Meaning and Definition
The Companies Act'2013 defines a company under Section 2(20) as:
"A company incorporated under this act or any previous company law
In common law, a company is a "legal person" or a "legal entity" which is
separate from and capable of surviving beyond the lives of its members.
A company is rather a legal device for the attainment of social and economic
It is, therefore, a combined political, social, economic and legal institution.
Thus, the term company.
It is an intricate, centralised, economic and administrative structure run by
professional managers who hire capital from the investors(s).
Lord Justice Lindley has defined a company as:
"An association of many persons who contribute money or money's worth to a
common stock and employ it in some trade or business and who share the profit
and losses arising there from".
Therefore, it can be deduced by the aforementioned definitions that Company
Law/Business Laws in layman's language are a set of rules and regulations for
the effective & efficient operation of companies under its ambit to prevent
corporate crimes and to have a common strategy to formulate and implement rules
and regulation under the spirit of co-operative federalism and promotion of fair
Section 149(4) of the Companies Act'2013 states:
Every listed company shall have at least 1/3rd of the total strength of
directors as independent directors and the following classes of companies shall
have at least 2 directors as independent directors.
Public Companies have a:
- Paid-up share capital of 10 crores or more
- Turnover of 100 crores or more
- Outstanding loans, debentures and deposits of 50 crores or more.
Corporate Governance is a fairly broad subject which now needs to be understood
colloquially, which simply means a system of practices, rules & processes by
which a firm is directed and controlled in balancing the interest of the
company's stakeholders, vis-a-vis company's shareholders, management staff,
management executives, supplies, financiers and the community.
A company's corporate governance is directly influenced by the decisions of its
Board of Directors. A company being derelict in its duties towards being a
well-governed company may face dire consequences of an ill reputation which
further might cast a shadow on its prospects and plans.
On the contrary, a company which has a good corporate governance policy will
gain the trust and backing of all its stakeholders and can promote long-term
financial vitality, and investor support in raising capital and translate to
protection against financial losses, waste, risks and corruption.
Relation Between Laws and Development
Hamid Ansari, Ex-Vice President, who had explained in the Bihar Chamber of
Commerce and Industry that the rule of law is a prerequisite to draw foreign
investment and boost economic growth. The Worldwide Economic Indicators has
prepared a data set which shows the different parameters surrounding the law and
legal systems affecting the economic development of a country, have a look at
the changes in the indices of Three different countries in the past decade. The
countries are India, the United States and China.
In India, the relationship between the law and legal systems, and economic
development can be drawn on two broad claims. The first claim is that "Law"
determines the access of a firm to its finances and ability to raise capital for
its working and operation. And the second is that the legal systems and legal
origins of a country play a great role in a country's dynamic, adept and evolve
its rules and regulations
The said claims and assertions are supported by the "Law Working Paper" on Law,
Finance and Politics: The Case of India by Armour and Lele (2009).
The is a direct correlation between the legal system to protect the interest of
investors and the development of the external finance market, the laws
regulating the protection of equity investors in India have witnessed an
exponential increase in India. Also, industry-wise development-wise development
has been witnessed predominantly in the areas of pharmaceuticals and software
solutions. But, such progress can also be linked to heavy reliance on debt by
these companies to market and gain dominance in the market upon acquisition of
Therefore, again, robust laws have been formulated to simplify and better the
process of raising equity and financing when compared to debt finance.
India's post-development laws were extremely weak and ineffective, disabling the
growth of industries. For example, The Companies Act'1956 lacked provisions
allowing firms to continue trade during corporate restructures and
renegotiations. However, the 1991 New Economic Policy Introduced humongous
changes in the investment climate in India.
By expanding the purview of protection via the enactment of legislations such as
FEMA (Foreign Exchange Management Act'1999, and through the establishment of
institutions such as SEBI (Securities Exchange Board of India 1992). Such
imperative and vital changes to the then legal system were an important
contribution to the easement in the financing system which then led towards
economic growth and development.
According to an analysis by La. Porta et al. In 1997 showcases that when a
country offers lethal protection to its investors and shareholders, the external
finance attracted by that county increases, which was witnessed by the Indian
economy post-1991 LPG reforms. As a result of which India developed an equity
and foreign exchange market.
