief in a fact. It is now
provided that in any prosecution for an offence under the Act which requires a
culpable mental state on the part of the accused, the Court shall presume the
existence of mental state. Of course, it is open to the accused to prove that he
had no such mental state with respect of the act committed by him.
Attempt and Abetment

Section 8 provides that any person who attempts to contravene or abets a contravention of any order made
under Section 3 shall be deemed to have contravened that order.
False Statement
A person shall be punishable under Section 9 with imprisonment for a term which may extend to five years or
with fine or with both for the following offences:
(i) when required by any order made under Section 3 to make any statement or furnish any information,
makes any statement or furnishes any information which is false in any material particular which he
knows or has reasonable cause to believe to be false or does not believe to be true, or
(ii) makes any such statement as aforesaid in any book, account, record, declaration, return or other
document which he is required by any such order to maintain or furnish.
Section 10(1) provides that if the person contravening an order under Section 3 is, a company, every person
who, at the time of the contravention, was in charge of, and was responsible to, the company for the conduct
of the business of the company, shall be deemed to be guilty of the contravention, and shall be liable to be
punished accordingly. In such cases, the company itself is also liable to be proceeded against. Any such
person, can, however, escape liability if he proves that the contravention took place without his knowledge or
that he exercised all due diligence to prevent it.
It may be noted that the term ‘company’ as used above, refers to any body corporate, and even includes a firm
or other association or individuals. In the case of a firm, the term ‘Director’ would mean a partner in the firm.
Publication of names of convicted companies by Court

Section 10-B of the Act provides that the Court may cause to be published in newspapers or in other manner
at the expense of the company the name, place of business and the offence/contravention committed by it
when a company has been convicted. However, no publication shall be made until the period for preferring
an appeal against the order of the Court has expired, without any appeal having been preferred or where
such appeal having been preferred, was disposed of. The expenses of any publication shall be recoverable
from the company as if it were a fine imposed by Court.
GRANT OF INJUNCTION BY CIVIL COURTS (SECTION 12B)

It is expressly provided by Section 12B that no Civil Court can grant any injunction or make any order for any
other relief against the Central or State Government or any public officer, in respect of any act done, or
purporting to be done, by such person in his official capacity under the Act, or any Order made thereunder, until
after notice of the application for such injunction or other report is given to the Government or to such officer.
330 EP-EBCL
LESSON ROUND-UP
• Essential Commodities Act, 1955 has been enacted to provide in the interest of the general public for the control of
the production, supply and distribution of and trade and commerce in, certain commodities.
• Section 2A dealing with Essential commodities declaration, etc. defines the "essential commodity” as to means a
commodity specified in the Schedule to the Act.
• Central Government has been empowered to administer the provisions of the Act by issuing orders/directions
notified in the official gazette and by delegating the authority to State Governments and administrators of Union
Territories.
• An essential commodity which has been seized could be confiscated. Therefore, confiscation is an action posterior
to the seizure of the essential commodity. A commodity that has not been seized cannot be confiscated. Seizure
itself does not imply confiscation.
• Mens rea or guilty mind is an essential ingredient of the offence punishable under the Act.
• Culpable mental state, which includes intention, motive, knowledge of a fact and the belief in a fact.
• Where an offence is committed by a company, if it is proved that the offence had been committed with the consent
or connivance of or is attributable to any neglect on the part of any Director, Manager, Secretary or other officer of
the company, such a person shall be deemed to be guilty of that offence, and is liable to be proceeded against and
• The Act expressly provides that no Civil Court can grant any injunction or make any order for any other relief against
the Central or State Government or any public officer, in respect of any act done, or purporting to be done, by such
person in his official capacity under the Act, or any Order made thereunder, until after notice of the application for
such injunction or other report is given to the Government or to such officer.
SELF TEST QUESTIONS

evaluation)
1. What do you understand by essential commodities? What are the commodities termed as essential
commodities, under the Essential Commodities Act?
2. Specify the authority responsible for the administration and execution of the Act?
3. What do you know about an ‘order’ under the Act? What are the powers of Central Government in
issuing the order under the Act?
4. There is difference in seizure and confiscation of commodities under the Act. How can the sale
proceeds of confiscated commodities be utilized? What is the procedure for disposal of confiscated
goods?
5. A reasonable opportunity is required to be given to the person concerned before confiscation of his
commodities or vehicle etc., under the Act. Elaborate this statement in the light of provisions of the
Act.
Lesson 15
Legal Metrology Act, 2009
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning objectives “Weights and measures may be ranked among the
• Legal Metrology necessaries of life to every individual of human
society. They enter into the economical arrangements
• International Organisation of Legal and daily concerns of every family", said Mr. John
Metrology Quincy Adams, the Sixth US President in his report to
Congress in 1821.
• Standard Weight and Measure
The essence of these words show the importance of
• Appointment and powers of Director and weights and measures. In fact, the influence and impact
Legal Metrology Officer of the system of weights and measures for trade use is
as pervasive as ever. Weights and measures embrace
• Verification and Stamping of Weight and
every aspect of modern living. It is therefore critical for
Measure
any country to have an accurate system of weights and
• Maintain Records and Registers measures. Such a system is indispensable in facilitating
trade – as it fosters certainty, trust and confidence in all
• Pre-packed Commodities transactions involving weights and measures. It
• Declaration on Pre-packed commodities underpins fair trade and competition and promotes
efficiency, and in so doing, helps economy to grow.
• Forfeiture
Metrology studies many types of measurements. It
• Power of the Central Government to make studies not only length but also such measurements as
Rules weight and time. Each and every one of these elements
can be studied in various manners as well. In
• Power of the State Government to make metrology, there are set standards that are set for
Rules measurement qualities to determine what the typical
• Compounding offence measurement is. In many cases, they also have a well
thought out plan as to how much of a degree of error
• Penalty for counterfeiting there is as well in each measurement. There are
various answers to questions about metrology because,
• Offences by companies
in many cases, each theory can be right. Metrology
• Lesson Round Up goes back thousands of years to early civilization and
was present well before the aspects of science as well.
The branch of knowledge concerning weights and
measures is technically known as legal metrology. In
basic form, metrology is the science of
measurement.
Legal metrology Act, 2009 intend to establish and enforce standards of weights and measures, regulate trade and
commerce in weights, measures and other goods which are sold or distributed by weight, measure or number and
for matters connected therewith or incidental thereto.
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INTRODUCTION
Legal Metrology is the name by which the law relating to weights and measures is known in international
parlance. Legal Metrology is very vital for scientific, technological and industrial progress of any country. The
establishment of national standards of weights and measures and their proper enforcement aim at ensuring
accuracy of measurements and measuring instruments and thus legal metrology strengthens the national
economy in a broader sense besides being a potential instrument of consumer protection. The scope of legal
metrology according to international practice extends to three broad fields of human activities, namely,
commercial transactions, industrial measurements and measurements needed to ensure public health and
human safety. The coverage of legal metrology varies from country to country. In some, almost all practical
measurements are brought under the purview of legal metrology, whereas in other countries legal metrology
finds restricted application in a few quantities like mass, length and volume used in trade and commerce. In
most of the countries, however, legal metrology encompasses measurements which have a bearing on the
protection of individuals from the financial and environmental points of view.
Legal metrology can be defined as that part of metrology which deals with units of measurement, methods of
measurement and measuring instruments in so far as they concern statutory, technical and legal
requirements which have the ultimate object of assuring public guarantee from the point of view of security
and of appropriate accuracy of measurements.
International Organization of Legal Metrology (OIML)

The International Organization of Legal Metrology (OIML) is an intergovernmental treaty organization whose
membership includes Member States, countries which participate actively in technical activities, and
Corresponding Members, countries which join the OIML as observers. It was established in 1955 in order to
promote the global harmonization of legal metrology procedures. Since that time, the OIML has developed a
worldwide technical structure that provides its Members with metrological guidelines for the elaboration of
national and regional requirements concerning the manufacture and use of measuring instruments for legal
metrology applications.
According to OIML legal Metrology is the entirety of the legislative, administrative and technical procedures
established by, or by reference to public authorities, and implemented on their behalf in order to specify and
to ensure, in a regulatory or contractual manner, the appropriate quality and credibility of measurements
related to official controls, trade, health, safety and the environment.
The OIML develops model regulations, International Recommendations, which provide Members with an
internationally agreed-upon basis for the establishment of national legislation on various categories of
measuring instruments. Given the increasing national implementation of OIML guidelines, more and more
manufacturers are referring to OIML International Recommendations to ensure that their products meet
international specifications for metrological performance and testing.
OIML Certificate System for Measuring Instruments

The OIML Certificate System for Measuring Instruments was introduced in 1991 to facilitate administrative
procedures and lower the costs associated with the international trade of measuring instruments subject to
legal requirements. The System provides the possibility for a manufacturer to obtain an OIML Certificate and
a Test Report indicating that a given instrument type (pattern) complies with the requirements of the relevant
OIML International Recommendations. Certificates are delivered by OIML Member States that have
established one or several Issuing Authorities responsible for processing applications by manufacturers
wishing to have their instrument types (patterns) certified.
Lesson 15 Legal Metrology Act, 2009 333
Certificates issued by OIML are accepted by national metrology services on a voluntary basis, and as the
climate for mutual confidence and recognition of test results develops between OIML Members, the System
serves to simplify the type (pattern) approval process for manufacturers and metrology authorities by
eliminating costly duplication of application and test procedures.
DEFINITIONS
Section 2 contains definitions of various terms used in the Legal Metrology Act. Some of the important ones
are reproduced hereunder.
Dealer
According to section 2(b) Dealer in relation to any weight or measure, means a person who, carries on,
directly or otherwise, the business of buying, selling, supplying or distributing any such weight or measure,
whether for cash or for deferred payment or for commission, remuneration or other valuable consideration;
and includes a commission agent, an importer, a manufacturer, who sells, supplies, distributes or otherwise
delivers any weight or measure manufactured by him to any person other than a dealer;
Export
According to section 2(d)''export'' with its grammatical variations and cognate expressions, means taking out
of India to a place 'outside India;
Import
According section 2(e)"import" with its grammatical variations and cognate expressions, means bringing into
India from a place outside India;
Label
Under clause(j) of section 2"label" means any written, marked, stamped, printed or graphic matter affixed to,
or appearing upon any pre-packaged commodity;
Legal Metrology
As per section 2(g)"Legal Metrology" means that part of metrology which treats units of weighment and
measurement, methods of weighment and measurement and weighing and measuring instruments, in
relation to the mandatory technical and legal requirements which have the object of ensuring public
guarantee from the point of view of security and accuracy of the weighments and measurements;
Manufacture
As per section 2(i) "manufacturer" in relation to any weight or measure, means a person who -
(i) manufactures weight or measure,
(ii) manufactures one or more parts, and acquires other parts, of such weight or measure and, after
assembling those parts, claims the end product to be a weight or measure manufactured by himself
or itself, as the case may be,
(iii) does not manufacture any part of such weight or measure but assembles parts thereof
manufactured by others and claims the end product to be a weight or measure manufactured by
himself or itself, as the case may be,
(iv) puts, or causes to be put, his own mark on any complete weight or measure made or manufactured
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by any other person and claims such product to be a weight or measure made or manufactured by
himself or itself, as the case may be;
Protection
Section 2(k) define “protection" as to mean the utilisation of reading obtained from any weight or measure,
for the purpose of determining any step which is required to be taken to safeguard the well-being of any
human being or animal, or to protect any commodity, vegetation or thing, whether individually or collectively;
Pre-packed Commodity
Section 2(l) define "pre-packaged commodity" as to mean a commodity which without the purchaser being
present is placed in a package of whatever nature, whether sealed or not, so that the product contained
therein has a pre-determined quantity;
Person
As per section 2(m) the term "person" includes,-
(i) a Hindu undivided family,
(ii) every department or office,
(iii) every organisation established or constituted by Government,
(iv) every local authority within the territory of India,
(v) a company, firm and association of individuals,
(vi) trust constituted under an Act,
(vii) every co-operative society, constituted under an Act,
(viii) every other society registered under the Societies Registration Act, 1860;
Premises
As per section 2 (n) the term “premises" includes—
(i) a place where any business, industry, production or transaction is carried on by a person, whether
by himself or through an agent, by whatever name called, including the person who carries on the
business in such premises,
(ii) a warehouse, godown or other place where any weight or measure or other goods are stored or
exhibited,
(iii) a place where any books of account or other documents pertaining to any trade or transaction are
kept,
(iv) a dwelling house, if any part thereof is used for the purpose of carrying on any business, industry,
production or trade,
(v) a vehicle or vessel or any other mobile device, with the help of which any transaction or business is
carried on;
Repairer
Section 2 (P) defines repairer" as to mean a person who repairs a weight or measure and includes a person
who adjusts, cleans, lubricates or paints any weight or measure or renders any other service to such weight
or measure to ensure that such weight or measure conforms to the standards established by or under this
Act;
Sale
"Sale", with its grammatical variations and cognate expressions, means transfer of property in any weight,
measure or other goods by one person to another for cash or for deferred payment or for any other valuable
consideration and includes a transfer of any weight, measure or other goods on the hire-purchase system or
any other system of payment by instalments, but does not include a mortgage or hypothecation of, or a
charge or pledge on, such weight, measure or other goods;[section 2 (r)]
Seal
As per section 2(s) "seal" means a device or process by which a stamp is made, and includes any wire or
other accessory which is used for ensuring the integrity of any stamp;
Stamp
Section 2(t) defines "stamp" as to mean a mark, made by impressing, casting, engraving, etching, branding,
affixing pre-stressed paper seal or any other process in relation to, any weight or measure with a view to-
(i) certifying that such weight or measure conforms to the standard specified by or under this Act, or
(ii) indicating that any mark which was previously made thereon certifying that such weight or measure
conforms to the standards specified by or under this Act, has been obliterated;
Transaction
Under section 2(u)"transaction" means,-
(i) any contract, whether for sale, purchase, exchange or any other purpose, or
(ii) any assessment of royalty, toll, duty or other dues, or
(iii) the assessment of any work done, wages due or services rendered;
Verification
As per section 2(v) "verification", with its grammatical variations and cognate expressions, includes, in
relation to any weight or measure, the process of comparing, checking, testing or adjusting such weight or
measure with a view to ensuring that such weight or measure conforms to the standards established by or
under this Act and also includes re-verification and calibration;
Weight and measure

Under section 2(w) "weight or measure" means a weight or measure specified by or under this Act and
includes a weighing or measuring instrument.
STANDARD WEIGHTS AND MEASURES

Chapter II of the Act containing sections 4 to 12 deals with standard weight and measure. Section 4 provides
units of weights and measures to be based on metric system.Section 5 provides the base unit of weights and
measures. Section 6 deals with base unit of numeration. Section 7 provides the standard units of weights and
measures. Section 8 states standard weight, measure or numeral. Section 9 provides the reference, secondary
and working standard.10 deals with use of weight or measure for particular purposes. Section 11 contains
prohibition of quotation, etc., otherwise than in terms of standard units of weight, measure or numeration.
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Section 4 of the Act provides that every unit of weight or measure shall be in accordance with the metric
system based on the international system of units.
Section 5 of the Act provides that the base unit of length shall be the meter; mass shall be the kilogram; time
shall be the second; electric current shall be the ampere; thermodynamic temperature shall be the Kelvin;
luminous intensity shall be the candela; and amount of substance shall be the mole.
Section 6 states that the base unit of numeration shall be the unit of the international form of Indian numeral.
Every numeration shall be made in accordance with the decimal system. The decimal multiples and sub-
multiples of the numerals shall be of such denominations and be written in such manner as may be
prescribed.
As per section 7 of the Act the base units of weights and measures specified in section 5 shall be the
standard units of weights and measures. The base unit of numeration specified in section 6 shall be the
standard unit of numeration. For the purpose of deriving the value of base, derived and other units
mentioned in section 5, the Central Government shall prepare or cause to be prepared objects or
equipments in such manner as may be prescribed. The physical characteristics, configuration, constructional
details, materials, equipments, performance, tolerances, period of re-verification, methods or procedures of
tests shall be such as may be prescribed.
Section 8 provides that any weight or measure which conforms to the standard unit of such weight or
measure and also conforms to such of the provisions of section 7 as are applicable to it shall be the standard
weight or measure. Any numeral which conforms to the provisions of section 6 shall be the standard
numeral.
No weight, measure or numeral, other than the standard weight, measure or numeral, shall be used as a
standard weight, measure or numeral. No weight or measure, shall be manufactured or imported unless it
conforms to the standards of weight or measure specified under section 8.
However, the aforesaid provisions shall not apply for manufacture done exclusively for export or for the
purpose of any scientific investigation or research.
Section 11 of the Act provides that no person shall, in relation to any goods, things or service, quote, or
make announcement of, whether by word of mouth or otherwise, any price or charge, or issue or exhibit any
price list, invoice, cash memo or other document, or prepare or publish any advertisement, poster or other
document, or indicate the net quantity of a pre-packaged commodity, or express in relation to any transaction
or protection, any quantity or dimension, otherwise than in accordance with the standard unit of weight,
measure or numeration.
It may be noted that the provisions mentioned above shall not be applicable for export of any goods, things
or service.
Section 12 provides that any custom, usage, practice or method of whatever nature which permits a person
to demand, receive or cause to be demanded or received, any quantity of article, thing or service in excess
of or less than, the quantity specified by weight, measure or number in the contract or other agreement in
relation to the said article, thing or service, shall be void.
Appointment and Power of Director, Controller and legal metrology officers

Chapter III of the Act containing sections 13 to 23 of the Act deals with appointment and powers of director,
controller and legal metrology officers.
Section 13 of the Act empowers the Central Government to appoint (by Notification) a Director of legal
metrology, Additional Director, Joint Director, Deputy Director, Assistant Director and other employees for
exercising the powers and discharging the duties conferred or imposed on them by or under this Act in
relation to inter-State trade and commerce.
The Director and every legal metrology officer, appointed, shall exercise such powers and discharge such
functions in respect of such local limits as the Central Government may, by notification, specify. Every legal
metrology officer shall exercise powers and discharge duties under the general superintendence, direction
and control of the Director.
The Director, the Controller and every legal metrology officer authorised to perform any duty by or under this
Act shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code. No
suit, prosecution or other legal proceeding shall lie against the Director, the Controller and legal metrology
officer authorised to perform any duty by or under this Act in respect of anything which is in good faith done
or intended to be done under this Act or any rule or order made there under.
The Central Government may, with the consent of the State Government and subject to such conditions,
limitations and restrictions as it may specify in this behalf, delegate such of the powers of the Director under
this Act as it may think fit to the Controller of legal metrology in the State, and such Controller may, if he is of
opinion that it is necessary or expedient in the public interest so to do, delegate such of the powers
delegated to him as he may think fit to any legal metrology officer and where any such delegation of powers
is made by such Controller, the person to whom such powers are delegated shall exercise those powers in
the same manner and with the same effect as if they had been conferred on him directly by this Act and not
by way of delegation.
Section 14 of the Act, provides that the State Government may, by notification, appoint a Controller of legal
metrology, Additional Controller, Joint Controller, Deputy Controller, Assistant Controller, Inspector and other
employees for the State for exercising the powers and discharging the duties conferred or imposed on them
by or under this Act in relation to intra State trade and commerce.
The Controller and every legal metrology officer so appointed shall exercise such powers and discharge
such functions in respect of such local limits as the State Government may, by notification, specify. Every
legal metrology officer shall exercise and discharge the duties under the general superintendence, direction
and control of the Controller.
Power of inspection, seizure

Section 15 of the Act confer powers of inspection on the Director, Controller or any legal metrology officer
may, if he has any reason to believe, whether from any information given to him by any person and taken
down in writing or from personal knowledge or otherwise, that any weight or measure or other goods in
relation to which any trade and commerce has taken place or is intended to take place and in respect of
which an offence punishable under this Act appears to have been, or is likely to be, committed are either
kept or concealed in any premises or are in the course of transportation.
The powers include entry at any reasonable time into any such premises and search for and inspect any
weight, measure or other goods in relation to which trade and commerce has taken place, or is intended to
take place and any record,” register or other document relating thereto. The power also include seizure of
any weight, measure or other goods and any record, register or other document or article which he has
reason to believe may furnish evidence indicating that an offence punishable under the Act has been, or is
likely to be, committed in the course of or in relation to, any trade and commerce.
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Where any goods seized are subject to speedy or natural decay, the Director, Controller or legal metrology
officer may dispose of such goods in such manner as may be prescribed. Every search or seizure made
under this section shall be carried out in accordance with the provisions of the Code of Criminal Procedure,
1973, relating to searches and seizures.
Forfeiture
Every non-standard or unverified weight or measure and every package used in the course of, or in relation
to, any trade and commerce and seized under section 15, shall be liable to be forfeited, to the State
Government.
However, such unverified weight or measure shall not be forfeited to the State Government if the person
from whom such weight or measure was seized gets the same verified and stamped within such time as may
be prescribed. Every weight, measure or other goods seized under section 15 but not forfeited shall be
disposed of by such authority and in such manner as may be prescribed.
Manufacturers. etc., to maintain records and registers

Section 17 of the Act provides that every manufacturer, repairer or dealer of weight or measure shall
maintain such records and registers as may be prescribed. The records and registers maintained shall be
produced at the time of inspection to the persons authorised for the purpose of Inspection.
Declarations on pre-packaged commodities
Section 18 states that no person shall manufacture, pack, sell, import, distribute, deliver,
offer, expose or possess for sale any pre-packaged commodity unless such package is in
such standard quantities or number and bears thereon such declarations and particulars in
such manner as may be prescribed. Any advertisement mentioning the retail sale price of a
pre-packaged commodity shall contain a declaration as to the net quantity or number of the
commodity contained in the package in such form and manner as may be prescribed.
Registration for importer of weight or measure

Section 19 provides that no person shall import any weight or measure unless he is registered with the
Director in such manner and on payment of such fees, as may be prescribed. No weight or measure,
whether singly or as a part or component of any machine shall be imported unless it conforms to the
standards of weight or measure established by or under this Act (Section 20).
Approval of model
Every person, before manufacturing or importing any weight or measure shall seek the approval of model of
such weight or measure in such manner, on payment of such fee and from such authority as may be
prescribed. However, such approval of model may not be required in respect of any cast iron, brass, bullion,
or carat weight or any beam scale, length measures (not being measuring tapes) which are ordinarily used in
retail trade for measuring textiles or timber, capacity measures, not exceeding twenty litre in capacity, which
are ordinarily used in retail trade for measuring kerosene, milk or potable liquors.
It may be noted that the prescribed authority may, if he is satisfied that the model of any weight or measure
which has been approved in a country outside India conforms to the standards established by or under this
Act, approve such model without any test or after such test as he may deem fit.
Prohibition manufacture, repair or sale of weight or measure without licence

Section 23 of the Act provides that no person shall manufacture, repair or sell, or offer, expose or possess
for repair or sale, any weight or measure unless he holds a licence issued by the Controller.However, no
licence to repair shall be required by a manufacturer for repair of his own weight or measure in a State other
than the State of manufacture of the same. The Controller shall issue a licence in such form and manner, on
such conditions, for such period and such area of jurisdiction and on payment of such fee as may be
prescribed.
Section 24 provides for verification and stamping of weight or measure. Every person having any weight or
measure in his possession, custody or control in circumstances indicating that such weight or measure is
being, or is intended or is likely to be, used by him in any transaction or for protection, shall, before putting
such weight or measure into such use, have such weight or measure verified at such place and during such
hours as the Controller may, by general or special order, specify in this behalf, on payment of such fees as
may be prescribed.
The Central Government may prescribe the kinds of weights and measures for which the verification is to be
done through the Government approved Test Centre. The Government approved Test Centre shall be
notified by the Central Government or the State Government, as the case may be, in such manner, on such
terms and conditions and on payment of such fee as may be prescribed.
Offences and penalties

Chapter V of the Act deals with offences and penalties.
Section 25 of the Act provides for penalty for use of non-standard Weight or measure. The section stipulates
that whoever uses or keeps for use any weight or measure or makes use of any numeration otherwise than
in accordance with the standards of weight or measure or the standard of numeration, as the case may be,
specified by or under this Act, shall be punished with fine which may extend to twenty-five thousand rupees
and for the second or subsequent offence, with imprisonment for a term which may extend to six months and
also with fine.
Under section 26 whoever tampers with, or alters in any way, any reference standard, secondary standard or
working standard or increases or decreases or alters any weight or measure with a view to deceiving any
person or knowing or having reason to believe that any person is likely to be deceived thereby, except where
such alteration is made for the correction of any error noticed therein on verification, shall be punished with
fine which may extend to fifty thousand rupees and for the second and subsequent offence with
imprisonment for a term which shall not be less than six months but which may extend to one year or with
fine or with both.
Section 27 provides that every person who manufactures or causes to be manufactured or sells or offers,
exposes or possesses for sale, any weight or measure which does not conform to the standards of weight or
measure specified by or under this Act; or which bears thereon any inscription of weight, measure or number
which does not conform to the standards of weight, measure or numeration specified by or under this Act,
except where he is permitted to do so under this Act, shall be punished with a fine which may extend to
twenty thousand rupees and for the second or subsequent offence with imprisonment for a term which may
extend to three years or with fine or with both.
Section 30 dealing with penalty for transaction in contravention of standard weight or measure provides that
whoever, in selling any article or thing by weight, measure or number, delivers or causes to be delivered to
the purchaser any quantity or number of that article or thing less than the quantity or number contracted for
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or paid for; or in rendering any service by weight, measure or number, renders that service less than the
service contracted for or paid for; or in buying any article or thing by weight, measure or number, fraudulently
receives, or causes to be received any quantity or number of that article or thing in excess of the quantity or
number contracted for or paid for; or in obtaining any service by weight, measure or number, obtains that
service in excess of the service contracted for or paid for, shall be punished with fine which may extend to
ten thousand rupees, and; for the second or subsequent offence, with imprisonment for a term which may
extend to one year, or with fine, or with both
Under section 31, Whoever, being required by or under this Act or the rules made thereunder to submit
returns, maintain any record or register, or being required by the Director or the Controller or any legal
metrology officer to produce before him for inspection any weight or measure or any document, register or
other record relating thereto, omits or fails without any reasonable excuse, so to do, shall be punished with
fine which may extend to five thousand rupees and for the second or subsequent offence, with imprisonment
for a term which may extend to one year and also with fine.
Section 35 provides that whoever renders or causes to be rendered, any service through means other than
the weight or measure or numeration or in terms of any weight, measure or number other than the standard
weight or measure, shall be punished with fine which shall not be less than two thousand rupees but which
may extend to five thousand rupees and for the second or subsequent offence, with imprisonment for a term
which shall not be less than three months but which may extend to one year, or with fine, or with both.
Under section 36 whoever manufactures, packs, imports, sells, distributes, delivers or otherwise transfers,
offers, exposes or possesses for sale, or causes to be sold, distributed, delivered or otherwise transferred,
offered, exposed for sale any pre-packaged commodity which does not conform to the declarations on the
package as provided in this Act, shall be punished with fine which may extend to twenty-five thousand
rupees, for the second offence, with fine which may extend to fifty thousand rupees and for the subsequent
offence, with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees
or with imprisonment for a term which may extend to one year or with both. Whoever manufactures or packs
or imports or causes to be manufactured or packed or imported, any pre-packaged commodity, with error in
pet quantity as may be prescribed shall be punished with fine which shall not be less than ten thousand
rupees but which may extend to fifty thousand rupees and for the second and subsequent offence, with fine
which may extend to one lakh rupees or with imprisonment for a term which may extend to one year or with
both.
Section 42 provides for vexatious search and empowers the Director, the Controller or any legal metrology
officer, exercising powers under this Act or any rule made thereunder, who knows that there are no
reasonable grounds for so doing, and yet searches, or causes to be searched, any house, conveyance or
place; or searches any person; or seizes any weight; measure or other movable property shall, for every
such offence, be punished with imprisonment for a term which may extend to one year, or with fine which
may extend to ten thousand rupees or with both.
Penalty for counterfeiting or seals

Section 44 provides that whoever counterfeits any seal specified by or under this Act or the rules made
thereunder, or sells or otherwise disposes of any counterfeit seal or possesses any counterfeit seal, or
counterfeits or removes or tampers with any stamp, specified by or under this Act or rules made thereunder,
or affixes the stamp so removed on, or inserts the same into, any other weight or measure, shall be punished
with imprisonment for a term which shall not be less than six months but which may extend to one year and
for the second or subsequent offence, with imprisonment for a term which shall not be less than six months
but which may extend to five years.
Counterfeit" shall have the meaning assigned to it in section 28 of the Indian Penal Code.
A person is said to "counterfeit" who causes one thing to resemble another thing, intending
by means of that resemblance to practice deception, or knowing it to be likely that deception
will thereby be practiced.
Explanation 1. It is not essential to counterfeiting that the imitation should be exact.
Explanation 2. When a person causes one thing to resemble another thing, and the resemblance is such
that a person might be deceived thereby, it shall be presumed, until the contrary is proved, that the person so
causing the one thing to resemble the other thing intended by means of that resemblance to practice
deception or knew it to be likely that deception would thereby be practiced.
Whoever obtains, by unlawful means, any seal specified by or under this Act or the rules made thereunder
and uses, or causes to be used, any such seal for making any stamp on any weight or measure with a view
to representing that the stamp made by such seal is authorised by or under this Act or the rules made
thereunder shall be punished with imprisonment for a term which shall not be less than six months but which
may extend to one year and for the second or subsequent offence, with imprisonment for a term which shall
not be less than six months but which may extend to five years.
Whoever, being in lawful possession of a seal specified by or under this Act or the rules made thereunder,
uses, or causes to be used, such seal without any lawful authority for such use, shall be punished with
imprisonment for a term which shall not be less than six months but which may extend to one year and for
the second or subsequent offence, with imprisonment for a term which shall not be less than six months but
which may extend to five years.
Whoever sells or offers or exposes for sale or otherwise disposes of any weight or measure which, he knows or
has reason to believe, bears thereon a counterfeit stamp, shall be punished with imprisonment for a term which
shall not be less than six months but which may extend to one year and for the second or subsequent offence,
with imprisonment for a term which shall not be less than six months but which may extend to five years.
Compounding of offence
In terms of offence punishable under section 25, sections 27 to 39, sections 45 to 47 either before or after
the institution of the prosecution, be compounded, on payment for credit to the Government of such sum as
may be prescribed.
However, the Director or legal metrology officer as may be specially authorised by him in this behalf, may
compound offences punishable under section 25, sections 27 to 39, or any rule made under sub-section (3)
of section 52. The Controller or legal metrology officer specially authorised by him, may compound offences
punishable under section 25, sections 27 to 31, sections 33 to 37, sections 45 to 47, and any rule made
under sub-section (3) of section 52:
Provided that such sum shall not, in any case, exceed the maximum amount of the fine, which may be
imposed under this Act for the offence so compounded.
Section 49 provides that where an offence under this Act has been committed by a company, the person, if
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any, who has been nominated to be in charge of, and responsible to, the company for the conduct of the
business of the company (hereinafter in this section referred to as a person responsible); or where no person
has been nominated, every person who at the time the offence was committed was in charge of, and was
responsible to, the company for the conduct of the business of the company; and the company, shall be
deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.
However, such person shall not be liable to any punishment, if he proves that the offence was committed
without his knowledge and that he exercised all due diligence to prevent the commission of such offence.
Any company may, by order in writing, authorise any of its directors to exercise all such powers and take all
such steps as may be necessary or expedient to prevent the commission by the company of any offence
under this Act and may give notice to the Director or the concerned Controller or any legal metrology officer
authorised in this behalf by such Controller in such form and in such manner as may be prescribed, that it
has nominated such director as the person responsible, along with the written consent of such director for
being so nominated.
It may be noted that where a company has different establishments or branches or different, units in any
establishment or branch, different persons may be nominated under this subsection in relation to different
establishments or branches or units and the person nominated in relation to any establishment, branch or
unit shall be deemed to be the person responsible in respect of such establishment, branch or unit.
Where an offence under the Act has been committed by a company and it is proved that the offence has
been committed with the consent or connivance of, or is attributable to the neglect on the part of, any
director, manager, secretary or other officer, such director, manager, secretary or other officer shall also be
deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Where any company is convicted under the Act for contravention of any of the provisions thereof, it shall be
competent for the court convicting the company to cause the name and place of business of the company,
nature of the contravention, the fact that the company has been so convicted and such other particulars as
the court may consider to be appropriate in the circumstances of the case, to be published at the expense of
the company in such newspaper or in such other manner as the court may direct. No publication shall be
made until the period for preferring an appeal against the orders of the court has expired without any appeal
having been preferred, or such an appeal, having been preferred, has been disposed of. The expenses of
any publication shall be recoverable from the company as if it were a fine imposed by the court. '
'Explanation.- For the purposes of this section,-

(a) "company" means any body corporate and includes a 'firm or other association of individuals; and
(b) "director", in relation to a firm, means a partner in the firm but excludes nominated directors,
honorary directors, Government nominated directors.
Power of the Central Government to make rules

Section 52 of the Act empowers the Central Government to make rules, by notification, for carrying out the
provisions of the Act.
In making any rule the Central Government may provide that a breach thereof shall be punishable with fine
which may extend to five thousand rupees.
Every rule made by the Central Government under this Act shall be laid, as soon as may be after it is made,
before each House of Parliament, while it is in session, for a total period of thirty days which may be
comprised in one session or in two or more successive sessions, and if, before the expiry of the session
immediately following the session or the successive sessions aforesaid, both Houses agree in making any
modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have
effect only in such modified form or be of no effect, as the case may be; so, however, that any such
modification or annulment shall be without prejudice to the validity of anything previously done under that
rule.
Power of State Government to make rules

Section 53 empowers the State Government to make rules, by notification, and after consultation with the
Central Government, to carry out the provisions of the Act.
In making any rule under this section, the State Government may provide that a breach thereof shall be
punishable with fine which may extend to five thousand rupees. The power to make rules under this section
shall be subject to the condition of the rules being made after previous publication in Official Gazette. Every rule
made under this section shall, as soon as may be after it is made, be laid before each House of State
Legislature, where there are two Houses and where there is one House of State Legislature, before that House.
LESSON ROUND-UP
• Weights and measures may be ranked among the necessaries of life to every individual of human society. They
enter into the economical arrangements and daily concerns of every family.
• Legal metrology Act, 2009 intend to establish and enforce standards of weights and measures, regulate trade and
commerce in weights, measures and other goods which are sold or distributed by weight, measure or number and
for matters connected therewith or incidental thereto.
• "Legal Metrology" means that part of metrology which treats units of weighment and measurement, methods of
weighment and measurement and weighing and measuring instruments, in relation to the mandatory technical and
legal requirements which have the object of ensuring public guarantee from the point of view of security and
accuracy of the weighments and measurements.
• Every unit of weight or measure to be in accordance with the metric system based on the international system of
units.
• A person shall not manufacture, pack, sell, import, distribute, deliver, offer, expose or possess for sale any pre-
packaged commodity unless such package is in such standard quantities or number and bears thereon such
declarations and particulars in such manner as may be prescribed.
• Any advertisement mentioning the retail sale price of a pre-packaged commodity shall contain a declaration as to the
net quantity or number of the commodity contained in the package in such form and manner as may be prescribed.
• Legal Metrology Act provides for penalty for use of non-standard Weight or measure.
• Label means any written, marked, stamped, printed or graphic matter affixed to, or appearing upon any pre-
packaged commodity.
• A person is said to "counterfeit" who causes one thing to resemble another thing, intending by means of that
resemblance to practice deception, or knowing it to be likely that deception will thereby be practiced.
• Legal Metrology Act empowers the Central Government and State Governments to make rules for carrying out the
provisions of this Act.
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SELF TEST QUESTIONS

evaluation)
1. What are the objectives of Legal Metrology Act, 2009?
2. Enumerate the powers and functions of Controller and Legal Metrology Officer?
3. Write short note on Counterfeit.
4. Every non-standard weight and measure used in the course of trade is liable to be forfeited.
Comment.
5. Briefly explain the provision regarding declaration on pre-packed commodities.
Lesson 16
Transfer of Property Act, 1882
LESSON OUTLINE
LEARNING OBJECTIVES
• Important Definitions
Article 17 of Universal Declaration on Human Rights
• Distinction between Moveable and
provides that everyone has the right to own property
Immoveable Property
alone as well as in association with others and no
• Rules relating to Transfer of Property one shall be arbitrarily deprived of his property. As
• Who can transfer the Property per Article 300A of Constitution of India, persons not
to be deprived of property save by authority of law.
• Subject matter of Transfer
• Rules against Inalienability Property has, always, been on the fundamental
elements of socio economic life of an individual.
• Transfer for benefit of Unborn Person
Transfer of Property means an act by which a living
• Conditional Transfer person conveys property in present, or in future, to
• Doctrine of Election one or more other living persons, or to himself and
one or more other living persons and "to transfer
• Doctrine of Holding Out
property" is to perform such an act. Consequently,
• Doctrine of Feeding the Grant by Estoppel the law relating to transfer of property is not only an
important branch of civil law but also one that
• Doctrine of Fraudulent Transfer
demands proper elucidation due to its complexity.
• Doctrine of Part-Performance
• Properties which cannot be Transferred Therefore, students should be well versed in this
subject so as to understand the intricacies involved in
• Rule against Perpetuity the transfer of property.
• Accumulation of Income
• Doctrine of Lis Pendens
• Provisions relating to Specific Transfers
• Actionable Claims
• Charges
• Lesson Round up
The law relating to transfer of property is governed by the Transfer of Property Act, 1882. The very preamble to the Act
suggests that it simply defines and amends certain parts of the law relating to transfer of property by act of parties.
346 EP-EBCL
INTRODUCTION
The law relating to transfer of property is governed by the Transfer of Property Act, 1882. Before this Act
came into force there was practically no law as to real property in India. Barring few points which were
covered by certain Regulations and Acts, the Courts in India in the absence of any statutory provisions,
applied rules of English law as the rule of justice, equity and good conscience.
The Act was enacted with the object to amend the law relating to the transfer of property by act of parties.
The Act excludes from its purview the transfers by operation of law, i.e. by sale in execution, forfeiture,
insolvency or intestate succession. The scope of the Act is limited, as it is confined to transfers inter vivos
and excludes testamentary succession, i.e. transfers by will.
The very preamble to the Act suggests that it simply defines and amends certain parts of the law relating to
transfer of property by act of parties, and it does not at all profess to be an exhaustive enactment as is
revealed by the omission of the word “consolidate”. Therefore, the Act leaves the scope for applying rules of
justice, equity and good conscience if a particular case is not covered by any of the provisions of the Act. But
if it is covered, the Act must be applied.
SCHEME OF THE ACT

Transfer
By Act of Parties By Operation of Law e.g.

Execution, Insolvency,
Succession, etc.
Testamentary (takes Inter vivos (takes effect between

effect after death and two living persons and governed
governed by the Indian by the T.P. Act.)
Succession Act)
Transfer of Property Special Transfers of

whether Immoveable Property
Moveable or Immoveable
Sales Mortgages Leases Exchanges Gifts Actionable

(Ss. 54-57) and (Ss. 105-117) (Ss. 118-121) (Ss. 122-129) claims
charges (Ss. 130-137)
(Ss. 58-104)
However, while explaining the provisions of the Act, the terms used are defined there itself, yet some of the
important terms used under the Act are as follows:
Instrument
"Instrument" means a non-testamentary instrument.

Lesson 16 Law Relating to Transfer of Property 347
Attached to the earth
Attach to the earth means:
(a) rooted in the earth, as in the case of trees and shrubs;
(b) imbedded in the earth, as in the case of walls or buildings; or
(c) attached to what is so embedded for the permanent beneficial enjoyment of that to which it is
attached.
Absolute Interest
When a person owns property, he has an "absolute interest" in the property. Ownership consists of a bundle
of rights, the right to possession, right to enjoyment and right to do anything such as selling, mortgaging or
making gift of the property. If A is the owner of a land, he has an absolute interest in the land. If A sells his
land to B, then B becomes the owner and he acquires an absolute interest in the land he has purchased from
A. Likewise if A makes a gift of his property to B, there again B gets an absolute interest in the property
which is gifted to him. These are instances where persons may have an absolute interest.
Reversion and Remainder
Some interests in the property are called in English Law, reversion and remainders. A "reversion" is the
residue of an original interest which is left after the grantor has granted the lessee a small estate. For
example, A, the owner of a land may lease it to B for a period of five years. The person who grants the lease
is the lessor and the person who takes the lease is called the lessee. Here, after the period of 5 years the
lease will come to an end and the property reverts back to the lessor. The property which reverts back to him
is called the reversion or the reversionery interest. The grantor has a larger and an absolute interest out of
which he carves out a smaller estate and gives to the grantee, i.e. the lessee.
When the owner of the property grants a limited interst in favour of a person or persons and gives the
remaining to others, it is called a "remainder". For instance, A the owner of a land transfers property to B for
life and then to C absolutely. Here the interest in favour of B is a limited interest, i.e., it is only for life. So long
as A is alive he enjoys the property. He has a limited right since he cannot sell away the property. His right is
only to enjoy the property. If he sells this interest it will be valid so long as he is alive. So after B’s death the
property will go to C, interest is called a remainder. In the case of a "remainder", the property will not come
back to the owner, but it goes over to the other person.
Vested and Contingent Interests
The word "vested" is used in two different senses. It may mean "vested in possession" or "vested in interest".
A right is said to be "vested in possession" when it is a right to present possession of property and it is said
to be "vested in interest" when it is not a right to present possession but a present right to future possession.
For instance, if a land is given to A for life with a remainder to B, A’s right is vested in possession, B’s right is
vested in interest. In the above example, the interest of B is not subject to any uncertain condition. It will
come into his possession after A’s life comes to an end. Therefore, an interest is said to be vested when it is
not subject to any condition, precedent, i.e., when it is to take effect on the happening of an event which is
certain, whereas an estate is contingent when the right to enjoyment depends upon the happening of an
event which may or may not happen. Thus, a gift to A on the death of B creates a vested interest in A even
during the life time of B for there is nothing more certain than death. But a gift to A on the marriage of B
creates a contingent interest, for B may never marry at all but that contingent interest becomes vested if and
when B marries.
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A vested interest is transferable and heritable. If property is given to A for life and afterwards to B, B gets a
vested interest and if B transfers this interest to C, C will take when the life estate of A comes to an end. B’s
interest, since it is vested, is also heritable. Therefore, if B dies during the lifetime of A, C will get the property
after the death of A.
A contingent interest, as said above, is an interest which takes effect after the condition is satisfied. It is
subject to a condition precedent, i.e., unless A marries B’s daughter, he will not get the property. The
following example will illustrate this point. Property is given to A for life and then to B if he marries C. B
should marry C before A dies. If he does so, his interest is converted into vested interest. Before B marries C
his interest is contingent. The contingent interest is not heritable although it is transferable. In a vested
interest the transfer is complete, but when the interest is contingent the transfer depends upon a condition
precedent. In a condition precedent the estate is not vested in the grantee until the condition is fulfilled.
Distinction between a vested and a contingent interest: The following are the principal points of distinction
between a vested and a contingent interest:
1. When an interest is vested the transfer is complete. It creates an immediate proprietory interest in
the property though the enjoyment may be postponed to a future date. A contingent interest on the
other hand is dependant upon the fulfilment of some conditions which may or may not happen. In
other words, in case of vested interest, the owner’s title is already prefect; in case of a contingent
interest, the title is as yet imperfect but may become perfect on the fulfilment of a stipulated
condition.
2. A vested interest takes effect from the date of transfer. A contingent interest in order to become
vested is conditioned by a contingency which may not occur.
3. A vested interest cannot be defeated by the death of the transferee before he obtains possession. A
contingent interest may fail in case of the death of transferee before the fulfilment of condition.
4. Since vested interest is not circumscribed by any limitation which derogates from the completeness
of the grant, it logically follows that a vested interest is transferable as well as heritable. If, therefore,
a transferee of the vested interest dies before actual enjoyment, it will devolve on his legal heirs. A
contingent interest, on the other hand, cannot be inherited though it may be transferred coupled with
limitation regarding fulfilment of a condition.
MOVEABLE AND IMMOVEABLE PROPERTY

The term “property” signifies the subject matter over which the right of ownership or any less right carved out
of ownership (e.g. mortgage right) is exercised. The Act deals with (i) various specific transfers relating to
Immoveable property and (ii) lays down general principles relating to transfer of both moveable and
immoveable property. Chapter II of the Act is divided into two parts. Parts A deals with the rules pertaining to
both moveable and immoveable property (Section 5 to 37), Part B embodies the rules relating to immoveable
property (Section 38 to 53A). The other chapters of the Act deal with transfers such as sales, mortgages,
leases, gifts, exchanges and actionable claims. The rules relating to these transactions are referred to as
rules governing special transfers to immoveable property. The fundamental rule relating to all transfers is that
a transfer cannot be effected in any other way except as prescribed under the Act. Furthermore, the Act
states that certain kinds of property cannot be transferred at all.
The first task is to define and distinguish between moveable and immoveable property.
Moveable property
The Transfer of Property Act does not defines the term "moveable property". Therefore, it is to be defined
with the help of other statutes. For e.g., it has been defined in the General Clauses Act, 1897 as to mean
“property of every description except immoveable property”. The Registration Act defines "moveable
property" to include property of every description excluding immoveable property but including standing
timber, growing crops and grass.
For the purpose of law, moveable property is sometimes regarded as immoveable property. This may
happen when a thing of chattel is attached or embedded in earth. For instance, if a machinery or a plant is
installed on the land, the question arises whether the machinery or the plant is moveable property or
immoveable property. In order to find out whether such a thing or chattel is an immoveable property or not, it
is to find out the mode of annexation of the thing and the object or purpose of such annexation. If the
machinery is fixed on the land permanently then it becomes immoveable property, whereas if the machinery
or engine or any other thing is fixed on a temporary basis, then it will be regarded as moveable property.
Thus, where the owner of a piece of land installed a bone mill along with machinery being held by iron bars
which have been dug to a considerable depth then it is a permanent fixture and this will become immoveable
property. Similarly, the machinery installed on a cement platform and held in position by being attached to
iron pillars fixed in the ground was held to be immoveable property as the annexation was made by the
person who owned the buildings as well as the machinery (Mohamed Ibrahim v. Northern Circars Fibre
Trading Company, A.I.R. 1944 Mad. 492).
Immoveable property
The term “immoveable property” is also not defined under the Act. However, it is defined in the negative
sense as “the immoveable property does not include standing timber, growing crops, or grass” (S. 3 Para 2).
Standing timber are trees fit for use for building or repairing houses. This is an exception to the general rule
that growing trees are immoveable property.
Growing crops: It includes all vegetable growths which have no existence apart form their produce such as
pan leaves, sugar cane etc.
Grass: Grass is moveable property, but if it is a right to cut grass it would be an interest in land and hence
forms immoveable property.
The General Clauses Act defines the term "immoveable property" but not exhaustively. It states:
“immoveable property shall include land, benefits to arise out of land and things attached to the earth, or
permanently fastened to any thing attached to the earth” [Section 3(25)]. The Indian Registration Act
expressly includes under to immoveable property the benefits to arise out of land, hereditary allowances,
rights of way, lights, ferries and fisheries.
If the definitions of "immoveable property" as given in the Transfer of Property Act, the General Clauses Act
and the Registration Act are viewed together, it is evident that they do not say what immoveable property is.
They only say what is either included or excluded therein. Still, reading the definition in the Act with one in
the General Clauses Act, immoveable property will be found to include land, benefit to arise out of land such
as rent, and things attached to the earth like trees and buildings but not standing timber, growing crops and
grass. The last three things are regarded as severable from the land on which they stand and, therefore, they
are not included in the term "immoveable property".
Thus, the meaning of immoveable property is as under:
"Immoveable property" means land, benefits to arise out of land, and things attached to the
earth, or permanently fastened to anything attached to the earth.
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“Attached to the earth” means (a) rooted in the earth, as in the case of trees and shrubs; (b) embedded in the
earth, as in the case of walls or buildings; or (c) attached to what is so embedded for the permanent
beneficial enjoyment of that to which it is attached (S. 3 Para 6 of the Act).
Things rooted in the earth: Trees and Shrubs are immoveable property according to this definition subject to
the exception as to standing timber.
Things embedded in the earth: A house being embedded in the earth is immoveable property and this is so
even if it is sold for enjoyment as a house with an option to pull it down. The mode of annexation and object
of annexation are the two tests to determine whether it is immoveable property or not.
Attached to what is so...: The attachment must be as the section says for the permanent beneficial
enjoyment of that to which it is attached e.g. the doors, windows of a house or moveable parts of fixed
machinery. But the attachment must be intended to be permanent.
A orally grants to B for Rs. 700/- the rights to catch and carry away fish from his lake. Is the grant valid? The
Supreme Court in Ananda Behra v. State of Orissa, (1956) SCJ p. 96, that such a right is a benefit arising
out of immoveable property namely the lake. So under General Clauses Act it is immoveable property. The
sale requires a registered instrument for its validity under Section 54 of the Transfer of Property Act.
Therefore, the oral grant is invalid and cannot pass away any title in favour of B.
Distinction between moveable and immoveable property
The distinction between moveable and immoveable property was explained

in the case of Sukry Kurdepa v. Goondakull, (1872) 6 Mad. H.C. 71, by
Holloway J. as moveability may be defined to be a capacity in a thing of
suffering alteration. Immoveablity for such alteration e.g., a piece of land in
all circumstances is immoveable. If a thing cannot change its place without
injury to the quality it is immoveable. Certain things e.g. trees attached to
the ground are so long as they are so attached, immoveable when the
severance has been effected they become moveable.
The following have been recognised as immoveable property:

The following have been held not to be immoveable property:
RULES RELATING TO TRANSFER OF PROPERTY (WHETHER MOVEABLE OR

IMMOVEABLE)
According to Section 5 of the Transfer of Property Act, the term “transfer of property” means an act by which
a living person conveys property in present, or in future, to one or more other living persons, or to himself,
and one or more other living persons and "to transfer property" is to perform such an act. In this section,
"living person" includes a company or association or body of individuals whether incorporated or not. But the
general provisions of the Act as to transfer do not effect the special provisions of the Companies Act, 1956.
To effect a transfer, property must be in existence. The word “transfer” is defined with reference to the word
“convey”. The fundamental rule is that a transfer cannot be affected in any way not prescribed by the Act.
The first point to note is that transfer inter vivos (i.e., between living persons) alone is contemplated by the
Act. A transfer by means of a will is not a transfer according to the Act, because it is not a transfer between
two living persons. Section 5 also says that the transfer may be “in present or in future”. The words in
present or in future qualify the words ‘conveys’, and not the word ‘property’. A transfer of property not in
existence operates as a contract to be performed in future which may be specially enforced as soon as the
property comes into existence (Jugalkishore v. Ram Cotton Company, (1955) I SCR 1369).
Further Section 6 (h) provides that no transfer can be made in so far as it is opposed to the nature of the
interest attached thereby or for an unlawful object or consideration or to a person legally disqualified to be a
transferee.
WHO CAN TRANSFER THE PROPERTY?

According to Section 7 of the Transfer of Property Act, every person who is competent to contract and
entitled to transferable property, or authorised to dispose of property is competent to transfer such property.
Hence, every person competent to contract and having ownership can trasnfer property. According to Indian
Contract Act, a person is competent to contract when he is a major and of sound mind and is not disqualified
from contracting by any law to which he is subject. But a minor can be a transferee as there is nothing in the
352 EP-EBCL
Transfer of Property Act to disqualify a person, who is a minor to be a transferee. Thus, a mortgage can be
validly executed in favour of a minor who has paid the consideration (Hari Mohan v. Mohini, 22 C.W.C. 130,
Raghava v. Srinivasa, (1917) 60 Mad. 308). Persons who are authorised to transfer property can also
transfer property validly. Although a minor is not competent to be a transferor yet a transfer to a minor is
valid. However, there are exceptions to this:
If a person holds himself out is the owner with the consent of the owner i.e. doctrine of holding out or if a
person represents to be the owner i.e. doctrine of feeding the grant by estoppel.
SUBJECT MATTER OF TRANSFER

Section 6 of the Transfer of Property Act says that property of any kind may be transferred except as provided
by this Act or any other law for the time being in force. The words “property of any kind” indicate that
transferability is the general rule and the right to property includes the right to transfer the property to another
person. Property of any kind excludes from its purview the future property. A transfer of future property can only
operate as a contract which may be specifically performed when the property comes into existence.
Exceptions to the general rule of transferability made by other laws
Certain restrictions are placed by Hindu law and Mohammedan law on the transfer of property.
FORMALITIES OF TRANSFER
Property can be transferred either orally or by writing. Moveable property can be transferred by delivery of
possession or by registration. Section 54 lays down the mode of transfer of immoveable property. Such
transfer, in the case of tangible immoveable property of the value of one hundred rupees and upwards, or in
the case of a reversion or other intangible thing, can be made only by a registered instrument.
In the case of tangible immoveable property of a value less than one hundred rupees, such transfer may be
made either by a registered instrument or by delivery of the property.
The tangible property means a property which can be touched physically and hence, capable of physical
dealing.
The intangible property means something in abstract, either capable of being touched or perceived and yet
standing in relation to a certain thing.
‘Reversion’ means the bundle of rights remaining with the lessor after the execution of a lease of a certain
immoveable property.
When a transfer is effected in writing, the person who signs the document professing to transfer the property
is called the executant. Execution consists in affixing his signature to the document to the effect that he is
transferring the property. An illiterate person who cannot write may direct some literate person to sign it on
his behalf and in his presence and the illiterate person may put his thumb impression.
(i) Attestation
Attestation is an important formality in connection with the execution of transfer. "Attest" means to testify a
factor, to bear witness to a fact. Attestation, in relation to a document, signifies the fact of authentication of
the signature of the executant of that document by the attestator by putting down his own signature on the
document in testimony of the fact of its execution. All transfers do not require attestation. For example, a sale
or a lease does not require attestation. But a mortgage or a gift requires that a mortgage deed or a gift deed
must be attested by two or more witnesses.
Attestation is valid and complete when two witnesses sign the instrument. According to the definition given in
the Transfer of Property Act (Section 3), the following essentials are required for a valid attestation:
(a) There must be at least two or more witnesses;
(b) Each witness must see (a) the executant’s sign or affix his mark to the instrument, or (b) some other
person sign the instrument in the presence and by the direction of the executant, or (c) receive from
the executant a personal acknowledgement of his signature or mark or of the signature of such
other person; and
(c) Each witness must sign the instrument, (i.e. document), in the presence of the executant.
It is not necessary that both attesting witnesses should be present at the same time. The instrument may be
attested after its execution by each of the attestators at different times. Attestation cannot take place before
the execution of the deed. The Act does not insist on any particular form of attestation. The attesting witness
may not be described as such on the face of the document (Yakub v. Kalzurkan, 52 Bombay 203). However,
the attesting witness must have put his signature antmus attestandi, i.e., with intention to attest. Thus, where
a Registrar or an identifying witness puts his signature on the document he cannot be regarded as an
attesting witness unless it is duly proved that he signed with the necessary intention to attest.
(ii) Registration
Registration is an essential legal formality to effect a valid transfer in certain cases. The advantage of
registering a document is that any person who deals with the property would be bound by the rights that are
created in earlier registered document.
Illustration
A executes a mortgage on property X and gets it registered. Subsequently he sells property X to B, B is

bound by the right of the mortgagee over the property X. Thus, whether B knows actually or not that there
was a mortgage the fact that the earlier document was registered is a notice to B and B takes property,
subject to the rights of the mortgagee. Therefore, if a document of transfer relating to immoveable property is
required by the law to be and has been effected by registered instrument, the persons who deal with the
property subsequently are deemed in the eye of law as having knowledge of the such registered instrument
from the date of its registration.
(iii) Notice
Notice, may be actual or constructive. If a person knows about a fact, he has an actual notice. But, in certain
circumstances law treats a man who ought to have known a fact even though he did not in fact know it. This
is called constructive notice.
The equitable doctrine of notice is recognised in various Sections of this Act. For instance in Section 39 of the
Act, where a transfer is made of property out of which a person has a right to receive maintenance, the
transferee takes subject to that right if he had notice of it, but not otherwise. Similarly under Section 40 if A
conveys to C property, which he had by a previous contract agreed to sell to B, then B can enforce the contract
against C, if C had notice of it, but not otherwise. If C had notice of the prior contract, he purchases with
knowledge that it was unconscionable of A to sell to him, and it is therefore, unconscionable of him to buy.
A person is deemed in the eye of law to have constructive notice of a fact when (i) but for willful absentation
from an enquiry or search which he ought reasonably to have made; or (ii) gross negligence on his part, he
would have known it. Constructive notice arises from an irrefutable presumption of notice. In law such a
presumption will arise when (i) there is a willful absentation on the part of a person to make necessary
enquiries regarding the existence of certain facts, or (ii) he showed gross negligence in the matter.
354 EP-EBCL
The words “wilful absentation” suggest want of bona fide in respect of particular transaction (Joshua v.
Alliance Bank, 22 Cal. 185). Thus, a person who refuses to receive a registered letter is, deemed to have
constructive notice of its contents.
Similarly, if a person proposes to sell his property to X who, at the same time knows that rents due in respect of
the property are paid by the tenants to a third person Y, X will be fixed with notice of the rights of Y (Mernt v.
Luck (1902) 1 Ch. 429).
In so far as gross negligence is concerned, it does not mean a mere carelessness but means carelessness
of such an aggravated nature as to indicate mental indifference to obvious risks. For example, if A buys
property from B and does not care to ask whether any amount by way of municipal tax is due on that
property and if the municipal corporation asks him to pay the arrears of tax, then B is responsible, and if he
does not pay, then the arrears of tax may be made a charge on the property.
Other Illustrations
(a) Where a purchaser was informed that the title deeds were in the possession of a bank for safe
custody and yet failed to make any enquiry in the bank. It was held that he was guilty of gross
negligence and must be deemed to have notice of the rights of the bank which has the custody of
the title needs (Imperial Bank of India v. Rai Gyand, I A 283).
(b) Where a person abstained from making further enquiries about the right of a person and did not
cause a search, to be made in the office of the Sub-Registrar to ascertain if there was any
encumbrance over the property, his omission must be held to be wilful or grossly negligent and he
would be said to have notice of the prior encumbrances (Rangappa Goundan v. Marapa Goundan,
AIR (1958) Madras 515).
The three Explanations to the definition of notice in Section 3, further mention certain circumstances wherein
statutorily presumption of knowledge arises. These circumstances relate to the fact of registration
(Explanation-I, Explanation-II) actual possession and notice to an agent (Explanation-III).
RESTRAINT ON TRANSFERS OR RULE AGAINST INALIENABILITY

Section 10 of the Act says that when property is transferred, the transferee should not be restrained
absolutely from alienating the property. One may give property to another subject to a condition, but the
condition should not be one which absolutely prevents the transferee from alienating the property. Suppose,
B gives property to A and his heirs adding a condition that if the property is alienated it should revert to B.
This condition is invalid and the transferee can ignore such condition. The transfer takes effect and is valid,
and the condition not to alienate the property is void.
Examples of absolute restraint
Suppose, A gives to B property worth only 2,000 rupees and adds a condition that B should sell property for
`50,000 and not below that amount, this condition will at once become invalid for no one will buy the property
which is only worth `2,000 for Rs. 50,000. Similarly, A gives to B property worth `50,000 and stipulates that if
B wants to sell the property he should sell it to C only for Rs. 1,000. This again will operate as an absolute
restraint. In Rosher v. Rosher, (1884) 26, Ch. D. 801, the testator gave his estate to his son and added a
condition that if his son wanted to sell the property he should first give an option to the testator’s wife who
should be able to buy for £ 3,000. The market value of the property when the testator died was £ 15,000. It
was held by the Court that the condition which compelled the son to sell the property for £ 3,000 was void. In
Trichinpoly Varthaga Sangum v. Shunmoga Sunderam, (1939) Madras 954, there was a partition between a
Hindu father and his five sons. The deed of partition provided that if any one of the sons wanted to sell his
share, he should not sell it to a stranger but to one of his brothers who should have the option to buy for a
sum not exceeding `1,000. It was held by the Court that the condition absolutely prevented the son from
selling the property to any one for good value. In this case the market value of the property of the son was far
greater than `1,000. Hence, the condition was declared invalid.
Partial restraint valid
Though absolute restraints are bad in law, partial restraints are valid. If there are conditions which restrain
the transferee not to alienate the property outside the family, it has been held by the Courts that they are
partial restraints. For example, whenever there are conditions in a family settlement whereby the members
are not allowed to sell their shares to a stranger, such conditions are valid.
But it is not permissible to restrict the alienation to a particular time. Such a restriction is not partial but an
absolute restraint and as such invalid.
When absolute restraint valid?
There are two exceptions to the rule that absolute restraints are void. Firstly, in the case of a lease, the
lessor can impose a condition that the lessee shall not sublet the property or sell his leasehold interest. Such
conditions are valid. The reason why such an exception is made in the case of a lease is that the lessor may
have confidence in the lessee but may not have the same confidence in some other person. So, if the lessor
puts a condition restraining the lessee from transferring the property to someone, the condition is valid.
The second exception is made in respect of a woman who is not a Hindu, Buddhist or Muslim. In such a
case, a condition to the effect that she shall not have power during her marriage to transfer the property is
valid.
Restraint on enjoyment
Section 11 of the Act also embodies a rule which is based on the principle that restraint on the enjoyment of
the property is invalid. The section lays down that where land is transferred by one to another, the transferor
should not impose conditions as to how and in what manner the transferee should enjoy the property.
Illustrations
(a) A sells his house to B and adds a condition that B only should reside in that house, the condition is
invalid. This is subject to the exception that, if a person transfers a plot of land keeping another plot
for himself, he can impose certain conditions which may interfere with the right of enjoyment of the
transferee.
(b) A has properties X and Y. He sells property Y to B and puts a condition that B should not construct
on property Y more than one storey so that A’s property X which he retains should have good light
and free air.
Thus, it is clear in the above illustration that the condition which is imposed by A is for the benefit of another
property which he retains. Such a condition is valid.
Section 12 also makes the transfer void if a property is transferred to any person adding a condition that if
such person becomes insolvent he ceases to hold that property. Such a condition is not recognised as valid
in law. Again, this is subject to the exception that if a landlord leases his property he can impose a condition
on the lessee that if the lessee becomes insolvent the lease should come to an end.
TRANSFER FOR BENEFIT OF UNBORN PERSON

Section 13 of the Transfer of Property Act lays down that where on a transfer of property, an interest therein
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is created for the benefit of a person not in existence at the date of transfer, subject to a prior interest created
by the same transfer, the interest created for the benefit of such person shall not take effect unless it extends
to the whole of the remaining interest of the transferor in the property. Thus if a property is given to an
unborn person, two conditions should be satisfied:
Illustration
A transfers property of which he is the owner to B in trust for A and his intended wife successively for their
lives, and after the death of the survivor, for the eldest son of the intended marriage for life, and after his
death for A’s second son. The interest so created for the benefit of the eldest son does not take effect,
because it does not extend to the whole of A’s remaining interest in the property.
CONDITIONAL TRANSFER
When an interest is created on the transfer of property but is made to depend on the fulfillment of a condition
by the transferee, the transfer is known as a conditional transfer. Such a transfer may be subject to a
condition precedent or a condition subsequent. If the interest is made to accrue on the fulfilment of a
condition, the condition is said to be condition precedent. For instance, A agrees to sell his land to B if B
marries C. This is a condition precedent. The condition precedent will be allowed to operate only if it is not hit
by the provisions of Section 25 of the Act. Section 25 in the first place, says that, the condition must not be
impossible to fulfil. For example, A lets a farm to B on condition that he shall walk a hundred miles in an
hour. The lease is void. Secondly, the condition must not be forbidden by law. Thirdly, it should not be of
such a nature that if permitted it would defeat the provisions of any law. For instance, A transfers Rs. 500 to
B on condition that he shall murder C. The transfer is void. Fourthly, it should not be fraudulent. For example,
X gives a false receipt to Y on behalf of his principal in consideration of transfer of land. The transfer would
be void. Fifthly, the condition should not be such as to cause injury to the person or property of another. And
lastly the condition should not be immoral or opposed to public policy. Thus, an agreement to give a son or
daughter in adoption for a consideration is opposed to public policy as trafficking in children is forbidden by
law.
If the condition is not hit by any of the above provisions, it is valid. Still the law does not insist on its literal
fulfilment. It is sufficient if it is substantially complied with. Thus, where A transfers, Rs. 5,000 to B on
condition that he shall marry with the consent of C, D and E. B marries with the consent of C and D only as E
has died earlier. B is deemed to have fulfilled the condition.
A transfer may also be made subject to a contingency which may or may not occur. Thus, an interest may be
created with the condition superadded that it shall cease to exist in case a specified uncertain event shall
happen, or in case a specified uncertain event shall not happen.
This is known as condition subsequent. Condition subsequent is one which destroys or divests the rights
upon the happening or non-happening of an event. For example, A transfers a farm to B for his life with a
proviso that in case B cuts down a certain wood, the transfer shall cease to have any effect. B cuts down the
wood. He loses his life interest in the farm. Similarly, if A transfers a farm to B provided that B shall not go to
England within three years after the date of transfer, the interest in the farm shall cease. B does not go to
England within the term prescribed. His interest in the farm ceases.
Now you will notice the distinction between condition precedent and condition subsequent. In condition
precedent, the condition comes before the interest; whereas in condition subsequent, the interest is created
before the condition. The one precedes the vesting of right and the other follows the vesting. In condition
precedent, the vesting of right is delayed until the happening of an event. In condition subsequent, there is
no postponement of vesting of right though it is to be destroyed or divested by reason of non-fulfilment of
condition. There are certain situations where the law says that either the transfer will take effect on the
fulfillment of a condition or will not take effect at all.
Again, if a transfer is made to defeat or delay the rights of a creditor, the transfer may be declared invalid by
the creditor. In some cases, if property is transferred during the period when parties are litigating in a Court
over a piece of property, then the transfer is not valid, or even if there is a transfer, it is subject to the rights
that are created in the Court’s decree. All these circumstances are given in the Transfer of Property Act e.g.,
doctrine of election, doctrine of fraudulent transfers and doctrine of Lis pendens.
DOCTRINE OF ELECTION
Section 35 of the Transfer of Property Act deals with what is called doctrine of election. Suppose, a property
is given to you and in the same deed of gift you are asked to transfer something belonging to you to another
person. If you want to take the property you should transfer your property to someone else, otherwise you
cannot take the property which is transferred to you by some one. Election may be defined as “the choosing
between two rights where there is a clear intention that both were not intended to be enjoyed.
The foundation of doctrine of election is that a person taking the benefit of an instrument must also bear
the burden, and he must not take under and against the same instrument. It is, therefore, a branch of a
general rule that no one may approbate and reprobate (Copper v. Copper (1874) H.L. 53). However
doctrine of election could not be applied to deprive a person of his statutory right to appear invoking
extraordinary jurisdiction of the Supreme Court under Article 136, (PR Deshpande v. MB Haribatti (1995
(2) Scale 804 SC).
Illustration
A transfers to you his paddy field and in the same deed of transfer asks you to transfer your house to C.
Now, if you want to have the paddy field you must transfer your house to C, because the transferor is
transferring to you his paddy field on the condition that you give your house to C.
Thus, either you take the paddy field and part with your house or do not take it at all. This is called the
doctrine of election. You must elect either to take under the instrument, in which case you will have to fulfil
the condition and bear the burden imposed upon you or you must elect against the instrument, in which case
neither the benefit nor the burden will come to you. The doctrine is based on the principle that “a donee shall
not be allowed to approbate and reprobate and that if he approbates, he shall do all in his power to confirm
the instrument which he approbates” (Cavendish v. Decre 31 C.D. 466).
In case, the person upon whom benefit is conferred rejects it, the property which was attempted to be
transferred to him will revert to the transferor and it is he who will compensate the disappointed person. If the
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transferor dies before the person upon whom the benefit is conferred and he rejects the transfer, then the
representatives of the transferor will have to satisfy the disappointed person out of the property which was
the subject of transfer.
Explanation of the above principle
A transfers his property worth `1,000 and by the same instrument asks B to transfer his property worth `500
to C. Here, if B does not accept, he will not take A’s property and the property will revert to A. If A is alive, it
is for him to give some property to C. But if A dies before B has made his election then the heirs of A have to
compensate C from A’s property to the extent of `500. (You will note that B’s property worth `500 was
intended by A to be transferred to C).
The question of Election arises only when a transfer is made by the same document. If the transferor makes
a gift of property by one deed and by another asks the donee to part with his own property then there is no
question of election.
Illustration
A transfers his land to B by a document. A by another document transfers B’s property to C. In this case B
can retain the property given to him and refuse to transfer his property to C as the two transfers do not form
part of the same document.
Further, the doctrine of election is applicable if the benefit is given directly. A person taking no benefit directly
under a transaction but deriving a benefit under it indirectly need not elect.
Illustration
A transfers his property to B’s son and by the same instrument transfer B’s property to C. In this case B need
not to elect and can keep his property. His son can have his gift.
There is, however, an exception to the doctrine of election. That is, if the transferor gives two benefits to a
person and one particular benefit is in lieu of an item of property belonging to that person which the
transferor has asked to transfer to a third-party then if the person elects to retain his property, he can retain
the other benefit.
Illustration
Under A’s marriage settlement, his wife is entitled, if she survives him to the enjoyment of the estate of
Sultanpur during her life. A by his will bequeaths to his wife an annuity of `200 p.m. during her life, in lieu of
her interest in the estate of Sultanpur, which estates he bequeaths to his son. A also gives his wife a legacy
of `1,000. After the death of A, his widow elects to take what she is entitled to take under the marriage
settlement (i.e., the enjoyment of estate of Sultanpur). In this case, the wife has to forfeit the claim of `200
which her husband has given to her. But she can claim other benefit i.e., `1,000.
Election may be express or implied by conduct.
Illustration
A transfers to B an estate to which C is entitled, and as part of the same transaction gives C a coal mine. C
takes possession of the mine and exhausts it. He has thereby confirmed the transfer.
In case of disability, the condition shall be postponed until the disability ceases, or until the election is made
by some competent authority.
TRANSFER BY OSTENSIBLE OWNER OR DOCTRINE OF HOLDING OUT
Where, with the consent, express or implied, of the persons interested in immoveable property, a person is
the ostensible owner of such property and transfers the same for consideration, the transfer shall not be
voidable on the ground that the transferor was not authorised to make it, provided that the transferee, after
taking reasonable care to ascertain that the transferor had power to make the transfer, has acted in good
faith. (Section 41)
The following conditions are necessary for the application of Section 41:
The transferor is the ostensible owner
He is so by the consent express or implied, of

the real owner
The transfer is for consideration
The transferee has acted in good faith taking

reasonable care to ascertain that th e transferor
had power to transfer
If any one of these elements is absent, the transferee is not entitled to the protection of this section.
This Section is a statutory application of the law of estoppel. The section makes an exception to the rule that
a person cannot confer a better title than he has. An ostensible owner is one who has all the indicia of
ownership without being the real owner.
Illustrations
(a) A made a gift of property to B but continued in possession of the gifted property. He purported to
exercise a power of revocation and then transferred the property to the defendant. The gift,
however, was not revocable as it was an unconditional gift. B seeks to recover possession from the
defendant. The defendant invoked protection under Section 41.
In the given example, the donor is not an ‘ostensible owner’ holding the property with the consent of
the real owner. The defendant cannot, therefore, invoke the protection of Section 41.
(b) The manager of a joint Hindu family consisting of some minor members alienated the ancestral
house to P without any necessity and the alienee transferred it to the defendants. The minors
challenged the alienation. The defendants sought protection under Section 41.
Here Section 41 has no application for “P was not the ostensible owner of the ancestral family house with the
consent, express or, implied, of the persons interested in the said ancestral house in as much as the plaintiff, who
had an interest in the said house, did not and could not by reason of the disability of infancy give their consent”.
DOCTRINE OF FEEDING THE GRANT BY ESTOPPEL
Where, a person fraudulently or erroneously represents that he is authorised to transfer certain immoveable
property and professes to transfer such property for consideration, such transfer shall, at the option of the
transferee, operate on any interest which the transferor may acquire in such property at any time during
which the contract of transfer subsists. (Section 43)
Nothing in this Section shall impair the right of transferees in good faith for consideration without notice of the
existence of the said option.
Essentials: In order to invoke this section, the transferee must prove that:
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Illustration
A, a Hindu, who has separated from his father B, sells to C three fields, X, Y and Z, representing that A is
authorised to transfer the same. Of these fields, Z does not belong to A, it having been retained by B on the
partition, but on B’s dying, A as heir obtains Z. C, not having rescinded the contract of sale may require A to
deliver Z to him. Thus, where a grantor has purported to grant an interest in land which he did not at that time
possess, but subsequently acquires, the benefit of his subsequent acquisition goes automatically to the
earlier grantee or as it usually expressed, feeds the estoppel.
DOCTRINE OF FRAUDULENT TRANSFER
Where a person transfers his property so that his creditors shall not have anything out of the property, the
transfer is called a fraudulent transfer. A debtor in order to defeat or delay the rights of a creditor, may
transfer his property to some person, who may be his relative or a friend. The law does not allow this.
Section 53 embodies the principle. It states:
“Every transfer of immoveable property made with intent to defeat or delay the creditors of the transferor
shall be voidable at the option of any creditor so defeated or delayed.”
Thus, where an owner of the property contracts a debt and then transfers his property to someone so that
the creditor cannot proceed against the property to realise his debt, such a transfer is voidable at the option
of the creditor. The transfer is valid so long as the creditor does not challenge it in a Court of law and gets a
declaration that the transfer is invalid. A suit instituted by a creditor to avoid a transfer on the ground that it
has been made with intent to defeat or delay the creditors of the transfer or shall be instituted on behalf of, or
for the benefit of all the creditors. Once the creditor sues the debtor and says that the debtor has the
intention to deceive him, the transfer can be declared invalid by the Court. The creditor has to satisfy the
Court that there was an intention on the part of the debtor to defeat his rights. If he does not prove this, then
the creditor will fail and the transfer is valid. The question arises as to when we can say that the transferor
has the necessary intention to defeat the claim of the creditor. This can be gathered from the surrounding
circumstances. Suppose a man takes a loan from the creditor. He does not pay the loan. Then the creditor
sues him in a Court to get back his debt. On seeing this the debtor transfers his property to a friend of his or
some other person who simply holds the property on behalf of the transferor. Again, the debtor may make a
gift of his property to his wife or sell it to a friend who will afterwards retransfer the same to the transferor.
Under these circumstances, we can easily say that the debtor’s intention was to prevent the creditor from
taking the property by a suit in the Court and to realise his debt.
But suppose the debtor has several creditors and he transfers his property to one of his creditors in
satisfaction of his whole debt to him. Is this also a fraudulent transfer? The answer is No. For a mere
preference of one creditor over the others is not fraudulent under the Section, even if the whole property is
so transferred and nothing is left for the other creditors. But the other creditors may file a petition in the Court
within three months of the transfer praying that the debtor be declared insolvent. If the debtor is adjudicated
an insolvent, their interest will be protected and the transfer will be declared as fraudulent preference. The
transfer will be set aside and the property will be distributed among all the creditors.
However, under Section 53(2) the rights of a transferee in good-faith and for consideration are protected. It
says nothing shall affect or impair the rights of a transferee in good-faith and for consideration.
DOCTRINE OF PART-PERFORMANCE
Lastly, we may also discuss briefly the doctrine of part-performance which is embodied in Section 53A of the
Transfer of Property Act.
A contract for the sale of land has been entered into between A and B. The transferee has paid the price
entering into possession and is willing to carry out his contractual obligations. As registration has not been
effected A, the transferor, seeks to evict B from the land. Can he do so? No, B will not be allowed to suffer
simply because the formality of registration has not been through. The legislature grants some relief to such
a transferee under Section 53A, which embodies the doctrine of part-performance.
The rule did not exist on the statute book before 1929. Section 53A, was inserted by an
amendment to the Act in 1929. Followings are the essential conditions for the operation of the
doctrine of part-performance according to Section 53A.
1. There must be a contract to transfer immoveable property.

