Chapter – 1

BUSINESS, TRADE & COMMERCE

Introduction

All human beings require different types of goods and services to satisfy their needs. The
necessity of supplying goods and services has led to certain activities being undertaken by
people to produce and sell what is needed by others. Business is a major economic activity in
all modern societies as it is concerned with the production and sale of goods and services to the
needy people.

History of Trade and Commerce

Trade and commerce have played a vital role in making India to evolve as a major actor in the
economic word in ancient times. Commercial cities like Harappa and Mohenjodaro were some
examples for the business development of ancient India. These civilizations had established
commercial connections with Mesopotamia and traded in gold, silver, copper, gemstones,
beads, pearls, sea shells etc. There were different types of coins and weighing practices during
that time.

Indigenous Banking System

As economic life progress, metallic money had been introduced which in turn accelerated the
economic activities. Documents such as Hundi and Chitti were in use for carrying out
transactions in which money passed from hand to hand.

Hundi as an instrument of exchange, it involved a contract which warrant the payment of

money, the promise or order which is unconditional and capable of change through transfer by
valid negotiation.

Indigenous banking system played a prominent role in lending money and financing domestic
and foreign trade with currency and letter of credit. With the development of banking, people
began to deposit precious metals with lending individuals functioning as Bankers or Seths.

Hundies practiced by Indian Merchant Communities

Name of Hundi Category Function
Payable to any persons – no liability over who received the
Dhani-jog
payment
Darshani Payable to a specific person (someone respectable). Liability
Sah-jog
over who received the payment.
Firman-jog Payable to order
Dekhan-har Payable to the presented or bearer.
Payable to any person – no liability over who received the
Dhani-jog
payment, but payment over a fixed term.
Firman-jog Muddati Payable to order following a fixed term.
Drawn against dispatched goods. If goods lost in transit, the
Jokhmi drawer or holder bears the costs and the drawee carries no
liability.

Major Trade Centres

1. Pataliputra – Patna in Bihar today. Commercial town and major centre for export of
stones.
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 2. Peshawar – City in Pakistan. Very popular for export of wool and for the import of horses.
Major transactions between India, China and Rome in the first century.
3. Taxila – City in Pakistan, also called Thakshashila. Popularly known as the city of
financial and commercial banks.
4. Indraprastha – Located in the region of present-day New Delhi. It was a commercial
junction where most routes leading the east, west, south and north converged (joined).
5. Mathura – City in UP. It was an emporium of trade and people here subsisted (lived) on
commerce. Many routes from South India touched Mathura and Broach (Bharuch in
Gujarat).
6. Varanasi – City in UP. Well known centre for textile industries and became famous for
gold silk cloth and sandalwood workmanship. It had links with Taxila and Bharuch.
7. Mithila – City in Bihar. The traders in this city crossed the seas by boats, through Bay of
Bangal to the South China. They established trading colonies in South China.
8. Ujjain – City in MP. Different verities of clothes were exported to different centres. It had
trade connections with Taxila and Peshawar.
9. Surat – City in Gujarat. It was an emporium of western trade during Mughal period.
They were also famous for gold boarder sarees.
10. Kanchi – Present day Kanchipuram in Tamil Nadu. Chinese came here to purchase
pearls, glass and rare stones and in return they sold gold and silk.
11. Madura – City in Tamil Nadu. It was the capital city of Pandya dynasty who controlled the
trade of pearl and fisheries of the Gulf of Mannar (shallow in between India and Sri
Lanka).
12. Broach –Present day Bharuch in Gujarat. It was a major trade centre in Western India.
13. Kaveripatta –Present day Kaveripattanam in Tamil Nadu. It was scientific in its
construction as a city and provided loading, unloading and strong facilities of
merchandise. It was also famous for perfumes, cosmetics, scents, silk, wool, cotton and
also for ship building.
14. Tamralipti –City in West Bengal (Kolkata). It was one of the greatest ports connected
both by sea and land. It was linked by road to Banaras (UP) and Taxila.
Major Exports and Imports
Spices, wheat, sugar, indigo, opium, sesame oil, cotton, parrot, live animals and animal products
were the major export items, whereas import items include horses, animal products, Chinese
silks, linen, wine, gold, silver, copper, etc.

The Indian economy is one of the fastest growing economies in the world today. The high
growth sectors have been identified, which are likely to grow at a rapid pace and the recent
initiatives of the Government of India such as ‘Make in India’, ‘Skill India’, ‘Digital India’, Foreign
Trade Policy 2015-20 etc. is expected to help the economy in terms of exports and imports and
trade balance.

Nature and Concept of Business

Concept of Business

The term business is derived from the word ‘busy’. Therefore, business means being busy. In
specific sense, business refers to an occupation in which people regularly engage in activities
related to purchase, production and / or sale of goods and services with a view to earn profits.

Business is defined as the “repeated buying and selling or manufacturing of goods and services
with an intention to earn profit which involves the creation of wealth.” Example; A factory, A retail
shop, Commission agents, brokers etc.

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In every society, people undertake various activities to satisfy their needs. These activities can
be classified into two, they are Economic Activities and Non-Economic Activities.

1. Economic Activities – These are those activities which are undertaken to earn money or
money’s worth and related to production and exchange of wealth. Eg; Running a factory,
Retail shop, Cultivating land etc. Economic activities may be further divided into three
categories, namely business, profession and employment.

Characteristics of Economic Activities.

a. Economic Activities are related to production of wealth.

b. These are undertaken to satisfy human wants.
c. They are performed with an expectation of earning money.
d. It acts as a basis for economic development of the society.

2. Non-economic Activities – Non-economic activities are those activities which are

undertaken not for any reward but for the personal satisfaction. Example; A mother looks
after her children, A house-wife cooks food for the family, Visiting Temples etc.

Differences between Economic activities and Non-economic activities

ECONOMIC ACTIVITIES NON-ECONOMIC ACTIVITIES

To earn money or money’s worth For personal or psychological
satisfaction
It can be measured in terms of money It cannot be measured in monetary
terms
Money is the reward Mental satisfaction is the reward

Characteristics of Business:

1. Economic Activity – because it is undertaken with the object or earning money or

livelihood.
2. Production or procurement of goods and service – In order to offer the goods for
consumption they must be either produced or procured by the business enterprise. Goods
may consist of consumer goods, industrial goods or capital goods. Services include facilities
offered to consumers in such as transportation, banking, insurance, electricity etc.
(Consumer goods – Pen, soap, sugar etc., Industrial goods – Steel, cement etc., Capital
goods – Machinery, furniture etc.)
3. Sale or exchange of goods and services – There should be sale or exchange of goods or
services between the seller and buyer. If goods are produced for personal use, it cannot be
treated as a business. Eg:Cooking food for the family is not a business, but cooking food
and selling it to others in a restaurant is a business.
4. Regular Dealings – Business involves dealing in goods and services on a regular basis.
One single transaction of sale or purchase is not considered as a business. For example, if
a person is selling is old car is not considered as a business.
5. Earning Profit – It is the main purpose of business. So that the businessmen should take
all efforts to increase the profit by increasing sales volume or reducing cost of production.
6. Uncertainty of Return – No business can predicts its future profit as it is uncertain. Also
there is a possibility of loss being incurred.
7. Element of Risk – Every business is subject to risk due to various reasons like change in
fashion, technological changes, increasing competition, fire, theft, accidents, natural
calamities etc.
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 Comparison of Business, Profession and Employment

Basics Business Profession Employment

1 Mode of Entrepreneur’s decision Membership of a Contract of
Establishment and legal formalities professional body employment
2 Nature of work Providing goods and Rendering As per the contract
services to the public personalized and
expert service
3 Qualification No minimum Prescribed Prescribed by the
qualification qualification by the employer
professional body
4 Reward or return Profit Fees Salary or wages
5 Capital Investment High Limited No capital
6 Risk High Limited risk Little risk
7 Transfer of interest Possible Not possible Not possible
8 Code of conduct Not prescribed Prescribed by the Laid down by the
professional body employer
9 Examples Shop, Factory etc. CA, Legal, Medical Jobs in banks,
Profession etc. insurance, govt.
departments etc.

Classification of Business
Business activities may be broadly classified into two broad categories – Industry and
Commerce.

INDUSTRY

The term industry refers to that part of business which is concerned with the production of goods
and material. An industry may be classified into primary industry, secondary industry and
tertiary industry.

1. Primary industries are concerned with the extracting, producing and processing of natural
resources. It may further be divided into extractive industries and genetic industries.

i. Extractive Industries are engaged in the extraction (collection) of useful materials from the
earth and sea. Mining, fishing, quarrying etc. are the examples for extractive industries.
The products of these industries are either directly consumed or used as raw materials by
other industries.

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b. Genetic Industries are engaged in the reproduction or multiplication of plants and animals.
E.g. Plant nurseries, Poultry farms, cattle breeding farms etc.

2. Secondary Industries are concerned with the materials which have already been produced
at the primary stage, and they are again classified into Manufacturing industries and
Construction industries.

a. Manufacturing Industries are engaged with the conversion of raw materials into finished
goods. E.g. cotton into textiles, timber into furniture etc. they change the form of goods
i.e. raw material into finished goods and thus create form utility. Manufacturing industries
usually produce consumer goods such as soap, cloth, tooth paste etc., industrial goods
such as steel, cement etc. and Capital goods such as machinery and tools.

Types of Manufacturing Industries:

i. Analytical industry – Separates different elements from the same material. Eg: oil refinery.
ii. Synthetical industry – Combines various ingredients into a new product. Eg: Cement.
iii. Processing industry – Go through successive stages for manufacturing a finished product.
Eg: sugar, paper etc.
iv. Assembling industry – Assembles different component parts to make a new product. Eg:
TV, Car, Mobile Phone, Computer etc.

b. Construction Industries are engaged in the construction of buildings, dams, roads, bridges
etc. and they use the products of manufacturing industries and extractive industries.

3. Tertiary Industries are providing support services to primary and secondary industries and it
form part of commerce. All service activities which are auxiliaries to trade like transport,
banking, insurance, warehousing, communication, packaging, advertising etc. fall under
this category.

COMMERCE

Commerce is concerned with the buying, selling and distribution of commodities and it is an
organized system for the exchange of goods and services in between the businessman and the
customers. It is also concerned with the marketing aspects of business, i.e. supply of right type
of goods to the right persons, at the right time and at the right price. Thus commerce includes
trade and aids to trade.

Definition – Commerce can be defined as the sum total of all those activities which are involved
in the removal of hindrances in the process of exchange of goods.

Functions of Commerce –

1. Removal of Hindrance of Person: It refers to the lack of contact between the producers
and customers. Here the trader acts as an intermediary among them and customers are
able to find out the products which they are wanted from the market.
2. Removal of Hindrance of Place: It is a common problem that the producers and
customers are in distant places, hence the commodities should be transferred from the
production centre to the hands of customers. This problem can be solved by the system
of commerce by means of transport, packing and insurance.
3. Removal of Hindrance of Risk: Goods and properties of business are subject to various
risk such as fire, theft, damage etc., and they have to be protected by insuring the goods
and properties.

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 4. Removal of Hindrance of Time: There may be a gap between the production and
consumption as the production is carried out in anticipation of future demands.
Therefore, it becomes necessary to store the goods until they are sold. This problem can
be solved by warehousing.
5. Removal of Hindrance of Knowledge: Advertising helps in the removal of hindrance of
knowledge among the buyers.
6. Removal of Hindrance of Finance: The problem of finance can be handled by banks,
which form part of commerce. It will also help the businessman in exchange of money
between different persons at different places.

TRADE

Trade means buying and selling of goods, which involves the exchange of commodities for
money or money’s worth.
Types of Trade:

1. Home Trade - It is also known as domestic trade or internal trade. It means that the buying
and selling of goods within the country and both the buyer and seller should belong the same
nation. Home trade is of two types:
a. Wholesale Trade - It implies that the buying and selling in large quantities. A wholesaler
buys goods directly from the producers and sells them to the retailers.
b. Retail Trade – It involves buying and selling of goods in small quantities. A retail trader
buys goods from the wholesalers and sells them to the customers.
2. Foreign Trade – It is also known as External trade or international trade. It involves the
buying and selling of goods and services in between the persons belonging to two or more
countries. Foreign trade is of the following types:
a. Export Trade – It implies the sale of goods to foreign countries.
b. Import Trade – It refers to the purchase of goods from foreign countries.
c. Entrepot Trade – It means importing goods from one country for the purpose of exporting
them to some other countries.

Aids to Trade (Auxiliaries to Trade)

The activities which assist trade are called aids to trade or Auxiliaries to Trade. It includes
Transport, Banking, Insurance, Warehousing, Advertising etc. These service enterprises
facilitate movements, storage, finance, risk coverage and sales promotion of goods.

1. Transport and Communication – Usually production takes place in certain locations and
consumption all over the country, for instance tea is produced in Kerala and Assam, Jute
in West Bengal, here there is an obstacle or barrier of place. This is removed by
transport through various modes such as road, rail or water transport.

Along with transport there arises the need for communication. This will help producers,
traders and consumers in exchange of information. Postal service, telephones and other
modern means of communication may be regarded as auxiliaries to business activities.

2. Banking and Finance – All business concerns need fund for acquiring assets, raw
materials and meeting day today expenses. Finance is the foundation of all business
provided by banks. The banks accepts deposits from the public and provide credit
facilities for business. They generally lend money by providing overdraft and cash credit
facilities, loans and advances and discounting of bills. Besides, they undertake collection
of cheques, remittance facilities and various other services to the business community.

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 3. Insurance – In business, there are a lot of chances of risks such as damage to property
and human resource (employees), such as fire, earthquake, theft, damage of goods in
stock and transit. Insurance has been emerged for the fulfillment of this need. On
payment of a nominal amount called premium, the amount of loss or damage is
compensated by the insurance company.
4. Warehousing – Production is always in anticipation of future demands, so that the
products are to be kept in good condition until they are sold. Storage of goods is done by
warehouses specially constructed for this purpose. They facilitate the availability of
goods when required. Thus warehousing stabilizes prices by equalizing supplies.

5. Advertising and Public Relations – It is an important device for promoting sales. It is

not an easy task to reach millions of customers; therefore, promoting sales, information
about the product must be made available to the potential buyers though advertising and
public relations.
Advertisements are always paid activity to promote the sales of a product or service,
while Public Relations are normally unpaid activity which will support the sales. Talk
shows, Interviews, news value items on media etc. are the examples for PR.

Objectives of Business (Multiple Objectives of Business)

A business enterprise must have multiple objectives to satisfy different individuals and groups
for its own survival and prosperity.

a. Market Standing – It refers to the position of an enterprise in relation to its competitors by

providing quality products and better service to its customers.
b. Innovations (Novelty) – Innovation means the introduction of something new to the market.
It may be a new design, new quality for the existing product, new method of production etc.
c. Productivity – Every enterprise should aim at greater efficiency and productivity by the best
use of available resources.
d. Physical and financial resources – The business enterprise must aim at acquiring physical
resources like buildings, plant and machinery, offices etc. and financial resources or fund for
its operations and ensure its efficient use.
e. Earning profits - It is the most important aim of every business. Profit is regarded as the life-
blood of a business to survive and to make growth and development of the enterprise.
f. Manager performance and development – The enterprise should take much initiative to
improve the efficiency of its managers by conducting various programs to motivate them.
g. Worker performance and attitude – Every enterprise should aim at improving its workers
performance and their positive attitude.
h. Social responsibility – It refers to the social obligations of business firms to contribute
resources for solving social problems and to work in a socially desirable manner.

BUSINESS RISK

In simple words risk means the possibility of loss. It can be defined as the chances of loss due
to certain uncertain events in the future. It may be of two types, such as speculative risk and
pure risk.

Speculative risk – It involves both chances of gain or loss. It arises due to change in demand
and supply, change in taste and habits of customers etc. If the market condition is favourable it
will result in gain, otherwise, loss.

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Pure risk – It involves the possibility of loss or even no loss. Fire, theft, earthquake, strike etc.
are the examples of pure risks. If such events take place, it may result in loss, non-occurrence
of which is explain absence of loss, instead of gain.

Nature of Business Risks

1. It arises due to uncertainties.

2. It is an essential part of every business (Unavoidable).
3. Degree of risk depends on the nature and size of business.
4. Profit is the reward for bearing risk.

Causes of Business Risk

1. Natural Causes: It may include damages from flood, fire, earthquake etc.
2. Human Causes: It may arise due to certain human activities, such as theft, bad debt,
mistakes, accidents etc.
3. Economic Causes: It include uncertainties relating to demand for products, competition,
price, change in technology, rise in interest rate, higher taxes etc.
4. Other Causes: Political disturbances, mechanical failures, change in exchange rates,
etc. come under this category.

Starting a business – Basic Factors

1. Selection of line of business – It means the nature and type of business that an
entrepreneur should choose to start his business.
2. Size of the firm – The promoter has to decide the size of business, which may be either
small scale, medium scale or large scale depends on the financial stability, future demand
etc.
3. Location of business – It must be decided by considering the factors like availability of
land, electricity, water, accessibility to market, transportation, scope for expansion etc.
Unscientific location affects the efficiency and profitability of business.
4. Financing the proposition (Capital needs) – The promoter has to decide about
business capital requirements and also find out the sources of finance. It may include
short term or long term capital requirements, sources like shares, debentures or bank
loans, cost of capital (interest or dividend) etc.
5. Physical facilities – It means the resources used to convert raw material into finished
goods, which includes buildings, machines and equipments, skilled and unskilled
workers, good quality raw materials etc.
6. Competent and committed work force – A scientific planning must be done by the
businessman in calculating the number of employees (skilled and unskilled) to be
appointed in various positions, and their qualities.
7. Tax planning – Tax planning does not mean non-payment of tax. It means to minimize
the taxes through better planning about location (tax free zones), size of business etc.
8. Launching the enterprise – After completing the above formalities, the entrepreneur can
launch his business by mobilizing necessary resources, starting production process and
initiating sales promotion activities.

