Definition and Explanation of Business Law
Section 2(20) of the Companies Act 2013 defines a company as “a company established under this act or any prior company legislation.”
According to common law, a corporation is a “legal person” or “legal entity” capable of existing beyond the lifetimes of its members.
A corporation is rather a legal instrument for achieving social and economic goals.
Hence, it is a political, social, economic, and legal institution. Therefore, the term business.
It is a complex, centralized economic and administrative organization governed by skilled management that borrows funds from investors (s).
Lord Justice Lindley says that a corporation is “an association of many people who put money or the value of money into a common stock, use it in a business or activity, and share the profits and losses that come from it.”
Company law, or business law in layman’s terms, is therefore a set of rules and regulations for the effective and efficient operation of companies under its jurisdiction to prevent corporate crimes and to have a common strategy to formulate and implement rules and regulations in the spirit of cooperative federalism and the promotion of fair business practices.
Section 149(4) of the Companies Act 2013 states: Each listed company must have at least one-third of its total number of directors to be independent directors, and each of the following kinds of businesses must have at least two independent directors.
Public Corporations possess:
paid-up share capital of at least 10 crores
100 billion or more in annual revenue
outstanding loans, bonds, and deposits of at least 50 billion rupees.
Corporate Governance is a fairly broad subject that must now be understood colloquially, which simply means a system of practices, rules & processes by which a company is directed and controlled in a manner that balances the interests of the company’s stakeholders, i.e. shareholders, management staff, management executives, suppliers, financiers, and the community.
Corporate governance is directly impacted by a company’s Board of Directors’ choices. A firm that neglects its responsibilities to be a well-governed corporation may suffer the grave repercussions of a poor reputation, which may throw a shadow on its prospects and ambitions.
In contrast, a firm with a sound corporate governance policy would acquire the trust and support of all its stakeholders, as well as encourage long-term financial vitality, investor support in capital-raising, and provide protection from financial losses, waste, dangers, and corruption.
Connection Between Business Laws and Development
Ex-Vice President Hamid Ansari emphasized to the Bihar Chamber of Commerce and Industry that the rule of law is necessary to attract international investment and stimulate economic growth. The Global Economic Indicators has compiled a data collection that illustrates the many elements surrounding the law and legal systems that influence the economic growth of a nation. See the changes in the indices of three nations over the past decade. These nations include India, the United States, and China.
The link between the law and legal systems and economic growth in India may be deduced from two basic assertions. The first assertion is that “Law” determines a company’s access to its money and its capacity to raise funds for operations and working capital. And the second is that a country’s legal systems and legal roots have a significant part in the country’s ability to be dynamic, adaptable, and modify its laws and regulations.
Armour and Lele’s “Law Working Paper” on Law, Money, and Politics: The Case of India (2009) backs up the arguments and claims made above.
There is a clear link between the laws put in place to protect investors’ interests and the growth of the foreign financial market. In India, the rules governing the protection of stock investors have grown exponentially. In addition, the fields of medicine and software solutions have had the most growth in terms of industry-wide development. Yet, this development can also be attributed to the firms’ strong dependence on debt to promote and acquire market dominance when acquiring opportunities.
Hence, substantial rules have been enacted to simplify and improve the process of raising equity and funding relative to debt financing.
The post-development rules of India were exceedingly weak and ineffective, inhibiting the expansion of its industry. For example, the Companies Act of 1956 didn’t have any rules that let businesses keep operating during corporate reorganizations and renegotiations. Nonetheless, the New Economic Policy of 1991 introduced enormous changes to India’s investment climate.
By extending the scope of protection via the implementation of laws such as FEMA (Foreign Exchange Management Act of 1999) and the development of agencies such as SEBI, the scope of protection has been widened (Securities Exchange Board of India 1992). At the time, these important and necessary changes to the legal system helped make the funding system easier to understand, which led to economic growth and development.
According to a 1997 study by La. Porta et al., when a government provides deadly protection to its investors and owners, the external money attracted by that country rises, as was the case for the Indian economy following the LPG reforms of 1991. Hence, India established an equities and foreign exchange market.
