CH-3

The legal and political environment - Introduction

Governments want to encourage business activity, but they also need to pass laws and put in
place rules and regulations to control business activity and avoid undesirable outcomes or
negative externalities. They may pass regulations concerning the employment of people,
environmental impact or perhaps constraints to ensure that all advertising is legal, decent and
truthful.
The legal environment therefore impacts on all business behaviour and can be split into a number
of different areas:
 Employment legislation - rules, regulations and laws concerning the employment of
people.
 Environmental legislation - laws, rules and regulations concerning the environmental
impact that then operations of firms create.
 Consumer law - businesses sell to consumers and it is important that consumers have
protection to ensure they are not misled or treated unfairly by firms.
 Competition law - competition is a healthy way to ensure that prices are kept down and
that businesses innovate. Without competition firms may be in a position to exploit
consumers and so governments often legislate to try to ensure competition is fair and to
prevent the development of monopolies.
 Information /reporting law - governments often legislate to ensure that the information
that firms provide is accurate and reflects the true state ('a true and fair view') of the
business. These types of rules and regulations may include accounting
regulations/standards to ensure firms represent their financial position accurately and
ensure that firms do not keep information on consumers that they are not entitled to
retain.
 Social legislation - here government attempts to promote the consumption of merit
goods, which enhance human welfare such as education and health services, and
discourages or prevents the consumption of demerit goods such as tobacco, and petrol.
Demerit goods result in higher social costs.
 In a broad sense the process of governing involves three major activities:

 making decision
 putting them into effect
 adjudicating over them in the event of dispute or non-compliance.
Each of these functions or branches of government, as they operate at a national level, is
discussed in turn below. A similar form of analysis could, if necessary, be applied at other spatial
levels.

The legislative function

Governing, as we have seen, is about making decisions which affect the lives of large numbers of
people. Some of these decisions require new laws or changes to existing laws to bring them into
effect so that the individuals and/or groups to whom they apply become aware of the
government’s wishes and requirements. In a democratic system of government this formal power
to make the law (i.e. to legislate)is vested in a legislative body (the legislature) which is elected
either wholly or partly by the people. As indicated above, this process of choosing a
representative decision-making body by popular election is a central feature of the democratic
approach to government.
Leaving aside for one moment the relative power of the legislative and executive branches of
government, it is possible to identify a number of common features which apply to legislatures
and the legislative function in most, if not all, democratic states. These include the following:
_ A bicameral legislature, that is, a legislature with two chambers: an upper house and a lower
house, each with specific powers and roles in the legislative process.In most countries each
chamber comprises representatives chosen by a separate electoral process and hence may be
dominated by the same party or different parties or by no single party, depending on the electoral
outcome. For a legislative proposal to be accepted, the consent of both chambers is normally
required.
This is one of the many checks and balances normally found in democratic systems of
government .
_ A multi-stage legislative process involving the drafting of a legislative proposal, its discussion
and consideration, where necessary amendment, further debate and consideration and ultimate
acceptance or rejection by either or both legislative chambers. Debates on the general principles
of a proposed piece of legislation would normally involve all members of each chamber, whereas
detailed discussion tends to take place in smaller groups or committees.
_ An executive-led process, that is, one in which most major legislative proposals emanate from
the executive branch of government. In a presidential system of government (e.g. the USA) the
chief executive (the President) is normally elected separately by the people and is not part of the
legislature (in other words there is a ‘separation of powers’). In a parliamentary system (e.g.
the UK) members of the executive may also be members of the legislative body and hence may
be in a position to control the legislative process.
_ Opportunities for legislative initiatives by ordinary representatives, that is, arrangements
which permit ordinary members of the legislative assembly to propose new laws or changes to
existing laws. In practice such opportunities tend to be limited and dependent to a large degree
for their success on a positive response from the political executive.
_ Opportunities to criticize and censure the government and, in some cases, remove it from
office (e.g. through impeachment) this is a vital function within a democratic system of
government in that it forces decision makers to defend their proposals, explain the logic of their
actions and account for any mistakes they may have made. Opposition parties play an important
role in this context with in the legislative body and through media coverage can attack the
government and articulate alternative views to the wider public. Specialist and Standing
Committees for scrutinizing legislation and the day-to-day work of the executive branch of
government also usually exist in democratic regimes.
_ Control of the purse strings, that is, the power to grant or deny government the money required
to carry out its policies and legislative program. In theory this is a formidable power, given that
no government can operate without funds. In practice the power of the legislature to deny
funding to a democratically elected government may be more apparent than real and, where
necessary, compromise tends to occur between the executive and legislative branches of
government.
As will be evident from the comments above, legislating is a complex and time consuming
process, offering numerous opportunities for individuals and groups both within and outside the
legislative body (e.g. pressure groups) to delay and disrupt the passage of legislation. While no
government can guarantee to achieve all its legislative aims, there is a cultural expectation in a
democracy that, as far as possible, promises made before an election will be put into effect at the
earliest opportunity by the democratically elected government. Such an expectation usually
provides the incumbent administration with a powerful argument for legislative support on the
occasions when it is confronted with intransigence within the legislative assembly or hostility
from outside sectional interests.

