Commerce Notes PDF

COMMERCE NOTES By Vyom Gupta 3.CLASSIFICATION OF BUSINESS ACTIVITIES Business can be broadly divided into industry and commerce: Industrial activities: Industrial activities are concerned with the growing, extending, and manufacturing of material goods. The main characteristics of industries are: WEEP PC 1. Wide range of scope 2. Economic activity 3. Economic development 4. Production 5. Part of business 6. Creation of Utility Types of industries: 1. Primary industries: Industries which provide basic raw materials from natural sources are called primary industries. They are of two types: Genetic Industry: This industry is concerned with the breeding of certain species of plants and animals to make a profit from their sale. Extractive industries: These industries are involved in the extraction of useful materials from natural surroundings such as air water and soil and beneath the earth's surface to sell for profit. The difference between extractive and genetic industries is that in extractive industries man cannot add wealth he withdraws from nature however in genetic industries man not only adds to the wealth but also reproduces the nature-made goods. 2. Secondary industries: They are concerned with the processing or transformation of raw goods and semi finished products into finished products. They consist of: Manufacturing industries which are made up of: 1. Analytical industries: Involved in the extraction of many goods from a single raw material. Such as: From petroleum synthetic fiber can be made and it can be purified to be used by cars. 2. Synthetic industries: This industry involves the combination of two or more raw materials to form a final or another raw material, such as soap, cement cosmetics etc. 3. Processing industries: These industries are involved in the processing of raw materials till they reach their final sales form such as cotton: cotton undergoes the process of spinning, weaving,dyeing, bleaching, and printing process before it is sold. 4. Assembly industries: These industries source various raw materials from different companies and are involved in having an assembly line to combine all the components physically or chemically to make the final product for sale for profit. Examples: radio, television, care, etc. Construction Industries: These industries create basic infrastructure through the process of fabrication. They are engaged in the construction, erection, and fabrication of buildings, bridges roads, etc. The distinctive feature of this industry is that the products remain fixed at one place and cannot be taken physically to market for sale. The companies are categorized in the following way according to (MSME) Small Medium Macro Enterprise Development Act 2006. 1. Micro Units: Industry: Upto 25 lacs Service: Upto 10 lacs 2. Small Units:Industry: from 25 lacs to 5 crores Services: from 10 lacs to 2 crores 3. Medium Units:Industry: from 5 crores to 10 crores Service: from 2 crores to 5 crore 4. Large Units:Industry: above 5 10 crores Service: above 5 crores Role of small-scale industry in India: MO BEEFS 1. Mobilization of local resources: These industries use latent resources especially in rural areas to help their industry. Example: Skilled labor in rural areas etc 2. Optimisation of Captial: They have a larger output per unit of capital 3. Balanced regional development: They provide for economic activity in rural areas hence decongesting economic hotspots such as cities. 4. Egalitarian Society: Prevents the formation of monopolies and the money lying in the hands of only a few. 5. Exchange earnings:1)They reduce the reliance on imports. 2)They earn valuable forex through their export. They contribute to 40 percent and 35 percent of exports of non traditional items and all exports respectively. 6. Feeder to larger industries: They provide raw materials and smaller components to large industries 7. Social advantage: They help raise the per capita income and standard of living in the country. Larger participation of people, less pollution and is the base of democracy, socialism and self-government. Small business serve as the seedbed of entrepreneurship as: 1)Less Capital 2)Start anywhere 3)less risk 4)Little training and skill 5)Traditional skill Commerce: Commercial operations deal with the buying and selling of goods, the exchange of commodities, and the contribution of finished products. Functions and importance of Commerce: 1. Hindrance of person: lack of contact between producers and consumers. Commerce removes this hindrance by trade which provides an organised market. 2. Hindrance of place: Major problem of sending goods ensuring they arent damaged lost or stollen, hence the commercial solution is transport and packing. 3. Hindrance of time: The time difference between the time of production and consumption solution is warehousing. 4. Hindrance of exchange: Buying and selling of goods requiring a common medium of payment. The solution is banking in the form of overdrafts, letters of credit, cash credit, and discounting of bills. 5. Hindrance of risk: Risk of goods being stollen. The solution is buying insurance. 6. Hindrance of knowledge: Consumers are unaware of producers. The solution is marketing. Branches of Commerce: 1)Trade 2)Aids to Trade 1)Trade: Trade is the process of procuring and purchasing goods and services with the object of selling them for profit. Trade is the nucleus of commerce.Trade can be divided into: 1. Home Trade: Domestic or internal trade, means the buying and selling of goods within the geographical boundaries of one country. There are two types of home trade: a)Wholesale trade: It implies the buying and selling of goods in large quantities. The buyers are usually institutional or industrial. Huge capital required. Link between producer and retail. He usually sells on credit.Small variety of goods. b) Retail trade: Buying in small quantities. The link between the wholesaler and final consumer. The final stage of distribution. A large variety of goods. 2.Foreign Trade: Buying and selling of goods between two or more countries. a)Export Trade: Selling goods to foreign buyers. b)Import Trade: Purchasing goods from foreign sellers. c)Entrepot Trade: The buying of goods from foreign sellers and selling them to foreign buyers. Also known as re-export trade. 2)Aids to trade: 1.Transportation: The conveyance of goods and services from the producer to the consumer providing for growth in economies and reaching far-flung consumers and pockets of demand which has not been met. Provides place utility. 2.Warehousing: Provides time utility. Storing of goods produced till the time of consumption or demand. Used for goods produced at a particular time but required year round such as wheat and goods required seasonally such as umbrellas. There are 3 types of warehouses: private, owned by merchants. Public owned by trading ports etc. Custom owned by the custom offices. 3.Insurance: Removes hindrance of risk.Uses the concept of “principle of pooling of risk”. Enables companies to operate peacefully and confidently. Companies pay insurance companies and pool all of their money in a common fund hence distributing burden of loss over a large amount of people. 4.Banking and finance:Removes hindrance of exchange. Large amounts of money are required to carry out transactions of business that may not be available.It takes time to collect money after sale of goods on credit. Banks help by providing funds and credit to business man. They also provide low interest rates on operations that use large sums of money. 5.Advertising and publicity: Removes hindrance of knowledge. It helps bring the consumer to the producer and educates user about product and provides greater satisfaction 6.Other aids: 1)Fast Communication of information through telephone service postal service etc. 2) Packing of goods to ensure they are safe. 5.SOLE TRADER Definition: A business organization at the head of which a person who is responsible, who entirely contributes to the capital, who gives orders for the direction of the company, and is solely eligible for the profit of the company and liable for losses and the risk the company bears. Characteristics of Sole Traders: SONNNUS 1. Single Ownership: The sole proprietor is the person who invests all of the capital either through what he has or borrowings and hence is the only owner of the business. 2. One Man Control: The sole proprietor is the owner, manager and has control of the business. He needs no external help. He may employ workers but he still remains the man who makes the decisions. 3. No legal formalities: No legal formalities or regulations affect the formation, dissolution or duration of a sole entity. 4. No legal separate entity: The business and the sole proprietor are a single entity. If the sole proprietor dies or becomes insolvent the business dissolves. 5. No sharing of profits: The sole proprietor bears the risk of business alone and his reward is profit. He is the only person who can receive the profits of the business. 6. Unlimited liability: If the business has to be dissolved and the assets of the business fall short of the amount of debt, the sole proprietors personal properties can be attached to pay of the debt. 7. Small Size: A sole proprietor is usually of small size and hence makes the business easier to operate. Objectives of Sole Traders: TTTIEF 1. To create self-employment: Sole proprietorships are small and hence can be started by anyone rather than looking for employment else where. 2. To utilise funds: If a person has funds he can invest it in the capital of his business and aim at growing it through profits rather than sitting on it. 3. To serve the customer: The sole traders have closer contacts to consumers and hence can better cater to their needs. 4. Independent living: A sole trader can live an independent and honorable life as he has full control over his business and can make all decisions. 5. Equitable distribution of wealth: This allows money to be distributed amongst many small businesses rather than in the hands of a few monopolies. 6. Feeder to bigger companies: The components and ancillary services required by larger companies can be sourced by these sole proprietorships. Merits of Sole Traders: PFEEEMMIQSS 1. Personal Touch: He can maintain personal contact with each and every customer and employee 2. Flexibility of Operations: As sole proprietorship is a small business he can easily expand it or reduce it according to the market and can modify his line of business. 