NCERT SOLUTIONS FOR CLASS 11 BUSINESS STUDIES

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Last modified:2019-08-23

NCERT Solutions for Class 11 Business Studies and Read NCERT Class 11 Business Studies Notes

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NCERT Class 11 Business Studies Chapter Wise Solutions

Chapter 1- Nature and Purpose of Business

Chapter 2 - Forms of Business Organisation

Chapter 3 - Private, Public and Global Enterprises

Chapter 4 - Business Services

Chapter 5 - Emerging Modes of Business

Chapter 6 - Social Responsibilities of Business

Chapter 7 - Formation of a Company

Chapter 8 - Sources of Business Finance

Chapter 9 - Small Business

Chapter 10 - Internal Trade

Chapter 11 - International Business - I

Chapter 12 - International Business - II

Chapter 1

Business, Trade and Commerce

Multiple Choice Questions

1. Which of the following does not characterise business activity?

  1. Production of goods and services
  1. Presence of risk
  2. Sale or exchange of goods and services
  3. Salary or wages

Answer (d) Salary or wages are paid as remuneration to workers who work for others and is not a characteristic of business.

2. Which of the broad categories of industries covers oil refinery and sugar milts?

  1. Primary
  2. Secondary
  3. Tertiary
  4. None of these

Answer (b) Oil refinery and sugar mills process tharnateriats (crude oil and sugarcane) which have already been extracted at the primary stage.

3. Which of the following cannot be classified as an auxiliary to trade?

  1. Mining
  2. Insurance
  3. Warehousing
  4. Transport

Answer (a) Activities which are meant for assisting trade are known as auxiliaries to trade. These do not comprise of mining as it is not a support service for trade.

4. The occupation in which people work for others and get remunerated in return is known as

  1. Business
  2. Employment
  3. Profession
  4. None of these

Answer (b) People engaged in business are entrepreneurs who earn income in the form of profit.

Professionals provide services directly to clients and do not work for others.                                                                                                                                                                                                   

5. The industries which provide support services to other industries are known as

  1. Primary industries
  2. Secondary industries
  3. Commercial industries
  4. Tertiary industries

Answer (d) Tertiary industries provide support services to facilitate activities of primary and secondary industries.

6. Which of the following cannot be classified as an objective of business?

  1. Investment
  2. Productivity
  3. Innovation
  4. Profit earning

Answer (a) Investment has to be made to start and run a business, thus it is an Input and not an objective of business.

7. Business risk is not likely to arise due to

  1. changes in government policy
  2. good management
  3. employee dishonesty
  4. power failure

Answer (b) Good management does not cause any chance of loss or reduction in profits.

Short Answer Type Questions

Question 1. State the different types of economic activities.

Answer 

Economic activities are those by which we can earn our livelihood. Economic activities may be further divided into three categories, namely business, profession and employment e.g, a person running a garment business a doctor operating in his chnic and a teacher teaching in a school- all three are doing so to earn their livelihood and are, therefore, engaged in economic activity.

Question 2. Why is business considered an economic activity?

Answer

Business may be defined as an economic activity involving the production and sale of goods and services undertaken with a motive of earning profit by satisfying human needs in society Business IS considered to be an economic activity because it is undertaken with the aim of earning money or livelihood and not because of any sentimental reason like love, affection or sympathy

Question 3. Explain the concept of business.

Answer

The term ‘business’ is derived from the word busy’. Thus, business means being busy. However, in a specific sense, business refers to any occupation In which people regularly engage in an activity with an objective of earning profit. The activity may consist of production or purchase of goods for sale, or exchange of goods or supply of services to satisfy the needs of other people in the society.

 Question 4. How would you classify business activities?

Answer

Various business acnvmes may be classified into two broad categories industry and commerce. industry is concerned With the production or processing of goods and materials. Industries may be divided into three broad categories namely primary, secondary and tertiary Commerce includes all those activities which are necessary for facilitating the exchange of goods and services. Commerce includes two types of activities, via., trade and auxiliaries. 

Question 5. What are various types of industries?

Answer

Industry refers to economic activities which are connected With conversion of resources into useful goods. Industnes may be divided into three broad categories namely primary, secondary and tertiary

  1. Primary Industries include all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms. plants etc.
  2. Secondary Industries are concerned with using or processing the materials which have already been extracted at the primary stage
  3. Tertiary Industries are concerned with providing support services to primary and secondary industries. They also Include activities relating to trade.

Question 6. Explain any two business activities which are auxiliaries to trade.

Answer

Activities which are meant for assist.nq trade are known as auxiliaries to trade. These acuvmes are generally. referred to as services because these are in the nature of facilitating the activities relating to Industry and trade. Two business activities which are auxiliaries to trade are:

  1. Transport and Communication Production of goods generally takes place In particular locations. Transport facilitates movement of raw material to the place of production and the finished products from factones to the place of consumption. Communication facilities help the producers. traders and consumers in exchanging information With one another. Thus, postal services and telephone facilities may also be regarded as auxiliaries to business activities.
  2. Warehousing Goods are not sold or consumed Immediately after production They are held in stock to be available as and when demand comes. Special arrangement must be made for storage of goods to prevent loss or damage Warehousing helps business firms to overcome the problem of storage and facilitates the availability of goods when needed.

Question 7. What is the role of profit in business?

Answer

Every business operates with an aim to earn more than what has been invested and profit is the excess of revenue over cost. Profit plays an Important role In business

  • It is a source of Income for business persons.
  • It can be a source of finance for meeting expansion requirements of business.
  • It indicates the efficient working of business
  • It can be taken as society’s approval of the utility of business
  • It builds up the reputation of a business enterprise.

Question 8. What is business risk? What is its nature?

Answer

The term business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. BUSiness risks are of two types speculative and pure Speculative risks Involve both the possibility of gall as well as the possibility of loss Speculative risks arise due to changes In market conditions, changes in prices or changes In fashion and tastes of customers Pure risks involve only the possibility of loss or no loss. The chances of fire, theft or strike are examples of pure risks.

Nature of business risks can be understood in terms of the following characteristics

  • Business risks arise due to uncertainties.
  • Risk is an essential part of every business.
  • Degree of risk depends mainly upon the nature and size of business.
  • Profit is the reward for risk taking.

Long Answer Type Questions

Question 1. Explain the characteristics of business.

Answer

Business refers to any occupation in which people regularly engage in an activity with an objective of earning profit. The activity may consist of production or purchase of goods for sale, or exchange.

If goods or supply of services to satisfy the needs of other people in the society, Business has the following characteristics:

1.Economic Activity

Business is considered to be an economic activity because it is undertaken with the aim of earning money or livelihood and not because of any sentimental reason like love, affection or sympathy.

2.Production or Procurement of Goods and Services

Goods are offered to consumers after they are either produced or procured by business enterprises. Thus, every business enterprise either manufactures the goods It deals in or it acquires them from other producers, to be further sold to consumers or users. Goods may be consumer goods like television, tea, pen, etc or capital goods like machinery, furniture, etc Services may include facilities offered to consumers in the form of transportation, banking electricity, etc.

3.Sale or Exchange of Goods and Services

Business involves transfer or exchange of goods and services for value addition. If goods are produced for self consumption and not for selling purpose, it cannot be called a business activity Cooking food at home for the family is not business, but cooking food and selling it to others in a restaurant is business. Thus, one essential characteristic of business is that there should be sale or exchange of goods or services between the seller and the buyer.

4.Regular Dealings in Goods and Services

Business involves dealings in goods or services on a regular basis. Therefore, one Single transaction of sale or purchase does not constitute business. e.g., if a person sells his/her old washing machine even at a profit. it will not be considered a business activity. But if he/she sells washing machines regularly it will be termed as a business.

5.Profit Earning

One of the main objectives of business is to earn profit. No business can survive for long without earning profit. It is a source of income for business persons and a source of finance for meeting expansion requirements of business. Hence, businessmen make all possible efforts to maximise profits, by increasing the sales revenue or reducing costs.

6.Uncertainty of Return

Uncertainty of return refers to the lack of surety relating to the amount of money-that the business is going to earn in a given period. Every business invests capital in its activities with the objective of earning profit. But it is not certain as to what amount of profit will be earned. There is even a possibility of losses being incurred even after the best efforts.

7.Element of Risk

Risk involves the possibility of inadequate profits or even losses due to uncertainties or unexpected events. It is caused by some unfavourable or undesirable event. The risks are related with certain factors like changes in consumer tastes and fashions, changes in methods of production, strike or lockout in the workplace, increased competition in the market, fire, theft, accidents, natural calamities, etc. No business can eliminate risks altogether.

Question 2. Compare business with profession and employment.

Answer

Economic activities may be divided into three major categories

  1. Business Business refers to those economic activities, which are connected with the production or purchase and sale of goods or supply of services with the main object of earning profit. People engaged in business earn income in the form of profit.
  2. Profession Profession includes those activities, which require special knowledge and skill to be applied by individuals in their occupation. Those engaged in professions are known as professionals and are generally subject to guidelines or codes of conduct laid down by professional bodies. e.g., lawyers are engaged in the legal profession, governed by the Bar Council of India and Chartered Accountants belonging to the accounting profession are subject to the regulations of the Institute of Chartered Accountants of India.
  3. Employment Employment refers to the occupation in which people work for others and get remunerated in return. Those who are employed by others are known as employees. Thus, people who work in factories, offices of banks, insurance companies or government department, etc at various posts are the employees of these organisations. They receive wages and salaries.

Comparison of Business, Profession and Employment

 

Basis

Business

Profession

Employment

Mode of establishment

Entrepreneur's decision and other legal formalities if necessary

Membership of a professional body and certificate of practice

Appointment letter and service agreement

Nature of work

Provision of goods and services to the public

Rendering of Personalised, expert services

Performing work as per service contract or rules of service

Qualification

No minimum qualification is necessary

Expertise and training In a specific field is a must

Qualification and training as prescribed by the Employer

Reward or return

Profit earned

Professional fee

Salary or wages

Capital investment

Capital Investment required as per size and nature of business

Limited capital needed for establishment

No capital required

Risk

Profit are uncertain and irregular; risk is present

Fee is generally regular and certain; some risk

Fixed and regular Pay; no or little risk

Transfer of Interest

Transfer possible with some formalities

Not possible

Not possible

Code of conduct

No code of conduct is prescribed

Professional code of conducts is to be followed

Norms of behaviour laid down by the employer are to be followed

 

Question 3. Explain with examples the various types of industries.

Answer

Industry refers to economic activities, which are connected with conversion of resources into useful goods. Industry is concerned with the production or processing of goods and materials as well as breeding and raising of animals. The term industry is used for activities in which mechanical appliances and technical skills are involved. The term industry is also used to mean groups of firms producing similar or related goods. SeNices such as banking and transport are also referred to as industries sometimes.

Industries may be divided into three broad categories namely primary, secondary and tertiary.

i.Primary Industries These Include all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants etc.

These industries may be further subdivided as follows:

Extractive Industries

These industries extract or draw out products from natural sources. Extractive Industries are suppliers of basic raw materials that are mostly products of the geographical or natural environment products of these Industries are usually transformed into useful goods by manufacturing mdustnes Farming, mining. lumbering. hunting and fishing-operations are some important extractive industries.

Genetic Industries

These industries are concerned with the breeding of plants and animals for their use in further reproduction Seeds and nursery companies cattle breeding farms. poultry farms and fish hatchery are examples of genetic Industries

ii.Secondary Industries These are concerned with USing and processing the materials. which have already been extracted by the primary sector to produce goods for final consumption or for further processing by other industrial units e g., the iron ore extracted by mining which is a primary industry. is processed Into steel and hence. steel Industry is a secondary industry Secondary industries may be further divided as follows

Manufacturing Industries

These industries are engaged In producing goods for Intermediate or final consumption through processing of raw materials and thus creating form utilities. Manufacturing industries may be further divided Into four categories on the basis of method of operation for production.

Analytical Industry

Which analyses and separates different elements from the same materials, eg. oil refinery

Synthetical Industry

Which combines various Ingredients Into a new product. E.g. cement industry

Processing Industry

Which involves successive stages for manufacturing finished products, e.g.. sugar and paper industries.

Assembling Industry

Which assembles different component parts to make a new product. e.g. car and computer industries.   

Construction Industries

These industries are involved in the construction of buildings, dams, bridges, roads, tunnels, and canals. Engineering and architectural skills play an important role in construction mdustnes. These Industries are Important for infrastructure development.

iii.Tertiary Industries These comprise of support services to primary and secondary industries as well as activities relating to trade These industries provide service facilities. These may be considered as a part of commerce because as auxiliaries to trade they assist trade. Transport, banking, insurance, warehousing. communication. packaging and advertising are examples of tertiary industries.

 Question 4. Describe the activities relating to commerce.

Answer

Commerce includes two types of activities, viz.,

(i) trade

(ii) auxiliaries to trade

Buying and selling of goods is termed as tradel. On the other hand, activities that are required to facilitate the purchase and sale of goods are called services or auxiliaries to trade. The various activities included in commerce are discussed below

  1. Trade

The hindrance of persons is removed by trade thereby making goods available to the consumers from the producers. Trade is an essential part of commerce. It refers to sale, transfer or exchange of goods. It helps in making the goods produced available to ultimate consumers or users. Businessmen are engaged in trading activities as middlemen like wholesalers and retailers to make the goods produced at a large scale in one place, available to consumers in different markets. Trade may be internal or external.

  1. Auxiliaries to Trade

Activities which are meant for assisting trade are known as auxiliaries to trade. These activities are generally, referred to as services because these are in the nature of support service facilitating the activities relating to industry and trade. These activities help in removing various hindrances which arise in connection with the production and distribution of goods. Auxiliaries to trade are briefly discussed belowAnchor

Transport and Communication

Transport removes the hindrances of place. Transport facilitates through road, rail or coastal shipping facilitate movement of raw material to the place of production and the finished products from factories to the place of consumption. Along with the transport facility, there is also a need lor communication facilities to enable the producers, traders and consumers to exchange information with one another. Thus, postal services and telephone facilities are also regarded as auxiliaries to business activities.

Banking and Finance Capital required to acquire assets and meeting the day-to-day expenses is provided by banking and financing institutions.

Commercial banks lend money to business organisations by providing: loans and advances. Banks also undertake collection of cheques, remittance of funds to different places, and discounting of bills on behalf of traders. In foreign trade, payments are arranged by commercial banks on behalf of importers and exporters.

Insurance The risk of loss or damage to the factory building, machinery, furniture, goods held in stock or goods in course of transport due to theft, fire, accidents, etc is removed by insurance of goods. By payment of a nominal premium, the amount of loss or damage and compensation for injury, if any, can be recovered from the insurance company.

Warehousing:

Storage and warehousing activities remove the hindrance of time by facilitating holding of stocks of goods to be sold as and when required. Warehousing helps business firms to overcome the problem of storage to prevent loss or damage and facilitates the availability of goods when needed Continuous supply of goods and thus stable prices can thus be maintained

Advertising:

Advertising makes it possible for producers and traders to promote the goods and services available in the market thus removing the hindrance of information. It is practically impossible for producers and traders to contact each and every customer Advertising helps in providing information about the goods available its features, price, etc, and Inducing customers to buy particular items.

Question 5. Why does business need multiple objectives? Explain any five such objectives.

Answer

Need for Multiple Objectives It is generally believed that profit earning is the primary objective of business. However, as per modern thinking, business needs to have several objectives. Consistent and sustainable profit can be earned only If the business performs useful services to society BUSiness requires multiple objectives since It has to balance a number of needs and goals related to various aspects of society. Following only one objective cannot lead business towards excellence.

Objectives are needed in every area where performance and results affect the survival and prosperity of business. Five of the objectives of business are described below:

i. Profit Maximisation

Profit is defined as excess of revenue over cost Profitability refers to profit in relation to capital Investment. Although earning profit cannot be the only objective of business, ItS importance cannot be ignored. Every business makes an attempt to reap maximum profit as possible in the given market conditions. Profit may be regarded as an essential objective of business for various reasonsAnchor

  • It is a source of income for business persons.
  • It can be a source of finance for meeting the expansion requirements of the business.
  • It indicates the efficient working of the business.
  • It can be taken as society’s approval of the utility of business.
  • It builds up the reputation of a business enterprise.

ii. Market Standing

Market standing refers to the position of an enterprise In relation to ItS competitors. A business enterprise must aim at standing on stronger footing In terms of offering competitive products to its customers and provide customer satisfaction.

iii. Innovation

Innovation is the introduction of new ideas or methods. There are two kinds of innovation in every business

Product Innovation

In product innovation a new product or service or an improved version of existing product is developed

Process Innovation

This Involves innovation in the methods, skills and activities needed to produce or supply products.

Product demand starts declining after a span of time. At this stage, the business must introduce a new innovation to create fresh demand for the existing product by introducing new features in it or bring out a new product to sustain in the market.

iv. Productivity

Productivity is calculated by comparing the value of outputs With the value of inputs. It is used as a measure of efficiency. Higher productivity leads to reduction In costs as the same amount of output is produced with lesser amount of inputs. This ensures survival and growth of the enterprise.

v. Social Responsibility

Every business operates within a society. It uses the resources of the society and depends on the society for its functioning. This creates an obligation on the part of business to look after the welfare of society. So, all the activities of the business should be such that they will not harm, rather they will protect and contribute to the interests of the society The activities of business towards the welfare or the society earn goodwill and reputation for the business In the eyes of consumers as well as government.

Question 6. Explain the concept of business risk and its causes.

Answer

The term ‘business risk’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. e.g., decline in demand for a product due to change in tastes and preferences of consumers resulting in lesser sales and profits; shortage of raw materials in the market leading to rise in its price and in turn raising cost for the business which uses them thereby reducing profits.

Business risk is of two types

  1. Speculative Risks involve both the possibility of gain as well as the possibility of loss. Speculative risks arise due to changes In market conditions including fluctuations in demand and supply, changes in prices or changes in fashion and tastes of customers.
  2. Pure Risks involve only the possibility of loss or no loss. The chance of fire, theft or strike is example of pure risks. Their occurrence may result in loss whereas non-occurrence may explain absence of loss, instead of gain.

Business risks arise due to a variety of causes, which are classified as follows

Natural Causes

Natural calamities like flood, earthquake, lightning, heavy rains famine etc are beyond human control. They result In heavy loss of life, property and income.

Human Causes

Human causes include such unexpected events like carelessness, negligence or dishonesty of employees, stoppage of work due to power failure, stokes. riots, management inefficiency etc.

Economic Causes

These include uncertainties caused due to economic fluctuations such as changes In demand for goods, competition, price, collection of dues from customers, change of technology or method of production, etc Financial problems like rise In interest rate and higher taxation, etc also come under economic causes as they raise the cost of operation of business unexpectedly.

Other Causes

These are unforeseen events ‘like political disturbances, mechanical failures, fluctuations in exchange rates, etc which lead to the possibility of business risks

Question 7. What factors are important to be considered while starting a business? Explain.

Answer

Business firms encounter some basic problems while starting a business. Various decisions have to be taken regarding the business while starling it. Some of the basic factors to be considered while starting a business are as follows

1.Selection of Line of Business

The first thing to be decided by any entrepreneur of a new business is the nature and type of business to be undertaken. One should enter an Industry which is in growth phase and thus has a higher possibility of profits. Technical knowledge and Interest the entrepreneur has for producing a particular product is also important in this regard.

2.Size of the Firm

Size of the firm refers to the scale of its operation. Business can be started at a large scale If the entrepreneur is confident that the demand for the proposed product is likely to be high over time and he has the necessary skills and capital for business. Business should be started at a small or medium scale if the market conditions are uncertain and risks are high.

3.Form of Ownership

There are various forms of ownership in a business organisation like sole Proprietorship, partnership or a Joint stock company. The choice of the suitable form of ownership will depend on such factors as the capital requirements, liability of owners, division of profit, transferability of interest and so on.

4.Location of Business Enterprise

Plant location is an Important factor to be considered at the start of the business. Availability of raw materials and labour; power supply and services like banking, transportation, communication, warehousing, etc, are Important factors while making a choice of location.

5.Financing Decisions

Financing is concerned with providing the necessary capital for starting as well as for continuing the proposed business Capital is required for Investment In fixed assets and current assets. Proper financial planning must be done to determine the requirement, source and allocation of funds.

6.Physical Facilities

Availability of physical facilities including machines and equipment building and supportive services is a very important factor to be considered at the start of the business. The decision relating to this factor will depend on the nature and size of business, availability of funds and the process of production

7.Plant Layout

Plant layout refers to a layout plan showing the arrangement of physical facilities such as machines and equipments for production It should be drawn by the entrepreneur after deciding about the scale of operation and physical facilities to be acquired.

8.Competent and Committed Employees

In present time, the most crucial resource for a business is the human resource. Every business depends on the competence and commitment of its workforce to perform various activities so that physical and financial resources are converted Into desired outputs in an effiCient and effective manner.

9.Tax Planning

Every business has to pay certain taxes as levied by the government. Tax planning and management for reducing tax liability as far as possible is acceptable both legally and ethically The entrepreneur must consider in advance the tax liability under various tax laws and its Impact on business decisions.

10.Launching the Enterprise

After the decisions relating to the above-mentioned factors have been taken, the entrepreneur can go ahead with actual launching of the enterprise which would mean mobilising various resources, fulfilling necessary legal formalities, starting the production process and initiating the sales promotion campaign.

Chapter 2

Forms of Business Organisation

Multiple Choice Questions

1. The structure in which there is separation of ownership and management is called

  1. Sole proprietorship
  2. Partnership
  3. Company
  4. A business organisations

Answer (c) The management and control of the affairs of the company is undertaken by the Board of Directors, which appoints the top management officials to the business. The managers are accountable to shareholders who are the owners of the company

2. The karta in Joint Hindu family business has

  1. limited liability
  2. unlimited liability
  3. no liability for debts
  4. joint liability

Answer (b) The joint Hindu family business is controlled by the head of the family who IS the eldest member and is called Karta. The kerte has unlimited liability while the liability of all other members is limited to their share of coparcenary property of the business.

3. In a co-operative society. the principle followed is

  1. one share one vote
  2. one man one vote
  3. no vote
  4. multiple votes

Answer (b) The principle of one man one vote governs the co-operative society Each member is entitled to equal voting rights reserved of the amount of capital contribution by him/her.

4. The board of directors of a joint stock company is elected by

  1. General public
  2. Government bodies
  3. Shareholders
  4. Employees

Answer (c) The shareholders are the owners of the company while the Board of Directors is the chief managing body elected by the shareholders.

5. The maximum number of partners allowed in the banking business are

  1. Twenty
  2. Ten
  3. No limit
  4. Two

Answer (b) The Minimum number of partners needed to start a partnership firm is two while the maximum number is ten In case of ban!(ing Industry and twenty In case of other businesses.

6. Profits do not have to be shared. This statement refers to

  1. Partnership
  2. Joint Hindu family business
  3. Sole proprietorship
  4. Company

Answer (c) Sole proprietorship refers to a form of organisation where business is owned, managed and controlled by a single Individual who bears all the risks and is the only recipient of all the profits.

7. The capital of a company is divided into number of parts each one of which are called

  1. Dividend
  2. Profit
  3. Interest
  4. Share

Answer (d) The capital of the company is divided into small parts called ‘shares’ which can be transferred freely from one shareholder to another person (except in a private company). The shareholders are thus the owners of the company.

8. The Head of the Joint Hindu family business is called

  1. Proprietor
  2. Director
  3. Katta
  4. Manager

Answer (c) The joint Hindu family business is controlled by me head of the family who is the oldest member and is called Karta.

9. Provision of residential accommodation to the members at reasonable rates is the objective of

  1. producer’s co-operative
  2. consumer’s co-operative
  3. housing co-operative
  4. credit co-operative

Answer (c) Co-operative housing societies are established to help people with limited income to construct houses at reasonable costs and giving the option of paying in instalments.