The executive function

Governing is not only about making decisions, it is also about ensuring that these decisions are
put into effect in order to achieve the government’s objectives. Implementing governmental
decisions is the responsibility of the executive branch of government.
In modern states the term ‘the executive’ refers to that relatively small group of individuals
chosen to decide on policy and to oversee its implementation; some of these individuals will hold
political office, others will be career administrators and advisers, although some of the latter may
also be political appointees. Together they are part of a complex political and administrative
structure designed to carry out the essential work of government and to ensure that those
responsible for policy making and implementation are ultimately accountable for their actions.
The policy-making aspect of the executive function is normally the responsibility of a small
political executive chosen (wholly or in part) by popular election. Under a presidential system of
government, the chief executive or President is usually chosen by separate election for a given
period of office and becomes both the nominal and political head of state. He/she subsequently
appoints individuals to head the various government departments/ministries/bureaux which are
responsible for shaping and implementing government policy. Neither the President nor the
heads of departments normally sit in the legislative assembly, although there are sometimes
exceptions to this rule (e.g. the Vice-President in the United States).

In contrast, in a parliamentary system the roles of head of state and head of government are
separated, with the former usually largely ceremonial and carried out by either a president (e.g.
Germany, India) or a monarch (e.g. UK, Japan). The head of government (e.g. Prime Minister),
while officially appointed by the head of state,is an elected politician, invariably the head of the
party victorious in a general election or at least seen to be capable of forming a government,
possibly in coalition with other parties. Once appointed, the head of government chooses other
individuals to head the different government departments/ministries and to be part of a collective
decision-making body (e.g. a Cabinet) which meets to sanction policy proposals put forward
through a system of executive committees and subcommittees (e.g. Cabinet Committees). These
individuals, along with the head of government, are not only part of the executive machinery of
the state but also usually members of the legislative assembly and both ‘individually’ and
‘collectively’ responsible to the legislature for the work of government.

The day-to-day administration of government policy is largely carried out by non-elected

government officials (sometimes referred to as civil servants or bureaucrats) who work for the
most part in complex, bureaucratic organisations within the state bureaucracy. Apart from their
role in implementing public policy, government officials help to advise ministers on the different
policy options and on the political and administrative aspects of particular courses of action.
Needless to say, this gives them a potentially critical role in shaping government policy, a role
which has been substantially enhanced over the years by the practice of granting officials a
significant degree of discretion in deciding on the details of particular policies and/or on how
they should be administered.
Whereas politicians in the executive branch of government tend to be transitory figures who
come and go at the whim of the head of government or of the electorate most, if not all, officials
are permanent, professional appointees who may serve a variety of governments of different
political complexions and preferences during a long career in public administration. Whatever
government is in power, officials are generally expected to operate in a non-partisan (i.e. neutral)
way when advising their political masters and when overseeing the implementation of
government policy. Their loyalty in short is to the current administration in office,

a principle which helps to ensure a smooth transition of government and to guarantee that the
upheaval caused by a general election does not prevent the business of the state from being
carried out as usual

The judicial function

Governing is not just about making and implementing laws; it is also about ensuring that they are
applied and enforced; the latter is essentially the role of the third arm of government, namely
the judiciaryand the system of courts. Like political institutions, legal structures and processes
tend to a degree to be country specific and vary according to a number of influences including
history, culture and politics. For example, while some states have a relatively unified legal
system, others organised on a federal basis usually have a system of parallel courts adjudicating
on federal and state/provincial law, with a Supreme Court arbitrating in the event of a dispute.
In some countries a proportion of the judges may be directly or indirectly elected by the public,
in others they may be appointed by government and/or co opted by fellow judges. Business
students should make themselves familiar with the legal arrangements within their own country.
In this section we look briefly at the judicial function as related to the concept of democracy.
Whereas in total itarian systems of government the judiciary is essentially the servant of the
ruling élite (e.g. the ‘party’), in a democracy it is an accepted principle that there should be a
separation between the judicial function and the other two branches of government in order to
protect the citizen from a too powerful state. This notion of an impartial and independent
judiciary, free to challenge the government and to review its decisions, is regarded as one of the
hallmarks of a democratic system of government; a further manifestation of the doctrine of the
separation of powers.

