STUDY NOTE - Dr. I.

Sridhar – Banking Law Insurance law, IP law

Banking Landscape in India

Basic Principles of Banking

Bank performs the following core functions:

- Acceptance of deposits from the public

- Making deposits of customers withdrawal by cheque or otherwise
- Lending or Investing funds collected from customers
The following are the basic principles of banking

(i). Principle of Intermediation

Banks are called financial intermediaries because they invest or lend funds of depositors. Banks
assume credit risk (arising from the default of the borrower) involved in direct lending to those
who need funds (borrowers). They have expertise and abilities to mange such risks. Thus banks
mediate between the depositors (savers of money) and borrowers (users of money) and earn
interest spread as a reward for risk taking.

(ii). Principle of Liquidity

The simultaneous operations of acceptance of deposits and lending these funds to borrowers in a
manner such that the bank would be able to arrange for the funds demanded by its depositors at
any point of time, is called ‘liquidity management’ or ‘asset liability management’. In line with
the liquidity principle, a bank must keep a certain portion of its deposit liabilities in liquid form
so as to be able to repay the same on demand or maturity dates to the depositors. This principle
is reinforced by the regulatory requirements of the RBI, that every bank has to maintain deposits
with RBI as cash reserve ratio (CRR), which currently stands at 4.75% of the bank’s demand and
time liabilities (DTL) and statutory liquidity ratio (SLR), wherein, every bank has to invest in
government and other approved securities (currently at 25% of DTL).

(iii). Principle of Profitability

1
Interest income, which represents the interest differential (spread) between its loans and deposits
rates, is the main source of profit of a bank. The interest earned by a bank on its lending
operations should be higher than the interest paid by it on its deposits operations. The interest
spread, along with the volume of its deposits and loans determines the total net interest income
of a bank.

(iv). Principle of Solvency

A bank’s financial soundness is judged by analyzing its financial graph of a couple of years and
comparing the relevant ratios with other banks (eg., capital adequacy ratio, standard assets ratio
and provisions to non-performing assets ratio, etc). The principle of solvency also encompasses
liquidity and profitability attributes.

(v). Principle of Trust

Trustworthiness is a function of a bank’s good track record over a fairly long period of time, in
terms of liquidity, profitability and financial soundness, and its record in meeting its
commitments to all concerned parties. It also reflects the governance quality of the bank. For
customers and public, trust indicates dependability and safety as they perceive while lodging
their deposits with a bank and it is reflected in the rate of growth of its deposits and profits on a
sustained basis.

Types of banking groups in India

The Indian Banking system regulated by the RBI comprises scheduled and non-scheduled banks
and these are classified in various sub categories as follows:

(a). Scheduled banks

(b). Non Scheduled banks

Scheduled Banks

These are the banks which are listed in the 2 nd Schedule of the RBI Act, 1934. These banks have
paid up capital and reserves of not less than Rs. 5 lakhs and they are successful in convicing the
RBI that their affairs are not conducted in a manner detrimental to their depositors. However,

2
presently to start a commercial bank, the RBI prescribed a minimum capital of Rs. 100 crores.
These banks have to maintain certain amount of reserves with the RBI, against which these
banks enjoy the facility of financial accommodation and remittance facility at concessionary rate
with the RBI. Scheduled banks are classified into:

- Co-operative banks
- Commercial banks (Foreign scheduled banks & Indian scheduled banks)
Indian scheduled banks are further sub classified as (i). Private sector scheduled banks and
(ii). Public sector scheduled banks.

Non Scheduled Banks

Non scheduled banks are those not included in the 2nd Schedule of the RBI Act.

The scheduled banks enjoy several privileges. An account with a scheduled bank carries a
greater assurance of safety and prestige value than an account with a non scheduled banks. In
times of urgent need, it may obtain finance from the RBI to help in tiding over temporary
financial difficulties. Settlement of accounts between scheduled banks is facilitated by the use of
“Bankers Clearing House Procedure”. Further scheduled banks are obliged to comply with the
directions received from the RBI and have to submit several returns with the RBI. The affairs of
the scheduled banks are closely watched by the RBI in order to safeguard the general health of
the banking industry as a whole.

Banking Regulation

The banking system in India is regulated by the RBI, the central banking authority in the country
in keeping with the Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949. It is
essential to exert reasonable regulation on the banking system to remove the possible
imprudence on the point of players. The absence of such regulation presents a danger of
jeopardizing public trust in the banking system. Thus it is necessary to regulate the banking
system in order :

- to generate, maintain and promote confidence and trust of the public in the banking
system

3
 - to protect investors interests through adequate / timely disclosure by the institutions and
access to revenue information by the investors.
- to ensure that the financial markets are both fair and efficient.
- to ensure that the participation measures up to the rules of the market place.
Objectives of RBI

(i). Promoting growth and maintaining price stability in the economy.

(ii). Maintaining monetary stability so that the business and economic life can deliver welfare
gains of a mixed economy.

(iii). Maintaining financial stability and ensuring the sound health of financial institutions so that
economic units can conduct their business with confidence.

(iv). Maintaining a stable payment’s system so that financial transactions can be safely and
efficiently executed.

(v). Ensuring that credit allocation by the financial system broadly reflects the national economic
priorities and social concerns.

(vi). Regulation of the overall volume of money and credit in the economy to ensure a reasonable
degree of price stability.

(vii). Promotion of the development of financial markets and systems to enable to regulate
efficiently.

(viii). Ensure orderly conditions are maintained in the foreign exchange market and the exchange
rate is not subject to excess volatility.

Main Functions of RBI

The functions of RBI can be classified into (i). Traditional, (ii). Promotional, (iii). Supervisory.

Traditional Functions

- Monopoly of note issue

- Banker to the government

4
 - Banker to the banks
- Acts as a national clearing house
- Lender of the last resort
- Acts as a controller of credit
- Custodian of the Foreign Exchange Reserves
- Exchange control
- Maintaining of value of currency
- Publishes the economic statistics
- Fights against economic crisis.
Promotional Functions

- Promotion of banking habits

- Provides refinance for export promotion
- Facilities for Agriculture
- Facilities for Small Scale Industries
- Prescription of minimum statutory requirements for banks
Supervisory Functions

- Granting licenses to banks

- Inspection & Enquiry
- Administers the Deposit Insurance Scheme
- Periodical review of the working of commercial banks in India
- Control of NBFCs.
Tools of Monetary Control

RBI uses its monetary policy for controlling inflationary or deflationary situation in the economy
by using one or more of the following tools of monetary control.

(i). Cash Reserve Ratio (CRR)

CRR refers to the cash that all banks are required to maintain with RBI as a certain percentage of
their demand and time liabilities (DTL). It may vary between 3% to 15% of bank’s DTL. If a
bank fails to maintain the prescribed CRR at prescribed levels, penal interest is levied on the
shortfall by adjustment from interest receivables on balances with RBI. A cut in CRR enhances

5
the loanable funds with banks and reduces the dependence on the call money market. An
increase in CRR reduces the liquidity in the banking system, reduces the lending operations and
tends to increase the call rates.

(ii). Statutory Liquidity Ratio (SLR)

It refers to liquid reserve requirement of banks, in addition to CRR. SLR is maintained by all
banks in the form of government securities. SLR has 3 objectives:

- to restrict expansion of banks credit

- to increase bank’s investment in approved securities
- to ensure solvency of banks.
Increase in SLR results in the reduction of the lending capacity of banks by preempting certain
portion of their DTL for government or approved securities. Therefore it results in reducing the
supply of loanable funds of banks, but also by increasing the lending rates in the face of an
increasing demand for bank credit. The reverse phenomenon happens in case of reduction in
SLR. Currently SLR is at 25% of DTL.

(iii). Bank Rate

Bank Rate is the standard rate at which the RBI is prepared to buy or rediscount bills of
exchange or other eligible commercial papers from banks. Bank Rate is used to vary the cost
and availability of refinance and change the loanable resources of banks. Change in Bank Rate
affects the interest rates on loans and deposits in the banking system across the board in the same
direction.

(iv). Open Market Operations (OMO)

This refers to the sale or the purchase of government securities by the RBI in the open market
with a view to increase or decrease the liquidity in the banking system and thereby affect the
loanable funds with banks.

Role and Functions of Commercial Banks

Commercial Banking system in India can be broadly classified into

6
(i). Public sector - Scheduled

(ii). Private sector - Scheduled and Non Scheduled

Public Sector banks are further subdivided into

- State Bank of India

- Associates of State Bank of India
- Other nationalized banks
Private Sector – Indian banks and Foreign banks.

A Scheduled bank is one which is included in the Second Schedule of the RBI Act. A Non
Scheduled bank is one which is not included in that schedule.

Banks play a vital role in the economic development of the country as mentioned hereunder:

- Banks creates purchasing power

- Promotes capital formation
- Assists in the optimum utilization of resources
- Finances priority sectors
- Promotes balanced regional development
2. Banking markets in changing environment

Banking industry has been witnessing major environmental changes during the last few decades.
The changes have been witnessed in political, economic, policy and regulatory areas and have
dramatically altered bank business strategies, organizational structures, critical management
areas and processes. Banks which have been quick enough to recognize the changing
environment and take appropriate measures have been able to set themselves on the path of
sustained business and profitability growth satisfying the expectations of the various
stakeholders.

The volatility of environment surrounding the banking organizations has made it clear to the
bank management(s) that strategies and systems that were adopted earlier and might effectively
have addressed the organizational concerns could no more be relied upon to provide solutions in
the current environment. The impact of the market is so emphatic that organizations which are

7
seen as not delivering adequate value by the shareholders or institutions in the capital markets
are rated very low in the equity markets. Banks, which are underperforming, thus find it very
difficult to access the equity and debt markets not only in the international markets but even at
the domestic level.

3. New Types of Risks for customers and banks

The risks faced by the corporate sector assume importance from a bank’s point of view. In the
first place, banks sell various loan products to corporate customers and in doing so assume credit
risk. Credit Risk implies failure on the part of the debtor to honour its obligations on the due
date. These failures can be caused by various factors some of which relate to the risk faced by
the debtors themselves in the conduct of their business. Thus, the knowledge of the various risks
faced by a bank’s debtor customers and an evaluation of the debtor’s management of such risks
assumes importance for the lending banker.

While different banks may group / categorise the risks faced by them various ways, a common
grouping of commercial banking risks adopted by the Basel Committee on Banking Supervision
(Basel Committee) as also by the RBI is as under:

- Credit Risk
- Market Risk covering Liquidity risk, Interest risk
- Operational risk
It is true that risk management function is not new to the banking system. Credit risk have been
there since the commencement of the bank lending activity. However, in the recent past the
complexity of risks have been assuming large proportions.

4. Prudential Regulations in a deregulating setting

Regulatory authorities have put in place a broad framework of prudential regulations. Instead of
controlling individual credit transactions or fixing interest or exchange rates, the banks are
required to put in place a framework of rules, regulations, procedures, systems, organizational
structures.

8
The approach of the bank regulators can best be understood by looking at the broad set of
prescriptions made by the Basel Committee on Banking Supervision. The Basel Committee’s
approach rests on three main pillars as under:

First Pillar : Minimum capital requirements to be observed by banks

Second Pillar: Supervisory review process

Third Pillar: Market discipline

Bank managements find themselves in a situation where environmental changes lead to a highly
volatile environment resulting in various types of risks in their activities. Better risk
management thus becomes necessary to ensure that their capital as well as earnings is protected.
Further, the regulators are enjoining bank’s managements to put in place efficient risk
management systems so that risks to the individual bank as well as to the financial system are
under control.

Securitisation Act, 2002

Securitisation - Concept

Securitisation is an important aspect of corporate finance in the modern world. Basically, it is a

process through which illiquid assets are transferred into a more liquid form of assets and
distributed to a broad range of investors through capital markets. The lending institution’s assets
are removed from its balance sheet and are instead funded by investors through a financial
instrument. The security is backed by expected cash flows from the assets. Securitisation is a
process of transformation of illiquid assets into security, which may be traded later in the open
market.
For banks and financial institutions, securitisation fundamentally involves conversion of long-
term assets into current asset. It is structured transaction whereby the bank transfers or sells
loans of a particular portfolio to a specially created trust which breaks the loan into convenient
amounts and raises money from the investors by selling the instruments which represent the loan
amounts. The illiquid assets such as mortgage loans, loan receivables, cash credit receivables,
etc on the balance sheet of the originator are packaged, underwritten and sold in the form of
securities to investors through a carefully structured process.

9
What is an NPA?

A non performing asset means an asset or account of a borrower, which has been classified by a
bank or financial institution as sub-standard, doubtful or loss asset.
The problem of NPA’s

For years, Indian banking and institutional lenders have had a major complaint; they were
criticized for their inability to control their burgeoning non-performing assets (bad debt lump),
currently estimated to be anywhere around 1lakh crores. Despite strict laws for willful loan
defaulters, red tape in the Indian administration undercut the statute’s usefulness and made sure
that Indian lenders and financial institutions, could’nt bite but just bark.. But all this has gone a
sea change.
To expedite recovery of loans and bring down the non-performing asset level of the Indian
banking and financial sector, the government introduced a new law that promises to make it
much easier to recover bad loans from willful defaulters.
The Securitisation and Reconstruction of Financial assets and Enforcement of Security
interest Act, 2002
The securitisation and reconstruction of financial assets and enforcement of security interest act
has given unprecedented powers to banks, financial institutions and asset reconstruction /
securitisation companies to take over management control of loan defaulter or even capture its
assets under police escort if necessary.

The law does not allow an appeal against seizure in any court or before any authority and the
only leeway a defaulter gets is a 60 day notice period to discharge in full his liabilities before a
seizure is initiated.

Another significant feature of this new law is that it does not allow a defaulter to escape a seizure
by taking resort to the bankruptcy administrator called the Board for Industrial and Financial
Reconstruction (BIFR). Once the defaulter is served a notice, no reference can be made to the
BIFR

10
What is an Asset Reconstruction Company?

An asset reconstruction company is a company that is set up to do exactly what the name
suggests – reconstruct or re-package assets to make them more saleable. The assets in question
here are loans from banks, card companies, financial institutions, etc.
Bad loans are essentially of two types: those that are a consequence of routine banking
operations and those that are a reflection of a greater systematic rot, as in the Indian context
where the bulk of non-performing assets (NPA’s) is due to government interference / loan
waivers / difficulties in recovering dues etc. There are essentially two approaches to tackling
NPAs; one, leave it to the banks to manage their own bad loans, two,do the same thing on a
concerted central level, through a centralized agency. ARCs are centralized agencies for
resolving bad loans created out of a systematic crisis. ARCs buy up distressed assets from bank /
card companies and other financial institutions, repackage them and sell them in the market.

Non-performing assets can be assigned to ARCs by banks at a discounted price, enabling a one-
time clearing of the balance sheet of banks. At the same time, the ARC can float bonds and
recover dues from the borrowers directly. ARCs can have several alternates. Banks are left with
cleaner balance sheets and do not have to deal with problem clients. Because ARCs deal with a
larger portfolio, they can mix up good assets with bad ones and make a sale, which is palatable to
buyers.

Under the guidelines framed by RBI for setting up ARCs, it should have a minimum paid up
capital of 2 crores. As of now there is one ARC set up by ICICI Bank on a pilot basis, but in
time we should be seeing a couple more.
The most crucial question in securitisation of NPA is : does a bad apple, when sliced, becomes
a good apple?

Proper management and speedy disposition of NPAs is one of the most critical tasks of banking
reforms today. The main purpose of active involvement by the government is to remove NPAs
from the banking system quickly so that the banks can resume their normal functions. Further
professionalism at the grass root level is a must to tackle this problem

11
Introduction to Intellectual Property Laws

1. What is Intellectual Property

Intellectual property is the property created by the intellect of human mind. Unlike other forms
of property, intellectual property is a nonphysical which stems from, or is identified as, and
whose value is based upon some ideas. Intellectual property insists on some amount of novelty /
originality to gain protection.

IPRs take the form of Patents, Copyrights, Trademarks, Registered Industrial Design,
Geographical Indications, Protection of undisclosed information. IPRs are largely territorial
rights except Copyright which is global in nature in the sense that it is immediately available in
all the member of the Berne Convention. These rights are awarded by the State and are
monopoly rights implying that no one can use these rights without the consent of the right
holder. It is important to know that these rights have to be renewed from time to time for
keeping them in force except in case of copyright and trade secrets. IPRs have fixed term
except trademark and geographical indications, which can have indefinite life provided these are
renewed after stipulated time specified in the law by paying official fees. IPRs can be assigned,
gifted, sold and licensed like any other property.

2. International Background to Intellectual Property

Paris Convention for the protection of industrial property - 1883

The Paris Convention was concluded on 20th March, 1883 at Paris, since then, it has been the
subject of a number of revisions. At Stockholm in 1967, the last revision was made to the Paris
Convention by which an international organization for administering and fostering intellectual
property on an international basis called World Intellectual Property Organization (WIPO) was
established. The Paris Convention establishes a Union for the protection of industrial property
and industrial property has its object patents, utility models, industrial designs, trademarks
service marks, trade names, indication of source or appellations of origin and repression of unfair
competition.

12
The Paris Convention for the protection of Industrial Property was an initiative in the sphere of
industrial property, which includes patents for inventions, industrial design rights, trademarks
and names and protection from unfair competition. But the Paris Convention had not referred to
the term “Intellectual Property”. Rather, it treats patents, utility models, industrial designs,
trademarks, service marks, trade names, indications of source or appellation of origin and the
repression of unfair competition as the objects for the protection of industrial property.

Berne Convention for the protection of Literary and Artistic Work - 1886

The printing industry was always accompanied by copying techniques which made piracy to go
on a large scale more than what was anticipated. These circumstances necessitated the evolution
of measures to be taken to curb piracy. The Berne Convention for formulated for the protection
of Literary and Artistic Works in 1886. The basic objective of this convention was to further
greater uniformity in the level of protection by bringing the countries with a lower level of
protection up to the standard of the countries with the higher level of protection.

The Berne Convention for the Protection of Literary and Artistic Works remains as the only
international document consolidating various aspects of the copyrighted works in an
international basis.

Patent Cooperation Treaty (PCT)

The territorial nature of the patent system resulted in the failure of countries to recognize the
inventions made outside its jurisdiction. Very often, it was difficult to patent an invention made
in one country in a foreign country. From an international perspective, a patent application
seeking patent protection in other foreign countries had to face many procedural problems.

PCT has tried to minimize the procedural difficulties in cases where one wishes to obtain patent
protection in various nations. Under PCT, the applicant gets a patent based on the grant from the
individual nations and the applicant is not getting an international patent enforceable in all
nations.

With PCT in 1977, a system of international patent applications was put into effect on a
worldwide basis. One cannot become a member of PCT unless it is a member of Paris
Convention. The basic objective of PCT is to make the acceptance, search and examination

13
stages of the patent procedure to be conducted on an international basis before proceeding to the
grant of the national patents.

The Madrid Agreement concerning the International Registration of Marks, 1891.

The Madrid system of international registration of marks is governed by two treaties: the Madrid
Agreement Concerning the International Registration of Marks, which dates from 1891, and the
Protocol Relating to the Madrid Agreement, which was adopted in 1989. The system is
administered by the International Bureau of WIPO, which maintains the International Register
and publishes the WIPO Gazette of International Marks.

The objectives of the system are twofold. Firstly, it facilitates the obtaining of protection for
marks, both trademarks and service marks. Secondly, since an international registration is
equivalent to bundle of national registrations, the subsequent management of that protection is
made much easier.

3. Patents

A Patent is an exclusive right granted by a country to the owner of an invention to make, use,
manufacture and market the invention, provided the invention satisfies certain conditions
stipulated in the law. Exclusive right implies that no else can make, use, manufacture or market
the invention without the consent of the patent holder. This right is available for a limited period
of time.

A patent in the law is a property right and hence, can be gifted, inherited, assigned, sold or
licensed. As the right is conferred by the State, it can be revoked by the State under very special
circumstances even if the patent has been sold or licensed or manufactured or marketed in the
meantime. The patent regime is territorial in nature and inventor / their assignes will have to file
a separate patent applications in countries of their interest, along with necessary fees, for
obtaining patents in those countries.

The Indian Patent Act, 1970 has now been radically been amended to become fully compliant
with the provisions of TRIPS. The most recent amendment was made in 2005.

14
3.1. Invention

Invention means a new product or process involving an inventive step and capable of industrial
application. New invention means any invention or technology which has not been anticipated
by publication in any document or used in the country or elsewhere in the world before the date
of filing of patent application with complete specification, ie., the subject matter has not fallen in
public domain or it does not form part of the state of the art.

Inventive step means a feature of an invention that involves technical advance as compared to
existing knowledge or having economic significance or both and that makes the invention not
obvious to a person skilled in the art.

3.2. What can be patented?

Novelty : An invention will be considered novel if it does not form a part of the global state of
the art. Information appearing in magazines, technical journals, books, newspapers etc.
constitute the state of the art. Oral description of the invention in a seminar / conference can also
spoil novelty. Novelty is assessed in a global context.

Inventiveness (Non –obviousness) : A patent application involves an inventive step if the

proposed invention is not obvious to a person skilled in the art, ie., skilled in the subject matter
of the patent application. If there is an inventive step between the proposed patent and the prior
art at that point of time, then an invention has taken place.

Usefulness : An invention must possess utility for the grant of patent. No valid patent can be
granted for an invention devoid of utility. The patent specification should spell out various uses
and manner of practicing them.

3.3. Non Patentable Inventions

An invention may satisfy the conditions of novelty, inventiveness and usefulness but it may not
qualify for a patent under the following situations.

i). an invention which is frivolous or which claims obviously contrary to well established natural
laws.

15
ii). an invention whose intended use or exploitation would be contrary to public order or morality
or which causes serious prejudice to human, animal or plant life or health or to the environment.

iii). The mere discovery of a scientific principal or formulation of an abstract theory.

iv). The mere discovery of a new form of a known substance which does not result in
enhancement of the known efficacy of that substance.

v). A substance obtained by a mere admixture resulting only aggregation of the properties of the
components thereof or a process for producing such substance.

vi). The mere arrangement or rearrangement or duplication of features of known devices each
functioning independently of one another in a known way.

vii). A method of agriculture or horticulture

viii). Any process for medical, surgical, curative or diagnostic, therapeutic or other treatment of
human beings, or any process for a similar treatment of animals to render them free of disease or
to increase economic value.

ix). Inventions relating to atomic energy

x). Mathematical or business methods or computer program per se or algorithms.

xi). A presentation of information

xii). Topography of integrated circuits

3.4. Term of the patent

Term of the patent will be 20 yrs from the date of filing of all types of inventions.

3.5. Application

The following are the stages for obtaining patent:

- Filing of an application for a patent accompanied by either a provisional specification or

complete specification.
- Filing request for examination

16
 - Examination of application by the examiner
- Replying to adverse report of examiner
- Publication of application with specifications
- Overcoming opposition to the grant of patent
- Grant of patent
In respect of patent applications filed, following aspects will have to kept in mind:

- Claim or claims can now relate to single invention or group of inventions linked so as to
form a single inventive concept.
- Patent application will be published 18 months after the date of filing
- Application has to request for examination 12 months within publication or 48 months
from date of application, whichever is later.
3.6. Provisional Specification

A provisional specification is usually filed to establish priority of the invention in case of the
disclosed invention is only at a conceptual stage and a delay is expected in submitting full and
specific description of the invention. Although a patent application accompanied with
provisional specification does not confer any legal patent rights to an invention. No patent is
granted on the basis of a provisional specification. It has to be followed by a complete
specification for obtaining a patent for the said invention. Complete Specification must be
submitted within 12 months of filing of the provisional specification.

3.7. Complete Specification

It may be noted that a patent document is a techno-legal document and it has to be finalized in
consultation with an attorney. Submission of Complete Specification is necessary to obtain a
patent. Contents of complete specification include the following:

- Tile of the invention

- Field to which the invention belongs
- Background of the invention including prior art giving drawbacks of the known
inventions or practices
- Complete description of the invention along with experimental results
- Drawings etc essential for understanding the invention

17
 - Claims, which are statements, related to the invention on which legal proprietorship is
being sought. Therefore claims have to be drafted very carefully.
3.8. Compulsory License

Any time after three years from date of sealing of a patent, application for compulsory license
can be made provided

- Reasonable requirements of public have not been met

- Patented invention is not available to public at a reasonably affordable price
- Patented invention is not worked in India
Among other things, reasonable requirements of public are not satisfied if working of patented
invention in India on a commercial scale is being prevented or hindered by importation of
patented invention.

Trade Marks Act

4.1. What is a Trade Mark

Trade mark is a mark capable of being represented graphically and which is capable of
distinguishing the goods or services of one person from those of others and may include shape of
goods, their packaging and combination of colours. It indicates in relation to goods or services, a
connection in the course of trade between the goods or services and the person having the right
to use the trade mark either as a proprietor or as a permitted user.

4.2. Registration of Trade Mark

Registration of Trade mark is not mandatory. But it may be noted that common law protection is
applicable both to registered as well as unregistered trademarks.

4.3. Procedure for registration of Trade mark

- Any person claiming to be proprietor of trade mark used or proposed to be used can apply
for registration of his trade mark..

18
 - Application should be filed with the Office of Registry under whose territorial
jurisdiction the principal place of business is situated.
- Before a trade mark is accepted, it is subjected to a close and through examination to
ensure that it is distinctive, is not deceptive and is free from conflict with registered and
pending marks.
- After application is accepted, an advertisement is issued in Trade mark Journal to give to
third parties an opportunity for opposition.
- Any person can make an application to Registrar for opposition to registration. Such
application has to be made within 3 months from the date of advertisement.
- Copy of the opposition shall be sent to applicant and he has to reply within 2 months with
his counter statement.
- Registrar will scrutinize the evidence, hear the parties and then decide the matter.
- After deciding on opposition and hearing parties, Registrar can register trade mark. Date
of application shall be deemed to be date of registration.
- Registration of Trade mark is valid for 10 years.
4.4. Assignment & Transmission of Trade Mark

Trade mark is assignable as well as transmissible. Assignment of a trade mark is taken to be a

sale or transfer of the trade mark by the owner or proprietor thereof to the third party. By
assignment, the original owner of trade mark is divested of his right, title or interest therein.

Assignment or transmission shall be registered with registrar. If assignment is not registered it

will not be accepted as evidence in any court.

4.5. Certification Trade Mark

Certification trade mark is a mark capable of distinguishing the goods or services in connection
with which it is used in the course of trade, which are certified by the proprietor of the mark in
respect of origin, material, mode of manufacture or performance of service quality, accuracy etc.
Examples of certification trade mark are ISI, AGMARK. Such certification trade mark can be
used by manufacturer or service provider only with the permission of proprietor of the
certification trade mark.

19
4.6. Infringement & Passing Off Action

A registered proprietor of a trade mark can prevent other from using an identical or deceptively
similar trade mark in relation to any goods in respect of which mark is registered. Therefore,
unauthorized use of registered trade mark is infringement of trade mark.

In an action for infringement, the plaintiff must make out that use of defendant’s mark is likely to
deceive. When the defendant’s mark is so close either phonetically, visually, structurally or
otherwise, and the court reaches the conclusion that there an imitation, no further evidence is
required to be established.

The relief obtainable in actions for infringement includes an injunction to restrain the threatened
use or the continuance of an existing use and an option of the plaintiff either damages or an
account of profits together with or without an order for the delivery of the infringing labels and
marks for destruction.

Passing Off

Principle of passing off is based on the concept that a person is not to sell his own goods under
the pretence that they are goods of another person. The passing off action is founded on
desirability of preventing commercial immorality. The purpose of an action for passing off is to
protect commercial goodwill; to ensure that people’s business reputations are not exploited.

Whereas infringement action can be only in respect of registered trade mark while passing off
action can be of registered as well as unregistered trade mark.

It is the tendency to mislead or cause confusion that thus forms the gist of passing off action. It
is not necessary for the plaintiff to establish fraud. It is sufficient if the plaintiff proves that the
defendant’s trade mark is likely to cause confusion and deception among the trade and public
enabling unscrupulous traders to pass of the defendant’s goods as that of the plaintiff. The Act
does not lay down any criteria for determining what is likely to deceive or cause confusion.
Therefore every case must depend upon its own particular facts.

20
The question has to be approached from the point of view of a man of average intelligence and
imperfect recollection.

4.7. Criminal complaint

In addition to action under Infringement or Passing Off (Civil Suit), action can also be taken by
filing a criminal complaint. In such a case, the court issues an order directing the crime branch
of the police to search and seize offending goods, labels and other materials. Whenever there is
slavish imitation of f trade mark it is advantageous to resort to criminal complaint rather than
undergo the long process of civil suit. The advantage in a criminal complaint is that it has
immediate effect. A criminal complaint can be filed even if a trade mark is not registered.

4.8. Trade Mark Agent

The process of work of registration of trade mark is undertaken by a Trade mark agent. They are
registered as such with the Registrar. They have to appear for an examination and on the
selection and payment of fees they are registered as trade mark agent.

4.9. Specimen Caution Notice

21
Trade Marks Act – Cases

1. Cadila Health Care Ltd Vs Cadila Pharamaceuticals Ltd

Most of our laws are modeled on laws enacted by the British Parliament and the enunciation of
laws by our courts is based on the principles of the interpretation laid down by superior courts in
England. The Supreme Court of India in the instant case has struck a warning that courts in
India should be wary of using English principles in their entirety, without regard to Indian
conditions.

This is because in India there is no common language for the whole country, a large majority of
the population is illiterate even in their own mother tongue. Only a small percentage of people
know English. In trade marks and passing off action cases the Supreme Court observed that “ To
apply the principles of English Law regarding dissimilarity of the marks or the customer

22
knowing about the distinguishing characteristics of the plaintiff goods is to over look the ground
realities in India.

In the case of medicinal preparation, for violation of trade mark in these cases, a stricter
approach is adopted because while confusion in the case of non-medicinal products may only
cause economic loss to the plaintiff, confusion between two medicinal products may have
disastrous effects.

Drugs are poisons not sweets. Confusion between medicinal products may be life threatening. It
is not uncommon that in hospitals drugs can be requested verbally. Many patients may be
elderly or inform or illiterate, may not be in a position to differentiate between one medicine and
another. It is to avoid such situation, the Act enjoins that the authority granting permission to
manufacture a drug should be satisfied that there will be no confusion or deception in the market.

2. Yahoo Inc Vs. Akash Arora

The plaintiff is a global internet media rendering services under the domain name / trade name
‘yahoo’. The plaintiff was amongst the first in the field to have the domain name yahoo
providing search services. The plaintiff had registered trade mark name of yahoo. Its
application for registration of trade mark are pending in 69 countries all over the world. Its
application for registration is also pending in India.

In the plaintiff filed in the High Court the plaintiff stated that the defendant, by adopting the
name of yahoo.india offering services similar to those provided by the plaintiff, had been
passing off services and goods of its own as those of the plaintiff trade mark and that this was
identical to or deceptively similar to the plaintiff trade mark.

The principle underlying action of passing off is that no man is entitled to carry on business of
another or to lead him to believe that he was carrying on or has any connection with the business
being carried on by another person.

In the instant case, both the parties have a common field of activity: operating on the web site
and providing information which is almost similar in nature. Courts in US have held that the

23
domain name serves the same function as the trade mark. In the instant case, yahoo of the
plaintiff and yahoo.india of the defendant are almost similar except for the use of the suffix
‘india’. When both the domain names are considered, it becomes clear that the two being almost
identical or similar in nature, there is every possibility of the user of internet being confused and
deceived into believing that both the domain names belong to one common source and
connection, although the two belong to the two different sources.

3. Rediff Communications Ltd Vs Cyberbooth

The domain name ‘rediff’ was registered by the plaintiff. In the present suit, they alleged that
the domain name ‘radiff.com registered by the defendant was intented to induce members of the
public into believing that the defendants were associated with the plaintiff.

Adoption of the name, according to them was deliberate act on the defendant’s part to pass off
their business services as those of the plaintiff.

Since both the plaintiff and defendant were carrying on business of communication and
providing services through the internet. The domain adopted by the defendant was almost
similar to the one adopted by the plaintiff. Therefore there is every possibility of an internet user
getting confused and deceived into believing that both the domain names belonged to one
common source.

Cease and desist order was passed on the defendant from infringing the name of the plaintiff.

Copyright Act

Copyright is a right, which is available for creating a original literary or dramatic or musical or
artistic work. Cinematographic films including sound track and video films and recordings on
discs, tapes, or other devices are covered by copyrights. Computer programs and software are
covered under literary works and are protected in India under copyrights.

24
Copyright gives protection for the expression of an idea and not for the idea itself. India is a
member of the Berne Convention, an international treaty on copyright. Under this convention,
registration is copyright is not essential requirement for protecting the right. It would, therefore
mean that the copyright on a work created in India would be automatically and simultaneously
protected through copyright in all the member countries of the Berne Convention. The moment
an original work is created, the creator starts enjoying the copyright. However, an undisputable
record of the date on which a work was created must be kept.

When a work is published with the authority of the copyright owner, a notice of copyright may
be placed on publicly distributed copies. The use of copyright notice is optional for the
protection of literary and artistic works. It is however, a good idea to incorporate a copyright
notice. As violation of copyright is a cognizable offence, the matter can be reported to a police
station. It is advised that registration of copyright in India would help in establishing the
ownership of the work. The registration can be done at the Office of the Registrar of Copyrights
in New Delhi. It is also to be noted that the work is open for public inspection once the
copyright is registered.

In the digital era, copyright is assuming a new importance as many works transacted through
networks such as databases, multimedia work, music, information etc are presently the subject
matter of copyright.

5.1. Coverage provided by copyright

(i). Literary, dramatic and musical work. Computer programs / software are covered within the
definition of literary work.

(ii). Artistic work

(iii). Cinematographic films, which include sound track and video films.

(iv). Recording on any disc, tape, perforated roll or other devices.

5.2. Infringement of copyright

Copyright gives the creator of the work the right to reproduce the work, make copies, translate,
adapt, sell or give on hire and communicate the work to public. Any of these activities done

25
without the consent of the author or his assignee is considered infringement of the copyright.
There is one associated right with copyright, which is known as ‘moral right’’, which cannot be
transferred and is not limited by the term. This right is enjoyed by the creator for avoiding
obscene representation of his / her works.

5.3. Transfer of copyright

The owner of the copyright in an existing work or prospective owner of the copyright in a future
work may assign to any person the copyright, either wholly or partially in the following manner:

- For the entire world or for a specific country or territory

- For the full term of copyright or part thereof
- Relating to all the rights comprising the copyright or only part of such rights.
One of the important requirements of copyright is that the work / expression should be fixed in a
tangible medium for copyright protection. Protection attaches automatically to an eligible work
of authorship, the moment the work is sufficiently permanent or stable to permit it to be
perceived, reproduced. A work may be fixed in words, numbers, notes sounds, picture or any
other graphic or symbolic indicia.

26
STUDY NOTE ON INSURANCE

Insurance Law

1. The Fundamental Principles of Insurance

An insurance contract is also a commercial contract. In India all contracts are governed by the
Indian Contracts Act. Under this Act, the definition of the term ‘ Contract’ is as follows:

“An agreement enforceable by law is a contract”.

Such an agreement must be entered into by two or more parties, with the intention of creating a
legally binding relationship. Since insurance contracts are commercial contracts, an insurance
contract should fulfill all the essential requirements of a valid contract.

However, an insurance contract is subjected to certain additional principles as under:

Principle of Insurable Interest

Insurable interest exists if the person entering the insurance contract stands to lose financially, if
the event insured against occurs. In the context of life insurance insurable interest exists if the
person entering the contract is likely to benefit financially if the insured continues to live and is
likely to suffer an economic loss, if the insured dies. Thus, the requirement of a life insurance
contract is that the person who gets the benefit of an insurance contract must have an insurable
interest in the life of the insured.

Principle of Utmost Good Faith

Commercial contracts are normally subject to the principle of Caveat Emptor or Buyer Beware.
However, in insurance contracts, the product sold is intangible. Therefore the law imposes a
greater duty on the parties to an insurance contract. This duty is one of Utmost good faith. It is
the duty of the person taking out the insurance policy to make a full disclosure of all material
facts whether requested or not. If the principle of utmost good faith is breached, in any insurance
contract, the insurance contract may be treated as null and void. The breach of utmost good faith
arises due to misrepresentation or non disclosure.

27
Principle of Indemnity

This is founded in the common law and it requires that insurance should basically indemnify the
insured, nothing more. That is to say, the insured must not be allowed to make profit from
insurance contracts. The financial position of the insured must be restored to the one he enjoyed
before making the loss. This principle makes sure that the insured neither makes a profit nor a
loss on account of the insurance contract. The reason for following the principle of indemnity is
to prevent the insured from bringing a willful loss upon himself and thereby make profit.

Principle of Subrogation

Subrogation is defined as the automatic transfer of rights and remedies of the insured to the
insurer upon the insured having received the benefits of insurance. So for instance, an insured is
paid the full value of a wrecked car by the insurer and the rights and remedies attached to the
wreckage transfer automatically to the insurer. The insured does not have any rights left in such
car. The principle of subrogation arises from the core principle of indemnity – where the insurer
indemnifies the insured to the extent of his loss, and not more.

Principle of Contribution

This applies if the insured has taken several insurance policies for the same risk from several
insurers. If the insured recovers his loss from several insurers then he may actually be in a
position to profit from insurance. Consequently several insurance contracts include the principle
of contribution expressly. Contribution works in a manner where each insurer pays only that
portion of the risk as is represented by proportion of the sum assured by him to the overall sums
assured by the different insurers. Wherever contribution applies, the insurers make it the
responsibility of the insured to file claims in the correct proportion with the insurers since they
may not be aware of each other’s contracts fully.

2. Insurance Regulatory and Development Authority Act, 1999

Indian insurance is unique in the sense that despite its one billion plus population, it still has a
low insurance penetration of less than 3 %. The insurance sector was opened in 1999 facilitating

28
the entry of private players into the industry. The government formally liberalized the insurance
sector in 2000 with the passage of the IRDA Bill, lifting entry restrictions for private players.
These reforms were aimed at creating an efficient and competitive system considering the recent
economic structural changes and on realizing that insurance can play an important role in the
overall economy of the country.

Consequent to the opening up of the sector, IRDA as per its mission statement, became the
industry watchdog with the following responsibilities:

- protection of the interest of and secure fair treatment to policy holders

- bringing about speedy and orderly growth of the insurance industry for the common man,
and to provide long term funds for accelerating growth of the economy.
- Ensuring that insurance customers receive precise, clear and correct information about
products and services and making them aware of their responsibilities and duties in this
regard.
- Ensuring speedy settlement of genuine claims, to prevent insurance frauds and putting in
place effective grievance redressal machinery
- Promoting fairness, transparency and orderly conduct ini financial markets dealing with
insurance and to build a reliable management information system to enforce high
standards of financial soundness amongst market players
- Bringing about optimum amount of self regulation in day to day working of the industry
consistent with requirements of prudential regulation.
3. Main Life insurance products

There are four main types of insurance policies

Term Insurance

Term insurance pays a death benefit to the legal heirs if the person insured dies during the
term of the policy. Such a policy provides cover for a specified period only and may be
described as temporary insurance. Term insurance plans offer pure risk cover without any
element of saving. The sum assured is payable only if he insured dies during the selected
period. In case the insured does not die during the tenure of insurance, nothing is payable.

29
Whole Life Insurance

Whole life insurance guarantees a death benefit cover throughout the course of life, provided
the required premiums are paid.. The advantage of whole life insurance is that the policy, if
kept current covers over entire life as opposed to term insurance that covers only for a certain
term of years. Whole life insurance policies pay out on the death of the assured whenever it
occurs.

Endowment Insurance

Pure endowment is a plan where the benefit is payable to the insured only on survival of the
specified term. Combing the features of the term assurance and pure endowment are
endowment policies which pay out either on the death of the assured, whenever it occurs, or
after a fixed number of years. Should the insured person survive the term of the policy, the
policy is said to mature. Hence the claim, under an endowment policy, may arise either by
death or by maturity.