3. Economy:The proprietor is the owner, manager and controller of the business and hence does not need employ many people. 4. Easy Formation:No legal rules and regulations trouble the sole proprietor except for in certain businesses such as dealing with alcohol. He does not need to get permission or associate with anyone. 5. Easy dissolution:Without any legal rules or regulations. 6. Minimum Government Regulations:No Government interference except for tax laws and labour laws. 7. Motivation to work: The sole proprietor bears all the profit, loss and risk of the business. Hence it motivates him to run the business well as there is a direct relation between effort and reward. 8. Independent Control:He is the supreme leader of all matters and complete freedom of action. 9. Quick decisions:He can make quick decisions and implement them without taking anyone elses approval.Hence not let opportunity slip. 10.Social Utility: The sole proprietorship gives self-employment. Provides honourable living and equitable distribution of wealth. 11.Secrecy of affairs:He does not need to publish his books of accounts hence giving him a better competitive strength. Demerits of Sole Traders: LLLUU 1. Limited Capital: The sole proprietor contributes all the capital of the business and hence may not have large funding and borrowing capacity is limited. 2. Limited managerial capabilities: It is rare for the business owner to have expertise in all fields of the business. Hence this will lead to less output in some parts of the business. Errors in judgment can also be made by the sole proprietor.Division of labour is not possible. 3. Limited scope for expansion: With lesser capital invested and limited managerial capabilities it will be unlikely for the company to draw knowledgeable and good employees to help expand the business.Cannot take advantage of economies of scale. 4. Unlimited liability: The business has an unlimited risk for the sole proprietor as if it dissolves his personal property is also attached as a liability. This makes the sole proprietor more conservative hence preventing the growth of the company. 5. Unlimited Uncertainty: Sole proprietor does not enjoy continuity of existence as it is dependent on the life of the proprietor. The business and the proprietor have no separate legal entity. 6.PARTNERSHIP Definition: Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. Features of a partnership: MALTS SUURJ (essential) 1. Mutual Agency: Each partner is an implied agent of the partner and of the firm and each partner is liable for acts performed by other partners on behalf of the firm. 2. Agreement: A partnership arises when there is an agreement of partnership between the two which must follow the essentials of a valid contract (may be oral or written). Example: An owner giving share in profit is not a partnership unless there is such an agreement. 3. Lawful Business: A partnership can only be formed to carry out business (owning a house with someone is not a partnership). The business cannot be illegal. 4. Two or more persons: For a partnership minimum: 2, maximum: 50 (Except professions which follow the professions rules). Exceeding the number makes the partnership illegal. 2 firms cannot combine to become a partnership, the members can combine to form a partnership. 5. Sharing of profits: The agreement must be to share profits ;profits are spilt in a predefined ratio and the manager must also get a share in profit. However, profit sharing is not a proof of partnership. (non-essential) 1. Utmost good faith. Must render true accounts and make no secret profit from business. 2. Unlimited liability. (same ) 3. Restriction on transfer of interest: Partner cannot give his share without the prior consent of all other partners. 4. Joint Ownership and control (by all partners) 5. Separate entity: No separate legal entity from partners. Formation of a partnership: Two or more persons, no specific mode even registration is not compulsory. It is a contractual relation based on good faith and mutual trust. It is to carry on legal business and to share the profits. In order to avoid disputes it should be in writing however if it is not then the rights and duties is determined by the Partnership Act, 1932. Partnership Deed: It contains all the terms and conditions and is signed by all the partners duly stamped and registered. It is a public document and must not contain any term which is contrary to the provision of the Partnership Act. The terms and conditions can be changed at any time provided consent of all the partners. A partnership usually defines the following clauses: NNNDAAPP 1. Name of the firm 2. Nature of the firm 3. The principal place of business 4. Duration of the partnership if any 5. Names and the addresses of partners 6. Amount of capital to be contributed by each of the partners 7. Amount which can be withdrawn by each partner 8. The profit-sharing ratio Consequences of not registering: 1. It cannot enforce it claims against a third party in a court of law 2. It cannot file a legal suit against any of its partners Nonregistration does not affect the following rights: 1. The right of the partner to sue for dissolution of the firm or for the accounts/ enforce any right or power to realize the property of a dissolved firm. 2. The power of an official assignee or receiver to realize the property of an insolvent partner. 3. The rights of a business having no place in India 4. The right of a third party to sue the unregistered firm or partners 5. The right to sue a third party for infrigemenent of patent right. Types of Partnerships: Basis General Partnership: Limited Liability Partnership: Legal entity The firm does not have a The firm has a separate legal separate legal entity entity Registration It may not be registered It must be registered Liabitlity Liability is usually unlimited The liability of every partner (except minors) is limited Number of partners There is restriction on There is no restriction on the (minimum being 2 for all) maximum number of partners maximum number of partners Dissolution The firm is dissolved due to The firm is not diisolved on lunacy, insolvency or death of the lunacy, insolvency or the partner death of the partner. Partnership at will: Indefinite time as period or purpose of firm is not mentioned at time of formation. It continues at will of partners and can be dissolved by any partner by giving a notice to the other partners of his desire to quit the firm. Particular Partnership: It is formed for a specific time period or to achieve a specified objective. It is automatically dissolved when it achieves either. Limited Liability Partnerships Advantages and disadvantages: Advantages: 1. It is a separate legal entity hence can own and hold property. 2. More stable than Genral Partnership as it is not dissolved due to X reasons. It enjoys perpetual existence. 3. Liability is limited 4. Raise large fund due to no limit on the number of partners. 5. A body corporate can be a partner in LLP. 6. A partner is not liable for the un authorised acts of other partners Disadvantages: 1. Waste of time and money to document it as it has to be registered under the Act. 2. Less secrecy of business affairs as it has to fulfil legal requirements. 3. Credit standing is reduced due to limited liability of partners. 4. There is less flexibility of operations due to some legal formalitiles. 5. The liability of the firm and partners is unlimited in the case if firm or partner intends to defraud the creditors or any other persons for fraudulent purpose 6. Cannot raise capital form public. Types of Partners: (Learn from textbook) 1. Active or working Partner 2. Sleeping or dormant partner 3. Secret Partner 4. Limited partner 5. Partner in profits only 6. Nominal or ostensible or quasi-partner: 7. Minor as a partner. 8. Sub partner Merits of a Partnership: PLEDFCCCSS 1. Ease of Formation Registration is not compulsory and the company can be dissolved at any time. They are also simple to form and inexpensive. 2. Larger financial resources: Creditworthiness is high as partners are severally and jointly liable for the debts of the firm and it is possible to raise large capital by admitting new partners. 3. Combined abilities and judgment: Skill and experience is pooled together, also there is a reduction in error due to judgement and specialisation is possible due to partners being assigned duties on the basis of talent 4. Direct motivation: Diffusion of risk and management and ownership lies in the same hands hence the relationship between effort and reward. 5. Close supervision: They can make personal contacts with employees and customers and management of partnerships are easier when expert managers are not employed. 6. The flexibility of operations: The partners can adapt to the changing environment of the market by changing size of the business, capital, and managerial structure without any legal restrictions or Government control. 7. Secrecy:It is not compulsory for a firm to publish its annual accounts or to get audited or submit any reports to the government. 8. Protection of minority interest: A partnership is democratic all important decisions are taken with the mutual consent of all the partners and incase a partner is dissatisfied he can retire or give notice for its dissolution. 9. Cooperation: They make a more balanced decision than one man. 10.Scope for expansion: More more partners can be taken in to meet the financial and managerial needs of the growing business. Demerits of Partnership: LLUURRRC 1. Limited Resources: Due to maximum number of partners it is not able to gain large financial resources and may not have professional management. 2. Lack of secrecy: The secrets of the partnership are known by all partners. 3. Unlimited Liability: Full liability leads to the hampering of initiative and growth of the business. 4. Uncertain Life: Instability due to death, insolvency, insanity or retirement or submission of a notice of dissolution by any partner may abruptly end business. 5. Risk of implied authority: Every partner is an agent of the firm hence if one partners is dishonest or negligence can cause harm to all partners. 6. Restrictions on transfer of interest: The partner has to liquidity of his investment as he cannot transfer or assign his share without the consent of the partners. 7. Reduced public confidence: As it does not have to publish its account or be audited or does not have any legal or government restrictions it does not have high prestige. 