In practice of course, notions of judicial independence and role within the democratic political
process tend to be the subject of certain amount of debate, particularly in countries where senior
appointments to the judiciary appear to be in the gift of politicians (e.g. Supreme Court judges in
the United States are nominated by the President with the consent of the Senate) or where
individuals with judicial powers also have an executive and/or legislative role (e.g. the Lord
Chancellor and Home Secretary in Britain). Equally there are questions over the degree to which
the courts should have the power to review the constitutionality of decisions made by a
democratically elected government. In the United States, for example, the Supreme Court has a
long-established right to declare a law void if it conflicts with its own interpretation of the
American constitution. In contrast in Britain, the legal sovereignty of Parliament and the absence
of a codified written constitution push the judiciary towards trying to interpret the intentions of
the framers of government legislation and any legal decision unwelcomed by the government can
be reversed by further legislation. That said, it is interesting to note that in recent years there has
been an increased willingness on the part of the British judiciary to review administrative
decisions, particularly those made by ministers.

Other aspects, too, call into question how far in modern democratic states there is a total
separation between the different arms of government (e.g. increasing use of administrative
courts/tribunals) and whether it makes sense to rigidly distinguish between rule making and rule
adjudication. Certainly some of the past judgments by the United States Supreme Court (e.g. in
the area of civil rights) demonstrate that the courts can be influential in shaping decisions on
major issues of policy and suggest that the judiciary are susceptible to influences from their own
values or to general societal pressures. In short it seems fair to suggest that under current legal
arrangements, legal adjudication is not far removed from the world of politics; arguably we may
like to perpetuate the myth of an entirely separate and independent judiciary since this is a
necessary aspect of the stability of many existing political systems.

Foreign Exchange Management Act – FEMA

The Central Government of India formulated an act to encourage external payments and across the
border trades in India known as the Foreign Exchange Management Act. FEMA (Foreign Exchange
Management Act) was introduced in the year 1999 to replace an earlier act FERA (Foreign
Exchange Regulation Act). FEMA was formulated to fill all the loopholes and drawback of FERA
(Foreign Exchange Regulation Act) and hence several economic reforms (major reforms) were
introduced under the FEMA act. FEMA was basically introduced to de-regularize and have a liberal
economy in India.

1.Objectives of FEMA
The main objective for which FEMA was introduced in Indian was to facilitate external trade and
payments. In addition to this, FEMA was also formulated to assist orderly development and
maintenance of the Indian forex market. FEMA outlines the formalities and procedures for the
dealings of all foreign exchange transactions in India. These foreign exchange transactions have
been classified into two categories — Capital Account Transactions and Current Account
Transactions.

Under the FEMA Act, the balance of payment is the record of dealings between the citizen of
different countries in goods, services and assets. It is mainly divided into two categories, i.e. Capital
Account and Current Account. Capital Account comprises all capital transactions whereas Current
Account comprises trade of merchandise.
Current Account transactions are those transactions which involve inflow and outflow of money to
and from the country/countries during a year, due to the trading/rendering of commodity, service,
and income. The current account is an indicator of an economy’s status.

As mentioned above the balance of payment comprises current and capital accounts, the remainder
of the Balance of Payment is Capital Account, which consists the movement of capital in the
economy due to capital receipts and expenditure. Capital account recognises domestic investment
in foreign assets and foreign investment in domestic.

2.Applicability of FEMA Act

FEMA (Foreign Exchange Management Act) is applicable to the whole of India and equally
applicable to the agencies and offices located outside India (which are owned or managed by an
Indian Citizen). The head office of FEMA is situated at New Delhi and known as Enforcement
Directorate.
FEMA is applicable to:

 Foreign exchange
 Foreign security
 Exportation of any commodity and/or service from India to a country outside India
 Importation of any commodity and/or services from outside India
 Securities as defined under Public Debt Act 1994
 Purchase, sale and exchange of any kind (i.e. Transfer)
 Banking, financial and insurance services
 Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or
more
 Any citizen of India, residing in the country or outside (NRI)
The Current Account transactions under the FEMA Act has been categorized into three parts which,
namely-
(i) Transactions prohibited by FEMA,
(ii) The transaction requires Central Government’s permission,
(iii) The transaction requires RBI’s permission.

