Author name: Prasanna

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 8 Sources of Business Finance Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Sources of Business Finance NCERT Solutions for Class 11 Business Studies Chapter 8

Sources of Business Finance Questions and Answers Class 11 Business Studies Chapter 8

Tick (✓) the correct answer out of the given alternatives :

Question 1.
Equity shareholders are called :
(a) Owners of the company
(b) Partners of the company
(c) Executives of the Company
(d) Guardian of the company
Answer:
(a) Owners of the company

Question 2.
The terin ‘redeemable’ is used for :
(a) Preference Shares
(b) Commercial Paper
(c) Equity Shares
(d) Public Deposits
Answer:
(a) Preference Shares

Question 3.
Funds required for purchasing current assets is an example of:
(a) Fixed capital requirement
(b) Ploughing back of profits
(c) Working capital requirement
(d) Lease financing
Answer:
(c) Working capital requirement

Question 4.
ADR’s are issued in:
(a) Canada
(b) China
(c) India
(d) USA
Answer:
(d) USA

Question 5.
Public deposits are the deposits that are raised directly from:
(a) The Public
(b) The Directors
(c) The Auditors
(d) The Owners
Answer:
(a) The Public

Question 6.
Under the lease agreement, the lessee gets to right to:
(a) Share profits earned by the lessor
(b) Participate in the management of the organization
(c) Use the assist for a specified period
(d) Sell the assets
Answer:
(c) Use the assist for a specified period

Question 7.
Debentures represent:
(a) Fixed capital of the company
(b) Permanent capital of company
(c) Fluctuating capital of the company
(d) Loan capital of the company.
Answer:
(d) Loan capital of the company.

Question 8.
Under the factoring arrangement, the factor:
(a) Produces and distributes the goods or services
(b) Makes the payment on behalf of the client
(c) Collects the client’s debt or account receivables
(d) Transfer the goods from one place to another.
Answer:
(b) Makes the payment on behalf of the client

Question 9.
The maturity period of a commercial paper usually ranges from:
(a) 20 to 40 days
(b) 60 to 90 days
(c) 120 to 365 days
(d) 90 to 364 days
Answer:
(d) 90 to 364 days

Question 10.
Internal sources of capital are those that are:
(a) generated through outsiders such as suppliers.
(b) generated through loans from commercial banks.
(c) generated through issue of shares.
(d) generated within the business.
Answer:
(d) generated within the business.

Short Answer Questions

Question 1.
What is business finance? Why do businesses need funds? Explain.
Answer:
Business is an economic activity directed towards producing, acquiring wealth through buying and selling of goods. It is a very wide term. Finance is the lifeblood of the business. Funds are required to commence and carry on business. All business activities such as planning, organizing, managing, controlling, purchasing, selling, directing, marketing, etc cannot take place without finance.

Thus, we can say the requirements of funds by a business to carry out its various activities is called business finance. When an entrepreneur takes a decision to start a business the need for funds arises in order to meet the expenses of the establishment of the business, finance is required for purchasing fixed and current assets, for day-to-day operations, purchase of raw material, to pay salaries, etc. Smooth functioning, expansion, and growth of the business are possible when it has sufficient funds.

Question 2.
List sources of raising long-term, and short-term finance.
Answer:
Types of Business Finance – On the basis-of nature and purpose served finance used in business is of the following types:
(i) Long-term finance
(ii) Medium-term finance.
(iii) Short-term finance.

Types of Business Finance
(i) Long-term Finance – Long-term finance is used for meeting the permanent needs of business. It is required for investment in fixed assets like, building, plant and machinery and for financing expansion programmes. Long-term funds are raised for a long period, say, more than five years. They are generally invested in fixed assets.

The sources of long-term financing are :

• shareholders
• debenture-holders
• financial institutions and
• retained earnings.

The amount of long-term finance required depends bn the type of business and the fixed assets required. For instance, a big steel, Cement or chemicals factory involves heavy investment on building, machinery and equipments.

A small factory producing garments or a small workship repairing electrical goods will require a small investment in fixed assets. Traders generally require lesser amounts for long-term investment as compared with the requirements of manufactures.

(ii) Medium-term finance – It is required for upgrading of technology, introduction of a new product, investment in working capital and for repayment of debts. It is raised for a period ranging from more than one year to less than five years. It is needed for modernization and expansion.

The sources of medium-term financing include :

• debentures
• financial institutions
• public deposits and
• commercial banks.

The need for medium-term funds arises because of changing technology, introduction of a new product or necessity to invest on advertisement and sales promotion. The extra income generated out of his investment is used to pay back the medium-term capital. Medium-term finance is raised from debenture holders, financial institutions and banks.

(iii) Short-term Finance – it is required for meeting the short term needs of working capital. Its period is one year or less than one year and it can be raised from the following sources:

• public deposits
• trade credits
• commercial banks
• customer advance.

Short-term funds are required for purchase of raw materials, payment of wages and salaries and meeting other day-to-day expenses. They are raised through short-term loans or trade credits. As soon as goods are sold and funds are recovered, the amounts may be used for current operations or for paying back the loans.Generally, production processes are completed within a year and goods are ready for sale. Hence, short term funds can be used over and over again from year to year.

Question 3.
What is the difference between internal and external sources of raising funds? Explain.
Answer:
Sources of Company Finance – A business firm can raise funds from two main sources:
(a) owned funds (internal sources)
(b) borrowed funds (external sources)

Owned funds refer to the funds provided by the owners. Insole proprietorship, the proprietor himself provides the owned fund from his personal property. In a partnership firm, the funds contributed by partners as capital are called owned funds. In a joint-stock company, funds raised through the issue of shares and reinvestment of earnings are the owned funds.

Borrowed funds are raised by way of issue of debentures. Raising loans from financial institutions, public deposits and commercial banks. Thus, the various sources of finance may be divided as follows :

Sources of Finance
Difference between owner’s fund and borrowed fund (internal and external source of raising loans):

(i) Owner’s funds are contributed by the owners and the reinvestment of profits in the business. It is a source of permanent capital of the business while borrowed funds are a source of temporary capital to the business.

(ii) Internal source of capital attaches risk to the business while borrowed funds have to be paid back regularly depending upon the time period of the loan, as long term, medium-term or short term.

(iii) owners have control over the management of the business regarding the follow on to the policies laid down, while the lenders do not have any right of control over management of the business.

(iv) Owners are entitled for dividends in case of sufficient profits while interest on borrowed capital is to be paid at regular intervals.

Question 4.
What preferential rights are enjoyed by preference shareholders? Explain.
Answer:
The following preferential rights are enjoyed by preference shareholders

1. Receiving a fixed rate of dividend, out of the net profits of the company, before the dividend is declared for equity shareholders.
2. Preference over equity shareholders in receiving their capital after the claims of the company’s creditors have been settled, at the time of liquidation.
3. In case of dissolution of the company, preference share capital is refunded prior to the refund of equity share capital.

Question 5.
Name any three special financial institutions and state their objectives.
Answer:
The government has established a number of financial institutions all over the country to provide finance to business organizations. These institutions are established by the Central or State, Governments. They provide both owned capital and borrowed capital : for long and medium-term requirements and supplement the traditional financial agencies like commercial banks.

In addition to providing financial assistance, these institutions also conduct market surveys and provide technical assistance and managerial services to people who run the enterprises. This source of financing is considered suitable when large funds for longer duration are required for expansion, reorganization and modernization of an enterprise.

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

(2) State Financial Corporations (SFC) – The State Financial Corporations Act 1951 empowered the State Government to establish State Financial Corporations in their respective regions for providing medium and short-term finance to industries which are outside the scope of the IFCI.

(3) Industrial Credit and Investment Corporation of India (ICICI) – This was established in 1955 as a public limited company under the Companies Act. ICICI assists the creation, expansion and modemalization of industrial enterprises exclusively in the private sector. The corporation has also encouraged the participation of foreign capital in the country.

(4) Industrial Development Bank of India (IDBI) – This was established in 1964 under the Industrial Development Bank of India Act 1964 with an objective to coordinate the activities of other financial institutions including commercial banks. It performs the different types of functions such as assistance to other financial institutions, direct assistance to industrial concerns and promotion of financial technical services.

Question 6.
What is the difference between GDR and ADR? Explain.
Answer:
Global Depository Receipts (GDR):
The depository receipts denominated in US dollars issued by depository bank to which the ” local currency shares of a company are delivered. GDR is a negotiable instrument and can be traded freely like any other security. In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange.

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

Long Answer Questions

Question 1.
Explain trade credit and bank credit as sources of short¬term finance for business enterprises.
Answer:
Short-term funds are required for trading purposes like purchase of raw materials, payment of wages and salaries and meeting other day-to-day expenses. They are raised through short-term loans or trade credits. As soon as goods are sold and funds are recovered, the amounts may be used for current operations or for paying back the loans.

Often all, production cycle is completed within a year and goods are sold during that period, the short-term funds can be used over and over again from year to year.

Bank credit for short-term needs of working capital reign on the business. Its period is 12 months or less than 12 months and it can be raised by the sources of public deposits, trade credits, commercial banks and customer advances. It is used for meeting the short-term needs of the business.

It is known as working capital requirements. Working capital is the capital required for meeting the day-to-day needs of the business i.e. purchase of materials and payment of wages, salaries, rent, taxes, freight charges etc. The firm can carry on its business smoothly and without any interruptions with the help of short¬term loans and finances.

Short-term financing is most common for financing of current assets such as accounts receivables and inventories. Seasonal businesses that must build inventories in anticipation of selling requirements often need – short-term financing for the interim period between seasons. Wholesalers and manufactures with a major portion of their assets tied up in inventories or receivable also require large amount of funds for a short period.

Question 2.
Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.
Answer:
Financial institutions established by the central as well as State Governments all over the country to provide finance to business organizations are considered the most suitable source of financing when large funds for longer duration are required for expansion, reorganization, and modernization of an enterprise.

This institution provides both owned capital and loan capital for long and medium-term requirements and supplements the traditional financial agencies like commercial banks. In addition to providing financial assistance, these institutions also conduct market surveys and provide technical assistance and managerial services to people who run the enterprises.

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

2. State Financial Corporations (SFC):
The State Financial Corporations Act, 1951 empowered the State Governments to establish State Financial Corporations in their respective regions for providing medium and short-term finance to industries which are outside the scope of the IFCI. Its scope is wider than IFCI since the former covers not only public limited companies but also private limited companies, partnership firms, and proprietary concerns.

3. Industrial Credit and Investment Corporation of India (ICICI):
This was established in 1955 as a public limited company under the Companies Act. ICICI assists the creation, expansion, and modernization of industrial enterprises exclusively in the private sector. The corporation has also encouraged the participation of foreign capital in the country.

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

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

6. Unit Trust of India (UTI):
It was established by the Government of India in 1964 under the Unit Trust of India Act, 1963. The basic objective of UTI is to mobilize the community’s savings and channelize them into productive ventures. For this purpose, it sanctions direct assistance to industrial concerns, invests in their shares and debentures, and participates with other financial institutions.

7. Industrial Investment Bank of India Ltd:
It was initially set up as a primary agency for the rehabilitation of sick units and was known as the Industrial Reconstruction Corporation of India. It was reconstituted and renamed as the Industrial Reconstruction Bank of India in 1985 and again in 1997, its name was changed to Industrial Investment Bank of India. The Bank assists sick units in the reorganization of their share capital, improvement in the management system, and provision of finance at liberal terms.

8. Life Insurance Corporation of India (LIC):
LIC was set up in 1956 under the LIC Act, 1956 after nationalizing 245 existing insurance companies. It mobilises the community’s savings in the form of insurance premia and makes it available to industrial concerns, both public as well as private, in the form of direct loans and underwriting of and subscription to shares and debentures.

Question 3.
What advantages does issue of debentures provide over the issue of equity shares?
Answer:
Debentures are an important instrument for raising long-term debt capital. The debenture issued by the company is an acknowledgment that the company has borrowed a certain amount of money.

Merits of Debentures: Debentures are an important source of raising long-term finance. The main advantages of debentures are as follows:

(1) Appeal to Cautious Investors – Large amount of finance can be raised by issue of debentures from cautious and orthodox investors who prefer safety of investment and a fixed return at lesser risk. In tight money conditions, debentures are the best source of finance. Debentures are liked by the investors who give weightage to safety of principal and a continuous income on their money.

(2) Regular Return – Debentureholders are paid interest at a fixed rate and at periodical intervals, irrespective of profits. Therefore, debenture holders are free from risk of fluctuations in the company’s earnings. A continuous return in the shape of interest on debentures attract the investor for regular return on their principal amount.

(3) Safety of Investment – Debentures are usually secured by a charge on the company’s assets. Therefore, their repayment is assured.

(4) Economical Source – A company can raise funds through debentures at a relatively low cost. This is because investors consider debentures a safe investment. Debentures can be sold more easily than shares. Underwriting commission, brokerage and other expenses of issue are lesser.

(5) Freedom of Management – Debentures do not carry voting rights. Therefore, a company can raise funds without diluting or weakening the control of the existing members. The management retains its independence as there is no interference from debenture holders.

(6) Trading on Equity – Interest on debentures is paid at a fixed rate. After payment of interest, the remaining profits are available to shareholders. When the earnings of the company increase, the rate of dividend on equity shares can be increased. This is known as trading on equity! Debenture offer an opportunity to the company to trade on equity and thereby increase the return of equity shareholders.

(7) Flexibility – A company can repay the funds raised through debentures when it does not require the funds any more. The facility of redemption avoids the danger of over capitalisation and keeps the financial structure flexible. Funds are available for a fairly long period and can be repaid out of earnings. Debentures provide financial flexibility as they can be redeemed when the company has surplus funds.

(8) Tax Relief – Interest paid on debentures is allowed a deduction while calculating taxable income. It results in saving in income tax liability. Thus, the company enjoys tax benefit by issuing debentures.

Popularity of Debentures – Despite their limitations, issue of debentures as a method of raising long-term finance has gained popularity these days. The response of the investors has been encouraging because of the following factors:
(i) Debentures with more attractive terms, particularly having a convertible clause have been issued. The conversion of debentures into equity shares encourages the investors to invest in debentures.

(ii) Statutory restrictions on the institutional investors like Life Insurance Corporation and Unit Trust of India have been relaxed. They can have more debentures in their investment portfolio.

(iii) Debentures are issued by the flourishing companies also to have the benefit of trading on equity. This has changed the attitude of banks and other institutions towards the companies having issued the debentures. Formerly, the companies having issued debentures were considered to be less credit-worthy concerns.

(iv) Companies prefer to issue debentures because of low cost of financing through debentures. Less formalities have to be observed while issuing debentures. Moreover, the interest paid on debentures is allowed as a deductible expenditure against the profit of the company.

(v) Companies can raise funds through debentures considering it as safe investment. Debentures can be sold more easily than shares. The facility of redemption of debentures avoids the danger of overcapitalization and keeps the financial position of the company strong and stable.

