Ebcl Notes 2022

INDEX
Sr No. Name Page No.

1 Reserve Bank of India Act, 1934 1.1 – 1.15
2 Foreign Exchange Management Act, 1999 2.1 – 2.17

3 Foreign Exchange Transactions & 3.1 – 3.16
Compliances
4. Foreign Contribution (Regulation) Act, 4.1 – 4.10
2010
5. Foreign Direct Investments 5.1 – 5.9
6. Overseas Direct Investment 6.1 – 6.9
7. Liberalized Remittance Scheme 7.1 – 7.8
8. External Commercial Borrowings (ECB) 8.1 – 8.17
9 Foreign Trade Policy & Procedure 9.1 – 9.17
10 Non-Banking Finance Companies(NBFCs) 10.1 – 10.15
11 Special Economic Zones Act, 2005 11.1 – 11.10
12 Competition Act, 2002 12.1 – 12.20
13 Consumer Protection Act, 2019 13.1 – 13.20
14 Essential Commodities Act, 1955   14.1 – 14.6
15 Legal Metrology Act, 2009 15.1 – 15.4
16 Transfer of Property Act, 1882 16.1 – 16.26
17 Real Estate (Regulation and Development) 17.1 – 17.16
Act, 2016
18 Benami Transaction Prohibitions (Act) 18.1 – 18.6
19 Prevention of Money Laundering 19.1 – 19.7
20 Indian Contracts Act, 1872 20.1 – 20.74
21 Specific Relief Act, 1963 21.1 – 21.18
22 Sale of Goods Act, 1930 22.1 –22.48
23 Partnership Act, 1932 23.1 - 23.37
24 Negotiable Instrument Act, 1881 24.1 – 24.41
Mark Distribution of EBCL from past Exams
Chapter Name Dec Dec June Dec Total
20 19 19 18
PART I
Reserve Bank of India Act, 1934 9 4 5 5 23
Foreign Exchange Management Act, 1999 13 14 9 17 43
Foreign Exchange Transactions &
Compliances
Foreign Contribution (Regulation) Act, 5 9 5 19
2010
Foreign Direct Investments 4 4 9 4 21
Overseas Direct Investment 4 4 8
Liberalized Remittance Scheme 9 4 4 17
External Commercial Borrowings (ECB) 4 4 4 12
Foreign Trade Policy & Procedure 4 4 4 4 16
Non-Banking Finance Companies(NBFCs) 4 8 8 8 28
Special Economic Zones Act, 2005 4 9 13 13 39
PART II
Competition Act, 2002 25 25 25 25 100
PART III
Consumer Protection
Consumer Protection Act, 1986 4 4 8
Essential Commodities Act, 1955 4 3 7
Legal Metrology Act, 2009 4 3 7
Property Law
Transfer of Property Act, 1882 7 7 7 7 28
Real Estate (Regulation and Development) 6 3 3 3 15
Act, 2016
Anti-Corruption Laws
Benami Transaction Prohibitions (Act) 7 3 3 3 16
Prevention of Money Laundering 3 3 3 3 12
Business Laws
Indian Contracts Act, 1872 4 14 12 11 41
Specific Relief Act, 1963 6 3 5 4 18
Sale of Goods Act, 1930 6 4 3 3 16
Partnership Act, 1932 3 3 3 9
Negotiable Instrument Act, 1881 3 7 7 12 29
www.pcbaba.in CS PRAVEEN CHOUDHARY
RBI Act 1934
Reserve Bank of India Act, 1934
Introduction
The origin of the Reserve Bank of India can be traced back to the year 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 function of 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 reform culminating in the start of its operations in the year 1935.
Since then, the Reserve Bank’s role and functions have undergone numerous
changes, with the change in the nature of Indian economy and financial sector.
Starting as a private shareholders’ bank, the Reserve Bank was nationalized in

1949 to achieve 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 regulation of the issue of Bank
notes and the keeping of reserves with a view to securing monetary stability in
India, generally to operate the currency and credit system of the country to
its advantage and operation of the monetary policy framework in India.
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.
1. 1
RBI Act 1934
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 also given
an explicit recognition in the development strategy.
The RBI designs and implements the regulatory policy framework for banking
and NBFCs with the aim of providing people access to the banking system,
protecting depositors’ interest, and maintaining the overall health of the
financial system.
ESTABLISHMENT AND INCORPORATION OF RESERVE BANK
(Sec 3)
Reserve Bank of India shall be constituted for the purposes of taking over the
management of the currency from the CG and of carrying on the business of
banking in accordance with the provisions of the Act.
(2) The Bank shall be a body corporate by the name of RBI, having perpetual
succession and a common seal, and shall by the said name sue and be sued.
ORGANISATIONAL STRUCTURE & MANAGEMENT

Central Board of Directors
Governor
Deputy Governor
Executive Directors
Principal Chief General Manager
Chief General Managers
General Managers
Deputy General Managers
1. 2
RBI Act 1934
Assistant General Managers
Managers
Assistant Managers
Support Staff
CENTRAL BOARD OF DIRECTORS
The Central Board of Directors is at the top of the Reserve Bank’s organisational
structure being entrusted with the general superintendence and direction of the
affairs and Business of the Reserve Bank. Appointed by the Government under
the provisions of RBI Act, 1934, the Central Board has the primary authority
and responsibility for the oversight of the function of Reserve Bank. It delegates
specific functions to the Local Boards and various committees.
The Central Government appoints and nominates the Directors on the Central
Board of the RBI, As per Section 8 of the Act, the constitution of the
Central Board is as follows:
a) A Governor and not more than four Deputy Governors to be appointed

by the CG;
b) 4 Directors to be nominated by the CG, one from each of the 4 Local
Boards;
c) 10 Directors to be nominated by the CG; and
d) 2 Government officials to be nominated by the CG;
The terms of the appointment or nomination of the members of the Central

Board, shall be as follows:
i. The Governor and a Deputy Governor shall hold office for such term of
maximum 5 years as the CG may fix when appointing them and shall be
eligible for re-appointment.
ii. Such nominated Director shall hold office for 4 years and shall be eligible
for reappointment, for maximum of 2 terms, that is, for a maximum
period of eight years either continuously or intermittently.
1. 3
RBI Act 1934
Local Boards (Sec 9)
The Reserve Bank also has 4 Local Boards, constituted by the CG, 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
5 members appointed by the CG for a term of 4 years and thereafter until
his successor is appointed. They are eligible for re- appointment for max 2
terms, that is, for a maximum period of 8 years either continuously or
intermittently.
The members of the Local Board shall elect from amongst themselves one person
as Chairman of the Board. 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.
Offices and Branches
The RBI has a network of offices and branches through which it discharges its
responsibilities. The units operating in the 4 metros — Mumbai, Kolkata, Delhi
and Chennai — are known as offices, while the units located at other cities and
towns are called branches.
Currently, the RBI 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.
THE GOVERNOR AND DEPUTY GOVERNOR
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 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 CG. The Deputy Governor and the Director may attend any meeting of
1. 4
RBI Act 1934
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.
The Governor and a Deputy Governor hold the office for maximum 5 years as
the CG may fix when appointing them, and they are eligible for re-appointment.
Functions of RBI
a) Banking Functions
b) Issue bank notes
c) Monetary Policy Functions
d) Public Debt Functions
e) Foreign Exchange Management
f) Banking Regulation & Supervision
g) Regulation and Supervision of NBFCs
h) Regulation & Supervision of Co-operative banks
i) Regulation of Derivatives and Money Market Instruments
j) Payment and Settlement Functions
k) Consumer Protection Functions
l) Financial Inclusion and Development Functions
*Financial inclusion is the pursuit of making financial services accessible at

affordable costs to all individuals and businesses E.g. jan dhan yojana, basic
services de-mat account
RBI 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 2 State Governments
Right to Issue Bank Notes (Sec 22)

Management of currency is one of the core central banking functions of the
RBI . Along with the Government of India, the Reserve Bank is responsible for
1. 5
RBI Act 1934
the design, production and overall management of the nation’s currency, with
the goal of ensuring an adequate supply of clean and genuine notes.
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 RBI 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 Rs.5, Rs.10, Rs.20,
Rs.50, Rs.100, Rs.200, Rs.500 and Rs.2,000. The printing of Rs.1 and Rs.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 Rs. 5000 and Rs. 10,000 or any other denomination, that
the Central Government may specify up to Rs. 10,000.
The CG 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 Rs.500 and Rs.1000 bank notes with effect from midnight
of November 8, 2016, making these notes invalid. A newly redesigned series of
Rs.500 banknote, in addition to a new denomination of Rs. 2000 banknote is
in circulation since 10 November 2016.
Form of Bank Notes (Sec 25)
1. 6
RBI Act 1934
The Department of Currency Management makes recommendations on design of
bank notes to the CG, forecasts the demand for notes, and ensures smooth
distribution of notes and coins throughout the country.
It arranges to withdraw unfit notes, administers the provisions of the RBI

(Note Refund) Rules, 2009 which deals 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 (Sec 26)

1. 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
CG.
2. 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 RBI decides on the various
denominations of the notes to be printed. The RBI 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 1 rupee. Coins are legal tender in India for
unlimited amounts. 50 paisa coins are legal tender for any sum not exceeding
Rs.10 and smaller coins for any sum not exceeding one rupee. The RBI acts as
1. 7
RBI Act 1934
an agent of the CG for distribution, issue and handling of the coins and for
withdrawing and remitting them back to Government as may be necessary.
Combating Counterfeiting
The RBI, 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.
Note: 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.
Power of CG to supersede Central Board (Sec 30)

If in the opinion of CG 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 CG may determine.
Issue of demand bills and notes(Sec 31)

No person in India other than the Bank, or, as expressly authorized by the Act
or the CG 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.
Notwithstanding anything contained in the Negotiable Instrument

Act, 1881, no person in India other than the Bank or, as expressly authorized
1. 8
RBI Act 1934
by the Act, the Central Government shall make or issue any promissory note
expressed to be payable to the bearer of the instrument.
RBI as Banker to Banks

The RBI 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 RBI has also introduced the Centralized Funds Management
System (CFMS) to facilitate centralized 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 RBI 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 RBI 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 RBI 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.
Prudential Norms for Banks

Capital Adequacy: The RBI 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,
1. 9
RBI Act 1934
banks are required to maintain adequate capital for credit risk, market risk,
operational risk and other risks.
Loans and Advances: In order to maintain the quality of their loans and
advances, the RBI requires banks to classify their loan assets as performing and
non-performing assets (NPA), primarily based on the record of recovery from
the borrowers. Banks are also required to make appropriate provisions against
each category of NPAs and 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 RBI 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).
Foreign Exchange Reserves Management

The RBI, as the custodian of the country’s foreign exchange reserves, is vested
with the responsibility of managing their investment. Management of foreign
exchange reserves is governed by the RBI Act, 1934. The basic parameters of
the RBI’s policies for foreign exchange reserves management are safety, liquidity
and returns.
Within this framework, the RBI focuses on:
(a) Maintaining market’s confidence in monetary and exchange rate policies.
(b) Enhancing the RBI’s intervention capacity to stabilize 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.
Payment and Settlement Systems
1. 10
RBI Act 1934
The regulation and supervision of payment systems is being increasingly
recognized 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 RBI as the authority
for the purpose. As per the Act, only payment systems authorized by the RBI
can be operated in the country.
The RBI 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.
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 RBI is vested with the responsibility of adopting and implementing
monetary policy. This responsibility is explicitly mandated under the RBI 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.
Instruments of Monetary Policy

 Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well
as term repo auctions. Progressively, the RBI 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 RBI
also conducts variable interest rate reverse repo auctions, as necessitated
under the market conditions.
1. 11
RBI Act 1934
 Repo Rate: The (fixed) interest rate at which the RBI 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 RBI absorbs
liquidity, on an overnight basis, from banks against the collateral of eligible
government securities under the LAF.
 Marginal Standing Facility (MSF): A facility under which scheduled
commercial banks can borrow additional amount of overnight money from
the RBI 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 RBI is ready to buy or rediscount
bills of exchange or other commercial papers. The Bank Rate is published
under Section 49 of the RBI 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 RBI as a share of such per cent of its Net demand
and time liabilities (NDTL) that the RBI 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 Stabilization 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 mobilized is held
in a separate government account with the RBI.
1. 12
RBI Act 1934
Constitution of Monetary Policy Committee (Sec 45ZB)

1. The CG 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) 1 officer of the Bank to be nominated by the Central Board—Member,
ex officio; and
d) 3 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 (Sec 45ZI)
1) The Bank shall organise at least 4 meetings of the Monetary Policy

Committee in a year.
2) The meeting schedule of the Monetary Policy Committee for a year shall
be published by the Bank at least one week before the 1st 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 meeting quorum shall be 4 Members, at least 1 of whom shall be the
Governor and in his absence, the Deputy Governor who is the Member of
the Monetary Policy Committee.
1. 13
RBI Act 1934
6) The meetings 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 shall have one vote.
8) All questions 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 CG 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 for a proposed resolution shall be recorded
against such Member.
11) Each Member 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 (Sec 45ZM(1))

The Bank shall, once in every 6 months, publish the Monetary Policy Report,
explaining—
a) The sources of inflation; and
b) The forecasts of inflation for the period between 6 to 18 months from the
date of publication of the document.
The form and contents of the Monetary Policy Report shall be in format
specified by the regulations made by the Central Board.
Penalties (Sec 58B)

1. Any person who does wilful misstatement or false statement or omits any
material information shall be punishable with imprisonment up to 3 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, he shall be punishable
with fine up to Rs. 1 Lakh for each offence and if he persists in such failure
1. 14
RBI Act 1934
or refusal, with further fine up to Rs. 5000 for every day, after the first
during which the offence continues.
3. If any person contravenes against issue of demand bills and notes, he shall
be punishable with fine up 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 prohibited credit information, he shall be
punishable with imprisonment up-to 6 mounts, or with fine up-to Rs. 1000,
or with both.
(4A) If any person contravenes the provisions Sec 45-IA(1), he shall be
punishable with imprisonment for atleast one year but up to 5 years and with
fine atleast Rs. 1 Lakh but up to Rs. 25 Lakh.
(4AA) If any auditor fails to comply with any direction given or order made
by the Bank, he shall be punishable with fine up-to Rs. 10 Lakh.
(4AAA) Whoever fails to comply with any order made by the CLB, shall be
punishable with imprisonment up-to 3 years and shall also be liable to a fine
of at-least Rs. 5,000 for every day during which such non-compliance continues.
5. If any person other than an auditor-
(a) receives any unauthorised deposit or in contravention of any direction given;
or
(aa) fails to comply with any direction given or order made by the Bank; or
(b) issues any unauthorised prospectus or advertisement.
6. he shall be punishable with imprisonment up to 3 years and shall also be
liable to fine which may extend,-
(i) for 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.
1. 15
FEMA 1999
Foreign Exchange Management Act, 1999

 Foreign Exchange Management Act, 1999 has replaced Foreign Exchange
Regulation Act 1973 and it came into effect from 1.6.2000.
 Reserve Bank of India is overall controlling authority in respect
of FEMA. In addition to RBI, Directorate of Enforcement has
also been formed for the implementation of FEMA.
 Section 46 of FEMA authorizes Central Govt. to make
Rules and Section 4 authorizes RBI to make Regulations to
carry out the provisions of the Act. Accordingly, the Central Govt.
has issued number of Rules and RBI has issued number of
Regulations for various purposes. The practical aspects are covered by
these Rules and Regulations.
 Objects – To facilitate external trade and payments and To promote the orderly
development and maintenance of foreign markets in India.
 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 provides –
 Free Transactions on current account subject to reasonable restrictions that may
be imposed.
 Capital Account Transactions.
 Realization of export proceeds
 Dealings in Foreign Exchange through Authorized person
 Adjudication of Offences – Appeal provisions includin Special Director (Appeals)
and Appellate Tribunal
FEMA Structure
The legislations, rules and regulations, governing Foreign Exchange Management
are as under:
2. 1
FEMA 1999
1. 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)
2. Rules made by Ministry of Finance under section 46 of FEMA (Subordinate
or delegated Legislations)
3. Regulations made by RBI under section 47 of FEMA (Subordinate or
delegated Legislations)
4. Master Direction issued by RBI on every year
5. Foreign Direct Investment policy issued by Department of Industrial Policy
and Promotion.
6. Notifications and Circulars issued by Reserve Bank of India.
Rules under FEMA

1. FEM (Encashment of Draft, Cheque, Instrument and Payment of Interest)
Rules, 2000
2. FEM (Authentication of Documents) Rules, 2000
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
Definitions
2. 2
FEMA 1999
Authorised Person Authorized person means an authorized dealer,
[Sec 2(c)] moneychanger, off-shore banking unit or any
other person for the time being authorized by the
RBI to deal in foreign exchange or foreign
securities.
Currency Notes Currency Notes means and includes cash in the
[Sec 2 (i)] form of coins and bank notes. In fact, it means
money and such bank notes or other paper money
as are authorized by law and circulates from hand
to hand as a medium of exchange
Foreign Exchange Foreign Exchange means foreign currency and includes
[Sec 2(n)] the following:
1. Deposits, credits and balance payable in any foreign
currency
2. Drafts, traveller's cheque, letters of credit
or bill of exchange expressed or
drawn in Indian currency but payable
foreign currency ; and
3. Drafts, traveller's cheque, letters of
credit or bill of exchange expressed
or drawn by banks, institutions or
person outside India payable in Indian currency.
Foreign Security Foreign Security means any security in the
[Sec 2(o)] form of shares, stocks, bond, debentures or
any other instrument denominated or expressed
in foreign currency. Further, the term foreign
security also includes security expressed in
foreign currency but where redemption or any
form or return such as interest or dividend is
payable in Indian Currency.
Person [Sec 2(u)] 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
2. 3
FEMA 1999
owned or controlled by such persons. Further, it
includes any other artificial person.
Person resident in Person resident in India means:
India [Sec 2(v)] 1. A person residing in India for more than 182
days during the course of preceding
financial year but does not include the
following:
a) Person who has gone out of India or who
stays outside India for any of the
following purposes :
I. For taking up employment outside India;
II. For carrying on a business or vocation
outside India;
III. For any other purpose in such
circumstances as would indicate his
intention to stay outside India for an
uncertain period.
b) Person who has come to India or who
stays in India for any purpose other than
the following purposes
I. For taking up employment in India;
II. For carrying on a business or vocation in India;
III. For any other purpose in such
circumstances as would indicate his
intention to stay in India for an
uncertain period.
2. Any person or body corporate registered or
incorporated in India;
3. An office, branch or agency established in
India which is owned or controlled by a
person resident outside India;
4. An office, branch or agency established outside
India, which is owned or controlled by a
person resident in India.
2. 4
FEMA 1999
Dealings in Foreign Exchange etc. (Section 3)

Except as otherwise provided in the Act, Rules or Regulations or with
the general or special permission of the RBI, no person shall:
1. Deal in or transfer any foreign exchange or foreign security to any
person not being an authorized person;
2. Make any payment to or for the credit of any person resident outside India in
any manner;
3. Receive otherwise through an authorized person any payment by order or on
behalf of any person resident outside India in any manner;
4. Enter into financial transaction in India as consideration for acquisition or
transfer of any asset outside India by any person.
Holding of Foreign exchange, foreign security & immovable

property (Section 4)
Except as otherwise provided in the Act, rules or regulations, no
person resident in India shall acquire, hold, own, possess or transfer
any foreign exchange, foreign security or any
immovable property situated outside India.
Rules and Regulations regarding Section 3 and Section 4

I. Possession and retention of foreign exchange or foreign coins
Foreign exchange can be possessed and retained subject to the following limits :
1. Authorized person can retain or possess foreign currency and
coins within the scope of his authority without any limit ;
2. Any person can possess foreign coins without limit;
3. A person resident in India can retain foreign exchange upto Us $2000
or its equivalent in aggregate in the following cases:
i. Such foreign exchange have been acquired by him while on a visit to
any place out of India by way of payment for services or by
way of honorarium or gift ;
2. 5
FEMA 1999
ii. Such foreign exchange have been acquired by him from any person resident
outside India and who is on a visit to India for services or by way of
honorarium or gift or in settlement of any lawful obligation ;
iii. Such foreign exchange represents unspent amount of foreign exchange
acquired by him from an authorized person for travel abroad.
4. A person resident in India but not permanently resident in India may possess
foreign exchange without any limit if such foreign exchange was acquired, held
or owned by him when he was resident outside India and has been brought
into India in accordance with the prescribed regulations.
II. Realization, Repatriation and Surrender of Foreign Exchange

 A person who is entitled to obtain foreign exchange should surrender it to
the authorized dealer. He can retain with himself such foreign
exchange as permitted by law.
 A person resident in India to whom any amount of foreign exchange is due
or has accrued shall take all reasonable steps to realize and to repatriate to
India such foreign exchange.
 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.
 A person not being an individual resident in India shall sell the realised foreign
exchange to an authorised person within the period specified below: -
 Foreign exchange due or accrued as remuneration for services rendered,
whether in or outside India, or in settlement of any lawful obligation, or
2. 6
FEMA 1999
an income on assets held outside India, or as inheritance, settlement or
gift, within seven days from the date of its receipt;
 in all other cases within a period of ninety days from the date of its
receipt
 In case the foreign exchange acquired was for travel abroad the unspent amount
must be surrendered to an authorized person in the following manner:
 Within 90 days from the date of return to India when the unspent
foreign exchange is in the form of currency notes and coins ;
foreign exchange is in the form of traveller's cheque.
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 travellers 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
Current Account Transaction [Section 2(j)]

The term current account transaction means a transaction other than a capital
account transaction and includes :
1. Payments due in connection with foreign trade, other current business, services
and short term banking and credit facilities in the ordinary course of business;
2. Payments due as interest on loan and as net income from investments;
3. Remittances for living expenses of parents, spouse and children
residing abroad
4. Expenses in connection with foreign travel, education and medical care of
parents, spouse and children
Dealings in current account transactions (Section 5)
2. 7
FEMA 1999
Any person may sell or draw any foreign exchange to and from an authorized
person if such sale or drawl is a current account transaction. However, the
Central Govt. may impose reasonable restrictions on current account
transactions in the public interest in consultation with the RBI by
making the appropriate rules. Accordingly, the Central Govt. has made
Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Thus, generally all current account transactions are free subject
to reasonable restrictions, which may be
imposed by Central Govt. in consultation with RBI.
Foreign Exchange Management (Current Account

Transactions) Rules, 2000
I. Prohibited Current Account Transactions: There is prohibition of certain remittances,
even if they are current account transactions. Such transactions are:
1. Transactions with Nepal /Bhutan
 Drawl of foreign exchange for travel in Nepal/Bhutan is not permitted
 Transactions with a person resident in Nepal/Bhutan cannot be made in
foreign exchange, unless permitted by RBI by a special or general order.
2. Commission on exports to Joint Venture/Wholly Owned Subsidiary abroad
Commission on exports made towards equity investments in Joint
Venture/Wholly Owned Subsidiary abroad
of Indian companies is not permitted.
3. Call back Charges
Payment related to call back services of telephone. In call back system,
the party which is receiving the telephone call makes
payment of telephone charges.
4. Lottery/ Races
 Remittance out of lottery winnings ;
 Remittance of income from racing/riding etc.;
 iii Remittance for purchase of lottery tickets, banned magazine, etc.
5. Lottery tickets/Money circulation schemes
Some organizations advise individuals they should arrange to remit some
amount in US dollars as fees. It has been clarified that remittance for
2. 8
FEMA 1999
lottery like schemes functioning under different names such as money
circulation scheme, remittance for purpose of securing prize money,
awards is prohibited.
6. Rupee State Credit Route
Payment of commission on exports under Rupee State Credit
Route, except commission upto 10 %
of invoice value of exports of tea and tobacco.
7. Interest on fund in Non Residents special rupee account
II. Central Government Approval :

In these cases, prior approval of concerned Ministry of Government of
India will be required for remittance, even if they are current account
transactions. However, if the payment is made out of Resident
Foreign Currency Account, approval of government is not required. The
relaxation is also applicable if payment is made out of
funds in EEFC A/C, in some cases
III. RBI Approval :

In respect of certain current account transactions, restrictions in the
form of RBI approval have been imposed. The purpose of such restriction is
to ensure that capital is not remitted in the garb of current account
payment. Thus, remittance above the prescribed limits will be permitted if
the RBI is satisfied that these are indeed current account transactions.
Note: If remittance is out of the Resident Foreign Currency Account, no permission
of RBI is required even for remittance above the prescribed limits. The said
relaxation is also available if payment
is made out of funds held in EEFC A/,but only in a few cases.
Following are the transactions for which the RBI approval is required :
1. Release of foreign exchange exceeding US $ 2,50,000 or its equivalent
in a calendar year for one or more private visits abroad
(other than Nepal and Bhutan);
2. Release of foreign exchange exceeding US $ 250000 or its equivalent
in a calendar year for business travel, attending conference and
specialized training;
2. 9
FEMA 1999
3. Release of foreign exchange exceeding US $ 250000 or its equivalent
for persons going abroad for employment;
4. Gift remittance to family members and relatives exceeding US $ 250000
or its equivalent per remitter/donor per annum;
5. Donations exceeding US $ 250000 or its equivalent
per remitter/donor per annum;
Donations by Corporate, exceeding one per cent of their foreign exchange
earnings during the previous three
financial years or US$ 5,000,000, whichever is less, for:-
 creation of Chairs in reputed educational institutes,
 to funds (not being an investment fund) promoted by education
al institutes; and
 to a technical institution or body or association in the field of
activity of the donor Company.
Explanation: For the purpose of remittance of gift and donation by resident
are subsumed under the Liberalised remittance scheme.
6. Release of foreign exchange for meeting expenses for medical treatment
abroad upto US $ 250000 or its equivalent without insisting on any estimate
from the hospital/doctor
7. Release of exchange for studies abroad exceeding the estimates
from the institution abroad or US $ 250000 per
academic year, whichever is higher;
8. Commission per transaction to agents abroad for sale of
residential flats/ commercial plots in India exceeding the limit of US $
25000 or 5% of the inward remittance per transaction
whichever is higher;
9. Remittance exceeding US $ 1 million per project for any
consultancy services procured from abroad;
10. Remittance exceeding US $ 1 lakh by an entity in India by
way of reimbursement of pre-incorporation expenses
Liberalised Remittance Scheme

Liberalised Remittance Scheme of USD 250,000 for Resident Individuals
Effective 1 June 2015, under the
2. 10
FEMA 1999
Liberalised Remittance Scheme, (hereinafter referred to as the
Scheme/LRS) resident individuals are allowed to remit upto USD 250,000 per
financial year (April-March) for any permitted current or capital account
transactions or a combination of both.
If an individual has already remitted any amount under the LRS, then the
applicable limit for such an individual would be reduced from the present limit of
USD 250,000 for the financial year by the amount already remitted.
The Scheme is available to all resident individuals including minors.
Under the Scheme, resident individuals are permitted purchase property abroad
and/or make investment abroad and/or in setting up wholly owned
subsidiaries and Joint Ventures abroad.
To facilitate ease of transactions, all the facilities (including private/business
visits) for release of exchange/remittances for current account transactions
available to resident individuals under Foreign Exchange Management
(Current Account Transactions) Rules, 2000, as amended from time to
time, shall now be subsumed under the overall limit of USD 250,000.
A resident individual is permitted to make a rupee gift/loan to a NRI/PIO who

is a close relative of the resident individual (close relative as defined in Section
6 of the Indian Companies Act, 1956). The gift/loan amount should be within
the overall limit of USD 250,000 per financial year as permitted under the
Liberalised Remittance Scheme (LRS) for a resident individual
The Scheme is not available for remittance to countries notified as non-

cooperative countries and territories by the Financial Action Task Force (FATF)
from time to time
and communicated by the Reserve Bank of India to all concerned.
Capital Account Transaction [Section 2(e)]

Capital Account Transaction has been defined to mean any
transaction which alters the assets or liabilities including contingent
2. 11
FEMA 1999
liabilities, outside India of persons resident in India or assets or
liabilities in India of persons resident outside India.
It relates to movement of capital. These include transactions in property
and investments and lending and borrowing money.
Regulations of Capital Account Transacation (Section 6)
Permissible Capital Account Permissible Capital Account Transactions of

Transactions of persons resident in persons resident outside India
India
A person resident in India may enter A person resident outside India may enter i
into any of the following Capital nto
Account Transactions subject to RBI
Regulations made in this regard any of the following subject to RBI Regulati
1. Investment in Foreign Securities ons
2. Foreign Currency loans raised made in this regard:
in India and abroad 1. Investment in securities of Indian b
3. Transfer of immovable prope ody corporates
rty outside India 2. Investment in capital of
4. Guarantee issued in favour a firm
of a PROI proprietorship concern or an association
5. Export, import and holdi of persons in India.
ng of currency 3. Acquisition and transfer of immov
6. Loans and overdraft from PROI able property in India.
7. Maintenance of foreign curre 4. Guarantee issued in favour of a PRI
ncy 5. Import and export of currency accounts
accounts in India and o n India.
utside India 6. Maintenance of foreign currency accounts
8. Taking out of an insurance po in India.
licy 7. Remittance of capital assets from
from an insurance co India outside India.
mpany outside India
9. Loans and overdraft to a PROI
2. 12
FEMA 1999
10. Remittance of capital assets
from outside India into India.
11. Sale and purchase of
foreign
exchange derivatives in I
2000ndia
and abroad and comm
odity derivatives abroad.
The RBI has made Foreign Exchange Management (Permissible Account
Transactions) Regulations, 2000. Thus, Capital Account Transactions are permitted
to the extent specifically permitted by RBI.
Foreign Exchange Management (Permissible Account

Transactions) Regulations, 2000
Unless otherwise provided in the Act, rules or regulations made thereunder, no
PROI shall make investment in India in any
entity which is engaged in any of the following activities:
1. Nidhi Company
2. Agricultural and Plantation activity
3. Real estate business or construction of farm house
4. Trading in transferable Development Rights
5. Atomic energy
Regulations regarding Capital Account Transactions

I. Acquisition or transfer of immovable property situated outside India
A person resident in India would require the prior approval of RBI
for acquisition or transfer of any immovable property situated outside India.
However, the approval of RBI is not required in the following cases:
1. Property held by a foreign citizen;
2. Property acquired by a person on or before July 8, 1947 and held
with the permission of RBI;
3. Property acquired by way of gift or inheritance from person referred to in
clause 2 above;
4. Property acquired by way of gift or inheritance from any person who acq
2. 13
FEMA 1999
uired, who held or owned such property when he was resident outside India.
5. Property purchased out of the funds held in Resident Foreign Currency Acc
ount.
6. 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

A company incorporated in India having overseas offices, may acquire immovable
property outside India for its business and for residential purposes of its staff,
provided total remittances do not exceed the following limits prescribed for
initial and recurring expenses, respectively:
 15 per cent of the average annual sales/ income or turnover of the Indian
entity during the last two financial years or up to 25 per cent of the
net worth, whichever is higher;
 10 per cent of the average annual sales/ income or turnover during the
last two financial years.
II. Acquisition or transfer of immovable property situated in India
1. Acquisition and transfer of property in India by an Indian citizen resident
outside India (NRI):
 A person resident in India who is a citizen of India may acquire any
immovable property in India other than agricultural property,
plantation property or farm house.
 He can transfer any immovable property in India to a person resident in In
dia.
 He can transfer any immovable property other than agric
ultural property,
plantation property or farm house to a person resident outside India wh
o is either an Indian citizen or a person of Indian origin.
2. 14
FEMA 1999
2. Acquisition and transfer of property in India by a person of Indian
origin (PIO) resident outside India
A person of Indian origin resident outside India may acquire immovable property
in India other than agricultural property, plantation property or farm house
by way of purchase. He can also acquire the property by way of gift or
inheritance. He can transfer any immovable property other than
agricultural property, plantation property or farm house, by way of gift
or sale, to a person resident in India who is a citizen of India. If asset
is sold, amount equivalent to foreign exchange brought in can be repatriated.
Note: Citizens of Bangladesh, Pakistan, Sri Lanka, Afghanistan, China, Nepal, Iran
or Bhutan cannot acquire immovable property in India without the prior permission
of RBI. However, they can acquire immovable property in India by way of lease
for a period upto 5 years without the RBI's approval.
3. Establishment of a branch office or liaison office or project office or any

other place of business in India:
No person resident outside India shall without prior approval of the Reserve
Bank open in India a branch office or a liaison office or a project office or
any other place of business by whatever name called except as laid down in
these Regulations. Provided that
a) A banking company resident outside India shall not require any approval
under these Regulations for establishing any office in India if such company
has obtained necessary approval under the provisions of the Banking
Regulation Act, 1949
b) An insurance company resident outside India shall not require any approval
under these Regulations for establishing any office in India if such company
has obtained approval from the Insurance Regulatory and Development
Authority established under section 3 of the Insurance Regulatory and
Development Authority Act, 1999.
c) A company resident outside India shall not require any approval under
these Regulations to establish a branch office in the Special Economic
Zones (SEZs) to undertake manufacturing and service activities, subject
to the conditions that:
i. Such branch offices are functioning in those sectors where 100%
2. 15
FEMA 1999
FDI is permitted;
ii. such branch offices comply with Chapter XXII of the Companies
Act, 2013;
iii. and such branch offices function on a stand-alone basis.
4. Acquisition of immovable property for carrying on business:
A person resident outside India who has established in India a branch office
or place of business (but not a mere liaison office) in accordance with
the RBI Regulations can acquire any immovable property in India which is
necessary for an incidental to carry on such activity.
The person acquiring such property in India shall file declaration in the prescribed
form with the RBI within 90 days of the acquisition of property.
If the asset is sold, sale proceeds can be repatriated only
with the prior permission of RBI.
Establishment in India of Branch/Liaison/Project Office

A body corporate outside India desirous of opening Branch/Liason/Project office
in India has to obtain permission of RBI under provisions of FEMA 1999. The
following additional criteria are also considered by the Reserve Bank while
sanctioning Liaison/Branch Offices of foreign entities:
 Track Record
 For Branch Office – a profit making track record during the immediately
preceding five financial years in the home country.
 For Liaison Office – a profit making track record during the immediately
preceding three financial years in the home country.
 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].
 For Branch Office — not less than USD 100,000 or its equivalent.
 For Liaison Office — not less than USD 50,000 or its equivalent.
Regulation 4(b) states that a person resident outside India permitted by the
Reserve Bank under the Regulations to establish a branch or liaison office in India
may undertake or carry on any activity specified in Schedule I or II, as the case
2. 16
FEMA 1999
may be, but shall not undertake or carry on any other activity unless otherwise
specifically permitted by the Reserve Bank.
A Liaison Office can undertake the following activities in India

i. Representing in India the parent company / group companies.
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.
Companies incorporated outside India and engaged in manufacturing or trading

activities are allowed to set up Branch Offices in India with specific approval of
the RBI. Such Branch Offices are permitted to represent the parent / group
companies and undertake the following activities in India:
i. Export / Import of goods.

ii. Rendering professional or consultancy services.
iii. Carrying out research work, in areas 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. Foreign airline / shipping company.
 Normally, the Branch Office should be engaged in the activity in which the
parent company is engaged.
 Retail trading activities of any nature is not allowed for a Branch Office in
India.
 A Branch Office is not allowed to carry out manufacturing or processing
activities in India, directly or indirectly.
 Profits earned by the Branch Offices are freely remittable from India, subject
to payment of applicable taxes.
2. 17
FETC
Foreign Exchange Transactions & Compliances

Dealings in Foreign Exchange etc. (Section 3)
Except as otherwise provided in the Act, Rules or Regulations or with
the general or special permission of the RBI, no person shall:
1. Deal in or transfer any foreign exchange or foreign security to any
person not being an authorized person;
2. Make any payment to or for the credit of any person resident outside India in
any manner;
3. Receive otherwise through an authorized person any payment by order or on
behalf of any person resident outside India in any manner;
4. Enter into financial transaction in India as consideration for acquisition or
transfer of any asset outside India by any person.
Holding of Foreign exchange, foreign security & immovable

property (Section 4)
Except as otherwise provided in the Act, rules or regulations, no
person resident in India shall acquire, hold, own, possess or transfer
any foreign exchange, foreign security or any
immovable property situated outside India.
Rules and Regulations regarding Section 3 and Section 4

I. Possession and retention of foreign exchange or foreign coins
Foreign exchange can be possessed and retained subject to the following limits :
1. Authorized person can retain or possess foreign currency and
coins within the scope of his authority without any limit ;
2. Any person can possess foreign coins without limit;
3. A person resident in India can retain foreign exchange upto Us $2000
or its equivalent in aggregate in the following cases:
i. Such foreign exchange have been acquired by him while on a visit to
any place out of India by way of payment for services or by
way of honorarium or gift ;
ii. Such foreign exchange have been acquired by him from any person resident
outside India and who is on a visit to India for services or by way of
honorarium or gift or in settlement of any lawful obligation ;
iii. Such foreign exchange represents unspent amount of foreign exchange
acquired by him from an authorized person for travel abroad.
4. A person resident in India but not permanently resident in India may possess
foreign exchange without any limit if such foreign exchange was acquired, held
or owned by him when he was resident outside India and has been brought
into India in accordance with the prescribed regulations.
II. Realization, Repatriation and Surrender of Foreign Exchange

3. 1
FETC
 A person who is entitled to obtain foreign exchange should surrender it to
the authorized dealer. He can retain with himself such foreign
exchange as permitted by law.
 A person resident in India to whom any amount of foreign exchange is due
or has accrued shall take all reasonable steps to realize and to repatriate to
India such foreign exchange.
 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.
 A person not being an individual resident in India shall sell the realised foreign
exchange to an authorised person within the period specified below: -
 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;
 in all other cases within a period of ninety days from the date of its
receipt
 In case the foreign exchange acquired was for travel abroad the unspent amount
must be surrendered to an authorized person in the following manner:
foreign exchange is in the form of currency notes and coins ;
foreign exchange is in the form of traveller's cheque.
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 travellers cheques, etc. to an authorised person
3. 2
FETC
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
Current Account Transaction [Section 2(j)]

Already covered
Dealings in current account transactions (Section 5)

Already covered
Foreign Exchange Management (Current Account Transactions) Rules,

2000
Already covered
Capital Account Transaction [Section 2(e)]
Already covered
Regulations of Capital Account Transacation (Section 6)

Already covered
Foreign Exchange Management (Permissible Account

Transactions) Regulations, 2000
covered
Regulations regarding Capital Account Transactions
 Already covered
Establishment in India of Branch/Liaison/Project Office

Already covered
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.
Duty of persons to realise foreign exchange due
3. 3
FETC
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 A PIO resident outside India can transfer 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 -
 that the receipt by him of the whole or part of that foreign exchange is
delayed; or
 that the foreign exchange ceases in whole or in part to be receivable by him.
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: -
 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;
 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
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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 60 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 90 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
ii. within 180 days from the date of return of the traveller to India, when
the unspent foreign exchange is in the form of travellers cheques.
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 travellers cheques, etc. to an authorised person within 180
days from the date of such receipt/ realisation/ purchase/ acquisition or date
of his return to India, as the case may be.
Remittance of Assets
'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.
Remittances by individuals not being NRIs/ PIOs
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 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.
iv. 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.
 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.
 These facilities are not available for citizens of Nepal or Bhutan or a PIO.
Remittances by NRIs/ PIOs

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
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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, 2013.
iii. In case of winding up otherwise than by a court, an auditor's certificate
to the effect that there are no 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:
 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;
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 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;
 confirming that no income accruing from sources outside India (including
proceeds of exports) has remained un-repatriated to India;
 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
 on account of legacy, bequest or inheritance to a citizen of foreign state,
resident outside India;
 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.
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.
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 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 coins

Under Regulation 3 of Foreign Exchange Management (Possession and Retention
of Foreign Currency) Regulations, 2015 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 travellers cheques not exceeding US $ 2000 or its
equivalent in aggregate, provided that such foreign exchange in the form of
currency notes, bank notes and travellers 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.
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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 travellers 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.
Authorised Person
1. Under Section 10, any person who has made an application to the RBI may
be authorised by it to act as an 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.
 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
 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.
2. 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
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exceeding Rs. 10,000/- and in the case of continuing contravention, with
an additional penalty which may extend to Rs. 2,000 for every day
during which such contravention continues.
3. 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.
Adjudication and Appeals

Adjudicating Authorities
Section 16 of Foreign Exchange Management Act, 1999 empowers the Central
Govt. to appoint Adjudicating Authorities. The Adjudicating Authorities can
hold enquiry only on receiving a complaint in one year. If it is not possible, he
shall record the reasons for not disposing off the complaint within 1 year.
The jurisdiction of various adjudicating authorities is as follows
There are 3 levels of Adjudicating Authorities i.e. Deputy Director,

Additional Director and Director of Directorate of Enforcement in the ascending
order of hierarchy. The Assistance Director of Directorate of
Enforcement normally makes a complaint before the
Adjudicating Authorities but sometimes he can also
act as Adjudicating Authority.
Special Director (Appeals)

Section 17 empowers the Central Govt. to appoint one or more Special
Director (Appeals) to hear the appeals against the orders of
Adjudicating Authorities.
Special Director (Appeals) shall have the jurisdiction to hear the appeals
only against the orders of Assistant Director and Deputy Director.
The appeal against the orders of Special Director (Appeals) shall lie
before Appellate Tribunal for Foreign Exchange.
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Appellate Tribunal for foreign exchange

Section 18 of Foreign Exchange Management Act, 1999 empowers the
Central Govt. establish an Appellate Tribunal for Foreign Exchange to hear
appeals against the orders of Adjudicating Authorities (i.e. Additional
Director and Director of Directorate of Enforcement) and Special Director
(Appeals).
 The appeal against the orders of Appellate Tribunal shall lie
before the High Court.
 The Appellate Tribunal consists of a Chairperson and other members.
 A person qualified to be a Judge of a High Court shall be appointed
as the Chairperson and
 A person qualified to be a judge of a District Court shall be appointed
as the member of the Appellate Tribunal
 Appointment shall be for a period of 5 years
Appeal against the orders of Appeallate Tribunal to High Court

 Before making an appeal against the orders of Appellate Tribunal for foreign
exchange, it must be kept in mind that such appeal can be made
only on questions of law and not on questions of facts.
 Any person aggrieved by an order of the Appellate Tribunal may file an appeal
within 60 days from the date of communication of the order of the Appellate
Tribunal, to the concerned High court.
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
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 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 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 Offences
 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.
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 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.
Application for compounding 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.
 Along with the application, the applicant may also furnish
 the details relating to FDI, ECB, 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.
Pre-requisite for Compounding Process

 In respect of a contravention committed by any person within 3 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 3 years from the
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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.
 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.
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
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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.
The time limit for this purpose would be reckoned from the date of receipt
of the completed application for compounding by the Reserve Bank.
 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 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.
 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).
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FCRA, 2010
FOREIGN CONTRIBUTION (REGULATION ACT),
2010
Introduction
The foreign contribution (Regulation) Act 1976 was enacted to regulate the
acceptance and utilization of foreign contribution or hospitality with a view to
ensure that parliamentary institutions, political associations, academic and other
voluntary organisations 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.
However, in 2010, Foreign Contribution (Regulation) act 2010 was enacted

and 1976 was repealed w.e.f May 1, 2011. The MHA has issued necessary
gazette notification dated 29th April 2011 in this regard. The MHA also notified
the foreign contribution (Regulation) Rules 2011 which came into force
simultaneously with FCRA 2010.
Definitions
Foreign Contribution “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 Govt. by the rules made by
it in this behalf;
ii. of any currency, whether Indian or foreign;
iii. of any security as defined in sec 2 (h) of
the Securities Contracts(Regulation) Act
1956
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Foreign Hospitality means any offer, not being a purely casua
[Section 2 (1) (i)] l 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.
Foreign Source [Section Includes -
2(1)(j)] i. Foreign Govt. or its agency.
ii. any international agency, except United
Nations or any of its specialised agencies,
the World Bank, IMF or such other
Govt. notified agencies;
iii. a foreign company;
iv. other incorporated foreign corporations;
v. MNCs
vi. A company within the meaning of the
Companies Act, 1956 or 2013 and more
than 50% of the nominal value of its share
capital is held, either singly or in the
aggregate, by one or more of the following,
namely:—
 Foreign Govt.;
 Foreign Citizen;
 Foreign corporations;
 Foreign trusts, societies or other
associations of individuals
 foreign company;
vii. Foreign Trade Union
viii. Foreign citizen
Person [Section 2(1)(m)] includes—
i. an individual;
ii. a HUF;
iii. an association;
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iv. a company registered under section 25 of
the Companies Act, 1956 OR Sec 8 of co.
act 2013
Political party Means an association or body of individual citizens
of India -
a) to be registered with the Election Commission
of India as a political party u/s 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;
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 CG;
 Association or company engaged in the production or any other mode
of mass communication;
 Correspondent or columnist, cartoonist, editor, owner of the
association or company.
Section 3(2)(a) 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.
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FCRA, 2010
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 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 section 3(1), 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 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 CG or SG; or
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FCRA, 2010
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 CG with regard to the
acceptance or retention of such gift or presentation; or
e) from his relative; or
f) by way of any scholarship, stipend or any payment of like nature:
Procedure to notify an organization of a political nature

Section 5(1) provides that the CG 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 section 3(1)(f). Further,
the CG 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 CG.
 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 CG, 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 CG 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
4. 5
FCRA, 2010
 Section 7 prohibits the transfer of foreign contribution to other pers
on.
 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 CG, 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 CG.
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. And
should not use more than 50% of foreign contribution received in
one financial year as administrative expenses.
Power of Central Government to prohibit receipt of foreign contribution

Section 9 deals with power of CG to prohibit receipt of foreign
contribution, etc., in certain cases.
Power to prohibit payment of currency received in contravention of the Act

Section 10 provides that where the CG 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.
Registration of certain persons with Central Government

 Section 11(1) requires that person having a definite
cultural, economic, educational, religious or social programme shall
4. 6
FCRA, 2010
accept foreign contribution if such person obtains a certificate of
registration from the CG.
 Certificate granted shall be valid for a period of 5 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.
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 CG.
Section 12(4) provides following conditions for granting certificate of

registration.
a) The person making an application for registration or grant of prior permission—
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;
b) the person making an application for registration, 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, has
prepared a reasonable project for the benefit of the society for which the
foreign contribution is proposed to be utilised;
4. 7
FCRA, 2010
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, is not
likely to affect prejudicially —
 the sovereignty and integrity of India; or
 the security, strategic, scientific or economic interest of the
State; or
 the public interest; or
 freedom or fairness of election to any Legislature; or
 friendly relation with any foreign State; or
 harmony between religious, racial, social, linguistic,
regional groups, castes or communities;
Suspension of certificate
Section 13 (1) provides that where the CG, for reasons to be
recorded in writing, is satisfied that pending consideration of the
question of cancelling the, it is necessary so to do, it may, by order
in writing, suspend the certificate for such period not exceeding 180
days 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.
Cancellation of certificate
Section 14 empowers the CG to cancel the certificate. Accordingly, the CG may,
if it is satisfied after making such inquiry as it may deem fit, by an order, cancel
the certificate if —
a) The holder of the certificate has made a statement in, or in relation
to, the application for the grant of registration or renewal thereof, which is
incorrect or false;or
b) The holder of the certificate has violated any of the terms and conditions
of the certificate or renewal thereof; or
4. 8
FCRA, 2010
c) In the opinion of the CG, it is necessary in the public interest
to cancel the certificate; or
d) The holder of certificate has violated any of the provisions of
this Act or rules or order made thereunder; or
e) If the holder of the certificate has not been engaged in any reasonable activity
in its chosen field for the benefit of the society for 2 consecutive years or
has become defunct.
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.
Renewal of certificate [Section 16].INTIMA

Every person who has been granted a certificate, shall have such certificate
renewed within six months before the expiry of the period of the certificate
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.
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.
4. 9
FCRA, 2010
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 the contribution was received.
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
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 or as the CG may deem fit.
4. 10
FEMA, 1999
Foreign Direct Investment in India
Introduction
Foreign Direct Investment in India (FDI) is made by the foreign
entities in Indian companies with the objective of acquiring some
kind of control in the Indian Companies. Whenever foreign direct
investment is made in India, generally a Joint Venture Company
or a Wholly Owned Subsidiary is set up.
Definitions
Depository Receipt ‘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.
Erstwhile Overseas Corporate ‘Erstwhile Overseas Corporate Body’ (OCB) means a

company, partnership firm, society and other
Body
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.
Foreign Currency Converti ‘Foreign Currency Convertible Bond’ (FCCB)

means a bond issued by an Indian company
ble Bond
expressed in foreign currency, the principal and
interest of which is payable in foreign currency.
Foreign Venture Capital ‘Foreign Venture Capital Investor’ (FVCI)

means an investor incorporated and
Investor
established outside India, which is registered under
the Securities and Exchange Board of India (Foreign
Venture Capital Investor) Regulations, 2000
5. 1
FEMA, 1999
{SEBI(FVCI) Regulations} and proposes to make
investment in accordance with these Regulations.
Indian Venture Capital Under ‘Indian Venture Capital Undertaking’ (IVCU) means a
n Indian company:
taking
(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.
Transferable Development ‘Transferable Development Rights’ (TDR) means
Rights 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.
Who can make FDI?

FDI can be made by a person resident outside India, other than
a citizen of Pakistan or an entity incorporated in Pakistan. A citizen of
Bangladesh or an entity incorporated in Bangladesh can invest in India only under
the Govt. Approval Route of FDI Policy.
Types of Instrument for FDI

 FDI may be by way of investment in equity shares, fully
compulsorily convertible preference shares, fully compulsorily convertible
debentures.
 Other types of Preference shares/Debentures i.e. non-convertible, optionally
convertible or partially convertible are considered as in India
5. 2
FEMA, 1999
debt. Accordingly all norms applicable for External Commercial Borrowings
shall apply.
 Further, the inward remittance received by the Indian company
vides issuance of GDRs/ADRs and FCCBs are
treated as FDI and counted towards FDI.
 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 1 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.
Issue of shares by Indian Companies under FCCB/ADR/GDR

1. Indian companies can raise foreign currency resources through
issue of FCCB /ADR /GDR by guidelines issued by the Govt.
2. Indian listed companies not eligible to issue services in India cannot issue ADRs
3. Unlisted companies wishing to issue ADRs will have to get listed in domestic
market
4. Issue proceeds can be utilized to by first stage acquisition of
shares in disinvestment process of PSUs/Enterprises and in the
mandatory second stage offer to the public in view of their strategic
importance. Voting rights on ADR/GDR issue as per Companies Act, 1956 and
in case of banking companies as per Banking Regulation Act, 1949
5. Erstwhile OCBs not eligible to invest in India also not eligible
to purchase ADRs/GDRs
6. Pricing of ADR/GDR or sponsored ADRs/GDRs to be
determined under various provisions, guidelines
and directions issued by Government and RBI.
5. 3
FEMA, 1999
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.
 Reissuance 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.
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.
Procedure for approval for FDI

 In general, FDI can be made under automatic route. However, in some
cases, government approval is required.
 Under the Automatic Route, the foreign investor or the Indian Company
does not require any approval
from the RBI or Govt. of India for the investment.
 Under the Govt. Route, prior approval of the Govt. of India
Portfolio Investment Scheme

Investment By Registered Foreign Portfolio Invester [RFPI]
Investment in equity shares:
A RFPI may purchase, sell shares and convertible debentures of an Indian company
through a registered broker on recognized Stock and Exchanges on repatriation
basis, subject to the satisfaction of the following conditions:
5. 4
FEMA, 1999
 Paid up value of shares/convertible debentures purchased by each RFPI shall
not exceed 10% of the total paid up value of equity
shares/convertible debentures of an Indian company;
 Paid up value of shares/convertible debenture purchased by all RFPI
shall not exceed 24% of the total paid up value of
equity shares/convertible debentures of an Indian company.
Investment in equity (NRIs)

A Non- Resident Indian can purchase in Indian company through
a registered broker on recognized Stock Exchanges on repatriation /non-
repatriation basis
Venture Capital Funds (VC)

A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute
upto 100% of the capital of a Venture Capital Fund/Indian
Venture Capital Undertaking and may also set up a domestic
asset management company to manage the fund. All such investments
are allowed under the automatic route subject to SEBI and
RBI regulations and FDI Policy
Other investments in India by Foreign entity

Acquisition of rights shares/convertible debentures issued by an Indian
company
A person resident outside India may purchase equity or preference

shares or convertible debentures offered on the rights basis by an Indian
company subject to the following conditions:
1. The offer should not result in increase in the percentage of foreign equity
already approved or permissible under the FDI Scheme;
2. The offer on rights basis to the person’s resident outside India should be
at price, which is not lower that the price at which the offer
is made to the resident shareholders;
3. The shares against which the bonus shares are issued by the Indian company
were acquired or held by non-resident shareholders in accordance with the rules
/regulations applicable to such acquisition; and
4. The rights shares/debentures purchased by a person resident outside India
shall be subject to same conditions including restrictions about
5. 5
FEMA, 1999
reparability as are applicable to the original shares against which the
right shares or debentures are issued.
A company issuing rights shares shall within 30 days from the date
of issue report the transaction in Form FC-GPR to the Reserve Bank of India.
FDI is prohibited in the following activities/sectors

 Atomic Energy
 Lottery Business including Government/private lottery, online lotteries, etc.
 Gambling and Betting including casinos etc.
 Business of chit fund
 Trading in Transferable Development Rights (TDRs)
 Real Estate Business or Construction of Farm Houses
 Activities/sectors not opened to private sector investment.
Acquisition of Bonus shares issued by an Indian company

An Indian company may issue bonus shares to its non-resident shareholders
subject to the following conditions:
1. The shares against which the bonus shares are issued by the Indian company
were acquired or held by non-resident shareholders in accordance with the
rules/regulations applicable to such acquisition and;
2. The bonus shares acquired by the non-resident shareholders shall be subject to
same condition including restrictions about repatriability as are applicable to
the original shares.
Issue of shares under Employee Stock Option Scheme to persons’ resident

outside India
 An Indian listed company may issue shares under the Employee Stock Option
Scheme to its employees or employees of its JV or WOS who are
persons resident outside India, other than to the citizens of Pakistan.
 ESOPs can be issued to citizens of Bangladesh with the prior approval of
Government.
 Shares under ESOPs can be issued subject of the satisfaction of the
following conditions:
1. The scheme should be as per the Guidelines made by the SEBI in this regard;
and
2. The face value of the shares to be allotted under the scheme to the
non-resident employee does not exceed 5 % of the paid-
up capital of the issuing company.
 Unlisted companies have to follow the provisions of the Companies Act, 2013.
The Indian company can issue ESOPs to employees who are resident
outside India, other than to the citizens of Pakistan ESOPs can be
issued to the citizens of Bangladesh with the prior approval of GOVT.
 Further, the issuing company shall furnish a report in Form FC-GPR
to the RBI regarding such issue of shares within 30 days from the
date of issue of shares under the scheme.
5. 6
FEMA, 1999
Transfer of shares and convertible debentures of Indian companies by non-resident

to non-resident
 Persons resident outside India (but not NRI) can transfer by way of sale or
gift the shares or convertible debentures to any person resident outside India.
 A non-resident Indian can transfer by way of sale or gift
the shares or convertible debentures by him to another non-resident
Indian only.
 Any other kind of transfer of securities not covered under the above
provisions will require the prior permission of RBI.
Transfer of shares and convertible debentures of Indian companies by resident

to non-resident and non-resident to resident.
1. A person resident outside India can transfer any security to a person resident
in India by way of gift. 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 SEBI.
2. General permission is also available for transfer of shares/convertible
debentures, by way of sale under private arrangement by a person outside
India to a person resident in India, subject to the prescribed guidelines.
3. A person resident in India can transfer by way of sale, shares /convertible
debentures (including transfer of subscriber’s shares), of an Indian company
in sectors other than financial services sectors (i.e. Banks,
NBFC, Insurance, ARCs, CIC, infrastructure companies in the
securities market viz. Stock Exchanges, Clearing Corporations, and
Depositories, Commodity Exchanges, etc) under private
arrangement to a person resident
outside India, subject to the prescribed guidelines.
Remittance of sale proceeds

Remittance of sale proceeds of securities (not of applicable taxes) to
the seller of shares resident outside India subject to the following conditions:
 The security was held by the seller on repatriation basis.
 Either the security has been sold on a recognized Stock Exchange
in India through a stock broker at the prevailing market price or the RBI
approval has been obtained in other cases and
 A no-objection/tax clearance certificate has been produced.
Remittance of winding up proceeds

1. 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.
2. 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.
3. AD Category-I
banks shall allow the remittance provided the applicant submits:
5. 7
FEMA, 1999
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 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.
Investment Financial Services Sector

Indian party seeking to make investment in an entity engaged in
the financial services sector also is required to fulfill the following additional
conditions:
1. Be registered with the appropriate regulatory authority in India for
conducting the financial sector activities;
2. Have earned net profit during the preceding three financial years from the
financial services activities;
3. Have obtained approval for investment in financial sector activities
abroad from regulatory authorities concerned in India and abroad; and
4. Have fulfilled the prudential norms relating to capital adequacy as prescribed
by the regulatory authority concerned in India.
A step down subsidiary of JV/WOS investing in a financial services sector
is also required to comply with the above conditions.
Investment in firm/proprietary concern in India

 A Non-Resident Indian (NRI) or a person of Indian origin can invest
by way of contribution to the capital of a firm
or a proprietary concern in India
 That the remittance is received from abroad or out of an account maintained
with an Authorized Dealer and
 The firm or the proprietary concern is not engaged in any agricultural
activity or plantation activity or real estate business (i.e. dealing
in land and immovable property with a view to
earning profit earning income therefrom) or in print media.
 The amount invested shall not be eligible for repatriation outside India.
However, interest is repatriable.
Investments with repatriation benefits: NRIs/PIOs may seek permission of RBI

for investment in sole proprietorship concerns/partnership firms with
repatriation benefits. The
application will be decided in consultation with the Govt. of India.
Investment by non-residents other than NRIs/PIOs: A person resident outside

India other than NRIs/PIOs may make an application and seek prior approval
of RBI investment by way of contribution to the capital of a firm
5. 8
FEMA, 1999
or a proprietorship concern or any association of persons in India.
The application will be decided in consultation with the Govt. of India.
FDI Limited Liability Partnership

a) FDI in LLPs has been allowed, through the Government approval route,
only for LLPs operating in sectors/activities where 100% FDI is allowed,
through the automatic route.
b) LLPs with FDI will not be allowed to operate in agriculture/plantation
activity, print media or real estate business.
c) An Indian company, having FDI, has been permitted to make
downstream investment in an LLP only if both-the company, as
well as the LLP – are operating in sectors where 100% FDI is allowed,
through the automatic route.
d) LLPs with FDI are not eligible to make any downstream investment.
e) Foreign Capital participation in the capital structure of LLPs is allowed
only by way of cash consideration, received by inward remittance,
through normal banking channels or by debit to NRE/FCNR account of
the person concerned, maintained with an authorized dealer/authorized
bank.
f) Investment in LLPs by Foreign Institutional Investors (FIIs) and
Foreign Venture Capital Investors (FVCIs) is not permitted. LLPs
are also not permitted to avail External Commercial Borrowings (ECBs)
g) Conversion of a company with FDI, into an LLP, is allowed only if
the above stipulations are met and with
the prior approval of the GOVT/Government.
Foreign Currency Account