Annuities

Annuities are a form of pension in which an insurance company makes a series of periodic
payments to a person over a number of years in return for the money paid to the insurance
company either in a lump sum or in instalments. Annuities start where life insurance ends. It
is called the reverse of the life insurance. Annuity stops on death of a person, whereas
theoretically, life insurance starts on the death of the assured.

Unit Linked Policies

A unit linked policies is a life insurance policy in which the benefits depend on the
performance of a portfolio of shares. Each premium paid by the insured person is split. A
part is used to provide life insurance cover, while the balance is used to buy units of mutual
funds. In this way a small investor can benefit from investment in a managed fund without

30
 making a large financial commitment. The unit linked policies can go up or down in value as
they are linked to the value of the shares.

4. What is a Contract of Insurance? - Legal Issues.

Contract of insurance is a contract whereby one person called the ‘ Insurer’ undertakes, in return
for the agreed consideration called the ‘Premium’ to pay to another person called the ‘Assured’ a
sum of money, or its equivalent on the happening of ‘ a specified event’.

The landmark decision which clarifies the entire legal position regarding the scope of a contract
of insurance is that of “Prudential Insurance Co Vs IRC”, a decision of English Court. It is to be
remembered that insurance law developed in England and its principles have been accepted in
India.

The first test to be applied to determine whether a contact of insurance is a contract or not is to
find out what is the thing insured.

Where you insure a ship or a house, you cannot insure that the ship shall not be lost or the house
burned, but what you do insure is that a sum of money shall be paid on the happening of a certain
event. This is the first requirement of a contract of insurance. It must be a contract whereby for
some consideration, usually but not necessarily, the payment of a sum of money called premium
you secure to yourself some benefit on the happening of some event.

The Second test was that the “specified event” must have some element of uncertainty about it.
There must be either some uncertainty whether the event will ever happen or not, or if the event
is one which must happen at some time or another there must be uncertainty as to the time at
which it will happen. There are also circumstances that in fact the happening of the event
depends upon accidental causes and the event, therefore, may never happen at all. This is called
“Accident”.

The Third test is that the specified event must further be of a character more or less adverse to
the interest of the assured.

In brief, therefore an insurance agreement to be a valid contract must be :

31
a). a contract between an “insurer” and “assured”.

b). the contract is based on the loss due to happening or not happening a future incident;

c). a consideration in the form of payment of an amount of the insured and

d). the insurer promises to make good the loss in so far money can do it, in case the loss occurs
on the happening of the contingency.

5. Agency Function in Life Insurance

Generally, an agent means a person who acts for and on behalf of another. The expression agent
is not defined in the Insurance Act or the Life Insurance Corporation Act.. Therefore, the
attributes of an agent under the general principles of contract law have to be taken consideration
for the definition and meaning of an agent.

Whereas the general principles of Contracts of Agency are equally applicable to all kinds of
agency contracts, the expression has a limited connotation in the field of insurance law and here
an agent is go earned by the terms and conditions of contract of agency between him and the
insurer. An agent in the field of insurance cannot bind his principal insurer unless has been so
authorized to do under the express terms of the contract, or has an implied authority to do such
acts or he has been held out by the insurer of being vested with such authority.

In India an agent has no authority to complete the contract in the name of the insurer. He can
only canvass for proposals and submit them o the insurer for consideration. Similarly, they are
not authorized to collect money, accept risks or bind the insurer in any way other than collect
deposit towards first premium and initial expenses.

6. Legal Status of the Policy

The document that contains the terms, conditions and the basic features of the contract between
the insurer and insured is known as “the Policy”. This document, therefore, is the contractual
law between the parties. Both the parties are bound by the stipulated terms in the policy paper.
Though the life insurance is not an indemnity contract but it is also bound to be in writing and
requires to be adequately tamped. The policy is binding against both the parties. Courts in India

32
take a liberal view and interpret the conditions liberally to ensure ‘public policy’ and justice and
justice.

7. Assignment of a Policy

A policy of life insurance may be assigned by the assured in favor of any person whom he
wishes to assign. Assignment means the transfer of real rights in the policy from one person to
another. The transferor is called the ‘assignor’ and the transferee is called the ‘assignee’. The
assignment of a policy means an assignment of a contract with the insurance company, the
passing of the rights and liabilities of the insured to the third party.

8. Nomination

Nomination does not amount to a transfer but, it merely enables the nominees to receive the sum
assured in the event of death of the life assured. It creates no interest in the nominees in respect
of the title to the insurance policy.

9. Settlement of Claims

Insurance contract is an indemnity contract expecting the life insurance. So, the insurer is found
to indemnify the loss sustained in hazards generally issued against. Life insurance is not an
indemnity contract. Claim on life insurance policy may be on i) maturity or ii) death of the
assured. The insurer has to satisfy himself that conditions stipulated in the policy must be
fulfilled before claim is made payable.

10. General Insurance

Conventionally, the concept of general insurance covered the following categories:

i). Fire Insurance : This branch covered the insurance of property against the risk of fire, riot,
flood, earthquake, etc. It also extends itself to the loss of profit due to the damage caused by any
of these perils.

33
ii). Marine Insurance : This covered two main types of risks, ie., risks of loss or damage to cargo
(known as cargo insurance) carried by sea, rail, air, road, etc and hull insurance that insured
damage to ships, vessels, boats, launches, etc.

iii). Accident Insurance : This covered all types of risks that were not covered in any of the
above two.

Today, the concept of general insurance offers highly evolved and sophisticated forms of
business and personal risk mitigation. The main groups under which general insurance is
practices is as follows:

a). Insurance of property : This group represents the bulk of general insurance practice. It
covers buildings, motor vehicles, aircraft, machinery, factories, ships, livestock, homes,
furniture, cash, securities, etc.

b). Insurance of persons : This group covers personal accident, disability and health related
risks.

c). Insurance of interest : This group covers fidelity guarantee insurance.

d). Insurance of liability : Public liability, product liability and professional indemnities etc fall
in this group.

Best Wishes

34