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Chapter – 2
FORMS OF BUSINESS ORGANIZATION
Forms of Business Organisations (Private Sector Undertakings):
Private business enterprises can broadly divided into two, ie; corporate enterprises and non-
corporate enterprises. Joint Stock companies and co-operative organizations form part of
corporate organizations. While non-corporate organizations consist of Sole-proprietorship, Joint
Hindu Family Business and Partnership firms.
I. Sole Proprietorship
It can be said that a “one man business” as he invests the entire capital, bears all the risks,
takes all the advantages and manages the business by himself. It is also called Individual
Proprietorship.
Features of Sole Proprietorship Business:
a. Formation and closure is easy – No separate law that governs sole proprietorship.
b. Liability – Unlimited.
c. Sole risk bearer and profit recipient
d. Control – Complete control of business is held with the proprietor himself.
e. No separate entity for the business from the businessman – So that the owner is held
liable for all the activities of the business.
f. Lack of business continuity – Since the business and owner are one and the same entity,
his death, insanity etc. will affect the existence of the business.
Merits of Sole Proprietorship
a. Quick decision making – No need to consult with others.
b. Confidentiality of information – Secrecy can be maintained.
c. Direct incentive - All the profit goes to the proprietor.
d. Sense of accomplishment – Personal satisfaction by working for himself.
e. Ease of formation and closure – Only minimum legal formalities.
Limitations of Sole Proprietorship
a. Limited resources – Capital is limited and the size of business is small.
b. Limited life – As the business has no separate legal entity.
c. Unlimited liability – even the personal properties are attached.
d. Limited managerial ability.
II. Joint Hindu Family Business (JHF) Hindu Undivided Family Business ( HUF)
A Joint Hindu Family business refers to a business which is owned by the members of a Joint
Hindu Family. It is the oldest system of business that can be seen only in India, which is
governed by the Hindu Law. The basis of membership in the business is birth in a particular
family and three successive generations can be members in the business.
The business is controlled by the head of the family who is the eldest member and is called
‘Karta’. All members (male and female) have equal ownership right over the property of an
ancestor and they are known as ‘co-parceners’.
Features of JHF
a. Formation – Minimum two members from the family and their ancestral property is used.
It is governed by Hindu Succession Act, 1956
b. Liability – Limited liability to the members except Karta.
c. Control – Management is vested in the hands of Karta.

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 d. Continuity – The death of a member or Karta does not affect the business.
e. Minor Members – It is because, membership by birth.
Note: Both male and female members in the family have equal right in the business based on the Hindu
Succession (Amendment) Act 2005.
Merits
a. Effective control – No conflict among members as the decisions are taken by Karta.
b. Continued existence – Even the death of Karta does not affect the existence of business,
as the next eldest member will take up the position.
c. Limited liability – Liability of members except Karta is limited.
d. Increased loyalty and cooperation – The business is treated as a pride to the family.
Limitations
a. Limited resources – It depends mainly on ancestral properties.
b. Unlimited liability of Karta – His personal properties are also liable to meet the debts of
the firm.
c. Dominance of Karta – The leadership of Karta may not be acceptable to all the members
in the family, which may results even the breakdown of family.
d. Limited managerial skills – The Karta may not be an expert in all the areas of
management.
III. Partnership
In order to overcome the difficulties of sole proprietorship business, a new form of business
organization has been emerged and it is called Partnership Business.
Definition – Section 4 of the Indian Partnership Act 1932 defines partnership as “the relation
between persons who have agreed to share profit of a business carried on by all or any
of them acting for all.”
Features of Partnership
a. Formation - The formation of partnership is based on the agreement among the partners
to run a lawful business and it may be either oral or written. But two people coming
together for charitable purpose is not a partnership.
b. Liability - The liability of each partner is unlimited i.e. even their personal properties are
held liable for the debts of the partnership firm.
c. Risk bearing – All the risk of loss is shared by the partners as they are sharing profits of
the firm.
d. Decision making and control – Decisions are generally taken with mutual consent.
e. Continuity – A partnership is purely a personal organization and it has no separate legal
existence apart from its members, hence it lacks continuity.
f. Membership – (2 to 50). Minimum number of members is 2. According to Section 464
of Companies Act 2013 maximum number of partners can be 100, subject the number
prescribed by the government. At present it is limited to 50 by Govt. of India.
g. Mutual agency – Each partner is an agent of the other partners as well as the firm.
Merits of Partnership
1. Easy formation and closure - due to less formality.
2. Balanced decision making – because of the involvement of more than one person.

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 3. More funds - Large capital can be accumulated.
4. Sharing of risk – reduces the anxiety, burden and stress on individual partners.
5. Secrecy can be maintained – No legal requirements to publish its accounts and reports.
Limitations of Partnership
1. Unlimited liability – attaches even the personal properties.
2. Limited resources – to run large scale business organizations.
3. Conflicts – Disagreement between partners leads to dissolution of firms.
4. Lack of continuity – as it has no separate legal existence.
5. Lack of public confidence – as it is free from government control.
Types of Partners
Depending on the nature of agreement and interest taken in the business, partners are of
different types:-
1. Active or Working Partner – A partner who contributes capital and take part in the day
to day affairs of the business is called active partner.
2. Sleeping or Dormant Partner – He does not play an active part in the business but
simply contributes capital and shares the profit or loss as the case may be.
3. Secret Partner – It is one whose association with the firm is unknown to the public. All
other features are just like an active partner.
4. Nominal Partner (Ostensible Partner or Quasi Partner) – Such a partner lends his
name and reputation for the benefit of the firm but neither contribute capital nor take part
in management as well as no share in profit of the firm . Although he becomes liable to
outsiders for the debts of the firm.
5. Partner by Estoppel – If a person acts as a partner of a firm by his words and conduct,
he can be called as partner by estoppel. Even though he is not an actual partner, he is
liable for the debts of the firm as he makes himself as a partner in front of the public.
6. Partner by holding out – Sometimes a person may be declared as a partner in a firm by
the outsiders and does not deny this even after becoming aware of it. Such a person is
known as partner by holding out. He is also liable for the debts of the firm though he is
not an actual partner.
Types of Partners – A Comparative Study

Share in
Type Capital Management Liability
Profits/Losses
Active Contributes Participates in
Shares Profits/Losses Unlimited
Partner Capital Management
Sleeping Contributes Does not Participate
Shares Profits/Losses Unlimited
Partner Capital in Management
Secret Contributes Participates in
Shares Profits/Losses Unlimited
Partner Capital Management
Does not
Nominal Does not Participate Generally does not
Contributes Unlimited
Partner in Management Share Profits/Losses
Capital

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 Does not
Partner by Does not Participate Does not Share
Contributes Unlimited
Estoppel in Management Profits/Losses
Capital
Does not
Partner by Does not Participate Does not Share
Contributes Unlimited
Holding out in Management Profits/Losses
Capital

Minor as a partner
A minor is a person who has not completed 18 years of age. A minor cannot become a partner
as he is not capable to enter into a contract, but he may be admitted as a partner to the benefits
of the firm, with the consent of all the partners. He cannot take active part in management and
his liability is limited to the extent of his share in the capital and profits of the firm. After
becoming major he will be eligible to enjoy all the rights of a partner and his liability becomes
unlimited. It should be noted that a partnership cannot be formed with a minor partner.
Rights of a minor partner
1. Right to share the profits and properties of the firm.
2. He can inspect and copy the accounts of the firm. But he has no access to all the
books of the firm.
3. He can sue the partners for payment of his share of profits or properties in the firm.
Types of Partnership
Partnership may be broadly divided into two, namely General or Ordinary Partnership and
Limited Partnership.
1. General Partnership - In this type of partnership the liability of all the partners is unlimited
usually these types of partnership is found in India. On the basis of duration, general
partnership is divided as follows:
a. Particular Partnership – It is formed for a particular purpose or for a particular period.
E.g. If a partnership is formed for two years, or for the construction of a house etc. After
the expiry of the time or the completion of construction, it will be dissolved.
b. Partnership at Will – If the duration of a partnership is not specified in the agreement, it
is called partnership at will. It will be continued for an indefinite period and it can be
dissolved at any time as it is decided by all or any of the partners.
2. Limited Partnership (Special Partnership) – In a limited partnership, there are two classes
of partners.
a. General Partners
b. Special Partners
There should be at least one general partner whose liability is unlimited and the liability of
special partners is limited to the extent of their capital contribution. It is not allowed in India but
prevails in England.

Partnership Deed
The written document which contains all the terms and conditions of partnership is called
partnership deed. It can be altered at any time with the consent of all the partners. It is also
known as the “Articles of Partnership”.

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Contents of Partnership Deed
1. Name of the firm
2. Names and addresses of all partners
3. Nature and place of business
4. Date of Commencement of partnership
5. Duration of partnership, if any
6. Capital contribution by the partners
7. The amount which can be withdrawn by each partner
8. Rules regarding operation of bank accounts
9. Division of profits or losses
10. Interest on capital or drawings, if any
11. Interest on partner’s loan to the firm
12. Salaries, commission, etc. if payable to any partner
13. Details of division of work among the partners
14. The ascertainment of goodwill on admission, retirement and death of a partner.
15. Settlement of accounts in the event of retirement or death of partners.
16. Settlement of accounts on dissolution of the firm
17. Provisions relating to the maintenance and audit of accounts
18. Provisions for arbitration in the event of disputes
19. Provision regarding borrowings of the firm
20. Rights, duties and liabilities of partners
Registration of Partnership
Even though registration of a partnership firm is not compulsory, it can be registered if the
partners so desire, according to the Partnership Act 1932 with the Registrar of Firms.
Procedure for getting registration:
a. The partners should submit an application in prescribed form contains the following:
i) Name of the firm.
ii) Location of the firm.
iii) Names of other places where the firm carries on business.
iv) The date of joining of each partner.
v) Names and addresses of partners.
vi) Duration of partnership.
vii) This application should be signed by all the partners.
b. Deposit of required fees with the Registrar of Firms.
c. After approval, the Registrar should enter the name of the firm in his register and issues
a certificate of registration.
Effects of Non-Registration
1. An unregistered firm cannot sue against a third party for the recovery of claims.
2. An unregistered firm cannot sue against its partners.
3. A partner of an unregistered firm cannot enforce his claims against outsiders or against
his co-partners or the firm.

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 However, non registration does not affect the following:
1. The right of a partner to sue for the dissolution or for settlement of accounts of the
dissolved firm.
2. The rights of a third party to sue the firm or the partners for the recovery of claims and
debts.
IV. Co-operative Societies
The word co-operation implies joint effort; through joint effort we can attain greater success than
individual effort. A co-operative society is a voluntary association of persons constituted for the
purpose of protecting their economic and social interest.
The basic principle of co-operative society is “Self-help through mutual help” or in other words,
“each for all and all for each”.
Features of Co-operative organizations
1. Voluntary Membership – Anybody can become a member in a co-operative society at his
own wish and there is no compulsion at all.
2. Legal Status – As the registration of a cooperative society is compulsory, it gets separate
legal entity and continuous existence.
3. Limited Liability – The liability of the members is limited.
4. Control – Control is vested in the hands of board of directors who are elected by the
members under the principle of one man one vote.
5. Service Motive – The main objective is to render services to its members rather than
profit.
Formation of a Co-operative Society
As per India Cooperative Societies Act 1912, a cooperative society can be started with a
minimum of ten members. These members called promoters, should present a joint application
to the Registrar of Co-operative Societies giving the following details.

a. Proposed name of the society.

b. Aim and objective.
c. Area of operation.
d. Nature of members’ liability
e. Particulars of share capital to be raised.
Application should be accompanied by two copies of the byelaws of the society. After scrutiny,
the Registrar issues a Certificate of Registration and thereafter the society can admit new
members.
(As per Kerala co-operative societies Act 1969, the minimum number of members is 25 to start
a cooperative society in Kerala)

Merits of Co-operative Societies

1. Equal voting rights – Each member is having equal voting rights irrespective of their
capital contribution, as it follows the principle of ‘one man one vote’.
2. Limited Liability – Liability of members is limited to the extent of their capital
contribution.
3. Stable existence – The existence of a society is not affected by the death, insanity,
insolvency etc. of members.

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 4. Economy in operation – To eliminate middlemen, the members offer honorary services
to the society, which will in turn reduces cost of operation.
5. Support from government – As it is a democratic organization, government provides
various supports such as low taxed, subsidies, grants, low interest rates for loans etc.
6. Easy to form – No complex legal formalities are required to form a co-operative society.
Limitations of Co-operative Societies
1. Limited resources – Low rate of dividend and one man one vote principle reverts the
members to invest more capital.
2. Inefficient Management – Office bearers are elected from members and they may not
be competent.
3. Lack of business secrecy – The general body openly discusses all facts and figures of
the society. Hence secrecy is lost.
4. Excessive Government control – affects the smooth functioning.
5. Difference of opinion – Conflict among the members adversely affect the organization.
Types of Co-operative Societies
1. Consumers’ Co-operative Societies – These are formed by consumers to ensure the
supply of consumer goods with a fair price. They purchase the goods directly from
wholesalers and distribute the same to its members and outsiders for a little margin of
profit.
2. Producers Co-operative Societies – They are also known as Industrial co-operative
societies. It is promoted by small producers, craftsmen etc. which will help them to start
small scale and cottage industries. It supplies raw-materials, tools and equipments to the
members and sells the products on behalf of them.
3. Marketing Co-operative Societies – It is formed by farmers, artisans and small
producers to market their products. E.g. Rubber Marketing Society, Coir Marketing
Society etc. They collect the products of its members and sell it in the market only in
favourable conditions. It will help to promote the bargaining capacity of its members.
The important functions of marketing societies are:
a. Pool together the output of individual producers.
b. Grade and process them.
c. Collect marketing information.
d. Provide storage facilities.
e. Provide finance and raw materials.
4. Farmer’s Cooperative Societies – It is an association of small farmers in a village and
they join together to reap the benefit of large scale production through Joint Cultivation.
Objectives of co-operative farming societies:
a. Large scale farming.
b. To increase yield per acre of land.
c. To introduce modern method of cultivation.
d. To inculcate the spirit of co-operation among farmers.
5. Credit Co-operative Societies – They extend short term finance at a reasonable rate of
interest and thereby the members are protected from the exploitation of money lenders
up to a certain extent.
There are four types of credit societies:
a. Rural banks to supports farmers
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 b. Urban Banks to help small traders and artisans.
c. Employees’ credit societies formed by the employees in govt. or non-govt
organizations.
d. Wage earner’ societies formed by workers to meet their credit needs.
6. Co-operative Housing Societies – They are formed to provide housing facilities to their
members, either on ownership or on rental basis. They also help the members to
purchase houses at relatively less cost and on easy installments.
V. Joint Stock Companies
With the rapid growth of commerce and industry, the size of business began to increase and
owing to the need for the establishment of large scale enterprises. In these circumstances the
sole traders and partnership found themselves unable to supply all the necessary capital and
managerial skill, moreover that they were unable to bear all the risks of that much a large scale
business. Therefore a new form of business organization came into existence and that is the
Joint Stock Companies.
Definition – A company is a voluntary association of persons having separate legal existence,
perpetual succession and a common seal.
As per Companies Act 2013, a company means company incorporated under this Act or any
other previous company law.

Previous Company Laws:

1. Act relating to companies in force before the Indian Companies Act 1866
2. The Indian Companies Act 1866
3. The Indian Companies Act 1882
4. The Indian Companies Act 1913
5. The Registration of Transferred Companies Ordinance 1942
6. The Indian Companies Act 1956

Features of a Company
1. Artificial Person – A company is created by law and exists independent of its members
and it can own properties, borrow funds, enter into contracts in its own name, but it is not
a natural person.
2. Separate Legal Entity – As the company is a registered body, it is treated as a legal
person and its assets and liabilities are separate from those of its owners.
3. Formation – Formation of a company is a time consuming and expensive process as it
involves the preparation of several documents and the registration is compulsory under
Companies Act 2013 or any other previous company laws.
4. Perpetual Succession – A company is created by law and hence only the law can bring
an end to its existence, i.e. the death, insanity, insolvency or lunacy of members does not
affect the life of the company.
5. Control – The owners of a company are the members or shareholders, whereas the
management and control is vested in the hands of directors elected by the members.
6. Liability – The liability of members is limited to the extent of their capital contribution
only. The members can be asked to contribute to the loss only if any unpaid amount on
shares held by them.

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 7. Common Seal – A company may or may not have a common seal. As it is an artificial
person it cannot sign documents for itself. Therefore a common seal is used for its
signature.
8. Risk bearing – The risk of loss in a company is borne by all the shareholders, so that it
will not become a heavy burden to them.
Merits of a Company
1. Limited Liability – The public may be encouraged to invest in the shares of a company
because of the limited liability.
2. Transfer of Shares – The investors are attracted to purchase the shares o companies
as it can be converted into cash at any time.
3. Perpetual existence – A company will continue to exist even if all the members die. It
can be liquidated only as per the provisions of Companies Act.
4. Scope for expansion – Through the issue of shares a company can accumulate a large
amount of capital. Hence it has greater scope for expansion.
5. Professional Management – Management of a company constitutes the Board of
Directors and supported by the salaried managers.
Limitations of a Company
1. Difficulty in formation due to complex formalities.
2. Lack of secrecy - Companies Act requires that each public company should publish
their accounts and reports to the Registrar of Companies and to the public time-to-time.
Hence there is no secrecy in the operations of a joint stock company.
3. Impersonal work environment – The large size of a company makes it difficult to
maintain personal contact with the employees, customers and creditors.
4. Numerous regulations – The functioning of a company is subject many legal provisions
and compulsions such as compulsory audit, filing of reports, statutory meeting, obtaining
certificates from Registrar, SEBI etc.
5. Delay in Decision making due to get consent from the Directors and Share holders.
6. Oligarchic management – Oligarchy means “rule by a few” , therefore, the control is in
the hands of a few people who may ignore the interests of the share holders.
7. Conflict of Interest between the management and share holders may adversely affect
the progress of the company.
Types of Companies
Companies are classified as:
a. Private Companies.
b. Public Companies
c. One Person Companies.
a. Private Company
A private company is defined as a company by its Articles of Association, restricts the right
to transfer the shares, has a minimum of 2 and maximum of 200 members excluding the

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present and past employees, does not invite public to subscribe to its securities and it is
necessary to use the word private limited after its name.
Privileges of a Private Company
1.
Easy formation – only two members are required.
2.
No need to issue prospectus.
3.
Allotment of shares can be down without receiving the minimum subscription.
4.
It can start the business as soon as it is incorporated.
5.
Need to have only two directors minimum. (Maximum number of directors is 15 in
private and public companies).
6. Not required to keep an index of members.
b. Public Company
As per Companies Act, 2013, a Public Company is a company which is not a private
company. In other words it has no restriction on the right of members to transfer the shares,
has a minimum of 7 members and no limit on maximum members and permits to make any
invitation to public to subscribe to its shares and debentures.
However, a private company which is the subsidiary of a public company is treated as a public
company.
c. One Person Company (OPC) – As per Section 3(1) of Indian Companies Act 2013
enables the formation of a new entity known as One Person Company. An OPC means a
company with only one person as its member. It enjoys the privilege of limited liability.
Differences between Private Company and Public Company
Basis Public Company Private Company
Minimum – 7 Minimum – 2
Members
Maximum – Unlimited Maximum – 200
Minimum number of directors Three Two
Index of members Compulsory Not Compulsory
Transfer of shares No restriction Restriction on transfer
Invitation to public to
Can invite Cannot invite
subscribe to shares
Choice of Form of Business Enterprise
Following factors are to be considered while choosing a suitable form of business enterprise:-
1. Cost and ease in setting up the organization – While considering this factor, sole
proprietorship and partnership are the most inexpensive form or organization and having
less legal formalities.
2. Liability – From side of investors, company form of organization is more suitable as the
risk involved is limited.
3. Continuity – Sole proprietorship and partnership business organizations lacks continuity.
If the business is intended for a long period of time, company or cooperative society form
of organizations are more suitable.
4. Managerial ability – A sole proprietor may find it difficult to have expertise in all
functional areas of management. But it is not a problem in other forms of organizations.