Foreign Currency Account Indian companies which are eligible to issue shares to
persons 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.
5. 9
ODI
Overseas Investment by Indian Entity

Direct investment outside Indian in Joint Venture(JV)/ Wholly
owned subsidiary
An Indian party shall not make any direct investment in
foreign entity engaged in Real estate or Banking business. A PRI can make
any direct investment outside India only with prior approval of RBI. However if
the following conditions are satisfied, then RBI approval is not required :
i. Total financial commitment of Indian party in JV/WOS shall not exceed
100% of its net worth as per the last audited B/sheet. However,
the ceiling on investment in JV/WOS is not applicable to investment
made out of balance in EEFC A/c and out of proceed of ADR /GDR;
ii. The direct investment is made in the overseas JV/WOS engaged in
bonafide business activity;
iii. The Indian party is not in the RBI's caution list or under
investigation by enforcement directorate;
iv. The Indian party routes all transaction relating to investment in
JV/WOS through only one branch of an AD to be designated by it.
However, the Indian party may designate different
branches for different JV/WOS outside India; and
v. The Indian party shall submit Form ODI to the designated branch
of an authorized dealer for onwards transactions to RBI.
Note: Unique Identification Number
RBI allots UIN for each JV/WOS outside India and the Indian companies shall
quote such number in all
its communication and reports to RBI and the authorized dealer.
i. Acquisition of Foreign Security by PRI:
PRI can purchase foreign security in any of the following manner without the
RBI approval:
a) Purchase of Foreign Security out of funds held in RFC A/c.
b) Acquire bonus shares on the foreign security in accordance with
provision of FEMA.
c) A person may purchase Foreign Security from out of his foreign
currency resources outside India when he was not permanently resident in India.
ii. Acquisition of Foreign Security by an Individual PRI:

A PRI, being an Individual, may acquire foreign security in the following manne
r:
a) by way of gift from PROI
b) by way of inheritance from any person
c) issued by a company incorporated outside India under cashless ESOP
6. 1
ODI
iii. A person being an individual, who is an employer or director of:

a) Indian office or branch of a foreign company; or
b) Indian subsidiary of foreign company; or
c) Indian company in which foreign equity holding is not less than 51% may
purchase the equity shares offered by the said foreign company.
iv. Acquisition of Right shares:

Persons who had acquired any foreign security in accordance with law
can acquire right share issued by virtue of holding such shares, without
permission of RBI. Investment beyond the entitlement can be made only
with the prior permission of RBI.
v. Investment by Resident in Foreign shares, other than assets etc(Covered

Under libralised remittance scheme):
An individual person can remit an amount upto US $250000 per calendar
year for acquiring share or other assets outside India. For such
transactions, RBI approval is not required.
However, in the following cases foreign exchange will not be given to the PRI :
a) Where current A/c transaction is prohibited /Restricted
b) Remittance directly/indirectly to Bhutan, Nepal, Mauritius, Pakistan
c) Remittance to specified non co-operative country /territory
d) Remittance to Individual /Entity identified as terrorist by RBI
vi. Investment in Equity of company registered overseas:

Listed Indian Companies, Mutual Funds and Individuals can invest in
equity shares, rated bonds/fixed income securities
of companies listed in foreign stock exchange.
Investment of Indian Listed Company shall not exceed 50% of its net worth
as per the last audited balance
sheet. All Mutual Funds can invest upto the extent of US $5 Billion.
Methods of Funding
Investment in an overseas JV/WOS may be funded out of one or more of the
following sources
i. drawl of foreign exchange from an AD bank in india
ii. Capitalization of exports;
iii. Swap of shares;
iv. Utilization of proceeds of ECBs/FCCBs
v. In exchange of ADRs/GDRs ,FCCBs and Ordinary shares;
vi. Balance held in EEFC a/c of the Indian party ,and
vii. Utilization of proceeds of foreign currency funds raised through ADRs/GDRs i
ssue;
Note: In respect of (vi) and (vii) above, the ceiling of 100% of net worth does not a
pply.
6. 2
ODI
Capitalisation of exports and other dues
Indian parties are also permitted to capitalise the payments due from
the foreign entity towards exports, fees, royalties or any other entitlements
due from the foreign entity for supplying technical know-how, consultancy,
managerial and other services within the ceilings applicable.
Capitalization of Export proceeds remaining unrealized beyond th
e prescribed
period of realization will require the prior approval of the Reserve
Bank before capitalisation.
Investments abroad by certain firms in India

1. An Indian firm registered under the Indian Partnership Act, 1932 and
engaged in providing specified professional services can make
investments in foreign concerns engaged in similar activities by
way of remittance from India or capitalization of fees or
other entitlements due to it such from foreign concerns.
2. However, such investment should not exceed US $ 1million or its equivalent
in one financial year and also such Indian firm should be
a member of the respective All India Professional Organization/Body.
3. In this regard, the investing firm is required to submit with RBI a report
within 30 days of making such investment.
Overseas Investment by trust or society

Registered Trusts and Societies engaged in manufacturing/educational sector
are allowed make investment in the same sector(s) in a Joint Venture or
Wholly Owned Subsidiary outside India, with the prior approval of the Reserve
Bank.
Conditions for eligibility:
a) The society or trust should be registered
b) The M OA of society or in case of trust, the trust d eed should
permit overseas investment
c) Society or trust id KYC compliant
d) Society or trust is not under adverse notice of ED, CBI etc.
Export of goods and services [Sec.7 & 8]

Introduction
Export of goods and services is regulated by the provisions of Sec.7 and 8 of
FEMA, 1999 and Foreign Exchange Management (Export of Goods
and Services) Regulations, 2000.
Generally, exports are free but in the case of following exports, prior approval of
RBI is required:
6. 3
ODI
1. Export of goods on lease, hire or any other manner other than sale or dispos
al of goods;
2. Exports on elongated credit terms;
3. Counter trade i.e. any arrangement involving adjustment of value of
goods imported in India against value of goods exported from India.
Export includes the taking or sending out of India, goods by land, sea or
air, on consignment by way of sale, lease, hire purchase or under any
arrangement by whatever name called. In the case of software, export
also includes transmission of any data through any electronic medium.
Declaration as regard to Export of Goods and Sevices

Every exporter of goods or software in physical form or through any other
form, either directly or indirectly, in any case outside India, other than Nepal and
Bhutan, shall furnish a Declaration in the prescribed form to the specified
authority. The aforesaid declaration shall
be submitted within 21 days from the date of export.
Export of goods or services may be made without furnishing the declaration in the
following cases, namely:
(i) trade samples of goods and publicity material supplied free of cost;
(ii) personal effects of travellers, whether accompanied or unaccompanied;
(iii) ships stores, trans-shipment cargo and goods supplied under the orders of
Central Government or of such officers as may be appointed by the Central
Government in this behalf or of the military, naval or air force authorities
in India for military, naval or air force requirements;
(iv) goods or software accompanied by a declaration by the exporter that they
are not more than twenty five thousand rupees in value;
(v) by way of gift of goods accompanied by a declaration by the exporter
that they are not more than one lakh rupees in value;
(vi) aircrafts or aircraft engines and spare parts for overhauling and/or repairs
abroad subject to their reimport into India after overhauling/repairs, within
a period of six months from the date of their export;
(vii) goods imported free of cost on re-export basis;
(viii) goods not exceeding US$ 1000 or its equivalent in value per
transaction exported to Myanmar under the Barter Trade Agreement
between the Central Government and the Government of Myanmar;
(ix) the goods which are permitted by the Development Commissioner of
the Export Processing Zones, EHTP, STP or Free Trade Zones to be re-
exported.
(x) Replacement goods exported free of charge in accordance
with the provisions of Exim Policy in force, for the time being.
(xi) goods sent outside India for testing subject to re-import into India.
6. 4
ODI
(xii) Defective goods sent outside India for repair and re-import provided
the goods are accompanied by a certificate from authorised dealer in India
that the export is for repair and re-import and that the export does not
involve any transaction in foreign exchange.
(xiii) export permitted by RBI.
Receipt of Export Proceeds – Important Provisions

The amount representing the full export value of the goods exported
shall be paid through an authorized dealer in the specified manner. It may
be noted that re- import into India, within the period specified for realization
of the export value, of the exported goods in respect of which a declaration
was made shall be deemed to be realization of full export value of such goods.
Period within which export value to be realized

1. In general, the amount representing export value of the goods or
software exported shall be realized and
repatriated to India within one year from the date of export.
2. However, if goods exported are exported to warehouse established outside
India with the permission of authorized dealer or RBI, the
amount representing the full export value of the goods exported shall be
paid to the authorized dealer as soon as it is
realized and in any case within 15 month
from the date of shipping of goods.
3. It may be noted that the aforesaid period can be extended by
RBI or authorized dealer
if there is a sufficient and reasonable cause for the case.
Steps to be taken by exporters ensure payment for the export

In respect of export of any goods or software for which a declaration is required
to be furnished, no person shall, except with the permission of the Reserve
Bank or authorized dealer, do or refrain from doing anything or take or
refrain from taking any action which has the effect of securing:
i. That the payment for the goods or software is made otherwise than in the
specified manner; or
ii. That the payment is delayed beyond the period specified under these
Regulations; or
iii. That the proceeds of sale of the goods or software do not represent the
full export value of the goods or software.
Project Exports
Following are collectively referred to as project exports :
 Export of engineering goods on deferred payment terms;
 Execution of turnkey projects; and
 Civil construction contracts.
These are generally high value contracts and thus, the exporter shall,
before entering into any such export arrangement, submit the
6. 5
ODI
proposal for prior approval of the approving authority, which shall
consider the proposal in accordance with the
guidelines issued by the Reserve bank from time to time.
Adjudication and Appeals

Adjudicating Authorities
Sec.16 of Foreign Exchange Management Act, 1999 empowers the Central Govt.
to appoint Adjudicating Authorities. The Adjudicating Authorities can hold
enquiry only on receiving a complaint in one year. If it is not possible, he shall
record the reasons for not disposing off the complaint within 1 year.
The jurisdiction of various adjudicating authorities is as follows
There are 3 levels of Adjudicating Authorities i.e. Deputy Director,

Additional Director and Director of Directorate of Enforcement in the ascending
order of hierarchy. The Assistance Director of Directorate of
Enforcement normally makes a complaint before the
Authority Jurisdiction
Deputy Director Cases involving amount upto Rs.75 lakhs
Additional Director Cases involving amount more than Rs.75 lakh an
d upto Rs.1 crore
Director Cases involving amount more than Rs.1 crore
Adjudicating Authorities but sometimes he can also
act as Adjudicating Authority.
Special Director (Appeals)

Section 17 empowers the Central Govt. to appoint one or more Special
Director (Appeals) to hear the appeals against the orders of
Adjudicating Authorities.
Special Director (Appeals) shall have the jurisdiction to hear the appeals
only against the orders of Assistant Director and Deputy Director.
The appeal against the orders of Special Director (Appeals) shall lie
before Appellate Tribunal for Foreign Exchange.
Appellate Tribunal for foreign exchange

Section 18 of Foreign Exchange Management Act, 1999 empowers the
Central Govt. establish an Appellate Tribunal for Foreign Exchange to hear
appeals against the orders of Adjudicating Authorities (i.e. Additional
Director and Director of Directorate of Enforcement) and Special Director
(Appeals).
 The appeal against the orders of Appellate Tribunal shall lie
before the High Court.
 The Appellate Tribunal consists of a Chairperson and other members.
6. 6
ODI
 A person qualified to be a Judge of a High Court shall be appointed
as the Chairperson and
 A person qualified to be a judge of a District Court shall be appointed
as the member of the Appellate Tribunal
 Appointment shall be for a period of 5 years
Law and Procedure for holding of enquiry by the Adjudicating Authorities

1. On receipt of a complaint, the Adjudicating Authority shall issue a
Show Cause Notice to the person who is alleged to have
committed the contravention indicating nature of contravention.
2. The person to whom the show cause notice has been served shall be given
a minimum time of 10 days for the purpose of filing the reply
to the Show Cause Notice.
3. On receipt of the reply to the SCN, the Adjudicating Authority will
issue a notice fixing the date of enquiry, if it is of the opinion
that the enquiry, should be conducted.
4. The person alleged to have committed the offence can attend the
enquiry proceeding either personally
or through some authorized representative.
5. He will be explained the charges and an opportunity to produce
any document or evidence will be provided to him.
6. Further Adjudicating Authorities can also summon and enforce attendance
of persons acquainted with the facts and circumstances of the case for
the purpose of giving the evidence.
7. After hearing and examining the evidence produced, Adjudicating Authority
can pass an order and thereby can impose penalty if the person is found
to have contravened the provisions of FEMA .
Appeal against the orders of Appeallate Tribunal

 Before making an appeal against the orders of Appellate Tribunal for foreign
exchange, it must be kept in mind that such appeal can be made
only on questions of law and not on questions of facts.
 Any person aggrieved by an order of the Appellate Tribunal may file an appeal
within 60 days from the date of communication of the order of the Appellate
Tribunal, to the concerned High court.
Penalties (Section 13)

If any person contravenes any of the provisions of FEMA 1999
or any Rules, Regulations, Notifications, Directions, or Orders issued in
exercise of the powers under FEMA, he shall be liable to penalty upto
3 times the sum involved in such contravention where such amount is
quantifiable or upto Rs.2 lakhs where the amount is not quantifiable. In
case, the contravention is a continuing one, then a further penalty upto
Rs.5000 per day shall be imposed until the contravention continues.
6. 7
ODI
Compounding of offences (Section 15)
Section 15 empowers the Directorate of Enforcement and Reserve Bank to
compound the offences. This section provides that the contravention
u/s 13 may be compounded within 180 days from the date of
receipt of application. No contravention shall be compounded unless
the amount involved in such contravention is quantifiable.
Where a contravention has been compounded, no proceeding can continue or be
initiated against the person in respect of the contravention.
Important Case Law

2G case: ED issues notices on FEMA violations of Rs3,805 crore.
The ED has been investigating financial transactions and role of these firms in
the 2G spectrum case for sometime and the agency issued notices after going
through all the "evidence on record" and information received from these
respective firms, the sources said.
The Enforcement Directorate (ED) today issued show causes notices for
alleged foreign exchange violations of Rs3,805 crore to telecom firms and other
entities as part of its investigation into the 2G spectrum allocation case.
The notices by the central probe agency have been issued against Loop Telecom
Limited, New Delhi for Rs549 crore, Ms Loop Mobile (India) Limited Mumbai
for Rs26 crore, Ms DB Realty Limited Mumbai for Rs2,831 crore and
Ms ETA star property developers pvt ltd, Chennai for Rs399.50 crore for
a variety of alleged contraventions under the Foreign Exchange Management
Act (FEMA), sources said.
Shilpa Shetty’s IPL team Rajasthan Royals fined Rs 98.5 crores

The agency, which is investigating irregularities under the Foreign Exchange
Management Act (FEMA), has sent out three separate notices to the
Rajasthan Royals franchisee, the total of which sums up to Rs98.5 crores.
While Rs. 50 crores penalty has been slapped on Jaipur IPL Cricket
Private Limited (JIPL) and its directors, Rs 34 crores notice for evasion of
forex duties has been issued against EM Sporting Holding, Mauritius and
its directors. A fresh notice of Rs 14.5 crores has been issued against
M/S ND Investments, United Kingdom and its directors. All the
three parties can appeal against this penalty in the appellate
authority of FEMA. The order requires the IPL team to pay the
money in 45 days. The Enforcement Directorate has been investigating
financial and foreign exchange irregularities against all the IPL franchisees
6. 8
ODI
for almost two years now and the first big notice against any team comes
just a day after the auctions concluded in Chennai
6. 9
www.pcbaba.in CS Praveen Choudhary
LRS
Liberalized Remittance Scheme(LRS)

Introduction
The Liberalized Remittance Scheme was introduced on February 4, 2004 The
RBI 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 LRS.
LRS 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:
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.
7. 1
LRS
Permissible Capital Account Transactions by an individual

under LRS
The permissible capital account transactions by an individual under LRS are:
1. Opening of foreign currency account abroad with a bank.
2. Purchase of property abroad.
3. Making investments abroad – acquisition and holding shares of both listed
and unlisted overseas company or debt instruments
4. Acquisition of qualification shares of an overseas company for holding the
post of Director; acquisition of shares of foreign company towards
professional services rendered online or in lieu of director’s remuneration.
5. Investment in units of Mutual funds, Venture Capital funds, unrated debt
securities, promissory notes
6. Setting up WOS and JV outside India for bonafide business subject to the
stipulated terms & conditions
7. Extending loans including loans in Indian Rupees to Non-Resident Indians
(NRIs) who are relatives as defined in Companies Act, 2013.
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:
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.
7. 2
LRS
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 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 bonafide 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
7. 3
LRS
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 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.
7. 4
LRS
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 3 FY 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 RBI.
Procedure for remittance:

Applications for remittances for purposes other than those specified above may
be forwarded to the RBI 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.
7. 5
LRS
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, 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 lumpsum payment under technical collaboration
7. 6
LRS
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
7. 7
LRS
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
1. Remittance out of lottery winnings
2. Remittance of income from racing/riding etc. or any other hobby.
3. Remittance for purchase of lottery tickets, banned/prescribed magazines,
football pools, sweepstakes etc.
4. Payment of commission on exports made towards equity investment in joint
ventures/ wholly owned subsidiaries abroad of Indian companies
5. Remittance of dividend by any company to which the requirement of dividend
balancing is applicable
6. Payment of commission on exports under Rupee State Credit Route, except
commission up-to 10% of invoice value of exports of tea and tobacco
7. Payment related to ‘call back services’ of telephones
8. Remittance of interest income on funds held in Non-resident Special Rupee
(Account) Scheme.
7. 8
ECB
EXTERNAL COMMERCIAL BORROWING

INTRODUCTION
ECBs are commercial loans raised by eligible resident entities from recognized
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 2 options:
Parameters Foreign Currency Indian Rupee denominated ECB

denominated ECB
Forms of Loans including bank loans; Loans including bank loans;
ECB floating/ floating/ fixed rate
 fixed rate notes/ bonds/ notes/bonds/ debentures/
debentures (other than preference shares ;
fully and compulsorily Trade credits beyond 3 yrs; and
convertible instruments); Financial Lease. Also, plain
Trade credits beyond 3 vanilla Rupee denominated
Yrs; bonds issued overseas, which can
 FCCB; be either Placed privately or
 Foreign Currency listed on exchanges as per host
Exchangeable Bonds and country Regulations.
Financial Lease.
Eligible All entities eligible to a) All entities eligible to raise
Borrowers receive FDI. Further, the Foreign Currency ECB; and
following entities are also b) Registered entities engaged in
eligible to raise ECB: micro-finance activities,
 Port Trusts; registered Not for Profit
 Units in SEZ; companies, registered
 SIDBI; and societies/trusts/ cooperatives
 EXIM Bank of India. and NGO.
8.1
ECB
AVAILABLE ROUTES FOR RAISING ECB
Automatic Route Approval Route

The cases are examined by the The prospective borrowers are
Authorised Dealer Category-I (AD required to send their requests to the
Category-I) banks. RBI through their ADs for
examination.
RECOGNISED LENDERS
The lender should be resident of Financial Action Task Force (FATF) or

International Organisation of Securities Commission's IOSCO compliant country,
including on transfer of ECB. However,
a. Multilateral and Regional Financial Institutions where India is a member

country will also be considered as recognised lenders;
b. Individuals as lenders can only be permitted if they are foreign equity
holders or for subscription to bonds/debentures listed abroad; and
c. Foreign branches / subsidiaries of Indian banks are permitted as recognised
lenders only for Foreign Currency ECB (except FCCBs and FCEBs).
d. Foreign branches / subsidiaries of Indian banks, subject to applicable
prudential norms, can participate as arrangers/underwriters/market-
makers/traders for Rupee denominated Bonds issued overseas.
However, underwriting by foreign branches/subsidiaries of Indian banks for
issuances by another Indian banks will not be allowed.
FATF Compliant Country

FATF Compliant Country means a country that is a member of the Financial
Action Task Force (FATF) or a member of a FATF-Style Regional Body; and
should not be a country identified in the public statement of the FATF as -
i. A jurisdiction having a strategic Anti-Money Laundering or Combating the
Financing of Terrorism deficiencies to which counter measures apply; OR
8.2
ECB
ii. A jurisdiction that has not made sufficient progress in addressing the
deficiencies or has not committed to an action plan developed with the
Financial Action Task Force to address the deficiencies.
IOSCO Compliant Country

A country whose securities market regulator is a signatory to the International
Organisation of Securities Commission's (IOSCO’s) Multilateral MOU or a
signatory to bilateral MOU with the SEBI for information sharing arrangements.
MINIMUM AVERAGE MATURITY PERIOD
Category I Category II Category III

 ECB with minimum  ECB with minimum  ECB with minimum
average maturity of 1/5 average maturity of 10 average maturity of
years. years. 7 years.
 1 year for ECB raised by  ECB raised for -  repayment of Rupee
manufacturing companies  Working capital purposes loans availed
up to USD 50 million or or general corporate domestically for
its equivalent per FY purposes capital expenditure
 5 years for ECB raised  On-lending by NBFCs for  On-lending by NBFCs
from foreign equity working capital purposes for the same
holder for working or general corporate purpose.
capital purposes, general purposes. It may be noted
corporate purposes or  It may be noted that: that:
for repayment of Rupee  ECB cannot be raised  ECB cannot be raised
loans. from foreign branches from foreign
 It may be noted that: / subsidiaries of Indian branches /
ECB cannot be raised banks subsidiaries of Indian
from foreign branches /  ECB raised for banks
subsidiaries of Indian repayment of Rupee
banks loans availed
domestically for
purposes other than
capital expenditure
8.3
ECB
 On-lending by NBFCs
for the same purpose.
ALL-IN-COST CEILING PER ANNUM
All-in-cost ceiling per annum is the Benchmark rate plus 450 BPS spread.
 It may be noted that All-in-Cost includes rate of interest, other fees,

expenses, charges, guarantee fees, Export Credit Agency charges (ECA),
whether paid in foreign currency or INR but will not include commitment
fees and withholding tax payable in INR.
 In the case of fixed rate loans, the swap cost plus spread should not be more
than the floating rate plus the applicable spread.
 Additionally, for FCCBs, the issue related expenses should not exceed 4 % of
the issue size and in case of private placement, these expenses should not
exceed 2 % of the issue size, etc.
 Various components of all in- cost have to be paid by the borrower without
taking recourse to the drawdown of ECB/TC, i.e., ECB/TC proceeds cannot
be used for payment of interest/charges.
 Further, Benchmark rate in case of Foreign Currency ECB refers to 6-months
LIBOR rate (London Inter Bank Offered Rate) of different currencies or any
other 6-month interbank interest rate applicable to the currency of
borrowing, for eg. EURIBOR.
 Benchmark rate in case of Rupee denominated ECB/TC will be prevailing yield
of the Government of India securities of corresponding maturity.
OTHER COSTS
Prepayment charge/ Penal interest, if any, for default or breach of covenants,

should not be more than 2 % over and above the contracted rate of interest
on the outstanding principal amount and will be outside the all-in-cost ceiling.
END-USES (NEGATIVE LIST)

Where the proceeds of ECB can-not be used –
8.4
ECB
i. Real Estate Activities.
ii. Investment in capital Market
iii. Equity investment
iv. Working Capital Expense
 Except ECB raised from foreign equity holder for working capital
purposes, general corporate purposes or for repayment of Rupee loans
AND
 Except ECB raised for
- Working capital purpose or general corporate purposes
- On -lending by NBFC’s for working capital purposes or general
corporate.
v. General corporate purposes,
 Except in case of ECB raised from foreign equity holder for working
capital purposes, general corporate purposes or for repayment of Rupee
loans and
 Except ECB raised for
- working capital purposes or general corporate purposes
- on-lending by NBFCs for working capital purposes or general corporate
purposes.
vi. Repayment of Rupee loans,
 except in case of ECB raised for
- repayment of Rupee loans availed domestically for capital expenditure
- on-lending by NBFCs for the same purpose and
 except ECB raised for
- repayment of Rupee loans availed domestically for purposes other
than capital expenditure
- on-lending by NBFCs for the same purpose.
vii. On-lending to entities for the above activities,
 except in case of ECB raised by NBFCs for
- working capital purposes or general corporate purposes
8.5
ECB
- on-lending by NBFCs for working capital purposes or general corporate
purposes and repayment of Rupee loans availed domestically for
capital expenditure
- on-lending by NBFCs for the same purpose and
 except ECB raised for
- repayment of Rupee loans availed domestically for purposes other
than capital expenditure
- on-lending by NBFCs for the same purpose.
EXCHANGE RATE
Change of currency of Foreign Currency ECB into Indian Rupee ECB can be at
the exchange rate prevailing on the date of the agreement for such change
between the parties concerned OR at an exchange rate, which is less than the
rate prevailing on the date of the agreement, if consented to by the ECB
lender.
For conversion to Rupee, the exchange rate shall be the rate prevailing on the
date of settlement.
HEDGING PROVISION
The entities raising ECB are required to follow the guidelines for hedging issued,
if any, by the concerned sectoral or prudential regulator in respect of foreign
currency exposure. Infrastructure space companies shall have a Board approved
risk management policy. Further, such companies are required to mandatorily
hedge 70 % of their ECB exposure in case the average maturity of the ECB is
less than 5 years. The designated AD Category-I bank shall verify that 70 %
hedging requirement is complied with during the currency of the ECB and
report the position to RBI through Form ECB 2.
The following operational aspects with respect to hedging should be ensured:
Coverage Tenure and Rollover Natural Hedge

8.6
ECB
 The ECB borrower will  A minimum tenure of 1  Natural hedge, in lieu of
be required to cover year for the financial financial hedge, will be
the principal as well as hedge would be required considered only to the
the coupon through with periodic rollover, extent of offsetting
financial hedges. duly ensuring that the projected cash flows /
 The financial hedge for exposure on account of revenues in matching
all exposures on account ECB is not unhedged at currency, net of all other
of ECB should start any point during the projected outflows.
from the time of each currency of the ECB.  For this purpose, an ECB
such exposure (i.e. the may be considered
day the liability is naturally hedged if the
created in the books of offsetting exposure has
the borrower). the maturity/cash flow
within the same
accounting year.
 Any other arrangements/
structures, where
revenues are indexed to
foreign currency will not
be considered as a natural
hedge
CHANGE OF CURRENCY OF BORROWING

 Change of currency of ECB from one freely convertible foreign currency to
any other freely convertible foreign currency as well as to Indian Rupee is
freely permitted.
 Change of currency from Indian Rupee to any freely convertible foreign
currency is not permitted.
LIMIT AND LEVERAGE

 All eligible borrowers can raise ECB up to USD 750 million or equivalent per
FY under the automatic route.
 Further, in case of Foreign Currency denominated ECB raised from direct
foreign equity holder, ECB liability-equity ratio for ECB raised under the
automatic route cannot exceed 7:1.
8.7
ECB
However, this ratio will not be applicable if the outstanding amount of all
ECB, including the proposed one, is up to USD 5 million or its equivalent.
Further, the borrowing entities will also be governed by the guidelines on debt
equity ratio, issued, if any, by the sectoral or prudential regulator concerned.
ISSUANCE OF GUARANTEE, ETC. BY INDIAN BANKS AND FINANCIAL

INSTITUTIONS
Issuance of any type of guarantee by Indian banks, AIFI and NBFCs relating to
ECB is not permitted. Further, financial intermediaries (viz., Indian banks,
AIFI, or NBFC) shall not invest in FCCB/ FCEB in any manner whatsoever.
PARKING OF ECB PROCEEDS
Parking abroad Parking domestically
 ECB proceeds meant only for foreign  ECB proceeds meant for Rupee
currency expenditure can be parked expenditure should be repatriated
abroad pending utilisation. immediately for credit to their
 Till utilisation, these funds can be Rupee accounts with AD Category-I
invested in the following liquid banks in India.
assets-  ECB borrowers are also allowed to
a) deposits or Certificate of Deposit park ECB proceeds in term deposits
or other products offered by with AD Category-I banks in India
banks rated not less than AA (- for maximum 12 months
) by Standard and Poor/Fitch cumulatively. These term deposits
IBCA or Aa3 by Moody’s; should be kept in unencumbered
b) Treasury bills and other monetary position.
instruments of one-year
maturity having minimum rating
as indicated above and
c) deposits with foreign
branches/subsidiaries of Indian
banks abroad.
Conversion Of ECB Into Equity
8.8
ECB
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 shall be covered under the automatic
route for FDI or approval route wherever applicable, for foreign equity
participation;
ii. The conversion, which should be with the lender’s consent and without any
additional cost, shall not result in breach of applicable sector cap on the
foreign equity holding;
iii. Applicable pricing guidelines for shares shall be complied with;
iv. Reporting requirements under ECB framework shall be 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 shall be complied
with; and
vi. Consent of other lenders, if any, to the same borrower shall be available
or at least 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,
 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.
SECURITY FOR RAISING ECB

AD Category-I banks are permitted to allow creation/cancellation of charge on
immovable assets, movable assets, financial securities and issue of corporate
and/or personal guarantees in favour of overseas lender / security trustee, to
secure the ECB to be raised/ raised by the borrower, subject to satisfying
themselves that:
8.9
ECB
 the underlying ECB is in compliance with the extant ECB guidelines,
 there exists a security clause in the Loan Agreement requiring the ECB
borrower to create/cancel charge, in favour of overseas lender/security
trustee, on immovable assets/movable assets/financial securities/issuance of
corporate and/or personal guarantee, and
 NOC, as applicable, from the existing lenders in India has been obtained in
case of creation of charge.
Once the aforesaid stipulations are met, the AD Category-I bank may permit
creation of charge on immovable assets, movable assets, financial securities and
issue of corporate and/or personal guarantees, during the currency of the ECB
with security co -terminating with underlying ECB, subject to the following:
Creation of Charge on Immovable Assets:

The arrangement shall be subject to the following:
 Such security shall be subject to provisions contained in the FEM
(Acquisition and Transfer of Immovable Property in India) Regulation 2017.
 The permission should not be construed as a permission to acquire
immovable asset (property) in India, by the overseas lender/ security
trustee.
 In the event of enforcement / invocation of the charge, the immovable
asset/ property will have to be sold only to a person resident in India and
the sale proceeds shall be repatriated to liquidate the outstanding ECB.
Creation of Charge on Movable Assets: In the event of enforcement/ invocation

of the charge, the claim of the lender, whether the lender takes over the
movable asset or otherwise, will be restricted to the outstanding claim against
the ECB. Encumbered movable assets may also be taken out of the country
subject to getting ‘No Objection Certificate’ from domestic
Creation of Charge over Financial Securities:

The arrangements may be permitted subject to the following:
 Pledge of shares of the borrowing company held by the promoters as well as
in domestic associate companies of the borrower is permitted. Pledge on other
financial securities, viz. bonds and debentures, Government Securities,
8.10
ECB
Government Savings Certificates, deposit receipts of securities and units of the
UTI or of any mutual funds, standing in the name of ECB borrower/promoter,
is also permitted.
 In addition, security interest over all current and future loan assets and all
current assets including cash and cash equivalents, including Rupee accounts of
the borrower with ADs in India, standing in the name of the
borrower/promoter, can be used as security for ECB. The Rupee accounts of
the borrower/promoter can also be in the form of escrow arrangement or debt
service reserve account.
 In case of invocation of pledge, transfer of financial securities shall be in
accordance with the extant FDI/FII policy including provisions relating to
sectoral cap and pricing as applicable read with the Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident outside India)
Regulations, 2017, as amended from time to time.
Issue of Corporate or Personal Guarantee:

The arrangement shall be subject to the following:
 A copy of Board Resolution for the issue of corporate guarantee for the
company issuing such guarantee, specifying name of the officials authorised to
execute such guarantees on behalf of the company or in individual capacity
should be obtained.
 Specific requests from individuals to issue personal guarantee indicating details
of the ECB should be obtained.
 Such security shall be subject to provisions contained in the FEM (Guarantees)
Regulations, 2000, as amended from time to time.
 ECB can be credit enhanced / guaranteed / insured by overseas party/ parties
only if it/ they fulfil the criteria of recognised lender under extant ECB
guidelines.
PROCEDURE FOR RAISING ECB

The procedure for raising ECB under approval route requires 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.
8.11
ECB
 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 RBI.
 The RBI 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 REQUIREMENT
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.
 Copies of loan agreement for raising ECB are not required to be submitted
to the RBI.
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. Monthly Reporting of actual transactions:

The borrowers are required to report actual ECB transactions through Form
ECB 2 Return through the AD Category I bank on monthly basis so as to
reach Department of Statistics and Information Management within seven
working days from the close of month to which it relates. Changes, if any,
in ECB parameters should also be incorporated in Form ECB 2 Return.
4. Late Submission Fee (LSF) for delay in reporting:

Any borrower, who is otherwise in compliance of ECB guidelines, can regularise
the delay in reporting of drawdown of ECB proceeds before obtaining LRN
8.12
ECB
or delay in submission of Form ECB 2 returns, by payment of prescribed
late submission fees.
5. Standard Operating Procedure (SOP) for Untraceable Entities:

The following SOP has to be followed by designated AD Category-I banks in
case of untraceable entities who are found to be in contravention of
reporting provisions for ECB by failing to submit prescribed returns under
the ECB framework, either physically or electronically, for past eight quarters
or more.
6. Any borrower who has raised ECB will be treated as ‘untraceable entity’, if
entity/auditor(s)/director(s)/promoters of entity are not
reachable/responsive/reply in negative over email/letters/phone for a period
of not less than 2 quarters with documented communication/ reminders
numbering 6 or more and it fulfils both of the following conditions:
 Entity not found to be operative at the registered office address as per
records available with the AD-Bank or not found to be operative during
the visit by the officials of the AD-Bank or any other agencies authorised
by the AD-bank for the purpose;
 Entities have not submitted Statutory Auditor’s Certificate for last 2
years or more;
The followings actions are to be undertaken in respect of ‘untraceable entities’:

 File Revised Form ECB, if required, and last Form ECB 2 Return without
certification from company with ‘UNTRACEABLE ENTITY’ written in bold
on top. The outstanding amount will be treated as written-off from
external debt liability of the country but may be retained by the lender
in its books for recovery through judicial/ non-judicial means;
 No fresh ECB application by the entity should be examined/processed by
the AD bank;
 Directorate of Enforcement should be informed whenever any entity is
designated ‘UNTRACEABLE ENTITY’; and
 No inward remittance or debt servicing will be permitted under auto
route.
8.13
ECB
ECB FACILITY FOR OIL MARKETING COMPANIES
 Public Sector Oil Marketing Companies (OMCs) can raise ECB for working
capital purposes with minimum average maturity period of 3 years from all
recognised lenders under the automatic route without mandatory hedging
and individual limit requirements.
 The overall ceiling for such ECB shall be USD 10 billion or equivalent.
However, OMCs should have a Board approved forex mark to market
procedure and prudent risk management policy for such ECB. All other
provisions under the ECB framework will be applicable to such ECB.
ECB FACILITY FOR STARTUPS

AD Category-I banks are permitted to allow Start-ups to raise ECB under the
automatic route as per the following framework:
 Eligibility: An entity recognised as a Start-up by the Central Government
as on date of raising ECB.
 Maturity: Minimum average maturity period will be 3 years.
 Recognised lender: Lender / investor shall be a resident of a FATF compliant
country. However, foreign branches/subsidiaries of Indian banks and overseas
entity in which Indian entity has made overseas direct investment as per
the extant Overseas Direct Investment Policy will not be considered as
recognised lenders under this framework.
 Forms: The borrowing can be in form of loans or non-convertible, optionally
convertible or partially convertible preference shares.
 Currency: The borrowing should be denominated in any freely convertible
currency or in Indian Rupees (INR) or a combination thereof. In case of
borrowing in INR, the non-resident lender, should mobilise INR through
swaps/outright sale undertaken through an AD Category-I bank in India.
8.14
ECB
 Amount: The borrowing per Start-up will be limited to USD 3 million or
equivalent per FY either in INR or any convertible foreign currency or a
combination of both.
 All-in-cost: Shall be mutually agreed between the borrower and the lender.
 End uses: For any expenditure in connection with the business of the
borrower.
 Conversion into equity: Conversion into equity is freely permitted subject
to Regulations applicable for foreign investment in Start-ups.
 Security: The choice of security to be provided to the lender is left to the
borrowing entity. Security can be in the nature of movable, immovable,
intangible assets (including patents, intellectual property rights), financial
securities, etc. and shall comply with foreign direct investment / foreign
portfolio investment / or any other norms applicable for foreign lenders /
entities holding such securities.
Further, issuance of corporate or personal guarantee is allowed.
Guarantee issued by a non- resident(s) is allowed only if such parties qualify
as lender under ECB for Start-ups. However, issuance of guarantee, standby
letter of credit, letter of undertaking or letter of comfort by Indian banks,
all India Financial Institutions and NBFCs is not permitted.
 Hedging: The overseas lender, in case of INR denominated ECB, will be eligible
to hedge its INR exposure through permitted derivative products with AD
Category – I bank in India. The lender can also access the domestic market
through branches/ subsidiaries of Indian banks abroad or branches of foreign
bank with Indian presence on a back to back basis. Start-ups raising ECB in
foreign currency, whether having natural hedge or not, are exposed to
currency risk due to exchange rate movements and hence are advised to
ensure that they have an appropriate risk management policy to manage
potential risk arising out of ECB.
 Conversion rate: In case of borrowing in INR, the foreign currency - INR
conversion will be at the market rate as on the date of agreement.
8.15
ECB
 Other Provisions: Other provisions like parking of ECB proceeds, reporting
arrangements, powers delegated to AD banks, borrowing by entities under
investigation, conversion of ECB into equity will be as included in the ECB
framework.
BORROWING BY ENTITIES UNDER INVESTIGATION
 All entities against which investigation / adjudication / appeal by the law

enforcing agencies for violation of any of the provisions of the Regulations
under FEMA pending, may raise ECB as per the applicable norms, if they
are otherwise eligible.
 The borrowing entity shall inform about pendency of investigation /
adjudication / appeal to the AD Category-I bank / RBI.
ECB BY ENTITIES UNDER RESTRUCTURING/ ECB FACILITY FOR

REFINANCING STRESSED ASSETS
 An entity which is under a restructuring scheme/ corporate insolvency

resolution process can raise ECB only if specifically permitted under the
resolution plan.
 Eligible corporate borrowers who have availed Rupee loans domestically for
capital expenditure in manufacturing and infrastructure sector and which
have been classified as SMA -2 or NPA can avail ECB for repayment of
these loans under any one-time settlement with lenders.
 Lender banks are also permitted to sell, through assignment, such loans to
eligible ECB lenders, provided, the resultant external commercial borrowing
complies with all-in-cost, minimum average maturity period and other
relevant norms of the ECB framework. Foreign branches/ overseas subsidiaries
of Indian banks are not eligible to lend for the above purposes. The applicable
MAMP will have to be strictly complied with under all circumstances.
Eligible borrowers under the ECB framework, who are participating in the
Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code,
8.16
ECB
2016 as resolution applicants, can raise ECB from all recognised lenders, except
foreign branches/subsidiaries of Indian banks, for repayment of Rupee term
loans of the target company.
8.17
Foreign Trade Policy
FOREIGN TRADE POLICY AND PROCEDURE

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:
i. To provide a stable and sustainable policy environment for foreign
trade in merchandise and services;
ii. 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;
iii. 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;
iv. 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;
v. To provide a mechanism for regular appraisal in order to rationalise
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:

 Employment creation in both manufacturing and services through the
generation of foreign trade opportunities
 Zero defect products with a focus on quality and standards;
 A stable agricultural trade policy encouraging the import of raw material where
required and export of processed products;
 A focus on higher value addition and technology infusion;
 Investment in agriculture overseas to produce raw material for the Indian ind
ustry;
 Lower tariffs on inputs and raw materials; and
 Development of trade infrastructure and provision of production and export i
ncentives
9.1
Exports and Imports – ‘Free’, unless regulated

 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.
 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
 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.
 ITC (HS) is aligned at 6 digit level with international Harmonized
System goods nomenclature maintained by World Customs Organization
However, India maintains national Harmonized
System of goods at 8 digit level.
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. 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.
 Only one IEC is permitted against on PAN. If any PAN card holder has
more than one IEC, the extra IECs shall be disabled.
 No export or import shall be made by any person without an IEC number
unless specifically exempted. An IEC number shall be granted on
application by competent authority in accordance with specified procedure.
 The following categories of importers of exports have been
exempted from obtaining IEC number;
 Ministries/ Departments of the Central or State Government.
 Persons importing or exporting goods for personal use for personal use
not connected with trade or manufacture or agriculture.
 Persons importing /exporting goods from/to Nepal provided the CIF
value of a single consignment does not exceed Indian Rs.25, 000.
 Person importing/exporting goods from/to Myanmar through
Indo- Myanmar border areas provided the CIF value of a single
consignment does not exceed Indian Rs.25, 000.
 The FTP allows the following permanent IEC numbers to be used by the
categories of importers
/ exporters mentioned against them for import/ export purposes.
Mandatory Documents for Export/Import of Goods

from/into India
a) Mandatory documents required for export of goods from India:
9.2
 Bill of Lading/Airway Bill
 Commercial Invoice cum Packing List*
 Shipping Bill/Bill of Export
b) Mandatory documents required for import of goods into India
 Bill of Lading/Airway Bill
 Commercial Invoice cum Packing List*
 Bill of Entry
c) For export or import of specific goods or category of goods, which are subject
to any restrictions/policy conditions or require NOC from the
regulatory authority concerned.
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: -
a) Protection of public morals;
b) Protection of human, animal or plant life or health;
c) Protection of patents, trademarks and copyrights, and the
prevention of deceptive practices;
d) Prevention of use of prison labour;
e) Protection of national treasures of artistic, historic or archaeological value;
f) Conservation of exhaustible natural resources;
g) Protection of trade of fissionable material or material from which they are d
erived;
h) Prevention of traffic in arms, ammunition and implements of war.
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:
1. Merchandise Exports from India Scheme (MEIS).
2. 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 :
 Payment of Customs Duties for import of inputs or good
 Payment of excise duties on domestic procurement of inputs or goods,
including capital goods as per Department of Revenue (DoR) notification.
9.3
 Payment of service tax on procurement of services as per DoR notification.

 Payment of Customs Duty and fee as per Foreign Trade Policy.
Merchandise Exports from India Scheme (MEIS).

The objective of 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:

The basis of calculation of reward would be on realized. 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 office using e-commerce

i. Exports of goods through courier or foreign post office using e-commerce,
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.
Service Exports from India Scheme (SEIS)

The objective of SEISis to encourage export of notified Services from India.
Eligibilty -
Service Providers of notified services, located in India, shall be rewarded under
SEIS, subject to conditions as may be notified. Following Services shall be eligible:
i. Supply of a ‘service’ from India to any other country
ii. Supply of a ‘service’ from India to service consumer(s) of any other country
;
iii. 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,
9.4
such minimum net free foreign exchange

earnings criteria would be US$10,000 in preceding financial year.
iv. 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.
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
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
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
Forei 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, FOB
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 Financi
al Year.
9.5
d) For granting
status, export performance is necessary in at least two out of three years.
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) The status holders would
be entitled to preferential treatment and priority in
handling of their consignments by the concerned agencies.
g) Manufacturer exporters who are also Status
Holders shall be eligible to self-certify
their goods as originating from India as per of Hand Book of Procedures.
h) 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
Duty Exemption Scheme Duty Remission Scheme
9.6
Advance Authorisation Duty Free Import Authorisation Duty Drawback

Scheme
A. Advance Authorisation
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.
Advance Authorisation is issued for inputs in relation to resultant
product, on the following basis:
 As per Standard Input Output Norms (SION) notified
(available in Hand Book of Procedures); OR
 On the basis of self-declaration as per of Handbook of Procedures.
Value Addition
Value Addition for the Duty Exemption / Remission Schemes (except for Gems
and Jewellery sector for which value addition is prescribed in of FTP) shall be:-
A-B
VA = ----------- x 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.
Export Obligation
i. Period for fulfilment of export obligation under Advance Authorisation
shall be 18 months from the date of issue of
Authorisation or as notified by DGFT.
ii. In cases of supplies to turnkey projects in India under deemed export
category or turnkey projects abroad, the Export Obligation period
shall be co-terminus with contracted duration of the project
execution or 18 months whichever is more.
iii. Export Obligation for items falling in categories of defense, military store,
aerospace and nuclear energy shall be 24 months from the date of issue of
authorization or co- terminus with contracted duration
of the export order whichever is more.
9.7
B. Duty Free Import Authorisation Scheme (DFIA)

a) Duty Free Import Authorisation is issued to allow duty free import of
inputs. In addition, import of oil and catalyst which is consumed /
utilised in the process of production of export product, may also be allowed.
b) 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.
Schemes for Exporters of Gems and Jewellery

Import of Input
Exporters of gems and Jewellery can import / procure duty free
input for manufactureof export product.
Items of Export
Following items, if exported, would be eligible:
 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;
 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;
 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.
Export Promotion Capital Goods 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:
 Capital Goods including in Completely Knocked down (CKD)/ Semi-
Knocked Down (SKD) condition thereof;
 Computer software systems;
9.8
 Spares, moulds, dies, jigs, fixtures, tools &

refractories for initial lining and spare refractories; and
 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.
Authorisation
Authorisation shall be valid for import for 18 months from the date of issue of
Authorisation.
Obligation on the part of importer/ exporter

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,
i. 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 state
the value, quality and description of
such goods to the best of his knowledge and belief
ii. 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 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 a
ction.
iii. 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.
iv. 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.
v. 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.
vi. 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
9.9
contravention of any provision of the

Act, any Rules or Orders made there under or the Foreign Trade Policy.
Export Oriented Units (EOUs), Electronics Hardware Technology

Parks (EHTPs), Software Technology Parks (STPs) And Bio-
Technology Parks (BTPs)
Introduction
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.
Objective
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).
c) 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).
d) 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.
e) 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.
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
g) Details of procured / imported goods and articles manufactured by the EOU
will be listed separately in the export documents. In such cases, value
9.10
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.
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.
b) 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 Commi
ttee
c) 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.
d) 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.
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.
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.
Application and Approvals

i. 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).
ii. In other cases, approval may be granted by BOA set up for this purpose as
indicated in HBP.
9.11
iii. 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.
iv. 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.
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
of FTP, besides discharge of export obligation, if any, on the supplier.
b) In addition, EOU / EHTP / STP / BTP units shall be entitled to following:
 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
 Exemption from payment of Central Excise Duty on goods procured from
DTA on goods manufactured in India.
 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.
 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 SS
I 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 acco
unt.
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:
 has achieved positive NFE / export obligation wherever applicable;
 has not been issued a show cause notice or a confirmed
demand, during the preceding 3 years, on grounds other than
procedural violations Customs Act, the Central Excise Act, the Foreign
Trade (Development & Regulation) Act, the Foreign Exchange
9.12
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
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 prio
intimation to concerned Development Commissioners of the transferor
and transferee units as well as concerned Customs authorities.
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.
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.
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:
 Transferred to another EOU / EHTP / STP / BTP / SEZ unit; or
 Disposed of in DTA with approval of Customs authorities on payment
of applicable duties and submission of import authorization; or
 Exported.
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.
c) 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.
9.13
Exit from EOU Scheme

i. 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.
ii. If unit has not achieved obligations, it shall also be liable to penalty at the
time of exit.
iii. 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.
iv. Unit proposing to exit out of EOU scheme shall intimate DC and
Customs and Central Excise authorities in writing. 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.
v. 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.
Conversion
 Existing DTA
units may also apply for conversion into an EOU / EHTP / STP / BTP unit.
 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:
9.14
i. Export goods for holding / participating in Exhibitions abroad with permission

of Development Commissioner.
ii. Personal carriage of gold / silver / platinum jewellery, precious, semi-
precious stones, beads and articles.
iii. Export goods for display / sale in permitted shops set up abroad.
iv. Display / sell in permitted shops set up abroad, or
in showrooms of their distributors / agents.
v. Set up showrooms / retail outlets at International Airports.
Export / Import by Post / Courier

Goods including free samples, may be
exported / imported by airfreight or through foreign
post office or through courier, as per Customs procedure.
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 Departmentof 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
9.15
they arise, need to be settled amicably as soonas possible. Importers too may
have grievances as well. 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:
a) Complaints received from foreign buyers in respect of poor quality of the
products supplied by exporters from India;
b) Complaints of importers against foreign suppliers in respect of
quality of the products supplied; and
c) 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.
1. 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.
2. 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:
 Additional DGFT/Joint DGFT/ (H.O.O): Chairperson
 Representative of Bureau of India Standard (BIS): Member
 Representative of Agricultural and Processed Food Products Export
Development Authority: Member
 Representative of the Branch Manager of the concerned Bank: Member
 Representative of Federation of Indian Exporter Organisation / and OR
Export Promotion Council: Member
 Representative of Export Inspection Agency: Member
 Nominee of Director of Industries of State Government: Member
 Nominee of Development Commissioner of MSME: Member
 Officer as nominated by Chairperson: Member Secretary
 Any other agency, as co-opted by Chairperson: Member.
3. 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
9.16
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.
9.17
NBFCs
Non-Banking Financial Companies

NBFCs comprise a heterogeneous group of financial intermediaries. Those under the regulatory
purview of the RBI consist of
 all-India financial institutions (AIFIs),

 nonbanking financial companies (NBFCs) and
 primary dealers (PDs).
AIFIs are apex institutions established during the development planning era to provide long-
term financing/refinancing to specific sectors such as
(i) agriculture and rural development;

(ii) trade;
(iii) small industries; and
(iv) housing.
NBFCs are dominated by joint stock companies, catering to niche areas ranging from personal
loans to infrastructure financing. PDs play an important role as market makers for government
securities.
Although housing finance companies, merchant banking companies, stock exchanges, companies
engaged in the business of stockbroking/sub-broking, venture capital fund companies, Nidhi
companies, insurance companies and chit fund companies are also NBFCs, they have been
exempted from the requirement of registration with the RBI u/s 45-IA of the RBI Act, 1934.
Regulatory Environment for NBFCs
NBFCs were brought under the regulation of the Reserve Bank in 1964 by inserting Chapter
III B in the Reserve Bank of India Act, 1934.
NBFC (Sec 45-I)
“Non-Banking Financial Company” means—
1. A financial institution which is a company;

2. A non-banking institution which is a company and which has as its principal business the
receiving of deposits or lending in any manner;
3. such other notified non-banking institution or class of such institutions.
10. 1
NBFCs
“Financial Institution” means any non-banking institution which carries on as its business or
part of its business any of the following activities, namely:—
1. the financing, whether by way of making loans or advances or otherwise, of any activity
other than its own;
2. the acquisition of shares, stock, bonds, debentures or securities issued by a Government
or local authority or other marketable securities of a like nature;
3. letting or delivering of any goods to a hirer under a hire-purchase agreement;
4. The carrying on of any class of insurance business;
5. managing, conducting or supervising, as foreman, agent or in any other capacity, of
chits or kuries or any other similar business,;
6. collecting, for any purpose or under any scheme or arrangement by whatever name
called, monies in lump sum or otherwise, by way of subscriptions or by sale of units,
or other instruments or in any other manner and awarding prizes or gifts, whether in
cash or king, or disbursing monies in any other way, to persons from whom monies are
collected or to any other person,
but does not include any institution, which carries on as its principal business,—
a) agricultural operations; or (aa) industrial activity; or

b) the purchase, or sale of any goods (other than securities) or the providing of any
services; or
c) the purchase, construction or sale of immovable property, so, however, that no
portion of the income of the institution is derived from the financing of purchases,
constructions or sales of immovable property by other persons;
“Non-banking institution” can be a company, corporation or co-operative society;
“Deposit” includes and shall be deemed always to have include any receipt of money by way
of deposit or loan or in any other form, but does not include,—
1. amounts raised by way of share capital;
2. amounts contributed as capital by partners of a firm;
3. amounts received from a scheduled bank or a co-operative bank or any other banking
company;
4. any amount received from,—
a) a State Financial Corporation,
b) any financial institution or
c) any other specified institution;
5. amounts received in the ordinary course of business, by way of—
a) Security deposit,
10. 2
NBFCs
b) Dealership deposit,
c) Earnest money, or
d) Advance against orders for goods, properties or services;
6. Any amount received from an individual or a firm or an association of individuals not
being a body corporate, registered under any enactment relating to money lending which
is for the time being in force in any State; and
7. Any amount received by way of subscriptions in respect of a chit.
Registration and Net Owned Fund (Sec 45-IA)
Notwithstanding anything contained in Chapter IIIB of the RBI Act or in any other law for the
time being in force, no NBFC shall commence or carry on the business of a non- banking financial
institution without—
a) obtaining a certificate of registration issued under Chapter IIIB; and

b) having the net owned fund of Rs. 25 Lakh or such other amount, not exceeding Rs.
100 Cr., as the Bank may, by notification in the Official Gazette, specify:
Provided that the RBI may notify different amounts of net owned fund for different categories
of NBFCs.
Every NBFC shall make an application for registration to the Bank in such form as the RBI may
specify.
The RBI, for the purpose of considering the application for registration, may require to be
satisfied by an inspection of the books of the NBFC or otherwise that the following conditions
are fulfilled:—
1. that the NBFC is or shall be in a position to pay its present or future depositors in
full as and when their claims accrue;
2. that the affairs of the NBFC are not being or are not likely to be conducted in a
manner detrimental to the interest of its present or future depositors;
3. that the general character of the management or the proposed management of the
NBFC shall not be prejudicial to the public interest or the interests of its depositors;
4. that the NBFC has adequate capital structure and earning prospects;
5. that the public interest shall be served by the grant of certificate of registration to
the NBFC to commence or to carry on the business of India;
6. that the grant of certificate of registration shall not be prejudicial to the operation
and consolidation of the financial sector consistent with monetary stability, and economic
10. 3
NBFCs
growth considering such other relevant factors which the RBI may, by notification in
the Official Gazette, specify; and
7. Any other condition, fulfilment of which in the opinion of the RBI, shall be necessary
to ensure that the commencement of or carrying on of the business in India by a NBFC
shall not be prejudicial to the public interest or in the interests of the depositors.
The RBI may, after being satisfied that the specified conditions are fulfilled, grant a certificate
of registration.
Cancelation of a Certificate of Registration
The RBI may cancel a certificate of registration granted to a NBFC, if such company—
1. ceases to carry on the business; or

2. has failed to comply with any condition; or
3. at any time fails to fulfil any of the conditions such as adequate capital structure and
earning prospects, public interest, monetary stability, and economic growth etc. or
4. fails to comply with any direction issued by the RBI; or
5. fails to maintain accounts; or
6. fails to submit or offer for inspection its books of account and other relevant documents
when so demanded by an inspecting authority of the RBI ; or
7. has been prohibited from accepting deposit by an order made by the RBI and such order
has been in force for a period of not less than 3 months.
A aggrieved company may prefer an Appeal, within 30 days from the date communication of
rejection, to the CG and the decision of the CG shall be final.
Maintenance of Percentage of Assets (Sec 45-IB)
Every NBFC shall invest and continue to invest in India in unencumbered approved securities,
valued at a price not exceeding the current market price of such securities, an amount which,
at the close of business on any day, shall not be less than 5% or such higher percentage not
exceeding 25% as RBI may, from time to time and by notification in the Official Gazette,
specify, of the deposits outstanding at the close of business on the last working day of the
2nd preceding quarter.
Further, the RBI may specify different percentages of investment in respect of different classes
of NBFC.
10. 4
NBFCs
For the purpose of ensuring compliance, the RBI may require every NBFC to furnish a return
to it.
If the amount invested at the close of business on any day falls below the specified rate , such
company shall be liable to pay to the RB, a penal interest at a rate of three per cent. per
annum above the bank rate on such amount by which the amount actually invested falls short
of the specified percentage, and where the shortfall continues in the subsequent quarters, the
rate of penal interest shall be 5% p.a above the bank rate on such shortfall for each subsequent
quarter.
The penal interest shall be payable within 14 days from the date of notice demanding payment
and the NBFC fails to pay, penalty may be levied by a direction of the principal civil court of
that area where an office of the defaulting NBFC is situated and such direction shall be made
only upon an application made in this behalf to the court by the a NBFC ; and When the
court makes a direction , it shall issue a certificate specifying the sum payable by the NBFC
and every such certificate shall be enforceable as decree made by the court in a suit.
Reserve Fund (Sec 45-IC)
Every NBFC shall create a reserve fund the transfer therein a sum not less than 20% of its
net profit every year as disclosed in the P&L account and before any dividend is declared.
Appropriation of any sum from the reserve fund shall not be made except for the specified
purpose and shall be reported to the RBI within 21 days from the date of such withdrawal.
However delay may be condoned by RBI.
The CG may, declare that the provisions of reserve fund shall not be applicable to the NBFC
for such period as may be specified in the order.
Power of Reserve Bank of India to Remove Directors from Office (Sec 45-ID)
Where the RBI is satisfied that in the public interest or to prevent the affairs being conducted
in a detrimental manner to the interest of the depositors or creditors, or financial stability or
for securing the proper management of such company, RBI may, by order and for reasons to
be recorded in writing, remove from office, a director (by whatever name called) of such
company, other than Government owned NBFC with effect from such date as may be specified
in the said order.
Where any order of removal is made in respect of a director of a company , he shall cease to
be a director of that NBFC and shall not, in any way, whether directly or indirectly, be
concerned with, or take part in the management of any NBFC for such period not exceeding 5
years at a time as may be specified in the order.
10. 5
NBFCs
Where an order of removal has been made, the RBI may, by order in writing, appoint a suitable
person in place of the director, who has been so removed from his office, with effect from
such date as may be specified in such order.
Supersession of Board of Directors of Non-Banking Financial Company (Sec 45-IE)
Where the RBI is satisfied that in the public interest or to prevent the affairs of a NBFC
being conducted in a manner detrimental to the interest of the depositors or creditors, or of
the NBFC (other than Government Company), or for securing the proper management of such
company or for financial stability, it is necessary so to do, the Reserve Bank may, for reasons
to be recorded in writing, by order, supersede the Board of Directors of such company for a
period not exceeding 5 years as may be specified in the order, which may be extended from
time to time, so, however, that the total period shall not exceed 5 years.
The Reserve Bank may, on supersession of the Board of Directors of the NBFC, appoint a
suitable person as the Administrator for such period as it may determine.
The RBI may issue such directions to the Administrator as it may deem appropriate and the
Administrator shall be bound to follow such directions.
Upon making the order of supersession of the Board of Directors of a NBFC,—
1. The chairman, managing director and other directors shall from the date of super session
of the Board of Directors vacate their offices;
2. All the powers, functions and duties, which may, by or under the provisions of RBI Act
or any other law for the time being in force, be exercised and discharged by or on
behalf of the Board of Directors of such NBFC or by a resolution passed in general
meeting of such NBFC, shall, until the Board of Directors of such company is
reconstituted, be exercised and discharged by the Administrator.
Power of Bank to Determine Policy and Issue Directions (Sec 45JA)
RBI may determine the policy and give directions to all or any of the non-banking financial
companies relating to income recognition, accounting standards, making of proper provision for
bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion
factors for off balance-sheet items and also relating to deployment of funds by a NBFC and
such NBFC shall be bound to follow the policy so determined and the direction so issued.
Power of Bank to Collect Information from Non-Banking Institutions as to Deposits

and to Give Directions (Sec 45K)
The RBI may direct that every non-banking institution shall furnish, such statements
information or particulars relating to or connected with deposits received.
10. 6
NBFCs
If it fails to comply with above direction, the RBI may prohibit the acceptance of deposits by
that non-banking institution.
Every non-banking institution receiving deposits may be asked to be send a copy of its annual
balance- sheet and P&L account or other annual accounts to every deposit holder holding deposit
higher than prescribed amount.
Power of Bank to Call for Information from Financial Institutions and to Give
Directions (Sec 45L)
RBI may—
1. require financial institutions to furnish statements, information or particulars relating

to the business.
2. give to such institutions directions relating to the conduct of business by them.
Duty of Non-Banking Institutions to Furnish Statements Required By Reserve Bank