2. It must be for consideration.
3. The contract should be in writing and signed by the transferor himself or on his behalf.
4. The terms necessary to constitute the transfer must be ascertainable with reasonable certainty from
the contract itself.
5. The transferee should have taken the possession of the property in part performance of the
contract. In case he is already in possession, he must have continued in possession in part
performance of the contract and must have done something in furtherance of the contract.
6. The transferee must have fulfilled or be ready to fulfill his part of the obligation under the contract.
If all the abovementioned conditions are satisfied, then, the transferor and the persons claiming under him
are debarred form exercising any right in relation to the property other than the rights expressly provided by
the terms of the contract notwithstanding the fact that the instrument of transfer has not been registered or
complete in the manner prescribed therefor by the law for time being in force. It should be noted that Section
53A does not confer any positive right on the transferee. It only prohibits exercise of the right of ownership in
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relation to the property in order to evict the transferee from the property because legal requirements have not
been satisfied.
However, the doctrine of part-performance will not affect the right of a subsequent transferee for
consideration without notice of the earlier contract and of its being partly performed.
The right conferred by this section is a right only available to a defendant to

protect his possession. This section does not create a title on the defendant. It
merely operates as a bar to the plaintiff asserting his title. It is limited to cases
where the transferee had taken possession, and against whom the transferor is
debarred from enforcing any right other than that expressly provided by the
contract. The section imposes a bar on the transferor. When the conditions
mentioned in the sections are fulfilled, it debars him from enforcing against the transferee any right
or interest expressly provided by the contract. So far as the tranferee is concerned, the section
confers a right on him to the extent it imposes a bar on the transferor (Delhi Motor Co. v. Basurkas,
(1968) SCR 720).
The English rules as to what acts constitute part-performance have been generally followed in India. These
rules are as follows:
(1) An act of part-performance must be an act done in performance of the contract. An act introductory
to and previous to the agreement, cannot therefore, be act of part-performance.
(2) The acts relied upon must be unequivocally and referable to no other contract than that alleged.
(3) An act of part-performance must be the act of the party seeking to avail himself of the equity.
PROPERTIES WHICH CANNOT BE TRANSFERRED

Section 6 of this Act contains some exceptions to the general rule that property of any kind may be
transferred. Consequently, the following properties cannot be transferred, namely:
(a) the chance of an heir apparent succeeding to an estate, the chance of a relation obtaining a legacy
on the death of a kinsman or any other mere possibility of a like nature cannot be transferred.
(b) A mere right of re-entry for breach of a condition subsequent cannot be transferred to any one
except the owner of the property affected thereby.
(c) An easement cannot be transfered apart from the dominant heritage.
(d) An interest is property restricted in its enjoyment to the owner personally cannot be transferred by
him.
(e) A right to future maintenance in whatsoever manner arising, secured or determined, cannot be
transferred.
(f) A mere right to sue cannot be transferred.
(g) A public office cannot be transferred nor can the salary of a public officer, whether before or after it
has become payable.
(h) Stipends allowed to military, naval, air force and civil pensioners of the Government and political
pensions cannot be transferred.
(a) Chance of an heir apparent or ‘Spes Successionis’
In this clause possibilities referred are bare or naked possibilities and not coupled with an interest such as
contingent remainders or future interest-also known as right of spes successionis which cannot be the
subject to transfer.
When a person is the owner of property, the property is in existence and it is in his possession. This he may
transfer. But if property is neither in existence nor is the person the owner of the property then it cannot be
transferred. For example, if a person is intending to buy certain property but, he has no interest in that
property, he cannot transfer it unless the property comes to his hands, i.e., unless he becomes the owner of
the property after buying it. But if a person obtains certain consideration and agrees to sell the property of
which he is not the owner, then on becoming the actual owner of the property he has to transfer the property
as there was a contract between him and the person who has agreed to buy the property. This transfer
operates on a contract to be performed when the property comes into the hands of the person who has
agreed to transfer. But where a person wants to make a gift of the property which is to come in his hands in
future, he cannot transfer it because a gift is voluntary transfer without any consideration. Thus a gift of future
property is void. Similarly, the chance of a heir apparent succeeding to the estate of a deceased person
cannot be transferred. Suppose A is the owner of the property and B is his son. B is the heir of A. During the
life time of his father A, B has only a hope expectancy that he will inherit the property of his father. This type
of property which B hopes to get after the death of the father cannot be transferred, during the life time of A.
Illustrations:
(a) Suppose A, a Hindu who has separate property, dies leaving a widow W and a brother L, L’s succession
to the property is dependent upon two factors, viz., (i) his surviving the widow, W, and (ii) W leaving the
property intact. L has only a bare chance of succession to the property left by A. This is spes successionis,
and therefore, cannot be transferred (Amrit Narayana v. Gyan Singh, (1918) 45 Cal. 690).
(b) A transfers to B for valuable consideration his reversionary interest in a property. When A succeeds to the
property, B sues him for possession of the same. B will not succeed as the reversionary interest is a spes
successionis and non-transferable. So the transfer is void and B’s suit for possession fails.
(b) Right of re-entry
The right which the lessor has against the lessee for breach of an express condition which provides that on
its breach the lessor may re-enter is called the right of re-entry. For instance, if A leases his property to B
and adds a condition that if B sub-lets the leased land, A will have the right to re-enter, i.e., the lease will
terminate if the lessee breaks the condition by subletting to a third person. Thus, right of re-entry being a
right for the personal benefit of any party cannot exist for the benefit of a person who has no personal
interest in the land. For example, A grants his land by way of lease to B, a limited liability company on
condition that the land should revert to A from B if the company goes into liquidation. This is a mere right in
favour of A and this right A cannot transfer to anyone as this is a personal right which can be exercised by A
only. But if A transfers the whole of his interest in the land including the right of re-entry to C, there the right
to re-entry is a legal incident of property and can be validly transferred along with the property.
(c) Transfer of easement
An easement is a right enjoyed by the owner of land over the land of another: such as, right of way, right of
light, right of support, right to a flow of air or water. Section 4 of the Easements Act defines an easement as a
right which the owner or occupier of certain land possesses as such for the beneficial enjoyment of the land,
to do and continue to do something or to prevent and to continue to prevent something being done in or upon
or in respect of certain other and not his own land. An easement includes a right to enjoy a profit out of the
land of another. An easement exists for the accommodation and better enjoyment of the land to which it is
annexed. The land owned by the possessor of the land is known as dominant tenement and the land over
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which the right is enjoyed is known as the servient tenement. As an easement confers no proprietory right on
its owner, it cannot be transferred apart from the land itself. For example, the right of certain villagers to bath
in another’s tank cannot be transferred. Similarly if A, the owner of a house X, has a right of way over an
adjoining plot of land belonging to B, he cannot transfer this right of way to C. But if he transfers the house
itself to C, the easement is also transferred to C.
It may be noted, however, that the prohibition is only with regard to transfer of an existing easement. The law
does not prohibit the grant or creation of new easement (Bhagwan Sahai v. Narsing. (1909) 31 ALL. 612;
Satyanarayana v. Lakshamaya 5 H.L.J. 56 or the extension of an easement by release in favour of the owner
of servient tenement).
(d) Restricted interest or personal interest

An interest restricted in enjoyment to the owner personally is by its very nature not transferable unless the
restriction is void under Section 10. Examples of such restricted interest or property are the following:
(i) The right of pre-emption given under the Mohammedan Law.
(ii) The office of a Shebait of a Temple or mohunt of a mutt or mutuwalli of a wakf.
(iii) Emoluments attached to a priestly office.
(iv) Service tenures.
(e) Right to future maintenance

This again is a personal right in the property which the law says that it cannot be transferred. The right of a
Hindu widow to maintenance is a personal right which cannot be transferred. Under the law the arrears of
past maintenance can be transferred, but not the right to future maintenance.
(f) Mere right to sue and actionable claim
A ‘mere right to sue’ apart from the interest from which such right accrues cannot be assigned. The ‘right to
sue’ is a personal right annexed to the ownership of property and cannot be severed, from it. It is based on
the principle of public policy to prevent multiplicity of suits; the object is mainly to prevent the abuse resulting
from trafficking in litigation.
The use of the word "mere" is significant. The question in every case is whether the subject-matter of transfer
is property with an incidental remedy for its recovery or is a ‘mere’ right to ‘sue’. Where property is
transferred along with a right to recover damages or compensation in respect of the property, the assignment
is not hit by clause (4) of Section 6 of the T.P. Act.
A mere right to sue cannot be transferred. The right refers to a right to damages arising both out of contracts
as well as torts. For example, A commits an assault on B, B can file a suit to obtain damages; but B cannot
assign the right to C and allow him to obtain damages. In contract also, the rule is the same. If A breaks a
contract which he has entered into with B, B can bring action for damages, but B cannot transfer this right to
C to recover damages.
There is clear distinction between an actionable claim and a mere right to sue. An actionable claim is
property and the assignee has a right to sue to enforce the claim.
As already noted a right to recover an unascertained amount of damages resulting from breach of contract or
tort is a mere right to sue. If, however, one has a right to recover an ascertained and definite debt, he may
transfer it because it is an actionable claim. Thus, suppose A is indebted to B for Rs. 2,000 and B transfers
the right to recover the debt of C, the transfer is void. A beneficial interest in specific moveable property is
also an actionable claim. It has been held that the right to claim the benefit of an executory contract
constitutes a beneficial interst in moveable property (Jaffer Meher Ali v. Budge Budge Jute Mills, (1900) 33
Cal. 702).
After breach of a contract for the sale of goods nothing is left but a right to sue for damages which cannot be
transferred. But before breach the benefit of an executing contract for the sale of goods may generally be
transferred and the buyer has the right to sue for the goods.
(g) Transfer of public office and salaries, stipends, etc.
It is against public policy for a public officer to transfer the salary of his office, for the salary is given for the
purpose of upholding its dignity and the proper performance of its duties. Civil and military pensions are not
transferable. A pension retains its character as long as it is unpaid and is in the hands of Government, but as
soon as it is paid to the pensioner or his legal representatives, it can be transferred. Since these allowances,
pensions and stipends are given on personal basis, the law does not allow these types of property to be
transferred.
RULE AGAINST PERPETUITY
Section 14 of the Act provides that no transfer of property can operate to create an interest which is to take
effect after the life time of one or more persons living at the date of such transfer, and the minority of some
person who shall be in existence at the expiration for that period, and to whom, if he attains full age, the
interest created is to belong.
The rule against perpetuity is based on the general principle that the liberty of alienation shall not be exercised
to its own destruction and that all contrivances shall be void which tend to create a perpetuity or place property
forever out of the reach of the exercise of the power of alienation. Perpetuity has been described as
“exemptions from intermission or ceasing”. This has been said to be “odious in law, destructive to the
commonwealth, and an impediment to commence, but preventing the wholesome circulation of property”.
A perpetuity in the primary sense of the word, “is a disposition which makes property inalienable for an
indefinite period” (Jarman on Wills, 8th ed., vol. 1, P. 284). Section 14 of the Act adopted with certain
modifications the English rule against perpetuities which is enunciated by Jarman as “Subject to the
exceptions to be presently mentioned, no contingent or executory interest in property can be validity created,
unless it must necessarily vest within the maximum period of one or more lives in being and twenty-one
years afterwards”. Section 14 of the Act fixes the perpetuity period as: Life (or Lives) living at the time of
transfer and actual minority of the then unborn ultimate transferee.
Any number of successive estates can be created between the transferees who are living persons e.g. A
transfer may be made to A for life and then to B for life and then to C for life and so on, provided that A, B
and C are all living persons at the date of the transfer. But if the ultimate beneficiary is some one who is not
in existence at the date of the transfer, the whole residue of the estate should be transferred to him. If he is
born before the termination of the last prior estate, he takes a vested interest at birth and takes possession
on the termination of the last prior estate but if he is not born till the termination of the last prior estate, the
transfer to him fails.
Further, the rule is not that vested interest is created at the birth of the beneficiary but that vested interest
cannot be delayed in any case beyond his minority. Therefore, the rule against perpetuity is that the minority
of the ultimate beneficiary is the latest period at which an estate can be made to vest.
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In India minority terminates at the end of 18 years.
The rule against perpetuities applies to both moveable and immoveable property.
Thus, the rule against perpetuity contains two propositions, i.e.:
However, Section 18 provides an exception to the above rule of perpetuity, where the transfer of property is
for the benefit of the public in the advancement of religion, knowledge, commerce, health, safety, or any
other object beneficial to mankind.
Effect of a transfer on failure of prior interest

Further, where by reason of any rules or the rules contained in Sections 13 and 14, interest created for the
benefit of a person or class of persons fails in regard to such person or the whole of such class, any interest
created in the same transaction and intended to take effect or upon failure of such prior intersts also fail
(Section 16). For example, property is transferred to A for life then to his unborn son B for life and then to C,
who is living at the date of transfer, absolutely. Here B is given only a life interest. So the transfer to B is
invalid under Section 13. The subsequent transfer to C absolutely is also invalid, because according to
Section 16, if a prior transfer fails, the subsequent transfer will also fail.
No transfer of property can operate to create an interest which is to take effect after the life time of one or
more persons living at date on such transfer, and the minority of some person who shall be in existence on
the expiration of that period, to whom, if he attains full age, the interest created is to belong.
The policy of the law has been to prevent property being tied up for ever. The vesting cannot be postponed
beyond the life time of any person living at the date of transfer. For example, if an estate is given to a living
person A for life and then to the unborn son of A, the son of A must be in existence on or before the date of
the expiry of the life estate in favour of A. The vesting of absolute interest in favour of an unborn person may
be postponed until he attains majority. For example, an estate may be transferred to A, living person, and
after his death to his unborn son when he attains the age of 18. Such transfer would not be violative of the
rule against perpetuity.
ACCUMULATION OF INCOME
Section 17 does not allow accumulation of income from the land for an unlimited period without the income-
being enjoyed by owner of the property. The law allows accumulation of income for a certain period only. The
period for which such accumulation is valid is :
(a) the life of the transferor, or
(b) eighteen years from the date of transfer.
Any direction to accumulate the income beyond the period mentioned above is void except where it is for:
(i) the payment of the debts of the transferor or any other person taking any interest under the
transferor,
(ii) portions for children or any other person taking any interest in the property under the transfer, and
(iii) for the preservation and maintenance of the property transferred.
DOCTRINE OF LIS PENDENS

Lis means dispute, Lis pendens means a pending suit, action, petition or the like. Section 52 of the T.P. Act
incorporates the doctrine of Lis pendens. It states that during the pendency of a suit in a Court of Law,
property which is subject to a litigation cannot be transferred. When we say that property cannot be
transferred what we mean in this context is that property may be transferred but this transfer is subject to the
rights that are created by a Court’s decree. For example, A and B are litigating in a Court of law over
property X and during the pendency of the suit A transfers the property X to C. The suit ends in B’s favour.
Here C who obtained the property during the time of litigation cannot claim the property. He is bound by the
decree of the Court wherein B has been given the property.
Section 52 lays down the Indian rule of Lis pendens being the legislative expression of the Maxim- “ut lite
pendente nihil innovetur” ‘During litigation nothing new should be introduced’.
Essentials
In order to constitute a Lis pendens, the following elements must be present:
The rule is based on the doctrine of expediency i.e., the necessity for final adjudication. A plea of lis pendens
will be allowed to be raised even though the point is not taken in the pleadings or raised as an issue.
When an application to sue in forma pauperis is admitted, the suit is pending from the time of presentation of
the application to the Court but not if it is rejected.
A suit in foreign Court cannot operate as lis pendens. The doctrine of lis pendens does not apply to
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moveables. It is the essence of the rule that a right to immoveable property is directly and specifically in
question in the suit. The doctrine is not applicable in favour of a third-party.
Effect
If the parties to the litigation, are completely prevented from transferring the property in litigation, it would
cause unnecessary delay and hardship, as they would have to wait till the final disposal of the case. So,
Section 53 creates a limitation over the transfer by making it subject to the result of the litigation. The effect
of this doctrine is not to invalidate or avoid the transfer, or to prevent the vesting of title in the transfer, but to
make it subject to the decision of the case, and the rule would operate even if the transferee pendente lite
had no notice of the pending suit or proceeding at the time of the transfer.
PROVISIONS RELATING TO SPECIFIC TRANSFERS

The Act expressly provides for special types of transfers such as sale, exchange, gift, mortgage and lease.
These are as follows:
In a sale, exchange and gift, there is a transfer of the ownership of property but mortgage is a transfer of an
interest in specific immoveable property and lease is a transfer of the right to enjoy immoveable property.
1. Sale
Under Section 54 of the T.P. Act, "sale" has been defined as a transfer of ownership in exchange
for a price paid or promised or part paid and part-promised.
Essentials
(a) The seller must be a person competent to transfer. The buyer must be any person who is not
disqualified to be the transferee under Section 6(h)(3).
(b) The subject matter is transferable property.
(c) There is a transfer of ownership. This feature distinguishes a sale from mortgage, lease etc., where
there is no such transfer of ownership.
(d) It must be an exchange for a price paid or promised or part paid and part promised.
(e) There must be present a money consideration. If the consideration is not money but some other
valuable consideration it may be an exchange or barter but not a sale.
Mode of transfer by sale

Sale of an immoveable property can be effected,
(a) Where such property is tangible (i) by a registered instrument if it is of the value of Rs. 100 and
upwards, and (ii) by a registered instrument or by delivery of property when it is less than Rs. 100 in
value, and
(b) Where the property is tangible or a reversion, only by a registered instrument.
Contract for sale

A contract for the sale of immoveable property differs from a contract for the sale of goods in that the Court
will grant specific performance of it unless special reasons to the contrary are shown.
The rights and liabilities of a seller and buyer are dealt with in Section 55 of the Transfer of Property Act.
2. Exchange
Sections 118 to 121 of the Transfer of Property Act, 1882 deal with "Exchanges".
When two persons mutually transfer the ownership of one thing for the ownership of another,
neither thing or both things being money only, the transaction is called an "exchange".
Essentials
(i) The person making the exchange must be competent to contract.
(ii) There must be mutual consent.
(iii) There is a mutual transfer of ownership though things and interests may not be identical.
(iv) Neither party must have paid money only.
This Section applies to both moveable and immoveable property.
Mode of exchange
A transfer of property in completion of an exchange can be made only in the matter provided for the transfer
of such property by sale.
3. Gift
The provisions relating to "Gifts" have been stipulated under Sections 122 to 128 of the Act.
Section 122 of the Transfer of Property Act defines "gift" as follows:

“Gift" is the transfer of certain existing moveable or immoveable property made voluntarily and
without consideration by one person called the donor, to another called the donee and
accepted by or on behalf of the donee.
Such acceptance must be made during the life time of the donor and while he is still capable
of giving. If the donee dies before acceptance, the gift is void.
Essentials
1. There must be a transfer of ownership.
2. The subject matter of gift must be a certain existing moveable or immoveable property.
3. The transfer must be made voluntarily.
4. It must be done without consideration.
5. There must be acceptance by or on behalf of the donee, and such acceptance must be made during
the lifetime of the donor and while he is capable of giving.
There are two parties to the gift: donor and donee. The donor must be a person competent to transfer;
whereas the donee may be any person. The gift can be made to any one, to an incompetent person or even
to a juridicial person. The essence of a gift is that it is a gratuitous transfer.
According to Section 123, a gift of immoveable property must be made by a registered instrument signed by
or on behalf of the donor and attested by at least two witnesses. A gift of moveable property may be made by
a registred instrument or by delivery of property. Where the donee is already in possession of the moveable
property, as no future delivery is possible, the donor may make a declaration of the gift in his favour. For
example, where a piece of furniture or a television set belonging to the donor is lying with a friend of his, the
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donor may simply declare that he makes a gift of the furniture or the television set and the gift is complete.
The declaration must be clear and the donee must accept the gift.
A gift of immoveable property, as said above, must be effected by registration. Where a gift in favour of
someone is registered but it is not accepted by the donee, the gift is incomplete. Suppose, a document is
executed by the donor who makes a gift of immoveable property and the deeds are delivered to donee, and
the donee accepts the gifts but the document is not registered. Will the gift be valid? It has been held by the
Courts that the gift is valid. While registration is a necessary formality for the enforcement of a gift of
immoveable property, it does not suspend the gift until registration actually takes place. The donee in such a
case can ask the donor to complete the gift by registration. Thus, the most essential thing for the validity of a
gift is its acceptance. If the gift is accepted but not registred it is a valid gift. The Privy Council in Kalyan
Sundram v. Kumarappa, A.I.R. 1925 P.C. 42, decided that after acceptance of the deed of gift and before
registration, the donor cannot revoke the gift. The gift which is accepted by the donee, will take effect from
the date of the execution of the document by the donor, even though it is registered at a later date.
If the deed of gift is executed but never communicated to the intended donee and remains in the possession
of the donor undelivered, it cannot be compulsory registered at the instance of the donee. The reason is that
the donee did not accept the gift, the donor can at any time before such acceptance revoke the gift. But once
a gift is accepted by the donee, the donor cannot revoke it. A gift may, however, be revoked if it is brought
about by a fraud or misrepresentation or undue influence.
The other essential characteristic of a gift is that it cannot be revoked at the will and pleasure of the grantor.
A revocable gift is one which may be revoked by the donor at any time. Its revocation would depend upon
the mere will or pleasure of the donor. Such a gift is void. But on the other hand, if the condition is one which
does not depend on the will or pleasure of the donor, the gift can be revoked on the happening of such
condition.
Illustrations
(a) A gives a field to B, reserving to himself, with B’s assent, the rights to take back the field in case B
and his descendents die before A, B dies without descendents during A’s lifetime. A may take back
the field.
(b) A gives a lakh of rupees to B, reserving to himself with B’s assent the right to take back at leisure
Rs. 10,000 out of one lakh. The gift holds goods as to Rs. 90,000 but is void as to Rs. 10,000 which
continues to belong to A.
A gift which comes into existence on the fulfilment of a condition, that is to say, a gift which is subject to a
condition precedent is also valid. A condition precedent, as already explained in this study dealing with
vested interest and contingent interest, is one which must be fulfilled before the transfer takes effect. But the
condition attached to the gift should not be illegal or immoral. For instance, a gift to A on condition that he
murders B is not valid.
A gift comprising both of existing property and future property is void as to the latter. For example, A makes a
gift of his house and also makes a gift of the additions that he is likely to make in future. Here the gift of the
house is valid but the gift of the additions that are yet to be made is invalid.
Onerous gift: Lastly reference may also be made to what is known as an onerous gift. It may be that several
things are transferred as a gift by single transaction. Whereas some of them are really beneficial the others
convey burdensome obligations. The result is that the benefit which it confers is more than counter balanced
by the burden it places. For instance, A makes a gift of shares in the companies X and Y. X is prosperous
but heavy calls are expected in respect of shares in Y company. The gift is onerous.The rule as laid down in
Section 127 is that the donee takes nothing by the gift unless he accepts it fully. Where the gift is in the form
of two or more independent transfers to the same person of several things, the donee is at liberty to accept
one of them and refuse the other.
The rules pertaining to gifts in the Transfer of Property Act do not apply to the gifts by Mohammedans. If a
gift is made by a Mohammedan, its validity has to be judged according to Muslim law and not according to
the Transfer of Property Act.
4. Leases
(i) Meaning and nature of lease: According to Section 105, a "lease" of immoveable
property is a transfer of a right to enjoy property. Since it is a transfer to enjoy and
use the property, possession is always given to the transferee. The lease of
immoveable property must be made for a certain period. For example, you may give
a lease of property for a definite number of years, or for life, or even permanently.
Essentials
The essentials of a lease are:
(1) It is a transfer of a right to enjoy immoveable property;
(2) Such transfer is for a certain time or perpetuity;
(3) It is made for consideration which is either premium or rent or both;
(4) The transfer must be accepted by the transferee.
The transferor is called the lessor, the transferee is called the lessee, the price is called premium and the
money, share, service or any other thing of value to be so rendered is called the rent.
The parties to the lease (i.e. lessor and lessee), must be competent to make and to take the lease
respectively.
(ii) Lease and licence: A lease should be distinguished from a licence. A licence is a right to do or continue
to do in or upon the immoveable property of the grantor, something which would, in the absence of such a
right, be unlawful.
A licence does not transfer any interest in the property and the licencee has no right to possession. A licence
can be revoked by the grantor at any time, whereas a lease cannot be revoked. If, I sell the fruits of my
garden to you, you are given permission or licence to enter my garden and take away the fruits. A lease
involves a transfer of interest followed by possession of the property for a specified period. The real test is
the intention of the parties.
If the document creates an interest in the property, it is a lease but if it only permits another to make use of
the property of which the legal possession continues with the owner, it is a licence because it does not create
any interest in that property (Associated Hotel of India v. R.N. Kapoor, A.I.R. (1956) S.C. 1962).
The question is not of words but of substance and the label which the parties choose to put upon the
transaction though relevant is not decisive.
(iii) Formalities: According to Section 107, a lease from year to year or for any term exceeding one year can
be made only by a registered document. If a lease is for a term below one year, it can be made by an oral
agreement. If a lease is created by oral agreement, it must be accompanied by delivery of possession. If the
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lease is for a year or more, it must be effected by a registered document. If after the registration, the lessor
does not give possession, the lessee can sue for possession.
(iv) Types of tenancies: Following are the various types of tenancies:

(a) Tenancy from year to year: A tenancy from year to year may be made by a grant of land from year
to year. If the tenancy is for a year to start with but after the expiration of one year the lessee
continues to be in possession and pays the rent to the landlord, the tenancy is regarded as a year-
to-year tenancy. If, in case of a tenancy for a period more than a year the landlord wants to
terminate or end the lease, he has to give a six-month’s notice to the lessee to quit. In case of a
tenancy from month to month, a fifteen days notice to quit is necessary. The monthly tenancy may
be created either by contract or may be presumed from the nature of the tenancy to be one, from
month to month.
(b) Tenancy-at-will: Tenancy-at-will is a tenancy recognised by law. This comes into existence where a
tenant holds over with the consent is let into occupation. We have stated above that if the tenant
continues to be in possession after the expiration of tenancy and pays the rent to the landlord, the
tenancy may be one from year to year or from month to month. During a period when the tenant is
in possession after expiry of the period, if the tenant stays with the consent of the landlord till such
time as further period is fixed or a fresh contract is made, the tenant is called a tenant-at-will. The
landlord will decide for what further period shall the tenancy be given. ‘A tenancy-at-will is implied
when a person is in possession by the consent of the owner and is not held in view of any tenancy
for a certain time. The tenancy-at-will does not mean that the landlord has to give a proper notice to
quit. The tenant-at-will cannot sublet during that period because no valid contract for further
extension in his favour has been made. The death of the landlord or tenant determines the tenancy,
i.e., the tenancy comes to an end.
(c) A tenancy by sufferance: This is a tenancy which is created by fiction of law. If a tenant continues
to be in possession after the determination of the period of the lease without the consent of the
landlord, he becomes a tenant by sufferance. A tenant-at-will is in possession with the consent of
the landlord, whereas a tenant by sufferance is in possession without his permission after the term
of the lease comes to an end. This type of tenant is not regarded as a trespasser because the
tenant had in his favour a valid lease to start with. No notice is necessary to such a tenant for
eviction. This tenant is not responsible for rent. He is liable to pay compensation for use and
occupation of the land.
(v) Requirements of a valid notice: In order that a notice to quit is valid it must be a proper notice. The notice
must convey the intention to terminate the tenancy as a whole and must specify the date on which the
tenancy would expire. As mentioned earlier, if the lease is a lease from month to month, 15 days, notice is
required. If it is from year to year 6 months’ notice is required. A lease of the moveable property for
agricultural or manufacturing purposes shall be deemed to be a lease from year to year. The notice should
expire with the end of the period of the tenancy. If it is a lease from month to month and the notice is given
by the landlord, the tenant should be asked to quit at the end of the month of the tenancy. The landlord
cannot ask his tenant to quit at any time before the expiry of a month or a year of the tenancy.
(vi) Determination of leases: Section 111 of the Transfer of Property Act spells out the various
contingencies in which a lease comes to an end. A lease is determined, i.e., comes to an end in the following
ways:
(1) By efflux of time or lapse of time: A lease for a definite period, such as a lease for a year, or for a
term of years, expires on the last day of the term and the lessor or any person entitled to get back
the property may enter without notice or any other formality. Since a lease is a transfer of interest in
the property, if during the period for which a lease is valid, the lessee dies, the heirs of the lessee
can continue the lease till the expiry of the period.
(2) By the happening of a special event: When a lease is granted subject to the happening of an event,
it comes to an end when the event takes place. Thus, if B grants lease to A for life, it comes to an
end on the death of A. Similarly, if a lease is granted for the duration of the war, it comes to an end
when the war ends. Where the interest of the lessor is limited, the lease comes, to an end when he
loses the interest or where he does not have any power to grant a lease. For example, a tenant for
life can grant a lease only to last during his life time. It comes to an end on his death.
(3) Merger: A lease comes to an end when the lessee buys the property of the lessor or when the
lessee takes the lessor’s interest by succession. Here the right of the lessee merges in that of the
lessor. Naturally, the lessee becomes the owner of the property after he acquires it. So there will be
no more a lease.
(4) By surrender: A lease may come to an end by surrender. Surrender may be either express or
implied. Express surrender arises when the lessee yields up his interst under a lease by mutual
consent. Implied surrender occurs, as follows :- if during the subsistence of the lease, a new lease
is granted to the tenant to commence at once in substitution for the existing lease, it operates as a
surrender of the old lease. For example, a lessee, accepts to take effect during the continuance of
the existing lease. This is an implied surrender of the former lease and such lease comes to an end.
Similarly, when the landlord reserves possession without any objection on the tenant’s part, there is
a surrender by implication. Mere non-payment of rent does not amount to surrender.
(5) By forfeiture: A lease also comes to an end by forfeiture. A forfeiture occurs when there is breach of
a condition in a lease contract by the lessee. Under the Transfer of Property Act, forfeiture occurs in
the following circumstances—the first case in which forfeiture occurs is the case when the lessee
breaks an express condition which may be of various types such as, if the lessee does not pay the
rent regularly, or if the lessee becomes insolvent, or where the lessee sublets the property to
another person. In all such cases there will be a forfeiture. But the condition that the lessee breaks
must be an express condition which must have been incorporated in the contract of lease. Then
only the lessor can re-enter the leased property and claim that the lease shall be forfeited.
In the case of a forfeiture due to default in payment of the rent, if the lessor sues the lessee to quit, the Court
can direct the lessee to pay the rent or arrears of rent and continue the lease. But in a breach of any other
condition, such as the breach of a condition preventing the lessee from subletting the property, the Court will
not help the lessee if he breaks the condition. He will incur forfeiture. A breach of condition by the lessee
gives an option to the lessor to bring the lease to an end. But if he does not exercise the option the lease will
continue validly. The lessee, however, cannot on breaking the condition, take advantage of his wrong and
terminate the lease.
The second case of forfeiture occurs when the tenant denies the title of the landlord and claims that
somebody else or he himself is the owner of the property. In order that a denial of the landlord’s title should
work as a forfeiture of the lease, three things are necessary:
(a) the tenant must set up title either in himself or in a third-party;
(b) the denial must be direct and not casual;
(c) it must be made known to the landlord.
(vii) Duties of the Lessor: Following are some of the duties of the lessor:
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(a) The lessor is bound to disclose to the lessee any material defect in the property with reference to its
intended use of which the lessor is and the lessee is not aware. This rule applies only to physical
defects of the property such as the condition and the nature of the property leased. You will note
that the lessor is not bound to disclose whether or not he has title to the property.
(b) The next duty of the lessor is to put the lessee in possession of the property. A lease is a transfer of
possession the consideration being rent and, therefore, it follows that the landlord cannot recover
the rent unless he has delivered possession to the tenant. If a contract of lease has been executed
and the lessor does not give possession of the property to the lessee, the lessee can sue the lessor
for possession.
(c) The next duty that is cast on the lessor is what is usually called convenant for quiet enjoyment. The
covenant, that is the right to undisturbed possession, so long as the lessee pays the rent,
presupposes possession and, therefore, no action can be brought on this convenant unless the
lessee has first obtained possession. The covenant for possession gives the lessee the right to
obtain possession; the covenant for quiet enjoyment gives the lessee a right to continue in such
possession. If the lessee’s possession is disturbed, he can sue for damages or, in case a part of the
leased property is taken possession of either by the lessor or by any third-party; the lessee can hold
a part of the leased property and pay a proportionate rent.
(viii) Duties of the lessee: The lessee has the following duties:
(a) The lessee is bound to disclose to the lessor any fact as to nature or extent of the interest that the
lessee is about to take, of which the lessee is, and the lessor is not aware and which materially
increases the value of such interest.
(b) The lessee is bound to pay or tender at the proper time and place, the premium or rent to the lessor
or his agent in this behalf. We have already seen that in case the lessee does not pay the rent, he
may incur forfeiture of the tenancy. The liability to pay the rent commences from the date the tenant
is put into possession.
(c) The next duty of the lessee is that he uses the property as a person of ordinary prudence would
make use of. But he shall not permit another person to use the property for purposes other than that
for which it was leased.
(d) He should not do any act which is destructive of or permanently injurious to the property.
(e) The lessee must not, without the lessor’s consent, erect on the property any permanent structure
except for agricultural purpose. If he wants to erect certain fixtures or chattel on the leased property,
it must be done without causing any damage to the property. Before the termination of the lease, he
can remove all the things attached to the earth. If permanent fixtures are to be made, the lessee
must obtain the consent of the landlord.
(f) If the lessee comes to know of any proceedings by way of suit to recover the property of the lessor,
the lessee should immediately inform the lessor. Since, the tenant is in possession of the property
he is the person who is not likely to know of any encroachment on the landlord’s property and he
should therefore inform the landlord.
(g) The lessee should hand over the property at the end of the lease.
(ix) Rights of the lessee: The lessee enjoys the following rights:
(a) If during the continuance of the lease any accession is made to the property, such accession is
deemed to be comprised in the lease, the lessee has a right to enjoy the accretions of the leased
property.
(b) Where, under the contract, the landlord has agreed to repair the property, the lessee can carry out
the repairs and deduct the expenses from the rent if the landlord fails to do so.
(c) If the lessee has made payment which the lessor is bound by law to pay such as payment of
Government revenues or municipal taxes on the property, the lessee can deduct the amount from
the rent and pay the balance to the lessor. He can even take interest on the amount he has paid.
(d) The lessee has a right to remove the fixtures he has erected-during the term of the lease.
(e) If, due to no fault of his, the lease comes to an end (i.e., when the lease is of uncertain duration),
the lessee or his legal representatives are entitled to all the crops planted or grown by the lessee.
The lessee or his representatives have got a right to come and carry away the crops, etc., which are
growing on the land. If the lease is of a definite period, such a right cannot be claimed, particularly,
when lessee has committed a fault, e.g., where he has committed a breach of a condition entailing
forfeiture.
(f) The lessee may avoid the lease, if property is wholly or partly destroyed by tempest, flood, or fire so
as to make it impossible to continue the lease for the purpose for which it was let.
(g) The lessee has right to transfer absolutely or by way of mortgage or sub-lease, the whole or any
part of his interest in the property. We have also noticed that the lessee’s rights are transferable.
5. Actionable Claims
"Actionable claim" has been dealt with under Sections 130 to 137 of the Act.
(i) Definition: "Actionable claim" is defined in Section 3 of the Transfer of Property Act as follows:
A claim to any debt, other than a debt secured by mortgage of immoveable property or by
hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not
in the possession, either actual or constructive, of the claimant, which the Civil courts recognize as
affording grounds for relief, whether such debt or beneficial interest be existent, accruing,
conditional or contingent.
Actionable claims are claims, to unsecured debts. If a debt is secured by the mortgage of immoveable
property it is not an actionable claim, because the Section clearly excludes such a debt. A debt is a
liquidated money obligation which is usually recoverable by a suit. To create a debt, first of all, there must be
a liquidated or definite sum which is actually due. For example, arrears of rent due. The term debt may also
include a sum of money which is due in the sense that it exists, but is not actually payable until a later date.
For example, A borrows money from B on the 1st of January and promises to repay on March 15, the
amount is not payable till the 15th of March, but certainly it is a debt and it is an accruing debt. Another
essential of an actionable claim is that it is not in possession of a person and the person can claim such a
debt by bringing an action in a Court of law.
The Section also says that it must be a claim to any debt which the Civil Courts recognise as affording
grounds for relief to the person who claims it.
Illustrations of actionable claims:
(i) Arrears of rent accrual constitute a ‘debt’ so it is an actionable claim (Sheu Gobind Singh v. Gauri
Prasad, AIR 1925 Pat. 310).
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(ii) Provident Fund that is standing to the credit of a member of the Provident Fund.
(iii) Money due under the Insurance Policy.
(iv) A partner’s right to sue for accounts of dissolved partnership is an actionable claim being a
beneficial interest in moveable property not in possession (Thakardas v. Vishindas).
Non-actionable claims
(i) Debentures are secured debts and therefore not regarded as actionable claims.
(ii) Copy right though a beneficial interest in immoveable property is not an actionable claim
since the owner has actual or constructive possession of the same (Savitri Devi v. Dwarka
Bhatya, (1939) All 305).
Again, an actionable claim includes a beneficial interest in the moveable property not in possession. Now, a
benefit of a contract for the purchase of goods is a beneficial interest in moveable property.
6. Mortgages
Sections 58 to 104 of the Act deal with "Mortgages".
Definition and nature of mortgage:
According to Section 58 of the Transfer of Property Act, a "mortgage" is the transfer of an interest in specific
immoveable property for the purpose of securing the payment of money advanced or to be advanced by way
of loan, an existing or future debt or the performance of an engagement which may give rise to pecuniary
liability.
The transferor is called a mortgagor, the transferee a mortgagee. The principal money and interest the
payment of which is secured for the time being are called the mortgage money and the instrument by which
the transfer is effected is called a mortgage deed.
Essentials of a mortgage:
(1) Transfer of interest: The first thing to note is that a mortgage is a transfer of interest in the specific
immoveable property. The mortgagor as an owner of the property is possessed of all the interests in
it, and when he mortgages the property to secure a loan, he only parts with an interest in that
property in favour of the mortgagor. After mortgage, the interest of the mortgagor is reduced by the
interest which has been transferred to the mortgagee. His ownership has become less for the time
being by the interest which he has parted with in favour of the mortgagee. If the mortgagor transfers
this property, the transferee gets it subject to the right of the mortgagor to recover from it what is
due to him, i.e., the principal plus interest.
(2) Specific immoveable property: The second point is that the property must be specifically mentioned
in the mortgage deed. Where, for instance, the mortgagor stated “all of my property” in the
mortgage deed, it was held by the Court that this was not a mortgage. The reason why the
immoveable property must be distinctly and specifically mentioned in the mortgage deed is that, in
case the mortgagor fails to repay the loan the Court is in a position to grant a decree for the sale of
any particular property in a suit by the mortgagee.
(3) To secure the payment of a loan: Another characteristic of a mortgage is that the transaction is for
the purpose of securing the payment of a loan for the performance of an obligation which may give
rise to pecuniary liability. It may be for the purpose of obtaining a loan, or if a loan has already been
granted to secure the repayment of such loan. There is thus a debt and the relationship between the
mortgagor and the mortgagee is that of debtor and creditor. When A borrows 100 bags of paddy
and further quantity by way of interest, it is mortgage transaction for the performance of an
obligation.
Where, however, a person borrows money and agrees with the creditor that till the debt is repaid he will not
alienate his property, the transaction does not amount to a mortgage. Here the person merely says that he
will not transfer his property till he has repaid the debt; he does not transfer any interest in the property to the
creditor. In sale as distinguished from a mortgage, all the interest or rights of ownership are transferred to the
purchaser. In a mortgage, as stated earlier, only part of the interests are transferred to the mortgagee, some
of them remaining vested in the mortgagor.
To sum up, it may be stated that there are three outstanding characteristics of a mortgage:
(a) the mortgagee’s interest in the property mortgaged terminates upon the performance of
the obligation secured by the Mortgage.
(b) the mortgagor has a right of foreclosure upon the mortgagor’s failure to perform.
(c) the mortgagor has a right to redeem or regain the property on repayment of the debt or performance
of the obligation.
Form of a mortgage contract:
According to Section 59, where the principal money secured is Rs. 100 or upwards, a mortgage, other than a
mortgage by deposit of title-deeds, can be effected only by a registered instrument or by delivery of property.
It should be noted that a mortgage is not a mere contract but it is the Conveyance of Interest in the
mortgaged property and as soon as the mortgage deed is registered an interest in the property vests in the
mortgagee.
Kinds of mortgages:
There are in all six kinds of mortgages in immoveable property, namely
Simple mortgage
Anomalous Mortgage by
mortgage conditional sale
Mortgage by
deposit of title Usufractuary
deeds or equitable mortgage
mortgage
English mortgage
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(a) Simple mortgage

In a simple mortgage, the mortgagor binds himself personally to pay the debt and agrees in the event of his
failure to pay the mortgage money, the mortgagee shall have the right to cause the property to be applied so
far as may be necessary by means of a decree for the sale of property. If the mortgaged property is not
sufficient to discharge the debt, the mortgagee can bring a personal action against the mortgagor and obtain
a decree which, like any other money decree, can be executed against other properties of the mortgagor. In
simple mortgage, no right of possession or foreclosure is available to the mortgagee.
(b) Mortgage by conditional sale
In this type of mortgage, the property is mortgaged with a condition super added that in the event of a failure
by the debtor to repay the debt at the stipulated time, the transaction should be regarded a sale, and in case
the loan is repaid at the stipulated time, the sale shall be invalid, or on condition that on such payment being
made the buyer shall transfer the property to the seller.
Thus, for all practical purposes, this type of mortgage is ostensible sale of the mortgaged property with a
condition for re-purchase by the mortgagor by repaying the loan. It will be noted that the mortgagor transfers
the property with the following three conditions:
(a) If the loan is repaid, the sale becomes void.
(b) If the loan is not repaid at the stipulated time, the sale will become absolute and binding.
(c) When the debt has been repaid at the stipulated time, the mortgagee shall re-transfer the property
to the mortgagor.
In case of mortgage by conditional sale, there is no personal covenant. That is unlike in the case of
a simple mortgage, the mortgagor in this case does not bind himself personally to repay the debt.
The mortgagee is not given the possession of the property in this type of mortgage. This is also the
position in the case of a simple mortgage. Again, in a mortgage by conditional sale, the mortgagee’s
remedy is ‘foreclosure’, that is he becomes the owner of the property in default of payment of the
debt by the mortgagor, he has to institute a regular suit in a Court of law to "foreclose" the
mortgage. To "foreclose" means to debar the mortgagor from redeeming the property forever.
(c) Usufructuary mortgage
Section 58(d) defines a "usufructuary mortgage" as “where the mortgagor delivers possession or expressly
or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and
authorises him to retain such possession until payment of the mortgage money, and to receive the rents and
profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of
interest, or in payment of the mortgage money, or partly in lieu of interest or partly in payment of the
mortgage money, the transaction is called an usufractuary mortgage. It is also called a mortgage with
possession.
Thus is this type of mortgage the mortgagor has to deliver possession of the property to the mortgagee. If the
possession is not given, the mortgagee can sue for possession. The mere fact that possession has not been
delivered will not alter the nature of the transaction. In Pratap Bahadur v. Gajadhar, 24 All 521, it was agreed
that the mortgagee will put the mortgagor in possession of a village on a certain date and to pay interest till
possession was delivered. It was held that mortgage was an usufructuary mortgage. The mortgagee is
authorised to retain possession and receive rents, etc., until he recovers the whole debt and the interest. The
usufructuary mortgagee has to look only to the profits that arise out of the property for realising his debt;
there is no personal liability on the part of the mortgagor. Similarly, the mortgagee has no right to foreclose
the mortgage or to sue for sale.
A mortgage may be regarded as usufructuary even though the entire debt is not to be paid out of the profits
of the property. Therefore, a usufructuary mortgage may be either (i) where the entire mortgage money is to
be paid from the profit of the land; or (ii) where only part of the mortgage money is principal or interest
amount is to be paid from the profit of the land.
If in a usufructuary mortgage a time is mentioned during which the mortgagee should recover the debt, etc.,
then after the time is over, the mortgagee should deliver back the property to the mortgagor. He cannot
refuse to give back the property, if he has not been able to recover the debt and the interest, etc. A
usufructuary mortgagee is supposed to remain in possession of the mortgaged property and manage the
same as a person of ordinary prudence would manage subject to the conditions of mortgage agreement. Any
loss due to failure on his part would be debited to his account (Panchanan Sharma v. B.P. Jagnani, SCALE
1995 (2) 641).
Thus, a usufructuary mortgage has the following characteristics:

1. Possession of property must be delivered to the mortgagee;
2. There is no personal liability on the part of the mortgagor to pay;
3. The mortgagee is entitled to rents and profits in lieu of interest or principal or both; and
4. The mortgagee however is not entitled to foreclose the mortgagee or to sue for sale.
(d) English mortgage

Section 58(e) states that: “where the mortgagor binds himself to repay the mortgage money on a certain
date, and transfers the mortgaged property absolutely to the mortgagee but subject to a proviso that he will
retransfer it to the mortgagor upon payment of the money as agreed, the transaction is called an English
mortgage”.
Here the mortgagor transfers the ownership of the property as security and the mortgagee promises to re-
transfer the ownership, if the money is paid within a definite time. There is also a personal covenant as the
mortgagor promises to repay within a certain date. In this type of mortgage, there is proviso that if money is
repaid the property would be reconveyed. The remedy of the mortgagee is sale of the property to recover the
debt. Thus, the essential features of an English mortgage are as under:
1. The mortgagor binds himself to repay the mortgage money on a certain day. In other words, there
should be a personal undertaking to pay.
2. The mortgaged property is absolutely transferred to the mortgagee.
3. Such absolute transfer is subject to a proviso that the mortgagee will reconvey the property to the
mortgagor upon payment by him of the mortgage money on the fixed day.
Distinction between English mortgage and mortgage by conditional sale

An English mortgage looks like a mortgage by conditional sale but there are obvious differences between the
two:
1. In English mortgage there is a personal liability undertaken by the mortgagor to pay the debt. In a
mortgage by conditional sale there is no personal covenant (agreement for payment of the
mortgage money and mortgagee has his remedy against the mortgaged property only;
2. In English mortgage the ownership in the mortgaged property is absolutely transferred to the creditor
(i.e. mortgagee) which however, may be divested on repayment of the loan on the fixed day.
In a mortgage by conditional sale, the mortgagee gets only a qualified ownership which may, however, ripen
into an absolute ownership in default of payment of the mortgage money.
(e) Mortgage by deposit of title deeds
This type of mortgage is called equitable mortgage in English law. In this transaction, a person delivers to the
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creditor or his agent documents of title of his immoveable property with an intention to create a security, and
obtains a loan. The requisites of such a mortgage are (i) a debt, (ii) deposit of title deeds, and (iii) an
intention that the deeds shall be security for the debt.
In order that a valid mortgage on an immoveable property should be effected, it must be in writing and
attested by two witnesses and the document must be registered. But in case of a mortgage by deposit of title
deeds, it need not be registered and an oral agreement between the person and the creditor followed by the
delivery of the documents of title to the property is enough. The creditor will have the possession of the
documents and he will advance the money at the stipulated rate of interest. In case the mortgagor does not
repay the loan, the creditor on the basis of having the title deeds in his possession can sue the debtor to
recover the money. This type of mortgage has been recognized due to expediency. Many persons, specially
the business people, may need money urgently and they cannot wait till a formal document is written, signed,
attested and then registered. So they will simply approach the creditor and hand over the title deeds of their
property and borrow money. This avoids delay and other formalities for effecting a valid mortgage.
There must be a clear intention on the part of the person who hands over the title deeds to effect a valid
mortgage. In the absence of any intention, the mere holding in possession of the title deeds will not create a
valid mortgage.
The term ‘documents of title’ or title deeds means such documents as will show prima facie or apparent title
to the property of the person who is borrowing money. Accordingly, in one case it was held that tax receipt
was not a document of title to the property on which the tax was paid. What is necessary to deposit is a
document which gives him his right to the property and the creditor should insist on the production of this
document before he gives money on a pledge of documents.
It should be noted that this type of mortgage can be created only in certain towns and not everywhere in
India. The facility to create a valid mortgage is available in the following towns in India: Calcutta, Madras,
Bombay, Adoni, Ajmer, Allahabad, Alwar, Bangalore, Bellary, Cochin, Coimbatore, Delhi, Jaipur, Jodhpur,
Kanpur, Rajahmundry, Udaipur, Vellor, Ellora, Pali, Bhilwara, Bikaner, Kakinada, Narayanganj, Mysore, and
Madurai. Though this type of mortgage is limited to specific cities it is at par with any other legal mortgage
(K.J. Nathan v. S.V. Maruthi Rao, A.I.R. 1965 S.C. 443).
Title deeds should be delivered in these areas, the property of the person may be situated elsewhere. If the
deposit of title deeds has taken place in any other town, it will not be a valid mortgage. Similarly, if the
property is situated in any one of the towns mentioned above, but the deposit of title deeds is made in other
towns or areas then again it will not be a valid mortgage.
(f) Anomalous mortgage
Section 58(g) of the Transfer of Property Act provides that “a mortgage which is not a simple mortgage, a
mortgage by conditional sale, usufructuary mortgage, an English mortgage, or a mortgage by deposit of title
deeds within the meaning of this section is called an anomalous mortgage”.
Thus, an anomalous mortgage is a combination of various other mortgages, for example, a usufructuary
mortgage may be created and the mortgagee shall have the right of sale. You have already noticed that in a
usufructuary mortgage only possession is given to the mortgagee and there is no right of sale. But in an
anomalous mortgage the right of sale along with the possession of the property may be given. You have also
seen that in the case of usufructuary mortgage, there is no personal liability on the part of a mortgagor but if
the mortgagor assumes personal liability to pay the mortgage money, it will be an anomalous mortgage.
Again, a mortgagee may be given possession of the property for a fixed period with a condition that in case
the debt is not discharged at the expiry of the period mentioned, the mortgage shall be regarded as a
mortgage by conditional sale. In this case, the mortgage has got a right of "foreclosure" and after the expiry
of the period if the debt is not paid, the mortgagee will become the owner of the property.
Two other terms in common use in connection with mortgage may be considered here. These terms are (i)
Sub-mortgage; and (ii) Puisne mortgage.
Sub-mortgage:
Where the mortgagee transfers by mortgage his interest in the mortgaged property, or creates a mortgage of
a mortgage the transaction is known as a sub-mortgage. For example, where A mortgages his house to B for
Rs. 10,000 and B mortgage his mortgagee right to C for Rs. 8,000. B creates a sub-mortgage.
Puisne mortgage:
Where the mortgagor, having mortgaged his property, mortgages it to another person to secure another loan,
the second mortgage is called a puisne mortgage. For example, where A mortgages his house worth ` one
lakh to B for `40,000 and mortgages the same house to C for a further sum of `30,000, the mortgage to B is
first mortgage and that to C the second or puisne mortgage. C is the puisne mortgagee, and can recover the
debt subject to the right of B, the first mortgagee, to recover his debt of `40,000 plus interest.
Rights of mortgagor:
By mortgaging the property the mortgagor does not cease to be its owner, he only transfers an interest in it.
The law, therefore, grants him the following rights:
(a) Right of redemption: The first and the most important right of the mortgagor is the right to redeem
i.e., take back the mortgaged property by paying the mortgage money at any time after the
stipulated date for repayment. Section 60 of the Act provides that any time after the principal
amount has become due, the mortgagor has a right to redeem the property. Although the Act gives
him the right to redeem “any time” after their debt has become due, it enjoins upon the mortgagor
the obligation to exercise this right (i) before the right is extinguished by the Act of parties or by a
decree of Court, or (ii) before it is barred by the Limitation Act. According to the Law of Limitation
the, mortgagor can redeem the property within 60 years after the money has become due. This right
to redeem the property even after the time of payment has elapsed is called the Right of Equity or
Redemption. But the mortgagor is not entitled to redeem before the mortgage money becomes due
on the date fixed for repayment of the loan. His right to redeem arises only when mortgage money
becomes due and not before.
(b) Right against clog on equity of redemption: Right of redemption or equity of redemption is the essence
of a mortgage, and any provision inserted in the mortgage deed to prevent, evade or hamper
redemption is void. Any condition which prevents the mortgagor from redeeming the property is called
a “clog” on the equity or right of redemption and is void. The rule of equity that once a mortgage
always a mortgage prohibits a clog on the right of redemption. In other words, once a transaction is
found to be a mortgage, the Court would not permit any condition in a mortgage deed which would
prevent or impede redemption or repayment of the loan for which the security was given.
(c) Right of partial redemption: A mortgage, as a rule, being one and indivisible for the debt and every
part of it, the mortgagor cannot redeem piecemeal; he must redeem the whole property. But Section
61 of the Act gives a right of partial redemption stating that “a mortgagor who has executed two or
more mortgages in favour of the same mortgagee shall, in the absence of a contract to the contrary,
when the principal money of any two or more of the mortgages has become due, be entitled to
redeem any one such mortgage separately or any two or more of such mortgages together.”
Implied contract by mortgagor:
The parties are free to enter into any terms they like. Where, however, the contract does not contain all the
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terms, Section 65 provides for implied terms as follows:
In the absence of a contract to the contrary, the mortgagor shall be deemed to have contracted with the
mortgagee that the:
(a) mortgagor is entitled to transfer the interest (covenant for title);
(b) mortgagor will assist the mortgagee to enjoy quiet possession;
(c) mortgagor will pay public charges in respect of the mortgaged property;
(d) mortgagor covenants as to payment of the rent due on lease where, the mortgaged property is
leased;
(e) mortgagor covenants as to payment of interest and principal on prior encumbrances, where the
mortgage is a second or subsequent encumbrance on the property.
Rights of mortgagee and his remedies:
If the mortgagor does not pay the mortgage money, the mortgagee may proceed to recover (i) from the
mortgaged property, or (ii) sue for recovery from the mortgagor personally. Thus the mortgagor has two
remedies: one against the property and the other against the mortgagor personally.
7. Charges
Meaning of charge: "Charge" has been defined under Section 100 as follows: “Where immoveable property
of one person is by the act of parties or operation of law made security for the payment of money to another,
and the transaction does not amount to a mortgage, the latter person is said to have a charge on the
property”.
As is evident from the above definition, a charge comes into existence either by the act of parties or by
operation of law.
Charge by act of parties: When in a transaction for value, both the parties (debtor and creditor) intend that
the property existing or future shall be made available as security for the payment of a debt and that the
creditor shall have a present right to have it made available, there is a charge.
Charge by Operation of Law: Charges created by law are those which arise on account of some statutory
provisions. They are not created by the voluntary action of parties but arise as a result of some legal
obligation.
Floating charge: A charge may be floating as well as fixed. A fixed charge is a charge on specific property
but a floating charge is an equitable charge on the assets for time being of a going concern. It is peculiar to
companies which are able to borrow money without any interference with their assets so long as they are
going concern. In other words, it is a charge on a class of the assets of the company, present as well as
future. The assets of the company are constantly undergoing a change but the creditors will not normally
interfere with the assets of the company unless there is breach of some condition. As Professor Gower says,
the assets are liquid and the charge is floating. It is ambulatory and shifting in its nature hovering over and so
to speak floating with the property which it is intended to effect. As it does not attach to any specific property,
it remains document until it crystallises.
A floating charge has the following characteristics:

1. It is a charge on class of assets both present and future.
2. The class of assets charged is one which in the ordinary course of business would be changing
from time to time.
3. It is contemplated by the charge that until some future step is taken by those who are interested in
the charge the company may carry on its business in the ordinary way, i.e., it may use its assets
charged in the ordinary course of its business. (Per Roman L.J. in Reyork Shive Wool Combers
Associated Limited, (1903) 2 Ch. 284) A floating charge is created by debentures on the company’s
undertaking or its estate, property and effects. It is not necessary that the charge should be on all
company’s assets. Thus a mortgage of a cinema and of the chattels used in the cinema premises
was held to be a floating charge as to the chattles (National Provisional Bank of England Limited v.
Charteb Electric Theatres Limited, (1916) Ch. 132). Similarly, a floating charge was created by a
mortgage of book and other debts which shall become due during the continuance of this security
(Reyork Shive Wool Combers Association, Supra).
Crystallisation of floating charge

A floating charge becomes fixed or crystallises in the following cases:
1. When the money becomes payable under a condition in the debenture and the debenture holder,
(i.e., the creditor) takes some steps to enforce the security;
2. When the company ceases to carry on business; and
3. When the company is being wound-up.
8. Distinction between Mortgage and Charge

Although in a charge, the property is made a security for the payment of the loan, yet the transaction does
not amount to mortgage. It is important, therefore to distinguish between a charge and mortgage.
(a) A mortgage is transfer of an interest in the property made by the mortgagor as a security for the
loan, while the charge is not the transfer of any interest in the property though it is security for the
payment of an amount.
(b) A charge may be created by act of parties or by operation of law. A mortgage can only be created
by act of parties.
(c) A mortgage deed must be registered and attested by two witnesses, while a charge need not be
made in writing, and if reduced to writing, it need not be attested or registered.
(d) In certain types of mortgage (viz., mortgage by conditional sale and anomalous mortgage) the
mortgagor can foreclose the mortgaged property but in charge, the charge-holder cannot foreclose
though he can get the property sold as in a simple mortgage.
(e) From the very nature of it, a charge as a general rule, cannot be enforced against a transferee for
consideration without notice. But in a mortgage, the transferee of mortgaged property from the mortgagor,
can only acquire the remaining interest of the mortgagor, and is therefore, only bound by the mortgage.
(f) In a charge created by act of parties the specification of the particular fund or property negatives a
personal liability and the remedy of the charge-holder is against the property only. In a mortgage,
there can be security as well as personal liability. In fact, the absence of a personal liability is the
principal test that distinguishes a charge from a simple mortgage.
LESSON ROUND-UP
• The law relating to transfer of property is governed by the Transfer of Property Act, 1882. ‘Transfer of
Property’ means an act by which a living person conveys property, in present or future, to one or more
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other living persons, or to himself, and one or more other living persons. ‘living person’ includes a company
or association or body of individuals, whether incorporated or not.
• Every person who is competent to contract and entitled to transferable property, or authorized to dispose of
property is competent to transfer such property. Property can be transferred either orally or by writing.
Moveable property can be transferred by delivery of possession or by registration. In the case of tangible
immoveable property of the value of one hundred rupees and upwards, or in the case of a reversion or
other intangible thing, transfer can be made only by a registered instrument. In the case of tangible
immoveable property of a value less than one hundred rupees, such transfer may be made either by a
registered instrument or by delivery of the property.
• When property is transferred, the transferee should not be restrained absolutely from alienating the
property. One may give property to another subject to a condition, but the condition should not be one
which absolutely prevents the transferee from alienating the property. A transfer may also be made subject
to a contingency which may or may not occur. This is known as condition subsequent. Condition
subsequent is one which destroys or divests the rights upon the happening or non-happening of an event.
• Section 35 of the Transfer of Property Act deals with what is called doctrine of election. Election may be
defined as “the choosing between two rights where there is a clear intention that both were not intended to
be enjoyed”. The foundation of doctrine of election is that a person taking the benefit of an instrument must
also bear the burden, and he must not take under and against the same instrument.
• Where, with the consent, express of implied, of the persons interested in immoveable property, a person is
the ostensible owner of such property and transfers the same for consideration, the transfer shall not be
voidable on the ground that the transferor was not authorized to make it, provided that the transferee, after
taking reasonable care to ascertain that the transferor had power to make the transfer, has acted in good
faith. This is called doctrine of Holding Out.
• Doctrine of Feeding the Grant by Estoppel means where, a person fraudulently or erroneously represents
that he is authorized to transfer certain immoveable property and professes to transfer such property for
consideration, such transfer shall, at the option of the transferee, operate on any interest which the
transferor may acquire in such property at any time during which the contract of transfer subsists.
• Where a person transfers his property so that his creditors shall not have anything out of the property, the
transfer is called a fraudulent transfer. A debtor in order to defeat or delay the rights of a creditor, may
transfer his property to some person, who may be his relative or a friend. The law does not allow this.
• The Act does not allow accumulation of income from the land for an unlimited period without the income-
being enjoyed by owner of the property. The law allows accumulation of income for a certain period only.
The period for which such accumulation is valid is : (a) the life of the transferor, or (b) eighteen years from
the date of transfer. Any direction to accumulate the income beyond the period mentioned above is void.
However, this is subject to certain exceptions.
• Lis pendens means a pending suit, action, petition or the like. Section 52 of the T.P. Act incorporates the
doctrine of Lis pendens. It states that during the pendency of a suit in a court of law, property which is
subject to a litigation cannot be transferred.
• The Act expressly provides for special types of transfers such as sale, exchange, gift, mortgage and lease.
In a sale, exchange and gift, there is a transfer of the ownership of property but mortgage is a transfer of an
interest in specific immovable property and lease is a transfer of the right to enjoy immoveable property.
• Actionable claims are claims, to unsecured debts. If a debt is secured by the mortgage of immoveable
property it is not an actionable claim, because the section clearly excludes such a debt.
• Charge under the Act has been defined as “where immoveable property of one person is by the act of
parties or operation of law made security for the payment of money to another, and the transaction does not
amount to a mortgage, the latter person is said to have a charge on the property”.
• As is evident from the above definition, a charge comes into existence either by the act of parties or by
operation of law. A charge may be floating as well as fixed. A fixed charge is a charge on specific property
but a floating charge is an equitable charge on the assets for time being of a going concern. It is peculiar to
companies which are able to borrow money without any interference with their assets so long as they are
going concerns.
SELF-TEST QUESTIONS
1. Discuss the object of the Transfer of Property Act. Distinguish between immoveable and moveable
property.
2. What is the subject matter of transfer under the T.P. Act? Discuss properties which cannot be
transferred.
3. Define a mortgage. Discuss various types of mortgages.
4. What is the rule against perpetuity?
5. Write short notes on

(i) Puisne mortgage;
(ii) Charges under the T.P. Act;
(iii) Vested and contingent interest;
(iv) Actionable claims.
386 EP-EBCL
Lesson 17
Real Estate (Regulation and
Development) Act, 2016
LESSON OUTLINE
LEARNING OBJECTIVES
Real estate sector plays a catalytic role in fulfilling
• Objects and reasons the needs and demand for housing and
• Salient Features of the Act infrastructure in the country and is an important
pillar of the economy. While this sector has grown
• Registration of Real Estate Project
significantly in recent years, it has been largely
• Real Estate Agents unregulated, with absence of professionalism and
• Real Estate Regulatory Authority standardisation and lack of adequate consumer
protection. It has no sectoral regulator like there are
• Central Advisory Council
for other specific sectors like insurance, telecom,
• The Real Estate Appellate Tribunal stock markets etc.
• Offences, Penalties and Adjudication A promoter shall not advertise, market, book, sell
• Specimen Agreement for Sale between or offer for sale, or invite persons to purchase in
the Promoter and the Allottee; Due any manner any plot, apartment or building, as the
Diligence Reporting case may be, in any real estate project or part of it,
in any planning area, without registering the real
• Lesson Round Up
estate project with the Real Estate Regulatory
• Self-Test Questions Authority established .

provisions relating to real estate sector in India.
Parliament enacted the Real Estate (Regulation and Development) Act, 2016 which aims at protecting the rights and
interests of consumers and promotion of uniformity and standardization of business practices and transactions in the
real estate sector.
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INTRODUCTION
Real estate sector plays a catalytic role in fulfilling the needs and demand for housing and infrastructure in
the country and is an important pillar of the economy. While this sector has grown significantly in recent
years, it has been largely unregulated, with absence of professionalism and standardisation and lack of
adequate consumer protection. It has no sectoral regulator like there are for other specific sectors like
insurance, telecom, stock markets etc. History is witness to the fact that whenever sectoral regulators like
SEBI, IRDAI, TRAI etc have been formed, they have helped in deepening the market and made it more
robust. Though the Consumer Protection Act, 1986 is available as a forum to the buyers in the real estate
market, the recourse is only curative and is not adequate to address all the concerns of buyers and
promoters in that sector. The lack of standardisation has been a constraint to the healthy and orderly growth
of industry. Therefore, since more than a decade the need for regulating the sector was being emphasised in
various forums.
In view of the above, Parliament enacted the Real Estate (Regulation and Development) Act, 2016 which
aims at protecting the rights and interests of consumers and promotion of uniformity and standardization of
business practices and transactions in the real estate sector. It attempts to balance the interests of
consumers and promoters by imposing certain responsibilities on both. It seeks to establish symmetry of
information between the promoter and purchaser, transparency of contractual conditions, set minimum
standards of accountability and a fast-track dispute resolution mechanism.
This Act will be put in operation just like the Motor Vehicles Act passed by the Central Government, pursuant
to which respective State Governments (“SG”) and Union Territories (‘UT”) are required to notify their own
Rules, which would be in the lines of the Central Act and accordingly administer their own State Rules.
Accordingly, every SG and UT are to required to promulgate their own Real Estate Rules which would be
based on the lines of the central Real Estate (Regulation and Development) Act 2016, and establish a Real
Estate Regulatory Authority (“RERA”) pursuant to the Rules, which will administer the respective Real Estate
Rules of the State or UT. State Governements and UTs were required to notify and enforce RERA by 1st
May 2017, which was the deadline set by the the Central Government. But a few State Governements have
missed the deadline of 1st May 2017. It is expected that most of the State Governments would meet the
second deadline of 31st July 2017, by which the ongoing projects are to be registered with RERA.
The objects and reasons for which the Act has been framed are:
Lesson 17 Real Estate (Regulation & Development) Act, 2016 389
Chronology of events leading to regulation of real estate sector including both residential and
commercial segments
S.No Date Event
1. May, 2008 Ministry of HUPA first prepared a Concept Paper on regulation of

real estate sector and a model law for legislation by States/UTs
2. 2011 Conference of Ministers of Housing suggested a central law for

regulation of real estate sector
3. July, 2011 Ministry of Law & Justice too suggested central legislation for
regulation
4. June, 2013 Union Cabinet approved Real Estate Bill, 2013
5. August, 2013 Real Estate Bill was introduced in Rajya Sabha and was referred
to Standing Committee
6. February, 2014 Report of Standing Committee was laid on the Tables of both
Houses of Parliament
7. February, 2014 Attorney General upheld validity of central law for regulation of the
Sector
8. April, 2015 Union Cabinet approved official amendments based on

recommendations of Standing Committee
9. May 20, 2015 Matter referred to the Select Committee of Rajya Sabha
10. July, 2015 Report of Select Committee tabled in Rajya Sabha
11. December, 2015 incorporating several modifications based on Select Committee

report and stakeholder consultations was approved by the Union
Cabinet
12. 10 March, 2016 The Real Estate (Regulation & Development) Bill, 2016 passed by
Rajya Sabha
13. 15 March, 2016 Lok Sabha passed the Bill as passed by Rajya Sabha
14. 25 March, 2016 President gives assent to the Bill
15. 15 April, 2016 59 Sections of the Act were notified making them effective from
May 1, 2016 enabling preparation of Real Estate Rules, setting up
of Regulatory Authorities and other infrastructure
16. 28 October, 2016 Real Estate Removal of Difficulties Order
17. 19 April, 2017 Remaining 32 Sections of the Act notified making them effective
from May 1st this year requiring registration of projects within
three months from tomorrow
18. 1 May, 2017 New era begins for development of real estate sector in an
atmosphere of investor confidence
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Salient Features of the Real Estate (Regulation and Development) Act, 2016
• Establish the Real Estate Regulatory Authority for regulation and promotion of the real estate sector
• Ensure sale of plot, apartment of building, as the case may be, or sale of real estate project, in an
efficient and transparent manner
• Ensure protect the interest of consumers in the real estate sector
• Establish an adjudicating mechanism for speedy dispute redressal and also to establish the Appellate
Tribunal to hear appeals from the decisions, directions or orders of the Real Estate Regulatory Authority
(RERA)
• Regulates transactions between buyers and promoters of residential real estate projects
• Establishes state level regulatory authorities called Real Estate Regulatory Authorities (RERAs)
• Residential real estate projects, with some exceptions, need to be registered with RERAs
• Promoters cannot book or offer these projects for sale without registering them. Real estate agents
dealing in these projects also need to register with RERAs
• Registration, the promoter must upload details of the project on the website of the RERA. These
include the site and layout plan, and schedule for completion of the real estate project
• Amount collected from buyers for a project must be maintained in a separate bank account and must
only be used for construction of that project. The state government can alter this amount
• Right to Legal Representation on behalf of client by Company Secretaries or chartered accountants or

cost accountants or legal practitioners
• Imposes stringent penalty on promoter, real estate agent and also prescribes imprisonment.
Advantages of RERA (Real Estate Development and Regulation Act)
Increased
FDI
Reduction in Customer
litigation management
RERA
Timely
Transparency completion
of the project
Project planning
RERA has brought in uniformity in definitions for important components of real estate, like, “carpet area”,
“common areas” etc which will prevent malpractices like changes in area, specifications etc. Some of the
important definitions are reproduced below:
"Advertisement" means any document described or issued as advertisement through any medium and
includes any notice, circular or other documents or publicity in any form, informing persons about a real
estate project, or offering for sale of a plot, building or apartment or inviting persons to purchase in any
manner such as plot, building or apartment or to make advances or deposits for such purposes;
"Agreement for sale" means an agreement entered into between the promoter and the allottee;
"Allottee" in relation to a real estate project, means the person to whom a plot, apartment or building, as the
case may be, has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the
promoter, and includes the person who subsequently acquires the said allotment through sale, transfer or
otherwise but does not include a person to whom such plot, apartment or building, as the case may be, is
given on rent;
"Apartment" whether called block, chamber, dwelling unit, flat, office, showroom, shop, godown, premises,
suit, tenement, unit or by any other name, means a separate and self-contained part of any immovable
property, including one or more rooms or enclosed spaces, located on one or more floors or any part thereof,
in a building or on a plot of land, used or intended to be used for any residential or commercial use such as
residence, office, shop, showroom or godown or for carrying on any business, occupation, profession or
trade, or for any other type of use ancillary to the purpose specified;
"Building" includes any structure or erection or part of a structure or erection which is intended to be used
for residential, commercial or for the purpose of any business, occupation, profession or trade, or for any
other related purposes;
"Carpet area" means the net usable floor area of an apartment, excluding the area covered by the external
walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but
includes the area covered by the internal partition walls of the apartment.
Explanation.— the expression "exclusive balcony or verandah area" means the area of the balcony or
verandah, as the case may be, which is appurtenant to the net usable floor area of an apartment, meant for
the exclusive use of the allottee; and "exclusive open terrace area" means the area of open terrace which is
appurtenant to the net usable floor area of an apartment, meant for the exclusive use of the allottee;
"Commencement certificate" means the commencement certificate or the building permit or the
construction permit, by whatever name called issued by the competent authority to allow or permit the
promoter to begin development works on an immovable property, as per the sanctioned plan;
"Common areas" mean—

(i) the entire land for the real estate project or where the project is developed in phases and
registration under this Act is sought for a phase, the entire land for that phase;
(ii) the stair cases, lifts, staircase and lift lobbies, fir escapes, and common entrances and exits of
buildings;
(iii) the common basements, terraces, parks, play areas, open parking areas and common storage
spaces;
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(iv) the premises for the lodging of persons employed for the management of the property including
accommodation for watch and ward staffs or for the lodging of community service personnel;
(v) installations of central services such as electricity, gas, water and sanitation, air-conditioning and
incinerating, system for water conservation and renewable energy;
(vi) the water tanks, sumps, motors, fans, compressors, ducts and all apparatus connected with
installations for common use;
(vii) all community and commercial facilities as provided in the real estate project;
(viii) all other portion of the project necessary or convenient for its maintenance, safety, etc., and in
common use;
"Company" means a company incorporated and registered under the Companies Act, 2013 and includes,—
(i) a corporation established by or under any Central Act or State Act;
(ii) a development authority or any public authority established by the Government in this behalf under
any law for the time being in force;
"Competent authority" means the local authority or any authority created or established under any law for
the time being in force by the appropriate Government which exercises authority over land under its
jurisdiction, and has powers to give permission for development of such immovable property;
"Completion certificate" means the completion certificate, or such other certificate, by whatever name
called, issued by the competent authority certifying that the real estate project has been developed according
to the sanctioned plan, layout plan and specifications, as approved by the competent authority under the
local laws;
"Day" means the working day, in the concerned State or Union territory, as the case may be, notified by the
appropriate Government from time to time;
"Development" with its grammatical variations and cognate expressions, means carrying out the
development of immovable property, engineering or other operations in, on, over or under the land or the
making of any material change in any immovable property or land and includes re-development;
"Development works" means the external development works and internal development works on
immovable property;
"Estimated cost of real estate project" means the total cost involved in developing the real estate project
and includes the land cost, taxes, cess, development and other charges;
"External development works" includes roads and road systems landscaping, water supply, seweage and
drainage systems, electricity suply transformer, sub-station, solid waste management and disposal or any
other work which may have to be executed in the periphery of, or outside, a project for its benefit, as may be
provided under the local laws;
"Family" includes husband, wife, minor son and unmarried daughter wholly dependent on a person;
"Garage" means a place within a project having a roof and walls on three sides for parking any vehicle, but
does not include an unenclosed or uncovered parking space such as open parking areas;
"Immovable property" includes land, buildings, rights of ways, lights or any other benefit arising out of land
and things attached to the earth or permanently fastened to anything which is attached to the earth, but not
standing timber, standing crops or grass;
"Interest" means the rates of interest payable by the promoter or the allottee, as the case may be.
Explanation.—
(i) the rate of interest chargeable from the allottee by the promoter, in case of default, shall be equal to
the rate of interest which the promoter shall be liable to pay the allottee, in case of default;
(ii) the interest payable by the promoter to the allottee shall be from the date the promoter received the
amount or any part thereof till the date the amount or part thereof and interest thereon is refunded,
and the interest payable by the, allottee to the promoter shall be from the date the allottee defaults
in payment to the promoter till the date it is paid;
"Internal development works" means roads, footpaths, water supply, sewers, drains, parks, tree planting,
street lighting, provision for community buildings and for treatment and disposal of sewage and sullage
water, solid waste management and disposal, water conservation, energy management, fire protection and
fire safety requirements, social infrastructure such as educational health and other public amenities or any
other work in a project for its benefit, as per sanctioned plans;
"Local authority" means the Municipal Corporation or Municipality or Panchayats or any other Local Body
constituted under any law for the time being in force for providing municipal services or basic services, as the
case may be, in respect of areas under its jurisdication;
"Occupancy certificate" means the occupancy certificate, or such other certificate by whatever name
called, issued by the competent authority permitting occupation of any building, as provided under local laws,
which has provision for civic infrastructure such as water, sanitation and electricity;
"Person" includes,—
(i) an individual;
(iii) a company;
(iv) a firm under the Indian Partnership Act, 1932 or the Limited Liability Partnership Act, 2008, as the
case may be;
(v) a competent authority;
(vi) an association of persons or a body of individuals whether incorporated or not;
(vii) a co-operative society registered under any law relating to co-operative societies;
(viii) any such other entity as the appropriate Government may, by notification, specify in this behalf;
"Planning area" means a planning area or a development area or a local planning area or a regional
development plan area, by whatever name called, or any other area specified as such by the appropriate
Government or any competent authority and includes any area designated by the appropriate Government or
the competent authority to be a planning area for future planned development, under the law relating to Town
and Country Planning for the time being in force and as revised from time to time;
"Promoter" means,—
(i) a person who constructs or causes to be constructed an independent building or a building
consisting of apartments, or converts an existing building or a part thereof into apartments, for the
purpose of selling all or some of the apartments to other persons and includes his assignees; or
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(ii) a person who develops land into a project, whether or not the person also constructs structures on
any of the plots, for the purpose of selling to other persons all or some of the plots in the said
project, whether with or without structures thereon; or
(iii) any development authority or any other public body in respect of allottees of—
(a) buildings or apartments, as the case may be, constructed by such authority or body on lands
owned by them or placed at their disposal by the Government; or
(b) plots owned by such authority or body or placed at their disposal by the Government, for the
purpose of selling all or some of the apartments or plots; or
(iv) an apex State level co-operative housing finance society and a primary co-operative housing
society which constructs apartments or buildings for its members or in respect of the allottees of
such apartments or buildings; or
(v) any other person who acts himself as a builder, coloniser, contractor, developer, estate developer or
by any other name or claims to be acting as the holder of a power of attorney from the owner of the
land on which the building or apartment is constructed or plot is developed for sale; or
(vi) such other person who constructs any building or apartment for sale to the general public.
Explanation.— where the person who constructs or converts a building into apartments or develops
a plot for sale and the persons who sells apartments or plots are different persons, both of them
shall be deemed to be the promoters and shall be jointly liable as such for the functions and
responsibilities specified, under this Act or the rules and regulations made there under;
"Prospectus" means any document described or issued as a prospectus or any notice, circular, or other
document offering for sale or any real estate project or inviting any person to make advances or deposits for
such purposes;
"Real estate agent" means any person, who negotiates or acts on behalf of one person in a transaction of
transfer of his plot, apartment or building, as the case may be, in a real estate project, by way of sale, with
another person or transfer of plot, apartment or building, as the case may be, of any other person to him and
receives remuneration or fees or any other charges for his services whether as commission or otherwise and
includes a person who introduces, through any medium, prospective buyers and sellers to each other for
negotiation for sale or purchase of plot, apartment or building, as the case may be, and includes property
dealers, brokers, middlemen by whatever name called;
"Real estate project" means the development of a building or a building consisting of apartments, or
converting an existing building or a part thereof into apartments, or the development of land into plots or
apartment, as the case may be, for the purpose of selling all or some of the said apartments or plots or
building, as the case may be, and includes the common areas, the development works, all improvements
and structures thereon, and all easement, rights and appurtenances belonging thereto;
"Sanctioned plan" means the site plan, building plan, service plan, parking and circulation plan, landscape
plan, layout plan, zoning plan and such other plan and includes structural designs, if applicable, permissions
such as environment permission and such other permissions, which are approved by the competent authority
prior to start of a real estate project;
‘Appropriate Government’
Section 2(g) of the Act defines ‘appropriate Government’ to mean as follows:
(i) for the Union territory without Legislature, the Central Government;
(ii) for the Union territory of Puducherry, the Union territory Government;
(iii) for the Union territory of Delhi, the Central Ministry of Urban Development;
(iv) for the State, the State Government.
Responsibilities of the appropriate Government
(a) As per section 84 of the Act the appropriate Government is required to notify Rules for the
implementation of the Act, within six months of its commencement.
(b) As per section 20 of the Act the appropriate Government is required to establish the Regulatory
Authority within 1 year from its commencement i.e. maximum by 30th April, 2017.
(c) As per section 20 of the Act the appropriate Government is required to designate an officer
(preferably Housing Secretary) as interim Regulatory Authority, until the establishment of a full time
Regulatory Authority.
(d) As per section 43 of the Act the appropriate Government is required to establish the Appellate
Tribunal within 1 year from its commencement i.e. maximum by 30th April, 2017.
(e) As per section 43 of the Act the appropriate Government is required to designate an existing
Appellate Tribunal (under any other law in force) to be the Appellate Tribunal, until the
establishment of a full time Appellate Tribunal.
(f) The Chairperson and Members of the Regulatory Authority and the Members of the Appellate
Tribunal are required to be appointed based on recommendations of a Selection Committee, thus
the appropriate Government is required to constitute the Selection Committee.
(g) As per section 28 and section 51 the appropriate Government is required to appoint officers and
other employees of Regulatory Authority and the Appellate Tribunal. In addition, it is required to
identify office space etc. and other infrastructure for its functioning.
(h) As per section 41 the Central Government (i.e. the Ministry of HUPA) is required to establish the
Central Advisory Council.
(i) As per section 75 the appropriate Government is required to constitute a ‘Real Estate Regulatory
Fund’.
REGISTRATION OF REAL ESTATE PROJECT AND REGISTRATION OF REAL ESTATE

AGENTS
Many developers across India follow a common practice of pre-lauching a project without securing requisite
approvals for the project from the local authorities, which is termed as “soft launch”, “pre-launch” etc. Buyers
also lap into this opportunity as they get discounted prices during the pre-launches period. But if it is from a
developer who is unscrupulous or a fly by night operator, then it carries a great risk. Hence, to plug this gap,
registration of every project with the regulatory authority has been mandatory before it is launched for sale
and for registration the basic pre-requisite is that the developer must have all the requisite approvals. Thus
the buyer is protected as the project is ring-fenced from the vagaries of non-approvals or delays in approvals
which are one of the major causes of delay for the project. The gist of relevant provisions for registration as
ascribed in sections 3, 4 and 5 of the Act are stated below:
Prior Registration of Real Estate project with Real Estate Regulatory Authority
A promoter shall not advertise, market, book, sell or offer for sale, or invite persons to purchase in any
396 EP-EBCL
manner any plot, apartment or building, as the case may be, in any real estate project or part of it, in any
planning area, without registering the real estate project with the Real Estate Regulatory Authority
established.
The projects that are ongoing on the date of commencement of this Act and for which the completion
certificate has not been issued, the promoter shall make an application to the Authority for registration of the
said project within a period of three months from the date of commencement of this Act.
Authority in the interest of allottees, for projects which are developed beyond the planning area but with the
requisite permission of the local authority, it may, by order, direct the promoter of such project to register with
the Authority, and the provisions of this Act or the rules and regulations made there under, shall apply to
such projects from that stage of registration where the real estate project is to be developed in phases, every
such phase shall be considered a stand alone real estate project, and the promoter shall obtain registration
under this Act for each phase separately.
Projects exempt from the ambit of the Act

The following projects do not require to be registered under the Act:
1. Area of land does not exceed 500 Sq. Meters
2. No. of apartments does not exceed 8
In case of Renovation/ Repair/Re-development

(a) where the area of land proposed to be developed does not exceed five hundred square meters or
the number of apartments proposed to be developed does not exceed eight, inclusive of all phases;
(b) where the promoter has received completion certificate for a real estate project prior to
commencement of this Act;
for the purpose of renovation or repair or re-development which does not involve marketing, advertising
selling or new allotment of any apartment, plot or building, as the case may be, under the real estate project.
Application for Registration of real estate projects

Every promoter shall make an application to the Authority for registration of the real estate project in such
form, manner, within such time and accompanied by such fee as may be specified by the regulations made
by the Authority.
Step 1 Step 2 Step 3

Applicant has to file an Application for registration On successful registration,
application for registration must be either approved or the promoter of the project
with RERA in prescribed rejected within a period of will be provided with a
form along with prescribed 30 days from the date of registration number, a login
fees and documents application by the RERA id and password for the
applicant
The promoter shall enclose the following documents along with the application, namely:—
(a) a brief details of his enterprise including its name, registered address, type of enterprise
(proprietorship, societies, partnership, companies, competent authority), and the particulars of
registration, and the names and photographs of the promoter;
(b) a brief detail of the projects launched by him, in the past five years, whether already completed or
being developed, as the case may be, including the current status of the said projects, any delay in
its completion, details of cases pending, details of type of land and payments pending;
(c) an authenticated copy of the approvals and commencement certificate from the competent authority
obtained in accordance with the laws as may be applicable for the real estate project mentioned in
the application, and where the project is proposed to be developed in phases, an authenticated
copy of the approvals and commencement certificate from the competent authority for each of such
phases;
(d) the sanctioned plan, layout plan and specifications of the proposed project or the phase thereof, and
the whole project as sanctioned by the competent authority;
(e) the plan of development works to be executed in the proposed project and the proposed facilities to
be provided thereof including fire fighting facilities, drinking water facilities, emergency evacuation
services, use of renewable energy;
(f) the location details of the project, with clear demarcation of land dedicated for the project along with
its boundaries including the latitude and longitude of the end points of the project;
(g) proforma of the allotment letter, agreement for sale, and the conveyance deed proposed to be
signed with the allottees;
(h) the number, type and the carpet area of apartments for sale in the project along with the area of the
exclusive balcony or verandah areas and the exclusive open terrace areas apartment with the apartment,
if any;
(i) the number and areas of garage for sale in the project;
(j) the names and addresses of his real estate agents, if any, for the proposed project;
(k) the names and addresses of the contractors, architect, structural engineer, if any and other persons
concerned with the development of the proposed project;
(l) a declaration, supported by an affidavit, which shall be signed by the promoter or any person
authorised by the promoter, stating:—
(A) that he has a legal title to the land on which the development is proposed along with legally
valid documents with authentication of such title, if such land is owned by another person;
(B) that the land is free from all encumbrances, or as the case may be details of the encumbrances
on such land including any rights, title, interest or name of any party in or over such land along
with details;
(C) the time period within which he undertakes to complete the project or phase thereof, as the
case may be;
(D) that seventy per cent. of the amounts realised for the real estate project from the allottees, from
time to time, shall be deposited in a separate account to be maintained in a scheduled bank to
cover the cost of construction and the land cost and shall be used only for that purpose:
The promoter shall withdraw the amounts from the separate account, to cover the cost of the project, in
proportion to the percentage of completion of the project. The amounts from the separate account shall be
withdrawn by the promoter after it is certified by an engineer, an architect and a chartered accountant in
practice that the withdrawal is in proportion to the percentage of completion of the project.
The promoter shall get his accounts audited within six months after the end of every financial year by a
chartered accountant in practice, and shall produce a statement of accounts duly certified and signed by
such chartered accountant and it shall be verified during the audit that the amounts collected for a particular
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project have been utilised for the project and the withdrawal has been in compliance with the proportion to
the percentage of completion of the project.
The promoter shall take all the pending approvals on time, from the competent authorities and furnished
such other documents as may be prescribed by the rules or regulations made under.
The Authority shall operationalise a web based online system for submitting applications for registration of
projects within a period of one year from the date of its establishment.
Granting of Registration by the Authority

On receipt of the application, the Authority shall within a period of thirty days-
(a) grant registration subject to the provisions of the Act and the rules and regulations made
thereunder. A registration number, including a Login Id and password to the applicant for accessing
the website of the Authority and to create his web page and to fill therein the details of the proposed
project; or
(b) reject the application for reasons to be recorded in writing, if such application does not conform to
the provisions of this Act or the rules or regulations made thereunder.Application shall not be
rejected unless the applicant has been given an opportunity of being heard in the matter.
If the Authority fails to grant the registration or reject the application, as the case may be, the project shall be
deemed to have been registered, and the Authority shall within a period of seven days of the expiry of the
said period of thirty days specified.
The registration granted shall be valid for a period declared by the promoter for completion of the project or
phase thereof, as the case may be.
Extension of registration
Delay in handing over of projects by the developer within the stipulated time frame has been a major woe of
the buyers and hence has been a major trigger for promulgation of this Act. Hence, at the time of registration,
a developer has to specify a time line during which he will complete and handover the project to the buyer.
The timeline is very sacrosanct because if he fails to do so within the stated time, then there are rigorous
provisions in the Act as prescribed in section 7 & 8 whereby his registration would be revoked and his project
would be usurped by the Regulator. Though as per section 6, an extension of registration may be granted at
the sole discretion of the regulator due to Force Majeure conditions or if there are reasonable circumstances
which merit extension.
The registration granted may be extended by the Authority on an application made by the promoter due to
force majeure, in such form and on payment of such fee as may be specified by regulations made by the
Authority.
"Force majeure" shall mean a case of war, flood, drought, fire, cyclone, earthquake or any other calamity
caused by nature affecting the regular development of the real estate project.
The Authority may in reasonable circumstances, without default on the part of the promoter, based on the
facts of each case, and for reasons to be recorded in writing, extend the registration granted to a project for
such time as it considers necessary, which shall, in aggregate, not exceed a period of one year.
Application for extension of registration shall not be rejected unless the applicant has been given an
opportunity of being heard in the matter.
Revocation of registration
The Authority may, on receipt of a complaint or suomotu in this behalf or on the recommendation of the
competent authority, revoke the registration granted, after being satisfied that—
(a) the promoter makes default in doing anything required by or under this Act or the rules or the
regulations made there under;
(b) the promoter violates any of the terms or conditions of the approval given by the competent
authority;
(c) the promoter is involved in any kind of unfair practice or irregularities.
The term "unfair practice means" a practice which, for the purpose of promoting the sale or development of
any real estate project adopts any unfair method or unfair or deceptive practice including any of the following
practices, namely:—
A. the practice of making any statement, whether in writing or by visible representation which,—
(i) falsely represents that the services are of a particular standard or grade;
(ii) represents that the promoter has approval or affiliation which such promoter does not have;
(iii) makes a false or misleading representation concerning the services;
B. the promoter permits the publication of any advertisement or prospectus whether in any newspaper
or otherwise of services that are not intended to be offered;
(a) the promoter indulges in any fraudulent practices.
The registration granted to the promoter shall not be revoked unless the Authority has given to the promoter
not less than thirty days’ notice, in writing, stating the grounds on which it is proposed to revoke the
registration, and has considered any cause shown by the promoter within the period of that notice against
the proposed revocation.
The Authority may, instead of revoking the registration, permit it to remain in force subject to such further
terms and conditions as it thinks fit to impose in the interest of the allottees, and any such terms and
conditions so imposed shall be binding upon the promoter.
The Authority, upon the revocation of the registration-

● Debar the promoter from accessing its website in relation to that project and specify his name in the
list of defaulters and display his photograph on its website and also inform the other Real Estate
Regulatory Authority in other States and Union territories about such revocation or registration;
● Facilitate the remaining development works to be carried out in accordance with the provisions of
section 8;
● Direct the bank holding the project back account to freeze the account, and thereafter take such
further necessary actions, including consequent de-freezing of the said account, towards facilitating
the remaining development works in accordancewith the provisions of section 8;
● To protect the interest of allottees or in the public interest, issue such directions as it may deem
necessary.
Obligation of Authority consequent upon lapse of or on revocation of registration (Section 8)
Upon lapse of the registration or on revocation of the registration under the Act, the authority, may consult
400 EP-EBCL
the appropriate Government to take such action as it may deem fit including the carrying out of the remaining
development works by competent authority or by the association of allottees or in any other manner, as may
be determined by the Authority.
The direction, decision or order of the Authority shall not take effect until the expiry of the period of appeal
provided under the provisions of the Act:
In case of revocation of registration of a project under the Act, the association of allottees shall have the first
right of refusal for carrying out of the remaining development works.
Registration of real estate agents

Real estate broking is one of the easiest business in India as there are no specific qualification or experience
requirements and also there is no code of practice which sets accountability, transparency and professional
benchmarks. Hence, there are thousands of non-professional agents/ brokers in every city operating without
any accountability. Hence, to bring in transparency and accountability, agents have also been covered under
the ambit of RERA and registration requirement has been mandatory for them as per section 9 of the Act.
Without obtaining registration, real estate agent shall not facilitate the sale or purchase of or act on behalf of
any person to facilitate the sale or purchase of any plot, apartment or building, as the case may be, in a real
estate project or part of it, being the part of the real estate project registered, being sold by the promoter in
any planning area.
Every real estate agent shall make an application to the Authority for registration in such form, manner,
within such time and accompanied by such fee and documents as may be prescribed.
The Authority shall, within such period, in such manner and upon satisfying itself of the fulfilment of such
conditions, as may be prescribed—
(a) grant a single registration to the real estate agent for the entire State of Union territory, as the case
may be;
(b) reject the application for reasons to be recorded in writing, if such application does not conform to
the provisions of the Act or the rules or regulations made there under:
Application shall not be rejected unless the applicant has been given an opportunity of being heard in the
matter.
Whereon the completion of the period prescribed under the act, if the applicant does not receive any
communication about the deficiencies in his application or the rejection of his application, he shall be
deemed to have been registered.
Every real estate agent who is registered as per the provisions of this Act or the rules and regulations made
there under, shall be granted a registration number by the Authority, which shall be quoted by the real estate
agent in every sale facilitated by him under this Act.
Every registration shall be valid for such period as may be prescribed, and shall be renewable for a period in
such manner and on payment of such fee as may be prescribed.
Where any real estate agent who has been granted registration under this Act commits breach of any of the
conditions thereof or any other terms and conditions specified under this Act or any rules or regulations
made there under, or where the Authority is satisfied that such registration has been secured by the real
estate agent through misrepresentation or fraud, the Authority may, without prejudice to any other provisions
under this Act, revoke the registration or suspend the same for such period as it thinks fit:
Provided that no such revocation or suspension shall be made by the Authority unless an opportunity of
being heard has been given to the real estate agent.
Functions of real estate agents

Every real estate agent which is not registered with the Authority shall not facilitate the sale or purchase of
any plot, apartment or building, as the case may be, in a real estate project or part of it, being sold by the
promoter in any planning area. So, firstly they require to register themselves with the authority.
Every real estate agent maintains and preserves such books of account, records and documents as may
prescribed.
Every real estate agent not to involve himself in any unfair trade practices, namely:—
(i) the practice of making any statement, whether orally or in writing or by visible representation
which—
▪ falsely represents that the services are of a particular standard or grade;
▪ represents that the promoter or himself has approval or affiliation which such promoter or
himself does not have;
▪ makes a false or misleading representation concerning the services;
(ii) permitting the publication of any advertisement whether in any newspaper or otherwise of services
that are not intended to be offered.
Every real estate agent shall facilitate the possession of all the information and documents, as the allottee, is
entitled to, at the time of booking of any plot, apartment or building, as the case may be and discharge such
other functions as may be prescribed.
FUNCTIONS AND DUTIES OF PROMOTER

The most important duty of the promoter which has been mandated by the Act is to provide complete details
of the project so that a layman who does not even know the legal requirements is able to check the legal
sanctity of the project. The promoter has also been debarred from advertising and selling his project until he
has procured the requisite approvals from the authorities and got his project registered with RERA.
Functions and duties of promoter

The promoter shall, upon receiving his Login Id and password, as the case may be, create his web page on
the website of the Authority and enter all details of the proposed project for public viewing, including—
(a) details of the registration granted by the Authority;
(b) quarterly up-to-date the list of number and types of apartments or plots, as the case may be,
booked;
(c) quarterly up-to-date the list of number of garages booked;
(d) quarterly up-to-date the list of approvals taken and the approvals which are pending subsequent to
commencement certificate;
(e) quarterly up-to-date status of the project; and
(f) such other information and documents as may be specified by the regulations made by the
Authority.
402 EP-EBCL
The advertisement or prospectus issued or published by the promoter shall mention prominently the website
address of the Authority, wherein all details of the registered project have been entered and include the
registration number obtained from the Authority and such other matters incidental thereto.
The promoter at the time of the booking and issue of allotment letter shall be responsible to make available
to the allottee, the following information, namely:—
(A) sanctioned plans, layout plans, along with specifications, approved by the competent authority, by
display at the site or such other place as may be specified by the regulations made by the Authority;
(B) the stage wise time schedule of completion of the project, including the provisions for civic
infrastructure like water, sanitation and electricity.
The promoter shall—

(a) be responsible for all obligations, responsibilities and functions under the provisions of the Act or the
rules and regulations made thereunder or to the allottees as per the agreement for sale, or to the
association of allottees, as the case may be, till the conveyance of all the apartments, plots or
buildings, as the case may be, to the allottees, or the common areas to the association of allottees
or the competent authority, as the case may be:
Provided that the responsibility of the promoter, with respect to the structural defect or any other
defect for such period as is referred to in sub-section (3) of section 14, shall continue even after the
conveyance deed of all the apartments, plots or buildings, as the case may be, to the allottees are
executed.
(b) be responsible to obtain the completion certificate or the occupancy certificate, or both, as
applicable, from the relevant competent authority as per local laws or other laws for the time being
in force and to make it available to the allottees individually or to the association of allottees, as the
case may be;
(c) be responsible to obtain the lease certificate, where the real estate project is developed on a
leasehold land, specifying the period of lease, and certifying that all dues and charges in regard to
the leasehold land has been paid, and to make the lease certificate available to the association of
allottees;
(d) be responsible for providing and maintaining the essential services, on reasonable charges, till the
taking over of the maintenance of the project by the association of the allottees;
(e) enable the formation of an association or society or co-operative society, as the case may be, of the
allottees, or a federation of the same, under the laws applicable:
Provided that in the absence of local laws, the association of allottees, by whatever name called,
shall be formed within a period of three months of the majority of allottees having booked their plot
or apartment or building, as the case may be, in the project;
(f) execute a registered conveyance deed of the apartment, plot or building, as the case may be, in
favour of the allottee along with the undivided proportionate title in the common areas to the
association of allottees or competent authority, as the case may be, as provided under section 17 of
this Act;
(g) pay all outgoings until he transfers the physical possession of the real estate project to the allottee
or the associations of allottees, as the case may be, which he has collected from the allottees, for
the payment of outgoings (including land cost, ground rent, municipal or other local taxes, charges
for water or electricity, maintenance charges, including mortgage loan and interest on mortgages or
other encumbrances and such other liabilities payable to competent authorities, banks and financial
institutions, which are related to the project):
Provided that where any promoter fails to pay all or any of the outgoings collected by him from the
allottees or any liability, mortgage loan and interest thereon before transferring the real estate
project to such allottees, or the association of the allottees, as the case may be, the promoter shall
continue to be liable, even after the transfer of the property, to pay such outgoings and penal
charges, if any, to the authority or person to whom they are payable and be liable for the cost of any
legal proceedings which may be taken therefore by such authority or person;
(h) after he executes an agreement for sale for any apartment, plot or building, as the case may be, not
mortgage or create a charge on such apartment, plot or building, as the case may be, and if any
such mortgage or charge is made or created then notwithstanding anything contained in any other
law for the time being in force, it shall not affect the right and interest of the allottee who has taken
or agreed to take such apartment, plot or building, as the case may be;
The promoter may cancel the allotment only in terms of the agreement for sale: However the allottee may
approach the Authority for relief, if he is aggrieved by such cancellation and such cancellation is not in
accordance with the terms of the agreement for sale, unilateral and without any sufficient cause.
The promoter shall prepare and maintain all such other details as may be specified, from time to time, by
regulations made by the Authority.
Obligations of promoter regarding veracity of the advertisement or prospectus