3.Prohibition on Drawal of Foreign Exchange

 Any kind of remittance out of winning the lottery
 Any kind of remittance from the income on racing/riding etc,
 Any remittance for buying of a lottery ticket, football pools, sweepstakes,
banned/prescribed magazines etc.,
 Commission payment on exports towards equity investment of Indian Companies in Joint
ventures/wholly owned subsidiaries abroad.
 Remittance of dividend by any company. However, this clause is applicable only if the
requirement of dividend balancing is applicable.
 Commission payment on exportation under Rupees State Credit Routes except
commission up to 10% of invoice value of export of tea and tobacco,
 Payment regarding “ Call back Services” of telephones
 A travel to Bhutan and/or Nepal
 Remittance of interest income on funds held in NRSR Account i.e. Non-resident Special
Rupees Scheme account
 A transaction with a resident of Bhutan or Nepal.
 4.Route for Drawal of
Foreign Exchange

According to Reserve Bank of India foreign Exchange can be drawn from any authorized dealer by
the Prior Approval Route or General Permission Route.

S.No.

Particulars

Limitations

1.

Visiting privarely to any country (except Bhutan and Nepal)

10,000 US dollars or its equivalents for one or more private visits in one year.

2
Donations/Gift per donor

Remittance should not exceed 1,25,000 US dollar during a Financial Year

Corporate Donations

1 percent of the forex earnings during the preceeding three Financial Year or 5 million US dollar,
whichever is less, for a specified purpose

Going out of India for the purpose of employment

1,00,000 US dollar one time only

Remittance facility for emigrations

1,00,000 US dollar or the prescribed amount by country of emigration not exceeding 1,00,000 US
dollar one time only.

Remittance for maintenance of relatives (only close relative) outside India

salary (after the deduction of income tax, Provident Fund and other deduction) of a person not
being a permanent resident in India and a citizen of foreign state other than Pakistan.

Or

1,00,000 US dollar a year per recipient in all other cases

Business Travel Abroad

25000 US dollar per trip respective of stay

Attending specialized training or conference

25000 US Dollar

For Medical treatment

1,00,000 US Dollar

10

Maintenance of a patient going for medical check-up or medical treatment abroad

25000 US Dollar

11

For Studying in Abroad

1,00,000 US Dollar per academic Year or the Institution’s estimation whichever is higher.

12

Meeting the expenses of a person accompanying as attendance to a patient going medical check-up
or for medical treatment abroad

25000 US Dollar

13

Payment of commission to an agent outside India for selling of commercial or residential plot or
flats in India

25000 US Dollar or 5 % of inward remittance per transactions whichever is higher

14

Consultancy services from abroad

1 million US Dollar per project to 10 million US Dollar per project (for infrastructure project)

1 million US Dollar In all other cases.

15

Pre-incorporation’s expenses reimbursement

100,000 US Dollar or 5 percent of the investment brought into India whichever is higher,

16

Remittance for purchase and/or use of Trade mark

Allowed without any approval of Reserve Bank of India

17

Remittance for securing Health Insurance for from a foreign company

Freely allow

18

Remittance of royalty and payment of lump sum fee under the technical collaboration agreement

Freely allow without any prior approval of RBI

19

Release of exchange for medical treatment outside India when a person has fallen sick after
proceeding abroad

Extent of USD 1,00,000 without any hassles and any loss of time on the basis of self declarations

20

Small Value Remittance

Up to USD 25000 (form A2)

Transactions for which Central Government prior approval is required for Drawl of foreign
exchange

 Cultural tours.
 Advertisement in print media of a foreign country for any purpose other than promoting
tourism, international bidding and foreign investments (exceeding 10000 US Dollar) by a
State Government and its Public Sector Units.
 Payment of importation by a Public Sector Unit or a department of government on c.i.f.
basis only for importation through ocean transport.
 Remittance of freight of vessels chartered.
 Remittance of detention charges of container exceeding the DGS’s (Director General of
Shipping) prescribed rate.
 Remittance of Prize money/sponsorship of any activity of sport outside India by a person
other than national/ international/street level sports bodies, if the amount of the prize
money/sponsorship exceeds 1,00,000 US Dollars.
 Remittance of hiring charges of transponders:
 Internet Service Providers
 TV channels
  Remittance for P&I Club ministry’s membership.
 Remittance by Multi-model transport operators to their agents in abroad