The service sector contributes to 53.89% of the Indian GDP. The service
industries are generally firms which do not have tangible assistance to offer as
collateral to raise debt finance, rendering equity finance to be a major source
of capital. India's strengthening approach to the application of robust laws on
equity finance has led to the growth of development and investment into
industries and the country and thereby contributing to the country's economic
India is a country which has been undergoing constant economic development (in
terms of Gross Domestic Product), and has witnessed fairly high growth rates in
the past decade or so. Research has indicated that a high growth rate has been
sustained by investment; typically a growth rate of 8% must be complemented by
an investment effort above 35% of GDP (Sanyal 2019).
Investment and equity finance are given weightage in determining the economic
development of a country primarily because it creates demand, introduce new
technology, increases productivity, generates employment opportunities, and
Therefore, it is important to note that when we analyse the impact of laws and
legal systems on the economic development in India ,an analysis of the impact on
investment policies would be a sufficient link between the two. This is
supported by the Economic Survey of 2019 which emphasised the importance of the
betterment of the legal system of further stir up an investment -driven
development model for the Indian economy.
Law And Development
There is ample evidence that the establishment of the rule of law attracts
private investment,to the extent that it creates a climate of stability and
predictability, where business risks may be rationally assessed, property rights
protected, and contractual obligations honoured. In layman language, experience
supports the proposition that tight rule of law is needed to give credibility to
commitments to applicable rules.
This, in turn, leads to lower transaction costs,greater access to capital, and
the maintenance of level playing field. As a result of such experience, recent
studies of ecnomic and business development has placed greater emphasis on
institutional economic, notably on preserving the quality of institutions
through the establishment and maintenance of an appropriate and workable legal
In the process of achieving economic development or expanding their private
business, countries often deplete their natural resources. Environmentally
sustavibake development, howeve, may be achieved through enactment of rigorous
regulatory regimes, the clarification needed of property rights, the
establishment of monitoring institutions staffed with well-trained
professionals, and the building up of approriate international law regimes.
Rapid growth can also be correlated to easing in economic or financial refroms
which do not bar entry or exit for a novice in an industry, but rather promotes
it. Relevant factors include defining the role of the state and the nature and
limits of its intervention, achieving good governance , improving the
performance of the public sector, supporting civil society and developing an
appropriate environment for growth of the business development.
Typically, reforms which aims at developing a business friendly legal framework
at the National level, addresses two fundamental processes.
The First process is the review of legal rules , starting with the constitution
and including legislation, administrative decrees, and orders. This process
should ensure that the contents do the rules incorporated in these instruments
respond to genuine social needs, reflect a per-existing or emerging public
opinion, are based on adequate data and studies, and result from some form of
participation, especially by those likely to be affected by them.
The Second is the enforcement legal rules, regardless of their content. Without
the first process law is not likely to be sound or useful; without the second it
is not law.
If either of these processes is flawed, confidence in the legal system will
suffer and broader processes of economic and social development will be
negatively affected in a number of ways.
Here are some examples of what usually happens in the absence of appropriate
and enforced legal rules:
- The effects on contracts:
Respect for contractual obligations will be left entirely to the good will
of the contacting parties, agreements will be binding only to extent their
beneficiaries have effective power to make them so,and resorting to
extra-legal means will become an ordinary method of enforcement.
- The effects on property rights:
Individuals and corporations will tend to acquire only the assests over
which they can maintain effective property rights. Many will prefer to
liquidate their assests and keep them in form of deposits or portfolio
investments abroad, putting pressure on the value of the local currency.
- Effect on corporations:
Most companies will take the form of closed corporations where shares are
held by reliable friends and relatives, thus barring the formation of large
domestic joint-stock companies and depriving ordinary citizens of
opportunities to own stock porfolios.
- Effects on transfer of technology:
The inflow of foreign direct investment, which normally introduces more
Morden technology, will slow down. Weak protection of intellectual property
rights rights will stifle imnvention and development of new ideas.
- Effects on transaction costs:
Enterprised will avoid competitive bidding as a normal o method of
procurement, preferring to deal with familiar and reliable sources. They
will also tend to seek favours from public officials through illegal means.
- Effect on ongoing and regulation:
Weak or ineffective laws usually lead to the enactment of further laws and
regulations. An over-regulated econonmy undermines new investment, increases
the cost of existing ones, and leads to the spread of corruption.
- Effects on the extent of criminal offenses in economic sphere:
Weak, ineffective, or excessive ,laws lead to tax evasion, smuggling, and
the growth of organised crime.