Where any person makes an advance or a deposit on the basis of the information contained in the notice
advertisement or prospectus, or on the basis of any model apartment, plot or building, as the case may be,
and sustains any loss or damage by reason of any incorrect, false statement included therein, he shall be
compensated by the promoter in themanner as provided under the Act.
If the person affected by such incorrect, false statement contained in the notice, advertisement or
prospectus, or the model apartment, plot or building, as the case may be, intends to withdraw from the
proposed project, he shall be returned his entire investment along with interest at such rate as may be
prescribed and the compensation in the manner provided under the Act.
No deposit or advance to be taken by promoter without first entering into agreement for
sale
A promoter shall not accept a sum more than ten per cent of the cost of the apartment, plot, or building as
the case may be, as an advance payment or an application fee, from a person without first entering into a
written agreement for sale with such person and register the said agreement for sale, under any law for the
time being in force.
The agreement for sale shall be in such form as may be prescribed and shall specify the particulars of
development of the project including the construction of building and apartments, along with specifications
and internal development works and external development works, the dates and the manner by which
payments towards the cost of the apartment, plot or building, as the case may be, are to be made by the
allottees and the date on which the possession of the apartment, plot or building is to be handed over, the
rates of interest payable by the promoter to the allottee and the allottee to the promoter in case of default,
and such other particulars, as may be prescribed.
404 EP-EBCL
Adherence to sanctioned plans and project specifications by the promoter

The proposed project shall be developed and completed by the promoter in accordance with the sanctioned
plans, layout plans and specifications as approved by the competent authorities.
Notwithstanding anything contained in any law, contract or agreement, after the sanctioned plans, layout
plans and specifications and the nature of the fixtures, fittings, amenities and common areas, of the
apartment, plot or building, as the case may be, as approved by the competent authority, are disclosed or
furnished to the person who agree to take one or more of the said apartment, plot or building, as the case
may be, the promoter shall not make—
(i) any additions and alterations in the sanctioned plans, layout plans and specifications and the nature
of fixtures, fittings and amenities described therein in respect of the apartment, plot or building, as
the case may be, which are agreed to be taken, without the previous consent of that person:
The promoter may make such minor additions or alterations as may be required by the allottee, or
such minor changes or alterations as may be necessary due to architectural and structural reasons
duly recommended and verified by an authorised Architect or Engineer after proper declaration and
intimation to the allottee.
"minor additions or alterations" excludes structural change including an addition to the area or
change in height, or the removal of part of a building, or any change to the structure, such as the
construction or removal or cutting into of any wall or a part of a wall, partition, column, beam, joist,
floor including a mezzanine floor or other support, or a change to or closing of any required means
of access ingress or egress or a change to the fixtures or equipment, etc.
(ii) any other alterations or additions in the sanctioned plans, layout plans and specifications of the
buildings or the common areas within the project without the previous written consent of at least
two-thirds of the allottees, other than the promoter, who have agreed to take apartments in such
building.
It may be noted that the allottees, irrespective of the number of apartments or plots, as the case may be,
booked by him or booked in the name of his family, or in the case of other persons such as companies or
firms or any association of individuals, etc., by whatever name called, booked in its name or booked in the
name of its associated entities or related enterprises, shall be considered as one allottee only.
Structural Defect
In case any structural defect or any other defect in workmanship, quality or provision of services or any other
obligations of the promoter as per the agreement for sale relating to such development is brought to the
notice of the promoter within a period of five years by the allottee from the date of handing over possession,
it shall be the duty of the promoter to rectify such defects without further charge, within thirty days, and in the
event of promoter's failure to rectify such defects within such time, the aggrieved allottees shall be entitled to
receive appropriate compensation in the manner as provided under the Act.
Obligations of promoter in case of transfer of a real estate project to a third party

The promoter shall not transfer or assign his majority rights and liabilities in respect of a real estate project to
a third party without obtaining prior written consent from two-third allottees, except the promoter, and without
the prior written approval of the Authority:
However such transfer or assignment shall not affect the allotment or sale of the apartments, plots or
buildings as the case may be, in the real estate project made by the erstwhile promoter.
The allottee, irrespective of the number of apartments or plots, as the case may be, booked by him or
booked in the name of his family, or in the case of other persons such as companies or firms or any
association of individuals, by whatever name called, booked in its name or booked in the name of its
associated entities or related enterprises, shall be considered as one allottee only.
On the transfer or assignment being permitted by the allottees and the authority, the intending promoter shall
be required to independently comply with all the pending obligations under the provisions of the Act or the
rules and regulations made thereunder, and the pending obligations as per the agreement for sale entered
into by the erstwhile promoter with the allottees:
Any transfer or assignment permitted shall not result in extension of time to the intending promoter to
complete the real estate project and he shall be required to comply with all the pending obligations of the
erstwhile promoter, and in case of default, such intending promoter shall be liable to the consequences of
breach or delay, as the case may be, as provided under this Act or the rules and regulations made
thereunder.
Obligations of promoter regarding insurance of real estate project
The promoter shall obtain all such insurances as may be notified by the appropriate Government, including
but not limited to insurance in respect of —
(i) title of the land and building as a part of the real estate project; and
(ii) construction of the real estate project.
The promoter shall be liable to pay the premium and charges in respect of the insurance and shall pay the
same before transferring the insurance to the association of the allottees.
The insurance shall stand transferred to the benefit of the allottee or the association of allottees, as the case
may be, at the time of promoter entering into an agreement for sale with the allottee. On formation of the
association of the allottees, all documents relating to the insurance shall be handed over to the association of
the allottees.
Transfer of title
The promoter shall execute a registered conveyance deed in favour of the allottee along with the undivided
proportionate title in the common areas to the association of the allottees or the competent authority, as the
case may be, and hand over the physical possession of the plot, apartment of building, as the case may be,
to the allottees and the common areas to the association of the allottees or the competent authority, as the
case may be, in a real estate project, and the other title documents pertaining thereto within specified period
as per sanctioned plans as provided under the local laws.
Provided that, in the absence of any local law, conveyance deed in favour of the allottee or the association of
the allottees or the competent authority, as the case may be, under this section shall be carried out by the
promoter within three months from date of issue of occupancy certificate.
After obtaining the occupancy certificate and handing over physical possession to the allottees, it shall be
the responsibility of the promoter to handover the necessary documents and plans, including common
areas, to the association of the allottees or the competent authority, as the case may be, as per the local
laws.
406 EP-EBCL
Provided that, in the absence of any local law, the promoter shall handover the necessary documents and
plans, including common areas, the association of the allottees or the competent authority, as the case may
be, within thirty days after obtaining the occupancy certificate.
Return of amount and compensation

If the promoter fails to complete or is unable to give possession of an apartment, plot or building,—
(a) in accordance with the terms of the agreement for sale or, as the case may be, duly completed by
the date specified therein; or
(b) due to discontinuance of his business as a developer on account of suspension or revocation of the
registration under this Act or for any other reason,
he shall be liable on demand to the allottees, in case the allottee wishes to withdraw from the project, without
prejudice to any other remedy available, to return the amount received by him in respect of that apartment,
plot, building, as the case may be, with interest at such rate as may be prescribed in this behalf including
compensation in the manner as provided under this Act.
Provided that where an allottee does not intend to withdraw from the project, he shall be paid, by the
promoter, interest for every month of delay, till the handing over of the possession, at such rate as may be
prescribed.
The promoter shall compensate the allottees in case of any loss caused to him due to defective title of the
land, on which the project is being developed or has been developed, in the manner as provided under this
Act, and the claim for compensation under this subsection shall not be barred by limitation provided under
any law for the time being in force.
If the promoter fails to discharge any other obligations imposed on him under this Act or the rules or
regulations made thereunder or in accordance with the terms and conditions of the agreement for sale, he
shall be liable to pay such compensation to the allottees, in the manner as provided under this Act.
Functions and duties of promoter
Sl. No. Obligation/Duty/Section
1. No promoter shall advertise, market, book, sell or offer for sale, or invite persons to purchase in
any manner any plot, apartment or building in any planning area, without registering the real
estate project with the Real Estate Regulatory Authority. Section 3(1)
2. Every promoter shall make an application to the Authority for registration of the real estate
project in prescribed form and manner. Section 4(1)
3. The promoter shall enclose the prescribed documents along with the application. Section 4(2)
4. The promoter shall also enclose a prescribed declaration along with application. Section 4(2)(l)
5. The promoter shall keep 70% of the amount received from allottees in a separate bank account
in a scheduled bank. Section 4(2)(l)(D)
6. The promoter shall withdraw the amounts from the separate account, to cover the cost of the
project, in proportion to the percentage of completion of the project. Section 4(2)(l)(D)
7. The promoter shall withdraw the amounts from the separate account after it is certified by an
engineer, an architect and a chartered accountant in practice and the withdrawal is in

proportion to the percentage of completion of the project. Section 4(2)(l)(D)
8. The promoter shall get his accounts audited within six months after the end of every financial
year by a chartered accountant in practice. Section 4(2)(l)(D)
9. The promoter shall furnish a statement of accounts duly certified and signed by auditor verifying
that the amounts collected for a particular project have been utilized for the project and the
withdrawal has been in compliance with the proportion to the percentage of completion of the
project. Section 4(2)(l)(D)
10. The promoter shall obtain a registration number and a Login Id and password to the promoter
for accessing the website of the Authority and to create his web page and to fill therein the
details of the proposed project. Section 5(2)
11. The promoter shall file application for extension of registration in prescribed form and manner
before the Authority if the project could not be completed within time due to force majeure.
Section 6
12. The promoter shall comply with anything required by or under the Act or the rules or the
regulations. Section 7(1)(a)
13. The promoter shall not violate any of the terms or conditions of the approval given by the
competent authority. Section 7(1)(b)
14. The promoter shall not be involved in any kind of unfair practice or irregularities. Section
7(1)(c)
15. The promoter shall respond to the Notice of Revocation, if any, issued by the Authority. Section
7(2)
16 The promoter shall follow any further terms and condition imposed by Authority permitting the
registration to remain in force, instead of revoking the registration under Section 7(1). Section
7(3)
17. The promoter shall follow the directions issued by the Authority upon revocation of registration,
unless right of appeal is exercised. Section 7(4)
17A.
The promoter shall use the services of only registered real estate agents for sale of apartment, plot
or building of any registered project. Section 9(1)
18. The promoter shall create his web page on the website of the Authority and enter all the
prescribed details of the proposed project in all the fields for public viewing. Section 11(1)
19. The promoter shall mention prominently the website address of the Authority in all advertisements or
prospectus issued or published. Section 11(2)
20.
The promoter shall be responsible to make available to the allottee, all the prescribed
information at the time of the booking and issue of allotment letter. Section 11(3)
21. The promoter shall be responsible for all obligations, responsibilities and functions under the
provisions of this Act or the rules and regulations. Section 11(4)(a)
408 EP-EBCL
22. The promoter shall be responsible to obtain the completion certificate or the occupancy
certificate, or both, as applicable, from the relevant competent authority. Section 11(4)(b)
23. The promoter shall be responsible to obtain the lease certificate, where the real estate project is
developed on a leasehold land. Section 11(4)(c)
24 The promoter shall be responsible for providing and maintaining the essential services, on
reasonable charges. Section 11(4)(d)
25. The promoter shall enable the formation of an association or society or co-operative society of
the allottees. Section 11(4)(e)
26 The promoter shall execute a registered conveyance deed of the apartment, plot or building in
favour of the allottee. Section 11(4)(f)
27 The promoter shall execute a registered conveyance deed of the undivided proportionate title in
the common areas to the association of allottees or competent authority. Section 11(4)(f)
28. The promoter shall pay all outgoings until he transfers the physical possession of the real
estate project to the allottee or the associations of allottees. Section 11(4)(g)
29. The promoter shall be liable for the cost of any legal proceedings which may be taken up by
authority or person for recovery of outstanding outgoings, if not paid by the promoter. Section
11(4)(g) Proviso
30. The promoter shall not mortgage or create a charge on any apartment, plot or building after
execution of an agreement for sale. Section 11(4)(h)
31.
The promoter may cancel the allotment only in terms of the agreement for sale. Section 11(5)
32. The promoter shall prepare and maintain all details as may be specified, from time to time, by
regulations made by the Authority. Section 11(6)
33. The promoter shall be liable to pay compensation to the allottee where he makes an advance
or a deposit on the basis of the information contained in the notice advertisement or
prospectus, or on the basis of any model apartment, plot or building and sustains any loss or
damage by reason of any incorrect, false statement . Section 12
34. The promoter shall enter into an agreement for sale and register the same before he accepts a
sum more than ten per cent of the cost of the apartment, plot, or building. Section 13(1)
35. The promoter shall ensure that the agreement for sale is in prescribed form and contain
specified particulars. Section 13(2)
36. The promoter shall develop and complete the proposed project in accordance with the
sanctioned plans, layout plans and specifications as approved by the competent authorities.
Section 14(1)
37. The promoter shall not make any additions and alterations in the sanctioned plans, layout plans and
specifications and the nature of fixtures, fittings and amenities in any apartment, plot or building
without the previous consent of the allottee(s) concerned. Section 14(2)(i)
38 The promoter shall not make any other alterations or additions in the sanctioned plans, layout
plans and specifications of the buildings or the common areas within the project without the
previous written consent of at least two-thirds of the allottees. Section 14(2)(ii)
39. The promoter shall be obliged to rectify without further charge, within thirty days, any structural
defect or any other defect in workmanship, quality or provision of services or any other
obligations of the promoter as per the agreement for sale relating to such development brought
to the notice by allottee within a period of five years from the date of handing over possession.
Section 14(3)
40. The promoter shall be responsible to pay to the aggrieved allottees appropriate compensation
in prescribed manner if he fails to rectify any structural defect or any other defect in
workmanship, quality or provision of services or any other obligations of the promoter as per the
agreement for sale. Section 14(3)
41. The promoter shall not transfer or assign his majority rights and liabilities in respect of a real
estate project to a third party without obtaining prior written consent from two-third allottees and
without the prior written approval of the Authority. Section 15(1)
42 The promoter shall obtain all such insurances in respect of title and construction, as may be
notified by the appropriate Government.Section 16(1)
43. The promoter shall be liable to pay the premium and charges in respect of the insurance.
Section 16(2)
44. The promoter shall transfer all benefits of insurance to allottees and/or the association of
allottees at the time of promoter entering into an agreement for sale with the allottee. Section
16(3)
45. The promoter shall hand over all documents relating to the insurance to the association of the
allottees on its formation. Section 16(4)
46. The promoter shall execute a registered conveyance deed in favour of the allottee. Section
17(1)
47. The promoter shall execute a registered conveyance deed of undivided proportionate title in the
common areas to the association of allottees or the competent authority. Section 17(1)
48. The promoter shall hand over the physical possession of the plot, apartment of building to the
allottee. Section 17(1)
49. The promoter shall handover or physical possession of the common areas to the association of
allottees or the competent authority. Section 17(1)
50.
The promoter shall handover the necessary documents and plans, including common areas, to the
association of the allottees or the competent authority. Section 17(2)
51.
The promoter shall on demand by the allottees, return the amount received by in respect of that
apartment, plot, building with interest and compensation. Section 18(1)
52.
The promoter shall compensate the allottees in case of any loss caused to him due to defective
title of the land. Section 18(2)
53. The promoter shall be liable to pay compensation if he fails to discharge any other obligations
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imposed on him under this Act or the rules or regulations. Section 18(3)
54. The promoter shall be obliged to furnish in writing such information or explanation relating to its
Affairs, as the Authority may require from time to time. Section 35(1)
55. The promoter shall be responsible to comply with any directions issued by the Authority unless he
makes an appeal against such directions. Section 37
56.
The promoter shall be liable to pay penalty or interest imposed by the Authority unless he
makes an appeal. Section 38(1)
57. The promoter shall be shall be liable to a penalty, which may extend up to ten per cent. of the
estimated cost of the real estate project, if he contravenes provisions of section 3. Section
59(1)
58. The promoter shall be liable to be punished with imprisonment for a term which may extend up
to three years or with fine which may extend up to a further ten per cent of the estimated cost of
the real estate project, or with both if he does not comply with the orders, decisions or
directions issued under Section 3(1). Section 59(2)
59. The promoter shall be liable to a penalty, which may extend up to five per cent of the estimated
cost of the real estate project, if he provides false information or contravenes the provisions of
Section 4. Section 60
60. The promoter shall be liable to a penalty which may extend up to five per cent of the estimated
cost of the real estate project, if he contravenes any other provisions of this Act. Section 61
61. The promoter shall be liable to a penalty for every day during which such default continues,
which may cumulatively extend up to five per cent of the estimated cost of the real estate
project, if any promoter, who fails to comply with, or contravenes any of the orders or directions
of the Authority. Section 63
62 The promoter shall be punishable with imprisonment for a term which may extend up to three
years or with fine for every day during which such default continues, which may cumulatively
extend up to ten per cent of the estimated cost of the real estate project if any promoter, who
fails to comply with, or contravenes any of the orders, decisions or directions of the Appellate
Tribunal. Section 64
RIGHTS AND DUTIES OF ALLOTTEES

Though the Act is pro-consumer, yet it has striked a balance by specifying the duties of the Allottees. Allottes
who do not pay their instalments, maintenance dues in time will also be subjected to the rigours of this Act.
Rights and duties of allottees

Section 20 provides for the various rights and duties of the allottees.
(1) The allottee shall be entitled to obtain the information relating to sanctioned plans, layout plans
along with the specifications, approved by the competent authority and such other information as
provided in the Act or the rules and regulations made thereunder or the agreement for sale signed
with the promoter.
(2) The allottee shall be entitled to know stage-wise time schedule of completion of the project,
including the provisions for water, sanitation, electricity and other amenities and services as agreed
to between the promoter and the allottee in accordance with the terms and conditions of the
agreement for sale.
(3) The allottee shall be entitled to claim the possession of apartment, plot or building, as the case may
be, and the association of allottees shall be entitled to claim the possession of the common areas,
as per the declaration given by the promoter.
(4) The allottee shall be entitled to claim the refund of amount paid along with interest at such rate as
may be prescribed and compensation in the manner as provided under the Act, from the promoter,
if the promoter fails to comply or is unable to give possession of the apartment, plot or building, as
the case may be, in accordance with the terms of agreement for sale or due to discontinuance of his
business as a developer on account of suspension or revocation of his registration under the
provisions of the Act or the rules or regulations made thereunder.
(5) The allottee shall be entitled to have the necessary documents and plans, including that of common
areas, after handing over the physical possession of the apartment or plot or building as the case may
be, by the promoter.
(6) Every allottee, who has entered into an agreement for sale to take an apartment, plot or building as the
case may be, shall be responsible to make necessary payments in the manner and within the time as
specified in the said agreement for sale and shall pay at the proper time and place, the share of the
registration charges, municipal taxes, water and electricity charges, maintenance charges, ground rent,
and other charges, if any.
(7) The allottee shall be liable to pay interest, at such rate as may be prescribed, for any delay in
payment towards any amount or charges to be paid under sub-section (6).
(8) The obligations of the allottee under sub-section (6) and the liability towards interest under sub-
section (7) may be reduced when mutually agreed to between the promoter and such allottee.
(9) Every allottee of the apartment, plot or building as the case may be, shall participate towards the
formation of an association or society or cooperative society of the allottees, or a federation of the
same.
(10) Every allottee shall take physical possession of the apartment, plot or building as the case may be,
within a period of two months of the occupancy certificate issued for the said apartment, plot or
building, as the case may be.
(11) Every allottee shall participate towards registration of the conveyance deed of the apartment, plot or
building, as the case may be, as provided under sub-section (1) of section 17 of this Act.
THE REAL ESTATE REGULATORY AUTHORITY
As stated earlier, though this sector has seen unprecedented growth since Independence, it has remained
unregulated till know. We have witnessed that whenever a regulator is appointed for a sector, like SEBI,
IRDAI, TRAI etc, it widens the sectors. Accordingly, this act mandates that RERA would be established by
each of the State and UT for administering the real estate sector in the respective State/UT. A state can have
more than one RERA or two states can have the same authority. All States and UTs were to appoint RERA
by 1st May 2017 but few States have missed the deadline but it is expected that they will appoint RERA in
their respective states by 31st July 2017 as it is the last date by which the ongoing projects have to
registered by the developer with RERA.
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Establishment and incorporation of Real Estate Regulatory Authority
The appropriate Government shall establish an Authority to be known as the Real Estate Regulatory
Authority to exercise the powers conferred on it and to perform the functions assigned to it under the Act.
The appropriate Government of two or more States or Union territories may, if it deems fit, establish one
single Authority. Further, the appropriate Government may, if it deems fit, establish more than one Authority
in a State or Union territory, as the case may be.
Until the establishment of a Regulatory Authority under this section, the appropriate Government shall, by
order, designate any Regulatory Authority or any officer preferably the Secretary of the department dealing
with Housing, as the Regulatory Authority for the purposes under the Act. After the establishment of the
Regulatory Authority, all applications, complaints or cases pending with the Regulatory Authority designated,
shall stand transferred to the Regulatory Authority so established and shall be heard from the stage such
applications, complaints or cases are transferred.
The Authority shall be a body corporate by the name aforesaid having perpetual succession and a common
seal, with the power, subject to the provisions of the Act, to acquire, hold and dispose of property, both
movable and immovable, and to contract, and shall, by the said name, sue or be sued.
Composition of Authority
The Authority shall consist of a Chairperson and not less than two whole time Members to be appointed by
the appropriate Government.
Qualifications of Chairperson and Members of Authority

The Chairperson and other Members of the Authority shall be appointed by the appropriate Government on
the recommendations of a Selection Committee consisting of the Chief Justice of the High Court or his
nominee, the Secretary of the Department dealing with Housing and the Law Secretary, in such manner as
may be prescribed, from amongst persons having adequate knowledge of and professional experience of at-
least twenty years in case of the Chairperson and fifteen years in the case of the Members in urban
development, housing, real estate development, infrastructure, economics, technical experts from relevant
fields, planning, law, commerce, accountancy, industry, management, social service, public affairs or
administration:
It may be noted that a person who is, or has been, in the service of the State Government shall not be
appointed as a Chairperson unless such person has held the post of Additional Secretary to the Central
Government or any equivalent post in the Central Government or State Government. Further, a person who
is, or has been, in the service of the State Government shall not be appointed as a member unless such
person has held the post of Secretary to the State Government or any equivalent post in the State
Government or Central Government.
Term of office of Chairperson and Members

(1) The Chairperson and Members shall hold office for a term not exceeding five years from the date on
which they enter upon their office, or until they attain the age of sixty-five years, whichever is earlier
and shall not be eligible for re-appointment.
(2) Before appointing any person as a Chairperson or Member, the appropriate Government shall
satisfy itself that the person does not have any such financial or other interest as is likely to affect
prejudicially his functions as such Member.
Salary and allowances payable to Chairperson and Members

(1) The salary and allowances payable to, and the other terms and conditions of service of, the
Chairperson and other Members shall be such as may be prescribed and shall not be varied to their
disadvantage during their tenure.
(2) The Chairperson or a Member, as the case may be, may,—
(a) relinquish his office by giving in writing, to the appropriate Government, notice of not less than
three months; or
(b) be removed from his office in accordance with the provisions of section 26 of this Act.
(3) Any vacancy caused to the office of the Chairperson or any other Member shall be filled-up within a
period of three months from the date on which such vacancy occurs.
Administrative powers of Chairperson

The Chairperson shall have powers of general superintendence and directions in the conduct of the affairs of
Authority and he shall, in addition to presiding over the meetings of the Authority, exercise and discharge
such administrative powers and functions of the Authority as may be prescribed.
Removal of Chairperson and Members from office in certain circumstances

Section 26 deals with Removal of Chairperson and Members from office in certain circumstances. Sub-section(1)
states that the appropriate Government may, in accordance with the procedure notified, remove from office the
Chairperson or other Members, if the Chairperson or such other Member, as the case may be,—
(a) has been adjudged as an insolvent; or
(b) has been convicted of an offence, involving moral turpitude; or
(c) has become physically or mentally incapable of acting as a Member; or
(d) has acquired such financial or other interest as is likely to affect prejudicially his functions; or
(e) has so abused his position as to render his continuance in office prejudicial to the public interest.
(2) The Chairperson or Member shall not be removed from his office on the ground specified under clause (d) or
clause (e) of sub-section (1) except by an order made by the appropriate Government after an inquiry made by a
Judge of the High Court in which such Chairperson or Member has been informed of the charges against him and
given a reasonable opportunity of being heard in respect of those charges.
Restrictions on Chairperson or Members on employment after cessation of office

The Chairperson or a Member, ceasing to hold office as such, shall not—
(a) accept any employment in, or connected with, the management or administration of, any person or
organisation which has been associated with any work under this Act, from the date on which he
ceases to hold office:
However nothing contained in this clause shall apply to any employment under the appropriate
Government or a local authority or in any statutory authority or any corporation established by or
under any Central, State or provincial Act or a Government Company, as defined under clause (45)
of section 2 of the Companies Act, 2013, which is not a promoter as per the provisions of the Act;
(b) act, for or on behalf of any person or organisation in connection with any specific proceeding or
transaction or negotiation or a case to which the Authority is a party and with respect to which the
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Chairperson or such Member had, before cessation of office, acted for or provided advice to the
Authority;
(c) give advice to any person using information which was obtained in his capacity as the Chairperson
or a Member and being unavailable to or not being able to be made available to the public;
(d) enter into a contract of service with, or accept an appointment to a board of directors of, or accept
an offer of employment with, an entity with which he had direct and significant official dealings
during his term of office as such.
The Chairperson and Members shall not communicate or reveal to any person any matter which has been
brought under his consideration or known to him while acting as such.
Officers and other employees of Authority
The appropriate Government may, in consultation with the Authority appoint such officers and employees as
it considers necessary for the efficient discharge of their functions under the Act who would discharge their
functions under the general superintendence of the Chairperson.
The salary and allowances payable to, and the other terms and conditions of service of, the officers and of
the employees of the Authority appointed shall be such as may be prescribed.
Meetings of Authority
(1) The Authority shall meet at such places and times, and shall follow such rules of procedure in
regard to the transaction of business at its meetings, (including quorum at such meetings), as may
be specified by the regulations made by the Authority.
(2) If the Chairperson for any reason, is unable to attend a meeting of the Authority, any other Member
chosen by the Members present amongst themselves at the meeting, shall preside at the meeting.
(3) All questions which come up before any meeting of the Authority shall be decided by a majority of
votes by the Members present and voting, and in the event of an equality of votes, the Chairperson
or in his absence, the person presiding shall have a second or casting vote.
(4) The questions which come up before the Authority shall be dealt with as expeditiously as possible
and the Authority shall dispose of the same within a period of sixty days from the date of receipt of
the application:
However where any such application could not be disposed of within the said period of sixty days, the
Authority shall record its reasons in writing for not disposing of the application within that period.
Filing of complaints with the Authority or the adjudicating officer
Any aggrieved person may file a complaint with the Authority or the adjudicating officer, as the case may be,
for any violation or contravention of the provisions of the Act or the rules and regulations made thereunder
against any promoter allottee or real estate agent, as the case may be.
It may be noted that“person" shall include the association of allottees or any voluntary consumer association
registered under any law for the time being in force.
Functions of Authority for promotion of real estate sector
The Authority shall in order to facilitate the growth and promotion of a healthy, transparent, efficient and
competitive real estate sector make recommendations to the appropriate Government of the competent
authority, as the case may be, on,—
— protection of interest of the allottees, promoter and real estate agent;

— creation of a single window system for ensuring time bound project approvals and clearances for
timely completion of the project;
— creation of a transparent and robust grievance redressal mechanism against acts of ommission and
commission of competent authorities and their officials;
— measures to encourage investment in the real estate sector including measures to increase
financial assistance to affordable housing segment;
— measures to encourage construction of environmentally sustainable and affordable housing,
promoting standardisation and use of appropriate construction materials, fixtures, fittings and
construction techniques;
— measures to encourage grading of projects on various parameters of development including grading
of promoters;
— measures to facilitate amicable conciliation of disputes between the promoters and the allottees
through dispute settlement forums set up by the consumer or promoter associations;
— measures to facilitate digitization of land records and system towards conclusive property titles with
title guarantee;
— to render advice to the appropriate Government in matters relating to the development of real estate
sector;
— any other issue that the Authority may think necessary for the promotion of the real estate sector.
Advocacy and awareness measures

The appropriate Government may, while formulating a policy on real estate sector (including review of laws
related to real estate sector) or any other matter, make a reference to the Authority for its opinion on possible
effect, of such policy or law on real estate sector and on the receipt of such a reference, the Authority shall
within a period of sixty days of making such reference, give its opinion to the appropriate Government which
may thereafter take further action as it deems fit.
The opinion given by the Authority shall not be binding upon the appropriate Government in formulating such
policy or laws.
The Authority shall take suitable measures for the promotion of advocacy, creating awareness and imparting
training about laws relating to real estate sector and policies.
Functions of Authority
The functions of the Authority shall include—
— to register and regulate real estate projects and real estate agents registered under the Act;
— to publish and maintain a website of records, for public viewing, of all real estate projects for which
registration has been given, with such details as may be prescribed, including information provided
in the application for which registration has been granted;
— to maintain a database, on its website, for public viewing, and enter the names and photographs of
promoters as defaulters including the project details, registration for which has been revoked or
have been penalised under this Act, with reasons therefor, for access to the general public;
— to maintain a database, on its website, for public viewing, and enter the names and photographs of
416 EP-EBCL
real estate agents who have applied and registered under this Act, with such details as may be
prescribed, including those whose registration has been rejected or revoked;
— to fix through regulations for each areas under its jurisdiction the standard fees to be levied on the
allottees or the promoter or the real estate agent, as the case may be;
— to ensure compliance of the obligations cast upon the promoters, the allottees and the real estate
agents under the Act and the rules and regulations made thereunder;
— to ensure compliance of its regulations or orders or directions made in exercise of its powers under
the Act;
— to perform such other functions as may be entrusted to the Authority by the appropriate Government
as may be necessary to carry out the provisions of the Act.
Powers of Authority to call for information, conduct investigation
Where the Authority considers it expedient to do so, on a complaint or suomotu, relating to the Act or the
rules of regulations made thereunder, it may, by order in writing and recording reasons therefor call upon any
promoter or allottee or real estate agent, as thecase may be, at any time to furnish in writing such information
or explanation relating to its affairs as the Authority may require and appoint one or more persons to make
an inquiry in relation to the affairs of any promoter or allottee or the real estate agent, as the case may be.
Notwithstanding anything contained in any other law for the time being in force, while exercising the powers,
the Authority shall have the same powers as are vested in a civil court under the Code of Civil Procedure,
1908 while trying a suit, in respect of the following matters, namely:—
(i) the discovery and production of books of account and other documents, at such place and at such
time as may be specified by the Authority;
(ii) summoning and enforcing the attendance of persons and examining them on oath;
(iii) issuing commissions for the examination of witnesses or documents;
(iv) any other matter which may be prescribed.
Power to issue interim orders
Where during an inquiry, the Authority is satisfied that an act in contravention of the Act, or the rules and
regulations made thereunder, has been committed and continues to be committed or that such act is about
to be committed, the Authority may, by order, restrain any promoter, allottee or real estate agent from
carrying on such act until the conclusion of such inquiry of until further orders, without giving notice to such
party, where the Authority deems it necessary.
Powers of Authority to issue directions
The Authority may, for the purpose of discharging its functions under the provisions of this Act or rules or
regulations made thereunder, issue such directions from time to time, to the promoters or allottees or real
estate agents, as the case may be, as it may consider necessary and such directions shall be binding on all
concerned.
Powers of Authority
(1) The Authority shall have powers to impose penalty or interest, in regard to any contravention of
obligations cast upon the promoters, the allottees and the real estate agents, under this Act or the
rules and the regulations made thereunder.
(2) The Authority shall be guided by the principles of natural justice and, subject to the other provisions
of this Act and the rules made thereunder, the Authority shall have powers to regulate its own
procedure.
(3) Where an issue is raised relating to agreement, action, omission, practice or procedure that—
(a) has an appreciable prevention, restriction or distortion of competition in connection with the
development of a real estate project; or
(b) has effect of market power of monopoly situation being abused for affecting interest of allottees
adversely, then the Authority, may suo motu, make reference in respect of such issue to the
Competition Commission of India.
Rectification of orders
The Authority may, at any time within a period of two years from the date of the order made under the Act,
with a view to rectifying any mistake apparent from the record, amend any order passed by it, and shall make
such amendment, if the mistake is brought to its notice by the parties.
It may be noted that no such amendment shall be made in respect of any order against which an appeal has
been preferred under the Act:
Recovery of interest or penalty or compensation and enforcement of order, etc.
If a promoter or an allottee or a real estate agent, as the case may be, fails to pay any interest or penalty or
compensation imposed on him, by the adjudicating officer or the Regulatory Authority or the Appellate
Authority, as the case may be, under this Act or the rules and regualtions made thereunder, it shall be
recoverable from such promoter or allottee or real estate agent, in such manner as may be prescribed as an
arrears of land revenue.
If any adjudicating officer or the Regulatory Authority or the Appellate Tribunal, as the case may be, issues
any order or directs any person to do any act, or refrain from doing any act, which it is empowered to do
under this Act or the rules or regulations made thereunder, then in case of failure by any person to comply
with such order or direction, the same shall be enforced, in such manner as may be prescribed.
Responsibilities of the ‘Regulatory Authority’
Registration of the real estate project

and the real estate agent
Recommendation for the growth and Extention of Registration of the real estate\
Promotion of a healthy, transparent, revocation
Project and its recocation
Notify Regulations Renewal of registration of the real

estate agent and its revocation
To appoint one or more ‘adjudicating office To maintain a website of

records for public rivewing
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CENTRAL ADVISORY COUNCIL
Establishment of Central Advisory Council

(1) The Central Government may, by notification, establish with effect from such date as it may specify
in such notification, a Council to be known as the Central Advisory Council.
(2) The Minister to the Government of India in charge of the Ministry of the Central Government dealing
with Housing shall be the ex officio Chairperson of the Central Advisory Council.
(3) The Central Advisory Council shall consist of representatives of the Ministry of Finance, Ministry of
Industry and Commerce, Ministry of Urban Development, Ministry of Consumer Affairs, Minstry of
Corporate Affairs, Ministry of Law and Justice, NitiAayog, National Housing Bank, Housing and
Urban Development Corporation, five representatives of State Governments to be selected by
rotation, five representatives of the Real Estate Regulatory Authorities to be selected by rotation,
and any other Central Government department as notified.
(4) The Central Advisory Council shall also consist of not more than ten members to represent the interests
of real estate industry, consumers, real estate agents, construction labourers, non-governmental
organisations and academic and research bodies in the real estate sector.
Functions of Central Advisory Council

The Central Advisory Council is required to advise the Central Government on matters relating to
implementation of the Act, questions of policy, protection of consumer interest, foster growth and
development of the real estate sector, and other matters as may be assigned to it by the Central
Government.
THE REAL ESTATE APPELLATE TRIBUNAL

Real Estate Appellate Tribunal (REAT) is to be formed by appropriate government to ensure faster resolution
of disputes. Parties aggrieved by the RERA order can appeal before REAT and REAT has to adjudicate such
cases within 60 days. Civil Courts have been prevented from exercising jurisdiction on such matters. If any of
the parties is not satisfied with the REAT order they can file an appeal against the REAT order to the High
Court within 60 days.
Establishment of Real Estate Appellate Tribunal

(1) The appropriate Government shall, establish an Appellate Tribunal to be known as the — (name of
the State/Union territory) Real Estate Appellate Tribunal.
(2) The appropriate Government may, if it deems necessary, establish one or more benches of the
Appellate Tribunal, for various jurisdictions, in the State or Union territory, as the case may be.
(3) Every bench of the Appellate Tribunal shall consist of at least one Judicial Member and one
Administrative or Technical Member.
(4) The appropriate Government of two or more States or Union territories may, if it deems fit, establish
one single Appellate Tribunal.
(5) Any person aggrieved by any direction or decision or order made by the Authority or by an
adjudicating officer under the Act may prefer an appeal before the Appellate Tribunal having
jurisdiction over the matter.
It may be noted that where a promoter files an appeal with the Appellate Tribunal, it shall not be entertained,
without the promoter first having deposited with the Appellate Tribunal atleast thirty per cent. of the penalty,
or such higher percentage as may be determined by the Appellate Tribunal, or the total amount to be paid to
the allottee including interest and compensation imposed on him, if any, or with both, as the case may be,
before the said appeal is heard.
"Person" shall include the association of allottees or any voluntary consumer association registered under
any law for the time being in force.
Application for settlement of disputes and appeals to Appellate Tribunal

Section 44 of the Act deals with Application for settlement of disputes and appeals to Appellate Tribunal. It
provides that:
The appropriate Government or the competent authority or any person aggrieved by any direction or order or
decision of the Authority or the adjudicating officer may prefer an appeal to the Appellate Tribunal.
Every appeal made to the Appellate Tribunal shall be preferred within a period of sixty days from the date on
which a copy of the direction or order or decision made by the Authority or the adjudicating officer is received
by the appropriate Government or the competent authority or the aggrieved person and it shall be in such
form and accompanied by such fee, as may be prescribed.
The Appellate Tribunal may entertain any appeal after the expiry of sixty days if it is satisfied that there was
sufficient cause for not filling it within that period.
On receipt of an appeal, the Appellate Tribunal may after giving the parties an opportunity of being heard, pass
such orders, including interim orders, as it thinks fit.
The Appellate Tribunal shall send a copy of every order made by it to the parties and to the Authority or the
adjudicating officer, as the case may be.
The appeal shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to
dispose of the appeal within a period of sixty days from the date of receipt of appeal:
Provided that where any such appeal could not be disposed of within the said period of sixty days, the
Appellate Tribunal shall record its reasons in writing for not disposing of the appeal within that period.
The Appellate Tribunal may, for the purpose of examining the legality or propriety or correctness of any order
or decision of the Authority or the adjudicating officer, on its own motion or otherwise, call for the records
relevant to deposing of such appeal and make such orders as it thinks fit.
Composition of Appellate Tribunal

The Appellate Tribunal shall consist of a Chairperson and not less than two whole time Members of which
one shall be a Judicial member and other shall be a Technical or Administrative Member
Qualifications for appointment of Chairperson and Members

A person shall not be qualified for appointment as the Chairperson or a Member of the Appellate Tribunal
unless he,—
(a) in the case of Chairperson, is or has been a Judge of a High Court; and
(b) in the case of a Judicial Member he has held a judicial office in the territory of India for at least
fifteen years or has been a member of the Indian Legal Service and has held the post of Additional
Secretary of that service or any equivalent post, or has been an advocate for at least twenty years
with experience in dealing with real estate matters; and
420 EP-EBCL
(c) in the case of a Technical or Administrative Member, he is a person who is well-versed in the field of
urban development, housing, real estate development, infrastructure, economics, planning, law,
commerce, accountancy, industry, management, public affairs or administration and possesses
experience of at least twenty years in the field or who has held the post in the Central Government,
or a State Government equivalent to the post of Additional Secretary to the Government of India or
an equivalent post in the Central Government or an equivalent post in the State Government.
The Chairperson of the Appellate Tribunal shall be appointed by the appropriate Government in consultation
with the Chief Justice of High Court or his nominee.
The judicial Members and Technical or Administrative Members of the Appellate Tribunal shall be appointed
by the appropriate Government on the recommendations of a Selection Committee consisting of the Chief
Justice of the High Court or his nominee, the Secretary of the Department handling Housing and the Law
Secretary and in such manner as may be prescribed.
Term of office of Chairperson and Members

(1) The Chairperson of the Appellate Tribunal or a Member of the Appellate Tribunal shall hold office,
as such for a term not exceeding five years from the date on which he enters upon his office, but
shall not be eligible for re-appointment:
It may be noted that in case a person, who is or has been a Judge of a High Court, has been
appointed as Chairperson of the Tribunal, he shall not hold office after he has attained the age of
sixty-seven years.
However no Judicial Member or Technical or Administrative Member shall hold office after he has
attained the age of sixty-five years.
(2) Before appointing any person as Chairperson or Member, the appropriate Government shall satisfy
itself that the person does not have any such financial or other interest, as is likely to affect
prejudicially his functions as such member.
Restrictions on Chairperson or Judicial Member or Technical or Administrative Member on

employment after cessation of office
The Chairperson or Judicial Member or Technical or Administrative Member, ceasing to hold office as such
shall not:—
(a) Accept any employment in, or connected with, the management or administration of, any person or
organisation which has been associated with any work under this Act, from the date on which he
ceases to hold office:
Provided that nothing contained in this clause shall apply to any employment under the appropriate
Government or a local authority or in any statutory authority or any corporation established by or
under any Central, State of provincial Act or a Government Company as defined under clause (45)
of section 2 of the Companies Act, 2013, which is not a promoter as per the provisions of the Act;
(b) act, for or on behalf of any person or organisation in connection with any specific proceeding or
transaction or negotiation or a case to which the Authority is a party and with respect to which the
Chairperson or Judicial Member or Technical or Administrative Member had, before cessation of
office, acted for or provided advice to the Authority;
(c) give advice to any person using information which was obtained in his capacity as the Chairperson
or Judicial Member or Technical or Administrative Member and being unavailable to or not being
able to be made available to the public;

(d) enter into a contract of service with, or accept an appointment to a board of directors of, or accept an
offer of employment with, an entity with which he had direct and significant official dealings during his
term of office as such.
The Chairperson or Judicial Member or Technical or Administrative Member shall not communicate or reveal
to any person any matter which has been brought under his consideration or known to him while acting as
such.
Powers of Tribunal
(1) The Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil
Procedure, 1908 but shall be guided by the principles of natural justice.
(2) Subject to the provisions of this Act, the Appellate Tribunal shall have power to regulate its own
procedure.
(3) The Appellate Tribunal shall also not be bound by the rules of evidence contained in the Indian
Evidence Act, 1872.
(4) The Appellate Tribunal shall have, for the purpose of discharging its functions under this Act, the
same powers as are vested in a civil court under the Code of Civil Procedure, 1908 in respect of the
following matters, namely:—
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examinations of witnesses or documents;
(e) reviewing its decisions;

(f) dismissing an application for default or directing it ex parte; and
(g) any other matter which may be prescribed.
(5) All proceedings before the Appellate Tribunal shall be deemed to be judicial proceedings within the
meaning of sections 193, 219 and 228 for the purposes of section 196 of the Indian Penal Code,
and the Appellate Tribunal shall be deemed to be civil court for the purposes of section 195 and
Chapter XXVI of the Code of Criminal Procedure, 1973.
Right to legal representation

Section 56 deals with Right to legal representation. It provides that
The applicant or appellant may either appear in person or authorise one or more chartered accountants or
company secretaries or cost accountants or legal practitioners or any of its officers to present his or its
case before the Appellate Tribunal or the Regulatory Authority or the adjudicating officer, as the case may
be.
Explanation.—For the purposes of this section,—

(a) "chartered accountant" means a chartered accountant as defined in clause (b) of sub-section (1) of
section 2 of the Chartered Accountants Act, 1949 or any other law for the time being in force and
who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;
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(b) "company secretary" means a company secretary as defined in clause (c) of sub-section (1) of
section 2 of the Company Secretaries Act, 1980 or any other law for the time being in force and who
has obtained a certificate of practice under sub-section (1) of section 6 of that Act;
(c) "cost accountant" means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of
the Cost and Works Accountants Act, 1959 or any other law for the time being in force and who has
obtained a certificate of practice under sub-section (1) of section 6 of that Act;
(d) "legal practitioner" means an advocate, vakil or an attorney of any High Court, and includes a
pleader in practice.
Orders passed by Appellate Tribunal to be executable as a decree

Every order made by the Appellate Tribunal under this Act shall be executable by the Appellate Tribunal as a
decree of civil court, and for this purpose, the Appellate Tribunal shall have all the powers of a civil court.
The Appellate Tribunal may transmit any order made by it to a civil court having local jurisdiction and such
civil court shall execute the order as if it were a decree made by the court.

Any person aggrieved by any decision or order of the Appellate Tribunal may, file an appeal to the High Court,
within a period of sixty days from the date of communication of the decision or order of the Appellate Tribunal to
him on any one or more of the grounds specified in section 100 of the Code of Civil Procedure, 1908.
The High Court may entertain the appeal after the expiry of the said period of sixty days, if it is satisfied that
the appellant was prevented by sufficient cause from preferring the appeal in time.
Explanation.— "High Court" means the High Court of a State or Union territory where the real estate project
is situated.
No appeal shall lie against any decision or order made by the Appellate Tribunal with the consent of the
parties.
Real Estate Regulatory Authority and Appellate Tribunal
─ Real Estate Regulatory Authority regulate

Transactions related to both residential and
commercial projects
— Appellate Tribunals be required to

adjudicate cases in 60 days
— Regulatory Authorities has to dispose

of complaints in 60 days
ROLE OF COMPANY SECRETARIES
Advisory Role
Compounding of Drafting of Various

offence Documents
Legal
Representaive Registration
Befor Tribunal under RERA
India is witnessing a phenomenal growth and expansion in the corporate sector. The growing demand for
specialists in almost every sphere of the corporate functions has led to emergence of professionals who can
perform specialized skills with near perfection in their respective fields. A company secretary is one such
professional who is responsible for efficient management of the corporate sector. He ensures compliance of
various company legislations and advises directors on statutory requirements of the company. Apart from
carrying out these functions, he also looks after finance, accounts, legal, secretarial, personnel and
administrative functions in private as well as public sectors.
The Companies Act, 2013 confers a special status to Company Secretary as the key managerial personnel
and has bracketed him along with Managing Director (MD) or Chief Executive Officer (CEO) or Manager,
Whole-time director(s) or Chief Financial Officer (CFO). Every listed company and every other public
company having a paid up share capital of ten crore rupees or more has to appoint a whole time Key
Managerial Personnel. Whole time Company Secretary is also required to be appointed in other companies
which have a paid up share capital of five crore rupees or more.
Almost every kind of organization whose affairs are conducted by boards, councils or other corporate
structures, be it a company, trust, association, federation, authority, commission or the like find it useful to
appoint a person who holds the qualification of Company Secretaryship in key administrative position.
Practising Company Secretaries have been authorized to issue Certificate regarding compliance of
conditions of Corporate Governance. Practising Company Secretaries have also been recognized to appear
before various Tribunals such as NCLT, NCLAT, Securities Appellate Tribunal, Competition Commission of
India, Telecom Disputes Settlement and Appellate Tribunal, Consumer Forums, Tax Tribunals etc. Reserve
Bank of India has also recognized the Practising Company Secretaries to undertake Diligence Report for
Banks.
The rapid Change in Indian Legislative has brought about a sea change in the role and profile of a company
secretary. They are now being seen as corporate development planners. Besides embarking upon traditional
areas of practice, Company Secretaries in Practice are increasingly required to advise and guide on legal
aspects of business which intimately concern areas such as registration under RERA, production, drafting of
various documents, sales, marketing and administration for identifying expansion opportunities, issuing due
diligence or comfort certificate, arranging foreign collaborations, amalgamations, mergers, acquisition,
424 EP-EBCL
takeovers, setting up of subsidiaries and joint ventures within and outside India etc. The new opportunities
offered by the growing capital markets and financial services have greatly contributed to the development of
the practice side of the profession.
Company Secretaries - One Stop Professional Advisory Services for Real Estate Projects
Company Secretaries holding Certificate of Practice by becoming an expert in the act can indulge in
providing advice in respect of:
— Financial Advisory Services
— Various applicable provision particular on real estate project
— Registration and extension procedure of real estate project with competent authority
— Various obligation, functions and duties of promoter in a real estate project
— Penal Provisions under the Act

— Funding Options for Real Estate Project
— Taxation aspects for Real Estate Project
— Legal & Regulatory Compliances
Company Secretaries – As a Legal Representative

As per Section 56 of the Act, a Company Secretary holding certificate of practice can appear before
Appellate Tribunal or a Regulatory Authority or Adjudicating Officer on behalf of applicant or appellant as the
case may be.
Hence a Company Secretary holding certificate of practice can –

— Represent a person (promoter) before any real estate regulatory authority for registration of real
estate project,
— Represent a person before real estate appellate tribunal.
— Represent a person before any other competent authority for any other purpose under Real Estate
(Regulation and Development) Act, 2016.
OFFENCES, PENALTIES AND ADJUDICATION

Punishment prescribed for non-registration of a project under the Act
As per section 59, where under the Act, it is obligatory for the promoter to register a project with the
Authority, and the promoter fails to do the same, he shall be liable to a penalty upto ten percent of the
estimated cost of the real estate project.
However, in case the promoter consistently defaults or does not comply with the directions orders of the
Authority as regards registration of the project with the Authority, he shall be liable to additional fine of ten
percent of the estimated cost of the real estate project or imprisonment upto 3 years or both.
Penalty for contravention of section 4(Application for registration of real estate projects)
If any promoter provides false information or contravenes the provisions of section 4, he shall be liable to a
penalty which may extend up to five per cent of the estimated cost of the real estate project, as determined
by the Authority.
Penalty for contravention of other provisions of the Act
If any promoter contravenes any other provisions of the Act, other than that provided under section 3 or
section 4, or the rules or regulations made thereunder, he shall be liable to a penalty which may extend up to
five per cent. of the estimated cost of the real estate project as determined by the Authority.
Penalty for non-registration and contravention under sections 9 and 10
If any real estate agent fails to comply with or contravenes the provisions of section 9 or section 10 he shall
be liable to a penalty of ten thousand rupees for every day during which such default continues, which may
cumulatively extend up to five per cent of the cost of plot, apartment or buildings, as the case may be, of the
real estate project, for which the sale or purchase has been facilitated as determined by the Authority.
Penalty for failure to comply with orders of Authority by promoter
If any promoter, who fails to comply with, or contravenes any of the orders or directions of the Authority, he
shall be liable to a penalty for every day during which such default continues, which may cumulatively extend
up to five per cent., of the estimated cost of the real estate project as determined by the Authority.
Penalty for failure to comply with orders of Appellate Tribunal by promoter
If any promoter, who fails to comply with, or contravenes any of the orders, decisions or directions of the
Appellate Tribunal, he shall be punishable with imprisonment for a term which may extend up to three years
or with fine for every day during which such default continues, which may cumulatively extend up to ten per
cent. of the estimated cost of the real estate project, or with both.
Penalty for failure to comply with orders of Authority by real estate agent
If any real estate agent, who fails to comply with, or contravenes any of the orders or directions of the
Authority, he shall be liable to a penalty for every day during which such default continues, which may
cumulatively extend up to five per cent., of the estimated cost of plot, apartment or building, as the case may
be, of the real estate project, for which the sale or purchase has been facilitated and as determined by the
Authority.
Penalty for failure to comply with orders of Appellate Tribunal by real estate agent
If any real estate agent, who fails to comply with, or contravenes any of the orders, decisions or directions of
the Appellate Tribunal, he shall be punishable with imprisonment for a term which may extend up to one year
or with fine for every day during which such default continues, which may cumulatively extend up to ten per
cent. of the estimated cost of plot, apartment or building, as the case may be, of the real estate project, for
which the sale or purchase has been facilitated, or with both.
Penalty for failure to comply with orders of Authority by allottee
If any allottee, who fails to comply with, or contravenes any of the orders, decisions or directions of the
Authority he shall be liable to a penalty for the period during which such default continues, which may
cumulatively extend up to five per cent. of the plot, apartment or building cost, as the case may be, as
determined by the Authority.
Penalty for failure to comply with orders of Appellate Tribunal by allottee
If any allottee, who fails to comply with, or contravenes any of the orders or directions of the Appellate
Tribunal, as the case may be, he shall be punishable with imprisonment for a term which may extend up to
one year or with fine for every day during which such default continues, which may cumulatively extend up to
426 EP-EBCL
ten per cent of the plot, apartment or building cost, as the case may be, or with both.
Where an Offence under the Act has been committed by a company, every person who, at the time, the
offence was committed was in charge of, or was responsible to the company for the conduct of, the business
of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly -
However nothing contained in this sub-section, shall render any such person liable to any punishment under
the Act if he proves that the offence was committed without his knowledge or that he had exercised all due
diligence to prevent the commission of such offence.
Where an offence under the Act has been committed by a company, and it is proved that the offence has
been committed with the consent or connivance of, or is attributable to, any neglect on the part of any
director, manager, secretary or other officer of the company, such director, manager, secretary or other
officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and
Explanation.-
(a) ''company'' means any body corporate and includes a firm, or other association of individuals; and
(b) ''director'' in relation to a firm, means a partner in the firm.
Compounding of offences
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, if any person is punished with
imprisonment under the Act, the punishment may, either before or after the institution of the prosecution, be
compounded by the court on such terms and conditions and on payment of such sums as may be prescribed.
However the sum prescribed shall not, in any case, exceed the maximum amount of the fine which may be
imposed for the offence so compounded.
Power to adjudicate
For the purpose of adjudging compensation under sections 12, 14, 18 and section 19(Section 12 deals with
obligations of promoter regarding veracity of the advertisement or prospectus, Section 14 deals with
Adherence to sanctioned plans and project specifications by the promoter, Section 18 deals with Return of
amount and compensation, Section 19 deals with Rights and duties of allottees), the Authority shall appoint
in consultation with the appropriate Government one or more judicial officer as deemed necessary, who is or
has been a District Judge to be an adjudicating officer for holding an inquiry in the prescribed manner, after
giving any person concerned a reasonable opportunity of being heard.
Any person whose complaint in respect of matters covered under section(s) 12, 14, 18 and section 19 is
pending before the Consumer Disputes Redressal Forum or the Consumer Disputes Redressal Commission
or the National Consumer Redressal Commission, established under section 9 of the Consumer Protection
Act, 1986, on or before the commencement of the Act, he may, with the permission of such Forum or
Commission, as the case may be, withdraw the complaint pending before it and file an application before the
adjudicating officer under this Act.
The application for adjudging compensation shall be dealt with by the adjudicating officer as expeditiously as
possible and dispose of the same within a period of sixty days from the date of receipt of the application.
Where any such application could not be disposed of within the said period of sixty days, the adjudicating
officer shall record his reasons in writing for not disposing of the application within that period.
While holding an inquiry the adjudicating officer shall have power to summon and enforce the attendance of
any person acquainted with the facts and circumstances of the case to give evidence or to produce any
document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject matter
of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of
any of the sections i.e., sections 12, 14, 18 and section 19, he may direct to pay such compensation or
interest, as the case any be, as he thinks fit in accordance with the provisions of any of those sections.
Bar of jurisdiction
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the
Authority or the Adjudicating officer or the Appellate Tribunal is empowered by or under the Act to determine
and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken
in pursuance of any power conferred by or under the Act.
SPECIMEN AGREEMENT FOR SALE TO BE EXECUTED BETWEEN THE PROMOTER AND

THE ALLOTTEE
This Agreement for Sale (“Agreement”) executed on this __ (Date) day of ______ (Month), 20____,
By and Between
[If the promoter is a company]
________________ (CIN no. __________________), a company incorporated under the provisions of the
Companies Act, [1956 or 2013, as the case may be], having its registered office at _______________ and its
corporate office at__________________________(PAN ______________), represented by its authorized
signatory ___________________________ (Aadhar no. __________________) authorized vide board
resolution dated _______________ hereinafter referred to as the “Promoter” (which expression shall unless
repugnant to the context or meaning thereof be deemed to mean and include its successor-in-interest, and
permitted assigns).
[OR]
[If the promoter is a Partnership firm]
________________________, a partnership firm registered under the Indian Partnership Act, 1932, having
its principal place of business at ___________________________, (PAN ________________), represented
by its authorized Partner ___________________, (Aadhar no. __________________) authorized vide
_____________________, hereinafter referred to as the “Promoter” (which expression shall unless
repugnant to the context or meaning thereof be deemed to mean and include the partners or partner for the
time being of the said firm, the survivor or survivors of them and their heirs, executors and administrators of
the last surviving partner and his/her/their assigns).
[OR]
[If the promoter is an Individual]
Mr. / Ms.____________________, (Aadhar no. __________________) son / daughter of ______________,

aged about _________, residing at ____________________, (PAN _______________), hereinafter called
the “Promoter” (which expression shall unless repugnant to the context or meaning thereof be deemed to
mean and include his/her heirs, executors, administrators, successors-in-interest and permitted assigns).
428 EP-EBCL
AND
[If the Allottee is a company]
_______________________, (CIN no. __________________) a company incorporated under the provisions

of the Companies Act, [1956 or 2013, as the case may be], having its registered office at
_____________________, (PAN ______________), represented by its authorized signatory,
__________________, (Aadhar no._________________) duly authorized vide board resolution dated
___________, hereinafter referred to as the “Allottee” (which expression shall unless repugnant to the
context or meaning thereof be deemed to mean and include its successor-in-interest, and permitted assigns).
[OR]
[If the Allottee is a Partnership]
__________, a partnership firm registered under the Indian Partnership Act, 1932, having its principal place
of business at __________, (PAN ______________), represented by its authorized partner,
_____________, (Aadhar no. __________________) authorized vide _____________________________,
hereinafter referred to as the “Allottee” (which expression shall unless repugnant to the context or meaning
thereof be deemed to mean and include the partners or partner for the time being of the said firm, the
survivor or survivors of them and their heirs, executors and administrators of the last surviving partner and
his/her/their assigns).
[OR]
[If the Allottee is an Individual]
Mr. / Ms. ___________________, (Aadhar no. __________________) son / daughter of ______________,

aged about _________, residing at _______________________, (PAN __________________), hereinafter
called the “Allottee” (which expression shall unless repugnant to the context or meaning thereof be deemed
to mean and include his/her heirs, executors, administrators, successors-in-interest and permitted a
assigns).
[OR]
[If the Allottee is a HUF]
Mr._______________, (Aadhar no. __________________) son of _________ aged about _________ for
self and as the Karta of the Hindu Joint Mitakshara Family known as _____________ HUF, having its place
of business / residence at ________________, (PAN ___________), hereinafter referred to as the
“Allottee” (which expression shall unless repugnant to the context or meaning thereof be deemed to mean
and the members or member for the time being of the said HUF, and their respective heirs, executors,
administrators and permitted assigns).
[Please insert details of other allottee(s), in case of more than one allottee]
The Promoter and Allottee shall hereinafter collectively be referred to as the “Parties” and individually as a
“Party”.
DEFINITIONS]
For the purpose of this Agreement for Sale, unless the context otherwise requires,-
(a) “Act” means the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
(b) “appropriate Government” means the Central Government;

(c) “Rules” means the Real Estate (Regulation and Development) (General) Rules, 2016 made under
the Real Estate(Regulation and Development) Act, 2016;
(d) “Regulations” means the Regulations made under the Real Estate (Regulation and Development
Act, 2016;
(e) “section” means a section of the Act.
WHEREAS
A. The Promoter is the absolute and lawful owner of [khasra nos./ survey nos.] [Please insert land
details as per local laws] ___________ totally admeasuring _____ square meters situated at
_____in Tehsil & District_____________(“Said Land”) vide sale deed(s) dated ______________
registered as documents no. ________ at the office of theSub-Registrar;
[OR]
_________________ (“Owner”) is the absolute and lawful owner of [khasra nos./ survey nos.]
[Please insert land details as per local laws] ___________totally admeasuring _____ square meters
situated at _____in Tehsil & District__________ (“Said Land”) vide sale deed(s) dated
______________registered as documents no.________ at the office of the Sub-Registrar. The
Owner and the Promoter have entered into a [collaboration /development / joint development]
agreement dated ____________ registered as document no. __________ at theoffice of the Sub-
Registrar;
B. The Said Land is earmarked for the purpose of building a [commercial/residential/ any other
purpose] project, comprising _____ multistoried apartment buildings and [insert any other components of
the Projects] and the said project shall be known as ‘__________________’ (“Project”);
[OR]
(C) The Said Land is earmarked for the purpose of plotted development of a
[commercial/residential/any other purpose] project, comprising ________plots and [insert any other
components of the Projects] and the said project shall be known as ‘__________________’
(“Project”):
Provided that where land is earmarked for any institutional development the same shall be used for
those purposes only and no commercial/residential development shall be permitted unless it is a
part of the plan approved by the competent authority;
(C) The Promoter is fully competent to enter into this Agreement and all the legal formalities with
respect to the right, title and interest of the Promoter regarding the Said Land on which Project is to
be constructed have been completed;
(D) The _______________[Please insert the name of the concerned competent authority] has granted
the commencement certificate to develop the Project vide approval dated __________ bearing
registration no._______________;
(E) The Promoter has obtained the final layout plan, sanctioned plan, specifications and approvals for
the Project and also for the apartment, plot or building, as the case may be, from
______________________________________[Please insert the name of the concerned
competent authority]. The Promoter agrees and undertakes that it shall not make any changes to
these approved plans except in strict compliance with section 14 of the Act and other laws as
430 EP-EBCL
applicable;
(F) The Promoter has registered the Project under the provisions of the Act with the _________ (Name
of Union Territory) Real Estate Regulatory Authority at _______ on _____________under
registration no._______________;
(G) The Allottee had applied for an apartment in the Project vide application no._______ dated
__________ and has been allotted apartment no. ___________having carpet area of ______
square feet, type ________, on ____ floor in [tower/block/building] no._______ (“Building”) along
with garage/covered parking no. _____ admeasuring _____ square feet in the ___________[Please
insert the location of the garage/covered parking], as permissible under the applicable law and of
pro rata share in the common areas (“Common Areas”) as defined under clause (n) of Section 2 of
the Act (hereinafter referred to as the “Apartment” more particularly described in Schedule A and
the floor plan of the apartment is annexed hereto and marked as Schedule B);
[OR]
The Allottee had applied for a plot in the Project vide application no. _________dated ______ and
has been allotted plot no. _________ having area of ______square feet and plot for garage/covered
parking admeasuring __________ square feet (if applicable)] in the _______________ [Please
insert the location of the garage/covered parking], as permissible under the applicable law and of
pro rata share in the common areas (“Common Areas”) as defined under clause (n) of Section 2 of
the Act (hereinafter referred to as the “Plot” more particularly described in Schedule A);
(H) The Parties have gone through all the terms and conditions set out in this Agreement and
understood the mutual rights and obligations detailed herein;
(I) _____________________________[Please enter any additional disclosures/ details];
(J) The Parties hereby confirm that they are signing this Agreement with full knowledge of all the laws,
rules, regulations, notifications, etc., applicable to the Project;
(K) The Parties, relying on the confirmations, representations and assurances of each other to faithfully
abide by all the terms, conditions and stipulations contained in this Agreement and all applicable
laws, are now willing to enter into this Agreement on the terms and conditions appearing
hereinafter;
(L) In accordance with the terms and conditions set out in this Agreement and as mutually agreed upon
by and between the Parties, the Promoter hereby agrees to sell and the Allottee hereby agrees to
purchase the [Apartment/Plot] and the garage/covered parking (if applicable) as specified in para G.
NOW THEREFORE, in consideration of the mutual representations, covenants, assurances, promises and
agreements contained herein and other good and valuable consideration, the Parties agree as follows:
1. TERMS:
1.1 Subject to the terms and conditions as detailed in this Agreement, the Promoter agrees to sell to the
Allottee and the Allottee hereby agrees to purchase, the [Apartment/Plot] as specified in para G.
1.2 The Total Price for the [Apartment/Plot] based on the carpet area is Rs. ________
(Rupees _______________________ only ("Total Price") (Give break up and description):
Block/Building/Tower no. ________Rate of Apartment per square feet*
Apartment no. ___________

Type ________
Floor ________
Total price (in rupees) _________________
*Provide break up of the amounts such as cost of apartment, cost of exclusive balcony or verandah
areas, cost of exclusive open terrace areas, proportionate cost of common areas, preferential location
charges, taxes, maintenance charges as per para 11 etc., if/as applicable.
[AND] [if/as applicable]

Garage/Covered parking – 1 Price for 1
Total price (in rupees) ______________
[OR]
Plot no. ___________ Rate of Plot per square feet*
Type ________
Total price (in rupees) _______________
*Provide break up of the amounts such as cost of plot, proportionate cost of common areas, taxes,
maintenance charges as per para 11 etc., if/as applicable.
[AND] [if/as applicable]
Total price (in rupees) _______________
Explanation:
(i) The Total Price above includes the booking amount paid by the allottee to the Promoter towards
the [Apartment/Plot];
(ii) The Total Price above includes Taxes (consisting of tax paid or payable by the Promoter by way
of Value Added Tax, Service Tax, and Cess or any other similar taxes which may be levied, in
connection with the construction of the Project payable by the Promoter, by whatever name
called) up to the date of handing over the possession of the apartment/plot to the allottee and
the project to the association of allottees or the competent authority, as the case may be, after
obtaining the completion certificate:
Provided that in case there is any change / modification in the taxes, the subsequent amount
payable by the allottee to the promoter shall be increased/reduced based on such change /
modification:
Provided further that if there is any increase in the taxes after the expiry of the scheduled date
of completion of the project as per registration with the Authority, which shall include the
extension of registration, if any, granted to the said project by the Authority, as per the Act, the
same shall not be charged from the allottee;
(iii) The Promoter shall periodically intimate in writing to the Allottee, the amount payable as stated
in (i) above and the Allottee shall make payment demanded by the Promoter within the time and
432 EP-EBCL
in the manner specified therein. In addition, the Promoter shall provide to the Allottee the details
of the taxes paid or demanded along with the acts/rules/notifications together with dates from
which such taxes/levies etc. have been imposed or become effective;
(iv) The Total Price of [Apartment/Plot] includes recovery of price of land, construction of [not only the
Apartment but also] the Common Areas, internal development charges, external development
charges, taxes, cost of providing electric wiring, electrical connectivity to the apartment, lift, water line
and plumbing, finishing with paint, marbles, tiles, doors, windows, fire detection and firefighting
equipment in the common areas, maintenance charges as per para 11 etc. and includes cost for
providing all other facilities, amenities and specifications to be provided within the [Apartment/Plot]
and the Project.
1.3 The Total Price is escalation-free, save and except increases which the Allottee hereby agrees to
pay, due to increase on account of development charges payable to the competent authority and/or
any other increase in charges which may be levied or imposed by the competent authority from time
to time. The Promoter undertakes and agrees that while raising a demand on the Allottee for
increase in development charges, cost/charges imposed by the competent authorities, the Promoter
shall enclose the said notification/order/rule/regulation to that effect along with the demand letter
being issued to the Allottee, which shall only be applicable on subsequent payments. Provided that
if there is any new imposition or increase of any development charges after the expiry of the
scheduled date of completion of the project as per registration with the Authority, which shall include
the extension of registration, if any, granted to the said project by the Authority, as per the Act, the
same shall not be charged from the allottee.
1.4 The Allottee(s) shall make the payment as per the payment plan set out in Schedule C (“Payment
Plan”).
1.5 The Promoter may allow, in its sole discretion, a rebate for early payments of installments payable
by the Allottee by discounting such early payments @_____% per annum for the period by which
the respective installment has been preponed. The provision for allowing rebate and such rate of
rebate shall not be subject to any revision/withdrawal, once granted to an Allottee by the Promoter.
1.6 It is agreed that the Promoter shall not make any additions and alterations in the sanctioned plans,
layout plans and specifications and the nature of fixtures, fittings and amenities described herein at
Schedule ‘D’ and Schedule ‘E’ (which shall be in conformity with the advertisement, prospectus etc.,
on the basis of which sale is effected) in respect of the apartment, plot or building, as the case may
be, without the previous written consent of the Allottee as per the provisions of the Act. Provided
that the Promoter may make such minor additions or alterations as may be required by the Allottee,
or such minor changes or alterations as per the provisions of the Act.
1.7 [Applicable in case of an apartment] The Promoter shall confirm to the final carpet area that has
been allotted to the Allottee after the construction of the Building is complete and the occupancy
certificate is granted by the competent authority, by furnishing details of the changes, if any, in the
carpet area. The total price payable for the carpet area shall be recalculated upon confirmation by
the Promoter. If there is reduction in the carpet area then the Promoter shall refund the excess
money paid by Allottee within forty-five days with annual interest at the rate prescribed in the Rules,
from the date when such an excess amount was paid by the Allottee. If there is any increase in the
carpet area, which is not more than three percent of the carpet area of the apartment, allotted to
Allottee, the Promoter may demand that from the Allottee as per the next milestone of the Payment
Plan as provided in Schedule C. All these monetary adjustments shall be made at the same rate per
square feet as agreed in para 1.2 of this Agreement.
1.8 The Promoter agrees and acknowledges, the Allottee shall have the right to the [Apartment/Plot] as
mentioned below:
(i) The Allottee shall have exclusive ownership of the [Apartment/Plot];
(ii) The Allottee shall also have undivided proportionate share in the Common Areas. Since the
share / interest of Allottee in the Common Areas is undivided and cannot be divided or
separated, the Allottee shall use the Common Areas along with other occupants, maintenance
staff etc., without causing any inconvenience or hindrance to them. It is clarified that the
promoter shall hand over the common areas to the association of allottees after duly obtaining
the completion certificate from the competent authority as provided in the Act;
(iii) That the computation of the price of the [Apartment/Plot] includes recovery of price of land,
construction of [not only the Apartment but also] the Common Areas, internal development
charges, external development charges, taxes, cost of providing electric wiring, electrical
connectivity to the apartment, lift, water line and plumbing, finishing with paint, marbles, tiles,
doors, windows, fire detection and firefighting equipment in the common areas, maintenance
charges as per para 11 etc. and includes cost for providing all other facilities, amenities and
specifications to be provided within the [Apartment/Plot] and the Project;
(iv) The Allottee has the right to visit the project site to assess the extent of development of the
project and his apartment/plot, as the case may be.
1.9 It is made clear by the Promoter and the Allottee agrees that the [Apartment/ Plot] along with ____
garage/covered parking shall be treated as a single indivisible unit for all purposes. It is agreed that
the Project is an independent, self-contained Project covering the said Land and is not a part of any
other project or zone and shall not form a part of and/or linked/combined with any other project in its
vicinity or otherwise except for the purpose of integration of infrastructure for the benefit of the
Allottee. It is clarified that Project’s facilities and amenities shall be available only for use and
enjoyment of the Allottees of the Project.
1.10 The Promoter agrees to pay all outgoings before transferring the physical possession of the
apartment to the Allottees, which it has collected from the Allottees, for the payment of outgoings
(including land cost, ground rent, municipal or other local taxes, charges for water or electricity,
maintenance charges, including mortgage loan and interest on mortgages or other encumbrances
and such other liabilities payable to competent authorities, banks and financial institutions, which
are related to the project). If the Promoter fails to pay all or any of the outgoings collected by it from
the Allottees or any liability, mortgage loan and interest thereon before transferring the apartment to
the Allottees, the Promoter agrees to be liable, even after the transfer of the property, to pay such
outgoings and penal charges, if any, to the authority or person to whom they are payable and be
liable for the cost of any legal proceedings which may be taken therefor by such authority or person.
1.11 The Allottee has paid a sum of Rs. ____ (Rupees _____________________only) as booking
amount being part payment towards the Total Price of the [Apartment/ Plot] at the time of
application the receipt of which the Promoter hereby acknowledges and the Allottee hereby agrees
to pay the remaining price of the [Apartment/Plot] as prescribed in the Payment Plan [Schedule C]
as may be demanded by the Promoter within the time and in the manner specified therein:
Provided that if the allottee delays in payment towards any amount which is payable, he shall be
liable to pay interest at the rate prescribed in the Rules.
2. Mode of Payment
Subject to the terms of the Agreement and the Promoter abiding by the construction milestones, the
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Allottee shall make all payments, on written demand by the Promoter, within the stipulated time as
mentioned in the Payment Plan
[Schedule C] through A/c Payee cheque/demand draft/bankers cheque or online payment (as
applicable) in favour of ‘________________________’ payable at _________.
3. Compliance of Laws Relating to Remittances
3.1 The Allottee, if resident outside India, shall be solely responsible for complying with the necessary
formalities as laid down in Foreign Exchange Management Act, 1999, Reserve Bank of India Act,
1934 and the Rules and Regulations made thereunder or any statutory amendment(s)
modification(s) made thereof and all other applicable laws including that of remittance of payment
acquisition/ sale/transfer of immovable properties in India etc. and provide the Promoter with such
permission, approvals which would enable the Promoter to fulfill its obligations under this
Agreement. Any refund, transfer of security, if provided in terms of the Agreement shall be made in
accordance with the provisions of Foreign Exchange Management Act, 1999 or the statutory
enactments or amendments thereof and the Rules and Regulations of the Reserve Bank of India or
any other applicable law. The Allottee understands and agrees that in the event of any failure on
his/her part to comply with the applicable guidelines issued by the Reserve Bank of India, he/she
may be liable for any action under the Foreign Exchange Management Act, 1999 or other laws as
applicable, as amended from time to time.
3.2 The Promoter accepts no responsibility in regard to matters specified in para 3.1 above. The
Allottee shall keep the Promoter fully indemnified and harmless in this regard. Whenever there is
any change in the residential status of the Allottee subsequent to the signing of this Agreement, it
shall be the sole responsibility of the Allottee to intimate the same in writing to the Promoter
immediately and comply with necessary formalities if any under the applicable laws. The Promoter
shall not be responsible towards any third party making payment/remittances on behalf of any
Allottee and such third party shall not have any right in the application/allotment of the said
apartment applied for herein in any way and the Promoter shall be issuing the payment receipts in
favour of the Allottee only.
4. Adjustment/Appropriation of Payments
The Allottee authorizes the Promoter to adjust/appropriate all payments made by him/her under any
head(s) of dues against lawful outstanding of the allottee against the [Apartment/Plot], if any, in
his/her name and the Allottee undertakes not to object/demand/direct the Promoter to adjust his
payments in any manner.
5. Time is Essence
The Promoter shall abide by the time schedule for completing the project as disclosed at the time of
registration of the project with the Authority and towards handing over the [Apartment/Plot] to the
Allottee and the common areas to the association of allottees or the competent authority, as the
case may be.
6. Construction of the Project/Apartment
The Allottee has seen the proposed layout plan, specifications, amenities and facilities of the
[Apartment/Plot] and accepted the floor plan, payment plan and the specifications, amenities and
facilities [annexed along with this Agreement] which has been approved by the competent authority,
as represented by the Promoter. The Promoter shall develop the Project in accordance with the said
layout plans, floor plans and specifications, amenities and facilities. Subject to the terms in this
Agreement, the Promoter undertakes to strictly abide by such plans approved by the competent
Authorities and shall also strictly abide by the bye-laws, FAR and density norms and provisions
prescribed by the ___________ [Please insert the relevant State laws] and shall not have an option
to make any variation /alteration / modification in such plans, other than in the manner provided
under the Act, and breach of this term by the Promoter shall constitute a material breach of the
Agreement.
7. Possession of the Apartment/Plot:
7.1 Schedule for possession of the said [Apartment/Plot] - The Promoter agrees and understands that
timely delivery of possession of the [Apartment/Plot] to the allottee and the common areas to the
association of allottees or the competent authority, as the case may be, is the essence of the
Agreement. The Promoter assures to hand over possession of the [Apartment/Plot] along with ready
and complete common areas with all specifications, amenities and facilities of the project in place
on _________________, unless there is delay or failure due to war, flood, drought, fire, cyclone,
earthquake or any other calamity caused by nature affecting the regular development of the real
estate project (“Force Majeure”). If, however, the completion of the Project is delayed due to the
Force Majeure conditions then the Allottee agrees that the Promoter shall be entitled to the
extension of time for delivery of possession of the [Apartment/Plot], provided that such Force
Majeure conditions are not of a nature which make it impossible for the contract to be implemented.
The Allottee agrees and confirms that, in the event it becomes impossible for the Promoter to
implement the project due to Force Majeure conditions, then this allotment shall stand terminated
and the Promoter shall refund to the Allottee the entire amount received by the Promoter from the
allotment within 45 days from that date. The promoter shall intimate the allottee about such
termination at least thirty days prior to such termination. After refund of the money paid by the
Allottee, the Allottee agrees that he/ she shall not have any rights, claims etc. against the Promoter
and that the Promoter shall be released and discharged from all its obligations and liabilities under
this Agreement.
7.2 Procedure for taking possession - The Promoter, upon obtaining the occupancy certificate* from the
competent authority shall offer in writing the possession of the [Apartment/Plot], to the Allottee in
terms of this Agreement to be taken within two months from the date of issue of occupancy
certificate. [Provided that, in the absence of local law, the conveyance deed in favour of the allottee
shall be carried out by the promoter within 3 months from the date of issue of occupancy certificate].
The Promoter agrees and undertakes to indemnify the Allottee in case of failure of fulfillment of any
of the provisions, formalities, documentation on part of the Promoter. The Allottee, after taking
possession, agree(s) to pay the maintenance charges as determined by the Promoter/association of
allottees, as the case may be after the issuance of the completion certificate for the project. The
promoter shall hand over the occupancy certificate of the apartment/plot, as the case may be, to the
allottee at the time of conveyance of the same.
7.3 Failure of Allottee to take Possession of [Apartment/Plot] - Upon receiving a written intimation from
the Promoter as per para 7.2, the Allottee shall take possession of the [Apartment/Plot] from the
Promoter by executing necessary indemnities, undertakings and such other documentation as
prescribed in this Agreement, and the Promoter shall give possession of the [Apartment/Plot] to the
allottee. In case the Allottee fails to take possession within the time provided in para 7.2, such
Allottee shall continue to be liable to pay maintenance charges as specified in para 7.2.
7.4 Possession by the Allottee - After obtaining the occupancy certificate and handing over physical
possession of the [Apartment/Plot] to the Allottees, it shall be the responsibility of the Promoter to
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hand over the necessary documents and plans, including common areas, to the association of
Allottees or the competent authority, as the case may be, as per the local laws. [Provided that, in
the absence of any local law, the promoter shall handover the necessary documents and plans,
including common areas, to the association of allottees or the competent authority, as the case may
be, within thirty days after obtaining the completion certificate].
7.5 Cancellation by Allottee – The Allottee shall have the right to cancel/withdraw his allotment in the
Project as provided in the Act:
Provided that where the allottee proposes to cancel/withdraw from the project without any fault of
the promoter, the promoter herein is entitled to forfeit the booking amount paid for the allotment.
The balance amount of money paid by the allottee shall be returned by the promoter to the allottee
within 45 days of such cancellation.
7.6 Compensation – The Promoter shall compensate the Allottee in case of any loss caused to him due
to defective title of the land, on which the project is being developed or has been developed, in the
manner as provided under the Act and the claim for interest and compensation under this provision
shall not be barred by limitation provided under any law for the time being in force.
Except for occurrence of a Force Majeure event, if the promoter fails to complete or is unable to
give possession of the [Apartment/Plot] (i) in accordance with the terms of this Agreement, duly
completed by the date specified in para 7.1; or (ii) due to discontinuance of his business as a
developer on account of suspension or revocation of the registration under the Act; or for any other
reason; the Promoter shall be liable, on demand to the allottees, in case the Allottee wishes to
withdraw from the Project, without prejudice to any other remedy available, to return the total
amount received by him in respect of the [Apartment/Plot], with interest at the rate prescribed in the
Rules including compensation in the manner as provided under the Act within forty-five days of it
becoming due. Provided that where if the Allottee does not intend to withdraw from the Project, the
Promoter shall pay the Allottee interest at the rate prescribed in the Rules for every month of delay,
till the handing over of the possession of the [Apartment/Plot], which shall be paid by the promoter
to the allottee within forty-five days of it becoming due.
8. Representations and Warranties of the Promoter
The Promoter hereby represents and warrants to the Allottee as follows:
(i) The [Promoter] has absolute, clear and marketable title with respect to the said Land; the
requisite rights to carry out development upon the said Land and absolute, actual, physical and
legal possession of the said Land for the Project;
(ii) The Promoter has lawful rights and requisite approvals from the competent Authorities to carry
out development of the Project;
(iii) There are no encumbrances upon the said Land or the Project; [in case there are any
encumbrances on the land provide details of such encumbrances including any rights, title,
interest and name of party in or over such land]
(iv) There are no litigations pending before any Court of law or Authority with respect to the said
Land, Project or the [Apartment/Plot];
(v) All approvals, licenses and permits issued by the competent authorities with respect to the
Project, said Land and [Apartment/Plot] are valid and subsisting and have been obtained by
following due process of law. Further, the Promoter has been and shall, at all times, remain to
be in compliance with all applicable laws in relation to the Project, said Land, Building and
[Apartment/Plot] and common areas;

(iv) The Promoter has the right to enter into this Agreement and has not committed or omitted to
perform any act or thing, whereby the right, title and interest of the Allottee created herein, may
prejudicially be affected;
(vii) The Promoter has not entered into any agreement for sale and/or development agreement or
any other agreement / arrangement with any person or party with respect to the said Land,
including the Project and the said [Apartment/Plot] which will, in any manner, affect the rights of
Allottee under this Agreement;
(viii) The Promoter confirms that the Promoter is not restricted in any manner whatsoever from
selling the said [Apartment/Plot] to the Allottee in the manner contemplated in this Agreement;
(ix) At the time of execution of the conveyance deed the Promoter shall handover lawful, vacant,
peaceful, physical possession of the [Apartment/ Plot] to the Allottee and the common areas to
the association of allottees or the competent authority, as the case may be;
(x) The Schedule Property is not the subject matter of any HUF and that no part thereof is owned
by any minor and/or no minor has any right, title and claim over the Schedule Property;
(xi) The Promoter has duly paid and shall continue to pay and discharge all governmental dues,
rates, charges and taxes and other monies, levies, impositions, premiums, damages and/or
penalties and other outgoings, whatsoever, payable with respect to the said project to the
competent Authorities till the completion certificate has been issued and possession of
apartment, plot or building, as the case may be, along with common areas (equipped with all the
specifications, amenities and facilities) has been handed over to the allottee and the association
of allottees or the competent authority, as the case may be;
(xii) No notice from the Government or any other local body or authority or any legislative
enactment, government ordinance, order, notification (including any notice for acquisition or
requisition of the said property) has been received by or served upon the Promoter in respect of
the said Land and/ or the Project.
9. Events of Defaults and Consequences:
9.1 Subject to the Force Majeure clause, the Promoter shall be considered under a condition of Default,
in the following events:
(i) Promoter fails to provide ready to move in possession of the [Apartment/ Plot] to the Allottee
within the time period specified in para 7.1 or fails to complete the project within the stipulated
time disclosed at the time of registration of the project with the Authority. For the purpose of this
para, 'ready to move in possession' shall mean that the apartment shall be in a habitable
condition which is complete in all respects including the provision of all specifications, amenities
and facilities, as agreed to between the parties, and for which occupation certificate and
completion certificate, as the case may be, has been issued by the competent authority;
(ii) Discontinuance of the Promoter’s business as a developer on account of suspension or
revocation of his registration under the provisions of the Act or the rules or regulations made
thereunder.
9.2 In case of Default by Promoter under the conditions listed above, Allottee is entitled to the following:
(i) Stop making further payments to Promoter as demanded by the Promoter. If the Allottee stops
making payments, the Promoter shall correct the situation by completing the construction
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milestones and only thereafter the Allottee be required to make the next payment without any
interest; or
(ii) The Allottee shall have the option of terminating the Agreement in which case the Promoter
shall be liable to refund the entire money paid by the Allottee under any head whatsoever
towards the purchase of the apartment, along with interest at the rate prescribed in the Rules
within forty-five days of receiving the termination notice:
Provided that where an Allottee does not intend to withdraw from the project or terminate the
Agreement, he shall be paid, by the promoter, interest at the rate prescribed in the Rules, for every
month of delay till the handing over of the possession of the [Apartment/Plot], which shall be paid by
the promoter to the allottee within forty-five days of it becoming due.
9.3 The Allottee shall be considered under a condition of Default, on the occurrence of the following
events:
(i) In case the Allottee fails to make payments for ____ consecutive demands made by the
Promoter as per the Payment Plan annexed hereto, despite having been issued notice in that
regard the allottee shall be liable to pay interest to the promoter on the unpaid amount at the
rate prescribed in the Rules;
(ii) In case of Default by Allottee under the condition listed above continues for a period beyond
____ consecutive months after notice from the Promoter in this regard, the Promoter may
cancel the allotment of the [Apartment/ Plot] in favour of the Allottee and refund the money paid
to him by the allottee by deducting the booking amount and the interest liabilities and this
Agreement shall thereupon stand terminated. Provided that the promoter shall intimate the
allottee about such termination at least thirty days prior to such termination.
10. Conveyance of the Said Apartment
The Promoter, on receipt of Total Price of the [Apartment/Plot] as per para 1.2 under the Agreement
from the Allottee, shall execute a conveyance deed and convey the title of the [Apartment/Plot]
together with proportionate indivisible share in the Common Areas within 3 months from the date of
issuance of the occupancy certificate and the completion certificate, as the case may be, to the
allottee. [Provided that, in the absence of local law, the conveyance deed in favour of the allottee
shall be carried out by the promoter within 3 months from the date of issue of occupancy certificate].
However, in case the Allottee fails to deposit the stamp duty and/or registration charges within the
period mentioned in the notice, the Allottee authorizes the Promoter to withhold registration of the
conveyance deed in his/her favour till payment of stamp duty and registration charges to the
Promoter is made by the Allottee.
11. Maintenance of the Said Building/Apartment/Project
The Promoter shall be responsible to provide and maintain essential services in the Project till the
taking over of the maintenance of the project by the association of allottees upon the issuance of
the completion certificate of the project. The cost of such maintenance has been included in the
Total Price of the [Apartment/ Plot].
12. Defect Liability
It is agreed that in case any structural defect or any other defect in workmanship, quality or
provision of services or any other obligations of the Promoter as per the agreement for sale relating
to such development is brought to the notice of the Promoter within a period of 5 (five) years by the
Allottee from the date of handing over possession, it shall be the duty of the Promoter to rectify such
defects without further charge, within 30 (thirty) days, and in the event of Promoter’s failure to rectify
such defects within such time, the aggrieved Allottees shall be entitled to receive appropriate
compensation in the manner as provided under the Act.
13. Right to Enter the Apartment for Repairs
The Promoter/maintenance agency/association of allottees shall have rights of unrestricted access
of all Common Areas, garages/covered parking and parking spaces for providing necessary
maintenance services and the Allottee agrees to permit the association of allottees and/or
maintenance agency to enter into the [Apartment/Plot] or any part thereof, after due notice and
during the normal working hours, unless the circumstances warrant otherwise, with a view to set
right any defect.
14. Usage
Use of Basement and Service Areas: The basement(s) and service areas, if any, as located within
the __________________________________ (project name), shall be earmarked for purposes
such as parking spaces and services including but not limited to electric sub-station, transformer,
DG set rooms, underground water tanks, pump rooms, maintenance and service rooms, fire fighting
pumps and equipment’s etc. and other permitted uses as per sanctioned plans. The Allottee shall
not be permitted to use the services areas and the basements in any manner whatsoever, other
than those earmarked as parking spaces, and the same shall be reserved for use by the association
of allottees formed by the Allottees for rendering maintenance services.
15. General Compliance with Respect to the Apartment
15.1 Subject to para 12 above, the Allottee shall, after taking possession, be solely responsible to
maintain the [Apartment/Plot] at his/her own cost, in good repair and condition and shall not do or
suffer to be done anything in or to the Building, or the [Apartment/Plot], or the staircases, lifts,
common passages, corridors, circulation areas, atrium or the compound which may be in violation
of any laws or rules of any authority or change or alter or make additions to the [Apartment/Plot] and
keep the [Apartment/Plot], its walls and partitions, sewers, drains, pipe and appurtenances thereto
or belonging thereto, in good and tenantable repair and maintain the same in a fit and proper
condition and ensure that the support, shelter etc. of the Building is not in any way damaged or
jeopardized.
15.2 The Allottee further undertakes, assures and guarantees that he/she would not put any sign-board /
name-plate, neon light, publicity material or advertisement material etc. on the face / facade of the
Building or anywhere on the exterior of the Project, buildings therein or Common Areas. The
Allottees shall also not change the colour scheme of the outer walls or painting of the exterior side
of the windows or carry out any change in the exterior elevation or design. Further the Allottee shall
not store any hazardous or combustible goods in the [Apartment/Plot] or place any heavy material in
the common passages or staircase of the Building. The Allottee shall also not remove any wall,
including the outer and load bearing wall of the [Apartment/Plot].
15.3 The Allottee shall plan and distribute its electrical load in conformity with the electrical systems
installed by the Promoter and thereafter the association of allottees and/or maintenance agency
appointed by association of allottees. The Allottee shall be responsible for any loss or damages
arising out of breach of any of the aforesaid conditions.
16. Compliance of Laws, Notifications etc. by Parties
The Parties are entering into this Agreement for the allotment of a [Apartment/ Plot] with the full
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knowledge of all laws, rules, regulations, notifications applicable to the project.
17. Additional Constructions
The Promoter undertakes that it has no right to make additions or to put up additional structure(s)
anywhere in the Project after the building plan, layout plan, sanction plan and specifications,
amenities and facilities has been approved by the competent authority(ies) and disclosed, except for
as provided in the Act.
18. Promoter shall not Mortgage or Create a Charge
After the Promoter executes this Agreement he shall not mortgage or create a charge on the
[Apartment/Plot/Building] and if any such mortgage or charge is made or created then
notwithstanding anything contained in any other law for the time being in force, such mortgage or
charge shall not affect the right and interest of the Allottee who has taken or agreed to take such
[Apartment/Plot/ Building].
19. Apartment Ownership Act (of the Relevant State)
The Promoter has assured the Allottees that the project in its entirety is in accordance with the
provisions of the _____________________________
[Please insert the name of the state Apartment Ownership Act ]. The Promoter showing compliance
of various laws/regulations as applicable in___________.
20. Binding Effect
Forwarding this Agreement to the Allottee by the Promoter does not create a binding obligation on
the part of the Promoter or the Allottee until, firstly, the Allottee signs and delivers this Agreement
with all the schedules along with the payments due as stipulated in the Payment Plan within 30
(thirty) days from the date of receipt by the Allottee and secondly, appears for registration of the
same before the concerned Sub-Registrar __________ (specify the address of the Sub-Registrar)
as and when intimated by the Promoter. If the Allottee(s) fails to execute and deliver to the Promoter
this Agreement within 30 (thirty) days from the date of its receipt by the Allottee and/or appear
before the Sub-Registrar for its registration as and when intimated by the Promoter, then the
Promoter shall serve a notice to the Allottee for rectifying the default, which if not rectified within 30
(thirty) days from the date of its receipt by the Allottee, application of the Allottee shall be treated as
cancelled and all sums deposited by the Allottee in connection therewith including the booking
amount shall be returned to the Allottee without any interest or compensation whatsoever.
21. Entire Agreement
This Agreement, along with its schedules, constitutes the entire Agreement between the Parties
with respect to the subject matter hereof and supersedes any and all understandings, any other
agreements, allotment letter, correspondences, arrangements whether written or oral, if any,
between the Parties in regard to the said apartment/plot/building, as the case may be.
22. Right to Amend
This Agreement may only be amended through written consent of the Parties.
23. Provisions of this Agreement Applicable on Allottee/Subsequent Allottees
It is clearly understood and so agreed by and between the Parties hereto that all the provisions
contained herein and the obligations arising hereunder in respect of the [Apartment/Plot] and the
Project shall equally be applicable to and enforceable against and by any subsequent Allottees of
the [Apartment/ Plot], in case of a transfer, as the said obligations go along with the [Apartment/
Plot] for all intents and purposes.
24. Waiver not a Limitation to Enforce
24.1 The Promoter may, at its sole option and discretion, without prejudice to its rights as set out in this
Agreement, waive the breach by the Allottee in not making payments as per the Payment Plan
[Annexure C] including waiving the payment of interest for delayed payment. It is made clear and so
agreed by the Allottee that exercise of discretion by the Promoter in the case of one Allottee shall
not be construed to be a precedent and /or binding on the Promoter to exercise such discretion in
the case of other Allottees.
24.2 Failure on the part of the Parties to enforce at any time or for any period of time the provisions
hereof shall not be construed to be a waiver of any provisions or of the right thereafter to enforce
each and every provision.
25. Severability
If any provision of this Agreement shall be determined to be void or unenforceable under the Act or
the Rules and Regulations made thereunder or under other applicable laws, such provisions of the
Agreement shall be deemed amended or deleted in so far as reasonably inconsistent with the
purpose of this Agreement and to the extent necessary to conform to Act or the Rules or
Regulations made thereunder or the applicable law, as the case may be, and the remaining
provisions of this Agreement shall remain valid and enforceable as applicable at the time of
execution of this Agreement.
26. Method of Calculation of Proportionate Share wherever referred to in the Agreement
Wherever in this Agreement it is stipulated that the Allottee has to make any payment, in common
with other Allottee(s) in Project, the same shall be the proportion which the carpet area of the
[Apartment/Plot] bears to the total carpet area of all the [Apartments/Plots] in the Project.
27. Further Assurances
Both Parties agree that they shall execute, acknowledge and deliver to the other such instruments
and take such other actions, in additions to the instruments and actions specifically provided for
herein, as may be reasonably required in order to effectuate the provisions of this Agreement or of
any transaction contemplated herein or to confirm or perfect any right to be created or transferred
hereunder or pursuant to any such transaction.
28. Place of Execution
The execution of this Agreement shall be complete only upon its execution by the Promoter through
its authorized signatory at the Promoter’s Office, or at some other place, which may be mutually
agreed between the Promoter and the Allottee, in ____________________ after the Agreement is
duly executed by the Allottee and the Promoter or simultaneously with the execution the said
Agreement shall be registered at the office of the Sub-Registrar at _______
(specify the address of the Sub-Registrar). Hence this Agreement shall be deemed to have been
executed at ____________________.
442 EP-EBCL
29. Notices
That all notices to be served on the Allottee and the Promoter as contemplated by this Agreement
shall be deemed to have been duly served if sent to the Allottee or the Promoter by Registered Post
at their respective addresses specified below:
___________________Name of Allottee
__________________ (Allottee Address) M/s ________________ Promoter name
_________________ (Promoter Address)

