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Business Regulations
Paper: LB-5036 | LL.B. V Term | Faculty of Law, University of Delhi | July 2020
Governing Statutes: Constitution of India (Articles 19(1)(g), 19(6), 298–301) | SEBI Act, 1992 | SARFAESI Act, 2002 | SEBI Takeover Regulations, 2011 | PMLA, 2002 | Essential Commodities Act, 1955 | TRAI Act, 1997 | RERA, 2016 | IRDAI Act, 1999
Introduction: Business Regulations is a multi-statute course covering the legal framework governing trade, commerce, and investment in India. It examines the constitutional foundation of the right to trade (Articles 19(1)(g) and 301), the securities markets regulator (SEBI), enforcement of security interests (SARFAESI), takeover regulations, anti-money laundering law (PMLA), regulation of essential commodities, and sectoral regulators (TRAI, RERA, IRDAI). The course connects constitutional principles with regulatory frameworks across nine major areas of Indian business law.
📋 Table of Contents
- Topic 1 – Right to Trade and Business under the Constitution
- Topic 2 – SEBI Act, 1992
- Topic 3 – SARFAESI Act, 2002
- Topic 4 – SEBI Takeover Code (Regulations 2011)
- Topic 5 – Prevention of Money Laundering Act, 2002
- Topic 6 – Essential Commodities Act, 1955
- Topic 7 – TRAI Act, 1997
- Topic 8 – Real Estate (Regulation and Development) Act, 2016
- Topic 9 – IRDAI Act, 1999
- 📝 Important Questions for Exam
- ⚡ Quick Revision Summary
1. Right to Trade and Business under the Indian Constitution
1.1 Article 19(1)(g) – Right to Practice Profession, Trade or Business
All citizens shall have the right to practise any profession, or to carry on any occupation, trade or business.
Article 19(1)(g) guarantees a wide range of economic freedoms to citizens. It covers:
- Profession: An occupation requiring special learning or skill (e.g., doctor, lawyer)
- Occupation: Any legitimate activity for earning livelihood
- Trade: Commercial activity involving buying and selling
- Business: Any commercial activity or enterprise for profit
The Supreme Court in Khoday Distilleries held that trade and business in potable liquor is NOT a fundamental right. It falls within the category of “res extra commercium” (things outside commerce) due to its inherently harmful nature, and the State has the right to completely prohibit such trade. However, the business of denatured spirit (industrial alcohol) may be a trade/business.
Facts: Distilleries challenged Karnataka Excise Rules of 1989 which restricted their right to manufacture, bottle, and sell liquor. They argued the rules violated Article 19(1)(g) as they unreasonably restricted their right to carry on trade in liquor.
Issue: Whether the manufacture and sale of liquor is a “trade or business” entitled to protection under Article 19(1)(g).
Held: The trade in potable liquor is not a fundamental right under Article 19(1)(g). Liquor trade is res extra commercium — outside the protection of Part III. The State can completely prohibit such trade or regulate it as it deems fit. Articles 47 (DPSP directing prohibition) and 19(6) together justify complete state control over liquor. The Rules were upheld.
Principle: The manufacture and sale of potable liquor is not a fundamental right under Article 19(1)(g); it is res extra commercium and can be completely prohibited or heavily regulated by the State.
Facts: The UP government issued a policy reserving retail sale of country liquor exclusively for Government corporations, effectively excluding private licensees from the liquor business.
Issue: Whether the State could create a monopoly in liquor business for Government corporations.
Held: The State is entitled to create a monopoly in liquor trade. Since liquor trade is not a fundamental right, the State can regulate, restrict, or monopolise it. The policy was upheld. Citizens have no vested right to continue in liquor business from year to year.
Principle: The State can create a Government monopoly in liquor business; since it is not a fundamental right, citizens cannot claim entitlement to liquor licenses from year to year.
1.2 Article 19(6) – Reasonable Restrictions on Article 19(1)(g)
Nothing in clause (g) of said Article 19(1) shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub-clause, and, in particular, nothing in the said sub-clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to—
(i) the professional or technical qualifications necessary for practising any profession or carrying on any occupation, trade or business, or
(ii) the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise.
Tests for “Reasonable Restrictions”
- The restriction must be in the interests of the general public (not merely in the interests of a section)
- The restriction must be reasonable — not excessive or disproportionate
- There must be a nexus between the restriction and the object sought to be achieved
- Court applies a test of proportionality — means must be proportionate to end
Facts: The MP Government imposed a total prohibition on the manufacture of bidis by villagers in certain areas during the agricultural season (June to November). The purpose was to ensure agricultural labour was available. Bidi manufacturers challenged this as an unreasonable restriction on their right to carry on trade.
Issue: Whether a complete prohibition on making bidis for 6 months in certain areas was a “reasonable restriction” under Article 19(6).
Held: The restriction was NOT reasonable. The law was an absolute prohibition on an entire trade during a substantial period. There was no direct nexus between making bidis and shortage of agricultural labour. The restriction went far beyond what was necessary. Struck down.
Principle: A restriction on trade is “reasonable” only if it bears a proportionate relationship to the object sought to be achieved; a blanket prohibition affecting an entire trade without a direct nexus to the asserted object is an unreasonable restriction.
Facts: The Government issued an order under the Essential Commodities Act prohibiting the importation, transport, storage, and use of copper in certain forms without licence. Copper traders argued this was an unreasonable restriction on their trade.
Issue: Whether the restrictions on trade in copper imposed under the Essential Commodities Act were reasonable under Article 19(6).
