Embed Size (px)
Citation preview
Business Economics and Financial Analysis
Introduction of the subject:
It is a combination of two essential fields which can provide the knowledge of
business in economic terms, because every activity in any business aimed at
earning or spending money is called economic activity and Financial Analysis
which will have huge concepts, Principals and methods for analysis of financial
matters in business. The main objective of the subject is to realize about the
entrepreneurial and business skills of the students in present business
environment. By learning these subject the student able to know about: What is
a business, how to form and manage business organization
UNIT-1
Business and new economic environment
Characteristic features of business; Features and evaluation of sole
proprietorship; Partnership; Joint stock company; Public enterprises and their
types; Changing business environment in post- liberalization scenario.
Business Organisation
Meaning
Business organisation refers to all necessary arrangements required to conduct a
business. It refers to all those steps that need to be undertaken for establishing
relationship between men, material, and machinery to carry on business efficiently for
earning profits. This may be called the process of organising. The arrangement which
follows this process of organising is called a business undertaking or organisation. A
business undertaking can be better understood by analysing its characteristics.
Characteristics
1. Distinct Ownership : The term ownership refers to the right of an individual or a
group of individuals to acquire legal title to assets or properties for the purpose of
running the business. A business firm may be owned by one individual or a group of
individuals jointly.
2. Lawful Business : Every business enterprise must undertake such business which is
lawful, that is, the business must not involve activities which are illegal.
3. Separate Status and Management : Every business undertaking is an independent
entity. It has its own assets and liabilities. It has its own way of functioning. The profits
earned or losses incurred by one firm cannot be accounted for by any other firm.
4. Dealing in goods and services : Every business undertaking is engaged in the
production and/or distribution of goods or services in exchange of money.
5. Continuity of business operations : All business enterprise engage in operation on a
continuous basis. Any unit having just one single operation or transaction is not a
business unit.
6. Risk involvement : Business undertakings are always exposed to risk and
uncertainty. Business is influenced by future conditions which are unpredictable and
uncertain. This makes business decisions risky, thereby increasing the chances of loss
arising out of business.
Features of business:
1. Perception: they are able to predict how you will receive their message
2. Precision: they create a "meeting of the minds" .When the finish expressing
themselves share the same mental picture.
3. Credibility: they are believable. you trust their information
4. Control: They shape your response, they can make you laugh, cry and change your
mind and take action.
5. Congeniality: They maintain friendly, pleasure relations with you regardless
whether you agree with them or not.
Definition of firm:
Hansn: The firm may be defined as an independently administered business unit.
“A firm is a business unit which hires productive resources for the purpose of
producing goods and services”.
The following features of a firm emerge from these definitions:
o It is a centre where decisions are taken about, what, where, how and how much
to produce.
o It is a centre where the means of production are hired or purchased and used for
production.
o It is a centre, where the success of production is reviewed in its entire context
and decisions are taken.
o It is a centre, where the means of product
From the above features of a firm, it will be clear that a firm has to perform several
functions simultaneously – i.e. to produce a commodity, to sell and distribute the
commodity, to advertise the commodity and to perform all those things which will be
required to survive competition. To cap it all, the firm is expected to make as much as
possible. Theoretically speaking, a firm is expected to organize all the factors of
production in the most profitable manner. If one studies the structure and function of
modern firm the above definitions will appear to be too simple, because in modern
times the firm is expected to perform so many other functions.
Formerly, the entrepreneur was taken to be an independent factor of production. Even
today the entrepreneur is no doubt a very important factor of production but he has
become so highly that it is very difficult to separate him from the production unit of
the firm because ultimately the will to produce is provided by the entrepreneur. The
mere presence of all the factors of production and a market does not guarantee
production. The will be to produce is very important and it cannot be separated from
the entrepreneur.
The firm and the Industry:
For understanding the difference between a firm and an industry, it would be
advisable to understand the nature of a competitive industry. A competitive industry
has three basic characteristics:
• Large number of firms
• Homogeneous product
• Freedom of entry and exit
In a competitive industry, there are a large number of firms, so that the action of a
single firm has no effect on the price and output of the whole industry.
Every firm therefore enjoys the freedom to increase or decrease its output
substantially by taking the price of the product as given.
Secondly, every firm in a purely competitive industry, it must be making a product
which is accepted by customers as being identical with that made by all the other
producers in the industry. This is known as the condition of homogeneity. This ensures
all firms have to charge the same price.
The firm and the Plant:
A plant is a technical unit of a given capacity of output.
For example: we speak of sugar plant. What is it? It is nothing but a assembly of
several machines, linked together (not necessary physically but by processes also)
capable of producing a given quantity of sugar per day.
There is a weighing system which weights the sugarcane, the convey or system what
takes the cane for crushing, the crushing machinery, and the machinery for removing
impurities and so on, until finally sugar is filled in gunny bags. This whole plant is taken
together is capable of producing a given quantity of one product sugar.
Same like, cement plant, steel plant, etc.
Factors affecting the choice of Form of business Organisation:
1. Easy to start and easy to close: The form of business organization should be
such that it should be easy to start and easy to close. There should not be
hassles or long procedures in the process of setting up or closing the business.
2. Division of labour: There should be possibility to divide the work among the
available owners. The idea is to pool the expertise of all the people in business
and run the business most efficiently.
3. Large amount of resources: Large volume of business requires large volume of
resources. Some forms of business organizations do not permit to raise larger
resources. Select the one which permits to mobilize the large resources.
4. Liability: The liability of the owners should be limited to the extent of money
invested in business. It is better if their personal properties are not brought into
business to make up the losses of the business.
5. Secrecy: The form of business organization you select should be such that it
should permit to take care of the business secrets. We know that century old
business units are still surviving only because they could successfully guard their
business secrets.
6. Transfer of ownership: There should be simple procedures to transfer the
ownership to the next legal heir.
7. Ownership, management and control: If ownership, management and control
are in the hands of one or a small group of persons, communication will be
effective and coordination will be easier. Where ownership, management and
control are widely distributed, it calls for a high degree of professional skills to
monitor the performance of the business.
8. Continuity: The business should continue forever and ever irrespective of the
uncertainties in future.
9. Quick decision making: Select such a form of business organization which
permits you to take decisions quickly and promptly. Delay in decisions may
invalidate the relevance of the decisions.
10. Personal contact with customers: Most of the times, customers give us clues to
improve business. So choose such a form which keeps you close to the
customers.
11. Flexibility: In times of rough weather, there should be enough flexibility to shift
from one business to the other. The lesser the funds committed in a particular
business, the better it is.
12. Taxation: More profit means more tax. Choose such a form which permits to
pay low tax.
Types of business Organizations
A business organization is concerned with how production and sale of a commodity
are organized.
A. Private Sector :
In a capitalist economy, the first four types of business organizations are set up in
the private sector. The private sector is owned by private individuals, families or
groups of individuals. It is characterized by private ownership in the means of
production, economic freedoms and profit motive.
In addition to the first three types of business organization, there are also Joint
Hindu Family Firms in the private sector in India and Business Organizations of the
New Millennium.
B. Public Sector :
The public sector includes public or state enterprises like railways, post sand
telegraphs, etc. The public sector is owned and controlled by the State. In India we
have also a number of public enterprises like Hindustan Machine Tolls, Life
Insurance Corporation, Bharat Heavy Electrical Ltd. ect. They are constituted as
companies, public corporations and departmental undertakings.
C. Joint Sector :
Joint sector organizations or enterprises are jointly owned by the public and
private sectors. But day-today management is left to the private sector.
The following chart indicates various forms of business organization:
Types of Business Organization
Private Sector Public Sector Joint Sector
7) State Enterprises 8) Public Private
Organizations
Capitalist Form Non – Capitation Form
1) Proprietary Firms 6) Co-operative Organizations
Or Proprietorship
2) Partnership
3) Joint-Stock Company
4) Joint-Hindu Family Firms
5) Business Organizations of New Millennium
SOLE PROPRIETORSHIP OR PROPRIETARY FIRMS:
'Sole' means single and 'proprietorship' means ownership. It means only one person or
an individual becomes the owner of the business. Thus, the business organisation in
which a single person owns, manages and controls all the activities of the business is
known as sole proprietorship form of business organisation. The individual who owns
Business Studies and runs the sole proprietorship business is called a ‘sole proprietor’
or ‘sole trader’.