It shall be the duty of the Allottee and the Promoter to inform each other of any change in address
subsequent to the execution of this Agreement in the above address by Registered Post failing
which all communications and letters posted at the above address shall be deemed to have been
received by the promoter or the Allottee, as the case may be.
30. Joint Allottees
That in case there are Joint Allottees all communications shall be sent by the Promoter to the
Allottee whose name appears first and at the address given by him/her which shall for all intents
and purposes to consider as properly served on all the Allottees.
31. Savings
Any application letter, allotment letter, agreement, or any other document signed by the allottee, in
respect of the apartment, plot or building, as the case may be, prior to the execution and registration of
this Agreement for Sale for such apartment, plot or building, as the case may be, shall not be construed
to limit the rights and interests of the allottee under the Agreement for Sale or under the Act or the rules
or the regulations made thereunder.
32. Governing Law
That the rights and obligations of the parties under or arising out of this Agreement shall be
construed and enforced in accordance with the Act and the Rules and Regulations made
thereunder including other applicable laws of India for the time being in force.
33. Dispute Resolution
All or any disputes arising out or touching upon or in relation to the terms and conditions of this
Agreement, including the interpretation and validity of the terms thereof and the respective rights
and obligations of the Parties, shall be settled amicably by mutual discussion, failing which the
same shall be settled through the adjudicating officer appointed under the Act.
[Please insert any other terms and conditions as per the contractual understanding between the
parties, however, please ensure that such additional terms and conditions are not in derogation of
or inconsistent with the terms and conditions set out above or the Act and the Rules and
Regulations made thereunder.]
IN WITNESS WHEREOF parties hereinabove named have set their respective hands and signed
this Agreement for Sale at ___________________________
(city/town name) in the presence of attesting witness, signing as such on the day first above written.
Signed and Delivered by the within Named

Allottee: (including joint buyers)
(1) Signature __________________________ Please affix
photograph
and sign
Name _____________________________ across the
photograph
Address ___________________________
(2) Signature __________________________ Please affix

photograph
and sign
Name ___________________________ across the
photograph
Address ___________________________
Signed and Delivered by the within Named

Promoter:
Please affix
(1) Signature (Authorised Signatory) _______
photograph
and sign
Name _____________________________
across the
photograph
Address ___________________________
At ________________on ______ in the presence of:
WITNESSES:
1. Signature __________________________
Name _____________________________
Address ___________________________
2. Signature __________________________
Name _____________________________
Address ___________________________
SCHEDULE ‘A’ ─ PLEASE INSERT DESCRIPTION OF THE [APARTMENT/PLOT] AND THE

GARAGE/COVERED PARKING (IF APPLICABLE) ALONG WITH BOUNDARIES IN ALL FOUR
DIRECTIONS
SCHEDULE ‘B’ ─ FLOOR PLAN OF THE APARTMENT
SCHEDULE ‘C’ ─ PAYMENT PLAN
SCHEDULE ‘D’ ─ SPECIFICATIONS, AMENITIES, FACILITIES (WHICH ARE PART OF THE

APARTMENT/PLOT)
SCHEDULE ‘E’ – SPECIFICATIONS, AMENITIES, FACILITIES (WHICH ARE PART OF THE PROJECT)
[The ‘Schedules’ to this Agreement for Sale shall be as agreed to between the Parties]
444 EP-EBCL
LESSON ROUND-UP
• Parliament enacted the Real Estate (Regulation and Development) Act, 2016 which aims at protecting the
rights and interests of consumers and promotion of uniformity and standardization of business practices
and transactions in the real estate sector. It attempts to balance the interests of consumers and promoters
by imposing certain responsibilities on both. It seeks to establish symmetry of information between the
promoter and purchaser, transparency of contractual conditions, set minimum standards of accountability
and a fast-track dispute resolution mechanism.
• Carpet area means the net usable floor area of an apartment, excluding the area covered by the external
walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area,
but includes the area covered by the internal partition walls of the apartment.
• Real estate project means the development of a building or a building consisting of apartments, or
converting an existing building or a part thereof into apartments, or the development of land into plots or
apartment, as the case may be, for the purpose of selling all or some of the said apartments or plots or
building, as the case may be, and includes the common areas, the development works, all improvements
and structures thereon, and all easement, rights and appurtenances belonging thereto.
• A promoter shall not advertise, market, book, sell or offer for sale, or invite persons to purchase in any
manner any plot, apartment or building, as the case may be, in any real estate project or part of it, in any
planning area, without registering the real estate project with the Real Estate Regulatory Authority
established .
• The appropriate Government shall establish an Authority to be known as the Real Estate Regulatory
Authority to exercise the powers conferred on it and to perform the functions assigned to it under the Act.
• The Central Advisory Council is required to advise the Central Government on matters relating to
implementation of the Act, questions of policy, protection of consumer interest, foster growth and
development of the real estate sector, and other matters as may be assigned to it by the Central
Government.
• Real Estate Appellate Tribunal (REAT) is to be formed by appropriate government to ensure faster
resolution of disputes. Parties aggrieved by the RERA order can appeal before REAT and REAT has to
adjudicate such cases within 60 days. Civil Courts have been prevented from exercising jurisdiction on
such matters.
• As per Section 56 of the Act, a Company Secretary holding certificate of practice can appear before
Appellate Tribunal or a Regulatory Authority or Adjudicating Officer on behalf of applicant or appellant as
the case may be.
SELF TEST QUESTIONS

evaluation)
1. Who is the ‘appropriate Government’ as per the Act?
2. What is the difference between the term ‘common area’ and ‘carpet area’?
3. What is the definition of ‘real estate project’? Does the term ‘project’ connote a ‘real estate project’?
4. What are the disclosures to be made on the website of the Regulatory Authority?
5. What are the rights and duties of the allottees under the Act?
Lesson 18
The Benami Transactions
(Prohibition) Act, 1988
LESSON OUTLINE
LEARNING OBJECTIVES
The Benami Transactions (Prohibition) Act, 1988
• Benami Property
provides that (a) all the properties held benami shall
• Benami Transaction be subject to acquisition by such authority in such
• Prohibition of Benami Transaction manner and after following such procedure as may
be prescribed; (b) no amount shall be payable for the
• Authority,Adjudication of Benami property
acquisition of any property held benami; (c) the
• Lesson Round Up purchase of property by any person in the name of
• Self-Test Questions his wife or unmarried daughter for their benefit would
not be benami transaction; (d) the securities held by
a depository as registered owner under the
provisions of the Depositories Act, 1996 or
participant as an agent of a depository would not be
benami transactions.
Any person enters into any benami transaction shall

be punishable with rigorous imprisonment.
The Benami Transactions (Prohibition) Act, 1988 was enacted to prohibit benami transactions and the right to recover
property held benami.
446 EP-EBCL
INTRODUCTION
The Benami Transactions (Prohibition) Act, 1988 was enacted to prohibit benami transactions and the right
to recover property held benami. The said Act, inter alia, provides that—(a) all the properties held benami
shall be subject to acquisition by such authority in such manner and after following such procedure as may
be prescribed; (b) no amount shall be payable for the acquisition of any property held benami; (c) the
purchase of property by any person in the name of his wife or unmarried daughter for their benefit would not
be benami transaction; (d) the securities held by a depository as registered owner under the provisions of the
Depositories Act, 1996 or participant as an agent of a depository would not be benami transactions.
During the administration of the Benami Transactions (Prohibition) Act, 1988, it was found that the provisions
of the aforesaid Act are inadequate to deal with benami transactions as the Act does not—(i) contain any
specific provision for vesting of confiscated property with Central Government; (ii) have any provision for an
appellate mechanism against an action taken by the authorities under the Act, while barring the jurisdiction of
a civil court; (iii) confer the powers of the civil court upon the authorities for its implementation; and (iv)
provide for adequate enabling rule making powers.
In view of the circumstances stated above, comprehensive amendments to the Benami Transactions
(Prohibition) Act, 1988 has become necessary in order to prohibit holding property in benami and restrict
right to recover or transfer property held benami and also to provide a mechanism and procedure for
confiscation of property held benami. It is, therefore, felt necessary to bring comprehensive amendments to
the Benami Transactions (Prohibition) Act, 1988 to deal with benami transactions.
With a view to providing effective regime for prohibition of benami transactions, the Benami Transactions
(Prohibition) Act, 1988 was amended through the Benami Transactions (Prohibition) Amended Act, 2016.
The amended law empowers the specified authorities to provisionally attach benami properties which can
eventually be confiscated. Besides, if a person is found guilty of offence of benami transaction by the
competent court, he shall be punishable with rigorous imprisonment for a term not less than one year but
which may extend to 7 years and shall also be liable to fine which may extend to 25% of the fair market value
of the property.
The legislation is also intended to effectively prohibit benami transactions and consequently prevent
circumvention of law through unfair practices. It empowers the Government to confiscate benami property by
following due procedure. It therefore promotes equity across all citizens. However, those who declare their
benami properties under income declaration scheme will get immunity under the Benami Act.
The Benami Transactions (Prohibition) Amendment Act, 2016 received the assent of the President on
the10th August, 2016and came into effect from1st November, 2016.
The Salient Features of the Benami Transactions (Prohibition) Act, 1988 are as under:
It defines a benami transaction and benami property and also provides for exclusions and
transactions which shall not be construed benami
It provides the consequences of entering into a prohibited benami transactions
It lays down the procedure for determination and related penal consequences in the case of
a prohibited benami transaction
It also provides that the powers of civil court shall be available to authorities under the said
Act
Lesson 18 The Benami Transactions (Prohibition) Act, 1988 447
Miscellaneous Provisions have been provided for service of notice, protection of action taken
in good faith, etc.
Central Government empowers to make rules for the implementation of the provisions of the
Bill
It enables the Central Government in consultation with the Chief Justice of the High Court to
designate one or more Courts of Session as Special Court or Special Courts for the purpose
of the Bill
It provides penalty for entering into benami transactions and for furnishing any false
documents in any proceeding under the Bill
It provides for transfer of any suit or proceeding in respect of a benami transaction pending
in any court (other than High Court) or Tribunal or before any authority to the Appellate
Tribunal
Important Definitions
"Attachment"
Attachment means the prohibition of transfer, conversion, disposition or movement of property, by an order
issued under theAct. [Section 2(5)]
"Benami Property"
Benami Property means any property which is the subject matter of a benami transaction and also includes
the proceeds from such property. [Section 2(8)]
"Benami Transaction"
As per Section 2 (9) of the benami transaction means-
(A) a transaction or an arrangement—

(a) where a property is transferred to, or is held by, a person, and the consideration for such property
has been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has
provided the consideration, except when the property is held by—
(i) a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held
for his benefit or benefit of other members in the family and the consideration for such property
has been provided or paid out of the known sources of the Hindu undivided family;
(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he
stands in such capacity and includes a trustee, executor, partner, director of a company, a
depository or a participant as an agent of a depository under the Depositories Act, 1996 and
any other person as may be notified by the Central Government for this purpose;
(iii) any person being an individual in the name of his spouse or in the name of any child of such
individual and the consideration for such property has been provided or paid out of the known
sources of the individual;
448 EP-EBCL
(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the
names of brother or sister or lineal ascendant or descendant and the individual appear as joint-
owners in any document, and the consideration for such property has been provided or paid out
of the known sources of the individual; or
(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or
(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of,
or, denies knowledge of, such ownership;
(D) a transaction or an arrangement in respect of a property where the person providing the consideration is
not traceable or is fictitious;
Explanation.—For the removal of doubts, it is hereby declared that benami transaction shall not include any
transaction involving the allowing of possession of any property to be taken or retained in part performance
of a contract referred to in section 53A of the Transfer of Property Act, 1882, if, under any law for the time
being in force,—
(i) consideration for such property has been provided by the person to whom possession of property
has been allowed but the person who has granted possession thereof continues to hold ownership
of such property;
(ii) stamp duty on such transaction or arrangement has been paid; and
(iii) the contract has been registered.
"Benamidar"
Benamidar means a person or a fictitious person, as the case may be, in whose name the benami property is
transferred or held and includes a person who lends his name.[Section 2(10)]
"Beneficial Owner"
"Beneficial Owner" means a person, whether his identity is known or not, for whose benefit the benami
property is held by a benamidar.[Section 2(10)]
"Fair Market Value"
Fair market value in relation to a property, means— (i) the price that the property would ordinarily fetch on
sale in the open market on the date of the transaction; and (ii) where the price referred to in sub-clause (i) is
not ascertainable, such price as may be determined in accordance with such manner as may be
prescribed.[Section 2(16)]
"Firm"
Firm shall have the same meaning as assigned to it in section 4 of the Indian Partnership Act, 1932 and shall
include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008.[Section 2(17)]
"Partner"
Partnershall have the same meaning as assigned to it in section 4 of the Indian Partnership Act, 1932, and
shall include,—
(a) any person who, being a minor, has been admitted to the benefits of partnership; and
(b) a partner of a limited liability partnership formed and registered under the Limited Liability
Partnership Act, 2008.[Section 2(22)]
"Partnership"
Partnership shall have the same meaning as assigned to it in section 4 of the Indian Partnership Act, 1932,
and shall include a limited liability partnership formed and registered under the Limited Liability Partnership
Act, 2008. [Section 2(23)]
"Person"
Person shall include—

(i) an individual;
(iii) a company;
(iv) a firm;
(v) an association of persons or a body of individuals, whether incorporated or not;
(vi) every artificial juridical person, not falling under sub-clauses (i) to (v).[Section 2(23)]
"Property"
Property means assets of any kind, whether movable or immovable, tangible or intangible, corporeal or
incorporeal and includes any right or interest or legal documents or instruments evidencing title to or interest
in the property and where the property is capable of conversion into some other form, then the property in
the converted form and also includes the proceeds from the property. [Section 2(26)]
"Transfer"
Transfer includes sale, purchase or any other form of transfer of right, title, possession or lien. [Section 2(26)]
Prohibition of benami transactions-

As per Section 3 of the Act, no person shall enter into any benami transaction. Whoever enters into any
benami transaction shall be punishable with imprisonment for a term which may extend to three years or with
fine or with both.
Where any person enters into any benami transaction on and after the date of commencement of the Benami
Transactions (Prohibition) Amendment Act, 2016, shall be punishable in accordance with the provisions
contained in Chapter VII.
Chapter VII deals with offences and prosecution. It provides that if a person is found guilty of offence of
benami transaction by the competent court, he shall be punishable with rigorous imprisonment for a term not
less than one year but which may extend to 7 years and shall also be liable to fine which may extend to 25%
of the fair market value of the property.
Prohibition of the right to recover property held benami

Section 4(1) provides that no suit, claim or action to enforce any right in respect of any property held benami
against the person in whose name the property is held or against any other person shall lie by or on behalf of
a person claiming to be the real owner of such property.
450 EP-EBCL
Further, Section 4(2) provides that no defense based on any right in respect of any property held benami,
whether against the person in whose name the property is held or against any other person, shall be allowed
in any suit, claim or action by or on behalf of a person claiming to be the real owner of such property.
Property held benami liable to confiscation

As per section 5 of the Act any property, which is subject matter of benami transaction, shall be liable to be
confiscated by the Central Government.
Prohibition on re-transfer of property by benamidar
Section 6 provides that a person, being a benamidar shall not re-transfer the benami property held by him to
the beneficial owner or any other person acting on his behalf.
Where any property is re-transferred in contravention of the above the transaction of such property shall be
deemed to be null and void.
Above provisions shall not apply to a transfer made in accordance with the provisions of section 190 of the
Finance Act, 2016.
Notice and attachment of property involved in benami transaction
Section 24 relates to notice and attachment of property involved in benami transaction. Sub-section (1) of
this section provides that where the Initiating Officer, on the basis of material in his possession, has
reason to believe that any person is a benamidar in respect of a property, he may, after recording
reasons in writing, issue a notice to such person to show cause within such time as may be specified
in the notice why the property should not be treated as benami property. Sub-section (2) of this section
provides that a copy of the notice may also be served upon such other person who is a beneficial owner.
Sub-section (3) of this section provides that where the Initiating Officer is of the opinion that the person in
possession of the property held benami may alienate such property during the period specified in the notice,
he may, with the previous approval of the Approving Authority, by order in writing, attach provisionally
such property in the manner as may be prescribed, for a period not exceeding ninety days from the date of
issue of notice under sub-section (1).
Sub-section (4) of this section provides that the Initiating Officer, after making such inquires and calling
for such reports or evidence as he deems fit and taking into account all relevant materials, shall, within
a period of ninety days from the date of issue of notice under sub-section (1), -
(a) where the provisional attachment has been made under sub-section (3), -
(i) pass an order continuing the provisional attachment of the property with the prior approval
of the Approving Authority, till the passing of the order by the Adjudicating Authority under
sub-section (3) of section 26; or (ii) revoke the provisional attachment of the property with the
prior approval of the Approving Authority;
(b) where provisional attachment has not been made under sub-section (3), -
(i) pass an order provisionally attaching the property with the prior approval of the Approving
Authority, till the passing of the order made by the Adjudicating Authority under sub-clause
(3) of section 26; or (ii) decide not to attach theproperty as specified in the notice, with
the prior approval of the Approving Authority.
Sub-section (5) of this section provides that where the Initiating Officer passes an order continuing the
provisional attachment of the property under sub-clause (i) of clause (a) of sub-section (4) or passes an
order provisionally attaching the property under sub-clause (i) of clause (b) of that sub-section, he shall,
within fifteen days from the date of the attachment, draw up a statement of the case and refer it to the
Adjudicating Authority.
It may be noted that Initiating Officer means an Assistant Commissioner or a Deputy Commissioner as
defined in clauses (9A) and (19A) respectively of section 2 of the Income-tax Act, 1961.
Manner of service of notice

Section 25 deals with the manner of service of notice. Sub-section (1) of this section provides that a notice
under sub-clause (1) of section 24 may be served on the person named therein either by post or as if it were
a summons issued by a Court under the Code of Civil Procedure, 1908.
Sub-section (2) of this section provides that any notice referred to above may be addressed---
(i) in case of an individual, to such individual ;
(ii) in the case of a firm, to the managing partner or the manager of the firm;
(iii) in the case of a Hindu undivided family, to karta or any member of such family;
(iv) in the case of a company, to the principal officer thereof;
(v) in the case of any other association or body of individuals, to the principal officer or any
member thereof;
(vi) in the case of any other person (not being an individual), to the person who manages or
controls his affairs.
Adjudication of benami property

Section 26 relates to adjudication of benami property. Sub-section (1) of this section provides that on receipt
of a reference under sub-section (5) of section 24, the Adjudicating Authority shall issue notice, to furnish
such documents, particulars or evidence as is considered necessary on a date to be specified
therein, on the following persons:-
However, the Adjudicating Authority shall issue notice within a period of thirty days from the date on which a
reference has been received. Further, the notice shall provide a period of time of not less than thirty days to
the person to whom such notice is issued to furnish the information sought.
452 EP-EBCL
Sub-section (2) of this section provides that where such property is held jointly by more than one person,
the Adjudicating Authority shall make endeavours to serve notice to all persons holding such
property. However, where the notice is served on one of the aforesaid persons the service of notice shall not
be invalid on the ground that the said notice was not served to all the persons holding the property.
Sub-section (3) of this section provides that the Adjudicating Authority shall, after considering the reply, if
any, to the notice issued under sub-section(1);making or causing to be made such inquiries and
calling for such reports or evidence as it deems fit; and taking into account all relevant materials, provide
an opportunity of being heard to the person specified as a benamidar therein, the Initiating Officer, and any
other person who claims to be the owner of such property. Thereafter, the Adjudicating Authority shall pass
an order holding the property not to be a benami property and revoking the attachment order; or
holding the property to be a benami property and confirming the attachment order in all other cases.
Sub-section (4) of this section provides that where the Adjudicating Authority is satisfied that some
part of the properties in respect of which reference has been made to him is benami property, but
is not able to specifically identify such part, he shall record a finding to the best of his judgment as
to which part or properties is held benami.
Sub-section (5) of this section provides that where in the course of proceedings before it, the Adjudicating
Authority has reason to believe that a property, other than a property referred to him by the Initiating
Officer is benami property, it shall provisionally attach the property and the property shall be deemed to be
a property referred to it on the date of receipt of the reference under sub-section (5) of section 24.
Sub-section (6) of this section provides that the Adjudicating Authority may, at any stage of the
proceedings, either on the application of any party, or suo moto, strike out the name of any party
improperly joined or add the name of any person whose presence before the Adjudicating Authority may be
necessary to enable it to adjudicate upon and settle all the questions involved in the reference.
Sub-section (7) of this section provides that no order under sub-section (3) shall be passed after the
expiry of one year from the end of the month in which the reference under section 24 was received.
As per section 7 of the Act, the Central Government shall, by notification, appoint one or more
Adjudicating Authorities to exercise jurisdiction, powers and authority conferred by or under this Act. An
Adjudicating Authority shall consist of a Chairperson and at least two other Members.
Confiscation and vesting of benami property

Section 27 deals with confiscation and vesting of benami property. Sub-section (1) of this section provides
that where an order is passed in respect of any property under sub-section (3) of section 26
holding such property to be a benami property, the Adjudicating Authority shall, after giving an opportunity
of being heard to the person concerned, make an order confiscating the property held to be a benami
property. However, where an appeal has been filed against the order of the Adjudicating Authority, the
confiscation of property shall be made subject to the order passed by the Appellate Tribunal under
section 46.Further, confiscation of the property shall be made in accordance with such procedure as may be
prescribed.
Sub-section (2) of this section provides that the above shall not apply to a property held or acquired by a
person from the benamidar for adequate consideration, prior to the issue of notice under sub-section (1)
of section 24 without his having knowledge of the benami transaction.
Sub-section (3) of this section provides that where an order of confiscation has been made, all the
rights and title in such property shall vest absolutely in the Central Government free of all
encumbrances and no compensation shall be payable in respect of such confiscation.
Sub-section (4) of this section provides that any right of any third person created in such property with a view
to defeat the purposes of this Act shall be null and void.
Sub-section (5) of this section provides that where no order of confiscation is made upon the proceedings
under this Act attaining finality, no claim shall lie against the Government.
Management of properties confiscated-

Section 28 relates to management of properties confiscated under this Act. Sub-section (1) of this section
provides that the Administrator shall have the power to receive and manage the property, in relation
to which an order of confiscation under sub-section (1) of section 27 has been made, in such
manner and subject to such conditions, as may be prescribed.
Sub-section (2) of this section provides that the Central Government may, by order published in the Official
Gazette, notify as many of its officers as it thinks fit, to perform the functions of Administrators.
Sub-section (3) of this section provides that the Administrator shall also take such measures, as the
Central Government may direct, to dispose of the property which is vested in the Central
Government under sub-section (3) of section 27 in such manner and subject to such conditions as
may be prescribed.
Possession of the property

Section 29 relates to possession of the property. Sub-section (1) of this section provides that where an order
of confiscation in respect of a property under subsection (1) of section 27 has been made, the
Administrator shall proceed to take the possession of such property.
Sub-section (2) of this section provides that the Administrator shall, -
(a) by notice in writing, order within seven days of the date of the service of notice any person, who may
be in possession of the benami property, to surrender or deliver possession thereof to the
Administrator or any other person duly authorised in writing by him in this behalf;
(b) in the event of non-compliance of the order referred to in clause (a), or if in his opinion, taking over of
immediate possession is warranted, for the purpose of forcibly taking over possession, requisition the
service of any police officer to assist him and it shall be the duty such officer to comply with the requisition.
It may be noted that Administrator” means an Income-tax Officer as defined in clause (25) of section 2
of the Income-tax Act, 1961
Appellate Tribunal
Chapter V deals with the provisions relating to the Appellate Tribunal.Section 30 deals with establishment of
Appellate Tribunal. The said section seeks to provide that the Central Government shall, by notification,
establish an Appellate Tribunal to hear appeals against the orders of the Adjudicating Authority and
the authorities under this Act.
Section 40 lays down the procedure and powers of Appellate Tribunal. Subsection (1) of this section
provides that the Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil
Procedure, 1908, but shall be guided by the principles of natural justice and, subject to the other
provisions of this Act, the Appellate Tribunal shall have powers to regulate its own procedure.
454 EP-EBCL

Section 49 relates to appeal to High Court. Sub-section (1) of this section provides that any party
aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court within
sixty days from the date of communication of the decision or order of the Appellate Tribunal to him on any
question of law arising out of such order.
Sub-section (2) of this section provides that the High Court may entertain any appeal after the said period of
sixty days, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal
within the period specified in sub-section (1).
Sub-section (3) of this section provides that where the High Court is satisfied that a substantial
question of law is involved in any case, it shall formulate that question.
Sub-section (4) of this section provides that the appeal shall be heard only on the question so
formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does
not involve such question.
Sub-section (5) of this section provides that nothing in this sub-section shall be deemed to take away or
abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial
question of law not formulated by it, if it is satisfied that the case involves such question.
Sub-section (6) of this section provides that the High Court shall decide the question of law so formulated
and deliver such judgment thereon containing the grounds on which such decision is founded and may
award such cost as it deems fit.
Sub-section (7) of this section provides that the High Court may determine any issue which — (a)
has not been determined by the Appellate Tribunal; or (b) has been wrongly determined by the
Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1).
Sub-section (8) of this section provides that save as otherwise provided in this Act, the provisions of the
Code of Civil Procedure, 1908, relating to appeals to the High Court shall, as far as may be, apply in the
case of appeals under this section.
Special Courts
Section 50 relates to Special Courts. Sub-section (1) of this section provides that the Central Government, in
consultation with the Chief Justice of the High Court, shall for trial of an offence punishable under this
Act, by notification, designate one or more Courts of Session as Special Court or Special Courts for such
area or areas or for such case or class or group of cases as may be specified in the notification.
Sub-section (2) of this section provides that while trying an offence under this Act, a Special Court shall also
try an offence other than an offence referred to in sub-section (1), with which the accused may, under the
Code of Criminal Procedure, 1973, be charged at the same trial.
Sub-section (3) of this section provides that the Special Court shall not take cognizance of any offence
punishable under this Act except upon a complaint in writing made by - (i) the authority; or (ii) any officer
of the Central Government or State Government authorised in writing by that Government by a general or
special order made in this behalf.
Sub-section (4) of this section provides that every trial under this section shall be conducted as
expeditiously as possible and an endeavour shall be made by the Special Court to conclude the trial
within six months from the date of filing of the complaint.
Offences and Prosecution

Chapter VII deals with the provisions relating to offences and prosecution. Section 53 relates to penalty
forbenami transaction. Sub-section (1) of this section provides that where any person enters into a
benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to
avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any
person to enter into such benami transaction, shall be guilty of the offence of benami transaction.
Sub-section (2) of this section provides that whoever is found guilty of the offence of benami
transaction referred to above shall be punishable with rigorous imprisonment for a term which shall not
be less than one year , but which may extend to seven years and shall also be liable to fine which
may extend to twenty-five per cent. of the fair market value of the property.
Section 54 relates to penalty for false information. This section provides that any person who is required
to furnish information under this Act knowingly gives false information to any authority or furnishes any
false document in any proceeding under this Act, shall be punishable with rigorous imprisonment for a term
which shall not be less than six months but which may extend to five years and shall also be liable to fine
which may extend to ten per cent. of the fair market value of the property .
Section 55 relates to previous sanction. This section provides that no prosecution shall be instituted
against any person in respect of any offence under sections 3,53 or section 54 without the previous
sanction of the Board.
Section 62 relates to consequences in case of offences by companies. Subsection (1) of this section
provides that where a person committing a contravention of any of the provisions of this Act or of
any rule, direction or order made thereunder is a company, every person who, at the time the
contravention was committed, was in charge of, and was responsible to, the company, for the
conduct of the business of the company as well as the company, shall be deemed to be guilty of the
contravention and shall be liable to be proceeded against and punished accordingly.
Sub-section (2) of this section provides that nothing contained in subsection (1) of this section shall
render any person liable to punishment, if he proves that the contravention took place without his
knowledge.
Sub-section (3) of this section provides that notwithstanding anything contained in sub-section (1),
where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder
has been committed by a company and it is proved that the contravention has taken place with the consent
or connivance of, or is attributable to any neglect on the part of any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer shall also be deemed
to be guilty of the contravention and shall be liable to be proceeded against and punished
accordingly.
It may be noted that for the purpose of section 62, a “Company” means a body corporate, and includes
(i) A firm; and
(ii) An association of persons or a body of individuals whether incorporated or not; and
“Director”, in relation to—
(i) A firm, means a partner in the firm;
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(ii) Any association of persons or a body of individuals, means any member controlling the
affairs thereof.
LESSON ROUND-UP
• The Benami Transactions (Prohibition) Act, 1988 prohibits benami transactions and consequently prevent
circumvention of law through unfair practices. It empowers the Government to confiscate benami property
by following due procedure. It therefore promotes equity across all citizens. However, those who declare
their benami properties under income declaration scheme will get immunity under the Benami Act.
• The Benami Transactions (Prohibition) Amendment Act, 2016received the assent of the President on the
10th August, 2016 and came into effect from1st November, 2016.
• Where any person enters into any benami transaction on and after the date of commencement of the
Benami Transactions (Prohibition) Amendment Act, 2016, shall be punishable in accordance with the
provisions contained in Chapter VII.
• Any property, which is subject matter of benami transaction, shall be liable to be confiscated by the Central
Government.
SELF TEST QUESTIONS

evaluation)
1. State the Salient Features of the Benami Transactions (Prohibition) Act, 1988
2. What is a Benami Transaction?
3. Discuss the attachment of property involved in benami transaction.
4. What are the penalties for Benami Property?
5. Write short notes on: (i)Benamidar (ii) Beneficial Owner.
Lesson 19
Prevention of Money Laundering
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning Objectives The globalization process driven by advancements in
communications and information technology, have
• Concept of money laundering
made the international system more interactive,
• Money laundering process integrated, interrelated, and interconnected. This
dynamic has unleashed the floodgates of
• Impact of money laundering on economic opportunities for criminals to expand, widen and
development deepen their reach, become more sophisticated in
their operations, and intensify their level and pace of
• Global initiatives for prevention of money transactions.
laundering Because of the opportunities and needs created by
• FAFT Recommendation the global dimension of business, crimes such as
fraud, counterfeiting, corruption and embezzlement
• Overview of Prevention of Money have opportunities to shift from individual or family
Laundering Act, 2002 ambit to more organized and competitive global
structures.
• Adjudication and Adjudicating Authority The problem of money-laundering is no longer
• Obligation of Banking Companies, restricted to the geo political boundaries of any
country. It is a global menace that cannot be
Financial Institutions and Intermediary contained by any nation alone. In view of this, India
• Summon, searches, seizures etc has become a member of the Financial Action Task
Force and Asia Pacific Group on money-laundering,
• Retention of Property which are committed to the effective implementation
and enforcement of internationally accepted
• Retention of Record standards against money-laundering and the
• Appellate Tribunal financing of terrorism.
The Prevention of Money-laundering Act, 2002
• Special Court addresses the international obligations under the
Political Declaration and Global Programme of Action
• KYC Guidelines
adopted by the General Assembly of the United
• KYC Policy Nations to prevent money laundering. The Act was
amended in the year 2005, 2009 and 2012 to remove
• Power of Central Government the difficulties arisen in implementation of the Act.
Therefore, it is essential for the students to be
• Agreement with foreign countries
familiar with the law relating to Prevention of Money-
• Attachment of property laundering Act, 2002.
• Lesson Round-up
• Self Test Questions
The Prevention of Money-laundering Act, 2002 enacted to prevent money laundering and to provide for confiscation of
property derived from, or involved in, money laundering and for matters connected therewith or incidental thereto.
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INTRODUCTION
Money laundering is the processing of criminal proceeds to disguise its illegal origin. Terrorism, illegal arms
sales, financial crimes, smuggling, and the activities of organised crime, including drug trafficking and
prostitution rings, generate huge sums. Embezzlement, insider trading, bribery and computer fraud also
produce large profits and create an incentive to legitimise the ill-gotten gains through money laundering.
When a criminal activity generates substantial profits, the individual or group involved in such activities route
the funds to safe heavens by disguising the sources, changing the form, or moving the funds to a place
where they are less likely to attract attention.
Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generates
it. In essence, the laundering enables criminal activity to continue.
Process of Money Laundering

The process of money laundering can be classified into three stages, namely, placement, layering and
integration.
Integration
Layering
Placement
In the initial or placement stage of money laundering, the launderer introduces his illegal profits into the
financial system, by breaking up large amounts of cash into less conspicuous smaller sums that are then
deposited directly into a bank account, or by purchasing a series of monetary instruments that are later
collected and deposited into accounts at another location.
After the funds are entered into the financial system, the layering takes place. In this stage, the launderer
engages in a series of conversions or movements of the funds to distance them from their source. The funds
might be channeled through the purchase and sale of investment instruments, or the launderer might simply
wire the funds through a series of accounts at various banks across the globe.
After successful processing of criminal profits through the first two phases of the money laundering process,
the launderer moves them to integration. In this stage the funds re-enter the legitimate economy. The
launderer might choose to invest the funds into real estate, luxury assets, or business ventures.
Impact of Money Laundering on Development
Economies with growing or developing financial centers, but inadequate controls are particularly vulnerable
to money laundering, as against the established financial center countries, which implement comprehensive
anti-money laundering regimes. The gaps in a national anti-money laundering system are exploited by
launderers, who tend to move their networks to countries and financial systems with weak or ineffective
countermeasures. As with the damaged integrity of an individual financial institution, there is a damping
effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be
subject to the control and influence of organised crime.
Lesson 19 Prevention of Money Laundering 459
In times of decelerating growth, an infusion of hard currency can bolster a country’s foreign reserves; ease
the hardship associated with budget tightening policies and moderate foreign indebtedness. While these are
short-term benefits associated with an inflow of criminal monies, the long-term effects are mostly negative.
One difference between official borrowing and laundered funds is that the former can be controlled by
Government, whereas the funds owned by criminals escape the governments ability to control and regulate
the economy.
The possible social, economic and political effects of money laundering, if left unchecked or dealt with
ineffectively, are serious. Through the process of money laundering, organised crime can infiltrate financial
institutions, acquire control of large sectors of the economy through investment, or offer bribes to public
officials and indeed governments. Thus, the economic and political influence of criminal organisations can
weaken the social fabric, ethical standards and ultimately the democratic institutions of society.
What is the connection of money laundering with society at large?
The possible social and political costs of money laundering, if left unchecked or dealt
with ineffectively, are serious. Organised crime can infiltrate financial institutions,
acquire control of large sectors of the economy through investment, or offer bribes to
public officials and indeed governments.
The economic and political influence of criminal organisations can weaken the social
fabric, collective ethical standards, and ultimately the democratic institutions of
society. In countries transitioning to democratic systems, this criminal influence can
undermine the transition. Most fundamentally, money laundering is inextricably
linked to the underlying criminal activity that generated it. Laundering enables
criminal activity to continue.
Prevention of Money Laundering – Global Initiatives

Since money laundering is an international phenomenon, transnational co-operation is of critical importance
in the fight against this menace. A number of initiatives have been taken to deal with the problem at
international level. In this context, the United Nations or the Bank for International Settlements, took some
initiatives in 1980s to address the problem of money laundering. However, with the creation of the Financial
Action Task Force (FATF) in 1989, regional groupings, such as the European Union, Council of Europe, and
organisation of American States also established anti- money laundering standards for their member
countries.
The major international agreements addressing money laundering include the United Nations Convention
against Illicit Trafficking in Drugs and Psychotropic Substances (the Vienna Convention) and Council of
Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime. The role of
financial institutions in preventing and detecting money laundering has also been the subject of
pronouncements by the Basle Committee on Banking Regulation Supervisory Practices, the European Union
and the International Organization of Securities Commissions.
The Vienna Convention

The first major initiative in the prevention of money laundering was the United Nations Convention against
Illicit Traffic in Narcotic Drugs and Psychotropic Substances in December 1988 (popularly known as Vienna
Convention). This convention laid the groundwork for efforts to combat money laundering by obliging the
member states to criminalize the laundering of money from drug trafficking. It promotes international
cooperation in investigations and makes extradition between member states applicable to money laundering.
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The convention also establishes the principle that domestic bank secrecy provisions should not interfere with
international criminal investigations.
Council of Europe Convention

The Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime,
1990 establishes a common policy on money laundering. It sets out a common definition of money
laundering and common measures for dealing with it. The Convention lays down the principles for
international cooperation among the member states, which may also include states outside the Council of
Europe. This convention came into force in September 1993. One of the purposes of the convention is to
facilitate international cooperation as regards investigative assistance, search, seizure and confiscation of
the proceeds of all types of criminality, particularly serious crimes, such as, drug offences, arms dealing,
terrorist offences etc. and other offences which generate large profits.
European Union Money Laundering Directive

In response to the new opportunities for money laundering opened up by the liberalization of capital
movements and cross-border financial services in the European Union, the Council of the European
Communities in June, 1991 issued a directive on the Prevention of Use of the Financial System for the
Purpose of Money Laundering. The directive requires member states to outlaw money laundering. The
member states have been put under obligation to require financial institutions to establish and maintain
internal systems to prevent laundering, to obtain the identification of customers with whom they enter into
transaction of more than a particular amount and to keep proper records for at least five years. The financial
institutions are also required to report suspicious transactions and ensure that such reporting does not result
in liability for the institution or its employees.
Basle Committee’s Statement of Principles

In December 1988 the Basle Committee on Banking Regulation Supervisory Practices issued a statement of
principles to be complied by the international banks of member states. These principles include identifying
customers, avoiding suspicious transactions, and cooperating with law enforcement agencies. The statement
aims at encouraging the banking sector to adopt common position in order to ensure that banks are not used
to hide or launder funds acquired through criminal activities.
Resolution of the International Organization of Securities Commissions
The International Organization of Securities Commissions (IOSCO) adopted, in October 1992, a resolution
encouraging its members to take necessary steps to combat money laundering in securities and futures
markets.
The Financial Action Task Force (FATF)

The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers
of its Member jurisdictions. The objectives of the FATF are to set standards and promote effective
implementation of legal, regulatory and operational measures for combating money laundering, terrorist
financing and other related threats to the integrity of the international financial system. The FATF is therefore
a “policy-making body” which works to generate the necessary political will to bring about national legislative
and regulatory reforms in these areas.
The FATF has developed a series of Recommendations that are recognised as the international standard for
combating of money laundering and the financing of terrorism and proliferation of weapons of mass
destruction. They form the basis for a co-ordinated response to these threats to the integrity of the financial
system and help ensure a level playing field. First issued in 1990, the FATF Recommendations were revised
in 1996, 2001, 2003 and in 2012 to ensure that they remain up to date and relevant, and they are intended to
be of universal application.
The FATF monitors the progress of its members in implementing necessary measures, reviews money
laundering and terrorist financing techniques and counter-measures, and promotes the adoption and
implementation of appropriate measures globally. In collaboration with other international stakeholders, the
FATF works to identify national-level vulnerabilities with the aim of protecting the international financial
system from misuse.
History of the FATF

In response to mounting concern over money laundering, the Financial Action Task Force on Money
Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989. Recognising the
threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and
President of the European Commission convened the Task Force from the G-7 member States, the
European Commission and eight other countries.
FATF Recommendations
The Task Force was given the responsibility of examining money laundering techniques and trends,
reviewing the action which had already been taken at a national or international level, and setting out the
measures that still needed to be taken to combat money laundering. In April 1990, less than one year after
its creation, the FATF issued a report containing a set of Forty Recommendations, which were intended to
provide a comprehensive plan of action needed to fight against money laundering.
In 2001, the development of standards in the fight against terrorist financing was added to the mission of the
FATF. In October 2001 the FATF issued the Eight Special Recommendations to deal with the issue of
terrorist financing. The continued evolution of money laundering techniques led the FATF to revise the FATF
standards comprehensively in June 2003. In October 2004 the FATF published a Ninth Special
Recommendations, further strengthening the agreed international standards for combating money laundering
and terrorist financing - the 40+9 Recommendations.
In February 2012, the FATF completed a thorough review of its standards and published the revised FATF
Recommendations,. This revision is intended to strengthen global safeguards and further protect the integrity
of the financial system by providing governments with stronger tools to take action against financial crime.
They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass
destruction, and to be clearer on transparency and tougher on corruption. The 9 Special Recommendations
on terrorist financing have been fully integrated with the measures against money laundering. This has
resulted in a stronger and clearer set of standards.
United Nations Global Programme Against Money Laundering

Office of the Drug Control and Crime Prevention implement this programme against Money Laundering with
a view to increase the effectiveness of international action against money laundering through comprehensive
technical cooperation services offered to Governments. The programme encompasses following three areas
of activities, providing various means to states and institutions in their efforts to effectively combat money
laundering:
(i) Technical cooperation is the main task of the Programme. It encompasses activities of creating
awareness, institution building and training.
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(ii) The research and analysis aims at offering States Key Information to better understand the
phenomenon of money laundering and to enable the international community to devise more
efficient and effective countermeasure strategies.
(iii) The commitment to support the establishment of financial investigation services for raising the
overall effectiveness of law enforcement measures.
The implementation of the Global Programme against Money Laundering is carried out in the spirit of
cooperation with other international, regional and national organizations and institutions.
What influence does money laundering have on economic development?
Launderers are continuously looking for new routes for laundering their
funds. Economies with growing or developing financial centres, but
inadequate controls are particularly vulnerable as established financial
centre countries implement comprehensive anti-money laundering regimes.
Differences between national anti-money laundering systems will be

exploited by launderers, who tend to move their networks to countries and
financial systems with weak or ineffective countermeasures.
Some might argue that developing economies cannot afford to be too

selective about the sources of capital they attract. But postponing action is
dangerous. The more it is deferred, the more entrenched organised crime
can become.
As with the damaged integrity of an individual financial institution, there is a damping effect on foreign direct
investment when a country’s commercial and financial sectors are perceived to be subject to the control and
influence of organised crime. Fighting money laundering and terrorist financing is therefore a part of creating
a business friendly environment which is a precondition for lasting economic development.
Prevention of Money Laundering – Indian Initiatives

In view of an urgent need for the enactment of a comprehensive legislation for preventing money-laundering
and connected activities, confiscation of proceeds of crime, setting up of agencies and mechanisms for
coordinating measures for combating money laundering etc., the Prevention of Money-Laundering Bill 1998
was introduced in the Parliament on the 4th August, 1998. The Bill was referred to the Standing Committee
on Finance, which presented its report on the 4th March, 1999 to Lok Sabha. After incorporating the
recommendations of the Standing Committee, the Government introduced the Prevention of Money
Laundering Bill 1999 in the Parliament on October 29, 1999. The Bill received the assent of the President
and became Prevention of Money Laundering Act, 2002 on 17th January 2003. The Act has come in force
with effect from July 1, 2005. The Act was last amended in the year 2009, 2012.
Prevention of Money Laundering Act, 2002

Scheme of the Act
The Prevention of Money Laundering Act, 2002 consists of ten chapters containing 75 sections and one
Schedule divided into five parts. Chapter I containing section 1 and 2 deals with short title, extent and
commencement and definitions. Chapter II containing sections 3 and 4 provides for offences and punishment
for money laundering. Chapter III (Section 5-11) provides for attachment, adjudication and confiscation and
Chapter IV (Sections 12-15) deals with obligations of banking companies, financial institutions and
intermediaries. Chapter V (Sections 16-24) relates to Summons, Searches and Seizures etc.
The Act provides for establishment of Appellate Tribunal and thus sections 25-42 under Chapter VI provides
for composition, procedure, power, jurisdiction etc. of the Appellate Tribunal. Chapter VII (Sections 43-47)
deals with Special Courts, and Chapter VIII (Sections 48-54) provides for various authorities under the Act,
their appointment, powers, jurisdiction etc. Chapter IX (Sections 55-61) deals with reciprocal arrangement for
assistance in certain matters and procedure for attachment and confiscation of property. Chapter X
containing Sections 62-75 deals with miscellaneous provisions including punishment for, vexatious search,
false information etc., cognizance of offences, and offences by companies, among others.
Major Provisions of the Act

Definitions
Section 2 of the Act defines various terms used in the Act. Some of the important definitions are given below:
Attachment
Sub-section 1(d) defines attachment as to mean prohibition of transfer, conversion, disposition or movement
of property by an order issued under Chapter III.
Proceeds of Crime
Section 2(1)(u) defines the term ‘proceeds of crime as to mean any property derived or obtained, directly or
indirectly by any person as a result of criminal activity relating to a scheduled offence or the value of any
such property.
Property
The term ‘property used in sub-section 1(v) of Section 2 means any property or assets of every description,
whether, corporeal or incorporeal, movable or immovable, tangible or intangible and includes, deeds and
instruments evidencing title to, or interest in such property or assets wherever located.
Intermediary
The term intermediary under sub-section 1(n) of Section 2 has been defined as to mean a stock broker, sub-
broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant
banker, underwriter, portfolio manager, investment advisor, and any other intermediary associated with
securities market and registered under Section 12 of the SEBI Act, 1992.
Investigation
Sub-section 2(1)(na) defines investigation to include all the proceedings under the Act conducted by the
Director or by an authority authorized by the Central Government under this Act for the collection of
evidence.
Money Laundering
Section 3 of the Act states that whosoever directly or indirectly attempts to indulge or knowingly assists or
knowingly is a party or actually involved in any process or activity connected with the proceeds of crime
including its concealment, possession, acquisition or use and projecting or claiming it is an untainted
property shall be guilty of offence of money laundering.
Section 4 provides that any person who commits the offence of money laundering shall be punishable with
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rigorous imprisonment for a term which shall not be less than three years but which may extend to seven
years and also liable to fine. However, where the proceeds of crime involved in money laundering relates to
any offence specified under the Narcotic Drugs and Psychotropic Substances Act, the punishment may
extend to rigorous imprisonment for ten years.
Attachment of property involved in money laundering
Where the Director or any officer not below the rank of Deputy Director authorised by him, has reason to
believe on the basis of material in his possession that any person is in possession of any proceeds of money
laundering; such person has been charged of having committed a scheduled offence and such proceeds of
crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any
proceedings relating to confiscation of such proceeds of crime, such officer may by order in writing,
provisionally attach such property for a period not exceeding 180 days from the date of the order, in the
manner provided in the Second Schedule of the Income-tax Act, 1961.
Every order of attachment shall cease to have effect after the expiry of ninety days from the date of the order
or on the date of the order made by the Administrating Officer finding the person interested is not prevented
from the enjoyment of property attached. ‘Person interested in relation to any immovable property includes
all persons claiming or entitled to claim any interest in the property. The Director or any other officer who
provisionally attaches any property shall, within a period of 30 days from such attachment file a complaint,
stating the facts of such attachment before the Adjudicating Authority.
Adjudicating Authority
Section 6 empowers the Central Government to appoint, by notification, one or more persons not below the
rank of Joint Secretary to the Government of India as Adjudicating Authority to exercise the jurisdiction,
powers and authority conferred on or under the Act.
Adjudication
Section 8 dealing with the adjudication provides that on receipt of a complaint from the Director or any other
officer who provisionally attaches any property or an application made by such officer for retention of seized
record or property, the Adjudicating Authority may, on reason to believe that any person has committed an
offence of money laundering, serve a notice of not less than thirty days on such person calling upon him to
indicate the sources of his income, earning or assets, out of which or by means of which he has acquired the
property attached or seized, the evidence on which he relies and other relevant information and particulars
and show cause why all or any of such property should not be declared to be the properties involved in
money laundering and confiscated by the Central Government. Where a notice specifies any property as
being held by a person on behalf of any other person, a copy of such notice shall also be served upon such
other person. Similar notice is required to be served on all persons when such property is held jointly by
more than one person.
Vesting of Property in Central Government
Section 9 provides that an order of confiscation made, in respect of any property of a person, vests in the
Central Government all the rights and title in such property free from all encumbrances. The Adjudicating
Authority after giving an opportunity of being heard to any other person interested in the property attached or
seized is of the opinion that any encumbrances on the property or lease hold interest has been created with
a view to defeat the provisions of the Act, it may, by order declare such encumbrances or lease hold interest
to be void and thereupon the property shall vest in the Central Government free from such encumbrances or
lease hold. However, this provision shall not discharge any person from any liability in respect of such
encumbrances which may be enforced against such person by a suit for damages.
Obligation of Banking Companies, Financial Institutions and Intermediaries

Chapter IV of the Act deals with obligations of Banking companies, financial institutions and intermediaries.
Section 12 requires every banking company, financial institution and intermediary to maintain a record of all
transactions, the nature and value of which may be prescribed, whether such transactions comprise of a
single transaction or a series of transactions legally connected to each other, and when such series of
transactions take place within a month. These informations are required to be furnished to the Director within
such time as may be prescribed. Banks and financial institutions are required to verify and maintain the
records of the identity of all its clients, in such manner as may be prescribed. The records as mentioned
above are required to be maintained for a period of ten years from the date of cessation of the transactions
between the clients and the banking company, financial institution or intermediary.
Section 13 states that the Director may, either on his own motion, or on an application made by any
authority, officer, or person, call for records of all transactions and make such inquiry or cause such inquiry to
be made, as he thinks fit. In the course of any inquiry, if the Director finds that a banking company, financial
institution or an intermediary or any of its officers has failed to maintain or retain records in accordance with
the provisions of the Act, he may, by an order, levy a fine on such banking company, financial institution or
intermediary which shall not be less than ten thousand rupees but may extend to one lakh rupees for each
failure.
Section 15 empowers the Central Government to prescribe, in consultation with the Reserve Bank of India,
the procedure and the manner of maintaining and furnishing information for the purpose of implementation of
the provisions of the Act.
Summon, Searches and Seizures, etc.

Section 16 empowers an authority to enter, on having reason to believe that an offence under Section 3 has
been committed, any place within the limits of the area assigned to him or in respect of which he is
authorised. Section 16(3) requires such authority to place marks of identification on the records inspected by
him and make or cause to be made extracts or copies therefrom, make an inventory of any property checked
or verified by him and record the statement of any person present in the place which may be useful for, or
relevant to, any proceedings under the Act.
Section 18 of the Act deals with search of persons and provides that if an authority authorised in this behalf
by the Central Government by general or special order has reason to believe that any person has secreted
about his person or in anything under his possession, ownership or control any record or proceeds of crime
which may be useful for or relevant to any proceedings under this Act, he may search that person and seize
such record or property which may be useful for or relevant to any proceedings under this Act.
Retention of Property
Section 20 of the Act deals with retention of property. As per Sub-section (1) provides that where any
property has been seized under section 17 or section 18 or frozen under sub-section (1A) of section 17 and
the officer authorised by the Director in this behalf has, on the basis of material in his possession, reason to
believe (the reason for such belief to be recorded by him in writing) that such property is required to be
retained for the purposes of adjudication under section 8, such property may, if seized, be retained or if
frozen, may continue to remain frozen, for a period not exceeding one hundred and eighty days from the day
on which such property was seized or frozen, as the case may be.
(2) The officer authorised by the Director shall, immediately after he has passed an order for retention or
continuation of freezing of the property for purposes of adjudication under section 8, forward a copy of the
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order along with the material in his possession, referred to in sub-section (1), to the Adjudicating Authority, in
a sealed envelope, in the manner as may be prescribed and such Adjudicating Authority shall keep such
order and material for such period as may be prescribed.
(3) On the expiry of the period specified in sub-section (1), the property shall be returned to the person from
whom such property was seized or whose property was ordered to be frozen unless the Adjudicating
Authority permits retention or continuation of freezing of such property beyond the said period.
(4) The Adjudicating Authority, before authorising the retention or continuation of freezing of such property
beyond the period specified in sub-section (1), shall satisfy himself that the property is prima facie involved in
money-laundering and the property is required for the purposes of adjudication under section 8.
(5) After passing the order of confiscation under sub-section (5) or sub-section (7) of section 8, the Court or
the Adjudicating Authority, as the case may be, shall direct the release of all property other than the property
involved in money-laundering to the person from whom such property was seized or the persons entitled to
receive it.
(6) Where an order releasing the property has been made by the Court under sub-section (6) of section 8 or
by the Adjudicating Authority under section 58B or sub-section (2A) of section 60, the Director or any officer
authorised by him in this behalf may withhold the release of any such property for a period of ninety days
from the date of such order, if he is of the opinion that such property is relevant for the appeal proceedings
under the Act.
Retention of records
Section 21 deals with retention of records. Section 21(1) states that where any records have been seized,
under section 17 or section 18 or frozen under sub-section (1A) of section 17 and the Investigating Officer or
any other officer authorised by the Director in this behalf has reason to believe that any of such records are
required to be retained for any inquiry under this Act, such records may if seized, be retained or if frozen,
may continue to remain frozen, for a period not exceeding one hundred and eighty days from the day on
which such records were seized or frozen, as the case may be.
(2) The person, from whom records seized or frozen, shall be entitled to obtain copies of records.
(3) On the expiry of the period specified under sub-section (1), the records shall be returned to the person
from whom such records were seized or whose records were ordered to be frozen unless the Adjudicating
Authority permits retention or continuation of freezing of such records beyond the said period.
(4) The Adjudicating Authority, before authorising the retention or continuation of freezing of such records
beyond the period specified in sub-section (1), shall satisfy himself that the records are required for the
purposes of adjudication under section 8.
(5) After passing of an order of confiscation under sub-section (5) or subsection (7) of section 8, the
Adjudicating Authority shall direct the release of the records to the person from whom such records were
seized.
(6) Where an order releasing the records has been made by the Court under subsection (6) of section 8 or
by the Adjudicating Authority under section 58B or subsection (2A) of section 60, the Director or any officer
authorised by him in this behalf may withhold the release of any such record for a period of ninety days from
the date of such order, if he is of the opinion that such record is relevant for the appeal proceedings under
the Act.
Presumption in Inter-connected Transactions

Section 23 of the Act deals with presumption in inter-connected transactions and provides that where money
laundering involves two or more transactions and one or more such transactions is or are proved to be
involved in money laundering, then for the purposes of adjudication or confiscation under Section 8, it shall
be presumed that the remaining transactions form part of such interconnected transactions, unless otherwise
proved to the satisfaction of the Adjudicating Authority.
Appellate Tribunal
Chapter VI of the Act deals with Appellate Tribunal. Section 25 empowers the Central Government, to
establish an Appellate Tribunal to hear appeals against the orders of Adjudicating Authority and other
authorities under the Act.
Special Courts
Sections 43 to 47 of the Act deal with provisions relating to Special Courts. Section 43(1) empowers the
Central Government to designate, in consultation with the Chief Justice of the High Court, one or more
Courts of Session as Special Courts or Court for such area or areas or for such case or class or group of
cases as may be specified in the notification, for trial of offence punishable under Section 4.
Offences Triable by Special Courts
Section 44(1) provides that the offence punishable under Section 4, shall be triable only by the Special Court
constituted for the area in which the offence has been committed or a special court may, upon a complaint
made by an authority authorised in this behalf take cognizance of the offence for which the accused is
committed to it for trial.
Offences to be cognizable and Non-bailable
Section 45 declares every offence punishable under the Act to be cognizable. It provides that
notwithstanding anything contained in the Code of Criminal Procedure, 1973, a person accused of an
offence punishable for a term of imprisonment of more than three years under Part A of the Schedule shall
not be released on bail or on his own bond unless the Public Prosecutor has been given an opportunity to
oppose the application for such release; and where the Public Prosecutor opposes the application, unless
the Court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and
that he is not likely to commit any offence while in bail.
However the special court shall not take cognizance of any offence punishable under Section 4, except upon
a complaint in writing made by (i) the Director or (ii) any officer of the Central Government or State
Government authorised in writing in this behalf by the Central Government by a general or special order
made by that Government.
Sub-section 1A inserted by Prevention of Money Laundering (Amendment) Act, 2005 provides that
notwithstanding anything contained in Code of Criminal Procedure, 1973 or any other provision of this Act,
no police officer shall investigate into an offence under this Act, unless specifically authorized, by the Central
Government by a general or special order, and subject to such conditions as may be prescribed.
Power of Central Government to Issue Directions
Section 52 empowers the Central Government to issue, from time to time, such orders, instructions and
directions to the authorities as it may deem fit for the proper administration of this Act. The authorities and all
other persons employed in execution of the Act have been put under obligation to observe and follow such
orders, instructions and directions of the Central Government. However, no such orders, instructions or
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directions shall be issued so as to require any authority to decide a particular case in a particular manner or
interfere with the discretion of the Adjudicating Authority in exercise of his functions.
Agreement with Foreign Countries
Section 56 empowers the Central Government to enter into an agreement with the Government of any
country for enforcing the provisions of the Act and also for exchange of information for the prevention of any
offence under the this Act or under the corresponding law in force in that country or investigation of cases
relating to any offence under the Act.
Assistance to a Contracting State in Certain Cases
Section 58 provides that, where a letter of request is received by the Central Government, from a court or
authority in a contracting State requesting for investigation into an offence or proceedings under the Act and
forwarding to such court or authority any evidence connected therewith, the Central Government may
forward such letter of request to the Special Court or to any authority as it thinks fit for execution of such
request in accordance with the provisions of the Act or as the case may be, any other law for the time being
in force. Section 58A empowering Special Court to release the property.
Reciprocal Arrangements for Processes and Assistance for Transfer of Accused Persons
Section 59(1) prescribes that where Special Court, in relation to an offence punishable under Section 4
desires that a summon to an accused person; or a warrant for the arrest of an accused person; or a summon
to any person requiring him to attend and produce a document or other thing, or to produce a document or
other things or to produce it; or a search warrant issued by it, shall be served or executed at any place in any
contracting state, it shall send such summons or warrant in duplicate in such form, to such court, Judge or
Magistrate through such authorities as the Central Government may by notification, specify in that behalf and
that court, Judge or Magistrate, as the case may be, shall cause the same to be executed.
Sub-Section (2) stipulates that where a Special Court, in relation to an offence punishable under Section 4
has received for service or execution, summon to an accused person; or a warrant for the arrest of an
accused person; or a summon to any person requiring him to attend and produce a document or other things
or to produce it; or a search warrant; issued by a court, Judge or Magistrate in a contracting State, it shall
cause the same to be served or executed as if it were a summon or warrant received by it from another court
in the said territories for service or execution within its jurisdiction. Where a warrant of arrest has been
executed, the person arrested shall, so far as possible be dealt with in accordance with the procedure
specified under Section 19 and where a search warrant has been executed, the things found in the search
shall so far as possible be dealt with in accordance with the procedure specified under Section 17 or 18.
However, where a summon or search warrant received from a contracting state has been executed, the
documents or other things produced or things found in the search shall be forwarded to the court issuing the
summon or search warrant through such authority as the Central Government may by notification specify in
this behalf.
Attachment, Seizure and Confiscation of Property, etc.
Section 60(1) provides that where the Director has made an order for attachment of any property under
Section 5 or where Adjudicating Authority has made an order confirming such attachment or confiscation of
any property under Section 8 and such property is suspected to be in a contracting state, the Special Court
on an application by the Director or the Administrator appointed under Section 10(1) as the case may be,
may issue a letter of request to a court or an authority in the contracting state for execution of such order.
Section 60(2) prescribes that when a letter of request is received by the Central Government from a court or
an authority in a contracting state requesting attachment or confiscation of the property in India derived or
obtained directly or indirectly, by any person from the commission of an offence under Section 3 committed
in that contracting state, the Central Government may forward such letter of request to the Director as it
thinks fit, for execution in accordance with the provisions of the Act. Sub-Section (3) stipulates that the
Director shall on receipt of a letter of request under Section 58 or Section 59 direct any authority under the
Act to take all steps necessary for tracing and identifying such property.
(KYC) Norms/ (AML) Measures/ (CFT) Guidelines – Anti Money Laundering Standards
RBI issued Master Circular on Know Your Customer (KYC) norms/Anti-Money Laundering (AML)
standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under Prevention of Money
Laundering Act, (PMLA), 2002 and Banks were advised to follow certain customer identification procedure
for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to
appropriate authority. These ‘Know Your Customer’ guidelines have been revisited in the context of the
Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML)
standards and on Combating Financing of Terrorism (CFT). Banks have been advised to ensure that a
proper policy framework on ‘Know Your Customer’ and Anti-Money Laundering measures with the approval
of the Board is formulated and put in place.
The objective of KYC Norms/ AML Measures/ CFT Guidelines
The objective of Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Measures/Combating of
Financing of Terrorism (CFT) guidelines is to prevent banks from being used, intentionally or unintentionally,
by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable
banks to know/understand their customers and their financial dealings better which in turn help them manage
their risks prudently.
Obligation of Banks
• Banks should keep in mind that the information collected from the customer for the purpose of opening
of account is to be treated as confidential and details thereof are not to be divulged for cross selling or
any other like purposes. Banks should, therefore, ensure that information sought from the customer is
relevant to the perceived risk, is not intrusive, and is in conformity with the guidelines issued in this
regard. Any other information from the customer should be sought separately with his/her consent and
after opening the account.
• Banks should ensure that any remittance of funds by way of demand draft, mail/telegraphic transfer or
any other mode and issue of travellers’cheques for value of Rupees fifty thousand and above is
effected by debit to the customer’s account or against cheques and not against cash payment.
• Banks should ensure that the provisions of Foreign Contribution (Regulation) Act, 1976 as amended
from time to time, wherever applicable are strictly adhered to.
KYC Policy
Banks should frame their KYC policies incorporating the following four key elements:
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For the purpose of KYC policy, a ‘Customer’ is defined as:

• a person or entity that maintains an account and/or has a business relationship with the bank;
• one on whose behalf the account is maintained (i.e. the beneficial owner);
• beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers,

Chartered Accountants, Solicitors etc. as permitted under the law, and
• any person or entity connected with a financial transaction which can pose significant reputational or
other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single
transaction.
Introduction of New Technologies – Credit cards/debit cards/ smart cards/gift cards

Banks should pay special attention to any money laundering threats that may arise from new or developing
technologies including internet banking that might favour anonymity, and take measures, if needed, to
prevent their use in money laundering schemes. Many banks are engaged in the business of issuing a
variety of Electronic Cards that are used by customers for buying goods and services, drawing cash from
ATMs, and can be used for electronic transfer of funds. Banks are required to ensure full compliance with all
KYC/AML/CFT guidelines issued from time to time, in respect of add-on/ supplementary cardholders also.
Further, marketing of credit cards is generally done through the services of agents. Banks should ensure that
appropriate KYC procedures are duly applied before issuing the cards to the customers. It is also desirable
that agents are also subjected to KYC measures.
Information to be preserved
Banks are required to maintain all necessary information in respect of transactions to permit reconstruction of
individual transaction, including the following information:
(a) the nature of the transactions;
(b) the amount of the transaction and the currency in which it was denominated;
(c) the date on which the transaction was conducted; and
(d) the parties to the transaction
Maintenance and Preservation of record
(a) Banks are required to maintain the records containing information of all transactions. Banks should
take appropriate steps to evolve a system for proper maintenance and preservation of account
information in a manner that allows data to be retrieved easily and quickly whenever required or
when requested by the competent authorities.
(b) Banks should ensure that records pertaining to the identification of the customer and his address
(e.g. copies of documents like passports, identity cards, driving licenses, PAN card, utility bills etc.)
obtained while opening the account and during the course of business relationship, are properly
preserved. The identification records and transaction data should be made available to the
competent authorities upon request.
(c) Banks have been advised to pay special attention to all complex, unusual large transactions and all
unusual patterns of transactions, which have no apparent economic or visible lawful purpose. It is
further clarified that the background including all documents/office records/memorandums
pertaining to such transactions and purpose thereof should, as far as possible, be examined and the
findings at branch as well as Principal Officer level should be properly recorded. Such records and
related documents should be made available to help auditors in their day-to-day work relating to
scrutiny of transactions and also to Reserve Bank/other relevant authorities.
Reporting to Financial Intelligence Unit – India

In terms of the PMLA Rules, banks are required to report information relating to cash and suspicious
transactions and all transactions involving receipts by non-profit organisations of value more than rupees ten
lakh or its equivalent in foreign currency to the Director, Financial Intelligence Unit-India (FIU-IND) in respect
of transactions.
Freezing of Assets under Section 51A of Unlawful Activities (Prevention) Act, 1967
The Unlawful Activities (Prevention) Act, 1967 (UAPA) has been amended by the Unlawful Activities
(Prevention) Amendment Act, 2012. Government has issued an Order dated August 27, 2009 detailing the
procedure for implementation of Section 51A of the Unlawful Activities (Prevention) Act, 1967 relating to the
purposes of prevention of, and for coping with terrorist activities. In terms of Section 51A, the Central
Government is empowered to freeze, seize or attach funds and other financial assets or economic resources
held by, on behalf of or at the direction of the individuals or entities Listed in the Schedule to the Order, or
any other person engaged in or suspected to be engaged in terrorism and prohibit any individual or entity
from making any funds, financial assets or economic resources or related services available for the benefit of
the individuals or entities Listed in the Schedule to the Order or any other person engaged in or suspected to
be engaged in terrorism.
LESSON ROUND-UP
• Money laundering is the processing of criminal proceeds to disguise its illegal origin.
• The process of money laundering can be classified into three stages, namely, placement, layering and integration.
• The Prevention of Money-laundering Act, 2002 was enacted to prevent money laundering and to provide for
confiscation of property derived from, or involved in, money laundering and for matters connected therewith or
incidental thereto.
• The Act also addresses the international obligations under the Political Declaration and Global Programme of Action
adopted by the General Assembly of the United Nations to prevent money laundering.
• The Act contains provisions pertaining to offences and punishment for money laundering, attachment, adjudication
and confiscation, obligations of banking companies, financial institutions and intermediaries, Summons, Searches
and Seizures etc.
• The Act states that whoever, acquires, owns, possesses, or transfers any proceeds of crime or knowingly enters into
any transaction which is related to proceeds of crime directly or indirectly or conceals or aids in the concealment of
the proceeds of crime, shall be guilty of offence of money laundering.
• Every banking company, financial institution and intermediary is required to maintain a record of all transactions, the
nature and value of which may be prescribed, whether such transactions comprise of a single transaction or a series
of transactions legally connected to each other, and when such series of transactions take place within a month.
• The objective of Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Measures/Combating of
Financing of Terrorism (CFT) guidelines is to prevent banks from being used, intentionally or unintentionally, by
criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to
know/understand their customers and their financial dealings better which in turn help them manage their risks
prudently.
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SELF TEST QUESTIONS

evaluation)
1. Define the term money laundering and explain the process of money laundering.
2. Briefly discuss the international efforts in preventing the money laundering.
3. Briefly explain the salient features of Prevention of Money Laundering Act.
4. Write short note on the following:
(a) Impact of money laundering on the Development.
(b) Obligation of banking companies, financial institutions and intermediaries.
(c) Attachment, seizure and confiscation of property etc.
5. What are the objectives of KYC guidelines and when does KYC norms apply?
Lesson 20
Indian Contract Act, 1872
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning Objective A contract is an agreement enforceable at law,
• Meaning and Nature of contract made between two or more persons, by which
rights are acquired by one or more to acts or
• Agreement
forbearances on the part of the other or others. A
• Essential elements of a valid contract contract is an agreement creating and defining
• Flaws in Contract obligations between the parties.
• Agreement that restrained of Trade The Indian Contract Act, 1872 regulates all the
transactions of a company. It lays down the general
• Wagering Agreement
principles relating to the formation and
• Void Agreement enforceability of contracts; rules governing the
• Quantum Meruit provisions of an agreement and offer; the various
types of contracts including those of indemnity and
• Restitution
guarantee, bailment and pledge and agency. It also
• Contingent Contract contains provisions pertaining to breach of a
• Quasi Contract contract.
• Contract of Indemnity Guarantee The Law of Contract constitutes the most important
branch of Mercantile or Commercial Law. It affects
• Remedies for Breach
everybody, more so, trade, commerce and industry.
• Contract of Bailment and Pledge It may be said that the contract is the foundation of
• Law of Agency the civilized world. Therefore, it is essential for the
students to be familiar with the law relating to
• Del Credere Agent
Contract.
• Termination of Agency
• When termination takes effect
• Joint Venture Agreements
• E-Contract
• Lesson round up
• Self test questions.
“Every agreement and promise enforceable at law is a contract”. —Sir Fredrick Pollock
“A contract is an agreement creating and defining obligations between the parties “. —Salmond
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Meaning and Nature of Contract
The law relating to contract is governed by the Indian Contract Act, 1872. The Act came into force on the first
day of September, 1872. The preamble to the Act says that it is an Act “to define and amend certain parts of
the law relating to contract”. It extends to the whole of India except the State of Jammu and Kashmir. The Act
is by no means exhaustive on the law of contract. It does not deal with all the branches of the law of contract.
Thus, contracts relating to partnership, sale of goods, negotiable instruments, insurance etc. are dealt with
by separate Acts.
The Indian Contract Act mostly deals with the general principles and rules governing contracts. The Act is divisible
into two parts. The first part (Section 1-75) deals with the general principles of the law of contract, and therefore
applies to all contracts irrespective of their nature. The second part (Sections 124-238) deals with certain special
kinds of contracts, namely contracts of Indemnity and Guarantee, Bailment, Pledge, and Agency.
The Indian Contract Act has defined contract in Section 2(h) as “an agreement enforceable by law”.
These definitions indicate that a contract essentially consists of two distinct parts. First, there must be an
agreement. Secondly, such an agreement must be enforceable by law. To be enforceable, an agreement
must be coupled with an obligation.
A contract therefore, is a combination of the two elements: (1) an agreement and (2) an obligation.
Agreement
An agreement gives birth to a contract. As per Section 2(e) of the Indian Contract Act “every promise and
every set of promises, forming the consideration for each other, is an agreement. It is evident from the
definition given above that an agreement is based on a promise. What is a promise? According to Section
2(b) of the Indian Contract Act “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. An agreement,
therefore, comes into existence when one party makes a proposal or offer to the other party and that other
party signifies his assent thereto. In nutshell, an agreement is the sum total of offer and acceptance.”
An analysis of the definition given above reveals the following characteristics of an agreement:
Lesson 20 Indian Contract Act, 1872 475
Obligation
An obligation is the legal duty to do or abstain from doing what one has promised to do or abstain from
doing. A contractual obligation arises from a bargain between the parties to the agreement who are called
the promisor and the promisee. Section 2(b) says that when the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted; and a proposal when accepted becomes a
promise. In broad sense, therefore, a contract is an exchange of promises by two or more persons, resulting
in an obligation to do or abstain from doing a particular act, where such obligation is recognised and
enforced by law.
Rights and Obligations

Where parties have made a binding contract, they have created rights and obligations between themselves.
The contractual rights and obligations are correlative, e.g., A agrees with B to sell his car for Rs. 10,000 to
him. In this example, the following rights and obligations have been created:
(i) A is under an obligation to deliver the car to B.
B has a corresponding right to receive the car.
(ii) B is under an obligation to pay `10,00,000 to A.
A has a correlative right to receive `10,00,000.
Agreements which are not Contracts

Agreements in which the idea of bargain is absent and there is no intention to create legal relations are not
contracts. These are:
Agreement relating to social matters
Domestic arrangements between husband

and wife
(a) Agreements relating to social matters: An agreement between two persons to go together to the
cinema, or for a walk, does not create a legal obligation on their part to abide by it. Similarly, if I
promise to take you for a dinner and break that promise, I do not expect to be liable to legal
penalties. There cannot be any offer and acceptance to hospitality.
(b) Domestic arrangements between husband and wife: In Balfour v. Balfour (1919) 2 KB 571, a
husband working in Ceylone, had agreed in writing to pay a housekeeping allowance to his wife
living in England. On receiving information that she was unfaithful to him, he stopped the allowance.
Held, he was entitled to do so. This was a mere domestic arrangement with no intention to create
legally binding relations. Therefore, there was no contract.
Three consequences follow from the above discussion:

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(i) To constitute a contract, the parties must intend to create legal relationship.
(ii) The law of contract is the law of those agreements which create obligations, and those obligations
which have their source in agreement.
(iii) Agreement is the genus of which contract is the specie and, therefore, all contracts are agreements
but all agreements are not contracts.
ESSENTIAL ELEMENTS OF A VALID CONTRACT

Section 10 of the Indian Contract Act, 1872 provides that “all agreements are contracts if they are made by
the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are
not hereby expressly declared to be void”.
The essential elements of a valid contract are:

(i) An offer or proposal by one party and acceptance of that offer by another party resulting in an
agreement—consensus-ad-idem.
(ii) An intention to create legal relations or an intent to have legal consequences.
(iii) The agreement is supported by a lawful consideration.
(iv) The parties to the contract are legally capable of contracting.
(v) Genuine consent between the parties.
(vi) The object and consideration of the contract is legal and is not opposed to public policy.
(vii) The terms of the contract are certain.
(viii) The agreement is capable of being performed i.e., it is not impossible of being performed.
Therefore, to form a valid contract there must be (1) an agreement, (2) based on the genuine consent of the
parties, (3) supported by a lawful consideration, (4) made for a lawful object, and (iv) between the competent
parties.
(a) Offer or Proposal and Acceptance
One of the early steps in the formation of a contract lies in arriving at an agreement between the contracting
parties by means of an offer and acceptance. Thus, when one party (the offeror) makes a definite proposal to
another party (the offeree) and the offeree accepts it in its entirety and without any qualification, there is a
meeting of the minds of the parties and a contract comes into being, assuming that all other elements are
also present.
What is an Offer or a Proposal?
A proposal is also termed as an offer. The word ‘proposal’ is synonymous with the English word “offer”. An
offer is a proposal by one person, whereby he expresses his willingness to enter into a contractual obligation
in return for a promise, act or forbearance. Section 2(a) of the Indian Contract Act defines proposal or offer
as “when one person signifies to another his willingness to do or abstain from doing anything with a view to
obtaining the assent of that other to such act or abstinence, he is said to make a proposal”. The person
making the proposal or offer is called the proposer or offeror and the person to whom the proposal is made is
called the offeree.
Rules Governing Offers

A valid offer must comply with the following rules:
(a) An offer must be clear, definite, complete and final. It must not be vague. For example, a promise to
pay an increased price for a horse if it proves lucky to promisor, is too vague and is not binding.
(b) An offer must be communicated to the offeree. An offer becomes effective only when it has been
communicated to the offeree so as to give him an opportunity to accept or reject the same.
(c) The communication of an offer may be made by express words-oral or written-or it may be implied
by conduct. A offers his car to B for `10,000. It is an express offer. A bus plying on a definite route
goes along the street. This is an implied offer on the part of the owners of the bus to carry
passengers at the scheduled fares for the various stages.
(d) The communication of the offer may be general or specific. Where an offer is made to a specific
person it is called specific offer and it can be accepted only by that person. But when an offer is
addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be
accepted by any member of the general public by fulfilling the condition laid down in the offer. The
leading case on the subject is Carlillv. Carbolic Smoke Ball Co. The company offered by
advertisement, a reward of `100 to anyone who contacted influenza after using their smoke ball in
the specified manner. Mrs. Carlill did use smoke ball in the specified manner, but was attacked by
influenza. She claimed the reward and it was held that she could recover the reward as general
offer can be accepted by anybody. Since this offer is of a continuing nature, more than one person
can accept it and can even claim the reward. But if the offer of reward is for seeking some
information or seeking the restoration of missing thing, then the offer can be accepted by one
individual who does it first of all. The condition is that the claimant must have prior knowledge of the
reward before doing that act or providing that information.
Example: A advertises in the newspapers that he will pay rupees one thousand to anyone who brings to him
his lost son. B without knowing of this reward finds A’s lost son and restore him to A. In this case since B did
not know of the reward, he cannot claim it from A even though he finds A’s lost son and brings him to A.
In India also, in the case of HarbhajanLal v. HarcharanLal (AIR 1925 All. 539), the same rule was applied. In
this case, a young boy ran away from his fathers home. The father issued a pamphlet offering a reward of
`500 to anybody who would bring the boy home. The plaintiff saw the boy at a railway station and sent a
telegram to the boys father. It was held that the handbill was an offer open to the world at large and was
capable to acceptance by any person who fulfilled the conditions contained in the offer. The plaintiff
substantially performed the conditions and was entitled to the reward offered.
An Offer must be Distinguished from

(a) An invitation to treat or an invitation to make an offer: e.g., an auctioneers request for bids (which are
offered by the bidders), the display of goods in a shop window with prices marked upon them, or the display
of priced goods in a self- service store or a shopkeepers catalogue of prices are invitations to an offer.
(b) A mere statement of intention: e.g., an announcement of a coming auction sale. Thus, a person who
attended the advertised place of auction could not sue for breach of contract if the auction was cancelled
(Harris v. Nickerson (1873) L.R. 8 QB 286).
(c) A mere communication of information in the course of negotiation: e.g., a statement of the price at which
one is prepared to consider negotiating the sale of piece of land (Harvey v. Facey (1893) A.C. 552).
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An offer that has been communicated properly continues as such until it lapses, or until it is revoked by the
offeror, or rejected or accepted by the offeree.
Lapse of Offer
Section 6 deals with various modes of lapse of an offer. It states that an offer lapses if—
(a) it is not accepted within the specified time (if any) or after a reasonable time, if none is specified.
(b) it is not accepted in the mode prescribed or if no mode is prescribed in some usual and reasonable
manner, e.g., by sending a letter by mail when early reply was requested;
(c) the offeree rejects it by distinct refusal to accept it;
(d) either the offeror or the offeree dies before acceptance;
(e) the acceptor fails to fulfill a condition precedent to an acceptance.
(f) the offeree makes a counter offer, it amounts to rejection of the offer and an offer by the offeree
may be accepted or rejected by the offeror.
Revocation of Offer by the Offeror

An offer may be revoked by the offeror at any time before acceptance.
Like any offer, revocation must be communicated to the offeree, as it does not take effect until it is actually
communicated to the offeree. Before its actual communication, the offeree, may accept the offer and create a
binding contract. The revocation must reach the offeree before he sends out the acceptance.
An offer to keep open for a specified time (option) is not binding unless it is supported by consideration.
Acceptance
A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the offeree to an
offer. Under Section 2(b) of the Contract Act when a 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..
Rules Governing Acceptance