Held: The restrictions were reasonable. Control of copper — essential for defence and industrial production — was clearly in the public interest. The courts give wide latitude to the legislature in determining what restrictions are necessary for national interest. The restrictions served the object and were not arbitrary or excessive.
Principle: Restrictions on trade in commodities essential for national defence and industry may be entirely reasonable under Article 19(6); courts give considerable latitude to legislative judgment on what constitutes “public interest.”
1.3 Article 301 – Freedom of Trade, Commerce and Intercourse
Subject to the other provisions of this Part (Part XIII), trade, commerce and intercourse throughout the territory of India shall be free.
Article 301 creates a right to free trade, commerce, and intercourse throughout India — removing inter-State barriers. Key points:
- This right is available to everyone (citizens and non-citizens), unlike Article 19(1)(g) which is for citizens only
- It primarily targets State barriers to inter-State trade (like local taxation that impedes free movement of goods)
- It can be restricted by Parliament under Article 302 or by State legislatures with Presidential sanction under Article 304
- It does not prevent regulation of trade — only discriminatory or preferential barriers
1.4 Articles 298–299 – State’s Power to Carry on Trade and Government Contracts
The executive power of the Union and of each State extends to carrying on any trade or business, and to the acquisition, holding, and disposal of property, and the making of contracts for any purpose. The Union’s executive power, where Parliament has not made law, is subject to State legislation; and each State’s executive power, where the State Legislature has not made law, is subject to Parliament’s legislation.
All contracts made in the exercise of the executive power of the Union or a State shall be expressed to be made by the President (for Union) or Governor (for State), and shall be executed by a person authorised by the President/Governor.
If these conditions are not met, no person shall be personally liable for such contracts, nor shall the Government be bound by them.
Facts: The National Highways Authority of India (NHAI) awarded a contract to Raunaq International for the construction of a highway. Subsequently, IVR Construction (a rival bidder) challenged the award. The question arose whether a court should interfere with government contracts and the exercise of discretion in awarding contracts.
Issue: When can courts interfere with Government contracts awarded under executive power? What standard of judicial review applies?
Held: Courts do not sit in appeal over Government decisions on contracts. The scope of judicial review is limited to: (1) whether the decision-making process was reasonable, fair, and non-arbitrary; (2) whether the decision was made with reference to irrelevant factors or ignoring relevant factors; (3) whether the decision shocks the conscience of the Court. Courts do not substitute their judgment for the Government’s commercial judgment.
Principle: Judicial review of Government contracts is limited to the decision-making process (procedural fairness, non-arbitrariness), not the merits of the commercial decision; courts will not second-guess Government’s choice among eligible contractors.
2. The Securities and Exchange Board of India Act, 1992
2.1 Establishment, Powers and Functions of SEBI
Section 3: Establishment of SEBI as a body corporate with perpetual succession and a common seal.
Section 11: Functions and powers of SEBI — to protect the interests of investors in securities; to promote the development of and regulate the securities market; to regulate intermediaries in the securities market; to promote investor education.
Functions of SEBI (Section 11)
- Regulating the business in stock exchanges and any other securities markets
- Registering and regulating the working of collective investment schemes including mutual funds
- Prohibiting fraudulent and unfair trade practices relating to securities markets
- Prohibiting insider trading
- Calling for information from, carrying out inspection, conducting inquiries and audits of stock exchanges, mutual funds and other persons associated with the securities market
- Performing functions and exercising powers under the Securities Contracts (Regulation) Act, 1956
“Collective Investment Scheme” (Section 11AA): Any scheme or arrangement made or offered by any company whereby: (a) the contributions or payments made by the investors are pooled and utilised with a view to receive profits, income, produce or property; (b) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property; and (c) the property, contribution or investment forming part of scheme or arrangement is managed on behalf of the investors.
“Securities” (SCRA Section 2(h)): Includes shares, scrips, stocks, bonds, debentures, debenture stock, units of collective investment scheme or mutual fund, and derivatives.
Facts: Sahara raised funds from over 30 million investors through “Optionally Fully Convertible Debentures” (OFCDs). SEBI ordered Sahara to return the money, contending that OFCDs were “securities” requiring registration and compliance with SEBI’s disclosure and investor protection norms. Sahara argued it was a “hybrid instrument” not covered by SEBI or that its investors were “friends and family.”
Issue: (1) Whether OFCDs issued by Sahara were “securities” under Section 2(h) of SCRA; (2) whether SEBI had jurisdiction over their issuance to millions of investors.
Held: OFCDs are “securities.” An offer of securities to 50 or more persons in a company constitutes a “public issue” requiring compliance with SEBI’s disclosure norms. Sahara’s offering to millions was clearly a public issue. SEBI had jurisdiction. Sahara was directed to refund the money with interest. This was a landmark case protecting millions of small investors.
Principle: OFCDs are “securities” under SCRA; an offer of securities to 50 or more persons constitutes a “public issue” requiring compliance with SEBI regulations; SEBI’s jurisdiction extends to all public issues of securities regardless of how they are labeled.
Facts: SEBI imposed a penalty on Shriram Mutual Fund for violating its regulations. The question arose whether SEBI could impose a penalty even without proving that investors had actually suffered losses. Shriram argued that without loss of investors, no penalty was warranted.
Issue: Whether actual loss to investors is a prerequisite for SEBI to impose a penalty for violation of its regulations.
Held: SEBI’s penalty is for violation of statutory obligations and regulations — it does not require proof of actual loss to investors. Regulatory violations carry their own penalties as deterrence. The SEBI Act’s penalty provisions are mandatory once a violation is established. Mens rea is not required for imposition of civil penalties under SEBI Act.