A sole proprietor pools and organises the resources in a systematic way and controls
the activities with the sole objective of earning profit. Is there any such shop near your
locality where a single person is the owner? Small shops like vegetable shops, grocery
shops, telephone booths, chemist shops, etc. are some of the commonly found sole
proprietorship form of business organisation. Apart from trading business, small
manufacturing units, fabrication units, garages, beauty parlors, etc., can also be run by
a sole proprietor. This form of business is the oldest and most common form of
business organisation.
A. Definition: Individual or sole proprietorship which is also called sole trader ship or
sole single entrepreneurship or proprietary firms is the most common, the
simplest and the oldest form of business organization.
Definition of Sole Proprietorship: A business enterprise exclusively owned,
managed and controlled by a single person with all authority, responsibility and risk.
In such a unit, a single man called proprietor organizes a business. It is owned,
managed, controlled and directed by him.
He fixes the amount of capital to be invested. (his own or borrowed), uses his own
labour and that of his family members, hires factors, whenever necessary, organizes
production as efficiently as possible and markets the product at the highest possible
prices. He assumes full responsibility for all business fails.
B. Characteristic features: The definition of sole proprietorship Proprietary Firm gives
its characteristics or features which are as follows:
(i) Ownership by a Single Person: A single person initiates a business whose
ownership lies in his hands. He enjoys full powers to fix the lay-out of his
business firm.
(ii) Organization and Control: A single person organizes and manages his
business according to his experience and efficiency. He has full powers to
conduct his business in any manner he likes. He need not consult any one. He
is also not required to take approval or agreement from others.
(iii) Capital: The owner uses his own capital. He may also borrow capital to invest
it in his business and thereby expand it.
(iv) No Sharing of Profits and Losses: All the profits of business earned by the
owner are enjoyed by him alone. These profits of business are not shared
with other persons. On the other hand, if there are losses, he has to bear
them alone entirely.
(v) Unlimited Liability: His liability is unlimited for all his debts. If he fails to clear
his business debts, all his private property can be attached by his creditors.
(vi) Easy to Form: It can be easily set up. It is not subject to any special
legislation. So no legal formalities are involved in starting such a concern by
any person who is of major age, i.e. 18 years and above.
(vii) Legal Status: A sole trading concern cannot be legally separated from its
owner or proprietor. The owner and organization are the same. The life of
such a concern depends upon the life of its proprietor.
These types of organization are found in agriculture, retails trade, hotel, printing
press, tailoring etc.
C. Merits and Demerits:
Merits:
1. Easily Started & Winding Up: Such a concern can be easily started without
any legal formalities. There is also little government interference. Also it is
simple to manage and control and requires a small amount of capital for
generally it adopts labour – intensive techniques. He can also get finance
on personal credit. Just a sole trader can easily start a business, so also he
may easily wind up his business at any time.
2. Prompt Action: The proprietor can take quick decisions and prompt action
regarding his business, its location, method of production etc. He need not
consult others about these problems.
3. Personal interest: He would always take personal interest in the business
with a view to finding out causes of loss and waste of resources. He would
then take measures to remove them. Thus he would maximize his profits.
4. Requirements of Consumers: He has direct contact with his customers, so
he can personally attend to all their requirements. He can produce goods
according to their desires, tastes and needs. His attempts to meet their
needs will help him to increase his sales and profits. Thus it is suitable for
small business.
5. Cordial Relations: He has direct and continuous contact with his employees. So
he can establish cordial relations with them. This is because he will be in a
continuous touch with them. He can also supervise them directly. Hence any
scope for conflict between workers and himself can be avoided.
6. Efficiency, Hard Work and Direct Gain: He will always attempt to work hard,
efficiently and continuously. This helps to enjoy maximum profits and avoid
any loss for his liability is unlimited.
7. Business Secrecy: He can carry on his business in secrecy. He is not required to
give publicity to the activities of his concern nor disclose his profits to the
public. He can also make use of any new idea for his business.
8. Economy in Expenses: Its overhead expenses are low. Hence it is economical.
The number of employees employed by him is low. Hence the working
expenses can be minimized.
9. Flexibility and Elasticity: Any change in business can be easily introduced
without consulting anybody. So it is flexible and elastic. It can easily and quickly
adapt to changes in the market conditions.
10. Transferability: It is easily transferable to heirs.
11. Self-Employment: It promotes self-employment, self-reliance, development of
one’s personality, self-confidence etc.
12. Lower Tax Burden: It is also subject to lower tax burden than other forms of
business organizations.
13. Concentration of Wealth: It helps prevent concentration of wealth and income
in the hand of a few persons.
Demerits:
1. Limited Capital: The amount of capital which an individual can command is
limited. He has to depend mainly on his own savings. So it would be difficult for
him to expand his business activities much. It may also be difficult for him to
raise additional capital by borrowing from banks. Hence the size of his business
is small.
2. Unlimited Liability and Risks: It may be very risky for him to invest in a
particular business. This is because if he adopts a wrong policy, he may lost
everything and also become insolvent. This is because his liability is unlimited.
This implies that if his debts exceed his business assets and if he suffers a loss,
he will have to use his private property to clear his debts. So the unlimited
liability restricts his business activities.
3. Lack of Skill for Efficient Management: It may not also be possible for him to
attend personally to all the activities of his concern such as correspondence,
maintaining accounts, advertisements, supervision, arrangement of finance, etc.
He cannot undertake all activities alone efficiently. Further his business
activities may be spread in different places and he may not possess all the
qualities and skills required for an efficient management, supervision and
control. The limited managerial ability may make it difficult for a sole proprietor
to face competition in his business which is subjected to many changes.
4. No Economics of Scale: A sole trader cannot secure many of the economics of
large – scale production such as purchase of raw materials at low prices,
advantages of specialization etc. and minimize its cost of production or running
business.
5. Weakness in Bargaining and Competition: On account of the limitations of
capital, ability and skill, the proprietor is likely to remain weak in respect of
bargaining and competition. He may have to compromise many times regarding
the terms and conditions of purchase of materials or borrowing loans from the
finance houses or banks.
6. Wrong Decisions: All the decisions about his business are taken by the sole
proprietor. Some of his decisions may prove to be wrong. This may involve him
in losses and ruin.
7. Closure on Death: Because of uncertainty there is no continuity in the duration
of the business. Such a concern may be closed on the death of the proprietor.
This is because he may not have heirs to run it or they may not like to continue
in his business. Hence the business may not be continued.
2. PARTNERSHIP:
It is basically a relation between two or more persons who join hands to form a
business organisation with the objective of earning profit. The persons who join hands
are individually known as ‘Partner’ and collectively a ‘Firm’. The name under which the
business is carried on is called ‘firm name’. Sultan Chand & Co, Ram Lal & Co, Gupta &
Co are the names of some partnership firms.
The partners provide the necessary capital, run the business jointly and share the
responsibility. You must be thinking how much capital each partner contributes? Do all
the partners jointly manage the business or can any of them manage the business on
behalf of others? Who will take the profits? If there is any loss then who will suffer the
loss? Yes, these are the few questions that might be coming to your mind. Actually,
when you invite your friends to start such a business, it should be the duty of all of you
to decide (i) the amount of capital to be contributed by each one of you; (ii) who will
manage; (iii) how will the profits and losses be shared. Thus, there must be some
agreement between the partners before they actually start the business. This
agreement is termed as ‘Partnership Deed’, which lays down certain terms and
conditions for starting and running the partnership firm.
This agreement may be oral or written. Actually, it is always better to insist on a
written agreement among partners in order to avoid future controversies.
Definition and Meaning:
The Indian Partnership Act, 1932, defines the partnership as “the relation between two
or more persons who have agreed to share profits of a business carried on by all or any
one of them acting for all.”
The English Partnership Act, 1980 defines partnership as “the relation which subsists
between persons carrying on a business in common with a view to profit.”
So a partnership refers to an organization owned and managed by two or more
persons. They pool their capital and undertake all risks associated with their business.