(a) Acceptance may be express i.e. by words spoken or written or implied from the conduct of the
parties.
(b) If a particular method of acceptance is prescribed, the offer must be accepted in the prescribed
manner.
(c) Acceptance must be unqualified and absolute and must correspond with all the terms of the offer.
(d) A counter offer or conditional acceptance operates as a rejection of the offer and causes it to lapse,
e.g., where a horse is offered for Rs. 1,000 and the offeree counter-offers Rs. 990, the offer lapses
by rejection.
(e) Acceptance must be communicated to the offeror, for acceptance is complete the moment it is
communicated. Where the offeree merely intended to accept but does not communicate his
intention to the offeror, there is no contract. Mere mental acceptance is not enough.
(f) Mere silence on the part of the offeree does not amount to acceptance.
Ordinarily, the offeror cannot frame his offer in such a way as to make the silence or inaction of the
offeree as an acceptance. In other words, the offeror can prescribe the mode of acceptance but not
the mode of rejection.
(g) If the offer is one which is to be accepted by being acted upon, no communication of acceptance to
the offeror is necessary, unless communication is stipulated for in the offer itself.
Thus, if a reward is offered for finding a lost dog, the offer is accepted by finding the dog after
reading about the offer, and it is unnecessary before beginning to search for the dog to give notice
of acceptance to the offeror.
(h) Acceptance must be given within a reasonable time and before the offer lapses or is revoked. An
offer becomes irrevocable by acceptance.
An acceptance never precedes an offer. There can be no acceptance of an offer which is not
communicated. Similarly, performance of conditions of an offer without the knowledge of the specific
offer, is no acceptance. Thus in Lalman Shukla v.GauriDutt(1913), where a servant brought the boy
without knowing of the reward, he was held not entitled to reward because he did not know about
the offer.
Standing Offers
Where a person offers to another to supply specific goods, up to a stated quantity or in any quantity which
may be required, at a certain rate, during a fixed period, he makes a standing offer. Thus, a tender to supply
goods as and when required, amounts to a standing offer.
A standing offer or a tender is of the nature of a continuing offer. An acceptance of such an offer merely
amounts to intimation that the offer will be considered to remain open during the period specified and that it
will be accepted from time to time by placing order for specified quantities. Each successive order given,
while the offer remains in force, is an acceptance of the standing offer as to the quantity ordered, and creates
a separate contract. It does not bind either party unless and until such orders are given.
Where P tendered to supply goods to L upto a certain amount and over a certain period, L’s order did not
come up to the amount expected and P sued for breach of contract Held: Each order made was a separate
contract and P was bound to fulfill orders made, but there was no obligation on L to make any order to all
(Percival Ltd. v. L.C.C. (1918).
Tickets
Tickets purchased for entrance into places of amusement, or tickets issued by railways or bus companies,
clock-room tickets, and many other contracts set out in printed documents contain numerous terms, of many
of which the party receiving the ticket or document is ignorant. If a passenger on a railway train receives a
ticket on the face of which is printed “this ticket is issued subject to the notices, regulations and conditions
contained in the current time-tables of the railway”, the regulations and conditions referred to are deemed to
be communicated to him and he is bound by them whether or not he has read them. He is bound even if he
is illiterate and unable to read them. But it is important that the notice of the conditions is contemporaneous
with the making of the contract and not after the contract has been made.
Contracts by Post
Contracts by post are subject to the same rules as others, but because of their importance, these are stated
below separately:
(a) An offer by post may be accepted by post, unless the offeror indicates anything to the contrary.
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(b) An offer is made only when it actually reaches the offeree and not before, i.e., when the letter
containing the offer is delivered to the offeree.
(c) An acceptance is made as far as the offeror is concerned, as soon as the letter containing the
acceptance is posted, to offerors correct address; it binds the offeror, but not the acceptor.
An acceptance binds the acceptor only when the letter containing the acceptance reaches the
offeror. The result is that the acceptor can revoke his acceptance before it reaches the offeror.
(d) An offer may be revoked before the letter containing the acceptance is posted. An acceptance can
be revoked before it reaches the offeror.
Contracts over the Telephone
Contracts over the telephone are regarded the same in principle as those negotiated by the parties in the
actual presence of each other. In both cases an oral offer is made and an oral acceptance is expected. It is
important that the acceptance must be audible, heard and understood by the offeror. If during the
conversation the telephone lines go “dead” and the offeror does not hear the offerees word of acceptance,
there is no contract at the moment. If the whole conversation is repeated and the offeror hears and
understands the words of acceptance, the contract is complete (Kanhaiyalal v. Dineshwarchandra (1959)
AIR, M.P. 234).
(b) Intention to Create Legal Relations
The second essential element of a valid contract is that there must be an intention among the parties that the
agreement should be attached by legal consequences and create legal obligations. If there is no such
intention on the part of the parties, there is no contract between them. Agreements of a social or domestic
nature do not contemplate legal relationship. As such they are not contracts.
A proposal or an offer is made with a view to obtain the assent to the other party and when that other party
expresses his willingness to the act or abstinence proposed, he accepts the offer and a contract is made
between the two. But both offer and acceptance must be made with the intention of creating legal relations
between the parties. The test of intention is objective. The Courts seek to give effect to the presumed
intention of the parties. Where necessary, the Court would look into the conduct of the parties, for much can
be inferred from the conduct. The Court is not concerned with the mental intention of the parties, but rather
with what a reasonable man would say, was the intention of the parties, having regard to all the
circumstances of the case.
For example, if two persons agree to assist each other by rendering advice, in the pursuit of virtue, science
or art, it cannot be regarded as a contract. In commercial and business agreements, the presumption is
usually that the parties intended to create legal relations. But this presumption is rebuttable which means that
it must be shown that the parties did not intend to be legally bound.
(c) Consideration
Need for Consideration
Consideration is one of the essential elements of a valid contract. The requirement of consideration stems
from the policy of extending the arm of the law to the enforcement of mutual promises of parties. A mere
promise is not enforceable at law. For example, if A promises to make a gift of `500 to B, and subsequently
changes his mind, B cannot succeed against A for breach of promise, as B has not given anything in return.
It is only when a promise is made for something in return from the promisee, that such promise can be
enforced by law against the promisor. This something in return is the consideration for the promise.
Definition of Consideration
Sir Fredrick Pollock has defined consideration “as an act or forbearance of one party, or the promise thereof
is the price for which the promise of the other is bought”.
It is “some right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss or
responsibility, given, suffered or undertaken by the other” (Currie v. Misa (1875) L.R. 10 Ex. 153).
Section 2(d) of the Indian Contract Act, 1872 defines consideration thus: “when at the desire of the promisor,
the promisee or any other person has done or abstained from doing, or does or abstains from doing, or
promises to do or to abstain from doing something, such act or abstinence or promise is called a
consideration for the promise”.
The fundamental principle that consideration is essential in every contract, is laid down by both the
definitions but there are some important points of difference in respect of the nature and extent of
consideration and parties to it under the two systems:
(a) Consideration at the desire of the promisor: Section 2(d) of the Act begins with the statement that
consideration must move at the desire or request of the promisor. This means that whatever is done
must have been done at the desire of the promisor and not voluntarily or not at the desire of a third
party. If A rushes to B’s help whose house is on fire, there is no consideration but a voluntary act.
But if A goes to B’s help at B’s request, there is good consideration as B did not wish to do the act
gratuitously.
(b) Consideration may move from the promisee or any other person: In English law, consideration must
move from the promisee, so that a stranger to the consideration cannot sue on the contract. A
person seeking to enforce a simple contract must prove in court that he himself has given the
consideration in return for the promise he is seeking to enforce.
In Indian law, however, consideration may move from the promisee or any other person, so that a stranger to
the consideration may maintain a suit. In Chinnaya v. Ramaya, (1882) 4 Mad. 137, a lady by a deed of gift
made over certain property to her daughter directing her to pay an annuity to the donors brother as had been
done by the donor herself before she gifted the property. On the same day, her daughter executed in writing
in favour of the donors brother agreeing to pay the annuity. Afterwards the donee (the daughter) declined to
fulfil her promise to pay her uncle saying that no consideration had moved from him. The Court, however,
held that the uncle could sue even though no part of the consideration received by his niece moved from
him. The consideration from her mother was sufficient consideration.
Privity of Contract
A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract. The
following illustration explains this point.
In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd. (1915) A.C. 847, D supplied tyres to a wholesaler X, on
condition that any retailer to whom X re-supplied the tyres should promise X, not to sell them to the public
below Ds list price. X supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list
price. Held: There was a contract between D and X and a contract between X and S. Therefore, D could not
obtain damages from S, as D had not given any consideration for Ss promise to X nor was he party to the
contract between D and X.
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Thus, a person who is not a party to a contract cannot sue upon it even though the contract is for his benefit.
A, who is indebted to B, sells his property to C, and C the purchaser of the property, promises to pay off the
debt to B. In case C fails to pay B, B has no right to sue C for there is no privity of contract between B and C.
The leading English case on the point is Tweddle v. Atkinson (1861) 1B and Section 393. In this case, the
father of a boy and the father of a girl who was to be married to the boy, agreed that each of them shall pay a
sum of money to the boy who was to take up the new responsibilities of married life. After the demise of both
the contracting parties, the boy (the husband) sued the executors of his father-in-law upon the agreement
between his father-in-law and his father. Held: the suit was not maintainable as the boy was not a party to
the contract.
Exception to the doctrine of privity of contract: Both the Indian law and the English law recognize certain
exceptions to the rule that a stranger to a contract cannot sue on the contract. In the following cases, a
person who is not a party to a contract can enforce the contract:
(i) A beneficiary under an agreement to create a trust can sue upon the agreement, though not a party
to it, for the enforcement of the trust so as to get the trust executed for his benefit. In Khawaja
Muhammad v. Hussaini Begum, (1910) 32 All. 410, it was held that where a Mohammedan lady
sued her father-in- law to recover arrears of allowance payable to her by him under an agreement
between him and her own father in consideration of her marriage, she could enforce the promise in
her favour in so far as she was a beneficiary under the agreement to make a settlement in her
favour, and she was claiming as beneficiary under such settlement.
(ii) An assignee under an assignment made by the parties, or by the operation of law (e.g. in case of
death or insolvency), can sue upon the contract for the enforcement of his rights, tittle and interest.
But a mere nominee (i.e., the person for whose benefit another has insured his own life) cannot sue
on the policy because the nominee is not an assignee.
(iii) In cases of family arrangements or settlements between male members of a Hindu family which
provide for the maintenance or expenses for marriages of female members, the latter though not
parties to the contract, possess an actual beneficial right which place them in the position of
beneficiaries under the contract, and can therefore, sue.
(iv) In case of acknowledgement of liability, e.g., where A receives money from B for paying to C, and
admits to C the receipt of that amount, then A constitutes himself as the agent of C.
(v) Whenever the promisor is by his own conduct estopped from denying his liability to perform the
promise, the person who is not a party to the contract can sue upon it to make the promisor liable.
(vi) In cases where a person makes a promise to an individual for the benefit of third party and creates
a charge on certain immovable property for the purpose, the third party can enforce the promise
though, he is stranger to the contract.
Kinds of Consideration
Kind of Consideration
Executory or future Executed or present Past which means a

past act or forbearance
Consideration may be:

(a) Executory or future which means that it makes the form of promise to be performed in the future,
e.g., an engagement to marry someone; or
(b) Executed or present in which it is an act or forbearance made or suffered for a promise. In other
words, the act constituting consideration is wholly or completely performed, e.g., if A pays today Rs.
100 to a shopkeeper for goods which are promised to be supplied the next day, A has executed his
consideration but the shopkeeper is giving executory consideration—a promise to be executed the
following day. If the price is paid by the buyer and the goods are delivered by the seller at the same
time, consideration is executed by both the parties.
(c) Past which means a past act or forbearance, that is to say, an act constituting consideration which
took place and is complete (wholly executed) before the promise is made.
According to English law, a consideration may be executory or executed but never past. The English law is
that past consideration is no consideration. The Indian law recognizes all the above three kinds of
consideration.
Rules Governing Consideration

(a) Every simple contact must be supported by valuable consideration otherwise it is formally void
subject to some exceptions.
(b) Consideration may be an act of abstinence or promise.
(c) There must be mutuality i.e., each party must do or agree to do something. A gratuitous promise as
in the case of subscription for charity, is not enforceable. For example, where A promises to
subscribe `5,000 for the repair of a temple, and then refuses to pay, no action can be taken against
him.
(d) Consideration must be real, and not vague, indefinite, or illusory, e.g., a son’s promise to “stop
being a nuisance” to his father, being vague, is no consideration.
(e) Although consideration must have some value, it need not be adequate i.e., a full return for the
promise. Section 25 (Exp. II) clearly provides that “an agreement to which the consent of the
promisor is freely given is not void merely because the consideration is inadequate”. It is upon the
parties to fix their own prices. For example, where A voluntarily agreed to sell his motor car for `500
to B, it became a valid contract despite the inadequancy of the consideration.
(f) Consideration must be lawful, e.g., it must not be some illegal act such as paying someone to
commit a crime. If the consideration is unlawful, the agreement is void.
(g) Consideration must be something more than the promisee is already bound to do for the promisor.
Thus, an agreement to perform an existing obligation made with the person to whom the obligation
is already owed, is not made for consideration. For example, if a seaman deserts his ship so
breaking his contract of service and is induced to return to his duty by the promise for extra wages,
he cannot later sue for the extra wages since he has only done what he had already contracted for:
Stilk v. Myrick (1809).
When Consideration not Necessary

The general rule is that an agreement made without consideration is void. But Section 25 of the Indian
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Contract Act lays down certain exceptions which make a promise without consideration valid and binding.
Thus, an agreement without consideration is valid:
The requirements in the above exceptions are noteworthy. The first one requires written and registered
promise. The second may be oral or in writing and the third must be in writing.
Illustrations
A, for natural love and affection, promises to give his son B `10,000. A put his promise to B into writing and
registered it. This is a contract.
A registered agreement between a husband and his wife to pay his earnings to her is a valid contract, as it is
in writing, is registered, is between parties standing in near relation, and is for love and affection (Poonoo
Bibi v. FyazBuksh, (1874) 15 Bom L.R. 57).
But where a husband by a registered document, after referring to quarrels and disagreement between
himself and his wife, promised to pay his wife a sum of money for her maintenance and separate residence,
it was held that the promise was unenforceable, as it was not made for love and affection (Rajluckhy Deb
v.Bhootnath(1900) 4 C.W.N. 488).
Whether Gratuitous Promise can be Enforced

A gratuitous promise to subscribe to a charitable cause cannot be enforced, but if the promisee is put to
some detriment as a result of his acting on the faith of the promise and the promisor knew the purpose and
also knew that on the faith of the subscription an obligation might be incurred, the promisor would be bound
by promise (KedarNath v. Gorie Mohan 64).
It may be noted that it is not necessary that the promisor should benefit by the consideration, it is sufficient if
the promisee does some act from which a third person is benefited and he would not have done that act but
for the promise of the promisor.
For example, Y requests X for loan, who agrees to give loan to Y if S gives guarantee of repayment of the
loan. S gives such a guarantee of repayment by Y. Thereupon X gives loan to Y. Here S will be promisor and
X the promisee, but from X’s action, benefit is derived by Y and not by S. X would not have given the loan to
Y had S not given the guarantee of repayment of loan. Thus, the benefit conferred on Y by X at the request
of S is a sufficient consideration on the part of X as against the promise of S to repay the loan. Alternatively,
it may be said that the detriment which X suffered by giving loan to Y at the request of S is sufficient
consideration on the part of X in respect of the promise of S to repay the loan.
Consideration therefore, is some detriment to the promisee or some benefit to the promisor. Detriment to one
person and benefit to the other are the same things looked from two angles. Ordinarily a promisor is not
bound by his promise, unless some consideration is offered by the promisee.
Terms Must be Certain

It follows from what has been explained in relation to offer, acceptance and consideration that to be binding,
an agreement must result in a contract. That is to say, the parties must agree on the terms of their contract.
They must make their intentions clear in their contract. The Court will not enforce a contract the terms of
which are uncertain. Thus, an agreement to agree in the future (a contract to make a contract) will not
constitute a binding contract e.g., a promise to pay an actress a salary to be “mutually agreed between us” is
not a contract since the salary is not yet agreed: Loftus v. Roberts (1902).
Similarly, where the terms of a final agreement are too vague, the contract will fail for uncertainty. Hence, the
terms must be definite or capable of being made definite without further agreement of the parties.
The legal maxim, therefore, is “a contract to contract is not a contract”. If you agree “subject to contract” or
“subject to agreement”, the contract does not come into existence, for there is no definite or unqualified
acceptance.
Resume
Thus, a contract is always based upon:
(i) Agreement (consensus ad idem) an unqualified acceptance of a definite offer;
(ii) An intent to create legal obligations; and
(iii) Consideration.
FLAWS IN CONTRACT
There may be the circumstances under which a contract made under these rules may still be bad, because
there is a flaw, vice or error somewhere. As a result of such a flaw, the apparent agreement is not a real
agreement.
Where there is no real agreement, the law has three remedies:
Firstly: The agreement may be treated as of no effect and it will then be known as void agreement.
Secondly: The law may give the party aggrieved the option of getting out of his bargain, and the contract is
then known as voidable.
Thirdly: The party at fault may be compelled to pay damages to the other party.
(a) Void Agreement

A void agreement is one which is destitute of all legal effects. It cannot be enforced and confers no rights on
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either party. It is really not a contract at all, it is non-existent. Technically the words ‘void contract’ are a
contradiction in terms. But the expression provides a useful label for describing the situation that arises when
a ‘contract’ is claimed but in fact does not exist. For example, a minors contract is void.
(b) Voidable Contract

A voidable contract is one which a party can put to an end. He can exercise his option, if his consent was not
free. The contract will, however be binding, if he does not exercise his option to avoid it within a reasonable
time. The consent of a party is not free and so he is entitled to avoid the contract, if he has given his cosent
due to misrepresentation, fraud, coercion or undue influence.
(c) Illegal Agreement

An illegal agreement is one which, like the void agreement has no legal effects as between the immediate
parties. Further, transactions collateral to it also become tainted with illegality and are, therefore, not
enforceable. Parties to an unlawful agreement cannot get any help from a Court of law, for no polluted hands
shall touch the pure fountain of justice. On the other hand, a collateral transaction can be supported by a
void agreement.
For example, one party may have deceived the other party, or in some other way there may be no genuine
consent. The parties may be labouring under a mistake, or one or both the parties may be incapable of
making a contract. Again, the agreement may be illegal or physically impossible. All these are called “the
FLAWS in contract or the VICES of contract”.
The chief flaws in contract are:
(i) Flaw in Capacity Capacity and Persons

In law, persons are either natural or artificial. Natural persons are human beings and artificial persons are
corporations. Contractual capacity or incapacity is an incident of personality.
The general rule is that all natural persons have full capacity to make binding contracts. But the Indian
Contract Act, 1872 admits an exception in the case of:
(i) minors,
(ii) lunatics, and
(iii) persons disqualified from contracting by any law to which they are subject.
These persons are not competent to contract. Section 11 provides that every “person is competent to contract
who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject”. A valid agreement requires that both the parties
should understand the legal implications of their conduct. Thus, both must have a mature mind. The legal
yardstick to measure maturity according to the law of contract is, that both should be major and of sound mind
and if not, the law would presume that the maturity of their mind has not reached to the extent of visualising the
pros and cons of their acts, hence, a bar on minors and lunatics competency to contract.
The contractual capacity of a corporation depends on the manner in which it was created.
Minor’s Contract
According to the Indian Majority Act, 1875, a minor is a person, male or female, who has not completed the
age of 18 years. In case a guardian has been appointed to the minor or where the minor is under the
guardianship of the Court of Wards, the person continues to be a minor until he completes his age of 21
years. According to the Indian Contract Act, no person is competent to enter into a contract who is not of the
age of majority. It was finally laid down by the Privy Council in the leading case of Mohori Bibi v.
DharmodasGhose, (1903) 30 Cal. 539, that a minor has no capacity to contract and minors contract is
absolutely void. In this case, X, a minor borrowed Rs. 20,000 from Y, a money lender. As a security for the
money advanced, X executed a mortgage in Y’s favour. When sued by Y, the Court held that the contract by
X was void and he cannot be compelled to repay the amount advanced by him.
Indian Courts have applied this decision to those cases where the minor has incurred any liability or where
the liabilities on both sides are outstanding. In such cases, the minor is not liable. But if the minor has carried
out his part of the contract, then, the Courts have held, that he can proceed against the other party. The
rationale is to protect minors interest. According to the Transfer of Property Act, a minor cannot transfer
property but he can be a transferee (person accepting a transfer). This statutory provision is an illustration of
the above principle.
The following points must be kept in mind with respect to minors contract:
(a) A minor’s contract is altogether void in law, and a minor cannot bind himself by a contract. If the
minor has obtained any benefit, such as money on a mortgage, he cannot be asked to repay, nor
can his mortgaged property be made liable to pay.
(b) Since the contract is void ab initio, it cannot be ratified by the minor on attaining the age of majority.
(c) Estoppel is an important principle of the law of evidence. To explain, suppose X makes a statement
to Y and intends that the latter should believe and act upon it. Later on, X cannot resile from this
statement and make a new one.
In otherwords, X will be estopped from denying his previous statement. But a minor can always
plead minority and is not estopped from doing so even where he had produced a loan or entered
into some other contract by falsely representing that he was of full age, when in reality he was a
minor.
But where the loan was obtained by fraudulent representation by the minor or some property was
sold by him and the transactions are set aside as being void, the Court may direct the minor to
restore the property to the other party.
For example, a minor fraudulently overstates his age and takes delivery of a motor car after
executing a promissory note in favour of the trader for its price. The minor cannot be compelled to
pay the amount to the promissory note, but the Court on equitable grounds may order the minor to
488 EP-EBCL
return the car to the trader, if it is still with the minor.

Thus, according to Section 33 of the Specific Relief Act, 1963 the Court may, if the minor has
received any benefit under the agreement from the other party require him to restore, so far as may
be such benefit to the other party, to the extent to which he or his estate has been benefited
thereby.
(d) A minors estate is liable to pay a reasonable price for necessaries supplied to him or to anyone
whom the minor is bound to support (Section 68 of the Act).
The necessaries supplied must be according to the position and status in life of the minor and must
be things which the minor actually needs. The following have also been held as necessaries in
India.
Costs incurred in successfully defending a suit on behalf of a minor in which his property was in
jeopardy; costs incurred in defending him in a prosecution; and money advanced to a Hindu minor
to meet his marriage expenses have been held to be necessaries.
(e) An agreement by a minor being void, the Court will never direct specific performance of the
contract.
(f) A minor can be an agent, but he cannot be a principal nor can he be a partner. He can, however, be
admitted to the benefits of a partnership.
(g) Since a minor is never personally liable, he cannot be adjudicated as an insolvent.
(h) An agreement by a parent or guardian entered into on behalf of the minor is binding on him
provided it is for his benefit or is for legal necessity. For, the guardian of a minor, may enter into
contract for marriage on behalf of the minor, and such a contract would be good in law and an
action for its breach would lie, if the contract is for the benefit of the minor (Rose Fernandez v.
Joseph Gonsalves, 48 Bom. L. R. 673) e.g., if the parties are of the community among whom it is
customary for parents to contract marriage for their children. The contract of apprenticeship is also
binding.
However, it has been held that an agreement for service, entered into by a father on behalf of his
daughter who is a minor, is not enforceable at law (Raj Rani v. PremAdib, (1948) 51 Bom. L.R.
256).
Lunatics Agreement (Section 2)

A person of unsound mind is a lunatic. That is to say for the purposes of making contract, a person is of
unsound mind if at the time when he makes the contract, he is incapable of understanding it and of forming
rational judgment as to its effect upon his interests.
A person of unsound mind cannot enter into a contract. A lunatics agreement is therefore void. But if he
makes a contract when he is of sound mind, i.e., during lucid intervals, he will be bound by it.
A sane man who is delirious from fever, or who is so drunk that he cannot understand the terms of a
contract, or form a rational judgement as to its effect on his interests cannot contract whilst such delirium or
state of drunkenness lasts. A person under the influence of hypnotism is temporarily of unsound mind.
Mental decay brought by old age or disease also comes within the definition.
Agreement by persons of unsound mind are void. But for necessaries supplied to a lunatic or to any member
of his family, the lunatics estate, if any, will be liable. There is no personal liability incurred by the lunatic.
If a contract entered into by a lunatic or person of unsound mind is for his benefit, it can be enforced (for the
benefit) against the other party but not vice-versa (Jugal Kishore v. Cheddu, (1903) l All. L.J 43).
Persons Disqualified from Entering into Contract

Some statues disqualify certain persons governed by them, to enter into a contract. For example, Oudh Land
Revenue Act provides that where a person in Oudh is declared as a ‘disqualified proprietor under the Act, he
is incompetent to alienate his property.
Alien Enemies
A person who is not an Indian citizen is an alien. An alien may be either an alien friend or a foreigner whose
sovereign or State is at peace with India, has usually contractual capacity of an Indian citizen. On the
declaration of war between his country and India he becomes an alien enemy. A contract with an alien
enemy becomes unenforceable on the outbreak of war.
For the purposes of civil rights, an Indian citizen of the subject of a neutral state who is voluntarily resident in
hostile territory or is carrying on business there is an alien enemy. Trading with an alien enemy is considered
illegal, being against public policy.
Foreign Sovereigns and Ambassadors

Foreign sovereigns and accredited representatives of foreign states, i.e., Ambassadors, High
Commissioners, enjoy a special privilege in that they cannot be sued in Indian Courts, unless they voluntarily
submit to the jurisdiction of the Indian Courts. Foreign Sovereign Governments can enter into contracts
through agents residing in India. In such cases the agent becomes personally responsible for the
performance of the contracts.
Professional Persons
In England, barristers-at law are prohibited by the etiquette of their profession from suing for their fees. So
also are the Fellow and Members of the Royal College of Physicians and Surgeons. But they can sue and be
sued for all claims other than their professional fees. In India, there is no such disability and a barrister, who
is in the position of an advocate with liberty both to act and plead, has a right to contract and to sue for his
fees (Nihal Chand v. Dilawar Khan, 1933 All. L.R. 417).
Corporations
A corporation is an artificial person created by law, e.g., a company registered under the Companies Act,
public bodies created by statute, such as Municipal Corporation of Delhi. A corporation exists only in
contemplation of law and has no physical shape or form.
The Indian Contract Act does not speak about the capacity of a corporation to enter into a contract. But if
properly incorporated, it has a right to enter into a contract. It can sue and can be sued in its own name.
There are some contracts into which a corporation cannot enter without its seal, and others not at all. A
company, for instance, cannot contract to marry. Further, its capacity and powers to contract are limited by
its charter or memorandum of association. Any contract beyond such power in ultra vires and void.
Married Women
In India there is no difference between a man and a woman regarding contractual capacity. A woman
married or single can enter into contracts in the same ways as a man. She can deal with her property in any
manner she likes, provided, of course, she is a major and is of sound mind.
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Under the English law, before the passing of the Law Reform (Married Women and Tortfeasors) Act, 1935, a
husband was responsible for his wifes contracts but since 1935 this liability no longer arises unless the wife
is acting as the husbands agent. Now, therefore, even in England a married woman has full contractual
capacity, and can sue and be sued in her own name.
Flaw in Consent
The basis of a contract is agreement, i.e., mutual consent. In other words, the parties should mean the
something in the same sense and agree voluntarily. It is when there is consent, that the parties are said to be
consensus ad idem i.e. their minds have met. Not only consent is required but it must be a free consent.
Consent is not free when it has been caused by coercion, undue influence, misrepresentation, fraud or
mistake. These elements if present, may vitiate the contract.
When this consent is wanting, the contract may turn out to be void or voidable according to the nature of the flaw
in consent. Where there is no consent, there can be no contract as in the case of mutual mistake. Where there is
consent, but it is not free, a contract is generally voidable at the option of the party whose consent is not free. In
the case of misrepresentation, fraud, coercion, undue influence, the consent of one of the parties is induced or
caused by the supposed existence of a fact which did not exist.
(ii) Mistake (Sections 20 and 21)

The law believes that contracts are made to be performed. The whole structure of business depends on this
as the businessmen depend on the validity of contracts. Accordingly, the law says that it will not aid any one
to evade consequences on the plea that he was mistaken.
On the other hand, the law also realises that mistakes do occur, and that these mistakes are so fundamental
that there may be no contract at all. If the law recognises mistake in contract, the mistake will render the
contract void.
Effect of Mistake
A mistake in the nature of miscalculation or error of judgement by one or both the parties has no effect on the
validity of the contract. For example, if A pays an excessive price for goods under a mistake as to their true
value, the contract is binding on him (Leaf v. International Galleries (1950) 1 All E.R. 693).
Therefore, mistake must be a “vital operative mistake”, i.e. it must be a mistake of fact which is fundamental
to contract.
To be operative so as to render the contract void, the mistake must be:

(a) of fact, and not of law or opinion;
(b) the fact must be essential to agreement, i.e., so fundamental as to negative the agreement; and
(c) must be on the part of both the parties.
Thus, where both the parties to an agreement are under a mistake as to a matter of fact essential to
agreement, the agreement is void (Section 20). Such a mistake prevents the formation of any contract at all
and the Court will declare it void. For example, A agrees to buy from B a certain horse. It turns out that the
horse was dead at the time of bargain though neither party was aware of the fact. The agreement is void.
Mistake of Law and Mistake of Fact

Mistakes are of two kinds: (i) mistake of law, and (ii) mistake of fact. If there is a mistake of law of the land,
the contract is binding because everyone is deemed to have knowledge of law of the land and ignorance of
law is no excuse (ignorantia juris non-excusat).
But mistake of foreign law and mistake of private rights are treated as mistakes of fact and are execusable.
The law of a foreign country is to be proved in Indian Courts as ordinary facts. So mistake of foreign law
makes the contract void. Similarly, if a contract is made in ignorance of private right of a party, it would be
void, e.g., where A buys property which already belongs to him.
Mutual or Unilateral Mistake

Mistake must be mutual or bilateral, i.e., it must be on the part of both parties. A unilateral mistake, i.e.,
mistake on the part of only one party, is generally of no effect unless (i) it concerns some fundamental fact
and (ii) the other party is aware of the mistake. For this reason, error of judgement on the part of one of the
parties has no effect and the contract will be valid.
Mutual or Common Mistake as to Subject-matter

A contract is void when the parties to it assume that a certain state of things exist which does not actually
exist or in their ignorance the contract means one thing to one and another thing to the other, and they
contract subject to that assumption or under that ignorance. There is a mistake on the part of both the
parties. Such a mistake may relate to the existence of the subject matter, its identity, quantity or quality.
(a) Mistake as to existence of the subject matter: Where both parties believe the subject matter of the
contract to be in existence but in fact, it is not in existence at the time of making the contract, there
is mistake and the contract is void.
In Couturier v. Hastie (1856), there was a contact to buy cargo described as shipped from port A to
port B and believed to be at sea which in fact got lost earlier unknown to the parties and hence not
in existence at the time of the contract. Held, the contract was void due to the parties mistake.
(b) Mistake as to identity of the subject matter: Where the parties are not in agreement to the identity of
the subject matter, i.e., one means one thing and the other means another thing, the contract is
void; there is no consensus ad idem.
In Raffles v. Wichelhhaks (1864), A agreed to buy from B a cargo of cotton to arrive “ex Peerless
from Bombay”. There were two ships called “Peerless” sailing from Bombay, one arriving in October
and the other in December. A meant the earlier ship and B the latter. Held, the contract was void for
mistake.
(c) Mistake as to quantity of the subject matter: There may be a mistake as to quantity or extent of the
subject matter which will render the contract void even if the mistake was caused by the negligence
of a third-party.
In Henkel v. Pape (1870), P wrote to H inquiring the price of rifles and suggested that he might buy
as many as fifty. On receipt of a reply he wired send three rifles. Due to the mistake of the telegraph
clerk the message transmitted to H was send the rifles. H despatched 50 rifles. Held, there was no
contract between the parties.
(d) Mistake as to quality of the subject-matter or promise: Mistake as to quality raises difficult questions.
If the mistake is on the part of both the parties the contract is void. But if the mistake is only on the
part of one party difficulty arises.
The general rule is that a party to a contract does not owe any duty to the other party to discloses all the
facts in his possession during negotiations. Even if he knows that the other party is ignorant of or under
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some misapprehension as to an important fact, he is under no obligation to enlighten him. Each party must
protect his own interests unaided. In contract of sale of goods, this rule is summed up in the maxim caveat
emptor (Let the buyer beware.) The seller is under no duty to reveal the defects of his goods to the buyer,
subject to certain conditions.
Unilateral Mistake as to Nature of the Contract

The general rule is that a person who signs an instrument is bound by its terms even if he has not read it. But
a person who signs a document under a fundamental mistake as to its nature (not merely as to its contents)
may have it avoided provided the mistake was due to either-
(a) the blindness, illiteracy, or senility of the person signing, or
(b) a trick or fraudulent misrepresentation as to the nature of the document.
Unilateral Mistake as to the Identity of the Person Contracted With

It is a rule of law that if a person intends to contract with A, B cannot give himself any right under it. Hence,
when a contract is made in which personalities of the contracting parties are or may be of importance, no
other person can interpose and adopt the contract. For example, where M intends to contract only with A but
enters into contract with B believing him to be A, the contract is vitiated by mistake as there is no consensus
ad idem.
Mistake as to the identity of the person with whom the contract is made will operate to nullify the contract
only if:
(i) the identity is for material importance to the contracts; and
(ii) the mistake is known to the other person, i.e., he knows that it is not intended that he should
become a party to the contract.
In Cundy v. Lindsay [(1878) 3 A.C. 459, one Blenkarn posing as a reputed trader Blankiron, placed an order for
some goods with M/s Lindsay and Co. The company, thought that it is dealing with Blankiron and supplied the
goods. Blenkarn sold the goods to Cundy and did not pay to Lindsay. The latter sued Cundy. The Court held
that there was no contract between Lindsay and Blenkarn and therefore Cundy has no title to the goods.
(iii) Misrepresentation(Section 18)

The term “misrepresentation” is ordinarily used to connote both “innocent misrepresentation” and “dishonest
misrepresentation”. Misrepresentation may, therefore, be either (i) Innocent misrepresentation, or (ii) Wilful
misrepresentation with intent to deceive and is called fraud.
Innocent Misrepresentation
If a person makes a representation believing what he says is true he commits innocent misrepresentation.
Thus, any false representation, which is made with an honest belief in its truth is innocent. The effect of
innocent misrepresentation is that the party misled by it can avoid the contract, but cannot sue for damages
in the normal circumstances.
But in order to avoid a contract on the ground of misrepresentation, it is necessary to prove that:
(i) there was a representation or assertion,
(ii) such assertion induced the party aggrieved to enter into the contract.
(iii) the assertion related to a matter of fact ( and not of law as ignorance of law is no excuse).
(iv) the statement was not a mere opinion or hearsay, or commendation (i.e., reasonable praise). For
example an advertisement saying, “washes whiter than the whitest".
(v) the statement which has become or turned out to be untrue, was made with an honest belief in its
truth.
Damages for Innocent Misrepresentation

Generally the injured party can only avoid the contract and cannot get damages for innocent
misrepresentation. But in the following cases, damages are obtainable:
(i) From a promoter or director who makes innocent misrepresentation in a company prospectus
inviting the public to subscribe for the shares in the company;
(ii) Against an agent who commits a breach of warranty of authority:
(iii) From a person who (at the Courts discretion) is estopped from denying a statement he has made
where he made a positive statement intending that it should be relied upon and the innocent party
did rely upon it and thereby suffered damages;
(iv) Negligent representation made by one person to another between whom a confidential relationship,
like that of a solicitor and client exists.
(iv) Wilful Misrepresentation or Fraud(Section 17)

Fraud is an untrue statement made knowingly or without belief in its truth or recklessly, carelessly, whether it
be true or false with the intent to deceive. The chief ingredients of a fraud are:
(i) a false representation or assertion;
(ii) of fact (and not a mere opinion),
(iii) made with the intention that it should be acted upon,
(iv) the representation must have actually induced the other party to enter into the contract and so
deceived him,
(v) the party deceived must thereby be damnified, for there is no fraud without damages, and
(vi) the statement must have been made either with the knowledge that it was false or without belief in
its truth or recklessly without caring whether it was true or false.
It is immaterial whether the representation takes effect by false statement or with concealment. The party
defrauded can avoid the contract and also claim damages.
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless
silence is in itself equivalent to speech, or where it is the duty of the person keeping silent to speak as in the
cases of contracts uberrimaefidei- (contracts requiring utmost good faith).
Contracts Uberrimae Fidei

There are contracts in which the law imposes a special duty to act with the utmost good faith i.e., to disclose
all material information. Failure to disclose such information will render the contract voidable at the option of
the other party.
Contracts uberrimaefidei are:

(a) Contract of insurance of all kinds: The assured must disclose to the insurer all material facts and
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whatever he states must be correct and truthful.

(b) Company prospectus: When a company invites the public to subscribe for its shares, it is under
statutory obligation to disclose truthfully the various matters set out in the Companies Act. Any
person responsible for non-disclosure of any of these matters is liable to damages. Also, the
contract to buy shares is voidable where there is a material false statement or non- disclosure in the
prospectus.
(c) Contract for the sale of land: The vendor is under a duty to the purchaser to show good title to the
land he has contracted to sell.
(d) Contracts of family arrangements: When the members of a family make agreements or
arrangements for the settlement of family property, each member of the family must make full
disclosure of every material fact within his knowledge.
Difference between Fraud and Innocent Misrepresentation

1. Fraud implies an intent to deceive, which is lacking if it is innocent misrepresentation.
2. In case of misrepresentation and fraudulent silence, the defendant can take a good plea that the
plaintiff had the means of discovering the truth with ordinary diligence. This argument is not
available if there is fraud (Section 19- exception).
3. In misrepresentation the plaintiff can avoid or rescind the contract. In fraud, the plaintiff can claim
damages as well.
4. If there is fraud, it may lead to prosecution for an offence of cheating under the Indian Penal Code.
(v) Coercion
Coercion as defined in Section 15 means “the committing or threatening to commit any act forbidden by the
Indian Penal Code, or unlawful detaining or threatening to detain, any property to the prejudice of any person
whatever with the intention of causing any person to enter into an agreement”. Simply stated, the doing of
any act forbidden by the Indian Penal Code is coercion even though such an act is done in a place where the
Indian Penal Code is not in force. If A at the point of a pistol asks B to execute a promissory note in his
favour and B to save his life does so he can avoid this agreement as his consent was not free. Even a threat
to third-party, e.g., where A compels B to sign a document threatening to harm C, in case B does not sign
would also amount to coercion.
It has been held that mere threat by one person to another to prosecute him does not amount to coercion.
There must be a contract made under the threat and that contract should be one sought to be avoided
because of coercion (Ramchandra v. Bank of Kohlapur, 1952 Bom. 715). It may be pointed out that coercion
may proceed from any person and may be directed against any person, even a stranger and also against
goods, e.g., by unlawful detention of goods.
(vi) Undue Influence

Under Section 16 of the Indian Contract Act, 1872, a contract is said to be produced by undue influence
“where the relations subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair advantage over the other”.
The elements of undue influence are (i) a dominant position, and (ii) the use of it to obtain an unfair
advantage. The words “unfair advantage” do not limit the jurisdiction to cases where the transaction would be
obviously unfair as between persons dealing on an equal footing. In the words of Lord Kingston, “the
principle applies to every case where influence is acquired and abused where confidence is reposed and
betrayed”.
Sub-section (2) of Section 16 provides that a person is deemed to be in a position to dominate the will of
another—
(a) Where he holds a real or apparent authority over the other or where he stands in a fiduciary relation
to the other, e.g., minor and guardian; trustee and beneficiary; solicitor and client. There is,
however, no presumption of undue influence in the relation of creditor and debtor, husband and wife
(unless the wife is a parda-nishin woman) and landlord and tenant. In these cases the party has to
prove that undue influence has been exercised on him, there being no presumption as to existence
of undue influence.
(b) Where he makes a contract with a person whose mental capacity is temporarily or permanently
affected by reason of age, illness or mental or bodily distress e.g., doctor and patient.
Illustration
A, having advanced money to his son B, during his minority, upon B’s coming of age obtains, by misuse of
parental influence a bond upon B for a greater amount than the sum due in respect of the advance. A
employs undue influence.
A, a man enfeebled by disease or age is induced by B’s influence over him as his medical attendant, to
agree to pay B an unreasonable sum for his professional services. B employs undue influence.
A parent stands in a fiduciary relation towards his child and any transaction between them by which any
benefit is procured by the parent to himself or to a third party, at the expense of the child will be viewed with
jealousy by Courts of Equity and the burden will be on the parent or third-party claiming the benefit of
showing that the child while entering into the transaction had independent advice, that he thoroughly
understood the nature of transaction and that he was removed from all undue influence when the gift was
made (Marim Bibi v. Cassim Ebrahim (1939) 184 I.C. 171 (1939) A.I.R. 278).
Where there is a presumption of undue influence, the presumption can be rebutted by showing that
(i) full disclosure of all material facts was made,
(ii) the consideration was adequate, and
(iii) the weaker party was in receipt of independent legal advice.
Transaction with parda-nishin women

The expression ‘parda-nishin denotes complete seclusion. Thus, a woman who goes to a Court and gives
evidence, who fixes rents with tenants and collects rents, who communicates when necessary, in matters of
business, with men other than members of her own family, could not be regarded as a parda-nishin woman
(Ismail Musafee v. Hafiz Boo (1906) 33 Cal. LR 773 and 33 I.A. 86). The principles to be applied to
transactions with parda-nishin woman are founded on equity and good conscience and accordingly a person
who contracts with parda-nishin woman has to prove that no undue influence was used and that she had free
and independent advice, fully understood the contents of the contract and exercised her free will. “The law
throws around her a special cloak of protection” (Kali Baksh v. Ram Gopal (1914) L.R. 41 I.A. 23, 28-29, 36
All 81, 89).
Unconscionable transactions: An unconscionable transaction is one which makes an exorbitant profit of the
others distress by a person who is in a dominant position. Merely the fact that the rate of interest is very high
in a money lending transaction shall not make it unconscionable. But if the rate of interest is very exorbitant
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and the Court regards the transaction unconscionable, the burden of proving that no undue influence was
exercised lies on the creditor. It has been held that urgent need of money on the part of the borrower does
not itself place the lender in a position to dominate his will within the meaning of this Section (Sunder Koerv.
Rai Sham Krishen (1907) 34 Cal. 150, C.R. 34 I.A. 9).
(vii) Legality of Object
One of the requisites of a valid contract is that the object should be lawful. Section 10 of the Indian Contract
Act, 1872, provides, “All agreements are contracts if they are made by free consent of parties competent to
contract for a lawful consideration and with a lawful object...” Therefore, it follows that where the
consideration or object for which an agreement is made is unlawful, it is not a contract.
Section 23 of the Indian Contract Act, 1872 provides that the consideration or object of an agreement is
lawful unless it is
(i) forbidden by law; or
(ii) it is of such nature that if permitted it would defeat the provisions of law; or
(iii) is fraudulent; or
(iv) involves or implies injury to the person or property of another; or
(v) the Court regards it an immoral or opposed to public policy.
In each of these cases the consideration or object of an agreement is said to be unlawful. Every agreement
of which the object or consideration is unlawful is void.
Illustration
(i) X, Y and Z enter into an agreement for the division among them of gains acquired by them by fraud.
The agreement is void as its object is unlawful.
(ii) X promises to obtain for Y an employment in the Government service and Y promises to pay Rs.
1,500 to X. The agreement is void, as the consideration for it is unlawful.
(iii) X promises to Y to drop a prosecution which he has instituted against Y for robbery, and Y promises
to restore the value of the things taken. The agreement is void as its object is unlawful.
(iv) A who is B’s mukhtr promises to exercise his influence, as such, with B in favour of C and C
promises to pay Rs. 1,000 to A. The agreement is void because it is immoral.
(v) An agreement by the proprietors of a newspaper to indemnify the printers against claims arising
from libels printed in the newspaper is void as it implies or involves injury to the person of another.
Void and Illegal Contracts
A void contract is one which is destitue of legal effects altogether. An illegal contract too has no legal effect
as between the immediate parties to the contract, but has the further effect of tainting the collateral contracts
also with illegality. For instance A borrows from B `1,000 for lending to C a minor. The contract between A
and C is void, but B can nevertheless recover the money from A, On the other hand, if A had borrowed
`1,000 from B to buy a pistol to shoot C, the question whether B can recover the money hinges on whether B
was aware of the purpose for which money was borrowed. If B had knowledge of the illegal purpose, he
cannot recover. Therefore, it may be said that all illegal agreements are void but all void agreements are not
necessarily illegal.
Consequence of Illegal Agreements

(i) an illegal agreement is entirely void;
(ii) no action can be brought by a party to an illegal agreement. The maxim is “Ex turpi cause non-oritur
action” - from an evil cause, no action arises;
(iii) money paid or property transferred under an illegal agreement cannot be recovered. The maxim is
in parti delicto potierest condition defendeties- In cases of equal guilt, more powerful is the condition
of the defendant;
(iv) where an agreement consist of two parts, one part legal and other illegal, and the legal parts is
separable from the illegal one, then the Court will enforce the legal one. If the legal and the illegal
parts cannot be separated the whole agreement is illegal; and
(v) any agreement which is collateral to an illegal agreement is also tainted with illegality and is treated
as being illegal, even though it would have been lawful by itself (Film Pratapchand v. Firm Kotri Re.
AIR (1975) S.C. 1223).
Exception to General Rule of no Recovery of Money or Property

In the following cases, a party to an illegal agreement may sue to recover money paid or property transferred:
(a) Where the transfer is not in pari delicto (equally guilty) with the defendant, i.e. the transferee. For
example, where A is induced to enter into an illegal agreement by the fraud of B, A may recover the
money paid if he did not know that the contract was illegal.
(b) If the plaintiff can frame a cause of action entirely dependent of the contract.
(c) Where a substantial part of the illegal transaction has not been carried out and the plaintiff is truly
and genuinely repentant. (Bigos v. Bonstead(1951), All E.R. 92).
Agreements Void as being Opposed to Public Policy
The head public policy covers a wide range of topics. Agreements may offend public policy by tending to the
prejudice of the State in times of war, by tending to the abuse of justice or by trying to impose unreasonable
and inconvenient restrictions on the free choice of individuals in marriage, or their liberty to exercise lawful
trade or calling. The doctrine of public policy is a branch of Common Law and like any other branch of
Common Law it is governed by the precedents [Gherulal Parakh v. MahadeodasMaiya (1959) 2 S.C.R.
(Suppl.) 406; AIR 1959 S.C. 781]. The doctrine of public policy is not to be extended beyond the classes of
cases already covered by it and no Court can invent a new head of public policy [Lord Halsbury, Janson v.
Driefontien Consolidated Mines (1902) A.C. 484, 491]. It has been said by the House of Lords that public
policy is always an unsafe and treacherous ground for legal decisions. Even if it is possible for Courts to
evolve a new head of public policy, it should be done under extraordinary circumstances giving rise to
incontestable harm to the society.
The following agreements are void as being against public policy but they are not illegal:
Agreement in restrain
of parental rights
Agreement in Agreement in
restraint of restraint of
trade marriage
Agreements in Marriage
restraint of brocage or
personal brokerage
freedom are void Agreements
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(a) Agreement in restrain of parental rights: An agreement by which a party deprives himself of the
custody of his child is void.
(b) Agreement in restraint of marriage: An agreement not to marry at all or not to marry any particular
person or class of persons is void as it is in restraint of marriage.
(c) Marriage brokerage or brokerage Agreements: An agreement to procure marriage for reward is
void. Where a purohit (priest) was promised Rs. 200 in consideration of procuring a wife for the
defendant, the promise was held void as opposed to public policy, and the purohit could not recover
the promised sum.
(d) Agreements in restraint of personal freedom are void: Where a man agreed with his money lender not
to change his residence, or his employment or to part with any of his property or to incur any obligation
on credit without the consent of the money lender, it was held that the agreement was void.
(e) Agreement in restraint of trade: An agreement in restraint of trade is one which seeks to restrict a
person from freely exercising his trade or profession.
AGREEMENTS IN RESTRAINT OF TRADE VOID

Section 27 of the Indian Contract Act states that every agreement by which any one is restrained from
exercising a lawful profession, trade or business of any kind, is, to that extent, void.
This Section is not happily worded and has been criticised by many authors. It appears from the wording that
every kind of restraint, whether total or partial falls within the prohibition of this Section. In English law the
Courts have held that if a restraint is reasonable, it will be valid. Leading case on his point is Nordenfelt v.
Maxim Nordenfelt Guns Co., (1894) A.C. 535. N was an inventor and a manufacturer of guns and
ammunition. He sold his world-wide business to M and promised not to manufacture guns anywhere in the
world for 25 years. The House of Lords held that the restraint was reasonable as it was no more than is
necessary for the protection of the company, the contract was binding. Whether a restraint is reasonable or
not depends upon the facts of each case.
Our courts are not consistent on the point whether reasonable restraints are permitted or not. In Madhub
Chunder v. RaCoomar(1874) 14 Bang. L.R. 76, A paid Rs. 900 to B’s workman. B undertook to stop his
business in a particular locality in Calcutta. He did not keep his promise. A’s suit for the sum was dismissed
since the agreement was void under Section 27. The reasonableness or otherwise of the restraint was not
discussed. However, if a restrictive meaning is adopted, most of the ordinary mercantile agreements may be
hit. Thus, the Courts have held that if the restraint is one which is really necessary for the carrying on
business, the same is not prohibited. In Mackenzie v. Sitarmiah, (1891) 15 Mad. 79, A agreed to sell to B all
the salt he manufactured and B agreed to buy such salt. A further agreed not to sell salt to third-parties. The
Court held that the agreement was valid.
Other type of restrains is personal covenants between an employer and his employee whereby the latter
agrees not to compete with the former or serve with any of his competitors after employment. This issue
came before the Supreme Court in Niranjan Shanker Golikari v. The Century Spinning and Manufacturing
Co. Ltd., AIR 1967 S.C. 1098. In this case N entered into a bond with the company to serve for a period of
five years. In case, N leaves his job earlier and joins elsewhere with companys competitor within five years,
he was liable for damages. N was imparted the necessary training but he left the job and joined another
company. The former employer instituted a suit against N. The Supreme Court, held that the restraint was
necessary for the protection of the companys interests and not such as the Court would refuse to enforce.
In other case, it has been reiterated that the restriction should be reasonable taking into account the facts
and circumstances of the case. In Superintendence Company of India Ltd. v. Krishna Murgai [(1981) 2 SCC
246], the Supreme Court laid down that a restraint beyond the term of service would be void and the only
ground on which it can be justified is by showing it is necessary for the protection of the employers goodwill.
The words “to the extent” in Section 27 make it clear that if in an agreement there are some convenants
which are prohibited whereas the others are not and if the two parts can be separated then only those
convenants which operate as restraint of trade would be void and not whole of the agreement itself. To
illustrate, in Brahmputra Tea Co. Ltd. v. Scarth(1885) I.L.R. Cal. 545, the employee agreed with the employer
firstly, not to compete with latter after leaving the job and, secondly, not to injure employer’s interest during
employment. The Court held that the first condition is a restraint of trade but the second is binding.
When Contracts in Restraint of Trade Valid

Prima facie every restraint of trade is void , but certain exceptions to this general rule are recognised. If a
partial and reasonable restraint falls under any of the following exceptions, the contract will be enforceable:
(a) Sale of goodwill: Where the seller of the goodwill of a business undertakes not to compete with the
purchaser of the goodwill, the contract is enforceable provided the restraint appears to be
reasonable as to territorial limits and the length of time.
(b) Partners agreements: Section 11(2) of the Indian Partnership Act permits contracts between
partners to provide that a partner shall not carry on any business other than that of the firm while he
is a partner.
(c) Section 36(2) and Section 54 of the Indian Partnership Act provide that a partner may make an
agreement with his partners that on ceasing to be a partner he will not carry on any business similar
to that of the firm within specified period or within specified limits. The agreement shall be binding if
the restrictions are reasonable.
Trade Combinations: An agreement, the object of which is to regulate business and not to restrain it is valid.
Thus, an agreement in the nature of a business combination between traders or manufactures e.g. not to sell
their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion
does not amount to a restraint of trade and is perfectly valid (Fraster& Co. v. Laxmi Narain, (1931) 63 All
316).
Negative stipulations in service agreements: An agreement of service by which a person binds himself during
the term of the agreement not to take service with anyone else is not in restraint of lawful profession and is
valid.
WAGERING AGREEMENTS
The literal meaning of the word “wager” is a “bet”. Wagerning agreements are nothing but ordinary betting
agreements. For example, A and B enter into an agreement that if Englands Cricket Team wins the test
match, A will pay B Rs. 100 and if it loses B will pay Rs. 100 to A. This is a wagering agreement and nothing
can be recovered by winning party under the agreement.
The essence of gaming and wagering is that one party is to win and the other to lose upon a future event
which at the time of the contract is of an uncertain nature that is to say, if the event turns out one way A will
lose; but if it turns out the other way he will win (Thacker v. Hardy, (1878) 4 OBD 685).
Wagering Agreements Void

In India except Mumbai, wagering agreements are void. In Mumbai, wagering agreements have been
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declared illegal by the Avoiding Wagers (Amendment) Act, 1865. Therefore, in Mumbai a wagering
agreement being illegal, is void not only between the immediate parties, but taints and renders void all
collateral agreements to it.
Thus, A bets with B and losses, applies to C for a loan, who pays B in settlement of A’s losses. C cannot
recover from A because this is money paid “under” or “in respect of” a wagering transaction which is illegal in
Mumbai. But in respect of India such a transaction (i.e., betting) being only void, C could recover from A. Of
course, if A refused to pay B the amount of the bet that he has lost, B could not sue A anywhere. Again,
where an agent bets on behalf of his principal and looses and pays over the money to the winner, he cannot
recover the money from his principal, if the transactions took place in Mumbai, but elsewhere he could
recover. But if the agent wins, he must pay the winnings to the principal, as this money was received on
behalf of the principal.
Sometimes, commercial transactions assume the form of wagering contracts. The sample test to find out
whether a particular transaction is a wager or a genuine commercial transaction is: “Where delivery of the
goods sold is intended to be given and taken, it is valid contract, but where only the differences are intended
to be paid, it will be a wagering contract and unenforceable”.
In a wagering contract there must be mutuality in the sense that the gain of one party should be loss to the
other on the happening of an uncertain event which is the subject matter of the contract.
VOID AGREEMENTS
The following types of agreements are void under Indian Contract Act:
(a) Agreement by or with a minor or a person of unsound mind or a person disqualified to enter into a
contract - Section 11;
(b) Agreement made under a mistake of fact, material to the agreement on the part of the both the
parties - Section 20.
(c) An agreement of which the consideration or object is unlawful - Section 23.
(d) If any part of a single consideration for one or more objects, or any one or any part of any one of
several considerations for a single object, is unlawful, the agreement is void - Section 24.
(e) An agreement made without consideration subject to three exceptions provided to Section 25.
(f) An agreement in restraint of marriage - Section 26.
(g) An agreement in restraint of trade - Section 27.
(h) An agreement in restraint of legal proceedings - Section 28.
(i) Agreements, the meaning of which is not certain, or capable of being made certain - Section 29.
(j) Agreement by way of wager- Section 30.
(k) An agreement to enter into an agreement in the future.
(l) An agreement to do an act impossible in itself - Section 56(1)
When contract becomes void

An agreement not enforceable by law is void ab initio - Section 2(g).
A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable - Section 2(j)
A contract becomes void when, by reason of some event which the promisor could not prevent, the
performance of the contract becomes impossible, e.g., by destruction of the subject- matter of the contract
after the formation of the contract.
A contract becomes void by reason of subsequent illegality. A in India agrees to supply goods to B in
Pakistan. After the formation of the contract war breaks out between India and Pakistan and the supply of
goods to Pakistan is prohibited by legislation. The contract becomes void.
A contingent contract to do or not do to anything if an uncertain future event happens becomes void if the
event becomes impossible.
Where a contract is voidable at the option of the aggrieved party, the contract becomes void when the option
is exercised by him.
RESTITUTION
When a contract becomes void, it is not to be performed by either party. But if any party has received any
benefit under such a contract from the other party he must restore it or make compensation for it to the other
party. A agrees to sell to B after 6 months a certain quantity of gold and receives `500 as advance. Soon
after the agreement, private sales of gold are prohibited by law. The contract becomes void and A must
return the sum of `500 to B.
Restitution is also provided for by Section 65 where an agreement is discovered to be void. A pays `500 in
consideration of B’s promising to marry, C, A’s daughter C is dead at the time of the promise. The agreement
is discovered to be void and B must pay back `500.
But there is no resolution where the parties are wholly incompetent to contract, e.g., where one of the parties
is a minor. The minor cannot be asked to restore the benefit, e.g., a minor borrowed `1,000 from B, he
cannot be asked to pay back `1,000 to B because the contract is void (Mohori Bibis case).
CONTINGENT CONTRACT (Section 31)

As per Section 31, 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. For example, A contracts to sell B 10 bales of cotton for Rs. 20,000,
if the ship by which they are coming returns safely. This is a contingent contract.
Contract of insurance and contracts of indemnity and guarantee are popular instances of contingent
contracts.
Rules regarding contingent contracts

The following rules are contained in Section 32-36:
(a) Contracts contingent upon the happening of a future uncertain event cannot be enforced by law
unless and until that event has happened. If the event becomes impossible, the contract becomes
void - Section 32.
(i) A makes a contract to buy B’s house if A survives C. This contract cannot be enforced by law
unless and until C dies in A’s lifetime.
(ii) A contracts to pay B a sum of money when B marries C, C dies without being married to B. The
contract becomes void.
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(b) Contracts contingent upon the non-happening of an uncertain future event can be enforced when
the happening of that event becomes impossible and not before - Section 33.
A contracts to pay B a certain sum of money if a certain ship does not return. The ship is sunk. The
contract can be enforced when the ship sinks.
(c) If a contract is contingent upon how a person will act at an unspecified time, the event shall be
considered to become impossible when such person does anything which renders it impossible that
he should so act within any definite time or otherwise than under further contingencies - Section 34.
A agrees to pay B Rs. 1,000 if B marries C. C marries D. The marriage of B to C must now be
considered impossible although it is possible that D may die and C may afterwards marry B.
(d) Contracts contingent on the happening of an event within a fixed time become void if, at the
expiration of the time, such event has not happened, or if, before the time fixed, such event
becomes impossible - Section 35.
A promises to pay B a sum of money if a certain ship returns with in a year. The contract may be
enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.
(e) Contracts contingent upon the non-happening of an event within a fixed time may be enforced by
law when the time fixed has expired and such event has not happened or before the time fixed has
expired, if it becomes certain that such event will not happen - Section 35
A promises to pay B a sum of money if a certain ship does not return within the year. The contract
may be enforced if the ship does not return within the year or is burnt within the year.
(f) Contingent agreements to do or not to do anything if an impossible event happens, are void, whether
the impossibility of the event is known or not known to the parties to the agreement at the time when it
is made - Section 36.
A agrees to pay Rs. 1,000 to B if two straight lines should enclose a space. The agreement is void.
CERTAIN RELATIONS RESEMBLING THOSE OF CONTRACT (QUASI CONTRACTS)
Nature of Quasi-Contracts
A valid contract must contain certain essential elements, such as offer and acceptance, capacity to contract,
consideration and free consent. But sometimes the law implies a promise imposing obligations on one party
and conferring right in favour of the other even when there is no offer, no acceptance, no consensus ad
idem, and in fact, there is neither agreement nor promise. Such cases are not contracts in the strict sense,
but the Court recognises them as relations resembling those of contracts and enforces them as if they were
contracts, hence the term quasi- contracts (i.e., resembling a contract).
A quasi-contract rests on the equitable principle that a person shall not be allowed to enrich himself unjustly
at the expense of another. In truth, it is not a contract at all. It is an obligation which the law creates, in the
absence of any agreement, when any person is in the possession of other persons money, or its equivalent,
under such circumstances that in equity and good conscience he ought not to retain it, and which in justice
and fairness belongs to another. It is the duty and not an agreement or intention which defines it. A very
simple illustration is money paid under mistake. Equity demands that such money must be paid back.
Quasi-Contracts or Implied Contracts under the Indian Contract Act

The following types of quasi-contracts have been dealt within the Indian Contract Act—
(a) Necessaries supplied to person incapable of contracting or to anyone whom he is illegally bound to
support - Section 68.
(b) Suit for money had and received - Section 69 and 72.
(c) Quantum Meruit
(d) Obligations of a finder of goods - Section 71.
(e) Obligation of person enjoying benefit of a non-gratuitous act - Section 70
Necessaries
Contracts by minors and persons of unsound mind are void. However, Section 68 of the Indian Contract Act
provides that their estates are liable to reimburse the trader, who supplies them with necessaries of life.
Suit for money had and received

The right to file a suit for the recovery of money may arise
(a) Where the plaintiff paid money to the defendant (i) under a mistake, (ii) in pursuance of a contract
the consideration for which has failed, or (iii) under coercion, oppression, extortion or other such
means.
A debtor may recover, from a creditor the amount of an over-payment made to him by mistake. The
mistake may be mistake of fact or a mistake of law.
(b) Payment to third-party of money which another is bound to pay. For example, where A’s goods are
wrongfully attached in order to realise arrears of Government revenue due by B, and A pays the
amount to save his goods from being sold, he is entitled to recover the amount from B.
(c) Money obtained by defendant from third-parties. For example, where an agent has obtained a
secret commission or a fraudulent payment from a third-party, the principle can recover the amount
from the agent.
Quantum Meruit
The expression “Quantum Meruit” literally means “as much as earned” or reasonable remuneration. It is used
where a person claims reasonable remuneration for the services rendered by him when there was no
express promise to pay the definite remuneration, Thus, the law implies reasonable compensation for the
services rendered by a party if there are circumstances showing that these are to be paid for.
The general rule is that where a party to a contract has not fully performed what the contract demands as a
condition of payment, he cannot sue for payment for that which he has done. The contract has to be
indivisible and the payment can be demanded only on the completion of the contract.
But where one party who has performed part of his contract is prevented by the other from completing it, he
may sue on a quantum meruit, for the value of what he has done.
The claim on a quantum meruit arises when one party abandons the contract, or accepts the work done by
another under a void contract.
The party in default may also sue on a “quantum meruit” for what he has done if the contract is divisible and
the other party has had the benefit of the part which has been performed. But if the contract is not divisible,
the party at fault cannot claim the value of what he has done.
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Obligations of finder of lost goods

The liability of a finder of goods belonging to someone else is that of a bailee. This means that he must take
as much care of the goods as a man of ordinary prudence would take of his own goods of the same kind. So
far as the real owner of the goods is concerned, the finder is only a bailee and must not appropriate the
goods to his own use. If the owner is traced, he must return the goods to him. The finder is entitled to get the
reward that may have been offered by the owner and also any expenses he may have incurred in protecting
and preserving the property.
Obligation of a person enjoying benefit of non-gratuitous act

Section 70 of the Indian Contract Act provides that where a person lawfully does something for another
person or delivers anything to him without any intention of doing so gratuitously and the other person accepts
and enjoys the benefit thereof, the latter must compensate the former or restore to him the thing so
delivered. For example, when one of the two joint tenants pays the whole rent to the landlord, he is entitled to
compensation from his co-tenant, or if A, a tradesmen, leaves goods at B’s house by mistake and B treats
the goods as his own, he is bound to pay A for them.
DISCHARGE OR TERMINATION OF CONTRACTS

A contract is said to be discharged or terminated when the rights and obligations arising out of a contract are
extinguished.
Contracts may be discharged or terminated by any of the following modes:
(a) Performance of Contracts (Section 37)

Section 37 of the Act provides that the parties to a contract must either perform or offer to perform their
respective promises, unless such performance is dispensed with or excused under the provision of the
Indian Contract Act, or any other law. In case of death of the promisor before performance, the
representatives of the promisor are bound to perform the promise unless a contrary intention appears from
the contract.
Illustration
X promises to deliver a horse to Y on a certain day on payment of Rs 1,000. X dies before that day. X’s
representatives are bound to deliver the horse to Y and Y is bound is pay Rs. 1,000 to X’s representatives.
Tender of Performance (Section 38)

In case of some contracts, it is sometimes sufficient if the promisor performs his side of the contract. Then, if
the performance is rejected,the promisor is discharged from further liability and may sue for the breach of
contract if he so wishes. This is called discharge by tender.
To be valid, a tender must fulfil the following conditions

(a) it must be unconditional;
(b) if must be made at a proper time and place;
(c) it must be made under circumstances enabling the other party to ascertain that the party by whom it
is made is able and willing then and there to do the whole of what he is bound, to do by his promise;
(d) if the tender relates to delivery of goods, the promisee must have a reasonable opportunity of
seeing that the thing offered is the thing which the promisor is bound by his promise to deliver;
(e) tender made to one of the several joint promisees has the same effect as a tender to all of them.
Who can demand performance?

Generally speaking, a stranger to contract cannot sue and the person who can demand performance is the
party to whom the promise is made. But an assignee of the rights and benefits under a contract may demand
performance by the promisor, in the same way as the assignor, (i.e., the promisee) could have demanded.
Effect of refusal of party to perform wholly

Section 39 provides that when a party to a contract has refused to perform or disabled himself from
performing his promise in its entirety, the promisee may put an end to the contract unless he had signified by
words or conduct his acquiescence in its continuance.
Illustration
(a) X, a singer enters into a contract with Y, the manager of a theatre to sing at his theatres two nights
in every week during the next two months, and Y engaged to pay her Rs. 100 for each nights
performance. On the sixth night X wilfully absents herself form the theatre. Y is at liberty to put an
end to the contract.
(b) If in the above illustration, with the assent of Y, X sings on the seventh night, Y is presumed to have
signified his acquiescence in the continuance of the contract and cannot put an end to it; but is entitled
to compensation for the damages sustained by him through X’s failure to sing on the sixth night.
By whom contract must be performed

Under Section 40 of the Act, if it appears from the nature of the case that it was the intention of the parties to
a contract that it should be performed by the promisor himself such promise must be performed by the
promisor himself. In other cases, the promisor or his representative may employ a competent person to
perform it.
Illustration
(a) X promises to pay Rs. 1,000 to Y. X may either personally pay the money to Y or cause it to be paid
to Y by another. If X dies before making payment, his representatives must perform the promise or
employ some proper person to do so.
(b) X promises to paint a picture for Y. X must personally perform the promise.
Devolution of Joint Liabilities

Under Section 42 of the Indian Contract Act, where two or more persons have made a joint promise then,
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unless a contrary intention appears from the contract all such persons should perform the promise. If any
one of them dies, his representatives jointly with the survivor or survivors should perform. After the death of
the last survivor, the representatives of all jointly must fulfil the promise.
Under Section 43 of the Indian Contract Act when two or more persons made a joint promise, the promisee
may, in the absence of an express agreement to the contrary compel any one or more of such joint
promisors to perform the whole of the promise. Each of two or more joint promisors may compel every other
joint promisor to contribute equally with himself to the performance of the promise unless a contrary intention
appears from the contract. If any one of two ore more promisors make default in such contribution, the
remaining joint promisors should bear the loss arising from such default in equal share.
Illustrations
(a) X, Y and Z jointly promise to pay `6,000 to A. A may compel either X or Y or Z to pay the amount.
(b) In the above example imagine, Z is compelled to pay the whole amount; X is insolvent but his
assets are sufficient to pay one-half of his debts. Z is entitled to receive `1,000 from X’s estate and
`2,500 from Y.
(c) X, Y and Z make a joint promise to pay `5,000 to A, Z is unable to pay any amount and X is
compelled to pay the whole. X is entitled to receive `2,500 from Y.
Under Section 44 of the Act, where two or more persons have made a joint promise, a release of one of such
joint promisors by the promisee does not discharge the other joint promisor(s); neither does it free the joint
promisor so released from responsibility to the other joint promisor or joint promisors.
Devolution of Joint Rights

A promise may be made to two or more persons. The promisees are called joint promisees. For example, X
may give a promise to repay Rs. 1,000 given by Y and Z jointly. In such case, in the absence of a contrary
intention, the right to claim, performance rests with Y and Z. If Y dies, Y’s representative jointly with Z may,
demand performance. If Z also dies, the representatives of Y and Z may demand jointly performance from X.
Assignment
The promisee may assign rights and benefits of contract and the assignee will be entitled to demand
performance by the promisor. But the assignment to be complete and effectual, must be made by an
instrument in writing.
An obligation or liability under a contract cannot be assigned. For example, if A owes B Rs. 500 and A
transfers the liability to C i.e. asks C to pay the sum to B, this would not bind B, and B may not consent to
this arrangement, as he may know nothing of C’s solvency. But if B consents to accept performance by C,
there is a substitution of new contract and the old contract is discharged and all rights and liabilities under it
are extinguished. This is technically called novation.
(b) Discharge by Mutual Agreement or Consent (Sections 62 and 63)

A contract may be discharged by the agreement of all parties to the contract, or by waiver or release by the
party entitled to performance.
The methods stipulated under Sections 62 and 63 of the Indian Contract Act for discharging a contract by
mutual consent are:
Novation  when a new contract is substituted for existing contract either between the same parties or
between different parties, the consideration mutually being the discharge of the old contract.
Alteration  change in one or more of the material terms of a contract.
Rescission  by agreement between the parties at any time before it is discharged by performance or in
some other way.
Remission  acceptance of a lesser sum than what was contracted for or a lesser fulfilment of the promise
made.
Waiver  deliberate abandonment or giving up of a right which a party is entitled to under a contract, where
upon the other party to the contract is released from his obligation.
(c) Discharge by Lapes of Time

The Limitation Act, in certain circumstance, affords a good defence to suits for breach of contract, and infact
terminates the contract by depriving the party of his remedy to law. For example, where a debtor has failed to
repay the loan on the stipulated date, the creditor must file the suit against him within three years of the
default. If the limitation period of three years expires and he takes no action he will be barred from his
remedy and the other party is discharged of his liability to perform.
(d) Discharge by Operation of the Law

Discharge under this head may take place as follows:
(a) By merger: When the parties embody the inferior contract in a superior contract.
(b) By the unauthorised alteration of items of a written document: Where a party to a written contract
makes any material alteration without knowledge and consent of the other, the contract can be
avoided by the other party.
(c) By insolvency: The Insolvency Act provides for discharge of contracts under particular
circumstances. For example, where the Court passes an order discharging the insolvent, this order
exonerates or discharges him from liabilities on all debts incurred previous to his adjudication.
(e) Discharge by Impossibility or Frustration (Section 56)

A contract which is entered into to perform something that is clearly impossible is void. For instance, A
agrees with B to discover treasure by magic. The agreement is void by virtue of Section 56 para 1 which lays
down the principle that an agreement to do an act impossible in itself is void.
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Sometimes subsequent impossibility (i.e. where the impossibility supervenes after the contract has been
made) renders the performance of a contract unlawful and stands discharged; as for example, where a
singer contracts to sing and becomes too ill to do so, the contract becomes void. In this connection, para 2 of
Section 56 provides that a contract to do an act, which after the contract is made, becomes impossible or by
reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes
impossible or unlawful.
If the impossibility is not obvious and the promisor alone knows of the impossibility or illegally then existing or
the promisor might have known as such after using reasonable diligence, such promisor is bound to
compensate the promisee for any loss he may suffer through the non-performance of the promise inspite of
the agreement being void ab-initio (Section 56, para 3).
In Satyabarta Ghose v. MugnuramA.I.R. 1954 S.C. 44 the Supreme Court interpreted the term ‘impossible
appearing in second paragraph of Section 56. The Court observed that the word ‘impossible has not been used
here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible
but it may be impracticable and useless from the point of view of the object and purpose which the parties had
in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the
parties rested their bargain; it can very well be said that the promisor found it impossible to do the act which he
promised to do. In this case, A undertook to sell a plot of land to B but before the plot could be developed, war
broke out and the land was temporarily requisitioned by the Government. A offered to return earnest money to
B in cancellation of contract. B did not accept and sued A for specific performance. A pleaded discharge by
frustration. The Court held that Section 56 is not applicable on the ground that the requisition was of temporary
nature and there was no time limit within which A was obliged to perform the contract. The impossibility was not
of such a nature which would strike at the root of the contract.
Discharge by Supervening Impossibility
A contract will be discharged by subsequent or supervening impossibility in any of the following ways:
(a) Where the subject-matter of the contract is destroyed without the fault of the parties, the contract is
discharged.
(b) When a contract is entered into on the basis of the continued existence of a certain state of affairs,
the contract is discharged if the state of things changes or ceases to exist.
(c) Where the personal qualifications of a party is the basis of the contract, the contract is discharged
by the death or physical disablement of that party.
Discharge by Supervening Illegality
A contract which is contrary to law at the time of its formation is void. But if, after the making of the contract,
owing to alteration of the law or the act of some person armed with statutory authority the performance of the
contract becomes impossible, the contract is discharged. This is so because the performance of the promise
is prevented or prohibited by a subsequent change in the law. A enters into contract with B for cutting trees.
By a statutory provision cutting of trees is prohibited except under a licence and the same is refused to A.
The contract is discharged.
Cases in which there is no supervening impossibility
In the following cases contracts are not discharged on the ground of supervening impossibility
(a) Difficulty of performance: The mere fact that performance is more difficult or expensive than the
parties anticipated does not discharge the duty to perform.
(b) Commercial impossibilities do not discharge the contract. A contract is not discharged merely
because expectation of higher profits is not realised.
(c) Strikes, lockouts and civil disturbance like riots do not terminate contracts unless there is a clause in
the contract providing for non-performance in such cases.
Supervening impossibility or illegality is known as frustration under English Law.
(f) Discharge by Breach

Where the promisor neither performs his contract nor does he tender performance, or where the
performance is defective, there is a breach of contract. The breach of contract may be (i) actual; or (ii)
anticipatory. The actual breach may take place either at the time the performance is due, or when actually
performing the contract. Anticipatory breach means a breach before the time for the performance has
arrived. This may also take place in two ways – by the promisor doing an act which makes the performance
of his promise impossible or by the promisor in some other way showing his intention not to perform it.
Anticipatory Breach of Contract

Breach of contract may occur, before the time for performance is due. This may happen where one of the
parties definitely renounces the contract and shows his intention not to perform it or does some act which
makes performance impossible. The other party, on such a breach being committed, has a right of action for
damages.
He may either sue for breach of contract immediately after repudiation or wait till the actual date when
performance is due and then sue for breach. If the promisee adopts the latter course, i.e., waits till the date
when performance is due, he keeps the contract alive for the benefit of the promisor as well as for his own.
He remains liable under it and enables the promisor not only to complete the contract in spite of previous
repudiation, but also to avail himself of any excuse for non- performance which may have come into
existence before the time fixed for performance.
In Hochester v. De La Tour (1853) E.R. 922, A hired B in April to act as a courier commencing employment
from 1st June, but wrote to B in May repudiating the agreement, B sued A for breach of contract immediately
after repudiation. A contended that there could not be breach of contract before June 1. Held, B was
immediately entitled to sue and need not wait till 1st June, for his right of action to accrue.
In Avery v. Bowden (1856) 116 E.R. 1122, A hired B’s ship to carry a cargo from Russia. Later on B
repudiated the contract. A delayed taking action hoping B would change his mind before the performance
date. War broke out between Russia and Britain before the performance date frustating the contract. Held, A
lost his right to sue B for damages by his delay.
In Frost v. Knight (1872) L.R. 7 Ex. 111, the law on the subject of anticipatory breach was summed up as
follows:
“The promisee if he pleases may treat the notice of intention as inoperative and await the time when the
contract is to be executed and then hold the other party responsible for all the consequences of non-
performance: but in that case he keeps the contract alive for the benefit of the other party as well as his own;
he remains subject to all his own obligations and liabilities under it, and enables the other party not only to
complete the contract, if so advised, notwithstanding his previous repudiation of it, but also to take advantage
of any supervening circumstances which would justify him in declining to complete it.”
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REMEDIES FOR BREACH

Where a contract is broken, the injured party has several courses of action open to him. The appropriate
remedy in any case will depend upon the subject-matter of the contract and the nature of the breach.
(i) Remedies for Breach of Contract

In case of breach of contract, the injured party may:
(a) Rescind the contract and refuse further performance of the contract;
(b) Sue for damages;
(c) Sue for specific performance;
(d) Sue for an injunction to restrain the breach of a negative term; and
(e) Sue on quantum meruit
When a party to a contract has broken the contract, the other party may treat the contract as rescinded and
he is absolved from all his obligations under the contract. Under Section 65, when a party treats the contract
as rescinded, he makes himself liable to restore any benefits he has received under the contract to the party
from whom such benefits were received. Under Section 75 of the Indian Contract Act, if a person rightfully
rescinds a contract, he is entitled to a compensation for any damage which he has sustained through the
non-fulfilment of the contract by the other party. Section 64 deals with consequences of rescission of
voidable contracts, i.e., where there is flaw in the consent of one party to the contract. Under this Section
when a person at whose option a contract is voidable rescinds, the other party thereto need not perform any
promise therein contained in which he is the promisor. The party rescinding a voidable contract shall, if he
has received any benefit thereunder, from another party to such contract, restore such benefit so far as may
be, to the person from whom it was received.
(ii) Damages for Breach of Contract

Under Section 73 of the Indian Contract Act, when a contract has been broken, a party who suffers by such
breach is entitled to receive, from the party who has broken the contract, compensation for any loss or
damage, caused to him thereby, which naturally arose in the usual course of things from such breach or
which the parties knew, when they made the contract to be likely to result from the breach of it. Such
compensation is not to be given for any remote and indirect loss or damage sustained by reason of the
breach.
The foundation of the claim for damages rests in the celebrated case of Hadley v. Baxendale, (1854) 9 Ex.
341. The facts of this case were as follows:
There was a breakdown of a shaft in A’s mill. He delivered the shaft to B, a common carrier to be taken to a
manufacturer to copy and make a new one. A did not make known to B that delay would result in loss of
profits. By some neglect on the part of B, the delivery of the shaft was delayed in transit beyond a reasonable
time. As a result, the mill was idle for a longer period than it would otherwise have been, had there been no
such delay. It was held, B was not liable for the loss of profits during the period of delay as the circumstances
communicated to A did not show that the delay in the delivery of the shaft would entail loss of profits to the
mill. In the course of the judgement it was observed:
“Where two parties have made a contract which one of them has broken, the damages which the other party
ought to receive in respect of such breach of contract should be such as may fairly and reasonably be
considered either arising naturally, i.e., according to the usual course of things from such breach of contract
itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time
they made the contract as the probable result of the breach of it. Now, if the special circumstances under
which the contract was actually made were communicated by the plaintiffs to the defendants and thus known
to both the parties, the damages resulting from the breach of such a contract which they would reasonably
contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under
these special circumstances so known and communicated. But, on other hand, if these special
circumstances were wholly unknown to the party breaking the contract, he at the most could only be
supposed to have had in his contemplation, the amount of injury which would arise generally and in the great
multitude of cases not affected by any special circumstances from such breach of contract. For, had the
special circumstances been known, the parties might have specially provided for the breach of contract by
special terms as to damages in that case and of this advantage it would be very unjust to deprive them.”
Liquidated and Unliquidated damages: Where the contracting parties agree in advance the amount payable
in the event of breach, the sum payable is called liquidated damages.
Where the amount of compensation claimed for a breach of contract is left to be assessed by the Court,
damages claimed are called unliquidated damages.
Unliquidated Damages
Those are of the following kinds:
(a) general or ordinary damages, (b) special damages (c) exemplary or punitive damages, and (d) nominal
damages.
Ordinary Damages
These are restricted to pecuniary compensation to put the injured party in the position he would have been
had the contract been performed. It is the estimated amount of loss actually incurred. Thus, it applies only to
the proximate consequences of the breach of the contract and the remote consequences are not generally
regarded. For example, in a contract for the sale of goods, the damages payable would be the difference
between the contract price and the price at which the goods are available on the date of the breach.
Special Damages
Special damages are those resulting from a breach of contract under some peculiar circumstances. If at the
time of entering into the contract, the party has notice of special circumstances which makes special loss the
likely result of the breach in the ordinary course of things, then upon his-breaking the contract and the
special loss following this breach, he will be required to make good the special loss. For example, A
delivered goods to the Railway Administration to be carried to a place where an exhibition was being held
and told the goods clerk that if the goods did not reach the destination on the stipulated date he would suffer
a special loss. The goods reached late. He was entitled to claim special damages.
Exemplary Damages
These damages are awarded to punish the defendant and are not, as a rule, granted in case of breach of
contract. In two cases, however, the court may award such damages, viz.,
(i) breach of promise to marry; and
(ii) wrongful dishonour of a customerscheque by the banker.
In a breach of promise to marry, the amount of the damages will depend upon the extent of injury to the
partys feelings. In the bankers case, the smaller the amount of the chequedishonoured, larger will be
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damages as the credit of the customer would be injured in a far greater measure, if a cheque for a small
amount is wrongfully dishonoured.
Nominal Damages
Nominal damages consist of a small token award, e.g., a rupee of even 25 paise, where there has been an
infringement of contractual rights, but no actual loss has been suffered. These damages are awarded to
establish the right to decree for breach of contract.
Liquidated Damages and Penalty

Where the contracting parties fix at the time of contract the amount of damages that would be payable in case
of breach, in English law, the question may arise whether the term amounts to “liquidated damages” or a
“penalty”? The Courts in England usually give effect to liquidated damages, but they always relieve against
penalty.
The test of the two is that where the amount fixed is a genuine pre-estimate of the loss in case of breach, it is
liquidated damages and will be allowed. If the amount fixed is without any regard to probable loss, but is
intended to frighten the party and to prevent him from committing breach, it is a penalty and will not be
allowed.
In Indian law, there is no such difference between liquidated damages and penalty. Section 74 provides for
“reasonable compensation” upto the stipulated amount whether it is by way of liquidated damages or penalty.
For example, A borrows Rs. 500 from B and promises to pay Rs. 1,000 if he fails to repay Rs. 500 on the
stipulated date. On A’s failure to repay on the given date, B is entitled to recover from A such compensation,
not exceeding Rs. 1,000 as the Court may consider reasonable. (Union of India v. Raman Iron Foundry, AIR
1974 SC 1265).
(iii) Specific Performance

It means the actual carrying out by the parties of their contract, and in proper cases the Court will insist upon
the parties carrying out this agreement. Where a party fails to perform the contract, the Court may, at its
discretion, order the defendant to carry out his undertaking according to the terms of the contract. A decree
for specific performance may be granted in addition to or instead of damages.
Specific performance is usually granted in contracts connected with land, e.g., purchase of a particular plot
or house, or to take debentures in a company. In case of sale of goods, it will only be granted if the goods
are unique and cannot be purchased in the market, e.g., a particular race horse, or one of special value to
the party suing by reason of personal or family association, e.g., an heirloom.
Specific performance will not be ordered:

(a) where monetary compensation is an adequate remedy;
(b) where the Court cannot supervise the execution of the contract, e.g., a building contract;
(c) where the contract is for personal service; and
(d) where one of the parties is a minor.
(iv) Injunction
An injunction, is an order of a Court restraining a person from doing a particular act. It is a mode of securing
the specific performance of a negative term of the contract, (i.e., where he is doing something which he
promises not to do), the Court may in its discretion issue an order to the defendant restraining him from
doing what he promised not to do. Injunction may be prohibitory or mandatory. In prohibitory, the Court
restrains the commission of a wrongful act whereas in mandatory, it restrains continuance of a wrongful
commission.
In Lumley v. Wagner (1852) 90 R.R. 125. W agreed to sing at L’s theatre and nowhere else. W, in breach of
contract with L entered into a contract to sing for Z. Held, although W could not be compelled to sing at L’s
theatre, yet she could be restrained by injunction from singing for Z.
CONTRACT OF INDEMNITY AND GUARANTEE (Sections 124 to 147)
Meaning of Indemnity
A contract of indemnity is a contract by which one party promises to save the other party from loss caused to
him by the conduct of the promisor himself, or by the conduct of any other person (Section 124). For
example, A contracts to indemnify B against the consequence of any proceedings which C may take against
B in respect of a certain sum of 300 rupees. This is a contract of indemnity. The contract of indemnity may be
express or implied. The later may be inferred from the circumstances of a particular case, e.g., an act done
by A at the request of B. If A incurs any expenses, he can recover the same from B.
The person who promises to indemnify or make good the loss is called the indemnifier and the person whose
loss is made good is called the indemnified or the indemnity holder. A contract of insurance is an example of
a contract of indemnity according to English Law. In consideration of premium, the insurer promises to make
good the loss suffered by the assured on account of the destruction by fire of his property insured against
fire.
Under the Indian Contract Act, the contract of indemnity is restricted to such cases only where the loss
promised to be reimbursed, is caused by the conduct of the promisor or of any other person. The loss
caused by events or accidents which do not depend on the conduct of any person, it seems, cannot be
sought to be reimbursed under a contract of indemnity.
Rights of Indemnity Holder when Sued

Under Section 125, the promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor—
(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not
contravene the orders of the promisor, and acted as if it would have been prudent for him to act in
the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the
suit; and
(3) all sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contrary to the orders of the promisor, and was one which it would have been
prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor
authorised him to compromise the suit.
Meaning of Contract of Guarantee

A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in
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case of his default. The person who gives the guarantee is called the Surety, the person for whom the
guarantee is given is called the Principal Debtor, and the person to whom the guarantee is given is called the
Creditor (Section 126). A guarantee may be either oral or written, although in the English law, it must be in
writing.
Illustration
A advances a loan of Rs. 5,000 to B and C promises to A that if B does not repay the loan, C will do so. This
is a contract of guarantee. Here B is the principal debtor, A is the creditor and C is the surety or guarantor.
Like a contract of indemnity, a guarantee must also satisfy all the essential elements of a valid contract.
There is, however, a special feature with regard to consideration in a contract of guarantee. The
consideration received by the principal debtor is sufficient for surety. Section 127 provides that anything done
or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for
giving the guarantee.
Illustration
(i) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee
the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s
promise to deliver the goods. This is sufficient consideration for C’s promise.
(ii) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year,
and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear
as requested. This is sufficient consideration for C’s promise.
Distinction between Indemnity and Guarantee

A contract of indemnity differs from a contract of guarantee in the following ways:
(a) In a contract of indemnity there are only two parties: the indemnifier and the indemnified. In a
contract of guarantee, there are three parties; the surety, the principal debtor and the creditor.
(b) In a contract of indemnity, the liability of the indemnifier is primary. In a contract of guarantee, the
liability of the surety is secondary. The surety is liable only if the principal debtor makes a default,
the primary liability being that of the principal debtor.
(c) The indemnifier need not necessarily act at the request of the debtor; the surety gives guarantee
only at the request of the principal debtor.
(d) In the case of a guarantee, there is an existing debt or duty, the performance of which is guaranteed
by the surety, whereas in the case of indemnity, the possibility of any loss happening is the only
contingency against which the indemnifier undertakes to indemnify.
(e) The surety, on payment of the debt when the principal debtor has failed to pay is entitled to proceed
against the principal debtor in his own right, but the indemnifier cannot sue third-parties in his own
name, unless there be assignment. He must sue in the name of the indemnified.
Extent of Surety’s Liability

The liability of the surety is co-extensive with that of the principal debtor unless the contract otherwise
provides (Section 128). A creditor is not bound to proceed against the principal debtor. He can sue the surety
without sueing the principal debtor. As soon as the debtor has made default in payment of the debt, the
surety is immediately liable. But until default, the creditor cannot call upon the surety to pay. In this sense,
the nature of the surety’s liability is secondary.
Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable
not only for the amount of the bill but also for any interest and charges which may have become due on it.
Section 128 only explains the quantum of a surety’s obligation when terms of the contract do not limit it.
Conversely it doesn’t follow that the surety can never be liable when the principal debtor cannot be held
liable. Thus, a surety is not discharged from liability by the mere fact that the contract between the principal
debtor and creditor was voidable at the option of the former, and was avoided by the former. Where the
agreement between the principal debtor and creditor is void as for example in the case of minority of
principal debtor, the surety is liable as a principal debtor; for in such cases the contract of the so-called
surety is not collateral, but a principal contract (Kashiba v.Shripat (1894) 19 Bom. 697).
Kinds of Guarantees
A contract of guarantee may be for an existing debt, or for a future debt. It may be a specific guarantee, or it
may be a continuing guarantee. A specific guarantee is given for a single debt and comes to an end when
the debt guaranteed has been paid.
A continuing guarantee is one which extends to a series of transactions (Section 129). The liability of surety
in case of a continuing guarantee extends to all the transactions contemplated until the revocation of the
guarantee. As for instance, S, in consideration that C will employ P in collecting the rents of C’s Zamindari,
promises C to be responsible to the amount of Rs. 5,000 for the due collection and payment by P of these
rents. This is a continuing guarantee.
Revocation of Continuing Guarantee

A continuing guarantee is revoked in the following circumstances:
(a) By notice of revocation by the surety (Section 130): The notice operates to revoke the surety’s
liability as regards future transactions. He continues to be liable for transactions entered into prior to
the notice (Offord v. Davies (1862) 6 L.T.S. 79).
(b) By the death of the surety: The death of the surety operates, in the absence of contract (Lloyds v.
Harper (188) 16 Ch. D. 290) as a revocation of a continuing guarantee, so far as regards future
transactions (Section 131). But for all the transactions made before his death, the surety’s estate will
be liable.
Rights of Surety
A surety has certain rights against the creditor, (Section 141) the principal debtor (Sections 140 and 145) and
the co-securities (Sections 146 and 147). Those are—
(a) Surety’s rights against the creditor: Under Section 141 a surety is entitled to the benefit of every
security which the creditor has against the principal debtor at the time when the contract of
suretyship is entered into whether the surety knows of the existence of such security or not; and, if
the creditor losses or, without the consent of the surety parts with such security, the surety is
discharged to the extent of the value of the security.
(b) Rights against the principal debtor: After discharging the debt, the surety steps into the shoes of the
creditor or is subrogated to all the rights of the creditor against the principal debtor. He can then sue
the principal debtor for the amount paid by him to the creditor on the debtors default; he becomes a
creditor of the principal debtor for what he has paid.
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In some circumstances, the surety may get certain rights even before payment. The surety has
remedies against the principal debtor before payment and after payment. In Mamta Ghose v.
United Industrial Bank (AIR 1987 Cal. 180) where the principal debtor, after finding that the debt
became due, started disposing of his properties to prevent seizure by surety, the Court granted an
injunction to the surety restraining the principal debtor from doing so. The surety can compel the
debtor, after debt has become due to exonerate him from his liability by paying the debt.
(c) Surety’s rights gains co-sureties: When a surety has paid more than his share of debt to the creditor,
he has a right of contribution from the co-securities who are equally bound to pay with him. A, B and C
are sureties to D for the sum of Rs. 3,000 lent to E who makes default in payment. A, B and C are
liable, as between themselves to pay Rs. 1,000 each. If any one of them has to pay more than Rs.
1,000 he can claim contribution from the other two to reduce his payment to only Rs. 1,000. If one of
them becomes insolvent, the other two shall have to contribute the unpaid amount equally.
Discharge of Surety
A surety may be discharged from liability under the following circumstances:
(a) By notice of revocation in case of a continuing guarantee as regards future transaction (Section
130.)
(b) By the death of the surety as regards future transactions, in a continuing guarantee in the absence
of a contract to the contrary (Section 131).
(c) Any variation in the terms of the contract between the creditor and the principal debtor, without the
consent of the surety, discharges the surety as regards all transactions taking place after the
variation (Section 133).
(d) A surety will be discharged if the creditor releases the principal debtor, or acts or makes an
omission which results in the discharge of the principal debtor (Section 134). But where the creditor
fails to sue the principal debtor within the limitation period, the surety is not discharged.
(e) Where the creditor, without the consent of the surety, makes an arrangement with the principal
debtor for composition, or promises to give time or not to sue him, the surety will be discharged
(Section 135).
(f) If the creditor does any act which is against the rights of the surety, or omits to do an act which his
duty to the surety requires him to do, and the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is discharged (Section 139).
(g) If the creditor loses or parts with any security which at the time of the contract the debtor had given
in favour of the creditor, the surety is discharged to the extent of the value of the security, unless the
surety consented to the release of such security by creditor in favour of the debtor. It is immaterial
whether the surety was or is aware of such security or not (Section 141).
CONTRACT OF BAILMENT AND PLEDGE