Principle: SEBI penalties do not require proof of actual investor loss; violation of SEBI regulations is itself punishable — the penalty regime is deterrent and mandatory, not compensatory; mens rea is not required for civil penalties under the SEBI Act.
2.2 SEBI (Prohibition of Insider Trading) Regulations, 2015
“Insider”: Any person who is: (i) a connected person, or (ii) in possession of or having access to Unpublished Price Sensitive Information (UPSI).
“Connected Person”: Any person who is or has during the six months prior to the concerned act been associated with the company in any capacity including as a director, officer, employee, auditor, lawyer, advisor, consultant, banker, or in any contractual relationship.
“Unpublished Price Sensitive Information” (UPSI): Information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities — and includes: financial results, dividends, change in capital structure, mergers/acquisitions, changes in key management, material events.
“Generally Available Information”: Information that is accessible to the public on a non-discriminatory basis.
Prohibition on Trading While in Possession of UPSI
- An insider shall not communicate, provide, or allow access to UPSI to any person
- No insider shall trade in securities while in possession of UPSI
- Trading Plan: An insider may trade pursuant to a written Trading Plan filed with the company — a pre-determined plan approved by the compliance officer — which provides a safe harbour
2.3 Collective Investment Schemes (CIS) and Mutual Funds
A Collective Investment Scheme pools money from multiple investors and invests in securities or assets on their behalf. Regulated by SEBI, CIS includes:
- Mutual Funds: Pool money from investors and invest in diversified portfolios of stocks, bonds, or other assets. NAV-based pricing.
- Other CIS: Real estate schemes, chit funds registered as CIS, plantation schemes, etc.
3. SARFAESI Act, 2002 — Securitisation and Reconstruction of Financial Assets
The SARFAESI Act was enacted to deal with the problem of Non-Performing Assets (NPAs) of banks and financial institutions. Before SARFAESI, recovery of secured loans required court proceedings — slow and expensive. SARFAESI allows secured creditors to enforce their security interest without court intervention.
Key Definitions
- Non-Performing Asset (NPA): A loan or advance whose principal or interest remains overdue for a period greater than 90 days for a term loan; varies for other types.
- Asset Reconstruction Company (ARC): A company registered with RBI that acquires NPAs from banks/FIs and manages them for reconstruction.
- Default: Non-payment of principal or interest on due date or failure to comply with the terms of the loan.
- Qualified Institutional Buyer (QIB): Financial institutions, insurance companies, mutual funds, etc., that can invest in security receipts issued by ARCs.
- Central Registry: A central database of equitable mortgages and security interests registered under the Act to prevent fraud.
Notwithstanding anything contained in any other law, any secured creditor may enforce the security interest without court intervention when the borrower defaults. The process:
(1) Serve a 60-day notice to the borrower requiring payment
(2) If not paid, take possession of secured assets
(3) Take over management of the business (if security is business)
(4) Appoint a manager to manage the assets
(5) Sell or lease or assign the assets to recover dues
Any person aggrieved by action taken under Section 13 may make an application to the Debt Recovery Tribunal within 30 days. The DRT may restore possession if the secured creditor’s action is found to be wrongful. However, under the original Act, the borrower had to deposit 75% of the demand before the application was heard — called the “deposit condition.”
No Civil Court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a DRT or DRAT is empowered by or under this Act to determine.
Facts: Various borrowers challenged the constitutional validity of the SARFAESI Act, particularly Section 17(2) (the 75% pre-deposit condition before DRT could hear their application). They argued this effectively denied them access to justice and was violative of Article 14 (equality) and Article 21 (right to life including right to justice).
Issue: (1) Is SARFAESI constitutionally valid? (2) Is the 75% pre-deposit condition in Section 17(2) unconstitutional?
Held: The SARFAESI Act is constitutionally valid. Banks have a legitimate and pressing need to recover NPAs. However, the 75% pre-deposit condition in Section 17(2) is unconstitutional — it is an oppressive condition that effectively denies justice to borrowers. This condition was struck down. The rest of the Act was upheld.
Principle: The SARFAESI Act is constitutionally valid; however, a condition requiring 75% pre-deposit before a borrower can challenge the creditor’s action is violative of Articles 14 and 21 — it effectively shuts the court door to borrowers and is struck down.
Facts: The question was whether cooperative banks (multi-state or otherwise) are covered by the SARFAESI Act and can enforce security interests under it, or whether they fall outside the Act’s purview as they are regulated under State cooperative laws.
Issue: Whether multi-state cooperative banks and State cooperative banks are covered by the SARFAESI Act and can invoke its provisions for enforcement of security interest.
Held: Multi-state cooperative banks are covered by SARFAESI and can enforce security interests under it. The Act applies to any “bank” which includes cooperative banks registered under the Multi-State Cooperative Societies Act. State cooperative banks’ inclusion depends on whether they are under central or state legislation.
Principle: Multi-state cooperative banks are covered by SARFAESI and can enforce security interests without court intervention; the Act’s application to cooperative banks depends on whether they are regulated under central or state legislation.
The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 made significant changes:
- Central Registry was expanded to include equitable mortgages of all kinds
- DRT jurisdiction was expanded; appeals to DRAT strengthened
- Timelines for enforcement were shortened
- Priority to secured creditors in insolvency was clarified
- Non-banking finance companies (NBFCs) above a certain asset size were included within the SARFAESI framework
4. SEBI Takeover Code — Substantial Acquisition of Shares and Takeovers Regulations, 2011
Acquirer: Any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in, or control over, a target company.