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

Public Deposits:
The deposits that are raised by organizations directly from the public are known as public deposits. Rates of interest offered on public deoosits are usually higher than those offered on bank deposits. Any person who is interested in depositing money in an organization can do so by filling up a prescribed form.

The organization in return issues a deposit receipt as an acknowledgment of the debt. Public deposits can take care of both medium and short-term financial requirements of a business. The deposits are beneficial to both the depositor as well as to the organisation.

While the depositors get higher interest rate than that offered by banks, the cost of deposits to the company is less than the cost of borrowings from banks. Companies generally invite public deposits for a period upto three years. The acceptance of public deposits is regu¬lated by the Reserve Bank of India.

Merits: The merits of public deposits are,

1. The procedure of obtaining deposits is simple and does not contain restrictive conditions as are generally there in a loan agreement.
2. Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions.
3. Public deposits do not usually create any charge on the assets of the company. The assets can be used as security for raising loans from other sources.
4. As the depositors do not have voting rights, the control of the company is not diluted.

Limitations: The major limitation of public deposits are as follows.

1. New companies generally find it difficult to raise funds through public deposits;
2. It is an unreliable source of finance as the public may not respond when the company needs money;
3. Collection of public deposits may prove difficult, particularly when the size of deposits required is large.

Retained earnings:
A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings maybe retained in the business for use in the future. This is known as retained earnings. It is a source of internal financing or selffinancing or ‘ploughing back of profits’. The profit available for ploughing back in an organisation depends on many factors like net profits, dividend policy and age of the organisation.

Merits: The merits of retained earning as a source of finance are as follows.

• Retained earnings is a permanent source of funds available to an organisation.
• It does not involve any explicit cost in the form of interest, dividend or floatation cost.
• As the funds are generated internally, there is a greater degree of operational freedom and flexibility.
• It enhances the capacity of the business to absorb unexpected losses.
• It may lead to increase in the market price of the equity shares of a company.

Limitations: Retained earning as a source of funds has the following limitations.

• Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends;
• It is an uncertain source of funds as the profits of business are fluctuating;
• The opportunity cost associated with these funds is not recognized by many firms. This may lead to sub-optimal use of the funds.

Question 5.
Discuss the financial instruments used in international financing.
Answer:
With globalization and liberalization of the economy, Indian companies, have started generating funds from international markets. The international sources from where the funds can be procured include foreign currency loans from commercial bank, financial assistance provided by international agencies and development banks and issue of financial instruments like GDRs and ADRs in capital markets. The prominent sources of international finance may be discussed as follows.

International Sources of Finance:
Euro Issue – The euro issue is an international source of finance for Indian companies. Under such an issue, securities are issued in some foreign currency and are offered for sale internationally.

That means private and corporate investors in different countries can purchase securities put for sale under a Euro issue by an Indian company. An Euro issue is different from a foreign issue under which securities are denominated in Rupee (i.e., the currency of the country of issue) and are aimed at the investors in the country where the issue is made.

The term “Euro market/issue” is not confined to the European countries only, rather it has got an international character now. The two major instruments which are floated in the Euro-capital markets are bonds and equity shares.

As a part of the globalisation of the Indian economy after 1991, the Government of India allowed Indian companies to float their securities in the Euro markets to raise funds in foreign currencies. Over the years, several Indian companies have raised capital from the Euro markets by issuing Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). These to instruments are commonly referred to as Euro issues.

Euro issues are treated as foreign direct investments (FDIs) in the issuing company and are subject to the Government policy concerning FDIs. In some cases, the issuing company has to obtain prior clearance of the Euro-issue from the Foreign Investment Promotion Board (FIPB). Each Euro-issue must be approved by the Ministry of Finance, Government of India.

Global Depository Receipts (GDRs) – A GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange. For instance, GDRs issued by Reliance Industries were listed in the New York Stock Exchange in 1992.

A GDR represents a number of shares of the issuing company registered in India. A holder of GDR can at any time convert it into the number of shares that it represents. Once conversion takes place, the underlying shares are listed and traded on some Indian stock exchanges. Many companies such as Infosys, Reliance groups, Wipro and ICICI have raised money through the issue of GDRs.

GDRs do not carry any voting rights unless they are converted into shares (in Indian Rupees). However, dividend on GDRs is to be paid in Rupees only as in case of equity shares. Thus, there is no risk of fluctuation in the rates of foreign exchange. Moreover, on conversion of GDRs into equity shares, no remittance is to be made by the company as in the case of redemption of bonds. GDR is a negotiable instrument and can be traded freely like any other security.

A global Depository Receipt (GDR) is issued in the form of a depository receipt/certificate created by the Overseas Depository Bank (ODB) outside India and issued to non-resident investors against the issue of ordinary shares or foreign currency convertible debentures (FCCDs) of the issuing company.

The ODB is the bank authorized by the issuing company to issue GDRs against its issue of ordinary shares or FCCDs. The issued shares or debentures are delivered by the issuing company to a Domestic Custodian Bank (DCB) who would request the ODB to issue GDRs (or ADRs) to the foreign investors.

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

Thus, ADRs are issued on behalf of an Indian company for raising funds from the investors of the USA. Like GDRs, ADRs are also treated as a foreign direct investment (FDI) in the issuing company.

ADRs are issued by an American Depository Bank certifying that shares of some non-USA based company (say Indian company) are held by some custodian bank in the home country. These may be listed on New York Stock Exchange, American Stock Exchange or Nasdaq. ADRs are bought and sold in American markets like regular shows.

An ADR represents a specified number of shares of the issuing company. It does not carry voting rights. A holder of ADRs can at any time convert them into the number of shares they represent. After conversion, shares are listed and traded on the domestic (i.e. Indian) stock exchanges.

The dividend on ADRs is payable in the Indian currency, i.e., Rupees. That means there is no outflow of any foreign exchange. Like GDRs, ADRs can also.be issued with the framework of the guidelines issued by the Ministry of Finance (Government of India) from time to time. The procedure for the issue of ADRs is quite similar to the issue of GDRs.

Foreign Currency Convertible Bonds (FCCBs) – An FCCB is a bond issued by an Indian company subscribed by non-resident in foreign currency and convertible into equity shares of issuing company. FCCBs are basically equity-linked debt securities, to be converted into equity or depository receipts after a specific period. Thus, a holder of FCCBs has the option of either converting them into equity shares, normally at a predetermined price and even at a predetermined exchange rate, or retaining the bond.

The FCCBs carry a fixed rate of interest which is lower than the rate of any other similar non-convertible debt instrument. They can be traded conveniently and at the same time the issuing company can avoid any dilution in earnings per share. Also, they can still be traded on the basis of underlying equity value. The FCCBs are issued in foreign currency.

FCCBs can be freely traded and the issuing company has no control over the transfer mechanism and is not even aware of the ultimate beneficiary. The convertible bonds provide an opportunity to the holders to participate in the capital growth of a company. Till the time a bondholder holds the bonds, he gets a fixed return and in case he chooses to convert them into equity, he will earn a capital gain.

Thus, the convertible bonds offer a mixture of the characteristics of the fixed interest and equity shares. Another advantage accruing to the investor is that the bonds can be issued in a currency different from the currency in which the shares of the company are denominated. This feature enables the option of diversifying currency risks.

FCCBs are very much like the Convertible Debentures (CDs) issued in India. FCCBs are issued in a foreign currency and carry a fixed interest or coupon rate. They are convertible into equity shares at the prefixed price. FCCBs are listed and traded in foreign stock exchanges.

Companies prefer FCCBs as a dilution of equity is delayed. It allows the company to avoid any current dilution in earnings per share that a further issue of equity shares would cause. There are some drawbacks also. FCCBs involve the creation of more debt and Forex outgo in the form of interests.

If the investors do not convert the bonds into equity shares there is burden of repayment. Foreign Direct Investment (FDI) – It refers to the investment – made by a company in manufacturing and/or marketing facilities in a foreign country. Foreign Direct Investment (FDI) connects direct investment in the equity shares, debentures or bonds of Indian companies by the foreign investors.

FDI is channelised in the form of direct foreign contribution to the equity capital of the company and is akin to domestic equity invested by the Indian shareholders of the companies. The New Industrial Policy, 1991 envisaged a significant inflow of FDI into the country.

The Government has set up a high-powered Foreign. Investment Promotion Board (FIPB) to provide for single-window approval channel for the inflow of FDI. Many restrictions on the inflow of foreign capital have been withdrawn over recent years. Enron the power plant in India is an example of investment made in foreign direct investment.

Prior to July 1991, FDI was allowed only on a case-to-case basis, with a normal ceiling of 40 percent of the total equity capital of the company registered in India. A higher percentage of FDI was permitted in certain country or.if the venture was mainly export-oriented.

Under the New Industrial Policy, 1991, foreign equity has been delinked from the technology transfer. As of now, FDI is being sought actively in a wide range of high priority, export-oriented, and critical infrastructure industries. With this purpose in view, the Central Government has liberalized rules for FDI over the years.

FDI includes

• investment in setting up a new subsidiary or branch in a foreign country
• expansion of overseas subsidiary or branch; and
• acquisition of an overseas enterprise.

The main features of the latest policy of the Government as regards FDI are as under :

(1) Automatic approval permitting 100 per cent foreign equity is allowed in respect of generation/transmission of electric energy, construction and maintenance of roads, highways, vehicular bridges, toll bridges/roads, ports and harbours, manufacture of pollution control devices, infrastructure and service sectors etc.

(2) During 2000-2001, FDI upto 100 percent of equity was permitted under the automatic route for:

• Business to Business e-commerce.
• Oil refining.
• All manufacturing activities in Special Economic Zones (SEZs) or Export Processing Zones (EPZs).
• Specified activities in the Telecom sector.

(3) Offshore Venture Capital Funds/Companies are allowed to invest in Indian Venture Capital Funds as well as other companies through the automatic route, subject to SEBI regulations.

(4) Existing companies with FDI are eligible for automatic route to undertake additional activities covered under the automatic route.

(5) FDI upto 26 percent is eligible under the automatic route in the insurance sector. However, a license from the Insurance Regulatory and Development Authority (IRDA) is essential.

(6) FDI is permitted upto 20 percent in the banking sector subject to the guidelines issued by the Reserve Bank of India. FDI through automatic route is not allowed in the following cases:

• Where industrial licence under the Industries Development and Regulation Act (IDRA) Is required, eg., alcohol, cigarette, defence related equipments.
• Industries reserved exclusively for the small-scale sector.
• Proposals in which a foreign collaborator has a joint venture.

Foreign investment proposals in the above areas require prior approval by the Foreign Investment Promotion Board (FIPB) or the Secretariat for Industrial Approval (SIA). After this approval, the Reserve Bank of India’s approval under Foreign Exchange Management Act is also required.

Thus, FDI is seen as a means to supplement domestic investment for achieving a higher level of economic growth and development. FDI benefits domestic industry as well as the Indian consumers by providing opportunities for technological upgradation, access to global managerial skills and practices, utilization of human and natural resources, making Indian industry internationally competitive, opening up export markets, providing backward and forward linkages and access to international quality goods and services.

Question 6.
What is commercial paper? What are its advantages and limitations?
Answer:
Commercial Paper emerged as a source of short-term finance in our country in the early nineties. Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance companies, pension funds, and banks.

The amount raised by CP is generally very large. As the debt is totally unsecured, the firms having good credit ratings can issue the CP. Its regulation comes under the purview of the Reserve Bank of India.

The merits and limitations of a Commercial Paper are as follows:
Merits:

1. A commercial paper is sold on an unsecured basis and does not contain any restrictive conditions.
2. As it is a freely transferable instrument, it has high liquidity.
3. It provides more funds compared to other sources. Generally, the cost of CP to the issuing firm is lower than the cost of commercial bank loans.
4. A commercial paper provides a continuous source of funds. This is because their maturity can be tailored to suit the requirements of the issuing firm Further, maturing commercial paper can be repaid by selling new commercial paper.
5. Companies can park their excess funds in commercial paper thereby earning some good return on the same.

Limitations:

1. Only financially sound and highly rated firms can raise money through commercial papers. New and moderately rated firms are not in a position to raise funds by this method.
2. The size of money that can be raised through the commercial paper is limited to the excess liquidity available with the suppliers of funds at a particular time.
3. Commercial paper is an impersonal method of financing. As such if the firm is not in a position to redeem its paper due to financial difficulties, extending the maturity of a CP is not possible.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 7 Formation of a Company Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Formation of a Company NCERT Solutions for Class 11 Business Studies Chapter 7

Formation of a Company Questions and Answers Class 11 Business Studies Chapter 7

Tick the followings :

Question 1.
Minimum number of members to form a private company is
(a)’2
(b) 3
(c) 5
(d) 7
Answer:
(a)’2

Question 2.
Minimum number of members to form a public company is
(a) 5
(b) 7
(c) 12
(d) 21
Answer:
(b) 7

Question 3.
Application for approval of name of a company is to be made to
(a) SEBI
(b) Registrar of Companies
(c) Government of India
(d) Government of the state in which company is to be registered
Answer:
(a) SEBI

Question 4.
A proposed name of company is considered undesirable if
(a) It is identical with the name of an existing company
(A) It is resembles closely with the name of an existing company
(c) It is an emblem of Government of India, United Nations etc.
(d) In case of any of the above.
Answer:
(d) In case of any of the above.

Question 5.
A prospectus is issued by
(a) A private company
(b) A public enterprise
(c) A public company seeking
(d) A public company investment from public
Answer:
(c) A public company seeking

Question 6.
Stages in the formation of a public company are in the following order ‘
(a) Promotion, Commencement of Business, Incorporation, Capital Subscription
(b) Incorporation, Capital Subscription, Commencement of Business Promotion.
(c) Promotion, Incorporation, Capital subscription, Commencement of Business
(d) Capital Subscription, Promotion, Incorporation,Commencement of Business
Answer:
(c) Promotion, Incorporation, Capital subscription, Commencement of Business

Question 7.
Preliminary contracts are signed
(a) Before the incorporation
(b) After incorporation but before capital subscription
(c) After incorporation but before commencement of business
(d) After commencement of business
Answer:
(a) Before the incorporation

Question 8.
Preliminary contracts are
(a) Binding on the company
(b) Binding on the company, if ratified after incorporation
(c) Binding on the company, after incorporation
(d) Not binding on the company.
Answer:
(b) Binding on the company, if ratified after incorporation

True-False Answer Questions

1. It is necessary to get every company incorporated whether private or public.
2. Statement in lieu of prospectus can be filed by a public company going for a public issue.
3. A private company can commence business after incorporation.
4. Experts who help promoters in the promotion of a company are also called promoters.
5. A company can ratify preliminary contracts after incorporation.
6. If a company is registered on the basis of fictitious names, its incorporation is invalid.
7. Articles of Association’ is the main document of a company.
8. Every company must file Articles of Association.
9. A provisional contract is signed by promoters before the incorporation of a company.
10. If a company suffers heavy losses and its assets are not enough to pay off its liabilities, the balance can be recovered from the private assets of its members.