(a) Bailment
A bailment is a transaction whereby one person delivers goods to another person for some purpose, upon a
contract that they are, when the purpose is accomplished to be returned or otherwise disposed of according
to the directions of the person delivering them (Section 148). The person who delivers the goods is called the
bailor and the person to whom they are delivered is called the bailee.
Bailment is a voluntary delivery of goods for a temporary purpose on the understanding that they are to be
returned in specie in the same or altered form. The ownership of the goods remains with the bailor, the bailee
getting only the possession. Delivery of goods may be actual or constructive, e.g., where the key of a godown is
handed over to another person, it amounts to delivery of goods in the godown.
Gratuitous Bailment
A gratuitous bailment is one in which neither the bailor nor the bailee is entitled to any remuneration. Such a
bailment may be for the exclusive benefit of the bailor, e.g., when A leaves his dog with a neighbour to be
looked after in A’s absence on a holiday. It may again be for exclusive benefit of the bailee, e.g., where you
lend your book to a friend of yours for a week. In neither case any charge is made.
A gratuitous bailment terminates by the death of either the bailor or the bailee (Section 162).
Under Section 159 the lender of a thing for use may at any time require its return if the loan was gratuitous,
even though he lent it for a specified time or purpose. But if on the faith of such loan made for a specified
time or purpose, the borrower has acted in such a manner that the return of the thing lent before the time
agreed upon would cause him loss exceeding the benefit actually derived by him from the loan, the lender
must, if he compels the return, indemnify the borrower the amount in which the loss so occasioned exceeds
the benefit so derived.
Bailment for Reward

This is for the mutual benefit of both the bailor and the bailee. For example, A lets out a motor-car for hire to
B. A is the bailor and receives the hire charges and B is the bailee and gets the use of the car. Where, A
hands over his goods to B, a carrier for carriage at a price, A is the bailor who enjoys the benefit of carriage
and B is the bailee who receives a remuneration for carrying the goods.
Duties of Bailee
The bailee owes the following duties in respect of the goods bailed to him:
(a) The bailee must take as much care of the goods bailed to him as a man of ordinary prudence would
take under similar circumstances of his own goods of the same bulk, quality and value as the goods
bailed (Section 151). If he takes this much care he will not be liable for any loss, destruction or
deterioration of the goods bailed (Section 152). The degree of care required from the bailee is the
same whether the bailment is for reward or gratuitous.
Of course, the bailee may agree to take special care of the goods, e.g., he may agree to keep the
property safe from all perils and answers for accidents or thefts. But even such a bailee will not be
liable for loss happening by an act of God or by public enemies.
(b) The bailee is under a duty not to use the goods in an unauthorised manner or for unauthorised
purpose (Section 153). If he does so, the bailor can terminate the bailment and claim damages for
any loss or damage caused by the unauthorised used (Section 154).
(c) He must keep the goods bailed to him separate from his own goods (Sections 155-157).
If the bailee without the consent of the bailor, mixes the goods of the bailor with his own goods, the
bailor and the bailee shall have an interest, in production to their respective shares, in the mixture
thus produced. If the bailee without the consent of the bailor, mixes the goods of the bailor with his
own goods, and the goods can be separated or divided, the property in the goods remains in the
parties respectively; but the bailee is bound to bear the expenses of separation, and any damages
arising from the mixture.
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If the bailee without the consent of the bailor mixes, the goods of the bailor with his own goods, in
such a manner that it is impossible to separate the goods bailed from the other goods and deliver
them back, the bailor is entitled to be compensated by the bailee for the loss of goods.
(d) He must not set up an adverse title to the goods.
(e) It is the duty of the bailee to return the goods without demand on the expiry of the time fixed or
when the purpose is accomplished (Section 160). If he fails to return them, he shall be liable for any
loss, destruction or deterioration of the goods even without negligence on his part (Section 161).
(f) In the absence of any contract to the contrary, the baliee must return to the bailor any increase, or
profits which may have accrued from the goods bailed; for example, when A leaves a cow in the
custody of B to be taken care of and the cow gets a calf, B is bound is deliver the cow as well as the
calf to A (Section 163).
Bailees Particular Lien (Section 170)

Where the goods are bailed for a particular purpose and the bailee in due performance of bailment, expands
his skill and labour, he has in the absence of an agreement to the contrary a lien on the goods, i.e., the bailee
can retain the goods until his charges in respect of labour and skill used on the goods are paid by the bailor. A
gives a piece of cloth to B, a tailor, for making it into a suit, B promises to have the suit ready for delivery within
a fortnight, B has the suit ready for delivery. He has a right to retain the suit until he is paid his dues. The
section expresses the Common Law principle that if a man has an article delivered to him on the improvement
of which he has to bestow trouble and expenses, he has a right to detain it until his demand is paid.
The right of lien arises only where labour and skill have been used so as to confer an additional value on the
article.
Particular and General Lien

Lien is of two kinds: Particular lien and General lien. A particular lien is one which is available only against
that property of which the skill and labour have been exercised. A bailee’s lien is a particular lien.
A general lien is a right to detain any property belonging to the other and in the possession of the person
trying to exercise the lien in respect of any payment lawfully due to him.
Thus, a general lien is the right to retain the property of another for a general balance of accounts but a
particular lien is a right to retain only for a charge on account of labour employed or expenses bestowed
upon the identical property detained.
The right of general lien is expressly given by Section 171 of the Indian Contract Act to bankers, factors,
warfingers, attorneys of High Court and policy-brokers, provided there is no agreement to the contrary.
Duties of bailor
The bailor has the following duties:
(a) The bailor must disclose all the known faults in the goods; and if he fails to do that, he will be liable
for any damage resulting directly from the faults (Section 150). For example, A delivers to B, a
carrier, some explosive in a case, but does not warn B. The case is handled without extraordinary
care necessary for such articles and explodes. A is liable for all the resulting damage to men and
other goods.
In the case of bailment for hire, a still greater responsibility is placed on the bailor. He will be liable
even if he did not know of the defects (Section 150). A hires a carriage of B. The carriage is unsafe
though B does not know this. A is injured. B is responsible to A for the injury.
(b) It is the duty of the bailor to pay any extraordinary expenses incurred by the bailee. For example, if
a horse is lent for a journey, the expense of feeding the house would, of course, subject to any
special agreement be borne by the bailee. If however the horse becomes ill and expenses have
been incurred on its treatment, the bailor shall have to pay these expenses (Section 158).
(c) The bailor is bound to indemnify the bailee for any cost or costs which the bailee may incur because
of the defective title of the bailor of the goods bailed (Section 164).
Termination of bailment
Where the bailee wrongfully uses or dispose of the goods bailed, the bailor may determine the bailment
(Section 153.)
As soon as the period of bailment expires or the object of the bailment has been achieved, the bailment
comes to an end, and the bailee must return the goods to the bailor (Section 160). Bailment is terminated
when the subject matter of bailment is destroyed or by reason of change in its nature, becomes incapable of
use for the purpose of bailment.
A gratuitous bailment can be terminated by the bailor at any time, even before the agreed time, subject to the
limitation that where termination before the agreed period causes loss in excess of benefit, the bailor must
compensate the bailee (Section 159).
A gratuitous bailment terminates by the death of either the bailor or the bailee (Section 162).
Finder of Lost Goods
The position of a finder of lost goods is exactly that of a bailee. The rights of a finder are that he can sue the
owner for any reward that might have been offered, and may retain the goods until he receives the reward.
But where the owner has offered no reward, the finder has only a particular lien and can detain the goods
until he receives compensation for the troubles and expenses incurred in preserving the property for finding
out the true owner. But he cannot file a suit for the recovery of the compensation [Section 168].
Thus, as against the true owner, the finder of goods in a public or quasi public place is only a bailee; he keeps
the article in trust for the real owner. As against every-one else, the property in the goods vests in the finder on
his taking possession of it.
The finder has a right to sell the property—

(a) where the owner cannot with reasonable diligence be found, or
(b) when found, he refuses to pay the lawful charges of the finder and—
(i) if the thing is in danger of perishing or losing greater part of its value, or
(ii) when the lawful charges of the finder for the preservation of goods and the finding out of the
owner amounts to two-thirds of the value of the thing (Section 169).
Carrier as Bailee
A common carrier undertakes to carry goods of all persons who are willing to pay his usual or reasonable
rates. He further undertakes to carry them safely, and make good all loses, unless they are caused by act of
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God or public enemies. Carriers by land including railways and carriers by inland navigation, are common
carriers. Carriers by Sea for hire are not common carriers and they can limit their liability. Railways in India
are now common carriers.
Inn-keepers: The liability of a hotel keeper is governed by Sections 151 and 152 of the Contract Act and is
that of an ordinary bailee with regard to the property of the guests.
C stayed in a room in a hotel. The hotel-keeper knew that the room was in an insecure condition. While C
was dining in the dining room, some articles were stolen from his room. It was held that the hotel-keeper was
liable as he should have taken reasonable steps to rectify the insecured condition of the rooms (Jan & San v.
Caneron (1922) 44 All. 735).
(b) Pledge
Pledge or pawn is a contract whereby an article is deposited with a lender of money or promisee as security
for the repayment of a loan or performance of a promise. The bailor or depositor is called the Pawnor and the
bailee or depositee the “Pawnee” (Section 172). Since pledge is a branch of bailment, the pawness is bound
to take reasonable care of the goods pledged with him. Any kind of goods, valuables, documents or
securities may be pledged. The Government securities, e.g., promissory notes must, however, be pledged by
endorsement and delivery.
The following are the essential ingredients of a pledge:
(i) The property pledged should be delivered to the pawnee.
(ii) Delivery should be in pursuance of a contract.
(iii) Delivery should be for the purpose of security.
(iv) Delivery should be upon a condition to return.
Rights of the Pawnee

No property in goods pawned passes to the pawnee, but the pawnee gets a “special property to retain
possession even against the true owner until the payment of the debt, interest on the debt, and any other
expense incurred in respect of the possession or for preservation of the goods pledged” (Section 173). The
pawnee must return the goods to the pawnor on the tender of all that is due to him. The pawnee cannot
confer a good title upon a bona fide purchaser for value.
Should the pawnor make a default in payment of the debt or performance of the promise at the stipulated
time, the pawnee may-
(i) file a suit for the recovery of the amount due to him while retaining the goods pledged as collateral
security; or
(ii) sue for the sale of the goods and the realisation of money due to him; or
(iii) himself sell the goods pawned, after giving reasonable notice to the pawnor, sue for the deficiency,
if any, after the sale.
If the sale is made in execution of a decree, the pawnee may buy the goods at the sale. But he cannot sell
them to himself in a sale made by himself under (iii) above. If after sale of the goods, there is surplus, the
pawnee must pay it to the pawnor (Section 176).
Rights of Pawnor
On default by pawnor to repay on the stipulated date, the pawnee may sell the goods after giving reasonable
notice to the pawnor. If the pawnee makes an unauthorised sale without giving notice to the pawnor, the pawnor
has the following rights—
(i) He can file a suit for redemption of goods by depositing the money treating the sale as if it had
never taken place; or
(ii) He can ask for damages on the ground of conversion.
Pledge by Non-owners
Ordinarily, the owner of the goods would pledge them to secure a loan but the law permits under certain
circumstances a pledge by a person who is not the owner but is in possession of the goods. Thus, a valid
pledge may be created by the following non-owners.
(a) A mercantile agent: Where a mercantile agent is, with the consent of the owner, in possession of
goods or the documents of title to goods, any pledge made by him, when acting in the ordinary
course of business of a mercantile agent, is as valid as if he were expressly authorised by the
owner of the goods to make the same. But the pledge is valid only if the pawnee acts in good faith
and has not at the time of the pledge notice that the pawnor has not the authority to pledge (Section
178).
(b) Pledge by seller or buyer in possession after sale: A seller, left in possession of goods sold, is no
more the owner, but pledge by him will be valid, provided the pawnee acted in good faith and had
no notice of the sale of goods to the buyer (Section 30 of The Sale of Goods Act 1930).
(c) Pledge where pawnor having limited interest: When the pawnor is not the owner of the goods but
has a limited interest in the goods which he pawns, e.g., he is a mortgagee or he has a lien with
respect of these goods, the pledge will be valid to the extent of such interest.
(d) Pledge by co-owner in possession: One of the several co-owners of goods in possession thereof
with the assent of the other co-owners may create a valid pledge of the goods.
(e) Pledge by person in possession under a voidable contract: A person may obtain possession under
a contract which is voidable at the option of the lawful owner on the ground of misrepresentation,
fraud, etc. The person in possession may pledge the goods before the contract is avoided by the
other party (Section 178A).
LAW OF AGENCY
Definition of Agent (Section 182)
An agent is a person who is employed to bring his principal into contractual relations with third-parties. As the
definition indicates, an agent is a mere connecting link between the principal and a third-party. But during the
period that an agent is acting for his principal, he is clothed with the capacity of his principal.
Creation of Agency
A contract of agency may be express or implied, (Section 186) but consideration is not an essential element
in this contract (Section 185). Agency may also arise by estoppel, necessity or ratification.
(a) Express Agency: A contract of agency may be made orally or in writing. The usual form of written
contract of agency is the Power of Attorney, which gives him the authority to act on behalf of his
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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.
(b) Implied Agency: Implied agency may arise by conduct, situation of parties or necessity of the case.
(i) Agency by Estoppel (Section 237): Estoppel arises when you are precluded from denying the
truth of anything which you have represented as a fact, although it is not a fact. Thus, where P
allows third-parties to believe that A is acting as his authorised agent, he will be estopped from
denying the agency if such third-parties relying on it make a contract with A even when A had
no authority at all.
(ii) Wife as agent: Where a husband and wife are living together, the wife is presumed to have her
husbands authority to pledge his credit for the purchase of necessaries of life suitable to their
standard of living. But the husband will not be liable if he shows that (i) he had expressly
warned the trademan not to supply goods on credit to his wife; or (ii) he had expressly forbidden
the wife to pledge his credit; or (iii) his wife was already sufficiently supplied with the articles in
question; or (iv) she was supplied with a sufficient allowance.
Similarly, where any person is held out by another as his agent, the third-party can hold that
person liable for the acts of the ostensible agent, or the agent by holding out. Partners are each
others agents for making contracts in the ordinary course of the partnership business.
(iii) Agency of Necessity (Sections 188 and 189): In certain circumstances, a person who has been
entrusted with anothers property, may have to incur unauthorised expenses to protect or preserve it.
Such an agency is called an agency of necessity. For example, A sent a horse by railway and on its
arrival at the destination there was no one to receive it. The railway company, being bound to take
reasonable steps to keep the horse alive, was an agent of necessity of A.
A wife deserted by her husband and thus forced to live separate from him, can pledge her husbands
credit to buy all necessaries of life according to the position of the husband even against his wishes.
(iv) Agency by ratification (Sections 169-200): Where a person having no authority purports to act as
agent, or a duly appointed agent exceeds his authority, the principal is not bound by the contract
supposedly based on his behalf. But the principal may ratify the agents transaction and so accept
liability. In this way an agency by ratification arises. This is also known as ex post facto agency—
agency arising after the event. The effect of ratification is to render the contract binding on the
principal as if the agent had been authorisedbefore hand. Also ratification relates back to the
original making of the contract so that the agency is taken to have come into existence from the
moment the agent first acted, and not from the date the principal ratified it. Ratification is effective
only if the following conditions are satisfied
(a) The agent must expressly contract as agent for a principal who is in existence and competent to
contract.
(b) The principal must be competent to contract not only at the time the agent acted, but also when
he ratified the agents act.
(c) The principal at the time of ratification has full knowledge of the material facts, and must ratify
the whole contract, within a reasonable time.
(d) Ratification cannot be made so as to subject a third-party to damages, or terminate any right or
interest of a third person.
(e) Only lawful acts can be ratified.
Classes of Agents
Agents may be special or general or, they may be mercantile agents:
(a) Special Agent: A special agent is one who is appointed to do a specified act, or to perform a
specified function. He has no authority outside this special task. The third-party has no right to
assume that the agent has unlimited authority. Any act of the agent beyond that authority will not
bind the principal.
(b) General Agent: A general agent is appointed to do anything within the authority given to him by the
principal in all transactions, or in all transactions relating to a specified trade or matter. The third-
party may assume that such an agent has power to do all that is usual for a general agent to do in
the business involved. The third party is not affected by any private restrictions on the agents
authority.
Sub-Agent
A person who is appointed by the agent and to whom the principal’s work is delegated to known as sub-
agent. Section 191 provides that “a sub-agent is a person employed by, and acting under the control of the
original agent in the business of the agency.” So, the sub-agent is the agent of the original agent.
As between themselves, the relation of sub-agent and original agent is that of agent and the principal. A sub-
agent is bound by all the duties of the original agent. The sub-agent is not directly responsible to the principal
except for fraud and wilful wrong. The sub-agent is responsible to the original agent. The original agent is
responsible to the principal for the acts of the sub-agent. As regards third persons, the principal is
represented by sub-agent and he is bound and responsible for all the acts of sub-agent as if he were an
agent originally appointed by the principal.
Mercantile Agents
Section 2(9) of the Sale of Goods Act, 1930, defines a mercantile agent as “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.
Factors
A factor is a mercantile agent employed to sell goods which have been placed in his possession or contract
to buy goods for his principal. He is the apparent owner of the goods in his custody and can sell them in his
own name and receive payment for the goods. He has an insurable interest in the goods and also a general
lien in respect of any claim he may have arising out of the agency.
Brokers
A broker is a mercantile agent whose ordinary course of business is to make contracts with other parties for
the sale and purchase of goods and securities of which he is not entrusted with the possession for a
commission called brokerage. He acts in the name of principal. He has no lien over the goods as he is not in
possession of them.
Del CredereAgent
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.
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Auctioneers
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 principals title to the goods. He is an agent for the seller but after the goods have
been knocked down he is agent for the buyer also for the purpose of evidence that the sale has taken place.
Partners
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
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.
Duties of the Agent

An agent’s duties towards his principal are as follows (which give corresponding rights to the principal who
may sue for damages in the event of a breach of duty by the agent):
(a) An agent must act within the scope of the authority conferred upon him and carry out strictly the
instructions of the principal (Section 211).
(b) in the absence of express instructions, he must follow the custom prevailing in the same kind of
business at the place where the agent conducts the business (Section 211).
(c) He must do the work with reasonable skill and diligence whereby the nature of his profession, the
agent purports to have special skill, he must exercise the skill which is expected from the members
of the profession (Section 212).
(d) He must disclose promptly any material information coming to his knowledge which is likely to
influence the principal in the making of the contract.
(e) He must not disclose confidential information entrusted to him by his principal (Section 213).
(f) He must not allow his interest to conflict with his duty, e.g., he must not compete with his principal
(Section 215).
(g) The agent must keep true accounts and must be prepared on reasonable notice to render an
account.
(h) He must not make any secret profit; he must disclose any extra profit that he may make.
Where an agent is discovered taking secret bribe, etc., the principal is entitled to (i) dismiss the
agent without notice, (ii) recover the amount of secret profit, and (iii) refuse to pay the agent his
remuneration. He may repudiate the contract, if the third-party is involved in secret profit and also
recover damages.
(i) An agent must not delegate his authority to sub-agent. A sub-agent is a person employed by and
acting under the control of the original agent in the business of agency (Section 191). This rule is
based on the principle: Delegatus non-potest delegare — a delegate cannot further delegate
(Section 190).
But there are exceptions to this rule and the agent may delegate (i) where delegation is allowed by
the principal, (ii) where the trade custom or usage sanctions delegation, (iii) where delegation is
essential for proper performance, (iv) where an emergency renders it imperative, (v) where nature
of the work is purely ministerial, and (vi) where the principal knows that the agent intends to
delegate.
Rights of Agents
Where the services rendered by the agent are not gratuitous or voluntary, the agent is entitled to receive the
agreed remuneration, or if none was agreed, a reasonable remuneration. The agent becomes entitled to
receive remuneration as soon as he has done what he had undertaken to do (Section 219).
Certain classes of agents, e.g., factors who have goods and property of their principal in their possession,
have a lien on the goods or property in respect of their remuneration and expense and liabilities incurred. He
has a right to stop the goods in transit where he is an unpaid seller.
As the agent represents the principal, the agent has a right to be indemnified by the principal against all
charges, expenses and liabilities properly incurred by him in the course of the agency (Sections 222-223).
Extent of Agent’s Authority

The extent of the authority of an agent depends upon the terms expressed in his appointment or it may be
implied by the circumstances of the case. The contractual authority is the real authority, but implied authority
is to do whatevers incidental to carry out the real authority. This implied authority is also known as apparent
or ostensible authority, Thus, an agent having an authority to do an act has authority to do everything lawful
which is necessary for the purpose or usually done in the course of conducting business.
An agent has authority to do all such things which may be necessary to protect the principal from loss in an
emergency and which he would do to protect his own property under similar circumstances. Where butter
was becoming useless owing to delay in transit and was therefore sold by the station master for the best
price available as it was not possible to obtain instructions from the principal, the sale was held binding upon
the principal.
Responsibilities of Principal to Third-parties

The effect of a contract made by an agent varies according to the circumstances under which the agent
contracted. There are three circumstances in which an agent may contract, namely—
(i) the agent acts for a named principal;
(ii) the agent acts for an undisclosed principal; and
(iii) the agent acts for a concealed principal.
(a) Disclosed principal: Where the agent contracts as agent for a named principal, he generally incurs neither
rights nor liabilities under the contract, and drops out as soon as it is made. The contract is made between
the principal and the third-party and it is between these two that rights and obligations are created. The legal
effect is the same as if the principal had contracted directly with the third-party.
The effect is that the principal is bound by all acts of the agent done within the scope of actual, apparent or
ostensible authority. This ostensible authority of the agent is important, for the acts of a general agent are
binding on the principal if they are within the scope of his apparent authority, although they may be outside
the scope of his actual authority. Therefore, a private or secret limitation or restriction of powers of an agent
do not bind innocent third-party.
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(b) Undisclosed principal: Where the agent disclose that he is merely an agent but conceals the identity of
his principal, he is not personally liable, as he drops out in normal way. The principal, on being discovered,
will be responsible for the contract made by the agent.
(c) Concealed principal: Where an agent appears to be contracting on his own behalf, without either
contracting as an agent or disclosing the existence of an agency (i.e., he discloses neither the name of the
principal nor his existence), he becomes personally liable. The third-party may sue either the principal (when
discovered) or the agent or both. If the third-party chooses to sue the principal and not the agent, he must
allow the principal the benefit of all payments made by him to the agent on account of the contract before the
agency was disclosed. The third-party is also entitled to get the benefit of anything he may have paid to the
agent.
If the principal discloses himself before the contract is completed, the other contracting party may refuse to
fulfil the contract if he can show that, if he had known who was the principal in the contract, or if he had
known that the agent was not the principal, he would not have entered into the contract.
Principal Liable for Agent’s Torts (Section 238)

If an agent commits a tort or other wrong (e.g., misrepresentation or fraud) during his agency, whilst acting
within the scope of his actual or apparent authority, the principal is liable. But the agent is also personally
liable, and he may be sued also. The principal is liable even if the tort is committed exclusively for the benefit
of the agent and against the interests of the principal.
Personal Liability of Agent to Third-party

An agent is personally liable in the following cases:
(a) Where the agent has agreed to be personally liable to the third-party.
(b) Where an agent acts for a principal residing abroad.
(c) When the agent signs a negotiable instrument in his own name without making it clear that he is
signing it only as agent.
(d) When an agent acts for a principal who cannot be sued (e.g., he is minor), the agent is personally
liable.
(e) An agent is liable for breach of warranty of authority. Where a person contracts as agent without
any authority there is a breach of warranty of authority. He is liable to the person who has relied on
the warranty of authority and has suffered loss.
(f) Where authority is one coupled with interest or where trade, usage or custom makes the agent
personally liable, he will be liable to the third-party.
(g) He is also liable for his torts committed in the course of agency.
Meaning of Authority Coupled with Interest (Section 202)

An agency is coupled with an interest when the agent has an interest in the authority granted to him or when
the agent has an interest in the subject matter with which he is authorised to deal. Where the agent was
appointed to enable him to secure some benefit already owed to him by the principal, the agency was
coupled with an interest. For example, where a factor had made advances to the principal and is authorised
to sell at the best price and recoup the advances made by him or where the agent is authorised to collect
money from third-parties and pay himself the debt due by the principal, the agencies are coupled with
interest. But a mere arrangement that the agent’s remuneration to paid out of the rents collected by him, it
does not give him any interest in the property and the agency is not the one coupled with an interest. An
agency coupled with interest cannot be terminated in the absence of a contract to the contrary to the
prejudice of such interest.
The principal laid down in Section 202 applies only if the following conditions are fulfilled:
(i) The interest of the agent should exist at the time of creation of agency and should not have arisen
after the creation of agency.
(ii) Authority given to the agent must be intended for the protection of the interest of the agent.
(iii) The interest of the agent in the subject matter must be substantial and not ordinary.
(iv) The interest of the agent should be over and above his remuneration. Mere prospect of
remuneration is not sufficient interest.
Termination of Agency
An agency comes to an end or terminates—
(a) By the performance of the contract of agency; (Section 201)
(b) By an agreement between the principal and the agent;
(c) By expiration of the period fixed for the contract of agency;
(d) By the death of the principal or the agency; (Section 201)
(e) By the insanity of either the principal or the agent; (Section 201)
(f) By the insolvency of the principal, and in some cases that of the agent; (Section 201)
(g) Where the principal or agent is an incorporated company, by its dissolution;
(h) By the destruction of the subject-matter; (Section 56)
(i) By the renunciation of his authority by the agent; (Section 201)
(j) By the revocation of authority by the principal. (Section 201)
When Agency is Irrevocable

Revocation of an agency by the principal is not possible in the following cases:
(a) Where the authority of agency is one coupled with an interest, even the death or insanity of the
principal does not terminate the authority in this case (Section 202).
(b) When agent has incurred personal liability, the agency becomes irrevocable.
(c) When the authority has been partly exercised by the agent, it is irrevocable in particular with regard
to obligations which arise from acts already done (Section 204).
When Termination Takes Effect

Termination of an agency takes effect or is complete, as regards the agent when it becomes known to the
agent. If the principal revokes the agents authority, the revocation will take effect when the agent comes to
know of it. As regards the third-parties, the termination takes effect when it comes to their knowledge
(Section 208). Thus, if an agent whose authority has been terminated to his knowledge, enters into a
contract with a third-party who deals with him bona fide, the contract will be binding on the principal as
against the third-party. The termination of an agent’s authority terminates the authority of the sub-agent
appointed by the agent (Section 210).
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The revocation of agency as regards the agent and as regards the principal takes effect at different points of
time. Section 209 charges the agent with duty to protect the principal’s interest where the principal dies or
becomes of unsound mind. It provides that when an agency is terminated by the principal dying or becoming
of unsound mind, the agent is bound to take, on behalf of the representatives of his late principal, all
reasonable steps for the protection and preservation of the interest entrusted to him. So it is the duty of the
agent to take all steps to protect the interest of his deceased principal on his death.
JOINT VENTURE/ FOREIGN COLLABORATION/MULTINATIONAL AGREEMENTS

International business professionals use the term “modes of entry” to describe the different methods and
approaches available to enter markets and conduct business in other countries. One mode of entry is the
joint venture where two or more organizations join together in a cooperative effort to further their business
goals. The joint venture is one of the most common and effective means of conducting business
internationally. The joint venture documents and agreements are critical to the success of the venture. The
joint venture agreement forms the basis of the understanding between and among the parties. It is relied
upon to ensure that all parties understand their roles, rights, responsibilities, and remedies in the conduct of
the venture. Organizations enter into joint ventures in good faith but closely scrutinize the joint venture
documents if anything goes awry.
The importance of the documents and the purpose of this part is to cover, step by step, the critical elements
to consider and include in joint venture agreements. Equity participation, for example, may or may not be as
important as operational control. Technical participation in the venture may or may not be as important as the
intellectual property rights that may result from the venture. A key to developing joint venture agreements is
to determine goals and objectives in advance and ensure that the interests are reflected in the agreement.
Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a
prospective joint venture partner should be supplemented with proper due diligence. Once a partner is
selected generally the parties highlighting the basis of the future joint venture agreement sign a
memorandum of understanding or a letter of intent. Before signing the joint venture agreement, the terms
should be thoroughly discussed to avoid any misunderstanding at a later stage. Negotiations require an
understanding of the cultural and legal background of the parties.
It is difficult to prepare a set frame of the terms and conditions. The conditions may differ according to the
requirements. While drafting a foreign collaboration agreement, the following factors should be kept in mind:
▬ Capability of the collaborator and the requirements of the party are clearly indicated.
▬ Clear definitions of technical terms are given.
▬ Specify if the product shall be manufactured/sold on exclusive or non-exclusive basis.
▬ Terms and conditions regarding nature of technical know-how, disclosure of drawings,

specifications and other documents, furnishing of technical information in respect of processes with
flow charts etc., plant outlay list of equipment, machinery and tool with specification have to be
provided.
▬ Provisions for making available the engineers and/or skilled workers of the collaborator on payment
of expenses relating to their stay per diem etc. are given.
▬ Details regarding specification and quality of the product to be manufactured are given.
▬ Quality control and trademarks to be used are also specified.

▬ Responsibility of the collaborator in establishing or maintaining assembly plants should be clearly

determined and provided for.
▬ If sub-contracting of the work is involved, clarify if there would be any restrictions.
▬ The rate of royalty, mode of calculation and payment etc. Also, make provision as to who will bear
the taxes/cess on such payments.
▬ Use of information and industrial property rights should also be provided for in the agreement.
▬ A clause on force majeure should be included.
▬ A clause that the collaborating company has to train the personnel of Indian company within a
specified period should be incorporated The clause should also specify the terms and conditions of
such assistance, place of training, period of training and fees payable.
▬ A comprehensive clause on arbitration containing a clear provision as to the kind of arbitrator and
place of arbitration should be included.
▬ There should be provision in the agreement for payment of interest on delayed payments.
E-CONTRACT
Electronic contracts are not paper based but rather in electronic form are born out of the need for speed,
convenience and efficiency. In the electronic age, the whole transaction can be completed in seconds, with
both parties simply affixing their digital signatures to an electronic copy of the contract. There was initially an
apprehension amongst the legislatures to recognize this modern technology, but now many countries have
enacted laws to recognize electronic contracts. The conventional law relating to contracts is not sufficient to
address all the issues that arise in electronic contracts. The Information Technology Act, 2000 solves some
of the peculiar issues that arise in the formation and authentication of electronic contracts
As in every other contract, an electronic contract also requires the following necessary ingredients:
An offer needs to be made

The offer needs to be accepted
There has to be lawful consideration
There has to be an intention to create legal relations
The parties must be competent to contract
There must be free and genuine consent
The object of the contract must be lawful
There must be certainty and possibility of performance.
LESSON ROUND-UP
• A contract is an agreement enforceable at law, made between two or more persons, by which rights are
acquired by one or more to acts or forbearances on the part of the other or others.
• Every promise and every set of promises, forming the consideration for each other, is an agreement.
• All agreements are contracts if they are made by the free consent of parties competent to contract, for a
lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
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• In flaw contract There may be the circumstances under which a contract made under these rules may still
be bad, because there is a flaw, vice or error somewhere. As a result of such a flaw, the apparent
agreement is not a real agreement.
• Section 27 of the Indian Contract Act states that every agreement by which any one is restrained from
exercising a lawful profession, trade or business of any kind, is, to that extent, void.
• The literal meaning of the word “wager” is a “bet”. Wagerning agreements are nothing but ordinary betting
agreements.
• An agreement not enforceable by law is void ab initio.
• 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. Contract of insurance and contracts of indemnity and guarantee are popular
instances of contingent contracts.
• A quasi-contract rests on the equitable principle that a person shall not be allowed to enrich himself unjustly
at the expense of another. In truth, it is not a contract at all. It is an obligation which the law creates, in the
absence of any agreement, when any person is in the possession of one persons money, or its equivalent,
under such circumstances that in equity and good conscience he ought not to retain it, and which in justice
and fairness belongs to another. It is the duty and not an agreement or intention which defines it.
• A contract is said to be discharged or terminated when the rights and obligations arising out of a contract
are extinguished.
• Where a contract is broken, the injured party has several courses of action open to him. The appropriate
remedy in any case will depend upon the subject-matter of the contract and the nature of the breach.
• A contract of indemnity is a contract by which one party promises to save the other party from loss caused
to him by the conduct of the promisor himself, or by the conduct of any other person.
• A bailment is a transaction whereby one person delivers goods to another person for some purpose, upon a
contract that they are, when the purpose is accomplished to be returned or otherwise disposed of according
to the directions of the person delivering them.
SELF TEST QUESTIONS

evaluation)
1. Define consideration and state its essential features.
2. “No consideration, no contract”. Do you agree?
3. “The essence of every agreement is that there ought to be free consent on both the sides”. Discuss.
4. How does a contract differ from agreements?
(a) Reciprocal promises.
(b) Substituted Agent.
Lesson 21
Specific Relief Act, 1963
LESSON OUTLINE
LEARNING OBJECTIVES
• Introduction The Specific Relief Act, 1963 was enacted to define
and amend the law relating to certain kinds of
• Scope of the Act
specific relief. It contains provisions, inter alia,
• Who may sue for Specific Performance specific performance of contracts, contracts not
specifically enforceable, parties who may obtain and
• Recovery of Possession of Movable and
against whom specific performance may be obtained,
Unmovable Property
etc. It also confers wide discretionary powers upon
• Rectification of Instruments the courts to decree specific performance and to
refuse injunction, etc.
• Rescission of Contract
• Declaratory Decree
how a party to the contract can get its specific
• Preventive Relief performance and who can sue for specific
• Learning objectives performance of a contract.
• Lesson Round up
The law relating to specific relief in India is provided in the Specific Relief Act, 1963.
532 EP-EBCL
INTRODUCTION
The law relating to specific relief in India is provided in the Specific Relief Act of 1963. The Specific Relief
Act, 1963 was enacted to define and amend the law relating to certain kinds of specific relief.
The expression ‘specific relief’ means a relief in specie. It is a remedy which aims at the exact fulfillment of
an obligation.
Scope of the Act

The Specific Relief Act, 1963 is not exhaustive. It does not consolidate the whole law on the subject. As the
Preamble would indicate, it is an Act ”to define and amend the law relating to certain kinds of specific relief”.
It does not purport to lay down the law relating to specific relief in all its ramifications (AIR 1972 SC 1826)
There are other kinds of specific remedy provided for by other enactments e.g. the Transfer of Property Act
deals with the specific remedies available to a mortgagor or mortgagee; the Partnership Act deals with the
specific remedies like dissolution and accounts as between partners.
Under the Specific Relief Act, 1963, remedies have been divided as specific relief (Sections 5-35) and
preventive relief (Sections 36-42). These are:
(i) Recovering possession of property (Sections 5-8);
(ii) Specific performance of contracts (Sections 9-25);
(iii) Rectification of Instruments (Section 26);
(iv) Rescission of contracts (Sections 27-30);
(v) Cancellation of Instruments (Section 31-33);
(vi) Declaratory decrees (Sections 34-35); and
(vii) Injunctions (Sections 36-42).
Who May Sue for Specific Performance

Section 15 lays down that specific performance of a contract may be obtained by (a) any party thereto; (b)
the representative in interest or the principal, of any party thereto; provided that where the learning, skill,
insolvency or any personal quality of such party is a material ingredient in the contract, or where the contract
provides that his interest shall not be assigned, his representative in interest or his principal shall not be
entitled to specific performance of the contract, unless such party has already performed his part of the
contract, or the performance thereof by his representative in interest, or his principal, has been accepted by
the other party; (c) where the contract is a settlement on marriage, or a compromise of doubtful rights
between members of the same family, any person beneficially entitled thereunder; (d) where the contract has
been entered into by tenant-for-life in due exercise of a power the remainder man; (e) a reversioner in
possession, where the agreement is a convenant entered into with his predecessor in title and the
reversioner is entitled to the benefit of such convenant; (f) a reversioner in remainder, where the agreement
is such a covenant, and the reversioner is entitled to the benefit thereof and will sustain material injury by
reason of its breach; (g) when a company has entered into a contract and subsequently becomes
amalgamated with another company the new company which arises out of the amalgamation; (h) when the
promoters of a company have, before its incorporation, entered into a contract for the purpose of the
company and such a contract is warranted by the terms of the incorporation of the company provided that
the company has accepted the contract and has communicated such acceptance to the other party to the
contract.
Lesson 21 Specific Relief Act, 1963 533
Generally, only a party to the contract can get its specific performance. The section gives the list of persons
who can sue for specific performance of a contract. The general principle is that in a suit for specific
performance of a contract, all the parties to the contract should be parties to the suit and no one else.
Contracts which can be specifically enforced

Section 10 provides the cases in which specific performance of contract is enforceable. It says that except as
otherwise provided in this Chapter, the specific performance of any contract may, in the discretion of the
Court, be enforced (a) when there exists no standard for ascertaining the actual damage caused by the non-
performance of the act agreed to be done, or (b) when the act agreed to be done is such that compensation
in money for its non-performance would not afford adequate relief. The explanation provides that unless and
until the contrary is proved, the Court shall presume:
(i) that the breach of a contract to transfer immovable property cannot be adequately relieved by
compensation in money, and (ii) that the breach of a contract to transfer movable property can be so relieved
except in the two cases: (a) where the property is not an ordinary article of commerce or is of special value
or interest to the plaintiff, or consists of goods which are not easily obtainable in the market, and (b) where
the property is held by the defendant as the agent or trustee of the plaintiff.
So, under this Section, contracts for sale of patent right, copy right, shares of a company which are not easily
available, future property, chattels of special value, etc., are specifically enforceable. In an agreement for
sale of agricultural land, the respondent vendor wilfully avoided the execution of sale deed after receiving full
sale consideration. Rajasthan High Court held that compensation by way of damages would not be
substituted to execution of sale deed. The Court directed the respondents to enforce the specific
performance of the agreement (Ram Karan and others v. Govind Lal and other, AIR 1999 Raj. 167). In a suit
for specific performance of contract of sale of a house, a stranger to the contract cannot seek to be
impleaded. That will change the very nature of the suit.
Cases in which specific performance of contracts connected with trusts enforceable

Section 11 lays down that except as otherwise provided in this Act, specific performance of a contract may,
in the discretion of the Court, be enforced when the act agreed to be done is in the performance wholly or
partly of a trust. But if a trustee enters into a contract in excess of his powers then such a contract cannot be
specifically enforced.
Illustrations
A contracts with B to paint a picture for B and B agrees to pay Rs. 1000 for the same. The picture is painted.
‘B’ is entitled to have it delivered to him on payment or tender of Rs. 1,000.
A is a trustee of land with power of lease it for 7 years. He enters into a contract with B to grant a lease of the
land for 7 years, with a covenant to renew the lease at the expiry of the term. This contract cannot be
specifically enforced.
The directors of company have power to sell the concern with the sanction of a general meeting of the
shareholders, Directors contract to sell it without any such sanction. This contract cannot be specifically
enforced.
Specific performance of part of a contract

Section 12 deals with specific performance of a part of a contract. Sub-section (1) lays down the general
principle that except as otherwise hereinafter provided in this section, the Court shall not direct the specific
534 EP-EBCL
performance of a part of a contract. Sub-sections (2)-(4) lay down the exceptions to this general rule as
follows:
(i) Sub-section 2 says that where a party to a contract is unable to perform the whole of his part of it, but the
part which must be left unperformed by only a small proportion to the whole in value and admits of
compensation in money, the Court may, at the suit of the either party, direct the specific performance of so
much of the contract as can be performed and award compensation in money for the deficiency.
A contracts to sell B a piece of land consisting of 100 bighas. It turns out that 98 bighas of the land belongs
to A and the two remaining bighas to a stranger, who refuses to part with them. The two bighas are not
necessary for the use of enjoyment of the 98 bighas, nor so important for such use or enjoyment that the loss
of them may not be made in goods in money. A may be directed at the suit of B to convey to B the 98 bighas
and to make compensation to him. For not conveying the two remaining bighas; B may be directed at the suit
of A, to pay to A, on receiving the conveyance and possession of the land, the stipulated purchase money
less the sum awarded as compensation for the deficiency.
(ii) Sub-section 3 lays down that where a party to a contract is unable to perform the whole of his part of it,
and the part which must be left unperformed either (a) forms a considerable part of the whole, though
admitting of compensation in money; or (b) does not admit of compensation in money; he is not entitled to
obtain a decree for specific performance; but the Court may, at the suit of the other party, direct the party in
default to perform specifically so much of his part of the contract as he can perform, if the party (i) in a case
falling under clause (a), pays or has paid the agreed consideration for the whole of the contract reduced by
the consideration for the part which must be left unperformed and in a case falling under clause (b), pays or
has paid the consideration for the whole of the contract without any abatement, and (ii) in either case,
relinquishes all claims to the performance of the remaining part of the contract and all rights to
compensation, either for the deficiency or for the loss or damage sustained by him through the default of the
defendant.
For example, A contracts to sell B a piece of land consisting of 100 bighas for
Rs. 1,00,000. It turns out that only 50 bighas of land belong to A. 50 bighas are substantial part of the
contract. A cannot demand specific performance of the contract but B can demand specific performance to
get 50 bighas of land from A by paying the full consideration i.e. Rs. 1,00,000.
(iii) Sub-section 4 lays down that when a part of a contract which taken by itself, can and ought to be
specifically performed, stands on a separate and independent footing from another part of the same contract
which cannot or ought not to be specifically performed, the Court may direct specific performance of the
former part. For the purposes of this section, a party to the contract shall be deemed to be unable to perform
the whole of his part of it, if a portion of its subject matter existing at the date of the contract has ceased to
exist at the time of its performance.
Section 13 lays down the rights of a purchaser or lessee against the seller or lessor with no title or imperfect
title. It lays down that where a person contracts to sell or let certain immovable property having no title or
only an imperfect title, the purchaser or lessee (subject to the other provisions of this Chapter) has the
following rights, namely: (a) if the vendor or lessor has, subsequent to the contract, acquired any interest in
the property, the purchaser or lessee may compel him to make good the contract out of such interest; (b)
where the concurrence of other persons is necessary for validating the title, and they are bound to convey at
the request of the vendor or lessor, the purchaser or lessee may compel him to procure such concurrence
and when conveyance by other person is necessary to validate the title and they are bound to convey at the
request of the vendor or lessor, the purchaser or lessee may compel him to procure such conveyance; (c)
where the vendor professes to sell unencumbered property but the property is, mortgaged for an amount not
exceeding the purchase money and the vendor has in fact only a right to redeem it, the purchaser may
compel him to redeem the mortgage and to obtain a valid discharge, and, where necessary, also a
conveyance from the mortgagee; (d) where the vendor or lessor sues for specific performance of the contract
and the suit is dismissed on the ground of his want of title, or imperfect title, the defendant has a right to a
return of his deposit, interest and costs on the interest, if any, of the vendor or lessor in the property which is
the subject matter of the contract. Sub-section (2) of Section 13 lays down that the aforesaid provisions of
the sections shall also supply, as far as may be to contracts for or hire of movable property.
Contracts which cannot be specifically enforced

Section 14 lays down the contracts which cannot be specifically enforced. They are (a) A contract for the
non-performance of which compensation in money is an adequate relief; (b) A contract which runs into such
minute and numerous details that the Court cannot enforce specific performance of its material terms or
which is dependant upon the personal qualification or volition of the parties or a contract from its nature is
such that the Court cannot enforce specific performance; (c) A contract which is in its nature determinable;
(d) A contract, the performance of which involves the performance of a continuous duty which the court
cannot supervise. Sub-section (2) lays down that save as provided by the Arbitration Act, 1943, no contract
to refer present or future difference to arbitration shall be specifically enforced; but if any person who has
made such a contract (other than an arbitration agreement to which the provisions for the said Act apply) and
has refused to perform it, sues in respect of any subject which he has contracted to refer, the existence of
such a contract shall bar the suit.
Sub-section (3) lays down that notwithstanding anything contained in clause (a) or clause (c) or clause (d) of
Sub-section (1), the Court may enforce specific performance in the following cases: (a) where the suit is for
the enforcement of a contract—(i) to execute a mortage or furnish any other security for securiing the
repayment of any loan which the borrower is not willing to repay at once; provided that where only a part of
the loan has been advanced the vendor is willing to advance the remaining part of the loan in terms of the
contract; or (ii) to take up and pay for any debentures of a company; (b) where the suit is for (i) the execution
of a formal deed of partnership, the parties having commenced to carry on the business, or (ii) the purchase
of a share of a partner of a firm (c) where the suit is for the enforcement of a contract for the construction of
any building or the execution of any other work on land provided that the following conditions are fulfilled,
namely, (i) the building or other work is described in the contract in terms sufficiently precise to enable the
Court to determine the exact nature of the building or work; (ii) the plaintiff has a substantial interest in the
performance of the contract and the interest is of such a nature that compensation in money for non-
performance of the contract is not an adequate relief; and (iii) the defendant has, in pursuance of the
contract, obtained possession of the land on which the building is to be constructed or other work is to be
executed.
Illustrations
A contracts to sell and B contracts to buy, one lakh of rupees in the four per cent Central Government loan;
the contract may be specifically performed.
A contracts to render personal service to B or A contracts to marry B or A contracts to employ B on personal

service or A, an author, contracts with B, a publisher to complete a literary work. B cannot enforce specific
performance of these contracts. Not only contract of personal service, but any contract requiring personal
skill, knowledge or volition of the parties, for example, to marry, to paint a picture, to complete a literary work
or to sing or act at a theatre will not be specifically enforced as such contracts would require a constant and
general superintendence as cannot be conveniently undertaken by a Court of Justice.
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A and B contract to become partners, the contract is not specifying the duration of the proposed partnership.
In such a case the contract cannot be specifically enforced since, either A and B might at once dissolve the
partnership (Scott v. Rayment (1868) L.R. 7 Eq. 112).
The Court will not decree specific performance of an agreement if it be of such a nature that better justice will
be done by leaving the parties to their remedy in damages (Wilson v. Northampton & Banbury Junction Rly.
Co. (1874) 9 C.H. App. 279).
The very foundation of specific performance of a contract is that an award for damages does not afford the
aggrieved party a complete remedy. If in the opinion of the Court damages will be an adequate remedy,
specific performance of the contract cannot be decreed (Ramji Patel v. Rao Kishore, (1929) P.C. 190).
In such a case pecuniary compensation is equated with the specific performance of the contract. It can be
decreed only when the remedy at law is not adequate or is defective. The court may come to the conclusion
that the ends of justice will be served better by awarding the damages instead of the specific performance of
the contract.
A Contract may be specifically enforced:

(a) If it is one for non-performance of which the mere payment of money would not be an adequate
relief; and
(b) the contract is otherwise, proper to be specifically enforced. Section 14(1)(b) provides three reasons
for refusing specific performance:
(i) When a contract runs into minute or numerous details; or
(ii) When a contract is dependent upon the personal qualification or volition of the parties; or
(iii) When the contract by nature is such that the Court cannot enforce, specific performance of its
material terms.
In the same way, contracts of personal service cannot be specifically enforced. These contracts are based
upon the personal relations of the parties. They require mutual trust and confidence of the parties. When the
contract is for personal service, it requires some skill or talent or of some intellectual pursuit, and in that case
a decree for its specific performance cannot be passed by the court, as it will never know if the decree has
been truthfully and fully executed. The Court will refuse specific performance of a contract if it is of such a
nature that the Court cannot enforce its specific performance.
Under Section 14(1)(c) contracts which are in their nature determinable cannot be specifically enforced.
The Court will not enforce a contract which is in its nature determinable by the defendant. Determinable
contract is such a contract where one of the parties can put an end to it. So even if a decree is passed, the
defendant by putting an end to the contract, will evade the decree. A and B contract to become partners in a
certain business, the contract not specifying the duration of the proposed partnership can not be specifically
performed, for if it were so performed, either A or B might at once dissolve the partnership.
Recovery of Possession of Movable and Immovable Property
Sections 5 to 8 deal with recovery of possession of property. Property may either be (i) immovable, or (ii)
movable. Sections 5 and 6 deal with recovery of possession of immovable property while Sections 7 and 8
deal with movable property.
Recovery of possession of specific immovable property

According to Section 5, a person, entitled to the possession of specific immovable property may recover the
same in the manner provided by the Code of Civil Procedure, 1908. The word ‘person’ includes any
company or association or body of individuals, whether incorporated or not. The action under Section 5
arises when claim is made on the basis of “title”.
RECOVERY OF POSSESSION OF DISPOSSESSED IMMOVABLE PROPERTY

The Act provides another relief under Section 6 for the recovery of possession of immovable property where
the claim is based merely on ‘possession’. Section 6 provides that if any person is dispossessed without his
consent, of immovable property otherwise than in due course of Law, he or any person claiming through him
may be suit recover possession thereof, notwithstanding any other title that may be set up in such a suit.
There are two restrictions; no suit under Section 6 shall be brought (i) after the expiry of 6 months from the
date of dispossession, or (ii) against the Government. Under Sub-section (3) no appeal or review is allowed
of any order of decree passed under this Section. Sub-section (4) allows a person to file a suit to establish
his title to such property and recover possession thereof.
The object of these provisions is to discourage people from taking the law into their own hands. The Sections
provide a speedy and summary remedy through a medium of Civil Court for restoration of possession to the
dispossed. Section 5 thus provides for a suit for ejectment on the basis of title and Section 6 gives a remedy
without establishing title provided the suit is brought within 6 months of the date of possession. The object of
Section 6 is to discourage forcible dispossession and to enable the person dispossessed to recover
possession by merely providing previous possession and wrongful dispossession without proving title
(Lachman v. Shambu Narain, ILR (1911) 33 ALL 174). A suit under Section 6 is maintainable between
landlords and tenants. Heirs are also entitled to sue for recovery of possession.
Recovery of specific movable property

A person is entitled to recover the possession of specific movable property in the manner provided by the
Code of Civil Procedure, 1908. (Section 7)
Explanation 1: A trustee may sue for possession of movable property of which he is a trustee. The term
‘trustee’ includes every person holding property in trust.
Explanation 2: A special or temporary right to the present possession of movable property is sufficient to
support a suit under this section.
Illustrations
(a) A bequeaths land to B for his life, with remainder to C. A dies, B enters on the land, but C, without
B’s consent, obtains possession of the title deeds, B may recover them from C.
(b) A pledges certain jewels to B to secure a loan. B disposes of them before he is entitled to do so. A,
without having paid or tendered the amount of the loan, sues B for possession of the jewels. The
suit should be dismissed, as A is not entitled to their possession, whatever right he may have to
secure their safe custody (See Donald v. Suckling (1866) L.R. 1 Q.B. 585).
(c) A receives a letter addressed to him by B. B gets back the letter without A’s consent. A has such a
property therein as entitles him to recover it from B (Oliver v. Oliver (1861) 11 C.B.N.S. 139).
(d) A deposits books and papers for safe custody with B. B losses them and C finds them, but refuses
to deliver them to B when demanded. B may recover them from C, subject to C’s right, if any, under
Section 168 of the Indian Contract Act, 1872.
538 EP-EBCL
(e) A, a warehouse-keeper, is charged with the delivery of certain goods to Z, which B takes out of A’s
possession. A may sue B for the goods.
An action in detinue would lie only for some specific article of movable property capable of being recovered
in specie and of being seized and delivered up to the winning party. Section 7 lays down that a person
entitled to the possession of specific movable property may recover the same in the manner prescribed by
the Civil Procedure Code. A trustee or a person having a special or a temporary right to the present
possession may also file a suit under this section.
Liability of person in possession, not as owner to deliver to persons entitled to immediate

possession
Section 8 lays down that any person having the possession or control of a particular article of movable
property of which he is not the owner, may be compelled specifically, to deliver it to the person entitled to its
immediate possession in any of the following four cases:
(a) When the thing claimed is held by the defendant as the agent or trustee of the plaintiff,
(b) when the compensation in money would not afford the plaintiff adequate relief for the loss of the
thing claimed,
(c) when it would be extremely difficult to ascertain the actual damage caused by its loss,
(d) when the possession of the thing claimed has been wrongfully transferred from the plaintiff.
Unless and until the contrary is proved, the Court shall, in respect of any article of movable property claimed
under clause (b) or (c) of this section presume that (i) compensation in money would not afford the plaintiff
adequate relief for the loss of the thing claimed or as the case may be, and (ii) it would be extremely difficult
to ascertain the actual damage caused by its loss.
Thus under this part of the Act, if a person, who has been dispossessed, does not bring a suit under Section
6 of the Specific Relief Act within 6 months, he may still bring a suit for recovery alleging any title to the
property. But in this case, the suit may be defeated by the defendant by proving a better title.
Illustrations
(a) A, proceeding to Europe, leaves his furniture in charge of B, as his agent during his absence. B,
without A’s authority, pledges the furniture to C, and C knowing that B had no right to pledge the
furniture, advertises it for sale. C may be compelled to deliver the furniture to ‘A’ for he holds it as
A’s trustee.
(b) Z has got possession of an idol belonging to A’s family, and of which A is the proper custodian. Z
may be compelled to deliver the idol to A.
(c) ‘A’ is entitled to a picture by a dead painter and a pair of rare China vases. B has possession of
them. The articles are of special character to bear an ascertainable market value. B may be
compelled to deliver them to A.
PERSONS AGAINST WHOM SPECIFIC PERFORMANCE AVAILABLE
Section 15 lays down the parties who can bring an action for specific performance.
According to Section 19, specific performance of a contract may be enforced against (a) either party thereto,
(b) any person claiming under him, by a title arising subsequently to the contract except a transferee for
value who has paid his money in good faith and without notice of the original contract, (c) any person
claiming under a title which though prior to the contract, and known to the plaintiff, might have been
displaced by the defendant, (d) when a company has entered into a contract and subsequently becomes
amalgamated with another company — the new company which arises out of the amalgamation, (e) when
the promoters of a company have before its incorporation entered into a contract, for the purpose of the
company and such contract is warranted by the terms of the incorporation of the company; provided that the
company has accepted the contract and communicated such acceptance to the other party to the contract.
Clauses (a) and (b) embody the principle that Court will enforce specific performance of a contract not only
against either party, thereto, but also against any person claiming under either of the parties, a title arising
subsequently to the contract, except a transferee for value who has paid money in good faith and without
notice of the original contract.
Examples to clause (c) are voluntary alienness, joint tenants claiming survivorship and remainder man.
PERSONS AGAINST WHOM SPECIFIC PERFORMANCE CANNOT BE ENFORCED
Under Section 16, specific performance of a contract cannot be enforced in favour of a person — (a) who
would not be entitled to recover compensation for its breach, or (b) who has became incapable of
performing, or violates any essential term of the contract that on his part remains to be performed, or acts in
fraud of the contract, or wilfully acts at variance with, or in subversion of, the relation intended to be
established by the contract, or (c) who fails to aver and prove that he has performed or has always been
ready and willing to perform the essential terms of the contract which are to be performed by him, other than
terms the performance of which has been prevented or waived by the defendant. The obligation imposed by
Section 16 of the Act is upon the Court not to grant specific performance to a plaintiff who has not met the
requirements of clause (a), (b) and (c) thereof.
Thus in a suit for specific performance the plaintiff should not only plead and prove the terms of the
agreement but should also plead and prove his readiness and willingness to perform his obligations under
the contract in terms of the contract.
To adjudge whether the plaintiff is ready and willing to perform his part of the contract, the court must take
into consideration the conduct of the plaintiff prior and subsequent to the filing of the suit along with other
attending circumstances. Right from the date of the execution till the date of the decree he must prove that
he is ready and has always been willing to perform his part of the contract. N.P. Thirgnanam v. Dr. R Jagan
Mohan Rao, AIR 1996 SC 116, (1995) 5 SCC 115.
The continuous readiness and willingness on the part of the plaintiff is a condition precedent to grant the
relief of specific performance. The circumstance is material and relevant and is required to be considered by
the Court while granting or refusing to grant the relief. If the plaintiff fails to either aver or prove the same he
must fail.
A Court may not, therefore, grant to a plaintiff who has failed to to prove that he has performed or has always
been ready and willing to perform his part of the agreement, the specific performance whereof he seeks (See
Ram Awadh v. Achhaibar Dubey, AIR 2000 SC 860).
The explanation states that for the purpose of clause (c), (i) where a contract involved the payment of
money, it is not essential for the plaintiff to actually tender to the defendant or to deposit in Court any money
except when so directed by the Court (ii) the plaintiff must aver performance of, or readiness and willingness
to perform, the contract according to its construction.
Section 17 sets out two more cases where specific performance cannot be enforced in favour of a vendor or
lessor. It states that a contract to sell or let any immovable property cannot be specifically enforced in favour of
vendor or lessor (a) who knowing himself not to have any title to the property, has contracted to sell or let the
property; (b) who, though he entered into the contract believing that he had a good title to the property, cannot
at the time fixed by the parties or by the Court for the completion of the sale or letting, give the purchaser or
lessee a title free from reasonable doubt sub-section (2) lays down that the provisions of Sub-section (1) shall
also apply as far as may be, to contracts for the sale or hire of movable property.
540 EP-EBCL
According to this Section, a contract to sell or hire property cannot be specifically enforced in favour of a
seller or lessor if he had no title to the property. A person who knows that he has no title to the property but
still enters into a contract with regard to that property, he cannot have the remedy of specific performance. It
is the duty of the vendor to make a reasonable, clear and marketable title about which there must not be any
rational doubt.
Illustration
A without C’s authority contracts to sell to B an estate which A knows to belong to C. A cannot enforce
specific performance of this contract even though C is willing to confirm it.
Non-enforcement except with variation
According to Section 18, where a plaintiff seeks specific performance of a contract in writing, to which the
defendant sets up a variation, the plaintiff cannot obtain the performance sought, except with the variation so
set up in the following cases, namely: (a) where by fraud, mistake of fact or misrepresentation, the written
contract of which performance is sought is in its terms or effect different from what the parties agreed to, or
does not contain all the terms agreed to between the parties on the basis of which the defendant entered into
the contract; (b) where the object of the parties was to produce a certain legal result which the contract as
framed is not calculated to produce, (c) where the parties have subsequently to the execution of the contract,
varied its terms.
Illustration
A contracts in writing to let a house to B for a certain term, at the rent of Rs. 100/- per month, putting it first
into tenantable repair. The house turns out to be not worth repairing. So with B’s consent, A pulls it down and
erects a new house in its place. B contracting orally to pay rent at Rs. 120/- per month. B then sues to
enforce specific performance of the contract in writing. He cannot enforce it except with the variations made
by the subsequent oral contract.
DISCRETION OF THE COURT
Sub-section (1) of Section 20 lays down that the jurisdiction to decree specific performance is discretionary,
and the Court is not bound to grant such relief merely because it is lawful to do so, but the discretion of the
Court is not arbitrary but based on sound and reasonable grounds guided by judicial principles and capable
of correction by a Court of appeal. Sub-section (2) lays down that the following are cases in which the Court
may properly exercise discretion not to decree specific performance —
Explanation 1 appended to the Section states that mere inadequacy of consideration, or the more fact that
the contract is onerous to the defendant or improvident in its nature, shall not be deemed to constitute an
unfair advantage within the meaning of clause (a) or hardship within the meaning of clause (b) Explanation 2
to the Section says that the question whether the performance of a contract would involve hardship on the
defendant within the meaning of clause (b) shall, except in cases where the hardship has resulted from any
act of the plaintiff subsequent to the contract, be determined with reference to the circumstances existing at
the time of the contract.
Sub-section (3) lays down that Court may properly exercise discretion to decree specific performance in any
case where the plaintiff has done substantial acts or suffered losses in consequences of a contract capable
of specific performance. Sub-section (4) says that the court shall not refuse to any party specific performance
of a contract merely on the ground that the contract is not enforceable at the instance of the other party.
Specific performance is a discretionary remedy. The Court is not bound to decree specific performance
merely because it is lawful to do so. Courts can take into consideration the conduct of the parties and the
circumstances attending its execution and may exercise a discretion in granting or withholding a decree for
specific performance (Jethalal v. Bachu, 47 Bom. 46). However, this discretion is not an arbitrary discretion
but one governed by sound principles of equity. It has been held that the court is not bound to grant relief of
specific performance even if it is lawful to do so. [Yellapa Sastri v. Gunda Shankara, AIR 2010 (NOC) 731
A.P. See also AIR 2008 SC 1786].
Illustration
In Dennev-light (1857) 8 D M & G 774, the Court refused specific performance against a buyer where the
land contracted to be purchased was wholly surrounded by land belonging to others over which there was no
right of way.
It is to be noted that the word ‘mere’ has to be given due weight. Specific performance may be refused where
inadequacy of consideration is coupled with some other factor not necessarily amounting to fraud, e.g.
mistake, or surprise, or unfair advantage taken by the plaintiff of his superior knowledge or bargaining
position even though the circumstances do not justify rescission of the contract.
The hardship to be considered is at the time of the contract, unless the hardship has been brought on by the
action of the plaintiff. Mere rise in price of the property agreed to be sold is not a ground for refusing a
discretionary relief in favour of the purchaser. What has to be considered is the fairness of the contract at the
time it was made and the subsequent rise in price is not a matter to be taken into consideration.
Court’s power to award damages in certain cases

Under Section 21 of the Specific Relief Act, the Court is empowered to award compensation in certain cases.
Sub-section (1) states that in a suit for specific performance of a contract, the plaintiff may also claim
compensation for its breach, either in addition to, or in substitution of such performance, Sub-section (2)
states that if, in any suit the Court decides that specific performance ought not to be granted but that there is
a contract between the parties which has been broken by the defendant and that the plaintiff is entitled to
compensation for that breach, it shall award him such compensation accordingly. Sub-section 3 lays down
that if, in any such suit the Court decides that specific performance ought to be granted, but that it is not
sufficient to satisfy the justice of the case, and that some compensation for breach of the contract should
also be made to the plaintiff, it shall award him such compensation accordingly. Sub-section (4) states that in
determining the amount of any compensation awarded under this section, the Court shall be guided by the
principles specified in Section 73 of the Indian Contract Act, 1872. Sub-section 5 lays down that no
compensation shall be awarded under this Section unless the plaintiff has claimed such compensation in his
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plaint provided that where the plaintiff has not claimed any such compensation in the plaint, the Court shall at
any stage at the proceeding, allow him to amend the plaint on such terms as may be just for including a
claim for such compensation. Even if the contract has become incapable of specific performance that does
not preclude the Court from exercising the jurisdiction conferred by this section.
The conditions according to which damages may be awarded by the Court in addition to specific
performance are:
(i) the Court decides that specific performance ought to be granted but,
(ii) the justice of the case requires that not only specific performance but also some compensation for
the breach of the contract should also be given to the plaintiff.
In a suit for specific performance, the plaintiff may ask for damages in the alternative or in addition
to specific performance of the contract. The Court’s power to award damages in a suit for specific
performance is laid down in Section 21.
The circumstances in which a court would award damages in lieu of specific performance:
(a) Specific performance could have been granted but in the circumstances of the case the Court in its
discretion considers that it would be better to award damages instead of specific performance.
(b) Though specific performance is refused, plaintiff is entitled to compensation for breach of the
contract.
(c) If the circumstances are such that specific performance would not be granted; for example, where
the plaintiff has disentitled himself to the specific performance, damages cannot be awarded under
Section 21 in lieu of specific performance.
Section 22 gives power to the Court to grant relief for possession, partitions, refund of earnest money. Under
Section 22 any person, suing for the specific performance of a contract for the transfer of immovable
property may, in an appropriate case ask for (a) possession or partition and separate possession, of the
property in addition to any such performance; or (b) any other relief to which he may be entitled in case his
claim for specific performance is refused.
The power of the Court to grant relief under clause (b) shall be without prejudice to its power to award
compensation under Section 21.
Illustrations
(a) A conveys land to B, who bequeaths it to C and dies. Thereupon D gets possession of the land and
produces a forged instrument stating that the conveyance was made to B in trust for him. C may obtain the
cancellation of the forged instrument.
(b) A, representing that the tenants on his land were all at will, sells it to B, and conveys it to him by an
instrument dated the 1st January 1877. Soon after that day, A fraudulently grants to C a lease of part of the
land, and procures the lease dated the 1st October, 1876 to be registered under the Indian Registration Act.
B may obtain the cancellation of this lease.
On such cancellation, the Court may require the party to whom such relief is granted to restore as far as may
be any benefit which he may have received from the other party and to make any compensation to him which
justice may require.
In a case defendant and plaintiff were real brothers residing jointly in a house. The defendant executed
agreement to sell the property of his share in favour of plaintiff. Subsequently he sold the same property to
another purchaser. The subsequent purchaser had no knowledge about the earlier agreement. It was held
that he is the bona-fide purchaser of the property. The plaintiff can recover back earnest money paid by him
to defendant (Jagtar Singh v. Gurmit Singh, AIR 2006 P&H 62).
Section 23 lays down that even if the parties have agreed for liquidated damages, in the contract itself,
specific performance of that contract may be decreed by the Court in proper cases but in that case the
payment of the sum named in the contract will not be decreed.
Section 24 imposes a bar on suit for compensation for breach of a contract after dismissal of the suit for
specific performance.
RECTIFICATION OF INSTRUMENTS
Section 26 of the Specific Relief Act, 1963 contains the law as to rectification of instruments.
Rectification means correction of an error in an instrument in order to give effect to the real intention of the
parties. Where a contract reduced into writing in pursuance of a previous agreement, fails to express the real
intention of the parties, the court will rectify the instrument in accordance with their true intention. Here, there
must be in existence as between the parties, a complete and perfectly unobjectionable contract; but the
writing designed to embody it, either from fraud or mutual mistake, is incorrect or imperfect and the relief
sought is to rectify the writing so as to bring it into confirmity with the true intention. In such a case, if such
instrument is enforced, one party will suffer and if it is rescinded altogether both the parties will suffer but if it
is rectified and enforced neither party will suffer. The principle on which the courts act in correcting
instruments is that the parties are to be placed in the same position as that in which they would have stood if
no error had been committed (Sudha Singh v. Munshi Ram, A.I.R. 1927 Cal. 605). There must have been a
complete agreement prior to the instrument. It should be in writing and there must be clear evidence of
mutual mistake or of fraud.
In order to obtain rectificaion the conditions mentioned in Section 26 must be present. Thus:
(i) Rectification would be granted where, though there was a consensus between the parties as to the
contract through fraud of one of the parties, the instrument did not correctly express the real
intention.
(ii) It will also be granted, at the instance of third party, where both the parties are equally innocent, but
owing to a common mistake, the instrument does not express their intention.
(iii) Sub-section (2) makes it clear that rectification would not be allowed so as to prejudice rights
acquired by third party in good faith and for value.
For example, A intending to sell to B his house and one of three godowns adjacent to it, executes a
conveyance prepared by B in which through B’s fraud, all three godowns are included. Of the two
godowns which were fraudulently included, B gives one to C and let the other to D for a rent, neither
C nor D having any knowledge of the fraud. The conveyance may, as against B and C, be rectified
so as to exclude from it the godown given to C, but it cannot be rectified so as to affect D’s lease.
(iv) The only limitation placed on the Courts discretion is that the rectification can be done without
prejudice to the rights acquired by third persons in good faith and for value.
RESCISSION OF CONTRACTS
Section 27 deals with Rescission of Contracts. “Rescission” means putting an end to a contract which is still
operative and making it null and void ab initio. It does not apply to void contracts. Section 27 states the
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principle upon which rescission can be ordered. A person suing for rescission cannot, in the alternative sue
for specific performance but a person suing for specific performance can sue for rescission. Sub-section (1)
lays down that any person interested in a contract may sue to have it rescinded, and such rescission may be
adjudged by the Court in any of the following cases, namely – (a) where the contract is voidable or
terminable by the plaintiff; (b) where the contract is unlawful for causes not apparent on its face and the
defendant is more to blame than the plaintiff. Sub-section (2) lays down that notwithstanding anything
contained in Sub-section (1), the Court may refuse to rescind the contract – (a) where the plaintiff has
expressly or impliedly ratified the contract; or (b) where, owing to the change of circumstances which has
taken place since the making of the contract (not being due to any act of the defendant himself), the parties
cannot be substantially restored to the position in which they stood when the contract was made; or (c)
where third-parties have, during the subsistence of the contract, acquired rights in good faith without notice
and for value; or (d) where only a part of the contract is sought to be rescinded and such part is not
severable from the rest of the contract. The explanation provides that in this Section, “contract” in relation to
the territories to which the Transfer of Property Act, 1882, does not extend, means a contract in writing.
“This specie of specific relief is the reverse of specific performance. In one case the relief is granted by
enforcing the performance of a contract which binds the parties, and the other by discharging him when it is
not just to bind him” (Banerjee). So the equitable relief by way of rescission is exactly opposite of specific
performance. Here, the contract is put to an end and is made null and void where by the contractual
obligations also come to an end. Section 27 provides ground to the aggrieved party to rescind a contract
without obtaining consent of the other party.
Under clause (a) where a contract is voidable or terminable by the plaintiff, he may rescind it. The contract
may become voidable or terminable due to fraud, undue influence, misrepresentation or coercion.
Any person interested in a contract may sue to have it rescinded. Hence a suit may be brought by a third
party whose interests are affected by the contract.
In case of a rescission of a contract, the Court may, in its discretion, require the party to whom such relief is
granted to make any compensation to the other party. The main object of this relief is to put both the parties
in their original positions. If a plaintiff fails to get specific performance of a contract in writing, he may get it
rescinded and delivered up to be cancelled.
Doctrine of part performance

The doctrine of part performance has been applied in India to the contracts of transfer of immovable property
which though required to be registered have not been registered. The doctrine has been given statutory
recognition in 1929 adding two new sections to Section 53A of the Transfer of Property Act and Section 27A
to the Specific Relief Act, and a proviso to Section 49 of the Indian Registration Act.
CANCELLATION OF INSTRUMENTS
Sub-section (1) of Section 31 provides that any person against whom a written instrument is void or voidable,
and who has reasonable apprehension that such instrument, if left outstanding may cause him serious injury,
may sue to have it adjudged void or voidable, and the Court may in its discretion, so adjudge it and order it to
be delivered up and cancelled. Sub-section (2) lays down that if the instrument has been registered under
the Indian Registration Act, 1908, the Court shall also send a copy of its decree to the officer in whose office
the instrument has been so registered; and such officer shall note on the copy of the instrument contained in
his books the fact of its cancellation.
The relief of cancellation of instruments is founded upon the administration of protective justice which is
technically known as “Quia time”. It is based upon the administration of protective justice for fear that the
instrument may be vexatiously, or injuriously used by the defendant against the plaintiff when the evidence to
impeach it may be lost or that it may throw a cloud of suspicion over the title or interest (Jekadula v. Bai Jini,
39 B T R.,1072).
Relief of cancellation under Section 31 would be available when (i) an instrument is void or voidable against
the plaintiff; (ii) where the plaintiff may apprehend serious injury if the instrument is left outstanding and (iii)
where it is proper under the circumstances of the case to grant the relief.
Illustrations
(a) A, the owner of a ship, by fraudulently representing her to be seaworthy, induces B, an underwriter, to
insure her. B may obtain the cancellation of the policy.
(b) A agrees to sell and deliver a ship to B, to be paid for by B’s acceptance of four bills of exchange, for
sums amounting to Rs. 30,000, to be drawn by A on B. The bills are drawn and accepted, but the ship is not
delivered according to the agreement. A sues B on one of the bills. B may obtain the cancellation of all the
bills (Anglo Danubian Co. v. Rogerson (1867) L.R. 4 Eq. 3).
Section 32 lays down that where an instrument is evidence of different rights or different obligations, the
Court may, in proper case, cancel it in part and allow it to stand for the residue. The Court is not bound to
cancel the whole of the instrument but may, in its discretion, when necessary, cancel it in part and allow rest
of it to stand.
A executes a deed of mortgage in favour of B. A gets back the deed from B by fraud and endorses on it a
receipt for Rs. 1,200 purporting to be signed by B. B’s signature is forged. B is entitled to have the
endorsement cancelled, leaving the deed to stand in other respects (Ram Chandar v. Ganga Saran, (1917)
39 All. 103).
Section 33(1) provides that on adjudging the cancellation of an instrument, the Court may require the party to
whom such relief is granted, to restore, so far as may be, any benefit which he may have received from the
other party and to make any compensation to him which justice may require. The provisions of this Section
are almost similar to the provisions of Section 30 of this Act. Under both the Sections, the plaintiff must make
such compensation to the defendant as the justice may require.
DECLARATORY DECREES
A declaratory decree is a decree whereby any right as to any property or the legal character of a person is
judicially ascertained.
The Supreme Court in State of Madhya Pradesh v. Mangilal Sharma, 1997 (7) SCALE 743, held that a
declaratory decree merely declares the right of the decreehoder vis-a-vis the judgement debtor and does not
in terms direct the judgement debtor to do or refrain from doing any particular act or thing. It cannot be
executed as it only declares the rights of the decree-holder qua the judgement debtor and does not, in terms,
direct him to do or refrain from doing any particular act or thing.
Section 34 lays down that any person entitled to any legal character, or to any right as to any property, may
institute a suit against any person denying, or interested to deny, his title to such character or right, and the
Court may in its discretion make therein a declaration that he is so entitled and the plaintiff need not in such
suit ask for any further relief provided that no Court shall make any such declaration where the plaintiff, being
able to seek further relief than a mere declaration of title, omits to do so. The explanation provides that a
trustee of property is a “person interested to deny” a title adverse to the title of someone who is not in
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existence, and for whom, if in existence, he would be a trustee.
The object of declaratory decree is to remove doubt by having legal status of any rights declared by the
Court, and to perpetuate and strengthen testimony regarding title of the plaintiff and protect it from adverse
attacks. One of the objects of the legislature was to allow the right to enjoy the property rightfully belonging to
the plaintiff. In case of declaratory decree, neither specific performance nor any compensation is awarded
but only a declaration of the rights of the parties is made without any consequential relief being granted. The
declaration does not confer any new rights upon the plaintiff but it merely declares what he had before. It
only clears the mist that has gathered round the plaintiff’s title or status. The Court is being asked to put an
end to the dispute and uncertainty by determining the legal character in issue. By that way the property may
be put to better use, enjoyment and improvement. To maintain a suit under this Section following conditions
must be fulfilled:
(a) the plaintiff must be a person entitled to any legal character or to any right as to any property;
(b) the defendant must be a person denying or interested to deny the plaintiff’s title to such legal
character or, right;
(c) The declaration issued for must be a declaration that the plaintiff is entitled to a legal character or to
a right to property; and
(d) where the plaintiff is able to seek further relief than a mere declaration he must seek such relief.
Illustration
A is properly in possession of certain lands. The inhabitants of a neighbouring village claim a right of way
across the land. A may use for a declaration that they are not entitled to the right so claimed.
The relief by way of declaration is purely discretionary. Instances of legal characters are —
(1) Divorce on the ground of impotency
(2) Legal character by marriage
(3) Legitimacy or illegitimacy
(4) Status of an adopted son
(5) Priest of temple
Effect of Declaration
Section 35 lays down that a declaration is binding only on the parties to the suit, persons claiming through
them respectively, and where any of the parties are trustees, on the persons for whom, if in existence at the
date of the declaration, such parties would be trustees.
Such a declaration is not judgement in rem and as such it cannot bind strangers.
Illustration
A, a Hindu, in a suit to which B, his alleged wife is the defendant’s seeks a declaration that his marriage was
duly solemnised and prays for an order of restitution of conjugal rights. The Court makes the declaration and
order of restitution of conjugal rights. C, a third-party claiming that B is his wife, sues A for the recovery of B.
The declaration made in the former suit is not binding upon C.
PREVENTIVE RELIEFS
Part III of the Specific Relief Act, 1963 grants specific relief called Preventive Relief i.e., preventing a party
from doing that which he is under an obligation not to do. Preventive relief is granted at the discretion of the
court by way of an injunction.
An injunction is a specific order of the Court forbidding the commission of a wrong threatened or the
continuance of a wrongful course of action already begun, or in some cases (when it is called a ‘mandatory
injunction’) commanding active restitution of the former state of things.
Lord Halsbury defines injunction as “a judicial process whereby a party is ordered to refrain from doing or to
do a particular act or thing”.
The main difference between an injunction and specific performance is that the remedy in case of an
injunction is generally directed to prevent the violation of a negative act and therefore deals not only with
contracts but also with torts and many other subjects of purely equitable one, whereas specific performance
is directed to compelling performance of an active duty.
It is known as a “judicial process by which one, who has invaded or is threatening to invade the rights (legal
or equitable) of another is restrained from continuing or commencing such wrongful act. Injunction is the
most ordinary form of preventive relief. For the effective administration of justice, this power to prevent and to
restrain is absolutely necessary.
Characteristics of an injunction
An injunction has three characteristic features;
If the wrongful act has already taken place, the injunction prevents its repetition. If it is merely threatened, the
threat is prevented from being executed.
Temporary and perpetual injunctions

Section 36 states that preventive relief is granted at the discretion of the Court by injunction, temporary or
perpetual.
The temporary injunctions are granted under Order 39 Rules 1-2 of the Civil Procedure Code while perpetual
injunctions are dealt within Section 38 of the Specific Relief Act.
The temporary injunction may be dissolved at any time under Civil Procedure Code by the defendant
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showing specific cause to the satisfaction of the Court against the order granting the injunction, or it
automatically terminate with the disposal of the suit. The general principles governing temporary and
permanent injunctions are mainly the same except that a temporary injunction is granted before the plaintiff
establishes his case at the trial.
Sub-section (1) of Section 37 lays down that temporary injunctions are such as are to continue until a
specified time, or until the further order of the Court and they may be granted at any stage of a suit, and are
regulated by the Code of Civil Procedure, 1908.
Sub-section (2) states that a perpetual injunction can only be granted by the decree made at the hearing and
upon the merits of the suit; the defendant is thereby perpetually enjoined from the assertion of right, or from
the commission of an act, which would be contrary to the rights of the Plaintiff. It may be pointed out that:
(i) While Section 37(1) of the Act gives the meaning of a perpetual injunction, Sections 37 to 62 lay
down the principles according to which the perpetual injunction would be granted.
(ii) The cases in which the perpetual injunction may be granted are of two classes. The object is to
prevent the breach of an obligation existing in favour of the applicant, but such obligation may either
arise out of a contract or otherwise. In case of contractual agreement principles governing specific
performance will apply and in other cases, the injunction would be granted if the plaintiff can show
that the defendant has a legal duty or obligation towards him and that by the non-performance of
such duty the right to enjoyment of property has been materially affected. Such cases are where the
defendant is trustee of the property of the plaintiff or where the injunction is necessary to prevent
multiplicity of judicial proceedings, etc.
Section 38 deals with granting of perpetual injunction. Sub-section (1) states that subject to the other
provisions contained in or referred to by this chapter, a perpetual injunction may be granted to the plaintiff to
prevent the breach of an obligation existing in his favour whether express or by implication.
Sub-section (2) provides that when any such obligation arises from contract, the Court shall be guided by the
rules and provisions contained in Chapter II, i.e., the chapter on specific performance of contracts. Sub-
section (3) lays down that when the defendant invades or threatens to invade the plaintiff’s right to, or
enjoyment of property, the Court may grant a perpetual injunction in the following cases, namely: (a) where
the defendant is a trustee of the property for the plaintiff; (b) where there exists no standard for ascertaining
the actual damage caused, or likely to be caused by the invasion; (c) where the invasion is such that
compensation in money would not afford adequate relief; (d) where the injunction is necessary to prevent a
multiplicity of judicial proceedings.
Difference between the remedies of specific performance and injunction

Specific performance is decreed to compel the performance of an active duty, while injunction is decreed to
prevent the violation of a negative duty. Normally, the former deals with contracts, while the latter with torts and
other subjects of equitable nature. If a contract is positive in its nature, it calls for the relief of specific
performance, on the other hand, if it is negative in its nature, it calls for relief of injunction.
The principle governing the award of injunction as a mode of enforcement of contracts is similar to that of
specific performance. This is clearly borne out by Section (38)2 of the Act. Thus, the enforcement of a
contract is governed by both specific relief and injunction. “The jurisdiction of equity to grant such injunction
is substantially coexistent with its jurisdiction to compel a specific performance”. But still their fields of
operation are separate from each other. While a promise to do is enforced by specific performance, a
promise to forbear is enforced by injunction. Section 41(e) further provides that contract which will not be
affirmatively enforced by a decree of specific performance, will not be negatively enforced by issuing an
injunction. The only exception to this rule is found in Section 42.
Mandatory injunction
Section 39 dealing with mandatory injunctions states that when to prevent the breach of an obligation, it is
necessary to compel the performance of certain acts which the Court is capable of enforcing, the Court may
in its discretion grant an injunction to prevent the breach complained of, and also to compel performance of
the requisite acts. For example, A builds a house with eaves projecting over B’s land, B may sue for an
injunction to pull down so much of the eaves as so projecting over his land.
According to Section 40, the plaintiff in a suit for perpetual injunction under Section 38 or mandatory
injunction under Section 39, may claim damages either in addition to, or in substitution for such injunction
and the Court, may, if it thinks fit, award such damages.
Injunction when refused

Section 41 gives a list of cases in which a perpetual injunction cannot be granted. It says that an injunction
cannot be granted —
(a) to restrain any person from prosecuting a judicial proceeding pending at the institution of the suit in
which the injunction is sought, unless such restraint is necessary to prevent a multiplicity of
proceedings;
(b) to restrain any person from instituting or prosecuting any proceeding in a Court not subordinate to
that from which the injunction is sought;
(c) to restrain any person from applying to any legislative body;
(d) to restrain any person from instituting or prosecuting any proceeding in a criminal matter;
(e) to prevent the breach of a contract the performance of which would not be specifically enforced;
(f) to prevent on the ground of nuisance, an act of which it is not reasonably clear that it will be
nuisance;
(g) to prevent a continuing breach in which the plaintiff has acquiesced;
(h) when equally efficacious relief can certainly be obtained by any other usual mode of proceeding
except in case of breach of trust;
(i) when the conduct of the plaintiff or his agents has been such as to disentitle him to the assistance
of the Court;
(j) when the plaintiff has no interest in the matter.
It may be noted that this relief also is a discretionary remedy. It may be refused even if the case is not
covered by Section 41.
Injunction to perform negative agreement

Section 42 provides that notwithstanding anything contained in clause (e) of Section 41, where a contract
comprises an affirmative agreement to do a certain act, coupled with negative agreement, express or
implied, not to do a certain act, the circumstance that the Court is unable to compel specific performance of
the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement,
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provided that the plaintiff has not failed to perform the contract so far as it is binding on him.
This Section is based upon an English case viz., Lumley v. Wagner (21) L.J. CH. 898. In this case Miss W, a
singer agreed to sing at L’s theatre for a certain period and not to sing anywhere else during that period.
Afterwards, she entered into a contract to sing at another theatre and refused to perform her contract with L.
The Court refused to enforce her positive agreement to sing at L’s theatre (by specific performance) but
granted an injunction restraining her from singing at any other theatre thereby preventing breach of the
negative part of the agreement though the positive part of it, being a contract for the personal service, could
not be specifically enforced.
Conditions necessary for the applicability of this Section are:

(1) The contract should comprise of two agreements, one affirmative and another negative.
(2) Both the agreements must be divisible.
(3) The negative agreement must relate to a specific act.
(4) The Court should be unable to compel specific performance of the affirmative agreement.
(5) The plaintiff must not have failed to perform the contract, so far as it is binding upon him.
A negative stipulation may be express or implied. An express negative stipulation in one where the negative
stipulation is put expressly. The Section does not say that every affirmative contract includes by necessary
implication a negative agreement to refrain from doing certain things. It is therefore a question of
interpretation in each case to find whether a particular contract can be said to have a negative stipulation,
express or implied, contained in it, e.g., the mere use of word “exclusively” does not imply a negative
stipulation to refrain from service of other people.
The provisions of this Section are based on the equitable principle that “he who seeks equity must do equity”.
The principle as laid down in Section 42 was followed in the cases of Burn Mcdonald (1907) 36 Cal 354;
Metropolitan Electric Supply v. Ginder, (1901) 2 Ch. 799; Subba Naidu v. Hari Badshah, (13 M.L.J. 13); and
Madras Rly Co. v. Rust, (1891) 14 Mad 18.
LESSON ROUND-UP
• Under the Specific Relief Act, 1963 only a party to the contract can get its specific performance. The
section gives the list of persons who can sue for specific performance of a contract. The general principle is
that in a suit for specific performance of a contract, all the parties to the contract should be parties to the
suit and no one else.
• The contracts which cannot be specifically enforced are a contract for the non-performance of which
compensation in money is an adequate relief; a contract which runs into such minute and numerous details
that the Court cannot enforce specific performance of its material terms or which is dependant upon the
personal qualification or volition of the parties or a contract from its nature is such that the Court cannot
enforce specific performance.
• The contracts which cannot be specifically enforced are a contract which is in its nature determinable; a
contract, the performance of which involves the performance of a continuous duty which the court cannot
supervise.
• The very foundation of specific performance of a contract is that an award for damages does not afford the
aggrieved party a complete remedy. If in the opinion of the Court damages will be an adequate remedy,
specific performance of the contract cannot be decreed.
• An injunction cannot be granted under Specific Relief Act to restrain any person from prosecuting a judicial
proceeding pending at the institution of the suit in which the injunction is sought, unless such restraint is
necessary to prevent a multiplicity of proceedings; to restrain any person from instituting or prosecuting any
proceeding in a Court not subordinate to that from which the injunction is sought.
SELF TEST QUESTIONS

evaluation)
1. Explain whether specific performance of a part of contract is allowed.
2. State the exception to a specific performance.
3. Who May Sue for Specific Performance?
4. Discuss recovery of possession of property under the Specific Relief Act, 1963.
5. State the persons against whom Specific Performance Available.
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Lesson 22
Sale of Goods Act, 1930
LESSON OUTLINE
LEARNING OBJECTIVES
• Learning objectives Sale of Goods Act is one of very old mercantile law.
Sale of Goods is one of the special types of
• Essentials of a Contract of Sale
contract. Initially, this was part of Indian Contract
• Sale Distinguished from Agreement to Act itself. Later, this was deleted in Contract Act,
Sell and separate Sale of Goods Act was passed in
• Bailment 1930.
• Contract for Work and Labour and Hire- Sale of Goods Act is complimentary to Contract Act.
Purchase Basic provisions of Contract Act apply to contract of
Sale of Goods Act also. Basic requirements of
• Conditions and Warranties contract i.e. Offer and acceptance, legally
• Doctrine of Caveat Emptor enforceable agreement, mutual consent, parties
competent to contract; free consent, lawful object,
• Performance of the Contract of Sale
consideration etc. apply to contract of Sale of Goods
• Lesson Round up Act also.
• Self-test Questions This lesson is to be taught after the students have

been made familiar with the general principles of
contract in which the emphasis is on understanding
and appreciating the basic essentials of a valid
contract and on the existence of contractual
relationship in various instances. In today’s era,
the need for awareness of buyers and sellers
rights is of utmost importance. In the backdrop of
this and Contract Act, Sales of Goods Act is taught
here to let the buyers beware and sellers to comply
the requisite law in better and spirit.
Every sale has five basic obstacles: no need, no money, no hurry, no desire, no trust.
Zig Ziglar
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The law relating to sale of goods is contained in the Sale of Goods Act, 1930. It has to be read as part of the
Indian Contract Act, 1872 [Sections 2(5) and (3)].
Contract of Sale of Goods