Thus there is joint ownership, management, control and risk – taking.
The person who own the partnership concern are called “partners” Collectively, all
partners constitute a “firm”.
Characteristics or Features of a Partnership Firm:
1. Two or more Members - You know that the members of the partnership firm
are called partners. But do you know how many persons are required to form a
partnership firm? At least two members are required to start a partnership
business. But the number of members should not exceed 10 in case of banking
business and 20 in case of other business. If the number of members exceeds
this maximum limit then that business cannot be termed as partnership
business. A new form of business will be formed, the details of which you will
learn in your next lesson.
2. Agreement: Whenever you think of joining hands with others to start a
partnership business, first of all, there must be an agreement between all of
you. This agreement contain so
• The amount of capital contributed by each partner;
• Profit or loss sharing ratio;
• Salary or commission payable to the partner, if any;
• Duration of business, if any ;
• Name and address of the partners and the firm;
• Duties and powers of each partner;
• Nature and place of business; and
• any other terms and conditions to run the business.
3. Unlimited Liability: The liability of all partners is unlimited. Hence all partners
are, jointly and severally, held responsible for the losses or debts of the firm to
the full extent of their personal assets. Creditors are entitled to attach assets of
any one partner or those of others so as to recover their dues.
4. Contact: It is formed voluntarily by an agreement between two or more persons
carrying on a particular business for common benefit. It may also be formed to
carry on certain trade, profession or lawful occupation. The partners can
continuously be in touch with the customers to monitor their requirements.
5. A Partnership Deed: A partnership is formally based upon a partnership deed or
agreement. It indicates the names of partners, the shares of individual partners
in the capital, their rights and duties, proportion for sharing profits and losses
by each of them etc.
6. Registration: The registration of a partnership firm is voluntary. It may or may
not be registered. However, if the partners so desire, it can be registered at any
time.
7. Joint – Liability
Ownership: The Partners are joint owners of the property of the firm. Its
property must be used only for the business purpose for which the partnership
was formed. It cannot be used by any partner for his personal purposes.
Management: All the partners enjoy equal rights of management. So every
partner can participate in management. But for the sake of convenience, a
single partner may be given right to manage the firm.
8. No Remuneration: No remuneration is paid to any partner for services
rendered by him to the firm. Each partner is supposed to work in the best
possible manner for promoting the interest of the firm.
9. Age Limit: Only persons who have attained the major status can become
partners. In other words, minors cannot become partners.
10. Statutory Limit or Number of Partners: It consists of minimum two persons and
maximum 20 persons in the case of general business and maximum 10 persons
in the case of banking.
11. Mutual Confident and Faith: A partnership is based upon mutual confidence
and trust of partners in each other or one another. Every partner must be
honest regarding the partnership dealings and should provide all the facts ad
information regarding their business to all partners.
12. Non-transferability of Interest: A partner cannot transfer his powers or rights
to any third party to do any work of the firm on his behalf. If he cannot do it
himself, he has to retire from the partnership firm. However, a partner may
admit another person as a new partner if other partners give their consent.
13. Principle of Agency: Every partner carries on business activities on behalf of the
firm. So he binds the firm and other partners for every commitment that he
makes in conducting business. Likewise he is bound by the business activities of
the other partners.
Thus every partner becomes a principal at one time and an agent of the firm at
another time. Hence a partnership firm can be run by one or more partners
acting on behalf of all partners.
14. Dissolution: A partnership firm may not last long. It may be dissolved by any
partner after giving a written notice to other partners and a new partnership
may be formed by the remaining partners. It may also be dissolved due to the
death of a partner or due to an adjudication of a partner as an insolvent.
Such partnership firms are found among builders, solicitors, chartered accountants,
small factories etc.
Advantages:
1. Easy to Form : A partnership firm can be easily formed. Its formation does not
involve legal formalities.
2. More or Additional Capital: Under the partnership, more funds can be raised by
all partners to start a business on a large scale. Because of the reputation of the
partners and heir contacts, it will not be difficult for a partnership concern to
borrow from banks on easy terms.
3. Greater Efficiency due to Division of Labour: There is a greater efficiency in the
working of partnership concerns because different partners can be assigned
those tasks for which they are best suited as per their qualifications, experience,
abilities, talents and aptitude. Thus there would be specialization in the task of
every partner.
4. Flexibility: It is also quite flexible and capable of adapting itself to changed
circumstances of business by means of quick decisions and prompt action by
the partners, i.e. it can quickly adapt itself to change in demand for its product,
by increasing and decreasing its business operations and by changing its
business policy.
Thus the organizational structure of a partnership firm is flexible. The decision
taking by a partnership firm does not involve any legal procedure. Its operations
are not also subject to any restriction by a government.
5. Co-operation & Personal Contact: It may elicit full co-operation from workers
by keeping a close touch with them, by understanding and solving their
difficulties. More scope to maintain personal contacts with customers & and
requirements by sharing responsibility among partners.
6. Expansion of Business: A partnership firm can expand its business by admitting
more partners and raising more capital from them and thereby attempt to earn
more profits.
7. Quick Decisions and Prompt actions: While there is an agreement and unity
among partners, it is enough to implement any decision and initiate prompt
actions.
8. Unlimited Liability: Since there is unlimited liability, the business status of a
partnership firm is raised. Hence it will be easy for it to get loans from financers.
9. Advantages of Large-scale production: It can secure all the advantages of large
– scale production such as advantages of division of labour, bulk purchases of
raw materials at lower price, best use of machinery etc.
10. Business Risks and Rewards: Business risks are equally shared by all the
partners. In case business fails, they would suffer losses. But if it succeeds, they
will enjoy profits. Hence they will try to manage it efficiently and make their
business profitable by putting the assets of the firm to the best uses so as to
avoid waste.
11. Management and Organizational Abilities: In a partnership fir, there is a
combination of capital, abilities and skill. Some partners offer capital. Some
partners are experts in management and organization. Some of them possess
technical skill. As a result of the pooling of the expert services of all partners, it
is possible to run a partnership firm efficiently.
12. Dissolution: In case a partner is not happy with the working of his partnership
firm, he can legally dissolve it. He can do so by giving a written notice to the
other partners indicating his decision to resign from it.
13. Mutual Consent: All the business decisions are taken with mutual consent of all
partners. They hold mutual consultations and discussions on important matters.
Thus every partner benefits from the advice of other partners. As a result, their
wisdom is pooled for the benefit of the firm.
Disadvantages:
1. Unlimited Liability and No Risk Business: On account of the principle of
unlimited liability, any bad or irresponsible partner may ruin all the partners.
This is because his activities will be binding on all other partners. Every
partner runs a considerably risk for any one of them is, jointly or severally,
held responsible for the debts or losses of the firm. Further due to unlimited
liability, the partners may not undertake any risk in business or take any
hasty step to expand business. Hence the spirit of enterprise is checked.
2. Limited on Size of Business: it is also difficult in increase the size of business
on account of limited amount of capital which the partners can raise or
provide from their own sources. A partnership firm cannot also admit more
than 20 members for raising additional resources. This limitation on the
number of partners restricts the growth of a partnership form.
3. Lack of Harmony: You know that in partnership firm every partner has an
equal right to participate in the management. Also every partner can place
his or her opinion or viewpoint before the management regarding any
matter at any time. Because of this sometimes there is a possibility of
friction and quarrel among the partners.
4. Non-Transferability: A share in a partnership form cannot be transferred by
any partner without the consent of all the partners. He cannot also transfer
his powers or rights to any third party to do any work of the firm on his
behalf.
5. Differences of Opinion: The partners may not agree upon certain matters of
business policy. There might by differences of opinion, clashes of interest,
mistrust, disputes etc. Such differences among partners may result in
dissolution of partnership firms.
6. Short-Lived: A partnership can be dissolved by any partner by giving a
written notice to other partners. So this type of business is short-lived. Also
default, bankruptcy or insanity of any one of the partners leads to
dissolution of the firm unless a provision is made in the partnership deed to
the contrary.
7. No Trust: The activities of a partnership firm are kept secret from outsiders.
It is not required to publish its accounts. It is also not subject to legal
restrictions. Hence people may not fully trust a partnership concern.