Control: The right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert — directly or indirectly — including by virtue of shareholding, management rights, shareholders agreements or voting agreements.
Persons Acting in Concert (PAC): Persons who, with a common objective or purpose of acquisition of shares or voting rights or exercising control over a target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly cooperate for acquisition.
Target Company: A listed company whose shares or voting rights or control is directly or indirectly acquired or is sought to be acquired.
Trigger Points for Open Offer (Mandatory Open Offer)
- 25% Threshold (Regulation 3): Any acquirer who acquires shares or voting rights that entitle him to exercise 25% or more of the total shares or voting rights of the target company must make an open offer.
- Creeping Acquisition (Regulation 3(2)): Any acquirer who holds 25% or more but less than the maximum permissible non-public shareholding, who acquires additional shares entitling him to more than 5% in any financial year, must make an open offer.
- Indirect Acquisition (Regulation 5): Acquisition of shares or control of any company that results in the acquisition of shares or control over a listed target company is treated as an indirect acquisition requiring an open offer.
- Voluntary Open Offer (Regulation 6): An acquirer holding 25% or more can voluntarily make an open offer to consolidate holdings.
An open offer must be for at least 26% of the total shares of the target company. The offer price must be the highest of: (a) negotiated price; (b) weighted average market price (preceding 52 weeks, 26 weeks, or 60 trading days); (c) highest price the acquirer paid in the preceding 26 weeks.
Facts: Akshya Infrastructure, along with persons acting in concert (PAC), indirectly acquired control over a listed company through a complex corporate restructuring. SEBI held that this constituted an acquisition requiring a mandatory open offer under the Takeover Regulations. Akshya challenged this, denying it had “control.”
Issue: What constitutes “control” for the purpose of Takeover Regulations? Does an indirect acquisition of management control trigger the open offer obligation?
Held: “Control” under Takeover Regulations is broadly defined and includes the ability to influence management. Indirect acquisition of management control through corporate restructuring triggers the open offer obligation. SEBI’s order requiring an open offer was upheld. The protective intent of Takeover Regulations — to give exiting shareholders a fair exit opportunity — was emphasised.
Principle: “Control” under Takeover Regulations is interpreted broadly to include indirect and functional control; any acquisition — direct or indirect — that results in control over a listed company triggers the mandatory open offer obligation.
Facts: Kosha Investments, acting in concert with others, crossed the 25% threshold in a listed company without making a mandatory open offer. SEBI ordered a mandatory open offer and imposed penalties. Kosha challenged the determination of “persons acting in concert.”
Issue: How are “persons acting in concert” determined for the purpose of calculating the acquisition threshold?
Held: Persons acting in concert are determined by looking at the objective purpose and effect of acquisitions, not just formal agreements. If multiple persons coordinate to collectively acquire shares and gain control, they are PACs even without a written agreement. Their combined shareholdings are aggregated to determine whether the threshold has been crossed.
Principle: “Persons acting in concert” are identified by the purpose and conduct of coordinated acquisition — not merely by formal agreement; coordinated acquisition of shares by multiple persons to gain control results in aggregation of their shareholdings for threshold calculation.
5. Prevention of Money Laundering Act, 2002 (PMLA)
Section 3 – Offence of Money Laundering: Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is 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 as untainted property shall be guilty of offence of money-laundering.
“Proceeds of Crime” [Section 2(1)(u)]: Any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence.
Three Stages of Money Laundering (Globally Recognised)
- Placement: The illegal proceeds are introduced into the legitimate financial system (e.g., depositing cash in bank)
- Layering: Disguising the trail of money through complex transactions (e.g., wire transfers, shell companies)
- Integration: The money re-enters the economy in a “clean” form (e.g., investment in real estate, businesses)
Section 4 – Punishment: Rigorous imprisonment for minimum 3 years, maximum 7 years; up to 10 years for drug-related scheduled offences; plus fine.
Section 5 – Attachment: The Adjudicating Authority may provisionally attach property for 180 days (extendable) if reason to believe it is “proceeds of crime.”
Section 8 – Adjudication: Adjudicating Authority (at PMLA level) determines whether the attachment should be confirmed.
Section 9 – Vesting in Government: After confirmation, property vests in the Central Government.
Section 12 – Reporting Obligations: Banks, financial institutions, and intermediaries must maintain records, report suspicious transactions, and comply with KYC (Know Your Customer) norms.
Section 19 – Power to Arrest: The Director of Enforcement may arrest a person if he has reasons to believe (based on material in his possession) that the person has been guilty of money laundering.
Facts: Former Finance Minister P. Chidambaram was arrested by the Enforcement Directorate (ED) in connection with the INX Media case — alleged that approvals for FDI received by INX Media were illegal and the proceeds of this illegality were laundered. Chidambaram sought anticipatory bail, claiming the predicate offence (CBI case) had not been tried and he was being victimised.
Issue: (1) Whether arrest under PMLA before conviction in the predicate offence is valid; (2) the scope of bail under PMLA.
Held: Arrest under PMLA does not require conviction in the predicate offence. The ED has power to arrest if there is reason to believe money laundering has occurred. Bail conditions under PMLA (Section 45) are stringent — the accused must show he is not guilty and will not commit offence while on bail. Anticipatory bail denied.
Principle: Under PMLA, the ED can arrest a person for money laundering on reasonable belief without a prior conviction in the predicate offence; bail conditions under PMLA are more onerous than regular criminal law — the accused must prima facie show innocence.