(Sec 45M)
It shall be the duty of every non-banking institution to furnish the statements, information
or particulars called for, and to comply with any direction given to it.
Powers and Duties of Auditors (Sec 45MA(1))
It shall be the duty of an auditor of a non- banking institution to inquire whether or not the
non-banking institution has furnished to the Bank required information and the auditor shall
make a report to RBI giving the aggregate amount of such deposits held by the non-banking
institution.
Where, for non-banking financial company, the auditor has made a report to RBI, he shall
include in his report under the Companies Act, the contents of the report which he has made
or intends to make, to the Reserve Bank.
Where the Reserve Bank in the public interest may order a special audit of the accounts of
the non-banking financial company for specified transaction for specified period and the Reserve
Bank may appoint an auditor or auditors to conduct such special audit and direct the auditor
or the auditors to submit the report to it.
The remuneration of the auditors as may be fixed by RBI, shall be borne by the non-banking
financial company so audited.
10. 7
NBFCs
Power to Take Action against Auditors (45MAA)
Where any auditor fails to comply with any direction given or order made by the RBI, the RBI
may remove or debar the auditor from exercising the duties as auditor of any of the RBI
regulated entities for a maximum of 3 years, at a time.
Power of RBI to Prohibit Acceptance of Deposit and Alienation of Assets (Sec 45MAB)
If any NBFC fails to comply with any direction or order given by the Bank under any of the
provisions of this Chapter IIIB, the RBI may prohibit the NBFC from accepting any deposit.
Notwithstanding anything to the contrary contained in any agreement or instruments or any

law for the time being in force, the RBI, on being satisfied that it is necessary so to do in
the public interest or in the interest of the depositors, may direct, the NBFC against which
an order prohibiting from accepting deposit has been issued, not to sell, transfer, create charge
or mortgage or deal in any manner with its property and assets without prior written permission
of the Reserve Bank for such period not exceeding 6 months from the date of the order.
Resolution of Non-Banking Financial Company (Sec 45MABA(1)
RBI may, if it is satisfied, upon an inspection of the Books of a NBFC that it is in the public
interest or in the interest of financial stability so to do for enabling the continuance of the
activities critical to the functioning of the financial system, frame schemes which may provide
for any one or more of the following, namely:—
1. amalgamation with any other NBFC;

2. reconstruction of the NBFC;
3. splitting the NBFC into different units or institutions and vesting viable and non- viable
businesses in separate units or institutions to preserve the continuity of the activities
of that NBFC that are critical to the functioning of the financial system and for such
purpose establish institutions called “Bridge Institutions.
Note: “Bridge Institutions” mean temporary institutional arrangement made under the scheme,
to preserve the continuity of the activities of a NBFC that are critical to the functioning of
the financial system.
Without prejudice to the generality of the foregoing provisions, the scheme referred may provide
for—
1. reduction of the pay and allowances of the CEO, MD, chairman or any officer in the
senior management of the NBFC;
10. 8
NBFCs
2. cancellation of all or some of the shares of the NBFC held by the CEO, MD, chairman
or any officer in the senior management or their relatives;
3. sale of any of the assets of the NBFC.
Power of Reserve Bank to File Winding Up Petition (Sec 45MC)
RBI, on being satisfied that a NBFC—
1. is unable to pay its debt; or

2. has become disqualified to carry on the business; or
3. has been prohibited from receiving deposit by an order and such order is in force for at-
least 3 months; or
4. the continuance of the NBFC is detrimental to the public interest or to the interest of
depositors of the company,
may file an application for winding up of such NBFC under the Companies Act.
A NBFC shall be deemed to be unable to pay its debt if it has refused or has failed to meet
within 5 working days any lawful demand made at any to its offices or branches and the Bank
certifies in writing that such company is unable to pay its debt.
A copy of every application made by RBI shall be sent to the ROC. All the provisions of the
Companies Act, relating to winding up of a company shall apply to a winding up proceeding
initiated on the application made by RBI.
Power in Respect of Group Companies (Sec 45NAA)
RBI may, direct a NBFC to annex to its financial statements or furnish separately, such
statements and information relating to the business or affairs of any group company of the
NBFC as the Bank may consider necessary or expedient to obtain for the purposes of RBI Act.
The Reserve Bank may, at any time, cause an inspection or audit to be made of any group
company of a NBFC and its books of account.
Disclosure of Information (Sec 45NB(1))
Any information relating to a NBC,—
1. Contained in any statement or return submitted by such company under the provisions of
Chapter IIIB; or
2. Obtained through audit or inspection or otherwise by the Bank, shall be treated as
confidential and shall not, except otherwise provided in Section 45NB, be disclosed.
10. 9
NBFCs
The RBI, in the public interest, may, either on its own motion or on being requested, furnish
or communicate any information relating to the conduct of business by any NBFC to any
authority constituted under any law.
No court or tribunal or other authority shall compel the RBI to produce or to give inspection
of any statement or other material obtained by the RBI under any provisions of Chapter IIIB.
Power of Reserve Bank to Exempt (Sec 45NC)
The RBI, may declare that any or all of the provisions of Chapter IIIB of the RBI Act shall not
apply to a NBFC either generally or for specified period, subject to specified conditions,
limitations or restrictions.
Chapter IIIB OF RBI Act to Override Other Laws (Sec 45Q)
The provisions of this Chapter IIIB of RBI Act shall have effect notwithstanding anything
inconsistent therewith contained in any other law for the time being in force or any instrument
having effect by virtue of any such law.
DIRECTIONS PERTAINING TO NBFCS ISSUED BY RESERVE BANK OF INDIA
The RBI in the public interest and to regulate the financial system to the advantage of the
country and to prevent the affairs of any NBFCs from being conducted in a manner detrimental
to the interest of investors or in any manner prejudicial to the interest of such NBFCs issues
Directions from time to time.
Following are the major Directions issued by Reserve Bank of India are as under:
 NBFC - Systemically Important Non-Deposit taking Company and Deposit taking Company
(RBI) Directions, 2016
 NBFC –Non-Systemically Important Non-Deposit taking (RBI) Directions, 2016
 Core Investment Companies (RBI) Directions, 2016
 NBFC Acceptance of Public Deposits (RBI) Directions, 2016
 NBFC Returns (RBI) Directions, 2016
 NBFC Auditor’s Report (RBI) Directions, 2016
 Monitoring of Frauds in NBFCs (RBI) Directions, 2016
 NBFC - Account Aggregator (RBI) Directions, 2016
 Miscellaneous NBFC (RBI) Directions, 2016
 NBFC – Peer to Peer Lending Platform (RBI) Directions, 2017
CLASSIFICATION OF NBFCS BY ACTIVITY

10. 10
NBFCs
NBFCs are classified on the basis of:
(a) their liability structures;
(b) the type of activities they undertake; and
(c) their systemic importance. In the first category, NBFCs are further subdivided into NBFCs-
D–which are authorized to accept and hold public deposits–and non-deposit taking NBFCs
(NBFCs-ND)– which do not accept public deposits but raise debt from market and banks.
NBFCs can also be categorised on the basis of activities undertaken as they typically focus on
niche segments and fulfil sector–specific requirements.
TYPE OF NBFC Activity

Asset Finance Company (AFC) Financing of physical assets including
automobiles, tractors and generators.
(NBFC-Investment and Credit Companies)
Loan Company Provision of loan finance
Investment Company Acquisition of securities for purpose of selling
NBFC-Infrastructure Finance Company Provision of infrastructure loans
(NBFC-IFC)
NBFC-Systemically Important Core Makes investments and loans to group
Investment Company (CIC-ND-SI) companies
Infrastructure Debt Fund-NBFC (IDF-NBFC) Facilitation of flow of long-term debt into
infrastructure projects
NBFC-Micro Finance Institution (NBFC-MFI) Credit to economically dis-advantaged groups
NBFC-Factor Acquisition of receivables of an assignor or
extending loans against the security interest
of thereceivables at a discount
NBFC-Non-Operative Financial Holding Facilitation of promoters/ promoter groups in
Company (NOFHC) setting up new banks
Mortgage Guarantee Company (MGC) Undertaking of mortgage guarantee business
NBFC-Account Aggregator (NBFC-AA) Collecting and providing information about a
customer’s financial assets in a consolidated,
organised and retrievable manner to the
customer or others as specified by the
customer.
NBFC–Peer to Peer Lending Platform Providing an online platform to bring lenders
(NBFC-P2P) and borrowers together to help mobilise
funds.
10. 11
NBFCs
DEFINITIONS OF NBFCS UNDER VARIOUS DIRECTIONS ISSUED BY RESERVE BANK
“SI- ND-NBFC”, means a NBFC not accepting / holding public deposits and having total assets
of Rs. 500 crore and above as shown in the last audited balance sheet;
“Infrastructure Finance Company” means a ND-NBFC that fulfills the following criteria:
1. (a) a minimum of 75 %of its total assets deployed in “infrastructure loans”;

2. (b) Net owned funds of Rs. 300 crore or above;
3. (c) minimum credit rating ‘A’ or equivalent;
4. (d) CRAR of 15 %.
“Investment and Credit Company - (NBFC-ICC)” means any company which is a financial
institution carrying on as its principal business - asset finance, the providing of finance whether
by making loans or advances or otherwise for any activity other than its own and the acquisition
of securities; and is not any other category of NBFC as defined by the Bank in any of its
Master Directions
“Non-Banking Financial Company - Factor (NBFC-Factor)” means a NBFC which has its principal
business as defined in paragraph 40 of these directions and has been granted a certificate of
registration of the Principal Business: An NBFC-Factor shall ensure that its financial assets in
the factoring business constitute at least 50 % of its total assets and its income derived from
factoring business is not less than 50 % of its gross income.
NBFC-MFI means a non-deposit taking NBFC that fulfils the following conditions:
(a) Minimum Net Owned Funds of Rs. 5 crore. (For NBFC-MFIs registered in the North
Eastern Region of the country, the minimum NOF requirement shall stand at Rs. 2 crore).
(b) Not less than 85% of its net assets are in the nature of “qualifying assets.” (Only the
assets originated on or after January 1, 2012 shall have to comply with the Qualifying Assets
criteria. As a special dispensation, the existing assets as on January 1, 2012 shall be reckoned
towards meeting both the Qualifying Assets criteria as well as the Total Net Assets criteria.
These assets shall be allowed to run off on maturity and shall not be renewed).
“Infrastructure Debt Fund-Non-Banking Financial Company” or “IDF-NBFC” means a non-deposit

taking NBFC that has Net Owned Fund of Rs. 300 crore or more and which invests only in
Public Private Partnerships (PPP) and post commencement operations date (COD)
infrastructure projects which have completed at least one year of satisfactory commercial
operation and becomes a party to a Tripartite Agreement.
10. 12
NBFCs
Core Investment Company (CIC), that is to say, a non-banking financial company carrying on
the business of acquisition of shares and securities and which satisfies the following conditions
as on the date of the last audited balance sheet:-
(i) it holds not less than 90% of its net assets in the form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies;
(ii) 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
and units of Infrastructure Investment Trust only as sponsor constitute not less than 60% of
its net assets;
Provided that the exposure of such CICs towards InvITs shall be limited to their holdings as
sponsors and shall not, at any point in time, exceed the minimum holding of units and tenor
prescribed in this regard by SEBI (Infrastructure Investment Trusts) Regulations, 2014, as
amended from time to time.
(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group
companies except through block sale for the purpose of dilution or disinvestment;
(iv) it does not carry on any other financial activity except
1. investment in
i. bank deposits,
ii. money market instruments, including money market mutual funds and liquid mutual
funds
iii. government securities, and
iv. bonds or debentures issued by group companies,
2. granting of loans to group companies and

3. issuing guarantees on behalf of group companies.
“Systemically important Core Investment Company (CIC-ND-SI)” means a core investment

company having total assets of not less than Rs.100 crore either individually or in aggregate
along with other CICs in the Group and which raises or holds public funds.
Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal
business the receiving of deposits, under any scheme or arrangement or in any other manner
and not being Investment, Asset Financing, Loan Company. These companies are required to
maintain investments as per directions of RBI, in addition to liquid assets. The functioning of
these companies is different from those of NBFCs in terms of method of mobilization of
deposits and requirement of deployment of depositors’ funds as per Directions. Besides,
Prudential Norms Directions are applicable to these companies also.
10. 13
NBFCs
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 Rs.100 crore and above.
 Half-yearly ALM return by NBFC holding public deposits of more than Rs. 20 crore or
asset size of more than Rs. 100 crore
 Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
 Branch Info Return.
RETURNS TO BE SUBMITTED BY NBFCS-ND-SI

 NBS-7 A 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.
 ALM returns:
 Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,
 Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly,
 Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearly
 • Branch Info return
10. 14
NBFCs
10. 15
Special Economic Zones Act, 2005

Salient features of the Act
The salient features of Special Economic Zone Ac 2005 are as follows:
 Matters dealing with setting up of special Economic Zone and units there-in
 Matters dealing with off shore banking units and units in international
financial services centre in SEZ
 Single window clearance mechanism at zone level
 Fiscal regime / scenario for developers of Special Economic Zone and units
 Providing authority for each SEZ granting them administrative autonomy
 Setting up special courts to ensure faster settlement of cases and speedy
investigation in equation to offences committed in Special Economic Zones.
Establishment of Special Economic Zone [Section 3]

 The Central Govt. State Govt. or any other person, jointly or severally, may
establish a Special Economic Zone.
 Any person who has intention to set up a SEZ may, after identifying
the area, make a
proposal to the State Govt. for the purpose of setting up a SEZ.
 The person may make a proposal directly to the Board for the purpose of
setting up a SEZ and the board may grant approval but after
receipt of such approval the
concerned person has to obtain the concurrence of the State Govt.
 Within prescribed time The state Govt. may on receipt of the proposal for
setting up a SEZ forward the proposal together with its
recommendations to the board of Approval within the specified time
afterwards the board may either approve the proposal or,
approve it subject to such terms and conditions as it may deem fit
to impose.
 The Board may also modify or reject the proposal.
 The Central Govt. has the
authority to specify the minimum area of Land for setting up
a SEZ another terms and
Establishment, Approval and authorisation to Operate SEZ

11.1
According to sec 4 of SEZ Act, after the grant of approval, the Developer
has to submit the exact particulars of the identified area to the central
Govt. which after satisfying that the specified requirements are fulfilled,
notify the specifically identified area in the state as SEZ.
Guidelines for notifying SEZ (Section 5)

The following guidelines should be considered by the C.G. while notifying any
area as a SEZ or an area to be included into SEZ and in discharging
its functions under the Act. The guidelines are as follows:
 Generation of additional economic activity;
 Promotion of exports of goods and services;
 Creation of employment Opportunity;
 Promotion of investment from domestic and foreign sources;
 Development of infrastructure facilities; and
 Maintenance of sovereignty and integrity of India, the security
of the State and friendly relations with foreign States.
Processing and Non Processing Areas (Section 6)
Central Govt. or any specified authority may demarcate the area falling within
the SEZ as
a) The processing area for setting up Units for activities, being the manufacture
of goods, or rendering of services.
b) The area exclusively for trading or warehousing purposes; or
c) The non- processing areas for activities other than those specified under (a)
or (b) above.
Exemption from taxes, duties or CESS (Section 7)

All the goods / services exported out, or imported into, or procured from the
Domestic Tariff Area, by a unit or Developer in SEZ from the payment
of taxes, duties or CESS underall enactments specified in the 1st schedule.
The enactment specified in the first schedule generally relate
to levy and payment of CESS
Constitution of Board of Approval (Section 8)

Central Govt. may constitute by notification, the Board of Approval within 15
days of the commencement of the Act. This Section also provides for composition
11.2
of Board, term of office of Members, co-option of certain persons as members

of the Board, its meeting and quorum, etc,
Duties, power and functions of Board of Approval (Section 9)

Under this section, the board has a duty to promote and ensure orderly
development of the SEZ. The power and duty of the board area.
a) Granting of approval or rejecting proposal or modifying such
proposals for establishment of the SEZ.
b) Granting approval of authorised operations to be carried out in SEZ.
c) Granting of approval or rejecting proposal for providing infrastructure facilities
in a SEZ or modifying such proposals;
d) Granting, a licence to an Industrial undertaking referred to
in sec 3(d) of IDR act, if such undertaking is established, as a
whole or part thereof, or proposed to be established, in a SEZ.
e) Disposing of appeals preferred under sec 15(4) and section 16(4) of the Act
,
f) Performing such other functions as may be assigned to it by the central Gov
t.
Suspension of letter of approval and transfer of SEZ in certain cases

According to Section 10 the Board has a power to suspend the letter of
approval granted to the Developer
In the following Circumstances the Board may order the suspension
a) The developer is unable to discharge the functions or perform the duties
imposed on him;
b) The developer has persistently defaulted in complying with the
directions of the board;
c) The developer has violated the term and conditions of the letter;
d) The financial position of the developer is such that he is unable to discharge
the duties and obligation imposed on him by the letter of approval.
Before such suspension 3 months’ notice should be given by the board, in writing
stating the grounds on which it proposes to suspend the letter of approval, and
should also consider any cause shown by the developer within the period
of that notice, against the proposed suspension. Provided further that
alternatively, the board may permit the licence of approval to remain in force
11.3
subject to further terms and conditions as it thinks fit. Such terms and
conditions will be binding on the developer.
Development commissioner and his Functions

C.G. may appoint the development commissioner for one or more SEZ and such
Officer and employees to assist every Development Commissioner. (Section 11)
The development commissioner should take following steps to ensure speedy
development of the SEZ and promotion of exports (Section 12)–
 Should guide the entrepreneur for setting up of Units in the SEZ.
 Should ensure
and take suitable steps for effective promotion of exports from the SEZ.
 Should make proper co-ordination with the central Govt. or State
Govt. departments concerned
or agencies with respect to, or for above purposes;
 Should monitor the performance of the Developer and the Units in SEZ
 Should Discharge such other functions assigned to him by the C.G. or
delegated by the board.
Development commissioner
According to sec 12 Development Commissioner to be overall in charge of the
SEZ and can exercise administrative control and supervision over the officers and
employees. Further the development commissioner may call for information
form a Developer or Unit as maybe
necessary to monitor the performance of the developer and the Unit.
Approval Committee (Section 13)

To exercise the specified power and functions, the C.G. may constitute
by notification, a committee for every SEZ, to be known as Approval
Committee. For existing SEZ, the approval Committee has to be constituted
within 6 months from the date of commencement of the Act and in case of
other SEZs established after the commencement of the Act the committee
should be constituted within 6 months from the date of establishment of such
SEZ.
11.4
According to Section 13 all orders decisions and instructions of the Approval

Committee should be authenticated by the signature of the chair person or any
other authorised member.
Power and functions of Approval Committee (Section 14)

Every Approval Committee should discharge the functions and 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 SEZ.
c) Monitor the utilisation of goods or services or warehousing or trading in the
SEZ.
d) Allow on receipt of approval foreign collaborations and foreign direct
investments, including investments
by a person outside India for setting up a Unit.
e) Monitor or supervise compliance of conditions subject to which the letter of
approval or permission, if any, is granted to the developer or entrepreneur
f) Perform any other functions as may be entrusted
to it by the C.G. or the S.G. concerned, as the case may be.
Setting up of Unit (Section 15)
Any person, who intends to set up a Unit for carrying on the authorised
operations in SEZ, should submit a proposal to the concerned Development
Commissioner. The development commissioner then forwards the proposal
to Approval Committee for its approval. The Approval Committee can,
approve the proposal with or with out modification, and subject to such term
and conditions as it may deem fit, or reject the same. Before
modification or rejection of proposal, the Approval Committee should give an
opportunity of being heard to the concerned person.
Person aggrieved by an order of Approval Committee may make an appeal to
the Board of Approvals within the prescribed time and specified manner.
Cancellation of letter of approval granted to entrepreneur (Section 16)
11.5
The approval committee may cancel the letter of Approval of an entrepreneur

after giving reasonable opportunity of being heard.
Approval committee can cancel the letter of approval at any time, if it
has any reason to believe that the entrepreneur has contravened any
of the term and conditions or its obligation subject to which the letter
of Approval was granted to the entrepreneur.
Provided further that from the date of cancellation the Unit shall not
be entitled to any exemption, concession, benefit or deduction available to
it as such. Any person aggrieved from an order of Approval Committee can
make an appeal to the Board of Approval within the prescribed time.
Setting up and Operation of Offshore Banking Unit (Section 17)

An application for setting up and operation of an Offshore Banking Unit in SEZ
can be made to Reserve Bank in the prescribed form and manner. The RBI after
being satisfied may grant permission to such applicant for setting up and operation
of an Offshore Banking Unit in SEZ.
According to section 17(3) RBI may specify, by notification, the term and
conditions subject to
which an Offshore banking unit may be set up and operate in the SEZ.
Single Application form, return etc (Section 19)

C.G. may prescribe single application form for obtaining any
licence, permission or registration or approval by a Developer or an entrepreneur
under one or more Central Acts. According to section 19(b), C.G. may authorize
the board, the Development Commissioner and the approval Committee to
exercise its power on matters relating to the development of SEZ or setting up
or operation or units.
Section 19(c) allows the C.G. to prescribe single form for furnishing returns or
information by a developer or an entrepreneur under one or more Central Acts.
Note: - Any person aggrieved by the order of the designated Court may file an
appeal to High Court within 60 days from the date of Communication of the
order of the said court to him. Further period may also be provided if high court
has a reason to believe that the applicant was prevented by
sufficient cause from filling an appeal within the prescribed period.
11.6
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,
 Section 21 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
 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.
Application of Income tax

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 and Services in SEZ

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
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,
11.7
SEZ 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
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 :
 the development of infrastructure in the Special Economic Zone;
 promoting exports from the Special Economic Zone;
 reviewing the functioning and performance of the Special Economic Zone;
 levy user or service charges or fees or rent for the use of properties
belonging to the Authority;
 performing such other functions as may be prescribed.
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.
Identity card
Section 46 requires that every person whether employed or residing or required
to be present in a Special Economic Zone be provided an identity card by every
Development Commissioner in prescribed form and containing specified particulars
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.
11.8
Digital India
With the launch of Digital India programme, the government is taking a big
step forward to transform the country into
a digitally empowered knowledge economy.
It includes various schemes worth over Rs 1 lakh crore like Digital Locker,
e-education, e-health, e-sign and national scholarship portal. Bharat Net in 11
states and Next Generation
Network (NGN), are also a part of Digital India campaign.
The programme includes projects that aim to ensure that government services
are available to citizens electronically and people get benefit of the latest
information and communication technology.
The Ministry of Communications and IT is the nodal agency to implement the
programme.
Apps for Digital India Digital India Portal, MyGov Mobile App, Swachh Bharat
Mission App and Aadhaar Mobile Update App. Vision Of Digital India Digital
Infrastructure as a Utility to Every Citizen Governance & Services on Demand
Digital Empowerment of Citizens Pillars Of Digital India Broadband Highways
Universal Access to Phones Public Internet Access Programme e Governance
– Reforming government through Technology e-Kranti – Electronic delivery of
services Information for All Electronics Manufacturing – Target NET
ZERO Imports IT for Jobs Early Harvest Programmes
Impact of Digital India by 2019

Broadband in 2.5 lakh villages, universal phone connectivity Net Zero
Imports by 2020 400,000 Public Internet Access Points Wi-fi in 2.5 lakh
schools, all universities; Public wi-fi hotspots for citizens Digital Inclusion: 1.7 Cr
trained for IT, Telecom and Electronics Jobs Job creation: Direct 1.7 Cr.
And Indirect at least 8.5 Cr. E-Governance & eServices: Across
government.
Make in India
Make in India is an initiative of the Government of India to encourage multi-
national, as well as domestic, companies to manufacture their products in India.
11.9
It was launched by Prime Minister Narendra Modi on 25 September 2014 India

would emerge, after initiation of the programme in 2015, as the top
destination globally for foreign direct investment, surpassing
China as well as the United States.
The major objective behind the initiative is to focus on job creation and skill
enhancement in 25 sectors of the economy. The initiative also aims at high
quality standards and minimizing the impact on the environment. The initiative
hopes to attract capital and technological investment in India.
Make in India focuses on the following 25 sectors of the economy:
 Automobiles
 Automobile Components
 Aviation
 Biotechnology
 Chemicals
 Construction
 Defence manufacturing
 Electrical Machinery
 Ports and Shipping
 Railways
 Renewable Energy
 Roads and Highways
 Space
 Textiles and Garments
 Thermal Power
 Tourism and Hospitality
 Wellness
 Electronic systems
 Food Processing
 Information Technology and business process management
 Leather
 Media and Entertainment
 Mining
 Oil and Gas
11.10
Competition Act 2002
COMPETITION ACT, 2002

Introduction
With the globalization of the world economy, it became necessary to encourage

competition to foster economic development. MRTP Act, 1969 has become
obsolete in certain areas in the light of international economic developments
relating to competition laws. So the need was
felt to shift the focus from curbing monopolies to promoting competition.
Hence, the Competition Act, 2002 was enacted, which aims at doing
away from the rigidly structured MRTP Act.
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.
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
12.1
the globe are increasingly trying to remove market imperfections through
appropriate regulations to promote competition.
Salient features of the Act

The Act seeks to provide, keeping in view the economic development of the country
i. For establishment of Competition Commission to prevent practice
s having
adverse effect on competition and prescribes its duties, functions and powers.
ii. to prevent abuse of dominance and prejudicial combinations,
iii. to promote and sustain competition in markets,
iv. to protect the interests of consumers,
v. to ensure freedom of trade carried on by other participants in markets in India
and for matters connected therewith.
vi. With the enforcement of the Competition Act, the MRTP Act,1969
shall stand repealed and the MRTP Commission shall be dissolved.
vii. It seeks to achieve its objectives by prohibiting anti-
competitive trade agreements,
preventing abuse of dominance, regulating combinations and formulating a policy
on competition, creating awareness by imparting training on competition issues .
viii. Further, the Commission shall also take up Competition Advocacy for
creating awareness and imparting training on competition.
Definitions (Section 2)
Agreement Agreement includes any arrangement or understanding or
action in concert –
 whether or not, such arrangement, understanding or concert
is in formal or in writing ;
or
 whether or not such arrangement, understanding or concert
is intended to be enforceable by legal proceedings
Cartel Cartel includes an association of producers, sellers or
distributors, traders to control the production, distribution,
sale or price of or ,trade in goods or provision of services. Th
e Act prohibits formation of certain cartels.
Case Law : In December 2010, CCI instituted a probe to exa

mine
if there was any cartelisation among traders when onion price
s
12.2
touched 80 rupees, but did not find sufficient evidence of m
arket manipulation.
Consumer Consumer means any person who -

buys any goods for a consideration which has been paid or
promised or 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 goods is for resale or for any commercia
l purpose or for personal use.
hires or avails of any services for consideration which has

been paid or promised or partly paid and partly promised
or partly paid and partly promised, or under any system
of deferred payment when such services are availed o
f with the approval of the first mentioned person whether
such hiring or availing of services is for any commercia
l
purpose or for personal use.
Goods Goods mean 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.
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.
Relevant Geographic Relevant Geographic Market means a market comprising the area
Market 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 neighboring areas.
Relevant Product Relevant Product Market means a market comprising of all
Market those products or services are regarded as interchangeable
or substitutable by the consumer, by reasons
of characteristics of products or services, their prices and
intended use.
12.3
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 nay 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.
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.
Important Provisions
Anti-competitive Agreement
Section 3(1) of the Competition Act, 2002 provides that no enterprise 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 provides that any anti-

competitive agreement within the meaning of Sec.3 (1) shall be void.
Prohibition on Agreements having Appreciable Adverse Effect on Competition

Comparative study: Section 3(3) and 3(4)
Section
3(3) : The agreements shall be presumed to have appreciable adverse effect on
competition and thereby they are consumed as deemed restrictive agreements.
Section 3(3) provides that following kinds of agreements entered into between
enterprises or association of enterprises or persons or associations or persons or
12.4
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 simi
lar goods or services which-
a) directly or indirectly determines purchase or sale price ;
b) limits or controls production , supply, markets , technical development , investme
nt or provision of services;
c) shares the market or source of production or provision of services, or allocation o
f
geographical area of market ,or type of goods or services ,or number of custome
rs 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 appropriate adverse effect on the competition and on
us to prove otherwise lies on the defendant.
Bid Rigging
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 private bodies
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:
1. agreements to submit identical bids
2. agreements as to who shall submit the lowest bid, agreements for the submission
of cover bids (voluntarily inflated bids)
3. Agreements not to bid against each other,
4. Agreements on common norms to calculate prices or terms of bids
5. Agreements to squeeze out outside bidders
6. Agreements designating bid winners in advance on a rotational basis, or
on a geographical or customer allocation basis
Case Law
12 December 2015
12.5
The Competition Appellate Tribunal (COMPAT) on Friday set aside the Competitio
n
Commission of India (CCI) decision imposing a cumulative penalty of Rs.6,316.59 cro
re on 11 cement companies on charges of ‘cartelisation’.
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
Section
3(4) : The agreements shall be judged by rule of reason and the onus lies on the
prosecutor to prove its appreciable adverse effect on competition .
Section 3(4) provides that any agreement amongst enterprises or persons at differen
t
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 service
s, including-
a) tie-in agreements;
b) exclusive supply agreement;
c) exclusive distribution agreement;
d) refusal to deal;
e) resale price maintenance;
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.
For the purpose of Section 3(4)

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 ti
e-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 Ga
s company]
12.6
“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 ot
her person.
Thus, where a manufacturer asks a dealer not to deal in similar prod

ucts of its
competitor directly or indirectly and discontinues the supply on the ground that dea
ler
also deals in product of suppliers’ competitor’s goods is an illustration of
exclusive dealing agreement. [Bhartia Curtec Hammer Ltd. In-re (1997)
“Exclusive distribution agreement” includes any agreement to limit, restric

t or
withhold the output or supply of any goods or allocate any area or marke
t for the
disposal or sale of the goods.Requiring a distributor not to sell the go
ods of the
manufacturer beyond the prescribed territory is a good example o
f 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 goo
ds 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 determinati
on of
agreement within a radius of five kms from showroom amounts to exclusive d
ealing agreement. DGIR v. Titan industries (2001)
“Resale price maintenance” includes any agreement to sell goods on condition tha
t
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.
Case Law
In the first major order of 2014 against the auto sector, the Competition Commissi
on of
India (CCI) slapped a penalty of Rs. 2,545 crore on 14 carmakers, including
Maruti
12.7
Suzuki and Tata Motors, for violating trade norms in the spare parts market. For
each
entity, the individual fine amounts to 2 per cent of their average turnover.
According to their agreements, the carmakers "imposed absolute restrictive covenants
and completely foreclosed the after-
market for supply of spare parts and other diagnostic tools".
Important factors while determing whether an agreement has an

appreciable adverse effect
Section
19(3) of the Competition Act,2002 provides that while determining the same ,the
Commission shall give 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.
Prohibition of abuse of dominant position
Section 4 expressly prohibits any enterprise or group from abusing its

dominant position, meaning thereby a position of strengt , 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.
12.8
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 :
 condition in purchase or sale of goods or services; or
 price in purchase or sale (including predatory price) of goods or service.
b) limits or restricts :
 production of goods or provision of services or market therefore; or
 technical or scientific development relating to goods or services to the prejudi
ce of consumers.
Case law 1:
12.9
State-
run Coal India has moved the Competition Appellate Tribunal against a CCI order
slapping Rs. 1,773 crore penalty on it for unfair trade practices. Competition Com
mission
of India (CCI) last month imposed the fine on Coal India, the first major penalty b
y the regulator on a state-
owned entity, for allegedly abusing its dominant position in fuel supplies.
Case law 2:
The Competition Commission of India (CCI) has imposed penalties upon 10 cement
companies and their trade association i.e. Cement Manufacturers Association (CMA)
for cartelisation in the cement industry.
The final order has been passed by CCI pursuant to the directions issued by
Competition Appellate Tribunal remanding the matter back while setting aside the
original order of CCI.
The information in the present case was filed by Builders Association of India under
Section 19(1)(a) of the Competition Act, 2002 (the Act) against the cement
companies and CMA alleging contravention of section Section 3(1) read with Section
3(3)(b) of the Act. the provisions of the Act.
Accordingly, penalties of Rs. 1147.59 crores (ACC), Rs. 1163.91 crores (ACL), Rs.
167.32 crores (Binani), Rs. 274.02 crores (Century), Rs. 187.48 crores (India
Cements), Rs. 128.54 crores (J K Cements), Rs. 490.01 crores (Lafarge), Rs.
258.63 crores (Ramco), Rs. 1175.49 crores (UltraTech) and Rs. 1323.60 crores
(Jaiprakash Associates Limited) have been imposed by CCI. In addition, a penalty of
Rs. 0.73 crore has also been imposed on CMA
NOTE: 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 competit
or;
e) dependence of consumers on the enterprise;
f) market structure and size of market;
g) any other factor which the Commission may consider relevant for the inquiry.
12.10
Orders by Commission after inquiry into agreements or abuse of
dominant position
1. The Commission may impose penalty not exceeding 10% of the average
turnover of last three preceding financial years, upon each of person or e
nteprises Which are parties to such agreement in contravention of Section
3 or are abusing dominant position within meaning of Section 4.
2. In case any agreement which is prohibited by Section 3 has been entered into
by any cartel, the Commission may impose upon each produce , 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.
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
d) Adequate Distribution facilities
e) Transport cost
f) Language
g) Consumer Preferences
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
3. Division of Dominant Enterprise

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,
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;
12.11
e) the extent to which, and the circumstances in which, provisions of the order
In India APPLICABLE ASSETS TURNOVER
TO
Individual Rs.2000 cr. Rs.6000 cr.
Group Rs.8,000 cr. Rs.24,000 cr
In India ASSETS TURNOVER
and Total Minimum Total Minimum
Outside Indian Indian
Component Component
out of Total
Individual $ 1B >Rs.1000 Cr.$ 3B >Rs.3000Cr.
parties
Group $ 4Bn. >Rs.1000 Cr.$.12B >Rs.3000Cr.
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.
Regulation of Combination
Section 5 provides that acquisition of one or more enterprises by one or
more persons or merger or amalgamation of enterprises shall be a
combination of such enterprises and persons or enterprises which are
above the certain prescribed size in terms of:
a) assets
or
b) turnover
Current Threshold
Section 6 Prohibits any person or enterprise from entering into a combination which
causes or is likely to cause as appreciable adverse effect on competition within the
relevant market in India 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
theproposed combination, in the from prescribed and submit the form together wit
h the
fee prescribed by regulations. Such intimation should be submitted within 30 days of:
a) approval of the proposal relating to merger or amalgamation for acquisition by t
he
Board of directors of the enterprise concerned with such merger or amalgamatio
n, as the case may be
b) execution of any agreement or other document for acquisition or acquiring of contr
ol
12.12
NOTE -
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 like
ly
to have an appreciable adverse effect on competition in the relevant market, namely ;
a) extent of barriers to entry into the market;
b) level of combination in the market
c) likelihood that the combination would result in the parties to the combinatio
n being able to significantly increase prices or profit margin.
d) extent to which substitutes are available or are likely to be available in the ma
rket
e) market share, in the relevant market, of the persons or enterprise in a com
bination, individually and as a combination;
f) likelihood that the combination would result in the removal of a effective co
mpetitor or competitors in the market;
g) nature and extent of vertical integration in the market;
Competitive Commission of India
Sec.7 empowers the Central Government to

Establishment [Section 7]
establish a Commission to be known as
'Competitive Commission of India'. It is a body
corporate having perpetual succession and common
seal. It has its head office at New Delhi (established w.e.f 14-10
2003).The Commission can establish its offices at other places in
12.13
The Commission shall consist of a Chairman and
Composition [Section 8] other members, which shall not be less than 2 and more tha
The Chairman and all the members shall be
appointed by the Central Govt.
Following are the qualifications of Chairman and the members :
 he shall be a person of ability, integrity and standing ;and
 he has been or is qualified to be a Judge of a High
Court or he has special knowledge and
professional experience of not less than 15 years in
international trade, economics, business,
commerce, law, finance, accountancy, management, etc.
The term of office of Chairman shall be 5 years or

Term of Office [Section 10] upto the age of 67 years, whichever is earlier and
that of other members shall be 5 years or upto
the age of 65 years, whichever is earlier. However,
they shall be eligible for reappointment.
Removal of Chairman and other The Chairperson or a member of CCI may be
removed from the office by the Central Govt. in the following
members [Section 11]  Where he is adjudged as an insolvent
 Where he has been engaged in any paid employment
 Where he has been convicted of an offence which
involved moral turpitude.
 Where he has acquired such financial or other
interest as is likely to affect prejudicially
 Where he has abused his position ; and
 Where he has become physically or mentally
incapable
Restriction on employment of The Chairperson and other members shall not for a period of 2
Chairperson and other members accept any employment connected with the management or
[Section 12] administration of any enterprise which has been a party to an
proceeding before the Commission under this Act.
However, the said restriction shall not apply where the Chairp
any member is offered an employment in a corporation establis
or under any Central, State of Provincial Act.
Validity of acts of CCI [Section An act of CCI cannot be challenged on the ground only of any
in constituition of CCI or the existence of any vacancy in th
15]
However, acts of CCI can be questioned on other acts such as
mala fide, acting on the basis of untenable evidence, etc.
12.14
Note – When an act of CCI is called in question on such other
grounds, defects in the constitution or the existence of a vaca
the CCI may also be urged as an additional ground
Powers of CCI 1. to inquire into anti-competitive agreements and abuse

dominant position ;
2. to determine whether an agreement has an appre
adverse effect on competition ;
3. enquire whether a combination has caused or is likely to cause
an appreciable adverse effect on competition ;
4. to issue 'cease and desist' orders ;
5. to grant such interim relief as would be necessary
particular case ;
6. to award compensation ;
7. to impose fines ;
8. to order division of dominant undertakings ;
9. to order demerger ;
10. to order cost for frivolous complaints
Power of CCI to regulate its own procedure (Section 36)

The CCI shall have the same powers as are vested in the Civil Court und
er The Code of Civil Procedure , 1908 while trying a suit, in respect of the
following matters, namely:
1. summoning and enforcing the attendance of any person and examining them on
oath
2. requiring the discovery and production of documents
3. receiving the evidence on affidavit
4. issuing the commissions for examination of witnesses or documents
5. requisitioning any public record/document from any office
6. dismissing an application in default or deciding it
7. any other such matter as may be prescribed
Section 36 empowers the Commission to call upon the

experts from fields of economics, commerce, accountancy, international trade
12.15
or from any other discipline to assist the
Commission in the conduct of any inquiry before it.
Director General
Section 16 empowers the central Government to appoint a Director General
an such number of additional,
joint, deputy or assistant Director Generals or other advisers, consultants
or offices .These persons shall 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 tirade, economics, law etc.
Director General is an important functionary under the Competition Acta.2
002.He assists
the Commission by furnishing Investigation Report in respect of such matters as are
referred to him
by the CCI .He also assists the commission in conducting proceedings
of enquiries which are initiated by the CCI suo moto.
Duties Powers and Functions of CCI

As per Section 18 of the Act, duties of the CCI are:
a) to eliminate practices having adverse effect on competition;
b) to promote and sustain competition;
c) to protect interests of consumers and
d) to ensure freedom of trade carried on by other participants, in markets in
India.
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.
Acts taking place outside India but having an effect on

competition in India
Competition Commission of India will have jurisdiction even if both the parties t
o an
agreement are outside. Section 32 extends the jurisdiction of Competition Commiss
ion
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 appreciab
le
12.16
adverse effect on competition in relevant market in India, notwithstanding
that, an
agreement referred to in Section 3 has been entered into outside India; or any par
ty to such agreement is outside India; or
 any enterprise abusing the dominant position is outside India; or
 a combination has taken place outside India; or
 any party to combination is outside India; or
 any other matter or practice or action arising out of such agreement o
r dominant position or
 Combination is outside India.
Appearance before Commission
As per Section 35 of the Act, following persons are entitled to appear before the
Commission
 a complainant; or
 a defendant; or
 the Director General
They may either appear in person or authorise any of the following:
i. a chartered accountant who has obtained a certificate of practice; or
ii. a company secretary who has obtained a certificate of practice;
iii. a cost accountant and who has obtained a certificate of practice;
iv. a legal practitioner that is an advocate, vakil or an attorney of any High
Court including a pleader in practice
Competition Advocacy
Section 49 of the Competition Act, 2002 provides that while formulating a
policy on competition including review of laws related to competition,
the central Government may make a
referee to the ACCI for its opinion on the possible effects of such a
policy on competition.
The Commission shall within 60 days of receipt of such a reference, given its opinion o
n
it to the Central Government. Thereafter the central Government may formulate s
uch
policy as it deems fit It may be noted that the rule of the Commission is advisory
and the opinion given by it shall not be binding on the Central Government.
The CCI had also been assigned the role to take prescribed suitable
measures for the following;
 Promotion of competition advocacy;
12.17
 Creating awareness about the competition; and
 Imparting training about competition issues. 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.
Competition Appellate Tribunal

Section
53A empowers the Central Government to establish by notification an Appellate
Tribunal to be known as Competition Appellate Tribunal –
a) to hear and dispose of appeals against any direction issued or decision made or orde
r passed by the Commission under the Act.
b) to adjudicate on claim of compensation.
Section 53D provides that the Chairperson of the Appellate Tribunal shall be a perso
n, who is, or has been a
Judge of the Supreme Court or the Chief Justice of a High Court.
The Chairperson or a member
of the Appellate Tribunal 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, no Chairperson or other member of the Appellate Tribunal shall hold office as
such after he has attained,
 in the case of the Chairperson, the age of sixty-eight years;
 in the case of any other member of the Appellate Tribunal, the age of sixty-
five years.
CASE LAW
In January 2013, CCI modified clauses in agreements between rea
l estate company DLF Limited and apartment buyers.
Some of the important modifications were:
1. The Builder cannot undertake any additional construction beyond the ap
proved
building plan given to the buyers. The builder will not have complete ownership
of
open spaces within the residential project area not sold. Not just the buyer but
the
builder will be liable for any defaults. All payments made by the buyers must be ba
sed
12.18
on construction milestones and not "on demand". The builder will not have the s
ole power to form the owner’s association..
2. On 8 February 2013, CCI imposed a penalty of Rs.24 crore (US$
8.4 million) on
the Board of Control for Cricket in India (BCCI) for misusing its dominant positi
on.
The CCI found that IPL team ownership agreements were unfair and discriminatory
,
and that the terms of the IPL franchise agreements were loaded in favour of BCCI
and
franchises had no say in the terms of the contract. The CCI ordered BCCI to "c
ease
and desist" from any practice in future denying market access t
o potential
competitors and not use its regulatory powers in deciding matters relating
to its commercial activities
Penalties
3. Power to impose penalty for non- penalty which may extend to one pe
furnishing of r
4. information on combination cent of the total turnover
5. or the
Penalty for making false statement Not be less than Rs.50 lacs but
which may extend to Rs.1 crore
Penalty for failure to comply with directions of Fine which may extend to Rs. 1
Commission and Director General lakh for each day during
which such failure continues subject
to a maximum of Rs.1 crore
Power to impose penalty for non-furnishing of penalty which may extend to 1%
information on combination of the total
turnover or the assets,
whichever is higher
Execution of orders of the Commission imposing monetary penalty
12.19
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.
12.20
COPRA 1986
Consumer Protection Act, 1986
Object of the Act

According to the preamble, the Act is 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 consumers' disputes and for
matters connected therewith.
It may be noted that Consumer Protection Act (COPRA) is in addition to and not
in derogation of any other law. [Section 3]
Basic Rights of Consumers (Section 6)

The basic rights of consumers that are sought to be promoted and protected are:
a) the right to be protected against marketing of goods and services which are
hazardous to life and property;
b) 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;
c) the right to be assured ,wherever possible, access to variety of goods and
services at competitive prices;
d) the right to be heard and to be assured that consumers' interest will receive due
consideration at appropriate forums;
e) the right to seek redressal against unfair trade practices or restrictive trade
practices or unscrupulous exploitation of consumers ;and
f) the right to consumer education.
Consumer Protection Councils

Introduction
The interest 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.
Central Consumer Protection Council

 Section
4 provides that the Central Government shall, by notification, establish a Council t
o be known as
Central Protection Council, which shall consist of the following members:
 The Minister-
in charge of Consumer affairs in the Central Government, who shall be its
Chairman; and
 Such number of other official members representing such interests
as may be prescribed.
13. 1
COPRA 1986
 The Central Council shall consist of 150 members and the term of council shall be 3
years.
 The Central Council shall meet as when necessary, but atleast one meeting shall
be held every year.
State Consumer Protection Council

 Section
7 provides that the State government shall ,by notification ,establish a Council t
o be known as Consumer Protection Council for
(name of the State), which shall consist of the following members :
 The Minister-in -
charge of consumer affairs in the State Government, who shall be its
Chairman:
 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 members or non-
official members, not exceeding 10, as
may be nominated by the Central Government.
 The State Council shall meet as and when necessary but not less than two mee
tings
shall be held every year. The procedure to be observed in regard to the transactio
n of its business at such meetings shall be prescribed by the State Government.
District Consumer Protection Council

 Section 8 provides that the State Govt. shall establish for every district by
notification, a council to be known as the District Consumer Protection
Council, which shall consist of the following members:
 The Controller of the district (by whatever name called), who shall be its Chair
man
 Such number of other official and non-
official members representing such interests
as may be prescribed by the State Govt.
 The District Council shall meet as and when necessary but not less than two mee
tings shall be held every year.
Redressal Machinery under the Act

Introduction
The Consumer Protection Act, 1986 provides for a three-tier quasi-judicial
redressal machinery at the District, State and National levels for redressal of
consumer disputes and grievances. They are known as
Consumer Disputes Redressal Agencies.
District Consumer Disputes Redressal Forum

13. 2
COPRA 1986
 The Act provides for the establishment of a District Forum by the State Govt.
in each district of the State by notification. The State Govt. may establish
more than one District Forum in a district if it thinks fit to do so.
 Section 10 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 s
hall be its President; and
 two other members ,one of whom shall be a woman
 The members of District Forum
should be persons of ability, integrity and standing; and should have experience
relating to economics, law, commerce, accountancy, industry, public affairs or
administration. They must be graduates and over 35 years of age.
 Every member of the District Forum shall hold office for a term of 5 years or u
pto the age of 65 years, whichever is earlier, and shall be eligible for re-
appointment.
Jurisdiction
Section
11 provides for the jurisdiction of the District Forum under the following two
criteria:
a) Pecuniary limits:
The District Forum can entertain complaints where the
value of goods or services and the compensation, if any, claimed is upto Rs.20 lakhs
b) Territorial limits:
The District Forum can entertain complaints if any of the opposite party ordina
rily resides or carries on business or personally works for gain or has a branch office;
or the cause of action arises within the local limits of its jurisdiction.
State Consumer Disputes Redressal Commission

 The Act provides for the establishment of the State Consumer Disputes
Redressal Commission by the State Govt. in the State by notification.
 Section 16 provides that each State Commission shall consist of:
 a person who is, or has been a judge of a High Court appointed by
the State Govt. (in consultation with the chief
Justice of the High Court),who shall be its President; and
 not less than two, and not more than such members, as may be prescribed,
and one of whom shall be a woman.
 The members of State Commission should be persons
of ability, integrity and standing; and should have experience relating to
economic, law, commerce, accountancy, industry, public affairs
or administration. They must be graduates and over 35 years.
13. 3
COPRA 1986
 Every member of the State Commission shall hold office for a term of 5 years o
r upto the age of 65 years, whichever is earlier, and shall be eligible for re-
appointed.
Jurisdiction (Section 17)

The jurisdiction of the State Commission is as follows:
a) Original Jurisdiction:
The State Commission can entertain complaints where the value of the
goods or services and the compensation, if any, claimed exceeds Rs 20 lakhs but
does not exceed Rs 1 crore. [Pecuniary Limits]
The State Commission can entertain complaints if any of the opposite party
ordinarily resides or carries on business or personally works for gain or has a branch
office; or the cause of action arises
within the local limits of its jurisdiction.[Territorial Limits]
b) Appellate Jurisdiction:
The State Commission also has the Jurisdiction to entertain appeals against the o
rders of any District Forum within the State.
c) Reversionary Jurisdiction:
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 of the same state.
National Consumer Disputes Redressal Commission

 The Act provides for the establishment of the National Consumer Disputes Redr
essal Commission by the Central Government by notification in the Official Gazette.
 Section 20 provides that the National Commission shall consist of:
 A person who is or has been a judge of the Supreme Court ,to be appointed
by the Central Govt.(in consultation with the Chief
Justice of India),who shall be its President;and
 Not less than four, and not more that such number of members, as may be p
rescribed, and one of whom shall be a woman.
 The members of National Commission should be persons of ability ,inte
grity and standing; and should have experience relating to economics,
law, commerce, accountancy, industry, public affairs or administration. They must
be graduates and over 35 years of age.
 Every member of the National Commission shall hold office for a term of 5 years o
r upto the age of 70 years, whichever is earlier and shall be eligible for re-
appointment.
Jurisdiction (Section 21)

The Jurisdiction of the National Commission is as follows :
13. 4
COPRA 1986
a) Original Jurisdiction:
The National Commission can entertain complaints where the value of the go
ods or services and the compensation, if any, claimed exceeds Rs.1 crore.
b) Appellate Jurisdiction:
The National Commission also has the jurisdiction to entertain appeals ag
ainst the original orders of any State Commission.
c) Reversionary Jurisdiction:
The National Commission also has the power to call for the reco
rds and pass
appropriate orders in any consumer dispute which is pending before or h
as been decided by any State Commission.
It may be noted that appeal against order of National Commission lies with Sup
reme
Court only in matters, where it exercises original jurisdiction i.e. when matter is ov
er Rs. 1 crore.
Various Time Limits
Time limit for filin A complaint must be filed within two years from the date on
g the Complaint which the cause of action arose. However, the District Forum,
State Commission or National Commission may enterta
in
complaint even after the expiry of two years, if it is satisfie
d
that there was sufficient cause for not filing the compl
aint
within prescribed period of two years
Time limit for filin An appeal to the :
g the I. State Commission against the orders of District Forum .
Appeal II. National Commission against the original orders of Stat
e
Commission
III. Supreme Court against the original orders of Na
tional
Commission
must be filed within 30 days from the date of receiving th
e
order of District Forum/State Commission/N
ational
Commission, Supreme Court may entertain an appeal eve
n
after the expiry of said 30 days if it is satisfied that there
was
sufficient cause of not filing the appeal within the prescribed
13. 5
COPRA 1986
period of 30 days.
Further, appellant shall be required to deposit 50% of
the
amount required to be paid as per the order of the Distric
t
Forum/State Commission/National Commission
or
Rs.25000/35000/50000 respectively, whichever is less
Nature and Scope of remedies (Section 14)

Where the goods complained against suffer from any of the defects specified i
n 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 th

e goods in question;
b) To replace the goods with new goods of similar description which shall be free from
any defect;
c) To return the prices of the charges, as the case may be, to the complainant;
d) To pay the amount of compensation to the consumer for any loss or injury suffe
red in addition, punitive damages can be granted;
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;
g) Not to offer the hazardous goods for sale;
h) To withdraw the hazardous goods from being offered for sale;
i) To cease manufacture of hazardous goods;
j) To pay such sum as may be determined by it;
k) To issue corrective advertisement; and
l) To provide for adequate costs to parties.
Definitions (Section 2)
Complainant [Sec 2(1)(b)] Complainant means -

a) a consumer
b) any voluntary consumer association registered und
er any law.
c) the Central and any State Government
d) one or more consumers, where there are nu
merous consumers having the same interest or
e) in case of death of a consumer, his leg
13. 6
COPRA 1986
al heir or
representative, who or which makes a complaint.
An association of persons to have locus sta
ndee as
consumer, it is necessary that all the individuals formi
ng
the association must be the consumer having purchase
d
the same goods or hired the same services from the s
ame party.
In case the affected consumer is unable to
file the
complaint due to ignorance, illiteracy or poverty
, any
recognized consumer association may file the complain
t
as per the above clause (b).Thus, rule of 'pr
ivity of
contract' or 'locus standee', which permits only
the
aggrieved party to take action, has very rightly been
set aside in the spirit of public interest.
Complaint [Sec 2(1)(c)] Complaint means any allegation in writing

made by a complainant that :
I. an unfair trade practice or restrictive trade pra
ctice has been adopted by any trader;
II. the goods bought by him or agreed to be bo
ught by him suffer from one or more defects;
III. the services hired or availed of or agreed to b
e hired
or availed of by him suffer from deficiency
in any respect ;
IV. the trader has charged a price in excess of the
price :
a. Fixed under any law.
b. Displayed on the goods or any package
containing such goods;
c. displayed on the price list exhibited by him;
or
d. agreed between the parties ;
V. goods which will be hazardous to life and proper
13. 7
COPRA 1986
ty
when used are being offered for sale to the pu
blic
VI. Services which will be hazardous to life and
safety of the public when used,
are being offered by the service provider
With a view to obtain any relief provided by la
w under this Act.
Consumer [Sec 2(1)(d)] Consumer means-

i. In respect of goods ,any person who purchases
goods for a consideration but does not include a
person who has purchased goods for re-sale or
commercial purpose. Such consideration may be
paid or promised or partly paid and partl
y
promised or under the system of deferre
d payment;
ii. Any person who is using the goods with the
permission of the buyer of such goods
as specified in clause (I);
iii. In respect of service, any person who hires or
avails service for a consideration but does not
include a person who has availed service for
commercial purpose. Such consideration may
be paid or promised or partly paid and partly
promised or under the system of deferr
ed
payment;
iv. Any person who is beneficiary under the service
with the permission of the hirer of such
deferred payment;
v. Any person who purchases goods or avails
services exclusively for the purpose of earning
his livelihood by means of self-employment
Consumer Dispute [Sec Consumer dispute means
2(1)(e)] dispute where the person against
a complaint has been made, denies or disputes the
allegation contained in the complaint.
The allegation referred to may relate to any unfair
trade
practice adopted by a trader, or against any
defect in
goods or against any deficiency in services or
against charging an exorbitant price.
13. 8
COPRA 1986
Goods [Sec 2(1)(i)] ‘Goods’ means goods as defined in the

Sale of goods Act,1930
As per Sale of Goods Act, goods means every kind of
moveable property other than actionable claims and
money and includes stock and shares, growing crops,
grass or 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 common products would come
within the purview of this definition.
Shares have been specifically included in 'goods'.
However, shares before allotment are not goods,
as they do not exist before the allotment is
made. To constitute a consumer, there must be
transaction of goods. Hence, a prospective investor
cannot be regarded as a consumer within the meaning
of this Act. [Morgan Stanley Mutual Fund v Kartik Das]
Services [Sec 2(1)(o)] “service” means 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, insurance,
transport, processing, supply of electrical or other
energy, board or lodging or both housing
construction, entertainment, amusement or the
purveying of news of
other information, but does not include the
rendering of any free of charge or under a
contract of personal service.
'Potential Users' mean those who are capable of using
the service.
[Lucknow Development Authority v M.K.Gupta]
Restrictive Trade Practices 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
13. 9
COPRA 1986
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.
Commercial Purpose A person who has purchased goods for “Commercial
purpose” shall not be deemed to be a consumer. A
purchase of goods could be said to be for a
'commercial purpose' only
if two conditions are satisfied ,namely :
i. the goods must have been purchased for being u
sed in some profit making activity
an a large scale; and
ii. there should be close and direct nexus between t
he purchase of goods and the profit
making activity.
Thus, a person who buys goods for re sale or
commercial purposes or avails services for commercial
purposes is specifically excluded from the definition of
‘consumer’.
For example, a person buying one truck or tempo or

sewing machine or one computer for
the purpose of earning his livelihood by self-
employment will be eligible to qualify as
consumer. However, if a person buys two type-
writers, out of which one is used by a person
employed by him, he will not be eligible to file
a
complaint as a consumer because a person buyin
g goods for re-sale or commercial
purpose is not a consumer.
For instance, a lawyer purchased a computer and a

printer for his office. the printer started giving
trouble form the day one.
The lawyer lodges a complaint under the
Consumer Protection Act. In this case
the printer has not been purchased by the
advocate
for any commercial purpose or for resale but for use
in his office to improve efficiency of his office.
Therefore he will be treated as consumer and will suc
ceed in his complaint.
[Sanjay Krishna Kant v M/s Grooy Communications & Others]
13. 10
COPRA 1986
Who is a Consumer?
Following are some of the important decided cases in this regard:
1. Railway passengers travelling on payment of fare is consumer [GM, South\ Eastern
Railways v Anand Prasad Sinha]
2. Beneficiary of bank guarantee is a consumer. [Union Bank v Seppo Rally]
3. Parents who bring the child to hospital and the child both are consumers. [Spring
Meadows Hospital v Hharjot Ahluwalia]
4. Allottees of house by Housing Board are consumer [UP Avas Gram Vikas Parishad v
Garima shukla]
5. A person obtaining water from a government agency and paying water bills for the
water supplied is a consumer. [Nagrik Parishad v Garhwal Jal Sanathan]
6. The widow of a deceased policy holder is a consumer ,as the term 'Consumer'
includes any beneficiary of service other than the person who hires the service for
consideration. [A Narsamma v LIC of India]
Who is not a consumer?