According to Section 4, a contract of sale of goods is a contract whereby the seller:
(i) transfers or agrees to transfer the property in goods,
(ii) to the buyer,
(iii) for a money consideration called the price.
It shows that the expression “contract of sale” includes both a sale where the seller transfers the ownership
of the goods to the buyer, and an agreement to sell where the ownership of goods is to be transferred at a
future time or subject to some conditions to be fulfilled later on.
The following are thus the essentials of a contract of sale of goods:
(i) Bilateral contract: It is a bilateral contract because the property in goods has to pass from one party
to another. A person cannot buy the goods himself.
(ii) Transfer of property: The object of a contract of sale must be the transfer of property (meaning
ownership) in goods from one person to another.
(iii) Goods: The subject matter must be some goods.
(iv) Price or money consideration: The goods must be sold for some price, where the goods are
exchanged for goods it is barter, not sale.
(v) All essential elements of a valid contract must be present in a contract of sale.
Distinction between Sale and Agreement to Sell

The following points will bring out the distinction between sale and an agreement to sell:
(a) In a sale, the property in the goods sold passes to the buyer at the time of contract so that he
Lesson 22 Sale of Goods Act, 1930 555
becomes the owner of the goods. In an agreement to sell, the ownership does not pass to the buyer
at the time of the contract, but it passes only when it becomes sale on the expiry of certain time or
the fulfilment of some conditions subject to which the property in the goods is to be transferred.
(b) An agreement to sell is an executory contract, a sale is an executed contract.
(c) An agreement to sell is a contract pure and simple, but a sale is contract plus conveyance.
(d) If there is an agreement to sell and the goods are destroyed by accident, the loss falls on the seller.
In a sale, the loss falls on the buyer, even though the goods are with the seller.
(e) If there is an agreement to sell and the seller commits a breach, the buyer has only a personal
remedy against the seller, namely, a claim for damages. But if there has been a sale, and the seller
commits a breach by refusing to deliver the goods, the buyer has not only a personal remedy
against him but also the other remedies which an owner has in respect of goods themselves such
as a suit for conversion or detenue, etc.
Sale and Bailment

A “bailment” is a transaction under which goods are delivered by one person (the bailor) to another (the
bailee) for some purpose, upon a contract that they be returned or disposed of as directed after the purpose
is accomplished (Section 148 of the Indian Contact Act, 1872).
The property in the goods is not intended to and does not pass on delivery though it may sometimes be the
intention of the parties that it should pass in due course. But where goods are delivered to another on terms
which indicate that the property is to pass at once the contract must be one of sale and not bailment.
Sale and Contract for Work and Labour

The distinction between a “sale” and a “contract for work and labour” becomes important when question of
passing of property arises for consideration.
However, these two are difficult to distinguish. The test generally applied is that if as a result of the contract,
property in an article is transferred to one who had no property therein previously for a money consideration,
it is a sale, where it is otherwise it is a contract for work and labour.
Sale and Hire Purchase Agreement

“Sale”, is a contract by which property in goods passes from the seller to the buyer for a price.
A “hire purchase agreement” is basically a contract of hire, but in addition, it gives the hirer an option to
purchase the goods at the end of the hiring period. Consequently, until the final payment, the hirer is merely
a bailee of goods and ownership remains vested in the bailor. Under such a contract, the owner of goods
delivers the goods to person who agrees to pay certain stipulated periodical payments as hire charges.
Though the possession is with the hirer, the ownership of the goods remains with the original owner.
The essence of hire purchase agreement is that there is no agreement to buy, but only an option is given to
the hirer to buy by paying all the instalments or put an end to the hiring and return the goods to the owner, at
any time before the exercise of the option.
Since the hirer does not become owner of the goods until he has exercised his option to buy, he cannot pass
any title even to an innocent and bona fide purchaser. The transaction of hire-purchase protects the owner of
the goods against the insolvency of the buyer, for if the buyer becomes insolvent or fails to pay the
instalments, he can take back the goods as owner. And if the hirer declines to take delivery of the goods, the
remedy of the owner will be damages for non-hiring and not for rent for the period agreed.
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It is important to note the difference between a hire purchase agreement and mere payment of the price by
instalments because, the latter is a sale, only the payment of price is to be made by instalments.
The distinction between the two is very important because, in a hire-purchase agreement the risk of loss or
deterioration of the goods hired lies with the owner and the hirer will be absolved of any responsibility
therefor, if he has taken reasonable care to protect the same as a bailee. But it is otherwise in the case of a
sale where the price is to be paid in instalments.
Subject matter of Contract of Sale of Goods

Goods
The subject matter of the contract of sale is essentially goods. According to Section 2(7) of the Sale of
Goods Act, “goods” means every kind of movable property other than actionable claims and money and
includes stock and shares, growing crops, grass and things attached to or forming part of the land which are
agreed to be severed before sale or under the contract of sale.
Actionable claims and money are not goods and cannot be brought and sold under this Act. Money means
current money, i.e., the recognised currency in circulation in the country, but not old and rare coins which
may be treated as goods. An actionable claim is what a person cannot make a present use of or enjoy, but
what can be recovered by him by means of a suit or an action. Thus, a debt due to a man from another is an
actionable claim and cannot be sold as goods, although it can be assigned. Under the provisions of the
Transfer of Property Act, 1882, goodwill, trade marks, copyrights, patents are all goods, so is a ship. As
regards water, gas, electricity, it is doubtful whether they are goods (Rash Behari v. Emperor, (1936) 41
C.W.N. 225; M.B. Electric Supply Co. Ltd. v. State of Rajasthan, AIR (1973) Raj. 132).
Goods may be (a) existing, (b) future, or (c) contingent. The existing goods may be (i) specific or generic, (ii)
ascertained or unascertained.
Existing Goods
Existing goods are goods which are either owned or possessed by the seller at the time of the contract. Sale
of goods possessed but not owned by the seller would be by an agent or pledgee.
Existing goods are specific goods which are identified and agreed upon at the time of the contract of sale.
Ascertained goods are either specific goods at the time of the contract or are ascertained or identified to the
contract later on i.e. made specific.
Generic or unascertained goods are goods which are not specifically identified but are indicated by
description. If a merchant agrees to supply a radio set from his stock of radio sets, it is a contract of sale of
unascertained goods because it is not known which set will be delivered. As soon as a particular set is
separated or identified for delivery and the buyer has notice of it, the goods are ascertained and become
specific goods.
Future Goods
Future goods are goods to be manufactured or produced or acquired by the seller after the making of the
contract of sale. A agrees to sell all the mangoes which will be produced in his garden next season. This is
an agreement for the sale of future goods. [Section 2(6)]
Contingent Goods
Where there is a contract for the sale of goods, the acquisition of which by the seller depends upon a
contingency which may or may not happen—such goods are known as contingent goods. Contingent goods
fall in the class of future goods. A agrees to sell a certain TV set provided he is able to get it from its present
owner. This is an agreement to sell contingent goods. In such a case, if the contingency does not happen for
no fault of the seller, he will not be liable for damages.
Actual sale can take place only of specific goods and property in goods passes from the seller to buyer at the
time of the contract, provided the goods are in a deliverable state and the contract is unconditional.
There can be an agreement to sell only in respect of future or contingent goods.
Effect of Perishing of Goods
In a contract of sale of goods, the goods may perish before sale is complete. Such a stage may arise in the
following cases:
(i) Goods perishing before making a contract
Where in a contract of sale of specific goods, the goods without the knowledge of the seller have, at the time
of making the contract perished or become so damaged as no longer to answer to their description in the
contract, the contract is void. This is based on the rule that mutual mistake of fact essential to the contract
renders the contract void. (Section 7)
If the seller was aware of the destruction and still entered into the contract, he is estopped from disputing the
contract. Moreover, perishing of goods not only includes loss by theft but also where the goods have lost
their commercial value.
(ii) Goods perishing after agreement to sell
Where there is an agreement to sell specific goods, and subsequently the goods without any fault of any
party perish or are so damaged as no longer to answer to their description in the agreement before the risk
passes to the buyer, the agreement is thereby avoided. The provision applies only to sale of specific goods.
If the sale is of unascertained goods, the perishing of the whole quantity of such goods in the possession of
the seller will not relieve him of his obligation to deliver. (Section 8)
Price
No sale can take place without a price. Thus, if there is no valuable consideration to support a voluntary
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surrender of goods by the real owner to another person, the transaction is a gift, and is not governed by the
Sale of Goods Act. Therefore, price, which is money consideration for the sale of goods, constitutes the
essence for a contract of sale. It may be money actually paid or promised to be paid. If a consideration other
than money is to be given, it is not a sale.
Modes of Fixing Price (Sections 9 and 10)

The price may be fixed:
Where the contract states that the price is to be fixed by a third-party and such third-party fails to do so, the
contract is void. But if the buyer has already taken the benefit of the goods, he must pay a reasonable price
for them. If the third-party’s failure to fix the price is due to the fault of the seller or buyer, then that party is
liable for an action for damages.
Where nothing is said by the parties regarding price, the buyer must pay a reasonable price. What is a
reasonable price is a question of fact dependent upon the circumstances of each particular case. Generally,
the market price would be a reasonable price.
Conditions and Warranties (Sections 12-17)

The parties are at liberty to enter into a contract with any terms they please. As a rule, before a contract of
sale is concluded, certain statements are made by the parties to each other. The statement may amount to a
stipulation, forming part of the contract or a mere expression of opinion which is not part of the contract. If it
is a statement by the seller on the reliance of which the buyer makes the contract, it will amount to a
stipulation. If it is a mere commendation by the seller of his goods it does not amount to a stipulation and
does not give the right of action.
The stipulation may either be a condition or a warranty. Section 12 draws a clear distinction between a
condition and a warranty. Whether a stipulation is a condition or only a warranty is a matter of substance rather
than the form of the words used. A stipulation may be a condition though called a warranty and vice versa.
Conditions
If the stipulation forms the very basis of the contract or is essential to the main purpose of the contract, it is a
condition. The breach of the condition gives the aggrieved party a right to treat the contract as repudiated.
Thus, if the seller fails to fulfil a condition, the buyer may treat the contract as repudiated, refuse the goods
and, if he has already paid for them, recover the price. He can also claim damages for the breach of contract.
Warranties
If the stipulation is collateral to the main purpose of the contract, i.e., is a subsidiary promise, it is a warranty.
The effect of a breach of a warranty is that the aggrieved party cannot repudiate the contract but can only
claim damages. Thus, if the seller does not fulfil a warranty, the buyer must accept the goods and claim
damages for breach of warranty.
Section 11 states that the stipulation as to time of payment are not to be deemed conditions (and hence not
to be of the essence of a contract of sale) unless such an intention appears from the contract. Whether any
other stipulation as to time (e.g., time of delivery) is of the essence of the contract or not depends on the
terms of the contract.
When condition sinks to the level of warranty
In some cases a condition sinks or descends to the level of a warranty. The first two cases depend upon the
will of the buyer, but the third is compulsory and acts as estoppel against him.
(a) A condition will become a warranty where the buyer waives the condition; or
(b) A condition will sink to the level of a warranty where the buyer treats the breach of condition as a
breach of warranty; or
(c) Where the contract is indivisible and the buyer has accepted the goods or part thereof, the breach
of condition can only be treated as breach of warranty. The buyer can only claim damages and
cannot reject the goods or treat the contract as repudiated.
Sometimes the seller may be excused by law from fulfilling any condition or warranty and the buyer will not
then have a remedy in damages.
Implied Warranties/Conditions
Even where no definite representations have been made, the law implies certain representations as having
been made which may be warranties or conditions. An express warranty or condition does not negative an
implied warranty or condition unless inconsistent therewith.
There are two implied warranties:
Implied Warranties [Section 14(b), 14(c) and 16(3)]

(a) Implied warranty of quiet possession: If the circumstances of the contract are such as there is an
implied warranty that the buyer shall have and enjoy quiet possession of the goods.
(b) Implied warranty against encumbrances: There is a further warranty that the goods are not subject
to any right in favour of a third-party, or the buyer’s possession shall not be disturbed by reason of
the existence of encumbrances. This means that if the buyer is required to, and does discharge the
amount of the encumbrance, there is breach of warranty, and he is entitled to claim damages from
the seller.
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Implied Conditions [Sections 14(a), 15(1), (2), 16(1) and Proviso 16(2), and Proviso 16(3) and
12(b) and 12(c)].
Different implied conditions apply under different types of contracts of sale of goods, such as sale by
description, or sale by sample, or sale by description as well as sample. The condition, as to title to goods
applies to all types of contracts, subject to that there is apparently no other intention.
Implied Conditions as to title

There is an implied condition that the seller, in an actual sale, has the right to sell the goods, and, in an
agreement to sell, he will have a right to sell the goods at the time when property is to pass. As a result, if the
title of the seller turns out to be defective, the buyer is entitled to reject the goods and can recover the full price
paid by him.
In Rowland v. Divall (1923) 2 K.B. 500, ‘A’ had bought a second hand motor car from ‘B’ and paid for it. After
he had used it for six months, he was deprived of it because the seller had no title to it. It was held that ‘B’
had broken the condition as to title and ‘A’ was therefore, entitled to recover the purchase money from ‘B’
Implied conditions under a sale by description

In a sale by description there are the following implied conditions:
(a) Goods must correspond with description: It is provided under Section 15 of the Act that when there is
a sale of goods by description, there is an implied condition that the goods shall correspond with description.
In a sale by description, the buyer relies for his information on the description of the goods given by the
seller, e.g. in the contract or in the preliminary negotiations.
Where ‘A’ buys goods which he has not seen, it must be sale by description, e.g., where he buys a ‘new Fiat
car’ from ‘B’ and the car is not new, he can reject the car.
Even if the buyer has seen the goods, the goods must be in accordance with the description (Beale v. Taylor
(1967) All E.R. 253).
(b) Goods must also be of merchantable quality: If they are bought by description from dealer of goods of
that description. [Section 16(2)]
Merchantable quality means that the goods must be such as would be acceptable to a reasonable person,
having regard to prevailing conditions. They are not merchantable if they have defects which make them unfit
for ordinary use, or are such that a reasonable person knowing of their condition would not buy them. ‘P’
bought black yarn from ‘D’ and, when delivered, found it damaged by the white ants. The condition of
merchantability was broken.
But, if the buyer has examined the goods, there is no implied condition as regards defects which such
examination ought to have revealed. If, however, examination by the buyer does not reveal the defect and he
approves and accepts the goods, but when put to work, the goods are found to be defective, there is a
breach of condition of merchantable quality.
The buyer is given a right to examine the goods before accepting them. But a mere opportunity without an
actual examination, however, cursory, would not suffice to deprive him of this right.
(c) Condition as to wholesomeness: The provisions, (i.e., eatables) supplied must not only answer the
description, but they must also be merchantable and wholesome or sound. ‘F’ bought milk from ‘A’ and the milk
contained typhoid germs. ‘F’s wife became infected and died. ‘A’ was liable for damages. Again, ‘C’ bought a
bun at ‘M’s bakery, and broke one of his teeth by biting on a stone present in the bun. ‘M’ was held liable.
(d) Condition as to quality or fitness for a particular purpose: Ordinarily, in a contract of sale, there is no
implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied.
But there is an implied condition that the goods are reasonably fit for the purpose for which they are required
if:
(i) the buyer expressly or by implication makes known to the seller the particular purpose for which the
goods are required, so as to show that he relies on the seller’s skill and judgement, and
(ii) the goods are of a description which it is in the course of the seller’s business to supply (whether he
is the manufacturer or producer or not). There is no such condition if the goods are bought under a
patent or trade name.
In Priest v. Last (1903) 2 K.B. 148, a hot water bottle was bought by the plaintiff, a draper, who could not be
expected to have special skill knowledge with regard to hot water bottles, from a chemist, who sold such
articles stating that the bottle will not stand boiling water but was intended to hold hot water. While being
used by the plaintiff’s wife, the bottle bursted and injured her. Held, the seller was responsible for damages
as the bottle was not fit for use as a hot water bottle.
In Grant v. Australian Knitting Mills (1936) 70 MLJ 513, ‘G’ a doctor purchased woollen underpants from ‘M’ a
retailer whose business was to sell goods of that description. After wearing the underpants, ‘G’ developed
some skin diseases. Held, the goods were not fit for their only use and ‘G’ was entitled to avoid the contract
and claim damages.
Implied conditions under a sale by sample (Section 17)

In a contract of sale by sample:
(a) there is an implied condition that the bulk shall correspond with the sample in quality;
(b) there is another implied condition that the buyer shall have a reasonable opportunity of comparing
the bulk with the sample;
(c) it is further an implied condition of merchantability, as regards latent or hidden defects in the goods
which would not be apparent on reasonable examination of the sample. “Worsted coating” quality
equal to sample was sold to tailors, the cloth was found to have a defect in the fixture rendering the
same unfit for stitching into coats. The seller was held liable even though the same defect existed in
the sample, which was examined.
Implied conditions in sale by sample as well as by description
In a sale by sample as well as by description, the goods supplied must correspond both with the samples as
well as with the description. Thus, in Nichol v. Godts (1854) 158 E.R. 426, there was a sale of “foreign
refined rape-oil having warranty only equal to sample”. The oil tendered was the same as the sample, but it
was not “foreign refined rape-oil” having a mixture of it and other oil. It was held that the seller was liable, and
the buyer could refuse to accept.
IMPLIED WARRANTIES
Implied warranties are those which the law presumes to have been incorporated in the contract of sale
inspite of the fact that the parties have not expressly included them in a contract of sale. Subject to the
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contract to the contrary, following are the implied warranties in a contract of sale:
(i) Warranty as to quiet possession: Section 14(b) of the Sale of Goods Act provides that there is an
implied warranty that the buyer shall have and enjoy quiet possession of goods. If the buyer’s
possession is disturbed by anyone having superior title than that of the seller, the buyer is entitled to
hold the seller liable for breach of warranty.
(ii) Warranty as to freedom from encumbrances: Section 14(c) states that in a contract of sale, there is
an implied warranty that the goods shall be free from any charge or encumbrance in favour of any
third party not declared or known to the buyer before or at the time when the contract is made. But if
the buyer is aware of any encumbrance on the goods at the time of entering into the contract, he will
not be entitled to any compensation from the seller for discharging the encumbrance.
(iii) Warranty to disclose dangerous nature of goods: If the goods are inherently dangerous or likely to
be dangerous and the buyer is ignorant of the danger, the seller must warn the buyer of the
probable danger.
(iv) Warranties implied by the custom or usage of trade: Section 16(3) provides that an implied warranty
or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade.
Doctrine of Caveat Emptor

The term “caveat emptor” is a Latin word which means “let the buyer beware”. This principle states that it is
for the buyer to satisfy himself that the goods which he is purchasing are of the quality which he requires. If
he buys goods for a particular purpose, he must satisfy himself that they are fit for that purpose. The doctrine
of caveat emptor is embodied in Section 16 of the Act which states that “subject to the provisions of this Act
and of any other law for the time being in force, there is no implied warranty or condition as to the quality or
fitness for any particular purpose of goods supplied under a contract of sale”. In simple words, it is not the
seller’s duty to give to the buyer the goods which are fit for a suitable purpose of the buyer. If he makes a
wrong selection, he cannot blame the seller if the goods turn out to be defective or do not serve his purpose.
The principle was applied in the case of Ward v. Hobbs, (1878) 4 A.C. 13, where certain pigs were sold by
auction and no warranty was given by seller in respect of any fault or error of description. The buyer paid the
price for healthy pigs. But they were ill and all but one died of typhoid fever. They also infected some of the
buyer’s own pigs. It was held that there was no implied condition or warranty that the pigs were of good
health. It was the buyer’s duty to satisfy himself regarding the health of the pigs.
Exceptions: Section 16 lays down the following exceptions to the doctrine of Caveat Emptor:
(1) Where the seller makes a false representation and the buyer relies on it.
(2) When the seller actively conceals a defect in the goods which is not visible on a reasonable
examination of the same.
(3) When the buyer, relying upon the skill and judgement of the seller, has expressly or impliedly
communicated to him the purpose for which the goods are required.
(4) Where goods are bought by description from a seller who deals in goods of that description.
Passing of Property or Transfer of Ownership (Sections 18-20)

The sole purpose of a sale is the transfer of ownership of goods from the seller to the buyer. It is important to
know the precise moment of time at which the property in the goods passes from the seller to the buyer for
the following reasons:
(a) The general rule is that risk follows the ownership, whether the delivery has been made or not. If the
goods are lost or damaged by accident or otherwise, then, subject to certain exceptions, the loss
falls on the owner of the goods at the time they are lost or damaged.
(b) When there is a danger of the goods being damaged by the action of third parties, it is generally the
owner who can take action.
(c) The rights of third parties may depend upon the passing of the property if the buyer resells the
goods to a third-party, the third-party will only obtain a good title if the property in the goods has
passed to the buyer before or at the time of the resale. Similarly, if the seller, in breach of his
contract with the buyer, attempts to sell the goods to a third party in the goods, has not passed to
the buyer, e.g., where there is only an agreement to sell.
(d) In case of insolvency of either the seller or the buyer, it is necessary to know whether the goods can
be taken over by the official assignee or the official receiver. It will depend upon whether the
property in the goods was with the party adjudged insolvent.
Thus in this context, ownership and possession are two distinct concepts and these two can at times remain
separately with two different persons.
Passing of property in specific goods

In a sale of specific or ascertained goods, the property in them passes to the buyer as and when the parties
intended to pass. The intention must be gathered from the terms of the contract, the conduct of the parties and
the circumstances of the case.
Unless a contrary intention appears, the following rules are applicable for ascertaining the intention of the
parties:
(a) Where there is an unconditional contract for the sale of specific goods in a deliverable state, the
property in the goods passes to the buyer when the contract is made. Deliverable state means such
a state that the buyer would be bound to take delivery of the goods. The fact that the time of
delivery or the time of payment is postponed does not prevent the property from passing at once.
(Section 20)
(b) Where there is a contract for the sale of specific goods not in a deliverable state, i.e., the seller has
to do something to the goods to put them in a deliverable state, the property does not pass until that
thing is done and the buyer has notice of it. (Section 21)
A certain quantity of oil was brought. The oil was to be filled into casks by the seller and then taken
away by the buyer. Some casks were filled in the presence of buyer but, before the remainder could
be filled, a fire broke out and the entire quantity of oil was destroyed, Held, the buyer must bear the
loss of the oil which was put into the casks (i.e., put in deliverable state) and the seller must bear
the loss of the remainder (Rugg v. Minett (1809) 11 East 210).
(c) Where there is a sale of specific goods in a deliverable state, but the seller is bound to weigh,
measure, test or do something with reference to the goods for the purpose of ascertaining the price,
the property to the goods for the purpose of ascertaining the price, does not pass until such act or
thing is done and the buyer has notice of it. (Section 22)
(d) When goods are delivered to the buyer “on approval” or “on sale of return” or other similar terms the
property therein passes to the buyer:
(i) when he signifies his approval or acceptance to the seller, or does any other act adopting the
transaction;
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(ii) if he does not signify his approval or acceptance but retains the goods without giving notice of
rejection, in such a case—(a) if a time has been fixed for the return of the goods, on the
expiration of such time; and (b) if no time has been fixed, on the expiration of a reasonable time.
Ownership in unascertained goods

The property in unascertained or future goods does not pass until the goods are ascertained.
Unascertained goods are goods defined by description only, for example, 100 quintals of wheat; and not
goods identified and agreed upon when the contract is made.
Unless a different intention appears, the following rules are applicable for ascertaining the intention of the
parties in regard to passing of property in respect of such goods:
(a) The property in unascertained or future goods sold by description passes to the buyer when goods
of that description and in a deliverable state are unconditionally appropriated to the contract, either
by the seller with the assent of the buyer or by the buyer with the assent of the seller. Such assent
may be expressed or implied and may be given either before or after the appropriation is made.
(Section 23)
(b) If there is a sale of a quantity of goods out of a large quantity, for example, 50 quintals of rice out of
a heap in B’s godown, the property will pass on the appropriation of the specified quantity by one
party with the assent of the other.
(c) Delivery by the seller of the goods to a carrier or other buyer for the purpose of transmission to the
buyer in pursuance of the contact is an appropriation sufficient to pass the property in the goods.
(d) The property in goods, whether specific or unascertained, does not pass if the seller reserves the
right of disposal of the goods. Apart from an express reservation of the right of disposal, the seller is
deemed to reserve the right of disposal in the following two cases:
(i) where goods are shipped or delivered to a railway administration for carriage by railway and by
the bill of lading or railway receipt, the goods are deliverable to the order of the seller or his
agent.
(ii) when the seller sends the bill of exchange for the price of the goods to the buyer for this acceptance,
together with the bill of lading, the property in the goods does not pass to the buyer unless he
accepts the bill of exchange.
Passing of Risk (Section 26)

The general rule is that goods remain at the seller’s risk until the ownership is transferred to the buyer. After
the ownership has passed to the buyer, the goods are at the buyer’s risk whether the delivery has been
made or not. For example, ‘A’ buys goods of ‘B’ and property has passed from ‘B’ to ‘A’; but the goods
remain in ‘B’s warehouse and the price is unpaid. Before delivery, ‘B’s warehouse is burnt down for no fault
of ‘B’ and the goods are destroyed. ‘A’ must pay ‘B’ the price of the goods, as he was the owner. The rule is
resperit domino- the loss falls on the owner.
But the parties may agree that risk will pass at the time different from the time when ownership passed. For
example, the seller may agree to be responsible for the goods even after the ownership is passed to the
buyer or vice versa.
In Consolidated Coffee Ltd. v. Coffee Board, (1980 3 SCC 358), one of the terms adopted by coffee board
for auction of coffee was the property in the coffee knocked down to a bidder would not pass until the
payment of price and in the meantime the goods would remain with the seller but at the risk of the buyer, In
such cases, risk and property passes on at different stages.
In Multanmal Champalal v. Shah & Co., AIR (1970) Mysore 106, goods were despatched by the seller from
Bombay to Bellary through a public carrier. According to the terms of the contract, the goods were to remain
the property of the seller till the price was paid though the risk was to pass to the buyer when they were
delivered to public carrier for despatch. When the goods were subsequently lost before the payment of the
price (and the consequent to the passing of the property to the buyer), the Court held that the loss was to be
borne by the buyer.
It was further held in the same case that the buyer was at fault in delaying delivery unreasonably and
therefore on that ground also he was liable for the loss, because such loss would not have arisen but for
such delay.
Thus, where delivery has been delayed through the fault of either the buyer or the seller, in such a case, the
goods are at the risk of the party at fault as regards any loss which might not have occurred but for such
fault.
Transfer of Title by Person not the Owner (Section 27-30)

The general rule is that only the owner of goods can sell the goods. Conversely, the sale of an article by a
person who is not or who has not the authority of the owner, gives no title to the buyer. The rule is expressed
by the maxim; “Nemo Dat Quod Non Habet” i.e. no one can pass a better title than he himself has. As
applied to the sale of goods, the rule means that a seller of goods cannot give a better title to the buyer than
he himself possess. Thus, even a bona fide buyer who buys stolen goods from a thief or from a transfree
from such a thief can get no valid title to them, since the thief has no title, nor could he give one to any
transferee.
Example:
1. A, the hirer of goods under a hire purchase agreement, sells them to B, then B, though a bona fide
purchaser, does not acquire the property in the goods. At most he can acquire such an interest as
the hirer had.
2. A finds a ring of B and sells it to a third person who purchases it for value and in good faith. The true
owner, i.e. B can recover from that person, for A having no title to the ring could pass none the
better.
Exception to the General Rule

The Act while recognizing the general rule that no one can give a better title than he himself has, laid down
important exceptions to it. Under the exceptions the buyer gets a better title to the goods than the seller
himself. These exceptions are given below:
(a) Sale by a mercantile agent: A buyer will get a good title if he buys in good faith from a mercantile
agent who is in possession either of the goods or documents of title to the goods with the consent of
the owner, and who sells the goods in the ordinary course of his business.
(b) Sale by a co-owner: A buyer who buys in good faith from one of the several joint owners who is in
sole possession of the goods with the permission of his co-owners will get good title to the goods.
(c) Sale by a person in possession under a voidable contract: A buyer buys in good faith from a person
in possession of goods under a contract which is voidable, but has not been rescinded at the time of
the sale.
566 EP-EBCL
(d) Sale by seller in possession after sale: Where a seller, after having sold the goods, continues or is
in possession of the goods or of the documents of title to the goods and again sells them by himself
or through his mercantile agent to a person who buys in good faith and without notice of the
previous sale, such a buyer gets a good title to the goods.
(e) Sale by buyer in possession: If a person has brought or agreed to buy goods obtains, with the
seller’s consent, possession of the goods or of the documents of title to them, any sale by him or by
his mercantile agent to a buyer who takes in good faith without notice of any lien or other claim of
the original seller against the goods, will give a good title to the buyer. In any of the above cases, if
the transfer is by way of pledge or pawn only, it will be valid as a pledge or pawn.
(f) Estoppel: If the true owner stands by and allows an innocent buyer to pay over money to a third-
party, who professes to have the right to sell an article, the true owner will be estopped from
denying the third-party’s right to sell.
(g) Sale by an unpaid seller: Where an unpaid seller has exercised his right of lien or stoppage in
transit and is in possession of the goods, he may resell them and the second buyer will get absolute
right to the goods.
(h) Sale by person under other laws: A pawnee, on default of the pawnee to repay, has a right to sell
the goods, pawned and the buyer gets a good title to the goods. The finder of lost goods can also
sell under certain circumstances. The Official Assignee or Official Receiver, Liquidator, Officers of
Court selling under a decree, Executors, and Administrators, all these persons are not owners, but
they can convey better title than they have.
Performance of the Contract of Sale

It is the duty of the seller and buyer that the contract is performed. The duty of the seller is to deliver the
goods and that of the buyer is to accept the goods and pay for them in accordance with the contract of sale.
Unless otherwise agreed, payment of the price and the delivery of the goods are concurrent conditions, i.e.,
they both take place at the same time as in a cash sale over a shop counter.
Delivery (Sections 33-39)

Delivery is the voluntary transfer of possession from one person to another. Delivery may be actual,
constructive or symbolic. Actual or physical delivery takes place where the goods are handed over by the
seller to the buyer or his agent authorised to take possession of the goods. Constructive delivery takes place
when the person in possession of the goods acknowledges that he holds the goods on behalf of and at the
disposal of the buyer. For example, where the seller, after having sold the goods, may hold them as bailee
for the buyer, there is constructive delivery. Symbolic delivery is made by indicating or giving a symbol. Here
the goods themselves are not delivered, but the “means of obtaining possession” of goods is delivered, e.g,
by delivering the key of the warehouse where the goods are stored, bill of lading which will entitle the holder
to receive the goods on the arrival of the ship.
Rules as to delivery
The following rules apply regarding delivery of goods:
(a) Delivery should have the effect of putting the buyer in possession.
(b) The seller must deliver the goods according to the contract.
(c) The seller is to deliver the goods when the buyer applies for delivery; it is the duty of the buyer to
claim delivery.
(d) Where the goods at the time of the sale are in the possession of a third person, there will be
delivery only when that person acknowledges to the buyer that he holds the goods on his behalf.
(e) The seller should tender delivery so that the buyer can take the goods. It is no duty of the seller to
send or carry the goods to the buyer unless the contract so provides. But the goods must be in a
deliverable state at the time of delivery or tender of delivery. If by the contract the seller is bound to
send the goods to the buyer, but no time is fixed, the seller is bound to send them within a
reasonable time.
(f) The place of delivery is usually stated in the contract. Where it is so stated, the goods must be
delivered at the specified place during working hours on a working day. Where no place is
mentioned, the goods are to be delivered at a place at which they happen to be at the time of the
contract of sale and if not then in existence they are to be delivered at the place at which they are
manufactured or produced.
(g) The seller has to bear the cost of delivery unless the contract otherwise provides. While the cost of
obtaining delivery is said to be of the buyer, the cost of the putting the goods into deliverable state
must be borne by the seller. In other words, in the absence of an agreement to the contrary, the
expenses of and incidental to making delivery of the goods must be borne by the seller, the
expenses of and incidental to receiving delivery must be borne by the buyer.
(h) If the goods are to be delivered at a place other than where they are, the risk of deterioration in transit
will, unless otherwise agreed, be borne by the buyer.
(i) Unless otherwise agreed, the buyer is not bound to accept delivery in instalments.
Acceptance of Goods by the Buyer

Acceptance of the goods by the buyer takes place when the buyer:
(a) intimates to the seller that he has accepted the goods; or
(b) retains the goods, after the lapse of a reasonable time without intimating to the seller that he has
rejected them; or
(c) does any act on the goods which is inconsistent with the ownership of the seller, e.g., pledges or
resells. If the seller sends the buyer a larger or smaller quantity of goods than ordered, the buyer
may:
(i) reject the whole; or
(ii) accept the whole; or
(ii) accept the quantity be ordered and reject the rest.
If the seller delivers with the goods ordered, goods of a wrong description, the buyer may accept the goods
ordered and reject the rest, or reject the whole.
Where the buyer rightly rejects the goods, he is not bound to return the rejected goods to the seller. It is
sufficient if he intimates the seller that he refuses to accept them. In that case, the seller has to remove them.
Instalment Deliveries
When there is a contract for the sale of goods to be delivered by stated instalments which are to be
568 EP-EBCL
separately paid for, and either the buyer or the seller commits a breach of contract, it depends on the terms
of the contract whether the breach is a repudiation of the whole contract or a severable breach merely giving
right to claim for damages.
Suits for Breach of Contract

Where the property in the goods has passed to the buyer, the seller may sue him for the price.
Where the price is payable on a certain day regardless of delivery, the seller may sue for the price, if it is not
paid on that day, although the property in the goods has not passed.
Where the buyer wrongfully neglects or refuses to accept the goods and pay for them, the seller may sue the
buyer for damages for non-acceptance.
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue him for
damages for non-delivery.
Where there is a breach of warranty or where the buyer elects or is compelled to treat the breach of condition
as a breach of warranty, the buyer cannot reject the goods. He can set breach of warranty in extinction or
dimunition of the price payable by him and if loss suffered by him is more than the price he may sue for the
damages.
If the buyer has paid the price and the goods are not delivered, the buyer can sue the seller for the recovery
of the amount paid. In appropriate cases the buyer can also get an order from the court that the specific
goods ought to be delivered.
Anticipatory Breach
Where either party to a contract of sale repudiates the contract before the date of delivery, the other party
may either treat the contract as still subsisting and wait till the date of delivery, or he may treat the contract
as rescinded and sue for damages for the breach.
In case the contract is treated as still subsisting it would be for the benefit of both the parties and the party
who had originally repudiated will not be deprived of:
(a) his right of performance on the due date in spite of his prior repudiation; or
(b) his rights to set up any defence for non-performance which might have actually arisen after the date
of the prior repudiation.
Measure of Damages
The Act does not specifically provide for rules as regards the measure of damages except by stating that
nothing in the Act shall affect the right of the seller or the buyer to recover interest or special damages in any
case where by law they are entitled to the same. The inference is that the rules laid down in Section 73 of the
Indian Contract Act will apply.
Unpaid Seller (Sections 45-54)
Who is an unpaid seller? (Section 45)
The seller of goods is deemed to be unpaid seller:

(a) When the whole of the price has not been paid or tendered; or
(b) When a conditional payment was made by a bill of exchange or other negotiable instrument, and
the instrument has been dishonoured.
Rights of an Unpaid Seller against the Goods

An unpaid seller’s right against the goods are:
(a) Right of Lien (Sections 47-49 and 54) An unpaid seller in possession of goods sold, may exercise his lien
on the goods, i.e., keep the goods in his possession and refuse to deliver them to the buyer until the
fulfilment or tender of the price in cases where:
(i) the goods have been sold without stipulation as to credit; or
(ii) the goods have been sold on credit, but the term of credit has expired; or
(iii) the buyer becomes insolvent.
The lien depends on physical possession. The seller’s lien is possessory lien, so that it can be exercised only
so long as the seller is in possession of the goods. It can only be exercised for the non-payment of the price
and not for any other charges.
A lien is lost
(i) When the seller delivers the goods to a carrier or other bailee for the purpose of transmission to the
buyer, without reserving the right of disposal of the goods;
(ii) When the buyer or his agent lawfully obtains possession of the goods;
(iii) By waiver of his lien by the unpaid seller.
(b) Stoppage in transit (Sections 50-52) The right of stoppage in transit is a right of stopping the goods while
they are in transit, resuming possession of them and retaining possession until payment of the price.
The right to stop goods is available to an unpaid seller

570 EP-EBCL
(i) when the buyer becomes insolvent; and

(ii) the goods are in transit.
The buyer is insolvent if he has ceased to pay his debts in the ordinary course of business, or cannot pay his
debts as they become due. It is not necessary that he has actually been declared insolvent by the court.
The goods are in transit from the time they are delivered to a carrier or other bailee like a wharfinger or
warehousekeeper for the purpose of transmission to the buyer and until the buyer takes delivery of them.
The transit comes to an end in the following cases:
(i) If the buyer obtains delivery before the arrival of the goods at their destination;
(ii) If, after the arrival of the goods at their destination, the carrier acknowledges to the buyer that he
holds the goods on his behalf, even if further destination of the goods is indicated by the buyer;
(iii) If the carrier wrongfully refuses to deliver the goods to the buyer.
If the goods are rejected by the buyer and the carrier or other bailee holds them, the transit will be deemed to
continue even if the seller has refused to receive them back.
The right to stop in transit may be exercised by the unpaid seller either by taking actual possession of the
goods or by giving notice of the seller’s claim to the carrier or other person having control of the goods. On
notice being given to the carrier, he must redeliver the goods to the seller who must pay the expenses of the
redelivery.
The seller’s right of lien or stoppage in transit is not affected by any sale on the part of the buyer unless the
seller has assented to it. A transfer, however, of the bill of lading or other document of seller to a bona fide
purchaser for value is valid against the seller’s right.
(c) Right of re-sale (Section 54): The unpaid seller may re-sell:
(i) where the goods are perishable;
(ii) where the right is expressly reserved in the contract;
(iii) where in exercise of right of lien or stoppage in transit, the seller gives notice to the buyer of his
intention to re-sell, and the buyer, does not pay or tender the price within a reasonable time.
If on a re-sale, there is a deficiency between the price due and amount realised, he is entitled to
recover it from the buyer. If there is a surplus, he can keep it. He will not have these rights if he has
not given any notice and he will have to pay the buyer profit, if any, on the resale.
(d) Rights to withhold delivery: If the property in the goods has passed, the unpaid seller has right as
described above. If, however, the property has not passed, the unpaid seller has a right of withholding
delivery similar to and co-extensive with his rights of lien and stoppage in transit.
Rights of an unpaid seller against the buyer (Sections 55 and 56)

An unpaid seller may sue the buyer for the price of the goods in case of breach of contract where the
property in the goods has passed to the buyer or he has wrongfully refused to pay the price according to the
terms of the contract.
The seller may sue the buyer even if the property in the goods has not passed where the price is payable on
a certain day.
Under Section 56, the seller may sue the buyer for damages or breach of contract where the buyer
wrongfully neglects or refuses to accept and pay for the goods.
Thus an unpaid sellers rights against the buyer personally are:

(a) a suit for the price.
(b) a suit for damages.
Auction Sales (Section 64)

A sale by auction is a public sale where goods are offered to be taken by bidders. It is a proceeding at which
people are invited to complete for the purchase of property by successive offer of advancing sums.
Section 64 lays down the rules regulating auction sales. Where goods are put up for sale in lots, each, lot is
prima facie deemed to be the subject of a separate contract of sale. The sale is complete when the
auctioneer announces its completion by the fall of the hammer or in other customary manner. Until such
announcement is made, any bidder may retract his bid.
A right to bid may be reserved expressly by or on behalf of the seller. Where such right is expressly so
reserved, the seller or any other person on his behalf may bid at the auction. Where the sale is not notified to
be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ
any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such
person. Any sale in contravention of this rule may be treated as fraudulent by the buyer. The sale may be
notified to be subject to a reserved price. Where there is such notification, every bid is a conditional offer
subject to its being up to the reserve price. Where an auctioneer inadvertently knocks down to a bidder who
has bid less than the reserved price, there is no contract of sale. If the seller makes use of pretended bidding to
raise the price, the sale is voidable at the option of the buyer.
Trading Contracts Involving Rail or Sea Transit

In the case of a contract for the sale of goods which are to be shipped by sea a number of conditions are
attached by the parties or by custom and practice of merchants. Some of the important types of such
contracts are given below:
(a) F.O.B.(Free on Board): Under an F.O.B. contract, it is the duty of the seller to put the goods on
board a ship at his own expenses. The property in goods passes to the buyer only after the goods
have been put on board the ship, and they are at buyer’s risk as soon as they are put on board the
ship, usually named by the buyer. The seller must notify the buyer immediately that the goods have
been delivered on board, so that the buyer may insure them. If he fails to do so the goods shall be
deemed to be at seller’s risk during such sea transit.
(b) F.O.R. (Free on Rail): Similar position prevails in these contracts as in the case of F.O.B. contracts.
(c) C.I.F. or C.F.I. (Cost Insurance and Freight): A CIF contract is a contract for the sale of insured
goods lost or not lost to be implemented by transfer of proper documents.
In such types of contracts, the seller not only bears all the expenses of putting the goods on board
the ship as in an F.O.B. contract, but also to bear the freight and insurance charges. He will arrange
for an insurance of the goods for the benefit of the buyer. On the tender of documents, the buyer is
required to pay and then take delivery. He has a right to reject the goods if they are not according to
the contract.
(d) Ex-Ship: Here the seller is bound to arrange the shipment of the goods to the port of destination,
and to such further inland destination as the buyer may stipulate. The buyer is not bound to pay until
the goods are ready for unloading from the ship and all freight charges paid. The goods travel at the
seller’s risk, but he is not bound to insure them.
572 EP-EBCL
LESSON ROUND-UP
• In a sale, the property in the goods sold passes to the buyer at the time of contract so that he
becomes the owner of the goods. In an agreement to sell, the ownership does not pass to the buyer
at the time of the contract, but it passes only when it becomes sale on the expiry of certain time or
the fulfilment of some conditions subject to which the property in the goods is to be transferred.
• Where goods are delivered to another on terms which indicate that the property is to pass at once
the contract must be one of sale and not bailment.
• The subject matter of the contract of sale is essentially goods. According to Section 2(7) of the Sale
of Goods Act, “goods” means every kind of movable property other than actionable claims and
money and includes stock and shares, growing crops, grass and things attached to or forming part of
the land which are agreed to be severed before sale or under the contract of sale. Goods may be (a)
existing, (b) future, or (c) contingent. The existing goods may be (i) specific or generic, (ii)
ascertained or unascertained.
• The sole purpose of a sale is the transfer of ownership of goods from the seller to the buyer. The
general rule is that only the owner of goods can sell the goods. Conversely, the sale of an article by
a person who is not or who has not the authority of the owner, gives no title to the buyer.
• It is the duty of the seller and buyer that the contract is performed. The duty of the seller is to deliver
the goods and that of the buyer to accept the goods and pay for them in accordance with the
contract of sale.
• Unless otherwise agreed, payment of the price and the delivery of the goods and concurrent
conditions, i.e., they both take place at the same time as in a cash sale over a shop counter.
• Delivery is the voluntary transfer of possession from one person to another. Delivery may be actual,
constructive or symbolic.
• A sale by auction is a public sale where goods are offered to be taken by bidders. It is a proceeding
at which people are invited to complete for the purchase of property by successive offer of advancing
sums.
SELF TEST QUESTIONS

evaluation)
1. Define contract of sale of goods and distinguish between sale and agreement to sell and hire
purchase agreement.
(i) Existing goods,
(ii) Future goods
3. Why it is important to know the time of passing of property?
4. What are the rights of an unpaid seller against the goods and against the buyer?
5. Explain Doctrine of Caveat emptor.
Lesson 23
Indian Partnership Act, 1932
LESSON OUTLINE
LEARNING OBJECTIVES
Likewise corporations which are regulated by
• Nature of Partnership Companies Act, 2013, the other form of business
• Essentials of a Partnership registration of is partnership which is regulated by Indian
Partnership Act, 1932. The partnership is considered
Partnership
as the convenient way to start a business. Suppose
• Classification of Partnership one wants to open a bookshop in the locality. There
• Kinds of Partners are various things that are required to start and
run the business which may not be feasible to
• Rights and Duties of Partners arrange all alone. These may include resources from
• Relation of Partners to Third Parties money to place to management. In that case, the
idea may be spoken to friends and relatives who
• Dissolution of Partnership
may agree to run the bookshop by contributing a
• Lesson Round Up certain amount of money and other things
• Self-Test Questions required. So all of them join hands together to
become the owners and agree to share profits and
losses.
This chapter deals with laws relating to

partnership that will regulate this form of
business, its registration, admission of new
partners, and dissolution. It also explains other
aspects of partnership like kinds of partners,
relationship among themselves and with others.
There's an assumption by many partners that no matter what happens to their business, they'll be partners forever.
David Gibbs
574 EP-EBCL
INTRODUCTION
The Indian Partnership Act, 1932, came into force w.e.f. 1st October, 1932 except section 69, which came
into force on the 1st day of October, 1933. It extends to the whole of India except the state of Jammu and
Kashmir.
It lays down the important provisions relating to partnership contracts. However, the general principles of the
Indian Contracts Act, 1872 which formally contained the provisions of the law of partnership shall apply so far
as they are not inconsistent with this Act. (Section 3)
DEFINITIONS
Partnership
According to Section 4 “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”.
When analysed, the definition tells us that in order that persons may become partners, it is essential that:
All these four elements must be present before a group or an association can be held to be partners. In other
words, it can be said that all the aforestated four elements must co-exist before a partnership can be said to
come into existence. If any one of them is not proved to be present, there cannot be a partnership. The first
element relates to the voluntary contractual nature of partnership; the second gives the motive which leads to
the formation of firms, i.e. the acquisition of gains; the third shows that the persons of the group who conduct
the business do so as agents for all the persons in the group, and are therefore liable to account to all the
persons in the group (Maliram Choudhary v. Jagannath, AIR 1972 Orissa 17).
Partners, Firm and Firm Name

Persons who have entered into partnership with one another are called individually “partners” and
collectively “a firm”, and the name under which their business is carried on is called the “firm name”.
(Section 4)
Lesson 23 Indian Partnership Act, 1932 575
In law, “a firm” is only a convenient phrase for describing the partners, and the firm has no legal existence
apart from its partners. It is neither a legal entity, nor is it a person as is a corporation; it is a collective name
of the members of a partnership.
As regard the “firm name”, partners have a right to carry on business under any name and style which they
choose to adopt, provided they do not violate the rules relating to trade name or goodwill. They must not
adopt name calculated to mislead the public into confusing them with a firm of repute already in existence
with a similar name. They must not use a name implying the sanction of patronage of the Government. A
partnership firm cannot use the word “Limited” as a part of its name.
Essentials of a Partnership and True Test of Partnership
These elements are discussed below in detail:
(1) Association of two or more persons
There must be a contract between two or more persons. Therefore unless there are at least two persons
there can not be a partnership. Persons must be competent to enter into a contract. They may all be natural
or artificial or some natural and other artificial. Thus a corporation or limited partnership may itself be a
partner in a general partnership.
(2) Agreement
Existence of an agreement is essential of partnership. Section 5 of the Act states that the relation of
partnership arises from contract and not from status; and in particular, the members of a Hindu Undivided
Family carrying on a family business as such, or a Burmese Buddhist Husband and wife carrying on
business as such are not partners in such business.
Such an agreement between the partners may be express or implied. Further, the agreement must be a valid
agreement and for a lawful object and purpose and between the persons competent to contract.
(3) Business
Partnership implies business and when there is no association to carry on business there is no partnership.
576 EP-EBCL
The term “business” is, however, used in the widest sense to cover trade, occupation and profession. As per
Section 2(b) of the Act the term “business” includes every trade, occupation and profession. In the definition
of partnership the word “business” is used in the sense of “carrying on business” which suggests continuity
or repetition of acts. But it does not mean that it should be confined to lengthy operations, it may consist of a
single adventure of a single undertaking, if there is continued participation of two or more persons for
acquisition of gains.
The term must be understood in a particular sense . It refers to any activity which, if successful, would result
in profit.
(4) Sharing of Profits
To constitute a partnership, the parties must have agreed to carry on a business and to share profits in
common. “Profits” mean the excess of returns over advances, the excess of what is obtained over the cost of
obtaining it. Sharing of profits also involves sharing of losses. But whereas the sharing of profit is an
essential element of partnership, the sharing of losses is not. It is open to one or more partners to bear all
the losses of the business.
It follows that the sharing of profits is an essential ingredient of partnership and there would be no
partnership where only one of the partners is entitled to the whole of the profits of the business. But it is open
to the partners to agree to share the profits in any way they like. They may agree to share the profits either in
specific proportions or in specific sums.
Sharing of Profits is not Conclusive

Test Although sharing of profits is a prima facie evidence of the existence of partnership, this is not the
conclusive test of the same. A person may have a share in the partnership profits, but still may not be a
partner. For instance, a joint owner of a property sharing its return or members of non-profit or non-trading
associations will not be called partners.
Illustrations
1. A and B buy 100 bales of cotton, which they agree to sell for their joint account, each party sharing
profits and bearing losses equally. A and B are partners in respect of such account.
2. A and B buy 100 bales of cotton agreeing to divide these between them. A and B are not partners.
3. “A” a trader, owed money to XY&Z. He agreed to pay XY&Z out of the profits of his business (run
under the supervision of X, Y and Z) what he owed to them. It was held that the arrangement does
not make X, Y and Z the partners with A in the business.
(5) Mutual Agency The True Test
Mutual agency is the foundation of partner’s liability. Each partner is both an agent and principal for himself
and others; that is the significance of the phrase “carried on by all or any of them acting for all”. Each partner
is an agent binding the other partners who are his principal and each partner is again a principal, who in turn
is bound by the acts of the other partners. In other words, there must be facts or circumstances from which it
can be inferred that each of the persons alleged to be partners was the agent, real or implied of another.
What is essential is that the partner who conducts the business of the firm not only acts for himself but for the
other partners also.
The true test, therefore, in determining whether a partnership exists, is to see whether the relation of
principal and agent exists between the parties and not merely whether the parties share the profits or the
business is carried on for the benefit of all. It is this relation of agency among partners which distinguishes a
partnership from a single co-ownership on the one hand and the agreement to share profits on the other. The
existence of this relation of agency can be gathered from the real intention of the parties and the
circumstances of the case. The question of intention must be decided on the basis of the conduct of parties
and of all the surrounding circumstances. The law of partnership is the extention of the law of agency
therefore every partner is liable for the act of other partner if within authority upto unlimited extent. The
relation of mutual agency is the conclusive test of partnership.
It may be observed that the question whether a person is or is not a partner depends almost in all cases
upon whether he has the authority to act for other partners and whether other partners have the authority to
act for him. It follows that the agency relationship is the most important test of partnership.
Formation of Partnership
According to the definition of partnership under the Indian Partnership Act, 1932, there must be an
agreement between the partners of a partnership firm.
The partnership agreement must comply with all the essentials of a valid contract. There must be free
consent of the parties who must be competent to contract and the object of partnership should not be
forbidden by law or immoral or opposed to public policy. Two exceptions, however, may be noted:
(i) A minor may be admitted to the benefits of a partnership with the consent of all other partners.
(ii) As relations of partners inter se are that of agency, no consideration is required to create the
partnership.
Partnership Deed
The agreement of partnership may be oral but to avoid future disputes it is always advisable to have it in
writing. The mutual rights and obligations of partners must be discussed in detail and should be put into
writing in the shape of a ‘Partnership Deed’, before the partnership is actually started. Thus, the written
document which contains the mutual rights and obligations of partners is known as partnership deed. (The
partnership deed is also called as ‘Partnership Agreement’, ‘Constitution of Partnership’, ‘Articles of
Partnership’ etc.). The deed must be property drafted and stamped according to the provisions of the Indian
Stamp Act. Each partner should be given a copy of the deed and if the firm is to be registered, a copy of the
deed should be filed with the Registrar of Firms at the time of such legislation. The partnership deed is not a
public document and therefore binds only third parties so far as they have notice of it.
Contents of Partnership Deed

The exact terms of the partnership deed (or agreement) will depend upon the circumstances but generally
a partnership deed contains the following covenants:
(i) The firm name and business to be carried on under that name.
(ii) Names and addresses of partners.
(ii) Nature and scope of business and address(s) of business place(s).
(iv) Commencement and duration of partnership.
(v) The capital and the contribution made by each partner.
(vi) Provision for further capital and loans by partners to the firm.
(vii) Partner’s drawings.
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(viii) Interest on capital, loans, drawings and current account.

(ix) Salaries, commission and remuneration to partners,
(x) Profit (or loss) sharing ratio of partners.
(xi) The keeping of proper books of accounts, inspection and audit, Bank Accounts and their operation.
(xii) The accounting period and the date on which that accounts are to be prepared.
(xiii) Rights, powers and duties of the partners.
(xiv) Whether and in what circumstances, notice of retirement or dissolution can be given by a partner.
(xv) Provision that death or retirement of a partner will not bring about dissolution of partnership,
(xvi) Valuation of goodwill on retirement, death, dissolution etc.
(xvii) The method of valuation of assets (and liabilities) on retirement or death of any partner.
(xviii) Provision for expulsion of a partner.
(xix) Provision regarding the allocation of business activities to be performed by individual partners.
(xx) The arbitration clause for the settlement of disputes. The terms contained in the partnership deed
may be varied with the consent of all the parties, and such consent may be express or implied by a
course of dealing. [Section 11(1)]
Classification of Partnership
A partnership may either be for a particular adventure or for a fixed period. It may also be a partnership at
will. From the duration point of view, a partnership may be classified into the following two categories:
(i) Particular Partnership (Section 8)
“A person may become a partner with another person in a particular adventure or undertaking”. When two or
more persons agree to do business in a particular adventure or undertaking, such a partnership is called
“Particular Partnership”. Thus, a particular partnership may even be for a single adventure or undertaking.
(ii) Partnership at Will (Section 7)
“Where no provision is made by contract between the partners for the duration of their partnership or for the
determination of their partnership, the partnership is called Partnership at Will”. A partnership is deemed to
be a partnership at will when (i) no fixed period has been agreed upon for the duration of partnership, and (ii)
there is no provision made as to the determination of partnership in any other way. The partnership at will
has no fixed or definite date of termination and, therefore, death or retirement of a partner does not affect the
existence of such partnership.
Section 43(1) provides that “Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm. The firm is dissolved as from the
date mentioned in the notice as the date of dissolution or, if no such date is mentioned, as from the date of
communication of the notice”. This accounts for the importance of the definition of ‘Partnership at Will’.
Co-ownership and Partnership

There is a possibility that two co-owners may employ their property in a business and share the profits, and
still be not partners. A distinction between the two is in point. Partnership is between two persons Co-
ownership is not always the result of an agreement: it may arise by the operation of law or from status, e.g.,
co-heirs of a property. Partnership must arise from an agreement. A partner is the agent of the other
partners, but a co-owner is not the agent of the other co-owner(s). Co-ownership does not necessarily
involve community of profits and loss, partnership does. A co- owner can without the consent of the others
transfer his rights and interests to strangers, a partner cannot do so without the consent of all the other
partners so as to make the transferee a partner in the firm. A co-owner can ask for division of property in
specie, but no partner can ask for this. His only right is to have a share of the profits out of the properties.
Partnerships end at death or insolvency; co-ownerships end at death. A co-owner has no lien on the property
while a partner has a lien on the firm property.
Hindu Joint Family Firm and Partnership

A Hindu joint family firm differs from a partnership in the following ways:
A partnership comes into existence by means of a contract between the partners; a Hindu joint family firm
arises as a result of status, i.e., by birth in the family. The death of a partner dissolves the partnership, but
the death of a co-parcener does not dissolve the family firm. In a joint family firm only the Karta or manager
(who is the head of the family) has implied authority to borrow and bind other members; in a partnership
each partner is entitled to do so. Every partner is personally liable for the debts of the firm; in a joint family
business only the Karta is personally liable. A minor is a member of a joint family firm from the very day of his
birth by virtue of his status, but he is not personally liable. A minor cannot be a partner, although he may be
admitted to the benefits of partnership. A partner can demand the accounts of the firm, a co-parcener cannot
ask for accounts, his only remedy is to ask for partition of the assets of the family firm. No registration of a
family firm is necessary, while a partnership firm must be registered before it can maintain suits against
outsiders. Each partner has a definite share in the business and this can be changed only by agreement, but
the share of a co-parcener is not fixed; it may be enlarged by death or reduced by a birth in the family. There
is a definite limit to the number of partners, but there is no such limit in the case of a Hindu joint family firm. A
Hindu joint family business is governed by Hindu Law, while Indian Partnership Act, governs partnerships
and excludes Hindu joint family firms. (Section 5)
Company and Partnership

The members constituting a partnership do not form a whole as distinct from the individuals composing it.
The firm has no legal entity and has no rights and obligations separate from the partners. In a firm every
partner is an agent of the rest of the partners, but a member of a company is neither the agent of the
company nor of other members. A company, as soon as it is incorporated, say by registration under the
Companies Act, becomes a legal entity distinct from its members constituting it (Salomon v. Salomon & Co.,
1897, A.C. 22). It can sue and be sued in its own name like any natural person. In a partnership, there are
rights and obligations as against individual partners, but in the case of a company, the rights and obligations
are as against the fictitious entity of the whole of the company and not the members composing it. The
creditors of the partnership can call upon individual partners to pay the firm’s debt, but the members of a
company are not personally liable for the company’s debts. In other words, a partner’s liability is unlimited
while the liability of the members of a company is limited to the extent of the amount remaining unpaid on
their shares (Prasad v. Missir). Partnership firm may dissolve by the death or insolvency of a partner, but a
company is not affected by the death or insolvency of a member. A partner cannot transfer his interest so as
to substitute the transferee in his place as the partner, without the consent of all the other partners; a
member can transfer his share to any one he likes.
Change in a Firm
The Indian Partnership Act, 1932, contemplates the following changes in a partnership firm:
(1) Changes in the constitution of a firm.
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(2) Changes in the nature of a business or undertakings.

(3) Changes in the duration of a firm.
A change in the constitution of a firm takes place when:

(a) a new partner is introduced as a partner in a firm; (Section 31)
(b) a partner retires from a firm; (Section 32),
(c) a partner is expelled from a firm; (Section 33),
(d) a partner is adjudicated as an insolvent; (Section 34) and
(e) a partner dies. (Section 35)
A change in the nature of the business can only be brought about by the consent of all the partners. Thus, a
partnership formed for a definite purpose, agreed upon at the time of formation of the partnership, cannot
depart from the agreed purpose without the consent of all the partners [Section 12(c)]. Section 17(c)provides
for a case whether a partnership firm is formed for a particular undertaking or undertakings, it proceeds to
carry on other undertaking or undertakings, in that event the mutual rights and duties of the partners in
respect of the other adventures or undertakings are the same as those in respect of the original adventures
of undertakings.
Partnership Property
It is open to the partners to agree among themselves as to what is to be treated as the property of the firm,
and what is to be separate property of one or more partners, although employed for the purposes of the firm.
In the absence of any such agreement, express or implied, the property of the firm is deemed to include:
(a) all property, rights and interests which have been brought into the common stock for the purposes
of the partnership by individual partners, whether at the commencement of the business or
subsequently added thereto;
(b) those acquired in the course of the business with money belonging to the firm; and
(c) the goodwill of the business. (Section 14)
The property of the firm belongs to the firm and not to the individual partner or partners. The ownership
belongs to the firm, and no partner can deal with specific properties as if the properties are his own, nor does
the partner possess any assignable interest in such property (Narayanappa v. Bhaskaia Krishnappa, AIR
1966 SC 1300). What is meant by the share of a partner is his proportion of the partnership assets after they
are all realised and converted into money, and all the partnership debts and liabilities have been paid and
discharged. If certain partners jointly own immovable property which they use for the purposes of the
partnership business, the mere use of such property does not make such property as partnership property.
Whether such property is or is not partnership property depends upon the agreement between the partners
(Lachhman Dass v. Mrs. Gulab Devi, AIR 1936 ALL. 270). The ultimate test to determine the property of the
firm is the real intention of the partners and the Court can take into consideration the following facts:
(1) The source of the purchase money.
(2) The reason due to which the property was purchased or acquired.
(3) The object for which the property was purchased or acquired.
(4) The mode in which the property was obtained.
(5) The mode in which the property was dealt with.
(6) The use to which the property was put to.
All such facts are matter of evidence and depend on the facts of each case. These facts indicate the
intention of the parties but are not conclusive to make a property as partnership property. These facts can be
established by entries in the books of account of the firm and of the partners, correspondence, the deed of
partnership, etc.
Kinds of Partners
The following kinds of partners generally exist in a partnership:
(i) Actual, Active or Ostensible Partner
These are the ordinary types of partners who invest money into the business of the firm, actively participate
in the functioning and management of the business and share its profits or losses. Section 12(a) lays down
that “Subject to contract between the partners, every partner is entitled to take part in the conduct of the
business of the firm”. Such partner as actively participates in the firm’s business, binds himself and other
partners by all his acts done in the usual course of partnership business. Such partner must give a public
notice of his retirement from the firm in order to absolve (free) himself from liability for the acts of the other
partners done after his retirement.
(ii) Sleeping or Dormant Partner
These partners invest money in the firm’s business and take their share of profits but do not participate in the
functioning and management of the business. But even then their liability is unlimited. The Act specially
provides that if an act is binding on the firm, every partner is liable for it.
A sleeping partner can retire from the firm without giving any public notice to this effect. His liability for the
acts of the firm ceases soon after retirement. Such partner has no duties to perform but is entitled to have
access to books and accounts of the firm and he can have a copy of them.
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(iii) Nominal Partner

Some people do not invest or participate in the management of the firm but only give their name to the
business or firm. They are nominal partners but are liable to third parties for all the acts of the firm. Unlike a
sleeping partner, they are known to the outsiders as partners in the firm, whereas actually they are not.
(iv) Partner in Profits Only

A partner who is entitled to share in the profits of a partnership firm without being liable to share the losses,
is called a partner in profits only. Thus, a person who has sufficient capital but is not prepared to take risk
may be admitted to the partnership by the other partners. Inspite of his specific position, he continues to be
liable to the third parties for all acts of the firm, just like other parties.
(v) Sub-Partner
Where a partner agrees to share his profits in the firm with a third person, that third person is called a sub-
partner. Such a sub-partner has no rights or duties towards the firm and does not carry any liability for the
debts of the firm. Also he cannot bind the firm or other partners by his acts.
(vi) Partner by Estoppel or Holding Out

If the behaviour of a person arouses misunderstanding that he is a partner in a firm (when actually he is not),
such a person is estopped from later on denying the liabilities for the acts of the firm. Such person is called
partner by estoppel and is liable to all third parties.
Similarly, if a person who is declared to be a partner (when actually he is not) does not deny the fact that he
is a partner, he being held out as a partner is responsible for all liability of the business. The law relating to
partners by holding out is contained in Section 28 of the Act which lays down thus:
“Any one who by words, spoken or written or by conduct represents himself, or knowingly permits himself to
be represented to be a partner in a firm, is liable as a partner in that firm to any one who has on the faith of
any such representation given credit to the firm, whether the person representing himself or represented to
be a partner does or does not know that the representation has reached the person so giving credit”. The
rule as to holding out is based on the doctrine of estoppel as contained in Section 115 of the Indian Evidence
Act.
Holding Out means “to represent”. Strangers, who hold themselves out or represent themselves to be
partners in a firm, whereby they induce others to give credit to the partnership are called “Partners by
Holding Out”.
In case of “Partnership by Estoppel”, the representation is made by partners about a stranger within his
knowledge and hearing and he does not contradict it. He is then held liable as a partner.
Effects of Holding out
The Holding Out partner becomes personally and individually liable for the acts of the firm. But he does not
become a partner in the firm and is not entitled to any rights or claim upon the firm. An outsider, who has
given credit to the firm thinking him to be a partner, can hold him liable as if he is a partner in that firm. As the
liability of the partners is joint and several he can be held liable to pay the entire amount. But under the
doctrine of subrogation as well as on the basis of quasi-contract, he can recover the amount so paid from the
partners of the firm, if they are solvent.
Exceptions to Holding Out
The doctrine of Holding Out is not applicable in the following cases:

1. It does not apply to cases of torts committed by partners. A person, therefore, cannot be held liable
for the torts of another simply because that other person held himself to be his partner.
2. It does not extend to bind the estate of a deceased partner, where after a partner’s death the
business of the firm is continued in the old firm name. [Section 28(2)]
3. It also does not apply where the Holding Out partner has been adjudicated insolvent. (Section 45)
Minor Admitted to the Benefits of Partnership

In view of Section 11 of the Indian Contract Act, 1872, and the decision of the Privy Council in Nohori Bibi v.
Dharmo Das Ghose, (1903) 30 I.A 114, a minor’s agreement is altogether void and unenforceable. An
agreement is an essential ingredient in a partnership, it follows that a minor cannot enter into an agreement of
partnership. On the same principle, a minor cannot be clothed with all the rights and obligations of a full-fledged
partner through a guardian. Section 5 states “The relation of partnership arises from a contract...” The minor is
incompetent to contract and, therefore, partnership cannot come into existence if the parties to a contract of
partnership consist of one major and one minor. The only provision that Section 30 makes is that with the
“consent of all the partners for the time being, a minor can be admitted into the benefits of partnership to which
a minor is going to be admitted”. A partnership firm cannot be formed with only minors as partners. There must
be atleast two major partners before a minor is admitted into the benefits of partnership.
Rights of Minor
He is entitled to his agreed share and can inspect books of account of the firm [Section 30(2)]. He can bring
a suit for account and his share when he intends to sever his connections with the firm, but not otherwise.
[Section 30(4)]
A minor who was admitted to the benefits during his minority within six months of his attaining the age of
majority or when he comes to know of his being so admitted (whichever date is later), he has to elect
whether he wants to become a partner, or sever his connection with the firm. He may give public notice of
his election to continue or repudiate, but if he fails to give any public notice within the period stated above, he
will be deemed to have elected to become a partner in the firm. [Section 30(5)]
Liabilities of Minor
1. His Share in Liability
A minor partner’s liability is confined only to the extent of his share in the firm. Section 30(3) provides that a
minor’s share is liable for the acts of the firm. But a minor is not personally liable in any such act. Thus, he is
neither personally liable nor is his private estate liable for the acts of the firm.
2. Personal Liabilities
Where a minor on attaining majority, elects to become a partner, he becomes personally liable as other
partners to the third parties for all the acts of the firm done since he was admitted to the benefits of
partnership.
Election by Minor
A minor who was admitted to the benefits during his minority within six months of his attaining the age of
majority or when he comes to know of his being so admitted (whichever date is later), he has to elect
whether he wants to become a partner, or sever his connection with the firm. He may give public notice of his
election to continue or repudiate, but if he fails to give any public notice within the period stated above, he
will be deemed to have elected to become a partner in the firm. [Section 30(5)]
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If he becomes or elects to become a partner, his position will be as under:

1. His rights and liabilities will be similar to those of a full-fledged partner.
2. He will be personally liable for all the acts of the firm, done since he was first admitted to the
benefits of the partnership.
3. His share of profits and property remains the same as was before, unless altered by agreement.
If he elects not to become a partner, then:

1. His rights and liabilities shall continue to be those of a minor upto the date of his giving public
notice.
2. His share shall not be liable for any acts of the firm done after the date of the public notice.
3. He is entitled to sue the partners for his share of the property and profits in the firm. [Section 30(8)]
Relation of Partners to one another

The relation of partnership arises through an agreement between the parties and such an agreement
normally provides for mutual rights and obligations, or duties of the partners. Where, however, partnership
arises by implication, or wherever the articles of partnership are silent, or where they do not exist, the rights
and duties of partners are governed by the Act.
Rights of Partners
Unless otherwise agreed by the partners, the following rules apply:
(a) Every partner has a right to take part in the conduct and management of the business. [Section
12(a)]
(b) Every partner whether active or dormant, has a right of free access to all records, books and
accounts of the business and also to examine and copy them. [Section 12(d)]
(c) Every partner is entitled to share in the profits equally, unless different proportions are stipulated.
[Section 13(b)]
(d) A partner who has contributed more than the share of the capital for the purpose of the business is
entitled to an interest at a rate agreed upon, and where no rate is stipulated for, at six per cent per
annum. But a partner cannot claim interest on capital, unless there is an agreement to pay it.
[Section 13(d)]
(e) A partner is entitled to be indemnified by the firm for all expenses incurred by him in the course of
the business, for all payments made by him in respect of partnership debts or liabilities and
disbursements made in an emergency for protecting the firm from loss. [Section 13(e)]
(f) Every partner is, as a rule, a joint owner of the partnership property, and have it applied exclusively
for the purposes of the partnership. (Section 15)
(g) A partner has power to act in an emergency for protecting the firm from loss. (Section 21)
(h) Every partner is entitled to prevent the introduction of a new partner into the firm without his
consent. (Section 31)
(i) Every partner has a right to retire by giving notice where the partnership is at will. [Section 32(1)(c)]
(j) Every partner has a right to continue in the partnership and not to be expelled from it. [Section
33(1)]
(k) An incoming partner will not be liable for any debts or liabilities of the firm before he becomes a
partner. [Section 31(2)] (l)
(l) Every outgoing partner has a right to carry on a competitive business under certain conditions.
(Section 36)
Duties of Partners
Apart from any duties imposed by the partnership articles, the following statutory duties are implied:
(a) Every partner is bound to carry on the business of the firm to the greatest common advantage.
(Section 9)
(b) Every partner must be just and faithful to other partners. (Section 9)
(c) A partner is bound to keep and render true, proper and correct accounts of the partnership. (Section
9)
(d) Utmost good faith between the partners is the rule and one partner must not take advantage of the
other. As an agent of other partners, every partner is bound to communicate full information to
them. (Section 9)
(e) Every partner must account for any benefits derived from the partnership business without the
consent of the other partners, i.e., a partner must not make “secret profits”. [Section 16(a)]
(f) A partner must not compete with the firm, without the consent of the other partners. Any profits
made by such unauthorised competition can be claimed by the firm. [Section 16(b)]
(g) Every partner is bound to attend diligently to the business of the firm and in the absence of any
agreement to the contrary, he is not entitled to receive any remuneration. [Section 12(b) and 13(a)]
(h) In the absence of an agreement to the contrary, every partner is bound to share losses equally with
the others. [Section 13(b)]
(i) Every partner must hold and use the partnership property exclusively for the firm. (Section 15)
(j) Every partner is bound to indemnify the firm for any loss caused by fraud in the conduct of the
business. (Section 10)
(k) A partner who is guilty of wilful neglect in the conduct of the business and the firm suffers loss in
consequence, is bound to make compensation to the firm and other partners. [Section 13(f)]
(l) No partner can assign or transfer his partnership interest to any other person, so as to make him a
partner in the business. (Section 29)
(m) But a partner may assign the profits and share in the partnership assets. But the assignee or
transferee will have no right to ask for the accounts or to interfere in the management of the
business; he would be entitled only to share the actual profits. On dissolution of the firm, he will be
entitled to the share of the assets and also to accounts but only from the date of dissolution.
(Section 29)
(n) Every partner is bound to act within the scope of his actual authority. If he exceeds his authority, he
shall compensate the other partners for loss unless they ratify his act.
Relation of Partners to Third Parties
Partners as Agents
Every partner is an agent of the firm and of other partners for the purpose of the business of the firm (Section
18). In the case of a partnership each partner is a principal and each one is an agent for the other partners. A
586 EP-EBCL
partner is both a principal and an agent. Thus, the general law of agency is incorporated into the law of
partnership. The law of partnership is often regarded as branch of the law of agency. The acts of every
partner who does any act for carrying on in the usual way the business of the kind carried on by the firm bind
the firm and his partners unless:
(i) The partner so acting has no authority to act for the firm in that matter; and
(ii) The person with whom he is dealing knows that he has no authority; or
(iii) Does not know or believe him to be a partner.
Authority of a Partner
The authority of a partner means the capacity of a partner to bind the firm by his act. This authority may be
express or implied.
(i) Express Authority: - Authority is said to be express when it is given by words, spoken or written. The firm
is bound by all acts of a partner done within the scope of his express authority even if the acts are not within
the scope of the partnership business.
(ii) Implied Authority: - The implied authority of a partner is also known as ostensible or apparent authority,
Sections 19 and 22 contain provisions regarding the scope of the implied authority of a partner. The implied
authority is subject to the following conditions:
(1) the act done must relate to the “normal business” of the firm;
(2) the act must be done in the usual way;
(3) the act must be done in the name of the firm.
Implied Authority of a Partner

Subject to the limitations mentioned above, every partner has an implied authority to bind the firm by the
following acts:
(i) By selling firm’s goods;
(ii) By purchasing goods for the firm;
(iii) By accepting any payment of debts due to the firm; and
(iv) By engaging and discharging employees.
In a Trading Firm (one which carries on business of buying and selling goods), a partner has the following
additional powers:
(i) To borrow money on the firm’s credit and to pledge the firm’s goods for that purpose;
(ii) To accept, make and issue negotiable instruments in the firm’s name; and
(iii) To employ a solicitor or attorney on behalf of the firm (Bank of Australasia v. Beriliat, (1847) 6 Moor,
P.C. 152 at pp. 193-94).
Acts beyond Implied Authority

Section 19(2) states that in the absence of any usage or custom or trade to the contrary, the implied authority
of a partner does not empower him to:
(a) submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;
(d) withdraw a suit or proceeding filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and
(h) enter into a partnership on behalf of the firm.
Extent of Partners’ Liability

It is, however, open to the partners by means of an express contract to extend or limit the implied authority,
but third parties will be bound by such limitations only when they have notice of such curtailment.
All partners are liable jointly and severally for all acts or omissions binding on the firm including liabilities
arising from contracts as well as torts (Section 25). This is known as the liability of partners for the acts of the
firm. But in order that an act done may be an act of the firm and, therefore, binding on the firm, it is
necessary that the partner doing the act on behalf of the firm must have done that act in the name of and on
behalf of the firm and not in his personal capacity. And the act must have been done in the ordinary course
of the business of the firm. [Sections 19(1) and 22]
Liability of the Firm for Torts

Every partner is liable for the negligence and fraud of the other partners in the course of the management of
business. A partner charges the firm if he acts as an agent for it. The firm is similarly liable where a partner
commits a tort with the authority of his co-partners. (Section 26)
If a partner acting within the scope of his apparent authority receives the property of a third person and
misapplies it, or if the firm in the course of its business receives the property of a third person and, while it is in
the firm’s custody, a partner misapplies it, in each case the firm is liable to make good the loss. (Section 27)
Liability of an Incoming Partner

As a general rule, an incoming partner is not liable for the debts incurred before he joined the firm as a
partner [Section 31(2)]. The incoming partner may, however, assume liability for past debts by novation, i.e.,
by a tripartite agreement between (i) the creditor of the firm, (ii) the partners existing at the time the debt was
incurred, and (iii) the incoming partner.
Liability of an Outgoing or Retiring Partner

An outgoing partner remains liable for the partnership debts contracted while he was a partner. He may,
however, be discharged by novation, i.e., by an agreement between himself, the new firm and the creditors.
He may also continue to be liable after retirement if he allows himself to be held out as a partner, e.g. by
allowing his name to remain the firm name. To protect himself from his liability, he should give express notice
of his retirement to the persons who were dealing with the firm before his retirement or give public notice in
the manner as laid down in Section 72 of the Act, that is to say, by publishing it in the Official Gazette and in
at least one vernacular newspaper where the firm carries on the business. [Section 32(3)]
Death or Insolvency
The estate of a partner who dies, or who becomes insolvent, is not liable for partnership debts contracted after
588 EP-EBCL
the date of the death or insolvency. It will, however, be liable for debts incurred before death or insolvency.
(Sections 34 and 35)
Dissolution
According to Section 39 “The dissolution of partnership between all the partners of a firm” is called the
“Dissolution of the Firm”. A dissolution does not necessarily follow because the partnership has ceased to do
business, for the partnership may continue for the purpose of realising the assets.
The Partnership Act makes a distinction between the “dissolution of partnership” and “dissolution of firm”.
Where there is dissolution of partnership between all the partners of a firm, it is a dissolution of the firm
(Section 39). Where there is an extinction of relationship between some of the partners only, it is a
dissolution of partnership. So the dissolution of a partnership may or may not include the dissolution of the
firm, but the dissolution of the firm necessarily means the dissolution of the partnership as well.
Dissolution of Partnership
The dissolution of partnership takes place (even when there is no dissolution of the firm) in the following
circumstances:
(a) By the expiry of the fixed term for which the partnership was formed.[Section 42(a)]
(b) By the completion of the adventure. [Section 42(b)]
(c) By the death of a partner. [Section 42(c)]
(d) By the insolvency of a partner. [Section 42(d)]
(e) By the retirement of a partner. [Section 42(e)]
In all the above cases, the remaining partners may continue the firm in pursuance of an agreement to that
effect. If they do not continue then the dissolution of the firm takes place automatically.
Dissolution of the Firm

In the following cases there is necessarily a breaking up or extinction of the relationship between all the
partners of the firm, and closing up of the business:
(a) By mutual agreement: A firm may be dissolved where all the partners agree that it shall be
dissolved. (Section 40)
(b) By the insolvency of all the partners but one: If all the partners except one become insolvent, the
firm must come to an end, as a partnership firm with one partner cannot continue. [Section 41(a)]
(c) By business becoming illegal: If the business of the firm becomes illegal because of some
subsequent events, such as change of law, it is automatically or compulsorily dissolved by the
operation of law. [Section 41(b)]
(d) By notice of dissolution: Where the partnership is at will, the firm may be dissolved at any time, by
any partner giving notice in writing of his intention to dissolve the firm, to all the other partners. The
dissolution will take place from the date mentioned in the notice or, if no such date is mentioned, as
from the date of the communication of the notice. (Section 43)
Dissolution of the Firm through Court

Unlike a partnership at will, the partnership for a fixed period cannot be dissolved by a notice. It could only be
dissolved by Court in a suit by a partner. Though remedy of dissolution by a suit is available in case of all
kinds of partnership, it is of practical importance in case of partnership for a fixed period.
As per Section 44, the Court may order dissolution of the firm in the following circumstances:
(a) When a partner becomes of unsound mind: As the insanity of a partner does not automatically
dissolve the firm, either the lunatic through his guardian or other partners may file a suit for the
dissolution of the firm, in either case the Court may order dissolution which will take effect from the
date of the order.
(b) Permanent incapacity of a partner: Where a partner has become permanently incapable of
performing his duties as a partner, e.g., he becomes blind, paralytic, etc., the Court may, at the
instance of any of the other partners, order the dissolution of the firm.
(c) Misconduct of a partner affecting the business: Where a partner is guilty of misconduct, which is
likely to affect prejudicially the business of the firm, the Court may dissolve the firm at the instance
of any of the other partners. Gambling by a partner or conviction of a partner for travelling without
ticket would be sufficient ground for dissolution.
(d) Persistent disregard of partnership agreement by a partner: Where a partner frequently commits
breaches of the partnership agreement and the other partners find it impossible to carry on the
business, the Court may order dissolution at the instance of the other partners.
(e) Transfer of interest or share by a partner: A partner is not entitled to assign away his interest so as
to introduce a new partner into the firm. Where a partner has transferred the whole of his interest to
a third person or where his interest has been attached under a decree or sold under a process of
law, the other partners may sue for dissolution.
(f) Business working at a loss: The Court may dissolve a partnership firm where it is satisfied that the
business of the firm cannot be carried on except at a loss.
(g) Where just and equitable: As the grounds mentioned are not exhaustive, the Court may dissolve a
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firm on any other ground if it is satisfied that it would be just and equitable to dissolve the firm. The
Court may order dissolution where the sub-stratum of the partnership firm has gone or where there
is a complete deadlock and destruction of confidence between the partners [re. Yenidje Tobacco
Co. Ltd. (1916) 2 Ch. 426].
Effect of Dissolution
Continuing authority of partners
The authority of partners to bind the firm continues so long as is necessary to wind up the business, provided
that the firm is in no case bound by the acts of a partner who has been adjudged an insolvent except on
the principle of holding out. (Section 47)
Also each partner has an equitable lien over the firm’s assets entitling him to have them applied in payment
of the firm’s debts, and in payment of whatever is due to partner. This lien can be enforced by injunction
forbiding unfair distribution. (Section 46)
Continuing liability of partners
The partners continue to be liable to outsiders for any act done by any of them which would have been an
act of the firm if done before the dissolution, unless a public notice is given of the dissolution.
After dissolution, the rights and obligations of partners continue in all things necessary for the winding up of
the business. The partners may complete unfinished transactions. But this authority is only for the winding up
of the affairs of the firm and not for new transactions.
Right to Return of Premium
To buy entry into an existing firm, a new partner sometimes has to pay a premium to the existing partners in
addition to any investment of capital. On dissolution, he is entitled to demand the return of a proportion of the
premium if the partnership was for a fixed term and was dissolved before the expiry of that term, unless
dissolution was caused by (i) agreement, or (ii) misconduct of the party seeking return of the premium, or (iii)
death of a partner. (Section 51)
Settlement of Accounts on Dissolution
Section 48 of the Act provides that in settling accounts between the partners after a dissolution of
partnership, the following rules shall, subject to any agreement, be observed:
(a) Losses, including deficiencies of capital shall be paid first out of undistributed profits, next out of
capital, and lastly, if necessary, by the partners individually in the proportion in which they were
entitled to share profits
(b) The assets of the firm, including the sums, contributed by the partners to make up losses or
deficiencies of capital shall be applied in the following manner and order:
(i) in paying outside creditors;
(ii) in repaying advances made by partners (distinct from investment of capital);
(iii) in repaying capital to partners; and
(iv) the ultimate residue, if any, shall be divided among the partners in the proportions in which profits
are divisible.
Where the assets are not sufficient, the partners have to bear the loss in equal shares. After they have
contributed their share of the deficiency they will be paid rateably the amount due to them by way of their
capital (The Rule followed in the case of Garner v. Murray, 1904 73 L.J. Ch. 66).
Loss due to insolvency of partners
In case a partner is insolvent and is not able to contribute towards the deficiency, the principle laid down in the
case of Garner vs. Murray will be applicable.
It helds that:
(a) The solvent partners will contribute only their share of deficiency in cash
(b) The available assets should be distributed among the solvent partners in proportion to their capital.
(c) Thus, the deficiency of capital of the insolvent partners will be distributed among the solvent
partners in the ratio of their respective capitals.
Goodwill
This is a partnership asset and means the benefit arising from a firm’s business connections or reputation. “It is
the advantage which is acquired by a business, beyond the mere value of the capital, stock fund and properly
employed therein, in consequence of the general public patronage and encouragement which it receives from
constant or habitual customers”. Though an intangible asset, it has value; and unless otherwise agreed in the
partnership articles, upon dissolution it must be sold and the proceeds of sale distributed as capital. Where
dissolution is caused by death, the estate of the deceased partner is entitled to share in the proceeds of the sale.
If the goodwill is sold and there is no agreement as to its disposal, any partner can carry on the business,
provided that by doing so he does not expose former partners to liability. But if by agreement the goodwill is
assigned to any person, he can restrain partners as explained in the next para.
Sale of Goodwill
Where goodwill is sold, either to a partner or to an outsider, the value is divisible among the partners in the
same manner as they share profits and losses, unless otherwise agreed.
The rights of the buyer and seller of the goodwill are as follows:
(a) Buyer’s rights: On the sale of goodwill the buyer may, unless the terms in the contract of sale
provide otherwise:
(i) represent himself in continuing the business,
(ii) maintain his exclusive rights to the use of the firm name, and
(iii) solicit former customers of the business and restrain the seller of the goodwill from doing so.
(b) Seller’s rights: The vendors may enter into competition with the purchaser unless he is prevented by
a valid restraint clause in the contract of sale.
Registration of the Firm

Section 56-71 deal with the registration of a firm and consequences of non-registration.
Registration
The registration of a firm may be effected at any time by sending by post or delivering to the Registrar of the
area in which any place of business of the firm is situated or proposed to be situated, a statement in the
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prescribed form and accompanied by the prescribed fee, stating:

(a) the name of the firm;
(b) the place or principal place of business of the firm;
(c) the names of any other places where the firm carries on business;
(d) the date when each partner joined the firm;
(e) the names in full and permanent addresses of the partners; and
(f) the duration of the firm.
The statement shall be signed and verified by all the partners or by their agents specially authorised in this
behalf. (Section 58)
The Partnership Act, 1932, does not make registration of a firm compulsory but it introduces certain
disabilities, which makes registration necessary at one time or other. An unregistered firm is not an illegal
association.
Effects of Non-registration
The following are the effects of non-registration of a firm:
1. Sub-section (1) of Section 69 places a bar on the right of the partners of a firm to sue each other or
the firm for enforcing any right arising from a contract or conferred by the Partnership Act, if the firm
is not registered and the person suing is or has not been shown in the Register of Firms as a
partner in the firm.
2. Sub-section (2) of Section 69 places a bar on the institution of a suit by or on behalf of a firm against
a third-party if the firm is not registered and the persons suing are or have not been shown in the
Register of Firms as partners in the firm.
3. There is no bar on the right of third-parties to sue the firm or any partner.
However, the Act allows the following suits:
(a) A suit for the dissolution of a firm.
(b) A suit for rendering of accounts of a dissolved firm.
(c) A suit for realisation of the property of a dissolved firm.
(d) A suit or claim of set-off, the value of which does not exceed one hundred rupees,
(e) A proceeding in execution or other proceeding incidental to or arising from a suit or claim for not
exceeding one hundred rupees in value.
(f) A suit by a firm which has no place of business in the territories to which the Indian Partnership
Act extends.
(g) A suit for the realisation of the property of an insolvent partner.
(h) A suit by a firm whose places of business are situated in areas which are exempted from the
application of Chapter VII of the Indian Partnership Act, 1932.
Section 69 bars the very institution of a suit by an unregistered firm or by its partners. Registration is a
condition precedent to the right to institute the suit and, therefore, the condition precedent must first be
fulfilled before the institution of the suit. If, therefore, on the date of the institution of a suit, the firm is not
registered, the subsequent registration cannot validate the suit. The only option left to the Court is to dismiss
the suit (Prithvi Singh v. Hasan Ali, (1950) Bom. L.R. 862). By virtue of this provision a partner of an
unregistered firm cannot institute a suit to compel the other partner or partners to join in the registration of
firm. The only remedy of such a partner is to institute a suit for dissolution (Keshav Lal v. Chuni Lal, AIR
1941 Rangoon 196). A suit by the firm is really a suit by all the partners who were its partners at the time of
the accrual of the cause of action and, therefore, all must join in the institution of the suit.
However, an unregistered firm can bring a suit to enforce a right arising otherwise than out of contract e.g.,
for an injunction against a person for wrongful infringement of trade mark etc.
Specific Performance of Partnership Agreement

It is not allowed. The working of a partnership depends upon the personal inclination of the partners, there
can be no specific performance of a partnership agreement (Scott v. Raymont, 1868, 7 Fq. 112).
Suit for Libel or Slander

A firm is merely a collection of partners and cannot bring a suit for libel or slander. Libel or slander against a
firm imply a libel or slander of its partners. Such partners themselves or any one may file the suit for libel or
slander (P.K. Oswal Hosiery Mills v. Tilak Chand, AIR 1969, Punj. 150).
LESSON ROUND-UP
• The Indian Partnership Act, 1932 lays down the important provisions relating to partnership contracts.
• According to Section 4 “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.
• A partnership may either be for a particular adventure or for a fixed period. It may also be a partnership at
will.
• The minor is incompetent to contract and, therefore, partnership cannot come into existence if the
parties to a contract of partnership consist of one major and one minor.
• Every partner is an agent of the firm and of other partners for the purpose of the business of the firm.
• The authority of a partner means the capacity of a partner to bind the firm by his act. This authority may be
express or implied.
• All partners are liable jointly and severally for all acts or omissions binding on the firm including liabilities
arising from contracts as well as torts.
• The dissolution of partnership between all the partners of a firm is called the “Dissolution of the Firm”.
• A dissolution does not necessarily follow because the partnership has ceased to do business, for the
partnership may continue for the purpose of realising the assets.
SELF TEST QUESTIONS

evaluation)
1. Describe the essentials of partnership. What is the true test of partnership?
2. What is the position of a minor in a partnership?
3. Discuss the liability of partners inter se.
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4. Whether registration of a firm is compulsory? Discuss the effects of non-registration.