8. No Government Control: There is no government control or supervision on
the activities of a partnership concern. Hence there is lack of public
confidence in such concerns.
9. Leakage of Important Information: Some of the partners may leak
important information to outsiders. This may happen when three are
differences of opinion among the partners. Hence it may be difficult to
maintain business secrecy in a partnership firm.
10. Joint Liability and Dishonest Activities of Some Partners: The activities of a
partner are binding on the partnership firm. Some partners may not behave
properly. Some of them may be dishonest. Hence they may misuse their
rights and bring the firm into difficulties and ruin its business. As a result, the
honest and efficient partners will have to suffer losses.
Kinds of Partners: In a partnership firm you can find different types of partners. Some
may actively participate in the business while others prefer not to keep themselves
engaged actively in the business activities after contributing the required capital. Also
there are certain kinds of partners who neither contribute capital nor actively
participate in the day-to-day business operations. Let us learn more about them.
a) Active partners - The partners who actively participate in the day-to-day
operations of the business are known as active or working partners. They
contribute capital and are also entitled to share the profits of the business. They
are also liable for the debts of the firm.
b) Dormant partners - Those partners who do not participate in the day-to-day
activities of the partnership firm are known as dormant or sleeping partners. They
only contribute capital and share the profits or bear the losses, if any.
c) Nominal partners - These partners only allow the firm to use their name as a
partner. They do not have any real interest in the business of the firm. They do
not invest any capital, or share profits and also do not take part in the conduct of
the business of the firm. However, they remain liable to third parties for the acts
of the firm.
d) Minor as a partner -You learnt that a minor i.e., a person under 18 years of age is
not eligible to become a partner. However in special cases a minor can be
admitted as partner with certain conditions. A minor can only share the profit of
the business. In case of loss his liability is limited to the extent of his capital
contribution for the business.
e) Partner by estoppels - If a person falsely represents himself as a partner of any
firm or behaves in a way that somebody can have an impression that such person
is a partner and on the basis of this impression transacts with that firm then that
person is held liable to the third party. The person who falsely represents himself
as a partner is known as partner by estoppel. Take an example. Suppose in Ram
Hari & Co firm there are two partners. One is Ram, the other is Hari. If Giri- an
outsider represents himself as a partner of Ram Hari & Co and transacts with
Madhu then Giri will be held liable for any loss arising to Madhu. Here Giri is
partner by estoppel.
f) Partner by holding out - In the above example, if either Ram or Hari declares that
Gopal is a partner of their firm and knowing this declaration Gopal remains silent
then Gopal will be liable to those parties who suffer losses by transacting with
Ram Hari & Co with a belief that Gopal is a partner of that firm. Here Gopal is
liable to those parties who suffer losses and Gopal will be known as partner by
holding out.
3. Joint Stock Companies:
Meaning of Joint Stock Company
In a partnership firm we know that the number of partners cannot exceed 20. So there
is a limit to the contribution of capital. Secondly, even if the partners could contribute
a large amount of capital, they would hesitate to do so considering the risk involved in
business and their unlimited liability. Mainly to take care of these two problems, a
company form of business organisation came into existence.
A company form of business orgnisation is known as a Joint Stock Company. It is a
voluntary association of persons who generally contribute capital to carry on a
particular type of business, which is established by law and can be dissolved only by
law. Persons who contribute capital become members of the company. This form of
business has a legal existence separate from its members, which means even if its
members die, the company remains in existence. This form of business organisations
generally requires huge capital investment, which is contributed by its members. The
total capital of a joint stock company is called share capital and it is divided into a
number of units called shares. Thus, every member has some shares in the business
depending upon the amount of capital contributed by him. Hence, members are also
called shareholders. And the name of the company ends with Limited (Ltd.) to give an
indication to the outsider that they are dealing with limited liability
The companies in India are governed by the Indian Companies Act, 1956. The Act
defines a company as an artificial person created by law, having a separate legal entity,
with perpetual succession and a common seal.
Characteristics of Joint Stock Company
You are now familiar with the concept of company as a form of business organisation.
Let us now study its characteristics.
1. Legal formation
No single individual or a group of individuals can start a business and call it a joint
stock company. A joint stock company comes into existence only when it has been
registered after completion of all formalities required by the Indian Companies Act,
1956.
2. Artificial person
Just like an individual, who takes birth, grows, enters into relationships and dies, a joint
stock company takes birth, grows, enters into relationships and dies. However, it is
called an artificial person as its birth, existence and death are regulated by law and it
does not possess physical attributes like that of a normal person.
3. Separate legal entity
Being an artificial person, a joint stock company has its own separate existence
independent of its members. It means that a joint stock company can own property,
enter into contracts and conduct any lawful business in its own name. It can sue and
can be sued by others in the court of law. The shareholders are not the owners of the
property owned by the company. Also, the shareholders cannot be held responsible
for the acts of the company
4. Common seal
A joint stock company has a seal, which is used while dealing with others or entering
into contracts with outsiders. It is called a common seal as it can be used by any officer
at any level of the organisation working on behalf of the company. Any document, on
which the company's seal is put and is duly signed by any official of the company,
become binding on the company. For example, a purchase manager may enter into a
contract for buying raw materials from a supplier. Once the contract paper is sealed
and signed by the purchase manager, it becomes valid. The purchase manager may
leave the company thereafter or may be removed from the job or may have taken a
wrong decision, yet for all purposes the contract is valid till a new contract is made or
the existing contract expires.
5. Perpetual existence
A joint stock company continues to exist as long as it fulfils the requirements of law. It
is not affected by the death, lunacy, insolvency or retirement of any of its members.
For example, in case of a private limited company having four members, if all of them
die in an accident the company will not be closed. It will continue to exist. The shares
of the company will be transferred to the legal heirs of the deceased members.
6. Limited liability
In a joint stock company, the liability of a member is limited to the extent of the value
of shares held by him. While repaying debts, for example, if a person owns 1000 shares
of Rs.10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is,
even if there is liquidation of the company, the personal property of the shareholder
can not be attached and he will lose only his shares worth Rs. 10,000.
7. Ownership and Management
The shareholder is spread over the length and breadth of the company. So, to facilitate
administration the shareholders elect some among themselves are the promoters of
the company as Directors to a Board, which looks after the management of the
business. The board recruits the managers and employees at different levels in the
management. Thus, the management is separated from the Owners.
8. Voluntary Association of Persons :
The company is association of voluntary association of persons who want carry on
business for profit. To carry on business they need capital. So, they invest in the share
capital of the company. The total capital is divided into certain no. of units. Each unit is
called a share. The price of each share is priced to low, that every investor would like to
invest in the company.
9. Winding up:
Winding up prefers to the putting an end to the company. Because law creates it, only
law can put an end to it in special circumstances such as representatives from the
creditors or financial intuitions or share holders against the company that their
interests are not safeguarded. And the company is not affected by death or solvency of
any of its members.
Kinds of Companies:
• Based on incorporation:
1. Charted Company: It is created by Royal Charter of the state. The charter
contains the rights, privileges and covers to be used by the charted
company. Ex: British East-India Company formed in England in 1600. To
trade with India and east.
2. Statutory Corporation: It is created by an Act of the state parliament. The
objective, Scope, Powers, responsibilities are clearly defined in the Act.
Ex: RBI, IDBI, food Corporation of India, APSRTC, etc.
3. Registered Company: It is which Registered under Indian Companies Act
1956 (1913). The provisions of the Act govern the formation and working of
these companies. And the company may be a Public Ltd. Or Private Ltd or
Government Company.
• Based on public interest:
1. Private limited company: According to Sec. 3 of the Indian Companies Act. A
private company means a company that has a minimum paid up capital of
one lakh rupees or such higher paid up capital as may be prescribed, and its
articles
a. Restricts the right of transfer its shares, if any
b. Limits the number of its members to fifty excluding present and past
employees
c. Prohibits any invitation to the public to subscribe any shares in or
debentures of, the company
d. Prohibits any invitation or acceptance of deposits from persons other
than its members, directors or their relatives
The name of a private company should necessarily end with
the words ‘private limited’ (Pvt. Ltd.).