The service sector generates 53.89 percent of India’s gross domestic product. The majority of businesses in the service sector lack physical assets to use as security for debt financing, making equity finance their primary source of capital. India’s increasing attitude to the application of rigorous regulations on equity finance has resulted in increased development and investment in the country’s industries, consequently contributing to the nation’s economic progress.
In terms of Gross Domestic Product, India is a country that has had consistent economic growth and quite high growth rates over the previous decade or so. According to research, a high growth rate has been sustained through investment; usually, an 8% growth rate requires an investment effort above 35% of GDP (Sanyal 2019).
Investment and equity financing are given weight in determining a country’s economic growth since they create demand, introduce new technologies, boost productivity, produce employment possibilities, and build capacity.
While analyzing the influence of laws and legal systems on India’s economic growth, an investigation of the impact on investment policies would provide a suitable link between the two concepts. This is confirmed by the 2019 Economic Report, which emphasized how important it is to improve the legal system to help the Indian economy grow in a way that is driven by investment.
Also, Read 3 Freedom of Media and Press
Business Law And Development
There is abundant evidence that the development of the rule of law encourages private investment, insofar as it fosters an environment of stability and predictability in which economic risks can be assessed rationally, property rights are safeguarded, and contractual commitments are honored. In common parlance, experience supports the claim that a strict rule of law is necessary to lend confidence to relevant rule obligations.
This means that transaction costs go down, more people can get money, and a level playing field is kept. As a result of this experience, recent studies of economic and corporate growth have put more emphasis on institutional economics, especially on keeping the quality of institutions by creating and maintaining a good legal framework.
Countries sometimes destroy their natural resources in pursuit of economic development or expansion of their own businesses. However, environmentally sustainable development can be achieved through the implementation of stringent regulatory regimes, the clarification of property rights, the establishment of monitoring institutions staffed by well-trained professionals, and the development of appropriate international law regimes.
Fast growth can also be associated with more relaxed economic or financial conditions that do not impede or discourage a novice’s entry into or exit from a business, but rather encourage it. Important elements include defining the role of the state and the nature and limitations of its intervention, attaining good governance, enhancing the performance of the public sector, supporting civil society, and creating an environment conducive to the growth and development of business.
Reforms that attempt to create a business-friendly legal framework at the national level often target two main processes.
The first step is to look at the rules of the law, starting with the constitution and including laws, administrative decrees, and orders. This process should make sure that the rules in these instruments meet real social needs, reflect an existing or developing public opinion, are based on enough data and studies, and are the result of some kind of participation, especially by those who are likely to be affected by them.
The Second is the application of legal norms, irrespective of their substance. Without the first step, the law is unlikely to be sound or beneficial, and without the second, it is not law.
If one of these procedures is wrong, public trust in the legal system will decline and a variety of economic and social development processes would be adversely affected.
Here are a few examples of what often happens when there aren’t enough and well-enforced laws:
The consequences for contracts:
Respect for contractual commitments will depend only on the goodwill of the contracting parties, agreements will be enforceable only to the degree that their beneficiaries have the ability to make them so, and extralegal measures of enforcement will become the norm.
People and businesses will seek to buy those assets over which they can effectively preserve property rights. Many will opt to liquidate their assets and store them overseas as deposits or portfolio investments, putting pressure on the local currency’s value.
The majority of firms will adopt the form of closed corporations whose shares are owned by trustworthy friends and family, so preventing the development of huge domestic joint-stock companies and denying regular citizens the opportunity to hold stock portfolios.
The influx of foreign direct investment, which often adds more modern technologies, will slow. Poor protection of intellectual property rights will inhibit innovation and the creation of new ideas.
Enterprises will eschew competitive bidding as a standard way of procuring, preferring to do business with established and dependable providers. They will also frequently use illicit measures to obtain favors from public authorities.
Weak or inefficient legislation typically results in the creation of more laws and rules. A highly regulated economy makes people less likely to invest, raises the cost of existing investments, and makes corruption more likely to grow.