10. A partner whose association with the firm is unknown to the general public is called

  1. Active partner
  2. Sleeping partner
  3. Nominal partner
  4. Secret partner

Answer (d) A secret partner is one whose association with the firm is unknown to the general public. He is like the rest of the partners in all other aspects

Short Answer Type Questions

1. For which of the following types of business do you think a sole proprietorship form of organisation would be more suitable and why?

  1. Grocery store
  2. Medical store
  3. Legal consultancy
  4. Craft centre
  5. Internet cafe
  6. Chartered accountancy firm

Answer

Sole Proprietorship will be most suitable in case of a Grocery store as in this case, initial business setting-up costs are not very high, the legal requirements are minimum and the scale of operations is small.

Besides, direct personal contact is needed with the customers in the case of a grocery store and hence, sole proprietorship where there is a single person who owns and manages the business may be more suitable as he would be able to know his customers well and thus serve them better.

Question 2. For which of the following types of business do you think a partnership form of organization would be more suitable and why?

  1. Grocery store
  2. Medical store
  3. Legal consultancy
  4. Craft centre
  5. Internet cafe
  6. Chartered accountancy firm

Answer

Partnership form of organisation would be most suitable for all Internet cafe as this business needs greater capital Investment and varied skills It can come into existence easily through a legal agreement by putting an agreement between the prospective partners into place whereby they agree to carry out the business of the firm and share risks. There is no compulsion with respect to registration of the firm In case of lack of demand closure of the firm too is not difficult Further the partners are jointly and individually liable for payment of debts which does not put the liability on one person as in sole proprietorship.

Question 3. Explain the following terms in brief

  1. Perpetual succession
  2. Common seal
  3. Karta
  4. Artificial person

Answer

a) Perpetual Succession

Company is a legal entity separate of its owners or members It can be brought to an end only by law as it is created by the law. It will only cease to exist when a specific procedure for lis closure. ca led winding up, is completed. Members may come and go but the company continues to exist through consecutive succession of old members by new members on a continuous basis We can say that perpetual succession’ Implies permanent existence which is not affected by death, retirement insolvency of members.

b) Common Seal

A company is a creation of law and exists Independent of its members Company is thus considered to be an artificial person who acts through its Board of Directors, When the Board of Directors enters into an agreement with others. It indicates the company’s approval through a common seal The common seal is the engraved equivalent of an official signature Any agreement which does not have the company seal put on it is not legally binding on the company.

c) Karta

The head of the Hindu Joint family who is the eldest member and controls the Joint Hindu family business which IS a specific form of business organisation found only in India is called Karta Joint Hindu family business refers to a form of organisation wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF) It is governed by the Hindu Law The control of the family business lies with the karta He lakes all the decisions and is authorised to manage the business. His decisions are binding on the other members. The karta has unlimited liability while the liability of all other members is limited to their share of coparcenary property of the business.

d) Artificial Person

A company is called an artificial person because just like natural persons, a company can own’ property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot breathe, talk, walk, eat, etc. A company is a creation of law and exists as an artificial person independent of its members.

Question 4. Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.

Answer

When the inclusion of an individual into the business occur due to the birth in the Hindu Undivided Family (HUF) is known as Minor. On the other hand partnership is based on legal contract between two persons who agree to share the profits or losses of a business carried on by them and a minor is incompetent to enter into such a valid contract with others.

Hence, a minor cannot become a partner In any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent of all other partners.

Question 5. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.

Answer

Registration of partnership firm means recording of the firm’s name and its relevant prescribed particulars, in the Register of firms kept with the Registrar of firms. It provides conclusive proof of the existence of a partnership firm. It is optional for a partnership firm to get registered still most of the partnership firms voluntarily get themselves registered as in case of non-registration, the firm has to face the following consequences

A.partner of an unregistered firm cannot file file suit against the firm or another partner.

B.The firm cannot file suit against third parties.

C.The firm cannot file a case against the partners.

Hence, to avoid these disadvantages, partnership firms register themselves.

Question 6. State the important privileges available to a private company.

Answer

The following are some of the privileges of a private limited company compared to a public limited company.

  1. The minimum number of members required to form a private company is only two while at least seven people are needed to form a public company.
  2. A private company does not need to issue a prospectus as public is not Invited to subscribe to its shares.
  3. Allotment of shares can be done without receiving the minimum subscription.
  4. A private company can start business as soon as it receives the certificate of incorporation and does not have to wait for the receipt of certificate of commencement as in case of a public company.
  5. A private company needs to have only two directors as against the minimum of three directors in the case of a public company.
  6. A private company is not required to keep an index of members unlike a public company.
  7. There is no restriction on the amount of-loans to directors in a private company while in case of a public company permission from the government is required.

Question 7. How does a co-operative society exemplify democracy and secularism? Explain.

Answer

The word co-operative means working together with others tor a common purpose. The co-operative society is a voluntary association of persons, who join together with the motive of welfare of the members.

The membership of a co-operative society is voluntary. A person is free to join a co-operative society and can also leave anytime without any compulsion. The decision making power in a co-operative society lies in the hands of an elected managing committee. Every member has one vote and this right to vote gives the members a chance to elect the members of the managing committee.

All these features lend the co-operative society a democratic character Further, the membership of a co-operative society is open to all. Irrespective of their religion caste and gender. The co-operative society through its purpose lays emphasis on the values of mutual help and welfare. These features prove the secular nature of co-operative societies.

Question 8. What is meant by ‘partner by estoppel’? Explain.

Answer

A partner by estoppel is a person who gives an impression to others that he/she is a partner of the firm through his/her own initiative, conduct or behaviour. Such partners are held liable for the debts of the firm because in the eyes of others, they are considered partners. even though they do not contribute capital or take part in its management e.g., Mr Sharma is a friend of Mr Mathur who is a partner in a pharmaceutical firm-Health First. On Mr.Mathur’s request, Mr.Sharma accompanies him to a business meeting with Wellness Pharmaceuticals and actively participates in the process of negotiation for a business deal anc gives the impression that he is also a partner in Health First. If credit is extended to Health First on the basis of these negotiations. Mr Sharma would also be liable for repayment of such debt, as il he is acting as the partner of the firm.

Long Answer Type Questions

Question 1. What do you understand by a sole proprietorship firm? Explain its merits and limitations?

Answer

Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. The word “sole” implies “only” and “proprietor” refers to “owner”.

Hence, a sole proprietor is the only owner of a business. This form of business is particularly common in small scale business and areas of personalised services.

Features of Sole Proprietorship

  1. Formation and Closure
  2. Very few legal formalities are required to start a sole proprietary business, except in the fields where a license is required. Closure of the business can also be done easily.
  3. Unlimited Liability Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts.
  4. Sole Risk Bearer and Profit Recipient: The sole proprietor bears the risk of failure of business all alone and also receives all the business profits which are a reward for his risk bearing.
  5. Control and Decision Making
  6. The sole proprietor has the absolute right to run the business and make all decisions regarding the business without any interference from others He is the king in all aspects.
  7. No Separate Entity. No distinction is made. between the sole proprietor and his business In terms of the law as the business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business.
  8. Lack of Business Continuity Sole proprietorship lacks continuity as death. insanity. imprisonment, physical ailment or bankruptcy of the sole proprietor will have a negative effect on the business and may even cause closure of the business.

Merits of Sole Proprietorship

(i) Prompt Decision Making

        The decision making is prompt under sole proprietorship. As there is a considerable degree of freedom in making business decisions and there is no need to consult others. This results in the timely capitalisation of market opportunities.

(ii) Confidentiality

All the information related to business operations is kept confidential and secrecy is maintained as the sole decision making authority rests with the proprietor. A sole proprietor is also no bound legally to publish firm’s accounts.

(iii) Direct Incentive

The sole proprietor receives al the business profits as a reward for bearing the business risk. He/she is the single owner and does not need to share profit. This provides an incentive to the sole proprietor to work hard.

(iv) Sense of Accomplishment

There is a sense of personal satisfaction involved In working for oneself. It insu s a sense of accomplishment and confidence in the individual.

(v) Ease of Formation and Closure

An Important merit of sole proprietorship s the possibility of entering into business with minima legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner Limitations of sole Proprietorship.

1. Limited Resources

Resources of a sole Proprietor are limited to his/her personal savings and borrowings from others Banks and other financial Institutions hesitate to provide long term loan to a sole proprietor and hence, the size of the business generally remains small.

2. Limited Life of a Business

Concern Death, Insolvency or illness of a proprietor has a detrimental effects on the business and can lead to its closure.

3. Unlimited ability

A major disadvantage of sole proprietorship is the unlimited liability of the owner In case of failure of business, the creditors can recover their dues not only from the business assets but also from the personal assets of the proprietor

4. Limited Managerial

Ability An individual may not be good in all managerial tasks such as purchasing. seiling, financing, etc. Thus. decision making of a sole proprietor may not be effective in all the cases.

Though sole proprietorship suffers from certain limitations, many entrepreneurs opt for ttus form of orqamsat-on because it requires less amount of capital and is best suited for small businesses and where customers demand personalised services.

Question 2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.

Answer

The Indian Partnership Act, 1932 delnes partnership as the relation between persons who have agreed to share the profit of the business carried on by all or anyone of them acting for all. Some people consider partnership to be relatively unpopular because the inherent features of partnership such as JOint risk bearing and profit sharing, collective decision making. unlimited liability of partners. etc Sometimes lead to conflicts among partners and undue burden on some of the partners Besides. public confidence in partnership firm is low. But partnership as a form of business organisation actually has both merits and limitations as discussed below:

Merits of Partnership

  1. Ease of Formation and Closure A partnership firm can be formed with minimal legal formalities by an agreement between the prospective partners whereby they agree to carryout the business of the firm and share risks. Registration of the firm is also not compulsory Closure of the firm can be done easily too.
  2. Varied Expertise and Effective Decisions The partners can look after different functions according to their areas of expertise. This reduces the burden of work on individual partners and leads to more effective decisions.
  1. More Capital In partnership. the capital is contributed by many partners. Thus larger amount of funds are available as compared to a sole proprietor to undertake additional operations when needed.
  2. Risk Sharing All the partners share the risks involved in running a partnership firm. This reduces the anxiety burden and stress on individual partners.
  3. Secrecy A partnership firm is not legally required to publish its accounts and submit reports. Hence, it can maintain confidentiality of information relating to its operations.

Limitations of Partnership

(i) Unlimited Liability

The partners of a firm have unlimited liability. Personal assets may be used for repaying debts if the business assets are insufficient. Further, the partners are Jointly and individually liable for payment of debts Hence if some partners are unable to pay the debt proportionate to their share, the others will have to repay the entire debt causing excessive burden on them.

(ii) Limited Resources

Partnership firms usually do not operate on a large scale as there is a restriction on the number of partners and hence. contribution in terms of capital investment remains Insufficient for business expansion beyond a point.

(iii) Conflicts Decision making authority in a partnership is shared by all the partners Difference In opinion may thus lead to conflicts between partners Decisions of one partner are binding on other partners and a wrong decision by one may result in financial problem for all others.

If a partner decides to leave the firm due to conflicts thrs can result in termination of partnership as there IS a restriction on transfer of ownership.

(iv) Lack of Continuity

Partnership comes to an end with the death, retirement. Insolvency or lunacy of any partner It may result in lack of continuity if the remaining partners do no enter Into a fresh agreement to continue the business.

(v) Low Public Confidence

Due to lack of transparency in the business of a partnership firm, the confidence of the public in partnership firms is generally low. It is difficult for the public to ascertain the true financial status of a partnership firm as it is not legally required to publish its financial reports or make other related information public.

Question 3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.

Answer

After studying various terms of business organisations. it is evident that each form has certain advantages as well as disadvantages.

The important factors deterrn.nmq the choice of organisation are discussed below:

  1. Cost and Ease of Starting Business

Sole propnetorshrp is started easily as far as initial business setting-up costs and legal requirements are concerned. In case of partnership also, the advantage of less legal formalities and lower cost is there because of limited scale of operations. Registration is compulsory in case of co-operative societies and companies Formation of a company involves a lengthy and expensive legal procedure.

  1. Liability

In case of sole proprietorship and partnership firms, the liability of the owners/partners IS unlimited. This may result in payment of debt from personal assets of the owners. In joint Hindu family business, only the karta has unlimited liability. In co-operative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets.

  1. Continuity

The continuity of sole proprietorship and partnership firms is affected by events such as death, insolvency or Insanity of the owners. However, such factors do not affect the continuity of business in the case of organisations like Joint Hindu family business, co-operative societies and companies.

  1. Managerial Ability

It is difficult for a sole proprietor to have expertise in all functional areas of business. In other forms of organisations like partnership and company, there is division of work among the members which allows the managers to specialise in specific areas, leading to better decision making. But this may sometimes lead to conflicts due to differences of opinion Company form of organisation is a better alternative if the operations are complex in nature and require professional management.

  1. Capital Requirements

For large scale operations, company form is the most suitable as large amount of funds can be arranged by issuing shares In this form. For medium and small sized business, one can opt for partnership or sole proprietorship. Capital requirements for expansion can also be met more easily in company form.

  1. Degree of Control

Sole proprietorship provides direct control over operations and absolute decision making power. But if the owners want to share control for more effective decision making, partnership or company form of organisation can be adopted. In company form of organisation, professionals are appointed to manage the affairs of a company as there is complete separation of ownership and management.

  1. Nature of Business

Sole proprietorship is more suitable for businesses in which direct personal contact is needed with the customers such as in the case of a beauty parlour or grocery store. The company form of organisation is suited for large manufacturing units. Partnership form is much more suitable in case of professional services. The factors stated above are inter-related and therefore, all the relevant factors must be taken into consideration while making a decision with respect to the form of organisation.

Question 4. Discuss the characteristics, merits and limitations of co-operative form of organisation. Also describe briefly different types of co-operative societies.

Answer

According to The Indian Co-operative Societies Act, 1912, “Co-operative organisation is a society which has its objectives for the promotion of economic interests of its members in accordance with co-operative principles.”

Features of a Co-operative Society

1. Voluntary Membership

The membership of a co-operative society is voluntary. There is no compulsion for anyone to join or quit a society after serving a notice procedurally. Membership is open to all, irrespective of their religion, caste and gender.

2. Legal Status

Registration of a co-operative society is compulsory. This accords a separate Identity to the society which is distinct from its members. The society can enter into contracts and hold property in its name, sue and be sued by others. As a result of being a separate legal entity, it is not affected by the entry or exit of its members.

3. Limited Liability

The liability of the members of co-operative society is limited to the extent of the amount contributed by them as capital. This defines the maximum risk that a member can be asked to bear.

4. Control

In a co-operative society, the power to take decisions lies in the hands of an elected managing committee. The right to vote gives the members a chance to choose the members who will constitute the managing committee and this leads the co-operative society a democratic character.

5. Service Motive

The co-operative society through its purpose lays emphasis on the values of mutual help and welfare. Hence, the motive of service dominates its working. If any surplus is generated as a result of its operations, it is distributed amongst the members as dividend in conformity with the bye-laws of the society.

Merits of Co-operative Society

1. Equality in Votes

Co-operative society is governed by the principle of ‘one man one vote’. Each member is entitled to equal vote rights irrespective of the amount of capital contributed by a member.

2. Limited Liability

The liability of members of a co-operative society is limited to the extent of their capital contribution and hence, the personal assets of the members cannot be used to repay business debts.

3. Continuity Death, bankruptcy or insanity of the members do not affect continuity of a co-operative society.

4. Economy in Operations

The focus of co-operative society is on elimination of middlemen which helps in reducing costs. The members generally ofter honorary services to the society and the risk of bad debts is lower as customers or producers are members of the society too.

5. Government Support

The co-operative society is supported by the government in the form of low taxes, subsidies and low interest rates on loans.

6. Ease of Formation

The co-operative society can be started with a minimum of ten members and the registration procedure is done under Co-operative Societies Act, 1912.

Limitations of Co-operative Society

1. Limited Resources

Capital contributions in a cooperative society are from the members with limited means.

2. Inefficient Management

The members of co-operative societies are not professionals and offer honorary services on a voluntary basis. They are not equipped to carry out the management functions effectively.

3. Lack of Secrecy

It is difficult to maintain secrecy about the operations of a co-operative society due to open discussions in the meetings and disclosure obligations as per the Societies Act, (7).

4. Government Regulations

Co-operative societies have to comply with several rules and regulations related to auditing of accounts. submission of accounts. etc and also work under control of state co-operative departments.

5. Internal Conflicts

Internal conflicts arise when personal interests start dominating the welfare motive.

Types of Cooperative Societies

1. Consumer’s Co-operative Societies

The consumer co-operative societies are comprises to protect the Interests of consumers as Its aim is eliminating middlemen to achieve economy in operations and provide good quality products at reasonable prices it purchases goods in bulk directly from the wholesalers and sells goods to the members.

2. Producer’s Co-operative Societies

These societies are comprise to protect the interest of small producers and are set up to provide the supplying of raw materials equipment and other Inputs to the members and buying their output for sale Profits among the members are distributed on the basis of their contributions to the society.

3. Marketing Co-operative Societies

Such societies consist to help the small producers who wish to obtain reasonable prices for their output and want to market their products. Its members jointly perform marketing functions like transportation. warehousing, packaging, etc to sell the output at the best possible price and profits are distributed according to each member’s contribution to the pool of output.

4. Farmer’s Co-operative Societies

These societies comprise of farmers as members who Jointly take up farming activities to gain the benefits of large scale farming and Increase the productivity. Such societies provide better quality seeds, fertilisers, machinery and other modern techniques to member farmers.

5. Credit Co-operative Societies

Credit co-operative societies are formed for providing easy credit on reasonable terms to the members These societies provide loans at low rates to members out of the amounts collected as capital and deposits from the members thereby eliminating exploitation by moneylenders.

6. Co-operative Housing Societies

Co-operative housing societies help people with low income to construct houses at reasonable costs and giving them the option of paying in instalments. These societies construct flats or provide plots to members for construction of houses.

Question 5. Distinguish between a Joint Hindu family business and partnership.

Answer

Basis

Partnership

Joint Hindu Family Business

Formation

Easy formation with An agreement between partners

Easy formation with An agreement between partners

Members

Minimum members should be 2 and maximum 10 for banking and 20 for others

Minimum members should be 2 and maximum 10 for banking and 20 for others

Registration Requirement

Registration is optional

Exemption from registration

Capital Contribution

Limited but more than that can be raised In case of sole proprietorship

The capital contribution comes from Ancestral property

Liability

Liability of members is unlimited and joint

Liability is unlimited only for Karta while it is limited for other members

Control and Management

Partners take decisions Joint and consent of all partners is needed

Karta takes decisions which are binding on other members

Continuity

Stable but affected by status of partners

Stable business, continues even in Karta dies through Succession in family

Question 6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?

Answer

Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who bears all risks and receives all profits. This form of business is suited mainly in areas of personalised services and small scale activities due to shortage of capital and limited abilities of an individual who is the proprietor. Still many people continue to prefer sole proprietorship over other forms of organisation as sole proprietorship offers many advantages such as:

1. Prompt Decision Making

The decision making is prompt under sole proprietorship as there is considerable degree of freedom in making business decisions and there is no need to consult others as in case of partnership or co-operative. This results in effective capitalisation of market opportunities as and when they arise.

2. Confidentiality

All the information related to business operations is kept confidential and secrecy is maintained as the sole decision making authority rests with the proprietor unlike partnership or co-operative form. A sole proprietor is also not bound legally to publish firm’s accounts as in case of a company.

3. Incentive to Work

The sole proprietor receives all the business profits as a reward for bearing the business risk He/She is the single owner and does not need to share profit. This provides an incentive to the sole proprietor to work hard.

4. Sense of Accomplishment

There is a sense of personal satisfaction involved in working for oneself. It instills a sense of accomplishment and confidence in the individual as he/she is the one who takes all the decisions without any interference from others which is present in all other forms of organisation.

5. Ease of Formation and Closure

An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship unlike other forms like co-operative or company. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.

Application Type Questions

Question 1. In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer.

Answer

In partnership form of organisation, a trade agreement made by one owner is binding on the others.

The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or anyone of them acting for all”.

The definition of partnership highlights the fact that it is a business carried on by all or anyone of the partners acting for all. One partner is an agent of other partners as he/she represents them and thereby binds them through his/her acts. He/She is a principal as he/she too can be bound by the acts of other partners Hence, every partner is both an agent and a principal. This is the reason why a trade agreement made by one owner is binding on the others.

Further, the partners are jointly responsible for the payment of debts and they contribute in proportion to their share in business and as such are liable to that extent. The partners share amongst themselves the responsibility of decision making and control of day-to-day activities.

Question 2. The business assets of an organisation amount to ₹ 50,000 but the debts that remain unpaid are ₹ 80,000. What course of action can the creditors take if:

  1. The organisation is a sole proprietorship firm.
  2. The organisation is a partnership firm with Anthony and Akbar as partners.

Which of the two partners can the creditors approach for repayment of debt? Explain giving reasons.

Answer

a. The organisation is a Sole Proprietorship firm. Sole Proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. As such the owner’s personal possessions such as his/her personal car and other assets could be sold for repaying the debt. In the given case the total debts that remain unpaid are ₹ 80,000 but the organisational assets amount to ₹ 50,000 only. In such a situation the creditors can demand from the proprietor to pay ₹ 30,000 from his/her personal sources even If he/she has to sell his/her personal property to repay the firm’s debts.

b. The organisation is a partnership firm with Anthony and Akbar as partners. The partners of a firm have unlimited liability. Personal assets may be used for repaying debts In case the business assets are insufficient. As the total debts that remain unpaid are ₹ 80,000 but the organisational assets amount to ₹ 50,000 only, the creditors can demand from both or any of the partners Anthony and Akbar to pay ₹ 30,000 from their personal sources even if they have to sell their personal property to repay the firm’s debts.

In the given situation, creditors can demand the payment of debt from both Anthony and Akbar as the partners are jointly liable for payment of debts and they contribute in proportion to their share in business as they are liable to that extent However, if one of them is not available or is unable to pay, the other partner will have to pay the creditors as each partner can be held responsible for repaying the debts of the business Such a partner can later recover from the other partner an amount of money equivalent to the share jn liability defined as per the partnership agreement

Question 3. Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighbourhood corner shop selling accessories such as artificial jewellery, bags, hair clips and nail art to a retail chain with three branches in the city. Although, she looks after the varied functions in all the branches. She is wondering whether she should form a company to better manage the business.She also has plans to open branches country wide.

a. Explain two benefits of remaining a sole proprietor.

b. Explain two benefits of converting to a Joint Stock Company.

c. What role will her decision to go nationwide play in her choice of form of the organisation?

d. What legal formalities will she have to undergo to operate business as a company?

Answer

a. Iran may have the following two benefits of remaining a sole proprietor.

  • Being the sole proprietor Kiran can enjoy all the profit earned from the business without having the need to share it with anyone.
  • She does not have to publish accounts or be regulated under any law governing sole proprietorship which maintains secrecy of the business activities.

b. Kiran may have the following two benefits of converting to a Joint Stock Company.

  • She will be able to acquire the funds required for expansion of her retail chain branches country wide through share capital in a Joint Stock Company.
  • Public has more faith in a Joint Stock Company than in a sole Proprietorship firm which will help In increasing the customer base for Kiran’s business.

c. Her decision to go nationwide involves an increase in her scale of operation, requirement of capital and management abilities. As a sole Proprietor, she may face limitations of resources and her limited managerial ability. She may not be good In all managerial tasks such as purchasing. selling. financing, etc. Thus, her decision making may not be effective in all the situations especially when there are complexities of large scale operation. Besides, she will have to bear more risk individually if she remains a sole proprietor and her liability will increase to a large extent. All these factors will definitely playa role in her choice of form of organisation and she will have much stronger reasons to form a Joint Stock Company in this case.

d. The formation of a company requires greater time, effort and extensive knowledge of legal requirements and the procedures involved. To operate her business as a company. first of all, Kiran will have to prepare several documents and will have to ensure compliance with several legal requirements before it can start functioning. She will have to register her company registration of the company is compulsory as provided under the Indian Companies Act. 1956.