Answer:

1. True
2. False
3. True
4. False
5. True
6. False
7. False
8. False
9. False
10. False

Short Answer Questions

Question 1.
Name the stages in the formation of a company.
Answer:
Formation of a company is a complex activity, involving these stages are as follows:

1. Promotion Identification of business opportunities, analysis of its prospects, and initiating steps to form a company is known as promotion of a company.
2. Incorporation Registration of a company as a body corporate under Companies Act, 1956 is known as incorporation.
3. Subscription of Capital A public company’s raising hinds from the public by means of an issue of shares and debentures is known as a capital subscription.
4. Commencement of Business the registrar issues certificate of commencement of business which is conclusive evidence of completion of the formation requirement of a company.

Question 2.
List the documents required for the incorporation of a company.
Answer:
Documents used information of a company – There are some basic documents that are required to be filed with the Registrar of Companies in the formation of a public company. These are :

• Memorandum of Association.
• Articles of Association.
• Prospectus or Statement in lieu of Prospectus.
• Consent of proposed Directors in Writing and Confirming that they agree to act in that capacity.
• The agreement which the company proposes to enter with an individual for appointment as the Managing Director or a whole-time Director or Manager.
• Statutory Declaration.
• Payment of fees.

Question 3.
What is a prospectus? Is it necessary for every company to file a prospectus?
Answer:
A prospectus is ‘any document described or issued as a prospectus including any notice, circular advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of, a body corporate’.

In other words, it is an invitation to the public to apply for shares or debentures of the company or to make deposits in the company. It is issued by a public company which is seeking to raise the required funds from the public by means of an issue of shares and debentures.

It is not necessary for every company to file a prospectus. A statement in lieu of prospectus is filed with the Registrar of Companies if the company has adopted Table A of the Companies Act instead of Articles of Association. Private companies are not required to file a prospectus.

Question 4.
Explain the term ‘Minimum Subscription’
Answer:
Minimum Subscription – A public limited company cannot make an allotment of shares unless a minimum subscription is received in cash. The amount of minimum subscription (90 percent of the issued amount) as per SEBI guidelines must be raised within 90 days from the date of the closure of the issue.

In case it is not raised the Company must return to applicants whatever amount it has raised within the next 10 days. The purpose of the minimum subscription is to ensure that no company is allowed to commence its business without raising a sufficient amount of capital. Minimum subscription is required to provide for the following:

• The purchase price of any property bought or agreed to be bought;
• All preliminary expenses, including underwriting commission and brokerage;
• Repayment of any money borrowed for the above purpose;
• Working capital; and
• Any other expenditure.

The company is required to file a declaration that the minimum subscription has been received in cash. This provision is not applicable to private companies.

Question 5.
Explain briefly the term ‘Return of Allotment’.
Answer:
Return of Allotment is a statement submitted to the Registrar which contains the names and addresses of shareholders and the number of shares allotted to each shareholder. Return of allotment, signed by a director or secretary is filed with the Registrar of Companies within 30 days of allotment. Return of allotment shows that the company has received the minimum subscription.

Question 6.
At which stage in the formation of a company does it interact with SEBI.
Answer:
Floatation of Capital Subscription – A private company can commence business immediately after incorporation. But a public company must raise the necessary capital and obtain the certificate of commencement of business before starting its operations. Capital subscription or floatation involves the following steps:

(1) Permission of Capital Issue – A company must ensure that the proposed issue of shares/debentures is in accordance with the guidelines prescribed by the Securities Exchange Board of India (SEBI). These guidelines have been laid down to protect the interests of investors. A draft prospectus containing the required particulars is vatted by SEBI prior to the public issue of shares/debentures. A company inviting funds from the general public must make before SEBI adequate disclosures of all relevant information and must not conceal any material fact.

(2) Appointment of Brokers etc. – The next step is to appoint brokers, bankers, secretaries, auditors, etc. for the company. Such appointments are made in a meeting of the Board of Directors.

(3) Underwriting – The underwriters for the capital issue are appointed. An agreement is made with each underwriter stating the amount underwritten and the underwriting commission. Underwriters undertake to buy the shares of these are not subscribed by the public.

(4) Filling o! Prospectus – A prospectus is drafted, printed and issued. A copy of the prospectus or statement in lieu of prospectus is filed with the Registrar of Companies.

(5) Listing of Shares in Stock Exchange – An application is made to the recognised Stock Exchange for permission for dealings in the shares or debentures. If such permission is not granted before the expiry of ten weeks from the date of closure of subscription list, the allotment shall become void and all money returned to applicants.

(6) Subscription – Application in the prescribed form along with the application money are received by the company’s bankers. The subscription list has to be kept open for a minimum period of three days and then it is closed at the discretion of the Board of Directors.

(7) Allotment of shares – Allotment letters are issued to the successful allotees. Return of allotment, signed by a director or secretary’ is filed with the Registrar of Companies within 30 days of allotment.

Question 7.
Distinguish between ‘Preliminary Contracts’ and ‘Provisional Contracts’.
Answer:
Preliminary contracts:

1. Contracts signed by promoters with third parties before the incorporation of the company.
2. These are not legally binding on the company and cannot be ratified after incorporation.
3. These contracts are the liabilities of promoters.
4. Both private and public companies have the right to undertake these contracts.

Provisional Contracts:

1. Contracts signed after incorporation but before the commencement of business.
2. These become enforceable only after the company gets the certificate of Commencement of Business.
3. These contracts are the responsibilities of the company.
4. They can only be undertaken by a public company.

Long Answer Questions

Question 1.
What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.
Answer:
Meaning and Functions of Promoters :
Meaning of Promotion – The term promotion refers to the sum total of activities by which a business enterprise is bring into existence. It consists of the business operations by which a company is established. It is the process of planning and organising the finances and other resources of a business enterprise in the corporate form.

“Promotion is the discovery of business opportunities and the subsequent organisation of funds, property and management ability into business concern for the purpose of making profit therefrom.” — C. W Gensterberg

Definition of Promoter – The person who identify a business idea and initiate to start a company to give a practical shape to the idea are known as promoters. A promoter qonceives the idea of a business enterprise. Thus, apart from conceiving a business opportunity the promoters analyse the prospectus and bring together the men, materials, machinery, managerial abilities and financial resources.

A promoter may be an individual, a firm, association or even a company engaged in the formation of the company. The pioneering promoters in India include Jamshedji N. Tata, Ghanshyam Das Birla, Gujjar Mai Modi, Dhirubhai Ambani.

Role (Functions) of Promoters – The functions or roles of promoters are discussed below :
(1) Discovery of Business Idea It is the promoter who conceives an idea of starting a business for making profit. With his experience, the promoter discovers the field of gainful investment. His knowledge enables him to judge fine soundness of a particular proposal. He also undertakes a preliminary analysis of risk involved, capital required, etc. Such analysis on idea is then analysed to see the technical and economic feasibility.

(2) Detailed Investigation – The promoter undertakes detailed investigation to find out whether the business which he intends to start will be profitable or not. Sometimes an idea may be good but technically not possible to execute. For this purpose, he can take the help of experts like engineers, accountants, cost accountants, market research specialists, etc. This will enable him to know the probable cost of production per unit and the probable demand of the product, etc.

(3) Assembly of Resources – After the promoter is convinced of the feasibility and profitability of the proposition, he takes steps to give the idea a practical shape. Assembling involves making contracts for the purchase of materials, land, machinery, tools, capital, etc. Decisions have to be made regarding the size, location, layout, etc., of the enterprise. Plans are prepared for the procurement of required workforce. Promoters usually take the help of experts while deciding such things.

(4) Preparation of Documents – The promoters prepare the ‘Memorandum of Association’ and ‘Articles of Association”. These documents are essential for the incorporation of the company. After incorporation, they have to prepare prospectus or ‘statement in lieu of prospectus’ to raise capital from the market and obtain certificate for commencement of business and have to select a name for the company and submit application to the registrar of companies of the state in which the registered office of the company is to be situated.

(5) Motivating signatories to Memorandum – To give practical shape to their proposal, the promoters motivate influential businessmen and executives to be the signatories (or founder members) to the Memorandum of Association. In case of a public company, at least seven signatories are required whereas in case of a private company, minimum of two signatories are required. The promoters also find out the first directors of the company. Their written consent to act as directors and to take up the qualification shares in the-company is necessary.

(6) Entering into Preliminary Contracts – The promoters make contracts (preliminary) regarding the purchase of property such as land, buildings, and machinery which require huge sums of money. They also enter into arrangements with the suppliers of materials and buyers of the company’s products.

(7) Appointment of Professionals – The promoters appoint the bankers of the company. They may also appoint merchant bankers, underwriters, solicitors, etc. to manage the issue of new capital.

8. Obtaining Licence – The promoters also take steps to obtain license from the government if the product to be manufactured by the company is covered by the licensing policy of the government.

Legal Status of a Promoter -During the preliminary stage, a company does not come into existence. Therefore, a  cannot be called an agent or trustee of the company. However, a promoter stands in a fiduciary relationship with the company he is promoting, i.e. a relationship involving confidence or trust. The relationship of good faith requires the promoter to act honestly and sincerely and in the best interests of the company.

He should not misuse his position for personal gain. Promoters can make a profit only if it is disclosed but must not make any secret profits. In the event of non-disclosure, the company can rescind the contract and recover the purchase price paid to the promoters. It can claim damages for the loss suffered due to the non disclosure of material information. Given below are the liabilities of a promoter:

• To disclose full details of the nature and extent of money taken by him in the process of promotion;
• To deposit all money received on behalf of the company in the company’s bank account;
• To refrain from selling his own property to the company at unreasonably high prices;
• To exercise due to care and intelligence in the work of promotion;
• To act without deceit, misfeasance or breach of trust towards the company;
• To surrender any secret profits made during promotion of the company;
• To be personally liable for preliminary contracts till they are approved by the company;
• To pay compensation to those who have invested money in the company on the basis of untrue statements or misrepresentation in the prospectus;
• To be liable for failure to comply with the legal formalities; and
• To make good any loss caused to the company on account of negligence or breach of trust.

Question 2.
Explain the steps taken by promoters in the promotion of a company.
Answer:
(i) Identification of business opportunity:
The first and foremost activity of a promoter is to identify a business opportunity. The opportunity may be in respect of producing a new product or service or making some product available through a different channel or any other opportunity having investment potential. Such opportunity is then analysed to see its technical and economic feasibility.

(ii) Feasibility studies:
It may not be feasible or profitable to convert all identified business opportunities into real projects. The promoters, therefore, undertake detailed feasibility studies to investigate all aspects of the business they intend to start. Depending upon the nature of the project, the following feasibility studies were maybe undertaken, with the help of the specialists like engineers, chartered accountants etc., to examine whether the perceived business opportunity can be profitably exploited.

(a) Technical feasibility:
Sometimes an idea may be good but technically not possible to execute. It may be so because the required raw material or technology is not easily available. For example, in our earlier story suppose Avtar needs a particular metal to produce the carburettor.

If that metal is not produced in the country and because of poor political relations, it can not be imported from the country which produces it, the project would be technically unfeasible until arrangements are made to make the metal available from alternative sources.

(b) Financial feasibility:
Every business activity requires funds. The promoters have to estimate the fund requirements for the identified business opportunity. If the required outlay for the project is so large that it cannot easily be arranged within the available means, the project has to be given up. For example, one may think that developing townships is very lucrative.

It may turn out that the required funds are in several crores of rupees, which cannot be arranged by floating a company by the promoters. The idea may be abandoned because of the lack of financial feasibility of the project.

(c) Economic feasibility:
Sometimes it so happens that a project is technically viable and financially feasible but the chance of it being profitable is very little. In such cases as well, the idea may have to be abandoned. Promoters usually take the help of experts to conduct these studies.

It maybe noted that these experts do not become promoters just because they are assisting the promoters in these studies. Only when these investigations throw up positive results, the promoters may decide to actually launch a company.

(iii) Name approval:
Having decided to launch a company, the promoters have to select a name for it and submit, an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval. The proposed name may be approved if it is not considered undesirable.

It may happen that another company exists with the same name or a very similar name or the preferred name is misleading, say, to suggest that the company is in a particular business when it is not true. In such cases the proposed name is not accepted but some alternate name may be approved.

Therefore, three names, in order of their priority are given in the application to the Registrar of Companies. (Performa Application for the availability of names (Form 1 A) is given at the end of the chapter.)

(iv) Fixing up Signatories to the Memorandum of Association:
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. Usually, the people signing the memorandum are also the first Directors of the Company. Their written consent to act as Directors and to take up the qualification shares in the company is necessary.

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

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

Question 3.
What is a ‘Memorandum of Association’? Briefly explain its clauses.
Answer:
Memorandum of Association is the most important document as it defines the objectives of the company. No company can legally undertake activities that are not contained, in ns Memorandum of Association. As per section 2(56) of The companies Act, 2013 “memorandum” means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.

The Memorandum of Association contains different clauses, which are given as follows:
(i) The name clause:
This clause contains the name of the company with which the company will be known, which has already been approved by the Registrar of Companies.

(ii) Registered office clause:
This clause contains the name of the state, in which the registered office of the company is proposed to be situated. The exact address of the registered office is not required at this stage but the same must be notified to the Registrar within thirty days of the incorporation of the company.

(iii) Objects clause:
This is probably the most important clause of the memorandum. It defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the objects stated in this clause. The object clause is divided into two subclauses, which are:

1. The main objects: The main objects for which the company is formed are listed in this sub-clause. It must be observed that an act which is either essential or incidental for the attainment of the main objects of the company is deemed to be valid, although it may not have been stated explicitly in the sub-clause.
2. Other objects: Objects not included in the main objects could be stated in this sub-clause. However, if a company wishes to undertake a business included in this subclause, it has to either pass a special resolution or pass an ordinary resolution and get centred government’s approval for the same.

(iv) Liability clause:
This clause limits the liability of the members to the amount unpaid on the shares owned by them. For example, if a shareholder has purchased 1000 shares of Rs. 10 each and has already paid Rs. 6 per share, his/her liability is limited to Rs. 4 per share. Thus, even in the worst case, he/she may be called upon to pay Rs. 4,000 only.

(v) Capital clause:
This clause specifies the maximum capital which the company will be authorised to raise through the issue of shares. The authorised share capital of the proposed company along with its division into the number of shares haying a fixed face value is specified in this clause.

For example, the authorised share capital of the company may be Rs. 25 with divided into 2.5 lakh shares of Rs. 10 each. The said company cannot issue share capital in excess of the amount mentioned in this clause.