2. Public Company : This means a company that
a. is not a private company
b. has a minimum paid up capital of five lakh rupees or such higher paid
up capital, as may be prescribed
c. is a private company, which is a subsidiary of a company that is not a
private company.
d. Allows transfer of its shares
e. Can have any number of members but minimum, there should be
seven members
f. Can issue the prospectus to raise the capital
The name of the public company ends with the word ‘limited’ (Ltd.)
3. Government Company: Section 617 of Indian Companies Act, 1956 defines a
government company as “any company in which not less that 51 percent of
the paid-up share capital is held by Central govt., or by any state govt. or
governments, or partly by Central Govt. and partly by one or more state
governments and includes a company which is a subsidiary of a govt.
Company. Ex : National Thermal Power Corporation (NTPC), Bharat Heavy
Electricals Ltd. (BHEL), Hindustan Machine Tools ( HMT), Hindustan Port
Trust, Steel Authority of India ( SAIL).
• Based on Controlling interest :
Holding and subsidiary companies: A holding company is a company that controls
the composition of the board of directors of another company or holds more than
half of the nominal value of the equity share capital of another company. The other
company that is controlled by the holding company is called subsidiary company. A
company (say, X), which is a holding company of another company ( Say, Y), but
subsidiary of a third company ( Say, Z) Then that another company (Y) will also be
subsidiary of the third company (Z).
• Based on liability:
1. Unlimited Company: An Unlimited Company is a company in which the liability
of every member is unlimited. This implies that the personal property of every
member is also liable for the debts of the company. The liability of member is
enforceable only at the time of winding up of the company. Unlimited
companies are rarely found in practice even through as per Indian Companies
Act, unlimited companies can be incorporated.
2. Limited Company: A Company is said to be Limited Liability Company where the
liability of its members is limited by the unpaid amount on the shares
respectively held by them. Generally, the companies incorporated under Indian
Companies Act are limited liability companies only.
3. Companies Limited by guarantee: A company is said to be limited guarantee
where the liability of the members is limited to such an amount as they agreed
upon to contribute to the assets of the company in the event of being wound
up.
• Based on nationality : Based on nationality the companies can be divided into two
types :
1. Foreign Company: Foreign Company is a company incorporated outside India
but established a place of business within India. Foreign companies come
under the purview of the Indian Companies Act, 1956.
2. Indian Company: A Company incorporated in India under the Indian
Companies Act, 1956.
How is Capital Raised by a Joint Stock Company?
1. Methods of Raising Capital : A Company raises in two ways, namely,
I. Through the sale of shares or stocks and
II. Through the sale of bonds or debentures.
2. Types of Share Capital :
I. Authorized Capital : Authorized Capital refers to the maximum amount
which can be raised by selling shares. This may be, say, Rs. 20 crores.
II. Issued Capital: Issued Capital refers to that part of the authorized
capital which is issued to the public for subscribed by the public. This
may be say, Rs. 14 crores.
III. Subscribed Capital: Subscribed Capital refers to that part of the issued
capital which is actually subscribed by the public. This may be say, Rs.
14 crores.
IV. Paid –up Capital: Paid- up Capital refers to that part of the subscribed
capital which the public directly pay – up to the company, as a part
payment of the value of their shares. This may be, say, Rs. 10 crores.
The remaining amount of the subscribed capital is paid after further
calls from the company.
3. Types of Shares: The capital of a company can be divided into three types of
shares:
I. Equity or Ordinary Shares: Such shares form the main basis of the finance
of a company. The holders of such shares get divided only after the
preference shareholders are paid out of its profits. Hence they bear
maximum risk. This is because they do not get any divided if the company
does not make any profit. At times when profits high, they get much more
than the rate of dividend paid to preference shareholders.
II. Preference Shares: These shareholders enjoy a preferential or prior right
over equity shareholders to the profit of a company. They are entitled to a
fixed rate of dividend after paying interest on debentures and before any
dividend is paid to equity shareholders.
III. Deferred Shares: They are called the Promoters’ or Management’s of
Founders’ shares. The holders of such shares are paid dividend last out of
the profits left after meeting the claims of ordinary and preference
shareholders and reserve funds. Normally they are issued to promoters of
a company but they may also be issued to public. If dividend paid to other
classes of shareholders is restricted, the deferred shareholders will enjoy
a bigger share of profits. But if there are no profits, they do not get
anything.
Sale of Bonds or Debentures –
Debentures: A company may also raise additional finance by borrowing from the
public for a specific period of time, say, 15 to 25 years, at a particular rate of interest.
This is done by issuing debentures or bonds.
A Debenture is an undertaking by a company to repay the borrowed money on or
before the specific date at particular interest rate, irrespective of profit or loss made
by the company.
The capital raised by selling debentures is like taking loans from the public.
Hence, a debenture- holder is creditor of a company with no voting right. As such, he
can’t directly interface with the activities of its management.
A company is also free to issue convertible debentures which can be converted into
equity share after a period of time, say, 5 to 10 years, at a ratio fixed in advance.
Advantages of Joint Stock Company
You must be keen to know why we should form a company for carrying out business?
Obviously, this is because there are many advantages which the company form of
business organization enjoys over other forms of business organization. Let us read
about those advantages.
The main advantages of Joint Stock Company are -
(i) Large financial resources: A joint stock company is able to collect a large amount
of capital through small contributions from a large number of people. In public
limited company shares can be offered to the general public to raise capital.
They can also accept deposits from the public and issue debentures to raise
funds.
(ii) Limited Liability: In case of a company, the liability of its members is limited to
the extent of the value of shares held by them. Private property of members
cannot be attached for debts of the company. This advantage attracts many
people to invest their savings in the company and it encourages the owners to
take more risk.
(iii) Professional management: Management of a company is vested in the hands
of directors, who are elected democratically by the members or shareholders.
These directors as a group known as Board of Directors ( or simply Board)
manage the affairs of the company and are accountable to all the members.
So members elect capable persons having sound financial, legal and business
knowledge to the board so that they can manage the company efficiently.
(iv) Large-scale production: Due to the availability of large financial resources and
technical expertise it is possible for the companies to have large-scale
production. It enables the company to produce more efficiently and at lower
cost.
(v) Contribution to society: A joint stock company offers employment to a large
number of people. It facilitates promotion of various ancillary industries, trade
and auxiliaries to trade. Sometimes it also donates money towards education,
health and community services.
(vi) Research and Development: Only in company form of business it is possible
to invest a lot of money on research and development for improved processes
of production, new design, better quality products, etc. It also takes care of
training and development of its employees.
Limitations of Joint Stock Company
In spite of many advantages of the company form of business organisation, it also
suffers from some limitations. Let us note the limitations of Joint Stock Companies.
(i) Difficult to form: The formation or registration of joint stock company involves a
complicated procedure. A number of legal documents and formalities have to be
completed before a company can start its business. It requires the services of
specialists such as Chartered Accountants, Company Secretaries, etc. Therefore,
cost of formation of a company is very high.
(ii) Excessive government control: Joint stock companies are regulated by
government through Companies Act and other economic legislations.
Particularly, public limited companies are required to adhere to various legal
formalities as provided in the Companies Act and other legislations. Non-
compliance with these invites heavy penalty. This affects the smooth functioning
of the companies.
(iii) Delay in policy decisions: Generally policy decisions are taken at the Board
meetings of the company. Further the company has to fulfill certain procedural
formalities. These procedures are time consuming and therefore, may delay
action on the decisions.
(iv) Concentration of economic power and wealth in few hands: A joint stock
company is a large-scale business organization having huge resources. This gives
a lot of economic and other power to the persons who manage the company.
Any misuse of such power creates unhealthy conditions in the society, e.g.,
having monopoly over a particular business or industry or product; exploitation
of workers, consumers and investors.
4. Public Sector Enterprises: Traditionally, business activities were left mainly to individual and private
organizations, and the government was taking care of only the essential services such
as railways, electricity supply, postal services etc. But, it was observed that private
sector did not take interest in areas where the gestation period was long, investment
was heavy and the profit margin was low; such as machine building, infrastructure, oil
exploration, etc. Not only that, industries were also concentrated in some regions that
had certain natural advantages like availability of raw materials, skilled labour,
nearness to market.