The Companies Act requires each public company to provide a lot of information to the office of the registrar of companies from time-to-time which Kiran will have to provide. The functioning of a company is subject to many legal provisions and compulsions A company has to comply with various restrictions including audit, voting, filing of reports and preparation of documents, and is required to obtain various certificates from different agencies such as registrar, SEBI, etc.

Chapter 3

Private, Public and Global Enterprises

Multiple Choice Questions

1. A government company is any company in which the paid up capital held by the government is not less than

  1. 49 per cent
  2. 51 per cent
  3. 50 per cent
  4. 25 per cent

 

Answer (b) According to the Indian Companies Act. 1956, a government company means any company in which not less than 51 per cent of the paid up capital is held by the Central Government, or by any State government or partly by Central Government and partly by one or more State Governments.

2. Centralised control in MNCs implies control exercised by

  1. Branches
  2. Subsidiaries
  3. Headquarters
  4. Parliament

Answer (c) MNCs have their headquarters in their home country and exercise control over all branches and subsidiaries Thus control IS limited to the broad policy framework and there IS no interference In day-to-day operations of the subsidies.

3.  PSE’s are organisations owned by

  1. Joint Hindu Family
  2. Government
  3. Foreign Companies
  4. Private Entrepreneurs

Answer (b) PSE stands for Public Sector Enterprise i.e., an enterprise in the public sector which is under government ownership.

4.  Reconstruction of sick public sector units is taken up by

  1. MOFA
  2. MoU
  3. BIFR
  4. NRF

Answer (c) If a public sector unit is making losses continuously and is declared Sick, it is referred to the Board for Industrial and Financial Reconstruction (BIFR) for complete overhauling or shut down.

5. Disinvestments of PSEs implies

  1. sale of equity shares to private sector/public
  2. closing down operations
  3. investing in new areas
  4. buying shares PSE’s

Answer (a) Disinvestment refers to the sale of the equity shares to the private sector and the public The objective of disinvestment IS to raise funds and encourage wider participation of the general public and workers in the ownership of these enterprises.

Short Answer Type Questions

Question 1. Explain the concept of public sector and private sector.

Answer

Indian Economy consists of mixed economy. A mixed economy refers to an Economic system where both private and government enterprises co-exist. The economy is therefore classified into two sectors viz., private sector and public sector.

The private sector consists of business enterprises owned by individuals or a group of individuals. The various forms of organisation are sole proprietorship, partnership, joint Hindu family, co-operative and company.

The public sector consists of business enterprises owned and managed by the government. These organisations may either be partly or wholly owned by the Central or State Government with an equity stake of at least 51 % with the government. They may also be a part of the ministry or might have come into existence by a Special Act of the Parliament. The government participates in the economic activities of the country through public sector.

Industrial policy resolutions announced by the government from time-to-time define the area of activities in which the private sector and public sector are allowed to operate.

Question 2. State the various types of organisations in the private sector.

Answer

The various types of organisations in private sector are:

(i)  Sole Proprietorship

It refers to the form of organisation where business is owned, managed and controlled by a single individual who bears all the risks and enjoys the whole profit.

(ii)  Partnership

It defined as an association of two or more persons who agree to carry the business together and share the profit as well as bear risks collectively.

(iii)  Joint Hindu Family

This business is owned and carried on by the member of a Hindu undivided family which is governed by the Hindu Law.

(iv)  Company

It may be defined as an artificial person existing only in the eyes of law with perpetual succession, having a separate legal entity and common seal. It’s of two types-Private and Public.

(v)  Multinational Corporations

They are huge industrial organisations which extend their industrial and marketing operations through a network of their branches in several countries.

Question 3. What are the different kinds of organisations that come under the public sector?

Answer

The forms of organisation which a public enterprise may take are as follows:

(i)  Departmental Undertaking

These enterprises are established as departments of the ministry and are considered as part or an extension of the ministry Itself. These undertakings may be under the Central or the State Government. Examples: Railways and; Post and Telegraph Department.

(ii)  Statutory Corporation

Statutory corporations are public enterprises brought into existence by a Special Act of the Parliament, which defines its powers and functions. It IS a financially independent corporate body created by the legislature and has a clear control over a specified area or a particular type of commercial activity.

(iii)  Government Company

According to the Indian Companies Act, 1956, a government company means any company in which at least 51 per cent of the paid up capital is held by the Central Government, or by any State Government or partly by Central Government and partly by one or more State Governments. These are established purely for business purposes.

Question 4. List the names of some enterprises under the public sector and classify them.

Answer

Some enterprises under the public sector are:

(i) Indian Railways: Departmental Undertaking

(ii) Indian Post and Telegraph: Departmental Undertaking

(iii) Steel Authority of India Limited (SAIL) : Government Company

(iv) Bharat Heavy Electricals Limited (BHEL) : Government Company

(v) Life Insurance Corporation (LIC) of India: Statutory Corporation

(vi) State Trading Corporation: Statutory Corporation

Question 5. Why is the government company form of organisation preferred to other types in the public sector?

Answer

The government company form of organisation is preferred to other types in the public sector because of the following advantages it offers

 

(i) Simple Procedure of Establishment

A government company can be easily formed as compared to other public enterprises. There is no need to get a bill passed by the Parliament or State Legislature. It can be formed simply by following the procedure laid down by the Companies Act.

(ii) Working on Business Principles

The government company works on business principles, It is independent in financial and administrative matters. Its Board of Directors usually consists of professionals and persons of repute.

(iii) Efficient Management

The management of a government company ensures efficiency in managing the business as it is more accountable than other forms of public enterprises because the annual report of the government company is placed before both the House of Parliament.

(iv)  Competition

These companies pose a healthy competition to private sector which ensures availability of goods and services at reasonable prices and good quality.

Question 6. How does the government maintain a regional balance in the country?

Answer

One of the major objectives of planning in India has been that of removing regional disparities. During the pre-independence period most of the industrial progress was limited to a few areas like the port towns. After the inception of planning in 1951, the government started paying special attention to those regions which were lagging behind and public sector industries were deliberately set up in those backward regions.

Four major steel plants were set up in the backward areas to accelerate economic development, provide employment to the workforce and develop ancillary industries. e.g., with the establishment of Bhilai Steel Plant in Madhya Pradesh, several new small mudstones have come up in that state.

The private businessmen hesitate to establish their enterprises in the backward areas due to lack of infrastructure facilities, skilled workforce, etc but these regions cannot be neglected in public interest. Therefore, the government located new enterprises in backward areas and at the same time prevented the mushrooming of private sector units in already advanced areas.

Long Answer Type Questions

Question 1. Describe the Industrial Policy,1991, towards the public sector.

Answer

Government of India introduced four major reforms in the public sector in its new Industrial Policy, 1991. Which were as follows

(i) Dereservation

In the 1956, Industrial Policy Resolution, 17 industries were reserved for the public sector. In 1991, only 8 industries were reserved for the public sector, they were restricted to the areas of atomic energy, arms and ammunition, defence, mining, and railways. This meant that the private sector could enter all areas except these eight (now three since 2001) giving competition to public sector.

(ii) Disinvestment of Public Sector Enterprises

Disinvestment involves the sale of the equity shares to the private sector and the public. This was done with an aim to raise funds and encourage wider participation of the general public and workers in the ownership of these enterprises. This was expected to result in improved managerial efficiency and financial discipline.

(iii) Policy Regarding Sick Units

All public sector units were referred to the Board of Industrial and Financial Reconstruction (BIFR) to decide whether a sick unit was to be restructured or closed down. A National Renewal Fund (NRF) was set up by the government to retrain or redeploy labour retrenched from a sick unit and to provide compensation to public sector employees seeking voluntary retirement,

(iv) Memorandum of Understanding Management of public sector units was granted greater autonomy but held accountable for specified results through signing of Memorandum of Understanding (MoU) between the particular public sector unit and their administrative ministries. Under this system, public sector units were given clear targets and operational autonomy for achieving those targets.

Question 2. What was the role of the public sector before 1991?

Answer

Public sector had a prominent role before 1991 as discussed below:

(i) Development of Infrastructure and Heavy Industries

At the time of independence, basic infrastructure was not developed and hence industrialisation was difficult due to lack of adequate transportation and communication facilities, fuel and energy, and basic and heavy industries. The private sector did not take initiative to invest in heavy industries and infrastructure due to heavy capital requirements and long gestation periods involved in these projects. Therefore, government took the lead in these projects through public sector enterprises.

(ii) Regional Balance

After the inception of planning in 1951, the government started paying special attention to those regions which were lagging behind and public sector industries were deliberately set up in those backward regions. Four major steel plants were set up as public sector units in the backward areas to accelerate economic development, provide employment to the workforce and develop ancillary industries.

(iii) Economies of Scale

Average cost of production is lowered when the scale of production is large. But large scale industries require huge capital outlay and hence the public sector had to step in to take advantage of economies of scale. Units of electric power. natural gas, petroleum, etc were set up in public sector as these units required a larger base to function economically which was possible only with government resources and mass production.

(iv) Concentration of Economic Power

At the time of independence, there were very few industrial houses which had the required capital to invest in heavy industries and if public sector units were not established, wealth could get concentrated in a few hands giving rise to monopolistic practices. The public sector ensures that the income and benefits that accrue are shared by a large of number of employees and workers.

(v) Self Reliance

One of the major objectives of Five Year Plans WaS self-reliance. It was difficult to import heavy machinery required for a strong industrial base due to shortage of foreign exchange. At that time, public sector companies involved in heavy engineering helped in import substitution. Simultaneously, public sector companies like STC and MMTC played an important role in expanding exports of the country.

Question 3. Can the public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer.

Answer

It is difficult though not impossible for the public sector companies to compete with the private sector in terms of profits and efficiency due to following reasons:

(i) Difference in Objective

Private sector firms operate with the objective of profit maximisation while public sector companies have social welfare as the prime objective and hence they cannot be completely profit oriented.

(ii) Difference in Ownership

The government is the sole or major shareholder in public sector companies. The management and administration of these companies therefore rests in the hands of the government which may not make economically sound policies due to political considerations.

(iii) Difference in Management Public sector companies are managed by government officials who may not be professionally trained while private sector companies are run and managed by professional managers. This leads to higher efficiency in private sector.

 

(iv)  Difference in Area of Operation Private sector operates in all areas with adequate return on investment while public sector operates mainly in basic and public utility sectors where returns are not very high.

Question 4. Why are global enterprises considered superior to other business organisations?

Answer

Global enterprises are large industrial organisations which extend their industrial and marketing operations through a network of their branches or subsidiaries in several countries. These enterprises are Considered superior to other private sector companies and public sector enterprises because of certain features which are as follows:

(i)  Availability of Funds These enterprises can survive in crises and register higher growth as they possess huge financial resources as they have the ability to raise funds from different sources such as equity shares, debentures or bonds. They are also in a position to borrow from financial institutions and international banks as they have high credibility.

(ii)  Diversification of Risk Global enterprises usually operate in different countries and enter into joint ventures with domestic firms of the host country. Thus, losses in one country may be compensated by profits in another country. Risk is also shared by the domestic partner in case of joint venture.

(iii)  Advanced Technology Global enterprises conform to international standards and quality specifications as they possess superior technologies and methods of production.

(iv)  Research and Development (R&D) High quality research involves huge expenditure which only global enterprises can afford. Therefore, these enterprises have highly sophisticated research and development departments which regularly come up with product as well as process innovations making these firms globally competitive.

(v)  Marketing Strategies Global companies use aggressive marketing strategies in order to increase their sales. Their market information systems are reliable and up-to-date leading to effective advertising and sales promotion. They manage their brands effectively as they have a global brand equity.

 

(vi)  Wider Market Access The operations and marketing of global companies extend to many countries in which they operate through a network of subsidiaries, branches and affiliates. Due to this they enjoy a far wider market access than domestic firms.

Question 5. What are the benefits of entering into joint ventures?

Answer

When two businesses agree to join together for a common purpose and mutual benefit, it gives rise to a joint venture. The major benefits of joint ventures are as follows

(i)  Increased Resources and Capacity When two firms come together, it enables the joint venture company to grow and expand more quickly and efficiently as the new business pools in financial and human resources. It is able to face market challenges and capitalise new opportunities more effectively.

(ii)  Access to New Markets and Distribution Networks When foreign companies form joint venture with companies in a host country, they gain access to the market of host country. They can also take advantage of the established distribution channels i.e., the wholesale and retail outlets in different local markets which may be very expensive for them otherwise.

(iii)  Access to Technology Most businesses enter into joint ventures to get access to an advanced technology which IS not possible or economically feasible to be developed on their own. Technology adds to efficiency and effectiveness, thus leading to reduction in costs and superior quality products.

(iv)  Innovation Products become outdated after sometime and demand for them starts falling. Consumers have become more demanding in terms of new and innovative products. JOint ventures enable companies to come up with innovative products because of new ideas and technology acquired from the partner In the joint venture.

(v)  Low Cost of Production When international corporations invest in developing countries through joint ventures. they are able to benefit from low cost of raw materials and labour The international partner is

 

thus able to produce the products of required quality and specification at a much lower cost than what is prevailing In the home country

(vi)  Established Brand Name When two businesses enter into a joint venture one of the parties benefits from the other’s goodwill already established in the market. In such cases, there is a ready market waiting for the product to be launched which saves expenditure on marketing activities otherwise required to launch a new product.

Chapter 4

Business Services

Multiple Choice Questions

1. DTH services are provided by

(a) transport companies

(b) banks

(c) cellular companies

(d) None of these

Answer (c) DTH (Direct to Home) is a satellite based media service provided by cellular companies.

2. The benefits of public warehousing includes.

(a) control

(b) flexibility

(c) dealer relationship

(d) None of these

Answer (b) The benefits of public warehousing include flexibility in the number of locations, no fixed cost and value added services like packaging and labelling.

3. Which of the following is not a function of insurance?

(a) Risk sharing

(b) Assist in capital formation

(c) Lending of funds

(d) None of these

Answer (c) Functions of insurance include providing certainty, protection, risk sharing and assisting in capital formation.

4. Which of the following is not applicable in life insurance contract ?

(a) Conditional contract

(b) Unilateral contract

(c) Indemnity contract

(d) None of these

Answer (c) Life insurance contract is not a contract of indemnity as the lite of a human being cannot be compensated and only a specified sum of money is paid.

5. CWC stands for

(a) Central Water Commission

(b) Central Warehousing Commission

(c) Central Warehousing Corporation

(d) Central Water Corporation

Answer (c) A central government undertaking CWC i.e., Central Warehousing Corporation provides warehousing services for businessmen across the country.

Short Answer Type Questions

Question 1. Define services and goods.

Answer

Services are essentially intangible activities which are separately identifiable and provide satisfaction of wants. We cannot kept it in stock. Their purchase does not result in the ownership of anything physical. Services involve an interaction to be realised between the service provider and the consumer.

A good is a physical product capable of being delivered to a purchaser and involves the transfer of ownership from seller to customer. Goods also refer to commodities or items of all types, except services, involved in trade or commerce.

Question 2. What is e-banking? What are the advantages of e-banking?

Answer

The growth of internet and e-commerce is dramatically changing everyday, with the model world wide web and e-commerce the world is transforming into a digital global village. In Simple terms, internet banking means any user with a PC and a browser can get connected to the banks website to perform the banking functions and avail the bank’s services.

e-banking refers to electronic banking or banking using electronic media. Thus, e-bankmq is a service provided by banks that enables a customer to conduct banking transactions, such as checking accounts, applying for loans or paying bills over the internet uSing a personal computer, mobile telephone or handheld computer.

e-banking includes a range of services like Electronic Funds Transfer (EFT), Automated Teller Machine (ATM), Electronic Data Interchange (EDI), Credit Cards, and Electronic or Digital Cash

Advantages of e-banking

(i) e-banking provides 24 hours, 365 days a year services to the customers of the bank,

(ii) It lowers the transaction cost.

(iii) It inculcates a sense of financial discipline and promotes transparency.

(iv) It reduces the load on bank branches.

Question 3. Write a note on various telecom services available for enhancing business.

Answer

There are various type of telecom services which facilitate business.

These include:

(i) Cellular Mobile Services These include all types of mobile telecom services including voice and non-voice messages, data services and PCO services utilising any type of network equipment within their service area.

(ii) Radio Paging Services Radio Paging Service is a means of transmitting information to persons even when they have mobile. It is an affordable one way information broadcasting solution which includes tone only, numeric only and alpha/numeric paging.

(iii) Fixed Line Services These include all types of fixed services including voice and non-voice messages and data services used to establish linkages for long distance traffic utilising any type of network equipment connected through fibre optic cables.

(iv) Cable Services These include linkages and switched services within a licensed area of operation to operate media services which are essentially one way entertainment related services.

(v) VSAT Services VSAT (Very Small Aperture Terminal) is a satellite-based communications service which is highly flexible, uninterrupted and reliable communication solution for applications such as newspapers-on-line and tele-education in both urban and rural areas.

(vi) DTH Services DTH (Direct to Home) is a satellite based media service provided by cellular companies. One can receive media services directly through a satellite with the help of a small dish antenna and a set top box.

Question 4. Explain briefly the principles of insurance with suitable examples.

Answer

The specific principles of a valid insurance contract consist of the following

(i) Utmost Good Faith:

A contract of insurance is a contract of uberrimae fidei i.e., a contract found on utmost good faith. It is the duty of the insured to voluntarily make full, accurate disclosure of all facts, material to the risk being proposed and the insurer to make clear all the terms and conditions in the insurance contract. e.g., if any person has taken a life insurance policy by hiding the fact that he is a cancer patient and later on if he dies because of cancer then insurance company can refuse to pay the compensation as the fact was hidden by the insured.

(ii) Insurable Interest:

The insured must have an insurable interest in the subject matter of insurance. Insurable interest means some pecuniary interest in the subject matter of the insurance contract. The insured must have an interest in the preservation of the thing or life insured. e.g.; If a person has taken the loan against the security of a factory premises then the lender can take fire insurance policy of that factory without being the owner of the factory because he has financial interest in the factory premises.

(iii) Indemnity:

According to it the insurer undertakes to put the insured in the same position that he occupied immediately before the loss due to happening of the event insured against. The principle of indemnity is not applicable to life insurance e.g., A person insured a car for 2.5 lakh against damage or an accident case. Due to accident he suffered a loss of 1 5 lakh, then the insurance company will compensate him 1.5 lakh only not the policy amount i.e. 2.5 lakh as the purpose behind it is to compensate not to make profit.

(iv) Contribution:

Under this principle, an insurer who has paid a claim under insurance has the right to call upon other liable Insurers to contribute for the loss of payment. e.g . A person gets his house insured against fire tor e.g.,1 lakh with insurer A and for 50000 with insurer B A loss of 75000 occurred Then A is liable to pay 50000 and B is liable to pay 25000.

Question 5. Explain warehousing and its functions.

Answer

Warehousing was initially viewed as a provision of static unit for keeping and storing goods in a SCientific and systematic manner so as to maintain their original quality, value and usefulness but now it is viewed as a logistical service provider of the right quantity, at the right place. in the right time. In the right physical form at the right cost.

Functions of Warehousing

(i) Consolidation The warehouse receives and consolidates materials/goods from different production plants and dispatches the same to a particular customer on a Single transportation shipment

(ii) Break the Bulk The warehouse divides the bulk quantity of goods received from the production plants into smaller quantities and then transported according to the requirements of clients 10 their places of business.

(iii) StockPiling Goods or raw materials which are not required immediately for sale or manufacturing are stored in warehouses to be made available to business depending on customers demand. This type of warehouse is also known as the storehouse of surplus goods.

(iv) Value Added Services Provision of value added services such as in transit mixing, packaging and labelling is also a function of modern warehousing.

(v) Price Stabilisation Warehousing performs the function of stabilising prices by adjusting the supply of goods according to demand.

(vi) Financing Warehouse owners provide loans to the owners on security of goods and further supply goods on credit terms to customers. The warehouse keepers issue a receipt when goods are kept in warehouse. This receipt can be used as security to get loans from banks and owners In this way it also helps in financing.

Long Answer Type Questions

Question 1. What are services? Explain their distinct characteristics?

Answer

Services are essentially intangible activities which are separately identifiable and provide satisfaction of wants. Their purchase does not result in the ownership of anything physical. Services involve an interaction to be realised between the service provider and the consumer.

There are five distinct characteristics of services as discussed below:

(i) Intangibility

Services are intangible, i.e., they cannot be touched. They can only be experienced and hence the quality of the service cannot be determined before consumption Therefore, the service providers consciously work on creating a desired service so that the customer has a favourable experience. e.g, service in a restaurant should be a favourable experience for customer to visit again.

(ii) Inconsistency

Services have to be performed exclusively each time according to different consumer demands as there is no standard tangible product on offer. Hence inconsistency is an important characteristic of services. Service providers need to modify their oHer to closely meet the requirements of the customers. e.g., services provided by nationalised banks are quite different from the banking services provided by private banks.

(iii) Inseparability

Activities of production and consumption are performed simultaneously in case of services which makes the production and consumption of services seem to be inseparable as services have to be consumed as and when they are produced. e.g., we cannot separate the medical services provided by a doctor.

(iv) Absence of Inventory

Services are intangible and perishable and hence cannot be stored for future use. This implies that the supply needs to be managed according to demand as the service has to be performed as and when the customer asks for it. e.g., a medicine can be stored but the medical care will be experienced only when the doctor provides It.

(v) Involvement

Participation of the customer in the service delivery process is an Important characteristic of services as the customer has the opportunity to get the services modified according to his/her specific requirements e g., cinema halls are providing services to watch movie but the customer has to visit to the hall to experience the movie in cinema hall.

Question 2. Explain the functions of Commercial Banks with an example of each.

Answer

Banks perform a variety of functions including the basic or primary functions and the agency or general utility functions as discussed below:

(i) Accepting Deposits

Banks accept deposits and pay interest on them as these deposits form the basis of loans given by banks. These deposits are generally taken through current account, savings account and fixed deposits Current account and savings accounts deposits can be Withdrawn at any time without any prior notice while Fixed reasons are time deposits of fixed maturity. Higher rate of interest is paid on fixed deposits as compared to the savings accounts.

(ii) Lending of Funds

Second major function of commercial banks is to provide loans and advances to individuals and businesses out of the money received through deposits. These advances can be made in the form of overdrafts, cash credits, discounting trade bills, term loans, consumer credits and other miscellaneous advances.

(iii) Cheque Facility

Banks collect the cheques of their customers drawn on other banks. The cheque is a developed credit instrument for the withdrawal of deposits which serves as a convenient and Inexpensive medium of exchange.

There are two types of cheques mainly:

(a) bearer cheques, which are encashable Immediately at bank counters

(b) crossed cheques which are to be deposited only in the payees account.

(iv) Remittance of Funds

Commercial banks provide the facility of fund transfer from one place to another, on account of the interconnectivity of branches. The transfer of funds IS administered by using bank drafts, pay orders or mail transfers on which the bank charges a nominal commission. The bank issues a draft for the amount on its own branches at other places or other banks at those places. The payee can present the draft on the drawee bank at his place and collect the amount.

(v) Allied Services

In addition to above functions, banks also provide allied services such as bill payments, locker facilities, underwriting services. Banks also perform other services like opening demat and trading accounts of customers for buying and selling of shares and debentures on instructions and other personal services like payment of insurance premium, collection of dividend etc.

Question 3. Write a detailed note on various facilities offered by Indian Postal Department.

Answer

Indian post and telegraph department provides various postal services across India. For providing these services the whole country has been divided into 22 postal circles. These circles manage the functioning of the various head post offices, sub-post offices and branch post offices. There are 154149 post offices and 564701 letter boxes processing 1575 crore mails every year. The various facilities provided by postal department are broadly categorised into:

(i) Financial Facilities

Post Office Savings Bank is the largest retail bank having 150000 plus branches. Financial facilities are provided through the post office’s savings schemes like Public Provident Fund (PPF), Kisan Vikas Patra, and National Saving Certificates apart from retail banking functions of monthly income schemes, recurring deposits, savings account, time deposits and money order facility.

(ii) Mail Facilities

Mail services consist of parcel facilities that is transmission of articles from one place to another; registration facility to provide security of the transmitted articles and insurance facility to provide insurance cover for all risks in the course of transmission by post.

(iii) Allied Facilities

(a) Greeting Post Indian post offers a beautiful and varied range of greeting cards for every occasion.

(b) Media Post Indian corporates can use media post which is an Innovative and effective vehicle to advertise their brand through postcards, envelopes, aerograms, telegrams, and also through letter boxes.

(c) Direct Post It is for direct advertising which can be both addressed as well as unaddressed.

(d) International Money Transfer Indian post has a collaboration with Western Union financial services, USA, which enables remittance of money from 185 countries to India.

(e) Passport Facilities Indian post has a unique partnership with the ministry of external affairs for facilitating the process of passport application.

(f) Speed Post Indian post has over 1000 destinations covered under the speed post facility in India and links with 97 many countries across the globe.

(g) e-bill Post It is the latest offering of the Indian post and telegraph department to co’ eet b, payment across the counter for SSNL and Bharti Airtel.

Question 4. Describe various types of insurance and examine the nature of risks protected by each type of insurance.

Answer

Insurance may be classified as follows:

(i) Life Insurance

A life Insurance policy protects against the uncertainty of life though its scope has now. Widened to suit the various insurance needs of an individual like disability insurance, health/medical insurance, annuity insurance and life insurance proper,

Life Insurance may be defined as a contract In which the Insurer In consideration of a certain premium. agrees to pay to the assured, or to the person for whose benefit the policy is taken.

the assured sum of money on the happening of a specified event contingent on the human life or at the expiry of certain period.

There are various types of life Insurance policies like:

(a) Whole Life Policy

(b) Endowment life Assurance Policy

(c) Joint Life Policy

(d) Annuity Policy

(e) Children’s Endowment Policy

(ii) Fire Insurance

Life insurance Is a contract whereby the insurer, in consideration of the premium paid undertakes to make good any loss or damage caused by fire dUring a specified period upto the amount specified in the policy

The fire Insurance policy is generally taken for a period of one year after which it is to be renewed from time to lime.

A claim for loss by fire is considered valid only if it satisfies the following two conditions:

(a) There must be actual loss 

(b) Fire must be accidents and unintentional

The fisk covered by a fire Insurance contract is the loss resulting from fire which is the proximate cause of the loss If damage is caused due to o overheating without ignition, it is not regarded as a fire loss within the meaning of fire Insurance and the loss cannot be claimed from the Insurer

(iii) Marine Insurance

A marine insurance contract is an agreement whereby the insurer undertakes to Indemnify the insured In the manner and to the extent thereby agreed against manne losses. Marine insurance provides protection against loss by marine perils or perils of the sea.

There are three things involved in marine insurance:

(a) Ship or Hull Insurance

Since the ship is exposed to many dangers at sea, the Insurance policy is for Indemnifying the insured for losses caused by damage to the ship.

(b) Cargo Insurance

An insurance policy can be issued to cover against the risks to cargo while being transported by ship. These risks may be at risk of theft lost goods or on voyage etc.

(c) Freight Insurance

Shipping company is insured under freight insurance for reimbursing the loss of freight to the shipping company If the cargo does not reach the destination due to damage or loss in transit.

Question 5. Explain in detail the warehousing services.

Answer

Warehousing was Initially viewed as a provision of static unit for keeping and storing goods in a scientific and systematic manner so as to maintain their original quality, value and usefulness but now it is viewed as a logistical service, that is, making available the right quantity, at the right place, in the right lime. In the right physical form at the right cost.

The various warehousing services are as follows:

(i) Consolidation

The warehouse receives and consolidates materials/goods from different production plants and dispatches the same to a particular customer on a single transportation shipment.

(ii) Break the Bulk

The warehouse divides the bulk quantity of goods received from the production plants Into smaller quantities to be transported according to the requirements of clients to their places of business.

(iii) Stockpiling

Goods or raw materials which are not required immediately for sale or manufacturing are stored in warehouses to be made available to business depending on customers demand. Agricultural products also need to be stored and released in lots as they are harvested at specific times in a year but are needed for consumption throughout the year.

(iv) Value Added Services

Provision of value added services such as in transit mixing, packaging and labelling is also a function of modern warehousing. Goods sometimes need to be opened and repackaged and labelled again at the time of inspection by prospective buyers. Another function of modern warehouses is to grade goods according to quantity and divide goods in smaller lots.

(v) Price Stabilisation

Warehousing performs the function of stabilising prices by adjusting the supply of goods according to demand. Thus, prices are controlled from falling when supply Is increasing and demand is slack and from rising in the reverse situation.

(vi) Financing

Warehouse owners provide loans to the owners on security of goods and further supply goods on credit terms to customers.

Chapter 5

 Emerging Modes of Business

Multiple Choice Questions

1. e-commerce does not include

(a) a business’s interactions with its suppliers

(b) a business’s interactions with its customers

(c) interactions among the various departments within the business

(d) interactions among the geographically dispersed units of the business

Answer (c) Interactions among the various departments within the business are Included in e-business but not In e-commerce.

2. Outsourcing

(a) restricts only to the contracting out of Information Technology Enabled Services (ITES)

(b) restricts only to the contracting out of non-core business processes

(c) includes contracting out of manufacturing and R&D as well as service processes-both core and non-core-but restricts only to domestic territory

(d) includes offshoring

Answer (d) Outsourcing Includes contracting out of manufacturing and R & D as well as service processes- both core and non-core- in domestic territory as well as foreign countries.

3. The payment mechanism typical to e-business

(a) Cash on Delivery (CoD)

(b) Cheques

(c) Credit and Debit Cards

(d) e-Cash

Answer (d) e-cash IS a computer generated Internet based system which allows funds to be transferred and items to be purchased by credit cards, cheques or by money order providing secure online transaction process

4. A call centre handles

(a) only in-bound voice based business

(b) only out-bound voice based business

(c) both voice based and non-voice based business

(d) both customer facing and back-end business

Answer (a) Call centres provide customer-oriented voice based services

5. It is not an application of e-business

(a) Online bidding

(b) Online procurement

(c) Online trading

(d) Contract R&D

Answer (d) Contract R & D is an outsourcing activity not covered under e-business.

Short Answer Type Questions

Question 1. State any three differences between e-business and traditional business.

Answer

Difference between Traditional and e-Business

 

Basis

e-business

Traditional Business

Formation

It is easy to form.

It takes lengthy and complicated Procedure to form.

Setting up cost

It takes a very nominal cost.

It takes huge capital in order to setup.

Risks Involved

High risk involved as there is no direct contact between the parties.

Less risk Involved as parties have personal interaction.

 

Question 2. How does outsourcing represent a new mode of business?

Answer

Outsourcing represents a new mode of business as it is a departure from the traditional thinking of self sufficiency in business It refers to a long-term contracting out of business activities to captive or third party specialists with a view to benefitting from their experience, expertise, efficiency and even investment. Generally the non-core business activities are outsourced but of late even some of the core activities have started being outsourced.

Outsourcing comprises four key segments: contract manufacturing, contract research, contract sales and Informatics. Global competitive pressures for higher quality products at lower costs, demanding customers and emerging technologies have induced a re-took at business processes and hence resulted in outsourcing as a new mode of business which is now being resorted to not out of compulsion but out of choice.

Question 3. Describe briefly any two applications of e-business.

Answer

Two applications of e-business are

1. e-Procurement

It involves internet-based sales transactions between business firms, including “reverse auctions” that facilitate online trade between a single business purchaser and many sellers and, digital marketplaces that facilitate online trading between multiple buyers and sellers.

2. e-Communication

e-Promotion: It includes e-mails, publication of online catalogues displaying images of goods, advertisement through banners, pop-ups, opinion polls and customer surveys, etc. Meetings and conferences may be held by the means of video conferencing.

Question 4. What are the ethical concerns involved in outsourcing?

Answer

Outsourcing has raised certain ethical concerns which need to be considered In search of cheap labour, manufacturing processes are being outsourced to developing countries where they use child labour/women. In the factories and working conditions are unhygienic and even unsafe The companies cannot do so in their developed home countries due to stringent laws forbidding use of child labour.

This raises the ethical concern whether this sort of cost cutting by using child labour justified. Similarly. there is a concern over the ethical aspect of outsourcing the work to countries where gender based wage-discrimination is done and hence women are paid lower wages.

Question 5. Describe briefly the data storage and transmission risks in e-business.

Answer

There are a number of risks to which data is exposed while it is stored or is en-route In a transaction. Vital Information may be stolen or modified to pursue individual gains. There can be attacks of VIRUS and hacking Virus means Vital Information Under Siege. It is a program which replicates itself on the other computer systems.

The effect of computer viruses can range from some annoying on-screen display (Level-1 virus), disruption of functioning (Level-2 virus) damage to target data files (Level-3 virus), to complete destruction of the system (Level-4 virus).Anti-Virus programmes need to be installed and updated on the system and hies and disks should be scanned with them to provide protection from virus attacks. Data may be intercepted In the course of transmission.

Cryptography is used for protection against such nsks. It refers to the art of protecting information by transforming it (encrypting It) Into an unreadable format called ‘cyphertext’. Only those who possess a secret key can decipher (or decrypt) the message into ‘plaintext’ and thus others do not understand your conversation.

Long Answer Type Questions

Question 1. Why are e-business and outsourcing referred to as the emerging modes of business? Discuss the factors responsible for the growing importance of these trends.

Answer

During the last decade or so the way of doing business has undergone fundamental changes. The manner of conducting business is referred to as the ‘mode of business’. e-business and outsourcing are referred to as ‘emerging modes of business’ as these have brought about new changes in the way or manner in which business is conducted and it is believed that these trends are likely to continue.

e-business may be defined as the conduct of industry, trade and commerce using the computer networks. e- business covers a firm’s interactions with its customers and suppliers over the internet and also other electronically conducted business functions such as production, inventory management, product development, accounting and finance and human resource management.

Outsourcing represents a new mode of business as it is a departure from the traditional thinking of self sufficiency in business. It refers to a long-term contracting out of business activities to captive or third party specialists with a view to benefitting from their experience, expertise, efficiency and, even investment. Generally the non-core business activities are outsourced but of late even some of the core activities have started being outsourced. Outsourcing comprises four key segments: contract manufacturing, contract research, contract sales and informatics.

The various factors responsible for the growing importance of these trends are:

1. Business managers and thinkers keep evolving newer and better ways of doing things in an effort to improve the business processes.

2. Business firms have to strengthen their capabilities of creating utilities and delivering value to successfully meet the competitive pressures.

3. Consumers have become far more demanding than ever in terms of higher quality, lower prices, speedier deliveries and better customer care.

4. Business as an activity nas to keep evolving by adopting new trends in order to benefit from emerging technologies.

Question 2. Elaborate the steps involved in online trading.

Answer

The following steps are involved in online trading:

(i) Registration Before online shopping one has to register with the online vendor by filling up a registration form. In this form one has to give a password to protect the account otherwise anyone can log in your account.

(ii) Placing an Order In online transactions the order can be placed by picking and dropping the items in the shopping cart. Shopping cart is an online record of what you have picked up while browsing. After being sure of what you want to buy then check out from shopping cart and choose your payment option.

(iii) Payment through Mechanism In an online purchase payment is made through

(a) Cash on delivery

(b) Through cheque

(c) Net banking transfer

(d) Credit or debit card

(e) Digital cash

Note: If they ask steps In e-trading then following steps are to be mentioned:

(a) Opening bank a/c

(b) Opening demat account with a depository participant

(c) Opening online trading account with stock brokers

(d) Trading software installation

(e) Bidding and trading in securities)

Question 3. Evaluate the need for outsourcing and discuss its limitations.

Answer

Global competitive pressures for higher quality products at lower costs. ever demanding customers and emerging technologies are responsible for the continuing emergence of outsourcing as a mode of business.

Need for outsourcing is outlined in the following points:

1. Focussed Attention

Business firms are realising that focusing their limited resources on a few areas where they have core competence, and contracting out the rest of the activities to their outsourcing partners can lead to better efficiency and effectiveness.

2. Quest for Excellence

Outsourcing enables the firms to pursue excellence by virtue of limited focus and also by extending their capabilities through contracting out the remaining activities to those who excel in performing them.

3. Cost Reduction

It has become necessary for firms operating In global markets to maintain quality of products while keeping prices low. Thus, the only way to survival and profitability is cost reduction. The outsourcing partners deliver the same service to a number of organisations and hence benefit from economies of large scale leading to lower cost.

4. Growth through Alliance

Investment requirements are reduced when some activities are outsourced. Outsourcing also facilitates inter organisational knowledge sharing and collaborative learning

5. Stimulates Economic

Development Outsourcing stimulates entrepreneurship. employment and exports in the host countries e g . IT sector in India has become undisputed leader as far as global outsourcing in software development and IT enabled services are concerned having 60% of the global outsourcing share in the informatics sector.

But there are certain limitations of outsourcing as given below:

1. Confidentiality

Outsourcing depends on shaflng a lot of vital Information and knowledge. If the outsourcing partner does not maintain the confidentiality It can harm the interest of the party that outsources Its processes.

2. Sweat Shopping

Outsourcing firms seek to lower their costs by utilising the low-cost manpower of the host countries. Moreover the work that is outsourced IS not of the type which may build the competency and capability of the outsourcing partner.

3. Ethical Concerns

In search of cheap labour manufacturing processes are being outsourced to developing countries where they use child labour/women in the factories and working conditions are unhygienic and even unsafe This raises ethical concerns.

4. Resentment in the Home Countries

The process of outsourcing manufacturing. marketing, research and development or IT-based services involves contracting out Jobs or employment opportunities from the home country which causes resentment particularly if the home country is suffering from the problem of unemployment.

Question 4. Discuss the salient aspects of B2C commerce.

Answer

B2C (Business-to-Customers) transactions have business firms at one end and its customers on the other end. The salient aspects of B2C Commerce are as follows:

1. Online Selling B2C commerce involves selling the products online to customers who register for online shopping However. it must be appreciated that ‘selling is the outcome of the marketing process.

2. Online Marketing B2C commerce includes a wide gamut of marketing activities such as promotion and sometimes even delivery of products (e.g music or e-books) that are carried out online at a much lower cost but high speed.

3. Adaptation to Customer Requirements B2C commerce has made it possible for firms to manufacture the product with customised features to suit the requirements of the customers and also to provide the convenience of delivery and payment to the customers.

4. Customer Feedback B2C variant of e-commerce enables a business to be in continuous touch with its customers through online surveys about demand trends and customer satisfaction.

5. C2B Interactions B2C is not a one-way traffic, i.e., from business-to-customers. It also covers C2B interactions which provide the consumers with the freedom of shopping-at-will. Customers can also make use of call centres set up by companies to make toll free calls to make queries and lodge complaints round the clock at no extra cost.

Outsourcing

The call centres or help lines for B2C commerce interactions may be outsourced and are not necessary to be set up by the business itself

Question 5. Discuss the limitations of electronic mode of doing business. Are these limitations severe enough to restrict its scope? Give reasons for your answer.

Answer

e-business has its own limitations as discussed below:

1. Low Personal Touch a-business lacks the warmth of interpersonal interactions and personal touch for satisfaction of customer. Thus, it is relatively less suitable mode of business for product categories requiring personal touch for convincing the customers such as garments, etc.

2. Incongruence between Order Taking/Giving and Order Fulfilment Speed In e-business orders can be placed at the click of a mouse, but the physical delivery of the product takes time. Customers are sometimes not patient enough to bear with this Incongruence. At times the users even get frustrated due to technical reasons when web sites take unusually long time to open.

3. Need for Technology Capability and Competence of Parties to e-business e-business requires the parties to be fairly familiar with computers and internet. The digital divide has thus limited the use of e-business

4. Increased Transaction Risk Internet transactions occur between cyber personalities and it is difficult to establish the identity of the parties or know the location from where the parties may be operating. e-business is also risky due to additional hazards of Impersonation and leakage of confidential information such as credit card details. Problems of ‘virus’ attacks and ‘hacking’ also pose security concerns in e- business.

5. Resistance to Change The process of adjustment to new technology and new way of doing things causes stress and a sense of insecurity due to change. As a result, people may resist a change from traditional business to e-business.

6. Ethical Fallouts Companies use an ‘electronic eye’ to keep track of the computer files. e-mail account and the websites visited by the their employees or others who use their network systems which is not considered right on ethical grounds.

But most of the limitations of e-business discussed above are In the process of being overcome. Websites are becoming more and more interactive to overcome the problem of ‘low touch.’ Speed and quality of communication through internet is being Improved through communication technology innovations.

Efforts are on to overcome the digital divide through setting up of community tale-centres in villages and rural areas with the involvement of government agencies, NGOs and international institutions. Thus, we can say that despite limitations, e-business is here to stay and bring a positive change In the businesses governance and the economies.

Chapter 6

Social Responsibilities of Business

Multiple Choice Questions

1. Social responsibility is

(a) same as legal responsibility

(b) broader than legal responsibility

(c) narrower than legal responsibility

(d) None of the above

Answer (b) Social responsibility is border than legal responsibility of business II is a firm’s recognition of SOCial obligated even though not covered by law, along with the obligations laid down by law.

2. If business is to operate in a society which is full of diverse and complicated problems, it may have

(a) little chance of success

(b) great chance of success

(c) little chance of failure

(d) no relation with success or failure

Answer (a) In this situation survival of business is endangered due to enormous social illnesses. A society with fewer problems provides better business environment for a firm.

3. Business people have the skills to solve

(a) all social problems

(b) some social problems

(c) no social problems

(d) all economic problems

Answer (b) Environmental pollution, unsafe workplace, corruption in public institutions, and discriminatory practices In employment are some of the social problems which can be solved with the help of business people.

4. That an enterprise must behave as a good citizen is an example of its responsibility towards

(a) owners

(b) workers

(c) consumers

(d) community

Answer (d) A business enterprise must behave as a good citizen and act according to the well accepted values of the society following government regulations and protect the environment for the benefit of the community.

5. Environmental protection can best be done by the efforts of

(a) business people

(b) government

(c) scientists

(d) all the people

Answer (d) All sections of the society have equal responsibility to protect the environment in their own capacity.

6. Carbon monoxide emitted by automobiles directly contributes to

(a) water pollution

(b) noise pollution

(c) land pollution

(d) air pollution

Answer (d) Air pollution is the result of a combination of factors which lowers the air quality especially the carbon monoxide emitted by automobiles.

7. Which of the following can explain the need for pollution control?

(a) Cost savings

(b) Reduced risk of liability

(c) Reduction of health hazards

(d) All of these

Answer (d) Pollution control result in all of these.

8. Which of the following is capable of doing maximum good to society?

(a) Business success

(b) Laws and regulations

(c) Ethics

(d) Professional management

Answer (c) Ethical behaviour is lust and fair conduct which goes beyond economic or professional success and observing laws or government regulations and hence does maximum good to society

9. Ethics is important for

(a) top management

(b) middle-level managers

(c) non-managerial employees

(d) All of these

Answer (d) Ethics should be followed at all loves for a value based business which is good tor the society.

10. Which of the following alone can ensure effective ethics programme in a business enterprise?

(a) Publication of a code

(b) Involvement of employees

(c) Establishment of compliance mechanisms

(d) None of the above

Answer (b) Involvement of employees In ethics programmes is essential as it is the employees at different levels who implement ethics policies to make ethical business a reality.

Short Answer Type Questions

Question 1. What do you understand by Social responsibility of business? How is it different from legal responsibility?

Answer

Social responsibility of business refers to its obligation to perform those actions which are desirable In terms of the objectives and values of our society and benefit the community BUSiness cannot exist With the sole purpose of maximising profits and has to undertake various activities for public good so as to maintain good will among people.

Social responsibility is broader than legal responSibility of business. Legal responsibility may be fulfilled by mere .compliance with the law but SOCial responsibility includes voluntary obligations towards society not covered by law, along with the obligations laid down by law.

Question 2. What is environment ? What is environmental pollution ?

Answer

The environment is defined as the totality of man’s surroundings including both natural and man-made surroundings including natural resources like land, water, air, fauna and flora and raw materials; or man-made resources such as cultural heritage, socioeconomic institutions and the people.

Environmental pollution refers to the injection of harmful substances into the environment which cause change in the physical, chemical and biological characteristics of air land and water and can harm the life of humans and other species.

Question 3. What is business ethics? Mention the basic elements of business ethics.

Answer

‘Ethics’ is a Greek word meaning character; norms, ideals or morals prevailing In a group or society Business ethics refers to the relationship between business objectives, practices, techniques and the good of society It is concerned with the socially determined moral principles which should govern business activities

The basic elements of business ethics are

(i) Top management commitment

(ii) Publication of a Code

(iii) Establishment of compliance mechanism

(iv) Involving employees at all levels

(v) Measuring results

Question 4. Briefly explain

(a) Air pollution,

(b) Water pollution and

(c) Land pollution.

Answer

(a) Air Pollution

Air pollution is caused by a combination of factors which lowers the air quality. It is mainly due to carbon monoxide emitted by automobiles smoke and other chemicals from manufacturing plants which are released in the air. Air pollution has created a hole In the ozone layer leading to dangerous warming of the Earth.

(b) Water Pollution

Water pollution is caused by dumping of chemical, waste in water bodies like rivers, streams, etc. Water pollution has led to the death of several animals and posed a serious threat to human life.

(c) Land Pollution

Land pollution is caused by the dumping of toxic wastes on land which damages the quality of land making it unfit for agriculture or plantation.

Question 5. What are the major areas of social responsibility of business?

Answer

When the business commenced, SOCial objective of the firm recognised and they are able to know to whom and for what the business and Its management are responsible. The major areas of social responsibilities of business Include the following:

(i) Responsibility towards the Shareholders or Owners

A business enterprise has the responsibility to provide a fair return to the shareholders or owners on their capital investment and to ensure the safety of such investment.

(ii) Responsibility towards the Workers

Management of an enterprise is also responsible for providing opportunities to the workers for meaningful work and ensure a fair wage of their work

(iii) Responsibility towards the Consumers

Supply of right quality and quantity of goods and services to consumers at reasonable prices constitutes the responsibility of an enterprise toward its customers.

(iv) Responsibility towards the Government and Community

An enterprise must respect the laws of. the country and pay taxes regularly and honestly. It must behave as a good citizen and act according to the well accepted values of the society and protect the natural environment.

Long Answer Type Questions

Question 1. Build up arguments for and against social responsibilities.

Answer

Arguments for Social Responsibility:

(i) Justification for Existence and Growth

The mission of every business is to provide goods and services to satisfy human wants. Profit should be viewed as an outcome of services to the people. Thus, practice of social responsibility by business provides justifications for its existence and growth.

(ii) Long-term Interest of the Firm

Social responsibility enhances the image and goodwill of the firm and results in maximum profits In the long run. If members of the society like workers, consumers, shareholders, and government officials are not convinced that the business enterprise is socially responsible, they will tend to withdraw their cooperation to the enterprise concerned.

(iii) Avoidance of Government Regulation

Government regulations limit the freedom of business. It IS believed that businessmen can avoid the problem of government regulations by voluntarily assuming social responsibilities, which helps to reduce the need for new laws

(iv) Maintenance of Society

Business enterprises should assume social responsibilities as the people who are dissatisfied with the business may resort to anti-social activities which may harm the interest of business itself.

(v) Availability of Resources with Business

Business institutions can help society to tackle its problems better as they have valuable financial and human resources which can be effectively used for solving problems.

(vi) Converting Threats into Opportunities

Business enterprises can solve the social problems and can reap gains from them by accepting the challenge of converting risky situations into profitable deals.

(vii) Better Environment for doing Business

Business may have little chance of success If it is to operate in a society full of diverse and complicated problems. Therefore. the business system should do something to solve the social problems to create a better environment conducive to its own survival.

(viii) Holding Business Responsible for Social Problems

Some of the social problems like environmental pollution, unsafe workplaces, corruption in public Institutions, and discriminatory practices in employment have either been perpetuated by business enterprises themselves. Therefore. it is the moral obligation of business to contribute in solving these problems.

Arguments Against Social Responsibility:

(i) Violation of Profit Maximisation Objective

According to this argument, business exists only for profit maximisation and social responsibility is against this objective. Social responsibility of business is fulfilled it it maximises profits through Increased efficiency and reduced costs.

(ii) Burden on Consumers

It is argued that social responsibilities like pollution control and environmental protection involve huge costs which are likely to be shifted on to the consumers in the form of higher prices

(iii) Lack of Social Skills

According to this argument social problems should be solved by specialised agencies as businessmen do not have the necessary understanding and training to solve social problems

(iv) Lack of Broad Public Support

According to this argument, the public in general does not like business involvement or interference in social programmes because of which business cannot operate successfully in solving social problems.

Question 2. Discuss the forces which are responsible for increasing concern of business enterprises toward social responsibility.

Answer

The following forces have been responsible for Increasing concern of business enterprises towards social responsibility.

(i) Threat of Public Regulation

Threat of public regulation is one important reason due to which business enterprise feels concerned with social responsibility. Democratically elected governments have to take care of every section of the societies thus regulating the businesses behaving in a socially irresponsible manner.

(ii) Pressure of labour Movement

Labour movement for ensuring fair gains for the working class throughout the world has become very powerful as labour has become far more educated and organised. This has forced business enterprises to pay due regard to the welfare of workers.

(iii) Impact of Consumerism

Development of education and mass media and increasing competition In the market have made the consumer aware of his rights and power which has forced business enterprises to follow a customer oriented approach.

(iv) Development of Social Standard for Business

New social standards consider economic activity of business enterprises as legitimate but with the condition that they must also serve social needs. Business functioning is to be ultimately judged on the basis of social standards

(v) Development of Business Education

Educated persons as consumers, investors, employees, or owners have become more sensitive towards social issues with the development of business education with its rich content of social responsibility.

(vi) Relationship Between Social Interest and Business

Interest Business enterprises have started realising the fact that social interest and business interest are complementary to each other and that long-term benefit of business lies In serving the society well.

(vii) Development of Professional, Managerial Class

Previously business was managed by the owners but now professional management education in universities and specialised management institutes have created a separate class of professional managers who have a positive attitude towards social responsibility along with profit earning.

Question 3. ‘Business is essentially a social institution and not merely a profit making activity’. Explain.

Answer

A business enterprise is permitted by SOCiety to carry on industrial or commercial activities and earn profits from It Therefore, a business enterprise is expected to do business and earn money in ways that fulfill the expectations of the society. Like every individual living in society, business too has certain obligations towards society in terms of respect for social values and norms of behaviour.

It is obligatory on part of the business enterprise not to do anything that is undesirable from society’s point of view. Manufacture and sale of adulterated goods, making deceptive advertisements, evading taxes, polluting the environment and exploiting workers are some examples of socially undesirable practices which may Increase the profit of enterprises but which have adverse social effects. On the other hand, supplying good quality goods, creating healthy working conditions, honestly paying taxes, prevention of pollution and resolving customer complaints are examples of socially desirable practices which improve the Image of enterprises leading to higher profits in the long run.

The major areas of social responsibility of business which explain that business is essentially a social Institution and not merely a profit making activity Include the following:

(i) Responsibility towards the Shareholders or Owners

A business enterprise has the responsibility to provide a fair return to the shareholders or owners on their capital investment and to ensure the safety of such investment

(ii) Responsibility towards the Workers

Management of an enterprise is also responsible for providing opportunities to the workers for meaningful work and ensures fair wage for their work.

(iii) Responsibility towards the Consumers

Supply of right quality and quantity of goods and services to consumers at reasonable prices constitutes the responsibility of an enterprise toward its customers.

(iv) Responsibility towards the Government and Community

An enterprise must respect the law and order of the country and pay taxes regularly and honestly It must behave as a good citizen and act according to the accepted values of the society and protect the natural environment.

Question 4. Why do the enterprises need to adopt pollution control measures?

Answer

Protection of the environment is a serious issue that confronts business managers and decision makers. Business enterprises need to adopt pollution control measures due to following reasons:

(i) Reduction of Health Hazards

Pollutants in the environment can cause many complications. diseases like Pollution control cancer, heart attacks and lung measures are needed to check the spread of such diseases for ensuring a healthy life on Earth.

(ii) Reduced Risk of Liability

If an enterprise is held liable for causing damage to people by the toxicity of gaseous, liquid and solid wastes. It has released into the environment. it may be required to pay compensation to affected people. This risk of liability can be reduced by Installing pollution control devices in its premises.

(iii) Cost Savings

Improper production technology results in greater wastes which leads to higher cost of waste disposal and cost of cleaning the plants An effective pollution control programme can thus save operating costs of business.

(iv) Improved Public Image

Society today is conscious of environmental quality and hence a firm’s policies and practices for controlling wastes Influence people’s attitude towards Its working. A firm that adopts pollution control measures will be perceived as a socially responsible enterprise

(v) Other Social Benefits

Pollution control results in many other benefits I ke clearer VISibility, cleaner buildings better quality of hfe, and the availability of natural products in a purer form.

(vi) Legal Obligations

There are certain laws in place to control pollution with which the business enterprises also have to comply so as to control pollution which causes risks to environmental quality, human health and damage to natural and man-made resources.

Question 5. What steps can an enterprise take to protect the environment from the dangers of pollution?

Answer

Some of the specific steps which can be taken by business enterprises to protect the environment from the dangers of pollution are as follows:

(i) Top Management Commitment

The first and the foremost step is to have a definite commitment by top management of the enterprise to create, mamtam and develop work culture for environmental protection

(ii) Involving Employees at All Levels

Second step is to ensure that commitment to environmental protection is shared throughout the enterprise by all divisions and employees as they will actually implement the environment protect on Programmes and policies.

(iii) Laying Down Policies for Environment Protection

Another important step is to develop clear-cut potatoes and programmes for purchasing good quality raw materials, employing superior technology using Scientific techniques of disposal and treatment of wastes and developing employee skills for the purpose of pollution control

(iv) Legal Compliance

A very Important and essential step is to comply with the laws and regulations enacted by the Government for prevention of pollution.

(v) Voluntary Participation

Participation in government programmes relating to management of hazardous substances. clearing up of polluted rivers plantation of trees and checking deforestation is also an important step in environmental protection by business enterprises

(vi) Measuring Results

Periodical assessment of pollution control programs In terms of costs and benefits is also essential In order to have steady progress With respect to environmental protection

(vii) Education and Training

Another step that can be taken for environmental protection is arranging educational workshops and training materials to share technical information and experience with suppliers, dealers and customers to get them actively involved In pollution control programs.

Question 6. Explain the various elements of business ethics.

Answer

The various elements of business ethics are as under:

(i) Top Management Commitment

The Chief Executive Officer (or CEO) and other higher level managers need to be openly and strongly committed to ethical conduct as top management has a crucial role in guiding the entire organisation towards ethical behaviour.

(ii) Publication of a ‘Code’

The principles of conduct for the organisation in the form of written documents are referred to as the “code”. It generally covers areas such as fundamental honesty and adherence to laws: product safety and quality; health and safety in the workplace; conflicts of interest; fairness in selling/marketing practices; and financial reporting.

(iii) Establishment of Compliance Mechanisms

Suitable compliance mechanisms should be established to ensure that actual decisions and actions comply with the firm’s ethical standards. Some examples of such mechanisms are: considering values and ethics in recruiting and hiring; emphasising corporate ethics in training; auditing performance regularly to analyse the degree of compliance; and instituting communication systems to help employees report incidents of unethical behaviour.

(iv) Involving Employees at All Levels

Involvement of employees at all levels in ethics programs is essential as it is the employees who implement ethics policies to make ethical business a reality. Thus, small groups of employees can be formed to discuss the important ethics policies of firms and examine the attitudes of employees towards these policies.

(v) Measuring Results

The firms must audit to monitor compliance with ethical standards to measure the end results of ethics programs as far as possible and further course of action should then be decided by the top management team in discussion with other employees.

Chapter 7

Formation of a Company

Multiple Choice Questions

1. Minimum number of members to form a private company is

(a) 2

(b) 3

(c) 5

(d) 7

Answer (a) To form a private company the memorandum of association is needed to be signed by at least two members.

2. Minimum number of members to form a public company is

(a) 5

(b) 7

(c) 12

(d) 21

Answer (b) To form a public company, at least seven members must sign the memorandum of association.

3. Application for approval of name of a company is to be made to

(a) SEBI

(b) Registrar of Companies

(c) Government of India

(d) Government of the State in which company is to be registered

Answer (b) The promoters have to select a name for the company and submit an application to the registrar of the companies of the slate in which the registered office of the company is to be situated for its approval

4. A proposed name of company is considered undesirable if

(a) it is identical with the name of an existing company

(b) it resembles closely with the name of an existing company

(c) it is an emblem of Government of India, United Nations etc

(d) in case of any of the above

Answer (d) According to name clause the name of a company should not be identical or resembling the name of an existing company and should not violate the provisions of ‘The Emblem and Names (Prevention of Improper Use) Act 1950.

5. A prospectus is issued by

(a) a private company

(b) a public company seeking investment from public

(c) a public enterprise

(d) a public company

Answer (b) for raising the required funds from the public by means of issue of shares and debentures, a public company has to Issue a prospectus which is an invitation to the public to subscribe to the capital of the company and undergo various other formalities

6. Stages in the formation of a public company are in the following order

(a) Promotion, Commencement of Business, Incorporation, Capital Subscription (b) Incorporation, Capital Subscription, Commencement of Business, Promotion (c) Promotion, Incorporation, Capital Subscription, Commencement of Business (d) Capital Subscription, Promotion, Incorporation, Commencement of Business

Answer (c) The formalIlles of formation of a company can be divided into four distinct stages, which are

(i) Promotion

(ii) Incorporation

(iii) Subscription of capital

(iv) Commencement of business

7. Preliminary Contracts are signed

(a) before the incorporation

(b) after incorporation but before capital subscription

(c) after incorporation but before commencement of business

(d) after commencement of business

Answer (a) Preliminary contracts ars pre-incorporation contracts.

8. Preliminary Contracts are

(a) binding on the company

(b) binding on the company, if ratified after incorporation

(c) binding on the company, after incorporation

(d) not binding on the company

Answer (d) Preliminary Contracts are not legally binding on the company. A company cannot ratify a preliminary contract.

True/False Type Questions

1. It is necessary to get every company incorporated, whether private or public.

Answer True

Promotion and incorporation stages have to be fulfilled by both private and public companies.

2. Statement in lieu of prospectus can be filed by a public company going for a public issue.

Answer True

A copy of the prospectus or statement In lieu of prospectus is filed with the Registrar of companies in case of going for a public issue.

3. A private company can commence business after incorporation.

Answer True

A private company can start its business immediately after obtaining the certificate of Incorporation. As it is prohibited to raise funds from public, It does not need to issue a prospectus and complete the formality of minimum subscription

4. Experts who help promoters in the promotion of a company are also called promoters.

Answer False

Experts do not become promoters just because they are assisting the promoters in the various feasibility studies.

5. A company can ratify preliminary contracts after incorporation.

Answer False

Preliminary contracts or pre-incorporation contracts are not legally binding on the company. A company cannot ratify a preliminary contract.

6. If a company is registered on the basis of fictitious names, its incorporation is invalid.

Answer False

The Certificate of incorporation once issued, is a conclusive evidence of the existence of the company even if there were deficiencies in the formalities. Even when a company gets registered With illegal objects using fictitious names, the birth of the company cannot be questioned The only remedy available is to wind it up.

7. ‘Articles of Association’ is the main document of a company.

Answer False

Memorandum of Association is the main document of the company and is subordinate to the Companies Act.

8. Every company must file ‘Articles of Association’.

Answer False

Every company has to file a ‘Memorandum of Association’. It is not compulsory for a company to file ‘Articles of Association’. It may adopt Table A of the Companies Act.

9. A provisional contract is signed by promoters before the incorporation of the company.

Answer False

Provisional contracts are signed after incorporation but before the commencement of business. These become enforceable only after the company gets the Certificate of Commencement of Business.

10. If a company suffers heavy issues and its assets are not enough to pay off its liabilities, the balance can be recovered from the private assets of its members.

Answer False

The shareholders of a company are liable to the extent of the amount unpaid on the shares held by them. Also. only the assets of the company can be used to settle the debts, leaving the members’ personal property free from any charge.

Short Answer Type Questions

Question 1. Name the stages in the formation of a company.

Answer

Formation of a company is a complex activity, involving these stages which are as follows

1. Promotion Identification of business opportunities, analysis of its prospects and initiating steps to form a company is known as promotion of a company.

2. Incorporation Registration of company as body corporate under Companies Act, 1956 is known as incorporation.

3. Subscription of Capital A public company’s raising funds from the public by means of issue of shares and debentures is known as capital subscription.

4. Commencement of Business The registrar issues certificate of commencement of business which is a conclusive evidence of completion of formation requirement of a company.

Question 2. List the documents required for the incorporation of a company.

Answer

The documents required for the incorporation of a company are:

1. The Memorandum of Association duly stamped, signed and witnessed.

2. The Articles of Association duly stamped and witnessed as in case of the Memorandum. If company adopts Table A, statement in lieu of the prospectus is submitted, instead of Articles of Association

3. Written consent of the proposed directors to act as directors and an undertaking to purchase qualification shares

4. The agreement, if any, with the proposed Managing Director, Manager or whole-time director.

5. A copy of the Registrar’s letter approving the name of the company.

6. A statutory declaration affirming that all legal requirements for registration have been complied with

7. A notice about the exact address of the registered office (can be submitted within 30 days of Incorporation)

8. Documentary evidence of payment of registration fees.

Question 3. What is a prospectus? Is it necessary for every company to file a prospectus?

Answer

A prospectus is ‘any document described or issued as a prospectus Including any notice circular advertisement or other document inviting deposits from the public or InvIting offers from the public for the subscription or purchase of any shares or debentures of, a body corporate’ in other words. it is an invitation to the public to apply for shares or debentures of the company or to make deposits in the company

It is issued by a public company which is seeking to raise the required funds from the public by means of issue of shares and debentures. It is not necessary for every company to file a prospectus A statement in lieu of prospectus IS filed with the Registrar of Companies If the company has adopted Table A of the Companies Act Instead of Articles of Association.

Private companies are not required to file a prospectus.

Question 4. Explain the term, ‘Minimum Subscription’.

Answer

Minimum subscription refers to the minimum amount required by the company for Its preliminary functions. It has been provided by the Companies Act, that the company must receive applications for a certain minimum number of shares before going ahead with the allotment of shares in order to prevent companies from commencing business with inadequate resources thus is called the minimum subscription. The limit of minimum subscription is 90% of the size of the issue.

Question 5. Briefly explain the term ‘Return of Allotment’.

Answer

Return of Allotment is a statement submitted to the Registrar which contains the names and addresses of shareholders and the number of shares allotted to each shareholder. Return of allotment, signed by a director or secretary is filed with the Registrar of Companies within 30 days of allotment. Return of allotment shows that the company has received the minimum subscription.

Question 6. At which stage in the formation of a company does it interact with SEBI.

Answer

A company interacts with SEBI (Securities and Exchange Board of India) in the third stage of formation that is, in the stage of capital subscription. SEBI is the regulatory authority of capital markets in our country which has issued guidelines for the disclosure of information and investor protection. A company inviting funds from the general public must make adequate disclosure of all relevant information and must not conceal any material information from the potential investors as per SEBI guidelines.

Prior approval from SEBI is, therefore, required before going ahead with raising funds from the public. SEBI ensures that the proposed issue of securities follows all the guidelines laid down by it, no oversubscription of any issue can be retained, full underwriting of the issue is important, promoters contribution must be 25% in an issue of less than ₹ 100 crores.

Question 7. Distinguish between ‘preliminary contracts’ and ‘provisional contracts’.

Answer

S.No.

Preliminary Contracts

Provisional Contracts

1

Contracts signed by promoters with third parties before the incorporation of the company.

Contracts signed after incorporation but before the commencement of business.

2

These are no illegally bonding on the company and cannot be ratified after Incorporation

These become enforceable only after the company gets the Certificate of Commencement of Business

3

These contracts are the liabilities of Promoters

These contracts are the responsibilities of the company

4

Both private and public company have the right to undertake these contracts

They can only be undertaken by a public Company.

Long Answer Type Questions

Question 1. What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.

Answer

Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking an initiative to form a company so that the available business opportunity can be turned into a real business project. A promoter is said to be the one who undertakes to form a company with reference to a given project and to set It going and who takes the necessary steps to accomplish that purpose It is the function of promoters to analyse the prospects and bring together the men, materials, machinery managerial abilities, financial resources and commence the business.

Promoters undertake various activities to get a company registered and get it to the position of commencement of business. But they are neither the agents nor the trustees of the company Legally they cannot be the agent of non existing companies. It means that he IS personally liable for the contracts, not legally. Also promoters are not the trustees they supposed to observe good faith in the promotion and must not making secret gains out of the dealings. If there is gain then it must be disclosed.

Promoters are not legally entitled to claim the expenses incurred in the promotion of the company but the pre-incorporation expenses may be reimbursed. The company may also remunerate the promoters for their efforts by paying a lump sum amount or a commission on the purchase price of property purchased through them or on the shares sold. Shares or debentures may also be allotted to the promoters or they may be given an option to purchase the securities at a future date.

Question 2. Explain the steps taken by promoters in the promotion of a company.

Answer

The Important steps taken by promoters in the promotion of a company are as follows:

1. Identification of Business Opportunity

The first step to be taken by a promoter is to identify a business opportunity. The opportunity may be in respect of producing a new product or service or making some product using a different process or any other opportunity having investment potential.

2. Feasibility Studies

All the identified business opportunities may not be feasible or profitable as real projects. The promoters, therefore, undertake detailed feasibility studies to investigate all aspects of the business they intend to start Various types of feasibility have to be assessed which include

(i) Technical Feasibility (ii) Financial Feasibility (iii) Economic Feasibility

These feasibility studies are undertaken with the help of the specialists like engineers, chartered accountants, etc and only when these Investigations throw up positive results, the promoters may decide to actually launch a company.

(iii) Name Approval

The promoters have to select a name for the company and submit an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval. The proposed name may be approved it i is not considered undesirable. According to the name clause the name of a company should not be identical or resembling the name of an existing company and should not violate the provisions of ‘The Emblem and Names (Prevention of Improper Use) Act, 1950.

Three names, In order of their priority are given in the application to the Registrar of Companies so that alternative name may be allotted in case the first preference does not fulfil the name clause.

(iv) Fixing up Signatories to the Memorandum of Association

Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company.

Usually the people signing memorandum are also the first Directors of the Company. Their written consent to act as Directors and to take up the qualification shares in the company is necessary.

(v) Appointment of Professionals

Certain professionals such as mercantile bankers, auditors etc, are appointed by the promoters to assist them in the preparation of necessary documents which are required to be submitted with the Registrar of Companies. The names and addresses of shareholders are the number of shares allotted to each is submitted In a statement called return of allotment to the Registrar with the help of these professionals.

(vi) Preparation of Necessary Documents

The promoter takes up steps to prepare certain legal documents which include Memorandum of Association, Articles of Association and Consent of Directors These documents have to be submitted under the law, to the Registrar of the Companies for getting the company registered.

Question 3. What is a ‘Memorandum of Association’? Briefly explain its clauses.

Answer

Memorandum of Association is the most important document. It defines the objectives of the company and determines the boundary line, with In which the company has to perform tasks. No company can legally undertake activities that are not contained In its Memorandum of Association. The Memorandum of Association contains different clauses, which are given as follows

(i) The Name Clause

This clause contains the name of the company with which the company will be known, which has already been approved by the Registrar of Companies. According to name clause the name of a company should not be identical or resembling the name of an existing company and should not violate the provisions of ‘The Emblem and Names (Prevention of Improper Use) Act 1950.

(ii) Registered Office Clause

This clause contains the name of the state, in which the registered office of the company is proposed to be situated.

The exact address of the registered office is not required at this stage but the same must be notified to the Registrar within thirty days of the incorporation of the company.

(iii) Objects Clause

This clause is the most Important one as it defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the objects stated in this clause. The object clause is divided into two objects

The Main Objects

The main objects for which the company is formed are listed in this subclause. Other Objects

Objects not included in the main objects could be stated in this sub-clause. A company can undertake a business included in this subclause, either by passing a special resolution or passing an ordinary resolution and get central government’s approval for the same.

(iv) Liability Clause

This clause limits tile liability of the members to the amount unpaid on the shares owned by them.

(v) Capital Clause

This clause specifies the maximum capital which the company will be authorised to raise through the Issue of shares. The authorised share capital of the proposed company along with its division into the number of shares having a fixed face value is specified in this clause

(vi) Association Clause

In this clause. the signatories to the Memorandum of Association state their intention to be associated With the company and also give their consent to purchase qualification shares. The Memorandum of Association must be signed by at least seven persons n case of a public company and by two persons In case of a private company.

Question 4. Distinguish between ‘Memorandum of Association’ and ‘Articles of Association’.

Answer

Difference between Memorandum of Association and Article of Association

 

Basis

Memorandum of Association

Articles of Association

Objectives

Memorandum of association defines the objects for which the company is formed.

Articles of association are rules of Internal management of the company They Indicate how the objectives of the company are to be achieved.

Position

This is the main document of the company and is subordinate to the companies act.

This is a subsidiary document and is subordinate to both the Memorandum of Association and the Companies Act.

Relationship

Memorandum of association defines the relationship of the company with outsiders.

Articles define the relationship of the members and the company.

Validity

Acts beyond the memorandum of association are invalid and cannot be ratified even by a unanimous vote of the members.

Acts which are beyond articles can be ratified by the members, provided they do not violate the memorandum.

 

Necessity

Every company has to file a Memorandum of Association.

It is not compulsory for a public limited company to file articles of association. It may adopt table A of the Companies Act.

Alteration

Alteration of memorandum of t association is quite difficult and in many cases, approval of certain statutory authority is required.

Articles can be altered by passing a special resolution by the members.

 

 

Question 5. What is the effect of conclusiveness of the ‘Certificates of Incorporation’ and ‘Commencement of Business’?

Answer

Effect of Certificates of Incorporation

A company becomes a legal entity with perpetual succession on the date printed on the Certificate of Incorporation. After conclusiveness of the certificate of incorporation, the company becomes entitled to enter into valid contracts. The Certificate of Incorporation is a conclusive evidence of the regularity of the incorporation and legal existence of a company.

Once a Certificate of Incorporation has been issued, the company has become a legal business entity irrespective of any flaw in its registration.

Thus, whatever be the deficiency in the formalities, the Certificate of Incorporation once issued, is a conclusive evidence of the existence of the company. Even when a company gets registered with illegal objects, the birth of the company cannot be questioned. The only remedy available is to wind it up.

On the issue of Certificate of Incorporation, a private company can immediately commence its business. It can raise necessary funds from friends, relatives or through private arrangement and proceed to start business. A public company, however, has to undergo two more stages in its formation.

Effect of Certificate of Commencement of Business

The Registrar, after examining the required documents like memorandum of association, articles of association and consent of Directors, etc. issues a ‘Certificate of Commencement of Business’ if these documents are found satisfactory.

This certificate is conclusive evidence that the company is entitled to do business. With the grant of this certificate the formation of a public Company is complete and the company can legally start doing business.

Questions 6. Is it necessary for a public company to get its share listed on a stock exchange? What happens if a public company going for a public issue faits to apply to a stock exchange for permission to deal in its securities or faits to get such permission?

Answer

A public company can raise the required funds from the public by means of Issue of shares and debentures For doing the same. It has to issue a prospectus which is an invitation to the public to subscribe to the capital of the company and undergo various other formalities. It is necessary for the company to make an application to at least one stock exchange for permission to deal in Its shares or debentures by getting its shares listed on the stock exchange

If a public company going for a public issue falls to apply to a stock exchange for permission to deal In its securities or fails to get such permission before the expiry of ten weeks from the date of closure of subscription list, the allotment of shares done by the company shall become void and all money received from the applicants will have to be returned to them within eight days.

Chapter 8

Sources of Business Finance

Multiple Choice Questions

 

1. Equity shareholders are called

(a) owners of the company

(b) partners of the company

(c) executives of the company

(d) guardian of the company

Answer (a) Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital and shareholders are called owners of the company.

2. The term ‘redeemable’ is used for

(a) preference shares

(b) commercial paper

(c) equity shares

(d) public deposits

Answer (b) Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period. varying from 90 days to 364 days after which it has to be redeemed.

3. Funds required for purchasing current assets is an example of

(a) fixed capital requirement (b) ploughing back of profits (c) working capital requirement (d) lease financing

Answer (c) Funds which are used for holding current assets such as stock of material, bills receivables and for meeting current expenses like salaries, wages. taxes, and rent is known as working capital of an enterprise.

4. ADRs are issued in

(a) Canada

(b) China

(c) India

(d) USA

Answer (d) The depository receipts issued by a company in the USA are known as American Depository Receipts (ADRs)

5. Public deposits are the deposits that are raised directly from

(a) the public

(b) the directors

(c) the auditors

(d) the owners

Answer (a) The deposits that are raised by organisations directly from the public are known as public deposits.

6. Under the lease agreement, the lessee gets the right to

(a) share profits earned by the lessor

(b) participate in the management of the organisation

(c) use the asset for a specified period

(d) sell the assets

Answer (c) A lease is a contractual agreement whereby the owner of an asset grants the lessee the fight to use the asset for a specified period In return for a periodic payment

7. Debentures represent

(a) fixed capital of the company

(b) permanent capital of the company

(c) fluctuating capital of the company

(d) loan capital of the company

Answer (d) The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date. Therefore, debentures represent loan capital of the company.

8. Under the factoring arrangement, the factor

(a) produces and distributes the goods or services

(b) makes the payment on behalf of the client

(c) collects the client’s debt or account receivables

(d) transfer the goods from one place to another

Answer (c) Factoring s a Imanciat service whereby the factor is responsible for all credit control and debt collection from the buyer and provides protection against any bad-debt losses to the firm

9. The maturity period of a commercial paper usually ranges from

(a) 20 to 40 days

(b) 60 to 90 days

(c) 120 to 365 days

(d) 90 to 364 days

Answer (d) Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varying from 90 days to 364 days after which it has to be redeemed.

10. Internal sources of capital are those that are

(a) generated through outsiders such as suppliers

(b) generated through loans from commercial banks

(c) generated through issue of shares

(d) generated within the business

Answer (d) Internal sources of capital are those sources that are generated within the business mainly through ploughing back or reinvestment of profits.

Short Answer Type Questions

Question 1. What is business finance? Why do businesses need funds? Explain.

Answer

Business is an economic activity directed towards producing, acquiring wealth through buying and selling of goods. It is a very wide term. Finance is the life blood of the business. Funds are required to commence and carry on business. All business activities such as planning, organizing, managing, controlling, purchasing, selling, directing, marketing etc cannot take place without finance, Thus, we can say requirements of funds by business to carry out its various activities is called business finance.

When an entrepreneur takes a decision to start business the need of fund arises in order to meet the expenses of establishment of business, finance is required for purchasing fixed and current assets, for day-to-day operations, purchase of raw material, to pay salaries etc. Smooth functioning, expansion and growth of business is possible when it has sufficient funds.

Question 2. List sources of raising long term and short term finance.

Answer

Sources of long Term Finance

(i) Equity Shares

(ii) Retained earnings

(iii) Preference shares

(iv) Debentures

(v) Loans from banks and other financial institutions

Sources of Medium Term Finance

(i) Lease financing

(ii) Public deposits

(iii) Loans from banks and other financial institutions

Sources of Short Term Finance

(i) Trade credit

(ii) Factoring

(iii) Commercial papers

(iv) Short term loans from banks

Question 3. What is the difference between internal and external sources of raising funds? Explain.

Answer

S.No.

Internal Sources of Finance

External Sources of Finance

1

Internal sources of funds are those that are generated within the business.

 

External sources of funds include those sources that lie outside an organisation, such as suppliers, lenders, and Investors.

2

Examples are accelerating collection of receivables, disposing of surplus inventories and ploughing back of profit.

Examples are issue of debentures, borrowing from commercial banks and financial institutions and accepting public deposits.

3

The internal sources of funds can fulfil only limited needs of the business. Cost of internal funds is low.

Large amount of money can be raised through external sources. External funds are more costly.

4

Business is not required to provide security while obtaining funds from Internal sources.

Business is required to mortgage Its assets as security while obtaining funds from external sources.

Question 4. What preferential rights are enjoyed by preference shareholders? Explain.

Answer

The following preferential rights are enjoyed by preference shareholders

(i) Receiving a fixed rate of dividend, out of the net profits of the company, before any dividend is declared for equity shareholders.

(ii) Preference over equity shareholders in receiving their capital after the claims of the company’s creditors have been settled, at the time of liquidation.

(iii) In case of dissolution of the company preference share capital is refunded prior to the refund of equity share capital.

Question 5. Name any three special financial institutions and state their objectives.

Answer

(i) Industrial Finance Corporation of India (IFCI) It was established in July, 1948 as a statutory corporation under the Industrial Finance Corporation Act, 1948. Its objectives include assistance towards balanced regional development and encouraging new entrepreneurs to enter into the priority sectors of the economy. IFCI has also contributed to the development of management education in the country.

(ii) State Financial Corporations (SFCs) State Financial Corporations are established by the State Governments under the State Financial Corporations Act, 1951 for providing medium and short term finance to industries which are outside the scope of the IFC!. Its scope is wider than IFCI as it covers not only public limited companies but also private limited companies, partnership firms and proprietary concerns.

(iii) Life Insurance Corporation of India (LIC) LIC was set up in 1956 under the LIC Act, 1956 after nationalising 245 existing insurance companies. It mobilises savings in the form of insurance premium and makes it available to industrial concerns in the form of direct loans and underwriting of and subscription to shares and debentures.

Question 6. What is the difference between GDR and ADR?Explain.

Answer

Global Depository Receipts (GDR) are the depository receipts denominated in US dollars issued by depository bank to which the local currency shares of a company are delivered. GDR is a negotiable instrument and can be traded freely like any other security. In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange.

American Depository Receipts (ADR) The depository receipts issued by a company in the USA are known as American Depository Receipts. ADRs are bought and sold in American markets like regular stocks. ADR is similar to a GDR except that it can be issued only to American citizens and can be listed and traded on a stock exchange of USA.

Long Answer Type Questions

Question 1. Explain trade credit and bank credit as sources of short term finance for business enterprises.

Answer

Trade Credit Trade credit is the credit extended by one trader to another for the purchase of goods and services It facilitates the purchase of supplies without immediate payment and is commonly used by business organisations as a source of short-term financing. Trade credit appears In the records of the buyer of goods as ‘sundry creditors’ or’ accounts payable’ It is granted prudently to those customers who have reasonable amount of financial standing and goodwill.

The volume and period of credit extended depends on factors such as reputation of the purchasing firm, financial position of the seller, volume of purchases, past record of payment and degree of competition In the market. Terms of trade credit may vary from industry to industry and from person to person As we know, trade is the purchase and sale of goods on profit motive. So, trade credit strictly refers to the routine business activity.

Bank Credit Commercial banks provide funds for different purposes and for different time periods to firms of all sizes by way of cash credits, overdrafts, term loans, purchase/discounting of bills, and issue of letter of credit. The rate of interest charged by banks depends on various factors such as the characteristics of the firm and the level of interest rates in the economy.

The loan is repaid either in lump sum or in instalments. Bank credit is not a permanent source of funds and is generally used for medium to short periods. The borrower is required to provide some security or create a charge on the assets of the firm before a loan is sanctioned by a commercial bank.

Question 2. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.

Answer

Financial institutions established by the central as well as State Governments all over the country to provide finance to business organisations are considered (he most suitable source of finance when large funds lor longer duration are required for expansion, reorganisation and modernisation of an enterprise. These institutions provide both owned capital and loan capital for long and medium term requirements and supplement the traditional financial agencies like commercial banks.

In addition to providing financial assistance. these institutions also conduct market surveys and provide technical assistance and managerial services to people who run the enterprises. The various Special Financial Institutions in India are as under.

(i) Industrial Finance Corporation of India (IFCI)

It was established in July, 1948 as a statutory corporation under the Industrial Finance Corporation Act, 1948. Its objectives include assistance towards balanced regional development and encouraging new entrepreneurs to enter into the priority sectors of the economy. IFCI has also contributed to the development 01 management education in the country.

(ii) State Financial Corporations (SFCs)

State Financial Corporations are established by the State Governments under the State Financial Corporations Act, 1951 for providing medium and short term finance to industries which are outside the scope of the IFC!. Its scope is wider than IFCI as it covers not only public limited companies but also private limited companies, partnership firms and proprietary concerns.

(iii) Life Insurance Corporation of India (LIC)

LIC was set up in 1956 under the LIC Act, 1956 after nationalising 245 existing insurance companies. It mobilises savings in the form of insurance premium and makes it available to industrial concerns in the form of direct loans and underwriting of and subscription to shares and debentures.

(iv) Industrial Credit and Investment Corporation of India (ICICI)

This was established in 1955 as a public limited company under the Companies Act. ICICI assists the creation, expansion and modernisation of industrial enterprises exclusively in the private sector. The corporation has also encouraged the participation of foreign capital in the country.

(v) Industrial Development Bank of India (IDBI)

It was established in 1964 under the Industrial Development Bank of India Act, 1964 with an objective to coordinate the activities of other financial institutions including commercial banks. The bank performs three types of functions, namely, assistance to other financial institutions, direct assistance to industrial concerns, and promotion and coordination of financial-technical services.

(vi) State Industrial Development Corporations (SIDC)

Many State Governments have set up State Industrial Development Corporations for the purpose of promoting industrial development in their respective states. The objectives of the SIDCs differ from one state to another.

(vii) Unit Trust of India (UTI)

It was established by the Government of India in 1964 under the Unit Trust of India Act, 1963. The basic objective of UTI is to mobilise the savings into productive ventures. It sanctions direct assistance to industrial concerns, invests in their shares and debentures, and participates with other financial institutions.

(viii) Industrial Investment Bank of India limited

Industrial Investment Bank of India assists sick units in the reorganisation of their share capital. Improvement In management system, and provision of finance at liberal terms.

Question 3. What advantages does issue of debentures provide over the issue of equity shares?

Answer

Debentures are long term debt instruments which bear a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date Debenture holders are paid a fixed stated amount of interest at specified Intervals say six months or one year

Issue of Zero Interest Debentures (ZID) which do not carry any explicit rate of interest It has also become popular In recent years. In the case of ZIDs. the difference between the face value of the debenture and its purchase price is the return to the investor.

Merits of Debentures over Equity Shares

(i) Debentures are preferred by investors who want fixed Income at lesser risk. (ii) Debentures are fixed charge funds and do not participate In profits of the company (iii) The issue of debentures is suitable in the situation when the sales and earnings are relatively stable (iv) Financing through debentures does not dilute control of shareholders on management as debentures do not carry voting rights. (v) Financing through debentures is less costly as compared to cost of equity capital as the Interest payment on debentures is tax deductible.

Question 4. State the merits and demerits of public deposits and retained earnings as methods of business finance.

Answer

Public Deposits

The deposits that are raised by organisations directly from the public are known as public deposits. Rates of interest offered on public deposits are usually higher than that offered on bank deposits The amount raised from public deposits is generally used by the company for meeting the requirement of working capital. It can take care of both medium and short term financial requirements.

Merits of Public Deposits

(i) The procedure of obtaining deposits is Simple and does not contain restrictive conditions as in case of a loan agreement.

(ii) Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions.

(iii) Public deposits do not usually create any charge on the assets of the company and hence the assets can be used as security for raising loans from other sources (iv) The control of the company is not diluted as the depositors do not have voting rights.

Limitations of Public Deposits

(i) New companies generally find it difficult to raise funds through public deposits due to lack of goodwill.

(ii) It is an unreliable source of finance as the public may not respond when the company needs money.

(iii) Collection of public deposits may prove difficult, particularly when the size of deposits required is large.

Retained Earnings

The portion of the net earnings which is not distributed amongst the shareholders as dividends and is retained in the business for use in the future is known as retained earnings. It is a source of internal financing and is also termed as accumulated earning.

Merits of Retained Earnings

(i) Retained earnings is a permanent source of funds available to an organisation. (ii) It does not Involve any explicit cost in the form of interest, or floatation cost. (iii) There is a greater degree of operational freedom and flexibility as the funds are generated internally.

(iv) It enhances the capacity of the business to absorb unexpected losses.

(v) It may lead to Increase in the market price of the equity shares of a company

Limitations of Retained Earnings

(i) High retention ratio may cause dissatisfaction amongst the shareholders as they would get lower dividends.

(ii) It is an uncertain source of funds as the profits of business keep fluctuating . (iii) If the opportunity cost associated with these funds is high it may lead to sub-optimal use of the funds.

Question 5. Discuss the financial instruments used in international financing.

Answer

Various financial instruments used in international facing include:

(i) Commercial Banks

Commercial banks extend foreign currency loans for business purposes. They are an important source of financing non-trade international operations. The types of loans and services provided by banks vary from country to country. Banks do not interfere in the management of companies and such loans can be repaid In parts and interest can be saved.

(ii) International Agencies and Development Banks

A number of international agencies and development banks provide long and medium term loans and grants to promote the development of economically backward areas in the world. These bodies were set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. The more notable among them include International Finance Corporation (IFC), EXIM Bank and Asian Development Bank.

(iii) International Capital Markets Prominent financial instruments used for international financing through capital markets are

(a) Global Depository Receipts (GDRs) These are the depository receipts denominated in US dollars issued by depository bank to which the local currency shares of a company are delivered. GDR is a negotiable instrument and can be traded freely like any other security. In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange,

(b) American Depository Receipts (ADRs) The depository receipts issued by a company in the USA are known as American Depository Receipts. ADRs are bought and sold in American markets like regular stocks. ADR is similar to a GDR except that It can be issued only to American citizens and can be listed and traded on a stock exchange of USA.

(c) Foreign Currency Convertible Bonds (FCCB’s) Foreign currency convertible bonds are equity linked debt securities that are to be converted into equity or depository receipts after a specific period at a pre-determined exchange rate. The FCCB’s are issued in a foreign currency and carry a fixed interest rate which is lower than the rate of any other similar non convertible debt instrument. FCCB’s are listed and traded in foreign stock exchanges.

Question 6. What is a commercial paper? What are its advantages and limitations?

Answer

Commercial paper is an unsecured promissory note Issued by a firm to raise funds for a short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance companies, pension funds and banks. The amount raised by CP is generally very large. The CP can be issued only by firms having good credit rating as this debt is totally unsecured. Issue of CP is regulated by the Reserve Bank of India.

Merits of Commercial Paper

(i) A commercial paper does not contain any restrictive conditions as it is sold on an unsecured basis.

(ii) It has high liquidity as it is a freely transferable instrument.

(iii) It provides more funds compared to other sources.

(iv) The cost of CP to the issuing firm is generally lower than the cost of commercial bank loans.

(v) A commercial paper provides a continuous source of funds because their maturity can be tailored to suit the requirements of the issuing firm.

(vi) Companies can invest their excess funds in commercial paper and can earn good return on them.

Limitations of Commercial Paper

(i) Only firms which are financially sound and have high credit ratings can raise money through commercial papers. New and moderately rated firms are not in a position to raise funds by this method as these are unsecured.

(ii) The amount of money that can be raised through commercial paper is limited. (iii) Commercial paper is an impersonal method of financing and if a firm is not in a position to redeem its paper due to financial difficulties, extending the maturity of a CP is not possible.

Chapter 9

Small Business

Short Answer Type Questions

Question 1. What are the different parameters used to measure the size of business?

Answer

Several parameters can be used to measure the size of business units. These include the number of persons employed in business, capital invested in business, volume of output or value of output of business and power consumed for business activities. Appropriate parameter may be used depending on the need and advantages or limitations of various measures.

Question 2. What is the definition used by Government of India for small scale industries?

Answer

The Government of India defines the small scale industries as per their investment In plant and machinery. In India the capital is scarce and labour is abundant this measure asks to keep in view the socio-economic environment.

Question 3. How would you differentiate between an ancillary unit and a tiny unit?

 

 

S.No

Ancillary Unit

Tiny Unit

1

All ancillary unit is the unit which supplies not less than 50% of its production to the parent unit.

A tiny unit is the business enterprise whose investment in plant and machinery not more than ₹ 25 lakhs.

2

Investment limit in such unit is one core.

Investment limit is ₹ 25 lakhs In this type of unit.

3

Parent unit assists the ancillary unit by providing technical and financial help.

No such assistance is there.

Question 4. State the features of cottage industries.

Answer

Cottage Industries are those where artistic goods are produced using manual techniques. For e.g; Handloom, Weaving etc. It is characterised by the following features:

1. Cottage industries are organised resources by individuals with private resources. 2. Cottage industries normally use family labour and locally available talent

3. The equipment used in cottage industries is simple.

4. Capital investment in cottage industries is small.

5. Cottage industries produce simple products, normally in their own premises.

6. Cottage Industries produce goods using indigenous technology.

Long Answer Type Questions

Questions 1. How do small industries contribute to the socio-economic development of India?

Answer

India is a developing country and in developing countries the scope of small scale industries are very wide. It is contributing to the socio-economic development in the following ways

1. Contribution in GOP Small industries in India account for 95% of the industrial units in the country. They contribute almost 40% of the gross industrial value added in the economy.

2. Contribution in Exports 45% of the total exports from India come from small scale industries. Gems and jewellery, handicrafts, sports goods, etc. are some items of exports from small scale sector.

3. Employment Generation Small industries are the second largest employers of human resources. after agriculture and generate more number of employment opportunities per unit of capital invested compared to large industries.

4. Variety of Production Small industries produce a wide variety of products ranging from mass consumption goods, readymade garments. hosiery goods. stationery items. soaps and detergents, domestic utensils, leather, plastic and rubber goods, processed foods and vegetables, wood and steel furniture. paints, varnishes, safety matches. etc. to the sophisticated items like electric and electronic goods, drugs and pharmaceuticals, agricultural tools and equipment and several other engineering products. Handlooms, handicrafts and other products from traditional village industries add to this diverse production from SSIs.

5. Regional Balance Small industries contribute significantly to the balanced development of the country as they produce simple products using simple technologies and depend on locally available resources both material and labour and can be set up anywhere in the country.

6. Entrepreneurship Development Small industries provide opportunity for entrepreneurship development in the country. The latent skills and talents of people can be transformed into business ideas with little capital investment and almost nil formalities to start a small business.

7. Low Cost of Production Small industries have the advantage of low cost of production as they use locally available resources which are less expensive: Establishment ana running costs of small industries are lower because of low overhead expenses.

8. Quick Decision Making Due to the small size of the organisations, quick and timely decisions can be taken without consulting many people. New business opportunities can therefore be captured at the right time.

9. Customised Production Small industries can design the product as per the tastes/preferences/needs of individual customers. They can provide customised production of even non-traditional products such as computers and other such products. They can produce according to the needs of the customers as they use simple and flexible production techniques.

10. Personal Touch Small industries have inherent strength of adaptability and a personal touch and therefore maintain good personal relations with both customers and employees. The government does not have to interfere in-the functioning of a small scale unit.

Question 2. Describe the role of small business in rural India.

Answer

Small Scale enterprises provide the numerous benefit in rural area. The role of small business in rural India is explained in the following points.

1. Non-farm Employment

Traditionally, rural households in India were exclusively engaged in agriculture. But now rural households have varied and multiple sources of income and participate in a wide range of non-agricultural activities such as wage employment and self-employment in commerce, manufacturing and services, along with the traditional rural activities of farming and agricultural labour. This can be largely attributed to the setting up of agro-based rural small industries.

2. Employment for Artisans

Cottage and rural industries play an important role in providing employment opportunities in the rural areas, especially for the traditional artisans and the weaker sections of society.

3. Prevention of Migration

Development of rural and village industries can also prevent migration of rural population to urban areas in search of employment.

4. Poverty Alleviation

Village and small industries are significant as producers of consumer goods and absorbers of surplus labour, thereby addressing the problems of poverty and unemployment.Promotion of small scale industries and rural industrialisation has been considered by the Government of India as a powerful instrument for realising the twin objectives of ‘accelerated Industrial growth and creating additional productive employment potential in rural and backward areas.’

5. Socio-economic Aspects

These industries contribute amply to other socio-economic aspects, such as reduction in income inequalities, dispersed development of industries and linkage with other sectors of the economy.

Question 3. Discuss the problems faced by small scale industries.

Answer

Small business have been facing a large number of problems compared to large scale industries. The scale of operations, shortage of funds, procurement of raw materials are some of them. The detailed description of problems are as follows

1. Finance

The most serious problem faced by SSls is that non availability of adequate finance to carry out their operations. Small scale sector lacks the creditworthiness and collateral required to raise capital from the capital markets or financial institutions and hence they depend on local money lenders who charge high interest rates. These units also suffer from lack of adequate working capital, either due to delayed payment of dues to them or locking up of their capital in unsold stocks.

2. Raw Materials

Another major problem of small business is the procurement of raw materials. If the required materials are not available, they have to compromise on the quality or have to pay a high price to get good quality materials. They purchase raw materials in small quantities due to lack of storage capacity and hence their bargaining power is low.

3. Managerial Skills

Small business is generally promoted and operated by a single person, who may not possess all the managerial skills required to run the business. Many of the small business entrepreneurs possess sound technical knowledge but are less successful in marketing and may not find enough time to take care of all functional activities. At the same time they are not in a position to afford professional managers.

4. Less Productive

Labour Small business firms cannot afford to pay high salaries to their employees, which affects employee willingness to work. Thus, productivity per employee, is relatively low and employee turnover is generally high. Small business organisations are unable to attract talented people because of lower remuneration. Division of labour cannot be practised in small scale units, which results in lack of specialisation and concentration.

5. Marketing

Effective marketing is a weaker area of small organisations. These organisations depend excessively on middlemen, who at times exploit them by paying low price and delaying payments. Direct marketing is also not feasible for small business firms as they lack the necessary infrastructure.

6. Quality

Small business organisations generally concentrate on cutting the cost and keeping the prices low. In doing this, they are unable to maintain the desired standards of quality as they do not have adequate resources to invest in quality research and expertise to upgrade technology.

7. Capacity Utilisation

Small business firms have to operate below full capacity due to lack of demand. Due to this their operating costs tend to increase which gradually leads to sickness and closure of the business.

