The following article has been written by Ishani Samajpati, pursuing B.A. LL.B. (Hons) under the University of Calcutta. This article provides a composite insight on legal environment as well as the classifications and implications of legal environment on business and the way legal environment can influence any business.
It has been published by Rachit Garg.
Legal environment acts as an important factor for setting up or running any business activities by an individual or any organisation in a particular country. The legal environment in one country is different from another country.
Legal environment decides the ways of how business activities of any particular country are able to flourish or may get constrained by the laws of the nation. It also influences in estimating the useful economic life of an intangible asset.
The components of the legal environment and how it affects any business is further discussed in this article.
What is the legal environment of a business
The term ‘legal environment’ of a business refers to the strategies adopted by any government to help, manage or constrain the business ecosystem of the country.
Legal environment of a business includes –
- various legislations enacted, amended or repealed by the government,
- administrative orders proclaimed by government authorities,
- decisions issued by various commissions and agencies of the central, state or local government as well as judicial activities, and
- The legal environment in India includes various laws regulating business activities like Companies Act 2013, Consumer Protection Act, 2019 and many other such legislations, policies relating to licensing and approvals, foreign trade etc.
In every country, the government frames its legal systems according to its definite purposes and priorities in order to regulate the business ecosystem of the country. The government may also limit the business activities by regulations. These factors, in turn, create the legal environment of a business.
The legal environment of a business indicates a twofold purpose set by the government which helps the business to flourish which, in turn, benefits the citizens either by generation of employment or by any service. In negative connotation, the legal environment, specially in socialist or mixed economies may constrain or hinder the growth of the business.
Different aspects of legal environment
Rather than simple compliance with the law of the land, the legal environment of business also implies understanding the legal frameworks which dictate the business operations.
The various laws that comprise the legal environment of a business are discussed below:
Anti-trust law is also known as competition law. It promotes or seeks to maintain competition by regulation of the anti-competitive conduct of the companies. Anti-competitive behaviour by companies includes monopoly or oligopoly which imply an imperfect market structure. Companies agree between each other that they will act unethically and not in the favour of the customers. Anti-trust law is also known as anti-monopoly law in China and Russia.
Anti-trust law is aimed to provide fair competition in the market so customers will not be in a disadvantageous position.
The practice of monopoly is when a particular business organisation dominates a particular industry by excluding all other potential competitors. Following are the ways through which a business organisation may establish monopoly in a particular business area:
Mergers and acquisition
A company may have a lot of mergers and acquisitions. As a result, it can be the only one that provides one particular product in the market.
Unnatural increase in the prices of the products
Oligopoly refers to the uncompetitive practices between the business organisations or firms when several of them agree to increase prices artificially altogether. It violates the anti-trust law. Hence , the regulations of the anti-trust law also helps to keep this situation in control.
Implications for monopolies for consumers
Monopoly can also be good or bad.
- Good monopoly provides lower prices and new products, being the only one in the market and it acts in the benefit of the customers.
- There might be a bad monopoly when there are higher prices, limited choices, less investment on new products, etc. it does not provide any diversity for the customers.
Anti-trust legislations and policies also prevent unfair price discrimination amongst consumer.
Anti-trust laws in India
The very first anti-trust law in India was The Monopolies and Restrictive Trade Practices Act, 1969 to restrict monopolistic practices in the market. It was repealed in 2009 and subsequently was replaced by The Competition Act, 2002.
Under this Act, the Competition Commission of India was established to prevent anti-competitive business activities in India.
Environmental protection laws
Environment protection laws are formulated in order to save the deterioration of the environment from the unlawful activities of human beings. Regulations on the environment impact the business directly or indirectly. On the other hand, it also ensures that the environment is not affected by the business.
Stringent environment protection laws may force the business organisations to change their business operations and activities or to relocate to another place with less stringent environmental regulations. However, there is a two-fold effect of these environmental laws in businesses as businesses might get carried away with less stringent laws in place.
Environment protection laws prioritise saving the environment and the business organisations need to adjust with the regulations.
- In pollution and energy-intensive sectors, environment protection laws may cause reduced employment and productivity.