Following are some of the important decided cases in this regard :
1. A charitable trust is not a consumer if it has purchased machinery for its
diagnostic center, when only 10% patients are provided free services and charges
are levied on remaining patients. Thus, the use is for ‘commercial purpose'
and hence it is not a ‘consumer’. [Kalpvrukksha Charitable Trust v Toshniwala Brothers ]
2. Person buying goods for manufacture of another product is not consumer as the
goods were intends for commercial purpose. [Rajeev Metal Works v MMTC]
3. A tenant is not consumer when landlord has not agreed to render any service to
tenant in lease agreement. [Laxmiben Laxmichand Shah v Sakerben Kanji]
4. A hospital will not be liable, if the hospital happens to be a govt. hospital where
no fee is charged for consultation and treatment,but only a token registration fee
is charged. [Indian Medical Assoc. V.P. Shanta & others]
Contract of Personal Service and Contract for Personal Service:

In contract of personal service, the master can order or require what is to be done a
nd how it is to be
done. This is out of the purview of COPRA as the master can always dispense
with the service of the servant and hence no occasion would arise for him to
complaint about service of the servant.
However, in contract for personal service, the person cannot order what is to be don
e and how it is to
be done. Services rendered in professional category could be treated as contract for
personal service and hence covered under COPRA.
13. 11
COPRA 1986
Consumer Forums cannot decide disputes arising out of contract of appointment
of personal service. For
instance, Civil servants and Professors in Universities are appointed under
contract of personal service and hence are not covered under COPRA .
[Centre for Research & Industrial Development v Madan Lal Sahni]
Professional Services like Doctors,Engineers,CAs,CS,s,Advocates ,etc. are covered under
COPRA. [Ram Ralsh v Smt.Ranjana]
What is Service?
1. Passengers travelling by trains on payment of the stipulated fare charged fo
r 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.
[GM, South Eastern Railways v Anand Prasad Sinha]
2. Similarly telephone services availed for consideration is a service.
[District Manager, Telephones Patna v. Lalit Kr. Baija ]
3. Service rendered to patient by a medical practitioner(except where the
doctor renders service free of charge to every patien ) by way of
construction diagnosis and treatment, both medical and
surgical, would fall within the ambit of service.
[Indian Medical Association v V.P.Shanta & others ]
4. Accepting deposits from public agreeing to pay interest is service. If interest
and principal is not paid on due dates, it is deficiency of service and consumer forums
can issue orders for payment of outstanding dues.
[Kalawati v United Vaish]
5. Education is an activity which comes within the ambit of 'service' because service
means service of any description which is made available to potential users under
this Act.
[The CBSE v Consumer Disputes Redressal Forum]
What is not a service?

] Following are some of the important decided cases in this regard:
1. Conducting examination is not service as a candidate appearing for examinat
ion could not be regarded as a person who has hired or availed the services
of the University or Board for consideration .Thus, the University or Board in
conducting examination is not performing any service.
[Chairman, Board of Examination v Mohideen Abdul Kader]
2. Registration of documents by Govt. is not a service. A person presenting a document
for registration is not a consumer.There is no commercialization involved. Officers
who are doing the work of registration are doing the statutory duty.
[S.P. V Collector of stamps]
13. 12
COPRA 1986
3. Payment of taxes is not hiring of services. No complaint can be lodged
against Municipal Corporation for failure to carry out its statutory
duty of proper maintenance of drains, as payment of taxes is not hiring of
services.
[Sibnet Corporation v Commissioner,MCD,New Delhi]
4. Promotional activities of State and its agencies are not services and complainants are
not consumers,as facilities are provided by State and its agencies
without any specific consideration.
[T.N.Sethuraman v Goa,Daman and Diu Industrial Development Corporation]
5. Even if a litigant pays court fees, he is not hiring services of Court. The
Court is exercising sovereign function of dispensation of justice. Thus,
complaint against Court for delay
in judgement is not maintainable under Consumer Forums.
6. Free Services are not covered under CORPA. The employer (Govt. in this
case) deducted insurance premium from salary of employee, but failed to make
payment to LIC. When the employee died. LIC refused to pay as premium was not
paid. It was held that the employer was giving free service and hence he is not liable.
[State of Orissa v LIC]
7. It was held that if the premium is paid by a person to the agent of LIC but the
agents did not deposit the premium & during that period if the death
of the person takes place then the defendant cannot claim compensation
on the ground that there was no deficiency
of service on the part of LIC, in view of the fact that the agent does not have
either expressed or implied authority to collect the premium.
[Harshad J Shah v LIC of India]
Defects and Deficiencies
Defect [Sec Defect means any fault ,imperfection or shortcoming in

the quality, quantity, potency, purity or standard of any
2(1)(f)]
goods which is required to be maintained by or under
any law for the time being in force or under any contact
,express or implied, or as is claimed by the trader in any
manner whatsoever in relation to any goods.
In the case of Abhay Kumar Panda v Bajaj Auto Ltd.

where the motor vehicle sold to the petitioner was found
to have major manufacturing defects which could not be
removed despite several repairs, it was held to be
'defective' and the vehicle was ordered to be replaced.
Deficiency Deficiency means any fault, imperfection ,shortcoming or
13. 13
COPRA 1986
[Sec inadequacy in the quality ,nature manner of performance
of any service which is required to be maintained by or
2(1)(g)]
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.
In order to get any loss compensated for deficiency in
service, mere loss or injury is not enough. Loss or injury
must be coupled with negligence. The term 'negligence'
means absence of reasonable care which a prudent
person is expected to observe in a given set of
circumstances Thus, no compensation can be claimed
even in case of loss or damage, if it was not caused due to
negligence of the person. [Consumer Unity and Trust
Society v Bank of Baroda]
For instance, the driver of a bus suddenly applied the
brake to avoid a collision with a bullock cart and the bus
met with an accident resulting in the death of a
passenger .The legal heirs of the deceased lodged a
complaint with Consumer Forum for compensation on
the ground of deficiency in service .In the present case,
the accident that occurred had nothing to do with the
service provided but due to the direct result of the
accident. Further, there was no element of negligence on the part of
the driver, as he had applied the brakes to avoid collision. Hence, the
heirs of the deceased will not succeed in their complaint against the
transport company.
[Chairman, Thiruvalluvar Transport Corporation v Consumer
Protection Council]
Note: It may be noted that CORPA does not have any jurisdiction
in respect of any matter, if there is some special law dealing with that matter .
What is deficiency in Service?

1. Negligence in settlement of Insurance claim.
[Div.Manager,LIC of India v Bhavanam Srinivas Reddy]
2. Ornaments kept in the banks locker were found lost though the certificate recorded
by the custodian of the bank stated all lockers operated during the day had
been checked and found properly locked.
[Punjab National Bank v K .B. Shetty]
3. Issuing drafts on foreign banks where the bank had no account
causing inconvenience to the customer.
[Tarun Kumar Kaniyalal Soni v Punjab National Bank]
4. Honoring forged cheques.
[Corporation bank v Filmalaya (P)] Ltd.]
13. 14
COPRA 1986
What is not deficiency in Service?

Following are some of the important decided cases in this regard:
1. Disconnection of electric supply for non-
payment of charges by consumer is not deficiency in service. Electric Board
has power to discontinue supply. It was also held that electricity board can make
supplementary bill for escaped bill.
[Swastik Industries v Maharashtra State Electricity Board]
2. Refusal to give credit to customers on grounds that the unit belonged t
o a sick industry or was not economically viable on any other
grounds would not fall under deficiency of service as a bank is the sole
3. In airline services, delay due to bad weather and poor visibility is unforeseen
circumstances and hence there is no deficiency in service. Compensation can be
awarded only if there is negligence and loss suffered by complainant on account of
negligence.
[Indian Airlines Limited v Dr.V.J.Philip]
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.
13. 15
COPRA 1986
VII. Negligence cannot be attributed to 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 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.
Conclusion
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
1. 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. Whe 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.
National Commission held 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.
13. 16
COPRA 1986
2. Removal of ladder of an aircraft while disembarking by the passenger— deficiency in

Service
In Station Manager, Indian Airlines v. Dr. Jiteswar Ahir [First Appeal No. 270 of
1994 decided on 28.2.1996 (NCDRC)] when the complainan -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 Rs. 10 lakhs the airlines was willing to pay
Rs. 40,000 as compensation which according to them was the
maximum statutory liability of the Corporation under the Carriage by Air Act,
1972.
The National Commission, held that in terms of regulations relied upon
by the appellant Corporation, if it was proved that the accident caused to the
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.
In Ravneet Singh Bagga v. KLM Royal Dutch Fintimes

[1999(7) SCALE 43], the complainant booked a ticket 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
13. 17
COPRA 1986
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.
3. 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.
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.
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.
4. 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
13. 18
COPRA 1986
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 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.
5. Cases relating to Insurance claims

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.
In Harshad J. Shah v. Life Insurance Corporation of India 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 received by the Corporation, that the agent was
not authorised to collect the premium amount.
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
13. 19
COPRA 1986
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.
13. 20
EC act 1955
Essential Commodities Act, 1955
Introduction
The object of this Act is to control the production, supply and distribution of certain
commodities in the interest of the general public so as to secure equitable distribution of
essential commodities and their availability at fair prices.
Definitions
Collector 'Collector' includes an Additional Collector,
and such other officer not below the rank of sub-
divisional Officer as may be authorized
to perform the functions and exercise the
powers of the Collector under the Act.
Essential commodities [Sec.2A] 'Essential Commodities' means any of the
following commodities :
1. drugs;
2. fertilizers, 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. seeds of food-crops and seeds of fruits and vegetables;
seeds of cattle fodder; and jute seeds
8. any other article within the scope of Entry 33 in List III
in the seventh Schedule to the constitution, which may
be notified by the Central Govt. to be an essential
commodity.
Sugar [Sec 2(e)] Sugar means –
i. Form of sugar containing more than 90% of sucrose,
including sugar candy
ii. Khandsari sugar or bura sugar or crushed sugar or any
sugar in crystalline powdered form or
iii. Sugar in process in vacuum pan sugar factory, or raw
sugar.
Case law: In S.Samuel, AID. Harrisons Malayava v. Union of India, 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. In common parlance,
anyone who has taken tea would not say that he has taken or eaten food.
14. 1
EC act 1955
Powers of Central Government to Control Production, Supply
and Distribution etc., of Essential commodities [Section 3]
Issue of Orders [Section 3(1)]
The Central Govt. can issue orders in the following situations for regulating or
prohibiting the production, supply and distribution of essential commodities and trade
and commerce therein:
i. To maintain or to increase supplies of any essential commodity.
ii. To secure the equitable distribution of essential commodities.
iii. To secure the availability of essential commodities at fair price, or
iv. To secure an essential commodity for the defense of India or for the efficient conduct of
military operations.
Matters that can be included in the Order [Sec.3 (2)]

Central Govt. may issue an order which may provide for all or any of the following matters :
a) Regulating the production or manufacture of any essential commodity by licences,
permits etc;
b) Regulating the storage, transport, distribution, disposal, acquisition, use or
consumption of any essential commodity by licences, permits, etc.
c) Bringing under cultivation any waste land for growing thereon of food crops ;
d) Controlling the price at which any essential commodity may be bought or sold;
e) Prohibiting the withholding from sale of any essential commodity ordinarily kept for sale;
f) Requiring any person holding in stock, or engaged in the production, or in the business
of buying or selling, of any essential commodity
 To sell the whole or a specified part of the quantity held in stock or produced
or received by him ;or
 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 Govt. or State Govt. or to an officer or agent of such Govt. or to a
Corporation owned or controlled by such Govt. or to such other person or class of
persons and in such circumstances as may be specified in the order;
g) Regulating or prohibiting any class of commercial or financial transactions relating to
foodstuff which are likely to be detrimental to the public interest;
h) Collecting any information or statistics from persons engaged in the production of, or
trade and commerce in, any essential commodity by requiring them to produce for
inspection such books, accounts and records relating to their business and to furnish
such information relating thereto as may be specified in the order.
i) For the issue of licences or permits, the charging of fees thereof, deposit of sum, or
security as may be specified for the due performance of the conditions of licence
or permit, the forfeiture of the sum so deposited or any part thereof for contravention
of any conditions and the adjudication of such forfeiture by specified authority;
j) For the entry, search or examination of premises, aircraft, vessels, vehicles or other
conveyances and animals;
14. 2
EC act 1955
k) For the seizure of any articles, premises, aircraft, vessels, vehicles or other
conveyances and animals by a person authorized to make such entry, search or
examination.
Case Law
In Ambika Prasad Rajwade v. State of Chhattisgarh, it was held that the
classification in the Chhattisgarh Public Distribution System (Control) Order, 2004
excluding private persons altogether from running fair price shops while allowing
other agencies specified therein to run the fair price shops, is not unreasonable and
does not attract Article14 of the Constitution.
Pricing of Essential Commodities [Sec.3(3)]

When the commodities are being sold to Central/State Govt. in compliance of order u/s 3 (2)
(f), 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) Where no such agreement can be reached, the price calculated with reference to
controlled price;
c) The market price on the date of sale, where none of the above clauses applies.
Pricing during Emergency [Sec.3(3A)]

If Central Govt. is of the opinion that fixing the price of a particular foodstuff in a
particular locality is necessary for controlling price rise or preventing the hoarding of
such foodstuff in such locality, it may direct, by way of a notification, the price at
which the foodstuffs in such locality will be sold to general public. Such a notification is
valid for a maximum period of 3 months. For selling specified foodstuffs in the
specified locality, the seller shall be paid price in the same manner as provided u/s 3(2)(f).
Procurement Price for Food grains, Edible Oil and Oil Seeds [sec.3(3B)]
In relation to sale under Sec. 3(2)(f), where no notification has been issued u/s 3
(3A), or if issued, it has ceased to be in force, the procurement price as specified
by State Govt. with the prior approval of Central Govt. shall be paid having regard
to the following facts :
a) Controlled price;
b) General crop prospects;
c) Need for making availability at reasonable prices to the consumers;
d) Recommendations, if any, of the Agricultural; Price Commission.
Pricing for Sugar [Sec.3 (3C)]

In relation to sale of sugar u/s 3(2)(f), where no notification has been issued
under Sec.3 (3A), or if issued, it has ceased to be in force, the producer shall be paid such
price for sugar as determined by the Central Govt. after considering the following
factors:
a) Minimum price, if any fixed for sugarcane by the Central Govt.
b) Manufacturing cost of sugar
c) Duty or tax (if any) paid or payable thereon; and
14. 3
EC act 1955
d) Reasonable return on the capital employed in the business of manufacturing sugar.
The Central Govt. may determine different prices for different areas from time to time
or for different factories or for different factories or for different kinds of sugar.
Confiscation of Essential Commodities

Seizure and confiscation of Essential Commodities [Sec 6A]
 The expression 'Seize' means to take possession contrary to the wishes of
the owner of the property.'
 ‘Confiscation' is a mode by which courts can dispose off the property which
is seized. Confiscation is an action posterior to the seizure of an essential
commodity. A commodity which has been seized could be confiscated.
 Where an essential commodity is seized, a report of such seizure shall be made and
sent to the Collector of the district in which such essential commodity is seized.
 The Collector may direct for the production of the seized commodity before him and if
he is satisfied that there has been contravention of the order u/s 3 he may pass
order for confiscation of the essential commodity so seized along with any package
or covering in which such essential commodity is found and any animal,
vehicle, vessel or other conveyance used in carrying such essential commodity.
 If any food grains or edible oilseeds have been seized, an order for confiscation of
such food grains or edible oilseeds cannot be made by the Collector.
 Also the owner of any animal, vehicle, vessel or other conveyance shall be given an
option to pay fine not exceeding the market price at the date of seizure, in lieu of its
confiscation.
Issue of Show Cause Notice before confiscation of Essential

Commodity [Sec 6B]
 Before passing an order for confiscation, the owner of the essential commodity,
package, covering, animal, vehicle, vessel or other conveyance 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 being heard in the
matter.
 It may be noted that no order of confiscation can be made if the owner 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 without the
knowledge of the person in charge of the vehicle (if any) and each of them had
taken the necessary precaution against such use.
Appeal against Confiscation Order [Sec 6C]

 Any person aggrieved by an order of confiscation may appeal to the State Govt. within
one month from the date of passing the order.
 The State Govt. 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.
 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 in
14. 4
EC act 1955
accordance with the provisions of Sec.3(3B) or Sec.3(3C) or Sec 3(3), as the case
may be along with the reasonable interest calculated from the day of seizure.
Sale of Seized Commodity [Sec 6A (2)]

Where the Collector, on receiving a report of seizure or on inspection of any essential
commodity, is of the opinion that the essential commodity is subject to speedy
and natural decay or it is otherwise expedient in the public interest to do so, he may
make an order for the sale of the essential commodity:
a) at the controlled price ; or
b) by public auction ; or
c) through fair price shops at the price fixed by the Central Govt. or by the
State Govt., for the retail sale of such food grains to the public.
Disposal of Sale proceeds of Confiscated goods [Sec 6A (3)]

The sale proceeds of the essential commodity sold, after deduction of the expenses of
sale shall be paid to the owner in the following circumstances:
a) where no order of confiscation is ultimately passed by the Collector;
b) where an order passed on appeal u/s 6C(1) so requires;
c) where in a prosecution for the contravention of the order, the person concerned is
acquitted.
Offences and Penalties

Every offence punishable under the Act shall be cognizable. Before a Court can take
cognizance of any offence punishable under the Act, the following three
conditions must be satisfied:
i) there must be a report in writing;
ii) the report must be made by a public servant;
iii) presence of Mens Rea or guilty mind is a must.
Offence by Companies
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 the officer of the company, such a person shall be
deemed to be guilty of that offence and is liable to be proceeded against and
punished accordingly.
Some important terms

Mens Rea
In Nathulal v. State of Madhya Pradesh, 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 food grains 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
14. 5
EC act 1955
only where it is absolutely clear that the implementation of the object of the Statute would
otherwise be defeated. 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.
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.
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.
14. 6
LM Act 2009
Legal Metrology Act, 2009
Introduction
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.
Definitions
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
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 ,aquires or Assembles parts and claims the
end product to be a weight or measure manufactured by
himself
iii. puts, or causes to be put, his own mark on any complete
weight or measure made or manufactured by others.
Pre-packed Section 2 (l) define "pre-packaged commodity" as to mean a
commodity 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
International Organisation of Legal Metrology (OIML)

 The International Organization of Legal Metrology (OIML) is an intergovernmental
treaty organization whose membership includes Member States, countries.
 It was established in 1955 in order to promote the global harmonization of legal
metrology procedures
 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.
OIML Certificate System for Measuring Instruments

 The OIML Certificate System for Measuring Instruments was introduced in 1991 to
facilitate administrative procedures
 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
15. 1
LM Act 2009
Standard Weights and Measures

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
a) Base unit of length shall be the metre;
b) mass shall be the kilogram; time shall be the second;
c) electric current shall be the ampere;
d) thermodynamic temperature shall be the kelvin;
e) luminous intensity shall be the candela;
f) 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.
Section 7 of the Act states
a) the base units of weights and measures specified in section 5 shall be the
standard units of weights and measures.
b) The base unit of numeration specified in section 6 shall be the standard unit of
numeration.
c) 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
d) 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
a) No weight, measure or numeral, other than the standard weight, measure or
numeral, shall be used as a standard weight, measure or numeral.
b) No weight or measure, shall be manufactured or imported unless it conforms to the
standards of weight or measure specified under section 8.
Note: 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
a) 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,
b) 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.
Appointment and Power of Director, Controller and legal

metrology officers
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LM Act 2009
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
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
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, 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.
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. Unless the same is
verified and stamped within such time 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.
Section 20 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.
Prohibition of manufacture, repair or sale og weight or measure

without licence
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LM Act 2009
Section 23 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.
Section 24 Every person possessing using or intending to use any weight or measure,
shall, before putting such weight or measure into such use, have such weight or measure
verified.
Offences and Penalties

Section 25 penalty for use of non-standard Weight or measure may be 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.
Penalty for counterfeiting of seals

Section 44 provides that whoever counterfeits any seal, sells, or disposes counterfeit
seal, or possesses any counterfeit seal, or counterfeits or removes or tampers with any
stamp, or affixes the stamp so removed on, or inserts the same into, any other weight or
measure, shall be punished
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Transfer of Property Act, 1882
Introduction
Transfer of Property Act, 1882 is the general law relating to transfer of immovable
property. The principal objectives of the Act are:-
 To lay down uniform rules for transfer of property; and
 To complete the code of contract law so far as it relates to immovable property.
Meaning of Immovable Property

Section 3 only states the Immovable property doesn’t include standing timber, growing
crops and grass.
According to the General Clauses Act,1897, Immovable Property includes land,
benefit to arise out of land, things attached to the earth, or permanently fastened to
anything attached to the earth.
Thus, by combining the aforesaid two definitions, we can say that the Immovable
property includes land, benefits arising out of the land, things attached to the earth,
etc., but doesn’t include standing timber, growing crops and grass.
Examples of Immovable Property
The following have been recognised as immoveable property:
 Right to collect rents of immovable property;
 A right to way;
 The equity of redemption;
 The interest of mortgagee;
 Right to collect lac from trees;
 A right of fishery;
 Right to receive future rents and profits of land;
 Reversion in property leased;
 A factory
Meaning of Movable 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 Example – A 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).
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Examples of Movable Property

The following have been held to be movable property;
 Right of worship;
 Government promissory notes;
 Royalty;
 A right to recover maintenance allowance;
 Copyright;
 A decree for sale on a mortgage –deed;
 A decree for arrears of rent;
 A machinery which is not permanently attached to earth;
 Standing timber , growing crop and grass.
Distinction between moveable and immoveable property

The distinction between moveable and immoveable property was explained in the case of
Sukry Kurdepa v. Goondakull, 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.
Transfer Of Property[Section 5]
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.
"Living person" includes a company or association or body of individuals whether
incorporated or not.
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).
Who Can Transfer The Property?

Every person who is competent to contract and entitled to transferable property, or
authorised to dispose of property is competent to transfer such 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 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,
Raghava v. Srinivasa). 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.
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EXCEPTION
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.
Formalities of Transfer
1. Attestation
Attestation, in relation to a document, implies 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 proof 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.
2. 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.
3. 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. 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 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.
The words “wilful absentation” suggests want of bona fide in respect of particular
transaction (Joshua v. Alliance Bank). 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
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municipal corporation asks him to pay the arrears of tax, then B is responsible, and
if does not pay, then the arrears of tax may be made a charge on the property.
Transferable Property [Section 6]

Section 6 provides that, in general, every kind of property can be transferred from one person
to another.
However, following are the exceptions to this general rule i.e; in the following
cases, property can’t be transferred from one person to another:
1. Chance of an Heir Apparent/Spes Successions

The technical expression for the chance of an heir apparent succeeding to an
estate is called spes successions. It means succeeding to a property.
This means an interest which has not arisen but which may arise in future. It
is in anticipation or hope of succeeding to a estate of a deceased person. Such
a chance is not property and as such cannot be transferred. If it is transferred, the
transfer is wholly void.
For Example 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.,
 his surviving the widow, W, and
 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,).
2. Right of Re-Entry
This is a right which a lesser has against the leasee for breach of an express
condition of lease which provides that on its breach the leaser may re-enter the
land. The transferor reserves this right to himself after having parted with the
possession of the property. This right is for his personal benefit and cannot,
therefore, be transferred.
3. Transfer of Easement
Easement means an interest in land owned by another that entitles his holders to
a specific limited use or enjoyment.
As an easement confers no proprietary 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.
4. Interest Restricted in its Enjoyment
The cases which fall under this head includes the following:
a) The right of “Pujari” in a temple to receive offerings.
b) The right of a “Widow” under Hindu law to residence and maintenance. The
rights given in these cases are purely of a personal nature and cannot,
therefore, be transferred. These rights are restricted to the person to whom
they belong.
5. Right to Future Maintenance
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A right to future maintenance in whatsoever manner arising, can’t be transferred.
It is solely for the personal benefits of the person to whom it is granted.
However, the arrears of the past maintenance can be transferred.
6. Mere right to sue and actionable claim
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.
Mere rights to sue can’t be transferred. The right refers to a right to damages arising
both out of contracts as well as torts. However, if it is incidental to transfer of another
right, it can be transferred.
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.
7. Public Offices and Salaries ,Stipends, Pension, Etc .

Transfer of public offices and salaries, stipends, pension etc., cannot be transferred
on the grounds of public policy.
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 Example, A agrees to sell his land to B if B marries C. This is a condition precedent.
Validity of conditions as per Section 25

 The condition must not be impossible to fulfil.
 The condition must not be forbidden by law.
 It should not be of such a nature that if permitted it would defeat the provisions of any
law.
 It should not be fraudulent.
 The condition should not be such as to cause injury to the person or property of another.
 The condition should not be immoral or opposed to public policy.
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-fulfillment of condition.
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Illegal Restraints On Certain Alienations [Sections 10, 11 & 12]
Conditions Restraining Alienation [Sec. 10]

Where property is transferred, subject to condition, absolutely restraining the
transferee from parting with or disposing of his interest in the property, the
condition is void.
It may be noted that absolute restraint is void but partial restraint qualified
as to place or person may be valid and binding.
For e.g. A transfers property B on the condition that he should not alienate it in
favour of C, who is A’s competitor. This is only a partial restraint and is 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.
Restraint on Enjoyment [Sec. 11]

When a property is transferred absolutely, the transferee should be free to enjoy the
property in any manner he likes. If the transferor imposes any restraint on the
enjoyment of the property by the transferee, the restraint is treated as clog in the
enjoyment of the property by the transferee; the restraint is treated as void.
For e.g. A sales his house to B and he adds the condition that only B shall reside in
the house. The condition is invalid.
It may be noted that if a person transfers a property to another keeping some
other property for himself, he can impose certain conditions which may interfere
with the rights of enjoyment of the transferee so that the transferee can enjoy
the transferred property in a particular manner only.[Exception to Section 11].
Condition making interest determinable on insolvency or attempted alienation

[Section 12]
If a person transfers property to anyone subject to a condition that if the
transferee becomes insolvent, the property should revert to the transferor, such
condition is void.
This rule is subject to an exception in the case of lease. Thus, if a landlord
imposes a condition in the lease that if the lessee becomes insolvent, the lease
should come to an end , the condition is valid.
Transfer subject to illegal, impracticable condition, etc. [Sec. 25]

Section 25. provides that any interest created in a property under transfer, which
depends on a condition the performance or satisfaction of which is either
impracticable or disallowed under law or fraudulent or harmful to the person or
property of another, is invalid.
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Transfer For The Benefit Of Unborn Person And People[
Sections 13,14 & 16]
Transfer for the benefit of unborn person [Sec.13]
Section 13 deals with the transfer of property for the benefits of unborn persons.
Following are the important provision of Sec. 13:
a) No transfer can be made directly to an unborn person;
b) The interest in favour of unborn person must be preceded by a prior interest;
c) The prior interest must also be created by the same transfer ; and
d) The unborn person must be given 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 :
 it should be preceded by a life estate in favour of a living person; and
 it should comprise the whole of remaining interest of the transferor so that
there can be no further interest in favour of other.
For example, 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.
Rule Against Perpetuity [ Sec . 14]

The rule against perpetuity prohibits the vesting of interest beyond a certain
reasonable period. It prescribes the maximum period within which a future
interest must vest, and if the vesting is postponed beyond such period, the vesting is
void for remoteness. Such maximum period is called the perpetuity period.
As per Section 14, the perpetuity period consists of the life time of one or more
persons say A, B and C, all living at the date of transfer of property and the further
period of minority of a person, say the eldest son of C, (who shall be in existence
at the expiration of that period) to whom the interest is to belong. In simple words,
‘perpetuity period’ is the life or lives in being and the further period of minority of a
person.
Simply put, there can be any number of transfers between living major persons,
but if the ultimate, transferee is a minor, the ultimate transfer to him should
transfer all of the interest in the property to him. This is to ensure that the
property is not inalienable for an indefinite period after the death of the original
transferor.
The effect of this rule is that it prevents the property owner from transferring
and controlling his assets for an exceptionally long period after his death – a
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concept generally known as ‘control by the dead hand’. Such a contract would be
inoperative to the extent it violates the rule; the rest it would be allowed to
operate normally.
The rules contained in Setion 14 as regards transfer to unborn persons may be summed up
as follows:
a) If before property is ultimately transferred to an unborn person, it is
transferred to different persons for their successive lives, they should all be living
at the date of the transfer.
b) The unborn person must come into existence on or before the expiration of
the existence life or lives named by the transferor.
c) He must be given the entire estate of the transferor and the transfer must be
absolute.
d) The vesting of the estate can’t be postponed to period longer than is
necessary for him to attain the majority.
Following are the exceptions to the rule against perpetuity:

1. Gift to charity.
2. Personal agreement i.e.; agreement which do not create any interest in the
property.
3. Contracts for perpetual renewal of leases.
4. Charges created on a property. The creation of charge is not a transfer of an\
interest in the property.
Transfer to Take Effect or Not on Failure of Prior Interest [Sec. 16]

Sometimes an interest is contended to take effect after or upon the failure of a prior
interest by reason of rules contained in Sections 13 & 14. In such a case when the
prior interest fails, the subsequent interest also fails.
For e.g. A transfers his property to B and his intended wife successively for their
lives and then to their eldest son for his life and then to C. The prior interest in
favour of the son of B, A fails u/s 13 & therefore the subsequent interst in favour
of C also fails.
When the prior interest fails not by reason of Sec. 13 & 14 but due to any reason,
the subsequent interest doesn’t always fail.
For e.g. A made a bequest to his wife for life and after her death to his death to
his younger son by her. The bequest to wife failed for want of registration but the
interest of the son will not fail, it will be valid.
Vested And Contingent Interest

Vested Interest [Sec. 19]
An interest is said to be vested when it is not subject to the happening of event or

if subject to the happening of an event, then the event is such that it is bound to
happen. For instance, movement of property from ‘A’ to ‘B’ on the death of C. Here,
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B has the vested interest because interest is subject to the happening of an event i.e.,
death of C and which is bound to happen.
It may be noted that a vested interest is not defeated by the death of the
transferee. If the transferee dies before he takes possession of the property, it
passes on to his legal heirs. Further, vested interest can also be re-transferred by
the transferee before he obtains the possession of the property.
Contingent Interest [ Sec. 21]
Where on a transfer of property, an interest therein is created in favour of a

person to take effect only on the happening or non-happening of a specified
uncertain event, such person thereby acquires a contingent interest in the
property. Such interest becomes a vested interest on the happening or non-
happening of the specified uncertain event.
For instance A promise to gift a car to B, if he marries C. Here B acquires a contingent

interest in the car because C may or may not marry B. If C marries B, the
contingent interest of B in the car becomes a vested interest.
It may be noted that a contingent interest is defeated by the death of the tranferee.
If the transferee dies before he takes possession of the property, the property doesn’t
pass on to his legal heirs. Similarly transferee can’t further re-transfer the property
before he acquires the possession of the property.
Distinction between a vested and a contingent interest

The following are the principal points of distinction between a vested and a contingent
interest:
 Vested interest creates an immediate proprietary interest in the property though the
enjoyment may be postponed to a future date. A contingent interest on the other
hand is dependent 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
perfect; in case of a contingent interest, the title is as yet imperfect but may become
perfect on the fulfilment of a stipulated condition.
 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.
 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.
 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.
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
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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.
For example 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 interest 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.
Important Doctrines
Doctrine of Election [Section 35]
 Election means ‘choice’. Doctrine of Election provides that where a property is
transferred to a person, then the transferee can make a choice between whether
to accept the transfer or to reject it. If he is accepting the transfer, then the
transferee shall, along with the benefits of transfer , also accept the burden of
transfer.
 In nutshell, it means that a man taking a benefit under an instrument must also
bear the burden. In other words, a man cannot approbate and reprobate or blow
hot and cold.
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 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).
 For example, A transfers his house to B, by a gift and in the same gift deed asks
B to transfer his shop to C. B may elect to accept the transfer or reject the
transfer. If B accepts the transfer, he will get house but in that case he will also
have to transfer the shop to C.
Example 2 – 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.
 Example 3 – 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 donates to his
wife an annuity of Rs. 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 Rs. 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 Rs. 200 which her husband has given to her. But
she can claim other benefit i.e., Rs. 1,000.
 It may be noted that 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
asks the donee, by another deed, to part with his own property, there is no
question of election.
 In case the person upon whom, a benefit is conferred rejects it, the property
which was attempted to be transferred to him will revert to the transferor and
it is the transferor who will compensate the disappointed transferee. If the transferor
dies, before the transferee makes the election, then the legal heirs of the
transferor will compensate the disappointed transferee out of the inherited
assets.
Doctrine of Holding Out ‘OR’ Transfer by Ostensible Owner [Section
41]
 Doctrine of Holding Out makes an exception to the rule that a person cannot
confer a better title than he himself has. An ostensible owner is one who has
all the indicia of ownership without being the real owner.
 Where the true owner of property, expressly or impliedly, permits another person
to hold himself as the true owner of the property and a third party, in good
faith, deals with the person permitted, then such third party will acquire a good
title as against the true owner.
 Following conditions are required to be complied with, so as to provide the
protection to the third party against the true owner:
 The transferor is the ostensible owner;

 He is ostensible owner by the express or implied consent of the true
owner;
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 The transfer is for consideration;
 The transferee has acted in good faith.
 For example, Ramesh made a gift of property to Suresh 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. Suresh 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.
 Example 2 – 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 [Section 43]

 Doctrine of Feeding the Grant by Estoppel provides that where a person
fraudently or erroneously represents that he is authorized to transfer certain
immovable 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.
 In order to invoke this section, the transferee must prove that:
 There was a fraudulent or erroneous representation;
 It was to the effect that the transferor is entitled to transfer the immovable
property;
 The transferor is found to have subsequently acquired the interest;
 The transfer of property was for consideration;
 The transferee has not rescinded the contract;
 The transferee acted in good faith.
 For example, Santa, a Hindu, who has separated from his father Banta, sells to Janta
three fields, X, Y and Z, representing that Santa is authorised to transfer the same.
Of these fields, Z does not belong to Santa, it having been retained by Banta on
the partition, but on Banta’s dying, Santa as heir obtains Z. Janta, not having rescinded
the contract of sale may require Santa 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 Lis Pendens ‘OR’ Lite Pendente [Section 52]

 The expression lis pendens means a pending litigation. The doctrine of lis pendens is
expressed in the maxim ‘ut lite pendente nihil innovateur’ which means
nothing new should be introduced during the pendency of a suit.
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 Doctrine of lis pendens provides that where a suit or proceeding is pending in
any Court between two persons with respect to any immovable property, the
property cannot be transferred or otherwise dealt with by any party, except under
the authority of the Court. If any party transfers or otherwise deals with that
property the transferee will be bound by the result of the suit or proceeding,
whether or not he had notice of the suit or proceeding.
 For example, there is a dispute between A and B with regard to ownership of
property X. A files a suit against B in a Court of law. A may either win or lose the
suit. If he wins, he gets the property. If he loses, B gets the property. Now suppose
during the pendency of the suit, A, professing to be the owner of the Property,
sells it to C. If the suit ends in A’s favour, no difficulty arises. If it ends in B’s
favour, C cannot retain the property. C is bound by the decree of the Court and
must return the property to B. He cannot even take the plea that he had no
notice of the pending litigation.
 It may be noted that the doctrine of lis pendens applies only when the property
has been transferred by a party to the litigation and it does not apply when
property has been transferred by as stranger i.e., the person who is not a party
to the litigation.
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.
 For Example 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
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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.
 Example 2 -: A 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.
Doctrine of Part Performance [Section 53 A]

 Doctrine of part performance prevents a transferor from taking any advantage on
account of non-registration of documents, provided that the transferee has
performed his part of the contract and in pursuance to that performance, the
transferee has taken possession of some part of the property.
 Essential conditions for the operation of the doctrine of part-performance:
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 ready to fulfill his part of the obligation under
the contract.
 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)
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 For example, 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 obligation . As registration of the transfer of land has
not been effected, A , the transferor, seeks to evict B from the land. In such
a situation, doctrine of part performance operates and it provides that A cannot
evict B from the land as B will not be allowed to suffer simply because formality
of registration has not been complied with.
 Exception : However, nothing in this section shall affect the rights of a
transferee for consideration, who has no notice of the contract or of part
performance. Thus, the doctrine of part performance shall not affect the rights
of a subsequent transferee for consideration without of the earlier contract and of
its being party performed.
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:
 the payment of the debts of the transferor or any other person taking any interest
under the transferor,
 portions for children or any other person taking any interest in the property under
the transfer, and
 for the preservation and maintenance of the property transferred.
Lease & Licence

Definition & Meaning of lease
The term ‘lease’ has been defined under Section 105 of the Transfer of Property Act,
1882. As per this, lease is a transaction whereby one person (i.e., lessor) transfers
the right to enjoy in an immovable property to another person (i.e., lessee) either
for a certain time or in perpetuity, in return of a consideration.
Following are the essential elements of a lease transaction:
1. There must be transferor (lessor) and a transferee (lessee) , both of whom have
agreed for the construction.
2. The lease must be for certain time or in perpetuity
3. There must be transfer of the right to enjoy immovable property.
4. The transaction must be in consideration of a price paid or promised.
5. The transaction must be in consideration of money.
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Definition and Meaning of Licence
The term ‘licence’ has been defined under Section 52 of the Indian Easements Act, 1882
as follows:
Where one person grants to another, or to a definite number of other persons, a
right to do, or continue to do, in or upon the immovable property of the grantor,
something which would, in the absence of such right, be unlawful, and such right does
not amount to an easement or an interest in the property, the right is called licence.
Thus, if a document gives only a right to another to come on the land or premises
and use that in some way or the other, while it remains in the possession and
control of the owner , it will be licence.
A licence is a personal right between the licensor and the licensee, and therefore,
a transferee from the licensor is not bound by the licence.
Difference between Lease and Licence
Lease Licence
 In a lease there is a transfer of  While in case of a licence, there
interest in land. is no such transfer, although the
 Leases are generally heritable. licensee acquires a right to
 Death of the lessor does not occupy the land.
terminate the lease.  Licences are not heritable.
 Generally the leases are not  Death of the licensor terminates
revocable at the will of the lessor. the licence.
 The transferee of the lessor is  But bare licences can be revoked
bound by the lease . at the will of the licenser.
 In the case of breach of lease deed, the  the transferee of the licensor is
aggrieved party can claim for the specific not bound by the licence.
performance  In case of breach of licence deed
the aggrieved party can onl
claim the compensation.
The question whether a particular grant/document amounts to a lease or licence depends

upon the intention of the parties and it is the substance of the agreement which is the
decisive consideration (Associated Hotels of India v. R.N. Kapoor)
Types of Tenancies
Following are the various types of tenancies:
1. 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-
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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.
2. 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.
3. 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.
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.
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
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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.
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 (gives up) his
interest 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. 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.
Duties of the Lessor:

Following are some of the duties of the lessor:
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.
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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.
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.
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.
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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.
Sale
Under Section 54 of the Transfer of Property 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
 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).
 The subject matter is transferable property.
 There is a transfer of ownership. This feature distinguishes a sale from mortgage, lease
etc., where there is no such transfer of ownership.
 It must be an exchange for a price paid or promised or part paid and part promised.
 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
 by a registered instrument if it is of the value of Rs. 100 and upwards, and
 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
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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.
Mortgage
Definition and Meaning of Mortgage
The term mortgage has been defined under Section 58 of the Transfer of Property
Act, 1882. As per this, a mortgage is the transfer of an interest in specific immovable
property for the purpose of securing any of the following :
a) The payment of money advanced or to be advanced by way of loan; or
b) An existing or future debt; or
c) The performance of an engagement which may give rise to pecuniary liabilities.
In a mortgage, out of the bundle of rights which constitute ownership, some are
transferred to the mortgagee and other rights remain vested in the mortgagor.
The word ‘specific’ shows that the description of the immovable property
should not only be free from ambiguity and uncertainty, but that it should be specific
as distinguished from general. A proper description of the property is necessary
to create a mortgage and for its registration.
It may be noted that in order to constitute a mortgage, the transfer of interest in
immovable property must be for one of the aforesaid purposes. The word
‘engagement’ means a contract and the qualification “as may give rise to pecuniary
liability” means a contract the non-fulfilment of which may result in liability to
pay money.
Kinds of Mortgage
1. Simple Mortgage
 The mortgagor undertakes personal liability for repayment.
 The mortgaged property is not required to be delivered to the mortgagee,
 On mortgagor’s default in making payment, mortgagee is entitled to cause
mortgaged property to be sold, after obtaining a decree from the court .
 There is no foreclosure of the mortgaged property
2. Mortgage by Conditional Sale

 The mortgagor ostensibly sells the mortgaged property.
 Here the condition being that the sale shall be absolute in default
of payment by a particular date or that the sale shall be void on payment
by a particular date and the property retransferred.
 The possession of the mortgage property is required to be delivered.
 The remedy to the mortgagee is by way of foreclosure and not by way
of sale.
3. English Mortgage
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( It is a combination of Simple Mortgage and Mortgage by Conditional Sale)
 The mortgaged property is transferred absolutely by the mortgagor to the
mortgagee.
 There is a personal covenant to repay on a certain date
 The remedy to the mortgagee is by way of sale and not by way of
foreclosure.
4. Usufructuary Mortgage
 The profit of the property is appropriated by the mortgagee towards
discharge of the advance.
 There is delivery of possession of the mortgaged property to the mortgagee.
 The property is returned when the amount due is personally paid or is
discharged by rents and profits rececived.
 There is no remedy to the mortgagee either by way of sale or by way of
foreclosure.
5. Mortgage by deposit of Title Deeds/ Equitable Mortgage

 It is created by delivery of the material Title Deeds in respect of the
mortgaged property to the mortgagee.
 All the provisions relating to Simple Mortgage shall apply to this kind of
mortgage.
6. Anomalous Mortgage
 This mortgage is the combination of two or more other kinds of mortgages.
 The remedy to the mortgagee may be by way of sale or by way of
foreclosure, depending the terms of the Deed.
Right of Redemption [Section 60]

Right of redemption means the right to resume those rights which the mortgagor
has parted with. The right of redemption is exercised after the payment of the
mortgaged money to the mortgagee at the proper time and at the proper place.
Any provision or condition which prevents this right of redemption is called ‘clog
(obstruction) on redemption’ and is such void. For example, a stipulation in a
usufructuary mortgage that if the mortgage is not redeemed within a certain
period from the date of mortgage, the mortgagee would become the absolute
owner. This is a clog on right of redemption of the mortgagor and, hence, is
void.
Marshalling [Section 56]

 Where the owner of two or more mortgaged properties sells one of them to
another, the purchaser has the statutory right to insist on the mortgage-debt
being satisfied out of the property or properties not sold to him. This right
is called the right of marshalling by a subsequent purchaser.
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TOPA 1882
 It may be noted this right of the purchaser cannot prejudice the rights of the
mortgagee or persons claiming under him. Nor this right can be enforced, if there
is a contract to the contrary.
 For example, A the owner of three properties X, Y and Z, mortgages them to
B. Subsequently A sells the property X to C. Here C has the right of marshalling,
i.e., he can vompel B to satisfy his mortgage-debt out of the properties Y and Z,
not sold to him.
 It may be noted that doctrine of marshalling is also dealt under Section 81 of
TOPA. Section 81 protects the rights of subsequent mortgagee in the same
manner as Section 56 protects the rights of subsequent purchaser.
Mortgage Charge
A mortgage is transfer of an interest in the
A charge is not the transfer of any interest
property made by the mortgagor as a in the property though it is security for the
security for the loan payment of an amount
A mortgage can only be created by act of A charge may be created by act of parties
parties. or by operation of law
A mortgage deed must be registered and Charge need not be made in writing, and if
attested by two witnesses reduced to writing, it need not be attested
or registered
In certain types of mortgage (viz., But in charge, the charge-holder cannot
mortgage by conditional sale and foreclose though he can get the property
anomalous mortgage) the mortgagor can sold as in a simple mortgage
foreclose the mortgaged property
In a mortgage, the transferee of mortgaged A charge as a general rule, cannot be
property from the mortgagor, can only enforced against a transferee for
acquire the remaining interest of the consideration without notice
mortgagor, and is therefore, only bound by
the mortgage
In a mortgage, there can be security as In a charge created by act of parties, the
well as personal liability specification of the particular fund or
property negatives a personal liability and
the remedy of the charge-holder is against
the property only
Important Terms
1. Charge
A charge is created when immovable property of one person is made security for
payment of money to another. No interest in the property is transferred. The
concept of charge is regulated by the provisions of Transfer of Property Act, 1882
which are applicable to a Simple Mortgage.
2. Exchange
The term ‘exchange’ has been defined in Section 118 of the Transfer of
Property Act, 1882. This section defines the term exchange in the following
words: “When two persons mutually transfer the ownership of one thing for
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TOPA 1882
ownership of another, neither thing or both things being money only, the
transaction is called “exchange”.
Essentials –
 The person making the exchange must be competent to contract.
 There must be mutual consent.
 There is a mutual transfer of ownership though things and interests may not be
identical.
 Neither party must have paid money only.
This Section applies to both moveable and immoveable property.
An exchange can be immovable property as well as movable property. An
exchange of immovable property is governed by the provisions of Transfer
of Property Act, 1882 whereas an exchange of movable property is called barter
and it is governed by the provisions of Indian Contract Act, 1872.
For example, exchange of car for two scooters or exchange of house for 10
hectares of land.
3. Gift
Section 122 of the Transfer of Property Act, 1882 defines the term ‘gift’. As
per this, ’gift’ is the transfer of certain existing movable or immovable
property made voluntarily or without consideration, by one person, called the
donor, to another called the donee, and accepted by or on behalf of the donee.
Thus, the essentials of a valid gift are:
 Gift must be existing property and not of future property;
 Gifts must be voluntarily i.e., it should not be induced by coercion, undue
influence, fraud, misrepresentation;
 It should be without consideration i.e., it can be for natural love and affection
or for past consideration barred by law of limitation but it cannot be for
present or future consideration;
 It must be accepted by the donee.
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 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
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TOPA 1882
document is not registered. Will the gift by 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,
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.
For Example, 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 descendants die before A, B dies without descendents during A’s
lifetime. A may take back the field.
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.
Actionable Claim
The term ‘Actionable Claim’ has been defined in Section 3 of the Transfer of
Property Act, 1882. As per this section, actionable claim means a claim to any
debt, other than a debt secured by mortgage of immovable property or by
hypothecation or pledge of movable property, or to any beneficial interest in
movable 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 existing , accruing , conditional or contingent.
Simply stated, an actionable claim means a claim to any unsecured debt or a claim to
any beneficial interest in movable property, not in possession of the claimant. The
debt or beneficial interest may be existing , accruing, conditional or contingent.
For example, A borrows Rs. 5000/- from B at 12% per annum interest on 1st
April, 2006 and promises to pay back the amount with interest on 1st July, 2006. Till
1st July, 2006, the debt is an accruing debt and is an actionable claim.
It may be noted that a person can have a actionable claim, even without consideration.
Further, such person’s claim will not be affected by claim of subsequent transferee with
consideration.
Illustrations of actionable claims:
i. Arrears of rent accrual constitute a ‘debt’ so it is an actionable claim (Sheu Gobind
Singh v. Gauri Prasad, ).
ii. Provident Fund that is standing to the credit of a member of the Provident Fund.
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TOPA 1882
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).
Illustrations of 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).
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RERA 2016
Real Estate (Regulation and Development) Act,
2016
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.
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.
Salient Features of the act:

I. Establish the Real Estate Regulatory Authority for regulation and promotion of the
real estate sector
II. Ensure sale of plot, apartment of building, as the case may be, or sale of real estate
project, in an efficient and transparent manner
III. Ensure protect the interest of consumers in the real estate sector
IV. 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 RERA
V. Regulates transactions between buyers and promoters of residential real estate
projects
VI. Establishes state level regulatory authorities called RERAs
VII. Residential real estate projects, with some exceptions, need to be registered with
RERAs
VIII. 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
IX. 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
X. 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
XI. Right to Legal Representation on behalf of client by CS/CA/CMA or legal
practitioners
XII. Imposes stringent penalty on promoter, real estate agent and also prescribes
imprisonment.
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Advantages of RERA:
Important definitions:
1. "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;
2. "Person" includes,—
i. an individual;
ii. a HUF;
iii. a company;
iv. a partnership firm or LLP, as the case may be;
v. a competent authority;
vi. an AOP or a BOI whether incorporated or not;
vii. a co-operative society registered under co-operative societies’ law;
viii. other notified entity;
3. "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;
4. "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
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thereof into apartments, for the purpose of selling all or some of the apartments
to other persons and includes his assignees; or
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;
5. "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;
6. ‘Appropriate Government’ (Sec 2 (g))

 For the Union territory without Legislature, the Central Government;
 for the Union territory of Puducherry, the Union territory Government;
 for the Union territory of Delhi, the Central Ministry of Urban Development;
 for the State, the State Government.
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RERA 2016
Responsibilities of the appropriate Government
a) To notify Rules for the implementation of the Act, within 6 months of its
commencement.
b) To establish the Regulatory Authority within 1 year from its commencement i.e.
maximum by 30th April, 2017.
c) To designate an officer (preferably Housing Secretary) as interim Regulatory
Authority, until the establishment of a full time Regulatory Authority.
d) To establish the Appellate Tribunal within 1 year from its commencement i.e.
maximum by 30th April, 2017.
e) 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) To appoint officers and other employees of Regulatory Authority and the Appellate
Tribunal.
h) To identify office space etc. and other infrastructure for its functioning.
i) To constitute a ‘Real Estate Regulatory Fund’.
j) The Central Government (i.e. the Ministry of HUPA) is required to establish the
Central Advisory Council.
Projects exempt from the ambit of the Act

The following projects do not require to be registered under the Act:
 Area of land does not exceed 500 Sq. Meters
 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 500 square
meters or the number of apartments proposed to be developed does not exceed 8,
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.
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Granting of Registration by the Authority

On receipt of the application, the Authority shall within 30 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
7 days of the expiry of the said period of 30 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 (problem) 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 (important) 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.
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RERA 2016
Revocation of registration
The Authority may, on receipt of a complaint or suo-moto 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 registration granted to the promoter shall not be revoked unless the Authority has
given to the promoter not less than 30 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, 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
accordance with 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 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
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RERA 2016
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 u/s 9.
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 or 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.
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.
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 10% 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.
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 30 days, and in
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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.
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
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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.
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.
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.
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.
The Authority shall consist of a Chairperson and not less than two whole time
Members to be appointed by the appropriate 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.
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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.
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.
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:
17. 10
RERA 2016
Responsibilities of the ‘Regulatory Authority
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.
THE REAL ESTATE APPELLATE TRIBUNAL
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RERA 2016
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.
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.
 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 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
17. 12
RERA 2016
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
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.
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RERA 2016
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.
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.
Appeal to High 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
17. 14
RERA 2016
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.
Real Estate Regulatory Authority and Appellate Tribunal
ROLE OF COMPANY SECRETARIES
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.
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RERA 2016
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.
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.
17. 16
Benami Transaction Act 1988
The Benami Transactions (Prohibition) Act, 1988
Introduction
The Benami Transactions (Prohibition) Act, 1988 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.
The amended law empowers the specified authorities to provisionally attach benami
properties which can eventually be confiscated.
Salient Features of the act 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 lays down the procedure for determination and related penal consequences in the
case of a prohibited benami transactions.
 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
1. Benami Property [Section 2(8)].
Benami Property means any property which is the subject matter of a benami
transaction and also includes the proceeds from such property.
2. 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—
18. 1
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;
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.
3. Benamidar [Section 2(10)]

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.
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.
18. 2
 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.
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.
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.
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.
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.
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:-
The person specified as a benamidar therein
18. 3
Any person referred to as the beneficial owner therein or identified as such
Any interested party,including a banking company
Any person who has made a claim in respect of the property
However, the Adjudicating Authority shall issue notice within a period of 30 days from
the date on which a reference has been received. Further, the notice shall provide a
period of time of not less than 30 days to the person to whom such notice is issued to
furnish the information sought.
 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, 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.
Confiscation and vesting of benami property

Section 27 deals with confiscation and vesting of benami property.
18. 4
 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.
 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 without his
having knowledge of the benami transaction. [sub-section 2]
 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 3]
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.
Adjudication procedure
Order of confiscation by CG under. [Section 26(3)]
Appeal against the order of CG before Appellate tribunal. [Section 30]
Appeal to the high court against the order of appellate tribunal. [Section 49]
Party aggrieved by any decision or order of the Appellate Tribunal may file an
appeal to the High Court within 60 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.
18. 5
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).
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.
Offences by Companies
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 proceeded against and punished.
18. 6
Prevention of Money Laundering Act
PREVENTION OF MONEY LAUNDERING ACT

Introduction
 The purpose and object of the Act is prevention of money laundering, which simply
means conversion of tainted (black) money into untainted(white) money.
 Money laundering is the processing of criminal proceeds to disguise its illegal origin.
 Terrorism, illegal arms sales, financial crimes, smuggling and the activities of
organized 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 legitimize the ill-gotten gains through money
laundering.
Process of Money Laundering

Money is Laundered in following three stages :
Placement:
Here, the launderer introduces his illegal profits into the financial system by breaking
up large sums of money into smaller sums.
Layering:
Here, the launderer engages in a series of conversions or movements of funds to
distance them from their source.
Integration:
Here, the Launderer integrates the smaller amounts into larger sums and enters the
legitimate economy by investing into real estate, business ventures, film industry etc.
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. But postponing
action is dangerous. The more it is deferred, the more organised crime will increase.
As with the damaged integrity of an individual financial institution, there is a damping effect
on foreign direct. Fighting money laundering and terrorist financing is therefore a part of
creating a business friendly environment which is a precondition for lasting economic
development.
Impact of Money Laundering

Money laundering process may create the following impact on the society
 Widespread use of bribery in government offices leading to corruption.
 Control over vast sector of economy by handful of people through investment by unfair
means
 Infiltration of banking and financial institutions through organized crimes.
 Dampen social fabric and ethical standards prevalent in the society.
19.1
 Weakens the democratic institution
Global initiatives in the prevention of money laundering

1. Fiancial Action Task Force (FATF)
FATF was established in 1989. It is an international body which promotes measures
taken up to counteract the world wide impact of money laundering
Main tasks/functions of FATF are:
 Review the techniques adopted for money laundering
 Checks the initiatives made by the countries to counteract money laundering
 Spread awareness among non-member countries also
Thus, FATF study, examine and evaluate the current situation, defines the policy and
initiatives measures that can act as solution to the problem of money laundering.
2. Prevention of Money Laundering Act, 2002

To counteract the harms caused by money laundering and with a view to prevent the
same, Prevention of Money Laundering Act, 2002 was enacted. This Act provides for
offences, punishments in lieu of money laundering, confiscation attachment and
other adjudication provisions so as to ensure effective prevention of money
laundering.
3. 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. The convention also
establishes the principle that domestic bank secrecy provisions should not
interfere with international criminal investigations.
4. 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. 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,
19.2
 Particularly serious crimes, such as, drug offences, arms dealing, terrorist
offences etc. and other offences which generate large profits.
5. 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.
6. 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.
Definitions
Proceeds of Crime means 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 such
property.
Attachment [Sec 2(1)(d)] It defines attachment as to mean prohibition of
transfer, conversion, disposition or movement of
property by an order issued under Chapter III
Property [Sec.2(1)(v)] 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 [Sec.2(1)(n)]The term intermediary has been defined as to mean a
stock broker ,sub-broker, share transfer agent, banker to
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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 Sec.12 of SEBI
Act 1992
Definition and Meaning of 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 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 year.
Attachment of property involved in money laundering

Where the Director or any officer not below the rank of Deputy Director authorized 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.
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.
Tibetan monk under ED lens

New Delhi: Enforcement Directorate has seized properties worth Rs 1.68 crore
acquired by a Tibetan monk here allegedly in contravention of money laundering
laws, and launched a probe against him.
ED sources said three properties with recorded purchase value of Rs 1.68 crore in the
national capital have been attached under Prevention of Money Laundering Act
(PMLA) which were acquired by Karma Lobsang Bhutia, also known as 10th Bo
Gankar Rinpoche of Karma Kagyu sect.
The current market value of these properties could be much higher, they said. The
ED's Delhi Zonal unit is investigating a case under Foreign Exchange Management Act
(FEMA) and PMLA involving alleged fraudulent financial activities by the
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monk. Himachal Pradesh Police had arrested the monk earlier, and incriminating
material were recovered and seized from his premises at Joginder Nagar in Mandi
district, they said.
Vesting of Property in Central Government (Section 9)

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 encumbrance 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 for a suit of damages.
Obligation 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 10 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 order, levy
a fine on such banking company, financial institution or intermediary which shall not
be less than Rs.10, 000 but may extend to Rs.1,00, 000 for each failure.
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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 or 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 u/s 3 has been committed, any lace within the limits of the area assigned to him
or in respect of which he is authorized.
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
authorized 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
Under Section 20 where any property has been seized under Section 17 or Section 18 and
the officer authorized by the director has reason to believe that such property is
required to be retained for the purpose of adjudication u/s. 8, such property may be
retained for a period of not exceeding three months from the end of the month in which
such property was seized and on expiry of the period of three months the property shall
be returned to the person from whom such property was seized unless the Adjudicating
Authority permits the retention of such property beyond the said period.
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 u/s 8, it shall be presumed that the remaining
transactions form part of such inter-connected transactions unless otherwise proved to
the satisfaction of the adjudicating Authority.
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
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of information for the prevention of any offence under this Act or under the corresponding
law in force in that country or investigation of cases relating to any offence under the Act.
KYC Policy
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). Detailed guidelines based on the Recommendations of the Financial
Action Task Force and the paper issued on Customer Due Diligence (CDD) for banks by
the Basel Committee on Banking Supervision, with indicative suggestions wherever
considered necessary, have been issued. Banks have been advised to ensure that a
proper policy framework on ‘Know Your Customer’ and Anti Money Laundering
measures is formulated with the approval of their Board and put in place
 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.
 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
 With effect from April 1, 2012, banks should not make payment of
cheques/drafts/pay orders/banker’s cheques bearing that date or any
subsequent date, if they are presented beyond the period of three months from the
date of such instrument.
 Banks should ensure that the provisions of Foreign Contribution (Regulation) Act,
2010, wherever applicable, are strictly adhered to.
Banks should frame their KYC policies incorporating the following four key elements:
a) Customer Acceptance Policy;
b) Customer Identification Procedures;
c) Monitoring of Transactions; and
d) Risk Management
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INDIAN CONTRACT ACT, 1872
Topic 1: AGREEMENT
Agreement: “Every promise and every set of promises, forming consideration for each
other, is an agreement.” [Sec. 2(e)]. In simple words, an agreement means a
promise. It is created when a person makes an offer to another person and that
person accepts it.
It is clear from the above definition that an agreement is created by exchange or

promises by the parties.
But, what is a promise? “A proposal, when accepted, becomes a promise.”[Sec.2 (b)]
Thus it is clear that agreement is created when one person proposes to another and
the other accepts it, irrespective of the fact that it is enforceable by law or not.
AGREEMENT = OFFER + ACCEPTANCE OF THE OFFER.
PROPOSAL AND ACCEPTANCE
PROPOSAL OR OFFER
The term ‘proposal’ has been defined in the Indian Contract Act as
 When one person signifies
 to another
 his willingness to do or
 to 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.[Sec.2(a)]
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 The person making the proposal is known as the ‘Proposer’, or ‘offeror’ and
 The person to whom it is made is known as the ‘Offeree’.
On acceptance of the proposal-
 The person making the proposal is called the ‘Promisor’ and
 The person accepting the proposal is called the ‘Promisee’ or the
‘Acceptor’.[Sec.2(c)]
Basic Characteristics of a Proposal

A valid proposal is said to be constituted when it possesses the following basic
characteristics:
1. At least two parties. In order to make a proposal – there must at least two
parties, i.e. the proposer and the offeree or acceptor.
2. A proposal may be positive or negative. It is positive when the proposer expresses
his willingness to do something. When the proposer expresses his willingness to
abstain from doing anything, it is negative proposal.
3. A proposal must be made to obtain assent. A proposal must be made with a view
to obtaining the assent of the offeree.
4. Proposal must be made with an intention to create relations. Whether a proposal
is made with or without any intention of parties is determined by the terms of
the agreement as well as by the surrounding circumstances of the proposal.
5. It must be signified or communicated. Every proposal is complete only when the
proposer signifies or communicates it to the party to whom he wants to
communicate it. If the intended party does not come to know about the offer,
the offer is incomplete.
TYPES OF OFFERS
The offers may be classified on the following basis:
1. On the Basis of Mode of Offer: The mode of offer may either-

(i) Express Offer. An offer made in words, written or spoken.
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(ii) Implied Offer. An offer made otherwise than in words. Such an offer is
inferred from the conduct of parties and circumstances of the case.
2. On the Basis of Offeree: There are two types of offers on the basis of Offeree-
(i) Specific Offer. An offer made to specific or a particular or an ascertained
person. Such an offer can be accepted by the particular or specific person to
whom it has been made and none else.[Boulton v.Jones (1857)2 H & N 564]
(ii) General Offer. An offer made to the public at large or to the whole world.
Any person from among the public who has knowledge of it may accept such
an offer.
Distinction between Specific and General Offer
Basis of
Specific offer General offer
distinction
A specific offer is an offer
A general offer is an offer made to
1. Meaning made to a particular or
public at large.
specific person.
It is accepted by any one from
The person, to whom it has
2. Acceptance among the public who had the
been made, accepts it.
knowledge of it.
It is accepted in the same It is accepted only by performance
3. Mode of
mode as defined in the offer of conditions or by doing the desired
acceptance
itself. act.
It continues up to reasonable It continues till it is accepted by
4.
time or till is accepted or any person by performance of
Continuation
revoked. conditions of it or it is withdrawn.
3. On the Basis of Nature of Offer: On the basis of their nature, offer may also be
classified as-
(i) Cross offer. When two persons make identical offer (i.e. similar in terms,
conditions etc.) to each other, without having knowledge of each other’s offer,
are known as cross offers. They are independent and identical offers of the
respective parties. Such offers do no constitute a contract even though both
the parties intend to do or not to do the same thing. Only when one of the
parties accepts the offer of the other party, contract comes into existence.
(ii) Counter offer. When an offer is accepted on the terms and conditions, other
than set out by the offerer, it is not an acceptance but a counter offer. A
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counter offer is, in fact, not only a rejection of the original offer but is also a
new offer by the original offeree.
(iii) Standing offer. A standing offer is an offer, which is open for acceptance over
a period of time. This is also known as continuing or open offer.
WHAT IS NOT PROPOSAL?