Key changes introduced by the Finance Act, 2019:
- Expanded the definition of “proceeds of crime” to include property equivalent in value, even if located outside India
- The statement recorded by Enforcement Officers (EO) under Section 50 is now admissible as evidence — making the ED’s investigation process more powerful
- Reporting obligations were expanded to include professionals (lawyers, CAs, etc.) for certain high-value transactions
- The twin bail conditions under Section 45 were re-validated after SC struck them down in Nikesh Tarachand case — Parliament restored them
Facts: Rose Valley Group raised money from the public through various real estate schemes that were classified as Collective Investment Schemes (CIS). SEBI found these to be unregistered CIS. The ED initiated PMLA proceedings, claiming the money raised was “proceeds of crime” as the CIS were operated in violation of SEBI regulations (a scheduled offence under PMLA).
Issue: Whether violation of SEBI regulations in running an unregistered CIS constitutes a “scheduled offence” under PMLA, making the funds raised “proceeds of crime.”
Held: Yes. SEBI violations (specifically operating unregistered CIS) are scheduled offences under the Second Schedule of PMLA. Money raised through such violations is proceeds of crime. The ED’s PMLA proceedings against Rose Valley were upheld.
Principle: Violations of SEBI regulations (such as operating an unregistered CIS) are scheduled offences under PMLA; money raised through such illegal schemes constitutes “proceeds of crime” and is subject to attachment and confiscation under PMLA.
6. Essential Commodities Act, 1955
“Essential Commodity”: Any of the commodities specified in the Schedule — including food crops, seeds, cattle fodder, cotton seed oil, sugar, petroleum products, raw jute, etc. The Central Government can add or remove items from the Schedule by notification.
The Central Government, so far as it appears to it to be necessary or expedient for maintaining or increasing supplies of any essential commodity or for securing equitable distribution and availability at fair prices, or for securing any essential commodity for the defence of India or for the efficient conduct of military operations, may by order provide for:
(a) Regulating or prohibiting the production, supply and distribution thereof and trade and commerce therein
(b) Controlling the price at which such commodity may be bought or sold
(c) Requiring any person holding stock to sell it to Central/State Government or an officer thereof
(d) Requiring any person to produce, supply or distribute any essential commodity
(e) Licensing and controlling the dealing in essential commodities
Important Features
- Central Government delegates powers to State Governments (Section 5)
- Violation of orders under Section 3 is a criminal offence punishable with imprisonment
- Essential commodities include: food crops and seeds; cattle fodder; cotton seed oil and groundnut oil; petroleum and petroleum products; raw jute; drugs; fertilizers
During the COVID-19 pandemic, the Government amended the ECA by ordinance (later enacted as law) to deregulate essential commodities including cereals, pulses, oilseeds, edible oils, onion, and potato. The amendment removed stock-holding limits and licensing requirements for these commodities to promote private investment in agriculture and ensure free movement of food products. However, this was reversed in 2021 following concerns about food security.
7. Telecom Regulatory Authority of India Act, 1997 (TRAI)
TRAI was established to regulate the telecommunications services, adjudicate disputes, dispose of appeals and protect the interests of service providers and consumers of the telecom sector, and to promote and ensure orderly growth of the telecom sector.
Structure
- TRAI: The Telecom Regulatory Authority — functions as a regulator; issues recommendations, tariff orders, and quality of service standards
- TDSAT: The Telecom Disputes Settlement and Appellate Tribunal — adjudicates disputes between service providers, between service providers and consumers groups; hears appeals against TRAI orders
Functions of TRAI
- Make recommendations (on its own or when referred by the Government) on: need and timing for introduction of new service providers; terms and conditions of licenses; revocation of licenses; measures to facilitate competition and promote growth of telecom; efficient management of radio frequency spectrum
- Fix the terms and conditions of interconnection between service providers
- Lay down standards of quality of service for all service providers
- Fix rates for telecom services; protect consumer interests
- Adjudicate disputes between service providers through TDSAT
Facts: TRAI issued regulations imposing financial disincentives on telecom service providers for call drops — operators were required to pay Re.1 per call drop to subscribers for the first three call drops per day. Telecom operators challenged this as beyond TRAI’s powers and violative of due process.
Issue: (1) Whether TRAI has power to impose financial penalties/disincentives on service providers for call drops through regulations; (2) whether such regulations were valid.
Held: The Supreme Court struck down TRAI’s call drop regulations. TRAI’s power to make regulations is limited to the purposes specified in the TRAI Act and cannot include mandatory compensation to consumers. The regulations were beyond TRAI’s statutory power. The proper remedy is improvement of service quality through its regulatory functions, not mandatory consumer compensation through regulations.
Principle: A regulator’s power to make regulations is limited by the enabling statute; TRAI cannot create mandatory compensation obligations for service providers through regulations if such power is not expressly granted by the TRAI Act.
8. Real Estate (Regulation and Development) Act, 2016 (RERA)
RERA was enacted to regulate and promote the real estate sector, ensure sale of plot, apartment, building in an efficient and transparent manner, protect the interests of consumers in the real estate sector, establish an adjudicating mechanism for speedy dispute redressal, and establish Real Estate Regulatory Authorities.
Key Provisions
- Section 3 – Registration of Real Estate Projects: No promoter shall advertise, market, book, sell, or offer to sell any plot, apartment, or building without registering the project with the Real Estate Regulatory Authority (RERA). Projects with an area exceeding 500 sq. m. or more than 8 apartments require compulsory registration.
- Section 3 – Registration of Real Estate Agents: No real estate agent shall facilitate the sale or purchase without registering with the RERA.