- There is hardly any possibility of huge negative effects of environmental regulation on business. However, for highly polluting industries, the possibility of effects of environmental regulations cannot be ruled out.
- The myriad benefits of environment protection laws largely outweigh the so-called losses in the business operations and activities.
Compliance to environment protection laws
Compliance to the existing environment protection laws of a particular country requires a business organisation to execute the following actions:
Environmental auditing is used to assess the impacts of business activities and operations on the environment against set criteria or standards. An environmental audit helps in:
- identification to reduce impacts of business on the environment,
- prioritise sustainable business activities, and
- demonstrate accountability to government, customers and shareholders and concerns for the environment.
India is the very first country to make environmental auditing in industrial units compulsory. The concept of environmental auditing in India was first formally introduced in 1992. The Supreme Audit Institution (SAI) in India is headed by the Comptroller and Auditor General (CAG) of India performs environmental auditing in India.
Setting up an environmental management system
Some businesses may require to set up an environment management system for the following:
- Objectives and targets of the business by means of protection of the environment;
- Finding out the impact of the business on the environment.;
- Practising environmental sustainability;
- Figuring out responsibilities to protect the environment and running the business; and
- Identification of business areas for improvement.
Proper monitoring and reporting on impacts on the environment
For most of the businesses, the monitoring and reporting the impacts of the business on the environment is not mandatory. But for some energy intensive industrial sectors, the monitoring and reporting includes the following:
- Levels of Carbon and greenhouse gas emissions;
- Level of waste materials and residue disposed in the water bodies; and
- Triple bottom line reporting. This includes evaluation in social, environmental and financial framework.
Compliance to government requirements
Many countries have administered their own environment protection laws. How these will affect the business depend upon the type and nature of the business. Some businesses also may require licensing and permission from the government.
Environment protection laws in India
The environmental consciousness and ethics of Indian civilisation traces back to the Ancient Vedic era. The same ethics is also followed in modern age while framing acts and regulations regarding the protection of environment
India has six major laws related to the protection of the environment as a whole and the protection of the components of it. These include: The Environment (Protection) Act, 1986; The Forest (Conservation) Act, 1980; The Wildlife Protection Act, 1972; Water (Prevention and Control of Pollution) Act, 1974; Air (Prevention and Control of Pollution) Act, 1981 and The Indian Forest Act, 1927.
Labour law mediates the relationship between the government and employers, employees and trade unions. Labour law ensures that the following rights of the employees are properly protected:
- Minimum wage: The minimum wage is the lowest amount which the employers should pay their employees. Each country around the world has a fixed minimum wage set by the labour law. The employers are required to take into consideration that they should agree to pay the minimum wage to any employee and should not exploit by paying less than that amount.
- Fixed working hours: The international standard working hours for a full-time employee is 8 hours, 5 days per week and a total 40 working hours a week. Many countries may have their own set standard of working-hours which the business organisations need to comply with. If a person works more than the mentioned hours which are not written in the contract, the employer is bound to pay overtime for that particular employee for working more.
- Public holidays: In labour law, it is strictly mentioned how employer and employee should act during the public holidays. During public holidays, an employee usually has a day off and the employer can only invite the employees for overtime.
- Maternity leave benefits: With more women joining the workforce, the need for maternity leave arose prominently during the 1970s internationally. In case of female employees, labour law mandates them to provide maternity leave with payment during and after the birth of a child for a particular time. After that period, maternity leave may still be available but without payments. The stipulated duration of maternity leave varies from country to country. This ensures the security of a mother’s job and proper care to the infant.
In India, maternity leave benefits are governed by The Maternity Benefit (Amendment) Act 2017.
- Workplace discrimination: There are other factors that the labour law supervises. Anti-discrimination laws offers protection against any discrimination based on race, class, creed, caste or gender.
Currently, India lacks an exhaustive legislatio on anti-discrimination laws which can cover up a broas dimension. India has a few different laws dealing with specialised protection against discrimination in any particular case.