There are certain communications or documents, which resemble as proposals but, in
fact, they are not proposals. They are either:
× Intention to put a proposal: The objective of proposal is to get the assent of the
other party whereas the intention to put a proposal is merely an expression or
declaration by a person that he intends to offer something in future.
× Invitation to proposal: The objective of proposal is to get the assent of the other
party but the invitation to proposal is made with an intention to receive a
proposal from other. The acceptance of offer creates an agreement whereas the
acceptance of invitation to proposal gives birth to a proposal. For example:
× Catalogue or price list.
× A banker’s catalogue.
× Menu card.
× Quotation of price.
× Prospectus inviting
× Time table of a carrier. (Railways, roadways or airlines)
ACCEPTANCE
According to Sec. 2(b)

“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.
Who May Accept? Acceptance may be given by the following:

1. In case of specific offer. Only the person to whom the offer is made may give the
acceptance. The underlying principle is that no person can give himself a contractual
right by interposing in an offer which was not intended for him.
2. In case of a general offer. Any person from among the public who has knowledge of
the offer may accept such an offer.
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ILLUSTRATIONS
1. Abhiram advertises in the newspaper that he will pay rupees one
thousand to anyone who restores to him his lost son. Decide who is
entitled for reward in the following cases:
a. Mr. Khoji saw the boy at a railway station and sent the telegram to
the boy’s father.
b. Servant Ramu Kaka without knowledge of this reward finds Abhiram’s
lost son and restore him to Abhiram.
Ans. In the case(a): When an offer is addressed to an uncertain body of
individuals i.e. 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. 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 [HARBHAJANLAL V/s
HARCHARANLAL]. Thus, Mr. Khoji has substantially performed the
conditions and is entitled to the reward.
In the case (b): Referring to the case mentioned above it is further

stated that the claimant must have the prior knowledge of the reward
before doing that act or providing that information. An acceptance never
precedes an offer which is not communicated. Similarly, performance of
conditions of an offer without the knowledge of the specific offer is no
acceptance [LALMAN SHUKLA V. GAURI DUTT (1913)]. Thus, Ramu
Kaka brought the boy without the knowledge of the reward and hence he
is not entitled to reward.
2. Shambu Dayal started “self-service” system in his shop. Smt. Prakash

entered the shop, took a basket and after taking the articles of her
choice into the basket reached the cashier for payments. The cashier
refuses to accept the price. Can Shambhu Dayal be compelled to sell the
said articles to Smt. Prakash? Decide.
Ans. No, as self service store is INVITATION TO OFFER & not offer.
3. "Good Girl" Soap Co. advertised that it would give a reward of Rs.
1,000 who developed skin disease after using, "Good Girl" soap of the
company for a certain period according to the printed directions. Miss
Rakhi purchased "Good Girl" and developed skin disease in spite of using
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this soap according to the printed instructions. She claimed reward of Rs.
1,000. The company refused the reward on the ground that offer was
not made to her and that in any case she had not communicated her
acceptance of the offer. Decide whether Miss Rakhi can claim the reward
or not. Refer the relevant case law, if any.
Answer: General offer: Yes, Miss Rakhi can claim the reward of Rs.
1,000 because the advertisement issued by the company is an offer made
to the public in general and hence anyone can accept and do the desired
act. Relevant case law is CARLILL V. CARBOLIC SMOKE BALL CO .
4. A sends an offer to B to sell his second-car for Rs. 40,000 with a

condition that if B does not reply within a week, he (A) shall treat the
offer as accepted. Is A correct in his proposition? What shall be the
position if B communicates his acceptance after one week?
Ans: Acceptance to an offer cannot be implied merely from the silence of
the offeree, even if it is expressly stated in the offer itself. So in the
given problem, if B remains silent, it does not amount to acceptance.
Essentials/Legal Rules of Valid Acceptance

For a valid acceptance of a proposal, certain legal rules must be observed. Some of
the rules are given in the Act itself while a few others have been laid down by the
Courts while deciding the cases. A few important rules of acceptance are summarized
as under:
 Acceptance must be absolute and unqualified.[Sec.7(1)]
 Acceptance must be in prescribed manner.
 Acceptance may be given by performance of conditions or act required by the
offeror.(Sec.8)
 It may be given by acceptance of consideration forwarded or act required by
the offeror.(Sec.8)
 It may express or implied.
 It must be given within specified or reasonable time.
 It must be given while the offer is in force.
 It must not precede an offer.
 It must be given by the person to whom offer is made.
 Acceptance must be communicated.
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Topic 2: CONTRACT
According to Section 2(h) of the Act, ‘An agreement enforceable by law is a
contract.’
Enforceability of the agreement: Every agreement is not a contract. Only an

agreement enforceable by law is a contract. An agreement is enforceable by law only
when it creates legal rights and obligations of the parties. Enforceability of the
agreement depends on the intention of the parties to the agreement as well as the
fulfillment of requirements of a valid contract.
CONTRACT = AGREEMENT + ENFORCEABILITY OF THE AGREEMENT.
ESSENTIALS OF A VALID CONTRACT
Section 10 states.
 All agreements are contracts
 if they are made by the free consent of
 parties competent to contract,
 for lawful consideration and with a lawful object,
 And are not hereby expressly declared to be void.
1. Plurality of parties. There must be at least two persons or parties. One of them
is known as ‘proposer’ or ‘promisor’ and other one is known an ‘offeree’ or
‘promisee’.
2. Proposal and acceptance (i.e. agreement)
3. Intention to create legal relations. For an agreement to be a contract, it must

be able to create legal relations. Whether or not any agreement creates legal
relations between the parties, would depend upon the intentions of the parties to
the contract.
In all social, domestic, moral, religious or political agreements, the usual
presumption is that the parties do not intend to create obligation. However, in
business agreements, usual presumption is that the parties intend to create legal
obligations. But, when the parties in a business transaction intend to rely on good
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faith and do want to go to the court of law, such transaction is not legally
binding.
4. Contractual Capacity. Only legally competent persons can make valid agreement.
The law presumes that every person is competent to enter into contract if he
fulfills the following conditions:
(i) He is a major.
(ii) He is of sound mind; and
(iii) He is not disqualified from contracting by any law of the land to which he is a
subject.
5. Consent or Consensus ad idem. Consent is the essence of a contract. The parties

are said to consent when they agree upon the same thing in the same
sense.(Sec.13) It means that both the parties must have ‘unision or meeting of
mind or mutually of assent’ (i.e. two minds with one intention) with regard to
the subject-matter of the contract. This is technically known as consensus ad
idem.
6. Free consent. Consent is said to be free when it is not caused by (i) coercion, or
(ii) undue influence, or (iii) fraud, or (iv) mis-representation, or (v) mistake.
(Sec.14).
7. Consideration. Generally, every agreement to be enforceable by law must be

supported by consideration’. Consideration means something, which the promisor
receives from his promise. In fact, it is the price for promise paid by the promisee
to the promisor. It may be in cash or kind.
Consideration must be lawful and real and not illusory. It must have some value
in terms of money. However, it may not be adequate. Nominal consideration
may even be enough for a valid contract if the parties are satisfied. But
agreements without consideration are always void subject to certain exception.
8. Lawful objects or consideration. Another essential of a contract is the lawful object

or consideration. Any agreement for an unlawful object or consideration is void ab-
initio. An agreement will be unlawful in any of the following circumstances:
(i) If it (agreement) is forbidden by law; or
(ii) If it is of such a nature that if permitted, would defeat the provisions of
any law; or
(iii) If it is fraudulent; or
(iv) If it involves or implies injury to the person or property of another; or
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(v) If the Court regards it as immoral; or
(vi) If the Court regards it against public policy.(Sec.23)
EXAMPLE
Determine In The Following Cases Whether The Consideration Is Lawful Or Unlawful?
Sr. Lawful/ Unlawful

Case
No Consideration
A agrees to sell his house to B for 10,000 rupees. Here B's
promise to pay the sum of 10,000 rupees is the
1. consideration for A's promise to sell the house, and A's
promise to sell the house is the consideration for B's
promise to pay the 10,000 rupees.
‘A’ promises to pay B 1,000 rupees at the end of six
months, if C, who owes that sum to B, fails to pay it. B
2 promises to grant time to C accordingly. Here the promise-
of each party is the consideration for the promise of the
other party
‘A’ promises, for a certain sum paid to him by B, to make
good to B the value of his ship if it is wrecked on a certain
3 voyage. Here A's promise is the consideration for B's
payment and B's payment is the consideration for A's
promise
A promises to maintain B's child and B promises to pay A
4
1,000 rupees yearly for the purpose.
A, B and C enter into an agreement for the division among
5 them of gains acquired, or- to be acquired, by them by
fraud.
A's estate is sold for arrears of revenue under the
provisions of an Act of the Legislature, by which the
defaulter is prohibited from purchasing, the estate. B, upon
6
an understanding with A, becomes the purchaser, and agrees
to convey the estate to A upon receiving from him the
price which B has paid.
9. Certainty of meaning. Agreements with certainty of meaning are only enforceable

by law. Agreements, the meaning of which is not certain, or which is not capable
of being made certain are void (Sec.29). The parties must agree upon the terms
which are definite without further agreement of the parties. If, however, the
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meaning of agreement can be made certain from the facts and circumstances of
the case, it will be a valid contract.
10. Possibility of performance. An agreement to be a valid contract must also be

possible to be performed. The terms of the agreement must be capable of
performance physically as well as legally. An agreement to do an impossible act is
void. (Sec.56).
11. Agreements not declared void. An agreement, which possesses all the essential of
a valid agreement, is generally a valid contract. However, if any such agreement
is expressly declared void by the law of the land, it is void. Agreements having
unlawful object or consideration, agreements without consideration, agreement in
restraint of trade or marriage, etc. are some of the expressly declared void
agreements.
12. Compliance of Legal formalities. Generally no legal formalities are required to be

complied with for a valid contract. A contract may be written, oral or gestural
(by signals).
However, Section 10, states that a contract should be made in writing or in the
presence of witnesses or be registered, if required by any law of the land.
Various law of our country requires that some formalities should be complied
with for an agreement to be enforceable.
For instance, agreements for transfer of property must also be written,
witnessed and registered. These are some examples where certain legal
formalities are required to be complied with the enforcement of agreement by
the law.
AGREEMENT VS. CONTRACT
All Contracts are Agreements but

All Agreements are not Contracts
On comparing the meaning of the two terms i.e. contract and agreement, it is
revealed that agreement is a wider terms than the term contract. That is why it is
repeated by experts “All contracts are agreements but all agreements are not
contracts.”
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All Agreements are not Contracts
The term agreement is a wider term than the term contract. It includes variety of
agreements such as personal, social, domestic, lawful, unlawful, void, voidable, etc.
Some of them are enforceable by law and others are not. Those agreements, which
are not enforceable by law, are definitely not contracts as per section 2(h). Hence,
it is generally said that all agreements are not contracts. A few examples of such
agreements are given to show that all agreements are not contracts.
1. Certain domestic and family agreements.
2. Political agreements/promises.
3. Commercial transactions without legal binding.
4. Agreement not possessing all essentials of a contract.
5. Agreements expressly declared to be void.
6. Agreement to make a contract.
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CLASSIFICATION OF CONTRACTS / AGREEMENTS
CLASSIFICATION ACCORDING TO ENFORCEABILITY/LEGALITY
1. Valid agreement i.e. contract: A valid agreement is a contract. It gives rise to

legal obligations of all parties to it. Such an agreement possesses all essentials of
a contract laid down by Section 10.
2. Void agreement: “An agreement not enforceable by law is said to be

void.”[Sec.2(g)] Such an agreement lacks essentials of a valid agreement and
consequently does not create legal obligations of the parties. It is also not
maintainable in law and is, therefore, a nullity.
Effects
(i) Void from beginning. The agreement is void from beginning. It does not
create any legal obligation of either party.
(ii) No restitution. No restitution can be granted. Any consideration passed
on by parties to each other, cannot be generally restored.
3. Void Contract: According to Sec 2(j) “A contract which ceases to be enforceable

by law becomes void when it ceases to be enforceable.” When a contract is valid
at the time of its making but later on due to change in circumstances or in law,
it becomes unenforceable, it is a void contract.
Effects
(i) Contract becomes void. Contract is void, when it is discovered to be void
or it becomes void due to change in circumstances.
(ii) Restitution is allowed. Any person who has received any advantage under
void contract, is bound to restore it to the person from whom he got
it.(Sec.65)
(iii) Payment or compensation for performance. Any party who has received
any advantage by way of part performance of a void contract (i.e. which
later on becomes void) is also bound to pay or make compensation to the
person from whom he received it. (Sec.65).
Distinction between Void Agreement and Void Contract.

Basis Void Agreement Void Contract
A contract which ceases to be
An agreement not enforceable
1. Definition enforceable by law becomes void
by law is said to be void.
when it ceases to be enforceable
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2. Time It becomes void subsequently due

when It is void from very beginning. to change in law or change in
becomes void circumstances.
Generally no restitution is
granted. however, the court Restitution may be granted
3.
may on equitable grounds grant when the contract is discovered
Restitution
restitution in case of fraud or to be void or becomes void.
misrepresentation by minors.
4.
Such agreements have been There is no mention of void
Description in
mentioned as void in the Act. contracts in the Act.
the Act
4. Voidable contract: According to Sec.2 (i), “An agreement which is enforceable by

law at the option of one or more of the parties thereto, but not at the option
of the others, is a voidable contract.”
Therefore, a voidable contract is an agreement, which is voidable at the option of
the aggrieved party. Voidable contracts may be of two types:
(i) Voidable from beginning. There are certain contracts, which are voidable
from the very beginning. It is so when the consent of the party is caused
either by
(a) coercion,
(b) undue influence,
(c) fraud or
(d)mis-representation.
(ii) Voidable subsequently. There are certain cases where one part may treat a
contract as voidable. In other words, when one of the parties to the
contract elects to treat the contract as void, then such a contract
becomes voidable subsequently. A contract becomes voidable subsequently
in the following three circumstances.
(a) On refusal of performance: When a party to a contract has refused to
perform his promise in entirety, the other party may put an end to
the contract, unless he has signified by words or conduct, his consent
to its continuance.(Sec.39)
(b) When a party prevents another from performing. When one party to
the contract prevents the other from performing a reciprocal promise,
the contract becomes voidable at the option of the party so
prevented. [Sec.53].
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(c) When a party fails to perform within a specific time. When a party to
a contract promises to do a certain thing at or before a specific time
and fails to perform it at or before such time, the contract becomes
voidable at the option of the promisee, if the parties intended that
the time should be of essence of the contract.
Effects
(i) Voidable at the option of aggrieved party.
(ii) Valid till rescinded. A voidable contract continues to be valid till the
aggrieved party rescinds it.
(iii) Other party relieved from performing. When aggrieved party rescinds the
contract, the other party need not perform any promise therein contained.
(Sec.64)
(iv) Restitution / Compensation is allowed if aggrieved party rescinds the
contract..
Distinction between Void Agreement and Voidable Contract

Basis Void Agreement Voidable Contract
An agreement not A contract, which is enforceable by
1. Definition enforceable by law is said to law at the option of the aggrieved
be void. party, is a voidable contract.
2. Period of It is void from the beginning It is valid till the aggrieved party
validity i.e. void ab initio. to the contract avoids it.
3. Legal It is nullity, hence does not It has its existence in the eye of
existence exist in the eye of law. law till it is repudiated.
Status of void agreement Status of such contract change
4. Change in
does not change with the when the aggrieved party elects to
status
change in circumstances. avoid it within a reasonable time.
A contract is voidable when the
Any agreement is void when
consent of the party is caused by
it is made with incompetent
coercion or undue influence or
parties or for unlawful
5.Causes fraud or misrepresentation.
objects and consideration or
Moreover, parties can treat the
it is expressly declared to be
contract voidable under the
void under the law.
provisions of Secs.39, 53 and 55.
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The party obtaining goods under

voidable agreement can transfer a
The party obtaining goods
good title to the third party if
6. Transfer of under void agreement cannot
the third party obtains it in good
title transfer a good title to the
faith and for consideration and the
third party.
aggrieved party has not avoided
the contract before such transfer.
Parties do not have right to
restore the benefits passed If the party rescinding the
on to the other unless the contract has received may benefit
parties were unaware of the under the contract from other
7. Restitution
impossibility of performance party, he must restore such
at the time of agreement benefit, so far as may be, to the
or the party to the other party.
agreement was minor.
If a party rightfully rescind (i.e.
No party has a right to get
puts an end) the contract, he can
compensation for damages
8. Damages claim compensation or damages
because such agreement has
sustained by him due to non-
no legal effects.
fulfillment of the promise.
Distinction between Void and Voidable contract

Basis of
Void contract Voidable Contract
distinction
A contract, which ceases to
A contract, which is enforceable by
be enforceable by law
1. Definition law at the option of the aggrieved
become void, when it ceases
party, is voidable contract.
to be enforceable.
It remains valid till the party, at
2. Period of It remains valid till it does
whose option it is voidable, avoids
validity not cease to be enforceable.
the same.
Its validity is not affected
3. Will of the Its validity is affected by the will
by the will of any party.
party of the aggrieved party.
The court decides it.
Contract is voidable when the
Contracts become void due
consent of the party is caused by
4. Causes to change in circumstances
coercion, undue influence, fraud or
or in the law of the land.
misrepresentation.
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5. Illegal Agreement. Generally speaking, an agreement, which is expressly or
impliedly prohibited by law, is an illegal agreement. Such an agreement may
either be against the law of the land or opposed to public policy or be criminal or
immoral in nature.
The term ‘illegal agreement’ has not been defined in the Indian Contract Act.
However, Section 23 of the Act states that the object or consideration of an
agreement is unlawful if-
(i) it is forbidden by law; or
(ii) it is of such a nature that, if permitted, it would defeat the provisions of
any law; or
(iii) it is fraudulent; or
(iv) it involves or implies, injury to the person or property of another; or
(v) The Court regards it as immoral; or
(vi) The court regards it apposed to public policy.
Thus, the term unlawful agreement is wider in its scope that the term illegal
agreement. All the agreements covered under the above stated six heads are not
illegal agreements. Only the agreements forbidden by law, agreements opposed to
public policy, agreement of criminal or immoral nature are included in illegal
agreements. Therefore, it is true that every illegal agreement is unlawful but every
unlawful agreement is not necessarily illegal.
Effects:
(i) Void agreement. The agreement is void ab initio.
(ii) Collateral agreement void. Every collateral agreement to an illegal agreement is
also void. It should be noted that if the main agreement were void but not
illegal, its collateral agreement would not be affected.
(iii) Legal part enforceable. If any part of a single agreement is illegal, the
whole agreement will be illegal and void. However, where the agreement consists
of two parts, one legal and the other illegal, and they are severable or separable
from each other, the legal part is enforceable and the illegal part will be void.
(iv) Punishment. The parties to an illegal agreement are punishable as per
the law of the land.
Similarities and Distinctions

Void and illegal agreements are similar in certain respects. The similarities are as
under:
(i) Both are un-enforceable agreements, hence void.
(ii) Restitution (Restoration of benefits) is not possible in either kind of agreements.
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Distinction between Void and Illegal Agreement
Basis of
Void Agreement Illegal Agreement
distinction
An agreement, which is
An agreement not enforceable by
1. Definition expressly or impliedly
law.
prohibited by law.
2. Effect on The agreement collateral to the The agreement collateral to
collateral void agreement is not necessarily an illegal agreement is always
agreement void. void.
All void agreements need not be All illegal agreements are
3. Scope
illegal agreements. void.
The Court may grant restitution
of money advanced if the party
Restitution of money is not
4. to an agreement is minor or if
granted in case of an illegal
Restitution the parties were unaware of the
agreement.
impossibility of performance of
the agreement.
6. Unenforceable contract. A contract, which is good in substance but cannot be

forced in a law court due to some technical defects, is said to be unenforceable
contract. Technical defects in a contract may be due to non-compliance of some
of the legal formalities. For instance, a particular law may require that the
contract must be in writing, witnessed, stamped and registered. In such a case,
the contract cannot be enforced if all the legal formalities are not complied with
properly. Even the absence of signature of witness or stamps of lesser amount
than required on the deed may render the contract unenforceable. As soon as
the technical defect is removed, the contract becomes enforceable.
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II. Classification According to Mode of Formation

Contracts may be classified on the basis of their mode of formation in three heads:
1. Express Contract. A contract is express when the parties state its terms and
conditions and show their assent by words, either oral or written.
2. Implied contract. Where a contract is made otherwise than in words, is said to be

implied.(Sec.9). An implied contract arises from the acts and conduct of the
parties or by their surrounding circumstances.
3. Tacit Contract: tacit contracts are those which are inferred from the conduct of
the parties. For example cash withdrawn by a customer from the bank ATM.
4. Quasi-contract. A quasi-contract is not a result of agreement, express or implied.

It is a contract imposed by the law on the parties and gives rise to obligations
similar to that arising under a contract. The parties do not intentionally make
such a contract.
III. Classification According to Extent of Execution

Contract may be classified according to extent of execution or performance under 2
heads:
1. Executed contract. A contract in which all the parties to the contract have
performed their respective obligations, is known as executed contract. Nothing
remains to be done by the parties under such a contract.
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2. Executory contract. A contract in which the parties to the contract have still to
perform their side of the contract, it is known as executory contract.
Where in a contract, one party has performed the contract but the other is yet
to perform his part of the contract, the contract will be known as partly
executed and partly executory contract.
On the basis of extent of execution or performance, the contracts can also be

classified as follows:
1. Bilateral contract. A bilateral contract is one in which both the parties exchange a
promise to each other. One party promises to perform some act in the future in
exchange for the other party’s promise to perform some act. In such a contract,
obligations on part of both the parties are outstanding at the time of formation
of the contract. Thus, it is similar to an executory contract. It is also known
as contract with executory consideration
Unilateral contract. It is a one-sided contract in which one party has already
performed his obligation at or before the point of time when the contract comes
into existence and the other party remains liable to perform his obligation after the
contract comes into existence.
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Topic 3: CONSIDERATION
The definition of 'agreement' itself states that the mutual promises should form
consideration of each other. Thus, 'consideration' is essential for an agreement.
Definition of consideration:
 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. [Section
2(d)].
Consideration' means quid pro quo i.e. 'something in return'. It is an advantage

moving from one to another. The consideration can be a positive act or abstinence
from act (i.e. negative act). It can be in form of cash, goods or services. It can be
past, present or future.
 Consideration should be at the desire of promisor - A cannot demand payment
for his services when he saved life of B when he was drowning, as it was
voluntary act and not at the desire of B.
 Consideration can be given to/by third person – It may move from promise or
any other person.
 Consideration must be lawful
 Past consideration valid, if given at desire of promisor
 Consideration should not be impossible
 Consideration should be certain - Promising to pay a 'reasonable sum' or 'as
may be mutually agreed upon' is not a consideration as it is uncertain.
Agreement containing such clause is not a valid contract.
 Act which promisor is anyway bound to do is not a 'consideration' - If the
promisor is any way legally bound to do something, and he agrees to do it, it
is not 'consideration' as any way he was bound to do it - e.g. agreeing to pay
an amount to witness to attend Court as per summons received by him is not
a 'consideration' as he was anyway bound to attend as per Court orders. - - A
promise to pay Advocate additional sum if he wins the case is not a valid
consideration as the advocate was even otherwise bound to render best of
his services.
Agreements void, if consideration or objects unlawful in part (Section 24)

 If any part of a single consideration for one or more objects, or any one or
any part of any one of several consideration of a single object, is unlawful, the
agreement is void.
EXAMPLE
Determine In The Following Case Whether The Agreement Is Valid Or Void?
Sr. Void / Valid

Case
No Agreement
1 A borrows from B to Rs.1000 for lending to C a minor
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2 A borrows Rs.1000 from B to buy a pistol to shoot C.
A promises to indemnify B in consideration of his beating

3
C.
A promised to obtain an employment to B in a public

4
office and B promises to pay A Rs.1000.
A promises to drop a prosecution which he has instituted

5 against B for robbery and B promises to restore the
stolen property
Rule: Contract without consideration is void
EXCEPTIONS to the above rule Section 25: Means Contract without consideration
will be valid.
Exception 1If agreement is made on account of natural love and affection between
parties standing in a near relation to each other if it is made it in writing and must
be registered.
Exception 2: promise to compensate for past voluntary service.
Exception 3: A Promise to pay time barred debt (law of limitation) is valid if it is

made in writing + signed by debtor.
Exception 4: Completed Gifts i.e. gift is completed when it is accepted by done.

However, agreement to make gift is not enforceable.
Exception 5: Creation of Agency or Partnership
EXAMPLE:
Determine in the following cases the validity of the contract
Sr. Valid/ Invalid

Case
No Contract
1 A promises, for no consideration, to give to B Rs. 1,000.
A, for natural love and affection, promises to give his son,

2 B, Rs. 1,000. A puts his promise to B into writing and
registers it.
A owes B Rs. 1,000, but the debt is barred by the

3 Limitation Act. A signs a written promise to pay B Rs.
500 on account of the debt.
4 A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's
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consent to the agreement was freely given.
A finds B's purse and gives it to him. B promises to give

5
A Rs. 50.
A supports B's infant son. B promises to pay A's expenses

6
in so doing.
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PRIVITY OF CONTRACT
As a general rule, stranger to contract cannot sue or be sued.
Rule: Stranger to contract cannot sue parties to contract
EXCEPTIONS to the above rule: Means EVEN stranger to contract can sue parties to
contract
Exception 1: Beneficiary can sue -Beneficiary of contract can sue if contract was for
his benefit. Beneficiary trust can enforce the contract. e.g. - A agrees to transfer
certain property to B to be held in to benefit of C. Here, C, being beneficiary, can
enforce the agreement even if he was not pa agreement - If airline books rooms for
its crew in a hotel, the crew member who is injured can sue hotel for injury suffered
by him, as he was beneficiary of the contract
Exception 2: Assignee of contract – When benefits under a contract is assigned, the

assignee can enforce the contract.
Exception 3: Devolution by operation of law - Sometimes, contract may devolve on

third person by operation of law (e.g, purchase or lease of interest in land, death,
bankruptcy, insolvency). In such case, the successor (in case of death), official
receiver (in case of insolvency) etc. can sue though they were not parties to
contract.
Exception 4: Insurance company can sue - Insurance Company can sue as it enters
into shoe of person to whom compensation was paid by it as per insurance contract.
Exception 5: Principal can enforce contract entered into by Agent - Principal can
enforce contract entered into by Agent on behalf of Principal, if Agent is acting
within his authority.
THERE CAN BE STRANGER TO CONSIDERATION

(STRANGER CAN PERFORM CONTRACT)
BUT
THERE CANNOT BE STRANGER TO CONTRACT
ILLUSTRATIONS
5. Mrs. Sonam made a deed of gift over certain property to her daughter,
directing her to pay an annuity to Mrs. Sonam’s brother as had been
done by Sonam herself before she gifted the property. On the same day
Sonam’s daughter executed in writing in favour of Sonam’s brother
agreeing to pay the annuity. Afterwards daughter declined to fulfill her
promise to pay her uncle saying no consideration had moved from him
(Sonam’s brother). State whether daughter’s contention is valid for
want of consideration?
Ans. Consideration is one of the essential elements of a valid contract. In
English law, consideration must move from promisee, so that stranger to
the contract cannot sue on contract. In Indian Law, however,
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consideration may move from promisee or any other any person, so that
the stranger to the contract may maintain a suit. [Chiinnaya v. Ramaya,
(1882) 4 Mad.137]
Thus in the instant case uncle (Sonam’s brother) could sue even though
no part of the consideration received by his niece moved from him. The
consideration from Sonam was sufficient consideration.
6. Tillu supplied tyres to a wholesaler Nillu on condition that any retailer to

whom Nillu re-supplied the tyre should promise Nillu, not to sell them
to public below Tillu’s list price. Nillu supplied tyres to Bablu upon this
condition but nevertheless Bablu sold the tyres below list price. Can Tillu
obtain damages from Bablu?
Ans. The doctrine of privity of contract states that stranger to a
contract cannot sue the parties to the contract. In the given case there
was a contract between Tillu & Nillu and Nillu & Bablu. Therefore, Tillu
could not obtain damages from Bablu as Tillu had not given any
consideration for Bablu’s promise to Nillu, nor was Bablu a party to the
contract between Tillu and Nillu.[DUNLOP PNEUMATIC TYRE CO. V.
SELFRIDGE & CO. (1915) A.C. 847]
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Topic 4: COMMUNICATION
1. COMMUNICATION OF PROPOSAL/OFFER
An offer is complete when it is properly communicated to the offeree. The
communication of offer is complete when it comes to the knowledge of the person to
whom it is made.[Sec.4, para 1]
2. COMMUNICATION OF ACCEPTANCE
Communication of acceptance of an offer completes at different times as against the
offeror and offeree. The time of completion of communication of acceptance against
each of them is as under:-
(a) As against the proposer/offeror: The communication of an acceptance is
complete as against the offeror when it is put into a course of transmission
to him so as to be out of the power of the acceptor. After such
communication, the offeror is bound by the acceptance.
(b) As against the acceptor: The communication of acceptance as against the
acceptor is complete when it comes to the knowledge of the offeror.(Sec.4
para 2.)
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14 Feb
OFFEROR
Offer
16 Feb
OFFEREE
20 Feb
Acceptance put in to course of transmission
Communication of ACCEPTANCE is complete as against the OFFEROR ???
3. COMMUNICATION OF REVOCATION
Revocation means ‘withdrawing’ or ‘taking back’. Offer as well as acceptance may be
revoked. The communication of revocation completes at two different counts:
(i) As against the person who makes. The communication of a revocation is
complete as against the person who makes it, when it is put into a course of
transmission.
(ii) As against the person to whom it is made . The communication of a revocation
is complete as against the person to whom it is made, when it comes to his
knowledge.(sec.4)
QUESTIONS
What can be revoked?
Who will revoke?
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Till which date can it be validly revoked?

Practical
Till which date can it be validly revoked?
Theory
GENERAL RULES AS TO COMMUNICATION OF ACCEPTANCE
1. In case of acceptance by post : Where the acceptance is given by post, the

communication of acceptance is complete as against the proposer when the letter
of 'acceptance .is posted. Thus, mere posting of letter of acceptance is sufficient
to conclude a contract. However, the letter must be properly addressed and
stamped.
2. Delayed or no delivery of letter: Where the letter of acceptance is posted by the

acceptor but it never reaches the offeror, or it is delayed in transit, it will not
affect the validity of acceptance. The offeror is bound by the acceptance.
3. Acceptance by telephones, telex or fax: If the communication of an acceptance is

made by telephone, teleprinter, telex, fax machines, etc., it completes when the
acceptance is received by the offeror. The contract is concluded as soon as the
offeror receives or hears the acceptance.
4. The place of Contract : In case of acceptance by the post, the place where the
letter is posted is the place of contract. Where the acceptance is given by
instantaneous means of communication (telephone, fax, teleprinter, telex, etc.),
the contract is made at the place where the acceptance is received.
.
REVOCATION OF OFFER
Time for Revocation of Offer

A proposal may be revoked at any time before the communication of acceptance is
complete as against the proposer, but not afterwards.(sec.5 para 1) It is possible
only when no acceptance has been given by the time the communication of revocation
of acceptance is complete.
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Modes of Revocation and Rejection of Offer
According to section 6, the following are the modes of revocation of an offer:
1. By notice.
2. By lapse of time.
3. By death of insanity of offeror. An offer stands revoked if the offeror dies or
becomes insane before acceptance and the fact of his death comes to the
knowledge of acceptor, before acceptance. [Sec.6(4)]
4. By Counter offer. A counter offer rejects the original offer.
5. by non- acceptance of the offer according to the prescribed or usual
mode.[Sec.7(2)]
6. By death of insanity of the offeree.
7. By destruction of subject matter.
8. By change in the law.
9. By rejection of offer.
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Topic 5: CAPACITY TO CONTRACT
Who are Competent to Contract?

Section 11 reads,
 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
 Not disqualified from contracting by any law to which he is subject
Conversely, following persons are not competent to contract:

× Minors
× Persons of unsound mind; and
× Persons disqualified from contracting by any other law of the land.
I. MINORS:
 According to Indian Majority Act, “A minor is a person who has not completed 18
years of age”
 When guardian is appointed by court, person becomes major when he attains the
age of 21 years.
Rules/Effects as to or Nature of Minor’s Agreement

1. Void-ab-Initio. Minor’s agreement in absolutely void from very beginning, i.e. void
ab initio. It is nullity in the eye of law. An agreement with minor, therefore, can
never be enforced by law.[Mohri bibi v.Dharmodas ghose]
2. Minor can be promisee or beneficiary. The Courts regard minor capable of accepting
benefits under an agreement. However, he must have performed his promise under
the agreement. It means that if a amajor borrows money from a minor and later
on refuses to pay it, minor can sue him and recover the money.
3. No ratification. One of the basic rules of ratification is that only valid acts may be
ratified. A minor’s agreement is void ab initio. Hence it cannot be ratified even
after attaining majority.
(i) It maybe noted that where a minor after attaining majority pays the debt
incurred during minority, he cannot afterwards recover it.
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(ii) Again it is worth noting that where a minor had not completed a transaction
during his minority and continues to complete the same on majority, he will be
liable for the whole transaction. Therefore, the services rendered at the desire
of the minor during his minority(to the minor) and are continued to be
rendered at his request after his majority and he makes a promise to pay for
the whole, the promise is enforceable.
4. NO Restitution / Compensation. Generally, a minor is not liable to compensate for

or restore any benefit which he has received.
Restitution order is granted subject to following conditions (Specific Relief Act,
1963):
 Power of court to order restitution is discretionary
 It is generally allowed when minor had misrepresented to other party about his
age
 If money paid to a minor is in the same form, minor may be ordered to pay
it back
 If money is used to purchase property, property purchased by the minor shall
be used in paying off the money.
5. No estoppel and can plead minority. The rule of estoppel says that when a person
by written or spoken words or by his conduct falsely represents another to believe
that certain state of things exists; he will not be allowed to deny the existence of
that state of things. However, the minor is not bound by the rule of estoppel. A
minor can always plead his minority. Even if he has falsely represented himself to
be a major and induced the other party to contract, he can later deny the stand.
He cannot be sued either in contract or in tort for fraud. If the aggrieved party is
allowed to sue, it would amount to allowing enforcement of void agreement which
is not possible.
6. No specific performance. Specific performance of a contract means performance of

contract as per the terms of the contract. Minor’s agreement being void, the
court cannot direct for specific performance of it.
7. Contract by parent / guardian / manager. A minor’s parent / guardian / manager

can enter into contract on behalf of the minor provided:
i) the parent / guardian / manager is authorized ; and
ii) the contract is for the benefit of the minor.
A certified guardian / manager by the Court may with the sanction of the Court,
sell the minor’s immovable property for his benefit.
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8. No liability of parents. The Parents (guardian) of a minor are not liable for
agreements made by their minor ward. However, they can be held liable if the
minor makes agreement as their authorized agent.
9. Minor agent. A minor cannot appoint an agent because only person competent to
contract can appoint agents. (Sec.183) However, a minor can be appointed as an
agent by any person competent to contract. The minor agent can bind his principal
by his acts but the principal would be unable to hold him personally liable for any
damage arising out of his negligence or wrongful acts. (Sec.184)
10. Minor partner. Partnership arises out of a contract and a minor is not competent
to make a contract. Hence he cannot be a partner in a partnership firm.
However, a minor can be admitted to the benefits of an existing firm with the
consent of all the partners. Thus, he can be a partner in the profits of a firm
but not partner of the firm. [sec.4 and 30 of the Indian Partnership Act, 1932]
11. Guarantee for a minor or by a minor. A contract of guarantee in favour of a

minor is valid. However, a minor cannot be a surety in a contract of guarantee.
This is because, the surety is ultimately liable under a contract of guarantee
whereas minor can never be personally liable.
12. Liability for necessaries of life. A minor is incompetent to contract; therefore, he

is not personally liable for the payment of price of necessaries of life supplied to
him or to his legal dependents. However, the person who has furnished such
supplies is entitled to be reimbursed from the property of the minor. (Sec.68)
Thus, it is clear that the liability of the minor is not personal but is only to the
extent of the minor’s property. The supplier’s right of reimbursement is based on
the principle of equity. The law presumes a quasi-contract between the minor and
the supplier.
ILLUSTRATION
7. Ramesh, a minor, by misrepresenting himself to be of 19 years, obtains a loan of
Rs.20000 from Suresh stating that the amount was badly needed by him to
complete his education. Suresh, without making any further enquiry, lent the
amount to Ramesh. Can Suresh recover the amount from Ramesh?
Ans. Estoppel is a rule of evidence. The rule of estoppels says that when
a person by written or spoken words or by his conduct falsely represents
another to believe that certain state of things exists; he will not be
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allowed to deny existence of that state of things. However, the minor is
not bound by rule of estoppel. A minor can always plead his minority
even if he has falsely represented to be a major and induced the other
party to contract.
Section 68 states that minor are not personally liable for the payment
of price of necessities of life supplied to him or to his legal dependant.
However, the person who has furnished such supplies is entitled to be
reimbursed from the property of the minor. Education in India has been
upheld to be a necessity. A loan given for education should, therefore,
qualify for that exception. Hence, Ramesh’s property, if any, shall be
attachable and in case he has no properties and the money is also spent,
Suresh shall have no remedies.
II. PERSONS OF UNSOUND MIND

“A person is said to be of sound mind for the purpose of making a contract if, at
the time when he makes it, he is capable of understanding it and of forming a
rational judgment as to its effect upon his interests.” (Sec.12)
When soundness of Mind is required?

The soundness of mind is required only at the time of making a contract.
1. Contract by a person usually of unsound mind. A person who is usually of unsound
mind, but occasionally of sound mind, may make contract when he is of sound
mind.(Sec.12 para 2)
2. Contract by a person usually of sound mind. A person who is usually of sound
mind, but occasionally of unsound mind, may not make a contract when he of
unsound mind.(Sec.12 para 3)
Types of Persons of Unsound Mind and their Contracts

1) Idiot. An idiot is a person who is congenital (by birth) of unsound mind. Such
a person can never understand contract and make a rational judgment as to its
effects upon his interests. Consequently, the agreement of an idiot is
absolutely void ab initio. He is not personally liable even for the payment of
necessaries of life supplied to him.
2) Lunatic. A lunatic is a person whose mental powers are damaged due to some
disease of brain or mental strain. A lunatic, therefore, may have lucid
intervals of sanity and insanity. He can make contracts during those intervals
when he is sane. He is not liable for agreements made during the intervals of
insanity.
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3) Delirious persons. A person delirious from fever is also not capable of
understanding the nature and implications of an agreement. Therefore, he
cannot enter into a contract so long as delirium lasts.
4) Drunken or intoxicated persons. A drunken or intoxicated person is temporarily
incompetent to contract. The mental faculties of such a person are clouded for
the time being when he is under the effect of drink or intoxicant. He cannot
enter into contract during the period when he is under the effect of such
things.
5) Hypnotized persons. Hypnotism produces temporary incapacity till a person is
under the effect of artificial induced sleep.
6) Mental decay. There may be mental decay or senile mind due to old age or
poor health. When such person is not capable of understanding the contract
and its effect upon his interests, he cannot enter into contract.
III. PERSONS DISQUALIFIED BY LAW

There are certain persons who are disqualified from contracting by the law of our
country. They are as under:
1) Alien enemy. Alien means foreign citizen living in India. When an alien is
declared as alien enemy (due to the declaration of war between his country
and the Republic of India or for any other reasons) he cannot enter into a
contract with any Indian national so long as the declaration is in force. The
contract made before the declaration stands suspended till such declaration
remains in force.
2) Foreign Sovereigns, diplomatic staff etc. Foreign sovereigns, their
representatives and diplomatic staff (e.g. ambassadors, envoys etc.) have full
capacity to contract in India but they can claim their privilege of not sued.
They cannot be sued unless they voluntarily submit to the jurisdiction of our
law Courts; or the Central Government permits to sue them. (they can enter
into valid contract)
3) Corporation and companies. Corporations and companies are the artificial
persons created by law. It is competent to make contract within the scope of
the Memorandum. Any contract made beyond the Memorandum is ultra vires
and void.
4) Insolvents. An adjudged insolvent (under the Insolvency Act to which he is a
subject) cannot enter into contract for the sale of his property. It is because
his property vests in the official Receiver or the Official Assignee. However, he
can make contracts of service or for purchase of property or to take loans.
5) Convicts. A convict during the period of his imprisonment becomes
incompetent for two things:
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a. To enter into contract, and
b. To sue on contracts made before conviction.
He may however, get a license from the government and perform the
above acts while undergoing imprisonment.
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Topic 6: FREE CONSENT

In order to constitute a valid contract, ‘consent’ of all the parties is
necessary and that too must be ‘free’. Consent is an absolute and
unconditional assent to an offer, given by the offeree. According to
Section 13, “Two or more persons are said to consent when they agree upon
the same thing in the same sense”.
Free Consent: Free consent is the consent given by the sweet will of the parties
and not caused by any form of physical or mental force or pressure or mistake.
According to Sec.14, consent is said to be free when it is not caused by
i) Coercion – Sec 15 , or
ii) Undue influence – Sec 16, or
iii) Fraud – Sec 17, or
iv) Mis-representation – Sec 18, or
v) Mistake Sec 20.21.22.
COERCION:
According to Section 15,
 Coercion is the
 Committing, or threatening to commit,
 Any act forbidden by the Indian Penal code, or
 The 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.
The Act also provides an explanation with this Section, which states,
“It is immaterial whether the Indian Penal Code is or is not in force in the
place where the coercion is employed.”
Effects
 Voidable contract.
 Restitution is allowed if aggrieved party rescinds the contract
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ILLUSTRATION
8. An Indian couple is in USA. Wife threatens to commit suicide and induces
husband to sign an agreement to sell his property located in India for small
sum of money. Assuming that attempt to commit suicide is not an offence
in USA but it is an offence in India. Is it coercion?
Ans. Section 15 of the Indian Contract Act, 1872 defines coercion
as committing or threatening to commit any act forbidden by
Indian Penal Cod. The explanation states it is immaterial whether
IPC is in force or not at the place where coercion is applied.
Hence, in the instant case, threat to commit suicide is an offence
under IPC. The place of threat is immaterial. Hence the contract
is caused by coercion.
UNDUE INFLUENCE:
According to section 16(1)
 A contract is said to be induced 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
 Kind of moral coercion.
Effect
 Voidable contract.
 Restitution is allowed if aggrieved party rescinds the contract
Presumption of UE:
(when is a person deemed to be in a position to dominate will of others?)
 Where he holds a real or apparent authority over the other (For ex- master &
servant, ITO & Assessee)
 Where he stands in a fiduciary relationship to the other.
 Unconscionable transaction - Where a party makes a contract with a person
whose mental capacity is temporarily or permanently affected by reason of age,
illness, or mental or bodily distress.
 Ex: Parent and child, guardian and ward, trustee and beneficiary, doctor and
patient, solicitor and client, Religious adviser and disciple.
NO Presumption
× Landlord and tenant, Creditor and debtor, Husband and wife, Principal & Agent.
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EXAMPLE
1. 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 from B
for a greater amount than the sum due in respect of the advance. A
employs undue influence.
2. 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.
3. A, being in debt to B, the money-lender of his village, contracts a
fresh loan on terms which appear to be unconscionable. It lies on B
to prove that the contract was not induced by undue influence.
4. A applies to a banker for a loan at a time when there is stringency
in the money market. The banker declines to make the loan except at
an unusually high rate of interest. A accepts the loan on these
terms. This is a transaction in the ordinary course of business, and
the contract is not induced by undue influence
5. A, a spiritual adviser (guru), induced B, his devotee, to gift him the
whole property to secure benefit to his (devotee’s) soul in the next
world. The consent of gift was held to be obtained by undue
influence.[MANNU SINGH V. UMADAT PANDEY (1890) 32
ALLAHABAD 523]
FRAUD
According to Sec.17
 Fraud means and includes any of following acts
a) The suggestion, as a fact, of that which is not true, by one who does
not believe it to true.
b) The active concealment of a fact, by one having knowledge or belief of
the fact;
c) A promise made without any intention of performing it;
d) Any other act fitted to deceive; and
e) Any such act or omission as the law specially declares to be
fraudulent
 Committed by a party to a contract,
a gwith
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 Or by his agent
 With an intent to deceive another party there to or his agent,
 Or to induce him to enter into the contract
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Rule: Silence ≠ Fraud

Explanation to Section 17 mentions the circumstances in which silence may be regarded
as fraud. The explanation reads “Mere silence as to facts likely to effect the
willingness of a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to them, it is the
duty of the person keeping silence to speak, or unless his silence is, in itself,
equivalent to speech.”
Duty to speak i.e. SILENCE WILL AMOUNT TO FRAUD

1. Contracts of uberrimae fidei, or utmost good faith. In contacts of
uberrimae fidei, there is a legal duty on the parties to disclose true and
full material facts. Suppression of truth in such contract amounts to
fraud. The following types of contract fall under this category:
(i) Contract of insurance. Insurance contracts are founded upon the
principle of utmost good faith. The proposer, therefore, is under a
duty to disclose all the facts known or ought to be known to him,
which are likely to affect the acceptance of the proposal.
(ii) Contracts for sale of immovable property. In such contracts, buyer
as well as seller is under a duty to disclose all material facts.
(Sec.55, Transfer of property Act)
(iii) Allotment of shares. Every prospectus issued by a company to the
public is an invitation to the public to subscribe shares in the
company. It must also disclose all the facts accurately otherwise the
allotment will be voidable at the option of the allottee.
(iv) Contract of marriage. Every party in a marriage contract is under a
duty to disclose all the material facts.
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(v) Contract of family settlement. Each member of family is under a

duty to disclose all material facts.(i.e. as to property etc.) at the
time of family settlement.
2. Contract of partnership. A contract of partnership is not strictly a

contract of uberrimae fidei. It is because every partner is not under a
duty to disclose all the material facts, which existed before the
partnership. They are required to observe good faith to each other.
Therefore, they are under a duty to give true account and information to
the firm on all matters affecting it.
3. Contract of guarantee. In contract of guarantee the parties are under a
duty to disclose all the material facts. A guarantee obtained by means of
keeping silence as to material fact, is invalid.(Sec.143)
4. Contract by parties having fiduciary relations. Where the parties stand in

fiduciary relationship, they are also under a duty to disclose all the
material facts likely to affect the willingness of another party. Fiduciary
relation is supposed to exist between parent and child, solicitor and client,
guardian and ward, trustee and beneficiary, doctor and patient etc.
5. Change in facts before conclusion of the contract. If a statement is true

when made, but subsequently becomes false before the conclusion of the
contract. In such a case, the party is under a duty to speak and notify
the change to the other party.
6. Required by law. Where disclosure of facts is required by a law of the land,

it creates a duty to speak.
7. Customs and usages. Where the custom and usage of trade requires a party
to disclose certain known facts, it becomes a duty of the party to do so.
8. In case of latent defect. Where a product has latent defect (i.e. not
visible by ordinary inspection) and the seller has knowledge of it, he will be
under a duty to disclose the defect.
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Silence Equivalent to Speech Sometimes keeping silence may also give an

impression of the existence of a certain fact. In such a case silence is, in itself
equivalent to speech.
Effects
 Contract voidable.
 Insisting for specific performance.
 Restitution.
 Claim for damages..
Exceptions
In the following cases, the contract is not voidable or contract cannot be rescinded:
× If the Aggrieved party had the means of discovering the truth with ordinary
diligence.(Exception of sec.19)
× A fraud which did not cause the consent of the party.(Explanation to sec.19)
× Where the party after becoming aware of the fraud affirms or ratifies the
contract.
× The right of rescission can be claimed within a reasonable time after
discovery of fraud.
× If a third party acquires rights or interest in the subject matter of the
contract for value and in good faith.
ILLUSTRATION
9. The prospectus of a company contained an untrue statement that D was
one of the directors of the company. On the faith of the prospectus A
bought shares of the company, but he had never heard of D. on discovering
that D was not the director of the company, A wanted to claim the
damages. A’s claim for damages was dismissed. In this case, the untrue
statement had not induced A to buy shares. Since A had never heard of D,
the statement was therefore, immaterial from his point of view. [SMITH
V. CHANDWICK (1884) 9 APP. CAS. 187]
MISREPRESENTATION
According to Sec 18, Misrepresentation is any innocent or unintentional false statement
or assertion of fact made by one party to the other during the course of negotiation of a
contract
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e a misrepresentation. The party making the statement honestly believes
in it to be true and is made in honest ignorance of its falsehood.
Effects
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ILLUSTRATION
10. Sohan induced Suraj to buy his motorcycle by saying that it was in a very
good condition. After the delivery, Suraj complained that there were many
defects in the motorcycle. Sohan proposed to get it repaired and promised
to pay 40% cost of the repairs. After a few days, the motorcycle did
not work at all. Now Suraj wants to rescind the contract. Decide giving
reasons.
Ans. The aggrieved party, in case of misrepresentation by the
other party, can avoid or rescind the contract (Section19, Indian
Contract Act, 1872). The aggrieved party loses the right to
rescind the contract if he, after becoming aware of the
misrepresentation, takes a benefit under the contract or in some
way affirms it. Accordingly in the given case Suraj could not
rescind the contract, as his acceptance to the offer of Sohan to
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bear 40% of the cost of repairs impliedly amount to full amount

of the sale [Long v. Lloyd, (1958)]
MISTAKE:
Mistake is a
 Misconception or
 Misimpression or
 Misunderstanding or
 Erroneous belief about something.
Usually, mistake does not affect the validity of a contract. However, under some
circumstances, mistake may render a contract void for a want of genuine consent.
Classification of Mistake
Mistake of LAW Mistake of FACT
Mistake of Mistake of
UNILATERAL Mistake BILATERAL Mistake
LAW of LAND FOREIGN LAW
VALID VOID VALID

VOID
No Excuse Like Mistake of FACT S.t. certain exceptions
Mistake of Law
 Mistake of law of the land. No party can seek the relief on the ground of ignorance of law of
the land. Sec.21 states that a contract is not voidable because it was caused by mistake as to
any law in force in India. The contract will have the same effect as if parties had full knowledge of
the law of the country.
 Mistake of foreign law. Ignorance of foreign law is excusable. Therefore, the mistake of
foreign law adversely affects the validity of a contract. It is void. Section 21 states that “ a
mistake as to a law not in force in India has the same effect as a mistake of fact”. The contracts
caused by mistake of fact are void. (Sec.20)
Mistake of fact
 Bilateral or mutual mistake. Where both the parties to an agreement are under a mistake
as to a matter of fact essential to the agreement, there is said to be a bilateral mistake. An
agreement caused by such a mistake is void.(Sec.20).Bilateral mistakes may be of two types:
 Mistake as to subject matter. Where both the parties are under a mistake as to
subject matter of the agreement, the agreement is void. Mistake as to subject matter
may be of the following types:
Mistake as to identity of subject matter, existence of subject matter, quality of subject
matter, quantity, price, title, existence of state of affairs.
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age as to possibility of performance. When both the parties believe that the
contract is capable of being performed but, in fact, it is impossible to be performed at the
time of contract. In such a case, the contract is void on the ground of bilateral mistake as
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 Unilateral Mistake: Where one of the parties to a contract is under a mistake as

to a matter of fact, it is unilateral mistake. Section 22 states that a contract is not
voidable merely because it was caused by one of the parties to it being
under a mistake as to a matter of fact.
However, in certain cases a unilateral mistake may also render a contract void
whether or not caused by fraud, misrepresentation etc. On the basis of judicial
decisions, they may be of following types:
 Mistake as to the identity of the party contracted with. Where a party
enters into an agreement with some person believing him to be some other
person, there is a mistake as to identity of the person contracted with. In such
a situation the contract would be void provided the identity of the party is of
material significance in the contract.
 Mistake as to identity of attributes of contracting party. Sometimes the
parties are face to face but one of the parties fails to identify the attributes of the
contracting party or person. If such identity of attributes of the person is a
material fact, the contract is void.
 Mistake as to the nature of the contract. When one of the parties makes a
mistake as to the nature of contract, it is void. Such a mistake may be caused
due to some physical or mental weakness or illiteracy of the party or due to
some fraudulent act of other party.
Important Case Laws on Bilateral Mistake

1. Mistake about the existence of the subject matter.
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Eg. A agrees to buy from B a certain horse. It turns out that the
horse was dead at the time of the bargain, though neither party
was aware of the fact. Agreement is void.
2. Mistake about the title of the subject matter.

Eg.A agreed to sell to B all his right in a land including the right to
mine minerals. Subsequently, it was found that A rights did not
include the right to mine the minerals. This fact was not known to
both the parties at the time of the agreement. The agreement was
held to be void because without this right to mine, the land was
worthless for B, whose only object was to work the mines.
3. Mistake about the substance of the subjects matter.

Eg. A, the owner of the forest, granted a license to B to cut, process
and manufacture all sisal growing in the forest. B in return
undertook to manufacture and deliver to A, 50 tonnes sisal fiber
per month. But it was found that the leaf potential of the sisal
area was not sufficient to manufacture 50 tonnes of sisal fiber per
month. As such, B cpuld not perform the contract. mA filed suit
against B for breach of contract. The agreement was held to be
void. And the court observed that “having regards to the nature of
the contract, it was very basis of the contract that the sisal area
should be capable of producing an average of 50 tonnes a month
throughout the term of the license, and the mistake was about the
matter of fact essential to the agreement”
4. Mistake about the quality of the subjects matter.

Eg: A offered to purchase a race horse from B, a horse dealer. B
accepted the offer believing it to be cart horse. In this case, the
agreement is void as both the parties are mistaken about quality of
the subject matter. Here, the mistake as to quality makes the
subject matter altogether different from the thing as it was
believed to be.
5. Mistake about the quantity of the subjects matter.
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Eg: A agreed t buy 200 sewing cotton reels each containing 400
meters of thread. But unknown to both the parties, the length of
the thread per reel was much less than 400 meters. The agreement
was void as there was bilateral mistake of the parties about the
quantity of the subjects matter.
6. Mistake about the price of the subjects matter.

Eg: A agreed to let out his house to B for a monthly rent of Rs. 450.
But in the written agreement the figure of rent was put as Rs.
540 by mistake. The agreement was held to be void.
7. Different subject matter in the minds of both the parties

Eg: A bought from B certain goods which were to arrive from Bombay
through a ship named “Peerless”. Two ships with the name
“Peerless” sailed from Bombay, one in October and the other in
December. A had the first ship in his mind, and B had the second in
his mind. The agreement was held to be void as there was no true
consent of the parties.
8. Mistake about impossibility of performance

Eg: A hired a room from B for watching the coronation procession of
King Edward VII. Unknown to both the parties the procession was
cancelled. This agreement was held to be void. In this case, the
performance of the agreement was impossible as the purpose for
which the room hired had been defeated. And both the parties were
mistaken about the fact of impossibility of perform
Important Case Laws on Unilateral Mistake
9. A received order, in writing, from a fraudulent man called “Blenkarn”.