Consumer Protection Act

Consumer Protection Act has been implemented(1986) or we can bring into existence to protect the
rights of a consumer. It protects the consumer from exploitation that business practice to make profits
which in turn harm the well being of the consumer and society.X

This right help to educate the consumer on the right and responsibilities of being a consumer and how
to seek help or justice when faced exploitation as a consumer. It teaches the consumer to make right
choices and know what is right and what is wrong.X

Who is a consumer according to the Consumer Protection Act, 1986? A consumer is one that buys good
for consumption and not for the resale or commercial purpose. The consumer also hires service for
consideration.X

Practices to be followed by Business under Consumer Protection Act

 If any defect found the seller should remove the mentioned defects from the whole batch or
the goods affected. For example, there have been cases where car manufacturing unit found a
defect in parts of the vehicle usually they remove the defect from every unit or they call of
the unit.

 They should replace the defective product with a nondefective product and that product
should be of similar configuration or should be the same as the product purchased..
Redressal: Three Tier System Under Consumer Act

 District Forum: These fora are set by the district of the state concerned in each district
wherein it consists of President and two members of which one should be a woman and is
appointed by the State Government. In this, the complaining party should not make a
complaint more than 20 Lacs and once the complaint is filed the goods are sent for testing
and if they found defective the accused party should compensate and if the party is
dissatisfied can make an appeal with state commission within 30 days.
  State Commission: This is set up by each state It consists of President and two members.
Complains should be at least 20 lacs and exceed not more than 1 crore. The goods are sent
for testing and if found defective are asked for replacement or compensation. If not satisfied
can make an appeal within 30 days in front of the National Commission.

 National Commission: Consist of President and 4 members. The complaint must exceed an

amount of 1 crore. The goods are sent for testing and if found defective are asked for
replacement or compensation

The salient features of Consumer Protection Act are-

 The Consumer Protection Act covers all public, private and cooperative sector.

 This applies to all the goods and services until and unless the Union government exempts it.

 Provisions of the Consumer Protection Act are compensatory in nature.

Consumer Rights

There are six broad consumer rights defined as per the Consumer Protection Act, 1986. These are:

Right to Safety
The Consumer Protection Act defines this right as a protection against goods and services that are
‘hazardous to life and property’. This particularly applies to medicines, pharmaceuticals, foodstuffs,
and automobiles. The right requires all such products of critical nature to life and property to be
carefully tested and validated before being marketed to the consumer.X

Right to Information
This right mentions the need for consumers to be informed about the quality and quantity of goods
being sold. They must be informed about the price of the product and have access to other information
specific to the product that they wish to consume.X

Right to Choose
The consumer must have the right to choose between different products at competitive prices. Thus,
the concept of a competitive market where many sellers sell similar products must be established to
ensure that the consumer can actually choose what to consume and in what quantity. This is to
avoid monopoly in the market.X
Right to Seek Redressal
When a consumer feels exploited, he/she has the right to approach a consumer court to file a
complaint. A consumer court is a forum that hears the complaint and provides justice to the party that
has been hurt. Thus, if the consumer feels he/she has been exploited, they can approach the court
using this right.

Right to be Heard
The purpose of this right is to ensure that the consumer gets due recognition in consumer courts or
redressal forums. Basically, when a consumer feels exploited, he has the right to approach a consumer
court to voice his complaint. This right gives him/her due respect that his/her complaint will be duly
heard. The right empowers consumers to fearlessly voice their concerns and seek justice in case they
are exploited.

Right to Consumer Education

Consumers must be aware of their rights and must have access to enough information while making
consumption decisions. Such information can help them to choose what to purchase, how much to
purchase and at what price. Many consumers in India are not even aware that they are protected by
the Act. Unless they know, they cannot seek justice when they are actually hurt or exploited.X

REFERNCES

http://textbook.stpauls.br/Business_Organization/page_60.htmX

https://www.wisdomjobs.com/e-university/business-environment-tutorial-296/the-three-
branches-or-functions-of-government-9735.htmlX

https://cleartax.in/s/fema-foreign-exchange-management-actX

https://www.toppr.com/guides/business-studies/consumer-protection/consumer-protection-act/X

https://www.toppr.com/guides/economics/consumer-rights/rights-of-consumers/X