- Section 20 – Real Estate Regulatory Authority: Each State/UT must establish a RERA Authority. RERA’s functions include: receiving and adjudicating complaints; maintaining a website for project information; ensure that promoters deposit 70% of amounts realised from allottees in a separate designated account — to be used only for construction of that project.
- Section 59 – Offences and Penalties: Failure to register: penalty up to 10% of the estimated cost of the project; false disclosure: up to 5% of project cost; contravention of RERA orders: imprisonment up to 3 years and/or fine up to 10% of project cost.
Facts: Real estate builders in Maharashtra challenged RERA on the ground that the Act had retrospective effect — requiring registration of ongoing projects and imposing obligations on projects that were partially sold or under construction before RERA came into force. They argued this was unreasonable and violated their vested rights.
Issue: Whether RERA’s requirement to register ongoing/existing projects (not just new projects) was constitutionally valid.
Held: RERA’s application to ongoing projects is constitutionally valid. RERA is a beneficial consumer protection legislation. Requiring registration of ongoing projects was essential to protect home buyers who had already invested. The 70% deposit requirement was also upheld as a reasonable consumer protection measure. The Act did not destroy vested rights — it regulated the manner of completing existing obligations.
Principle: RERA’s requirement to register ongoing real estate projects is constitutionally valid as a consumer protection measure; the 70% deposit requirement is reasonable; applying RERA to existing projects does not violate vested rights as it only regulates the manner of performing existing obligations.
9. Insurance Regulatory and Development Authority Act, 1999 (IRDAI)
The Insurance Regulatory and Development Authority is a statutory body established to regulate and promote the insurance sector, protect the interests of policyholders, and ensure the orderly growth of the insurance industry.
Duties, Powers and Functions of IRDAI (Section 14)
- Issue to applicants a certificate of registration, modify, withdraw, suspend or cancel such registration
- Protection of interests of policy holders in matters concerning assigning of policies, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policies, and other terms and conditions
- Specifying requisite qualifications, code of conduct and practical training for insurance agents and intermediaries
- Specifying the code of conduct for surveyors and loss assessors
- Promoting efficiency in the conduct of insurance business
- Promoting and regulating professional organisations connected with the insurance and re-insurance business
- Levying fees and other charges for carrying out the purposes of the Act
- Calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations
- Control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business
- Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered
- Regulating investment of funds by insurance companies
- Adjudication of disputes between insurers and intermediaries or insurance intermediaries
- Supervising the functioning of the Tariff Advisory Committee
Under IRDAI regulations:
- Minimum capital requirement: Rs.100 crore for life insurance; Rs.100 crore for general insurance
- FDI limit in insurance: 74% (increased from 49% in 2021 Budget)
- Solvency margin: Insurers must maintain assets exceeding liabilities by a prescribed amount
- Investment guidelines: Life insurers must invest minimum 50% in approved government securities/bonds
- Rural and social sector obligations: Insurers must write a minimum percentage of policies in rural/social sectors
📝 Important Questions for Exam
A. Short Answer Questions (2–5 marks)
- Is the trade in potable liquor a fundamental right under Article 19(1)(g)? What is res extra commercium?
- What are the tests for determining whether a restriction on trade is “reasonable” under Article 19(6)?
- Distinguish between Article 19(1)(g) and Article 301 as sources of freedom of trade.
- What are the essential requirements for a valid government contract under Article 299?
- Define “Securities” and “Collective Investment Scheme” under the SEBI Act.
- What is “Unpublished Price Sensitive Information” under the Insider Trading Regulations? Give two examples.
- What is a “Non-Performing Asset”? How does SARFAESI help banks recover NPAs?
- Explain the 60-day notice requirement under Section 13 of the SARFAESI Act.
- What is the “25% threshold rule” under the SEBI Takeover Regulations? What obligation does it trigger?
- Who are “Persons Acting in Concert” under the Takeover Regulations?
- Define “money laundering” under Section 3 of PMLA. What are the three stages of money laundering?
- What are the reporting obligations of banks and financial institutions under Section 12 of PMLA?
- What is the scope of the Central Government’s power under Section 3 of the Essential Commodities Act?
- Distinguish between TRAI (regulator) and TDSAT (tribunal).
- What is the 70% deposit requirement under RERA? What is its purpose?
B. Long Answer / Essay Questions (10–15 marks)
- “Trade in potable liquor is res extra commercium.” Critically examine this statement with reference to Article 19(1)(g) and the Supreme Court’s ruling in Khoday Distilleries. Can the State create a Government monopoly in liquor trade?
- What constitutes a “reasonable restriction” on the right to trade under Article 19(6)? Discuss the tests evolved by the Supreme Court with reference to Chintaman Rao and Narendra Kumar cases.
- Discuss the powers and functions of SEBI under the SEBI Act, 1992. How did the Sahara case redefine the scope of SEBI’s jurisdiction over fundraising activities?
- Explain the prohibition on insider trading under SEBI (Prohibition of Insider Trading) Regulations, 2015. Define UPSI, connected person, and insider. What is a Trading Plan and what protection does it offer?
- Discuss the SARFAESI Act, 2002 — its objective, the mechanism under Section 13 for enforcement of security interest, and the borrower’s remedies. What was struck down in Mardia Chemicals?
- Explain the SEBI Takeover Regulations 2011. When does a mandatory open offer arise? Who are Persons Acting in Concert? Discuss with reference to decided cases.
- Write a detailed note on the Prevention of Money Laundering Act, 2002 — the offence of money laundering, powers of attachment and arrest, adjudication process, and the Finance Act 2019 amendments.
- Discuss RERA 2016 — objectives, registration requirements, the 70% deposit rule, and penalties. Was the application of RERA to ongoing projects constitutionally valid?