The order papers had printed heading, “Blenkarn & Co., 37 Wood
Street”. There was a well known and respectable firm “Blenkiron &
Co.”, in the same street. A believing that the order had come from a
genuine firm sent a large quantity of handkerchief. The Blenkarn received
the goods and disposed them off to B., who acted in good faith. It was
held that there was no contract between A and Blenkarn because A
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intended to contract with Blenkiron & Co and not with Blenkarn. A

knew nothing about Blenkarn and never intended o deal with him.
10. A, a fraudulent man, adopted the name of “H & Co”. the firm with
the name of H & Co was not in existence. It was only a fictitious name
adopted by A, who placed an order with B for the supply of some
goods. On the basis of this order, B supplied goods to A, who further
sold the goods to C who acted in good faith. B sued C for the value of
goods. It was held the contract between B and H & Co was not void
because B contracted to sell the goods to the writer of the letter.
Here A and H & Co being the same person, B had not made any
mistake as to the identity of the contracting party. The contract
between B & H & Co was voidable for fraud and it could not be revoked
after C had acquired the goods in good faith.
11. A placed a document before B, an old man. A falsely told B that it was
an ordinary guarantee, and induced him to sign the document. B signed
the document on the belief that it was mere guarantee. In fact the
document was a BOE which was later on endorsed by B to C. C filed a
suit against A, on the basis of BOE. It was held that A was not liable
for the bill as he never intended to sign the BOE. He was deceived not
merely for the legal effects but also for the very nature of the
document.
EXAMPLE
1. A agrees to sell to B a specific cargo of goods supposed to be on
its way from England to Bombay. It turns out that, before the
day of the bargain, the ship conveying the cargo had been cast
away and the goods lost. Neither party was aware of the facts.
State the consequence
2. A agrees to buy from B a certain horse. It turns out that the

horse was dead at the time of the bargain, though neither party
was aware of the fact. State the consequence
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3. A, being entitled to an estate for the life of B, agrees to sell it

to C. B was dead at the time of the agreement, but both parties
were ignorant of the fact. State the consequence
4. A, intending to deceive B, falsely represents that 500 mounds of

indigo are made annually at A’s factory, and thereby induces B to
buy the factory.
5. A, by misrepresentation, leads B erroneously to believe that 500

mounds of indigo are made annually at A’s factory. B examines the
accounts of the factory, which shows that only 400 mounds in
indigo have been made. After this B buys the factory.
6. A, fraudulently informs B that A’s estate is free from

encumbrance. B thereupon buys the estate. The estate is subject
to mortgage.
7. B, having discovered a vein of ore on the estate of A, adopts

means to conceal, and does conceal the existence of the ore from
A. Through A’s ignorance B is enabled to buy the estate at an
undervalue.
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Topic 7: VOID AGREEMENTS

“An agreement not enforceable by law is said to be void”. [(Sec.2 (g)]
Section Explanation
11 Agreements by incompetent persons
20 Agreement made under bilateral mistake as to material fact
23 Agreement of which the consideration or the object is unlawful
Agreement on which the consideration or the object is unlawful in part
24
and cannot be separated from the lawful part.
25 Agreements made without consideration with certain exceptions
26 Agreement in restraint of marriage, void
27 Agreement in restraint of trade, void
28 Agreements in restrain of legal proceedings, void
29 Agreements void for uncertainty
30 Agreements by way of wager, void
36 Agreements contingent on impossible event
56 Agreements to do impossible act
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AGREEMENTS OPPOSED TO PUBLIC POLICY
1. Trading with the enemy.
2. Stifling (suppressing) prosecution:
3. Champerty and maintenance - When a person helps another in litigation
 Does not share in the proceeds of the action, it is called
MAINTENANCE.
 Exchange of a promise to hand over a portion of the fruits of the
litigation, if any, it is called CHAMPERTY.
 VOID if litigation is of a gambling character
4. Marriage brokerage.
5. Sale of public offices, titles and appointments.
6. To create monopolies.
7. Restraining personal liberty.
8. Restraint of parental rights
9. Restraint of marriage / trade / legal proceedings
AGREEMENT IN RESTRAINT OF MARRIAGE, VOID

Every agreement in restraint of the marriage of any person, other than a minor, is
void.
ILLUSTRATION
11. A agreed to marry B and none else. He further agreed to pay Rs. 1,000 to B if
he (A) married someone else. But A married C. B brought an action against A for
the recovery of the agreed sum on the ground that he (A) married someone else.
It was held that the agreement was void as it was in restraint of marriage.
[LOWER V. PEERS (1918) 98 ER. 160]
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AGREEMENTS IN RESTRAINT OF TRADE
Section 27 of the Act states that every agreement by which anyone is restrained
from exercising a lawful profession, trade or business of any kind, is to that extent
void.
Exceptions: The exceptions to the rule that agreement in restraint to trade is void
can be classified into:
1) Statutory Exceptions. Following are the statutory exceptions to the rule that an
agreement in restraint of trade is void.
(a) When goodwill is sold, seller is restrained from carrying on SIMILAR business
within specified local limits
(b) Where the partners of the firm make an agreement that a partner shall not
carry on any business other than that of the firm while he is a partner, the
agreement is valid.[Sec.11(2)Indian Partnership Act]
(c) Partners may agree that on ceasing to be partner, they will not carry on any
business similar to that of the firm within a specified period or within specified
local limits. Such an agreement is valid if the restrictions imposed are
reasonable.[Sec.36(2) Partnership Act]
(d)Where the partners, upon or in anticipation of dissolution of the firm, make an
agreement that some of all of them will not carry on a business similar to
that of the firm, it is valid agreement. [Sec.54, Indian Partnership Act]
(e) A service agreement may restraint employees from working elsewhere DURING
period of employment.
2) Exception under Judicial Interpretations

(a) Restraint by trade combinations. Now a days it is common to form trade,
business or professional association i.e. combination. These associations usually
frame rules, regulations and conditions of trade, sometimes, fix up the price to
be charged, or fix up the mode of selling the products or services etc. All these
bind the members, although these restrain the freedom of action of the
members.
(b) Restraint by sole selling agreement. Sometimes a seller or producer agrees to
sell his entire goods to a sole selling agent or exclusive dealer in a particular
area and who in turn also agrees not to deal in the goods of any other
producer. Such an agreement is valid and not a restraint in trade.
ILLUSTRATION
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12. Shanti paid Rs. 9000 to Venus to stop his business in a particular locality in
Nagpur. Venus did not keep his promise. Shanti filed suit for the sum. What will
be the consequence?
Ans. 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. Accordingly Shanti’s suit
for the sum will be dismissed. (MADHUB CHUNDER V/s RACOOMAR.
1874 Bang.)
However if restraint is one which is really necessary for carrying on
business, the same is not prohibited.
13. Ram entered into a bond with the company to serve for a period of five years. In
case Ram leaves the job earlier and joins elsewhere with company’s competitor
within five year, he was liable for damages. Ram was imparted necessary training
but he left the job and joined another company by taking a plea that agreement
in restraint of profession is void. Decide.
Ans. It is correct that agreement in restraint of trade is void but if
such restrictions are reasonable then they are allowed. The restraint was
reasonable as it was no more than is necessary for the protection of the
company. (Niranjan V/s The Century Spinning and Manufacturing Co.
ltd.)
AGREEMENT IN RESTRAINT OF LEGAL PROCEEDINGS (SECTION 28)
All agreements, which interfere with the course of justice, are unlawful and void as
these are against public policy. Section 28 the Act has following provisions:
(i) Agreements restricting enforcement of rights. Every agreement by which any
party to it is restricted absolutely from enforcing his rights under or in respect
of any contract by the usual legal proceedings in ordinary tribunal is void to
that extent. However, the partial restriction on the right to legal proceedings
would be valid and enforceable.
(ii) Agreements reducing the period of enforcement. Every agreement, which limits
the time within which any party may enforce his rights, is to that extent
void.
(iii) Agreement extinguishing rights on the expiry of certain period. Every
agreement that extinguishes the rights of any party to it, (from any liability)
under or in respect of any contract on the expiry of a specific period so as to
restrict any party from enforcing his rights is void to that extent.
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Exceptions:
i. any dispute between them in respect of any subject shall be referred to
arbitration (present disputes)
ii. To refer to arbitration any question between them which has already arisen or
which may arise in future, is valid; but such a contract must be in writing.
(agreement to refer past & future disputes to arbitration)
iii. Referring disputes to court in particular jurisdiction
WAGERING AGREEMENTS OR WAGER (Section 30)
According to Sir William Anson, “A wager is a promise to give money or money’s

worth upon the determination or ascertainment of an uncertain event.” Justice
Hawkins defines, “a wagering agreement is one by which two persons, professing to
hold opposite views touching the issue of a future uncertain event, mutually agree
that, dependent upon the determination of that event, one shall win from the other
and that other shall pay or hand over to him a sum of money or other stake…”
[Carlill v.Carbolic Smoke Ball Company’s case]
Such an agreement has been declared as void under the act. (Sec.30). For example
betting on cricket matches.
Effects of wagering Agreements

1. Void. The agreements by way of wager are void from beginning.(Sec.30)
2. Collateral agreements valid. The agreements collateral to void agreements need
not necessarily be void. [Gherulal Parekh v.Mahadel dass]. However, in the
State of Maharashtra and Gujarat, wagering agreements have been declared as
illegal. Therefore, in these States the collateral agreements to wagering
agreements are also void.
3. No recovery of money paid to stake holder. Money paid to the stakeholder
cannot be recovered.
4. A winner in the wagering agreement cannot sue for the recovery of money
won.
5. No suit can lie on promissory note made for a debt due on a wagering
agreement. Such a note is deemed to have been made without consideration
because a void agreement (wagering agreement) cannot be treated as
consideration for a promissory note.
6. Agents cannot recover money from his principal. An agent is not entitled to
recover any money from the principal which he has paid on a wagering
agreement, entered into on behalf of the principal.[Sec.222]
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ILLUSTRATION
14. Chandan, in Mumbai, bets with Nandan and loses. Chandan applies to Tandon for
a loan in order to pay Nandan. Tandon gives the loan to Chandan to enable him
to pay Nandan. Can Tandon recover the amount of loan from Chandon? Would it
make any difference if this transaction takes place in Hyderabad?
Ans.
i. In Mumbai (State of Maharashtra), wagering agreements are illegal
and hence void. Where an agreement is illegal, any collateral
transaction also becomes unenforceable, since it is tainted with
illegality. The contract between Chandan and Tandon is illegal and
void, being a collateral transaction to an illegal agreement. So,
Tandon cannot recover the amount of loan from Chandan.
ii. If the transaction has taken place in Hyderabad, betting transactions
are only void u/s 30 and not illegal i.e. transactions collateral to
the void agreement are valid. Thus the loan given by Tandon to
Chandan would have been valid and enforceable contract in
Hyderabad. So, Tandon can recover the amount of loan from
Chandan
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Topic 8: CONTINGENT CONTRACTS

A contract may be either absolute or contingent. In an absolute contract, promisor
undertakes to perform contract absolutely, i.e. unconditionally. But a contingent
contract depends upon the happening or non-happening of event collateral to such
contract.
According to Sec.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. The
contracts of indemnity, insurance and guarantee are definitely contingent contracts.
Similarly the contracts of life insurance are also contingent contracts to a certain
extent.
Characteristics/Essential of contingent Contracts

Following are the main characteristics of contingent contracts:
1) The performance of a contingent contract depends upon the happening or non-
happening of some future event.
2) A contingent contract is dependent upon an uncertain event.
3) The event upon which performance of a contingent contract depends must be
collateral or incidental to the contract. Collateral event is the event for which
neither of the parties makes any promise but the contract is dependent upon
the happening or non-happening of the event. It means that a contract
already exists between the parties but its performance depends upon the
happening or non-happening of the event.
4) The contingent event or act must not be the mere will of the promisor.
5) A contingent contract has all essentials of a valid contract. If any of the
elements is missing, the contingent contract is not enforceable.
Rules as To Enforcement of Contingent Contracts

The rules as to enforcement of contingent contracts are given in Sections 32 to 36
of the Act. They are as under:
1. Contingent contracts dependent on the happening of some specific uncertain
future event can be enforced only when the event has happened. (Sec.32) If the
event becomes impossible, such contracts become void.
2. Where a contingent contract is dependent upon the happening of a specified

uncertain event within a fixed time, the contract can be enforced only when the
specified event happens within the time fixed. (Sec.35 para 1)
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3. Where a contingent contract is to be performed on non-happening of a specified
future uncertain event, the contract can be enforced when the happening of that
event becomes impossible, and not before. (Sec.33).
4. Where a contingent contract is dependent upon the non-happening of some

specified uncertain future event within the time fixed, the contract may be
enforced when the (i) time fixed has expired and such event has not happened,
or (ii) before the expiry of time, if it becomes certain that the event will not
happen.(Sec.35 para 2)
5. Sometimes, a contingent contract is dependent upon the way in which a person

will act at an unspecified time. In such a case, the event shall be considered to
have 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. (Sec.34)
6. Where a contingent agreement is dependent upon the happening of an impossible

event, the agreement is void. It makes no difference whether the impossibility of
the event was known or not known to the parties at the time when the
agreement was made. (Sec.36)
PERFORMANCE OF CONTRACT
Obligations of parties to contract (Section 37)

The parties to a contract must either perform, or offer to perform, their respective
promises, unless such performance in dispensed with or excused under the provision of
this Act, or of any other law. Promises bind the representative of the promissor in
case of the death of such promissor before performance, unless a contrary intention
appears from the contract.
TENDER OF PERFORMANCE(Sec 38)

Tender is not actual performance but is only an offer to perform the obligation
under the contract. Where the promisor offers to perform the obligation, or makes a
tender and the other party refuses to accept the performance, such tender shall be
regarded as equivalent to performance. It is, therefore, also called “attempted
performance”.
Sec. 38 sums up the position as under: “Where a promisor has made an offer of
performance to the promisee, and the offer has not been accepted, the promisor is
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not responsible for non-performance, nor does he thereby lose his rights under the
contract.
Requisites of a valid tender-
a) It must be unconditional.
b) It must be of the whole quantity contracted for or of the whole obligation.
c) It must be by a person who is in a position, and is willing, to perform the
promise.
d) It must be made at the proper time and place.
e) It must be in proper form.
f) It must give a reasonable opportunity to the promisee for inspection of goods.
g) It must be made to proper person, i.e. the promisee or his duty authorized
agent.
h) It may be made to one of the several joint owners, and in such a case it has
the same effect as a tender to all of them.
Kinds of tender: Tender or attempted performance may be-

1) Tender of goods. Where in a contract for the sale of goods, the seller
satisfies all the requirements of the contract as to delivery (i.e., the
goods are in a deliverable state and nothing remains to be done by the
seller to ascertain the price) and the buyer refuses to accept the goods,
the seller is discharged by such a tender of performance and may either
maintain or successfully defend an action for breach of the contract.
2) Tender of money. Where a debtor makes a valid tender of money, but the
creditor refuses to accept it, the debtor is not discharged from making
the payment. Tender, in this case, does not constitute discharge of the
debt. When the creditor files a suit against the debtor, the debtor can
set up the defence of tender. If he deposits the money in the Court and
proves his pleas, the creditor gets the amount originally tendered to him
without any interest, whereas the debtor gets judgment for his cost of
defence.
Effect of refusal of party to perform promise wholly (Section 39)

When a party to a contract has refused to perform, or disabled himself from
performing, his promise in its entirely, the promisee may put an end to the
contract, unless he has signified, by words or conduct, his acquiescence in its
continuance.
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ILLUSTRATION
15. Emon, a singer, enters into a contract with Soni, the manager of the theatre, to
sing in his theatre two nights in every week during the next two months and
Soni agrees to pay him @ Rs.1000 for each night. On the sixth night Emon
wilfully absents himself. With the assent of Soni, Emon sings on the seventh
night. But on the following day Soni puts an end to the contract. Can Emon
claim damages for breach of contract? If Soni rescinds the contract on the sixth
night itself then state the privileges available for Emon.
Ans. On the sixth night when Emon wilfully absents himself from the
theatre, Soni is at the liberty to put an end to the contract. If Emon
sings on the seventh night with the consent of Soni, Soni has signified
his acquiescence in the continuance of the contract and cannot now put
an end to it. Emon is entitled to compensation.
If Soni rescinds the contract on sixth night when Emon was absent then
Soni can claim damages for the breach of contract by Emon (Breach by
conduct).
Person by whom promises is to be performed (Section 40)

If it appears from the nature of the case that it was the intention of the parties
to any contract that any promise contain in it should be performed by the promisor
himself, such promise must be performed by the promisor. In other cases, the
promisor or his representative may employ a competent person to perform it.
ILLUSTRATION
16. A promises to pay B a sum of money. A may perform this promise, either by
personally paying the money to B or by causing it to be paid to B by another ;
and, if A dies before the time appointed for payment, his representatives must
perform the promise, or employ some proper person to do so.
17. A promises to paint a picture for B. A must perform this promise personally
Time and Place of performance of contracts

Usually the parties lay down in the contract entered into by them the terms about
time and place of performance of that contract. Sec. 46 to 50 lay down rules
regarding time and place of performance of a contract. These Sections are reproduced
below:
1. Where, by the contract, a promisor is to perform his promise without
application by the promisee, and no time for performance is specified, the
engagement must be performed within a reasonable time.(Sec.46).
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2. When a promise is to be performed on a certain day, and the promisor has
undertaken to perform it without application by the promisee, the promisor
may perform it at any time during the usual hours of business on such day and
at the proper place at which the promise ought to be performed (Sec.47).
3. When a promise is to be performed on a certain day, and the promisor has not
undertaken to perform it without application by the promisee, it is the duty
of the promisee to apply for performance.
i. at a proper place; and
ii. within the usual hours of business(Sec.48).
4. When a promise is to be performed without application by the promisee, and
no place is fixed for its performance, it is the duty of the promisor to apply
to the promisee to appoint a reasonable place for the performance of the
promise, and to perform it at such place (Sec.49).
5. The performance of any promise may be made in any manner, or at any time,
which the promisee prescribes (Sec.50).
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Topic 9: PERFORMANCE &

DISCHARGE
A contract is said to be discharged, when the obligations created by it come to an

end. A contract may be discharged or terminated by any one of the following modes:
1. Discharge by performance. The most obvious mode of discharge of a contract is by

performance of the obligation by each party. When each party performs his
obligation, the contract comes to an end.
Performance may be actual, or attempted. Where a person does what he undertook
to do, he is said to have actually performed his promise. But sometimes it may
happen that a person who is bound to perform a promise is willing to perform it at
the proper time and place but cannot do so because the other party does not accept
the performance. This is knows as “attempted performance” or “tender”.
2. Discharge by agreement or consent. A contract rests on the agreement of the

parties. As it is their agreement, which binds them, so by their agreement, they
may be discharged.
Now we may take up the various cases that fall under this head one by one:
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i. Novation: Novation occurs when a new contract is substituted for an existing
one, either between the same parties; or between the new parties. The
consideration for the new contract is the discharge of the old contract.
ii. Alteration. Alteration of a contract may take place when one or more terms
of the contract are altered by the mutual consent of all the parties to the
contract.
iii. Rescission. Rescission of a contract takes place when all or some of the
terms of the contract are cancelled. It may occur under any of the following
circumstances:
(a) By mutual consent
(b) Where one party fails in the performance of his obligation under the
contract, the other party may rescind the contract without
prejudice to his right to claim compensation for breach by the other
party.
(c) In a voidable contract, the aggrieved party may cancel the contract.
Rescission can be effected by agreement between the parties at any
time before the contract is discharged by performance or in some
other ways.
iv. Remission. Remission means acceptance of lesser fulfillment of the promise
made, e.g. acceptance of a lesser sum than what was contracted for in
discharge of the whole of the debt.
v. Waiver. Waiver means the intentional relinquishment or giving up of a right
by a party entitled thereto under a contract so that the other party to
the contract is released from his obligation.
vi. Merger. Merger takes place when an inferior right accruing to party in a
contract vanishes or merges into the superior right accruing to the same
party under the same contract. If, for example, a higher security is accepted
in place of a lower security, the security, which in the eyes of law is inferior
in operative power, merges and is extinguished in the higher security.
MATTER NOVATION ALTERATION

Meaning New contract in place of old Change in one or more terms
contract of contract with consent of
parties
New contract Yes Does not require
Different parties May involve Parties are same
Change in terms & May or may not involve Always require
conditions
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MATTER RESCISSION ALTERATION

Meaning Cancellation of contract Change in one or more terms
of contract
Mutual consent With mutual consent or by Can’t take place without
aggrieved party mutual consent
Effect Contract ends Parties are bound to each
other under altered contract
3. By impossibility of performance (Sec.56). Impossibility of performance may fall

into any of the following three categories:
a. Impossibility at the time making the contract, with the knowledge of the
parties. In this case the contract is void ab initio and the parties are discharged
from the performance of the contract.
b. Impossibility at the time of making the contract unknown to the parties. In
this case, the contract becomes void as soon as the impossibility is discovered.
c. Impossibility, which arises subsequent to the formation of the contract. Such
impossibility, as a general rule, is no excuse for the non-performance of the
contract. But where this impossibility is caused by the circumstances beyond
the control of the parties, they are discharged from the further performance
of the obligation arising under the contract.
4. By lapse of time. The Limitation Act lays down that a contract should be
performed within a specified period otherwise the contract shall be terminated. For
example, a loan should be paid back within 3 years and if it is not paid back and the
creditor does not file a suit within this period for the recovery of the amount, the
debt becomes time-barred and hence irrecoverable. Again if a contract is to be
performed at a stipulated time, it is discharged if it is not performed at such
stipulated time. The party not in fault, in such a case, need not perform his
obligation.
5. Discharge by operation of law. This includes discharge-

a. By merger. Refer to point 2 (vi) discussed above.
b. By the unauthorized alteration of terms of a written agreement. Where a
party to a contract makes any material alteration in the contract, without
the consent of the other party, the other party can avoid the contract.
c. By insolvency. When a person is adjudged insolvent, he is discharged from all
liabilities or debts incurred prior to his adjudication.
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d. By death. In contracts involving personal skill or ability, the contract is
terminated on death. In other contracts, the rights and liabilities of a
deceased person pass on to the legal representatives of the deceased person.
e. By rights and liabilities becoming vested in the same person. Where the rights
and liabilities under a contract vest in the same person, the other parties are
discharged, e.g., when a bill gets into the hands of the acceptor, the other
parties are discharged of their liability.
6. Discharge by breach of contract. If one of the two parties to a contract breaks

the obligation or shows by his conduct or words his unwillingness to perform the
obligation, which the contract imposes, a new obligation arises- a right of action
conferred upon the party injured by the breach. This right of action by the injured
party consists in-
i. treating the contract as discharged and suing the other party for breach of
contract, or
ii. treating the contract as still binding, if the time for the performance has
not yet arrived and compelling the other party to perform his part when
the time for it comes.
Subsequent or supervening impossibility

Impossibility, which arises subsequent to the formation of the contract, is called
subsequent or supervening impossibility. Sec.56, expressly provides that ‘A contract
to do an act which after the contract is made becomes impossible, or by
reason or some event which the promisor could not prevent, becomes void
when the act becomes impossible or unlawful.’ This is called the doctrine of
supervening impossibility.
A contract is discharged by supervening impossibility in the following cases:
 Destruction of subject matter of contract
 Nonexistence or non-occurrence of particular state of things.
 Death or incapacity of a person, where the contract depends on the
personal skill or qualification.
 Government or legislative intervention
 Outbreak of war
Impossibility of performance-not an excuse

Impossibility of performance is, as a rule, not an excuse for non-performance of a
contract. In the following cases a contract is not discharged on the ground of doctrine of
supervening impossibility.
 Difficulty of performance: A contract is not discharged by the mere fact
that it has become more difficult to perform due to some non contemplated
events or delay.
 Commercial hardship
 Impossibility due to failure of a third person on whose work the promisor
relied
 Strikes, lock-outs and civil disturbances
 Failure of one of the objects
Effects
When the performance of a contract becomes impossible or unlawful subsequent to its
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formation, the contract becomes void (Sec.56)
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ILLUSTRATION
18. Akhilesh entered into an agreement with Shekher to deliver him (Shekhar) 5000
bags to be manufactured in his factory. The bags could not be manufactured
because of strike by the workers and Akhilesh failed to supply the said bags to
Shekhar. Decide whether Akhilesh can be exempted from liability under the
provisions of Indian Contract Act, 1872.
Ans. No, as strike is not supervening impossibility.
APPROPRIATION OF PAYMENTS
The question of appropriation of payment becomes important when a debtor owns

several distinct debts to the same creditor and makes part payment to the creditor.
At that time a question may arise: against which debt is this payment to be
appropriated? The creditor would naturally like to appropriate a payment towards a
debt, which he is not likely to recover. But appropriation is a right generally given to
the debtor and for his benefit.
The rules relating to appropriation of payments made by a debtor to his creditor as
contained in Secs.59 to 61 are as follows:
i. Where the debtor intimates (Sec.59). In the first instance, the right to
adopt the manner of appropriation rests with the debtor. If he expressly
intimates that the payment should be applied towards the discharge of a
particular debt, the creditor must do so. If there is no express intimation by
the debtor, the law will look to the circumstances attending the payment for
appropriation.
ii. Where the debtor does not intimate (Sec.60). Where the debtor does not
expressly intimate or where the circumstances attending on the transaction
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do not indicate any intention, the creditor is at liberty to apply it to any
lawful debt actually due and payable to him. But the creditor cannot apply
the payment to a disputed or unlawful debt. The creditor may even apply
the payment to a time-barred debt.
iii. Where the debtor does not intimate and the creditor fails to appropriate
(Sec.61). Where the debtor does not expressly intimate and where the
creditor fails to make any appropriation, it is open to the debtor to insist
that the appropriation shall be done in chronological order i.e. in order of
time.
EXAMPLE
 A owes B, among other debts, 1,000 rupees upon a promissory note
which falls due on the' first June. He owes B no other debt of that
amount. On the first June A pays to B 1,000 rupees. The payment is
to be applied to the discharge of the promissory note.
 A owes to B, among other debts, the sum of 567 rupees. B writes to
A and demands payment' of this sum A sends to B 567 rupees. This
payment is to be applied to the discharge of the debt of which B had
demanded payment.
ASSIGNMENT OF CONTRACT
By the assignment of a contract we mean transfer of contractual rights and liabilities

to a third party with or without the concurrence of the other party to the
contract.
Assignment may take place-
 By the act of the parties. This will include assignment of- i. contractual
liabilities, and ii. contractual rights.
 By operation of law. This will take place by death, or insolvency of a party to
the contract.
1. Assignment by act of the parties of the contractual liabilities.

A promisor cannot assign his liabilities or obligations under a contract. In other
words, a promisee cannot be compelled by the promisor or a third party to accept
any other person as liable to him on the promise.
Limitations to the rule:
i. Vicarious performance. It is open to a party to have the contract performed
vicariously by another person in a satisfactory manner provided the contract
does not expressly or impliedly contemplate performance only by the promisor.
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However, the original party remains liable for the proper performance of the
obligation under the contract.
ii. Novation (Secs.41 and 62). Novation is the substitution of a new contract
for an existing one either between the same parties or between new parties,
the discharge of the old contract being the consideration for the new one.
Novation can take place only by an agreement between the parties. However,
contracts involving personal skill or ability or other personal qualifications
cannot be assigned (Sec.40).
ILLUSTRATION
1. A owes money to B under a contract. It is agreed between A, B and C
that B shall thenceforth accept C as his debtor, instead of A. The old
debt of A to B is at an end, and a new debt from C to B has been
contracted.
2. A owes B 10,000 rupees. A enters into an arrangement with B, and
gives B a mortgage of his (A's) estate for 5,000 rupees in place of the
debt of 10,000 rupees. This is a new contract and extinguishes the old.
(b) Assignment by act of the parties of contractual rights.

i. The right and benefits under a contract may be assigned, if the
obligation under the contract is not a personal nature, and the assignee
can demand performance from the other party to the contract, i.e. the
promisor.
ii. An actionable claim can always be assigned but the assignment to be
complete and effectual must be effected by an instrument in writing.
Notice of such assignment must also be given to the debtor.
2. Assignment by operation of Law

This takes place in cases of death and insolvency.
i. Death. Upon the death of a party to a contract his rights and liabilities
under the contract (except in the case of contracts involving personal
qualifications) devolve upon his heirs and legal representatives.
ii. Insolvency. In case of insolvency of a person, his rights and liabilities
incurred previous to adjudication pass on to the Official Receiver or
Assignee, as the case may be
RIGHTS AND LIABILITIES OF JOINT PROMISORS
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Where two or more persons enter into a joint agreement with one or more persons,
the question arises; who is liable to perform and who can demand performance?
Secs.42 to 45 deal with this subject and are discussed below:
1. Devolution of joint liabilities (Sec.42). When two or more persons have made a
joint promise, then, unless a contrary intention appears from the contract, all
such persons must jointly fulfill the promise. Upon the death of one of the joint
promisor, his liability devolves upon his legal representatives, and his legal
representatives are jointly to perform the contract with the surviving parties. If
all the parties die, the liability devolves upon their legal representatives jointly.
2. Any one of joint promisors may be compelled to perform (Sec.43). When two or
more persons make a joint promise, the promisee may, in the absence of 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 or more joint
promisors makes default in such contribution the remaining joint promisors must
bear the loss arising from such default in equal shares.
3. Effect of release of one joint promisor.(Sec.44) 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 or joint promisors, neither
does it free the joint promisors so released from responsibility to the other joint
promisor or joint promisors.
4. Devolution of joint rights (Sec.45). When a person has made a promise to
several persons, then, unless a contrary intention appears from the contract, the
right to claim performance rests as between him and them i.e., all promisees
jointly during the lifetime. When one of the promisees dies, the right to claim
performance rests with his legal representatives jointly with the surviving
promisees. When all the promisees die, the right to claim performance rests with
their legal representatives jointly.
EXAMPLE
3. A, B and C jointly promise to pay D 3,000 rupees. D may compel
either A or B or C to pay him 3,000 rupees.
4. A, B and C jointly promise to pay D the sum of 3,000 rupees. C is
compelled to pay the whole. A is insolvent, but his assets are sufficient
to pay one-half of his debts. C is entitled to receive 500 rupees from
A's estate, and 1,250 rupees from B.
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5. A, B and C are under a joint promise to pay D 3,000 rupees. C is
unable to pay anything, and A is compelled to pay the whole. A is
entitled to receive 1,500 rupees from B.
6. A, B and C are under a joint promise to pay D 3,000 rupees, A and B
being only sureties for C. C fails to pay. A and B are compelled to pay
the whole sum. They are entitled to recover it from C.
7. A, in consideration of 5,000 rupees, lent to him by B and C, promises
B and C jointly to repay them that sum with interest on a day
specified. B dies. The right to claim performance rests with B's
representative jointly with C during C's life, and after the death of C
with the representatives of B and C jointly
ILLUSTRATION
8. X, Y and Z jointly borrowed Rs.50,000 from A. the whole amount was
paid to A by Y.
Decide in the light of the Indian Contract Act, 1872 whether: (5 Marks)
(i) Y can recover the contribution from X and Z,
(ii) legal representatives of X are liable in case of death of X,
(iii) Y can recover the contribution from the assets, in case I
becomes insolvent.
Ans:
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Topic 10: BREACH OF CONTRACT

Breach of Contract
Actual Anticipatory
Breach Breach
On the due date of performance

OR BEFORE due date of
During performance performance
Aggrieved Party can TREAT CONTRACT AS DISCHARGED

And
CAN TAKE LEGAL ACTION IMMEDIATELY
MEASURE OF DAMAGES
KEPT ALIVE TILL

CONTRACT ENDED AT ONCE PERFORMANCE DATE
PRICE ON DATE OF BREACH PRICE ON DATE OF

(-) PERFORMANCE
CONTRACT PRICE (-)
CONTRACT PRICE
REMEDIES FOR BREACH OF CONTRACT
Rescission
Damages
Quantum meruit
Specific performance
Injunction
Restitution
Parties to a contract are expected to perform their respective promises. If one of

the parties breaks his obligation that the contract imposes, there takes place “breach
of contract.” In such a case, a new obligation will arise- a right of action conferred
upon party injured by the breach. Besides this, there are circumstances in which the
breach not only gives rise to a cause of action but will also discharge the injured
party from such performance as may still be due from him.
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If the contract is unilateral, the only remedy available to the party who suffers by
breach shall be to claim relief for the breach. If the contract is bilateral, the party
who suffers by breach by the other party has two remedies:
1. He can claim relief for breach, and
2. In certain circumstances, he can be absolved from the further performance
of the contract.
Breach of contract may be-

1. Actual Breach of contract:
(a) At the time when performance is due. Actual breach of contract occurs when
at the time when performance is due, one party fails or refuses to perform
his obligation under the contract.
(b) During the performance of the contract. Actual breach of contract occurs
when during the performance of the contract, one party fails or refuses to
perform his obligation under the contract.
2. Anticipatory breach of contract. Anticipatory breach of contract occurs when a

party repudiates his promise or obligation under the contract before the time for
performance arrives. This may happen in one of the following ways:
Rights of promisee in case of anticipatory breach:

1. He can treat the contract as discharged so that he is absolved from the
performance of his part of the promise.
2. He can immediately take a legal action for breach of contract, i.e. file a suit
for damages, specific performance, or injunction.
The breach of contract by one party, before the time for performance has come,
does not, of itself, put an end to the contract. However, the breach discharges the
aggrieved party, if he so chooses, and entitles him to sue for the breach at once.
If however, he (the promisee or party not in fault) refuses to accept the discharge
or repudiation by the other party, the contract remains in existence, but at the risk
of the promisee. The promisor may subsequently perform it or if an event happens
which discharges the contract legally (e.g. supervening impossibility), the promisor
may take advantage of such discharge. In other words, the promisee looses his right
to sue for the damages.
Measure of damages in anticipatory breach of contract:
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1. If the contract is ended at once. If the promisee elects to end the contract
at once, he can sue the promisor for the damages. The amount of damages,
which he can recover, will be measured by the difference between,
i. The price prevailing on the date of the breach; and
ii. The contract price.
2. If the contract is kept alive till the date of performance of the contract,
then the measure of damages will be the difference between
i. The price prevailing on the date of the performance; and
ii. The contract price.
REMEDIES FOR BREACH OF CONTRACT

In case of breach of contract, the injured party has one or more of the following
remedies:
1. Rescission. When there is breach of a contract by one party, the other party
is absolved from all his obligations under the contract.
2. Damages. When one party breaches a contract, the other party can claim
damages under the contract. Damages are monetary compensation payable to
the aggrieved party. The object of awarding damages for breach of a contract
is to put the injured party in the position in which he would have been had
there been performance and not breach.
3. Quantum meruit. This means ‘as much is merited’. Where the further
performance of a contract is not possible because of some hurdle created by
the promisee, the promisor can claim compensation for the work already done
by him.
4. Specific performance: It means the actual carrying out of the promise by the
parties to the contract
When is specific performance allowed?
a. When actual damages are not measurable
b. Where monetary compensation is not adequate remedy.
When is specific performance NOT allowed?

i. Where monetary compensation is an adequate remedy.
ii. Where the contract is not certain.
iii. Where the contract is in its nature revocable.
iv. Where the contract is of a personal nature, e.g., a contract to marry.
v. Where the contract is made by a company in excess of its powers as laid
down in its charter (ultra vires)
vi. Where the performance of a contract involves the performance of a
continuous duty, which the Court cannot supervise.
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5. Injunction. Injunction is a mode of securing the specific performance of the
negative terms of the contract.
6. Restitution : When an aggrieved party rescinds a voidable contract, it shall, if
it has received any benefit under the contract from the other party to such
contract, restore such benefit, so far as may be, to the other party from
whom he received it (Sec.64).
Likewise, when an agreement is discovered to be void or when a contract
becomes void, the party which has received any benefit under the agreement
or contract, shall have to restore it to the person from whom he received it
(Sec.65).
PRINCIPLES TO ASCERTAIN DAMAGES

The foundation of modern law of damages, is to be found in the judgement in the
case of Hadley vs. Baxendale, (1854) 9 Exch.341. Alderson B. observed in this case
as follows:
Sec.73 is clearly based on the judgment in the case of Hadley vs. Baxendale. The
rules laid down in this Section are as follows:
i. Ordinary / Natural Damages: these are the damages which are payable fro the
loss arising naturally & directly as a result of breach of contract.
ii. Remote Damages: Damages not arising in the usual course of things but arising
in circumstances peculiar to the special case are not recoverable.
iii. Special Damages: these are the damages which are payable for loss arising due
to some special circumstance. It can be recovered only if it is in contemplation
of both the parties i.e parties have notice of such damage.
iv. Nominal Damages: where party suffers no loss, court may allow nominal
damages simply to establish that party has proved his case & won. It is very
small in amount.
v. Exemplary / vindictive / punitive damages: these damages are allowed not to
compensate party but as mean of punishment to defaulting party. Court may
award in following two cases:
 Breach of contract to marry – loss based on mental injury
 Wrongful dishonor of cheque – smaller amount, larger the damage.
vi. Liquidated damages & penalty: party may specify the amount of damage at
the time of entering into contract in event of breach of contract.
 If specified sum represents, fair & genuine pre-estimate damages
likely to result due to breach, it is called liquidated damages
 But if specified sum is disproportionate to the damages, it is
called penalty.
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QUANTUM MERUIT
The phrase ‘quantum meruit’ literally means ‘as much as earned’ or ‘as much as is
merited’. When a person has begun work on a contract, and before he has completed
it, if the other party repudiates the contract or some event happens which makes
the further performance of the contract impossible, he can claim remuneration for
the work he has already done. The right to claim quantum meruit does not arise out
of a contract as the right to damages does; it is a claim on the quasi-contractual
obligation, which the law implies in the circumstances.
The claim on ‘quantum meruit’ arises;
1. Claim of Quantum Meruit for party NOT in fault:
(a) When one party prevents other from completion of contract
(b) Where contract has become void before completion of contract
(c) Where agreement is discovered to be void.
2. Claim of Quantum Meruit for party at fault:

(a) If divisible contract is partly performed
Ex: A agreed to supply B 500 units of TV set before a particular
date. A supplied only 4oo sets before the date & declared his
intention not to deliver remaining units. B retained 400 units. A,
therefore, is entitled to recover the price of 400 sets on quantum
meruit.
(b) Indivisible contract is performed completely but badly
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Ex: A agreed to paint & decorate B’s house for a lump sum of Rs. 1
Lakh. The work was done but in a defective manner. The cost of
remaking was Rs. 15,000. Held A could recover from B, Rs. 85,000.
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Topic 11: QUASI CONTRACTS

In some cases the law implies from the circumstances of the case and from the conduct and
relationship of the parties that there is a promise imposing an obligation on one party and
conferring a right in favour of the other even though there is no offer and acceptance,
consensus ad idem, and agreement. These cases, strictly speaking, are not contracts but the
law recognizes them as ‘relations resembling those created by contracts.’ Such relationships
are called quasi-contracts, or constructive contracts in English Law and ‘Certain relations
resembling those created by contracts’ under Indian Law. Such contracts rest on the ground
of equity that a person shall not be allowed to enrich himself unjustly at the expense of
another.
Sec. 68 o 72 deal with the following quasi-contracts:
a. Claim for necessaries supplied to a person incapable of contracting, or on his account
(Sec.68). If a person, incapable of entering into a contact (e.g.. a minor), or
anyone whom he is legally bound to support, is supplied by another with necessaries
suited to his condition in life, the person who has furnished such supplies is entitled
to be reimbursed from the property of such incapable person.
b. Re-imbursement of person paying money due by another in payment of which he is
interested (Sec.69). A person who is interested in the payment of money, which
another is bound by law to pay, and who therefore, pays it, is entitled to be
reimbursed by the other.
c. Obligation of person enjoying benefit of a non-gratuitous act (Sec.70). Where a
person lawfully does anything for another person, or delivers anything to him, not
intending to do so gratuitously, and such other person enjoys the benefit thereof,
the latter is bound to make compensation to the former in respect of, or to
restore, the thing so done or delivered.
d. Responsibility of finder of goods (Sec.71). A person, who finds goods belonging to
another and takes them into his custody, is subject to the same responsibility as a
bailee. In all cases of bailment the bailee is bound to take as much care of the goods
bailed to him, as a man of ordinary prudence would, under similar circumstances, take
of his own goods of the same bulk, quality and value as the goods bailed.
e. Liability of person to whom money is paid or thing delivered by mistake or under
coercion (Sec.72). A person to whom money has been paid, or anything delivered, by
mistake or under coercion, must repay or return it.
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Specific Relief Act 1963
Specific Relief Act, 1963
Introduction
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 fulfilment 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
Under the Specific Relief Act, 1963, remedies have been divided as specific relief
(Sections 5-35) and preventive relief (Sections 36-42). These are:
 Recovering possession of property (Sections 5-8);
 Specific performance of contracts (Sections 9-25);
 Rectification of Instruments (Section 26);
 Rescission of contracts (Sections 27-30);
 Cancellation of Instruments (Section 31-33);
 Declaratory decrees (Sections 34-35); and
 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 covenant entered into with
his predecessor in title and the reversioner is entitled to the benefit of such
covenant;
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;
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fa) when a LLP has entered into a contract and subsequently becomes amalgamated
with another limited liability partnership, the new LLP which arises out of the
amalgamation.”.
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.
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, (subject to provision of Sec
11(2), 14 & 16) 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:
 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
 where the property is held by the defendant as the agent or trustee of the
plaintiff.
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).
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, (contract Shall) be
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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.
Specific performance of part of a contract (Section 12)

Section 12(1) lays down the general principle that except as otherwise hereinafter
provided in this section, the Court shall not direct the specific performance of a part
of a contract.
Sections 12(2)-(4) lay down the exceptions to this general rule as follows:
i. Section 12(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.
ii. Section 12(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
 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
 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. Section 12(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.
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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:
 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;
 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;
 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;
 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.
Contracts which cannot be specifically enforced (Sec 14)

The following contracts cannot be specifically enforced, namely:—
a) Where a party to the contract has obtained substituted performance of contract u/s
20;
b) A contract, the performance of which involves the performance of a continuous duty
which the court cannot supervise;
c) A contract which is so dependent on the personal qualifications of the parties that
the court cannot enforce specific performance of its material terms; and
d) A contract which is in its nature determinable.
Power of court to engage experts (Sec 14A)

1) Without prejudice to the generality of the provisions contained in the CPC 1908, in
any suit under this Act, where the court considers it necessary to get expert opinion
to assist it on any specific issue involved in the suit, it may engage one or more
experts and direct to report to it on such issue and may secure attendance of the
expert for providing evidence, including production of documents on the issue.
2) The court may require or direct any person to give relevant information to the
expert or to produce, or to provide access to, any relevant documents, goods or
other property for his inspection.
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3) The opinion or report given by the expert shall form part of the record of the suit;
and the court, or with the permission of the court any of the parties to the suit, may
examine the expert personally in open court on any of the matters referred to him or
mentioned in his opinion or report, or as to his opinion or report, or as to the
manner in which he has made the inspection.
4) The expert shall be entitled to such fee, cost or expense as the court may fix, which
shall be payable by the parties in such proportion, and at such time, as the court may
direct.”.
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 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 (through whom he
has been in possession or any person) claiming through him may by 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. Section 5 thus provides for a suit for ejectment on the basis of title
and Section 6 gives a remedy without establishing title
 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,).
 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 (Section 7)

A person is entitled to recover the possession of specific movable property in the
manner provided by the Code of Civil Procedure, 1908.
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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 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.
 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.
Liability of person in possession, not as owner to deliver to persons entitled to

immediate possession (Section 8)
It 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, 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.
 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.
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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,
ca) when a LLP has entered into a contract and subsequently becomes amalgamated
with another LLP, the new LLP which arises out of the amalgamation”.
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.
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, (who has
obtained subsequent performance u/s 20) 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 explanation states that for the purpose of clause (c),
 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
 the plaintiff must aver Prove performance of, or readiness and willingness to
perform, the contract according to its construction.
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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)
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 (Ram Awadh v. Achhaibar Dubey)
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.
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.
Non-enforcement except with variation (Section 18)

According to this Section, 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;
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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.
Substituted performance of contract (Section 20)

(1) Without prejudice to the generality of the provisions of ICA, 1872, and, except
as otherwise agreed upon by the parties, where the contract is broken due to non-
performance of promise by any party, the party who suffers by such breach shall
have the option of substituted performance through a 3rd party or by his own
agency, and, recover the expenses and other costs actually incurred, spent or
suffered by him, from the party committing such breach.
(2) But he need to give a written notice of 30 days to the party in breach calling
upon him to perform the contract within specified time, and on his refusal or
failure to do so, he may get the same performed by a 3rd party or by his own
agency:
Provided that the party who suffers such breach shall not be entitled to recover
the expenses and costs unless he has got the contract performed through a 3rd
party or by his own agency.
(3) Where the party suffering breach of contract has got the contract performed
through a 3rd party or by his own agency after giving notice, he shall not be
entitled to claim relief of specific performance against the party in breach.
(4) Nothing in this section shall prevent the party who has suffered breach of
contract from claiming compensation from the party in breach.
Special provisions for contract relating to infrastructure

project (Section 20A)
(1) No injunction shall be granted by a court in a suit under this Act involving a
contract relating to an infrastructure project specified in the Schedule, where
granting injunction would cause impediment or delay in the progress or
completion of such infrastructure project.
(2) The CG may, depending upon the requirement for development of

infrastructure projects, and if it considers necessary or expedient to do so, by
notification in the Official Gazette, amend the Schedule relating to any Category of
projects or Infrastructure Sub-Sectors.
(3) Every notification issued under this Act by the CG shall be laid, as soon as may
be after it is issued, before each House of Parliament, while it is in session, for a
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total period of 30 days which may be comprised in one session or in 2 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 notification or both Houses agree that the notification should
not be made, the notification 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 notification.
Special Courts (Section 20B)

The SG, in consultation with the Chief Justice of the High Court, shall designate, by
notification published in the Official Gazette, one or more Civil Courts as Special
Courts, within the local limits of the area to exercise jurisdiction and to try a suit
under this Act in respect of contracts relating to infrastructure projects.
Expeditious disposal of suits (Section 20C)

Notwithstanding anything contained in the CPC, 1908, a suit filed shall be
disposed of by the court within 12 months from the date of service of summons to
the defendant:
Provided that the said period may be extended for a further period not exceeding
6 months in aggregate after recording reasons in writing for such extension by
the court.”.
Court’s power to award damages in certain cases(Section 21)

 Section 21(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.
 Section 21(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.
 Section 21(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.
 Section 21(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.
 Section 12(5) lays down that no compensation shall be awarded under this Section
unless the plaintiff has claimed such compensation in his 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.
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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.
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 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.
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)

 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
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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).
 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.

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 Contract(Section 27)

 “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 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 –
 where the contract is voidable or terminable by the plaintiff;
 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
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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.
 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.
Cancellation of Instruments
 Section 31(1) 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.
 Section 31(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).
 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, 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.
 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.
For example, 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
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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).
 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.
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 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.
 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.
 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.
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,
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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.
 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;
1. It is a judicial process.
2. The object of this judicial process is to restrain or to prevent.
3. The act restrained or prevented is a wrongful act. An injunction acts or operates
always in personam.
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 injunction may be dissolved at any time under Civil Procedure Code
by the defendant 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.
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 Section 37(1) 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.
 Section 37(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.
 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.
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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;
ha) if it would impede or delay the progress or completion of any infrastructure
project or interfere with the continued provision of relevant facility related
thereto or services being the subject matter of such project.”
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,
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
21. 17
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. 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”.
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The Sale Of Goods Act, 1930
SALE OF GOODS ACT, 1930

Topic 1: SALE & AGREEMENT TO SELL
Introduction:
 The Sale of Goods Act, 1930, governs transfer of property in goods
 It does not include transfer of immovable property which is governed by
the Transfer of Property Act, 1882.
 Contract of Sale of Goods is a special contract.
 Originally, it was part of Indian Contract Act itself in chapter VII (sections
76 to 123). Later these sections in Contract Act were deleted, and separate
Sale of Goods Act was passed in 1930.
 It came into force on the 1st of July 1930 as, „The Indian Sale of Goods Act,
1930‟. Later in 1963, the word “Indian” was omitted and it became “The Sale of
Goods Act, 1930”.
 The Sale of Goods Act extends to the whole of India.
 As per section 3 of the Sale of Goods Act, the principles of the Contract Act
relating to formation of contract, performance of contract, law of damages etc
are also applicable to contract of the sale of goods in so far as they are not
inconsistent with the express provisions of the Sale of Goods Act
22.1
Sale of Goods
Transfer of Price Performance of Breach of

Property (Money Consideration) Contract Contract
Immediate Ownership
transfer of in goods not
ownership yet Subject matter Unpaid
Effects of Contract
(Sale) transferred Goods Seller
(Agreement
to sell)
Specific or Right of Lien
Future or Conditions & Right of stoppage in
Ascertained or
Contingent Warranties transit
Unascertained
Right to re-sale
Contract of Sale:
A contract of sale of goods is a contract

 Whereby the seller
 Transfers or Agrees
 To Transfer the property / ownership
 In Goods
 To the Buyer
 For a price
Essentials of Contract of Sale

 Two parties. A contract of sale is made between two parties. They are known as
‘seller’ and ‘buyer’. Seller and buyer must be two different persons, because a person
cannot buy his own goods. However, in case of sale by auction, the seller may reserve
his right to bid in the auction and purchase his own goods.[Sec.64(3)]. A husband
and wife can also be the two parties in a contract of sale.
 Goods. In order to make a contract of sale, there must be some goods. Goods mean
every kind of movable property other than actionable claims and money, i.e. legal
22.2
tender. It includes shares, patent rights, copyrights, trademarks, growing crops, grass,
fruits, minerals, water, electricity etc. But immovable property cannot be the subject
matter of contract of sale.
 Price. One of the most essential elements of a contract of sale is ‘price’. ‘Price’ means
the money consideration for a sale of goods.[Sec.2(10) It is a consideration paid or
agreed to be paid by a buyer to the seller. If the property in the goods is
voluntarily transferred without any consideration, it is a gift.
If goods are exchanged for goods, it is barter, and not sale. Similarly, where goods are
given in consideration for the work or labour done or for rent for any valuable
consideration other than money, it is not a sale.
 Transfer of property. In a contract of sale, the seller must transfer or agree to
transfer the general property (i.e. absolute ownership) in the goods to the buyer.
 Free consent. A contract of sale must be by the free consent of the parties
 Sale or agreement to sell. Contract of sale includes both a sale and agreement to sell.
 Essential elements of a contract. In addition to the above stated essential elements, all
the essentials elements of a valid contract must be simultaneously present in a
contract of sale.
SALE Vs. AGREEMENT TO SELL
A ‘contract of sale’ is a generic term and includes the following:

(1) Sale: Where under a contract of sale the property in the goods is transferred from the
seller to the buyer, the contract is called a sale.[Sec.4(3)]. According to Blackstone ‘sale
is a transmutation of property from one man to another in consideration of some price.’
Example: A sells is motorcycle to B for ` 10,000. It is sale since the ownership of motorcycle
is transferred to B.
(2) Agreement to Sell: Where the transfer of the property in the goods is to take place
at a future time or subject to some conditions thereafter to be fulfilled, the contract is
called an agreement to sell.[Sec.4(3)]
Thus, in case of agreement to sell, the transfer of property in the goods does not takes place
immediately but at a future time. Thus, it is an executory contract.
An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled
subject to which the property in the goods is to be transferred.[Sec.4(4)]
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Example: A agreed to buy from B a certain quantity of nitrate of soda. The ship, carrying
the nitrate of soda, was yet to arrive. This is an agreement to sell. In this case, the
ownership is to be transferred to A on the arrival of ship containing the specified goods.
Distinction between Sale and Agreement to Sell

Basis of
Sale Agreement to sell
distinction
1. Nature It is an executed contract. It is an executory contract.
2. Transfer In sale, the ownership of the Transfer of ownership takes

to ownership goods is transferred place at a future time or on
immediately. fulfillment of conditions of
agreement to sell.
3. Conveyance A sale implies a contract plus In agreement to sell, there is no
of property conveyance of property. conveyance of property. It gives
Therefore, a buyer gets a right buyer the rights against the
in rem. He can enjoy the goods seller only.
against the whole world.
4. Type of Only the existing and specific In case of agreement to sale,
goods goods can be the subject the goods are usually the future
matter of sale. or contingent. Sometimes, it is
unascertained existing goods.
5. Risk of In sale, risk passes with the In this case, the seller is to bear
loss ownership. Hence, if goods are the risk of loss even though the
destroyed, the buyer is to bear goods are in possession of the
the loss even though the goods buyer.
are with the seller.
6. Rights of In sale, if seller is an unpaid In case of agreement to sell if
seller seller, he can sue the buyer for the buyer makes the breach of
price. If goods are in his contract the seller can sue the
possession he can also exercise buyer for damages even though
his rights against the goods, the goods are in his possession.
i.e.(i) lien, (ii) stoppage of
22.4
goods on transit, and (iii) resell
the goods.
7. Rights of In a sale, if the seller makes a In an agreement to sell, the
buyer breach of contract, the buyer buyer can sue the seller for
can sue for damages. If the damages on breach of contract.
seller resells the goods, the
buyer can even sue the third
party for recovery of the
goods.
8. Insolvency In case a sale, if the buyer In agreement to sell, the seller
of the buyer. becomes insolvent, the official is not bound to deliver the
assignee/receiver can claim the goods unless the full price of
goods because the buyer is the the goods is paid to him because
owner of goods. The seller is the ownership of the goods is
entitled to ratable dividend for still with the seller.
the price only.
9. Insolvency If the seller becomes insolvent If the seller becomes insolvent
of the seller after sale, the buyer can claim after agreement to sale, the
the goods from official buyer can claim ratable dividend
Assignee/ Receiver. It is for the price of the goods if he
because ownership of the goods has already paid.
is with the buyer.
22.5
Topic 2: SALE & OTHER TRANSACTIONS

SALE AND HIRE – PURCHASE AGREEMENT
In a sale, the seller the seller transfers the property in the goods to the buyer for a price.
A hire-purchase agreement is not a sale or actual sale. It is an agreement under which an
owner of goods or article gives it on hire on a promise by the hirer to pay a certain number
of installments of specified amount of money as hire charges and the owner gives the hirer an
option either to return the article or to become owner of it by paying all the installments of
hire.
Distinction between a Sale and a Hire-Purchase Agreement

Basis Sale Hire-purchase agreement
1. Transfer of In sale, ownership of goods In hire-purchase agreement, the
ownership is immediately transferred. ownership of goods passes to the
hirer when he pays all the
installment of hire.
2. Number of There is only one contract There are two contracts within this
contracts of sale. agreement (i) the contract of
bailment for hire, and (ii)
agreement to sell subject to the
payment of installments.
3. Possession of In sale, the possession of The possession of goods must pass
goods goods may remain with the on to the hirer.
seller
4. Position of The buyer is in the position The hirer is in a position of a
parties. of an owner of goods. bailee.
5. Termination of A seller or buyer cannot A hirer has an option to terminate
contract terminate the contract. If the contract of hire at any time.
anyone does so, he is liable But in such a case, the owner can
to pay damages. retain the installments paid and
22.6
claim the arrears of installments
due.
6. Treatment of In sale, the payment made Payment of installments is treated
installments in installments is treated as as hire charges for the use of goods
payment towards the price until all the installments are paid
of goods. and option to buy is exercised by
the hirer.
7. Right to regain In sale, once possession of The owner can regain the possession
possession goods is transferred to the of goods until all the installments
buyer, the seller cannot are paid or hirer does something
regain it. against the terms of the
agreement.
8. Transfer of In sale, the buyer can The hirer cannot transfer a good
title to third transfer a good title to the title to the goods held on hire to
party. goods to a third party. any third party without the
consent of the seller.
9. Written The sale may be by words The hire-purchase contract must be
contract of mouth or by a written in writing and signed by all the
contract. parties.
10. Regulating Act This is regulated by the Sale The Hire Purchase Act, 1972,
of Goods Act, 1930. regulates this.
SALE DISTINGUISHED FROM OTHER CONTRACTS
1. Sale and contract for work and labour. A contract of sale of goods is one whereby the seller
transfers or agrees to transfer the property in the goods to the buyer for a price. But a
contract of work and labour is one whereby one party agrees to render service or exercise
skill on the material supplied by another party. Thus, the essence of the contract of work
and labour is the exercise of skill or rendering of services by a party on material supplied by
another. For instance, when cards and envelopes are supplied to a printer for printing
invitation cards of a marriage ceremony, it is a contract of work and labour and not a
contract of sale. But, if the substance of the contract is the production of something to
be sold, then it is a contract of sale. For instance, making of false teeth is a contract of
sale.[Lee v.Griffin AIR (1939) Nag.19] similarly, the sale of photograph taken by a
photographer is a contract of sale.[Newman v.Lipman, (1951) 1 KB 333] However, asking a
22.7
painter to paint a picture is not a contract of sale because it involves the exercise of
skill.[Robinson v.Graves, (1935) 1 KB 579]
2. Sale and bailment. A sale and bailment is different on the following grounds.
(i) Ownership. In sale, the goods are transferred to the buyer whereas no change in
ownership takes place in case of bailment. There is only a transfer of possession of goods
from a bailor to a bailee.
(ii) Use of goods. A buyer may use the goods as he likes but a bailee can use goods only if
the terms of bailment allow and in accordance with the terms of bailment.
(iii) Return in goods. In sale, the buyer does not return goods to the seller. But in case of
bailment, bailee is bound to return the goods to the bailor or dispose of according to his
directions when purpose of bailment is accomplished.
(iv) Price. A price is paid in money as consideration for a sale but a bailment may be
without any consideration, i.e. gratuitous bailment.
3. Sale and barter or exchange. Sale means transfer of property from one person to
another for a price paid or to be paid in money. Barter or exchange is a contract where the
consideration for the transfer of the property from one person to another consists of
goods.
4. Sale and gift. Sale mean transfer of property in goods from one person to another for
a price paid or to be paid in money. On the other hand, where one person transfers
property in the goods to another without any price or consideration, the transaction is
called a gift.
5. Sale and mortgage or pledge. Sale means the transfer of general property in the goods
from one person to another for price paid or to be paid in money. Mortgage of goods
means the transfer of an interest in the goods from the mortgagor to the mortgagee in
order to secure a debt. Mortgagee or pledgee gets only special property in the goods.
22.8
Topic 3: SUBJECT MATTER OF SALE &

PRICE
Definition
According to section 2(7) of this act, Goods means very kind of
 Movable property
 Other than actionable claim 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
Thus, every kind of movable property such as (i) shares, (ii) growing crops, (iii) grass, (iv)
things attached to or forming part of the land which are agreed to be severed before sale
have expressly been included in the term goods.
Moreover, various courts have held that following are also covered under the definition of
goods:
(i) Metal and stone are goods even in unqualified state
(ii) Interest of a partner in a partnership firm is goods.
(iii) Embellishments such as vegetables, fruits etc. are included in the term goods.
(iv) Fixtures and buildings when sold as materials and seller agrees to sever them before sale.
(v) Shares before allotment are also goods
(vi) Debentures after allotment are goods.
(vii) Old coins or old notes that have ceased to be legal tender and have become objects of
curiosity are included in the goods.
(viii) Foreign currency is also goods.
(ix) Goodwill, copyright, patents are goods.
(x) Water, gas and electricity are goods.
(xi) A court decree is good.
Things Not Included in the Goods

(i) Actionable claims, i.e. a claim or right that can be enforced through the court. For
instance, a lottery ticket is a goods but a right to claim prize, if successful is an
actionable claim.
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(ii) Money, i.e. current money or currency notes and emblems of money constituting ‘legal
tender’.
Besides the above two, the courts have held that debentures before allotment, services,
immovable property are not covered in the goods. Goods served or sold in a hotel or
restaurant or supplied by Airline Company to its residents or customers or passengers, is in
the nature of service and it is, therefore, not a sale of goods.
22.10
CLASSIFICATION OF GOODS.
1. Existing goods. Goods owned or possessed by the seller at time of contract or sale are
known as existing goods.[Sec.6(1)] Sale or actual sale may be affected only of existing goods.
The existing goods may be further classified into three types:
(i) Specific goods. Specific goods means the goods identified and agreed upon at the time a
contract of sale made.[Sec.2(14)]. In other words, the goods whose individuality has been
found out at the time of making the contract are called as specific goods.
Example: out of four cars in different colors displayed in a show room, A selects white car and
agrees to buy it. The white car is specific existing goods.
(ii) Unascertained or generic goods. The goods, which are not identified and agreed upon at
the time of making of contract of sale, are known as unascertained goods. Such goods are
indicated or defined by description at the time of contract of sale.
Example: A had ten horses. He agreed to sell one horse to B. in this case, the contract is for
sale of unascertained goods as the horse has not been identified at the time of contract of sale.
(iii) Ascertained goods. Generally, the term specific goods and ascertained goods are used for the
same kind of goods. But, more specifically, the term ascertained goods is used to denote the
goods, which is ascertained after formation of contract of sale.
Example: A had 100 bales of cotton lying in his godown. He agreed to sell 50 bales of cotton to
B, who agreed to purchase the same. After making of the contract, the cotton bales to be
delivered to B was identified & kept separate by A, and B agreed to take delivery of the same. In
this case, the contract is for sale of ascertained goods, as the cotton bales to be sold are
identified & agreed after the formation of contract. It may be noted that before ascertainment of
the goods, the contract was or sale of unascertained goods.
2. Future goods. Future goods means the goods to be manufactured or produced or

acquired by the seller after making of the contract of sale.[Sec.2 (6)] where a contract of sale
of future goods is made, it is an agreement to sell’ & not a ‘sale’ [Sec.6 (3)] It is because the
property in the goods can be transferred only at a future date when the goods shall be manufactured
or acquired.
Example: A, a manufacturer of table fans, contracted to sell 100 fans to B at a certain rate. B
agreed to purchase the fan. However, the fans were yet to be manufactured by A. This is an
agreement to sell & not sale.
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Contingent goods. Contingent goods are the goods, the acquisition of which depends upon the
happening or non-happening of a contingency i.e. contingent event.[Sec.6(2)]
Example: P contract to sell 50 pieces of particular article provided the ship which is
bringing them reaches the port safely. This is an agreement for the sale of contingent
goods.
Effect of Destruction of Specific Good
The effect of destruction of specific good on a contract of sale is discussed as under in two
different conditions:
1. Goods perishing before making contract. A contract of sale of goods is void if-
(i) The contract is for the sale of some specific goods,
(ii) The goods have perished, and
(iii) The seller was having no knowledge of the destruction of the goods at the time of
contract of sale. (Sec.7)
Where the specific goods become so damaged as they are no longer to answer to their
description in the contract, the contract of sale also becomes void.(Sec.7) Similarly, when
the specific goods are lost due to theft or goods have lost their commercial value, before
contract is made, the contract becomes void.
Example: A agreed to sell to B 100 bags of cement lying in his godown. In fact, that
cement has already been destroyed by leakage of water and has been converted into
stone. But this fact was not known to the seller. In this case, the contract is void.
2.Goods perishing before sale but after agreement to sell. An agreement to sell goods
becomes void if
(i) The agreement to sell is for specific goods,
(ii) The goods perish subsequent to the agreement to sell the goods is made but before the
risk passes to the buyer, and
(iii) Goods perish without any fault on the part of the seller or buyer.(Sec.8)
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It should also be noted that where the specific goods become so damaged as they are no
longer to answer their description in the contract, the agreement to sell also becomes
void.(Sec.8.
Example: A delivered a horse to B for trial for 8 days. It was agreed that the sale
would be completed if the horse was found suitable for B’s purpose. The horse died on
the third day without any fault of either party. It was held that the contract was
void and A could not recover the price from B.
Exceptions: Section 7 and 8 do no apply in the following two cases;

(i) Where the seller has knowledge of the destruction of the goods.
(ii) Where the contract of sale is not for specific goods but for generic or unascertained
goods.
Example: A agreed to sell to B 10 bales of Egyptian Cotton out of 100 bales lying in
his godown. The goods were already destroyed by fire before the contract of sale. But
both A and B did not know about the fire. In this case, the contract is not void as it
was not for the sale of specific goods, but for sale of unascertained goods. And thus,
A is liable to supply 10 bales to B, or pay him damages for the breach of contract.
22.13
Document of Title to Goods
According to Section 2 (4) documents of title to goods includes a bill of lading, dock-
warrant, warehouse keeper’s certificate, document used in the ordinary course of business as
proof of the possession or control of goods, or authorizing or purporting to authorize, either
by endorsement or by delivery, the possessor of the document to transfer or receive goods
there by represented.
Essentials. The essential features of document of title to goods are as under:

(i) A document of title to goods symbolizes the goods; therefore, it can become subject
matter of contract of sale.
(ii) It authorizes its possessor to receive or to transfer the goods represented by it.
(iii) The possessor of the documents of title to the goods can effect actual sale as well as
make an agreement to sell.
(iv) A transfer of such document of title operates a symbolic delivery of goods.
(v) A transfer of such document operates as transfer of the property in the goods to the
transferee.
Following are the usual types of documents of title to goods.