5. Briefly discuss the provisions relating to the dissolution of partnership or firm and what are its
effects?
Lesson 24
Negotiable Instruments Act, 1881
LESSON OUTLINE
LEARNING OBJECTIVES
Sale Exchange of goods and services is the basis
• Negotiable Instruments and Parties of every business activity. Goods are bought and
• Alteration sold for cash as well as on credit. All these
transactions require flow of cash either immediately
• Crossing and bouncing of Cheques or after a certain time. In modern business, large
• Dishonour of Cheques & its Remedies number of transactions involving huge sums of
money takes place every day. It is quite
• Presumption of Law as to Negotiable
inconvenient as well as risky for either party to make
Instruments
and receive payments in cash. Therefore, it is a
• Lesson round up common practice for business men to make use of
certain documents as means of making payment.
• Self-test questions
Some of these documents are called negotiable
instruments. But on the other hand, accepting
payment using negotiable instruments is no less than
a risky transaction since it involves deferred
payments.
In the light of this, the Negotiable Instruments Act

was passed in 1881. There is no doubt that the Act is
to regulate commercial transactions and was drafted
to suit requirements of business conditions prevailing
then.
This lesson deals with the common provisions of the

mentioned act, which has played an important
role in increasing commercial activities.
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DEFINITION OF A NEGOTIABLE INSTRUMENT
The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. It is an Act
to define and amend the law relating to promissory notes, bills of exchange and cheques.
The Act does not affect the custom or local usage relating to an instrument in oriental language i.e., a Hundi.
The term “negotiable instrument” means a document transferable from one person to another. However the
Act has not defined the term. It merely says that “A negotiable instrument” means a promissory note, bill of
exchange or cheque payable either to order or to bearer. [Section 13(1)]
A negotiable instrument may be defined as “an instrument, the property in which is acquired by anyone who
takes it bona fide, and for value, notwithstanding any defect of title in the person from whom he took it, from
which it follows that an instrument cannot be negotiable unless it is such and in such a state that the true
owner could transfer the contract or engagement contained therein by simple delivery of instrument” (Willis—
The Law of Negotiable Securities, Page 6).
According to this definition the following are the conditions of negotiability:
(i) The instrument should be freely transferable. An instrument cannot be negotiable unless it is such
and in such state that the true owner could transfer by simple delivery or endorsement and delivery.
(ii) The person who takes it for value and in good faith is not affected by the defect in the title of the
transferor.
(iii) Such a person can sue upon the instrument in his own name.
Negotiability involves two elements namely, transferability free from equities and transferability by delivery or
endorsement (Mookerjee J. In Tailors Priya v. Gulab Chand, AIR 1965 Cal).
But the Act recognises only three types of instruments viz., a Promissory Note, a Bill of Exchange and a
Cheque as negotiable instruments. However, it does not mean that other instruments are not negotiable
instruments provided that they satisfy the following conditions of negotiability:
1. The instrument should be freely transferable by the custom of trade. Transferability may be by (i)
delivery or (ii) endorsement and delivery.
2. The person who obtains it in good faith and for consideration gets it free from all defects and can
sue upon it in his own name.
3. The holder has the right to transfer. The negotiability continues till the maturity.
Effect of Negotiability
The general principle of law relating to transfer of property is that no one can pass a better title than he
himself has (nemodat quad non-habet). The exceptions to this general rule arise by virtue of statute or by a
custom. A negotiable instrument is one such exception which is originally a creation of mercantile custom.
Thus a bona fide transferee of negotiable instrument for consideration without notice of any defect of title,
acquires the instrument free of any defect, i.e., he acquires a better title than that of the transferor.
Lesson 24 Negotiable Instruments Act, 1881 597
IMPORTANT CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

Following are the important characteristics of negotiable instruments:
Classification of Negotiable Instruments

The negotiable instruments may be classified as under:
(1) Bearer Instruments
A promissory note, bill of exchange or cheque is payable to bearer when (i) it is expressed to be so payable,
or (ii) the only or last endorsement on the instrument is an endorsement in blank. A person who is a holder of
a bearer instrument can obtain the payment of the instrument.
(2) Order Instruments
A promissory note, bill of exchange or cheque is payable to order (i) which is expressed to be so payable; or
(ii) which is expressed to be payable to a particular person, and does not contain any words prohibiting
transfer or indicating an intention that it shall not be transferable.
(3) Inland Instruments (Section 11)
A promissory note, bill of exchange or cheque drawn or made in India, and made payable, or drawn upon
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any person, resident in India shall be deemed to be an inland instrument. Since a promissory note is not
drawn on any person, an inland promissory note is one which is made payable in India. Subject to this
exception, an inland instrument is one which is either:
(i) drawn and made payable in India, or
(ii) drawn in India upon some persons resident therein, even though it is made payable in a foreign
country.
(4) Foreign Instruments
An instrument which is not an inland instrument, is deemed to be a foreign instrument. The essentials of a
foreign instrument include that:
(i) it must be drawn outside India and made payable outside or inside India; or
(ii) it must be drawn in India and made payable outside India and drawn on a person resident outside
India.
(5) Demand Instruments (Section 19)
A promissory note or a bill of exchange in which no time for payment is specified is an instrument payable on
demand.
(6) Time Instruments
Time instruments are those which are payable at sometime in the future. Therefore, a promissory note or a
bill of exchange payable after a fixed period, or after sight, or on specified day, or on the happening of an
event which is certain to happen, is known as a time instrument. The expression “after sight” in a promissory
note means that the payment cannot be demanded on it unless it has been shown to the maker. In the case
of bill of exchange, the expression “after sight” means after acceptance, or after noting for non-acceptance or
after protest for non-acceptance.
Ambiguous Instruments (Section 17)

An instrument, which in form is such that it may either be treated by the holder as a bill or as a note, is an
ambiguous instrument. Section 5(2) of the English Bills of Exchange Act provides that where in a bill, the
drawer and the drawee are the same person or where the drawee is a fictitious person or a person
incompetent to contract, the holder may treat the instrument, at his option, either as a bill of exchange or as a
promissory note.
Bill drawn to or to the order of the drawee or by an agent on his principal, or by one branch of a bank on
another or by the direction of a company or their cashier are also ambiguous instruments. A promissory note
addressed to a third person may be treated as a bill by such person by accepting it, while a bill not
addressed to any one may be treated as a note. But where the drawer and payee are the same, e.g., where
A draws a bill payable to A’s order, it is not an ambiguous instrument and cannot be treated as a promissory
note. Once an instrument has been treated either as a bill or as a note, it cannot be treated differently
afterwards.
Inchoate or Incomplete Instrument (Section 20)

When one person signs and delivers to another a paper stamped in accordance with the law relating to
negotiable instruments, and either wholly blank or having written thereon an incomplete negotiable instrument,
he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a
negotiable instrument, for any amount specified therein, and not exceeding the amount, covered by the stamp.
Such an instrument is called an inchoate instrument. The person so signing shall be liable upon such
instrument, in the capacity in which he signs the same, to any holder in due course for such amount, provided
that no person other than a holder in due course shall recover from the person delivering the instrument
anything in excess of the amount intended by him to be paid thereon.
The authority to fill up a blank or incomplete instrument may be exercised by any “holder” and not only the
first holder to whom the instrument was delivered. The person signing and delivering the paper is liable both
to a “holder” and a “holder-in-due- course”. But there is a difference in their respective rights. A “holder” can
recover only what the person signing and delivering the paper agreed to pay under the instrument, while a
“holder-in- due-course” can recover the whole amount made payable by the instrument provided that it is
covered by the stamp, even though the amount authorised was smaller.
KINDS OF NEGOTIABLE INSTRUMENTS

The Act recognises only three kinds of negotiable instruments under Section 13 but it does not exclude any
other negotiable instrument provided the instrument entitles a person to a sum of money and is transferable
by delivery. Instruments written in oriental languages i.e. hundis are also negotiable instruments. These
instruments are discussed below:
(i) Promissory Notes

A “promissory note” is an instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a certain
person, or only to bearer of the instrument. (Section 4)
Parties to a Promissory Note:

A promissory note has the following parties:
(a) The maker: the person who makes or executes the note promising to pay the amount stated therein.
(b) The payee: one to whom the note is payable.
(c) The holder: is either the payee or some other person to whom he may have endorsed the note.
(d) The endorser.
(e) The endorsee.
Essentials of a Promissory Note:

To be a promissory note, an instrument must possess the following essentials:
(a) It must be in writing. An oral promise to pay will not do.
(b) It must contain an express promise or clear undertaking to pay. A promise to pay cannot be
inferred. A mere acknowledgement of debt is not sufficient. If A writes to B “I owe you (I.O.U.) Rs.
500", there is no promise to pay and the instrument is not a promissory note.
(c) The promise or undertaking to pay must be unconditional. A promise to pay “when able”, or “as
soon as possible”, or “after your marriage to D”, is conditional. But a promise to pay after a specific
time or on the happening of an event which must happen, is not conditional, e.g. “I promise to
pay Rs. 1,000 ten days after the death of B”, is unconditional.
(d) The maker must sign the promissory note in token of an undertaking to pay to the payee or his
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order.
(e) The maker must be a certain person, i.e., the note must show clearly who is the person engaging
himself to pay.
(f) The payee must be certain. The promissory note must contain a promise to pay to some person or
persons ascertained by name or designation or to their order.
(g) The sum payable must be certain and the amount must not be capable of contingent additions or
subtractions. If A promises to pay Rs. 100 and all other sums which shall become due to him, the
instrument is not a promissory note.
(h) Payment must be in legal money of the country. Thus, a promise to pay Rs. 500 and deliver 10
quintals of rice is not a promissory note.
(i) It must be properly stamped in accordance with the provisions of the Indian Stamp Act. Each stamp
must be duly cancelled by maker’s signature or initials.
(j) It must contain the name of place, number and the date on which it is made. However, their
omission will not render the instrument invalid, e.g. if it is undated, it is deemed to be dated on the
date of delivery.
Note: A promissory note cannot be made payable or issued to bearer, no matter whether it is
payable on demand or after a certain time (Section 31 of the RBI Act).
(ii) Bills of Exchange

A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to or to the order of, a certain person or to the
bearer of the instrument. (Section 5)
The definition of a bill of exchange is very similar to that of a promissory note and for most of the cases the
rules which apply to promissory notes are in general applicable to bills. There are however, certain important
points of distinction between the two.
Parties to bills of exchange

The following are parties to a bill of exchange:
(a) The Drawer: the person who draws the bill.
(b) The Drawee: the person on whom the bill is drawn.
(c) The Acceptor: one who accepts the bill. Generally, the drawee is the acceptor but a stranger may
accept it on behalf of the drawee.
(d) The payee: one to whom the sum stated in the bill is payable, either the drawer or any other person
may be the payee.
(e) The holder: is either the original payee or any other person to whom, the payee has endorsed the
bill. In case of a bearer bill, the bearer is the holder.
(f) The endorser: when the holder endorses the bill to any one else he becomes the endorser.
(g) The endorsee: is the person to whom the bill is endorsed.
(h) Drawee in case of need: Besides the above parties, another person called the “drawee in case of
need”, may be introduced at the option of the drawer. The name of such a person may be inserted
either by the drawer or by any endorser in order that resort may be had to him in case of need, i.e.,
when the bill is dishonoured by either non-acceptance or non-payment.
(i) Acceptor for honour: Further, any person may voluntarily become a party to a bill as acceptor. A
person, who on the refusal by the original drawee to accept the bill or to furnish better security,
when demanded by the notary, accept the bill supra protest in order to safeguard the honour of the
drawer or any endorser, is called the acceptor for honour.
Essentials of a Bill of Exchange:

(1) It must be in writing.
(2) It must contain an unconditional order to pay money only and not merely a request.
(3) It must be signed by the drawer.
(4) The parties must be certain.
(5) The sum payable must also be certain.
(6) It must comply with other formalities e.g. stamps, date, etc.
Distinction between Bill of Exchange and Promissory Note

The following are the important points of distinction between a bill of exchange and a promissory note:
(a) A promissory note is a two-party instrument, with a maker (debtor) and a payee (creditor). In a bill
there are three parties—drawer, drawee and payee, though any two out of the three capacities may
be filled by one and the same person. In a bill, the drawer is the maker who orders the drawee to
pay the bill to a person called the payee or to his order. When the drawee accepts the bill he is
called the acceptor.
(b) A note cannot be made payable to the maker himself, while in a bill, the drawer and payee may be
the same person.
(c) A note contains an unconditional promise by the maker to pay to the payee or his order; in a bill
there is an unconditional order to the drawee to pay according to the directions of the drawer.
(d) A note is presented for payment without any prior acceptance by the maker. A bill payable after
sight must be accepted by the drawee or someone else on his behalf before it can be presented for
payment.
(e) The liability of the maker of a pro-note is primary and absolute, but the liability of the drawer of a bill
is secondary and conditional.
(f) Foreign bill must be protested for dishonour but no such protest is necessary in the case of a note.
(g) When a bill is dishonoured, due notice of dishonour is to be given by the holder to the drawer and
the intermediate endorsee, but no such notice need to be given in the case of a note.
(h) A bill can be drawn payable to bearer provided it is not payable on demand. A promissory note
cannot be made payable to bearer, even if it is made payable otherwise than on demand.
How Bill of Exchange Originates—Forms of Bills of Exchange
Bills of exchange were originally used for payment of debts by traders residing in one country to another
country with a view to avoid transmission of coin. Now-a-days they are used more as trade bills both in
connection with domestic trade and foreign trade and are called inland bills and foreign bills respectively.
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Inland Bills (Sections 11 and 12)
A bill of exchange is an inland instrument if it is (i) drawn or made and payable in India, or (ii) drawn in India
upon any person who is a resident in India, even though it is made payable in a foreign country. But a
promissory note to be an inland should be drawn and payable in India, as it has no drawee.
Two essential conditions to make an inland instrument are:

(1) the instrument must have been drawn or made in India; and
(2) the instrument must be payable in India or the drawee must be in India.
Examples: A bill drawn in India, payable in USA, upon a person in India is an inland instrument. A bill drawn
in India and payable in India but drawn on a person in USA is also an inland instrument.
Foreign Bills
All bills which are not inland are deemed to be foreign bills. Normally foreign bills are drawn in sets of three
copies.
Trade Bill
A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. When a trader sells goods
on credit, he may make use of a bill of exchange. Suppose A sells goods worth Rs. 1,000 to B and allows him
90 days time to pay the price, A will draw a bill of exchange on B, on the following terms: “Ninety days after
date pay A or order, the sum of one thousand rupees only for value received”. A will sign the bill and then
present it to B for acceptance. This is necessary because, until a bill is accepted by the drawee, nobody has
either rights or obligations. If B agrees to obey the order of A, he will accept the bill by writing across its face the
word “accepted” and signing his name underneath and then delivering the bill to the holder. B, the drawee, now
becomes the acceptor of the bill and liable to its holders. Such a bill is a genuine trade bill.
Accommodation Bill
All bills are not genuine trade bills, as they are often drawn for accommodating a party. An accommodation
bill is a bill in which a person lends or gives his name to oblige a friend or some person whom he knows or
otherwise. In other words, a bill which is drawn, accepted or endorsed without consideration is called an
accommodation bill. The party lending his name to oblige the other party is known as the accommodating or
accommodation party, and the party so obliged is called the party accommodated. An accommodation party
is not liable on the instrument to the party accommodated because as between them there was no
consideration and the instrument was merely to help. But the accommodation party is liable to a holder for
value, who takes the accommodation bill for value, though such holder may not be a holder in due course.
Thus, A may be in need of money and approach his friends B and C who, instead of lending the money
directly, propose to draw an “Accommodation Bill” in his favour in the following form:
“Three months after date pay A or order, the sum of Rupees one thousand only”.
B.
To
C.
If the credit of B and C is good, this device enables A to get an advance of `1,000 from his banker at the
commercial rate of discount. The real debtor in this case is not C, but A the payee who promises to
reimburse C before the period of three months only. A is here the principal debtor and B and C are mere
sureties. This inversion of liability affords a good definition of an accommodation bill: “If as between the
original parties to the bill the one who should prima facie be principal is in fact the surety whether he be
drawer, acceptor, or endorser, that bill is an accommodation bill”.
Bills in Sets (Section 132 and 133)

Foreign bills are usually drawn in sets to avoid the danger of loss. They are drawn in sets of three, each
of which is called “Via” and as soon as any one of them is paid, the others become inoperative. All these
parts form one bill and the drawer must sign and deliver all of them to the payee. The stamp is affixed only
on one part and one part is required to be accepted. But if the drawer mistakenly accepts all the parts of the
same bill, he will be liable on each part accepted as if it were a separate bill.
Right to Duplicate Bill

Where a bill of exchange has been lost before it was overdue, the person who was the holder to it may apply
to the drawer, to give him another bill of the same tenor. It is only the holder who can ask for a duplicate bill,
promissory note or cheque.
Bank Draft
A bill of exchange is also sometimes spoken of as a draft. It is called as a bank draft when a bill of exchange
drawn by one bank on another bank, or by itself on its own branch, and is a negotiable instrument. It is very
much like the cheque with three points of distinction between the two. A bank draft can be drawn only by a
bank on another bank, usually its own branch. It cannot so easily be counter-manded. It cannot be made
payable to bearer.
Specimen of a Bank Draft

A.B.C. Bank
X.Y.Z. Branch
No..................... Date...................
On demand pay ‘A’ or order the sum of rupees one thousand five hundred only for value received.
`1,500/-
Sd./-
Manager
To
‘B’ Branch, (Place)
In the above demand draft, the drawer is X.Y.Z. Branch, the drawee is ‘B’ branch and the payee is ‘A’.
(iii) Cheques
The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 has broadened, the
definition of cheque to include the electronic image of a truncated cheque and a cheque in the electronic
form. Section 6 of the Act provides that a ‘cheque’ is a bill of exchange drawn on a specified banker and not
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expressed to be payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form.
Despite the amendment as is evident the basic definition of the cheque has been retained and the definition
has only been enlarged to include cheques in the above form as well.
As per explanation appended to the section, the expression:

(i) ‘“a cheque in the electronic form” means a cheque drawn in electronic form by using any computer
resource and signed in a secure system with digital signature (with or without biometrics signature)
and asymmetric crypto system or with electronic signature, as the case may be;
(ii) ‘a truncated cheque’ means a cheque which is truncated during the course of a clearing cycle,
either by the clearing house or by the bank whether paying or receiving payment, immediately on
generation of an electronic image for transmission, substituting the further physical movement of the
cheque in writing. (Explanation I).
The expression ‘clearing house’ means the clearing house managed by the Reserve Bank of India or a
clearing house recognised as such by the Reserve Bank of India. (Explanation II).
‘Explanation III. – For the purposes of this section, the expressions “asymmetric crypto system”, “computer
resource”, “digital signature”, “electronic form” and “electronic signature” shall have the same meanings
respectively assigned to them in the Information Technology Act, 2000.’
Simply stated, a cheque is a bill of exchange drawn on a bank payable always on demand. Thus, a cheque
is a bill of exchange with two additional qualifications, namely: (i) it is always drawn on a banker, and (ii) it is
always payable on demand. A cheque being a species of a bill of exchange, must satisfy all the requirements
of a bill; it does not, however, require acceptance.
Note: By virtue of Section 31 of the Reserve Bank of India Act, no bill of exchange or hundi can be made
payable to bearer on demand and no promissory note or a bank draft can be made payable to bearer at all,
whether on demand or after a specified time. Only a cheque can be payable to bearer on demand.
Parties to a cheque
The following are the parties to a cheque:
(a) The drawer: The person who draws the cheque.
(b) The drawee: The banker of the drawer on whom the cheque is drawn.
(c), (d), (e) and (f) The payee, holder, endorser and endorsee: same as in the case of a bill.
Essentials of a Cheque
(1) It is always drawn on a banker.
(2) It is always payable on demand.
(3) It does not require acceptance. There is, however, a custom among banks to mark cheques as
good for purposes of clearance.
(4) A cheque can be drawn on bank where the drawer has an account.
(5) Cheques may be payable to the drawer himself. It may be made payable to bearer on demand
unlike a bill or a note.
(6) The banker is liable only to the drawer. A holder has no remedy against the banker if a cheque is
dishonoured.
(7) A cheque is usually valid for fix months. However, it is not invalid if it is post dated or ante-dated.
(8) No Stamp is required to be affixed on cheques.
Distinction between Cheques and Bills of Exchange

As a general rule, the provisions applicable to bills payable on demand apply to cheques, yet there are few
points of distinction between the two, namely:
(a) A cheque is a bill of exchange and always drawn on a banker, while a bill may be drawn on any
one, including banker.
(b) A cheque can only be drawn payable on demand, a bill may be drawn payable on demand, or on
the expiry of a specified period after sight or date.
(c) A bill payable after sight must be accepted before payment can be demanded, a cheque does not
require acceptance and is intended for immediate payment.
(d) A grace of 3 days is allowed in the case of time bills, while no grace is given in the case of a
cheque, for payment.
(e) The drawer of a bill is discharged, if it is not presented for payment, but the drawer of a cheque is
discharged only if he suffers any damage by delay in presentment for payment.
(f) Notice of the dishonour of a bill is necessary, but not in the case of a cheque.
(g) The cheque being a revocable mandate, the authority may be revoked by countermanding payment,
and is determined by notice of the customer’s death or insolvency. This is not so in the case of bill.
(h) A cheque may be crossed, but not a bill.
A cheque is a bill of exchange drawn on a specified banker and always payable on demand. A cheque is
always drawn on a particular banker and is always payable on demand. Consequently, all cheques are bills
of exchange but all bills are not cheques.
Specimen of a Cheque
A.B.C. Bank
X.Y.Z. Branch
Date...................................
Pay ‘A’............................................................................................... or the bearer sum of

rupees...................................................................................................... only.
Rs.........../-
A/c No...............LF.............
No..................................... Sd/-
Banker
A banker is one who does banking business. Section 5(b) of the Banking Regulation Act, 1949 defines
banking as, “accepting for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise and withdrawable by cheque, draft or otherwise.” This definition
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emphasises two points: (1) that the primary function of a banker consists of accepting of deposits for the
purpose of lending or investing the same; (2) that the amount deposited is repayable to the depositor on
demand or according to the agreement. The demand for repayment can be made through a cheque, draft or
otherwise, and not merely by verbal order.
Customer
The term “customer” is neither defined in Indian nor in English statutes. The general opinion is that a
customer is one who has an account with the bank or who utilises the services of the bank.
The special features of the legal relationship between the banker and the customer may be termed as the
obligations and rights of the banker. These are:
1. Obligation to honour cheques of the customers.
2. Obligation to collect cheques and drafts on behalf of the customers.
3. Obligation to keep proper record of transactions with the customer.
4. Obligation to comply with the express standing instructions of the customer.
5. Obligation not to disclose the state of customer’s account to anyone else.
6. Obligation to give reasonable notice to the customer, if the banker wishes to close the account.
7. Right of lien over any goods and securities bailed to him for a general balance of account.
8. Right of set off and right of appropriation.
9. Right to claim incidental charges and interest as per rules and regulations of the bank, as
communicated to the customer at the time of opening the account.
Liability of a Banker
By opening a current account of a customer, the banker becomes liable to his debtor to the extent of the
amount so received in the said account and undertakes to honour the cheques drawn by the customer so
long as he holds sufficient funds to the customer’s credit. If a banker, without justification, fails to honour his
customer’s cheques, he is liable to compensate the drawer for any loss or damage suffered by him. But the
payee or holder of the cheque has no cause of action against the banker as the obligation to honour a
cheque is only towards the drawer.
The banker must also maintain proper and accurate accounts of credits and debits. He must honour a
cheque presented in due course. But in the following circumstances, he must refuse to honour a cheque and
in some others he may do so.
When Banker must Refuse Payment

In the following cases the authority of the banker to honour customer’s cheque comes to an end, he must
refuse to honour cheques issued by the customer:
(a) When a customer countermands payment i.e., where or when a customer, after issuing a cheque
issues instructions not to honour it, the banker must not pay it.
(b) When the banker receives notice of customer’s death.
(c) When customer has been adjudged an insolvent.
(d) When the banker receives notice of customer’s insanity.

(e) When an order (e.g., Garnishee Order) of the Court, prohibits payment.
(f) When the customer has given notice of assignment of the credit balance of his account.
(g) When the holder’s title is defective and the banker comes to know of it.
(h) When the customer has given notice for closing his account.
When Banker may Refuse Payment

In the following cases the banker may refuse to pay a customer’s cheque:
(a) When the cheque is post-dated.
(b) When the banker has no sufficient funds of the drawer with him and there is no communication
between the bank and the customer to honour the cheque.
(c) When the cheque is of doubtful legality.
(d) When the cheque is not duly presented, e.g., it is presented after banking hours.
(e) When the cheque on the face of it is irregular, ambiguous or otherwise materially altered.
(f) When the cheque is presented at a branch where the customer has no account.
(g) When some persons have joint account and the cheque is not signed jointly by all or by the
survivors of them.
(h) When the cheque has been allowed to become stale, i.e., it has not been presented within six
months of the date mentioned on it.
Protection of Paying Banker (Sections 10, 85 and 128)

Section 85 lays down that where a cheque payable to order purports to be endorsed by or on behalf of the
payee the banker is discharged by payment in due course. He can debit the account of the customer with the
amount even though the endorsement turns out subsequently to have been forged, or the agent of the payee
without authority endorsed it on behalf of the payee. It would be seen that the payee includes endorsee. This
protection is granted because a banker cannot be expected to know the signatures of all the persons in the
world. He is only bound to know the signatures of his own customers.
Therefore, the forgery of drawer’s signature will not ordinarily protect the banker but even in this case, the
banker may debit the account of the customer, if it can show that the forgery was intimately connected with
the negligence of the customer and was the proximate cause of loss.
In the case of bearer cheques, the rule is that once a bearer cheque, always a bearer cheque. Where,
therefore, a cheque originally expressed by the drawer himself to be payable to bearer, the banker may
ignore any endorsement on the cheque. He will be discharged by payment in due course. But a cheque
which becomes bearer by a subsequent endorsement in blank is not covered by this Section. A banker is
discharged from liability on a crossed cheque if he makes payment in due course.
Payment in due Course (Section 10)

Any person liable to make payment under a negotiable instrument, must make the payment of the amount
due thereunder in due course in order to obtain a valid discharge against the holder.
A payment in due course means a payment in accordance with the apparent tenor of the instrument, in good
608 EP-EBCL
faith and without negligence to any person in possession thereof.
A payment will be a payment in due course if:

(a) it is in accordance with the apparent tenor of the instrument, i.e., according to what appears on the
face of the instrument to be the intention of the parties;
(b) it is made in good faith and without negligence, and under circumstances which do not afford a
ground for believing that the person to whom it is made is not entitled to receive the amount;
(c) it is made to the person in possession of the instrument who is entitled as holder to receive
payment;
(d) payment is made under circumstances which do not afford a reasonable ground believing that he is
not entitled to receive payment of the amount mentioned in the instrument; and
(e) payment is made in money and money only.
Under Sections 10 and 128, a paying banker making payment in due course is protected.
Collecting Banker
Collecting Banker is one who collects the proceeds of a cheque for a customer. Although a banker collects
the proceeds of a cheque for a customer purely as a matter of service, yet the Negotiable Instruments Act,
1881 indirectly imposes statutory obligation, statutory in nature. This is evident from Section 126 of the Act
which provides that a cheque bearing a “general crossing” shall not be paid to anyone other than banker and
a cheque which is “specially crossed” shall not be paid to a person other than the banker to whom it is
crossed. Thus, a paying banker must pay a generally crossed cheque only to a banker thereby meaning that
it should be collected by another banker. While so collecting the cheques for a customer, it is quite possible
that the banker collects for a customer, proceeds of a cheque to which the customer had no title in fact. In
such cases, the true owner may sue the collecting banker for “conversion”. At the same time, it cannot be
expected of a banker to know or to ensure that all the signatures appearing in endorsements on the reverse
of the cheque are genuine. The banker is expected to be conversant only with the signatures of his
customer. A customer to whom a cheque has been endorsed, would request his banker to collect a cheque.
In the event of the endorser’s signature being proved to be forged at later date, the banker who collected the
proceeds should not be held liable for the simple reason that he has merely collected the proceeds of a
cheque. Section 131 of the Negotiable Instruments Act affords statutory protection in such a case where the
customer’s title to the cheque which the banker has collected has been questioned. It reads as follows:
“A banker who has in good faith and without negligence received payment for a customer of a cheque
crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any
liability to the true owner of the cheque by reason of only having received such payment.
Explanation: A banker receives payment of a crossed cheque for a customer within the meaning of this
section notwithstanding that he credits his customer’s account with the amount of the cheque before
receiving payment thereof."
The Amendment Act, 2002 has added a new explanation to Section 131 which provides that it shall be the duty
of the banker who receives payment based on an electronic image of a truncated cheque held with him, to
verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent
on the face of the instrument that can be verified with due diligence and ordinary care. (Explanation II)
The requisites of claiming protection under Section 131 are as follows:

(i) The collecting banker should have acted in good faith and without negligence. An act is done in
good faith when it is done honestly. The plea of good faith can be rebutted on the ground of
recklessness indicative of want of proper care and attention. Therefore, much depends upon the
facts of the case. The burden of proving that the cheque was collected in good faith and without
negligence is upon the banker claiming protection. Failure to verify the regularity of endorsements,
collecting a cheque payable to the account of the company to the credit of the director, etc. are
examples of negligence.
(ii) The banker should have collected a crossed cheque, i.e., the cheque should have been crossed
before it came to him for collection.
(iii) The proceeds should have been collected for a customer, i.e., a person who has an account with
him.
(iv) That the collecting banker has only acted as an agent of the customer. If he had become the holder
for value, the protection available under Section 131 is forfeited—Where for instance, the banker
allows the customer to withdraw the amount of the cheque before the cheque is collected or where
the cheque has been accepted in specific reduction of an overdraft, the banker is deemed to have
become the holder for value and the protection is lost. But the explanation to Section 131 says that
the mere crediting of the amount to the account does not imply that the banker has become a
holder for value because due to accounting conveniences the banker may credit the account of the
cheque to the customer’s account even before proceeds thereof are realised.
Overdue, Stale or Out-of-date Cheques
A cheque is overdue or becomes statute-barred after three years from its due date of issue. A holder cannot
sue on the cheque after that time. Apart from this provision, the holder of a cheque is required to present it
for payment within a reasonable time, as a cheque is not meant for indefinite circulation. In India, a cheque,
which has been in circulation for more than six months, is regarded by bankers as stale. If, as a result of any
delay in presenting a cheque, the drawer suffers any loss, as by the failure of the bank, the drawer is
discharged from liability to the holder to the extent of the damage.
Liability of Endorser
In order to charge an endorser, it is necessary to present the cheque for payment within a reasonable time of
its delivery by such endorser. ‘A’ endorses and delivers a cheque to B, and B keeps it for an unreasonable
length of time, and then endorses and delivers it to C. C presents it for payment within a reasonable time
after its receipt by him, and it is dishonoured. C can enforce payment against B but not against A, as qua A,
the cheque has become stale.
Rights of Holder against Banker
A banker is liable to his customer for wrongful dishonour of his cheque but it is not liable to the payee or
holder of the cheque. The holder has no right to enforce payment from the banker except in two cases,
namely, (i) where the holder does not present the cheque within a reasonable time after issue, and as a
result the drawer suffers damage by the failure of the banker in liquidation proceedings; and (ii) where a
banker pays a crossed cheque by mistake over the counter, he is liable to the owner for any loss occasioned
by it.
Crossing of Cheques
A cheque is either “open” or “crossed”. An open cheque can be presented by the payee to the paying banker
and is paid over the counter. A crossed cheque cannot be paid across the counter but must be collected
through a banker.
610 EP-EBCL
A crossing is a direction to the paying banker to pay the money generally to a banker or to a particular
banker, and not to pay otherwise. The object of crossing is to secure payment to a banker so that it
could be traced to the person receiving the amount of the cheque. Crossing is a direction to the paying
banker that the cheque should be paid only to a banker or a specified banker. To restrain negotiability,
addition of words “Not Negotiable” or “Account Payee Only” is necessary. A crossed bearer cheque can be
negotiated by delivery and crossed order cheque by endorsement and delivery. Crossing affords security
and protection to the holder of the cheque.
Modes of Crossing (Sections 123-131A)
There are two types of crossing which may be used on cheque, namely: (i) General, and (ii) Special. To
these may be added another type, i.e. Restrictive crossing.
It is general crossing where a cheque bears across its face an addition of two parallel transverse lines and/or
the addition of the words “and Co.” between them, or addition of “not negotiable”. As stated earlier, where a
cheque is crossed generally, the paying banker will pay to any banker. Two transverse parallel lines are
essential for a general crossing (Sections 123-126).
In case of general crossing, the holder or payee cannot get the payment over the counter of the bank but
through a bank only. The addition of the words “and Co.” do not have any significance but the addition of the
words “not negotiable” restrict the negotiability of the cheque and in case of transfer, the transferee will not
give a better title than that of a transferor.
Where a cheque bears across its face an addition of the name of a banker, either with or without the words
“not negotiable” that addition constitutes a crossing and the cheque is crossed specially and to that banker.
The paying banker will pay only to the banker whose name appears across the cheque, or to his collecting
agent. Parallel transverse lines are not essential but the name of the banker is the insignia of a special
crossing.
In case of special crossing, the paying banker is to honour the cheque only when it is prescribed through the
bank mentioned in the crossing or it’s agent bank.
Account Payee’s Crossing: Such crossing does, in practice, restrict negotiability of a cheque. It warns the
collecting banker that the proceeds are to be credited only to the account of the payee, or the party named,
or his agent. If the collecting banker allows the proceeds of a cheque bearing such crossing to be credited to
any other account, he will be guilty of negligence and will not be entitled to the protection given to collecting
banker under Section 131. Such crossing does not affect the paying banker, who is under no duty to
ascertain that the cheque is in fact collected for the account of the person named as payee.
Not Negotiable Crossing
A cheque may be crossed not negotiable by writing across the face of the cheque the words “Not Negotiable”
within two transverse parallel lines in the case of a general crossing or alongwith the name of a banker in the
case of a special crossing. Section 130 of the Negotiable Instruments Act provides “A person taking a
cheque crossed generally or specially bearing in either case with the words ”not negotiable" shall not have
and shall not be capable of giving, a better title to the cheque than that which the person from whom he took
it had". The crossing of cheque “not negotiable” does not mean that it is non-transferable. It only deprives the
instrument of the incident of negotiability. Normally speaking, the essential feature of a negotiable instrument
as opposed to chattels is that a person who takes the instrument in good faith, without negligence, for value,
before maturity and without knowledge of the defect in the title of the transferor, gets a good title to the
instrument. In other words, he is called a holder in due course who acquires an indisputable title to the
cheque. (When the instrument passes through a holder-in-due course, it is purged of all defects and the
subsequent holders also get good title). It is exactly this important feature which is taken away by crossing
the cheque “not negotiable”. In other words, a cheque crossed “not negotiable” is like any other chattel and
therefore the transferee gets same title to the cheque which his transferor had. That is to say that the
transferee cannot claim the rights of a holder-in-due-course. So long as the title of the transferors is good,
the title of the transferees is also good but if there is a taint in the title to the cheque of one of the endorsers,
then all the subsequent transferees’ title also become tainted with the same defect they cannot claim to be
holders-in-due-course.
The object of this Section is to afford protection to the drawer or holder of a cheque who is desirous of
transmitting it to another person, as much protection as can reasonably be afforded to him against
dishonestly or actual miscarriage in the course of transit. For example, a cheque payable to bearer is
crossed generally and is marked “not negotiable”. It is lost or stolen and comes into the possession of X who
takes it in good faith and gives value for it, X collects the cheque through his bank and paying banker also
pays. In this case, both the paying and the collecting bankers are protected under Sections 128 and 131
respectively. But X cannot claim that he is a holder-in-due course which he could have under the normal
circumstances claimed. The reason is that cheque is crossed “not negotiable” and hence the true owner’s
(holder’s) right supercedes the rights of the holder-in-due-course. Since X obtained the cheque from a
person who had no title to the cheque (i.e. from one whose title was defective) X can claim no better title
solely because the cheque was crossed “not negotiable” and not for any other reason. Thus “not negotiable”
crossing not only protects the rights of the true owner of the cheque but also serves as a warning to the
endorsees’ to enquire thoroughly before taking the cheque as they may have to be answerable to the true
owner thereof if the endorser’s title is found to be defective.
“Not negotiable” restricts the negotiability of the cheque and in case of transfer, the transferee will not get a
better title than that of a transferor.
If the cheque becomes “not negotiable” it lacks negotiability. A cheque crossed specially or generally bearing
the words “not negotiable”, lacks negotiability and therefore is not a negotiable instrument in the true sense.
It does not restrict transferability but restricts negotiability only.
Specimen of a general crossing Specimen of a special crossing

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Maturity
Cheques are always payable on demand but other instruments like bills, notes, etc. may be made payable
on a specified date or after the specified period of time. The date on which payment of an instrument falls
due is called its maturity. According to Section 22 of the Act, “the maturity of a promissory note or a bill of
exchange is the date at which it falls due”. According to Section 21 a promissory note or bill of exchange
payable “at sight” or “on presentment” is payable on demand. It is due for payment as soon as it is issued.
The question of maturity, therefore, arises only in the case of a promissory note or a bill of exchange payable
“after date” or “after sight” or at a certain period after the happening of an event which is certain to happen.
Maturity is the date on which the payment of an instrument falls due. Every instrument payable at a specified
period after date or after sight is entitled to three days of grace. Such a bill or note matures or falls due on
the last day of the grace period, and must be presented for payment on that day and if dishonoured, suit can
be instituted on the next day after maturity. If an instrument is payable by instalments, each instalment is
entitled to three days of grace. No days of grace are allowed for cheques, as they are payable on demand.
Where a note or bill is expressed to be payable on the expiry of specified number of months after sight, or
after date, the period of payment terminates on the day of the month which corresponds with the date of
instrument, or with the date of acceptance if the bill be accepted or presented for sight, or noted or protested
for non-acceptance. If the month in which the period would terminate has no corresponding day, the period
shall be held to terminate on the last day of such month.
Illustrations
(i) A negotiable instrument dated 31st January, 2001, is made payable at one months after date. The
instrument is at maturity on the third day after the 28th February, 2001, i.e. on 3rd March, 2001.
(ii) A negotiable instrument dated 30th August, 2001, is made payable three months after date. The
instrument is at maturity on 3rd December, 2001.
(iii) A negotiable instrument dated the 31st August, 2001, is made payable three months after date. The
instrument is at maturity on 3rd December, 2001.
If the day of maturity falls on a public holiday, the instrument is payable on the preceeding business day.
Thus, if a bill is at maturity on a Sunday. It will be deemed due on Saturday and not on Monday.
The ascertainment of the date of maturity becomes important because all these instruments must be
presented for payment on the last day of grace and their payment cannot be demanded before that date.
Where an instrument is payable by instalments, it must be presented for payment on the third day after the
day fixed for the payment of each instalment.
Holder
According to Section 8 of the Act a person is a holder of a negotiable instrument who is entitled in his own
name (i) to the possession of the instrument, and (ii) to recover or receive its amount from the parties
thereto. It is not every person in possession of the instrument who is called a holder. To be a holder, the
person must be named in the instrument as the payee, or the endorsee, or he must be the bearer thereof. A
person who has obtained possession of an instrument by theft, or under a forged endorsement, is not a
holder, as he is not entitled to recover the instrument. The holder implies de jure (holder in law) holder and
not de facto (holder in fact) holder. An agent holding an instrument for his principal is not a holder although
he may receive its payment.
Holder in Due Course

Section 9 states that a holder in due course is (i) a person who for consideration, obtains possession of a
negotiable instrument if payable to bearer, or (ii) the payee or endorsee thereof, if payable to order, before its
maturity and without having sufficient cause to believe that any defect existed in the title of the person from
whom he derived his title.
In order to be a holder in due course, a person must satisfy the following conditions:
(i) He must be the holder of the instrument.
(ii) He should have obtained the instrument for value or consideration.
(iii) He must have obtained the negotiable instrument before maturity.
(iv) The instrument should be complete and regular on the face of it.
(v) The holder should take the instrument in good faith.
A holder in due course is in a privileged position. He is not only himself protected against all defects of the
persons from whom he received the instrument as current coin, but also serves as a channel to protect all
subsequent holders. A holder in due course can recover the amount of the instrument from all previous
parties, although, as a matter of fact, no consideration was paid by some of the previous parties to the
instrument or there was a defect of title in the party from whom he took it. Once an instrument passes
through the hands of a holder in due course, it is purged of all defects. It is like current coin. Whoever takes it
can recover the amount from all parties previous to such holder.
Capacity of Parties
Capacity to incur liability as a party to a negotiable instrument is co-extensive with capacity to contract.
According to Section 26, every person capable of contracting according to law to which he is subject, may
bind himself and be bound by making, drawing, acceptance, endorsement, delivery and negotiation of a
promissory note, bill of exchange or cheque.
Negatively, minors, lunatics, idiots, drunken person and persons otherwise disqualified by their personal law,
do not incur any liability as parties to negotiable instruments. But incapacity of one or more of the parties to a
negotiable instrument in no way, diminishes the abilities and the liabilities of the competent parties. Where a
minor is the endorser or payee of an instrument which has been endorsed all the parties accepting the minor
are liable in the event of its dishonour.
Liability of Parties
The provisions regarding the liability of parties to negotiable instruments are laid down in Sections 30 to 32
and 35 to 42 of the Negotiable Instruments Act. These provisions are as follows:
1. Liability of Drawer (Section 30)
The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof,
to compensate the holder, provided due notice of dishonour has been given to or received by the drawer.
The nature of drawer’s liability is that by drawing a bill, he undertakes that (i) on due presentation, it shall be
accepted and paid according to its tenor, and (ii) in case of dishonour, he will compensate the holder or any
endorser, provided notice of dishonour has been duly given. However, in case of accommodation bill no
notice of dishonour to the drawer is required.
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The liability of a drawer of a bill of exchange is secondary and arises only on default of the drawee, who is
primarily liable to make payment of the negotiable instrument.
2. Liability of the Drawee of Cheque (Section 31)
The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the
payment of such cheque must pay the cheque when duly required to do so and, or in default of such
payment, he shall compensate the drawer for any loss or damage caused by such default.
As a cheque is a bill of exchange, drawn on a specified banker, the drawee of a cheque must always be a
banker. The banker, therefore, is bound to pay the cheque of the drawer, i.e., customer, if the following
conditions are satisfied:
(i) The banker has sufficient funds to the credit of customer’s account.
(ii) The funds are properly applicable to the payment of such cheque, e.g., the funds are not under any
kind of lien etc.
(iii) The cheque is duly required to be paid, during banking hours and on or after the date on which it is
made payable.
If the banker is unjustified in refusing to honour the cheque of its customer, it shall be liable for damages.
3. Liability of “Maker” of Note and “Acceptor” of Bill (Section 32)
In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity
of a bill of exchange are bound to pay the amount thereof at maturity, according to the apparent tenor of the
note or acceptance respectively. The acceptor of a bill of exchange at or after maturity is bound to pay the
amount thereof to the holder on demand.
It follows that the liability of the acceptor of a bill corresponds to that of the maker of a note and is absolute
and unconditional but the liability under this Section is subject to a contract to the contrary (e.g., as in the
case of accommodation bills) and may be excluded or modified by a collateral agreement. Further, the
payment must be made to the party named in the instrument and not to any-one else, and it must be made at
maturity and not before.
4. Liability of endorser (Section 35)
Every endorser incurs liability to the parties that are subsequent to him. Whoever endorses and delivers a
negotiable instrument before maturity is bound thereby to every subsequent holder in case of dishonour of the
instrument by the drawee, acceptor or maker, to compensate such holder of any loss or damage caused to him by
such dishonour provided (i) there is no contract to the contrary; (ii) he (endorser) has not expressly excluded,
limited or made conditional his own liability; and (iii) due notice of dishonour has been given to, or received by,
such endorser. Every endorser after dishonour, is liable upon the instrument as if it is payable on demand.
He is bound by his endorsement notwithstanding any previous alteration of the instrument. (Section 88)
5. Liability of Prior Parties (Section 36)
Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is
duly satisfied. Prior parties may include the maker or drawer, the acceptor and all the intervening endorsers
to a negotiable instrument. The liability of the prior parties to a holder in due course is joint and several. The
holder in due course may hold any or all prior parties liable for the amount of the dishonoured instrument.
6. Liability inter se
Various parties to a negotiable instrument who are liable thereon stand on a different footing with respect to
the nature of liability of each one of them.
7. Liability of Acceptor of Forged Endorsement (Section 41)
An acceptor of a bill of exchange already endorsed is not relieved from liability by reason that such
endorsement is forged, if he knew or had reason to believe the endorsement to be forged when he accepted
the bill.
8. Acceptor’s Liability on a Bill drawn in a Fictitious Name
An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by
reason that such name is fictitious, relieved from liability to any holder in due course claiming under an
endorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.
Negotiation (Section 14)

A negotiable instrument may be transferred by negotiation or assignment. Negotiation is the transfer of an
instrument (a note, bill or cheque) for one person to another in such a manner as to convey title and to
constitute the transferee the holder thereof. When a negotiable instrument is transferred by negotiation, the
rights of the transferee may rise higher than those of the transferor, depending upon the circumstances
attending the negotiation. When the transfer is made by assignment, the assignee has only those rights
which the assignor possessed. In case of assignment, there is a transfer of ownership by means of a written
and registered document.
Negotiability and Assignability Distinguished

A transfer by negotiation differs from transfer by assignment in the following respects:
(a) Negotiation requires mere delivery of a bearer instrument and endorsement and delivery of an order
instrument to effectuate a transfer. Assignment requires a written document signed by the
transferor.
(b) Notice of transfer of debt (actionable claim) must be given by the assignee to the debtor in order to
complete his title; no such notice is necessary in a transfer by negotiation.
(c) On assignment, the transferee of an actionable claim takes it subject to all the defects in the title of,
and subject to all the equities and defences available against the assignor, even though he took the
assignment for value and in good faith. In case of negotiation the transferee, as holder-in-due
course, takes the instrument free from any defects in the title of the transferor.
Importance of Delivery
Negotiation is effected by mere delivery of a bearer instrument and by endorsement and delivery of an order
instrument. This shows that “delivery” is essential in negotiable instruments. Section 46 expressly provides
that making acceptance or endorsement of negotiable instrument is not complete until delivery, actual or
constructive, of the instrument. Delivery made voluntarily with the intention of passing property in the
instrument to the person to whom it is given is essential.
Negotiation by Mere Delivery

A bill or cheque payable to bearer is negotiated by mere delivery of the instrument. An instrument is payable
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to bearer:
(i) Where it is made so payable, or
(ii) Where it is originally made payable to order but the only or the last endorsement is in blank.
(iii) Where the payee is a fictitious or a non-existing person.
These instruments do not require signature of the transferor. The person who takes them is a holder, and
can sue in his own name on them. Where a bearer negotiates an instrument by mere delivery, and does not
put his signature thereon, he is not liable to any party to the instrument in case the instrument is
dishonoured, as he has not lent his credit to it. His obligations are only towards his immediate transferee and
to no other holders.
A cheque, originally drawn payable to bearer remains bearer, even though it is subsequently endorsed in full.
The rule is once a bearer cheque always a bearer cheque.
Negotiation by Endorsement and Delivery

An instrument payable to a specified person or to the order of a specified person or to a specified person or
order is an instrument payable to order. Such an instrument can be negotiated only by endorsement and
delivery. Unless the holder signs his endorsement on the instrument, the transferee does not become a
holder. Where an instrument payable to order is delivered without endorsement, it is merely assigned and
not negotiated and the holder thereof is not entitled to the rights of a holder in due course, and he cannot
negotiate it to a third person.
Endorsement (Sections 15 and 16)

Where the maker or holder of a negotiable instrument signs the same otherwise than as such maker for the
purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto (called Allonge), or
so, signs for the same purpose, a stamped paper intended to be completed as a negotiable instrument, he is
said to endorse the same (Section 15), the person to whom the instrument is endorsed is called the
endorsee.
In other words, ‘endorsement’ means and involves the writing of something on the back of an instrument for
the purpose of transferring the right, title and interest therein to some other person.
Classes of endorsement
An endorsement may be (a) Blank or General, (b) Special or Full, (c) Restrictive, or (d) Partial, and (e)
Conditional or Qualified.
(a) Blank or General: An endorsement is to be blank or general where the endorser merely writes his
signature on the back of the instrument, and the instrument so endorsed becomes payable to
bearer, even though originally it was payable to order. Thus, where bill is payable to “Mohan or
order”, and he writes on its back “Mohan”, it is an endorsement in blank by Mohan and the property
in the bill can pass by mere delivery, as long as the endorsement continues to be a blank. But a
holder of an instrument endorsed in blank may convert the endorsement in blank into an
endorsement in full, by writing above the endorser’s signature, a direction to pay the instrument to
another person or his order.
(b) Special or Full: If the endorser signs his name and adds a direction to pay the amount mentioned in
the instrument to, or to the order of a specified person, the endorsement is said to be special or in
full. A bill made payable to Mohan or Mohan or order, and endorsed “pay to the order of Sohan”
would be specially endorsed and Sohan endorses it further. A blank endorsement can be turned
into a special one by the addition of an order making the bill payable to the transferee.
(c) Restrictive: An endorsement is restrictive which prohibits or restricts the further negotiation of an
instrument. Examples of restrictive endorsement: “Pay A only” or “Pay A for my use” or “Pay A on
account of B” or “Pay A or order for collection”.
(d) Partial: An endorsement partial is one which purports to transfer to the endorsee a part only of the
amount payable on the instrument. A partial endorsement does not operate as negotiation of the
instrument. A holds a bill for Rs. 1,000 and endorses it as “Pay B or order Rs. 500". The
endorsement is partial and invalid.
(e) Conditional or qualified: An endorsement is conditional or qualified which limits or negatives the
liability of the endorser. An endorser may limit his liability in any of the following ways:
(i) By sans recourse endorsement, i.e. by making it clear that he does not incur the liability of an
endorser to the endorsee or subsequent holders and they should not look to him in case of
dishonour of instrument. The endorser excludes his liability by adding the words “sans recourse”
or “without recourse”, e.g., “pay A or order sans recourse”.
(ii) By making his liability depending upon happening of a specified event which may never happen,
e.g., the holder of a bill may endorse it thus: “Pay A or order on his marrying B”. In such a case,
the endorser will not be liable until A marries B.
It is pertinent to refer to Section 52 of the Negotiable Instruments Act, 1881 here. It reads “The endorser of a
negotiable instrument may, by express words in the endorsement exclude his own liability thereon, or make
such liability or the right of the endorsee to receive the amount due thereon depend upon the happening of a
specified event, although such event may never happen”.
Negotiation Back
Where an endorser negotiates an instrument and again becomes its holder, the instrument is said to be
negotiated back to that endorser and none of the intermediary endorsees are then liable to him. The rule
prevents a circuity of action. For example, A, the holder of a bill endorses it to B, B endorses to C, and C to
D, and endorses it again to A. A, being a holder in due course of the bill by second endorsement by D, can
recover the amount thereof from B, C, or D and himself being a prior party is liable to all of them. Therefore,
A having been relegated by the second endorsement to his original position, cannot sue B, C and D.
Where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all the
intermediate endorsers are liable to him. “the italicised portion of the above Section is important”. An
illustration will make the point clear. A is the payee of a negotiable instrument. He endorses the instrument
‘sans recourse’ to B, B endorses to C, C to D, and D again endorses it to A. In this case, A is not only
reinstated in his former rights but has the right of an endorsee against B, C and D.
Negotiation of Lost Instrument or that Obtained by Unlawful Means
When a negotiable instrument has been lost or has been obtained from any maker, acceptor or holder
thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or endorsee, who
claims through the person who found or obtained the instrument is entitled to receive the amount due
thereon from such maker, acceptor, or holder from any party prior to such holder unless such possessor or
endorsee is, or some person through whom he claims was, a holder in due course.
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Forged Endorsement
The case of a forged endorsement is worth special notice. If an instrument is endorsed in full, it cannot be
negotiated except by an endorsement signed by the person to whom or to whose order the instrument is
payable, for the endorsee obtains title only through his endorsement. Thus, if an instrument be negotiated by
means of a forged endorsement, the endorsee acquires no title even though he be a purchaser for value and
in good faith, for the endorsement is a nullity. Forgery conveys no title. But where the instrument is a bearer
instrument or has been endorsed in blank, it can be negotiated by mere delivery, and the holder derives his title
independent of the forged endorsement and can claim the amount from any of the parties to the instrument.
For example, a bill is endorsed, “Pay A or order”. A endorses it in blank, and it comes into the hands of B, who
simply delivers it to C, C forges B’s endorsement and transfer it to D. Here, D, as the holder does not derive his
title through the forged endorsement of B, but through the genuine endorsement of A and can claim payment
from any of the parties to the instrument in spite of the intervening forged endorsement.
Acceptance of a Bill of Exchange

The drawee of a bill of exchange, as such, has no liability on any bill addressed to him for acceptance or
payment. A refusal to accept or to pay such bill gives the holder no rights against him. The drawee becomes
liable only after he accepts the bill. The acceptor has to write the word ‘accepted’ on the bill and sign his
name below it. Thus, it is the acceptor who is primarily liable on a bill.
The acceptance of a bill is the indication by the drawee of his assent to the order of the drawer. Thus, when
the drawee writes across the face of the bill the word “accepted” and signs his name underneath he
becomes the acceptor of the bill.
An acceptance may be either general or qualified. A general acceptance is absolute and as a rule, an
acceptance has to be general. Where an acceptance is made subject to some condition or qualification,
thereby varying the effect of the bill, it is a qualified acceptance. The holder of the bill may either refuse to
take a qualified acceptance or non-acquiescence in it. Where he refuses to take it, he can treat the bill as
dishonoured by non-acceptance, and sue the drawer accordingly.
Acceptance for Honour

When a bill has been noted or protested for non-acceptance or for better security, any person not being a
party already liable thereon may, with the consent of the holder, by writing on the bill, accept the same for the
honour of any party thereto. The stranger so accepting, will declare under his hand that he accepts the
protested bill for the honour of the drawer or any particular endorser whom he names.
The acceptor for honour is liable to pay only when the bill has been duly presented at maturity to the drawee for
payment and the drawee has refused to pay and the bill has been noted and protested for non-payment. Where
a bill has been protested for non-payment after having been duly accepted, any person may intervene and pay
it supra protest for the honour of any party liable on the bill. When a bill is paid supra protest, it ceases to be
negotiable. The stranger, on paying for honour, acquires all the right of holder for whom he pays.
Presentment for Acceptance

It is only bills of exchange that require presentment for acceptance and even these of certain kinds only. Bills
payable on demand or on a fixed date need not be presented. Thus, a bill payable 60 days after due date on
the happening of a certain event may or may not be presented for acceptance. But the following bills must be
presented for acceptance otherwise, the parties to the bill will not be liable on it:
(a) A bill payable after sight. Presentment is necessary in order to fix maturity of the bills; and
(b) A bill in which there is an express stipulation that it shall be presented for acceptance before it is
presented for payment.
Section 15 provides that the presentment for acceptance must be made to the drawee or his duly authorised
agent. If the drawee is dead, the bill should be presented to his legal representative, or if he has been
declared an insolvent, to the official receiver or assigner.
The following are the persons to whom a bill of exchange should be presented:
(i) The drawee or his duly authorised agent.
(ii) If there are many drawees, bill must be presented to all of them.
(iii) The legal representatives of the drawee if drawee is dead.
(iv) The official receiver or assignee of insolvent drawee.
(v) To a drawee in case of need, if there is any. This is necessary when the original drawee refuses to
accept the bill.
(vi) The acceptor for honour. In case the bill is not accepted and is noted or protested for non-
acceptance, the bill may be accepted by the acceptor for honour. He is a person who comes
forward to accept the bill when it is dishonoured by non-acceptance.
The presentment must be made before maturity, within a reasonable time after it is drawn, or within the
stipulated period, if any, on a business day within business hours and at the place of business or residence
of the drawee. The presentment must be made by exhibiting the bill to the drawee; mere notice of its
existence in the possession of holder will not be sufficient.
When presentment is compulsory and the holder fails to present for acceptance, the drawer and all the
endorsers are discharged from liability to him.
Presentment for Acceptance when Excused

Compulsory presentment for acceptance is excused and the bill may be treated as dishonoured in the
following cases:
(a) Where the drawee cannot be found after reasonable search.
(b) Where drawee is a fictitious person or one incapable of contracting.
(c) Where although the presentment is irregular, acceptance has been refused on some other ground.
Presentment for Payment

Section 64 lays down the general rule as to presentment of negotiable instruments for payment. It says all
notes, bills and cheques must be presented for payment thereof respectively by or on behalf of the holder
during the usual hours of business and of the maker or acceptor, and if at banker’s within banking hours.
[Section 64(1)]
As mentioned earlier, the definition of cheque has been broadened to include the electronic image of a
truncated cheque and a cheque in the electronic form. Thus, the section has also been suitably amended to
provide rules as to presentment of truncated cheque. The amendment, despite recognising electronic image
of a truncated cheque, has made provision for the drawee bank to call for the truncated cheque in original if it
is not satisfied about the instrument.
Section 64(2) stipulates, where an electronic image of a truncated cheque is presented for payment, the
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drawee bank is entitled to demand any further information regarding the truncated cheque from the bank
holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent
tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the
instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification:
Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment
is made accordingly.
Presentment for Payment when Excused

No presentment is necessary and the instrument may be treated as dishonoured in the following cases:
(a) Where the maker, drawer or acceptor actively does something so as to intentionally obstruct the
presentment of the instrument, e.g., deprives the holder of the instrument and keeps it after
maturity.
(b) Where his business place is closed on the due date.
(c) Where no person is present to make payment at the place specified for payment.
(d) Where he cannot, after due search be found. (Section 61)
(e) Where there is a promise to pay notwithstanding non-presentment.
(f) Where the presentment is express or impliedly waived by the party entitled to presentment.
(g) Where the drawer could not possibly have suffered any damage by non-presentment.
(h) Where the drawer is a fictitious person, or one incompetent to contract.
(i) Where the drawer and the drawee are the same person.
(j) Where the bill is dishonoured by non-acceptance.
(k) Where presentment has become impossible, e.g., the declaration of war between the countries of
the holder and drawee.
(l) Where though the presentment is irregular, acceptance has been refused on some other grounds.
Dishonour by Non-Acceptance
Section 91 provides that a bill is said to be dishonoured by non-acceptance:
(a) When the drawee does not accept it within 48 hours from the time of presentment for acceptance.
(b) When presentment for acceptance is excused and the bill remains unaccepted.
(c) When the drawee is incompetent to contract.
(d) When the drawee is a fictitious person or after reasonable search can not be found.
(e) Where the acceptance is a qualified one.
Dishonour by Non-payment (Section 92)

A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of
the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to
pay the same. Also, a negotiable instrument is dishonoured by non-payment when presentment for payment
is excused and the instrument when overdue remains unpaid.
If the bill is dishonoured either by non-acceptance or by non-payment, the drawer and all the endorsers of
the bill are liable to the holder, provided he gives notice of such dishonour. The drawee is liable only when
there is dishonour by non-payment.
Notice of Dishonour (Sections 91-98 and Sections 105-107)

When a negotiable instrument is dishonoured either by non-acceptance or by non-payment, the holder or
some party liable thereon must give notice of dishonour to all other parties whom he seeks to make liable.
Each party receiving notice of dishonour must in order to render any prior party liable to himself, give notice
of dishonour to such party within a reasonable time after he has received it. The object of giving notice is not
to demand payment but to whom the party notified of his liability and in case of drawer to enable him to
protect himself as against the drawee or acceptor who has dishonoured the instrument issued by him. Notice
of dishonour is so necessary that an omission to give it discharges all parties other than the maker or
acceptor. These parties are discharged not only on the bill or note, but also in respect of the original
consideration.
Notice may be oral or in writing, but it must be actual formal notice. It must be given within a reasonable time
of dishonour.
Notice of Dishonour Unnecessary

No notice of dishonour is necessary:
(a) When it is dispensed with or waived by the party entitled thereto, e.g., where an endorser writes on
the instrument such words as “notice of dishonour waived”,
(b) When the drawer has countermanded payment.
(c) When the party charged would not suffer damage for want of notice.
(d) When the party entitled to notice cannot after due search be found.
(e) When the omission to give notice is caused by unavoidable circumstances, e.g., death or
dangerous illness of the holder.
(f) Where the acceptor is also a drawer, e.g., where a firm draws on its branch.
(g) Where the promissory note is not negotiable. Such a note cannot be endorsed.
(h) Where the party entitled to notice promises to pay unconditionally.
Noting and Protest (Sections 99-104 A)
Noting
Where a note or bill is dishonoured, the holder is entitled after giving due notice of dishonour, to sue the
drawer and the endorsers. Section 99 provides a convenient method of authenticating the fact of dishonour
by means of “Noting”. Where a bill or note is dishonoured, the holder may, if he so desires, cause such
dishonour to be noted by a notary public on the instrument, or on a paper attached thereto or partly on each.
The noting or minute must be recorded by the notary public within a reasonable time after dishonour and
must contain the fact of dishonour, the date of dishonour, the reason, if any, assigned for such dishonour if
the instrument has not been expressly dishonoured the reasons why the holder treats it dishonoured and
notary’s charges.
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Protest
The protest is the formal notarial certificate attesting the dishonour of the bill, and based upon the noting
which has been effected on the dishonour of the bill. After the noting has been made, the formal protest is
drawn up by the notary and when it is drawn up it relates back to the date of noting.
Where the acceptor of a bill has become insolvent, or has suspended payment, or his credit has been
publicly impeached, before the maturity of the bill, the holder may have the bill protested for better security.
The notary public demands better security and on its refusal makes a protest known as “protest for better
security”.
Foreign bills must be protested for dishonour when such protest is required by the law of the place where
they are drawn. Foreign promissory notes need not be so protested. Where a bill is required by law to be
protested, then instead of a notice of dishonour, notice of protest must be given by the notary public.
A protest to be valid must contain on the instrument itself or a literal transcript thereof, the names of the
parties for and against whom protest is made, the fact and reasons for dishonour together with the place and
time of dishonour and the signature of the notary public. Protest affords an authentic evidence of dishonour
to the drawer and the endorsee.
Discharge
The discharge in relation to negotiable instrument may be either (i) discharge of the instrument or (ii)
discharge of one or more parties to the instrument from liability.
Discharge of the Instrument

A negotiable instrument is discharged:
(a) by payment in due course;
(b) when the principal debtor becomes the holder;
(c) by an act that would discharge simple contract;
(d) by renunciation; and
(e) by cancellation.
Discharge of a Party or Parties

When any particular party or parties are discharged, the instrument continues to be negotiable and the
undischarged parties remain liable on it. For example, the non-presentment of a bill on the due date
discharges the endorsers from their liability, but the acceptor remains liable on it.
A party may be discharged in the following ways :

(a) By cancellation by the holder of the name of any party to it with the intention of discharging him.
(b) By release, when the holder releases any party to the instrument
(c) Discharge of secondary parties, i.e., endorsers.
(d) By the operation of the law, i.e., by insolvency of the debtor.
(e) By allowing drawee more than 48 hours to accept the bill, all previous parties are discharged.
(f) By non-presentment of cheque promptly the drawer is discharged.
(g) By taking qualified acceptance, all the previous parties are discharged.
(h) By material alteration.
Material Alteration (Section 87)

An alteration is material which in any way alters the operation of the instrument and the liabilities of the
parties thereto. Therefore, any change in an instrument which causes it to speak a different language in legal
effect from that which it originally spoke, or which changes legal character of the instrument is a material
alteration.
A material alteration renders the instrument void, but it affects only those persons who have already become
parties at the date of the alteration. Those who take the altered instrument cannot complain. Section 88
provides that an acceptor or endorser of a negotiable instrument is bound by his acceptance or endorsement
notwithstanding any previous alteration of the instrument.
Examples of material alteration are :
Alteration (i) of the date of the instrument (ii) of the sum payable, (iii) in the time of payment, (iv) of the place
of payment,(v) of the rate of interest, (vi) by addition of a new party, (vii) tearing the instrument in a material
part.
There is no material alteration and the instrument is not vitiated in the following cases:
(i) correction of a mistake, (ii) to carry out the common intention of the parties, (iii) an alteration made before
the instrument is issued and made with the consent of the parties, (iv) crossing a cheque, (v) addition of the
words “on demand” in an instrument where no time of payment is stated.
Section 89 affords protection to a person who pays an altered note bill or cheque. However, in order to be
able to claim the protection, the following conditions must be fulfilled:
(i) the alteration should not be apparent;
(ii) the payment must be made in due course; and
(iii) the payment must be by a person or banker liable to pay.
Section 89 has been amended to provide for the amendment in the definition of cheque so as to provide for
electronic image of a truncated cheque. The section provides that any bank or a clearing house which
receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the
image to it, that the image so transmitted to it and received by it, is exactly the same. Where there is any
difference in apparent tenor of such electronic image and the truncated cheque, it shall be a material
alteration. In such a case, it shall be the duty of the bank or the clearing house, as the case may be, to
ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and
transmitting the image. If the bank fails to discharge this duty, the payment made by it shall not be regarded
as good and it shall not be afforded protection.
Retirement of a Bill under Rebate

An acceptor of a bill may make payment before maturity, and the bill is then said to be retired, but it is not
discharged and must not be cancelled except by the acceptor when it comes into his hands. It is customary
in such a case to make allowance of interest on the money to the acceptor for the remainder of the time
which the bill has to run. The interest allowance is known as rebate.
624 EP-EBCL
Hundis
Hundis are negotiable instruments written in an oriental language. They are sometimes bills of exchange and
sometimes promissory notes, and are not covered under the Negotiable Instruments Act, 1881. Generally,
they are governed by the customs and usages in the locality but if custom is silent on the point in dispute
before the Court, this Act applies to the hundis. The term “hundi” was formerly applicable to native bills of
exchange. The promissory notes were then called “teep”. The hundis were in circulation in India even before
the present Negotiable Instrument Act, 1881 came into operation. The usages attached to these hundis
varied with the locality in which they were in circulation.
Generally understood, the term “hundi” includes all indigenous negotiable instruments whether they are bills
of exchange or promissory notes. An instrument in order to be a hundi must be capable of being sued by the
holder in his own name, and must by the custom of trade be transferred like cash by delivery. Obviously the
customs relating to hundis were many. In certain parts of the country even oral acceptance was in vague.
The following types of hundis are worth mentioning :
1. Shah Jog Hundi
“Shah” means a respectable and responsible person or a man of worth in the bazar. Shah Jog Hundi means
a hundi which is payable only to a respectable holder, as opposed to a hundi payable to bearer. In other
words the drawee before paying the same has to satisfy himself that the payee is a ‘SHAH’.
2. Jokhmi Hundi
A “jokhmi” hundi is always drawn on or against goods shipped on the vessel mentioned in the hundi. It
implies a condition that money will be paid only in the event of arrival of the goods against which the hundi is
drawn. It is in the nature of policy of insurance. The difference, however, is that the money is paid before
hand and is to be recovered if the ship arrives safely.
3. Jawabee Hundi
According to Macpherson, “A person desirous of making a remittance writes to the payee and delivers the
letter to a banker, who either endorses it on to any of his correspondents near the payee’s place of
residence, or negotiates its transfer. On the arrival, the letter is forwarded to the payee, who attends and
gives his receipt in the form of an answer to the letter which is forwarded by the same channel of the drawer
or the order.” Therefore, this is a form of hundi which is used for remitting money from one place to another.
4. Nam jog Hundi
It is a hundi payable to the party named in the bill or his order. The name of the payee is specifically inserted
in the hundi. It can also be negotiated like a bill of exchange. Its alteration into a Shah Jog hundi is a material
alteration and renders it void.
5. Darshani Hundi
This is a hundi payable at sight. It is freely negotiable and the price is regulated by demand and supply. They
are payable on demand and must be presented for payment within a reasonable time after they are received
by the holder.
6. Miadi Hundi
This is otherwise called muddati hundi, that is, a hundi payable after a specified period of time. Usually
money is advanced against these hundis by shroffs after deducting the advance for the period in advance.
There are other forms of hundis also like.
Dhani Jog Hundi - A hundi which is payable to “dhani” i.e., the owner.
Firman Jog Hundi - which is payable to order if can be negotiated by endorsement and delivery.
Presumptions of Law
A negotiable instrument is subject to certain presumptions. These have been recognised by the Negotiable
Instruments Act under Sections 118 and 119 with a view to facilitate the business transactions. These are
described below:
It shall be presumed that:
(1) Every negotiable instrument was made or drawn for consideration irrespective of the consideration
mentioned in the instrument or not.
(2) Every negotiable instrument having a date was made on such date.
(3) Every accepted bill of exchange was accepted within a reasonable time before its maturity.
(4) Every negotiable instrument was transferred before its maturity.
(5) The instruments were endorsed in the order in which they appear on it.
(6) A lost or destroyed instrument was duly signed and stamped.
(7) The holder of the instrument is a holder in due course.
(8) In a suit upon an instrument which has been dishonoured, the Court shall presume the fact of
dishonour, or proof of the protest.
However these legal presumptions are rebuttable by evidence to the contrary. The burden to prove to the
contrary lies upon the defendant to the suit and not upon the plaintiff.
Payment of Interest in case of dishonour
The Negotiable Instruments Act, 1881 was amended in the year 1988, revising the rate of interest as
contained in Sections 80 and 117, from 6 per cent to 18 per cent per annum payable on negotiable
instruments from the due date in case no rate of interest is specified, or payable to an endorser from the date
of payment on a negotiable instrument on its dishonour with a view to discourage the withholding of payment
on negotiable instruments on due dates.
Penalties in case of dishonour of cheques
Chapter XVII of the Negotiable Instruments Act provides for penalties in case of dishonour of certain
cheques for insufficiencies of funds in the accounts. Sections 138 to 147 deal with these aspects.
Chapter XVII has been amended by the Negotiable Instruments (Amendment and Miscellaneous Provisions)
Act, 2002. The amendments have provided the drawer with more time to send notice, made the punishment
for the offence more stringent, given power to court for condonation of delay in filing of complaint, excluded
liability of government nominated directors, made provision for summary trial of cases under the Chapter and
time bound disposal of cases, have relaxed the rules of evidence, and made the offences under the Act
compoundable.
626 EP-EBCL
The working of the provisions of Chapter XVII for a period of more than a decade had brought to the fore
front various lacunae and shortcomings from which it suffered. It was seen that there were enormous delays
in the disposal of the cases filed under Section 138 and the drawer of the cheques, by taking shield of
various technicalities and procedures were frustrating the very object of the Chapter.
The provisions contained in this Chapter provide that where any cheque drawn by a person for discharge of
any liability is returned by the bank unpaid for the reason of insufficiency of the amount of money standing to
the credit of the account on which the cheque was drawn or for the reason that it exceeds the arrangement
made by the drawer of the cheque with the banker for that account, the drawer of such cheque shall be
deemed to have committed an offence. In that case, the drawer, without prejudice to the other provisions of
the Act, shall be punishable with imprisonment for a term which may extend to two years, or with fine which
may extend to twice the amount of the cheque, or with both.
In order to constitute the said offence
(a) such cheque should have been presented to the bank within a period of six months from the date on
which it is drawn or within the period of its validity, whichever is earlier; and
(b) the payee or holder in due course of such cheque should have made a demand for the payment of
the said amount of money by giving notice, in writing, to the drawer of the cheque within thirty days
of the receipt of information by him from the bank regarding the return of the cheque unpaid; and
(c) the drawer of such cheque should have failed to make the payment of the said amount of money to
the payee or the holder in due course of the cheque within fifteen days of the receipt of the said
notice.
It has also been provided that it shall be presumed, unless the contrary is proved, that the holder of such
cheque received the cheque in the discharge of a liability. Defences which may or may not be allowed in any
prosecution for such offence have also been provided to make the provisions effective. The Supreme Court
in Modi Cements Ltd. v. K.K. Nandi, (1988) 28 CLA 491, held that merely because the drawer issued a
notice to the drawee or to the Bank for ‘stop payment’, it would not preclude an action under Section 138 by
the drawee or holder in due course.
The liability of government nominated directors has been excluded under Section 141 of the Act dealing
with ‘offences by companies’. The second proviso inserted in Section 141 by the Amendment Act, 2002
provides that where a person is nominated as a director of a company by virtue of his holding any office or
employment in the Central Government or State Government or a financial corporation owned or controlled
by the Central Government or the State Government, as the case may be, he shall not be liable for
prosecution under this Chapter. In order to ensure that genuine and honest bank customers are not
harassed or put to inconvenience, sufficient safeguards have also been provided in the new Chapter, as
under:
(a) that no court shall take cognizance of such offence except on a complaint in writing, made by the
payee or the holder in due course of the cheque;
(b) that such complaint is made within one month or the date on which the cause of action arises;
Provided that the cognizance of a complaint may be taken by the court after the prescribed period, if
the complainant satisfies the court that he had sufficient cause for not making the complaint within
such period.
(c) that no court inferior to that of a Metropolitan Magistrate or a Judicial magistrate of the first class
shall try any such offence. (Section 142)
Moreover, the new Sections inserted by the Amendment Act, 2002 provide that all offences under this
Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the
provisions of Sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such
trials:
Provided that in the case of any conviction in a summary trial under this Section, it shall be lawful for the
Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine
exceeding five thousand rupees:
Provided further that when at the commencement of, or in the course of, a summary trial under this Section,
it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term
exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case
summarily, the Magistrate shall, after hearing the parties, record an order to that effect and thereafter recall
any witness who may have been examined and proceed to hear or rehear the case in the manner provided
by the said Code.
According to the sub-section (2) of Section 142 of the Negotiable Instrument (Amendment) Act, 2015, the
offence under section 138 shall be inquired into and tried only by a court within whose local jurisdiction,—
if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder
in due course, as the case may be, maintains the account, is situated; or
if the cheque is presented for payment by the payee or holder in due course, otherwise through an account,
the branch of the drawee bank where the drawer maintains the account, is situated.
Explanation. – For the purposes of clause (a), where a cheque is delivered for collection at any branch of the
bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the
branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.”.
(2) The trial of a case under this Section shall, so far as practicable, consistently with the interests of justice,
be continued from day to day until its conclusion, unless the court finds the adjournment of the trial beyond
the following day to be necessary for reasons to be recorded in writing.
(3) Every trial under this Section shall be conducted as expeditiously as possible and an endeavour shall be
made to conclude the trial within six months from the date of filing of the complaint. (Section 143)
A Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at
the place where such accused or witness ordinarily resides or carries on business or personally works for
gain, by speed post or by such courier services as are approved by a Court of Session.
Where an acknowledgement purporting to be signed by the accused or the witness or an endorsement

purported to be made by any person authorised by the postal department or the courier services that the
accused or the witness refused to take delivery of summons has been received, the court issuing the
summons may declare that the summons has been duly served. (Section 144)
The evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be
read in evidence in any enquiry, trial or other proceeding under the said Code.
The court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and
628 EP-EBCL
examine any person giving evidence on affidavit as to the facts contained therein. (Section 145)
The court shall, in respect of every proceeding under this Chapter, on production of bank’s slip or memo
having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of
dishonour of such cheque, unless and until such fact is disproved. Every offence punishable under this Act
shall be compoundable. (Sections 146 and 147)
The practical effect of these amendments which have only recently been brought into force would be seen
with time to come but it is expected that they would go a long way in making the remedy provided for by
Chapter XVII meaningful and effective.
National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS)
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds
transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any
bank branch to any individual, firm or corporate having an account with any other bank branch in the country
participating in the Scheme.
NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which
settles transactions in batches. In DNS, the settlement takes place with all transactions received till the
particular cut-off time. These transactions are netted (payable and receivables) in NEFT whereas in RTGS
the transactions are settled individually. For example, currently, NEFT operates in hourly batches. Any
transaction initiated after a designated settlement time would have to wait till the next designated settlement
time Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business
hours.
The acronym ‘RTGS’ stands for Real Time Gross Settlement, which can be defined as the continuous (real-
time) settlement of funds transfers individually on an order by order basis (without netting). ‘Real Time’
means the processing of instructions at the time they are received rather than at some later time; ‘Gross
Settlement’ means the settlement of funds transfer instructions occurs individually (on an instruction by
instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of
India, the payments are final and irrevocable.
LESSON ROUND-UP
• The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. It is an Act
to define and amend the law relating to promissory notes, bills of exchange and Cheques.
• The term “negotiable instrument” means a document transferable from one person to another.
• A “promissory note” is an instrument in writing containing an unconditional undertaking, signed by the
maker to pay a certain sum of money to, or to the order of, a certain person, or only to bearer of the
instrument.
• A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to or to the order of, a certain person or to the
bearer of the instrument.
• Bills of exchange were originally used for payment of debts by traders residing in one country to another
country with a view to avoid transmission of coin. Now-a-days they are used more as trade bills both in
connection with domestic trade and foreign trade and are called inland bills and foreign bills respectively.
• A ‘Cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand and it includes the electronic image of a truncated Cheque and a Cheque in the
electronic form.
SELF TEST QUESTIONS

evaluation)
1. Define negotiable instrument. Make a distinction between a Bill and a Cheque.
2. What is crossing of a cheque?
3. What is hundi? Describe some of the important hundis.
4. Describe legal presumption in case of negotiable instruments.
5. Discuss the penal provisions in case of dishonour of cheque?
630 EP-EBCL
631
EXECUTIVE PROGRAMME
ECONOMIC BUSINESS AND COMMERCIAL LAWS
EP-EBCL
WARNING
It is brought to the notice of all students that use of any malpractice in Examination is misconduct as
provided in the explanation to Regulation 27 and accordingly the registration of such students is liable to be
cancelled or terminated. The text of regulation 27 is reproduced below for information:
“27. Suspension and cancellation of examination results or registration
In the event of any misconduct by a registered student or a candidate enrolled for any examination
conducted by the Institute, the Council or the Committee concerned may suo motu or on receipt of a
complaint, if it is satisfied that, the misconduct is proved after such investigation as it may deem necessary
and after giving such student or candidate an opportunity to state his case, suspend or debar the person
from appearing in any one or more examinations, cancel his examination result, or studentship registration,
or debar him from future registration as a student, as the case may be.
Explanation - Misconduct for the purpose of this regulation shall mean and include behaviour in a disorderly
manner in relation to the Institute or in or near an Examination premises/centre, breach of any regulation,
condition, guideline or direction laid down by the Institute, malpractices with regard to postal or oral tuition or
resorting to or attempting to resort to unfair means in connection with the writing of any examination
conducted by the Institute".
632 EP-EBCL
EXECUTIVE PROGRAMME
ECONOMIC BUSINESS AND COMMERCIAL LAWS
TEST PAPER
Time Allowed: 3 hours Maximum Marks: 100
NOTE: Answer All Questions.

PART I
1. (a) Discuss the functions of the Reserve Bank of India.

(b) Reserve Bank of India as Banker to Banks. Examine.
(c) What are the instrument of Monetary Policy?
(d) State the overview of Foreign Exchange Management Act, 1999
(e) Enumerate the Prohibited Transactions under Liberalized Remittance Scheme.
(4 Marks each)
2. (a) Define Authorised person? Briefly discuss the powers of RBI to give directions to Authorised
persons?
(b) Explain the concept of ‘organisation of a political nature’ under the Foreign Contribution (Regulation)
Act, 2010.
(c) Write short notes on: (i) Automatic Route (ii) Government Route under FDI Policy
(d) State Permissible source of funding under Overseas Direct Investment.
(e) Is it necessary that every NBFC should be registered with RBI?
(4 Marks each)
PART II
3. (a) The Competition Act does not prohibit dominance, but the abuse of dominant position. Explain.
(b) Discuss the procedure for enquiry into anti-competitive agreements.
(c) States the factor that the Commission shall have due regard while determining whether an
enterprise enjoys dominant position or not under the Competition Act, 2002.
(d) What are the thresholds for availing exemption for acquisitions under Competition Act, 2002?
(e) Define and discuss Relevant Geographic Market under Competition Act, 2002?
(5 Marks each)
PART III
4. (a) Specify the authority responsible for the administration and execution of the Essential Commodities
Act?
(b) Briefly explain the provision regarding declaration on pre-packed commodities.
(c) What are the rights and duties of the allottees under the Real Estate (Regulation and Development)
Act, 2016?
(5 Marks each)
633
5. (a) State the Salient Features of the Benami Transactions (Prohibition) Act, 1988.
(b) What are the obligation of banking companies, financial institutions and intermediaries under the
Prevention of Money-laundering Act, 2002?
(c) “No consideration, no contract”. Do you agree?
(5 Marks each)
Attempt all parts of either the Question No. 6 or 6A

6. (a) Who May Sue for Specific Performance under the Specific Relief Act, 1963?
(b) Why it is important to know the time of passing of property under the Sale of Goods Act, 1930?
(5 Marks each)
Or Alternate Question to Qn. No. 6

6A (a) Briefly discuss the provisions relating to the dissolution of partnership or firm and what are its effect
sunder Indian Partnership Act, 1932?
(b) Discuss the penal provisions in case of dishonour of cheque under the Negotiable Instruments Act,
1881?
(5 Marks each)

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STUDY MATERIAL

Public Dealing Timings

Laser Typesetting by Delhi Computer Services, Dwarka, New Delhi

Foreign Exchange Management & NBFCs

Act • Reserve Bank of India Act, 1934

There are approximately

Competition Act, 2002

• The Competition Commission of India

• The Competition Commission of India

• The Competition Commission of India

• The Competition Commission of India

• The Competition Commission of India

• The Competition Commission of India

Consumer Business Laws

Property Laws Anti-Corruption Laws

• Transfer of Property Act, 1882 • Benami Transactions

Part I : To provide expert knowledge in Foreign Exchange Management and NBFCs.

Part I: Foreign Exchange Management &NBFCs (40 Marks)

2. Foreign Exchange Management Act, 1999 : Introduction

6. Overseas Direct Investment: ODI Policy, foreign currency remittances, Setting up of

7. Liberalized Remittance Scheme: Investment Outside India by Indian Residents.

8. External Commercial Borrowings (ECB): An Overview.

10. Non-Banking Finance Companies(NBFCs): Definition; Types; Requirement of Registration as

Case Laws, Case Studies & Practical Aspects

LESSON WISE SUMMARY

Lesson 1 - Reserve Bank of India Act, 1934

Lesson 2 - Foreign Exchange Management Act, 1999 – Introduction

• Understand the Concept of FEMA;

• Structure and Overall Schemes of FEMA;

• Rules and Regulations framed by RBI under FEMA;

Lesson 3 - Foreign Exchange Transactions & Compliances

The objective of the lesson is to facilitate the students to acquaint with:

• Concept of Current Account Transactions and Capital Account Transactions;

• Provisions of Realisation, Repatriation and Surrender of Foreign Currency;

• Limits for possession or retention of foreign currency or foreign coins; and

• Procedure for Adjudication, Appeal and Compounding.

Lesson 4 - Foreign Contribution (Regulation) Act, 2010

• Regulation of foreign contribution, foreign Source and foreign hospitality;

• Accounts, Intimation, Audit and Disposal of Assets; and

• Inspection, Search and Seizure.

Lesson 5 - Foreign Direct Investment – Regulation & Policy

The objective of the lesson is to familiarize the students with:

• Eligible Investors under FDI;

• Prohibited and Permitted Sectors;

• Conditions of FDI in major sector i.e. E-commence activity, Insurance etc.;

• Conversion of ECB/lump sum fee/royalty etc. into Equity;

• Acquisition of Shares under Scheme of Merger/Demerger/Amalgamation;

• Modes of Payment allowed for receiving FDI in an Indian Company;

• Reporting of FDI i.e. Reporting of Inflow/Issue of shares/Transfer of shares etc; and

Lesson 6 - Overseas Direct Investments (ODI)

The purpose of the lesson is to familiarize the students with:

• Eligibility to make ODI under the Automatic Route;

• Permissible Sources for Funding Overseas Direct Investment;

• Acquisition/Sale of Foreign Securities by Resident Individual in India; and

Lesson 7 - Liberalized Remittance Scheme (LRS)

This lesson is designed to familiarize the students with:

• Overview of Liberalised Remittance Scheme;

• Remittance facilities to Persons other than Individuals.

Lesson 8 - External Commercial Borrowings (ECB)

The objective of the lesson is to familiarize the students with: