Business Environment Chapter 3

7/31/2019 Business Environment Chapter 3

1/12

AFTAB G M, ANJUMAN DEGREE COLLEGE, BHATKAL.

Economic or business environment of a nation is dependent on political environment, because it is political

parties who frame business or economic policies. Political factors, which constitute political environment, may inclu

political system of the country, nature of Government, political parties and their political ideologies or philosophies

owards business.

Political environment of a society is determined by following factors:

1. There are two systems of political governance:a) People elect government under this system peoples representatives who are electe

through elections rule the country. As these people are elected or selected by the people, they underst

the needs of people and society. They rule the government in order to satisfy the needs of people. Th

kind of system provides a suitable environment for business as its policies are based on needs of socie

b) This kind of political system is ruled by Monarch, Kings, Queens etc.They derive their power to rule by their heredity or ancestors. Autocratic or authoritarian form of

political system may not provide good environment of business as there is no chance to people or busi

to decide policies.

2. The constitution defines powers, privileges, rights and duties available to citizens includinbusiness organizations. Constitution of the country is described as mother of all laws. The various laws tha

will be passed to regulate business activities must be within the limits defined the constitution.

3. Ideologies of some political parties are pro labour and rural. Policiethese parties may not help for the growth of business. Some states have seen mush progress in business. Th

because ideologies and philosophies of these parties who rule them, favour business.

4. Government which is strong, i.e. which has clear and independent majority of its owcan implement policies of its choice. On the other hand if government has thin majority or it is dependent on

other political parties for support, it has to compromise its economic policies with supporting political party


2/12


There is close link between political factors and business environment. Political factors or environment consi

f political system, the constitution, political parties and the government. These institutions and system has the ta

nsuring economic and social welfare of society. Economic welfare of society is ensured with the help of business.Political environment decides business policies and directs these policies so that necessary goods and services are

reated to satisfy the needs of society. Political environment has the responsibility to create a healthy business

nvironment in order to satisfy economic needs of society,. Business has the responsibility to co-operate with politic

ystem of the country. The economic objectives of profit making by business depends on political objectives of the

parties. The political system defines the nature of business that can be undertaken. Procedures and functioning of

business are decided through economic policies that are designed by the government. Business can make profits by

onducting its activities as per the policies that are decided by the government.

Legal environment applicable to business consists of laws applicable to business, institutions a

machineries, which regulate and control functioning of business. Business has to carryout lawful activities and it h

egal obligation towards society ot deliver goods required by the society. Legal environment monitors the behavior of

business to ensure that business functions within the limitations defined by various laws and provisions.

Components of legal environment or laws applicable to business are presented in tollowing table.

Companies Act 1956

Contract Act 1872

Factories Act 1948

IDR Act 1951Environment

Protection Act 1985

Municipal and Town

Planning Act

Companies Act 1956

Competition Act

2003 (MRTP)

FEMA RegulationsSICA 1985

Patients Act 1970

Trade Marks Act

1999

Income tax 1961

Securities Contract

Act 1956

SEBI 1992

RBI ActBanking Regulation

Act 1948

DFIs Act

Indian Contract Act

1872

Essential commodities

ActConsumer Protection

Act

Drugs Control Act

Prevention of Food

Adulteration Act

Minimum Wages

Payment of Wage

Act

Trade Unions AcESI Act

Industrial Disput

Act

PF Act


3/12


Provisions of ISOs

Sales Tax Act

(VAT)

Standards, and

weights and measures

Business has to be legal. The objectives, activities, performance of the business must be legal and it must

atisfy legal provisions laid down by various acts. At every stage of business i.e. promotion, management, market

inance, labour etc. laws have been passed to regulate the affairs of business. Specific legal machineries have been

reated to ensure that business conduct its affairs as per these provisions. Legal environment gives protection to

business and the persons who are connected with business. These consumers related acts ensure that people get quali

goods at reasonable price. Legal provisions also protect environment, as establishment, as establishment of business

must get clearance from environment authorities. The interest of business itself is protected through various Acts.

Government has the responsibility to ensure economic welfare of society. The concept of Welfare State i.e.

people should live in prosperity is possible when government taxes part and directs economic activity of society.

1. government regulated economic activity and controls functioning of business through varegulations and laws. These legal procedures and provisions are spread from the stage of promotion till the

final stage of liquidation. Regulatory system is determined by economic system is strict in case of communi

pattern compared to capitalist model.

2. Developed or developing economy, the states role as promoter is vital. Governmendirectly responsible for developing infrastructure that is necessary for development of business. Power,

transport, finance, communication, water etc are basic infrastructure facilities which support industrial

development and government takes initiative in developing these areas. Government may itself develop these

infrastructure facilities or it may invite private investment in these areas by offering incentives.

3. Government may assume the role of entrepreneur by promoting Public SectorEnterprises. Underdeveloped and developing economies. Which have poor per capita income cannot attract


4/12


private investment particularly in core industries. Government itself has to take initiative in promoting such

ventures. These PSEs are established to achieve economic growth and also avoid consumer exploitation.

4. Government can play an active role by undertaking economic planning for entire nation.These economic plans determine economic objectives, policies, goals, investment priorities, strategies etc.

Through these plan documents, government gives directions to the business in Public and Private sector as t

what should be the economic agenda of society.

Economic planning by state has following benefits:

1.Market forces cannot address major economic issues like growth in GDP, PCI and standard of living etc2. Socio-economic problems faced by society like food, shelter, education and poverty can be systematically

handled through a national economic plan.

3.It will help to make efficient use of natural resources of country to the best use and purpose of entirecommunity.

4. The gap between rich and poor can be reduced by diverting resources to those areas, which help to uplift poothe society.

Irrespective of nature of government, system of economy and political ideologies every kind of business has t

atisfy rules, regulations conditions, provisions etc. that are laid out by various acts and laws. From the stage of

promotion to the final stage of liquidation business has to undertake activities as defined by these regulations. Stantervention in business means regulations, restrictions, provisions, procedures, controls etc. laid by through variou

acts and machineries by the government to control the behavior and performance of business in order to meet social a

conomic objectives defined by the government.

State intervention in business has following benefits:

1. Economic policies of the government, which give direction to business activitiare framed looking into requirement of the nation. Policies are famed and regulations are laid down to endu

development of all sectors.

2. Economic growth is measured in terms of GDP i.e. volume of goods anservices produced in a year. Development is measured in terms of development in all sectors of economy.


5/12


Government will intervene through necessary policies and legislations to ensure that every sector of economy w

receive adequate importance.

3. The development of a nation depends on core industries like steel, cement,power, transport etc. These industries require heavy investment and they have long gestation period.

Government may itself promote such enterprise. It may also give necessary incentives and support to private

entrepreneurs who want to start such industries.

4. Monopoly nature of business is detriment to the interest osociety. They may charge high price, control supply and exploit consumers and workers. Business i.e. not

controlled may undertake unfair trade practices like hoarding, false advertisement, charging high prices etc

Control over these aspects in India is ensured through government Acts.

5. Every business, particularly industrial activity exploits natural resources.Unrestricted business activity may disturb ecological balance, which will result in natural calamities like flearthquake, drought etc.

6. Market is always imperfect; particularly market will not meet the requirement of poor in society. Market need to be regulated. Government can regulate the market through fixing of prices, control

supply and other provisions. These measures can meet requirements of all people in society.

7. Workers should get adequate wages, better working conditions and othincentives. Government by passing legislations can safeguard the interest of workers.

Too much intervention of has got its own limitations. Some of the drawbacks of intervention are as follows.

1. Laws prescribe procedures and formality to be fulfilled by business establishment which aremonitored by government machinery. Government machinery may take unreasonable time to give permissions,

licenses etc. Files will not be cleared quickly. These aspects may escalate the cost of business and it will ca

unnecessary inconvenience to the owners of business and also users i.e. consumers.

2. Bureaucrats and Politicians always misuse the power in their hands. To sanction permits, givlicense and clear files they charge fees in the form of corruption. Corrupt practices are harmful for the grow

of business and development of society.


6/12


3. Innovativeness and initiative can grow in business when there is freedom to think and athe business idea. State intervention will bring too many restrictions through laws and acts and business

initiative is lost due to procedural hurdles.

4. Law makers and policy makers in an economy are the politicians and bureaucrats. But these people come under the pressure of some lobby i.e. big industrialists and traders such

lobby may influence these people to manipulate policies and laws to suit vested interest in society.

5. State will pass too much legislation, creates too many government bodies, prescribmany procedures to monitor the promotion and management of business. There may not be proper co-ordinat

between these agencies. Unless a person gets permission from these entire government establishments he cann

start business.

6. There is argument that market knows it better as to what are the requirements ofpeople. If freedom is given to market, it will determine goods and services to be produced and distributed.

7. Many PSUs are making losses, as they are located in backward areas, whereadequate facilities of business are not available. Continuous loss of such units results in wastage of resourc

invested in those businesses.

8. Planning machinery and its implementation is in the hands of bureaucrats and ogovernment officers. These people may not be well versed either in economic or political aspects. They are

administrator not expert planners. Further the tools and resources available in their hands are limited, due

this planning process and its implementation will not be perfect.

The act came into force on Feb. 20 1957. The act was passed to monitor transactions in company

securities. The act has following objectives.

a. To promote healthy and orderly development of sector market in India.b. To protect the interest of investors by preventing unhealthy speculation in stock exchanges in India.c. To empower the central government to regulate functioning of stock exchanges in India.

The act contains following provisions.

1. The act says that only recognized stock exchanges can function in India. Texchange authorities have to submit required information to get recognition.


7/12


2. Stock exchange has to periodically send records and returns of informatias prescribed by the act.

3. The act has given powers to central government to direct stock exchangeregarding:

a) Management of Stock Exchanges.b) To prescribe duties and powers for management of stock exchange.

4. In case of any emergency situation central governmhas the power to suspend business in stock exchange for a period not exceeding seven days.

5. Central government has power make listing compulsory forPublic ltd., Companies.

6. If governing body is not functioning properly the centralgovernment has authority to direct reconstitution of governing body or it may supersede themanagement stock exchanges.

7. The act says that the byelaws of exchange and any modification in that to be approved by SEBI.

8. Central government and SEBI have power to any information regarding functioning of exchange.

Securities and Exchange Board of India was established by central government. It is created to monitoand regulate activities of capital market in India.

As per the SEBI act, the objectives of SEBI are to protect the interests of and investors

securities and to promote the development of and to regulate, the securities market for matters connected

there with or incidental there with.

The Board of Management of SEBI consists of a chairman:

i) One member each form Ministry of Finance and Law of Central government.ii) Two members appointed by Central Government, who are professional in Stock Market,


8/12


SEBI following powers and functions:

1. Registering and regulating the functioning of people connected with security trading i.e. brokers, transferagents, bankers, underwriters, investment advisers etc.

2.Registering and regulating the working of collective investment schemes, including mutual funds.

3.Prohibiting fraudulent and unfair trade practices in securities market.4. Prohibiting insider trading in securities.5. Promoting investor education and training of intermediaries in securities market.6. Regulating substantial acquisition of shares and takeover of companies.7. Calling for information, undertaking inspection, conducting inquiries and audit of stock exchanges and

intermediaries in stock market.

8.Performing such functi8ons and powers as delegated by Central Government or by securities Contract Act.9.Conducting research in the above matters.10.Levying fees and other charges in discharge of above functions.

The act was passed to protect consumer rights and interests. The act is passed to curb the consumers, exploitat

through: 1) high price 2) low quantity 3) poor quantity 4) misleading advertisement 5) hazardous production 6

alteration 7) poor services etc.

The act has identified rights of consumers and seeks to protect him through various legislative measures. T

are:

1) The right to protect against goods and services that are hazardous to life and property.2) The right to be informed about quantity, potency, purity, standard and price of goods and services so a

protect consumer against unfair trade practices.

3) The right to seek redressal against unfair trade practices or unscrupulous exploitation of consumers.4) The right to consumer education.

1. The act applies to the whole of India (except J&K) and to as goods and services except those, which aredebarred by government.


9/12


2. It is basically compensation in character i.e. it provides compensation to the consumer for the damage causeloss suffered.

3.If a consumers dispute in already pending in a civil court. It cannot be adjudicated bya consumer forum.4. It seeks to provide cheap and speedy redressal mechanism to the consumer disputes.

The act provides for a three-tier system for redressal of consumer disputes. These are:

i) District Forumii) State Commission andiii) National Commission.

The following table explains the features of these forums:

Comparative study of district, state and national consumer forums

Members3

Rank/status of president

Appointment

Term

Jurisdiction

Appeal

Location

1 president

2 members

Judge of district court

By state government

5 years up to 65 years of

age

District and amount up to

Rs. 20 lakhs

Judgment can be referred to

state forum

In each district

1 president

2 members

Judge of high court

By state government

5 years up to 65 years of

age

State and amount up to

Rs. 1 crore

Judgment can be referred

national forum

In each state

1 president

2 members

Judge of supreme court

By central government

5 years up to 70 years

age

National

-

Judgment can be referre

supreme court

One forum

In order to remove various weaknesses in the Act, following amendments are introduced to the act in 2003.


10/12

0


1.A case for hearing has to be admitted within days, the decision is to be given within 3 months and additiontwo months can be taken if it involves product testing.

2.During the hearing of the case adjournment is prohibits.3.If the numbers of cases are large, additional benches may be provided. These measures have been undertake

ensure speedy justice.

4. The court can issue interim orders. Under the new law court can award punitive damages.5. If persons fail to pay compensation, the court can order recovery in the same manner as arrears of land

revenue.

The companies Act 1956 is adopted to regulate functioning of joint stock companies in India. It is the biggest

legislation with 658 sections. 13 schedules, 32 rules and 107 forms with several guidelines and classifications

which are issued by the government from time to time. The act was passed to achieve following objectives.

1. To ensure healthy promotion and management companies in India.2. To ensure full and fair disclosure of all reasonable information of the company.3.Effective participation and control by shareholders in the affairs of company.4. Protection of investors interest.5. Power to undertake investigation of the affairs of company if not managed in the interest of company.Administration of company has to be according to the provisions laid down in the act. A three-layer system ha

been created to ensure effective company law administration. At the top is company law board (CLB), which h

the overall responsibility of administration of companies act. The CLB has following powers:

1.Alteration in Memorandum of Association (M/A).2. Power to issue shares at discount.3. Power to order meeting.4. Power to accord approval, wherever it is required under the provisions of the act.Next to CLB there are four Regional Directors at Calcutta, Mumbai, Chennai and Kanpur. They act as lin

between Registrars and government. They inform all relevant matters to CLB.


11/12

1


Registrar of companies is in the third layer. Each state has a office of registrar. Every company in the state

o register its name with the Registrar. The registrar has authority and power to ensure that companies in his stat

are managed as per the provisions of the act. The registrar has following functions:

1.

Collect necessary documents from the companies, keeping and preserving them for inspection.2. Ensure prompt functioning of company by insisting on prompt submission of reports and returns.3.Scrutinize the returns submitted by companies to ensure its legality compliances. Consult the CLB or Regi

Director in the matter of investigation.

Companies Act 1956 with its amendment from time to time includes detailed provisions regarding various aspe

of company and its management. The main provisions of the act concentrate on following aspects:

1.Definition of company.2. Registration, formalities and documents necessary for registration.3.Issue of capital: Procedure and formulation, of issue of prospectus.4.Management of company: Board of Directors, managing director secretary auditors etc. their appointment

qualification, powers, duties and remuneration.

5. Restriction on powers of directors and acts of ultra vires.6.Meetings and resolutions: Types, procedures and formalities.7.Accounts and Audit: Methods of maintaining accounts and audit of accounts etc.


12/12

2


Documents

Business Environment Chapter 3