1. Bill of lading. It is a document if title to the goods, which entitles the possessor to
receive the goods, referred in it from the captain of the ship.
2. Dock-warrant. It entitles the possessor of it to receive the goods represented by it from
the dock-owner.
3. Warehouse keeper’s or wharfinger’s certificate. It entitles the possessor of it to recover
the goods described in it from the warehouse keeper or wharfinger.
4. Railways receipt. A R/R is a document, the possessor of which is entitled to receive goods
described in it from the railway company issuing it.
5. Delivery warrants or order. It is a document which contains an order by the owner of the
goods to a person having possession of goods on his behalf, to deliver the goods specified in
it to a person named therein or to the bearer of it in case of warrant.
22.14
PRICE OF THE GOODS
Price means the money consideration for a sale of goods (Sec.2(10). Money means legal
tender money in circulation. Old and rare coins are not included in the definition of money.
How is the price of the goods ascertained? Section 9 provides 4 modes of ascertainment of
price. The price in a contract of sale may be -
a. Fixed by the contract
b. May be left to be fixed in an agreed manner (such as market price or fixation of price
by a third party).
c. May be determined by the course of dealings between parties. (Such as manufacturing
cost, market price ).
d. A reasonable price (if price cannot be fixed in accordance with the above provisions)
Sec 9(2): What is a reasonable price is a question of fact dependent on the circumstances of
each particular case.
Consequence of Non-Fixation of Price by Third Party (section 10)

 The parties may agree to sell and buy goods on the terms that the price is to be
fixed by the valuation of a third party. If such third party fails to make the valuation
the contract becomes void.
 However, if the buyer has received and appropriated the goods or any part thereof, he
becomes bound to pay reasonable price.
 If the third party is prevented from making the valuation by the fault of the seller or
the buyer, the innocent party may maintain suit for damages against the party in
fault.
Example: A agreed to sell his 100 bags of rice to B at a price to be fixed by C. but C
failed to fix the price. In this case, the agreement becomes void on C’s failure to fix
the price.
Example: A agreed to sell his 100 bags of rice to B at a price to be fixed by C. C is
willing to value & fix the price. But A by his wrongful act, prevent C from making
the valuation. In this case, B can claim damages from A.
22.15
Topic 4: CONDITIONS & WARRANTIES

Stipulation
Conditions Warranties
As to time Essential to the main Collateral to the main
purpose of the contract purpose of the contract
Any other matter Implied Conditions as to: Implied Warranties as to:

Payment of price - title - quiet possession of
(time of delivery)
Are not deemed to be - description goods
Depends upon
essence of contract - sample - freedom from charge or
terms of contract
- sample as well as description encumbrance
- quality or fitness - quality or fitness
- merchantable quality - disclose dangerous
- wholesomeness nature
STIPULATIONS AS TO TIME
In a contract of sale of goods, the stipulations as to time may be related to the following:
1) Stipulations as to time of payment. Stipulations as to time are not deemed to be the
essence of a contract of sale unless a different intention appears from the terms of
contract.(Sec.11)
2) Stipulations as to time of any other matter. Except the stipulations as to time of
payment, whether any other stipulation as to time is of the essence of the contract
or not depends on the terms of the contract.(Sec.11)
Therefore, the parties may make the stipulation as to time of delivery of goods. In such case,
if the seller fails to deliver the goods at the time fixed, there is a breach of condition of
contract of sale. Consequently, the buyer may refuse to take delivery and treat the contract
as repudiated.
Conditions & Warranties
1. Condition: A condition is a stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to treat the contract as repudiated.[Sec.12(2)]
Thus, stipulation, which forms the foundation of contract of sale, is said to be the
condition of the contract. It is so vital to the contract the non-fulfillment of it defeats
22.16
the very purpose for which the contract was made. When a party fails to perform such
stipulation, the other party gets a right to repudiate the contract and reject the goods.
Example: A consulted B. a car dealer & told him that he wanted to purchase a car
suitable for touring purpose. B, suggested that a “Bugatti” car would be fit for the
purpose. Relying upon this statement, A bought a Bugatti car. Later on, the car
turned out to be unfit for touring purpose. A wanted to reject the car & demanded
the refund. It was held A was entitled to reject the car & have the refund of price. In
this case, the suitability of the car, for touring purpose, was a condition of the
contract. It was so important that the non-fulfillment defected the very purpose for
which A bought the car. [Baldrey V. Marshall]
2. Warranty: A warranty is a stipulation collateral to the main purpose of the contract, the
breach of which gives rise to a claim for damages but not to a right to reject the goods
and treat the contract as repudiated.(Sec.12(3)]
Thus, a warranty is that stipulation which is not essential to the main purpose of the
contract. Consequently, the aggrieved party can claim only damages arising from breach of
such stipulation. He cannot reject the goods.
Example: A goes to B, a car dealer, and says, “I want a good car” The car dealer
shows him a car and says,” it can give you a mileage of 20 kms/litre” .A buys the car.
Later on, A finds that the car is giving a mileage of 10 kms/litre only. There is a
breach of warranty, because the stipulation made by the seller was only collateral one.
When a condition can be treated as a warranty:

1. Voluntary waiver of a condition: sec 13(1) where a contract of sale is subject to a
condition to be fulfilled by the seller, the buyer may -
 Waive the condition, for example a buyer may accept defective goods or accept
goods beyond stipulated time.
 Elect to treat a breach of condition as a breach of warranty, i.e. instead of
repudiating the contract he may accept performance and sue for damages, if he has
suffered any. - Sec. 13(1).
 Once a buyer decides to waive, he cannot afterwards insist on its fulfilment.
2. Compulsory waiver of a condition: sec 13(2) Where a contract of sale is not severable (i.e.
indivisible) and the buyer has accepted the goods or a part thereof, he cannot r epudiate the
contract but can only sue for damages. In such a case, the breach of condition can only be
treated as a breach of warranty, unless there is a contract to the contrary. -Sec.13 (2).
22.17
Exception. If the fulfillment of any condition of the contract of sale is excused by law by
reason of impossibility or otherwise, the condition cannot be treated as warranty.[Sec.13(3)].
Distinction between condition and Warranty

Basis of Condition Warranty
distinction
Nature A condition is stipulation that is A warranty is a stipulation
essential to the main purpose of that is collateral to the main
the contract. purpose of the contract.
Significance It is essential to the very purpose It is so essential that a failure
of the contract that its non- to perform it cannot be
performance may be considered as considered as failure to
failure to perform the contract. perform the contract.
Consequence The aggrieved party may treat the The aggrieved party cannot
of breach contract as repudiated. repudiate the contract but can
claim damages.
Treatment A breach of condition may be A breach of warranty cannot
treated as breach of warranty. be treated as breach of
condition.
Types of Conditions And Warranties

In a contract of sale, conditions and warranties may be of two types:
1) Express conditions and warranties. Express conditions and warranties are those, which
are expressly agreed upon by the parties and provided in the contract of sale.
2) Implied conditions and warranties. The implied conditions and warranties have been
provided in this Act in Sections 14 to 17. These implied conditions and warranties
apply to every contract of sale unless they are inconsistent with any express condition
and warranty agreed to by the parties.[Sec.16(4)]
IMPLIED CONDITIONS
Following are the implied conditions, incorporated in the Sale of Goods Act:
1. Condition as to title. In a contract of sale, there is an implied condition on the part of
the seller that-
22.18
(i) In case of sale, he has a right to sell the goods, and
(ii) In case of agreement to sell, he will have a right to sell the goods at the time when
the property is to pass.{Sec.14(a)]
Example: A bought a second hand car from B, a car dealer. After a few months, the
car was taken by the police as it was stolen one and A was forced to return the car
to the true owner. It was held that A could recover the full price from B. In this
case, there was breach of condition as to title as B had no right to sell the car.
[Rowland V. Divall]
2. Condition as to description. Where there is a contract for sale of goods by description of

goods, implied conditions exists that goods shall correspond to description. The description
may include physical characteristics, class or grade, trademarks, brand name label, model,
mode of packing etc. of the goods.
Example: A purchased from B a car, which he had never seen. B described the car as
‘brand new’. However, on delivery, A found that the car was used & repainted and
returned the car to B. it was held that the sale was by description and the car did
not correspond to the description & A was entitled to reject the car. [Varley V.
Whipp]
3. Condition as to sample. A contract of sale is a contract for sale by sample where there is
a term in the contract, express or implied, to that effect.[Sec.17((1)]
Following are the three implied conditions in the case of a contract for sale by sample:
(a) The bulk shall correspond with the sample in quality.
(b) The buyer shall have a reasonable opportunity of comparing the bulk with the sample.
(c) The goods shall be free from any defect, which would not be apparent on reasonable
examination of the sample. If the defect is visible and can be discovered on inspection,
the seller cannot be held liable for the same.
4. Condition as to sample as well as description. Where the goods are sold by sample as well
as by description, the implied condition is that the goods must correspond with
both.(Sec.150) If not, the buyer can reject the goods.
Example: A agreed to sell B some cotton which was described as ‘Long Staple Cotton’.
The sample was also shown to B. A delivered the cotton which was of the quality of
sample. But subsequently, B found that the cotton was not ‘Long Staple Cotton’ but
22.19
only ‘Western Madras Cotton’. It was held that the buyer could reject the goods
(i.e., cotton) as they do not correspond with the description given by the seller,
though they correspond with the sample. [Azemar v. Carella (1867) 2 CP 431]
5. Condition as to quality or fitness. General rule is that there is no implied condition as to

quality or fitness for any particular purpose of goods supplied. Therefore, the buyer
himself must ensure that the goods suit his purpose before he buys.
But there is an implied condition in a contract of sale that the goods shall be reasonably
fit for the buyer’s purpose provided following conditions are satisfied:
(a) The buyer expressly or by implication makes known to the seller the particular purpose
for which the goods are required.
(b) The buyer relies on the seller’s skill or judgment.
(c) The seller deals in the goods in his usual course of business. [Sec.16(1)]
Example: A bought a set of false teeth from B, a dentist. But the set was not fit
for A’s mouth. A rejected the set of teeth and claimed the refund of price. It was
held that A was entitled to do so as the only purpose for which he wanted the set of
teeth was not fulfilled.
But the condition of fitness or quality does not apply in the following specific cases, even
if the buyer has made known to the seller the purpose for which he is buying:
(i) Where the goods sold is a specified article under its patent or other trade
mark.(Proviso to Sec.16(1)] This exception is applicable only when the buyer does not
rely on the seller’s skill and judgment.
Example: an hotelier orders “Sujeet” juicer and mixer (patent product) for his
business. The juicer and mixer supplied was found to be unsuitable for commercial use.
The buyer has no cause of action against the seller, since he purchased the juicer by its
patent name.
(ii) Where the product is used only for a particular purpose but buyer fails to disclose his
abnormal circumstances.
(iii) Where the goods can be used for more than one purpose and buyer fails to
make known to the seller the purpose of his buying, the seller is not be liable.
6. Condition as to merchantable quality. Where goods are bought by description from a seller
who deals in goods of that description (whether he is the manufacturer or producer or
22.20
not), there is an implied condition that the goods shall be of merchantable
quality.[Sec.16(2)]The expression ‘Merchantable quality of goods’ means the goods fit in
terms of their quality and condition for the purpose for which they are bought by
prudent persons, or the goods which are marketable at their full value.
Example : A & Co., a firm of merchants, contracted to buy from B, a London
Merchant, a number of bales of ‘Manila Hemp’. This was to arrive from Singapore.
The hemp arrived wetted by sea water, and it was so much damaged that it was not
possible to sell it in the market as ‘Manila Hemp’. It was held that the goods (i.e.,
hemp) were not of merchantable quality. In this case, the hemp was not sealable
under the description of ‘Manila Hemp’.
Example : A, a shopkeeper, sold a radio set to B, who purchased it in good faith. The
set had some manufacturing defect and it did not work after a few days in spite of
repairs. In this case, the radio was not merchantable as it was not fit for ordinary
purpose. Thus, the buyer had the right to reject the radio and to have the refund of
the price.
7. Condition as to wholesomeness: This condition is part of the condition as to

merchantability. It is applicable in cases of eatables, i.e., foodstuffs and other goods which
are used for human consumption. As per this condition, goods sold must be fit for human
consumption.
Example : A purchased some milk from B, a milk dealer. The milk contained some
typhoid germs. After consuming the milk, A’s wife got infection and died. It was
held that A was entitled to recover damages from the milk dealer. In this case, the
milk was not wholesome as it was not pure and fit for human consumption.
IMPLIED WARRANTIES
Following are the implied warranties in every contract of sale of goods:

1. Warranty as to quiet possession of goods. In every contract of sale, unless there are
intentions to the contrary, there is an implied warranty that the buyer shall have and
enjoy quiet possession of the goods.[Se.14(b)]
Example: A purchased a second hand typewriter from B. A used it for sometime and
also spent some money on its repairs. The typewriter turned out to be stolen one
and as such A had to return it to the true owner. It was held that A could recover
damages from B amounting to the price paid and the cost of repair.
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2. Warranty as to freedom from charge or encumbrance. In a contract of sale, there is also

an implied warranty that the goods shall be free from any charge or encumbrance in favour
of any third party. [Sec.14(c)]
Example: A obtained a loan of Rs. 200 from B and hypothecated his cycle with B as
security for the repayment of the loan. Subsequently, A sold the same cycle to C, an
innocent buyer, who had no knowledge about B’s charge on the cycle. In this case, if
C’s possession is disturbed by B who is having charge on the cycle, then he (C) can
claim damages from A for any loss which he may suffer due to such charge.
3. Warranty as to quality or fitness by usage of trade. In every contract of sale, an implied

warranty as to quality or fitness for a particular purpose may be annexed by the usage of
trade.[Sec.16(3)]
4. Warranty to disclose dangerous nature of goods. Many Courts have held that there is a
warranty from the seller to disclose dangerous nature of the goods.
DOCTRINE OF CAVEAT EMPTOR

Doctrine of Caveat Emptor:
 It is buyer’s duty to examine goods thoroughly.
 The buyer should ensure at the time of purchase that the goods conform to his
requirements.
 If the goods turn out to be defective, buyer cannot hold the seller responsible.
 Caveat emptor means ‘buyers beware’ or buyer take care.
Exceptions
The age-old doctrine of caveat emptor is subject to express and implied conditions and
warranties. As per the provisions of Indian law, following are the exception to the doctrine of
caveat emptor.
1. Fitness as to quality or use. Sec. 16(1)
 Where 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 the buyer relies on the seller’s skill, or judgement, and
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 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 not, there is an implied condition that the
goods shall be reasonably fit for such purpose )
2. Sale of goods by description. Sec. 16(2)

Where there is a sale of goods by description, there is an implied condition that the goods
are merchantable that is, fit for particular purpose.
3. Trade usage. Sec 16 (3) : An implied condition of fitness may be annexed to a contract
of sale by usage of trade.
Example: A sold certain drugs by auction, to B. In case of sale by auction, it was a
trade usage to declare any ‘sea damage’ in the goods. In this case, the goods were
sold without such declaration. Subsequently, the goods were found to be sea damaged.
It was held that the sale without such declaration meant that the goods were free
from any sea damage. And thus, B could reject for drugs and claim the refund of the
price.
4. Where the seller is guilty of fraud: where the seller makes a false representation and
buyer relies on that representation, the doctrine of caveat emptor will not apply. In such
a case the buyer will be entitled to the goods according to that representation.
5. Where seller actively conceals a defect: Where the seller actively conceals a defect in the
goods so that the same could not be discovered on a reasonable examination, the doctrine
of caveat emptor will not apply. Such a contract will be voidable.
6. Sale by sample: When goods are purchased by sample, the bulk must correspond with the
sample and the buyer must have reasonable opportunity of inspecting the goods.
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Topic 5: TRANSFER OF PROPERTY

TRANSFER OF PROPERTY =
PASSING OF PROPERTY =
TRANSFER OF OWNERSHIP
Passing of property in the goods implies passing of absolute legal ownership of the goods
under a contract of sale from the seller to the buyer for a price. On passing of the
property, the goods sold ceases to be the property of the seller and vests in the buyer.
It should be noted that passing of property in the goods is not similar to passing of
possession of goods. A person may be in possession of goods but may not be the owner of
the goods. For instance, an agent or servant, or a hire purchaser may be in possession of the
goods but cannot be the owner of the goods. Similarly, a person may be the owner of the
goods but he may not be in possession of the goods. Thus, the ownership of property in the
goods may pass with or without transfer of possession.
Significance of Transfer Of Property In The Goods

In a contract of sale of goods, the time of transfer of property is very significant for the
following reasons.
1. Risk follows ownership. It is the general rule of law that ‘risk follows ownership’.
Therefore, the risk in the goods remains with the seller until the property in the goods is
transferred to the buyer subject to a contract to the contrary. When the property in the
goods is transferred to the buyer, the goods are at the buyer’s risk whether delivery has
been made or not. But if the delivery has been delayed through the fault of either of
the buyer or seller, the goods are at the risk of the party in fault.
2. Action against third parties. A general rule of law is that the owner alone can exercise
proprietary right. When the goods are damaged by the fault of any other person, it is
only the owner of the goods who is entitled to take action against such person.
3. Suit for price. A seller is entitled to sue for the price of goods sold against the buyer
only when the property in the goods has passed to the buyer.
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4. Insolvency of the buyer or seller. Time of transfer of property also decides the right of
official Assignee/ Receiver to claim the possession of the goods. If the property in the
goods sold has passed to the buyer before the date of order of his insolvency, the official
Receiver/Assignee will be entitled to claim the possession of goods from the seller. If the
seller has become insolvent after passing of property in the goods sold to the buyer, the
Official Receiver/Assignee cannot detain the goods.
Rules Relating To Transfer Of Property

Rules relating to transfer of property may be discussed under the following heads:
I. Transfer of property in Specific Goods / Ascertained goods. ‘Specific goods’ means good
identified and agreed upon at the time of contract of sale is made.[Sec.2 (14)] Ascertained
goods’ means goods ascertained by identifying out of the lot of specific goods.
The general rule is that the property in the specific or ascertained goods is transferred to
the buyer at such time as the parties intend it to be transferred.[Sec.19(1)]For the
purpose of ascertaining the intention of the parties regard shall be had to
(i) the terms of the contract,
(ii) the conduct of the parties, and
(iii) the circumstances of the case.[Sec.19(2)]
Rules for ascertaining intention. Unless different intention appears, the following are the
rules for ascertaining the intention of the parties as to the time at which the property in
the goods is to pass to the buyer.
1. Where specific goods are in delivered state. Where there is an unconditional contract for
the sale of specific goods in a delivered state, the property in the goods passes to the
buyer when the contract is made.[Sec.20].
2. Where specific goods to be put into deliverable state. Where there is a contract for the
sale of specific goods but the goods are not in delivered state at the time of contract
of sale, the property in such goods passes when the goods are bought to a deliverable
state and buyer has a notice of it.(Sec.21)
3. When something is to be done for ascertaining the price. Where there is a contract for
the sale of specific goods in a delivered state, but the seller is bound to weigh, measure,
test or do some other act or thing with reference to the goods for the purpose of
ascertaining the price. In such a case, the property does not pass until such act or
thing is done and the buyer has notice thereof.(Sec.22)
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Example: A, a car dealer, has many cars in his showroom. Out of these cars, he sold
one car of sale. But the car sold to B was not identified and separated from the
other cars at the time of contract of sale. In this case, the ownership of the car is
not transferred to B at the time of contract of sale, because the contract is not for
the sale of specific goods. However, had the car been identified and kept separate
from the other cars, the ownership of car would have been transferred to B at the
time of making the contract. [Provincial Auto Co. v. State (1952) STC 147]
Example: A sold to B, 152 bales of yarn lying in his godown along with other bales.
Before the bales could be identified and separated, all the bales were destroyed I a
fire. It was held that the ownership of the bales had not transferred to the buyer as
the bales were not identified and separated from the rest of the bales. [L. Karn v.
John & Co. 1967 All 308]
Example: A sold to B some quantity of oil lying in cistern. As per the terms of
contract, A was required to fill the oil in drums and the drums were to be taken away
by B. A filled some of the drums in B’s presence. Before the remainder could be
filled, a fire broke out and the whole quantity if oil was destroyed. It was held that
the buyer must bear the loss of oil which was filled in drums, and the seller must bear
the loss of remaining unfilled drums. [Rugg v. Minett (1809) 11 East 210]
Example: A sold some quantity of wheat to B at the rate of Rs. 10 per kg. However,
A had to weigh the wheat in order to know the price of the entire quantity of wheat
sold to B. In this case, the ownership of the wheat shall transfer to B as soon as A
weighs the wheat and B comes to know about the same.
II. Transfer of Property in Unascertained or Future Goods: Unascertained goods means goods
which has not been identified and agreed upon at the time the contract of sale is made.
Future goods means the goods to be manufactured or produced or acquired by the seller
after making the contract of sale.[Sec.2(6)]
Property in the unascertained or future goods sold by description passes to the buyer when
following steps are taken or conditions are fulfilled:
1. The goods must be appropriated to the contract either by the buyer or by the seller
with the consent of the other party.
2. The goods appropriated must be of the same description as given in the contract.
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3. The appropriated goods must be in a deliverable state.
4. The appropriation must be unconditional.[Sec.23(1)]
Appropriation of goods may be done

a) by separating the goods sold from other goods, or
b) by putting the quantity of goods sold in suitable receptacles.
Ascertainment of Goods: It is a process by which the goods to be delivered under the

contract are identified and set apart. It is unilateral act of the seller alone to identify and
set apart the goods.
Appropriation of Goods: It is a process by which the goods to be delivered under the

contract are identified and set apart with the mutual consent of the seller & buyer. It is a
bilateral act of the seller and the buyer to identify and set apart the goods. The
appropriation may be done either by the seller with the consent of the buyer or by the
buyer with the consent of the seller.
Deemed appropriation of goods:. Where the seller delivers the goods to any of the following
for the purpose of transmission to the buyer without reserving the right of disposal he is
deemed to have unconditionally appropriated the goods to the contract:
1. to the buyer,
2. To a carrier or
3. to a Bailee.
Example: A agreed to sell to B the oil to be produced by him. The oil was filled by A
into the bottles supplied by B. It is an effective appropriation and the ownership
passes to the buyer when the oil is filled into the bottles. In this case, the buyer
gave his consent to the appropriation by supplying the bottles.
Example: A sold to B, 20 bags of sugar out of larger quantity. Four bags of sugar
were filled and taken away by B. Later on, A filled 16 more bags and informed B. B
promised to take the delivery of those 16 filled bags also. Before B could take the
delivery, the goods were lost. It was held, that at the time of loss, the ownership
22.27
has passed to the buyer. Therefore, he should suffer the loss. In this case, the
appropriation is unconditional and mutual.
The seller appropriated by putting the sugar into bags, and the buyer gave his consent
by promise to take the deliver
III. Transfer of Property in the Goods Sent on Approval: When the goods are sent ‘ on
approval’ or ‘on term’ or on other similar terms, the property in the goods passes to buyer
if any of the following situations emerges:
1. When the buyer signifies his approval or acceptance to the seller, the property in the
goods passes to the buyer at the time of approval.[Sec.24 (a)]
2. When a buyer having goods on approval, adopts the goods by his acts, the property in
the goods passes to the buyer when he adopts.[Sec.24(a)]
3. When buyer retains the goods without signifying approval. In such a case, if a time has
been fixed for the return of the goods, the property in the goods passes to the buyer
on expiration of such time. If no time has been fixed, on the expiration of the
reasonable time.[Sc.24(b)]
4. When the buyer makes the return of the goods impossible by his act or default, the
property in the goods passes when he does the act or makes the default.
IV. Transfer of Property when Right of disposal is reserved: Sometimes a seller appropriates
the goods to a contract but at the same time reserve the right of disposal of the goods
until the buyer fulfills certain conditions. The seller can do so if the terms of the contract
or appropriation of goods allows him.
If the seller reserves a right of disposal of the goods appropriated, the property in the
goods does not pass to the buyer until the conditions imposed by the seller are fulfilled,
even if the goods have been delivered to the buyer, or to a carrier or to other bailee for
the purpose of transmission to the buyer.[Sec.25(1)]
Deemed right of disposal:

In following two cases right of disposal is deemed to be reserved:
1. When seller make document of title in his or his agent’s name
2. When seller sends BOE along with document of title.
Example: A agreed to sell certain goods to B. one of the conditions of contract of sale
was that the buyer must pay the price before the delivery of the goods. In this case,
22.28
by making delivery of the goods conditional upon payment of price, the seller has
reserved the right of disposal. The ownership of the goods will not be transferred to B
unless this condition is fulfilled.
SPECIAL CONTRACTS
CIF Contracts
The term ‘C.I.F.’ means ‘cost’ insurance and freight’. And a ‘C.I.F.’ contract is a contract
for the sale of goods at a price which includes the cost of goods, insurance and freight
charges. Thus, in such contracts, the charges of insurance during transit and the freight
charges are paid by the in such contracts, the charges of insurance during transit and the
freight charges are paid by the buyer.
In case of C.I. F. contracts, the ownership of the goods is transferred to the buyer when the
shipping documents are delivered to the buyer and he receives them by paying price of the
goods. Thus, on buyer’s refusal to take the shipping documents, the seller can claim the
damages for the breach of contract, and not the price of the goods
F.O.B Contracts
The term FOB means “free on board”. AFOB contract is a contract for sale of goods where,
for the purpose of transmission to the buyer, the seller has to put the goods on board a ship
at his own expense. It may be noted that the seller has to bear only the expenses of loading
the goods. On the goods are loaded on the board the ship, they are at the buyer’s risk, and
he is responsible for freight, insurance and subsequent expenses.
The ownership of the goods is transferred to the buyer as soon as the goods are boarded on
the ship.
Ex – Ship Contracts
An ‘ex-ship’ contract is a contract for the sale of goods in which the seller has to deliver the
goods to the buyer at the port of destination. The freight charges are to be borne by the
seller. It may be noted that during the voyage (sea route), the goods are at the risk of the
seller. Thus, to protect his own interest, the seller may insure the goods, if he so wishes, at
his own expenses
In case of ex-ship contracts, the ownership of the goods is transferred to the buyer only
when the goods are actually delivered at the port of destination to enable the buyer to take
their delivery.
22.29
22.30
Topic 6: TRANSFER OF TITLE BY NON-

OWNERS
The Latin maxim ‘nemo dat quad non habet’ conveys the general rule of law as to transfer of
title. It means that ‘nobody can give what he himself has not got’. When this maxim is
applied to the sale of goods, it means that no seller can transfer a better title than he
himself has. Therefore, a thief cannot make any person the owner of articles stolen by him
even though the buyer pays full price. The general rule is that only an owner or his
authorized agent can transfer a good title to the buyer.
Exceptions:
1. Sale by a person under the implied authority of the owner or transfer by estoppel.
Sometimes the owner of the goods by his act or conduct or omission causes the buyer to
believe that the seller of the goods has the authority to sell them. In such a situation, if
the buyer buys the goods, the owner is precluded from denying from seller’s authority to
sell.(Sec.27, para-1) The buyer gets a good title to the goods bought from such a seller.
2. Sale by mercantile agent. When a mercantile agent sells goods, the buyer gets a good
title to the goods although the agent himself is not an owner. This exception is subject to
the following conditions:
(i) The seller must be a mercantile agent having possession of goods or documents of title
to the goods with the consent of the owner.
(ii) The sale must have been made by him when acting in the ordinary course of business.
(iii) The buyer must act in good faith not having notice that the agent has no authority
to sell.(Proviso to Sec.27)
22.31
3. Sale by one of the joint owners. Any one of the several joint owners can make a valid
sale of the goods if the following conditions are satisfied:
(i) The goods must in the joint ownership.
(ii) Any one joint owner is in the sole possession of the goods with the permission of other
joint owners.
(iii) The buyer must act in good faith without having notice of the fact that such a joint
owner has no authority to sell.(Sec.28)
4. Sale by person in possession of goods under voidable contract. Where a person obtains
the goods under a voidable contract (by coercion, under influence, fraud or
misrepresentation), the sale by such person is valid provided following conditions are
satisfied:
(i) Seller has possession of goods under voidable contract.
(ii) The contract must not have been rescinded at the time of the sale.
(iii) The buyer should have acted in goods faith without notice of the seller’s defect of
title.(Sec.29)
22.32
5. Sale by seller in possession of goods. A seller (or a mercantile agent) who is in

possession of goods or documents of title to the goods after sale can make a valid sale if
the following conditions are satisfied:
(i) The seller must be in possession of the goods or documents of title to the goods before
sale.
(ii) He must be in possession with the consent of the buyer (in capacity of agent & not
bailee)
(iii) The buyer must not have notice of the previous sale [Sec.30(1)]
6. Sale by buyer in possession of goods. A buyer or his mercantile agent who is in

possession of goods before sale can make a valid sale if the following conditions are satisfied:
(i) The buyer must in possession of the goods or documents of title to the goods before
sale, i.e. before transfer of property to him.
(ii) He must be in possession with the consent of the seller.
(iii) The buyer must act in good faith without notice of any defect in the right of the
seller.[Sec.30(2)]
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7. Resale by unpaid seller. An unpaid seller of goods can resale the goods already sold by
him provided the following conditions are satisfied:
(i) The seller must an unpaid seller.
(ii) The seller must be in possession of the goods already sold.
(iii) He must have exercised his right lien or stoppage in transit.
8. Sale by finder of goods. A finder of goods stands in a position of a bailee. He is not

the owner of the goods found but can transfer a better title to be buyer then he himself
has, under certain specified conditions as follows:
 If the owner cannot be found with reasonable diligence or
 If found, he refuses to pay lawful charges of the finder or
 If the goods are in danger of perishing or
 If the lawful charges of the finder, in finding the real owner and in preserving the
goods found, amount to at least two third of the value of the goods found.
9. Sale by Pawnee. Generally, pawnee of the goods is liable to return the goods to the
pawnor when the debt is repaid. But, if the pawnor makes a default in repayment of the
debt and interest thereon, the pawnee may sale the goods pledged. The person buying the
goods from such pawnee good title to the goods.
10. Sale by official Receiver/Assignee/Liquidator. Official Receiver/Liquidator does not get

ownership of the goods of the insolvent, but can sell his goods. The person buying the goods
gets a good title to such goods.
22.34
PERFORMANCE OF CONTRACT
Performance of contract of sales means as regards the seller, delivery of goods to the buyer
of the quality, in the quantity, at a place and in the manner agreed upon, and as regards the
buyer, acceptance of the delivery of the goods validity tendered and paying the price at a
time and place agreed upon.
Duties of Seller and Buyer
 It is the duty of the seller to deliver the goods and of the buyer to accept and
pay for them, in accordance with terms of the contract of sale.(Sec.31)]
 In the absence of a contract to the contrary, seller shall be ready and willing to
give possession of the goods to the buyer in exchange for the price and buyer shall
be ready and willing to pay the price in exchange for possession of goods.(Sec.32)
22.35
Topic 7: DELIVERY OF GOODS

DELIVERY OF THE GOODS
“Delivery” means voluntary transfer of possession of goods from one person to
another.[Sec.2(2)]
Delivery of goods sold may be made by doing anything which the parties agree shall be treated
as delivery or which has the effect of putting the goods in the possession of the buyer or of
any person authorized to hold them on his behalf.(Sec.33)
Thus, the delivery of goods may take place in any one of the following three modes:
1. Actual delivery. Actual delivery is a manual transfer of the goods sold to the buyer.
In other words, where the goods are handed over by the seller to the buyer, or to his
authorized agent, it is said to be actual delivery of the goods. For example, A sells a
TV to B. A gives physical delivery of the TV to B. it is an actual delivery.
2. Symbolic delivery. Symbolic delivery is the mode of delivery of goods under which goods
are not physically handed over to the buyer but the seller does something, which has
the effect of putting the goods in possession of the buyer. For example delivering
keys of a warehouse containing goods sold, or R/R or bill of lading or other document
of title to the goods sold.
Example: A sold to B all the table fans lying in his godown. And A delivered the keys
of his godown to B in order that he may get the fans from the godown. In this case,
there is a symbolic delivery of table fans from A to B.
3. Constructive or fictitious delivery or delivery by attornment. Constructive delivery

takes place when the seller does some act which expresses his intention to transfer
property in the goods sold to the buyer. For instance, if a bailee is holding goods on
behalf of the seller and the seller orders to the bailee in the presence of the buyer to
hold the goods sold for the use of the buyer, it is constructive delivery of goods.
Example: A sold to B 50 bags of rice which were in possession of C, a warehousemen.
And A ordered C to transfer the rice to B. Accordingly, C transferred the rice, in his
books, in B’s name. in this case, there is constructive delivery.
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4. Forward delivery: where the delivery is to be made in future, and not at the time
contract is entered into.
Rules Relating to Delivery of Goods.

Following are the rules relating to delivery of goods from seller to the buyer.
1. Modes of delivery: A seller can deliver the goods by any mode which puts the goods or has
effect of putting the goods in the possession of the buyer or his agent.(Sec.33). Thus,
the delivery may be either (I) actual (ii) symbolic, or (iii) constructive
2. Concurrent conditions: Payment and delivery are concurrent conditions. In the absence of
the contract to the contrary, the seller shall be ready and willing to give possession of the
goods to the buyer in exchange for the price, and buyer shall be ready and willing to pay
the price in exchange for possession of the goods.(Sec.32)
3. Buyer to apply for delievery: In the absence of a contact to the contrary, the seller is
not bound to deliver the goods until the buyer applies for delivery.(Sec.35)
4. Place for delivery of goods: Buyer and seller are entitled to decide the place of delivery of
goods by an agreement between them. Such agreement may be express or implied. Where
there is no agreement as to place of delivery between the parties, the following rules will
apply:
Nature of goods Place of delivery
Delivery of goods sold At the place at which they are at the
time of the sale.
Delivery of goods agreed to be sold At the place at which they are at the
time of the agreement to sell.
Delivery of goods not in existence at the At the place at which they are
time of agreement manufactured or produced
5. Time for delivery of goods:

 Where under the contract of sale the seller is bound to send the goods to the
buyer, but no time for sending them is fixed, the seller is bound to send them
within a reasonable time.[Sec.36(2)]
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 Where terms like ‘directly, without loss of time, forthwith’ and the like are found
in the contract, no delay shall be made and seller is expected to make quick and
immediate delivery.
6. Goods in possession of 3rd party: Where the goods at the time of sale are in the
possession of third person, there is no delivery by seller to buyer unless and until such
third person acknowledges to the buyer that he holds the goods on his behalf.[Sec.36(3)]
7. Expenses or the delivery of the goods: Unless otherwise agreed, the expenses of and
incidental to putting the goods into a deliverable state shall be borne by the
seller.[Sec.36(5)]
8. Part delivery of goods: A delivery of part of goods is a delivery of the whole. But a
delivery of part of the goods, with an intention of severing it from the whole, does not
operate as a delivery of the remainder.(Sec.34)
 Part delivery = Delivery : Delivery of a part of goods sold may amount to delivery of
the whole if it is so intended & agreed
 Part delivery = No Delivery: Where the part is intended to be severed from whole,
part delivery doesn’t amount to delivery of whole.
9. Delivery of wrong quantity: It is the duty of the seller to deliver the quantity of goods in
accordance with the terms of the contract. If the seller tenders larger or smaller quantity
of goods than was agreed upon, the buyer is not bound to accept it.
In case of delivery of wrong quantity of goods, following three situations may emerge:
Short delivery Excess delivery Mixed delivery
(less than contracted) (more than contracted) (with goods of different
description)
a) Reject the goods or a) Reject in full or a) Accept the contracted
b) Accepts & pay as per the b) Accept the contract goods & reject the rest
contracted rate quantity & reject the or
excess or b) Reject the entire lot
c) Accept the whole
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10. Delivery of goods in installments: Unless otherwise agreed, the buyer of the goods is not
bound to accept delivery of goods in installments.[Sec.38(1)] Thus, the seller must deliver
the goods to the buyer in one lot unless otherwise agreed by the parties.
11. Delivery to carrier or wharfinger: Where, in pursuance of a contract of sale, the seller is
authorized or required to send the goods to the buyer,
 delivery of the goods to a carrier, for the purpose of transmission to the buyer, or
 delivery of the goods to a wharfinger for safe custody,
Is prima facie deemed to be a delivery of the goods to the buyer.[Sec.39(1)]
12. Deterioration of goods during transit: Where the seller of goods, agrees to deliver them at
his own risk at a place other than where they are when sold, the buyer shall bear risk of
deterioration in the goods necessarily incidental to the course of transit. The parties, may
however, make a contract to the contrary.(Sec.40)
13. Liability of buyer for neglecting or refusing delivery of goods.- When the seller is ready
and willing to deliver the goods and requests the buyer to take delivery (proper tender of
performance), and the buyer does not within a reasonable time after such request take
delivery of the goods , Buyer is liable to the seller for any loss occasioned by his neglect or
refusal to take delivery and also for a reasonable charge for the care and custody of the
goods.
22.39
Topic 8: UNPAID SELLER &

REMEDIES FOR BREACH OF
CONTRACT
UNPAID SELLER
1) Unpaid seller:
a) Non Payment: When the whole of the price has not been paid or
tendered.
b) Dishonor of negotiable instrument: When a bill of exchange or other
negotiable instrument has been received as conditional payment, and the
condition on which it was received, has not been fulfilled by reason of the
dishonour of the instrument or otherwise.[Sec.45(1)]
2) Seller to include agent: The term “Seller” includes any person who is in the
position of a seller, as, for instance an agent of the seller to whom the bill of
lading has been endorsed, or a consignor or agent who has himself paid, or is
directly responsible for the price.[Sec.45(2)] It should be noted that a seller
who has obtained money decree for the price of the goods is still an unpaid
seller, if the decree has not been paid satisfied.[Sec.49(2)]
RIGHTS OF AN UNPAID SELLER

A. Rights against the Goods B. Rights against the Buyer
a) When property in the goods has a) Suit for price
passed b) Suit for damages for non-acceptance
I. Right of lien, c) Suit for interest
II. Right of stoppage of goods in
transit, and
III. Right of resale.
b) When property in the goods has NOT

passed
I. In addition to the above 3
remedies, the right of withholding
delivery.
22.41
I. Right of Lien
 A lien is a right to retain the possession of goods until some claim due
against it is satisfied.
 An unpaid seller of goods who has possession of the goods is entitled to retain
possession of them until payment or tender of price.[Sec.47(1)
 Lien can be exercised only for price and not for any other expenses ex:
godown charges, interest etc.
The right of lien of an unpaid seller is subject to the following rules:

a. The seller must be in possession of the goods sold.[Sec.47(1)]
b. The seller may have possession of the goods as an agent or bailee for the buyer.
In other words, the seller may exercise his right of lien even if he is possession of
goods as agent or bailee for the buyer.[Sec.47(2)
c. The lien can be exercised only when the goods are not sold on credit.(Sec.47)
d. Where the goods have been sold on credit, the term of credit must have
expired.(Sec.47)
e. Where the part delivery of goods does not imply that the seller has waived the
lien, the seller can exercise lien on remaining goods.(Sec.48)
f. The right of lien can be exercised only when the seller has not waived his right
expressly or impliedly.[Sec.49(1)]
g. The unpaid seller of goods, having a lien thereon, does not lose his lien by reason
only that he has obtained a decree for the price of the goods.[Sec.49(2)]
When Lien can be exercised?

a. Where the goods have been sold without any stipulation as to credit.
b. Where the goods have been sold on credit, but the term of credit has expired.
c. Where the buyer becomes insolvent.[Sec.47(1)]
Termination or Loss of Lien: The unpaid seller of goods loses his lien in the following
cases:
a. When the seller delivers the goods to a carrier or the bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods,
he loses his right of lien on the goods sold.[Sec.49(1)(a)]
b. The seller’s lien is also lost when the buyer or his agent lawfully obtains
possession of the goods. [Sec.49(1)(b)]
c. The seller also loses his right of lien once he waives this right, expressly or
impliedly. [Sec.49(1)(a)]
22.42
Right of lien can be waived either expressly or impliedly. Express waiver mean the
waiver provided in the express terms of the contract. Implied waiver means the
waiver implied by the conduct of the seller or by the prevailing circumstances of the
case. Right of lien can be waived when he grants a fresh term of credit, or accepting
a negotiable instrument for payment of price.
II. RIGHT OF STOPPAGE OF GOODS IN TRANSIT

The right of stoppage of goods in transit means the right of an unpaid seller to
stop further transit of the goods with a view to regain actual or constructive
possession of the goods till the price is paid.
Right of stoppage of goods in transit can be exercised if the following conditions are
satisfied:
(i) If the seller is an unpaid seller.
(ii) If he has parted with the possession of goods to carrier.
(iii) If the goods are in the transit.
(iv) If the buyer of the goods has become insolvent.
Termination or Loss of Stoppage in transit:

a. Buyer taking delivery before their arrival at destination, transit comes to
an end.
b. Acknowledgement by carrier: if, after the arrival of the goods at their
destination, carrier or bailee acknowledges to the buyer or his agent that
he holds goods on his behalf, and continues the possession of the goods,
the transit is at end even if the buyer indicates further destination for
the goods to the carrier.
c. Delivery to ship: When ship is chartered by the buyer, the transit ends as
soon as the goods are loaded on the ship.
d. Wrong denial to deliver goods by the carrier, the transit will be deemed to
be at an end.
e. Sub-sale by the buyer with seller’s consent leads to loss of right of
stoppage in transit
f. If the goods are rejected by the buyer and the carrier or bailee continues
in possession of them, the transit is NOT deemed to be at an end, even
if the seller has refused to receive them back.
Distinct Between Right of Lien and Right of Stoppage in Transit

Basis Right of lien Right of Stoppage in Transit
1. Possession In order to exercise lien, In order to exercise the right of
seller must be in stoppage in transit, the carrier or
22.43
possession of the goods. the other bailee must be in
possession of goods on behalf of
the seller.
2. Nature and Right of lien is a right to Right of stoppage in transit is a
purpose of retain the goods until right to regain possession.
right price due thereon is paid.
3.Availability Seller gets right of lien Seller gets the right of stoppage
of the right when the buyer fails to in transit only when the buyer
pay. becomes insolvent.
4. End and Lien comes to an end Right of stoppage in transit
commencement when the seller delivers commences when the seller delivers
of right the goods to a carrier or goods to a carrier or bailee.
bailee.
5. Exercise of The seller himself can The seller through the carrier or
right exercise lien. bailee of the goods can exercise
this right.
RIGHT OF RE-SALE
An unpaid seller can re-sell only when he is in possession of the goods either
by
a) Exercising lien or
b) Has regained possession by stoppage in transit upon buyer’s insolvency
Rules of re-sale:
a. Situation:
I. Where the goods are of a perishable nature,
II. Where the seller has given a notice to the buyer of his intention to resale
the goods, may resale them if the buyer does not within a reasonable
time pay the price.
b. Buyer response: Buyer does not pay or tender the price within reasonable time
c. Unpaid seller’s right: resell the goods within reasonable time or can recover from
original buyer damages for any loss occasioned by his breach of contract.
22.44
d. Buyer’s right: The buyer shall not be entitled to any profit on such re-sale by
the unpaid seller. Where the buyer had paid some money by way of advance or
deposit, then such amount can be claimed by him, but subject to the seller’s
claim for damages.
e. Perishable goods: Where the goods are of a perishable nature, the unpaid seller
can resale the goods without any notice to the buyer. Perishable means =
Physical deterioration or commercially perishable.
f. Notice not given: then, unpaid seller cannot claim damages and the buyer is
entiled to profit, if any, on re-sale.
g. Good title to subsequent buyer: Despite the fact that no notice of re-sale has
been given by the seller to the original buyer.
RIGHTS AGAINST THE BUYER
The unpaid seller also has the rights against the buyer personally in addition to his
rights against the goods. These are as under:
1. Suit for price. This right can be discussed under two specific conditions:
(i) Where under a contract of sale, the property in the goods has passed to the
buyer and the buyer wrongfully neglects or refuses to pay for the goods
according to the terms of the contract, the seller may sue him for the price of
the goods.[Sec.55(1)]
(ii) Where price is payable on a day certain. Sometimes, the contract of sale
stipulates that the price is payable on a certain day irrespective of delivery but
the buyer wrongfully neglects or refuses to pay such price. In such a case, the
seller may sue the buyer for the price although the property in the goods has
not passed and the goods have not been appropriated to the
contract.[Sec.55(2)]
2. Suit for damages for non-acceptance. Where the buyer wrongfully neglects or
refuses to accept and pay for the goods, the seller may sue him for damages for
non-acceptance.(Sec.56)
3. Suit for repudiation of contract before due date. In case the buyer repudiates
the contract of sale before the date of delivery, the seller has two options:
(i) The seller may immediately treat the contract as rescinded and sue for damages
for the breach.
22.45
(ii) The seller may treat contract as subsisting (Alive) and wait till the date of
delivery.(Sec.60) this section is based on the principle of anticipatory breach of
contract.
4. Suit for interest. The sale of goods Act gives the seller a right to recover
interest if by law interest is recoverable.[Sec.61(2)]
Buyer’s Remedies / Right against Seller

In case of breach of contract by seller’s fault, the buyer has following
remedies/rights against the seller:
1. Suit for damages for non-delivery.: Where the seller wrongfully neglects or refuses
to deliver the goods to the buyer, the buyer may sue the seller for damages for
non-delivery.
2. Suit for specific performance of the contract: In any suit for breach of contract
to deliver specific or ascertained goods, the Court may by its decree direct that
the contract shall be performed specifically, without giving the seller an option of
retaining the goods on payment of damages. The decree may be unconditional, or
upon such terms and conditions as to damages, payment of the price or
otherwise, as the Court may deem just.
3. Suit for breach of warranty.
4. Suit for damages for repudiation of contract before due date.
5. Suit for refund of price.
6. Interest by way of damages and special damages:
a) Buyer has a right to recover money paid to the seller where consideration
for payment of it has failed, e.g. where the buyer is deprived of Goods by
their true owner, he may recover the price for breach of condition as to
title.
b) When under a contract of sale, Buyer has paid the price, but Seller
neglects to deliver Goods, Buyer has a right to claim interest on the
amount of price.
c) The buyer can claim interest only when he can recover the price.
d) Interest may be calculated from the date on which the payment was
made.
e) The rate of interest to be awarded is at the discretion of the Court.
22.46
Topic 9: AUCTION SALE

AUCTION SALE
Auction sale is a public sale, where goods are offered to be taken by the highest
bidder from among the public.
According to the usual practice, proposed auction is advertised. The advertisement
generally contains the brief description of the subject-matter of sale; date time and
place of auction; and the names of persons from whim further information may be
obtained. The auctioneer prepares catalogue of the goods, statements of terms and
conditions and makes them available to the public. Sometimes, the terms and
conditions of auction are displayed at the place of auction.
On the appointed day, the time and place, the auctioneer puts up the lots of goods
to be sold. Then he invites bids for every lot from the people assembled at the
place of auction. He announces every bid made by the people and induces them to
make bids of a higher price. When auctioneer finds any bid reasonable and in
accordance with the directions of the seller or equal or more than the ‘reserve price’
if any, he may accept it. He accepts or knocks-down, the highest bid by striking
with his hammer, or by any other approved method, e.g. by pronouncing the words.
‘One..,two.., three.., or going—going--gone. With the ‘Knock down’ the contract of
sale is completed. Before the known down, any bidder may retract his bid. Similarly,
the auctioneer may reserve a right even to reject the highest bid.
Rules of Auction Sale.

1. In the case of sale by auction, where goods are put for sale in lots, each lot is
prima facie deemed to be the subject-matter of a separate contract of
sale.[Sec.64(1)]
2. In auction sale, the sale is complete when the auctioneer announces its
completion by the fall of the hammer or in other customary manner.
3. Sometimes, the conditions of sale by auction require the deposit of security
amount by the bidders. In such a case, every bidder is bound to deposit the
security before he makes a bid in the auction.
4. Auction sale could be conditional or unconditional. If the auction sale is
conditional, the sale is not complete until the condition is satisfied. For
instance, where auction sale is subject to the approval of some authority, the
sale is complete only after approval by such authority. The bidder can withdraw
his bid before such approval in spite of the fact that bid as provisionally
accepted.
22.47
5. In an unconditional sale by auction of specific goods in a deliverable state, the
property in the goods passes to the buyer by the fall of hammer.(consolidated
Coffer Ltd. V.Coffer Board,AIR(1980) SC 1468]
6. In sale by auction, 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 one person
on his behalf may, bid at the auction.[Sc.64(3)].The one person who is notified
to make a bid on sellers behalf is a ‘puffer’. He is also known as ‘white
bonnet’, by bidder, or decoy duck,. Only the notified one puffer can make bid on
behalf of the seller.
7. The sale by auction may be notified to be subject to a reserve price or upset
price.[Sec.64(5)] the auctioneer is not authorized to sell below the notified
reserve price. In case, the auctioneer by mistake knock-down a lot for less than
the reserve price, the buyer has no remedy against the auctioneer.
8. Pretended bidding. Where the seller makes use of pretended bidding to raise the
price, the sale is voidable at the option of the buyer.[Sec.64(6)]
9. ‘Knock-out’ or agreement not to bid each other. A ‘knock-out’ is a combination
of persons to prevent competition among them at an auction. The persons joining
the combination agree that only one of them shall bid. Anything obtained by
him shall be afterwards disposed of privately among themselves. Such
combinations or knock-out is not illegal.
10. Damping is unlawful. ‘Damping’ is any act by which an intending bidder is
dissuaded or discouraged from bidding. Some of the damping acts are under.
(i) Pointing out effects in the goods put up for auction sale.
(ii) To take intending bidder away from the place of auction.
(iii) To create confusion in the minds of intending bidders as to real value of
the goods put for sale.
----***---
22.48
The Partnership Act, 1932
Topic 1: INTRODUCTION
Introduction
 Prior to the Partnership Act, 1932 the law of partnership was covered by the Indian
Contract Act, 1872
 The law governing partnership in India is now embodied in the Indian Partnership
Act, 1932 which came into force (except Sec.69) on the 1st day of October 1932.
 The Partnership is Act is not exhaustive. Where the Partnership Act is silent on any
point, the general principles of the law of contract apply(section3)
Definition of Partnership (Sec.4, Para-1).
 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’
 Collectively ‘a firm’ and
 The name under which their business is carried on is called the ‘firm
name’.(Sec.4, para-2)
Essential of Partnership
An analysis of this definition reveals the following essential element of partnership.
1. At least two persons. There must be at least two persons to form a partnership.
All of them must be competent to contract. If at any time the numbers of
partners in a firm gets reduced to one (whether by death or insolvency) the firm
is dissolved.
2. Maximum number or partners. The partnership Act does not prescribes the
maximum number of partners in a firm. However, Section 464 of the Companies
Act 2013 ready with rules made there under, states that the partners in a firm
must not exceed 50.
23.1
3. Agreement. The relation of partnership arises from a valid agreement i.e.

contract. There must be an agreement between two or more persons to act as
partners. It must be voluntary. The agreement may either be expressed or
implied from the conduct of partners or from the circumstances of the case.
4. Business. A partnership can be formed for the purpose of carrying on business and
business alone. Where there is no business there exists no partnership. The term
“ business” includes every trade, occupation and profession.
5. Sharing of profits. Sharing of profits of the partnership business among the

partners is a must but sharing of losses by all the partners is not essential.
Thus, if any partner does not get a share in the profits of the firm, he is not a
partner. However, the partners by an express agreement may agree that any one
or more of them shall not be liable for the losses.
6. Mutual agency. To continue, partnership, there must be a relation of mutual

agency between the partners, Section 4 states that the partnership must be
carried on by all or any of them acting for all. Therefore, every partner can carry
on business on behalf of all the partners and can, by his actions, bind all the
partners of the firm.
Law of Partnership – A Branch of Law of Agency

The fundamental principal of a partnership is that the partners when carrying on
business of the firm are agents as well as the principals. Thus, there is a relation of
mutual agency between the partners, which is governed by the law of agency. This is
the reason why law of partnership is termed as an extension of branch of law of agency.
Every partner has double role to play in a firm. He embraces the character and role of
both a principal and agent as under:
1. As an agent. Subject to the provisions of the Act, a partner is an agent of the
firm for the purpose of the business of the firm. (Sec.18) Therefore, the firm is
liable for the acts of the partners acting within the scope of his authority.
2. As a principal. Every partner of the firm is a principal for all other co-partners.
Therefore, in a capacity of the principal, every partner is liable for the acts of his
partners.
23.2
Hence, it is proved that there is a relation of mutual agency between the partners.
They are principals as well as agents of each other’s.
TEST OF PARTNERSHIP
A group of persons is a partnership or not, can be determined by looking into its

features or characteristics. If the group possesses all essentials of a valid partnership as
required by Section 4, the group is said to be a partnership, otherwise not.
The essential features of a valid partnership are as under:
1. There must be an agreement between two or more persons.
2. There must be a business of partnership.
3. The partners must have agreed to share the profits of the business.
4. The business must be carried on by all or any one acting for all. In other words,
there must be ‘mutual agency’ between the partners.
Section 6 specifies the following cases where there is no real relation of partnership
between the group of persons:
1. Joint holders of property sharing profits. Where the joint holders of property
share the profits or gross returns arising from such property, they are not the
partners in a firm.
2. Sharing of profits. Sharing of profit of a business is a prima facie test of the
partnership but not a conclusive evidence of the existence of the partnership.
The following are the particular cases where the sharing of a profit does not
constitute partnership.
(i) Money lender sharing profits. Where a money lender money to a firm and
receives a share of profits in lieu of interest, or in addition to an interest,
lender does not become a partner of the firm.
(ii) Servant or agent receiving share in profits. A servant or an agent who
receives a share of profits as a part of his remuneration is not a partner.
(iii) Widow or child of deceased partner. A widow or child of a deceased
partner receiving a share of profits as annuity is also not a partner of the
firm.
23.3
(iv) Seller of goodwill. If a previous owner(or part of the owner) of the

business shares profit of the firm as consideration for the sale of the goodwill
of the business. Such owner is not a partner of the firm.
In addition to the above persons, the following persons are not treated as partners
although they share the profits:
a) Members of Hindu undivided family. Members of a Hindu undivided family(HUF)
who carry on business and share profits among them are not partners.(Sec.5).
b) Business of Buddhists Couple. A Burmese Buddhists husband and wife carrying on a
business and sharing profits of it between them are not partners.(Sec.5)
FORMATION OF PARTNERSHIP
Partnership arises from contract and not from status.(Sec.5) Thus, a partnership can
be formed by a contract between the persons. The contract of partnership may be
express or implied. A valid contract of partnership has following essentials.
1. Agreement. There must be an agreement between the persons forming a
partnership. The agreement may be between two or more persons but not more
than 50 persons, as the case may be.
2. Contractual capacity. Since the partnership arises from contract, the partners must
be competent to contract. Therefore, persons incompetent to contract cannot form
partnership. However, a minor can be admitted to the benefits of partnership with
the consent of all the partners after the formation of partnership.
3. Free consent. The competent persons must give their consent to become partners
and that too must be free.
4. No consideration. There need not be any consideration for a contract of partnership.
This is because partners are mutual agents and no consideration is required to create
an agency. (Sec.185, Indian Contract Act).
5. Lawful object. A partnership can be formed only for lawful object.
6. Legal formalities. Generally, no formalities are required to be complied with for the
formation of a partnership. But, if the partners wish, they can make a contract in
writing,(i.e. Partnership deed) They can also opt to get the firm registered with
Registrar of Firms.
23.4
WHO MAY BECOME PARTNER?
Partnership is product of a valid agreement and valid agreement can be made by persons
competent to contract. Therefore, all persons who are competent to contract can
become partners in a firm. According to Section 11 of the Indian Contract Act, every
person except the following is competent to contract.
1. Minor. A minor is not competent to contract. Therefore, he cannot become
partner in a firm but he may be admitted to the benefits of an existing firm with
the consent of all the partners of the firm.
2. Persons of unsound mind. A person of unsound mind is not competent to contract.