Question 4.
Distinguish between ‘Memorandum of Association’ and ‘Articles of Association’.
Answer:
The relationship between Memorandum and Articles may be viewed from the opinion of Lord Cairns that articles play a part subsidiary to a Memorandum of Association. Memorandum is the area beyond which the actions of the company cannot go, but Articles are subordinate to the Memorandum. The main points of distinction between Memorandum and Articles are given below in the table :

Question 5.
What is the effect of conclusiveness of the ‘Certificate of Incorporation’ and ‘Commencement of Business’.
Answer:

Effect of the Certificate of Incorporation:
A company is legally born on the date printed on the Certificate of Incorporation It becomes a legal entity with perpetual succession on such date. It becomes entitled to enter into valid contracts. The Certificate of Incorporation is conclusive evidence of the regularity of the incorporation of a company.

Imagine, what would happen to an unsuspecting party with which the company enters into a contract, if it is later found that the incorporation of the company was improper and hence invalid. Therefore, the legal situation is that once a Certificate of incorporation has been issued, the company has become a legal business entity irrespective of any flaw in its registration.

The Certificate of Incorporation is thus conclusive evidence of the legal existence of the company. Some interesting examples showing the impact of the conclusiveness of the Certificate of Incorporation are as under:

1. Documents for registration were filed on 6th January. Certificate of Incorporation was issued on 8th January. But the date mentioned on the Certificate was 6th January. It was decided that the company was in existence and the contracts signed on 6th January were considered valid.
2. A person forged the signatures of others on the Memorandum. The Incorporation was still considered valid.

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

Because the Certificate of Incorporation is so crucial, the Registrar has to go very carefully before issuing it. On the issue of Certificate of Incorporation, a private company can immediately commence its business. It can raise necessary funds from friends, relatives or through private arrangements and proceed to start a business. A public company, however, has to undergo two more stages in its formation.

Question 6.
Is it necessary for a public company to get its share listed on a stock exchange? What happens if a public company going for a public issue fails to apply to a stock exchange for permission to deal in its securities or fails to get such permission?
Answer:
Applying with a stock exchange for permission to deal in shares before the issue – Every company intending to offer shares or debentures to the public by the issue of the prospectus shall make an application before the issue, to one or more recognised stock exchanges for permission for the shares or debentures to be dealt with at the exchange (Section 73C) of Companies Act 1956.

Stating the name of Exchanged in the Prospectus – Where a prospectus states that an application has been made for permission for shares or debentures to be dealt at one or more recognised stock exchanges, such prospectus shall state the name of stock exchange(s).

Allotment Void if Permission not Granted – Any allotment made shall be void if the permission has not been granted by the stock exchange before the expiry of ten weeks from the date of the closing of the subscription lists.

Repayment of Money on Refusal of Permission – Where the permission has not been granted by the stock exchange(s), the company shall forthwith repay without interest all moneys received from applicants. If any such money is not repaid within 7 days after the company becomes liable to repay it, the company and every director of the company who is an officer in default shall, on and from the expiry of the seventh day, be jointly and severally liable to repay that money with prescribed rate of 15 percent. If default is made in repayment of the amount, the company and every officer of the company, who is in default, shall be punishable with fine which may extend to Rs. Fifty thousand.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 6 Social Responsibilities of Business and Business Ethics Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Social Responsibilities of Business and Business Ethics NCERT Solutions for Class 11 Business Studies Chapter 6

Social Responsibilities of Business and Business Ethics Questions and Answers Class 11 Business Studies Chapter 6

Question 1.
Social responsibility is:
(a) Same as a legal responsibility
(b) Broader than legal responsibility
(c) Narrower than legal responsibility
(d) None of them
Answer:
(b) Broader than legal responsibility

Question 2.
If the business is to operate in a society which is full of diverse and complicated problems. It may have
(а) Little chance of success
(b) Great chances of success
(c) Little chance of failure
(d) No relation with success or failure
Answer:
(а) Little chance of success

Question 3.
Business people have the skills to solve –
(a) All Social Problems
(b) Some Social problems
(c) No social problems
(d) All economic problems
Answer:
(d) All economic problems

Question 4.
That an enterprise must behave as a good citizen is an example of its responsibility.
(a) Owners
(b) Workers
(c) Consumers
(d) Community
Answer:
(d) Community

Question 5.
Environmental protection can best be done by the efforts of –
(a) Business People
(b) Government
(c) Scientists
(d) All the people
Answer:
(d) All the people

Question 6.
Carbon monoxide emitted by automobiles directly contributes to –
(a) Water Pollution
(b) Noise Pollution
(c) Land Pollution
(d) All the people
Answer:
(d) All the people

Question 7.
Which of the following can explain the need for pollution control?
(a) Cost savings
(b) Reduced risk of liability
(c) Reduction of health hazards
(d) All of them.
Answer:
(d) All of them.

Question 8.
Which of the following is capable of doing maximum good to society?
(a) Business Success
(b) Laws and Regulations
(c) Ethics
(d) Professional Management
Answer:
(c) Ethics

Question 9.
Ethics is important for –
(a) Top Management
(b) Middle Level Managers
(c) Non-managerial employers
(d) All of them.
Answer:
(a) Top Management

Question 10.
Which of the following alone can ensure effective ethic programme in a business enterprise?
(a) Publication of code
(b) Involvement of employees
(c) Establishment of compliance mechanism
(d) None of them
Answer:
(c) Establishment of compliance mechanism

Short Answer Questions

Question 1.
What do you understand by social responsibility of a business? How is it different from legal responsibility?
Answer:

1. Social responsibility of business refers to its obligations to make those decisions and perform those actions which are desirable on terms of the objectives and values of our society.
2. Social responsibility of business refers to a voluntary obligation on the part of business concerns to contribute for the welfare of society.
3. Social responsibility refers to any business concerns, not only protecting its own interest such as making a profit, it protecting the interest of different groups of society like as owner, investors, consumers, employee, government and society.

Question 2.
What Is environment? What is environmental pollution?
Answer:
Environment (Meaning) — Environment is defined as the sum total of all conditions and influences that affect the life and development of organisms. It includes the non-living things also like to pography of area, climate including light, temperature, rainfall etc.

Business and environmental protection – The health and well being of people and other living creatures depends to a great extent on the quality of environment in which they live and work. Rapid industrialisation and growing traffic have caused a great damage to the environment. Forests, wildlife and other desirable elements in the environment are declining very fast to accommodate growing population and industry and commerce.

This damage to the environment has contributed to increasing disease and disaster. All types of pollution air, water, noise are rapidly growing. Governments in various countries (including India) have enacted laws to prevent pollution of air and water. Pollution control boards have also been set up by Central and State Governments. But laws alone is not sufficient for controlling pollution.

Environmental pollution is of seven types – Air pollution, water pollution, soil pollution, noise pollution, thermal pollution and nuclear pollution. The rapid unplanned industrial progress added to our pollution problem. Today, the cry of pollution is heard from all the nooks and comers of the globe, and pollution has become a real threat to very existence of mankind on the earth. It is the major challenge in this time.

Question 3.
What is business ethics? Mention the basic elements of business ethics.
Answer:
‘Ethics’ is a Greek word meaning character; norms, ideals, or morals prevailing in a group or society. Business ethics refers to the relationship between business objectives, practices, techniques, and the good of society. It is concerned with the socially determined moral principles which should govern business activities.
Top management commitment:

• Publication of a ‘Code’.
• Establishment of a compliance mechanism.
• Involving employees at all levels.
• Measuring results.

Question 4.
Briefly explain
(a) Air pollution
(b) Water pollution and
(c) Land pollution.
Answer:
(a) Air pollution – Air pollution is the result of combination of factors which lowers the air quality. It is mainly due to carbon monoxide emitted by automobiles. The use of chemicals in industries and air pollution caused by industries have created a hole in the ozone layer. This produces greenhouse effect which means a dangerous warming of the earth. It is the responsibility of business to check the use of industrial chemicals and take effective steps to control air pollution.

(b) Water pollution-Carefulness disposal of industrial wastes and effluents has caused the problem of water pollution. This has led to the death of animals in several cases and also posed a threat to human life. Several diseases are reported to have been caused by water pollution.

Thus, it should be obligatory for every industrial unit to take steps to check water pollution. They should adopt scientific methods to dispose of waste and affluents and clean the polluted water through water treatment plants before disposing of the water in drains, canals or rivers. Water pollution had led to the death of several animals and posed a serious threat to human life.

(c) Land pollution – Dumping of toxic wastes in the land causes land pollution. This might damage the quality of land making it unfit for agriculture. In order to check land pollution, solid waste disposal methods should be used by the industrial organisations. The combustible wastes should be separated and used as fuels in industrial boilers.

Question 5.
What are the major areas of social responsibility of business?
Answer:
Social responsibility has an element of voluntary action on the part of the business person to perform social responsibilities.
The case for social responsibility – Business is expected to be responsible to society due to the following reasons :
(1) Self-interest – Business exists for providing goods and services to satisfy human needs. Though, profit motive is an important justification for business activity but in the long-term, it is in the interest of business to assume social obligations.

Enlightened businessmen recognise that they can succeed better by fulfilling the demands and aspirations of society. People who have had a higher standard of living and have been exposed to an environment conducive to healthy growth make better employees and customers for business than those who are poor, ignorant and oppressed. For example, provision of higher wages and good working conditions motivates workers to work hard and produce more. In fact, the prosperity and growth of business is possible only through continuous service to society.

(2) Creation of society – Business is a creation of society and uses the resources of society. Therefore, it should fulfill obligations to society. Businessmen should respond to the demands of society and should utilise the social resources at their command for the benefit of the people. In the long run a successful business can be built on the foundations of a happy community and a satisfied workforce. Social responsibility by business provides justifications for its existence and growth.

(3) Social power – Businessmen have considerable social power. Their decisions and actions affect the lives and fortunes of all of us. They collectively determine for the nation such important matters as amount of employment, rate of economic progress and distribution of income among various groups.

Businessmen should assume social obligations commensurate with their social power. Otherwise, their social power will be taken away by the society through government controls and other regulations. It is, therefore, the moral and right thing for business enterprises to assume social obligations. Therefore, it is in the interest of business to fulfil social responsibilities in order to improve the image of business when it supports social goals.

(4) Public image-A business can improve its image in public by assuming social obligations. Good relations with workers, consumers and suppliers help in the success of business. Social obligations improve the confidence and faith of people in a business enterprise.

(5) Social awareness – No business can be done in isolation from society. It is the society that permits business to exist and grow. Nowadays consumers and workers are well informed about their rights. Consumers expect better quality products at reasonable prices. Similarly, workers desire fair wages and other benefits. They exercise pressure on the employers through trade unions. If business does not fulfil its obligations, there will be industrial unrest and conflict in society. A society with fewer problems provides better environment for a firm to conduct its business.

(6) Free enterprise If businessmen do not accept and discharge their social obligations they will lose their freedom. For example, the government has passed the Consumer Protection Act to prevent businessmen from indulging in adulteration, black marketing and other anti-social practices.

Thus, social responsibilities are essential for avoiding governmental action against business. Such action will reduce the freedom of decision matting in business. Business enterprises have started realising the fact that social interest and business interest are not contradictory. Instead, these are complementary in nature.

(7) Law and order – Business can survive and grow only when there is law and order in society. Every business has a responsibility to operate within the laws of the land. Since these laws are meant for the good of the society, a law abiding enterprise is a socially responsible enterprise as well.

(8) Moral justification – In a large country like India, government alone cannot solve all Hie problem -. Business has money and talent with which it can assist the government in solving which it can assist the government in solving problems.

For example, business can play a vital role in solving regional disparities, unemployment illiteracy, scarcity of foreign exchange and such other problems in the country. Moreover, business has created some problems such as pollution. Therefore, business should help society in solving its problems.

(9) Socio-cultural Norms – India has a rich cultural heritage. Businessmen who help in preserving and promoting this heritage will naturally enjoy the patronage of the society and the government. Business should, therefore, promote equality of opportunity, healthy relations with employees and customers, etc.

(10) Professionalisation – Management of business enterprises is being professionalised. An owner-manager nurses a greater greed for profiteering because all the gains go to him. But a salaried and qualified manager is loss likely to be lured because he does not benefit from the profits earned through questionable practices.

(11) Trusteeship – Mahatma Gandhi suggested that “those who own money or property should hold and use it in trust for society”. Businessmen should run business firms not for their self-enrichment but for the good of the society.

Long Answer Questions
Question 1.
Build up arguments for and against social responsibility.
Answer:
Arguments for Social Responsibility:
(i) Justification for existence and growth:
Business exists for providing goods and services to satisfy human needs. Though profit motive is an important justification for undertaking the business activity, it should be looked upon as an outcome of service to the people. In fact, the prosperity and growth of the business are possible only through continuous service to society. Thus, the assumption of social responsibility by businesses provides justifications for their existence and growth.

(ii) Long-term interest of the firm:
A firm and its image stand to gain maximum profits in the long run when it has its highest goal as ‘service to society’. When increasing number of members of society including workers, consumers, shareholders, government officials, feel that business enterprise is not serving its best interest, they will tend to withdraw their cooperation to the enterprise concerned. Therefore, it is in its own interest if a firm fulfills it’s social responsibility. The public image of any firm would also be improved when it supports social goals.

(iii) Avoidance of government regulation:
From the point of view of a business, government regulations are undesirable because they limit freedom. Therefore, it is believed that businessmen can avoid the problem of government regulations by voluntarily assuming social responsibilities, which helps to reduce the need for new laws.

(iv) Maintenance of society:
The argument here is that laws cannot be passed for all possible circumstances. People who feel that they are not getting their due from the business may resort to anti-social activities, not necessarily governed by law. This may harm the interest of business itself. Therefore, it is desirable that business enterprises should assume social responsibilities.

(v) Availability of resources with business:
This argument holds that business institutions have valuable financial and human resources which can be effectively used for solving problems. For example, business has a pool of managerial talent and capital resources, supported by years of experience in organising business activities. It can help society to tackle its problems better, given the huge financial and human resources at its disposal.

(vi) Converting problems into opportunities:
Related with the preceding argument is the argument that business with its glorious history of converting risky situations into profitable deals, can not only solve social problems but it can also make them effectively useful by accepting the challenge.

(vii) Better environment for doing business:
If business is to operate in a society which is full of diverse and complicated problems, it may have little chance of success. Therefore, it is argued that the business system should do something to meet needs before it is confronted with a situation when its own survival is endangered due to enormous social illnesses. A society with fewer problems provides be ‘ r environment for a firm to conduct its business.

(viii) Holding business responsible for social problems:
It is argued that some of the social problems have either been created or perpetuated by business enterprises themselves. Environmental pollution, unsafe workplaces, corruption in public institutions, aid discriminatory practices in employment are some of these problems. Therefore, it is the moral obligation of business to get involved in solving these problems, instead of merely expecting that other social agencies will deal with them on their own.

Arguments against Social Responsibility Major arguments against social responsibility are:
1. Violation of profit maximisation objective:
According to this argument, business exists only for profit maximisation. Therefore, any talk of social responsibility is against this objective. In fact, business can best fulfill its social responsibihty if it maximises profits through increased efficiency and reduced costs.