MEANING OF PUBLIC ENTERPRISES
As state earlier, the business units owned, managed and controlled by the
central, state or local government are termed as public sector enterprises or public
enterprises. These are also known as public sector undertakings.
A public sector enterprise may be defined as any commercial or industrial
undertaking owned and managed by the government with a view to maximize social
welfare and uphold the public interest.
Public enterprises consist of nationalized private sector enterprises, such as,
banks, Life Insurance Corporation of India and the new enterprises set up by the
government such as Hindustan Machine Tools (HMT), Gas Authority of India (GAIL),
State Trading Corporation (STC) etc.
CHARACTERISTICS OF PUBLIC ENTERPRISES
Looking at the nature of the public enterprises their basic characteristics can be
summarized as follows:
(a) State Control: The public enterprises are owned and managed by the central or
state government, or by the local authority. The government may either wholly own
the public enterprises or the ownership may partly be with the government and partly
with the private industrialists and the public. In any case the control, management and
ownership remain primarily with the government. For example, National Thermal
Power Corporation (NTPC) is an industrial organization established by the Central
Government and part of its share capital is provided by the public. So is the case with
Oil and Natural Gas Corporation Ltd. (ONGC).
(b) Financed from Government Funds: The public enterprises get their capital from
Government Funds and the government has to make provision for their capital in its
budget.
(c) Accountability of public services: They are accountable to the public beause they
are accountable to the government which represents the people. Public enterprises
are not guided by profit motive. Their major focus is on providing the service or
commodity at reasonable prices. Take the case of Indian Oil Corporation or Gas
Authority of India Limited (GAIL). They provide petroleum and gas at subsidized prices
to the public.
(d) Excessive Formalities: The government rules and regulations force the public
enterprises to observe excessive formalities in their operations. This makes the task of
management very sensitive and cumbersome.
On the other hand public sector refers to economic and social activities
undertaken by public authorities. The enterprises in public sector are set up with the
main aim of protecting public interest. Profit earning comes next.
FORMS OF ORGANISATION OF PUBLIC ENTERPRISES
There are three different forms of organisation used for the public sector enterprises
in India. These are:
PUBLIC ENTERPRISES
Departmental
Undertakings
Statutory
Corporations
Government
Companies
Example 1. Posts & Telegraph 2. Railways 3. All India Radio (AIR) 4. DoorDarshan (TV)
5. Ordnance Factories
Example 1. Hindustan Machine Tools Limited 2. Steel Authority of India Limited
3. Hindustan Shipyard Limited
Example 1. Food Corporation of India 2. Industrial Finance Corporation of India 3. Life Insurance Corporation of India 4. Unit Trust of India
5. State Trading Corporation
Departmental Companies:
Departmental Undertaking form of organisation is primarily used for provision of
essential services such as railways, postal services, broadcasting etc. Such
organisations function under the overall control of a ministry of the Government and
are financed and controlled in the same way as any other government department.
This form is considered suitable for activities where the government desires to have
control over them in view of the public interest.
Departmental undertakings are the oldest among the public enterprises. A
departmental undertaking is organised, managed and financed by the Government. It
is controlled by a specific department of the government. Each such department is
headed by a minister. All policy matters and other important decisions are taken by
the controlling ministry. The Parliament lays down the general policy for such
undertakings.
The main features of departmental undertakings are as follows:
(a) It is established by the government and its overall control rests with the minister.
(b) It is a part of the government and is managed like any other government
department.
(c) It is financed through government funds.
(d) It is subject to budgetary, accounting and audit control.
(e) Its policy is laid down by the government and it is accountable to the legislature.
Statutory companies:
Statutory Corporation (or public corporation) refers to a corporate body created by
the Parliament or State Legislature by a special act which define its powers, functions
and pattern of management. Statutory corporation is also known as public
Corporation. Its capital is wholly provided by the government. Examples of such
organisations are Life Insurance Corporation of India, State Trading Corporation etc.
The Statutory Corporation (or Public Corporation) refers to such organisations which
are incorporated under the special Acts of the Parliament/State Legislative Assemblies.
Its management pattern, its powers and functions, the area of activity, rules and
regulations for its employees and its relationship with government departments, etc.
are specified in the concerned Act. Examples of statutory corporations are State Bank
of India, Life Insurance Corporation of India, Industrial Finance Corporation of India,
etc. It may be noted that more than one corporation can also be established under the
same Act. State Electricity Boards and State Financial Corporation fall in this category.
The main features of Statutory Corporations are as follows:
(a) It is incorporated under a special Act of Parliament or State Legislative Assembly.
(b) It is an autonomous body and is free from government control in respect of its
internal management. However, it is accountable to parliament and state legislature.
(c) It has a separate legal existence. Its capital is wholly provided by the government.
(d) It is managed by Board of Directors, which is composed of individuals who are
trained and experienced in business management. The members of the board of
Directors are nominated by the government.
(e) It is supposed to be self sufficient in financial matters. However, in case of necessity
it may take loan and/or seek assistance from the government.
(f) The employees of these enterprises are recruited as per their own requirement by
following the terms and conditions of recruitment decided by the Board.
Government Companies:
Government Company refers to the company in which 51 percent or more of the paid
up capital is held by the government. It is registered under the Companies Act and is
fully governed by the provisions of the Act. Most business units owned and managed
by government fall in this category.
As per the provisions of the Indian Companies Act, a company in which 51% or more of
its capital is held by central and/or state government is regarded as a Government
Company. These companies are registered under Indian Companies Act, 1956 and
follow all those rules and regulations as are applicable to any other registered
company. The Government of India has organised and registered a number of its
undertakings as government companies for ensuring managerial autonomy,
operational efficiency and provide competition to private sector.
The main features of Government companies are as follows:
(a) It is registered under the Companies Act, 1956.
(b) It has a separate legal entity. It can sue and be sued, and can acquire property in its
own name.
(c) The annual reports of the government companies are required to be presented in
parliament.
(d) The capital is wholly or partially provided by the government. In case of partially
owned company the capital is provided both by the government and private investors.
But in such a case the central or state government must own at least 51% shares of the
company.
(e) It is managed by the Board of Directors. All the Directors or the majority of
Directors
are appointed by the government, depending upon the extent of private participation.
(f) Its accounting and audit practices are more like those of private enterprises and its
auditors are Chartered Accountants appointed by the government.
(g) Its employees are not civil servants. It regulates its personnel policies according to
its articles of associations.
Advantages of Public Enterprises:
1. Social Welfare: Some of the public enterprises like post and telegraphs are not
run for earning profit while other enterprises like HMT as in India run for profits.
But the profits earned by them are utilized for improving services rendered or
for further expansion of their activities. In certain fields the state enterprises
may work more efficiently than private enterprises. This is particularly the case
with public utility services for electricity, water railway service, etc.
2. Sufficient Capital: It is also quite likely that the private sector may not be in a
position to raise enough capital for a project or an industry. But the government
can raise any amount of capital from various sources for investment in any
project or an industry. Hence such projects industries are stated in the public
sector.
3. Large-Scale Production: On account of large scale production, they can enjoy
the economics of large-scale production because the government, has therefore
undertake such big investment in the interest of the society for a long period.
For ex: construction and management of river linking projects, etc.
4. Convertible profits: The profits based enterprises can convert their profits into
another enterprises which are facing survival problems in line with serving the
society and also for the equal development of the all departmental and other
enterprises for Nation’s growth.
5. Balanced Development: They can contribute to a balanced regional
development by locating public enterprises in less developed areas and thereby
reduce the regional income inequalities.
6. Control by people: the working of the public enterprises is subject to the
criticism of the people and the Members of Parliament. Hence, if there is
anything wrong in the working of the public enterprises, it would be set right.
So the public enterprises are ultimately controlled by the people themselves.
Disadvantages:
1. Inefficient management: The government officials may take a long time in
taking decisions as well as action. Hence the government enterprises may be
run with excessive social cost of operation. This may be so because all of them
may be possess much business experience.
2. Lack of Incentives: The public enterprises may not create incentives for hard
work for their workers. The managers may not take risk. This is because their
acts as questioned.
3. Bureaucracy and Corruption: Bureaucracy and corruption may obstruct the
growth of public enterprises. The bureaucrats may not take quick action
because they have followed the established procedures. Hence they may cause
losses to the public enterprises. This would involve a burden to the taxpayers.
4. Political considerations: Political considerations may determine appointments
transfers and promotions. Hence right man may not be placed in the right place.
Such a policy is detrimental to the efficient working of the public enterprises.
Further, bribery and corruption may predominate. Also an enterprise may be
located in a particular area out of the political rather than economic
considerations.
5. Transferring officials: If there might be frequent transfers of the government
officials, this would disturb the smooth working and also development plans of
the government enterprises.
Changing business environment in post- liberalization scenario
Business and new economic environment:
The new economic environment comprises the recent developments that have taken
place in the environment of business. The terms to all those factors that is external to
the individual business unit/industry. Environment is basically macro in nature and the
business form is only a micro. Thus the environmental factors constitute the main
system in which the firm is only a micro sub-system. The firm has to function within
the given main system over which it has no control. The environmental factors varied
in natures and the environment of business is quite complex.
o The New Industrial Policy of the State
o Export and import policies
o Policies regarding Sales tax, Income Tax, Wealth tax, Property tax, etc.
o Government policy regarding concessional loans, subsidies, and loan
waivers to industry, agriculture and educational sectors.
Economic environment in India was standardize with the Industrial policies adopted in
the years 1948, 1956, 1973, 1980 and was revolutionized by New Industrial Policy,
1991 because the economic environment in India prior to 1991 was characterized by
regulations and control in every aspect of business such as Capacity utilization limits on
size of investment and restrictions on the imports.
To overcome the crises the New Industrial Policy 1991 focused on the following
objectives of:
a) To speed up liberalization measures
b) To correct the distortions or weaknesses the might have crept in
c) To maintain sustained growth in productivity and gainful employment
d) To attain international competitiveness
To achieve these objectives, the main features of NIP-1991 are:
• Far with licensing requirements of the industry:
In a major move to liberalise the Indian economy, the new industrial policy
abolished all kinds of industrial licensing irrespective of the level of investment
in all except 18 industries related to security and strategic concerns, safety,
environmental issues, etc. In continuation of the 1991 policy with regard to
delicensing, there are only six industries related to health, strategic and security
consideration that remain under the purview of industrial licensing.
• Diminishing role of public sector:
The spirit of the 1991 policy is diametrically opposite to that of 1956 policy with
regard to the role of the public sector in economic growth and development.
The 1956 resolution reserved 17 industries in the public sector is just three. The
government decided to open the arms and ammunition industry also to the
private sector. The government decided to open the arms and ammunition
industry also to the private sector.
• More support for Foreign investment and technology:
The new Industrial Policy prepared a specified list of high technology and high
investment priority industries where automatic permission was to be made
available for foreign director investment up to 51% foreign equity. At present
foreign equity upto 100% has been permitted in infrastructure industries such
as electricity generation, transmission and distribution, construction and
maintenance of roads, highways, vehicular bridges, ports and harbours.
• Radical changes in Monopolies and Restrictive Trade Practices (MRTP) Act:
The Monopolies and Restrictive Trade Practiceds (MRTP) act has been amended
in tune with the spirit of the NIP. Earlier, there were restrictions on the size of
asets of MRTP companies (which are very strong in terms of assets and market
hold). Such restrictions have now been lifted and the companies operate freely.
• elimination of convertibility clause:
In India, a greater part of the industrial investment used to be made in the form
of loans from banks and financial institutions. These institutions followed
compulsory practice of including a convertibility clause in their lending
operations for new projects. This clause provided these institutions an option of
converting part of their loans into equity if it was thought necessary by their
respective managements.
Evaluation of LPG Policies:
• Liberalization
• Privatization
• Globalization
Liberalization
The liberalization measures taken since 1991 have been addressed to augment the
production of necessary goods and services in the Indian economy. These measure can
be grouped under
(a) Trade and Capital flow reforms,
(b) Industrial deregulation
(c) Public enterprise reforms
(d) Financial sector reforms
(a) Trade and Capital Flow Reforms:
The major trade reforms comprised:
• Devaluation of Indian rupee (to restore India’s competitiveness)
• Introduction of convertibility of the rupee on trade account and, later, current
account
• Allowing foreign equity participation up to 51% in service areas
• Delinking technology transfer from equity investment as a measure of flexibility
in the choice of technology.
Foreign Trade Policy: An outward looking and liberal trade policy is one of the main
features of India’s economic reforms. The trade policy:
• Rationalized tariff levels.
• Dispensed with the practice of channelizing large part of the exports and
imports through the public sector. This gave an opportunity to the private
sector to gain access to foreign trade.
• Provided a variety of export promotion measures (under the Exim Policy3 1992-
97) such as setting up export oriented units from agricultural and allied sectors,
simplification of the Export Promotion Capital Goods Scheme, broadened the
scope of export processing zones, duty-free import for export under the
advance licensing scheme, setting up of exporters’ grievance cell in the Ministry
of Commerce, etc. Enhancing global competitiveness of the Indian economy is
one of the major thrust areas of the present Exim Policy of 2002-07
• Allowed exporters exim4 scripts equal to 30 to 40 % of their export earnings to
import even restricted items.
• Reduced drastically quantitative restriction s by introducing a streamlined and
simplified system of export and import licences.
Imports: Most of the goods are freely importable on payment of a specified customs
duty. However, imports are restricted in the case of a small number of goods on the
bases of security, health and environmental protection. Also, these are such goods
that require low skills and can be produced by the small scale or cottage industries by
employing a large number of people
There are no quantitative restrictions on the import of capital goods and
intermediaries. However, in the case of second hand capital goods, only those with
more than a 10 year usage can be imported, with a specific licence from the govt. of
India.
Exports: Export of goods is allowed freely, except for a few items in the negative list.
Exports are the major focus of India’s trade policy, and a thrust in the new economic
policy of the country. The export promotion Package is better with incentives offered
anywhere in the world. The major focus has been to motivate foreign investors to set
up Export Oriented Units (EOUs) in India.
(b) Industrial Deregulation:
The industrial sector tied up by many regulations such as the MRTP Act, was freed by
appropriate deregulation in the NIP, 1991.
1. Industrial licensing abolished: Except for establishments in the health, strategic
and security sectors, the new industrial policy has abolished licensing in all
other industries irrespective of the level of investment.
2. Limit on the size of companies: Enforced earlier under the MRTP Act. Was
scrapped to enable the industrial units grow optimally and derive the benefits
of scale economics.
3. Simplifying, the industrial location policy: there is no need to, for instance,
obtain industrial approval from the Centre except for industries subject to
compulsory licensing for projects to be setup in locations other than cities of
more than one million population.
4. Phased manufacturing programmes: for new projects, introduced earlier to
encourage indigenization in manufacturing, have been abolished. It was felt
that there is no need for enforcing the local content requirements on every
case, particularly in the light of substantial reforms made in the trade policy.
5. Removal of mandatory convertibility clause: Financial institutions can no
longer take the option of converting part of their loans into equity of newly-
funded projects.
(c) Public Sector Reforms:
The volume of investments in Public Sector Enterprises(PSEs) grew from Rs.290 million
in 1951 to Rs.2,301 billion in 1999. The number of enterprises grew from five in 1951
to 240 in 1999.
PSEs have been called “While elephants” consuming huge amounts of public funds. But
most of them proved contrary in the past five decades. With the results the NIP
focused on the following major reforms including disinvestment in public sector:
• Restructure and revive potentially viable public sector enterprises. Profit making
PSEs to get more managerial autonomy for better performance.
• Bring down the government equity in all non-strategic PSEs to 26% or lower, if
necessary partial disinvestment of equity in select PSEs.
• Promote private sector competition in areas where social considerations are
less significant.
• Close down those PSEs that cannot be revived and dispose off burdensome or
loss making PSEs.