The anti-discrimination laws in India include:
- The Sexual Harassment of Women at Workplace (Prevention, Prohibition And Redressal) Act, 2013, also known as PoSH at Work Act, 2013 offers protection to women from the events of sexual harassment in workplace,
- The Rights of Persons with Disabilities Act, 2016 for safeguarding the rights of persons with disabilities including workplace,
- The Human Immunodeficiency Virus And Acquired Immune Deficiency Syndrome (Prevention And Control) Act, 2017, also known as HIV/ AIDS Act, 2017 which includes the rights of the infected person against discrimination at workplace.
- The Transgender Persons (Protection Of Rights) Act, 2019 for protection of transgender persons from discrimination even at workplace.
The Industrial Disputes Act, 1947 prohibits commission of certain ‘unfair labour practices’, which offers protection against discrimination and showing favoritism or partiality to any individual or a group of workers regardless of merit.
Labour laws in India
Apart from the pieces of legislation mentioned, India has a long list of labour laws to protect the employees. Many activities by the various trade unions have also contributed to it. It is impossible to put all the legislation here for the paucity of space. The concerned pieces of legislation can be found from the official website of the central government under the Ministry of Labour and Employment.
Health and Safety Promotion Law
Health and safety promotion law ensures that every single employer takes the responsibility of the health and safety of the employees during the time at the workplace. The employer needs to make sure that during the work, all the employees are provided with proper and relevant safety measures.
Health and safety promotion law
The National Policy on Safety, Health and Environment at Work Place details the position of the Indian government regarding the health and safety concerns of the workers. India has few important pieces of central acts governing the health and safety of the employees. i) The Fatal Accident Act, 1855 governs the compensation paid to the relatives of the deceased in case of an accidental death. ii) The Factories Act, 1948 protects the labourers in factories. iii) The Mines Act, 1952 regulates the safety of labourers in mines. iv) The Dock Workers (Safety, Health And Welfare) Act, 1986 inspect the “safety, health and welfare” of dock workers.
Apart from all these, the The Occupational Safety, Health And Working Conditions Code, 2020 intends to regulate the occupational safety, health and working conditions of employees.
More composite details regarding the health and safety promotion laws in India can be found out here.
Contract law governs every aspect of business arrangements. Contract law allows standardisation of contracts setting out the rights and obligations of the government.
While laws relating to contract of sales sets the legal framework for exchange of goods, the laws which deal with delivery of goods. Contract laws also include laws relating to business partnerships.
Contract laws in India
The sole law governing the contracts in India is the Indian Contract Act, 1872. The law governing exchange of goods is The Sale of Goods Act, 1930 and The Partnership Act, 1932 defines the law relating to the business partnership.
Laws on consumer protection
Consumer protection laws include a variety of laws and organisations formed to protect the rights of the consumers as well as to ensure fair trade practices, competition and accurate product information in the marketplace. It is the right of the consumers to be protected from all the unfair means and adulteration of business.
Consumer protection law ensures that a consumer gets a product without any manufacturing defects or faults. Consumer law covers major factors like warranty and prohibits false or misleading advertisement.
Business organisations need to take into consideration that they cannot provide defective goods or mislead the consumers about the product through false or misleading advertisements.
Under consumer protection law, consumer goods come with a warranty from the manufacturer. Warranty means the written guarantee provided by the manufacturer or the seller giving assurance to the longevity and quality of the product upto a certain period. If the product does not last as promised, it is the duty of the manufacturer or the seller to either replace or repair it free of cost.
Warranty also covers any defects in the goods upto a certain time.
False/ misleading advertisement
Consumer law strictly regulates false or misleading advertisements. Manufacturers cannot falsely represent or mislead the consumers in terms of price and characteristics of the product through advertisements. Because of the consumer law, they have to provide valid information in terms of advertisements.
Consumer protection laws in India
The government protects the rights of the consumers from any exploitations through the proper implementation of the consumer protection laws. The Consumer Protection Act, 2019 is one of the major acts to protect the interests of consumers and to establish Consumer Forums in district, state and national levels to address and redress consumers’ disputes.
Apart from that,The Standards of Weights and Measures Act, 1976 regulates weight and measures in any goods. The Essential Commodities Act, 1955 and The Prevention of Blackmarketing and Maintenance of Supplies of Essential Commodities Act, 1980 are the two acts that deal with regulations of essential commodities, especially food crops.