2. Burden on consumers:
It is argued that social responsibilities like pollution control and environmental protection are very costly and often require huge financial investments. In such circumstances, businessmen are likely to simply shift this burden of social responsibihty by charging higher prices from the consumers instead of bearing it themselves. Therefore, it is unfair to tax the consumers in the name of social responsibihty.

3. Lack of social skills:
All social problems cannot be solved the way business problems are solved. In fact, businessmen do not have the necessary understanding and training to solve social problems. Therefore, according to this argument, social problems should be solved by other, specialized agencies.

4. Lack of broad public support:
Here the argument is that the public in general does not like business involvement or interference in social programmes. Therefore, business cannot operate successfully because of lack of public confidence and cooperation in solving social problems.

Question 2.
Discuss the forces which are responsible for increasing concern of business enterprises towards social responsibility
Answer:
Responsibilities towards different interest groups – As a socio-economic institution, business comes into contact with several groups such as shareholders, employees, customers, the government, community, suppliers, competitors, etc. Business is responsible to all these interest groups.

(1) Responsibilities towards owners and investors – A business enterprise has the responsibility to provide a fair return to shareholders or owners on their capital investment and ensure the safety of their investment. To provide the shareholders the following informations in order to protect their investment:

• To ensure safety of investment;
• To provide a fair and regular dividend or interest;
• To offer reasonable appreciation of capital through optimum utilisation of resources;
• To provide regular, accurate and adequate information on the financial position of the company;
•  To offer reasonable opportunities for participation of shareholders in policy decisions; and
• To give equal treatment to all shareholders.

(2) Responsibilities towards workers – The employees are the greatest asset of a business and their well-being is a matter of material advantage as well as moral obligation. Employees should be treated as honourable individuals who are justly rewarded, fairly encouraged, fully informed and properly assigned.

Their lives must be given meaning and dignity. A senseofpartnershipand belonging should be inculcated. They should be provided both economic and psychological satisfaction. The enterprise must respect the democratic rights of workers. Business has the following responsibilities towards its employees:

• To pay a regular wage or salary;
• To provide good working conditions;
• To ensure welfare facilities such as housing, medical care, social security, recreation, etc.;
• To provide opportunities for education and self-development;
• To develop a sense of belonging and dignity of labour; and
• To guarantee freedom of religion and political views.

(3) Responsibilities towards customers – Supply of right quality and quantity of goods and services to consumers at reasonable price is the responsibility of business. The responsibilities of business towards its customers are given below :

• To supply socially useful products that meet the needs of customers;
• To ensure regular and adequate supply of products;
• To provide goods of standard quality:
• To charge fair prices;
• To provide prompt and courteous service;
• To ensure a fairly wide distribution of products during shortage;
• To handle consumers’ complaints and grievances quickly;
• To supply useful information about new products and new uses of existing products;
• To avoid unfair trade practices such as adulteration, hoarding, black marketing, false advertising, under weighing, etc.and
• To provide benefits of cost reduction in the form of lower prices.

(4) Responsibilities towards government – An enterprise must behave as a good citizen and act accordingly to the well-accepted values of the society. Business has the following responsibilities towards the government:

• To abide by the laws of the land;
• To pay taxes promptly and regularly;
• To cooperate with the state in solving national problems such as poverty, over-population, illiteracy, concentration of economic power, backward regions, etc.;
• To adopt dealings in foreign trade in order to maintain the country’s image.
• To refrain from corrupt public servants and the democratic process; and
• To avoid monopolistic and restrictive trade practices.

(5) Responsibilities towards the community and public – Every business owes an obligation to the local community and general public or society. It should improve the quality of life and contribute towards social welfare. The main responsibilities of business towards the public are as follows :

• To protect the environment from all types of pollution;
• To make optimum utilisation of natural resources; e.g. energy conservation.
• To assist local bodies in providing amenities such as drinking water, sanitation, public transport etc.
• To provide more and more employment opportunities;
• To provide assistance to hospitals, religious institutions, educational institutions, sports bodies, etc.
• To preserve social and cultural values;
• To help the weaker sections of society such as disabled persons, orphans, widows, scheduled tribes, etc.
• To promote national integration; and
• To cooperate and be truthful with media about issues affecting public welfare.

(6) Responsibilities towards suppliers and competitors – Management should deal with the suppliers judiciously. lt should offer them fair terms and conditions regarding prices, quality, delivery of goods and payment. In the absence of fair dealings, the suppliers will not supply them the goods on credit. The business owes the follow ing responsibilities towards the suppliers:

• To make fair and regular payments to suppliers;
• To adopt fairtrade practices regarding price, quality and services;
• To protect and assist small-scale and cottage industries; and
• To patronise trade associations and chambers of commerce.

To sum up, the social responsibilities of business include high level of
employment, high standard of living, swift economic progress, economic stability and national security.

The interests of various groups are not always in harmony. It is the management’s task to strike an equitable balance among the conflicting interests. The management serves as an arbiter among the various interest groups. It is the duty of managers to divide the return from business equitably by providing a fair return to the investors, fair pay and working conditions to employees, good quality and fair prices to customers, fair prices to suppliers and also to serv e as an asset to the local community and the nation.

Question 3.
‘Business is essentially a social institution and not merely a profit-making activity.’ Explain.
Answer:
A business enterprise is permitted by society to carry on industrial or commercial activities and earn profits from it. Therefore, a business enterprise is expected to do business and earn money in ways that fulfill the expectations of society. Like every individual living in society, business to has certain obligations towards society in terms of respect for social values and norms of behavior.

It is obligatory on part of the business enterprise not to do anything that is undesirable from society’s point of view. The manufacture and sale of adulterated goods, making deceptive advertisements, evading taxes, polluting the environment and exploiting workers are some examples of socially undesirable practices which may increase the profit of enterprises but which have adverse social effects.

On the other hand, supplying good quality goods, creating healthy working conditions, honestly paying taxes, prevention of pollution, and resolving customer complaints are examples of socially desirable practices which improve the image of enterprises leading to higher profits in the long run.

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

When the business commences, the social objective of the firm is recognized and it is important for the organisation to know to whom and for what the business and its management are responsible. The major areas of social responsibilities of business include the following.

(i) Responsibility towards the shareholders or owners:
A business enterprise has the responsibility to provide a fair return to the shareholders or owners on their capital investment and to ensure the safety of such investment. The corporate enterprise on a company form of organisation must also provide the shareholders with regular, accurate and full information about its working as well as schemes of future growth.

(ii) Responsibility towards the workers:
Management of an enterprise is also responsible for providing opportunities to the workers for meaningful work. It should try to create the right kind of working conditions so that it can win the cooperation of workers. The enterprise must respect the democratic rights of the workers to form unions. The worker must also be ensured of a fair wage and a fair deal from the management.

(iii) Responsibility towards the consumers:
Supply of right quality and quantity of goods and services to consumers at reasonable prices constitutes the responsibility of an enterprise toward its customers. The enterprise must take proper precaution against adulteration, poor quality, lack of desired service and courtesy to customers, misleading and dishonest advertising, and so on. They must also have the right of information about the product, the company and other matters having a bearing on their purchasing decision.

(iv) Responsibility towards the government and community:
An enterprise must respect the laws of the country and pay taxes regularly and honestly. It must behave as a good citizen and act according to the well-accepted values of the society. It must protect the natural environment and should avoid bad, effluent, smoky chimneys, ugly buildings dirty working conditions. It must also develop a proper image in society through continuous interaction with various groups of people.

Question 4.
Why does the enterprise need to adopt pollution control measures?
Answer:
Need for pollution control – Pollution prevention or control is needed to preserve precious environmental resources and to improve the environment quality so that the preserved resources can be utilized for the benefit of mankind and improvement of health and well-being of the people.

Pollution spoils the quality of the environment and makes it unfit for a normal life. Air becomes harmful to breathe, water becomes unfit to drink and land becomes unfit to live on. The main reasons for pollution control are as follows :

(1) Reduction of health hazards – Environmental pollution is the main cause of cancer, heart and lung diseases. These diseases are now the leading causes of death in modern society. Air pollution is known to aggravate heart disease. Similarly, water pollution may cause liver and kidney diseases. Pollution control will help to reduce these health hazards by making the environment more conducive to healthy living.

(2) Reduced risk of liability- It is possible that an enterprise is held liable to pay compensation to people affected by the toxicity of gaseous liquid and solid waste it has released into the environment. Refineries and other industries cause pollution and create hazards. Control over pollution is necessary to reduce safety hazards. Therefore, it is necessary to install pollution control devices in their premises to reduce the risk of liability.

(3) To reduce nuisance-Air pollution creates personal discomfort such as irritation in eyes and difficulty in breathing. Similarly, water pollution makes swimming and fishing difficult. Pollution control is required to reduce such inconvenience.

(4) Cost savings – Pollution causes economic loss such as damage to vegetation and live-stock, spoiling of
buildings and works of art, spoiling of clothes which result increase in washing expenses. Control over environmental pollution will reduce such economic loss. Cost savings are particularly noticeable when improper production technology results in greater wastes such which leads to higher cost of waste disposal and cost of cleaning the plants.

(5) To ensure aesthetic pleasure – Pollution control is necessary to reduce noise so that normal conversation becomes possible, to reduce foul smell, to protect monuments such as Taj Mahal.

(6) Other social benefits – Pollution control results in many other benefits like clearer visibility, cleaner buildings, better quality of life, and the availability of natural products in a proper form.

Question 5.
What steps can an enterprise take to protect the environment from the dangers of pollution?
Answer:
Since the quality of the environment is important for all of us, we have a collective responsibility to protect it from being spoiled. Whether it is government, business enterprises, consumers, workers, or other members of society, each one can do something to stop polluting the environment.

The government can enact laws to ban hazardous products. Consumers, workers, and members of society can avoid using certain products and doing things that are not environment-friendly. Business enterprises should, however, take the lead in providing their own solutions to environmental problems.

It is the social responsibility of every business to take steps not only to check all sorts of pollution but also to protect environmental resources. Business enterprises are leading creators of wealth, employment, trade, and technology. They also command huge financial, physical, and human resources.

They also have the know-how to solve environmental pollution problems with a preventive approach by controlling pollutants at the source. In most cases, modification or change in the process of production, redesign of equipment, substituting poor quality materials with better ones or other innovative approaches could greatly reduce or even eliminate pollution entirely. Some of the specific steps which can be taken by business enterprises for environmental protection are as stated below:

1. A definite commitment by top management of the enterprise to create, maintain and develop a work culture for environmental protection and pollution prevention.
2. Ensuring that commitment to environmental protection is shared throughout the enterprise by all divisions and employees.
3. Developing clear-cut policies and programs for purchasing good quality raw materials, employing superior-technology, using scientific techniques of disposal and treatment of wastes, and developing employee skills for the purpose of pollution control.
4. Complying With the laws and regulations enacted by the Government for the prevention of pollution
5. Participation in government programmes relating to the management of hazardous substances, clearing up of polluted rivers, plantation of trees, and checking deforestation.
6. Periodical assessment of pollution control programmes in terms of costs and benefits so as to increase the progress with respect to environmental protection.
7. Arranging educational workshops and training materials to share technical information and experience with suppliers, dealers and customers to get them actively involved in pollution control programmes.

Question 6.
Explain the various elements of business ethics.
Answer:
1. Top Management Commitment:
The top management has a crucial role in guiding the entire organization towards ethically upright behavior. To achieve results, the ChiefExecutive Officer (or CEO) and other higher-level managers need to be openly and strongly committed to ethical conduct.

2. Publication of a ‘Code’:
Enterprises with effective ethics programs define the principles of conduct for the whole organization in the form of written documents which is referred to as the “code”. This involves areas such as fundamental honesty and adherence to laws; product safety and quality; health and safety in the workplace etc.

3. Establishment of Compliance Mechanisms:
Company must ensure that actual decisions and actions comply with the firm’s ethical standards by establishing suitable mechanisms. Some examples of such mechanisms are: paying attention to values and ethics in recruiting and hiring; emphasizing corporate ethics in training; auditing performance regularly to analyze the degree of compliance; and instituting communication systems to help employees report incidents of unethical behavior.

4. Involving Employees at all Levels:
Involvement of employees in ethics programs is a must as at different levels they are the ones who implement ethics policies to make ethical business a reality. Although it is difficult to accurately measure the end results of ethics programs, the firms can certainly audit to monitor compliance with ethical standards. The top management team and other employees should then discuss the results for further course of action.

5. Measuring results:
Although it is difficult to accurately measure the end results of ethics programmes, the firms can certainty audit to monitor compliance with ethical standards. The top management team and other employees should then discuss the results for further course of action.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 5 Emerging Modes of Business Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Emerging Modes of Business NCERT Solutions for Class 11 Business Studies Chapter 5

Emerging Modes of Business Questions and Answers Class 11 Business Studies Chapter 5

Tick mark (✓) the most appropriate answer to the following questions :

Question 1.
E-commerce does not include
(a) A business’s interactions with its suppliers.
(b) A business’s interactions with the customers.
(c) Interactions among the various departments within the business.
(d) Interactions among the geographically dispersed units of the business.
Answer:
(c) Interactions among the various departments within the business.

Question 2.
Outsourcing ………….
(a) Restricts only to the contracting out of Information Technology Enabled Services (ITES).
(b) Restricts only to contracting out of non-core business processes.
(c) Includes contracting out of manufacturing and R&D as well as service processes – both core and non-core – but rescticts only to domestic territory.
(d) Includes off-shoring.
Answer:
(b) Restricts only to contracting out of non-core business processes.

Question 3.
The payment mechanism typical to e-business
(a) Cash on Delivery (COD)
(b) Cheques
(c) Credit and Debit cards
(d) e-cash
Answer:
(d) e-cash

Question 4.
A call centre handies
(a) Only in-bound voice based business
(b) Only out-bound voice based business
(c) Both voice based and non-voice based business
(d) Both customer facing and back-end business
Answer:
(a) Only in-bound voice based business

Question 5.
It is not an application of e-business
(a) Online bidding
(b) Online procurement
(c) Online trading
(d) Contract R&D
Answer:
(d) Contract R&D

Short Answer Questions

Question 1.
State any three differences between e-business and traditional business.
Answer:
e-Business and Traditional Business – e-business may be defined as the conduct of industry, trade and commerce using the computer networks. It includes all types of business functions such as production, finance, marketing and personite administration as well as managerial activities like planning, organizing and controlling can be carried out over computer networks.

A firm’s e-transactions and network can be visualised as extending into three directions i.e. B2B interactions with other businesses, B2C, business interactions with customers, and intra B commerce.

Difference between Traditional and e-Business

Question 2.
How does outsourcing represent a new mode of business?
Answer:
Outsourcing represents a new mode of business as it is a departure from the traditional thinking of self-sufficiency in business. It refers to a long-term contracting out of business activities to captive or third party specialists with a view to benefitting from their experience, expertise, efficiency, and even investment.

Generally, the non – core business activities are outsourced but of late even some of the core activities have started being outsourced. Outsourcing comprises four key segments: contract manufacturing, contract research, contract sales and informatics.