Impact on the magnitude of economic criminal activity:
Laws that are weak, ineffective, or too strict lead to tax evasion, smuggling, and the growth of organized crime.
The topic of how the law may be used to accomplish economic restoration in the short term and sustainable development over time is central to the national and international legal framework. In contrast to the conventional conception, this framework includes more than only relevant legal requirements. The framework may be described in terms of a three-pillared system.
The first pillar reflects legally enforceable regulations. These regulations are not just understood beforehand. They are genuinely imposed by the state on all celebratory gatherings and are only susceptible to adjustment according to established processes.
The second pillar is made up of the ways that these rules are made, put into practice, or broken when necessary. Obviously, the rightness of such steps will depend on the circumstances in each country.
The Third Pillar of the legal system consists of well-functioning public institutions staffed by skilled and motivated employees, transparent and responsible to citizens, abiding by and adhering to legislation, and applying such regulations without corruption.
A functional legal system is adjudicated by a just and effective judicial system. The absence of effective institutions for enforcing rules and resolving problems reflects the preceding characteristics of “rules” and “processes.”
As was said, a country’s economic success depends a lot on its laws and legal system. The interaction between the allocative and procedural aspects of legal systems generates favorable economic change. In the context of India, the law has played a crucial role in economic growth.
The legal system in India impacts the access of entities to financing, which is one of the necessary conditions for economic growth, and the genesis of the legal system is significant for evaluating the law’s adaptability. The economic growth and deficiencies of India have been related to the legal system’s excellence and deficiencies. India was used to illustrating the contrast between common law and civil law systems and their respective roles in economic growth, as well as an examination of the jurisprudence of the courts.
The causes of the rise of the American economy in connection to its law and legal systems have been investigated and compared to those of India, highlighting how the American Legal system has an edge over the Indian Law system.
The Chinese economic model was studied as a contrast to the Indian and American economic models since the Chinese economy had made a lot of progress even though their laws were very strict. Consequently, it may be inferred that laws and legal systems have a significant influence on the economic growth of a nation, but this is not a rule of thumb, since several other variables also contribute.
The influence of laws and legal systems on economic growth is subjective and not absolute. The American legal system performs the best, followed by the Indian system, and then by the Chinese system, according to a quick analysis of the below-mentioned. This aligns with the reasons presented in this study.
Closing Comments
It may be useful to end my observations by quickly discussing what the World Bank (“Bank” or “World Bank”) is doing to enhance the business climate. Through its adjustment program, the Bank helps countries that borrow money to improve their macroeconomic frameworks, open up their trade and investment policies, sell off their public companies, and strengthen their financial sectors, especially their banks and capital markets.
In addition, the Bank provides loans to support legal and judicial reform initiatives and has even provided grants for the necessary preliminary research. Maybe the most significant lesson is that such a change must be all-encompassing. It should not be restricted to newly enacted laws and regulations.
It must also address the methods through which current regulations have been created and applied, as well as the organizations that apply these rules, including the court. Changes to a country’s laws should be made by the country itself, not by its foreign donors. These changes should be in line with the country’s needs, social norms, and other unique qualities.
The World Bank’s experience with financial legal reform shows how important it is to involve both the local legal and business sectors in planning and putting the change into action. Very often, it has been helpful to set up a central legal reform unit that reports directly to the head of government and does a good job of coordinating the needs of different internal sectors and outside funders. Last but not least, it has been shown that important parts of successful legal reform are improving legal education and giving lawyers and judges ongoing training.
The World Bank provides help to the private sector in several ways. In addition to the loans and guarantees offered by the bank to private businesses, the host’s guarantee. Also, the world is paving the way for current attempts outside of the World Bank to develop a global convention on the handling of foreign investment, an endeavor that has proven unsuccessful in the past.
As the relevance and importance of law and institutional reform to the development process as a whole become more clear, it is likely that the World Bank will keep trying to improve the legal framework for private business in the countries that borrow from it.