Apart from the mentioned acts, India also has a number of acts and regulations regarding consumer protection which can be accessed from the official website of the Ministry Of Consumer Affairs, Food and Public Distribution.
Intellectual Property Laws
Intellectual property law deals with the laws to secure and enforce the legal rights to inventions, designs and artistic works. The intellectual property law provides an opportunity to protect the unique ideas and inventions in a business so that no one except the creator or the owner can imitate or produce it. As a result, it helps to recognise the hard work behind an innovation and competitive advantage as well. Intellectual property is especially important in case of branding and advertisement of any product. Laws relating to Trademarks, Copyrights and Patents fall under the category of intellectual property law.
Intellectual property laws in India
Impacts of legal environment on businesses
A stable legal environment is an indispensable factor for any business to flourish. The laws, rules and regulations by the government form the legal environment of any business. The impact of legal environment on business are as follows:
- Taxation on the business by the government is one of the regulatory measures which determines the course of the business. Higher rate of taxation will impact the business negatively while a low taxation rate helps the business to earn more profit
- A proper legal environment helps to promote economic growth. The taxation imposed by the government and other regulatory measures help in promoting economic growth. These also protect the rights of the consumers and save them from exploitation and other illegal factors.
- Legal environment directs the businesses to protect the rights of consumers from any exploitations, unfair means and fraud.
- It determines the rate of success of any business.
- Legal environment includes some regulatory activities such as limits and restrictions on environmental pollution, laws regarding employment regulations and minimum wages laws, regulations relating to the safety of foods and medicines to protect both the consumers as well as the entrepreneurs.
Impacts of legal environment on businesses in India
The government of India has formed some strict regulations in connection to selling of certain tobacco or alcoholic products under the act of the Cigarettes And Other Tobacco Products (Prohibition Of Advertisement And Regulation Of Trade And Commerce, Production, Supply And Distribution) Act, 2003. It also includes the regulations for selling the substitute for mother’s milk under The Infant Milk Substitutes, Feeding Bottles And Infant Foods (Regulation Of Production, Supply And Distribution) Act, 1992. All of these regulations are mandatory for the manufacturers, advertisers and sellers to follow.
Some of the regulations for protecting the interests of the consumers framed by the Indian government is illustrated below:
- Advertisement of alcoholic beverages at public places is prohibited.
- Advertisements of cigarettes must carry the statutory warning. The warnings must also be printed on the packets of cigarettes.
- Advertisements and packets of tobacco products and products like pan masala must also carry a statutory warning.
- Advertisements and packets of baby food and substitute foods for mother’s milk must necessarily inform the potential buyer that mother’s milk is the best, as laid down in Section 6(a) of the Act.
Government legislations and policies governing legal environment
In democratic countries, with the varying public demand and political structure, legislations and public policies are constantly subjected to change. Proper scrutinisation of the programs and policies of the ruling government by the opposition parties and peer groups is required.
Through the direct use of democratic process, large business houses often try to influence the government and public servants so that the newly enacted laws help the business to flourish.
The administrative wing of the government is also an integral part of the legal environment since it enacts the laws, rules and regulations.
Taxation is one of the important public policies of the government which determines the success of any business.
Business activities and the related laws
To perform any business activity, it is mandatory to keep the related law in mind. A brief generalised insight of the types of laws associated with any particular business activity is mentioned below in the form of chart:
Legal environment of business
India follows a common law system, also known as precedential legal system, i.e. a legal system based on previously recorded judicial precedents. India has a plethora of laws governing the business ecosystem.
Ignorance or wilful non-compliance of laws can make the business entrepreneurs face legal consequences.
To run a business properly in India, a basic knowledge of Companies Act, 2013; Industries (Development and Regulations) Act 1951; Foreign Exchange Management Act, 1999; Factories Act, 1948; Trade Union Act; 1926; Workmen’s Compensation Act, 1923; Competition Act, 2002 and such other legal enactments as amended or repealed from time to time by the Parliament, is required amongst others.
India has improved a lot in terms of ease of doing business due to various reformations and improvement of proper legal environment in business.