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 5. Capital consideration – If the business requires huge capital, it should be organized as
a company or co-operative society.
6. Degree of control – If direct control over operations and decision making is required,
proprietorship is more preferred.
7. Nature of Business - If the business requires personal attention it is better to have a
sole proprietorship. Eg: Tailor shop, hair cutting saloons, grocery shop etc. For large
business units, where personal attention is not much required, company form of
organization is more suitable.

Comparative Evaluation of Forms of Organisation

Sole Joint Hindu
Cooperative
Basis Proprietor Partnership Family Company
Society
ship Business
Compulsory
Easy – registration –
Easy – Less Registration is
Formation Easy Registration expensive and
legal formalities compulsory
is optional complex
formalities
Private Co.
Min: 2
Max: 200
Minimum: 2 Minimum 2 Minimum 10
Only
Members persons from the adults. No
Owner Maximum: 50 family maximum Limit Public Co.
Min: 7
Max:
Unlimited

Ancestral
Capital Limited Limited Limited Large
property

Unlimited for
Karta and
Liability Unlimited Unlimited Limited Limited
Limited for other
members

Control &
With the
Managem All partners Karta Elected Board Elected Board
Owner
ent
Stable – Stable –
Stable even if
Continuity Unstable More stable separate legal separate legal
Karta dies
status status

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Chapter – 3
PRIVATE, PUBLIC AND GLOBAL ENTERPRIESES
Private Sector Enterprises

These firms are owned, controlled and managed by Private businessmen. The main object of
such undertaking is profit making. They are as follows:
1. Sole Proprietorship Concerns
2. Hindu Undivided Family Business
3. Partnership Business Organizations
4. Co-operative Societies
5. Joint Stock Companies

Public Sector Enterprises

These are the enterprises which are owned and managed by the central government or by the
state government or by both. The basic purpose of such undertakings is to render service to
society. E.g. Railways, LIC, FCI, Post Offices etc.

Forms of Public Sector Enterprises

Public enterprises are organized as departmental undertakings, public corporations and

Government Companies.

1. Departmental Undertakings:

These are the undertakings created by the decision of the government, financed and controlled
by the Government and it is managed by the government officials under the ultimate control of a
minister.

Some important Departmental Undertakings in India:

1. All India Radio 6. Integral Coach Factory Madras

2. Doordarshan 7. Silver Refinery Project, Calcutta
3. Post and Telegraph 8. Diesel Locomoties, Varanasi.
4. Indian Railways 9. Ordinance Factories
5. Chittaranjan Locomoties, Calcutta 10. Kolar Gold Mines, Mysore

Features / Characteristics
a. Funding – Financed through budget allocation.
b. Audit and Control – They are subject to Government audit.
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 c. Employees – Employees are Government servants.
d. Control – They are subject to direct control by the concerned ministry.
e. Accountability – They are accountable to the ministry and the government.

Merits

a. Control of parliament – Better control over funds and operations as it is controlled by

ministry.
b. Public accountability – Responsibility to the government.
c. Source of revenue to government – Income earned by these organizations directly
goes to the treasury.
d. National security - Secrecy can be maintained especially in case of strategic industries
such as defense etc.

Limitations

a. Lack of flexibility – due to predetermined rules and regulations and interference from
the ministry.
b. Delay in decisions – Approval from the government is necessary to take decisions.
c. Unable to tap business opportunities – Conservative approach of bureaucrats does
not allow them to take risky ventures.
d. Red tapism and bureaucracy – It results delay in decision making and operations.
e. Political interference – These enterprises are subject political interference through the
ministry.
f. Consumer needs – They usually do not give any consideration for consumer needs.

2. Statutory Corporations or Public Corporations

It is generally created as an autonomous institution by passing a Special Act in the Parliament

or State Legislature. As a body corporate, it is a separate entity for legal purposes and can sue
and be sued, enter into contracts and acquire property in its own name.

Some Important Public Corporations:

1. Reserve Bank of India - RBI
2. Indian Airlines Corporation
3. Life Insurance Corporation - LIC
4. Air India
5. Oil and Natural Gas Commission – ONGC
6. Industrial Finance Corporation
7. State Bank of India
8. Unit Trust of India – UTI
9. Kerala State Road Transport Corporation – KSRTC
10. Kerala State Industrial Development Corporation – KSIDC
(1- 8 By Special Act of Parliament and 9 -10 by the Act of State Legislature)

Features

a. Formed by special Act – Created under a special Act of Parliament or State Assembly.
b. Ownership – It is owned by the Government.
c. Separate legal existence – It has a separate legal entity, so that it can own properties
and enter into contract in its own name.
d. Financial autonomy – It obtains funds through borrowing from treasury or public and
from the sales of goods and services. It has the power to utilize its revenues.

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 e. Employees – The employees are appointed as per the terms and conditions of the
corporation and they are not to be treated as government servants.
f. Independent accounting and audit – It has its own accounting and audit, but not
subject to government audit and budget allocation.

Merits

a. High degree of flexibility – It enjoys flexibility of operations and financial and

managerial freedom since it is free from undesirable government control.
b. Least government interference – As there is no budget allocation for funds from
government there is no much government control.
c. Autonomous status – So that they can frame their own policies and procedure within
the purview of the Act.
d. Helps in economic development – It contributes towards economic development in a
big way.
e. Stability – Since they are not subject to political changes, they can take long term
business policies.

Limitations

a. Rules and regulations – It does not enjoy much operational flexibility as it is governed
by various rules and regulations of the Act.
b. Political interference – In practice complete autonomy is not possible due to
interference from the ministry.
c. Chances of corruption – Officials may misuse the autonomy status for their personal
gain.
d. Inefficiency – Absence of competition and profit motive leads to inefficient operations.
e. Delay in action – Quick decisions cannot be taken by the officials because of the
involvement of government nominees in the director board.

3. Government Company

Public enterprises organized under the Companies Act are Government companies. It is
defined as a company in which at least 51% of share capital is held by the central government
or by the State Government or governments or partly by the central and partly by one or more
State Government.

Some of the Government Companies in India:

1. Hindustan Machine Tools Ltd. (HMT) 5. Fertilizers and Chemicals (Travancore)
2. Hindustan Steel Ltd. Ltd.
3. Indian Telephone Industries Ltd. 6. Bharat Electronics Ltd.
4. Hindustan Shipyard Ltd. 7. Asoka Hotels Ltd.

Features

a. Incorporation – It is incorporated under Companies Act.

b. Separate legal entity – It can own properties, enter into contracts, sue and be sued in its
own name.
c. Management – Management is vested in the hands of Directors, appointed by
Government.
d. Memorandum and Articles of Association – Objects of the company and its rules and
regulations are contained in these documents.

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 e. Accounting and audit procedure – They are exempted from accounting and audit rules
as per the Act. However government appointed auditor’s report should be presented in the
Parliament or Legislative Assembly.
f. Funds – Investment in government companies is raised by government shareholdings and
from private shareholders.

Merits

a. Easy formation by registration – No need of enactment of special Act in Parliament.

b. Separate legal entity – It has separate existence apart from the government.
c. Quick decisions – Prompt decisions in time as it has autonomy power.
d. Prevents unhealthy business – It can control unhealthy business practices by providing
goods and services at a reasonable price.

Limitations

a. Autonomy is just for name sake – Since the government is the only shareholder in some
companies, provisions of Companies Act have no relevance.
b. No accountability – Even though major investment is made by the government, it is not
answerable to the Parliament.
c. Main purpose is not served – Being the major shareholder, government controls the
affairs of the company. It defeats the main purpose by registering like other companies.

Importance of Public Sector

1. Development of infrastructure – Infrastructure includes transportation, communication,

fuel and energy, basic and heavy industries etc. which are very essential for
industrialization and economic development. Government has set up various public sector
undertakings in these segments where private enterprises are unwilling to invest.
2. Regional balance – To maintain balanced regional development the government has
taken initiative to start a number of public sector units in backward areas.
3. Economies of scale – Government has set up large scale industries in public sector to
take advantages of economies of scale. Eg. Electric power plants, petroleum refinery,
telephone industries etc.
4. Check over concentration of economic power – With the establishment of public sector
undertakings, the flow of economic resources to the private sector industrialists can be
controlled up to a certain extent.
5. Import substitution – Government has set up public sector units for production of capital
goods which were imported earlier. Eg. BHEL has played an important role in import
substitution by producing electricity generators. Likewise, several public sector companies
are producing goods on a large scale, thus playing an important role in expanding exports
of the country.

Government policy towards the public sector since 1991

Government of India introduced four major reforms in the public sector thorough the Industrial
Policy in 1991.

a. Restructure and revive potentially viable Public Sector Undertakings (PSUs)

b. Close down PSUs, which cannot be revived.
c. Bring down government equity in all non-strategic PSUs to 26% or lower if necessary.
d. Fully protect the interest of workers.

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Measures taken by the govt. to achieve the above:

a. Reduction in the number of industries reserved for public sector – 17 industries were
reserved for public sector as per the Industrial Policy 1956. It has been reduced to 8
industries in 1991 and again to 3 industries in 2001, they are atomic energy, arms and rail
transport.
b. Disinvestment – It means sale of equity shares of PSUs to private sector and to the public.
Government holding in such units is thereby reduced and private participation enhanced.
Sale of shares in Indian Petro Chemicals Ltd. and Maruthi Udyog Ltd. are examples of
disinvestment.
c. Protection of sick units - Highly sick public enterprises which are unlikely to be revived
will be referred to the Board for Industrial and Financial Reconstruction (BIFR) for
rehabilitation.
d. Memorandum of understanding (MOU) – To improve the performance of PSUs
government introduced MOU system by giving clear target and operational autonomy to
achieve those targets. Here PSUs are accountable for specified results.

Global Enterprises / Multinational Companies

In simple terms, a multinational company is a company carrying on business in two or more
countries. Therefore it may be defined as a company that operates in several countries, such a
company has factories, branches or offices in more than one country. Their branches are also
called Majority Owned Foreign Affiliates (MOFA).

It is also known as multinational corporation, Transnational corporation, global giant, world

enterprise, international enterprise, MNCs etc. e.g. Hindustan Lever Ltd. , ITC, Coco-cola, Pepsi,
Union Carbide, Sony, Suzuki in Japan, Seimens, Glaxo, Good year etc.

Features
a. Huge capital – They can have large capital investment as they are running large scale
business units. Investors and financial institutions of the host country will be ready to invest
in MNCs because of their credibility.
b. Foreign collaboration – Global enterprises usually collaborate with Indian companies,
both private and public sector, by this both the parties will be benefited by sharing
technology, brand name etc.
c. Advanced technology – MNCs are able to provide world class products of international
standards by using advanced technology in the areas of production, marketing etc.
d. Marketing strategies – They adopt aggressive marketing techniques to increase the sales
in a short period. They can have advanced marketing information system, advertising and
sales promotion techniques and a good brand name.
e. Expansion of market territory – They can extent their markets very easily to the foreign
countries as they are running the branches in various nations.
f. Product innovation – Their products are always highly innovative as they are running their
own research and development wing for developing new products and superior designs for
existing products.
g. Centralized control – The headquarters of an MNC can exercise better control over the
operations of its branches in various countries as they operate within the policy framework
of the parent organization.

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Joint Ventures (JVs)
An association of two or more individuals or organizations formed by agreement for a common
purpose or mutual benefit is called a joint venture. These organizations may be private,
government or a foreign company. Usually JVs are formed to share strengths, minimize risks and
to increase competitive advantage in the market place

Types of Joint Ventures

1. Contractual Joint Ventures (CJV) – In this case a new entity is not created. There is only
an agreement to work together. The parties do not share ownership of the business but
exercise some elements of control
in the joint venture. Franchisee
relationship is a typical example for
contractual joint ventures.

2. Equity Based Joint Venture (EJV)

– In this case a separate business
entity is formed jointly owned by two
or more parties based on an
agreement. The ownership of this
organization is shared by these
parties.

Benefits of a Joint Venture Business

1. Increased resources and capacity – JVs can easily expand their business and they are
able to face market challenges, reap the benefits of economies of scale.
2. Access to markets – When a foreign company enters into JV with an Indian company,
they gain access to the vast Indian market.
3. Access to technology – Technology adds to efficiency and effectiveness and thus
reduces the cost.
4. Innovation – JVs comes up with some new ideas and techniques. Especially foreign
partners can introduce innovative products in the market based on their experience.
5. Low cost of production – When two firms join hands, they can operate on large scale and
reap the benefits of economies of scale.
6. Established brand name – In JVs goodwill of one party can be enjoyed by the other party
also. So that this new organization need not take much effort to establish their new brand.
Eg., Toyota Kirloskar, Maruthi Suzuki etc.

Some Examples of Joint Ventures:

No. Name of JV Established Joint Venture Holders

1. AVI Oil India Pvt. Ltd 1993 Balmer Lawrie & Co. Ltd and NYCO SA France
2. Green Gas Ltd 2005 GAIL (India) Ltd. and IOCL
3. Delhi Aviation Fuel 2010 BPCL and DIAL
Facility Pvt. Ltd

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Public Private Partnership (PPP)

PPP is defined as a relationship between public and private entities in the context of infrastructure
and other services. Under PPP model public sector plays an important role and ensures that the
social obligations are fulfilled and public investments are successfully met. The public partners in
PP are Government entities like ministries, government departments, municipalities etc.

The government’s contribution to PPP is in the form of capital for investment and transfer of
assets that support the partnership. Whereas the role of private sector is to make use of its
expertise in operation, managing tasks and innovation to run the business efficiently.

Power generation and distribution, water and sanitation, pipelines, hospitals, school buildings and
teaching facilities, stadiums, air traffic control, prisons, railways, roads, billing and other
information technology system, housing etc. are the major sectors in which PPP operates.

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Chapter – 4
BUSINESS SERVICES
Nature of Services – There is five basic features of service called five “I”s, they are as follows:

1. Intangibility – Services are intangible. We cannot touch or taste or feel them. E.g. one
cannot taste a doctor’s treatment, only can experience it.
2. Inconsistency – Services are provided depending upon the demands and expectations
of different customers as and when it is needed. Service providers should adjust their
offer to closely meet the requirements of the consumers. E.g. Service given by the
mobile service providers.
3. Inseparability – Services are produced and consumed at a time. But in case of goods
it is not so.
4. Inventory – (No Inventory) since there are not tangible components in services, they
cannot be stored for future use.
5. Involvement – It implies the participation of the customer in the service delivery
process.
Differences between Services and Goods

Services Goods
1. An activity or process A physical object
2. Intangible Tangible
3. Inconsistency – different customers Consistency – All customers get standardized
different demands products.
4. Inseparability – production and Separable – production and consumption are
consumption at a time. separated in different times.
5. No inventory Inventory – can be kept in stock

Types of Services

1. Business Services – Business includes trade and aids to trade. Banking, Insurance,
Transportation, Warehousing etc. are aids to trade or service sectors of business. They
provide services to business enterprises for the conduct of their activities.
2. Social Services – Services rendered voluntarily to achieve certain social goals are
called social services. They are meant for improving the standard of living of weaker
section of society or providing education, healthcare etc.
3. Personal Services – these types of services differ depending upon the tastes and
preferences of customers. E.g. tourism, recreation, resorts etc.

Business Services

I. BANKING

According to the Banking Regulations Act 1949, banking means “accepting for the purpose
of lending or investment of deposits of money from the public, repayable on demand or
otherwise and may be withdrawn by cheque, draft or otherwise”.

Types of Banks

1. Commercial Banks 3. Specialized Banks

2. Co-operative Banks 4. Central Bank

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1. Commercial Banks – These are the institutions dealing in money and credit. They are
governed by Indian Banking Regulation Act 1949.

Types of Commercial Banks:- Commercial banks are classified on the basis of their
ownership.

a. Public Sector Banks: They are the banks which are owned and managed by the
government with a view to channelize bank credit in line with national priorities. Government of
India nationalized fourteen commercial banks in 1969 and another six commercial banks in
1980.

b. Private Sector Banks: They are owned and managed by private parties. Even though they
are governed by the RBI, they are free to evolve their own policy decisions regarding the
banking operations. About to be 34 private sector banks are their in India like IDBI, ICICI,
Federal Bank, Catholic Syriyan Bank, Dhanalakshmi Bank etc. and ICICI Bank is the largest
private sector bank in India.

2. Cooperative Banks – Banks organized based on cooperative principles. They are

governed by the provision of State Cooperative Societies Act. It is an important source for
rural credit.
3. Specialized Banks – Organized to render specific services to the public. Eg., Foreign
Exchange Banks, Industrial Banks, Export-Import (EXIM) Banks etc.
4. Central bank – This is also known as bankers’ bank, which controls and regulates the
operations of all commercial banks in the country. It acts as banker to the government and
controls the currency and credit policy of the country. The Reserve Bank of India is the
central bank of our country established in 1935.

Functions of Commercial Banks:

Banks perform a variety of functions. Some of them are the basic or primary functions of a
bank while others are agency or general utility services in nature. The important functions are
given below:

a. Accepting Deposits: It accepts deposits from the public in the form Fixed Deposits,
Savings Bank Deposits, Current Deposits, Recurring Deposits etc.
b. Lending of Funds: Lending of money is the main business of commercial banks and the
interest charged on such advances is the main source of income. It may be in the form of
cash credit, overdraft, discounting of bills, term loans etc.
c. Cheque facility - Collection of cheques is an important service provided by the bank to its
customers. It may be crossed cheques (encashed through account only) and bearer
cheques (encashable at the bank counters).
d. Remittance of funds – Transfer of funds from one account to another is made possible
by issuing demand drafs (DD).
e. Allied services (Personal Services) – It include Payment of insurance premium,
telephone charges etc. and the collection of dividend, interest etc.

E – Banking – Electronic banking or internet banking means that, any user can get connected
to the bank’s website to perform banking operations and services with help of a computer or
mobile phone.

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E-Banking Services
a. Automated Teller Machine (ATM)
b. Electronic Funds Transfer (EFT)
c. Point of Sale (Pos)
d. Electronic Data Interchange (EDI) – Business documents like invoices, shipping bills
etc. can be sent to the parties in electronic format.
e. Credit Cards

Benefits of E-Banking

a. Any time service – Providing round the clock service.

b. Any where banking is possible (either at home, or office)
c. Creates financial discipline.
d. Less risk and greater security (risk of handling cash may be eliminated)
e. Work load on branches reduced.

II. INSURANCE

Insurance can be defined as a contract in writing whereby one party, called the insurer agrees
in consideration of either a single or a periodical payment called the premium to indemnify
another party called the insured against loss or damage resulting on the happening of a
specified event or events.

The document containing the terms of contract of insurance is known as the Policy. Insurance
is a method of averaging risks. Everyone contributes a small amount in order to pay out the
affected who loses heavily.

Functions of Insurance

1. Providing certainty – Insurance provides certainty of payment when loss occurs.

2. Protection – Insurance creates a sense of security to the insured.
3. Risk sharing – The risk of loss can be shared among all the policy holders.
4. Assist in capital formation – The fund collected by way of premium can be invested in
various income generating schemes. This results in capital formation.

Principles of Insurance

1. Utmost Good Faith – While entering into a contract of insurance, all the material facts
are to be disclosed, otherwise it will become void.

2. Insurable Interest – The insured must have an interest on the subject matter of
insurance, otherwise the contract of insurance become void. E.g. a person who has
advanced money on the security of a house, has an insurable interest on that house.

3. Indemnity – All insurance except life insurance and personal accident insurance are
based on the principle of indemnity. Here the insured is entitled to get only the actual
amount of loss suffered by him and it will not be a source of profit.

4. Causa Proxima (Proximate Cause) – It means the nearest cause. It says that an
insured can recover the loss only when it is caused by any of the risk insured against.

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 5. Subrogation – This principle states that, after the payment of loss to the insured on the
property, the whole right of such property is entitled with the insurer. This right is
exercised by the insurer to earn any compensation for the damages on the property
either from the party who were responsible for such damages or by the sale of such
property to some others. This is because the insured should not make profit by selling
the damaged property.

6. Contribution – This principle applies only when the same subject matter is insured with
different insurers, here the actual amount of loss is divided among various insurers. In
this case the contribution of each insurer can be calculated by the following equation:

Liability of one insurer = Sum insured with that insurer / Total sum insured X Loss

e.g. A house is insured against fire for Rs.50000 with A Co. and for Rs.25000 with B
company. There is an actual loss of Rs.15000. Here the insured can recover the loss
from both the companies as follows:

Liability of A Co. = 50000 / 75000 X 15000 = 10000

Liability of B Co. = 25000 / 75000 X 15000 = 5000
Total 25000
=====
7. Mitigation of Loss – It is the duty of the insured to take preventive measures to
minimize the loss of the property. If any expenses are incurred by him for such
activities, he is entitled to get that much of amount along with the compensation from the
insurance company.
(Acronym: CIMICUS)

Types of Insurance

1. Life Insurance – In this case a person can take a life policy on his own life or on the life
of another person eg. Husband on the life of his wife.
The person who insures his life is called the assured. Here a specified amount of
money is payable on the death of insured or on the expiry of the specified period.
LIC enjoyed monopoly of life insurance business till the end of 2000. Now we have a lot
of private insurance companies.

Elements of Life Insurance

a. Valid contract – Life insurance contract must fulfill all the essential conditions of a
valid contract.
b. Utmost good faith – The insurer and the insured must disclose all material facts to
each other.

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 c. Insurable interest – The insured must have insurable interest in the life of assured
at the time of taking policy, it is not needed at the time of maturity.
d. Not a contract of Indemnity – The life of a human being cannot be compensated in
terms of money. That is why the amount payable to the insured on the happening of
the event is fixed in advance.

Types of Life Insurance Policies

a. Whole life Policy - This policy taken for one’s whole life and the payment will be made
to the legal heirs. If premium is payable for a fixed period, say 20 years, the policy will
continue till the death of the assured.
b. Endowment Policy – This policy taken for a specified period e.g. 20 yrs. 15yrs. Etc.
Insurance company undertakes to pay a fixed sum when the assured attains a particular
age or on his death whichever is earlier.
c. Joint Life Policy – Policy taken out jointly by two or more persons. Premium can be
paid jointly or by any of them in installment or lump sum. This policy matures either on
the death of any of the assured or at the expiry of the period.
d. Annuity Policy – In this policy, the assured gets a regular payment after he attains a
particular age (pension plan). The premium is paid either in installment for a definite
period or as a single premium.
e. Children’s Endowment Policy – This policy is taken by a person to provide funds for
the education or marriage of his / her children. If the parent dies before the maturity,
the policy will continue to exist even without the payment of further premium.

2. Fire Insurance – Fire insurance policy is a contract in which the insurer agrees to pay
the loss or damage caused by fire to the insured and this contract exists only for one
year. The claim for compensation should satisfy the following:
a. There must be an actual loss, and
b. The fire is accidental and non-intentional.

Elements of Fire Insurance

a. Insurable interest – The insured must have insurable interest on the subject matter of
insurance. It must be present both at the time taking policy and at the time of loss. Eg.
A house property mortgaged to a bank.
b. Utmost good faith - The insurer and the insured must disclose all material facts to each
other.
c. Indemnity – Indemnity is the protection against loss. In the event of loss the insured
can recover only the actual loss and not the policy amount.
d. Proximate cause – The insurer is liable to compensate only when the loss is due to fire.

3. Marine Insurance – It is a contract whereby the insurer agrees to indemnify the owner
of a ship or cargo against risks which are incidental to marine adventure in consideration
of premium. It covers a variety of risks like sinking or burning of the ship, spoilage of the
cargo, freight loss etc. The subject matter of the insurance may be the ship, the cargo
and the freight.

Types of Marine Insurance

a. Ship or Hull Insurance – The subject matter of insurance in this case is the hull or
ship.
b. Cargo Insurance – Here the cargo (goods in the ship) is insured.
c. Freight Insurance – It covers the risk of loss of freight by shipping companies in the
event of loss or destruction of goods.

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Elements of Marine Insurance

a. Contract of indemnity – The insured can recover the actual loss if occurred.
b. Utmost good faith - The insurer and the insured must disclose all material facts to each
other.
c. Insurable interest – Insurable interest need not be present at the time of taking policy,
but must exist at the time of loss.
d. Proximate cause – The insurer should compensate the insured by considering the
nearest cause for damage, which must be covered by the policy.

Differences between Life Insurance, Fire Insurance and Marine Insurance

No. Basis Life Insurance Fire Insurance Marine Insurance
Maturity or death is
1 Risk Risk is uncertain Risk is uncertain
certain
2 Period Long term contract Short term (1 year) Short term (1 year)
Must be present at the
time of taking the Must be present on Insurable interest
Insurable
3 policy but not taking policy and at the is needed only in
Interest
necessary at the time time of loss. the event of loss.
of death.
Premium paid is
returned with or Will not be
4 Premium Will not be returned
without bonus to the returned
insured
Monthly, quarterly,
Payment of At the time of taking At the time of
5 half-yearly or yearly
Premium policy taking policy
instalments
Loss can be
Not applicable, as loss Loss can be measured
measured and the
6 Indemnity on the death cannot be and the insured is
insured is
measurable. indemnified.
indemnified.
Investment and Protection against loss Protection against
7 Objective
protection only loss only
Life insurance has
8 Surrender value No surrender value No surrender value
surrender value
Double Can enjoy the benefit
9 No chance No chance
insurance of double insurance
One can insure any Only up to the value of Only up to the
10 Policy amount
amount property value of property

4. Other Insurance / Miscellaneous Insurance:

i. Health Insurance – for reimbursement of expenses due to hospitalization because

of illness.

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 ii. Motor Vehicle Insurance – for protection against loss to vehicle, passenger or third
parties due to motor accident.
iii. Burglary Insurance – provide protection against loss by theft or house breaking. It
covers the risk of loss to stock, cash in safe and properties in the business premises.
iv. Cattle Insurance – To cover the loss due to death of animals like bulls, buffaloes,
cows etc.
v. Crop Insurance – To support the farmers due to crop failures due to draught or
flood.
vi. Sports Insurance – To give protection for amateur sportsmen by covering their
sports equipments, legal liability and personal accident.
vii. Third Party Insurance – This policy covers the risk of liability that may arise
because of damage to the property of a third party and the risk of personal injury to
such persons.
viii. Employer’s Liability Insurance – It is intended to protect an employer against any
liability due to death or injury to his employees during the course of employment.
ix. Fidelity Insurance – to cover the risk of loss due to fraud or malpractices by the
employees.
x. Personal Accident Insurance – to compensate the loss due to accident (death or
injury).
III. COMMUNICATION SERVICES

The term communication refers to the flow of information, ideas, feelings and emotions from
one person to another. In order to co-ordinate the activities of different departments or
personnel in an organization communication is very necessary. Communication may be either
Internal Communication or External Communication.

Internal Communication consists of company mail service, messenger system, intercom, CCTV
etc. External Communication includes postal services, courier, Telegrams, network, telephone,
e-mail etc.

Postal and Telecom Services

Postal Services – The Government of India provides postal services on a national and
international level. It has 22 postal circles. Though it is reliable, they lack speed. To
overcome the competition from courier services it has started speed post services. Facilities
provided by postal services are financial facilities and mail facilities.

Financial facilities – Post office savings schemes like PPF (Public Provident Fund), Kisan
Vikas Patra and NSC (National Savings Certificates). They also provide retail banking services
like RD (Recurring Deposits), savings account, time deposits and money order facility.

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Mail facilities – It includes parcel services, registration facilities (security for transmitted
articles) and insurance facilities (coverage of risks in the course of transmission). Postal
services also include allied facilities such as:
1. Greeting Post – greeting cards on every occasion.
2. Media Post – Advertisements through post cards, envelops etc.
3. International Money Transfer – in collaboration with Western Union Financial Services
USA.
4. Passport facilities – Partnership with ministry of external affairs.
5. Speed post – More than 1000 destinations in Indian and links with 97 major countries.
6. E-bill post – For collecting bill payments for BSNL and Bharati Airtel.

Telecom Services:
1. Cellular mobile services (Mobile phone service provider)
2. Radio Paging services
3. Fixed line services (Land Line)
4. Cable services (leased lines for banks etc.)
5. VSAT (Very Small Aperture Terminal) services – Satellite based communication service
most reliable in urban and rural areas.
6. DTH (Direct to Home) services

IV. TRANSPORTATION

Transport means the movement of goods and persons from one place to another.

Importance of Transport

1. It helps to widen the market

2. Creates place utility and time utility
3. Helps in large scale production
4. Division of labour and specialization is possible
5. Helps in stabilizing prices
6. Standard of living can be improved
7. Providing direct and indirect employment
8. Helps in national defense
9. Development of education and culture
10. Promoting national unity.

V. WAREHOUSING

As the production is carried out on the anticipation of future demand, the finished goods are to
be stored until it is being utilized in a good condition in a well equipped godown. “A warehouse
is an establishment for the storage and accumulation of goods”

Types of Warehouses

1. Private Warehouses – These are owned by large business houses to store their own
stock.
2. Public Warehouses - They are also known as duty-paid warehouses. They are owned
and managed by some agencies whose main occupation is to provide storage space
against the payment of certain fees. They have to obtain a license and their working is
subject to some government regulations.

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 3. Bonded Warehouses – It may be owned by dock authorities or private individuals
under the strict supervision of customs authorities. They are licensed by the
government to accept imported goods for storage before the payment of customs duty
by the importers of such goods. It is the duty of the owner of the warehouse to collect
the customs duty of the goods removed from the warehouse by the importer. Goods
stored in such a warehouse is said to be ‘in a bond’ and therefore the warehouse is
known as “Bonded Warehouses”.
4. Government Warehouses – They are owned by Government . E.g. Central and State
Warehouses, FCI, STC etc.
5. Co-operative Warehouses – They are owned by co-operative undertakings such as
National Co-operative Development Corporation, Co-operative Marketing Federations
etc.

Functions of Warehousing

1. Consolidation – Receives goods from various plants and dispatch them to a particular
customer on a single consignment.
2. Breaking the bulk – Here the bulk quantity of goods from various plants may be divided
into small quantity and send the same to the needy customers.
3. Stock piling – Storage of surplus products.
4. Value added services – Packaging, labeling, grading etc.
5. Price stabilization – Stabilize prices by equalizing supplies.
6. Financing – Financial assistance may be available by pledging commodities to the
warehouse keeper either from himself or from a bank on the warehouse receipt.

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Chapter – 5

EMERGING MODES OF BUSINESS

E-Business: E-Business may be defined as the conduct of industry, trade and commerce
using the computer networks. Almost all types of business functions as well as managerial
activities like production, inventory management, product development, accounting and
finance, human resource management etc. can be carried out over computer networks.

E-Commerce: Commercial transactions conducted electronically on the internet is called E-

Commerce. It covers a firm’s interactions with its customers and suppliers over the internet.
It is only a part of e-Business.

Scope of e-Business: Firm’s e-business transactions can be seen in the following four ways:

1. B2B Commerce: In this commercial transactions take place between different business
organizations. It includes placing of purchase orders, invoices, quotations etc.
Business to Business(B2B) form major share of total e-commerce volume.
2. B2C Commerce: It means Business to Customers transactions. It includes selling of
goods, call centers, ATM facility etc.
3. Intra-B Commerce: Here the transactions take place within the firm. It includes use of
computer networks in marketing, finance, production, purchase, human resource,
Research and Development departments.... It also includes interaction of business with
its employees (B2E) like salary payment, seeking suggestions from employees etc.
4. C2C Commerce: It means Customer to Customer. This type of commerce is best suited
for dealing in goods for which there is no established market mechanism. The vast
space of the internet ( eBay.com, olx.com, etc.) allows persons to globally search for
potential buyers.

Differences between Traditional and e-Business.

Basis Traditional Business e-Business

1. Ease of Formation Difficult Simple
2. Physical presence Required Not required
3. Location requirement Important Not important
4. Cost of setting up High Low
5. Operating cost High Low
6. Contact with suppliers and Indirect through Direct
customers intermediaries
7. Business process and length Long time Shorter
of cycle
8. Interpersonal touch More Less
9. Ease of going global Less More
10. Employees Semi-skilled or unskilled Technically
qualified
and professionally

11. Transaction risk Low due to face to face High due to lack of personal
contact contact

Ajith Kanthi @ Ajith P P SKMJ HSS Kalpetta Business Studies I Ch – 5 Page 1

 Benefits of e-Business:

1. Ease of formation – It is very easy to start due to less legal formalities and with a
limited investment.
2. Convenience – Internet offers the convenience of 24 hours business.
3. Speed – Internet allows faster services.
4. Global reach – It provides a boundary less market.
5. Movement towards a paperless society – Use of internet has considerably
reduced dependence on paperwork.

Limitations of e-Business:

1. Low personal touch – There is no face to face contact between the seller and buyer.
2. Incongruence between order and supply – Order taking is very fast, but the delivery
of product takes time.
3. Need for technology – To access e-business, it requires familiarity with computer and
internet. But it is not accessible for all people because of digital divide.
4. High risk – Difficulty in locating the persons and their places from which they are
operating, problem of impersonation (someone may operate in your name), problem of
leakage of confidential information such as credit card details, passwords etc. are the
reasons for high risk.
5. People Resistance – Adjustment with new technology creates stress and a sense of
insecurity to the employees.
6. Ethical fallouts – Information exchanged through internet may be stolen or misused by
dishonest people for illegal activities.

Online transactions – Three stages are involved in online transactions:-

1. Pre purchase/sale stage – Advertising, collection of information etc.
2. Purchase/sale stage – Price negotiation, finalizing the deal and making payment.
3. Delivery stage – Dispatching goods to the buyers.

Procedure for online transaction

a. Registration – Before online shopping, one has to register with the online vendor
by filling-up a registration form.
b. Placing an order – Here we can add the items in the shopping cart. Shopping cart is
an online record of what you have picked up while browsing the online store.
c. Payment mechanism: Payment for the purchases through online shopping may be
done in a number of ways such as-Cash on Delivery(CoD), cheque, net banking,
credit/debit card, digital cash such as Paytm, Jio money, e-wallets etc.

Security and safety of e-Transactions (E-Business Risk)

1. Transaction risks – In e-business, risk may arise for the seller or the buyer on
account of default on order taking/giving, delivery as well as payment.
2. Data storage and transmission risk – Vital information may be stolen or modified
to pursue some selfish motives or simply for fun. VIRUS – Vital Information
Resources Under Siege (attack), Hacking, Brand hijacking etc. are some of risks in
e-business.

A Virus is a program that attacks itself to computer system and destroys or corrupts
the data. Installing and updating anti-virus programs is the solution.
Ajith Kanthi @ Ajith P P SKMJ HSS Kalpetta Business Studies I Ch – 5 Page 2
 Hacking refers to unauthorized access into website; hackers often destroy the data
and information which causes huge loss to the business.

Data may be intercepted (interrupted) while in transmission. For this we can use
cryptography. It is an act of protecting information by transforming it into an
unreadable format called cipher text (secret language).

(Cryptography relates to the study of encryption. Encryption is translation of data

into secret codes. Cipher text is encrypted text.)

3. Risk of threat to intellectual property and privacy – Once the information is

published over Internet, it is difficult to protect it from being copied as it is an open
space.

Resources required for successful e-business implementation:

a. Adequate computer with telecom network.

b. Technically qualified and trained work force.

c. Well-developed websites.

d. Well-developed telecommunication facilities.

e. A good system of making payments using credit instruments.

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Chapter – 6

SOCIAL RESPONSIBILITIES OF BUSINESS & BUSINESS ETHICS

Social Responsibility

It is very clear that no business can be survived without the support of the society, as it is run by
the people, through the people and for the people. Because of the same reason it has certain
responsibilities towards the society.

Social responsibility refers to the obligations of the businessmen which are desirable in terms of
the objectives and values of our society.

Arguments for social responsibility

1. Existence and growth – Prosperity and growth of business is possible only through
rendering continuous service to society.
2. Long term interest of the firm – A firm and its image stands to gain more profits in the
long run when it accepts service as the highest goal. Supporting social goals enhances
public image of any firm.
3. Avoidance of government regulations – Businessman should voluntarily assume
social responsibilities, so that they can avoid government regulations. Eg:
Environmental pollution.
4. Maintenance of society – If the people feel that they are not getting their due from the
business, they will not support such business organisations.
5. Availability of resources with business – Available resources with the business such
as managerial talent and financial resource can be utilized to solve the problems of the
society when it is needed.
6. Converting problems into opportunities – Business is always looking for converting
risky situations to opportunities, this quality can be utilized for solving the problems in the
society.
7. Better environment for doing business – A society with fewer problems and
complaints provides better environment for the business.
8. Holding business responsible for social problems - Some of the social problems
such as pollution, unsafe work environment, discrimination in employment etc. are
created by business enterprises themselves, so that it is their moral obligation to solve
them.

Arguments against social responsibility

1. Violation of objective – Business is an economic entity and it s main objective is profit

maximization. If the business organizations are engaged in social activities their profit
will be reduced. It will affect the success of the business.
2. Burden on consumers – It is an argument that the cost of social responsibility will be
shifted to the consumers by charging higher prices.
3. Lack of social skill – It is an argument that the business people have no skill to take up
social work as they are always engaged in business activities.
4. Lack of public support – Public usually do not like business interference in social
programs, so that they cannot operate successfully in such areas.

Ajith Kanthi @ Ajith P P SKMJ HSS Kalpetta Business Studies I Chapter 6 Page 1
Reality of Social Responsibility

1. Threat of public regulation – When business enterprises act in a socially irresponsible

manner, government will act by regulating them for safeguarding public interest.
2. Pressure of labour movement – Labour movement has become very powerful now-a-
days, so that the businessmen are forced to protect the interest of the workers.
3. Consumer consciousness – Business enterprises have started customer oriented
policies as they are aware about their rights and privileges.
4. Development of social standard for business – Newly developed social standards
consider only legitimate economic activities along with serving the society. Then only the
business can survive and grow.
5. Development of business education – Because of development of business
education, people are aware of the social purpose of business.
6. Relationship between social interest and business interest – Businessmen have
realized that social interest and business interest are not contradictory, but they are
complementary to each other.
7. Development of professional managerial class – Professional management
education has created a class of professional managers who have got a positive attitude
towards the social responsibility as compared to the earlier class of owner managers.

Kinds of Social Responsibility

1. Economic responsibility – Since the business is an economic entity, it has to produce

goods and services that society wants and sells them at a profit.
2. Legal responsibility – Business enterprises have the responsibility to operate within the
laws of the country.
3. Ethical responsibility – It refers to the moral principles to be followed by the
businessmen in relation to the society. Eg: Protecting religious sentiments and dignity of
people while advertising a product.
4. Discretionary responsibility – This is voluntary obligation of a business enterprise. Eg;
giving charity to an educational institution, helping people in natural calamities etc.

Social Responsibility towards different Interest Groups

As a socio-economic institution business is always in touch with various groups such as

owners, employees, customers, suppliers etc. and it has to discharge certain responsibilities as
follows:
1. Shareholders or Owners:
a. Safety of investment.
b. Adequate return on investment.
c. Accurate financial information should be provided.
2. Workers:
a. Fair wages
b. Job security
c. Promotion opportunities
d. Welfare measures
e. Better working conditions
f. Participation in management
3. Consumers:
a. Regular supply of commodities.
b. Better quality
c. Reasonable Price
d. Avoidance of unfair trade practices.

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 4. Government and Community:
a. Lawful business.
b. Prompt payment of tax.
c. Help the government in socio-economic development (employment opportunities,
literacy, poverty etc.)
d. Optimum use of natural resources.
e. Concentrate in safety and welfare of the people.
f. Control pollution as far as possible.

Business & Environmental Protection

The health and well being of people depends on the quality of environment in which they live
and work. Rapid industrialization and growing traffic have caused a great damage to the
environment.
Pollution is the injection of harmful substances into the environment largely because of
industrial production. It changes the physical, chemical and biological characteristics of air,
water and land.
Causes and Types of Environment Pollution:
1. Air Pollution: It is the contamination of air by the accumulation of harmful or toxic
substances which will create serious health problems to living organisms, monuments
etc.
2. Water Pollution: Water is said to be polluted when it is changed in the quality as a
result of waste disposal and other human activities, so that it become less suitable for
drinking.
3. Land Pollution / Soil Pollution: It may be due to the dumping of non-degradable waste
material into the land from industrial units, hospitals, hotels, dwelling units etc. This
damages the quality of soil making it unfit for cultivation.
4. Noise / Sound Pollution: It may cause damages to the human body and mind, the
smooth functioning of hospitals, educational institutions etc. Industrial units,
Automobiles etc. are the major sound pollutants.

Need for pollution control

1. Reduction of health hazards – Major diseases like cancer, heart attacks etc. are
caused by pollutants in the environment. Pollution control measures only can prevent
such diseases up to a certain extent.
2. Reduce risk of liability – In case a disaster has been take place the entire liability will
be borne by the enterprise. E.g. Union Carbide Tragedy in Bhopal.
3. Cost savings – Effective pollution control strategy helps to reduce cost of operating
business. If they use improper technology with greater wastes leading to high waste
disposal cost.
4. Public image – A business enterprise which follows good pollution control measures
can enjoy a good reputation in the society and will be perceived as a socially responsible
enterprise.
5. Other social benefits – It includes clear visibility, clean buildings and monuments,
quality life and availability of pure natural products.

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 Role of business in Environmental Protection

1. Top level management should create a work culture for environmental protection and
pollution control.
2. Sharing the ideas and technical information regarding environmental protection
among the employees.
3. Use good quality materials.
4. Adopt modern technology.
5. Follow the rules and regulations by the government.
6. Scientific methods of waste management.
7. Support in government programs like clearing up of polluted water sources, plantation
of trees, checking deforestation etc.
8. Timely assessment of pollution control programs.

BUSINESS ETHICS

The word “ethics” derived from the Greek word “ethos” which means character or sentiments of
community. Ethics specifies what is good or bad, fair or unfair, right or wrong.

Business ethics refers to the moral principles followed by a businessman in his dealings with
the people and it involves better quality, fair price, justice, courage, thrift etc. Business ethics
helps to win the confidence of customers which will ensure the prosperity and progress of the
business.

Examples of ethical business practices:

1. Fair and reasonable price 5. Sale of genuine products to

2. Correct weight and measures customers
3. Disclose actual profit and prompt 6. Take reasonable profit
payment of tax 7. No bribes
4. Fair treatment to the employees

Common unethical business practices are as follows:

1. Adulteration 5. Fake goods

2. Poor quality 6. Deceptive packaging
3. Black marketing and hoarding 7. Pollution of environment
4. Misleading advertisements 8. Exploitation of workers

Elements of business ethics

Practicing business ethics means doing things in conformity with existing norms or standards of
society. The main elements are:

1. Top management commitment – The top level managers need to be openly strong in
ethical matters, so that they can guide their organization towards ethically upright
behavior.

2. Publication of a “Code’ – Code means a written document which contains the moral
principles to be followed by the organization. It covers the areas like honesty, adherence
to laws, quality, health and safety in workplace, employment practices fairness in selling
etc.
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 3. Establishment of compliance mechanism – A suitable mechanism should be introduced
to ensure that actual decisions and practices comply with firm’s ethical standards. Eg:
Paying attention to values and ethics in recruiting employees.

4. Involving employees at all levels – Involvement of employees in all the levels in ethical
programs is a must, then only they can do accordingly. Eg: Conducting a group
discussion among the employees in small groups to discuss the ethical policies to be
followed in the firm.

5. Measuring results – The firm can monitor the actual performance with ethical standards
and they can take necessary steps for further course of action.

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Chapter – 7
Formation of a Company
Formation of a company involves the following stages:

1. Promotion
2. Incorporation
3. Subscription of Capital

A private company has to complete only the first two stages, while a public company must
undergo all the three stages.

I. Promotion

It refers to the sum total of activities by which a business enterprise is brought into existence, or
in other words the business operations by which a company is established. Promotion is the
discovery of business opportunities and the subsequent organization of funds, property and
management ability into business concern for the purpose of making profit there from.

Promoter

The persons who perform the work of promotion and bring an enterprise into existence are
known as promoters. A promoter is an entrepreneur or businessman who gives birth to a
business concern and a promoter may be an individual, a firm or a company.

Functions of Promoters

1. Identification of business opportunity – Here the promoters have to discover a

business idea. It may be about a new line of business or the expansion of an existing
business.

2. Feasibility studies – It involves the evaluation and analysis of the potential of the
proposed project. Promoters may conduct the following types of feasibility studies:

a. Technical feasibility – Here the promoters have to ensure the project is technically
possible such as availability of raw materials, infrastructure, adequate technology etc.
b. Financial feasibility – If the project requires large funds which cannot be raised within
the available means, it is better to stop that project.
c. Economic feasibility – Even if the project is technically and financially viable, it may
have poor profitability, so that the promoters have to take expert advice.
Only when the above feasibility studies give positive results, the promoters can launch
the new project.

3. Name approval – They have to select a name for the company and it should not be
identical or same to an existing company. If it is satisfied by the Registrar of Companies,
it will approved.
4. Fixing up of signatories to the Memorandum of Association – Here the promoters
have to fix the members who are willing to sign the MoA and obtain their written consent
to act as directors and to take the qualification shares.
5. Appointment of professionals – The promoters are entitled to appoint professionals
like mercantile bankers, auditors etc. to assist them in the formalities of registration of the
company.

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 6. Preparing necessary documents – The promoters are bound to prepare necessary
documents for registration such as Memorandum of Association, Articles of Association,
Prospectus or Statement in lieu of prospectus, list of directors etc.

Documents Required to be Submitted for Registration of Companies

1. Memorandum of Association (MoA)

2. Articles of Association (AoA)
3. Consent of Proposed Directors
4. Agreements if any
5. Statutory Declaration
6. Receipt of payment of Fee

1. Memorandum of Association -

It is the most important document of a company. It defines the objects and powers of a
company and the company’s relationship with the outside world. While preparing the
Memorandum of Association, great care should be taken, because the company cannot go
beyond the limits laid down in it as it is the charter or magna carta of the company.

Contents of Memorandum (Clauses of MoA)

1) Name Clause – It contains the name of the company. A company can have any name
subject to the following conditions: -
a. The name must not be identical to the name of an existing company.
b. The name should not give an impression that the company has a connection with the
government or national heroes.
c. The name should end with the word “Limited” or “ Pvt. Limited” as the case may be.

2) Registered Office Clause – It contains the name of State where in the company’s
registered office is proposed to be situated. Exact address is not required at the time of
registration but it should be informed to the Registrar within 30 days.

3) Objects Clause – It defines the purpose for which the company is formed. i.e. the aim
of the company be disclosed in the object clause.
4) Liability Clause – This clause limits the liability of members to the amount unpaid on the
shares owned by them. Eg: Face value of a share is Rs.10, on which Rs.6 paid, the
liability of the shareholder is limited to the balance amount of Rs.4 only.
5) Capital Clause – This clause states the maximum capital (authorized capital) with which
the company is to be incorporated along with its division, ie: 1 lakh shares of Rs.10 each
comprises a total capital of Rs.10 lakhs.

2. Articles of Association - It is the byelaw of a company. It contains the rules and

regulations for the internal management of the company. It is subsidiary to MoA and hence
it should not contradict with anything stated in MoA.
A company may have its own AoA or may adopt Table F,G,H,I or J. These Tables are
model AoA given in Companies Act 2013 for different types of companies such as
Company Limited by shares (Table F), Company Limited by Guarantee (Table G) etc.
3. Consent of Proposed Directors - A written consent of proposed directors is also required
to confirm that they agree to act as directors and to undertake qualification shares.

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4. Agreement – Agreement with any individual for appointing him as Managing Director or
whole time director or manager is another document to be submitted to the Registrar.
5. Statutory Declaration – It should be submitted to the Registrar stating that all legal
formalities have been complied with. It must be signed by any one of the following: an
advocate of high court or supreme court, a chartered accountant, a director of the
company, manager or secretary of the company.
6. Receipt of Payment of Fee – Along with all the above documents, necessary fee has to
be paid for registration based on the authorized capital of the company.
Position of promoters – The promoter is deemed to act as a trustee of the company under
promotion (actually he is not an agent or trustee). The contracts entered by the promoter with
the various parties are ratified (approved) by the company on incorporation. He should not
make any secret profits. He has the right to get remuneration for the services rendered and be
reimbursed for the expenses incurred by him.

The promoter is personally liable for all the preliminary contracts even after incorporation and
he is also liable to the shareholders and debenture holders for any mis-statement in the
prospectus at the time of issue of company securities.

II. Incorporation

Incorporation means the registration of the company under the Indian Companies Act. It is the
second stage in formation of a company. In order to get registered, the promoters have to
submit the above mentioned documents to the Registrar of Companies which are listed below
in brief.
1. Memorandum of Association
2. Articles of Association
3. Written consent of proposed directors to act as directors
4. Agreement if any, with the proposed managing director or manager
5. A copy of the approval of name from the Registrar
6. Statutory declaration
7. Notice of exact address of the registered office of the company (30 days exemption)
8. Documentary evidence of payment of registration fee
Certificate of Incorporation
After scrutiny of the above documents, the Registrar issues a certificate of registration which is
called the Certificate of Incorporation. It is also called the birth certificate of the company.
Effect of Certificate of Incorporation
a. A company becomes a legal entity with perpetual succession.
b. It can enter into valid contracts.
On the issue of certificate of incorporation, a private company can commence its business. But
a public company has to go through one more stage in the formation.
III. Capital Subscription
A public company can raise funds from the public by issuing shares and debentures. Following
are the steps required for raising funds from the public.

1. SEBI Approval – Approval from Securities and Exchange Board of India (SEBI) is the
regulatory authority in India is to be obtained for raising funds from the public.
2. Filing of Prospectus - A copy of prospectus or statement in lieu of prospectus must be
filed with the Registrar of Companies.

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 3. Appointment of Bankers, Brokers and Underwriters – Bankers collect the application
money from the public, brokers distribute the application form and encourage the public
to apply for shares and underwriters give guarantee to the issue of shares by giving an
undertaking to buy the shares for a commission if not subscribed by the public.
4. Minimum Subscription – It is the minimum amount of capital which must be subscribed
by the public before a public company allots shares is known as minimum subscription.
It is decided by the directors and must be stated in the prospectus. (90% of the issued
amount as per the SEBI guidelines)
Minimum subscription is used to purchase property, to meet all preliminary expense and
as working capital. If minimum subscription is not received within 120 days from the date
of issue, amount collected must be returned to the applicants. If not, the directors are
liable to repay the money with 6% interest from 130th day onwards.
5. Application to stock exchange – Company must give an application to at least one
stock exchange for permission to deal in its shares or debentures.
6. Allotment of shares – Once the permission is obtained from the stock exchange, the
company can allot shares to the applicants.

Prospectus

It is a document, notice, circular or advertisement inviting offers for subscription or purchase of

any shares or debentures of a company from the public. A public limited company limited by
shares must issue a prospectus if it intends to issue the shares to the public and a copy of the
same should be filed with the Registrar.

Statement in lieu of Prospectus

In case a public company is confident of raising the required capital privately, they need not
issue a prospectus to the public. But they have to prepare a Statement in Lieu of Prospectus
and it must be filed with the Registrar for registration.
Differences between Memorandum and Articles of Association

Basis MoA AoA

Rules of internal management and it
Defines the objects for which the
Objectives indicates how the objectives of company
company is formed
are to be achieved
Main document of the company
Subsidiary document and it subordinates
Position and it subordinates to the
to MoA
Companies Act
Defines the relationship of Defines the relationship of members and
Relationship
company with outsiders the company
Acts which are beyond AoA can be
Validity Acts beyond the MoA are invalid ratified by the members without violating
MoA
It is not necessary for a public ltd.
Necessity Every company has to file a MoA company to file Articles, but it can adopt
Table F of the Companies Act 2013

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Ajith Kanthi @ Ajith PP SKMJ HSS Kalpetta Business Studies Ch – 7 Page 4

Chapter – 8

Sources of Business Finance

Business finance refers to the money and credit invested or employed in the business firm. It is
concerned with the acquisition and utilization of capital in meeting the financial needs and
overall objectives of a business enterprise. Finance is very important to the business as it is the
lifeblood of an organization. Without adequate amount of finance an enterprise cannot function
smoothly.

Nature of Business Finance

1. It includes capital and borrowed funds.

2. It requires in all types of organization – big, small, production, trading etc.
3. Differs depending on the nature and size of business.
4. Requirement of fund vary from time to time – boom period and depression.
5. It requires on a continuous basis.

Significance of Business Finance

1. It requires to start a business.

2. To meet day-to-day expense.
3. To modernize, expand and diversify business.
4. To buy fixed assets.

Financial Needs of Business

1. Fixed capital requirements – Purchase of land, buildings, plant, machinery etc.

2. Working capital requirements – It may be used for holding current assets like stock,
bills receivable and for meeting current expenses such as salary, rent, taxes etc.

Classification of sources of funds:

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On the Basis of Period

1. Long Term Finance (Fixed capital) – It refers to the funds raised for a long period,
(minimum 5 Years) and it is used for investment in fixed assets which required for
permanent needs of the business. Usually, long term finance is raised from
shareholders, debenture holders, financial institutions, retained earnings etc.

2. Medium term finance – It is used for the modernization and expansion of business,
usually it is raised for a period of 1 to 5 years. It is also raised from the debenture
holders, financial institutions, commercial banks, public deposits etc.

3. Short term finance – It is raised for a period of less than a year and is used for meeting
the short term needs of the business such as investment in working capital. E.g.
purchase of materials, payment of wages and salaries, rent etc.

On the Basis of Ownership

1. Owners’ funds or Ownership capital – It is the amount of capital contributed by the

owner, partners or the share holders as the case may be. Issue of shares and retained
earnings are the two important sources of company finance.

Features

a. Risk capital – all the risk with regard to the enterprise lies on the shoulders of the owners
and hence their capital bears all the risks.
b. It is a permanent source of capital to the business.
c. No security is required.
d. It provides the right to manage and control the business.

2. Borrowed Funds

It refers to the funds raised through loans or borrowings. It may be from the debenture holders,
or from public deposits, financial institutions, commercial banks etc.

Features
a. Raised for a fixed period.
b. Fixed interest rate to be paid even if there is loss.
c. Charge on assets.
d. No sharing of control in management.

On the Basis of Sources of Generation

1. Internal sources – It refers to the funds that are generated within the organization.
Eg: Equity shares, disposing of surplus stock , retained earnings etc.
2. External sources – It refers to those funds that are raised outside the business.
Eg: Issue of debentures, bank loans, public deposits etc.

Choice of Source of Finance – A business can raise funds from various sources by way of
issue of shares, retained earnings, issue of debentures, loans from financial institutions and
commercial banks, public deposits etc. Each of them are having its own merits and demerits,
the entrepreneurs have to take decisions regarding their choice based on their situation and
purpose.

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Retained Earnings or Ploughing Back of Profits - Usually a part of the profits is transferred
to the reserves every year and it can be retained or reinvested in the business for its
modernization, expansion etc. Reinvestment of undistributed profits is a very good source of
business finance.

Merits
1. It is more dependable than external sources.
2. No dividend is to be paid.
3. No cost of raising funds such as prospectus, advertisement etc.
4. No sharing of ownership and control.
5. No security is needed.
6. It makes companies financially strong.

Limitations
1. It may result in overcapitalization.
2. It may create dissatisfaction among the share holders.
3. Not dependable in the year of inadequate profit.
4. Ignores opportunity cost.

Trade Credit – It is the credit extended by one trader to another for the purchase of goods and
services. When creditors grant such a facility, they are in fact financing purchases for a short
period.

Merits
1. Convenient source of financing.
2. Readily available.
3. Increased sales.
4. Helps in maintaining higher inventory level.
5. No charge on the assets.

Limitations
1. Chances of overtrading – bulk trading than required.
2. Limited funds can only be generated.
3. Higher cost – by charging high price.

Factoring – A factoring organization is a financial service provider which specializes in

collection and administration of debts. A factor may be an individual or an institution.

Debt collection and credit management is a tedious (difficult) process for the organization and it
will take a long period of time. In such a case this duty may be entrusted to an agency called
Factoring Organizations who are specialized in collection and administration of debts.

They extend financial assistance (advance) against book debts and provide full protection
against any bad debt. Factors do this service in return for a factoring commission and interest
on advance granted.

Services rendered by Factors:

1. Discounting of bills and collection of the client’s debt – Here the accounts
receivable (bill receivable) are sold to the factors at a discount with or without recourse
and they assumes all the risks on it. Eg: SBI Factors, Commercial Services Ltd.,
Canbank Factors Ltd. and some financial institutions are also providing factoring
services.

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 a. Recourse factoring – No protection is offered to the client on bad debt.
b. Non-recourse factoring – Factor assumes the entire risk.

2. Providing information – Factors provide information about the creditworthiness of the

firms.
Merits
1. Cheaper fund than other means.
2. Instant cash flow enables the client to settle his liabilities in time.
3. It provides security for debt.
4. No charge on assets of the company.
5. The client can concentrate on core-areas.
Limitations
1. Expensive on invoices of small amounts.
2. Interest charged by factors on advance may be higher.
3. Customers may not feel comfortable while dealing with a third party factor.

Lease Financing – Now a days it has been treated as an important source of long term
financing. It is an arrangement under which a company acquires the right to use an asset
without holding its title.

The owner of the asset is called lessor and the user is lessee. The lessee has to pay the
lease rent to the lessor for the use of the asset. At the end of the lease agreement the asset
reverts to the lessor, who is the legal owner of the asset.

Merits
1. It enables the lessee to acquire the assets with a very little investment.
2. Limited formalities only.
3. Lease rent is a charge against profit, hence the tax liability is reduced.
4. It provides finance without sharing the ownership.
5. The risk of obsolescence on the shoulders of the owner of the asset.

Limitations
1. Restrictions on the use of asset.
2. Normal business operations may be affected on non-renewal of agreement.
3. If the lease agreement is terminated before maturity, it results in heavy loss.
4. Lessee may not take much care on the asset as he never becomes the owner.

Public Deposits – It can also be treated as medium term finance, by which the companies may
try to invite deposits from public at a higher rate of interest than the commercial banks. They
are issued for a period up to 3 years. The acceptance of public deposits by companies is
regulated by the RBI.

Merits
1. Less formality.
2. No security is given by the company.
3. No sharing of control.
4. No charge on assets.

Limitations
1. Not easy for a new company – Only the company with proven track record will get good
response.
2. Unreliable source – Poor response from investors.
3. Limited funds – Raising large fund is not possible.

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Commercial Paper (CP) – It is an unsecured promissory note issued to the public with a fixed
maturity period ranging from 90 days to 1 year. Issuing commercial paper in India as a money
market instrument took place in 1989-90. Since it is being unsecured, this is issued by highly
reputed corporate entities. Commercial banks, Companies and mutual funds contribute towards
this kind of instruments. It is also regulated by RBI.

Merits
1. No restrictive conditions – Since it is unsecured it has no restrictive conditions.
2. High liquidity – Freely transferable.
3. Economical – Cost of raising fund is cheaper than a bank loan.
4. Continuous source – Repayment of a CP can be made by issuing new CPs.
5. Investment of excess funds – Companies can keep their excess funds in CPs to earn
more returns.
Limitations
1. Only sound firms can issue.
2. Limited funds can be raised.
3. Impersonal financing – Extension of maturity period is not possible in case of difficulties.

Issue of Shares

The capital of a company is divided into a large number of equal parts or units. Each such unit
is called a share. In other words share is the share in the share capital of a company. The
aggregate value of shares is known as share capital.

Those who subscribe to the share capital become the members of the company and are called
share holders and they are getting the status of owners in the company. Hence shares are also
described as ownership securities. Two types of shares are issued by companies to raise its
capital such as Equity shares and Preference Shares.

a. Equity Shares (Ordinary shares) – Equity shares are those shares which do not carry any
special or preferential rights in payment of dividend or repayment of capital. Equity share
holders are the risk bearers as well as the real owners as they are entitled to receive any
money only after the payment of all other debts. The amount raised by the issue of equity
shares is known as equity share capital.

Merits
1. Suitable for risk takers.
2. No obligation for dividend.
3. Permanent capital.
4. Provides creditworthiness to the company.
5. No charge against assets.
6. They have voting rights – Companies follow democratic management.

Limitations
1. Income is not steady – Fluctuation in dividend based on profit.
2. High cost – Cost of raising equity capital is very high.
3. Dilution in control for existing share holders when the company makes fresh issues.
4. Complex legal formalities – for the issue of shares.

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 b. Preference Shares – A preference share is one which carries certain preferential rights
with regard to the payment of dividend at a fixed rate during the continuance of the
company and repayment of capital on the winding up of the company. The capital raised
by issue of preference shares is called preference share capital.

Privileges of a Preference Shareholder

i. Right to get the dividend first at a fixed rate, before it is given to the equity
shareholders.
ii. Right to get the repayment of capital on winding up, before it is paid to the equity
shareholders.

Merits
1. Fixed rate of return is guaranteed.
2. Preference in repayment of capital on winding up
3. No dilution in control – they have only restricted voting rights.
4. Trading on equity – Equity shareholders enjoys more return in good times.
5. No charge over the assets.
6. Economical – Cost of raising preference share capital is cheaper than equity capital.

Demerits
1. Not suitable for high risk takers – The return on investment is fixed.
2. Dilutes claim on assets – The claim on assets in the company should be shared with
preference shareholders also.
3. High rate of dividend – Normally preference share capital bears high rate of dividend
than the interest rate of debentures.
4. It may not attract many investors – The return on investment is not assured, but it is paid
only if there is profit.
5. No tax benefits – Dividend on preference shares is not a charge against profit.

Types of Preference Shares

1. Cumulative Preference Shares – They have the right to enjoy unpaid dividend (in the
year of loss or inadequate profit) in future years.
2. Non-cumulative Preference shares – Unpaid dividend is not carried forward to the
subsequent years.
3. Participating Preference Shares – Usual dividend at fixed rate and share in surplus
profit of the company.
4. Non-participating Preference Shares – No right to share surplus profit, fixed dividend
only.
5. Convertible Preference Shares – These shares can be converted into equity shares
after a particular period.
6. Non-convertible Preference Shares – No right to be converted into equity shares.

Note: As per Indian Companies Act 2013, all preference shares issued by Indian Companies
must be redeemed within 20 years.

Issue of Debentures

In simple meaning debenture is a written document of debt. In other words, it is a written

acknowledgement of debt by a company which contains the provisions regarding payment of
interest and repayment of principal amount.

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A company can issue debentures, if permitted by its Memorandum of Association and Articles
of Association to invite the general public to contribute to its loan capital in the same manner as
it invites the share capital. A person who holds the debenture is called Debenture holder and
he has the status of a creditor of the company.

Merits
1. Fixed income at lesser risk – Suitable to conservative investors who are not willing to
take much risk.
2. No participation in profit – Debentures are fixed interest bearing securities.
3. No dilution in control – Debenture holders have no voting rights.
4. Suitable during stable earnings – If the sales and profits are stable, it is better to raise
funds through issue of debentures.
5. Less costly – Debenture financing is relatively cheaper than other sources.

Limitations
1. Permanent burden - Interest is to be paid even if there is no profit.
2. Repayment difficulty – Company has to accumulate enough funds for the repayment
of debentures on redemption even if on financial difficulties.
3. Reduces borrowing capacity – As debenture itself is a debt for the company, they
cannot raise additional funds by borrowings.

Types of Debentures

1. Secured or Mortgage Debentures – Issued with a charge on assets of the company.

2. Simple or Naked or Unsecured Debentures – Issued without any charge (security) on
assets.
3. Registered Debentures – Names of debenture holders are entered in the ‘Register of
Debenture holders’.
4. Bearer Debentures – Issued without the name of the owner. They are transferable by
mere delivery.
5. Convertible Debentures (CD) – Issued with an option to convert them into equity
shares after a particular period.
6. Non – Convertible Debentures (NCD) – It will not be converted into equity shares.
7. First Debentures – They are repayable before other debentures are repaid.
8. Second Debentures – Repayable after the first debentures have been paid back.

Differences between Shares and Debentures:

Shares Debentures
1. Ownership document Creditorship document
2. Shareholder Debenture holder
3. Dividend Interest
4. Voting right No voting right
5. Dividend is an appropriation of profit Interest is a charge against profit

Commercial Banks – Banks extend loans to firms in many ways like cash credit, overdraft,
term loans etc. Rate of interest depends on factors like nature of business, interest rate
prevailing in the country etc. Usually loans are allowed on the basis of securities and they are
repayable either in lump sum or by installments.

Merits
1. Timely assistance – Banks provide timely help by providing funds as and when needed.
2. Secrecy – Information furnished to the bank by the borrower is kept confidential.

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 3. Less formalities – Formalities like issue of prospectus etc. not required.
4. Flexible – The loan amount can be increased or decreased or even repaid whenever
required.

Limitations
1. Meeting short term needs only – Most of the bank loans are short period in nature. It’s
extension or renewal is uncertain.
2. Detailed investigation – Banks may conduct detailed investigation about company’s
affairs, financial structure and also ask for securities. All these make the procedure
difficult.
3. Too many restrictions – Banks may impose difficult terms for granting loans, which may
affect the smooth functioning of the business. Eg: Restriction on the sale of mortgaged
asset.

Loans from Financial Institutions - A number of financial institutions have been set up by
government with the main object of promoting long term industrial finance. As they aim at
promoting industrial development, they are also called “development banks”. They are not only
providing financial assistance, but conducting market surveys, providing technical and
managerial services etc.

Special Financial Institutions / Development Banks

a. Industrial Development Bank of India (IDBI).

b. Industrial Finance Corporation of India (IFCI).
c. Industrial Credit and Investment Corporation of India (ICICI).
d. Industrial Reconstruction Bank of India (IRBI)
e. Unit Trust of India (UTI).
f. Life Insurance Corporation of India (LIC).
g. State Financial Corporation (SFCs)
h. State Industrial Development Corporation (SIDC)

Merits
1. Long term finance – They provide long term finance, which is not provided by
commercial banks.
2. Additional services – They are also conducting market surveys, providing managerial
and technical services etc.
3. Increases goodwill of the company – Obtaining funds from these financial institutions
often increased the reputation of the firm.
4. Easy repayments – It reduces burden for the business.
5. Reliable source – Funds are available even during depression, when other sources are
not available.

Limitations
1. Complicated formalities – Rigid formalities in obtaining loans makes the procedure time
consuming and expensive.
2. Imposing restrictions – Restrictions on dividend payments may be imposed.
3. Interference in management – Financial institutions may have their nominees in director
board of the company.

International Financing

Indian companies have an access to funds in global capital market. Various international
sources from where funds may be generated include:

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 1. Commercial Banks: CBs all over the world extend foreign currency loans for business
purposes. Eg: Standard Chartered Bank, City Bank etc.

2. International Agencies and Development Banks: A number of international agencies

and development banks have emerged over the years to finance international trade and
business. Eg. IFC (International Finance Corporation), EXIM Bank and ADB (Asian
Development Bank) etc.
3. International Capital Markets: The major instruments used in international capital
markets are:

a. GDRs (Global Depository Receipts): It is an instrument issued abroad by an Indian

company through an Overseas Depository Bank (ODB) to raise funds from foreign
countries and is listed and traded on a foreign stock exchange. It does not carry any
voting right but only dividends and capital appreciation. It is usually seen in European
Union.

b. ADRs (American Depository Receipts): ADRs are bought and sold in American
markets like other stocks. It is similar to GDR except that it can be traded only on a
stock exchange of USA.

c. IDRs (Indian Depository Receipts): It is a financial instrument denominated in

Indian Rupees in the form of Depository Receipt. It is created by an Indian
Depository to enable a foreign company to raise funds from Indian securities market.

‘Standard Chartered PLC’ was the first foreign company that issued IDR in Indian
securities market in June 2010.

d. FCCBs (Foreign Currency Convertible Bonds): These are the securities that are
to be converted into equity after a specified period of time. They are issued in a
foreign currency and carry a fixed interest rate. These are listed and traded in foreign
stock exchanges. It is very similar to convertible debentures issued in India.

Factors affecting the choice of the Source of Funds

a) Cost (cost of procurement and cost of utilizing the fund).

b) Financial strength and stability of operation of the business – if the firm is in a sound
financial position it can resort to more borrowed funds.
c) Form of business and legal status – only a joint stock company can issue shares and
debentures, but a partnership firm cannot do so.
d) Purpose of the fund and time period – Commercial paper, trade credit etc. is suitable for
short term fund while shares, debentures etc. are better for long term.
e) Risk profile of each source – risk is least in case of equity shares compared to loans.
f) Control - Extent to which they are willing to share their control over the business.
g) Effect on creditworthiness – For example, issuing secured debentures may affect the
interest of unsecured creditors, so that they may not extend further credit.
h) Flexibility and ease of obtaining funds – bank loans are bound to detailed investigations
and documentation, which will take very much time to obtain funds.
i) Tax benefits – interest on debentures is a deductible expense where as dividend is not
so.
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Ajith Kanthi @ Ajith P P SKMJ HSS Kalpetta Business Studies I Ch - 8 Page 9
Chapter - 9
MSME & BUSINESS ENTREPRENEURSHIP

Micro, Small and Medium Enterprises (MSME) contribute significantly to the development
process and acts as a vital link in industrialization in terms of production, employment and exports for
economic prosperity by widening the entrepreneurial base and use of local raw materials and indigenous
skills.
In India, the MSME consists of both ‘traditional’ and ‘modern’ small industries, such as
handlooms, handicrafts, coir, sericulture, khadi and village industries, small scale industries and power
looms.

Micro, Small and Medium Enterprises

The definition used by the Government of India to describe MSME is based on the investment in plant
and machinery and turnover.
Investment in Plant &
Type of Unit Turnover
Machinery
Micro Enterprises 1 Crore Does not exceed 5 crore
Small Enterprises 10 Crore Does not exceed 50 crore
Medium Enterprises 50 Crore Does not exceed 250 crore

% of Share of MSMEs in
Micro Enterprises 99.4%
Small Enterprises 0.52%
Medium Enterprises 0.1%

MSMED Act
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 addressed these issues
relating to its definition, credit, marketing and technology upgradation. Medium scale enterprises and
service related enterprises also come under the purview of this Act.

Village Industries – They are located in rural area which produces any goods, renders any service with
or without the use of power and in which the fixed capital investment per head or artisan or worker is
specified by the central government from time to time.

Cottage Industries – They are also known as Rural Industries or Traditional Industries. They are not
defined by capital investment criteria but on the basis of characteristics, which are as follows:

i. These are organised by individuals with private resources.

ii. Normally use family labour and locally available talent.
iii. Simple equipments are used.
iv. Small capital investment.
v. Produce simple products, normally in their own premises.
vi. Production of goods using indigenous technology.

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Role of MSME

1. It ensures the balanced regional development of the country.

2. They provide a large number of employment opportunities.

3. They provide a large variety of products for mass consumption like consumer goods, readymade
garments, hosiery goods, stationery items etc.

4. They produce simple products using simple technology and mainly depend on locally available
resources. It will lead to the overall development of the country.

5. They provide a lot of opportunity to the new entrepreneurs.

6. Low cost of production - Locally available resources are less expensive.

7. Quick and timely decisions can be taken without consulting many people as they are running on
small scale and hence new business opportunities can be captured at the right time.

Problems of MSME (Small Business) – Following are the major problems faced by small business in
India:

1. Finance – One of the severe problems faced by SSIs is that of non-availability of adequate finance
to carry out its operations.
2. Raw materials – Availability and procurement of raw material is another major problem faced by
the SSIs. Their bargaining power is relatively low due to the small quantity of purchases.
3. Managerial skills – SSIs are generally promoted and operated by single person, who may not
possess all the managerial skills required to run the business. They are also not in a position to
afford professional managers.
4. Marketing – In most of the cases, marketing is a weaker area of small organisations; therefore
exploitation of middlemen is very more.
5. Quality – Many small businesses do not follow the desired standards of quality due to shortage of
finance and resources.
6. Capacity utilization – Many of the SSIs are operating below full capacity due to lack of marketing
skills or demand. It will cause to increase its operating cost and leads to sickness and closure of the
business.
7. Global competitions – Most of the SSIs face competitions not only from medium and large
industries, but also from Multinational Companies in the areas of quality, technology, finance,
managerial skills etc.

MSME and Entrepreneurship Development

The word entrepreneur is derived from the French verb entreprende, which means to undertake.
Entrepreneurship is the process of setting up of one’s own business. The person who sets up the business
is entrepreneur and the outcome of the process (business unit) is called enterprise.

“Entrepreneur is a person who organizes the business, undertakes the risk and enjoys the profit” –
Richard Cantillon_French Economist.

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An entrepreneur is basically a businessman and he brings together the factors of production such as land,
labour and capital and organizes it. An entrepreneur is more than a businessman, if a businessman brings
some innovation to his activities and eyes on value addition to his products or services, he is called an
entrepreneur. In fact, all entrepreneurs are businessmen, but all businessmen are not entrepreneurs.

“Entrepreneurship is the purposeful activity of an individual or a group of associated individuals,

undertaken to initiate, maintain or organize profit oriented business unit for production or distribution of
economic goods and services.”

Characteristics of Entrepreneurship

1. Systematic activity – Entrepreneurship is a systematic, step by step and purposeful activity. It

requires skill, knowledge and competency which can be acquired, learnt and developed through
education, training, observation and experience. Thus we can say the entrepreneurs are made but
not born.
2. Lawful and purposeful activity – The aim of entrepreneurship is to run a lawful business.
3. Brings innovation and creativity to the business.
4. Organizes production – The entrepreneur brings the idea of business and the factors of
production, thus he organizes the production activities.
5. Risk taking – The entrepreneur takes all the risks in the business as he brings all the factors of
production including capital.

Startup India Scheme

Startup India Scheme is an important initiative by Govt. of India to promote a strong ecosystem for
nurturing innovation and startup (new enterprises) in the country. As per the notification of the
Ministry of Commerce and Industry, a startup means:

1. An entity incorporated or registered in India.

2. Not older than 5 years.
3. Annual turnover does not exceed Rs.25 crores in any preceding year.
4. Working towards innovation, development or commercialization of products or services with the
support of technology or Intellectual Property Rights (IPR) and Patents.

Popular Startups in India – Paytm, Flipcart, Snapdeal, Swiggy, Bigbasket, Byju’s App, Ola Cabs,
Make My Trips, ShopClues, OYO Rooms, Zomato, Redbus, Uber Eats etc.

Intellectual Property Rights (IPR)

Intellectual Property is a category of property that includes intangible creations of human intellect. The
most prominent types of intellectual properties are trade secrets, copyrights, patents, trademarks etc. All
inventions begin with an idea. Once the idea becomes an actual product, that idea is treated as an
intellectual property. The legal rights conferred on such products (idea) are called IPR. Once it is
allotted to a person by the Govt. authority, he/she can rent, give or sell it to others.

Intellectual property is divided into two categories: Industrial properties like trademarks, industrial
designs etc. and copyrights which includes literary and artistic works such as novels, poems, plays,
films music, photographs, drawings, paintings, sculptures, architectural designs etc.

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Importance of IPR
1. Path-breaking inventions – It encourages new inventions in all segments. Eg: Cancer cure
medicines.
2. Incentive – It incentivizes inventors, authors, creators etc. for their work.
3. Helps to prevent loss of income – It allows the inventor to sell the rights to third parties and thus
he/she can generate income.
4. Recognition – It helps authors, creators etc. to get recognition for their work.

Types of IPs

1. Copy Right – It is the right to “not copy” conferred upon the creators of literary, artistic, musical,
sound recording, films etc.

2. Trademark – Any word, name, or symbol that gives an identity to goods or service made by an
individual, company, organization etc. (To register the trademark you can visit
www.ipindia.nic.in).

3. Geographical Indication – GI is an identification which identifies agricultural, natural or

manufactured products originating from a definite geographical territory. Eg: Banaras Brocades,
Kashmiri Pashmina Woolen Shawl, Nagpur Orange etc.

4. Patent – It is an exclusive right granted by the government to prevent others from making, using,
offering for sale, selling or importing the invention. For an invention to be patentable, it must be
new, non-obvious (not easily discoverable) and having an industrial application.

5. Design – It includes shape, pattern etc. that is applied to any article. Eg: Design of a car, house,
bottle etc. The term of protection of a design is valid for 10 years, which can be renewed for
further 5 years. After that it will come under public domain.

6. Plant Variety – It is a type of variety which is bred and developed by farmers. Eg: hybrid
versions of potatoes, rice, pepper etc. This lead to the growth of seed industry.

7. Semiconductor Integrated Circuits Layout Design – It is used to perform electronic circuitry

function. Eg; Computer Chip.

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Chapter – 10
Internal Trade
TRADE
Trade means buying and selling of goods, which involves the exchange of commodities
for money or money’s worth. On the basis of scale of operation, internal trade can be divided
into Wholesale trade and Retail trade.

A. Wholesale Trade – It implies that the buying and selling in large quantities. A wholesaler
buys goods directly from the producers and sells them to the retailers. One who deals in
wholesale trade is known as wholesaler or wholesale dealer.

Services of Wholesalers to manufacturers / producers

1. Facilitating large scale production – Bulk orders from wholesalers enable to produce in
large quantity.
2. Bearing risk – They purchase the entire goods immediately on production, so that they
take the risk of change in demand, spoilage, damage, theft etc. during transportation and
storage.
3. Financial assistance – Wholesalers purchase on cash basis and sometimes they may
give advance payment for bulk purchases.
4. Expert advice – Wholesalers are in constant touch with the retailers, they can collect
information about the tastes and fashion of consumers and passes it on to producers.
5. Helps in marketing – Wholesalers take care of distribution of goods, market research,
transportation, warehousing etc.
6. Facilitates continuity of production – Wholesalers purchase goods on a real time basis
as and when they produce goods. It helps the manufacturers to carryout continuous
production.
7. Storage – The burden of storing goods passes to the wholesalers.

Services to Retailers
1. Availability of goods – Retailers get goods as and when they required as there is a
large quantity stored by wholesalers.
2. Marketing support – Wholesaler takes all the burden of advertisement and sales
promotion activities, and the retailer enjoys the benefit.
3. Providing credit facilities – It enables the retailers to conduct their business without
much investment in working capital.
4. Specialized knowledge – Wholesalers can give expert advice on their products as they
are dealing only a limited line of goods. They also inform the retailers about new
products, their uses, quality, prices etc.
5. Risk sharing – The risk of retailers gets reduced as most of the burden of marketing
such as price fluctuation, loss of goods in transit, storage etc. is born by the wholesalers.

B. Retail Trade - It involves buying and selling of goods in small quantities. A retail trader buys
goods from the wholesalers and sells them to the customers. In other words, retail trade
includes all activities directly related to sale of goods or services to ultimate consumers for
consumption.

Services of Retailers to Manufacturers / Wholesalers

1. Helps in distribution – Retailers help in distribution of goods to the ultimate consumers

who are scattered over the world.
2. Personal selling – Most of the consumer goods requires personal selling, wholesalers
and producers are free from this task as it is undertaken by the retailers.

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 3. Large scale operations – Manufacturers and wholesalers are free from the trouble of
making individual sales to consumers in small quantities. This enables them to operate
on large scale.
4. Collecting market information – Since the retailers are in constant touch with the
consumers, they can collect reliable market information, which can be passed to the
wholesalers and manufacturers.
5. Help in sales promotion – Retailers also undertake advertisement and other sales
promotion activities to increase their sales, which in turn will be benefited to the
wholesalers and manufacturers in promoting the sales of their products.

Services to Consumers

1. Regular availability of products – Most often the retailers holds sufficient stock of
goods from various producers and wholesalers. This ensured ready and regular supply
of goods.
2. New products information – By arranging proper display and through personal selling
efforts, the retailers provide relevant information about the new products and their
features to the consumers.
3. Convenience in buying – Retailer sells goods in small quantities and they have set up
their stores in residential areas which are very near to the consumers.
4. Wide selection – The retailer has a large variety of goods from different manufactures.
5. After-sales services – Retailers provide after-sales services in the form of home
delivery, supply of spare parts and other customer services. It induces the consumers to
make repeat purchases of the products.
6. Provide credit facilities – The retailers often provide credit facilities to regular and
trusted customers.

Types of Retail Trade

1. Itinerant Traders - These types of traders are having no fixed place of business, they
may include vendors like hawkers, street traders etc.
2. Fixed shop retailers – They maintain permanent shops or stores to sell their goods.

Characteristics of Itinerant Retailers

a. Small scale operation – due to limited resources.

b. Deal in consumer products – Usually they deal in consumer goods of daily use. Eg:
Fruits, vegetables, fish, stationery etc.
c. Door step service – They provide goods at the door step of the consumers.
d. Limited stock – As they have no fixed place to operate, they do their business with
limited stock only.

Kinds of Itinerant Traders

1. Hawkers and Peddlers – Hawkers are the traders who carry their products on carts or
bicycles, while peddlers carry their products on their back or head or in baskets or
shoulder bags.

Features:
a. Generally dealing non-standardized and low value goods.
b. Operates mainly on streets of residential areas, exhibition grounds, public places etc.
c. Supply the goods at the door step of the consumers.

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 2. Market Traders – These traders sell their articles on fixed days in different market
places.

Features:
a. They deal in one particular line of goods. Eg: toys, garments, crockery etc.
b. Sell products on fixed days in the market.
c. Dealing in Low priced goods.
d. They move from one market to another.

3. Street Traders / Pavement Traders – These traders generally arrange their articles at
busy street corners, near railway stations etc.

Features:
a. They sell consumer items of daily use.
b. Generally operates near public places.
c. Do not change their places of business frequently.

4. Cheap Jacks – They usually, hire small shops for a short period of time. Depending upon
the scope of sale they keep shifting from one locality to another.

Features:
a. They deal in consumer items.
b. Also provide services like repairing watches, shoes, buckets etc.
c. Move from one area to another depending on sales potential.
d. They sell goods in temporary sheds during festivals.

Fixed Shop Retailers

These retailers are those who carry on business by maintaining a fixed place of business to sell
their goods. They do not move from one place to another. Depending upon the size of
operations, they can be of two types, such as Small scale Retailers and Large scale retailers.

Features:
a. Large resources – They have a lot of goods compared to itinerant traders.
b. Deal in different products – They deal consumer goods, both durables and non-
durables.
c. Credibility – They have greater credibility in the minds of consumers as they provide
services like home delivery, guarantees, repairs, credit facility etc.

Types of Fixed Shop Retailers:

1. Small Scale Retailers - They are running their business on a small scale and deal in a
limited line of goods.

a. General Stores – They are selling all general items of goods such as groceries,
stationery, oils, etc. Customers can buy most of their requirements at one place. They
may also provide free home delivery, credit facilities etc. to regular customers.

Features:
 They stock variety of goods for day to day requirement.
 Open for long hours based on the convenience of consumers.
 Provide credit facilities to regular customers.

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  Located near residential area.
 Provide service like home delivery etc.

b. Speciality Shops- They are specialized in a single product of a certain line. Also
known as Single Line Stores. E.g. kids wear shop, computer shop etc.

Features:
 Specialize in one product only. Eg: Kids wears, Men’s wear, Book shop,
electronics etc.
 Located in central places.
 Keep all brands of a particular product.

c. Street Stall Holders – They are generally located at street crossings or in the main
street. They usually display their goods on a table, stand or by fixing a shelf on the
wall.

Features:
 Deal in cheaper goods. Eg: toys, soft drinks, hosiery items etc.
 They mainly attract floating customers.
 The stall is housed in very small area.
 Found in high customer traffic area.

d. Second hand goods shop – They are dealing in second hand goods such as books,
furniture, clothes, used cars and other household items.

Features:
 Usually found in busy streets.
 Helpful for low income group.
 They often sell antique items and rare object of historical value.

2. Large Scale Retailers – Large scale retailing may be defined as retail trade involving
operations on a large scale and sale of goods in small quantities. They are of different
types:-

a. Departmental Stores– A departmental store is a large scale retail shop selling a wide
variety of goods in different departments under one roof and one management. Each
department deals in separate line of goods like stationery, books, furniture, clothing,
footwear etc.

Features
 They provide additional facilities like restaurant, telephone booth, rest room, play area
etc.
 Usually located in central place of a big city.
 It is a large scale retail organization, generally formed as joint stock companies.
 Elimination of middlemen – They are making their purchases directly from the producers.
 Centralized purchases and decentralized selling.

Advantages
 More customers - Central location attracts more and more customers.
 Convenience – They offer large variety of products under one roof.

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  Attractive Services – Consumer services are provided like free home delivery,
telephone facilities, restaurants, rest rooms etc.
 Economies of large scale operation in the matter of transportation, advertising,
purchase etc.
 Promotion of sales – Automatic mutual advertisement, advertising and promotional
activities help in boosting the sales.

Limitations:

 Lack of personal attention – as they have to handle a very large number of customers
daily.
 High Operating Cost – due to heavy rent, salaries of experts etc.
 High possibility of loss – They incur high loss due to change in taste and fashion of
consumers, as they have a large quantity of stock.
 Inconvenient Location – The central location of the store make it inconvenient for the
consumers who reside away from it, also it suffers from traffic problems and parking
difficulties.
 Huge investment – It requires heavy investment for establishment and maintenance.

b. Multiple Shops or Chain Stores - It is a system of branch shops operated under a

centralized management and dealing in similar line of goods. Branches of the shop are
located throughout the nation under the same name and management and they specialize in
one or two lines of goods.

Multiple shops are organized by the manufacturers to eliminate middlemen. In a multiple

shop there is uniformity in advertisement, window display and interior display of goods etc.
e.g. Bata shoe company, Bombay Dyeing Show Rooms, Big Bazar, Coffee Day, Raymonds,
KFC etc.

Features
 Convenient location for consumers.
 Centralized buying and decentralized selling.
 Centralized management and unified system of control.
 Follows cash and carry principle.
 Uniformity in shop’s design and lay-out.
 Proper inspection from head office ensures the smooth functioning.

Advantages
 Economies of large scale buying – Centralized purchase attracts higher discount, low
transportation cost, common advertisement etc.
 Elimination of middlemen – Direct bulk purchase from producers.
 No bad debts – They follow cash and carry system.
 Diffusion of risk – Loss in one shop may be compensated by the profits in other shops.
 Low cost – Low cost of operation because of economies of scale.
 Flexibility – Unprofitable branches can be shifted to somewhere else.

Limitations
 Limited choice – as they deal in one or two lines of goods.
 Lack of initiative and motivation – Due to centralized control, there is only less chance for
initiatives from the part of the branch managers.
 No personal contact due to large scale operations.
 Risk due to change in taste and fashion lead to great loss.
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 Differences between Departmental Stores and Multiple Shops

Basis Departmental Stores Multiple Shops

1. Location Central location Not necessary
Large variety of goods from Limited variety of goods from a
2. Variety of goods
different producers specific producer only
Additional facilities like
No such additional facilities
3. Services offered restaurants, play zone,
are provided
alteration of garments etc.
No uniform pricing policies,
instead they are giving Fixed price and uniform pricing
4. Pricing policy
discounts to clear the stocks in policies are followed
special occasions
Suitable for middle and low
High income group who care
income group who are more
5. Class of customers more for the services rather
concern about quality products
than the price of products
at reasonable price
Sometimes to regular
6. Credit facilities Strictly on cash basis
customers
More flexibility regarding line No much scope for flexibility,
7. Flexibility of products, as they deal in as they deal only in limited line
wide variety of products.

c. Mail Order Houses – It is a form of retailing where the business transactions are done
through post or by mail. There is no direct personal contact between the buyer and the
seller. Under this system, receipt of orders, delivery of goods and payment etc. are done
through the mail. E.g. VPP (Value Payable Post). This system is also called shopping by
post.

Mode of operation

1. Giving advertisement in various media.

2. Preparing a mailing list of prospective customers. (Data may be collected from telephone
directories, social media etc.)
3. Approaching the prospective customers by sending circulars, catalogues etc. by post.
4. Receiving of orders from customers.
5. Execution of orders by sending the goods through post office.
6. Receiving payment – It may be in different forms such as advance payment at the time of
placing orders, VPP or payment through bank.

Suitability of goods for mail order business

1. Graded and standardized goods.
2. Easily transported at low cost. Eg: light in weight.
3. Goods having ready demand in the market.
4. They should be available in large quantity throughout the year.
5. Goods which are having least competition in the market.
6. Goods which are not available in the local market.

Advantages
 Limited capital – It does not require huge buildings, furniture etc.
 Elimination of middlemen – Hence the cost of operation is minimized
 No bad debt – No credit facilities are allowed to customers.
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  Wide reach – The area of operation is not limited.
 Convenience in buying – i.e. delivery of goods are made at the door steps.

Limitations
 No personal contact – Customers do not have a chance to examine the products.
 High promotion cost – Heavy expenses on advertising.
 No after-sales service.
 No credit facilities.
 Delay in delivery.
 Possibility of abuse – Dishonest traders may cheat the customers.
 High dependence on postal services – Success of the business depends on the
efficiency of postal department.

d. Consumer Co-operative Store – It is a retail store formed and run by consumers on co-
operative principles. These stores are owned and managed by consumers so as to make
goods available at a reasonable price. They are dealing in all types of consumer goods of
daily use such as grocery, stationery, dress materials etc.

The capital is raised by the issue of shares to the members and the management is vested in
the hands of Board of Directors. It should be registered under the Co-operative Societies Act.

Advantages
 Easy to form – Any ten people may come together and form a society with limited
formalities.
 Limited liability – Liability of members is limited.
 Democratic management – It is based on democratic principles.
 Low price – by eliminating middlemen.
 Cash sales – No chance for bad debt due to cash and carry system.
 Convenient location – Usually set up in public places.

Limitations
 Lack of initiative – The persons who manage and work on honorary basis may not
take much initiative for the success of business.
 Shortage of funds – Difficulty in raising capital.
 Lack of patronage – All members may not be in touch with the organization regularly.
 Lack of training and expertise in management.

e. Super Bazaar (Super Market) – It is also a large scale retail store selling a wide variety of
consumer goods. The most distinctive feature is the absence of salesmen and shop
assistants to help the customers in selecting the goods. Hence they are also called ‘Self
Service Stores’.
Various products are arranged in well marked divisions or departments on open shelves.
They are neatly packed and the weight, price, quality etc. are marked on the packets.
Customers pick the required products and place them on baskets or wheeled trolleys etc.
and are placed at the counter where the goods are billed and payment is made.

Features:
 Wide variety – Buyers can purchase a wide variety of products under one roof.
 Self service – Super markets functions on the principle of self service which results in
lower operating cost.
 Low price – Because of bulk purchase and lower operating cost, they can sell their
products at low price than other retail shops.
Ajith Kanthi @ Ajith P P SKMJ HSS Kalpetta BUSINESS STUDIES I Ch 10 Page 7
  Cash basis – This feature helps them to eliminate bad debts.
 Centrally located – Generally located at central place of a city.

Advantages
 One roof and low cost – This is convenient as well as economical to the buyers.
 Central location – So that it is easily accessible to the people.
 Wide selection – They offer wide variety of goods from different producers.
 No bad debt – They follow cash and carry system.
 Economies of large scale – It enjoys the benefits of large scale operations.
Limitations
 No credit – It restricts the purchasing power of consumers.
 No personal attention – Due to the absence of salesmen, the items which need
personal attention may not be sold out.
 Mishandling of goods – Consumers may handle the goods kept in the shelves
carelessly.
 High overhead expense – High rent due to prime location, heavy administrative cost etc.
 Huge capital requirement – Establishment and running cost is relatively high.

f. Vending Machine - These are coin operated machines found very suitable in selling
products like hot beverages, platform tickets, soft drinks, newspaper etc. ATM (Automated
Teller Machine) is also a vending machine in banking business.

They are suitable for selling pre-packed items of low priced products, with uniform size and
weight. Initial cost of the machine, maintenance charges etc. are high. Another drawback is
that the consumers cannot see the product before buying. No return of goods is possible.

Goods and Service Tax (GST)

Introduced by Government of India – 1st July 2017 – One Nation One Tax – It is a destination
based single tax on the supply of goods and services from the manufacturer to the consumer –
Replaced multiple taxes levied by central and state governments – Reduced tax burden by
eliminating tax on tax – GST consists of CGST and SGST, which are applicable in case of intra-
state supply of goods and services and IGST in case of inter-state supply of goods and services
– Tax liability arises when the taxable person crosses the limit of 20 lakhs turn over per year.

Key Features of GST

a. GST is applicable to the whole country including Jammu and Kashmir.
b. It is a destination based consumption tax.
c. IGST is applicable for imported goods and services.
d. CGST, SGST and IGST are levied at rates mutually agreed by the Centre and the State
based on the recommendations of GST Council.
e. There are four tax slabs: 5%, 12%, 18% and 28%
f. Export and supplies to SEZ are zero-rated.
g. Tax payer can remit the tax amount through different payment gateways such as Net
Banking, Debit/Credit Card, NEFT (National Electronic Fund Transfer) and RTGS (Real
Time Gross Settlement.

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Role of Commerce and Industry Association in promotion of Internal Trade

The Chambers of Commerce and Industry was formed as an association of business

and industrial houses to promote and protect their common interest and goals.

Eg.CII (Confederation of Indian Industry), FICCI (Federation of Indian Chambers of Commerce

and Industry), ASSOCHAM (Associated Chamber of Commerce and Industry) etc. They play
an important role in strengthening internal trade and overall economic activity. Some of their
roles are:


Helps in many activities relating interstate movement of goods.

To ensure that octroi and other local levies are charged reasonably.

Helps in harmonization of GST and VAT (Value Added Tax).

Helps in marketing of agro products and related issues.

Interacting with the government to take action against those who violates rules relating to
weights and measures and prevention of duplication of brands.

Promoting sound infrastructure etc.

Labour legislation - Interact with the government on issues of labour laws.

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Ajith Kanthi @ Ajith P P SKMJ HSS Kalpetta BUSINESS STUDIES I Ch 10 Page 9

Chapter – 11
INTERNATIONAL BUSINESS
Buying and selling of goods and services between two countries are called external
trade or foreign trade or international business. It facilitates specialization and efficient
utilization of resources.

Reason for International Business

The basic reason behind international business is that the countries cannot produce
equally well or cheaply all that they need due to the unequal distribution of various resources
such as labour, raw materials, capital etc. Moreover, labour productivity and production costs
differ among nations due to various socio-economic, geographical and political reasons.
Therefore, some countries being in a better position to produce better quality products or at
lower costs than what other nations can do.
Differences between Domestic Business and International Business
Basis Domestic Business International Business
Buyer and seller belong to They are from different
1. Nationality
one nation countries
Suppliers, employees,
middlemen, shareholders etc. Various stakeholders from
2. Other Stakeholders
are the citizens of same different countries
nation
More heterogeneous in the
Customers are more
3. Customer heterogeneity matter of language,
homogeneous in nature
preferences, customs etc.
4. Business system and Different systems and
Relatively same system
practices practices are followed
5. Political system and risk Subject to the same country Subject to different countries
Subject to the rules, laws, Subject to the rules and
6. Business regulations and
taxation policies of the same policies prevailing the
policies
nation concerned nations
Currency of the domestic Currencies of more than one
7. Currency
country countries

Scope of International Business – Major areas of operations of international business are

briefly discussed below:
1. Merchandise exports and imports – Merchandise means goods which are tangible, ie,
those that can be seen and touched.
2. Service exports and imports – It means trade in intangibles, i.e., those that cannot be
seen or touched. It is also known as invisible trade. Eg. Tourism and travel,
transportation, entertainment, communication, educational service etc.

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 3. Licensing and franchising – Permitting a person/firm in a foreign country to produce
and sell goods under your trademarks, patents or copyrights for a fee is another way of
operating international business. Eg. Pepsi, Coca-Cola etc. Franchising is somewhat
similar to licensing with the difference that it is connected with provision of services. Eg.
Mc Donald (fast food restaurants), KFC etc.
4. Foreign Investments – It means investment abroad in exchange for financial return. It
can be in FDI (Foreign Direct Investment)- directly invested in properties, and FPI
(Foreign Portfolio Investment)- investing by way of acquiring shares or granting loans.
Benefits of International Business
Benefits to Nations: Earning of foreign exchange, more efficient use of resources, improving
growth prospects and employment potentials, increased standard of living etc.
Benefits to Firms – Higher profits, increased capacity utilization, prospects for growth, way out
to intense competition in domestic market, improved business vision etc.
Modes of entry into International Business: A company can enter into international business
in the following ways:
1. Exporting and Importing: Export refers to sending of goods and services for sale from the
home country to foreign countries. Importing means purchasing of goods and services from
foreign countries for domestic use.
Advantages – Following are the major advantages of exporting and importing when compared
with the entry of international business through other forms such as Joint Venture, Wholly
owned subsidiaries in foreign countries etc.
a. Less complexity.
b. Less investment.
c. Less risk.
Limitations
a. High cost – Additional cost of packaging, transportation, insurance, customs duty etc.
b. Import restrictions for various products in different countries.
c. Less direct contact with the foreign market – Actual pulse in the market cannot be
analysed.
2. Contract Manufacturing: In this a company enters into a contract with a local
manufacturer in a foreign country. The contract is for getting certain components or goods
produced as per specifications given. It is also called outsourcing. It may takes place in
the following three forms:
a. production of certain components only
b. assembly of components into final products
c. complete manufacture of the products

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 Advantages:
a. Goods can be produced on large scale without any investment
b. Less investment risk
c. Getting products with lower material and labour costs.
d. Utilization of idle capacity of the manufacturer.
e. Producer may get export incentives from the government.
Disadvantages:
a. Quality problem – Local manufacturer in a foreign country may not be able to
compete with international standards.
b. No freedom in the production process – Producer has to follow specifications given
to him strictly.
c. No freedom to sell – According to the terms of contract, they cannot freely sell in the
open market.
3. Licensing and Franchising: It is a contractual agreement in which one firm permits
another firm in a foreign country to access its trademark, patents or technology for a fee
called royalty. The firm which gives permission is called licensor and to whom it is given is
called licensee.
Franchising is similar to licensing; it is concerned with provision of services. The parent
company is called franchiser and the party to whom franchise is granted is called the
franchisee.
Advantages:
a. Less expensive - It is a less expensive mode for licensor as the licensee makes all
investments in his country.
b. Limited risk - The licensor or franchiser has only a limited risk, as he has not made
any investment.
c. Less government intervention – Since the licensee is a local person in his country,
there is only less government intervention.
d. Knowledge about the market – Since the licensee / franchisee is a local person, he
might have greater knowledge about the local market.
e. Protection of trademarks – Because of strict laws in foreign countries, only the
licensee can use the trademark or patent.
Limitations:
a. Identical or duplicate product – The licensee, when get experienced can make an
identical product with a slight different brand name.
b. Loss of secrecy – There are chances of trade secret being lost in the foreign market.
c. Conflicts between licensor and licensee regarding payment of royalty, maintenance of
accounts, difference in quality etc.

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4. Joint Ventures: It means starting a firm which is jointly owned by two or more firms. It
comes into existence in three major ways:
a. foreign investor buying an interest in a local firm.
b. local firm acquiring an interest in an existing foreign firm
c. both the foreign and local entrepreneurs jointly establishing a new firm.
Advantages:
a. Less financial burden – Investment is made by both the parties.
b. Large scale operation – Usually joint ventures are running on large scale.
c. Local partner’s knowledge – Foreign partner is also benefited because of local
partner’s knowledge about competition, culture, language, business policies etc.
d. Cost and risk sharing – Entering into foreign market is very costly and risky, it can be
shared among the joint venture partners.
Disadvantages:
a. Loss of secrecy
b. Chances of conflicts
5. Wholly owned subsidiaries: In this system, the holding company (parent company)
acquires 100% shares in a subsidiary company . A wholly owned subsidiary company can
be established in a foreign market in two ways:

a. Set up a new firm in a foreign country.

b. Acquire an existing firm in a foreign country.
Advantages:
a. Full control over operation.
b. Trade secrets will not be lost.
Disadvantages:
a. Huge investment – Not suitable for small and medium size business.
b. No sharing of loss.
c. Not allowed by some countries.
Export – Import Procedure and Documentation
International business or foreign trade involves export, import and entrepot. Export trade
means sale of domestic goods to a foreign country. Import trade refers to purchase of goods
from a foreign country for domestic use.
Export Procedure – Following are the major steps involved in exporting goods to a foreign
country:
1. Receipt of enquiry and sending quotation – The exporter gets an enquiry from
prospective buyers from a foreign country and sending quotation in the form of a
proforma invoice, which is a document containing all description about the product such
as price, quality, grade, size, weight, mode of delivery, type of packing, payment terms
etc.

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 2. Receipt of order or indent – If the buyer is satisfied with the conditions in the proforma
invoice, an order will be placed. This order is also called indent. It contains the
description of goods, price, quality etc.
3. Assessing importer’s creditworthiness and securing a guarantee for payments –
After receiving indent, the exporter conducts an enquiry about the financial capacity of
the importer to ensure the promptness in settlement. Usually, exporters may demand a
letter of credit in this regard.

Letter of credit is a guarantee given by the importer’s bank that it will honour payment
up to a specified amount of export bills to the bank of the exporter.
4. Obtaining export license – In order to get the export license from the Import-Export
Licensing Authority, the exporter has to fulfill the following formalities:
a. Open a bank account.
b. Obtaining Import Export Code (IEC) number from the Directorate General of
Foreign Trade or Regional Import Export Licensing Authority.
c. Registering with appropriate export promotion council. Eg: Apparel Export
Promotion Council, Council for Leather Exports etc.
d. Registering with Export Credit and Guarantee Corporation (ECGC) to cover the
risk of non-payment.
5. Obtaining pre-shipment finance – After the confirmation of order the exporter may
approach his bank for getting pre-shipment finance to carry out export production.
6. Production or procurement of goods – The exporter makes ready the goods as per
specification either by production or by purchasing it from the market.
7. Pre-shipment inspection – In foreign trade the quality of goods must conform to
international standards. For this compulsory inspection by Export Inspection Agency –
EIA (Govt. of India undertaking) should be done.
8. Excise Clearance – All goods produced are subject to excise duty under Central Excise
and Tariff Act, but exported goods are either exempted or if paid, it is later refunded. So
the exporter has to apply to the Excise Commissioner for export clearance. If the
authority is satisfied, the excise clearance is given or the claim for refund is allowed.
Such refund of duty is called duty drawback.
9. Obtaining certificate of origin – Some importing countries provide tariff concession or
other exemptions for goods imported from certain countries. To avail such benefits the
exporter has to obtain and submit certificate of origin along with other export documents.
Certificate of Origin is a proof that the goods are actually been produced in the country
from where it is exported.
10. Reservation of shipping space – The exporter has to apply for this by furnishing
complete information about the goods, probable date of shipment and port of destination.
On acceptance, the shipping company issues a shipping order.
Shipping order is an instruction to the captain of the ship that the specified goods after
customs clearance at a designated port be received on board.

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 11. Packing and forwarding – Goods are packed and marked with details such as name
and address of importer, gross and net weight, destination port, country of origin etc. A
packing list is attached herewith all other documents.
Packing list is a document stating the number of cases or packs and the details of
goods contained in these packs.
12. Insurance of goods – The exporter has to insure the goods with an insurance company
to cover the risk due to sea perils in transit.
13. Customs clearance – Before loading the goods on the ship, customs clearance should
be obtained by the exporter. For this the exporter prepares a shipping bill (5 copies).
Shipping bill is a document contains the particulars of goods, name of the vessel (ship),
destination port, exporting country, exporter’s name, address etc.
Documents to be attached with the shipping bill for customs clearance:
a. Export order.
b. Letter of credit.
c. Commercial invoice.
d. Certificate of origin.
e. Certificate of inspection.
f. Marine insurance policy.
Based on the above documents, the port authority issues a Carting Order. It is an
instruction to the staff at the gate of the port to allow the cargo inside the dock.
14. Obtaining mates receipt – After the goods are loaded on the ship, the captain or mate
of the ship issues a certificate called mate’s receipt.
Mates receipt – It is a receipt issued by the captain or mate of the ship as an
acknowledgement of the receipt of goods in the ship, which contains the name of ship,
berth, date of shipment, description of packages, condition of cargo etc.
15. Payment of freight and insurance of bill of lading – The C&F agent (Clearing and
Forwarding agent) submits the mate’s receipt to the shipping company for computation
of freight. After the payment of freight, the shipping company issues a bill of lading.
Bill of lading – It is document issued by the shipping company after the cargo is loaded
on the ship. It is prepared on the basis of Mates Receipt. The shipping company
undertakes the delivery of goods to the buyer by producing this document.
In case goods sent by air, this document is known as airway bill.
16. Preparation of invoice – The exporter has to prepare an invoice of the goods, which
contains the details such as quantity and the amount to be paid by the importer.
17. Securing payment – After shipment of goods, the exporter sends the relevant
documents like Bill of lading, bill of exchange, letter of credit, invoice, etc. to the bank for
completing the formalities to receive payment from the importer.

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Import Procedure – Following are the steps involved in importing goods to our country.
1. Trade enquiry – The importer has to collect information about the exporters of the
products he needs from various sources like trade directories, trade associations,
websites etc. After identifying the exporter, he sends the trade enquiry. Trade enquiry is
a written request by the importer to the overseas supplier for getting information such as
price, quality and other terms and conditions for export.
2. Obtain the import license – Certain goods can be imported freely, while others require
license. He has to apply for the import license at DGFT and obtain IEC number.
3. Obtaining foreign exchange – In import trade, payment is made in foreign currency, all
foreign exchange transactions are regulated by RBI in India. So that the importer has to
get prior sanction for foreign exchange.
4. Placing order or indent – The importer has to place an order or indent for the supply of
goods. It should contain price, quality, quantity, size, grade and instructions relating to
packing, shipping, delivery schedule, insurance and mode of payment etc.
5. Obtaining letter of credit – The importer should obtain the letter of credit from his bank
and forward it to the exporter.
6. Arranging finance – Importer should arrange fund in advance to pay to the exporter on
arrival of goods.
7. Receipt of shipment advice – It is a document sent by the exporter to the importer
containing information about the shipment of goods after it is being loaded on the ship.
8. Retirement of import documents – After the goods are shipped, the exporter submits
all the necessary documents with his banker for getting payment. Here the importer has
to retire (receive) the documents either by ready payment or by accepting a bill of
exchange.
9. Arrival of goods – On arrival of goods the person in charge of the ship informs the
officer at the dock through a document called import general manifest.
Import General Manifest is a document contains the details of imported goods and on
the basis of which the cargo is unloaded.
10. Customs clearance and release of goods – After fulfilling all the formalities at the dock
and payment of dock dues, freight if any and the customs duty, the importer can release
the goods from the port. In order to calculate the customs import duty, the importer has
to submit a document called the Bill of Entry.
Bill of Entry is a form supplied by the customs office to the importer for filling and
submitting for assessment of customs import duty.
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