Global competitive pressures for higher quality products at lower costs, demanding customers and emerging technologies have induced a re-look at business processes and hence resulted in outsourcing as a new mode of business which is now being reported to not out of compulsion but out of choice.

Question 3.
Describe briefly any two applications of e-business.
Answer:
e-business includes not only e-commerce but also other electronically conducted business functions such as production, inventory management product development, accounting over finance and human resource management, e-business is, therefore, clearly much more than buying and selling over the internet.

The applications of e-business can be presented in these class of business situations such as:
(i) Business to Business (B2B) Application : In such situation, business transactions take place between different business firms. B2B transactions are in practice in several firms including Maruti Udyog, Telco, Bajaj Auto, Kinetic etc. ‘

(ii) Business to Consumer (B2C) Application : Under this situation, transactions take place between business firm and consumers. In B2C transactions firm sell physical goods to consumers, online in personalised environment. In this technique, each transaction represents an individual buying online. In India, Amul Com. sells the Amul brand products online under B2C mode of transaction.

(iii) Consumer to Consumer (C2C) Application : In C2C commerce, the seller may sell his services/goods by providing information on the net. This information may be evaluated by a requester/buyer to carry out the transaction. Similarly, the buyer may also give his requirements to select the desired services.

Question 4.
What are the ethical concerns involved in outsourcing?
Answer:
Outsourcing has raised certain ethical concerns which need to be considered. In search of cheap labour, manufacturing processes are being outsourced to developing countries where they use child labour/women in the factories, and working conditions are unhygienic and even unsafe.

The companies cannot do so in their developed home countries due to stringent laws forbidding the use of child labor. This raises the ethical concern of whether this sort of cost-cutting by using child labour justified. Similarly, there is a concern over the ethical aspect of outsourcing the work to countries where gender-based wage – discrimination is done and hence women are paid lower wages.

Question 5.
Describe briefly the data storage and transmission risks in e-business.
Answer:
Online transactions (e-business) are prone to a number of risks. Risks refer to the probability of any mishappening that can result into financial, reputational and psychological losses to the party involved in the transaction. The major risks in e-transactions are data storage and transmission risks.

Data storage and transmission risks – Data stored in the systems and ex-route is exposed to a number of risks. Many times vital information may be missing or changed to pursue selfish motives or for some pleasure. The word VIRUS stands for Vital Information Under Siege is a program which replicates itself due to series of wrong command on the other systems of computer. Installing and timely updating anti¬virus programmes and scanning the files and disks with them provides protection to data files, folders and systems from virus attacks.

Data may be interpreted in the course of transmission. For this, one can use cryptography. It is the art of protecting information by transforming it into an unreadable format called cyphertext.

Long Answer Questions

Question 1.
Why are e-business and outsourcing referred to as the emerging modes of business? Discuss the factors responsible for the growing importance of these trends. ‘
Answer:
Discuss the factors responsible for the growing importance of these trends. During the last decade or so the way of doing business has undergone fundamental changes. The manner of conducting business is referred to as the mode of business’, e-business and outsourcing are referred to as ‘emerging modes of business’ as these have brought about new changes in the way or manner in which business is conducted and it is believed that these trends are likely to continue, an e-business may be defined as the conduct of industry, trade and commerce using the computer networks, e-business covers a firm’s interactions with its customers and suppliers over the internet and also other electronically conducted business functions such a production, inventory management, product development, accounting and finance and human resource management.

Outsourcing represents a new model of business as it is a departure from the traditional thinking of self-sufficiency in business. It refers to a long-term contracting out of business activities to captive or third party specialists with a view to benefitting from their experience, expertise, efficiency and, even investment.

Generally, the non – core business activities are outsourced but of late even some of the core activities are being outsourced. Outsourcing comprises four key segments; contract manufacturing, contract research, contract sales and informatics.

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

1. Business managers and thinkers keep evolving newer and better ways of doing things in an effort to improve the business processes.
2. Business firms have to strengthen their capabilities of creating utilities and delivering Value successfully to meet the competitive pressures.
3. Consumers have become far more demanding than ever in terms of higher quality, lower prices, speedier deliveries and better customer care,
4. Business as an activity has to keep evolving by adopting new trends in order to benefit from emerging technologies.

Question 2.
Elaborate the steps involved in On-line Trading.
Answer:
The three stages involved in online transactions. Firstly, the pre-purchase or sale stage including advertising and information seeking. Secondly, the purchase or sale stage comprised of price negotiation, closing of purchase or sales deal and payment and thirdly, the delivery stage of the transaction. Following are the steps involved in online transactions:

(i) Registration – Registration is required for online transaction with the vendor by filling up a registration form. Among various details in account, a ‘password’ for selecting your account and ‘shoppingcart’ are password protected. Otherwise, anyone can logging using your name and shop in your name. .

(ii) Placing an order – After registration one can pick and drop the items in the shopping cart. Shopping cart is an online record of what one have picked up while browsing the online store. After being sure of what one want to why, he can ‘checkout’ and choose his payment options.

(iii) Payment mechanism – Payment under online transactions may be made in a number of methods such as :
Cash on Delivery (COD) : As the name suggest, payment is made in cash for online transactions when physical delivery of goods reached.

Cheque: Another way of payment is picking up of cheque from the customer’s end. On realisation of payment of cheque, that goods may be delivered.

Net banking transfer: In today’s world, banks provide to their customers the facility of electronic transfer of funds over the net. In such case, the buyer may transfer the amount for the agreed price of the transaction to the account of the online vendor, so that the vendor may proceed to arrange for delivery of goods.

Credit or Debit cards: Debit or credit cards also known as ‘plastic money’ are mostly used as a medium of exchange in online transactions. Almost 99% of online consumer transactions are executed with the help of these cards.

The cardholder is authorised to purchase on credit, the amount due from the cardholder is assumed to be paid by the issuing bank of these cards, who later transfers the amount involved in the transactions to the credit of the vendor. The buyer’s account is debited and the amount of bank will be received generally in instillments at the convenience of the buyers.

Digital cash: This form of money exists only in cyberspace. It has no real physical properties but offers the ability to use real currency in an electronic format.

Question 3.
Evaluate the need for outsourcing and discuss its limitations.
Answer:
(i) Focusing of attention:
Business firms are realizing the usefulness of focusing on just a few areas where out the rest of the activities to their outsourcing partners. In order to create utilities or value, a business engages in a number of processes, viz., purchase and production, marketing and sales, R&D, accounting and finance, HR and administration, etc., firms need to define or redefine themselves.

They, for example, need to consider whether they would like to be called manufacturing or marketing the scope of business enables them to focus their attention and resources on select activities for better efficiency and effectiveness.

(ii) Quest for excellence:
Outsourcing enables firms to pursue excellence in two ways. One they excel in the activities that they can do the best by virtue of limited focus. And they excel by extending their capabilities through contracting out the remaining activities to those who excel in performing them In the quest for excellence, it is necessary not only to know what you would like to focus on but also what you would like others to do for you.

(iii) Cost reduction:
Global competitiveness necessitates not only global quality but also global competitive pricing. As the prices turn southwards due to competitive pressures, the only way to survival and profitability is cost reduction. Division of labour and specialization, besides improving quality, reduces cost too. This happens due to the economies of large scale accruing to the outsourcing partners as they deliver the same service to a number of organizations.

(iv) Growth through alliance:
To the extend, you can avail of the services of others’, your investment requirements are reduced, others have invested in those activities for you. Even if you may like to have a stake in the business of your outsourcing partners, you profit from not only the low-cost and better quality services provided by them you but also by virtue of a share in the profit from the overall business they do.

Therefore, you can expand rapidly as the same amount of invisible funds result in the creation of a large number of businesses. Apart from financial returns, outsourcing facilities inter-organizational knowledge sharing and collaborative learning. This may also explain the reasons why the firms today are outsourcing not only their routine. Non-core processes. But also seeking to benefit from outsourcing such strategic and core processes as Research and development.

(v) Fillip to economic development:
Outsourcing, more so offshore outsourcing, stimulates entrepreneurship, employment, and exports in the host countries. In India in the IT sector alone, for example, there has been such a tremendous growth of entrepreneurship, employment, and exports that today we are the undisputed leaders as far as global outsourcing in software development and IT-enabled services are concerned. Presently, we have 60 percent of the $ 150 billion global outsourcing share in the informatics sectors.

But there are certain limitations of outsourcing as given below:
(A) Confidentiality:
Outsourcing depends on sharing a lot of vital information and knowledge. If the outsourcing partner does not preserve the confidentiality, and, say, for example, passes it on to competitors, it can harm the interest of the party that outsources its processes. If outsourcing involves complete processes/products, there is a further risk of the outsourcing partner starting up a competitive business.

(B) Sweat-shopping:
As the firms that outsource seek to lower their costs, they try to get the maximum benefit from the low-cost manpower of the host countries. Moreover, it is observed that whether in the manufacturing sector or the IT-sector, what is outsourced is the kind of components or work that does not much build the competency and capability of the outsourcing partner beyond the skills needed to comply with a rigidly prescribed procedure/ method. So, what the firm that go in for outsourcing look for is the ‘doing’ skills rather than the development of the ‘thinking’ skills.

(C) Ethical concerns:
Think of a shoe company that, in order to cut costs, outsources manufacturing to a developing country where they use child labour/women in the factories. Back home, the company cannot do so due to stringent laws forbidding the use of child labour. Is cost-cutting by using child labour in countries where it is not outlawed or where the laws are ‘weak’, ethical? Similarly, is it ethical to outsource the work to countries where there exists wage-discrimination on the basis of the sex of the worker?

(D) Resentment in the home countries:
In the course of contracting out manufacturing, marketing, Research, and Development or IT-based services, what is ultimately contracted out is ‘employment’ or jobs. This may cause resentment back in the home country (i.e., the country from which the job is being sourced out) particularly if the home country is suffering from the problem of unemployment.

Question 4.
Discuss the salient aspects of B2C commerce.
Answer:
B2C Commerce: As the name implies, B2C (business-to-customers) transactions have business firms at one end mid its customers on the other end. Although what comes to one’s mind instantaneously is online shopping, it must be appreciated that ‘selling’ is the outcome of the marketing process.

And, marketing begins well before a product has been sold. B2C commerce, therefore, entails a wide gamut of marketing activities such as identifying activities, promotion, and sometimes even delivery of products (e.g.., music or films) that are carried out online. E-commerce permits the conduct of these activities at a much lower cost but high speed.

For example, ATM speeds up the withdrawal of money. Customers these days are becoming very choosy and desire individual attention to be given to them. Not only do they require the product features to be tailor-made to suit their requirements, but also the convenience of delivery and payment at their pleasure. With the onset of e-commerce, all this has become a reality.

Further, the B2C variant of e-commerce enables a business to be in touch with its customers on a round-the-clock basis. Companies can conduct the online surveys to ascertain as to who is buying what and what the customer satisfaction level is. By now, you might have formed the opinion that B2C is one-way traffic, i.e., from business-to-customers.

But do remember that its corollary, C2B commerce is very much reality which provides the Consumers with the freedom of shopping-at-will. Customers can also use call-centers set up by companies to make toll-free calls to make queries and lodge complaints round the clock at no extra cost to them. The beauty of the process is that one need not set up these call centers or helplines; they may be outsourced.

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

e-business has its own limitations as discussed below:
(i) Low Personal Touch:
e-business lacks the warmth of interpersonal interactions and personal touch for the satisfaction of customers. Thus, it is a relatively less suitable mode of business for product categories requiring personal touch for convincing the customers such as garments, etc.

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

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

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

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

(vi) Ethical Fallouts:
Companies use an ‘electronic eye’ to keep track of the computer files, email account, and the websites visited by their employees or others who use their network systems which are not considered right on ethical grounds.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 4 Business Services Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Business Services NCERT Solutions for Class 11 Business Studies Chapter 4

Business Services Questions and Answers Class 11 Business Studies Chapter 4

Multiple Choice Questions

Question 1.
DTH services are provided by
(a) Transport company
(b) Bank
(c) Cellular company
(d) None of the above
Answer:
(c) Cellular company

Question 2.
The benefits of public warehousing includes –
(a) Control
(b) Flexibility
(c) Dealer relationship
(d) None of the above
Answer:
(b) Flexibility

Question 3.
Which of the following is not a function of insurance?
(a) Risk sharing
(b) Assist in capital formation
(c) Lending of funds
(d) None of the above
Answer:
(c) Lending of funds

Question 4.
Which of the following is not applicable in life insurance contract?
(a) Conditional contract
(b) Unilateral contract
(c) Indemnity contract
(d) None of the above
Answer:
(c) Indemnity contract

Question 5.
CWC stands for –
(a) Central water commission
(b) Central warehousing commission
(c) Central warehousing corporation
(d) Central water corporation
Answer:
(c) Central warehousing corporation

Short Answer Questions

Question 1.
Define services and goods.
Answer:
Services are those separately identifiable, essentially intangible activities that provide the satisfaction of wants, and are not necessarily linked to the sale of a product or another service.

A good is a physical product capable of being delivered to a purchaser and involves the transfer of ownership from the seller to the customer. Goods are also generally used to refer to commodities or items of all types except services, involved in trade or commerce. While goods are produced, services are performed. A service is an act which cannot be taken home.

What we can take home is the effect of the services. There are five basic features of services. These features also distinguish them from goods and are known as’’ intangibility, inconsistency, inseparability, inventory and involvement (five I’s). Service facilities help ensure the supply of the right place at the right time. These facilities ensure a smooth flow of exchange of goods and services. Efficient service facilities provide the following benefits:

• Improved customer service.
• Lower distribution costs.
• Additional sales volume.
• Time and place utilities.
• Stabilization of prices.

Services required in business are transportation banking, insurance, communication, and warehousing.

Question 2.
What is e-banking. What are the advantages of e-banking?
Answer:
Electronic Banking (E-Banking)
These days banks have been providing the following new services due to the introduction of computerised equipments :
(1) Electronic Funds Transfer System (EFTs) – It allows transfer of funds electronically. It is a cost-saving scheme for the convenience of customers. Under the scheme the banks transfer the wages and salaries from company’s account to employees’ accounts as per the instruction of the employer.

This system removes the risk and inconvenience of handling cash. Similarly, a company can distribute dividend to its shareholders electronically. This is very safe method of transfer money.

(2) Automated Teller Machine (ATMs) – It is a free-standing self-service terminal which renders the facility of withdraw and deposit a money. While using ATM a plastic card is inserted into the terminal. After that identification code is also inserted. The machine responds by delivering required cash, cashing cheques, taking deposits and simple banking transactions.

(3) Debit Card – The card issued to the Bank Account holders against their bank balance to facilitate and simplify the payment, withdrawal and transfer of money any time, any where through the computer is known as Debit Card. There is no overdraft facility to Debit Cardholders. There is no fee interest and charge for issuing these cards. These cards are being issued in India by ICICI, HDFC, HSBC, Citi Banks, SBI, PNB etc.

Under the scheme point-of-sale (POS) terminals are located at merchants check out counters audited electronically to a bank computer. When the customer presents a debit card, the point-of-sale terminal automatically)
transfers the money for the purchase from customer’s account to store’s account. Under this system an individual can pay bills automatically by using a personal computer, which is linked by telephone to the bank computer.

Net Banking – In order to provide convenience to the customers for banking anytime, anywhere in the world, net banking is used. Customers are provided secured log in id and password through which they can access their account and make transactions like account balance enquiry, cheque book request, fund transfer etc.

(4) Credit Card – It is also called plastic money as it allow the cardholder to withdraw money without depositing. The card issued to selected customers to enable them to make payment of credit bills upto specified limit any time anywhere through computer is known as credit card. It is also used for withdrawing cash from ATMs.

The amount overdrawn is repaid upto specified date. Interest is charged if payment is not made upto specified date. The credit card system has facilitate simplified encourage credit transactions.

Credit card is a substitute for cash that can be used by selected customers. It is the key to the opening of bank account for daily payments. It provides overdraft facilities also. These are plastic cards having the photo identity and the signature embossed on the cards. It also contains issuing bank’s name and validity period of the card. The credit card holder has to deposit the amount withdrawn along with interest due to credit and company or bank.

Question 3.
Write a note on various telecom services available for enhancing business.
Answer:
The various types of telecom services are:
(i) Cellular mobile services:
These are all types of mobile telecom services including voice and non-voice messages, data services, and PCO services utilizing any type of network equipment within their service area. They can also provide direct interconnectivity with any other type of telecom service provider.

(ii) Radio paging services:
Radio paging service is an affordable means of transmitted information to persons even when they are mobile. It is a one-way information broadcasting solution and has spread its reach far and wide. Radio paging services are available including tone only, numeric only, and alpha / numeric paging.

(iii) Fixed line services:
These are all types of fixed services including voice and non-voice messages and data services to established linkages for long-distance traffic. These utilize any type of network equipment primarily connected through fiber optic cables laid across the length and breadth of the country. They also provide interconnectivity with other types of telecom services.

(iv) Cable services:
These are linkages and switched services within a licensed area of operation to operate services. The two-way communication including voice, data and information services through cable networks would emerge significantly in the future. Offering services through the cable network would be similar to providing fixed services.

(v) VSAT services:
VSAT (Very Small Aperture Terminal) is a satellite-based communications service. It offers businesses and government agencies a highly flexible and reliable communication solution in both urban and rural areas. Compared to land-based services, VSAT offers the assurance of reliable and uninterrupted service that is equal to or better than based services.

It can be used to provide innovative applications such as telemedicine, newspapers, online, market, rates, and tele-education even in the most remote areas of our country.

(vi) DTH services:
DTH (Direct to Home) is again a satellite-based media service provided by cellular companies. One can received media services directly through a satellite with the help of a small dish antenna and a set-top box. The service provider of DTH services provides a bouquet of multiple channels. It can be viewed on our television without being dependent on the services provided by the cable network services provider.

Question 4.
Explain briefly the principles of insurance with suitable examples.
Answer:
Fundamental Principles Of Insurance
(1) Principle of utmost good faith (uberrimate fide). This principle implies that the insurer and insured must disclose all the material facts apd information to each other. Material facts, here means all the important information, which would have affected the insurance policy as regards accepting the risk at that rate of premium.

Concealment of the material fact wi 11 make the contract voidable at the discretion of the aggrieved party. For example, the insured is a cancer patient but does not disclose this material fact in his proposal form. If the insured dies of cancer, the insurance company is not liable to pay the insurance money.

In case of fire insurance if certain flammable material like patrol is stored in the godown, it must be intimated to the insurance company. If this fact is concealed and the godown catches fire, the insurance company will not be liable to compensate for damages. Misrepresentation or failure to reveal material information gives the affected party the right to cancel the control.

(2) Principle of insurable interest – It is the basic and essential requirement of an insurance contract that the person taking the insurance policy must have personal and direct insurable interest in the insured person or property. The insured must have insurable interest.

The person is said to have an insurable interest, when he stands to gain with the safe existence of the insured person or property and would suffer personal loss due to the destruction of the insured. The objective behind this principle is that the insured should be compensated for the loss.

The loss will be suffered by the insured, if his own personal property is destroyed. He cannot be said to have suffered loss due to the destruction of the property of someone else. In case of life insurance, it must be present at the time of falling the policy. In fire insurance, both at the time of calling policy and at the time of actual loss.

(3) Principle of Indemnity – All insurance contract, except life insurance, are contract so find enmity. The objective behind this principle is to place the insured person as far as possible in the same financial position which he had enjoyed before the loss. In case of loss the insured will be paid the amount of actual loss or the amount of the policy, whichever is lesser.

The policy behind this arrangement is that nobody should treat insurance contract as the source of profit. The purpose of this principle is to put the insured in the same position after the event happened in which he was immediately before the event.

Example – The owner of the house gets his house insured for Rs. 10,00,000. Unfortunately the house catches fire and half of the house is destroyed. In this case the insurance company will pay only Rs.5,00,000 as compensation. It is the amount of actual loss. Suppose the house was worth Rs.20,00,000 but insured for Rs. 10,00,000. In this case if the entire house is fully destroyed, the insurance company will pay only Rs. 10,00,000. If half of the house is damaged the insurance company will pay Rs.5,00,000 only.

(4) Principle of Mitigation of losses – In the event of misshaping it is the duty of the insured that he must take all reasonable steps to minimise the loss in the same manner, which he would have done if the property was not insured. If the insured suffers any loss or incurs expenses in minimising the loss, he can recover the loss from the insurers.

If it is proved that the insured did not take steps to minimise the loss, which many prudent persons would have done, simply because the loss will be borne by the insurance company not by him, the insurance claim may be lost. The insured must act in the same manner as he would have gone, if the property were not insured.

(5) Principle of causa Proxima – According to this principle compensation is paid to the insured if the causes responsible for loss were insured. In case, the cause of the loss was not insured, compensation is not paid. The insured risk must be the proximate or nearest not remote. If the risk insured is the remote cause of the loss, then the insurer is not bound to pay compensation.

In case of marine insurance, shipping company is held responsible for certain risks, some risks are borne by the owner of goods and the insurance company is held liable if the loss is caused by the insured risk. If the loss is due to many complex causes, the nearest cause of the loss is ascertained.

For example, sugar sent by ship was insured against sea hazards. Rats made hole by cutting the pipe of the toilet. Sea-water entered through-hole and the sugar was destroyed. In this case, the nearest cause of the loss of sugar is the seawater, a risk, which was insured and the insurance company will be liable for risk. If the rats would have damaged the sugar directly insurance company would not have been liable for the risk.

(6) Principle of subrogation – Do6trine of subrogation states that after making compensation for the loss, the, insurer steps into the shoes of the insured. It means that the insurance company becomes entitled to exercise all the rights and remedies, which the insured had in respect of the property.

Let us take an example. Anil ensured his factory for Rs. 4,50,000. There was partial damage of the factory by fire due to the negligence of employee Anil’s claim for Rs.2,00,000 was admitted by the insurance company and paid later on. An filed a case against employee and received Rs.40,000 as compensation. The insurance company is entitled to receive Rs.40,000 from Anil which he received from employee.

(7) Principle of contribution – It implies that when property is insured for the some risk with two or more insurers, the different insurers will contribute to the total payment in proportion to the amount assured to each. In case one insurer has paid full compensation of loss, he is entitled to receive proportionate contribution from other insurers.

For example, A gets his house insured against fire for Rs. 1 lakh with insurer B and for Rs.50000 with insurer C.A loss of Rs.75000 occurs to the house due to a fire. Then, B is liable to contribute Rs.50000 and C Rs.25000. In case B pays the whole amount of loss, he can recover Rs.25000 from C. This principle is not applicable to life insurance.

Question 5.
Explain warehousing and its functions.
Answer:
Meaning Of Warehousing
A warehouse in simple language is the place used for the storage or accumulation of goods. Warehousing means holding and preservation of goods from the time of their production or purchase and until their sale or use. It involves making suitable and effective arrangements for keeping the goods in proper condition.

A warehouse is a place used for the storage of surplus goods. It helps the businessmen to keep suits during dull session. It may also be defined as an establishment that assumes responsibility for the safe custody of goods. Warehousing enables businessmen to produce goods throughout the year and sell them whenever there is adequate demand. It creates time utility by bridging the time gap between production and distribution of goods. Thus, warehousing creates time utility.

Functions of Warehouses
A modern warehouse performs the following important functions:
(1) Storage-The basic function of a warehouse is to store the surplus goods which are not needed immediately. Surplus goods are preserved and made available when required. A warehouse acts as a reservoir or storehouse of surplus goods and made available whenever they are demanded by the customers.

(2) Safety of Goods-A warehouse protects goods against pilferage, theft and damage. Goods are preserved safely from rain, sun, moisture, pests, fire, etc. Perishable goods such as fruits, vegetables, eggs, etc. can be preserved in cold storages. Thus, warehouses provide for the safe custody of goods.

(3) Price Stabilisation – Warehouses facilitate the smooth supply of goods and remove the fluctuations in the prices of goods. A warehouse enables businessmen to store excess goods and thereby avoid emergency sale. In the absence of storage facilities they have to dispose of the entire stock as soon as it is produced.

In warehouses available goods can be stored when they are in abundant supply and released when the demand is high. Thus, fall in prices is checked when the supply is at its peak and rise in prices is avoided during the slack season. In this way, producers can realise better prices and consumers can buy goods at reasonable prices.

(4) Risk Bearing- Warehouses safeguard the stock of goods against damage due to fire or theft. Once goods are handed to a warehouse the responsibility for ensuring the safety of goods passes to the warehouse¬keeper. The risk of loss or damage is borne by the warehouse-keeper. Moreover, goods kept in a recognised warehouse can be insured at a low premium. In case of loss or damage the value of goods can be recovered from the insurance company. Building of warehouses are specially constructed to safeguard the goods against several risks.

(5) Financing – In India, warehouse authorities advance money to owners of goods on security of goods deposited. Warehouses issue receipts to the persons who keep their goods on rent in warehouses. The receipt issued by a warehouse is a good collateral security against which money can be borrowed from banks and other financial institutions. In this way, warehouses help in financing trade.

(6) Mass Production – A warehouse removes the hindrance of time of production and consumption. Warehouses facilitate production in anticipation of demand. They create time utility by bridging the time gap between production and demand. In the absence of warehouses, the scale of production will be restricted to the level of current demand. Warehousing enables businessmen to avail of the economics of large- scale production and bulk-buying.

(7) Facilities-Warehouses provide facilities of processing, packing, blending etc. for the purpose of sale. A modern warehouse provides several facilities to businessmen. Goods can be prepared for sale by arranging them in small and suitable lots. They can be repacked, graded, blended and labelled. Prospective buyers can be taken to the warehouse for inspecting the goods. A warehouse can also deliver goods strictly according to the instructions of their owner.

(8) Employment – Warehouses provide jobs to a large number of persons. They offer direct employment and also generate employment opportunities by increasing the scale of operations.

(9) Facilitate Foreign Trade – An importer can keep the imported goods in bonded warehouses if he is unable or willing to pay customs duty immediately. He can pay duties in installments and draw goods gradually.

Long Answer Questions

Question 1.
What are services? Explain their distinct characteristics?
Answer:
Services are essentially intangible activities which are separately identifiable and provide satisfaction wants. Their purchase does not result in the ownership of anything physical Services involve an interaction to be realized between the service provider and the consumer.

(i) Intangibility:
Services are intangible, i.e., they cannot be touched. They are experiential in nature. One cannot taste a doctor’s treatment, or touch entertainment. One can only experience it. An important implication of this is that the quality of the offer can often not be determined before consumption and, therefore, purchase.

It is, therefore, important for the service providers that they consciously work on creating the desired service so that the customer undergoes a favourable experience. For example, treatment by a doctor should be a favourable experience.

(ii) Inconsistency:
The second important characteristic of services is inconsistency. Since there is no standard tangible product, services have to be performed exclusively each time. Different customers have different demands and expectations. Service providers need to have an opportunity to alter their offer to closely meet the requirements of the customers. This is happening, for example, in the case of mobile services.

(iii) Inseparability:
Another important characteristic of services is the simultaneous activity of production and consumption being performed. This makes the production and consumption of services seem to be inseparable. While we can manufacture a car today and sell it after, say, a month this is often not possible with services that have to be consumed as and when they are produced.

Service providers may design a substitute for the person by using appropriate technology but the interaction with the customer remains a key feature of services. Automated Teller Machines (ATMs) may replace the banking clerk for the front office activities like cash withdrawal and cheque deposit. But, at the same time, the presence of the customer, is required and his/her interaction with the process has to be managed.

(iv) Inventory (Less):
Services have little or no tangible components and, therefore, cannot be stored for a future use. That is, services are perishable and providers can, at best, store some associated goods but not the service itself. This means that the demand and supply needs to be managed as the service has to be performed as and when the customer asks for it.

They cannot be performed earlier to be consumed at a later date. For example, a railway ticket can be stored but the railway journey will be experienced only when the railways provide it.

(v) Involvement:
One of the most important characteristics of services is the participation of the customer in the service delivery process. A customer has the opportunity to get the services modified according to specific requirements.

Question 2.
Explain the functions of commercial banks with an example of each :
Answer:
Commercial Banks
Commercial banks are very popular in every country due to services rendered by them. A commercial bank is a financial institution; which deals in money and credit. It accepts deposits from those who have a surplus and lends to those who need them. The difference between the rate of interest on deposits and loans is the profit of the bank.

Definition of the Bank – According to Indian Banking Companies Act 1949, “A bank is an institution accepting for the purpose of lending or investment in deposit money from public repayable on demand or otherwise, withdrawal by cheque, drafts, order or otherwise’.

In the words of R.S.Mayers, “Banks are institutions whose debts are referred to as ‘bank deposits ’ and they are commonly accepted in final settlement of ‘other people s debts ’

According to Justice Holmes, “The real business of banker is to obtain deposits of money which he may use for his own profits by lending it out again ‘

Bank is German word, which means ‘to collect’. The main function of the bank is the collection of funds as deposits. Later on bank started performing other functions such as lending etc.

Bank has occupied very important place in the economic structure of the country. After independence in order to achieve social objectives of the country banks were nationalised. According to 20 point programme of the government banks have been entrusted the responsibility for developing the undeveloped regions of the country.

In the light of these recent thinking, banks may be defined as the financial institution dealing in money and credit to achieve the economic and social objectives of the business. In India, some of major commercial banks are – State Bank of India, Punjab National Bank, Bank of Baroda, Canera Bank and Syndicate Bank etc.

Functions Of Commercial Bank

(1) Accepting deposits – This is one of the primary function of the bank. The main purpose of banks is to promote savings and accept deposits from customers. Banks offer facilities in different ways to suit the needs, tastes and preferences of the customers. Deposits are accepted mainly in current, savings, fixed deposit, home safe and recurring deposits accounts.