- Discuss the role and functions of TRAI. Can TRAI impose financial penalties on service providers through regulations? Discuss with reference to the Call Drops case.
- Write a comprehensive note on IRDAI — establishment, functions, and key regulatory requirements for insurance companies in India.
C. Problem-Based Questions
- Problem: The State of X issues a government order completely prohibiting private sector companies from manufacturing or distributing biscuits for 8 months in a year, claiming the flour used should go to bread production for the poor. The biscuit manufacturers challenge this. Decide.
Hint: Apply Chintaman Rao — a blanket prohibition on trade for the entire period is an unreasonable restriction. No direct nexus between biscuit ban and flour availability for bread. Restriction struck down under Article 19(1)(g) read with 19(6). - Problem: Zeta Ltd. has raised Rs.500 crore from 2 crore small investors through “Redeemable Preference Shares” promoted by agents nationwide. SEBI orders Zeta to refund the money. Zeta argues the shares are not “securities” and the offering was not a “public issue.” Decide.
Hint: Apply Sahara case — if the shares are offered to 50 or more persons, it is a public issue. Preference shares are “securities.” SEBI has jurisdiction. Refund ordered. - Problem: A, a research analyst at a brokerage, learns through her work that Company Y is about to receive regulatory approval for a blockbuster drug. She buys Y’s shares before the news is public. Her employer has no Trading Plan covering this. Is A guilty of insider trading?
Hint: A is an “insider” (connected person — employed by an entity associated with Y through research). The regulatory approval news is UPSI. Trading while in possession of UPSI without a Trading Plan = insider trading. Yes, A is guilty. - Problem: Bank B has a Rs.50 crore NPA against M/s XYZ. After issuing 60-day notice, Bank B takes possession of XYZ’s factory under SARFAESI. XYZ files a writ petition directly in the High Court challenging the bank’s action. Can the HC entertain this?
Hint: Section 34 SARFAESI bars civil courts. Section 17 provides the remedy — XYZ should have applied to DRT within 30 days. HC writ jurisdiction under Article 226 may still be invoked if DRT remedy is inadequate but courts generally insist on exhausting DRT remedy first. - Problem: Person A is accused of money laundering based on a predicate offence (tax fraud) that is being investigated but has not yet been tried. The ED arrests A under Section 19 PMLA. A argues that without conviction in the predicate offence, there can be no money laundering. Is A’s argument correct?
Hint: Apply P. Chidambaram case — arrest under PMLA does not require prior conviction. ED can act on “reason to believe” that money laundering has occurred. A’s argument fails. Bail conditions under Section 45 PMLA are also stringent.
D. MCQ Practice (20 Questions)
- The trade in potable alcohol is held to be:
(a) A fundamental right (b) A constitutional right (c) Res extra commercium (d) Protected under Article 301 - Article 19(6) permits restrictions on trade and business only if they are:
(a) In the interest of the State (b) In the interests of the general public (c) Approved by Parliament (d) Prescribed by SEBI - In Chintaman Rao, the restriction on bidi making during agricultural season was struck down because:
(a) It was a permanent ban (b) It targeted only scheduled castes (c) There was no direct nexus between bidi making and agricultural labour shortage (d) It was passed without following procedure - SEBI was established under:
(a) SEBI Act, 1992 (b) Securities Contracts (Regulation) Act, 1956 (c) Companies Act, 2013 (d) PMLA, 2002 - In the Sahara case, SEBI’s jurisdiction was upheld over OFCDs because:
(a) OFCDs were bonds (b) The investors numbered less than 50 (c) OFCDs are “securities” and offering to millions was a “public issue” (d) Sahara was a public company - Under SEBI Insider Trading Regulations, “UPSI” means:
(a) Any confidential information (b) Information about the director (c) Information relating to a company that is not generally available and likely to materially affect the price of its securities (d) Any quarterly report - SARFAESI Act allows banks to enforce security interest:
(a) Only through courts (b) Without court intervention after 60-day notice (c) Only through DRT (d) Only after 3 years of NPA status - In Mardia Chemicals, the Supreme Court struck down:
(a) The entire SARFAESI Act (b) Section 13 of SARFAESI (c) Section 17(2) — the 75% pre-deposit condition before DRT (d) The Central Registry provisions - Under SEBI Takeover Regulations, a mandatory open offer is triggered when the acquirer crosses:
(a) 10% (b) 15% (c) 25% (d) 50% - An open offer under Takeover Regulations must be for at least:
(a) 10% (b) 15% (c) 26% (d) 51% of target company shares - The offence of money laundering under PMLA is defined in:
(a) Section 2 (b) Section 4 (c) Section 3 (d) Section 12 - The maximum punishment for money laundering under PMLA is:
(a) 3 years (b) 5 years (c) 7 years (10 years for drug-related offences) (d) Life imprisonment - Under the Essential Commodities Act, the power to control production and distribution is under:
(a) Section 2 (b) Section 2A (c) Section 3 (d) Section 5 - TRAI was established under:
(a) Indian Telegraph Act, 1885 (b) TRAI Act, 1997 (c) Telecom Act, 2023 (d) PMLA, 2002 - TDSAT adjudicates:
(a) Criminal offences (b) Disputes between telecom service providers and consumers/service providers (c) Tax disputes (d) Insurance claims - Under RERA, what percentage of realised amounts must be deposited in a separate designated bank account?