8. Technology

Use of outdated technology is a serious shortcoming of small industries which results in low productivity and uneconomical production.

9. Sickness

Small industries become sick due to both internal and external causes. Internal problems include lack of skilled and trained labour and managerial and marketing skills. Some of the external problems include delayed payment, shortage of working capital, inadequate loans and lack of demand for their products.

10. Global Competition

Small businesses are threatened with global competition from multinational corporations and cheap imports. It is difficult for them to compete with the quality standards, technological skills and marketing capabilities of the large multinationals.

Question 4. What measures has the government taken to solve the problem of finance and marketing in the small scale sector?

Answer

The contribution of small scale industries are remarkable. Thus, Government has provided the following institutional support to solve the problem of finance and marketing in the small scale sector:

(i) National Bank for Agriculture and Rural Development (NABARD)

NABARD was setup in 1982, to promote Integrated rural development. Apart from agriculture, it supports small industries, cottage and village industries, and rural artisans. It provides credit and offers counselling and consultancy services and organises training and development programmes for rural entrepreneurs.

(ii) The Rural Small Business Development Centre (RSBDC)

It was set up by the world association for small and medium enterprises and is sponsored by NABARD. It works for the benefit of socially and economically disadvantaged individuals and groups. It aims at providing management and technical support to current and prospective micro and small entrepreneurs in rural areas.

(iii) National Small Industries Corporation (NSIC)

This was set up in 1955 with a view to promote, aid and foster the growth of small business units in the country. Functions of NSIC include:

(a) Supply of machines on easy hire-purchase terms.

(b) Procure, supply and distribute raw materials.

(c) Export the products of small business units and develop export-worthiness.

(d) Mentoring and advisory services.

(e) Serve as technology business incubators.

(f) Creating awareness on technological upgradation.

(g) Developing software technology parks and technology transfer centres.

Scheme of ‘performance and credit rating’ of small businesses is implemented through NSIC to ensure that they score higher rating for their credit requirements as and when they approach the financial institutions for their working capital and investment requirements.

(iv) Small industries Development Bank of india (SIDBI)

SIDBI was set up as an apex bank to provide direct  Vs indirect financial assistance under different schemes, to meet credit needs of small business organisations and to coordinate the functions of other institutions in similar activities.

(v) The National Commission for Enterprises in the Unorganised Sector (NCEUS)

The NCEUS was constituted in September, 2004, with the objectives of recommending measures considered necessary for improving the productivity of small enterprises in the informal sector and to enhance the competitiveness of the sector in the emerging global environment by developing linkages of the sector with other institutions in the areas of credit, raw materials, infrastructure, technology upgradation, marketing, etc.

(vi) Rural and Women Entrepreneurship Development (RWED)

The Rural and Women Entrepreneurship Development programme aims at promoting a conducive business environment and at building institutional and human capacities that will encourage and support the entrepreneurial initiatives of rural people and women by providing training and advisory services.

(vii) Scheme of Fund for Regeneration of Traditional Industries (SFURTI)

The Central Government set up this fund to make the traditional industries more productive and competitive and to facilitate their sustainable development. The main objectives of SFURTI are to develop clusters of traditional industries in various parts of the country; build innovative and traditional skills, improve technologies and encourage public-private partnerships, develop market intelligence etc.

(viii) The District Industries Centres (DIGs)

District Industries Centre is the institution at the district level which provides all the services and support facilities to the entrepreneurs for setting up small and village industries including identification of suitable schemes. preparation of feasibility reports. arranging for credit, machinery and equipment, provision of raw materials and other extension services. This was launched on 1st May, 1978.

Question 5. What are the incentives provided by the Government for industries in backward and hilly areas?

Answer

Some of the common incentives provided by the Government tor industries in backward and hilly areas are as follows

1. Land

Every state offers developed plots for setting up of industries. The terms and conditions may vary. Some states don’t charge rent In the initial years, while some allow payment in instalments.

2. Power

Power is supplied at a concessional rate of 50%, while some states exempt such units from payment in the initial years.

3. Water

Water is supplied on no-profit. no-loss basis or with 50% concession or exemption from water charges for a period of 5 years.

4. Sales Tax

In all union territories, industries are exempted from sales tax, while some states extend exemption for 5 years period.

5. Octroi

Most states have abolished octroi.

6. Raw Materials

Units located in backward areas get preferential treatment in the matter of allotment of scarce raw materials like cement, iron and steel etc.

7. Finance

Subsidy of 10-15% is given tor building capital assets. Loans are also offered at concessional rates.

8. Industrial Estates

Some states encourage setting up of industrial estates in backward areas.

9. Tax

Holiday Exemption from paying taxes for 5 or 10 years is given to industries established In backward, hilly and tribal areas.

S.No.

Ancillary Unit

Tiny Unit

1

All ancillary unit is the unit which supplies not less than 50% of Its production to the parent unit.

A tiny unit is the business enterprise whose investment in plant and machinery not more than ₹ 25 lakhs.

2

Investment limit in such unit is one core.

Investment limit is ₹ 25 lakhs In this type of unit.

3

Parent unit assists the ancillary unit by providing technical and financial help.

No such assistance is there.

Chapter 10

Internal Trade

Short Answer Type Questions

Question 1. What is meant by internal trade?

Answer

Buying and selling of goods and services within the boundaries of a nation are referred to as internal trade. No custom duty or import duty is levied on such trade as goods are the part of domestic production and consumption. Internal trade can be classified into two broad categories:

(i) Wholesale trade

(ii) Retail trade

Question 2. Specify the characteristics of fixed shop retailers.

Answer

Fixed shop retailers are retail shops who maintain permanent establishment to sell their merchandise.

They, therefore, do not move from one place to other serve their customers. Other characteristics of fixed shop retailers are

(i) They have greater resources and operate at a relatively large scale as compared with the itinerant traders.

(ii) These retailers deal in different products, including consumer durables as well as nondurables.

(iii) They have greater credibility in the minds of customers.

(iv) They are in a position to provide greater services to the customers such as home delivery, repairs, credit facilities, etc.

Question 3. What purpose is served by wholesalers providing warehousing facilities?

Answer

Two way purpose is served by wholesalers providing warehousing facilities in the following manner:

(i) Wholesalers take delivery of goods when these are produced in factory and Keep them in their godowns/warehouses which reduces the burden of manufacturers of providing for storage facilities for the finished products.

(ii) Warehousing by wholesalers relieves the retailers of the work of collecting goods from several producers and keeping big inventory of the same for maintaining adequate stock of varied commodities for the customers.

Question 4. How does market information provided by the wholesalers benefit the manufacturers?

Answer

Wholesalers provide useful market information to the manufacturers about various aspects like customer’s tastes and preferences, market conditions, competitive activities and the features preferred by the buyers. This information proves extremely beneficial to the

manufacturers as it helps them in taking effective decisions regarding their production and marketing strategies.

Question 5. How does the wholesaler help the manufacturer in availing the economies of scale?

Answer

Wholesalers serve as a link between retailers and the manufacturers. They collect small orders from number of retailers and pass on the pool of such orders to manufacturers and make purchases in bulk quantities. This enables the producers to undertake production on a large scale and thus take advantage of the economies of scale.

Question 6. Distinguish between single line stores and speciality stores. Can you identify such stores in your locality?

Answer

S.No

Single Line Stores

Speciality Stores

1

The stores which are dealing in general category product lines are called single line stores. e.g., Garments, medicine etc.

The stores which are dealing in a particular type of product under one product Line e g., Jeans shop have all brands of Jeans only.

2

There is no such advantage of specialization.

They take advantage of specialisation in a particular segment of the market.

3

They are situated in market places.

They are located in a central place of market.

Question 7. How would you differentiate between street traders and street shops?

Answer

S.No.

Street Traders

Street Shops

1

The traders who are generally sell their goods on busy street comers, Bus stand etc.

These are the platforms used to display the goods for sale.

2

They deal in cheap variety of goods.

They Deal in low priced articles but not that much cheap.

Question 8. Explain the services offered by wholesalers to manufacturers.

Answer

The major services offered by wholesalers to the producers of goods and services are given as below:

(i) Facilitating Large Scale Production

Wholesalers collect small orders from number of retailers and pass on the pool of such orders to manufacturers and make purchases in bulk quantities.

(ii) Bearing Risk

The wholesalers deal in goods in their own name, take delivery of the goods and keep them in their warehouses bearing risks of fall In prices, theft, spoilage, fire, etc.

(iii) Financial Assistance

The wholesalers provide financial assistance to the manufacturers In the sense that they generally make cash payment for the goods purchased by them.

(iv) Expert Advice

Wholesalers can advice the manufacturers about various aspects like customer’S tastes and preferences, market conditions, competitive activities and the features preferred by the buyers as they are in touch with retailers.

(v) Help in the Marketing Function

The wholesalers take care of the distribution of goods to a number of retailers who, in turn, sell to large number of customers spread over a large geographical area.

(vi) Facilitate Continuity

The wholesalers facilitate continuity of production activity throughout the year by purchasing the goods as and when these are produced.

(vii) Storage

Wholesalers take delivery of goods when these are produced in factory and keep them in their godowns!warehouses.

Question 9. What are the services offered by retailers to wholesalers and consumers?

Answer

Retailer renders following services to the wholesalers

(i) Help in Distribution of Goods Wholesalers provide help in the distribution of goods and making them available to final consumers.

(ii) Personal Selling In this the retailers relieve the producers of this activity and help them In actualising the sale of the products.

(iii) Enabling Large Scale Operations It enables them to operate at large scale and fully concentrate on activities.

(iv) Collecting Market Information Retailers remain in touch with the buyers they know about the tastes, attitudes, preference etc.

Such Information is very useful in taking marketing decisions in an organisation.

Some of the important services of retailers from the point of view of consumers are as follows:

(i) Regular Availability of Products

In order to buy products as and when needed retailer maintains the regular availability of the product.

(ii) New Products Information

By arranging effective display of products and personal selling retailers, provide important information about their products.

(iii) Convenience in Buying

Retailers are situated very near to the residential areas and remain open for long hours which enables customer to buy products of their requirement.

(iv) After Sales Service

Retailers provide after sales services to the customers in the form of home delivery, supply of spare parts etc.

Long Answer Type Questions

Question 1. Itinerant traders have been an integral part of internal trade in India. Analyse the reasons for their survival in spite of competition from large scale retailers.

Answer

Itinerant retailers are traders who do not have a fixed place of business to operate from. They keep on moving with their wares from street to street or place to place, in search of customers. Following are the reasons for their survival in spite of competition from large scale retailers:

(i) They are small traders and hence rural customers and consumers from backward areas find themselves more comfortable dealing with them.

(ii) They normally deal in consumer products of daily use such as toiletry products, fruits and vegetables, etc demand for which does not fall much with time.

(iii) The emphasis of such traders is on providing greater customer service by making the products available at the very doorstep of the customers. This makes it convenient for the consumers and helps In the survival of itinerant sellers.

(iv) Their cost of operation is very low as compared to large scale retailers as they do not have to incur expenses of fixed shops and inventory costs. Therefore, they are in a position to offer lower prices to consumers.

Question 2. Discuss the features of a departmental store. How are they different from multiple shops or chain stores?

Answer

A departmental store is a large establishment offering a wide variety of products, classified into well-defined departments, aimed at satisfying practically every customer’s need under one roof. It has a number of departments, each one confining its activities to one kind of product. e.g., there may be separate departments for toiletries, medicines, furniture, groceries, electronics, clothing and dress material. Thus, they satisfy diverse market segments with a wide variety of goods and services.

Some of the important features of a departmental store are as follows

(i) A modern departmental store may provide all facilities such as restaurant, restrooms, etc. In this way they try to provide maximum service to higher class of customers for whom price is of secondary importance.

(ii) These stores are generally located at a central place in the city, which caters to a large number of customers.

(iii) They are generally formed as a joint stock company managed by a board of directors as the size of these stores is very large.

(iv) A departmental store combines both the functions of retailing as well as warehousing. They purchase directly from manufacturers and operate separate warehouses thereby eliminating undesirable middlemen between the producers and the customers.

(v) All the purchases in a department store are made centrally by the purchase department of the store, whereas sales are decentralised in different departments.

Chain stores or multiple shops are networks of retail shops that are owned and operated by manufacturers or intermediaries.

Under this type of arrangement, a number of shops with similar appearance are established in localities, spread over different parts of the country in contrast to departmental stores which are established at a central place in the city. These different types of shops normally deal in standardised and branded consumer products, which have rapid sales turnover. These shops are run by the same organisation and have identical merchandising strategies. with identical products and displays.

Question 3. Why are consumer co-operative stores considered to be less expensive? What are its relative advantages over other large scale retailers?

Answer

A consumer co-operative store is an organisation owned, managed and controlled by consumers themselves The cooperative stores generally buy In large quantity. directly from manufacturers or wholesalers and sell them to the consumers at reasonable prices Members get products of good quality at cheaper rates Since the middlemen are eliminated or reduced

The major advantages of a consumer cooperative store are as follows

(i) Ease of Formation

It is easy to form a consumer cooperative society Any 10 people can come together to form association and get themselves registered with the a voluntary Registrar of Cooperative Societies by completing certain formalities

(ii) Limited liability

The liability of the members in a cooperative store is limited to the extent of the capital contributed by them. They are not liable personally to pay for the debts of society. In case the liabilities are greater than its assets.

(iii) Democratic Management

Cooperative societies are democratically managed through management committees which are elected by the members. Each member has one vote. Irrespective or the number of shares held by him/her.

(iv) Lower Prices

A cooperative store purchases goods directly from the manufacturers or wholesalers and sells them to members and others Elimination or middlemen results in lower prices for the consumer goods to the members.

(v) Cash Sales

The consumer cooperative stores normally sell goods on cash baSIS. As a result. the requirement for working capital is reduced

(vi) Convenient location

The consumer cooperative stores are generally opened at convenient public places where the members and others can easily buy the products as per their requirements.

Question 4. Imagine life without your local market. What difficulties would a consumer face if there is no retail shop?

Answer

Life without a focal market would be very difficult because of the following points

(i) Non-Availability of Products

Without a local market regular availability of goods to the consumers would be hampered. There would not be a mechanism through which products could reach consumers from the manufacturers as and when required

(ii) Information about New Products

Information about new products reaches the consumers through the local markets. The new products even after being advertised would not be available to consumers easily If there were no local markets.

(iii) Inconvenience

Local markets provide consumers the convenience of place and urns In buying products This would be lost In the absence of local markets and consumers will have to go long distances for buying products directly from the manufacturer’s warehouse.

(iv) Lack of Variety of Products

Local markets provide consumers with a Wide variety of products for choice based selection. This would not be available at one place in the absence of local markets.

(v) Lack of After Sales Services

The retailers in the local market provide after sales service to the consumers for goods purchased from the retail shops This service would become difficult in case there are no local markets.

Question 5. Explain the usefulness of mail orders houses. What type of products are generally handled by them? Specify.

Answer

Mail order houses are the retail outlets that sell their rner nandre through mail There is generally no direct personal contact between the buyers and the sellers in this type of trading For obtaining orders, potential customers are approached through advertisements In newspapers or magazines. circulars catalogues, samples and bills. and price lists sent to them by post.

All the relevant information about the products such as the price features, delivery terms, terms of payment. etc, are described In the advertisement On receiving the orders, the Items are carefully scrutinised With respect to the specifications asked for by the buyers and are complied with through the post office

Advantages of Mail Order Houses

(i) Limited Capital Requirement

Mail order business can be started with relatively low amount of capital as It does not require heavy expenditure on building and other infrastructural facilities

(ii) Elimination of Middlemen

The biggest advantage of mall-order business for consumers is that unnecessary middlemen between the buyers and sellers are eliminated which results in savings to the buyers as well as to the sellers

(iii) Absence of Bad Debt

Since the mail order houses do not extend credit facilities to the customers, there are no chances of any bad debt on account of non payment by the customers.

(iv) Wide Reach

This system has a wide reach as a large number of people throughout the country can be served through mail and the goods can be sent to all the places having postal services.

(v) Convenience

This system is very convenient for the consumers as the goods are delivered at the doorstep of the customers.

Mail order houses usually deals only in the goods that can be:

(i) graded and standardised

(ii) easily transported at low cost

(iii) have ready demand in the market

(iv) are available in large quantity throughout the year

(v) involve least possible competition in the market

(vi) can be described through pictures etc.

Chapter 11

International Business – I

Multiple Choice Questions

Question 1. In which the following modes of entry, does the domestic manufacturer give the right to use intellectual property such as patent and trademark to a manufacturer in a foreign country for a fee?

(a) Licensing

(b) Contract manufacturing

(c) Joint venture

(d) None of these

Answer (a) Licensing refers to permitting another party in a foreign country to produce and sell goods under trademarks. patents or copyrights in lieu of some fee. Example: Pepsi and Coca Cola are produced and sold all over the world by local bottlers in foreign countries through licensing.

Question 2. Outsourcing a part of or entire production and concentrating on marketing operations in international business is known as:

(a) Licensing

(b) Franchising

(c) Contract manufacturing

(d) Joint venture

Answer (c) Contract manufacturing refers to a type of outsourcing in international business where a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain components or goods produced as per its specifications.

Question 3. When two or more firms come together to create a new business entity that is legally separate and distinct from its parents it is known as

(a) Contract manufacturing

(b) Franchising

(c) Joint ventures

(d) Licensing

Answer. (c) A joint venture means establishing a firm that is jointly owned by two or more otherwise independent firms.

Question 4. Which of the following is not an advantage of exporting?

(a) Easier way to enter into international markets

(b) Comparatively lower risks

(c) Limited presence in foreign markets

(d) Less investment requirements

Answer (c) Export firms basically operate from their home country. Hence, they have limited presence in foreign markets which is disadvantageous for them.

Question 5. Which one of the following modes of entry requires higher level of risks?

(a) Licensing

(b) Franchising

(c) Contract manufacturing

(d) Joint venture

Answer (d) Foreign firms entering into joint ventures share the technology and trade secrets with local firms in foreign countries, thus always running the risks of such a technology and secrets being disclosed to others apart from the risks associated with entry into foreign markets with unknown business environments.

Question 6. Which one of the following modes of entry permits greatest degree of control over overseas operations?

(a) Licensing/Franchising

(b) Wholly owned subsidiary

(c) Contract manufacturing

(d) Joint venture

Answer (b) The parent company acquires full control over the foreign company by making 100% investment in its equity capital in a wholly owned subsidiary

Question 7. Which one of the following modes of entry brings the firm closer to international markets?

(a) Licensing

(b) Franchising

(c) Contract manufacturing

(d) Joint venture

Answer (d) In a joint venture, both the foreign and local entrepreneurs jointly form a new enterprise. The foreign business firm benefits from a local partner’s knowledge of the host countries regarding the competitive conditions, culture, language, political systems and business systems, thus bringing the firm closer to international markets.

Question 8. Which one of the following is not amongst India’s major export items?

(a) Textiles and garments

(b) Gems and jewellery

(c) Oil and petroleum products

(d) Basmati rice

Answer (c) Oil and petroleum products are amongst India’s major imports.

Question 9. Which one of the following is not amongst India’s major import items?

(a) Ayurvedic medicines

(b) Oil and petroleum products

(c) Pearls and precious stones

(d) Machinery

Answer (a) Ayurvedic medicines are not a major import item, rather India holds the distinct position of being the largest exporter in the world of ayurvedic products.

Question 10. Which one of the following is not amongst India’s major trading partners?

(a) USA

(b) UK

(c) Germany

(d) New Zealand

Answer (d) USA. UK and Germany are major trading partners of India with USA having the highest share.

Short Answer Type Questions

Question 1. Differentiate between international trade and international business.

Answer

S.No.

International Trade

International Business

1

International trade means movements of goods only.

Business transactions that takes place between two or more countries is known as international business.

2

It involves only the movements of goods and international currency is used for dealing.

It involves not only the International movements of goods and services, but also capital,personnel, technology and intellectual property like trademarks of patents.

3

International trade is a narrow them.

International business is much broader than international trade.

Question 2. Discuss any three advantages of international business.

Answer

For Nations Three advantages of international business to the nations are:

1. International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products, etc.

2. International trade allows a country to produce what a country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently.

3. International business helps the countries in improving their growth prospects and creates employment opportunities.

For Firms:

Three advantages of international business to the firms are

1. International business can be more profitable than the domestic business as business firms can earn more profits by selling their products In countries where prices are high.

2. International business leads to fuller utilisation of production capacity as a result these firms get benefits of large economies of scale and reduction In the cost of production.

3. Companies get strategic and technical advantages by going international.

Question 3. What is the major reason underlying trade between nations?

Answer

The major reason behind international business is that the countries have unequal distribution of natural resources among them or have differences in their productivity levels because of which they cannot produce all that they need equally well or at equal costs. Trade between nations allows a country to produce what a country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently.

Question 4. Discuss as to why nations trade.

Answer

The countries have unequal distribution of natural resources among them or have differences in their productivity levels because of which they cannot produce all that they need equally well or at equal costs.

Availability of various factors of production such as labour, capital and raw materials that are required for producing different goods and services differ among nations. Moreover, labour productivity and production costs differ among nations due to various socio-economic, geographical and political reasons.

Due to these differences each country finds it advantageous to produce those select goods and services that it can produce more efficiently at home, and procuring the rest through trade with other countries which the other countries can produce at lower costs. This is precisely the reason as to why countries trade with others.

Question 5. Enumerate limitations of contract manufacturing.

Answer

Following are the limitations of contract manufacturing:

1. Local firms might not adhere to production design and quality standards, thus causing serious product quality problems to the international firm.

2. Local manufacturer in the foreign country loses his control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract.

3. The profitability of local firm producing under contract manufacturing is low as it is not free to sell the contracted output as per its will. It has to sell the goods to the international company at prices agreed upon under the contract which may be lower than the open market prices.

Question 6. Why is it said that licensing is an easier way to expand globally?

Answer

Licensing is considered to be the easier way of expanding globally due to following advantages:

1. Under the licensing system, it is the licensor who sets up the business unit and invests his/her own money in the business and the licensor has to virtually make no investments abroad. Licensing is, therefore, considered a less expensive mode of entering into international business.

2. Licensor is paid by the licensee by way of fees fixed in advance as a percentage of production or sales turnover and licensor does not bear risk of losses.

3. Since the business in the foreign country is managed by the licensee who is a local person, there are lower risks of business takeovers or government interventions.

4. Licensee being a local person has greater market knowledge and contacts which can prove quite helpful to the licensor in successfully conducting its marketing operations.

Question 7. Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.

Answer

Contract manufacturing refers to a type of international business where a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain components or goods produced as per its specifications while in a wholly owned subsidiary the parent company acquires full control over the foreign company by making 100% investment in its equity capital.

Question 8. Distinguish between licensing and franchising.

Answer

1. Licensing is an agreement between licensor and licensee where as franchising is an agreement between franchisee and franchiser.

2. Licensing means permitting other party in a foreign country to produce and sell goods under trademark, patents where as franchising means sell or distribute the branded products in a specific geographical area. e.g., through its franchising system MC Donalds operates’ first food restaurants in the whole world.

Question 9. List major items of India’s exports.

Answer

Major items of India’s exports are

(i) Primary Products

(a) Agriculture and allied

(b) Ores and minerals

(ii) Manufactured Goods

(a) Textiles including garments

(b) Gems and jewellery

(c) Engineering goods

(d) Chemicals and related products

(e) Leather and manufactures

Question 10. What are the major items that are exported from India?

Answer The major items that are exported from India include:

(i) Primary Products

(a) Agriculture and allied

(b) Ores and minerals

(ii) Manufactured Goods

(a) Textiles including garments

(b) Gems and jewellery

(c) Engineering goods

(d) Chemicals and related products

(e) Leather and manufactures

Question 11. List the major countries with whom India trades.

Answer

Following are the major countries with whom India trades

(i) USA

(ii) UK

(iii) Belgium

(iv) Germany

(v) Japan

(vi) Switzerland

(vii) Hong Kong

(ix) China

(viii) UAE

(x) Singapore

(xi) Malaysia

Long Answer Type Questions

Question 1. What is an international business? How is it different from the domestic business?

Answer

Manufacturing and trade beyond the boundaries of one’s own country is known as international business.

International business is defined as those business activities that take place across the national frontiers. It involves not only the international movements of goods and services, but also of capital, personnel, technology and intellectual property like patents, trademarks, know-how and copyrights.Domestic and international businesses following aspects differ from each other in the:

1. Nationality of Buyers and Sellers

In the case of domestic business, both the buyers and sellers are from the same country but in international business buyers and sellers come from different countries and their languages, attitudes, social customs and business goals and practices are not identical as in case of domestic business. This makes relatively more difficult for them to interact with one another and finalise business transactions.

2. Nationality of Other Stakeholders

The other stakeholders such as employees, suppliers, shareholders/partners and general public associated with firms doing international business have different nationalities while in the case of domestic business all such factors belong to one country. Therefore, decision making in international business becomes much more complex due to wider set of values and aspirations of the stakeholders belonging to different nations.

3. Mobility of Factors of Production

The degree of mobility of factors like labour and capital is generally less between countries than within a country due to legal restrictions and variations in socio-cultural environments, geographic influences and economic conditions.

4. Customer Heterogeneity Across Markets

Since buyers in international markets hail from different countries, they differ in their socio-cultural background. Differences in their tastes, fashions, languages, beliefs and customs, attitudes and product preferences cause variations in not only their demand for different products and services, but also in variations in their communication patterns and purchase behaviours Such variations greatly complicate the task of designing products and evolving strategies appropriate for customers in different countries.

5. Differences in Business Systems and Practices

The differences in business systems and practices are considerably higher among countries than within a country as countries differ from one another in terms of their socio-economic development. availability, cost and efficiency of economic infrastructure and market support services, etc which make it necessary for firms interested in international business to adapt their production, finance. human resource and marketing plans as per the conditions prevailing in the international markets.

6. Political System and Risks

Political factors such as the type of government, political party system. political ideology, political risks, etc, have an impact on business operations. International business firms need to monitor political changes in the concerned countries and devise strategies to deal with diverse political risks.These firms also face discrimination as nations tend to favour products and services originating in their own countries to those coming from other countries while this is not a problem for business firms operating domestically.

7. Differences in Business Regulations and Policies

Every country has its own set of business laws and regulations. These laws, regulations and economic policies are more or less uniformly applicable within a country but they differ widely among nations. Tariff and taxation policies, import quota system, subsidies and other controls adopted by a nation are not the same as in other countries and often discriminate against foreign products, services and capital.

8. Difference in Currency

International business involves the use of different currencies while in domestic business all transactions are done in the same currency. International business firms have to keep exchange rate fluctuations into consideration in fixing prices of their products and hedging against foreign exchange risks.

Question 2. “International business is more than international trade”. Comment.

Answer

International trade comprises of exports and imports of goods and forms an important component of international business. But the scope of international business is substantially wider than that of international trade. International business includes international exchange of services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising. It also covers foreign investments and overseas production of goods and services.

Multinational companies have started making investments into foreign countries and undertaking production of goods and services in foreign countries to explore foreign markets and produce at lower costs. All these activities form part of international business. To conclude, we can say that international business is a much broader term and is comprised of both the trade and production of goods and services across frontiers.

International trade is done through exporting of goods while international business modes include licensing, franchising, contract manufacturing, joint ventures and establishment of wholly owned subsidiaries apart from exporting.

Question 3. What benefits do firms derive by entering into international business?

Answer

Firms derive the following benefits by entering into international business:

1. Prospects for Higher Profits

International business can be more profitable than the domestic business as business firms can earn more profits by selling their products in countries where prices are high when the domestic prices are lower.

2. Increased Capacity Utilisation

Firms can make use of their surplus production capacities and also improving the profitability of their operations by going for overseas expansion and procuring orders from foreign customers. Production on a larger scale often leads to economies of scale, which in turn lowers production cost and improves per unit profit margin.

3. Prospects for Growth

Business firms can improve prospects of their growth by entering into overseas markets when demand for their products starts getting saturated in the domestic market.

4. Way out from Intense Competition in Domestic Market

Internationalisation is the only way to achieve significant growth when competition in the domestic market is very intense. Highly competitive domestic market induces many companies to go international in search of markets for their products.

5. Improved Business Vision

The growth of international business of many companies is essentially a part of their business policies or strategic management. The vision to become international comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalisation.

Question 4. In what ways is exporting a better way of entering into international markets than setting up wholly owned subsidiaries abroad?

Answer

Exporting is a better way of entering into international markets than setting up wholly owned subsidiaries abroad in the following ways:

1. Exporting is the easiest way of gaining entry into international markets. It is less complex than setting up and managing joint ventures or wholly owned subsidiaries abroad.

2. Exporting involves lesser time and effort as business firms are not required to invest that much time and money as is needed when they set up manufacturing plants and facilities as wholly owned subsidiary in host countries.

3. Since exporting does not require much of investment in foreign countries, exposure to foreign investment risks is nil or much lower than that in establishing wholly owned subsidiary.

Question 5. Discuss briefly the factors that govern the choice of mode of entry into international business.

Answer

The following factors govern the choice of mode of entry into international business

1. Ease of Entry

Some modes of entry into international business like exporting involve lesser formalities than others such as going for joint ventures, franchising or wholly owned subsidiaries. Thus, initially exporting is the mode generally adopted for entry into international markets.

2. Associated Risk

Risk of international exposure is higher in joint ventures and wholly owned subsidiaries as more investment is involved and socio-economic conditions of the host country along with political and regulatory concerns become more important. Therefore, some other mode like licensing or contract manufacturing might be chosen to reduce risk.

3. Efforts Involved

Time and effort one needs to put in is another factor which determines the mode of international business. Modes like exporting, licensing and franchising involve lesser effort than joint venture or wholly owned subsidiary.

4. Degree of Control

If a firm wants to exercise full control over the operations in foreign countries, it goes for wholly owned subsidiary. Similarly, degree of control is higher in franchising as compared to licensing and so on.

5. Nature of Business

If the business requires the firm to be in close contact with the customers in the foreign markets, wholly owned subsidiary or joint venture is more suitable while if the products can be supplied from a distance, modes like exporting can suffice. The nature of products being manufactured and availability of raw material also determine the mode of entry Into international business.

Question 6. Discuss the major trends in India’s foreign trade. Also list the major products that India trades with other countries.

Answer

India’s share in world trade in 2003 was abysmally low i.e., just 0.8% as compared to those of other developing countries such as China (5.9%), Hong Kong (3.0%), South Korea (2.6%), Malaysia (1.3%), Singapore (1.9%), and Thailand (1.1%).India’s share in world merchandise exports started rising fast since 2004, reached 1.3% in 2009 and 1.5% in 2010. It increased to 1.9% in the first half of 2011, mainly due to the relatively higher Indian export growth of 55% compared to the 23.1% export growth of the world.

Trends in India’s Foreign Trade in Goods

Volume of Trade Share of foreign trade in the country’s Gross Domestic Product (GOP) has considerably increased from 14.6% in 1990-91 to 24.1% in 2003-04. India’s total merchandise exports were ₹ 606 crores in 1950-51 which increased to ₹ 293367 crores in 2003-04, representing an increase of over 480 times over the last five decades. During the last decade, India’s exports and imports registered a five to seven fold increase from US $ 44.6 billion and US $ 50.5 billion respectively in 2000- 01 to US $ 251.1 billion and US $ 369.8 billion in 201011 respectively.While the Compound Annual Growth Rates (CAGR) of India’s exports and imports (in US dollar terms) were 8.2% and 8.4% respectively in the 1990s, they increased to 19.5% and 25.1 % during 2000-01 to 2008-09. Total imports which stood at ~ 608 crores in 1950-51 increased to ₹ 359108 crores in 2003-04, thus registering a growth of about 590 times during the same period.

Composition of Trade Composition wise, textiles and garments, gems and Jewellery, engineering products and chemicals and related products and agricultural and allied products are India’s major items of India’s exports. Great changes in the sectoral composition of India’s export basket were seen in the 2000s decade.

The share of petroleum crude and products increased by 11.8 percentage points during the 10 year period tram 2000-1 to 2009-10, and further increased by 4.8 percentage points from 2009-10 to the first half of 2011-12. The share of the other two sectors, i. e., manufactures and primary products fell almost proportionately by 11.6 and 1.1 percentage points respectively during 2000-1 to 2009-10.

Although in overall terms India accounts for just above 1% of world exports, in many individual product items such as tea, pearls, precious and semi-precious stones, medicinal and pharmaceutical products, rice, spices, iron ore and concentrates, leather and leather manufactures, textile yarns fabrics, garments and tobacco, its share is much higher and ranges between 3% to 13%.

India even holds the distinct position of being the largest exporter in the world in select commodities such as basmati rice, tea, and ayurvedic products. As far as imports are concerned, products likes crude oil and petroleum products, capital goods (i.e., machinery), electronic goods, pearl, precious and semi-precious stones, gold, silver and chemicals constitute major items of India’s imports. India’s trade in services has also grown manifold over the years.

Question 7. What is invisible trade? Discuss salient aspects of India’s trade in services.

Answer

Invisible trade refers to trade in services. Service exports and imports involve trade in intangibles because of which trade in services is also known as invisible trade. Trade in services includes trade in tourism and travel, boarding and lodging, entertainment and recreation, transportation, professional services, communication, construction and engineering, marketing, educational and financial services.

India’s trade in services has increased substantially over the years. Both the exports and imports of services relating to foreign travel, transportation and insurance have increased at a high rate during the last four decades.

Software and other miscellaneous services (including professional technical and business services) have emerged as the main categories of India’s exports of services. While the relative share of travel and transportation has declined from 64.3% in 1995-96 to 29.6% in 20032004, the share of software exports has gone up from 10.2% to around 49% in the corresponding period.

Chapter 12

International Business – II

Multiple Choice Questions

Question 1. Which of the following documents are not required for obtaining an export license?

(a) lEC number

(b) Letter of credit

(c) Registration cum membership certificate

(d) Bank account number

Answer (b) Bank account, IEC, registration with export promotion council and registration with ECGC are required for obtaining export license.

Question 2. Which of the following documents is not required in connection with an import transaction?

(a) Bill of lading

(b) Shipping bill

(c) Certificate of origin

(d) Shipment advice

Answer (b) Shipping bill is the main document on the basis of which the customs office gives the permission for export.

Question 3. Which of the following do not form part of duty drawback scheme?

(a) Refund of excise duties

(b) Refund of customs duties

(c) Refund of export duties

(d) Refund of income dock charges at the port of shipment.

Answer (d) Major duty drawbacks include refund of excise duties paid on goods meant for exports, refund of customs duties paid on raw materials and machines imported for export production.

Question 4. Which one of the following is not a document related to fulfil the customs formalities

(a) Shipping bill

(b) Export licence

(c) Letter of insurance

(d) Proforma invoice

Answer (b) Export Contract or Export Order, Shipping Bill, Letter of Credit,  Commercial Invoice, Certificate of Origin, Certificate of Inspection, Marine Insurance Policy are needed for customs formalities.

Question 5. Which one of the following is not a part of export documents?

(a) Commercial invoice

(b) Certificate of origin

(c) Bill of entry

(d) Mate’s receipt

Answer (c) The importer fills ‘bill of entry’ form for the assessment of customs import duty.

Question 6. A receipt issued by the commanding officer of the ship when the cargo is loaded on the ship is known as

(a) shipping receipt

(b) mate receipt

(c) cargo receipt

(d) charter receipt

Answer (b) A mate receipt is a receipt issued by the commanding officer of the ship when the cargo is loaded on board, and contains the information about the name of the vessel, berth, date of shipment. description of packages, marks and numbers, condition of the cargo at the time of receipt on board the ship, etc.

 

Question 7. Which of the following document is prepared by the exporter and includes details of the cargo in terms of the shipper's name, the number of packages, the shipping bill, port of destination, name of the vehicle carrying the cargo?

(a) Shipping bill

(b) Packaging list

(c) Mate’s receipt

(d) Bill of exchange

Answer (a) The shipping bill is the main document on the basis of which customs office grants permission for the export. The shipping bill contains particulars of the goods being exported, the name of the vessel, the port at which goods are to be discharged, country of final destination, exporter’s name and address, etc.

Question 8. The document containing the guarantee of a bank to honour drafts drawn on it by an exporter is

(a) letter of hypothecation

(b) letter of credit

(c) bill of lading

(d) bill of exchange

Answer (b) A letter of credit is a guarantee issued by the importer’s bank that it will honour up to a certain amount the payment of export bills to the bank of the exporter.

Question 9. Which of the following does not belong to the World Bank Group?

(a) IBRD

(b) IDA

(c) MIGA

(d) IMF

Answer (d) IMF does not belong to the World Bank Group.

Question 10. TRIP is one of the WTO agreements that deal with

(a) trade in agriculture

(b) trade in services

(c) trade related investment measures

(d) None of the above

Answer (d) TRIP is related to trade of intellectual property rights.

Short Answer Type Questions

Question 1. Discuss the formalities involved in getting an export licence.

Answer

Important formalities in getting an export licence are as follows

(i) Opening a bank account in any bank authorised by the Reserve Bank of India (RBI) and getting an account number.

(ii) Obtaining Import Export Code (IEC) number from the Directorate General Foreign Trade (DGFT) or Regional Import Export Licensing Authority.

(iii) Registering with appropriate export promotion council.

(iv) Registering with Export Credit and Guarantee Corporation (ECGC) in order to safeguard against risks of non payments.

Question 2. Why is it necessary to get registered with an export promotion council?

Answer

It is necessary for the exporter to become a member of the appropriate export promotion council and obtain a Registration Cum Membership Certificate (RCMC) for availing benefits available to export firms from the Government like duty exemptions. These councils also provide incentives to the exporters.

Question 3. What is IEC number?

Answer

Import Export Code (IEC) number is given to an export firm by Director General for Foreign Trade (DGFT) which the firm needs to be filled in various export! import documents. For obtaining the IEC number, a firm has to apply to the DGFT with documents such as exporter/importer profile, bank receipt for requisite fee, certificate from the banker on the prescribed form, two copies of photographs attested by the banker, details of the non-resident interest and declaration about the applicant’s non association with caution listed firms.

Question 4. What is pre-shipment finance?

Answer

Pre-Shipment finance is the finance that the exporter needs before shipment of the order for procuring raw materials and other components, processing and packing of goods and transportation of goods to the port of shipment or we can say pre-shipment finance is the finance which is required to undertake export production.

Question 5. Why is it necessary for an export firm to go in for pre-shipment inspection?

Answer

An export firm has to go in for pre-shipment inspection as required by the Government of India to ensure that only good quality products are exported from the country. The government has passed Export Quality Control and Inspection Act, 1963 for this purpose of compulsory inspection of certain products by a competent agency as deSignated by the government. If the product to be exported comes under such a category, the exporter needs to contact the Export Inspection Agency (EIA) or the other designated agency for obtaining Inspection certificate.

The pre-Shipment inspection report is required to be submitted along with other export documents at the time of exports Such an inspection is not compulsory in case the goods are being exported by star trading houses, trading houses, export houses, industrial units setup in Export Processing Zones/Special Economic Zones (EPZs/SEZs) and 100% Export Oriented Units (EOUs).

Question 6. Discuss the procedure related to excise clearance of goods.

Answer

The exporter has to apply to the concerned Excise Commissioner in the region with an Invoice because according to the Central Excise Tariff Act, excise duty is payable on the materials used in manufacturing goods. If the Excise Commissioner is satisfied, he may issue the excise clearance.

But in many cases the government exempts payment of excise duty or later on refunds it If the goods so manufactured are meant for exports This is done to provide an incentive to the exporters to export more and also to make the export products more competitive In the world markets

Question 7. Explain briefly the process of customs clearance of export goods.

Answer

The goods must be cleared from the customs before these can be loaded on the ship. For obtaining customs clearance, the exporter prepares the shipping b II which contains particulars of the goods being exported, the name of the vessel, the port at which goods are to be discharged country of “nal destination, exporter’s name and address, etc. Five copies of the shipPing bill along with the following documents are then submitted to the Customs Appraiser at the Customs House for clearance:

(i) Export Contract or Export Order

(ii) Letter of Credit

(iii) Commercial invoice

(iv) Certificate of Origin

(v) Certificate of Inspection, where necessary

(vi) Manne Insurance Policy

After submission of these documents the superintendent of the concerned port trust is approached for carting order and after obtaining it, the Cargo is physically moved Into the port area and stored in shed.

Question 8. What is bill of lading? How does it differ from bill of entry?

Answer

Bill of lading is issued by the shipping company after the receipt of freight, it serves as an evidence that the shipping company has accepted the goods for carrying to the designated destination. in case the goods are being sent by air. this document IS referred to as airway bill

On the other hand “Bill of entry” is filled by the importer for assessment of customs import duty. One appraiser examines the document carefully and gives the examination order The importer procures the said document prepared by the appraiser and pays the duty. if any. After payment of the import duty, the bill of entry has to be presented to the dock superintendent The examiner gives his report on the bill of entry which is then presented to the port authority which issues the release order after receiVing necessary charges

Question 9. What is Shipping Bill?

Answer

Shipping bill is the main document on the basis of which the customs office gives the permission for export. Shipping bill contains particulars of the goods being exported. the name of the vessel. the port at which goods are to be discharged, country of final destination, exporter’s name and address, etc. Exporter prepares the shipping bill for obtaining customs clearance. Thus, we can say shipping bill is the bill which is prepared by exporter and required for the customs clearance.

Question 10. Explain the meaning of Mate’s receipt.

Answer

A mate receipt is a receipt issued by the commanding officer of the ship when the cargo is loaded on board, and contains the information about the name of the vessel, berth, date of shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on board the ship, etc. The port superintendent. on receipt of port dues, hand over the mate’s receipt to the C&F agent.

Question 11. What is a letter of credit? Why does an exporter need this document?

Answer

A letter of credit is a guarantee issued by the importer’s bank that it will honour up to a certain amount of export bills to the bank of the exporter. Letter of credit is the most appropriate and secure method of payment adopted to settle international transactions.

The exporter needs this letter to insure against the non payment of dues by the importer in the foreign country as there IS always a risk In the collection of payment from the importers. Thus, in order to protect the exporter from financial loss “Letter of credit” is needed.

Question 12. Discuss the process involved in securing payment for exports.

Answer

The process involved in securing payment for exports includes the following steps:

(i) After the shipment of goods, the exporter informs the importer about the shipment of goods.

(ii) The exporter sends the documents like certified copy of invoice, bill of lading, packing list, etc. needed by the importer to claim the title of goods on their arrival at his/her country and getting them customs cleared.

These documents are sent through exporter’s banker with the instruction that these may be delivered to the importer after acceptance of the bill of exchange.

(iii) On receiving the bill of exchange, the Importer releases the payment in case of sight draft or accepts the usance draft for making payment on maturity of the bill of exchange.

(iv) The exporter’s bank receives the payment through the importer’s bank and is credited to the exporter’s account.

(v) The exporter can get immediate payment from his/ her bank on the submission of documents by Signing a letter of indemnity.

(vi) After receiving the payment for exports, the exporter needs to get a bank certificate of payment which states that the necessary documents relating to the particular export consignment have been presented to the importer for payment and the payment has been received in accordance with the exchange control regulations.

Question 13. Differentiate between the following

(i) Sight and usance drafts

(ii) Bin of lading and airway bill

(iii) Pre-shipment and post-shipment finance

Answer

(i) Sight and Usance Drafts In the case of sight draft. the drawer instructs the bank to hand over the relevant documents to the importer against payment. But in the case of usance draft, the drawer instructs the bank to hand over the relevant documents to the importer against acceptance of the bill of exchange.

(ii) Bill of Lading and Airway Bill Bill of lading is a document prepared and signed by the master of the ship acknowledging the receipt of goods on board. It contains terms and conditions on which the goods are to be taken to the port of destination.

On the other hand. Airway Bill is a document wherein an airline/shipping company gives its official receipt of the goods on board its aircraft and at the same time gives an undertaking to carry them to the port of destination.

(iii) Pre-shipment and Post-shipment Finance Pre-shipment finance is provided to an exporter for financing the purchase. processing, manufacturing or packaging of goods for export purpose while the post-shipment finance is provided to the exporter from the date of extending the credit after the shipment of goods to the export country.

Question 14. Explain the meaning of the following documents used in connection with import transactions

(i) Trade enquiry (ii) Import licence (iii) Shipment of advice (iv) Import general manifest (v) Bill of entry

Answer

(i) Trade Enquiry A trade enquiry is a written request by an importing firm to the exporter for supply of information regarding the price and various terms and conditions on which the latter is ready to exports goods.

(ii) Import Licence Licence which permits the Import of goods that cannot be imported freely is called an import licence. The importer needs to consult the Export Import (EXIM) policy in force to know whether the goods that he or she wants to import are subject to Import licensing In case goods can be imported only against the licence. the importer needs to procure an Import licence.

(iii) Shipment of Advice Shipment advice contains Information about the shipment of goods. The information provided in the shipment advice includes details such as invoice number. bill of lading/airways bill number and date. name of the vessel with date. the port of export. description of goods and quantity, and the date of sailing of vessel The overseas supplier dispatches the shipment advice to the Importer after loading the goods on the vessel.

(iv) Import General Manifest Import general manifest is a document that contains the details of the imported goods. It is a document on the basis of which unloading of cargo takes place. It is provided by the person in charge of the carrier (ship or airway) to the officer in charge at the dock.

(v) Bill of Entry Bill of entry IS a form filled by the Importer for assessment of customs import duty. One appraiser examines the document carefully and gives the examination order. The Importer procures the said document prepared by the appraiser and pays the duty, if any. After payment of the Import duty, the bill of entry has to be presented to the dock superintendent The examiner gives his report on the bill of entry which IS then presented to the port authority which Issues the release order after receiving necessary charges.

Question 15. List out major affiliated bodies of the World Bank.

Answer

Major affiliated bodies of the World Bank are

(i) International Bank for Reconstruction and Development (IBRD)

(ii) International Finance Corporation (IFC)

(iii) International Development ASSOCiation(IDA)

(iv) Multilateral Investment Guarantee Agency (MIGA)

(v) International Centre for Settlement of Investment Disputes (ICSID)

Question 16. Write short notes on the following

(i) UNCTAD

(ii) MIGA

(iii) World Bank

(iv) ITPO

(v) IMF

Answer

(i) UNCTAD

The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 as a permanent intergovernmental body It is the principal organ of the United Nations

General Assembly dealing with trade, investment, and development issues.

The organisation’s goals are to “maximize the trade, investment and development opportunities of and developing countries and assist them in their efforts to integrate into the world economy on an equitable basis”. UNCTAD was created to address the concerns of developing countries over the international market, multinational corporations, and the disparity between developed nations and developing nations.

The primary objective of the UNCTAD is to formulate policies relating to all aspects of development including trade, aid, transport, finance and technology The conference ordinarily meets once in four years. UNCTAD has 194 member States and has its permanent secretariat in Geneva.

One of the principal achievements of UNCTAD has been to conceive and Implement the Generalised System of Preferences (GSP). Under the GSP Scheme, manufactured goods

exports and some agricultural goods from the developing countries enter duty-free or at reduced rates in the developed countries. This was done in order to promote exports of manufactured goods from developing countries.

(ii) MIGA

The Multinational Investment Guarantee Agency (MIGA) was established in April, 1988 to supplement the functions of the World Bank and IFC with the following objectives