• Protect the interest of workers through retraining and rehabilitation
programmes by creating a special fund called the National Renewal fund (NRF)
(4) Financial Sector Reforms:
Financial sector reforms can broadly under two things:
1. Financial sector reforms for the banking sector
2. Financial sector reforms for the insurance sector
1. The new industrial policy has initiated some reforms in the financial sector. Its main
objectives are :
a. to activate and modernize banking operations in the country and
b. to enable financial institutions, including banks to seize upon and avail of the
emerging opportunities resulting from economic reforms.
That resulted in reform as:
1. Statutory regulatory body established
2. Foreign portfolio investment
3. Internationally accepted norms
4. Increased autonomy
5. Strict supervision on banks
6. Banks funds spared
7. Lower SLR and CRR
8. Encourages use of indirect monetary control instrucments
9. Initiates structural changes
10. Reduced minimum government shareholding
11. Revised norms
12. Social responsibility factor
2. For Insurance financial sector the Government of India owned both life and other
insurance business in India. The LIC, GIC along with its four subsidiaries (United India
Assurance, Oriental Insurance, New India Assurance and National Insurance) were the
major players. After the insurance sector was opened to private players, companies
like Tata AIG, ICICI-Prudential Life Insurance, Max New York Life Insurance company,
etc. offer a variety of insurance policies and schemes.
PRIVATISATION
Why Privatisation?
It is resorted to for any one or more of the following reason:
a. To raise revenues for the government through sale of assets of
public enterprises
b. To extend the State ownership to private entrepreneurs.
c. To improve efficiency through competition
d. To improve the performance of the a PSEs
Privatization may take in the following forms:
1. Liquidation: The assets of the Public enterprise, in case of liquidation, are sold
off to a private entrepreneur for a consideration
2. Management Buyout: Employees may form a cooperative and take over the
ownership of the PSE. They may raise the necessary finances form financial
institutions for this purpose. They also get dividends as owners.
3. Holding company pattern: A holding company is one which has working control
of one or more companies called subsidiaries. It was a part or whole of the
share capital of subsidiaries. The main purpose of holding company is to own
shares in other companies and to exercise control over the same.
4. Liberalization: It is as a strategy of privatisation refers to an attempt to permit
and promote competition in areas where previously there was none. Earlier
road transport was totally controlled by state road transport corporations.
Today, the government has permitted private bus operators to run their buses
on State Road Transport corporation (SRTC)routes.
5. Leasing: By this the govt. transfers the physical possession of PSE butnot its
ownership to a private agency with certain conditions and for a specific period.
After the expiry of the lease period the government takes back the possession
of PSE.
6. Denationalization: When the Govt. transfers the ownership of a public
enterprise to entrepreneurs in the private sector , the public enterprise is said
to be denationalized.
7. Joint venture: When part of the ownership (ranging from 25-50 %) in public
enterprise is transferred to the private sector, it is said to be a joint venture.
The percentage of transfer in the ownership is governed by a number of factors
such as govt. policy, financial conditions of PSE, etc.
8. Restructuring: The Govt. May prefer to restructure ailing or sick PSEs by
redefining or restructuring the whole set of operational or commercial activities
or just the issues governing financial matters.
9. Disinvestment: One of the main objectives of privatization is to raise resources
for the govt. In India, disinvestment is the process of withdrawing the
investments made by the govt. in a public enterprise. In keeping with the NIP of
1991, the govt. has been following a disinvestment strategy in respect of PSEs.
Disinvestment as a current trend has been discussed earlier under public sector
reforms.
10. Franchising or contracting out: when private firms are allowed and encouraged
to make bids to run services that were previously exclusively run by the public
sector, the work is said to be franchised or contracted out.
11. Operational strategies: Several measure can be initiated for the privatization of
a public enterprise without resorting to any of the above measures. It may
directed to:
a. Increase production by offering special incentives and overtime to the
workers
b. Outsourcing the public enterprises which doesn’t have the competition
c. Buy from the market by special tenders such items as may be costly to
produce internally
d. Raise funds from the National or International capital market and so on.
GLOBALISATION
It means ‘integrating’ the economy of a country with the world economy with a view
to eliminating supply bottlenecks, improving investment climate, providing a wide
choice of quality goods and services to the ultimate customers. In general globalization
is characterised by the following parameters:
• Reduction of trade barriers among different countries across the world.
• Creation of a conducive environment in which thre can be perfect mobility of
factors of production such as capital and human resources among countries.
• Ensuring free flow of technology across the countries
Policy measures towards globalization:
1. Full Convertibility: A country’s currency is fully convertible when it allows its own
exchange rate to be determined in the international market without official
intervention. The govt. of India has been lifting exchange control measures in a phased
manner and is working towards full convertibility.
2. Liberalising imports: This is more of a strategic measure that makes available to
domestic producers quality machinery and other key inputs, which are likely to
facilitate quality output for exports. The gov. has in keeping with the requirements of
the World Banks to bear lowering import tariffs on goods, except those mentioned in
the negative list and allowing free import of all goods, including charges have been
drastically reduced to facilitate imports.
3. Attracting Foreign Capital: The size of foreign directo investment is one of the major
indicators of globalization of an economy. The NIP, 1991, announced a list of high
technology and investment priority industries where automatics permission was
granted for direct foreign investment upto 51% to 100% foreign equity. They can
invest in Indian capital markets provided they are registered with Securities and
Exchange Board of India (SEBI). They can use their trademarks in India, take back their
profits to their respective native countries, deal in immovable property in India etc.
and 100% DFI is allowed in select sectors such a pharma, tourism, infrastructure,
telecom, etc.
India and the WTO:
India was one of the 118 countries that signed the final Act of the Uruguay Round at
Marrakesh in April 1994, which paved the way for setting up of the WTO in 1995. India,
which was one of the founder members of general agreement in Tariffs and Trade
(GATT), has now become a founder member of the WTO. The WTO agreement was
ratified on December, 1994, and this has far reaching implications for strengthening
global trade and economic growth
It is to be noted that GATT which was promoted by 23 countries in 1947, including
India, was not a formal organization but only a legal arrangement to promote
international trade through tariff reduction, etc.
Environment in Post Liberalization Scenario:
Economic reforms, as envisaged in NIP of 1991, are now 20 year old and there is now
ample evidence to assess their impact on Indian Economy. The Indian industry for over
40 years since independence was predominantly operating in a regulated and
protected economy and hence remained an underperformer. During the
implementation of LPG policies, it would sustain extremely well the pressures in the
new competitive environment.
The impact of economic reforms can be outlined as follows:
1. Attention to World Market: Many companies are setting their eyes on global
markets. With their prudent financial polities, they have emerged cash rich and with
liberal flow of foreign direct investments, they are poised to improve in world clas
ratings. For instance, Tata Steel emerged as the world’s fifth largest steel company
with its recent acquisition of Corus Group, UK. This many companies are now directing
their efforts towards the world market.
2. Improvement in Work culture: Everywhere, including in Govt. organizations, there
is noticeable change in the work culture. The employees have realized the need for
observing speed in response, customer focus and organisations have been focusing on
‘high performing work culture’. The workers/employees have become more quality
and cost conscious.
3. Focus on Capital Intensive Technologies/processes: For long time, the focus was on
labour intensive policies sand processes. Not considering the philosophy that ‘capital
intensive technologies will increase unemployment’, most industries have been
focusing on capital intensive technologies. So many ATMs set up by banks across every
urban area are an example for this.
4. Downsizing and Rightsizing: With a view to reducing the salary bill and enchancin
the productivity per employee, every organization, without exception, has reduced the
number of employees (headcount) significantly through voluntary retirement schemes.
5. Awareness and Stress on quality and R&D: The customer earlier used to trade of
between price and quality. This trend has changed now. The quality awareness levels
have considerably improved.
6. Scale Economies: It is common to find leading companies in every sector to
double/triple their volume of production to attain scale economics through rapid
technological growth and increased productivity.
7. Aggressive Branch Building: The market place became increasingly competitive in
view of domestic companies becoming more aggressive in promoting their brands and
foreign companies invading Indian markets through their cost-effective quality
Products/Services.
In extent of these, there have been many positive developments now encouraging the
Country to think in terms of strengthening these reforms further and moving to
second-generation reforms.
Compiled by
N. Aruna Kumari