(a) 50% (b) 60% (c) 70% (d) 80% - RERA applies compulsorily to real estate projects having area exceeding:
(a) 100 sq m or 5 apartments (b) 500 sq m or more than 8 apartments (c) 1000 sq m or 20 apartments (d) All projects - IRDAI was established to regulate:
(a) Stock markets (b) Banking (c) Insurance sector (d) Telecom sector - Under Article 299, government contracts must be executed in the name of:
(a) The Ministry (b) The Finance Secretary (c) The President (Union) or Governor (State) (d) The Cabinet - In the Call Drops case, TRAI’s regulations imposing compensation for call drops were:
(a) Upheld (b) Modified (c) Struck down as beyond TRAI’s statutory powers (d) Remitted for reconsideration
⚡ Quick Revision Summary — Business Regulations
1. Key Statutes and Their Regulators
| Statute | Year | Regulator/Enforcer | Key Object |
|---|---|---|---|
| Constitution of India | 1950 | Parliament/Courts | Articles 19(1)(g), 19(6), 298–301 — freedom of trade |
| SEBI Act | 1992 | SEBI | Protect investors; regulate securities market |
| SARFAESI Act | 2002 | Banks/FIs, DRT, DRAT | Enforce security interest without courts; recover NPAs |
| SEBI Takeover Regulations | 2011 | SEBI | Regulate takeovers; protect public shareholders |
| PMLA | 2002 | Enforcement Directorate (ED) | Combat money laundering; confiscate proceeds of crime |
| Essential Commodities Act | 1955 | Central/State Government | Regulate production, supply, distribution of essential commodities |
| TRAI Act | 1997 | TRAI (regulator), TDSAT (tribunal) | Regulate telecom sector; resolve disputes |
| RERA | 2016 | State RERA Authorities | Regulate real estate; protect home buyers |
| IRDAI Act | 1999 | IRDAI | Regulate and develop insurance sector |
2. Landmark Cases Summary
| Case | Subject | Key Holding |
|---|---|---|
| Khoday Distilleries v. State of Karnataka (1995) | Article 19(1)(g) | Liquor trade = res extra commercium; not a fundamental right; State can completely prohibit |
| B.R. Enterprises v. State of UP (1999) | Article 19(1)(g) | State can create Government monopoly in liquor; citizens have no vested right to liquor licenses |
| Chintaman Rao v. State of MP (1951) | Article 19(6) | Complete prohibition on bidi making = unreasonable; no direct nexus between restriction and public interest |
| Narendra Kumar v. Union of India (1960) | Article 19(6) | Restrictions on copper trade for national interest = reasonable; courts give wide latitude to legislature |
| Raunaq International v. IVR Construction (1998) | Articles 298-299 | Courts do not sit in appeal over Government commercial decisions; review limited to process fairness |
| Sahara India v. SEBI (2012) | SEBI Act | OFCDs = securities; offer to 50+ persons = public issue; SEBI has jurisdiction; refund ordered |
| Chairman SEBI v. Shriram Mutual Fund (2006) | SEBI Act | SEBI penalties do not require proof of investor loss; violation itself is punishable; no mens rea needed |
| Mardia Chemicals v. UOI (2004) | SARFAESI | SARFAESI constitutionally valid; but 75% pre-deposit condition for DRT application struck down |
| Pandurang Chaugule v. Vishwasrao Bank (2020) | SARFAESI | Multi-state cooperative banks covered by SARFAESI |
| SEBI v. Akshya Infrastructure (2014) | Takeover Regs | Indirect acquisition of control triggers mandatory open offer; “control” broadly defined |
| Kosha Investments v. SEBI (2015) | Takeover Regs | PACs identified by coordinated purpose; their shareholdings aggregated for threshold calculation |
| P. Chidambaram v. ED (2019) | PMLA | ED can arrest without conviction in predicate offence; Section 45 bail conditions are stringent |
| Rose Valley Real Estate v. UOI (2015) | PMLA | Violation of SEBI regulations (unregistered CIS) = scheduled offence; money raised = proceeds of crime |
| Cellular Operators v. TRAI (2016) | TRAI Act | TRAI cannot impose mandatory compensation on service providers through regulations — beyond statutory power |
| Neelkamal Realtors v. UOI (2017) | RERA | RERA’s application to ongoing projects is constitutional; 70% deposit requirement upheld |
3. Key Thresholds and Numbers
- SEBI public issue threshold: 50 or more persons
- Takeover mandatory open offer trigger: 25% shareholding
- Open offer minimum size: 26% of target company shares
- SARFAESI notice period: 60 days before enforcement
- DRT application period (borrower): 30 days from action
- PMLA attachment period: 180 days (provisional)
- PMLA minimum punishment: 3 years RI; maximum: 7 years (10 for drugs)
- RERA separate deposit: 70% of amounts realised from allottees
- RERA registration threshold: 500 sq. m. or >8 apartments
- IRDAI minimum capital for insurance: Rs. 100 crore
- FDI limit in insurance: 74%
4. Golden Rules
- Liquor = res extra commercium; not a fundamental right; State can monopolise or prohibit
- Reasonableness under 19(6) = proportionality + nexus + public interest
- Government contracts must be in the name of President/Governor (Article 299)
- SEBI = investor protector; its penalties do not require proof of investor loss
- SARFAESI = bank can enforce without court; but DRT available to borrower; 75% deposit struck down
- Takeover: 25% trigger → mandatory open offer for 26% at specified price
- PMLA: arrest possible before conviction; proceeds of crime = attachable; Section 45 bail = twin conditions
- TRAI regulates; TDSAT adjudicates; TRAI cannot go beyond statutory powers
- RERA: 70% deposit rule; registration mandatory; applicable to ongoing projects