8. Conflicts: Between partners causes delayed decisions and inefficiency and chances of conflict are high because every partner has the right to take part in the management of the firm. Basis of distinction Sole Proprietorship Partnership Members: One-man show Minimum:2 Max: 50 Agreement: Not required Essential Capital: Contributed by owner Contributed by partners Registration: No provision for registration Desirable Management: Lies with owner Lies with the partners Secrecy: Easy to maintain Difficult to maintain Risk: Borne entirely by the owner Depends on the mutual trust and unity among the partners Continuity: Depends on the life of the Depends on mutual trust and owner unity among the partners Scale of operations: Small scale Medium scale 7.JOINT STOCK COMPANY Definition: Joint Stock company is an incorporated association of persons that have separate legal entity, with perpetual succession and common seal. Its capital is divided into shares which are freely transferable and the owners of these have limited liability. It is an artificial person created by law. Features of Legal entity: SSSPLATVCC Separate Legal existence: The company has an identity separate from its members and own property, make contracts and file suits against people. The shareholders(members) are not liable for any for acts of the company, they are not agents of the company and creditors cannot take money from them. Example: The Salomon v Salomon case where the final verdict was that even though the company was owned by Saloman it was a separate identity hence as the company on winding up made a loss, would have to pay all creditors back equally which included salomon. Separate ownership and control: members cannot manage a company but elect their representatives, the board of directors who manage the company hence their is a difference between the owners (shareholders) and the management (board of directors) with a centralized and delegated system. Statutory control and regulation: The government has control over the business through the company laws the company has to follow. It also requires the company to file documents with the registrar. Perpetual succession: The business once established continues until it is dissolved by law and does not matter on whether the owner or member becomes insolvent, dies or insane. Limited Liability: The shareholders are only liable to the nominal price of the amount of shares they bought. This means that incase the business makes a loss when it is wound up the creditors cannot go to the members seeking their return. A unlimited company can also be formed. Artificial person: Already mentioned. Transferability of shares: A shareholder can give up his membership in a company by transferring his shares however in the actual world there are some restrictions. Voluntary association: A company is a voluntary association of people with a common purpose who could join or leave at any time they decide. Corporate finance: The capital of the company is broken into numerous parts of small value called shares which could be bought by a normal man hence enabling a large capital. Company Seal: The seal is like the signature of the company that proves the validity of the document and has the name of the company engraved on the seal. All important documents of the company must have this seal or they are not binding. Distinction between Company and Partnership: FLIGT DDRLSS MAN Basis of Distinction Company Partnership Formation By incorporation- legal By agreement- no legal formalities formalities Liability Limited Unlimited Implied Agency Members are not agents Members are agents Governing Law The Company Act,2013 The Partnership Act, 1932 Transferability of Interest Freely except for private Transferable with consent of companies (they require the all partners consent of all the members) Durability Independent of members Dependent on members Dissolution Legal process- Winding up By agreement between partners Registration Compulsory Optional Legal Status Separate No separate identity Scale of operation Large Medium Statutory law Legal formalities- account No legal formalities audits, directors Management Board of directors Partners Audit Compulsory Not compulsory Number of Members Min - 2 Max- 200 (Private) Min- 2 Max 10 (banking) Min-7 Max- unlimited (public) otherwise 20 Objectives of a Joint Stock Company: GMBLERSI 1. Growth in social sector and rural economy: Companies help in the growth of social sectors like banking, insurance, transport and education etc. They also develop the rural economy through agro-based economies (Jute cotton etc). 2. Mobilization of idle resources: They help uniting the scattered small savings of the people and increasing the capital formation (investment) rate of the nation. 3. Better utilization of resources: Due to the use of modern: methods of production, distribution machines with better technology they are able to produce goods more efficiently with unutilised resources of the country. 4. Large -Scale Production: Companies are able to produce in large scale due to better technology, and mass production and marketing. They utilize economies of scale and mass produce quality goods at a cheap price. 5. Employment generation: These companies and the ancillaries they produce are a great source employment for the people. 6. Rapid Industrialisation: Industrialisation is key to achieve 5 Year Plans of the nation however they require the infrastructure (coal, electricity, power) which requires lot of investment and have risk something only companies can do due to large mobilized funds. 7. Self-Reliance: Companies help in production in the country hence they help reduce imports. The produced goods can further help exports increasing the forex of our nation. 8. Improvement of living standards: R and D have to improve quality and reduce price so that living standards increase and the luxuries of yesterday become necessities of today. Merits of a Company: LLEEDCTGS 1. Large Capital resources: The capital of the company is divided into small shares of small value and hence can be bought by a large number of normal individuals hence enabling large capital generation. The company also enjoys high credit scores hence has widespread appeal to all types of investors. 2. Limited Liability: The shareholders are only liable to the nominal(face) value invested by them in the company. The risk is known, restricted and divided amongst many people. 3. Economies of Scale: Tremendous scope for growth and expansion due to large capital and management facilitate large scale operations across all areas of business. 4. Efficient management: A company has specialization and distribution of labor and centralized management which helps action and continuity of policy. There is also a combined judgment of many directors. 5. Democratic management: The board of directors powers are checked by The Companies Act to prevent mismanagement. Directors are elected by the members and are accountable to the members. 6. Transferability of shares: The shares of the company are a liquid asset hence stimulating investment in industrial and commercial companies. 7. Continuity of existence: The life of the business is not dependent on its members and does not get dissolved due to the death, lunacy or insolvency of its members. 8. Goodwill: The company has a good reputation as it is scrutinized by the government is has its accounts audited and released to the public. Hence enjoys public confidence. 9. Social Advantages: A company helps mobilize the scattered savings of the people and rises the capital formation of the nation. Demerits of a company: LLEEDCCS 1. Lack of motivation: The directors and owners are not personally attached to the company and there is a lack of incentive due to no direct effort and reward. 2. Legal formality: Legal work is time consuming and expensive which cause companies to lose momentum early on. Too many documents have to be prepared and filed. 3. Excessive Government Control: At every stage in management there are rules and regulations and several legal provisions have to be followed and reports have to be filed leading to lot of time and money being wasted. 4. Economic Oligarchy: In practice power of the company is actually held in the hands of directors and major shareholders of the company. Shareholders are often ignorant and indifferent in the working of the company. 5. Delay in decisions: Red tape and bureaucracy do not permit quick decisions and employees tend to shift responsibility to play it safe. 6. Corrupt management: Clever and dishonest promoters and directors may deprive the investors of their hand earned money.There is danger of fraud and misuse of property by dishonest management. The company may also be leaded by an incompetent person. 7. Conflict of interests: The directors and the owners and other groups like debentureholders conflict lead to loss in moral and efficiency of operations. 8. Social evils: A few companies may form monopolies in their market where they hold all the power and wealth. They use their power to influence politicians and government officials leading to corruption in public life. 8.TYPES OF COMPANIES Mode of Liability of Public interest Ownership and Nationality or Incorporation members control Jurisdiction Chartered Unlimited Public Holding Indian Statutory Limited by Private Subsidiary Foreign shares Registered or Limited by One Person Government Multinational incorporated guarantee Company On mode of Incorporation: 1. Chartered: The companies that are established under the Royal Charter or under special orders of the King or Queen are known as chartered Companies. They exist in colonial countries and are no longer present in India. Example - Chartered Bank of India or East India Company 2. Statutory: The companies which are established under an Act passed by the State legislature or the parliament whichever may be the case. These companies have special powers. They do not have a memorandum of association as the objects and powers are outlined in the act. Examples are - LIC, RBI, UTI and IDBI 3. Registered: The companies which are registered under The Company Act is called the Registered or Incorporated Company. They are the most common. Companies related to insurance, banking and electricity supply are incorporated under The Company Act , but must follow the Insurance Act, 1938, The Banking Regulation Act, 1949, and the Electricity Supply Act, 1949. Examples - Maruti Udyog Ltd, Reliance Industries Ltd (RIL), etc, SAIL (Steel Authority of India). On the basis of liability (these companies fall under registered companies) 1. Limited by shares: The companies in which the shareholder is liable only for the nominal value of the share held by him and no further. In case of partly paid shares, then the liability is limited to whatever is the pending amount. These companies are the most common. 2. Limited by guarantee: The companies in which the liability of members is limited to such amount as they agree to contribute to the assets of the company in the event of its being wound up.The guarantee is mentioned in the MOA. The member can also have a shares in the company that is beside the guarantee amount. The share is called a ‘Reserved Capital’ as it can be only called up at the time of winding up.This sort of business is usually set up for trade associations, and to promote art, science and sport companies. Under Section 25: Companies can be set up to promote commerce, art , philanthropy, science, etc. and have deployed profit or income to further these aims. Distribution of dividends is prohibited. 3. Unlimited: Companies where the members have unlimited liability which extends to their personal property. The creditors however cannot sue the members directly but must go through the company. The liability is enforceable at the time of winding up of the company. Such a company is provided for in The Companies Act, 2013. On the basis of holding and control: 1. Holding Companies: Companies which directly or indirectly, through the medium of another company, holds more than half of the equity share capital or controls the composition of the board of directors of some other company is known as a holding company. A company becomes a holding company if: a. It holds more than 50 percent of the equity shares of another company b. It holds more than 50 percent of the voting rights of another company c. By holding the right to appoint the majority of the directors of the company. 2. Subsidiary Companies: The companies owned and controlled by another company to the extent that it is a mere instrument to carry out the objectives of the owning company. 3. Government Companies: Companies in which 51 percent of the upfront capital was paid by the central and/or one or more state governments is known as a government company. Subsidiaries of Government companies are also considered a government company. They are also registered under The Company Act. Examples of Government companies are - SAIL (Steel Authority of India Limited). On the basis of nationality or jurisdiction: 1. Indian Companies: Companies that are incorporated in India are known as Indian companies. They have to follow the Companies Act. It has a registered office in India and may carry out business outside India. 2. Foreign Companies: Companies that are not incorporated in India are known as foreign Companies. A company is considered an international company if: a. It carries out business itself, through an agent, physically or through electronic mode b. Conducts any business activity in India in any manner (they must conspicuously exhibit on every office or place where it carries on business in india and the name of the company and the country it is from in english and local language.) If an international company's paid up share capital worth 51 percent or more are bought by an Indian person or company the company has to comply with the rules as a company incorporated under the Indian Company Act. The following has to be done by international companies: a. Certified copies of its Memorandum and Article of Association b. It must give the address of its registered office c. Full particulars of its directors and secretary d. Name and address of its authorized representative in India e. It must give the place in which it is operating in India 3. Multinational Companies: These are companies that has set up production and marketing in two or more countries.(also management, ownership and control) These companies may enter India through a Franchise, Branch, Joint Venture, Subsidiary or a turnkey event. Examples are- Colgate, Proctor and Gamble. On the basis of public interest: 1. Private Companies: Minimum paid up value is 1 lac and the AoA: a. Restricts the right of its members to transfer shares (if any) b. Limits members to 200 ; except incase of one person company(excluding people who were in employment at the company) c. Prohibits invitation to the public to subscribe to any securities d. Prohibits any invitation of deposits from persons other than members of directors or their relatives The company must use ‘Private’ in its name, enjoys exemptions and privileges from The Company Act and is usually a family affair. 2. Public Companies: means: a. The company is not private b. Is a private company which is a subsidiary of a company which is not a private company. c. Has a minimum paid-up capital of 5 lac Hence is the opposite of all the points of the mentioned in the AoA for pvt. companies. 3. One Person Company (OPC): The company name will have the suffix ‘OPC’ and the process of set up is the same as that of private companies. The single member can choose a nominee to take on the company on the members death or disability, this nominee has to give his consent in writing which has to be filed by the registrar of companies. Two meetings every year if there is more than one board member else no provisions. Resolution passed by the sole member must be noted in the minute book.However there is no exemption from audits as conducted for private companies Distinction between private and public companies NNPPASSLMFQD Basis of Distinction Private Company Public Company Number of members Min- 2 Max- 200 Min- 7 Max - no limit Name The name must include the The name must include the words ‘Private Limited’ words ‘Limited’ Prospectus Need not issue and file Must issue and file a prospectus prospectus/ statement in lieu of prospectus Allotment of shares No restriction on allotment of Must have minimum shares. No binding on further subscription and comply with issue of shares. However legal formalities to allot transfer shares can only be shares. Further issue of given if consented by all the shares should in the first members. instance be offered to existing members. Share warrants Cannot issue share warrants Can issue share warrants Statutory meeting and report Not required Required Listing on stock exchange Cannot be listed Can be listed Managerial remuneration No restrictions on directors Total remuneration must not remunerations. exceed 11 percent of net profits and incase of insufficiency of profits max- 50000 per annum. Filing Need not send the list of Must send the list of directors directors and their consent to and their consent to the the registrar registrar. Quorum at annual general 2 members personally At least 5 members meeting present personally present Paid up capital 1 lac 5 lac Directors 2 3 [Privileges of a Private Company: (Almost same as differences) 1. It is not required to obtain the certificate of commencement of business 2. Exempted from remunerations concerning managerial personnel, appointment of persons to office of profit, intercompany investments, and publication of accounts. 3. It can issue shares with a disproportionate voting right 4. Exempted from preparing index to its register of members (public has to prepare if it has more than 50 members) Merits (Private Demerits (Public Merits (Public Demerits (Private Company) Company) Company) Company) Easy Formation: The Difficult formation: A Larger Resources: Limited Resources: company needs only public company There is no restriction They cannot have 2 people to form it needs a paid up on the number of more than 50 and can start capital of at least 4 member hence can members and cannot operations lac and needs a mobilize a large invite public deposits. immediately and an certificate of financial resources to Limited resources upfront paid up commencement. It is meet needs of the cause there to be capital is only 1 lac. an expensive, business. less growth potential. cumbersome process Secrecy: Largely a Lack of Secrecy: The Limited Liability: The Poor protection to family affair hence company has to keep members do not bare members:(due to does not need to its accounts open to large risk. exemption from legal publish its accounts public inspection. formalities) Minority or keep them open to at the mercy of the public. majority due to non transferability of shares. Characteristics of Government Companies: IOSMOFACE 1. Incorporation: The company is incorporated under The Company Act, as a private or public company with common seal and perpetual existence. 2. Ownership: The company may be fully owned by the government or the government must have at least 51 percent or more share capital in the company. 3. Separate Legal Entity: The company has a legal entity separate from the government and can own property, make contracts and file suits. 4. Management: The company is managed by a board of directors elected by the government and shareholders in the company. They can formulate their own policy rules and exceptions granting them exemption from the Company Act. 5. Own staff: The staff is not made up of IGovernment Servants and rules are not of civil services, the government independently choses appointment and service conditions. 6. Financial autonomy: The company has borrowing powers but is not subject to budgetary, accounting an audit controls applicable to Government departments. 7. Accountability: The company is accountable to the department concerned and the report is presented in the Parliament or State legislature. 8. Creation: The company is created by an executive order and not legislative action of the government. The AoA is made by the Government. 9. Exemptions: The company is excepted from carrying out a lot of things mentioned under the Company Act. Examples: NTPC, NMDC, SBI, BHEL, SAIL, GAIL Merits of Government companies: 1. Easy formation: A government company is easy to form 2. Internal autonomy: The day to day workings of the company are not effected by the politicians Demerits of Government Companies: 1. Lack of Accountability: As it is not fully accountable to the parliament or general public and enjoys special privileges that officers may be tempted to use against the interest of the public. 2. Political interference: Politicians and bureaucrats interfere in the functioning of government companies and such interference and red tapism causes lackness in management. Government company is particularly useful when: 1. To takeover existing enterprise in emergency 2. To start an enterprise with view to transfer to private sector 3. To launch an enterprise with collaboration with private sector or foreign company. Global Enterprises Characteristics: LIISTGM 1. Large size: The company controls assets worth trillions of dollars some of them are worth more than the gdp of small nations. 2. Integrated structure: 3. International management: The 4. Several forms: The company can be in the form of franchises, branches, joint ventures, turnkey projects. They may also form subsidiaries 5. Transfer of resources: These companies help in the transfer of capital, knowledge from one country to another 6. Geographical dispersion: They are located in many countries and may have a head location for each continent. Coca cola is located in 70 countries 7. Multiple Objectives: 9.FORMATION OF A COMPANY A public company has to follow the following steps to form a company: 1. Promotion 2. Formation 3. Incorporation 4. Commencement of business Promotion: Promotion is the discovery of business opportunities and the subsequent organisation of funds, property and management abilities into business concerns for the purpose of making a profit. The person who performs the task of promotion is known as a promoter or entrepreneurs. A joint stock company may be promoted in any of the following two ways: 1. The setting up of a new company altogether to make a new line of business. 2. By converting an existing partnership or proprietorship firm into a joint stock company Stages in promotion: 1. Discovery: The finding of a business opportunity due to the increase of demand in a market, discovery of untapped resources, a new invention, an inferior product in the market. At this time preliminary analysis is made to see if the idea requires time and cost of detailed investigation as many new enterprises fail due to a faulty idea. 2. Detailed investigation: On the basis of technical feasibility and commercial viability. Conducted by professional financial analysts and valuers to ensure ~income will meet ~expense and returns to investors for their risk. The investigation involves the study of market demand, availability cost of raw materials, machinery, competition, selling price and profits. This data is shown in a ‘project report’ or feasibility report’ which helps procure licences and finance from governmental agencies. 3. Assembly: On checking the feasibility and profitability of the business the promoter persuades people tp join hands with him to get his invention made, acquire patent rights, select factory site, plant and machinery, contacts for raw material, purchase of material, buildings, capital. Plans for size, layout and procurement of required workers and execs. 4. Financing of proposition: The business proposition is presented in the form of a prospectus to the public in order to persuade them for financial support. Financial requirements are estimated and sources for money are decided. The capital structure and time and method of capital issue are also decided. The roles of a promoter: CMCBPERL 1. Conceiving a business idea in the form of a joint stock company 2. Making Preliminary Investigation into the future prospects and economic worth of business. 3. Detailed investigation into the business to ensure the idea is practical and profitable. 4. Bring in various peoples who agree to associate in the business. 5. Preparing documents to get the company incorporated. 6. Entering into contracts relating to the purchase of various asset, acquiring rights and hiring employees. 7. Raising capital 8. Launching the enterprise as a going concern. Incorporation of a business: AFPRC 1. Approval of name: The company has to file an application with the Registrar of Companies in order to get their company approved. 2. Filing of Documents: Memorandum of Association: The main document which has to be signed and stamped by at least 7 members in a public company and 2 members in a private company. Articles of Association: Has to be signed and stamped by all subscribers of the memorandum along with: 1. Declaration of an advocate, chartered account, cash accountant or company secretary, and the board of directors stating the company totally complies with the Companies Act and all rules thereunder preceding and laws implied. 2. Affidavit of all subscribers of the memorandum and board of directors stating that they are not convicted of any wrong doing regarding the promotion and incorporation of the company. They also have to ensure that they followed the law and all the rules for the last 5 years with previous companies too. 3. The address for correspondence till the registered office is established. 4. The particulars of the name, surname, residential address and nationality of every subscriber to the memorandum and along with proof of identity as prescribed. 5. The particulars of name, surname, residential address, nationality and Directors Identification Number of all the persons mentioned in the article as the first directors. 6. The particulars of interest of the persons mentioned as first director along with consent to act as director of the company in such form and manner as prescribed. 3. Payment of fees: The company must pay fees for filing of documents, stamp duty and registration of company in accordance to the authorised capital of the company. 4. Registration: The Registrar will carefully scrutinise the documents filed by the company and if satisfied by the requirements regarding with registration have been complied with the company will be entered into the register. 5. Certificate of Incorporation: The company (comes into existence) becomes a distinct legal entity with perpetual succession and common seal from the date mentioned in the certificate. The Certificate is signed and stamped by the Registrar and its existence cannot be challenged even if a defect is found in the Certificate of Incorporation. The Registrar issues a corporate identity number (CIN) to the company. Commencement of Business: A private company can directly commence business after obtaining Certificate of Incorporation but a public company having share capital and prospectus cannot start business immediately. A public Company can only start business after receiving the Certificate of Commencement of Business which is issued after the following documents: 1. A declaration by director in the form and verified manner as prescribed which confirms that all the subscribers to the memorandum have paid up their agreed share of up front capital which can be no less than 5-lacs for public companies and no less than 1 lac for private companies on date of declaration. 2. The company has filed with the Registrar a verification of its verified office within a period of 30 days of its incorporation in manner prescribed. If the Registrar is satisfied with the document submitted by the company he will provide them with the Certificate of Commencement of Business. The date signifies the start of the company. The documents used in commencement of a business are: MAPS 1. Memorandum of Association Meaning: The memorandum of association is the charter and defines the limitations of the powers of the company. It contains the fundamental conditions upon which alone the company is allowed to be incorporated. Purpose: The purpose of the memorandum of association is to enable shareholders, creditors and others who deal with the company to know its permitted range of activities. Any act of the company beyond the Memorandum is Ultra Vires and therefore not binding to the company. The following things are required for the Memorandum of Association: 1. Must be in numbered paragraphs 2. Must have the signatures of the subscribers with one witness present 3. Must be readily available at a nominal charge as it is a public document. The following are the main clauses of the Memorandum of Association: NSSOL 1. Name Clause: a. The name not match or be similar to that of another company b. The name must not convey any connection to any Government department or local authority as that would lead to confusion among the public c. Public Company- “Limited” Private Company- “ Private Limited”. d. The name must follow the Names and Emblems (Prevention and Improper Use) Act of 1950 e. The name but be consciously placed outside all the established places of the company (also in bills cheques any document related to the company) also in the local language and must be engraved on the stamp of the company. 2. Situation (Domicile) Clause: Necessary to identify domicile- Place of registration and legal jurisdiction. The company must report the state in which it is going to function to the Registrar of Companies however it is practice to give the exact location of the Registered Office as that is where all the circulars and notices go. That location is also where all the minute books, register charges, register of members, register of debentureholders etc. 3. Objective Clause: This is the main clause at the core of the business which defines scope and power. It lays down the objectives of the business and gives creditors and shareholders an idea of the purpose their money is going to be used for. They have to list the a) The main objectives and the b) The other objectives and submit it to the registrar. Any activity done outside the objectives is considered ultra vines or null. The objective of a company can be changed by filing a request with the central government. The objective cannot- against public policy, Companies Act, illegal, immoral, fraudulent. 4. Liability Clause: The company has to state the fixed liability of the shareholders in case of a company limited by shares and the guaranteed amount to be given in case the company wins up in a company limited by guarantee. An unlimited company does not need to have this in their memorandum of association. 5. Capital Clause: Total amount of authorised shares with which the company is registered, Division of shares into fixed denominations and number and type of shares. Not required for Unlimited Companies. 6. Subscription or Association Clause: Contains the full names, occupations, addresses of the subscribers to the memorandum. They make a declaration under their signature duly attested by a witness that they desire to be formed into a company and agree to take qualification shares if any. 2. Article of Association: The article of association defines the rules and regulations of the management of internal affairs. It defines the rights,powers and duties of the management, determines the mode and manner in which business is conducted and the manner in which internal regulations of the company may be changed from time to time. It also determines the way the members interact with themselves and the company. Is a subsidiary of the MOA and cannot go against it, The Company Act or public policy. It can either be incorporated or follow the default as follows: Companies Limited by shares - Schedule 1, Article A (99 articles) Companies Limited by guarantee ( no share capital) - Article C Companies Limited by guarantee (with share capital)- Article D Unlimited Companies- Article E Private company must contain the following restrictions: 1. Restrict the right to transferability of shares 2. Limit the number of members to 50 3. Prohibit the invitation to the public to subscribe to any shares in, or debentures of the company. The contents of the Article of Association are the following: 1. Contracts of the company 2. Number and value of shares 3. Allotment of shares 4. Division of shares 5. Calls on shares 6. Lieu of shares 7. Accounting and audit 8. Winding up of company 9. Seal of company 3. Prospectus: Any document described or issued as a prospectus and includes a Red-Herring prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate. Importance: a. It is an invitation to the public to the shares and debentures of the company b. It informs the public about the company and stimiulates people to invest money in the company c. It reflects the business policies and programmes of the company d. It helps investors to take investment decisions e. It provides authentic record of terms and conditions on which share and debentures have been issued f. It identifies the persons who can be held responsible for any untrue or incorrect statements made. Contents of the prospectus: 1. Name of the Company 2. Address of the registered office 3. Nature and main objectives of the business 4. Capital Structure 5. Particulars about underwriters, auditors, brokers, bankers 6. Particulars, objects and terms of the current issues. 7. Financial Information 8. Contingent and outstanding liabilities 9. Names of the stock exchange where application for listing has been made 10.Management perception of risk factors Shelf Prospectus: It is a prospectus in respect of which securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of further prospectus. Red-Herring Prospectus: It means a prospectus which does not contain complete particulars on the price or the quantum of the securities included therein. It is issued by companies which raise capital through the book building process. 4.Statement in Lieu of Prospectus: A public company having share capital need not file and publish prospectus if it wants to raise its capital privately without public notice. It just need to file a ‘statement in lieu of prospectus’ with Registrar of Companies at least 3 days prior before allotment of shares. It must be duly signed by all directors and should be dated and should indicate when it was sent to the registrar. It should be set in accordance to Part 1 of Schedule III of the Companies Act, 2013. The contents are the same as prospectus. Minimum Subscription: 10.PUBLIC ENTERPRISES, PUBLIC UTILITIES, AND PUBLIC-PRIVATE PARTNERSHIPS Meaning: All commercial and industrial undertakings owned, controlled and managed by the Government are called public enterprises(public undertakings/public-sector undertakings). Characteristics: SSSGPA 1. Service motive: The company is not concerned about making a loss but rather is concerned with the welfare of the the people of the nation 2. State ownership: The central government or state government or combination of both or combination with private company where the government holds more than 51% of the shares is known as a public enterprise 3. State controlled: The government controls who is on the board of directors and the chief executive. 4. Government financed: Major portion of the capital is from the government. 5. Public accountability: As the are financed out of publics money the company is accountable to the public's elected representatives ie. The parliament or state legislative department related to these companies 6. Autonomous bodies: Some companies are run directly under the department of the government while others operate independently (as companies and statutory corporations). Objectives: SEEEEDD PCL 1. Self-reliance: Aim for self-reliance in strategic sectors of the economy such as transportation, communication, energy etc. They provide basic infrastructure. 2. Employment: Several sick units in the private sector have been nationalised in order to protect jobs. 3. Economic Development: These companies have a strong industrial base for rapid industrialisation of the country. 4. Egalitarian Society: Public companies check the power of the private companies ensuring there is no formation of a monopoly and hence ensuring equitable distribution of wealth amongst the people. 5. Economic surplus: Earn money and mobilise public savings for industrial development. 6. Defence: The defence sector is one of national interest and hence controlled by public companies and for need of utmost secrecy. 7. Development of backward areas: Public enterprises are set up in backward areas to reduce regional imbalances in development. 8. Public utilities: Services which do not have a profit motive like water and gas hence not taken on by private sectors. 9. Consumer Welfare: Essential commodities at cheaper prices stabilising prices. (no profit) 10.Labour Welfare: Public enterprises serve as a model employer ensuring welfare and social security of employees. Role and Rational of Public Enterprises: FEBOMSSP 1. Fill in the gaps: At time of independence there was gap in industrial structure (Heavy industries) require large investment, high risk and long gestation periods hence private companies are not willing to invest in them. The public companies take over them to ensure industrialisation of our nation. 2. Employment: The public sector employees 2/3rd of the total employment in organised industrial sector in India, and takes over sick units to ensure job security and serves as a model employer. 3. Balanced Regional Development:Private companies tend to stick to certain regions hence Public enterprises are set up in rural and backwards areas like bhilai, rourkela for steel;sindri for fertilisers and rajasthan,kerala for tools. This helps employment and provision of essentials to these places. 4. Optimum utilisation of resources: These companies use economics of scale to produce goods in large quantity for cheap hence ensuring full use of installed capacity 5. Mobilisation of surplus: They mobilise scattered savings of the public for capital formation in the country. The surplus they generate is also given as export which helps the forex of the nation. They invest for expansion and diversification. 6. Self-reliance:These companies cut down the requirement for imports in key sectors and help the increase in forex by exporting surplus. 7. Socialistic pattern of society: They prevent the concentration of wealth in the hands of the few and ensure equitable distribution of wealth. 8. Public welfare: They ensure the availability of necessities in large quantity for cheap. They also provide employment to a large number of people.Promote interest of workers. Criticism of Public Enterprises: DFHPIPL 1. Delay in completion: This leads to increase in the cost of the project or the project having lesser benefit than initially intended. 2. Faulty evaluation: They do not correctly assess the market supply and demand and are usually set up on political considerations leading to a waste of national resources. 3. Heavy overhead costs: For examples, the housing of all the employees is paid for however this leads to a large cut from capital and projects suffer financial difficulties. 4. Poor returns: Most incur loss due to lack of effective financial control, wasteful expenditure and dogmatic pricing policy. 5. Inefficient management: These companies are controlled centrally and usually high level posts are there because of political connections rather than true expertise. 6. Political interference: Causes little autonomy and flexibility of operations as there is a rigid control over them by politicians and civil servants. 7. Labour problems: Usually public enterprises are overstaffed due to poor planning hence guarantee of these jobs often encourages trade unions to be militant in pursuing their aims. Forms of Organisation in Public Sector: Features:FAB CLASS MED Basis of Departmental Public Corporations Government Comparison Undertakings Companies Formation It is formed as a It is formed under a It is formed by separate wing of a special Act of registration under the ministry Parliament or Companies Act Legislature Separate legal entity Accountability To Government To Parliament or To Government Legislature Budget Part of General Separate Separate Expense Control Direct control of By the Parliament or By the central ministry Legislature ministry Legal Status No separate legal Separate legal entity Separate legal entity entity Autonomy and No autonomy, lack of Substantial Limited autonomy but flexibility flexibility autonomy, little sufficient flexibility flexibility Suitability Strategic industries Industrial and Industrial and like defence, railways commercial commercial enterprises of great enterprise with significance private participation. Source of finance Out of government Initially by Government provides budget Government major part of equity capital Staff/employee Government separate separate employees Management Government officials Nominated Board of Majority of directors Directors nominated by Government Examples Indian Railways, RBI, LIC, SBI Steel Authority of Posts and India, Hindustan Telegraphs, Atomic Machinery and Tools, Power projects Cochin Refinery Distribution of Deposited in Back in business Back in business earnings Government treasury Departmental Undertakings: These are the oldest and traditional form of organising public sector undertakings. They are organised, controlled and financed as another department of the government. They can be run by the central government or by the state government. They are run by government officials who are led by the head of the department concerned. The undertaking is under direct and ultimate control of a minister who is responsible to Parliament. Merits: SAIDPPPE 1. Secrecy: The important industries related to defence can avoid disclosure on the plea of public interest. 2. Aid to public revenue: The money is reinvested into the government treasury meaning it reduces the tax burden on the public. 3. Instrument of social change: They have an effective control on the production and distribution of goods and services and serve as an instrument of public policy. 4. Direct Government Control: Effective in achieving tasks laid down by the government. 5. Public Accountability: They have maximum accountability to the parliament hence keeping management alert. 6. Public Interest:Public utility and defence services. 7. Proper use of money: The undertaking has a strict budget, accounting and audit controls hence risk of misuse of money is reduced.Discipline over public funds. 8. Easy formation: The company requires no laws or provisions to be passed it has to be formed by the administrative decision of the Government. Demerits: FRIILL 1. Financial dependency: The undertaking is at the mercy as all of its earnings are deposited in the treasury and is at the mercy of allotment of budget by the Government for the year and is unable to take long term plans due to this uncertainty. 2. Red Tapism: Centralization of authority the causes Red Tapism and decisions are delayed due to bureaucratic procedures and political interference. Adherence to strict rules causes loss of business opportunities. 3. Inefficient management: The company is managed by people with political support rather than expertise to run the company and pass along their work and have a carefree attitude. They are managed by deputation of Government officials and civil servants who are buried in paper work and do not pay attention to management. 4. Insensitive towards customers needs: Bureaucratic control and lack of incentive on the part of officials make the undertaking inefficient and unresponsive to customers needs. 5. Lack of flexibility: They have constant influence from politicians and civil servants hence making them unable to make business decisions on their own. There is also little delegation of power hence the staff gets little opportunity to exercise initiative. 6. Lack of motivation: The employees lack motivation as their is a disconnect between work and reward as promotions are usually given on the basis of seniority hence leading to work being passed on. Public/Statutory Corporations: These are autonomous corporate bodies set up under a special Act passed by the Parliament or State Legislature. They enjoy the flexibility of a private company but the ownership and accountability is to the public. Enterprises do not become public corporations simply by using the word ‘corporation’ in its name like State Trading Corporation. Merits:QOEEFSMP 1. Quick Decisions: Free from prohibitory rules applicable to expenditure of public fund, hence can make prompt decisions to adapt to the changing market. 2. Operational autonomy: The public corporation enjoys internal autonomy as there is no interference of the parliament. 3. Economics of scale: These companies are usually of large size and enjoys monopolistic power. 4. Efficient management: Top executives can be drawn from different occupations. Professionals can be appointed important positions in the corporation. 5. Flexibility of operations: As it is free from bureaucratic control it enjoys the flexibility and initiative in business affairs. 6. Special privileges: The law by which it is created caters for specific needs in a particular situation. 7. Motivation: They can attract talented and experienced managers as the service conditions of employees are better than those Government servants. 8. Parliamentary control: Parliament control helps in ensuring proper use of public money and improving performance in the public interest. Demerits:DRANEC Government Companies: These are companies that have either Central Government, State Government or a combination of both whos paid up capital is greater than 51%. They are created under a provision of The Company Act 2013 provision for Government Companies. They can be either formed as a public company where they own at least 51% of the shares or a private company with whole ownership. In most cases it is a private company. They are also known as mixed ownership companies. (BHEL, NTPC, Indian Drug and Pharmaceuticals, Hindustan Antibiotics, Hindustan Cables, etc.) Merits:FFEEPPPICS 1. Financial control 2. Ease in formation 3. Economics of scale 4. Prompt decisions 5. Public accountability 6. Protection of public interest 7. Internal autonomy 8. Collaboration 9. Statutory discipline Demerits:FABL 1. Fear of exposure 2. Autonomy in name 3. Board packed with yes-men 4. Lack of accountability Public Utilities: Public utilities are a special type of business undertaking which are engaged in the supply of essential public services in limited market areas on a monopolistic basis. Public utilities concern electricity, gas, water, transport etc which are indispensable for society. They are undertakings that supply essential services, enjoy special privileges and operate under State regulation and control. Characteristics: SHINMPS 1. Supply of essential services: It is necessary that these services are supplied efficiently, adequately and regularly as they are indispensable to the community. 2. Heavy fixed investment: Large capital is required to establish the operation of a public utility concern for instance electricity. Overheads constitute the majority of the operating cost therefore it is necessary to make use of the installed capacity and has to maintain extra capacity to meet peak and uneven demand. 3. Inelastic demand: The demand is inelastic which means it does not change substantially with price however this is not the same for products with its derived demand. 4. Non-transferable demand: The demand for services of public utilities is non-transferable. 5. Monopoly position: There should be only one supplier of public utilities in an area so that the demand is not shifted or this will lead to inefficiencies for the two public utility concerns. 6. Public regulation and control: The object of public regulation and control is to ensure that services of reasonable quality at fair rates are regulated and adequately available to the public. They take place in the following forms: a. Regulation of rates to ensure the puc does not misuse its monopoly b. Regulation of quality of service to protect public health c. Regulation to ensure that there is minimum possible inconvenience to the public for the installation of services 7. Special Franchise: Franchise is granted to protect them from competition. A franchise is a charter containing special powers, privileges and immunities and is granted for a period of 50 to 90 years or is perpetual. Public-Private Partnerships (PPPs) Meaning: A public-private partnership is the partnership between a public sector and private sector in financing, design and developing infrastructural facilities. In PPP projects the private sector contributes money, technical knowhow and managerial expertise. The help in projects such as transport, power, water, healthcare etc. Example- Delhi Airport is a PPP with Airport Authority of India and GMR. Features: PPHSRF 1. Partnership: Betweenpublic and private sector 2. Pooling of resources: The funds, expertise and management of both public and private. 3. High priority project: National importance 4. Social Objective: Public and good welfare 5. Revenue Sharing: Shared between public and private. The private company is either provided capital subsidy or yearly revenue for a fixed period to make the project attractive to private sector partners. 6. Forms depending on: a. Degree of responsibility b. Level of risk c. Tenure of contract The basic form of PPP is Service Contract where the Govt. gives a short term of (1-3 yrs) and is usually contracts for specific services like renting cars. The most advanced re divesture and Built Own Operate (BOLT) whereby the government sells its shares in a public utility. Example: Delhi Vidyut Board to NDPL,BSES and Rajdhani. Merits: 1. Less financial burden on the Government as the PPP leverages significant funding from the private sector 2. Faster implementation and reduced life cycle of infrastructure projects. 3. Better Quality services because of more efficient development of projects. 4. Reduced cost 5. Division of risk 6. Government remains accountable for the cost and quality of public services. Demerits: 1. Involvement of private sector in infrastructure projects of national interest may harm public interest 2. Private sector primarily aims at profit 3. Important country secrets leaked out by private firms 4. Conflict between the public and private sector leads to delay in the completion of crucial projects. 11.COOPERATIVE ORGANISATION Definition: “ A society which has the objectives for the promotion oof economic interests of its members in accordance with cooperative principles Characteristics of Cooperative Societies: SSSOLDVRPC 1. Separate legal entity: 2. Service motive: 3. State control: 4. One -man one vote: 5. Limited return on capital: 6. Disposal of surplus: 7. Voluntary association 8. Religious and political neutrality 9. Perpetual existence: 10.Cash trading: Types of cooperative societies: 1. Consumers’ Cooperative Societies: These cooperatives are formed by consumers to ensure daily requirements at a reasonable price by protection from profit seeking businessmen by purchasing goods directly from wholesalers and manufacturers and distributing those goods. The profits are distributed amongst the consumers in the ratio in which they purchased goods. An example is SuperBazaar. 2. Producers’ Cooperatives: It is a voluntary association of small scale artisans and producers to join hands and face competition: a. Industrial service cooperatives:The cooperatives supply raw materials to the producers who work independently and sell the industrial output to the cooperative who markets it. b. Manufacturing cooperatives: The cooperative supplies work materials to the producers who are almost like employees who receive wages and make the product in a common place or their homes and then give it back to the cooperative to be sold. The profits are then divided amongst the members. 3. Cooperative Farming Societies: They pool their lands and do farming collectively with the help of modern technology to maximise their agricultural output. 4. Housing Societies: They are formed by low and middle income families to have housing of their own in urban areas either by acquiring plots of land to build their house or take houses constructed by cooperatives and make payments in instalments. 5. Marketing Cooperatives: These are voluntary associations of independent producers who want to sell their output at remunerative prices through centralised agencies by removing the middle man. The sale proceeds are distributed amongst the members in the ratio of their outputs.