Liberalisation and globalisation in the 90s
The economic liberalisation in India in 1991 is the perfect example of how a suitable legal environment helps the businesses to grow and flourish. The liberalisation and globalisation, even after some negative effects, during the 90s has helped India a lot in this regard.
During the 90s global political and economic trends shaped Indian policies and regulations towards becoming more open to private businesses and enterprises. Some of the individuals including then Prime Minister P. V. Narasimha Rao and the Finance Minister in his cabinet Dr. Manmohan Singh supported the reformist moves of liberalisation and globalisation. Liberalisation aimed towards less stricter regulations in the market for private individuals through de-licensing and freeing up licensing controls from the private sectors.
Along with economic liberalisation in India, globalisation was also introduced in 1991. It opened up the Indian market to a large number of international brands and also attracted Foreign Direct Investments (FDI).
These actions, in turn, strengthened the Indian economy and increased the flow of capital, made good-quality products available at comparatively lower prices etc.
Benefits of studying legal environment of a business
It is vital for the management of any business organisation or enterprise to obey the existing laws of the land. Consequently, a proper and adequate knowledge of the rules and regulations framed by the Government acts as a pre-requisite for improving the business performance. Non-compliance of these can land the business in trouble and may spoil the growing prospects of it.
The benefits of studying the legal environment of a business are:
- It helps to decide how to perform the business properly.
- Proper studying of the legal environment helps to maximise the margin of profit.
- It aids in planning a proper business strategy.
- The studying of the legal environment contributes to successful business.
- It helps to get introduced to the legal agendas of a country which, in turn, helps in taking managerial decisions in the future.
- A proper legal environment contributes to forming a strong and healthy economy.
Limitations of studying legal environment of a business
As mentioned beforehand, it is mandatory to know the laws of the land to comply with them while setting up or running any business. While studying the legal environment is a pre-requisite for any business, it does ot guarantee anything regarding the success, failure or growth of the business. The limitations of studying the legal environment of any business are as follows:
- Studying the legal environment fails to predict any financial, operational, reputational or security risk factors of business. It only safeguards any business from compliance risks such as legal penalties, void contracts, responsibilities towards employees etc.
- A thorough study of the legal environment helps in gathering a lot of information which may create confusion in practical situations.
- Too much studying of the legal environment makes one very cautious and it may discourage from taking strategic risks in business.
- Studying the legal environment does not provide any explanation of uncertain events in business.
A proper legal environment for a business helps a business ecosystem to flourish. Alternatively, a strict legal environment may hinder business activities, too.
It can be concluded that behind a flourishing business, there is an appropriate legal environment. It also ensures the safety and security of the consumers. The legal environment, with suitable labour legislation, may also help in generation of employment and subsequent elevation of financial status. Proper regulations in business also help in the development of the economy.
Legal environment also makes sure that the relation between the society and the business organisation is based on welfare terms.
Frequently Asked Questions (FAQs) on legal environment
What is the relation of the legal environment with a business?
The legal environment of business surveys the role of how legislation and government policies affect all aspects of business and management.
What comprises the legal environment?
The legal environment includes various laws and regulations enacted, amended or repealed by the government, policies relating to licensing and approvals, policies related to foreign trade, strategies adopted by the government to improve the business ecosystem are the examples of legal environments.
How do the factors of the legal environment affect the business activities?
A proper legal environment is responsible for a successful business ecosystem. In a properly suitable legal environment, a business can touch its actual profitability point. Foreign investors are also attracted in a proper legal environment.
On following proper business ethics, the external investors feel secure about their investments in the market.
The best example of how a proper legal environment helps any business to flourish is the liberalisation and globalisation of the Indian economy during the 90s.
What are legal frameworks?
Legal frameworks comprise of legal documents like the constitution, existing, repealed or amended legislations, rules and regulations. Court judgements also act as legal frameworks in the precedential legal system.
What are the objects to study the legal environment of a business?
Studying the legal environment of a business helps to grow the business properly. For an entrepreneur initially starting the business, the studying of the legal environment helps him or her to understand various factors like success or failure, growth or diminishment of the business. It is also important for individuals or any business organisation to study properly in order to expand the business.
It also helps one to decide the loss or profitability of the business.
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