Hence, he cannot become partner in a firm.
3. Persons disqualified by any law to which they are subject. For eg,. Alien enemy
4. Married woman. A married woman has independent identity in the eyes of law.
Therefore, every woman married or not can enter into any contract including a
partnership. She and her personal property (or stridhan) will be held liable for the
liabilities of the firm. Her husband and his property will not be liable for any
liability arising out of any such partnership. A married woman can even be a
partner of her husband.
5. Artificial Persons. Artificial persons, e.g. companies, corporations etc. are also
included in the term ‘person’. Therefore, a company can become a partner in a
firm provided its memorandum of association authorizes it.
Other Points:
 Moreover, two or more companies can also enter into a contract of partnership.
Every company shall be taken as one person and not as a group of individuals
comprising it.[Sri Murugan Oil Industries(P) Ltd. v.A.V Suryanarayan Chettiar].
 However, a firm is not a person. It is not a separate legal entity from its
partners. Therefor, two or more firms cannot enter into a contract of
partnership. But the partners of two firms can form a new firm provided the
number of partners in the firm does not exceed the statutory maximum limit.
23.5
Thus, same partners may constitute more than one distinct and separate firm
but firms have no juristic personality.[Dy.C.S.T. v.Kelukutty]
 Two or more joint Hindu families represented by their Kartas can also enter into
a partnership if the number of adult members(male and female member excluding
minors) of all the joint families does not exceed 50,.{Shyamlal Roy
v.Madhusudan Roy].
It should be noted that whenever a minor members of any of the joint families
attains majority, and consequently the number of members exceeds the statutory
maximum limit, the partnership will become illegal if carries on its business.
Is there partnership in the following cases?

 A and B are co-owners of a house let to a paying tenant. A and B
divide the net rents between themselves. A and B are not partners,
because letting a house is not a business.
 A and B buy 100 bales of cotton, which they agree to sell for their
joint account. A and B are partners in respect of such cotton.
 A and B buy 100 bales of cotton, agreeing to share it between

them. A and B are not partners.
 A agrees with B, a goldsmith, to buy and furnish gold to B, to be

worked up by him and sold, and that they shall share in the
resulting profit or loss. A and B are partners.
 A and B agrees to work together as carpenters, but that A shall

receive all profits and shall pay wages to B. A and B are not
partners.
 A and B are joint owners of a ship. This circumstance does not make
23.6
them partners.
TOPIC 2: REGISTRATION OF FIRM

Registration of a firm means getting the partnership firm registered with the Registrar
of Firms. A partnership may be registered with the Registrar of Firms of the area in
which any place of business of the firm is situated or proposed to be situated. The
State Government appoints such registrar.
Registration not compulsory

 The registration of a firm is not compulsory. Under the partnership Act, it is
optional for the partners.(Sec.58) Thus, an existing firm may be registered at
any time even after the partners have agreed to dissolve the firm. But a firm
must be registered firm on the date of institution of a suit.(Sec.69(1)].
 It should also noted that any change in the facts registered in the Registrar of
Firms must also be registered.(Sec.60-63) If such changes are not registered,
the firm will be treated as unregistered firm for the purpose of instituting a
suit.
Important Sections:
Section Changes Period of Intimation to ROF Signed & verified by

Recording Of
Requires almost a new
Alterations In Firm- Within a period of 90 days
registration to be
60 Name, Nature Of from the date of making such
signed & verified by
Business And Principal alteration.
ALL partners
Place Of Business.
Within a period of 90 days
from the date of such
Noting Of Closing And discontinuance or, from the By any partner or
61
Opening Of Branches. date on which the firm begins agent
to carry on business at such
place
Noting Of Changes In Within a period of 90 days By any partner or
62
Names And Addresses from the date of making such agent
23.7
Of Partners alteration.
By any partner who
Recording of Within a period of 90 days
was a partner
63(1) reconstitution And from the date of such change
immediately before the
Dissolution Of A Firm or dissolution
dissolution
Change regarding
minor’s decision Within a period of 90 days
63(2) By minor himself
regarding becoming a from the date of his election
partner
Sec 69A . Penalty For Contravention Of Section 60, 61, 62, Or 63

Penalty: Not exceeding ten rupees per day, as the Registrar may determine in respect of
the period between the date of expiry of the period specified in sections 60, 61, 62 or as
the case may be, 63 and the date of making the amendments in the entries relating to
the firm.
Sec 70 . Penalty for Furnishing False Particulars

Any person who signs any statement, amending statement, notice or intimation any
particulars
 which he knows to be false or
 does not believe to be true, or
 containing particulars which he knows to be incomplete or
 does not believe to be complete,
shall, on conviction, be punished with imprisonment for a term which may extend to one
year, or with fine, or with both & fine shall not be less than one thousand rupees.
Procedure for Registration

Procedure for registration of firm comprises the following steps[Secs.58 & 59]
1. Preparing statement in the prescribed form. The partners must prepare a statement
in the prescribed form. The statement contains the following information.
(i) The firm name. But the firm name shall not contain any of the following words.
Namely ‘Crown”, “Empress”, “Empire”, “ Imperial”, “King”, “Queen”, “Royal”,
or words expressing or implying the sanction, approval or patronage of
Government, except when the State Government signifies its consent to the use
of such words as part of the firm name by order in writing.
23.8
(ii) The place or principal place of business of the firm.

(iii) The names of any other places where the firm carries on business,
(iv) The date when each partner joined the firm.
(v) The names in full and permanent addresses of the partners.
(vi) The duration of the firm.[Sec.58(1)]
2. Signing the statement.
3. Verifying the statement.
4. Submitting the statement with fee. When the above-required formalities have been
complied with, the partners must submit the statement along with the prescribed
fee for registration. The statement is to be submitted to the Registrar of the
area in which any place of business of the firm is situated or proposed to be
situated.[Sec.58(1)].
5. Registration. When the Registrar is satisfied that the provisions of Section 58 have
been duly complied with, he shall record an entry of the statement in the Register
of firms, and shall file the statement.[Sec.59].
6. Issue of certificate of registration. Registrar after registration of the firm issues
under his hand a ‘Certificate of Registration’.
7. Effective date of registration: When the registrar files the statement & makes
entries in the register of firms and not from the date of presentation of statement
to him.
Effects of Non-registration
Though the registration of firm is not compulsory but has become essential or desirable
in view of the several adverse effects arising from non-registration. In other words the
unregistered firm and its partners suffer from many disabilities. The effects of non-
registration of firm are as under:
1. No suit by a partner against the firm. A partner of an unregistered firm cannot
file a suit to enforce his rights arising from a contract or conferred by this Act
against the firm.[69(1)].
2. No suit by a partner against any other partner. A partner of an unregistered firm

cannot file a suit to enforce his rights arising from a contract or conferred by this
Act against any other present or past partner in the firm.[Sec.69(1)].
23.9
3. No suit by an unregistered partner against the firm and other partners. No

partners of the firm whose name has not been shown in the Registrar of Firms as a
partner in the firm can sue against the firm or other partners in the
firm.[Sec.69(1)]
4. No suit by unregistered partner against third party. A partner of a registered firm

whose name has not been shown in the register of firm as partner in the firm
cannot sue to enforce his right arising from a contract against any third
party.[Sec.69(2)]
5. No suit by the firm against third party. An unregistered firm cannot file a suit in
any court to enforce his any right arising from a contract against any third
party.[Sec.69(2]
23.10
6. Third parties can sue against the firm and its partners. Third parties can sue on any
unregistered firm and its partners.[Sec.69(3)]
7. No claim of set-off exceeding Rs.100. An unregistered firm or any partner thereof

cannot claim a set off of value exceeding Rs.100 in proceedings instituted against
him by a third party to enforce his right arising from a contract.
Exceptions i.e. Non – registration not to affect the following Sec 69:
1. Right of third party to sue the firm or any partner
2. Right of partners to sue for –
a. Dissolution of firm
b. Settlement of accounts of a dissolved firm
c. Realizing the property of dissolved firm
3. Power of official assignee, receiver or court to realize the property of an insolvent
partner and to bring an action on behalf of insolvent partner.
4. Right of the firm to institute a suit or claim of set off not exceeding Rs. 100
PROPERTY OF THE FIRM Sec 14 & 15
The property of the firm or partnership property means and includes all the property,
rights, and interest and good will of the business of the firm to which the firm is (i.e.
all partners jointly) entitled. Partners are free to determine by agreement the
property of the firm. But in the absence of any contract between the partners, the
property of the firm includes the following.
1. All property, right and interest originally brought into the common stock of the
firm.
2. All property, rights and interest acquired by purchase or otherwise, by or for the
firm for the purposes and in the course of the business of the firm.
23.11
3. Goodwill of the business of the firm.

It should be noted that the Section states that the property of the firm ‘includes’.
The word ‘includes’ implies that the list of property is not exhaustive.
Any property and right or interest brought into originally at the time of
commencement of the firm as well as the property and rights or interest acquired or
purchased for the purposes and in the course of business of the firm and goodwill of
the business earned etc. are included in the property in the firm. While determining
the property of the firm, the real intention of the partners will be considered.
Therefore, a mere use of property of partner by the firm does not itself make the
property of firm unless it is intended to be treated as such.
Thus, the partners may by contract treat the personal property of partners as
property of the firm. Similarly, if partnership property is allotted to a partner, it
becomes the property of that partner. Moreover, where certain property is purchased
with partnership money but in the name and for the personal purposes of a partner, it
becomes the personal property of the partner and such partner will become a debtor of
the firm for the purchase money.
But section 14 clearly states that unless the contrary intention appears, property and
rights and interest in property acquired with money belonging to the firm are deemed
to have been acquired for the firm.
Application of the property of the firm (sec. 15) : Subject to contract between
partners, the property of the firm shall be held and used by the partners exclusively
for the purposes of the business.
23.12
TOPIC 3: TYPES OF PARTNERSHIP &

PARTNERS
TYPES OF PARTNERSHIPS
Partnership may be for a fixed term or without any duration, i.e. partnership at will.
1. Partnership for a fixed term. When the partners fix the duration of partnership by
an agreement, it is said to be partnership for a fixed term or period. Such
partnership comes to an end on the expiry of that term..If the firm continues to
carry on the business after expiry of that term the partnership becomes partners at
will. However, the mutual rights and duties of the partners remain the same as
they were before the expiry of the term.[Sec.17(b)]
2. Partnership at will. Where no provision is made by contract between the partners

for the duration of their partnership or for determination of their partnership, the
partnership is ‘partnership at will’.(Sec.7)
The main provisions regarding such a partnership are as under:
 It is partnership for which no duration has been fixed.
 Its existence depends on the will of partners.
 Where partnership is at will, a partner may retire by giving a notice in
writing to all the other partners of his intention to retire.
 Where the partnership is at a will, the firm may be dissolved by any partner
by giving notice in writing of his intention to dissolve the firm to all the
other partners.
3. Particular partnership. When a person becomes a partner with another person in a

particular adventure or undertaking, it is called a particular partnership. For
instance, A and B enter into partnership to produce a film. It is a particular
partnership. Where a particular partnership continues even after the completion of
the adventure, the partnership becomes the partnership at will. But in such a case,
mutual rights and duties of the partners in respect of the other adventure remain
the same as they were in respect of the original adventure.[Sec.17(c)]
23.13
TYPES OF PARTNERS
There are many types of partner having varying degrees of rights, duties and
responsibilities. A few important types of partners are as under:
1. Actual or ostensible or active partner. Actual partner is one

 Who becomes a partner in the firm by an agreement; and
 Who actively participates in the conduct of the business of the firm. An
actual partner is actually an agent of the other partners in the usual course
of business of the firm. He, therefore, binds himself and all his copartners
by his acts done in the usual course of business and in the name of the firm.
2. Sleeping or dormant partner. A sleeping or dormant partner means a partner whose

existence, as a partner is not known to the public. He becomes a partner in the
firm by agreement but never takes active part in the conduct of the business of the
firm. Therefore, he cannot bind all other partners by his acts. But , as long as he
remains a partner, his liability for the acts of the firm is the same as that of an
actual partner.
3. Nominal partner. A nominal partner is one who lends his name to the firm without
having any pecuniary interest in the business of the firm. Neither he invests money
in the firm nor he shares the profits of the business of the firm. H e even does
not take part in the conduct of the business of the firm. But, he is liable like an
actual partner of the firm to the third for all the debts of the firm. Such partner
however, does not fulfill the requirements of a valid partnership.
4. Partner in profits only. In a partnership, sharing of profits of the business of the

firm is a must but sharing of losses is not essential by all the partners. Therefore, a
partner who agrees to share in the profits of the firm only and does not agree to
be liable for the losses of the firm is a partner in profits only. However, he is
liable to the third parties for all the debts of the firm. It is so because as per the
law every partner is liable severally and jointly to the third parties do the entire
debt of the firm.
5. Sub-partner. A sub-partner is not a partner in the firm but a partner in the firm.
Thus, a sub-partner is the person who gets a share in the profits derived by a
23.14
partner from the firm. A sub-partner is not directly connected with the firm and
does not have mutual agency with any partner of the firm. Therefore, he cannot
bind the firm by his acts. He does neither enjoy any right against the firm nor
does he carry any duties for the business of the firm.
6. Partner by estoppel or holding out. When a person who is not a partner in a firm
but held liable as a partner in the firm under certain circumstances, such a person is
said to be partner by estoppel or holding out. A person is held liable as a partner
by holding out when-
1. He by spoken or written words or by conduct represents himself to be a partner
in a firm; or he knowingly permits himself to be represented as a partner in a
firm, and
2. any other person having faith on such representation gives credit to the firm.
In this connection, it is immaterial 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 the credit.[Sec.28(1)]
A partner by holding out becomes liable jointly and severally only to the persons who
have given credit to the firm on the faith of his representation. But such a
partner is no way becomes a partner in the firm. Therefore, he is not entitled to
any right against the firm or partners in the firm. At the same time he is not
liable to the partners in the firm.
Exceptions
The principal of holding out is not applicable in the following two cases:
(i) Where after a partner’s death the business is continued by the firm with the old
firm’s name or remaining partners continue to use the name of the deceased
partner, his legal representative or his estate shall not be liable for any act of
the firm after his death. [Sec.28(2)]
(ii) Insolvency of a partner also terminates his liability forth with. His estate is no
more liable for any act of the firm done after the date of the order or
adjudication.[Sec.34(2)].
23.15
Profit Liability towards 3rd

Type Loss Sharing Management
Sharing Party
Actual or ostensible
Yes Yes Yes Yes
or active partner
Sleeping or dormant
Yes Yes No Yes
partner
Nominal partner No No No Yes
Partner in profits
Yes No Yes / No Yes
only
Sub-partner No No No No
Yes, only for the 3rd
Partner by estoppel
No No No party who relied on his
or holding out
representation
MINOR AS PARTNER IN BENEFITS
 The relation of partnership arises from a contract.(Sec.5)

 A minor being incompetent to contract cannot be a partner in a firm.
 It is impossible for minors to form a partnership.
 Even one adult and all other minors cannot form a partnership. According to
the Supreme Court of India, a minor can never be a full-fledged partner even in
an existing firm.[ CIT. v Dwarkadas Khaitan & Co.]
 Minor may be admitted to the benefits of partnership. A person who is a minor
may not be a partner in a firm, but, with the consent of all the partners, he
may be admitted to the benefits of partnership.(Sec.30).
Rights of Minor
When a minor is admitted to the benefits of partnership, his rights are as under before
attaining majority:
1. To share profits. A minor admitted to the benefits of partnership, has a right
to receive the agreed share of profits of the firm.
23.16
2. To share the property. Such a minor also has a right to receive the agreed share
of the property of the firm.
3. To inspect the books. A minor is also entitled to have copy of any of the
accounts of the firm.
4. To copy accounts A minor is also entitled to have a copy of any of the accounts
of the firm.
5. To sue partners. A minor when serving his connection with the firm, may sue
the partners for (I) an account, or(ii) payment of his share of the property of
profits of the firm.
6. To become or not to become a partner in the firm. Such a minor on attaining
majority will have an option either to become or not to become partner of the
firm. He may use this option at any time within 6 month of his attaining
majority or of his obtaining knowledge that he had been admitted to the
benefits of partnership, whichever date is later.
Liabilities of Minor
When a minor is admitted to the benefits of partnership, his liabilities are as under
before attaining majority:
1. No personal liabilities. Such a minor has no personal liabilities for the acts of the
firm.
2. Minor’s share is liable. The liability of such a minor is limited to the extent of
his share in the property or profits of the firm.
3. Liability in case of insolvency. Such minor will not be liable even in case of
insolvency of the firm. But in such a case, his share in the property or profits
of firm shall vest in the official assignee/receiver.
4. To give public notice on attaining majority. Such minor is liable to give public
notice of his intention that he has elected not to become partner in the firm.
He must give such notice at any time within six moths o his attaining majority
or of his obtaining knowledge that he has been admitted to the benefits of
partnership, whichever date is later If he fails to give such notice, he shall be
liable as full-fledged partner in the firm.
23.17
TOPIC 4: RELATION OF PARTNERS

MUTUAL RELATIONS OF PARTNERS
Their respective rights and duties govern mutual relations of partners in a firm. They
are usually determined by a contract among them. Such contract may be expressed or
may be implied by a course of dealing. However, this rule is subject to the provisions of
the Partnership Act. [Sec.11(1)].
Rights of Partners
Where there is no contract between the partners to the contrary, every partner has
the following rights:
1. Right to take part in business. Subject to contract between the partners every
partner has a right to take part in the conduct of the business.[Sec.12(a)].
2. Right to be consulted. Subject to contract between the partners, every partner has
a right to be consulted on all-important matters connected with the business of the
firm. Sometimes difference of opinion among partners may arise. In such case, if
difference arises as to ordinary matters, it shall be decided by a majority of
partners. Where the difference arises as to change in the nature of business, it
cannot be decided without the consent of all the partners[Sec.12.(c)].
3. Right of access to books. Every partner has a right to have assess to and to inspect
and copy any of the books of the firm.[Sec.12(a)]. Minor admitted to partnership
benefits can have access to and to inspect and copy the accounts only but not the
books.
4. Right to remuneration. Generally, a partner is not entitled to receive remuneration

for taking part in the conduct of the business.[Sec.13(a)]. However, if authorized
by an express contract, he can claim remuneration.
5. Where a partner willfully neglects or refuses to perform his duties for the conduct
of business and burden of such duties falls on other partners, the other partners can
claim compensation for the labor and trouble imposed upon them.[Krishnama Chariar
v.Shanakara]
23.18
6. Right to share profit. Subject to contract between the partners, every partner is
entitled to share equally in the profits earned, and is liable to contribute equally to
the losses sustained by the firm.(Sec.13(b)]
7. Right to interest on capital. If the partnership deed provide for payment of

interest on capital, the partners are entitled to the interest. However, the
interest on capital shall be payable only out of profits.[Sec.13(c)].
8. Right to interest on advances. Sometimes, a partner makes an advance to the firm

beyond the amount of capital. In such a case, the partner is entitled to interest
thereon at the rate of six percent per annum[Sec.13(d)] .
9. Right in emergency. A partner has authority, in an emergency, to do all such acts

for the purpose of protecting the firm from loss as would be done by a person of
ordinary prudence, in his own case, acting under similar circumstances. The firm will
be bound by such acts.(Sec.21).
10. Right to be indemnified. Every partner has a right to be indemnified by the firm in
respect of the payment made or liability incurred by him
(i) in the ordinary and proper conduct of the business, and
(ii) in doing any act in emergency for the purpose of protection the firm from
loss.
11. Right as an agent of the firm. Subject to the provisions of this Act, a partner is
the agent of the firm for the purposes of the business of the firm.(Sec.18)
12. Right to prevent admission of a new partner. Every partner has a right to prevent
the admission of new partner in the firm without consent of all the partners, or
where partnership is at will, giving notice in writing to all the other
partners.[Sec.32(1)].
13. Right to retire. A partner has a right to retire (a) with the consent of all the
other partners, or (b) in accordance with the agreement by the partners, or (c)
where partnership is at will, by giving notice in writing to all the other
partners.[Sec.32(1)]
23.19
14. Right not to be expelled. Subject to contract to the contrary, every partner has a
right not to be expelled from the firm by any majority of the partners[Sec.33(1)]
15. Right of outgoing partner to carry on competing business. Subject to a contract to

the contrary, an outgoing partner may carry on a business competing with that of
the firm and he may advertise such business but without-
 using the firm name
 representing himself as carrying on the business of the firm, or
 soliciting the custom of persons who were dealing with the firm before he ceased
to be partner.[Sec.36(1)]
16. Right of outgoing partner to share subsequent profits. Every outgoing partner or
representative of a deceased partner has a right to claim either a share in the
subsequent profits of the firm or interest at the rate of 6 percent per annum on
the amount of his share in the property of firm till the accounts are finally settled.
This right is subject to a contract to the contrary.(Sec.37)
17. Right to dissolve the firm. Where the partnership at will, any partner may dissolve
the firm. For this, the partner is required to give notice in writing to all the other
partners of his intention to dissolve the firm.[Sec.439(1)].
Duties of Partners
Partnership is the relation founded on the principal of good faith. It is primarily based
on mutual trust and confidence. Most of the duties of partners emerge from this
fundamental principal. Some of the duties of partners are as under:
1. To carry on business to the greatest common advantage. Every partner is bound to
carry on business of the firm to the greatest common advantage of all the partners.
Therefore, if a partner derives any profit for himself from any transaction of the
firm or from the use of the property or business connection of the firm of firm
name, he is bound to pay the firm.
2. To be just and faithful. Partnership is a relation founded upon good faith. Every
partner, therefore is bound to be just and faithful to each other.(Sec.9)
23.20
3. To render true accounts. Every partner is also bound to maintain and render true
account of partnership business and funds with him.(Sec.9)
4. To give full information. Partners are also under a duty to give full information of
all things affecting the firm to all the other partners or their legal
representatives.(Sc.9) No partner should conceal any information in his possession
about the affairs of the firm from his co-partners.
5. To indemnify for fraud. Every partner is under a duty to indemnify the firm for any
loss caused to it by his fraud in the conduct of business of the firm.(Sec.10)
6. To attend diligently. Subject to contract between the partners, every partner is

bound to attend diligently to his duties in the conduct of business.[Sec.12(b)] If
the firm suffers any loss by the willful neglect of a partner he shall be liable to
indemnify the firm.
7. Not to claim remuneration. Subject to contract between the partners, a partner is

not entitled to receive remuneration for taking part in the conduct of its
business.[Sec.13(a)]
8. Duty to share losses. In the absence of contract to the contrary, every partner is
liable to contribute equally to the losses sustained by the firm.(Sec.13(b)].
9. To use property for the business of the firm. Subject to contract between the
partners, every partner is under a duty to hold and use the property of the firm
exclusively for the purposes of the business. (Sec.15)
10. To account for private profits. A partner is bound to account for and pay to the
firm the profit derived for himself from any of the following.
(i) From any transaction of the firm.
(ii) From use of the property of the firm.
(iii) From use of business connection of the firm or firm name.
However, this duty is subject to a contract to the contrary.
23.21
11. To account for profits of a competing business. No partner can carry on any business
competing with that of the firm while he is a partner. If he carry on that, he is
bound to account for and pay to the firm all profits made by him in that business.
[Sec.16(b)]
12. To act within authority. Every partner is bound to act within the scope of his
implied and express authority. In case he exceeds his authority, he is liable to
compensate the firm for the loss caused by such acts.
13. To be liable for the acts of the firm. Every partner is liable jointly with all the
other partners and also severally, for all acts of the firm done while he is a
partner.(Sec.25).
RELATIONS OF PARTNERS TO THIRD PARTIES OR IMPLIED AUTHORITY OF

PARTNERS
A partnership business may be carried on by all the partners or by any one on their
behalf. Thus, every partner is an agent all the other partners in the firm for the
purposes of the business of the firm, subject to a contract to the contrary.(Sec.18).
Scope of Implied Authority

According to Section 19(1) subject to the provisions of section 22, the act of a
partner which is done to carry on, in the usual way, business of the kind carried on by
the firm, binds the firm. The authority of a partner to bind the firm conferred by this
section is called his implied authority.
Section 22 lays down that in order to bind a firm, an act or instrument done or
executed by a partner or other person on behalf of the firm shall be done or executed
in the firm name, or in any other manner expressing or implying an intention to bind
the firm.
The scope of implied authority is subject to the following conditions:
1. The act must be done in the capacity as a partner. If he does some act in a
capacity other than as a partner, the firm is not liable.
2. The act must relate to the normal business of the firm. In other words, every
partner has an implied authority, to do an act similar to the kind of business
carried on by the firm. Sometimes, a partner does an act similar to the kind of
23.22
business of the firm but for his personal purposes. In such a case, if the third
party knows this fact, the firm is not liable for such on act.
3. Acts must be done in the usual way of carrying on the business of the firm. In
other words, any act incidental or consequential to the normal business of firm
may also be done by a partner.
4. The act must be done in the name of the firm. For instance, if an instrument
drawn on behalf of the firm, the partner must sign it for and on behalf of the
firm and not in his individual capacity.
Acts within implied authority. Acts outside implied authority

 To buy goods of the kind dealt/used in  To submit a dispute relating to the
the business of the firm. business of the firm or arbitration.
 To sell the goods of the firm.  To open a bank account on behalf of
 To buy things necessary (incidentally or the firm in his own name.
consequently) for carrying on the  To compromise or relinquish any claim
business of the firm. or portion of a claim by the firm.
 To accept payments of the debts due  To withdraw a suit or proceeding filed
to the firm and issue receipts for the on behalf of the firm.
same.  To admit any liability in a suit or
 To employ servants for the business of proceeding against the firm.
the firm.  To acquire immovable property
 To acknowledge a subsisting debt. belonging to the firm.
 To borrow money on credit of the  To enter into partnership on behalf of
firm. the firm.
 To pledge goods or borrowing money on
behalf of the firm.
 To issue negotiable instruments
(Cheque, bills etc.) for and on behalf
of the firm.
 To settle accounts with persons dealing
with the firm.
 To render accounts to the creditors of
the firm.
 To defend an action brought against
23.23
the firm and to engage a lawyer for

the purpose.
These statutory restrictions are effective against the whole world whether a particular
person contracting with the firm knows about them or not. Therefore, the firm will
not be liable to any third parties for any of the above acts of a partner. A partner
can bind by any of these acts only when he is expressly authorized to do that or the
usage or custom of trade allows him to do that act.
Restrictions by contract. Partners may by contract between all the partners restrict
the implied authority of any partner. Therefore, any restriction imposed on implied
authority of a partner by a contract between all the partners will be effective provided
the third party with whom the partner deals knows of such restriction.(Sec.20)
Partner’s Authority in an Emergency

A partner has authority to do all the necessary acts in an emergency subject to the
following conditions:
(i) The acts must be done for the purpose of protecting the firm from loss
threatened by the emergency.
(ii) The partner must act as a prudent person would act under similar circumstances in
his own case.(Sec.21).
23.24
TOPIC 5: LIABILITY OF FIRM

1. Liability for extension and restriction of partner’s implied authority. The partners in a
firm may, by a contract between them, extend or restrict the implied authority of
any partner. Any restriction imposed on the implied authority of any partner will
have no effect against third party unless the party with whom the partner is dealing
has notice of such restriction or the party does now know to believe that he is
dealing with a partner in a firm,.(Sec.20).
2. Liability for acts done in an emergency. When a partner does some act beyond
his authority in an emergency in firm is liable for such acts subject to the following
conditions:
(i) The act must have been done to protect the firm from loss threatened by the
emergency.
(ii) The partner must act as a prudent person would act under similar circumstances in
his own case.(Sec.21).
3. Liability for acts done in the name of the firm. Any act done or instrument
executed by a partner or other person on behalf of and in the name of the firm with
an express or implied intention to bind the firm. The firms is liable for the
same.(Sec.22).
4. Liability for admission by a partner. An admission (i.e. acknowledgement) or

representation made by a partner concerning the affairs of the firm is evidence against
the firm if it is made in the ordinary course of business. The firm is liable and bound
by such admission or representation by any partner. But admission or representation
made by a partner beyond the scope of his implied authority will not bind the
firm.(Sec.23)
5. Liability for the notice to a partner. Notice to a partner operates as notice to

the firm provided the following conditions are satisfied.
(i) When the notice is given to an active partner.
(ii) The notice must be of any matter relating to the affairs of the firm.
23.25
(iii) There must not be any fraud committed on the firm with the consent of that
partner (Sec.24).
6. Liability for wrongful acts of a partner. The firm is liable for the wrongful acts
or omission of a partner subject to the following conditions:
(i) when the wrongful acts are done while acting in the ordinary course of business of
the firm or with the authority of his co-partners.
(ii) Such acts cause loss or injury to any other party or any penalty is
incurred.(Sec.26)
7. Liability for misapplication of money. The firm is liable to make good the loss
caused to a third party due to misapplication of his money or property by a partner
in the following cases:
(i) Where a partner acting within his apparent authority receives money or property
from third party and misapplies it.
(ii) Where a firm in the course of its business receives money or property from a third
party, and the money or property is misapplied by any of the partners while it is
in the custody of the firm.(Sec.27).
23.26
TOPIC 6: RECONSTITUTION OF FIRM

Reconstitution of a firm means a change in the relations between the partners and/or
change in the composition of the firm. The reconstitution of a firm may take place in
any of the following ways:
1. Introduction / Admission of a Partner: Subject to the provisions of Section 30 (which

deals with the admission of minor in the benefits of partnership), a person may be
introduced as partner into the firm in any of the two ways.
i. With the consent of all the existing partners.
ii. In accordance with the contract between the partners or the provisions of
partnership deed. The new admitted partner is known as incoming partner.
Liability of new partner.

 A person who is introduced as partner into a firm does not thereby become liable
for any act of the firm done before he became a partner.(Sec.31(2)] Thus,
generally the liability of a new partner in a firm commences from the date of his
admission. He may, however, agree with his co-partners to be liable for the pre-
existing debts. But such an agreement is binding upon the partners only. This
agreement does not give a right to the creditors to sue against the new partner
for the pre-existing debts.
 It should be noted that a minor on attaining majority might also elect to
become a partner in the firm. But his position will be different from a new
partner. When a minor on attaining majority elects to become partner of the
firm, he becomes liable for all acts and debts of the firm since the date of his
admission in the benefits of partnership. On the other hand, the liability of a
new partner commences from the date of his admission unless he agrees to be
liable for the pre-existing debts.
2. Retirement of Partner: Retirement of partner is said to be when a partner

withdraws from a firm and the remaining partners continue to carry on business of
the firm. A retiring partner is also known as ‘outgoing partner’ although latter term
includes an expelled partner or a partner adjudged insolvent.
Modes of retirement: A partner may retire in any one of the following ways:
23.27
(i) With a consent of all the other partners.

(ii)In accordance with an express agreement by the partners, i.e. in accordance
with the provisions of partnership deed.
(iii) Where the partnership is at will, by giving notice in writing to all the
other partners of his intention to retire.(Sec.32(1)].
Liability of retired partner: A retiring partner continues to be liable for the acts done
or debts incurred till the date of retirement unless he is discharged from his liability.
He may be discharged from his liability if the following two conditions are fulfilled.
(i) when the partners of reconstituted firm agree to take over the liability of the
retiring partner.
(ii) When the third parties agree to discharge the liability of retiring partner from
his liability ad agree to accept partners of the new firm as their new parties or
debts. This is known as novation of contract between partners and third
parties. [Sec.32]
Rights of Retired Partner: The rights of a retiring partner are as follows:

A. To carry on competing business. A retiring or outgoing partner may carry on
business competing with that of the firm and may advertise such business subject
to a contract to the contrary, but he must not-
(a) use the name of the firm
(b) represent himself as carrying on the business of the firm, or
(c) solicit the customs of persons who were dealing with the firm before he ceases
to be a partner.
B. To share profits or claim interest. Subject to a contract to the contrary, a
retiring outgoing partner has the following two options on retirement till the final
settlement of accounts between the partners takes place:
(i) He or his estate is entitled to share the profits made since he ceased to be a
partner. His share of profit will be such as may be attributable to the use of
his share of the property of the firm.
(ii) He or his estate is entitled to interest at the rate of 6 percent per annum on
the amount of his share in the property of the firm.
3. Expulsion of a Partner: A partner can be expelled from a firm only when the
following conditions are satisfied:
23.28
(i) When the contract between partners.(i.e. partnership deed) confers power on
partners to expel any partner.
(ii) The power to expel must be exercised by any majority of the partners.
(iii) The power to expel must be exercised in good faith.
Rights and liabilities of an expelled partner: The rights and liabilities of a properly
expelled partner are the same as those of a retired partner.
4. Insolvency of a Partner: Where a partner in a firm is adjusted an insolvent, he

ceases to be a partner on the date on which the order of adjudication is made by the
Court. Whether or not the firm is dissolved by the insolvency of the partner depends
on the terms of the contract between the partner.
5. Death of Partner A partner ceases to be partner in the firm on his death.

Consequently, a firm is also dissolved by the death of a partner in the absence of any
contract to the contrary.[42(c)]
Liability of the deceased partner. The liability of the deceased partner is as under:
i. Liability for acts done before death. The estate of the deceased partner will not be
liable for the acts done by the firm before his death. But the estate or
representative of the deceased partner will not be liable for the following.
a. For the money borrowed by surviving partners to pay for the goods ordered in
the life time of the deceased partner.[Sheshi Ammal v.Variavan Chettiar]
b. For the goods ordered before but delivered after death of the partner. It is
because there is no liability or debt due before the death of the partner.
ii. Liability for acts done after death. In case the firm is not dissolved and carries on
its business, the estate of the deceased partner is not liable for the acts of the
firm done after his death.(Sec.35).
6. Transfer of Partner’s Interest: A partner in a firm cannot transfer his interest

or share in the firm like any other property because the partnership relation is based
upon mutual confidence and trust. However, the Act does not prohibit any partner
from transferring his interest in the firm. A partner may transfer his interest by
sale, mortgage, or by creating a charge on such interest in the firm.
Rights of Transferee. The transferee will have the following rights.
23.29
(a) Right to receive profits during continuation of the firm. A transferee will be
entitled to receive the share of profits of the transferring partner during the
continuance of the firm, But he will have to accept the account of profit agreed
to by the partners [Sec.29(1)]
The Supreme Court of India has held, that the assignee would get the rights to
receive the share of the profits of the assignor and accept the account of profit
agreed to by the partners[Addanki v.Bhaskara]
But a transferee will not be entitled to the following rights during the
continuation of the firm.
(i) To interfere in conduct of the business of the firm.
(ii) To require accounts of the firm.
(iii) To inspect the books of the firm.
(iv) To challenge the accounts of profits agreed to by the partners.[Sec.29(2)]
(b) Rights on dissolution of the firm. On the dissolution of the firm, the transferring
partner ceases to be a partner of the firm. In such a case, the transferee is
entitled to receive the transferring partner’s share in the assets of the firm.
For the purpose of ascertaining that share, the transferee is entitled to receive
an account as from the date of dissolution.
23.30
TOPIC 7: DISSOLUTIN OF FIRM /

PARTNERSHIP
Distinction between Dissolution of Partnership and dissolution of Firm
Basis of distinction Dissolution of partnership Dissolution of firm

1. Relation In case of dissolution of In case of dissolution of firm, the
between partners partnership, the relation jural relation between all the
between partners of the firm partners come to an end.
change.
2.Change in There may or may not be All the partners cease to be in a
partners change in the partners. New position of partners. They are no
partners may be introduced. more mutual agents.
3. Continuation of The business is continued in The business is discontinued in the
business the same firm’s name. firm’s name.
4. Revaluation of In this case, the firm’s assets In this case, the firm’s assets are
realization of are revalued in order to realized to pay off debts and
assets determine the share of the distribute surplus.
each partner at the time of
reconstitution.
5. Reconstitution Dissolution of partnership Dissolution of firm results winding
and winding up. results in reconstitution of the up of the firm.
firm.
MODES OF DISSOLUTION OF FIRM

Modes of dissolution of a firm may be classified into two heads:
I. Modes without the order of the court or voluntary modes, and
II. Mode by order of the court.
I. Without the Order of the Court:

Dissolution without the order of the court or voluntary dissolution may take place in
any of the following ways:
23.31
1. Dissolution by agreement. A firm may be dissolved by agreement in the following

ways:
(a) With the consent of all the partners, i.e. by unanimous decision of the partners.
Such decision may be taken by all the partners at any time, or
(b) In accordance with a contract between a partners, i.e. according to the provisions
of the partnership agreement.(Sec.40) If contract provides, the firm may also be
dissolved by a decision of majority of partners or on notice by any partner.
2. Compulsory dissolution: A firm is compulsory dissolved in the following

circumstances:
(i) By insolvency of all partners or all but one. A firm is dissolved when all the
partners or all the partners except one are adjudicated as insolvent.
(ii) By business becoming unlawful. A firm is also dissolved -
(a) when the business of the firm becomes unlawful; or
(b) when it becomes un-lawful for the partners to carry on the business in
partnership
3. Dissolution by happening of contingencies. Subject to contract between the

partners, a firm is dissolved by happening of any of the following contingencies:
(i) Expiry of the term.
(ii) Completion of adventure.
(iii) Death of a partner.
(iv) Insolvency of a partner
4. Dissolution by notice. 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. If no such date is mentioned the dissolutions is effective as from the
date of the communication of the notice.
The notice must be served on all the partners. It must be clear and unambiguous and
state the intention of the partner giving notice to dissolve the firm.
It should be noted that a notice for dissolution once given cannot be withdrawn unless
all other partners agree to the same.
23.32
II. Dissolution by Court

A firm may be dissolved by the order of the Court on the following grounds:
1. Insanity. When a partner has become of unsound mind, a suit may be filed for
dissolution of the firm. Such a suit can be filed by any other partner or by the
next friend of the partner of unsound mind.
2. Permanent incapacity. When a partner has become in any way permanent by

incapable of performing his duties as partner, a suit may be filed before the Court
for dissolution of the firm. Such suit may be filed only by any other partner. The
partner suffering from incapacity cannot sue for dissolution.
Incapacity of a partner must be permanent. It may be physical or mental. For
instance, loss of eyes, hands, legs, hearing capacity etc. But incapacity of a dormant
partner cannot be ground for order of dissolution of the firm.
3. Misconduct. When a partner is guilty of conduct or misconduct (which is likely to

affect prejudicially the carrying of the business, regard being had to the nature of
business), the Court may dissolve the firm. Such suit may be filed by a partner
other than the guilty partner [Sec.44(c)]
Misconduct need not be directly connected with the business of the firm. It may
be of any kind, which may affect prejudicially the business of the firm. Following
acts have been held to be misconduct of a partner:
a) The adultery by a partner with another partner’s wife [Abbot v. Crump]
b) Guilty for breach of trust by a partner. (Esselv. Hayward]
4. Persistent breach of agreement. The Court may also dissolve a firm when a suit is
filed against a partner for willful or persistent breach of agreement. However, the
willful or persistent breach agreement must be relating to any of the following.
(i) Management of the affairs of the firm.
(ii) The conduct of the business of the firm.
Moreover, it will also be deemed to be a willful or persistent breach of agreement if
the partner conducts himself in the matters relating to the business that it is not
reasonably practicable for the other partners to carry on in partnership with him.
5. Transfer of interest. The Court may order the dissolution of the firm when a
partner has transferred his interest in any of the following ways:
23.33
(i) When a partner has transferred whole of his interest in the firm to a third
party.
(ii) When he has allowed his share to be charged under Civil Procedure Code.
(iii) When he has allowed it to be sold in the recovery of land revenue.
(iv) When he has allowed it to be sold in the recovery of any dues recoverable
as arrears of revenue of land due by the partner.
6. Perpetual losses. When the business of the firm cannot be carried on except at a
loss the court may dissolve the firm on an application by any partner.
7. Any other just and equitable ground. When any partner makes an application for
dissolution of the firm on any ground and the court thinks it just and equitable
that the firm should be dissolved.
RIGHTS OF PARTNERS ON DISSOLUTION

Following are the fights of partners on dissolution of a firm.
1. Right to enforce winding up. On dissolution of a firm, every partner or his
representative is entitled to the following rights of general lien against all the other
partners or their representatives:
(i) To have the property of the firm applied in payment of the debts and liabilities
of the firm.
(ii) To have the surplus distributed among the partners of their representative
according to their rights.
2. Rights to have debts of the firm and personal debts paid-off. Where there are joint
debts due from the firm, and also separate debts due from any partner, the
property of the firm shall be applied in the first instance in payment of the debts
of the firm, and, if there is any surplus, then the share of each partner shall be
applied in payment of his debts or paid to him. Similarly, the private property of
any partner shall be applied first in the payment of his private debts, and the
surplus(if any) in the payment of the debts of the firm, if any.(Sec.49)
3. Right to use the name of the firm. Where any partner has bought the goodwill of
the firm after its dissolution, he shall have a right to use the name of the firm.
23.34
4. Right to claim return of premium(goodwill) on premature dissolution. Where a

partner has paid a premium(goodwill) on entering into partnership for a fixed term
and the firm is dissolved before the expiration of that term, he shall be entitled to
repayment of the premium or of such part thereof as may be reasonable.
The amount of refund of premium will depend upon two things:
(i) The terms upon which he became partner in the firm.
(ii) The length of time during which he was a partner in the firm.
But in the following cases no refund of premium is allowed on premature dissolution
of the firm.
(i) When premature dissolution is due to the death of any partner.
(ii) The dissolution is mainly due to the misconduct of the partner claiming the
return of the premium.
(iii) The dissolution is in pursuance of an agreement containing no provision for the
return of the premium or any part thereof.
5. Right in case of fraud or misrepresentation. Where a contract of partnership is

rescinded on the ground of fraud or misrepresentation of any of the partners, the
aggrieved partner is entitled to the following rights in addition to his usual rights:
(a) Right of lien on surplus assets. He is entitled to a lien on, or a right of
retention of, the surplus or the assets of the firm remaining after the debts
of the firm have been paid, for any sum paid by him for the purchase of a
share in the firm and for any capital contributed by him.
(b) Right to subrogation. He is also entitled to subrogate to the rights of a
creditor of the firm in respect of any payment made by him towards the debts
of the firm.
(c) Right to be indemnified. He is also entitled to be indemnified by the partner
or partners guilty of the fraud or misrepresentation against all the debts of
the firm.
6. Right to restrain use of the firm name. On dissolution of the firm, every partner or
his representative may restrain any other partner or his representative from carrying
on a similar business in the firm name or from using any of the property of the
firm for his own benefit, until the affairs of the firm have been completely wound
up. This right is, however, subject to the following conditions.
(i) There is no contract between the partners contrary to it.
23.35
(ii) The partner carryon on a similar business has bought the goodwill of the firm.
LIABILITIES OF THE PARTNERS

On dissolution of a firm, the liabilities of the partners are as under:
1. Liability for the acts done after dissolution. All the partners continue to be liable to
the third parties for any act done by any of them after dissolution of the firm but
before public notice of dissolution is given.
However, if the dissolution is a consequence of (a) death of a partner,(b) adjudication
of insolvency of a partner, or(c) retirement of a dormant / sleeping partner, the
estate of such partner will not be liable for the acts done after the date on which he
ceases to be partner
2. Continuing authority of partners. After the dissolution of a firm, the authority of

each partner to bind the firm as well as mutual rights and obligations of the partners
continue, so far as may be necessary for the following two purposes only:
(i) For winding up of the affairs of the firm.
(ii) For completing the unfinished transactions at the time of dissolution.
SETTLEMENT OF ACCOUNTS
Subject to agreement between the partners, following provisions will apply in the
settlement of accounts of a firm after dissolution:
1. Treatment of losses and deficiency of capital. Losses including deficiency of capital,
shall be paid in the following sequence:
(i) First, out of profits.
(ii) Next, out of capital.
(iii) Lastly, if necessary, by the partners individually in their profit sharing ratio.
2. Application of assets. The assets of the firm (including any sums contributed by the
partners to make up deficiencies of capital) shall be applied in the following manner
and order.
(i) In paying the debts of the firm to third parties.
(ii) In paying to each partner ratably what is due to him from the firm for
advances as distinguished from capital.
23.36
(iii) In paying to each partner ratably what is due to him on account of capital;
and
(iv) The residue, if any, shall be divided among the partners in their profit sharing
ration.[Sec.48(b)]
3. Treatment of deficiency arising due to insolvency. There are also cases where a
partner becomes insolvent and nothing or a part of deficiency of his capital can be
recovered from his personal assets. In such a case, the solvent partners are bound to
contribute to make-up such deficiency. But the question is in what proportion the
partners are bound to contribute to make-up such deficiency. This question was
settled by the decision given in the well known case of Garner v. Murry. The
principles laid down by this decision are as under:
(i) The solvent partners should contribute to the deficiency of capital in their
profit sharing ration.
(ii) The solvent partners should bear the loss of deficiency of capital of insolvent
partner in the ratio of their agreed capital.
4. Treatment of goodwill. In setting the accounts of a firm after dissolution, the

goodwill shall, subject to contract between the partners, be included in the assets,
and it may be sold either separately or along with other property of the firm.
----****----
23.37
Negotiable Instrument Act 1881
Negotiable Instruments Act, 1881
Definition of a Negotiable Instrument

 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).
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.
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.
24. 1
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.
Important Characteristics of Negotiable Instruments

 The instrument holder is presumed to be owner of the property contained
in it.
 They are freely transferable.
 A holder in due course gets the instrument free from all defects of the
title of any previous holder.
 The holder in due course is entitled to sue on the instrument in his own
name.
 The instrument is transferable till maturity and in case of cheques till it
becomes stale (on the expiry of 6 months from the date of issue)
 Certain equal presumptions are applicable to all negotiable instruments unless
the contrary is proved.
Classification of Negotiable Instruments

a) Bearer Instruments
24. 2
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.
b) 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.
c) Inland Instruments (Section 11)
A promissory note, bill of exchange or cheque drawn or made in India, and
made payable, or drawn upon 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.
d) 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.
e) 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.
f) 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
24. 3
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.
 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 3rd 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.
24. 4
 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:

1. 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.
24. 5
d) The endorser.
e) The endorsee.
Essentials of a Promissory Note:

i. It must be in writing. An oral promise to pay will not do.
ii. 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 Rs. 500", there is no promise
to pay and the instrument is not a promissory note.
iii. The promise or undertaking to pay must be unconditional. A promise to
pay “when able”, or “as soon as possible”, 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.
iv. The maker must sign the promissory note in token of an undertaking to
pay to the payee or his order.
v. The maker must be a certain person.
vi. The payee must be certain.
vii. 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.
viii. Payment must be in legal money of the country.
ix. 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.
x. 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).
24. 6
2. 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)
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:

i. It must be in writing.
24. 7
ii. It must contain an unconditional order to pay money only and not merely
a request.
iii. It must be signed by the drawer.
iv. The parties must be certain.
v. The sum payable must also be certain.
vi. It must comply with other formalities e.g. stamps, date, etc.
Forms of Bills of Exchange

i. 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:

 the instrument must have been drawn or made in India; and
 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.
ii. Foreign Bills

All bills which are not inland are deemed to be foreign bills. Normally foreign
bills are drawn in sets of three copies.
iii. 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.
iv. 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
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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.
v. 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 cancelled. It cannot be made payable to bearer.
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3. Cheques
 Section 6 of the Act provides that 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.
 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 2 additional
qualifications, namely:
a. it is always drawn on a banker, and
b. 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 RBI 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) (c), (d), (e) and (f) The payee, holder, endorser and endorsee: same as in
the case of a bill.
Essentials of a Cheque
i. It is always drawn on a banker.
ii. It is always payable on demand.
iii. It does not require acceptance.
iv. A cheque can be drawn on bank where the drawer has an account.
v. Cheques may be payable to the drawer himself. It may be made payable
to bearer on demand unlike a bill or a note.
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vi. The banker is liable only to the drawer. A holder has no remedy against
the banker if a cheque is dishonoured.
vii. A cheque is usually valid for fix months. However, it is not invalid if it
is post dated or ante-dated.
viii. No Stamp is required to be affixed on cheques.
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.”
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:
 Obligation to honour cheques of the customers.
 Obligation to collect cheques and drafts on behalf of the customers.
 Obligation to keep proper record of transactions with the customer.
 Obligation to comply with the express standing instructions of the
customer.
 Obligation not to disclose the state of customer’s account to anyone
else.
 Obligation to give reasonable notice to the customer, if the banker wishes
to close the account.
 Right of lien over any goods and securities bailed to him for a general
balance of account.
 Right of set off and right of appropriation.
 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
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 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.
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.
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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.
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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.
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 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.
The requisites of claiming protection under Section 131 are as follows:

i. The collecting banker should have acted in good faith and without negligence.
The burden of proving this is upon the banker claiming protection.
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
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 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.
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 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. 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.
Mode of crossing (Sections 123-131A)

There are two types of crossing which may be used on cheque, namely:
 General, and
 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.
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.
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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 along with the name of a banker in the
case of a special crossing.
 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. 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’
24. 18
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. “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.
Maturity
 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.
 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.
Illustration - 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.
 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.
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 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.
Holder (Sec 8)
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 (Sec 9)

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:
 He must be the holder of the instrument.
 He should have obtained the instrument for value or consideration.
 He must have obtained the negotiable instrument before maturity.
 The instrument should be complete and regular on the face of it.
 The holder should take the instrument in good faith.
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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)
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 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.
 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
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pay the amount thereof at maturity, according to the apparent tenor of
the note or acceptance respectively.
 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.
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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 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
24. 24
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 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
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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: 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
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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:
 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”.
 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 which 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.
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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.
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.
Forged Endorsement
 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.
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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.
 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.
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.
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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(2) stipulates, where an electronic image of a truncated cheque
is presented for payment, the 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
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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)
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.
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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.
 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.
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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 and Protest (Section 99-104A)

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”.
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.
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”.
 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.
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 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
 discharge of the instrument or
 discharge of one or more parties to the instrument from liability.
1. Discharge of the Instrument

A negotiable instrument is discharged:
i. by payment in due course;
ii. when the principal debtor becomes the holder;
iii. by an act that would discharge simple contract;
iv. by renunciation; and
v. by cancellation.
2. 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.
A party may be discharged in the following ways :
i. By cancellation by the holder of the name of any party to it with the
intention of discharging him.
ii. By release, when the holder releases any party to the instrument
iii. Discharge of secondary parties, i.e., endorsers.
iv. By the operation of the law, i.e., by insolvency of the debtor.
v. By allowing drawee more than 48 hours to accept the bill, all previous
parties are discharged.
vi. By non-presentment of cheque promptly the drawer is discharged.
vii. By taking qualified acceptance, all the previous parties are discharged.
viii. By material alteration.
Material Alteration (Section 87)
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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.
 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
 of the date of the instrument
 of the sum payable,
 in the time of payment,
 of the place of payment,
 of the rate of interest,
 by addition of a new party,
 tearing the instrument in a material part.
 There is no material alteration and the instrument is not vitiated in the
following cases:
a) correction of a mistake,
b) to carry out the common intention of the parties,
c) an alteration made before the instrument is issued and made with the
consent of the parties,
d) crossing a cheque,
e) 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 so that it also provides that any bank or a
clearing house which receives a transmitted electronic image of a truncated
24. 35
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.
Hundis
 Hundis are negotiable instruments written in an oriental language.
 They 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.
 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.
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
24. 36
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
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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.
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:
i. Every negotiable instrument was made or drawn for consideration
irrespective of the consideration mentioned in the instrument or not.
ii. Every negotiable instrument having a date was made on such date.
iii. Every accepted bill of exchange was accepted within a reasonable time
before its maturity.
iv. Every negotiable instrument was transferred before its maturity.
v. The instruments were endorsed in the order in which they appear on it.
vi. A lost or destroyed instrument was duly signed and stamped.
vii. The holder of the instrument is a holder in due course.
viii. 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 & to 18 %
p.a. 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
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Chapter XVII of the Negotiable Instruments Act provides for penalties in case
of dishonour of certain cheques for insufficiencies of funds in the accounts.
Chapter XVII has been amended by the Negotiable Instruments (Amendment
and Miscellaneous Provisions) Act, 2002.
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 and shall be punishable with imprisonment for a term which may extend
to 2 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 6
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 30 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 15 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.
The Supreme Court in Modi Cements Ltd. v. K.K. Nandi, 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 u/s 138 by the drawee or holder
in due course.
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:
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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;
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:
According to Section 142(2) 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, 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.
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 court may, if it thinks fit, and shall, on the application of the prosecution
or the accused, summon and 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 & 147)
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National Electronic Fund Transfer (NEFT) & Real Time
Gross Settlement (RTGS)
 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.
 RTGS which can be defined as the continuous (realtime) 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.
24. 41

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INDEX

Sr No. Name Page No.

2 Foreign Exchange Management Act, 1999 2.1 – 2.17

Starting as a private shareholders’ bank, the Reserve Bank was nationalized in

ORGANISATIONAL STRUCTURE & MANAGEMENT

CENTRAL BOARD OF DIRECTORS

a) A Governor and not more than four Deputy Governors to be appointed

The terms of the appointment or nomination of the members of the Central

Offices and Branches

THE GOVERNOR AND DEPUTY GOVERNOR

*Financial inclusion is the pursuit of making financial services accessible at

Right to Issue Bank Notes (Sec 22)

Form of Bank Notes (Sec 25)

It arranges to withdraw unfit notes, administers the provisions of the RBI

Legal tender character of notes (Sec 26)

Power of CG to supersede Central Board (Sec 30)

Issue of demand bills and notes(Sec 31)

Notwithstanding anything contained in the Negotiable Instrument

RBI as Banker to Banks

Prudential Norms for Banks

Foreign Exchange Reserves Management

The RBI has adopted a three-pronged strategy of consolidation, development

Instruments of Monetary Policy

Constitution of Monetary Policy Committee (Sec 45ZB)

Meetings of Monetary Policy Committee (Sec 45ZI)

1) The Bank shall organise at least 4 meetings of the Monetary Policy

Monetary Policy Report (Sec 45ZM(1))

Penalties (Sec 58B)

Foreign Exchange Management Act, 1999

Rules under FEMA

Dealings in Foreign Exchange etc. (Section 3)

Holding of Foreign exchange, foreign security & immovable

Rules and Regulations regarding Section 3 and Section 4

II. Realization, Repatriation and Surrender of Foreign Exchange

Period for surrender of received/ realised/ unspent/ unused foreign exchange

Current Account Transaction [Section 2(j)]

Dealings in current account transactions (Section 5)

Foreign Exchange Management (Current Account

II. Central Government Approval :

III. RBI Approval :

Liberalised Remittance Scheme

A resident individual is permitted to make a rupee gift/loan to a NRI/PIO who

The Scheme is not available for remittance to countries notified as non-

Capital Account Transaction [Section 2(e)]

Regulations of Capital Account Transacation (Section 6)

Permissible Capital Account Permissible Capital Account Transactions of

Foreign Exchange Management (Permissible Account

Regulations regarding Capital Account Transactions

Companies having overseas offices

3. Establishment of a branch office or liaison office or project office or any

Establishment in India of Branch/Liaison/Project Office

A Liaison Office can undertake the following activities in India

Companies incorporated outside India and engaged in manufacturing or trading

i. Export / Import of goods.

Foreign Exchange Transactions & Compliances

Holding of Foreign exchange, foreign security & immovable

Rules and Regulations regarding Section 3 and Section 4

II. Realization, Repatriation and Surrender of Foreign Exchange

Period for surrender of received/ realised/ unspent/ unused foreign exchange

Current Account Transaction [Section 2(j)]

Dealings in current account transactions (Section 5)

Foreign Exchange Management (Current Account Transactions) Rules,

Regulations of Capital Account Transacation (Section 6)

Foreign Exchange Management (Permissible Account