The question of how law may be utilised to achieve economic revival the short
run and sustainable development in the long run addresses the key concept of thr
legal framework both on national and international levels. In contrast with the
usual conceptualisation, such a framework consists of more than just applicable
legal rules. The framework can be defined in terms of a system based on three
The first pillar represents the legally binding rules. Such rules are not only
known in advance. They are actually enforced by the State on all revelant
parties, and are subject to modifications pursuant only to previously known
The Second pillar consists of appropriate processes through which such rules are
made, and through which they are either enforced in practice or are deviated
from when necessary. The appropriateness of such processes will obviously differ
according to the circumstances of each country.
The Third pilar of the legal framework consists of well-functioning public
institutions that are staffed by trained and motivated individuals, are
transparent and accountable to citizens, are bound by and adhere to regulations,
and apply such regulations without arbitrariness or corruption.
An efficient and fair judicial system serves as the final arbiter of functioning
legal system. The absence of efficient institutions for the enforcement of rules
and resolution of conflicts reflects reflects on the previous elements of
"rules" and "processes".
As explained, the laws and legal systems are on essential determinant of the
economic development of a country. The interplay between the allocative and
procedural dimensions of legal systems bring forth positive economic change. In
Indian context, law has played an extremely important role in economic
The legal system in India determines the access of entities to finance, which is
one of the essentials for economic development, and the origin of the legal
system is important to judge the flexibility of the law. India's economic
development and shortfalls has been linked to the virtue of the legal system,
and its shortcominings. The distinction between common law and civil law
systems, and their role in economic development, along with an analysis of the
jurisprudence of the courts, has been explained with reference to India.
The causes of the boom of the American economy in relation to its law and legal
systems has been studied, and it has been related to that of India, comparing
how the Indian Legal systems is different from American Legal system, which puts
the latter at an advantage.
Lastly, the Chinese economic model was studied, and it presented a counter to
the Indian and American Models, as the Chinese economic development was
substantial even though their legal systems isn't as structured or flexible.
Therefore, it is concluded that laws and legal systems do play an important role
in the economic development of a country, but this isn't a rule of thumb, as
there are multiple factors other than the legal systems contributing as well.
The magnitude of the impact of laws and legal systems on the economic
developments is subjective, and not absolute. A brief study of the
belowmentioned shows how the the American legal systems performs the best,
followed by India, and then followed by China. This is in line with the
arguments put forward by this paper.
It may be appropriate to conclude these remarks by referring briefly to what the
World Bank ("Bank" or "World Bank') is doing to improve the enabling environment
for private business. Through its adjustment , the Bank supports borrowing
countries in their efforts to improve their macro-economic frameworks, to
liberalize their trade and investment regimes, to privatise public enterprises,
and to strength their financial sectors, including in particular, banking
institutions and capital market.
In addition, the Bank offers loans to finance legal and judicial reform projects
and has even given grants for the initial studies needed for this purpose.
Perhaps, the most important lesson is that such reform should be comprehensive
in scope. It should not be limited to the new legislation and regulations.
It must also include a series of the processes through which existing rule have
been made and applied and cover the institutions which apply these rules,
including, of course, the judiciary. The contents and direction of a country's
legal reforms should be the responsibility of the country itself, not that of
its foreign donors, and must conform with the country's needs, its social norms,
and other special characteristics.
World Bank experience in financial legal reform also highlights the importance
of participation of both local legal and business communities in the design and
details of the reform process. Quite often, it has also been useful to establish
a central legal reform unit which reports to the head of government and thus,
effectively coordinates the varied demands of various internal sectors and
external donors. Finally, strengthening legal education and providing continuous
training to lawyers and judges have proven to be important elements in a
successful legal reform.
The World Bank's assistance to private business takes other forms as well. In
addition to the loans and guarantees provided by the Bank to private enterprise
with the gurantee of the host. The World is also paving the way for current
efforts outside the World Bank to formulate a multilateral convention on the
treatment of foreign investment, an effort which has proven unworkable in the
The Worlds Bank's efforts to improve the legal framework for private business in
its borrowing member countries is expected to continue with increasing
realisation of the relevance and importance of the role of law, and
institutional reform, in general, the the developmental process.
Written By: Tanmaya Jha
- Armour.J and Lele, (2009) Law,Finance and Politiucs: The Case of India',
Law & SocietReview
- Batra,S.(2003) 'The Asians recovery: Progress and pitfalls, The position
of India, Global forum on Insolvency Risk Management', World Bank,
Washington DC [Prepint]
- La Porta, R.et al (1997)'Legal Detriminants of External Finance', The
journal of finance.
- Fordham International Law Journal
- Sanyal,S (2019) 'Improving legal system is the best investment India can
make' The Economic Times.
5th Year BBA.LLB(H) Student at K.R.Mangalam