(cooperative may also do marketing of goods). Example NAFED- The National Agricultural Cooperative Marketing Federation 6. Credit Cooperatives: Are formed by poor people to protect themselves from money lenders exorbitant interest rate from borrower and provide financial help. In rural areas it is for agricultural activities while in urban areas it is credit facilities by urban banks for household needs. Merits of Cooperative Organisation: DLLICCSSOE 1. Democratic management: Every member has an equal vote irrespective of his capital contribution 2. Limited liability: The liability of every member is limited and known as it is to the extent of his share in the societies capital. 3. Low operating costs: Office bearers are honorary, cash trading avoids bad debt, no need to maintain large stock, members are primarily customers removes need for ads, and elimination of middleman adds to economy of operations. 4. Internal financing: Large portion of profit is transferred back to general reserve and dividend on capital cannot exceed 10 percent. 5. Continuity and stability: After registration the cooperative becomes a separate legal entity hence death, lunacy etc of a member does not affect its operations 6. Cheaper and better supplies: Due to welfare of members motive the goods supplied are cheap and of better quality and surplus is shared by members on an equitable basis. 7. State patronage: Government provides concessions to cooperatives in terms of tax etc. 8. Social utility: 9. Open membership: Cost of share is low hence anyone with common interest can join and leave at pleasure with no discrimination or racism against anyone. 10.Ease of formation: 10 adults can join together and form a cooperative with little time and money required to get cooperative registered as legal formalities are few. Demerits of Cooperative Organisation: LLLIERN 1. Limited Capital: Usually formed by people with limited means and ‘one man- one vote’ discourages people from investing a large amount. Hence they often face fund shortages and is not able to mobilise capital for large scale operations. 2. Lack of motivation: Honorary office bearers have little incentive to work for society and there is no direct link between effort and reward. Members sometimes ignorant of the principles of the company misappropriate the funds collected. 3. Lack of secrecy: Affairs of company are openly discussed in meetings with members and every member is free to inspect the books and records of the society. 4. Inefficient management: Cooperatives cant afford to employ expert professional managers at high salaries hence office-bearers are elected by members; however the office bearers may not be competent or experienced 5. Excessive Government Control: Keeping accounts, regular audits and inspections are essential reports have to be sent to Registrar hence time consuming formalities and rules and regulations of Govt ruin flexibility and initiative. 6. Rift among memebers: Lack of harmony amongst members and managing committee and members ars they try to dominate the working of the society. 7. Non-transferability of interest: The shares are not transferable and a member who wants to quit the society have to submit his shares to the society in order to get his money back 12. SOCIAL RESPONSIBILITY OF BUSINESS AND BUSINESS ETHICS Definition: Social responsibility referes to the obligation of businessmen to pursue those policies to make those decisions or to follow those lines of action which are desirable in terms of the objectives and values of our society. Nature of Social responsibilities of business: 1. Based on the premise that a business is more than an economic institution and the goal is beyond profit 2. A business can be socially responsible without charity. (ex. Not extracting large sums from consumers) 3. Social responsibility is consistent with profit motive and cannot grow without it. 4. Personal obligation which is discharged by the persons who own and control the company. 5. Reciprocal relationship between society and business. 6. Social responsibility is commensurate with its social power. Example: Smaller company has less CSR than bigger one. 7. It is an ongoing obligation 8. Business responsibility is beyond economic and legal obligation. Need for Social Responsibility: SSSSPPC FLMT 1. Self interest: In the long run CSR helps the company by fulfilling peoples demand sthey have a higher standard of living and make better employees in the environment conducive to growth than compared to those who are poor, oppressed and ignorant. 2. Social Power:Companies CSR initiatives decide employment, rate of economic progress, distribution of income etc. because of their considerable social powe hence. CSR should be at the same level as the social power the company has otherwise their social power will be taken away by Government controls and other regulations. 3. Social Awareness: Nowadays, both workers and consumers are educated about their rights hence Workers desire better fair wages/benefits and consumers better quality goods for a cheaper price, if these are not met there will be industrial unrest and conflict in society. 4. Socio-cultural norms: Businessmen who help preserving and promoting Indias rich heritage will receive patronage of Government and society. Therefore should promote equality of opportunity and healthy relations with employees and customers. 5. Professionalism: A qualified manager is less likely to be lured to keep more profits as he does not benefit from questionable practices. Hence CSR indicates the strong internal management of a company. 6. Public Image: CSR activities improve confidence faith and public image of the business in peoples eyes. 7. Creation of Society: Business is a creation of society and uses resources of society hence it should give in to certain demands of society which will be beneficial in the long run as the business can be built on the foundations of a happy community and satisfied work force. 8. Free enterprise: CSR is essential to prevent Governmental action against business as if taken will reduce the freedom of decision making in the business. Example: Consumer Protection Act to prevent business men from adulteration, black marketing and other anti-social practices. 9. Law and order: If companies exploit weaker sections of society for too long they will take law into their own hand which will destroy law and order which helps business flourish. 10.Moral Justification: Business creates social problems like pollution hence it should give back to the society. Also the government cannot solve all socio-cultural problems where businesses can play a big role such as regional disparities, unemployment, illiteracy, scarcity of forex etc. 11.Trusteeship: Mahatma Gandhi “Those who own money or property should hold and use it in trust for society”. Responsibilities towards: GECCO Owner and Employees Consumers Government Community Investors FFWOGS P SSSAP FRWBH PAAR FC PPPPPOACH EFRRO 1 Ensure safety of Fair and regular Supply socially Prompt payment Protect investment wages useful products of taxes environment and meet needs of from all types of consumers pollution 2 Fair and Freedom of Supply useful Abide by laws of Promote Regular political and information about land national dividend/interest religious views new goods integration 3 Reasonable Welfare facilities Standard quality of Avoid Preserve social appreciation on such as provident goods monopolistic and and cultural capital through fund, housing etc. restrictive trade values optimum use of practices resources 4 Regular, Opportunites for Avoid unfair trade Refrain from Provide more accurate education and self practices such as corrupting public employment information on development adulteration, servants and opportunities financial hoarding etc. democratic position and process future schemes 5 Offer Good working Prompt and Fair dealings in Provide reasonable conditions and courteous service foreign country to assistance to opportunities for whole time maintain hospitals, shareholders employment countries name educational participation in institutions etc. policy decisions 6 Sense of Fair prices Cooperate with Optimum belonging and the state in utilisation of dignity of labour solving national resources problems such as poverty 7 Protect trade Regular and Assist local unions rights adequate supply bodies in including of goods providing participating in ammenities like management clean water etc. 8 Wide distribution Cooperate and be truthful with media on matters affecting public welfare 9 Benefits of cost Help weaker reduction in form section of of lower price societies such as scheduled tribes 10 Handle customer complaints Business and Environmental Pollution: Health of all living creatures is dependent on the quality of environment which has been which has been caused great damage due to rapid industrialisation and growing population industry and commerce. Pollution is injecting harmful substances into the environment. Such as air,water noise etc. are growing rapidly. Governments in various countries have enacted laws to prevent pollution of air and water and Polution Control Boards have been Central and State Governments but laws alone are not good enough and business can help by: 1. Top managements commitment to create and maintain worl culture for environmental protection 2. Ensure that all divisions and employees of the firm share the commitment to environmental protection 3. Develop Policies and programmes for using proper technology and materials to ensure pollution control and ensure scientific techniques for disposal of waste 4. Comply with the countries laws and regulations for preventing pollution 5. Periodically assess pollution control programmes in terms of costs and benefits Meaning of Business Ethics: The word ethics comes from Greek work ethos which means character, ideals and standards of behaviour that are meaningful when viewed from the decisions and actions of the individual in a particular field of activity. Hence ethics help differentiate between right and wrong in terms of truth and justice. Business ethics hence can be defined as a set of standards or principles governing moral conduct of businessmen. Ethical behaviour is above the behaviour required by law though in many ways ethics and laws overlap. Lwas are the minimum standards of conduct and behaviour. Importance of Business Ethics:

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