(2) Advancing loans – This is also the important function of the bank. The bank advances loans to merchants and manufacturers at higher rates of interest than what it allows on deposits. The difference between the two rate of interest is the profit of the bank. The bank advances loans through cash credit, bank overdraft, discounting of bills etc.

(a) Cash credit- In this method, the bank instead of making payment to the borrower in cash, deposits the money in the Current Account, opened in the name of the borrower. The borrower can withdraw the money by using cheques upto specified limit. The bank asks the borrower to submit a promissory note for the loan. Cash credit is like overdraft arrangement, but for this purpose it is not necessary to operate a current account. Interest is to be paid on the amounts with drums.

(b) Bank overdraft – This facility is granted by the bank to its current account holders. Under this arrangement the customer is authorised to withdraw more than the amount deposited. The amount of overdraft is settled between the bank and customer. This facility is granted without holding security’. Interest is charged by the bank on the amount actually withdrawn on monthly basis. In practice the customer pledges security of stock of goods.

(c) Discounting of the bills – Financial help can also be sought from the bank by discounting Bills of exchange before the due date. The bank charges interest in the shape of discount for the period between date of discounting and the due date of the bill. The bank pays the amount or credits the amount into the account of the drawer after deducting discount.

3. Agency functions – Commercial banks perform the following agency functions:

(a) Collection of cheques, bills and drafts- Bank collects cheques, drafts and bills on behalf of its customers. The customer deposits his cheques received from outside parties, bills accepted by other parties and bank drafts received from outside. Bank collects the amounts of these documents and credits the money into the customers’ accounts.

(b) Collection of interest and dividends etc. – The customer may – have invested in shares and debentures and received interest and dividend.
The bank may be instructed to collect interest and dividend on behalf of the customer and deposit in his account.

(c) Payment of interest, instalment of loan and insurance premium etc.-The customer may instruct the bank to make the payment of his instalment of loan borrowed by him and interest thereon. He may also instruct the bank to make payment of his insurance premium, rent of the shop, factory, residence etc. The bank, after making payment of these expenses debits the amount to customers’ account.

(d) Purchase/Sale of securities – The bank can also work as an agent of the customer and assist in purchasing/selling shares, debentures, bonds, certificates and government securities.

(e) Transfer of funds through drafts/mail transfers – Bank provide facilities to transfer funds from one place to another place at nominal charges. Bank also provides the facility of purchase and sale in foreign currencies.

4. Other services – In addition to agency services banks provide other miscellaneous services also:

(a) Issuing travellers cheques – There is always risk to undertake long journey from one place to another place with large sum of money in cash. Banks issue travellers cheques for the desired amount. The cheque can be encashed for the desired amount at different places. The amount paid against cheque are entered at its back. The total amount withdrawn cannot exceed the amount of the cheque. Travellers cheque ensure safe journey without risks.

(b) Issuing letter of credit – The bank issues letter of credit on-demand to its customers. Sometimes suppliers of goods and lenders of money insist upon letter of credit issued by the bank.

(c) Locker or custodial services – There is always great risk in keeping large amount of cash, jewellery and other valuables. The bank offers an opportunity in the form of lockers in the premises of the bank itself, where valuables can be kept on payment of nominal charges. There are two or three keys of the locker, so for opening and closing it both the keys (one kept by the bank and the other kept by the customers) are used. The locker is operated by the customer as and when required.

(d) Underwriting securities – Underwriting means undertaking the risk to subscribe for shares and debentures of Companies in case applications from public fall short. Banks also underwrite shares and debentures of companies. In this way, banks help in building and strengthening capital market.

(e) Dealing in foreign exchange – Foreign currency is required for import, export, foreign travel and all sorts of foreign dealings. We can get foreign exchange through banks.

(f) Providing references – Sometimes creditors and money lenders require from the customers trade references, preferably from banks. Reference services are also provided by the government.

(g) Issuing bank drafts – Bank drafts are the economical and safest means of sending money. It is an instruction of the bank to its branch to pay the certain specified amount to the particular party. These bank drafts can be obtained against bank account and can also be obtained by cash payment.

(h) Advisory functions – Bank also functions as a friend, philosopher and guide of his customers. Bank renders advisory services on economic matters to its customers.

Question 3.
Write a detailed note on various facilities offered by the Indian Postal Department.
Answer:
Indian post and telegraph department provides various postal services a cross India. For providing these services the whole country had been divided into 22 postal circles. These circles manage the day-to-day functioning of the various head post offices, sub-post offices and branch post offices. Through their regional and divisional level arrangements, the various facilities provided by postal department are broadly categorized into:

(i) Financial facilities:
These facilities are provided through the post office’ savings scheme like Public Provident Fund (PPF), Kisan Vikas Patra and National Saving Certificates in association to normal retail banking functions of monthly income schemes, recurring deposits, savings account, time deposits and money order facility.

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

(iii) Financial services: (SCSS, PPF, KVP, NSC, TDJ)
Senior Citizen Savings Scheme (SCSS): Any individual who has attained the age 60 years on the date of opening or who has attained the age of 55 years and who has voluntarily retired from the service can open this account. Here, the account holder gets an attractive interest. Automatic transfer of interest into savings account facility is available.

Joint account is opened with the spouse only and not with any other person. The amount of deposit is Rs. 500/- and maximum is Rs. 1.0 lakh. Subject to certain conditions loan facilities are available after 3 years. The investment by an individual will qualify for tax deduction under section 88 of IT Act. .

(iv) Kisan Vikas Patras (KVP):
The certificates will be available in the denominations of Rs. 100, Rs.500, Rs. 1000, Rs.5000, Rs. 10000 and Rs.50000. certificates will be issued to individuals only. There is no limit for purchase. Certificates can be cashed at any time after expiry of 2 years and 6 months from the date of purchase. Nomination and identity slip facilities are available. .

(v) National Saving Certificate (NSC):
NSC VIII Issue available in denominations of. 100,500,1000,5000 and 10,000 can be issued to individuals only. The maturity period shall be 6 years from the date of issue. There is no limit for purchase. Only local cheques are accepted. They can be pledged as security.

A nomination facility is available. No premature encashment is permitted in the normal course. Investments by individuals will qualify for tax deduction under Income Tax Act.

(vi) Time Deposit Accounts (TD):
There are four types of accounts, namely 1-year, 2-year, 3-year and 5-year accounts. A single can open an account, two adults jointly, Guardian on behalf of a minor or a minor himself who has attained the age of 10 years. Any number of accounts can be opened. There shall be only one deposit in an account.

The deposit should be in multiples of Rs. 200 and there is no maximum limit. Annual interest can be automatically credited to the savings account of the depositors, Post maturity interest shall be allowed for a maximum period of 24 months SB rate premature closure of the account is permitted on some conditions.

Question 4.
Describe various types of insurance and examine the nature of risks protected by each type of insurance.
Answer:
1. Life Insurance
Life insurance is a contract between a person and an Insurance company. According to the contract of insurance a specified sum of money is payable by insurance company on the death of the insured or after the expiry of the policy period, whichever is earlier in consideration to the payment of the premiums, whenever due. The amount of the premium is determined on the basis of the amount of the policy, the period of the policy and terms of the premium, whether monthly, quarterly, half-yearly or annually.

There is an element of investment in the life insurance, because the amount of the policy is received in both the cases i.e. on the death of the insured or at the expiry of the policy. Life insurance is not a contract of indemnity because it is impossible to compensate the deceased policyholder. The person whose life is insured is called the assured. The consideration paid to the insurance company is premium. It is based on good faith and based on insurable interest in the like assured.

2. Fire Insurance
Fire insurance is an agreement between the insurance company and the owner of the property, wherein insurance company, after receiving specified premium assures actual loss or the amount of the fire policy (whichever is less) will be paid if the insured property catches fire.

Fire insurance is a contract of indemnity. It is based upon the principle of good faith. The insured must have an Insurable interest in the subject-matter of Insurance. It must exist both at the time of insurance and at the time of loss. It is a contract from year to year on a renewable basis.

3. Marine Insurance
Marine insurance is an agreement in which the insurance company assures to compensate for the loss, if any, caused by insured marine perils after the receipt of the premium. Marine policies can be taken for the ship, loaded goods (cargo) for freight” and salaries of employees etc.

This contract is based on utmost good faith. Both the insured and the insurer must disclose everything which is in their knowledge and can affect the contract. Insurable interest must exist at the time of actual loss incurred and based on the approximate cause for which insurance policy is taken.

4. Miscellaneous Insurance
Some important types of insurance have been discussed below:

(1) Motor Vehicle Insurance – Under this insurance vehicles on roads such as motors, trucks, cars, vans, motorcycles, scooters etc. are insured. If the insured vehicle is lost or damaged or becomes the victim of accident, the insurance company compensates for the actual loss or the amount of the policy, whichever is lower. If the insured vehicle causes damage to any other vehicle the insurance company will compensate to the owner of other vehicle. Motor vehicle insurance is classified as follows:

(a) Comprehensive Insurance — This insurance covers all types of risk causing damage to the insured vehicle.

(b) Third Party Insurance – If any vehicle causes damage to any person or vehicle the owner of the vehicle will compensate. The insurance company under Third Party Insurance will compensate to the owner of vehicle only.

(2) Burglary Insurance – Under this insurance, loss due to theft or burglary is compensated by the insurance company. While taking policy detailed information of the article to be insured is furnished. The insurance company compensates for the loss of the insured due to theft or burglary. Insured items may include gold and ornaments, other household items such as refrigerator, T.V., Air Conditioners etc.

(3) Personal Accident Insurance – This insurance policy is taken to compensate for the loss caused by accident. If the insured person dies or meets any fatal accident, the insurance company makes the payment of the insured amount to the person himself if he survives or to the nominee of the insured person, if he dies. In case of partial disability the amount is paid according to the terms and conditions of the insurance policy. The insurer, in an accident policy, is liable only if the unfair or death is caused by an accident and not due to natural causes.

(4) Fidelity Insurance-This insurance policy protects against the loss caused by embezzlement, dishonesty and fraud of employees. In order to protect itself from losses caused by these misshaping the insurance company guarantees to compensate for the loss caused by dishonesty of employees. If the business suffers any lose due to the fraud of the employee, the insurance company compensates for it. In case of this insurance policy the business cannot make any change in the service conditions of the employee without consulting insurance company.

(5) Employees Accident Insurance – Workers working in the factory may be subjected to any accident.at any time while working in the factory. In case of partial loss of limbs or disability, the owner of the factories have to compensate for the loss to the employees as per the provisions of factory act. If the factory owner desires, he can get the risk insured with the insurance company. In the case of insurance, the insurance company will have to compensate the employee.

(6) Health Insurance – Under this insurance policy medical expenses of illness and disability are covered by the Insurance. This type of Insurance can transfer the burden, of the costs of illness or accident, so that people do not have to face financial ruin, because of poor health. This insurance covers basic medical expenses, major medical expenses, disability income and long term hospitalization reimbursement of charges.

Question 5.
Explain in detail the warehousing services.
Answer:
Functions Of Warehousing
(1) Stability in prices-Warehousing maintains the stability of price by storing goods in the godown and releasing as per requirements of the market. Prices of seasonal commodities can be stabilised. Warehousing help in removing violent fluctuation in the prices of goods through smooth supply throughout the year.

(2) Surety for loan – The warehouse receipt can be deposited with the bank and the lending institution as security against loans borrowed.

(3) Storage facility—Surplus goods required to be used in future can be stored in godown and taken back, whenever required.

(4) Safety of goods – Godowns are specially made to keep goods safe. Certain godown storing specific commodities are built to suit the nature of the commodity. Goods are always safe in their proper godowns. Godown safeguards the show of merchandise from deterioration pilferage and vastage etc.

(5) Other functions-Warehouses provide facilities for grading and packaging of goods. In case of bonded warehouse, the importer gets reasonable time to arrange funds to make the payment of customs and other dock charges.

Importance Of Warehousing

Goods are stored by manufacturers, producers, farmers, wholesalers and even retailers. Storage and warehousing have the following advantages and importance:

(1) Protection of goods-A warehouse protect goods against pilferage, theft and damage. After keeping goods in the godown the businessman are carefree. Goods are preserved free from rain moisture, pests, fire etc.

(2) Useful for seasonal goods – There are certain things which are produced once in a year and used throughout the year, such as wheat, rice, sugar, potatoes etc. By keeping goods in the warehouses, goods are available throughout the year.

(3) Seasonal consumption of goods – There are certain commodities which are produced throughout the year but consumed during the season. These commodities are woolen garments, heaters, coolers etc. As such in order to maintain balance between demand and supply these commodities are required to be stored safely. A warehouse acts as a reservoir of store house of surplus goods.

(4) Production to meet future demand – These days goods are produced on a large scale in anticipation of future demand. There is time gap between the production and consumption of goods. It is, therefore, necessary that goods should be kept safe and secured during this period.

(5) Storage of raw material – Production is a continuing activity, so raw material is required throughout the year. Supply of raw material can be maintained throughout the year by proper storing of raw material.

(6) Stability of prices – In order to maintain the stability of price, it is necessary that surplus goods during the season should be stored and brought out during the offseason. This will also check the fluctuation of price.

(7) Facilitating foreign trade – An importer can keep the imported goods in bonded warehouses if they is unable or unwilling to pay custom duty immediately. He can pay duties in installments and draw goods gradually.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 3 Private, Public and Global Enterprises Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Private, Public and Global Enterprises NCERT Solutions for Class 11 Business Studies Chapter 3

Private, Public and Global Enterprises Questions and Answers Class 11 Business Studies Chapter 3

Tick the appropriate answer:
Question 1.
A government company is any company in which the paid-up capital held by the government is not less than
(a) 49%
(b) 51%
(c) 50%
(d) 25%
Answer:
(a) 49%

Question 2.
Centralised control in MNC’s implies control exercised by
(a) Branches
(b) Subsidiaries
(c) Headquarters
(d) Parliament
Answer:
(c) Headquarters

Question 3.
PSE’s (Public Sector Enterprises) are organizations owned by
(a) Joint Hindu Family
(b) Government
(c) Foreign Company
(d) Private Entrepreneurs
Answer:
(a) Joint Hindu Family

Question 4.
Reconstruction of sick public sector units is taken up by
(a) MOFA
(b) MOU
(c) BIFR
(d) NRF
Answer:
(c) BIFR

Question 5.
Disinvestment of PSE’s implies
(a) Sale of equity shares to
(b) Closing down operations private sector/public sector
(c) Investing in new areas
(d) Buying shares PSE’s
Answer:
(a) Sale of equity shares to

Short Answer Questions

Question 1.
Explain the concept of the public sector and private sector.
Answer:
Indian Economy consists of a mixed economy. A mixed economy refers to an Economic system where both private and government enterprises co-exist. The economy therefore classified into two sectors viz., private sector and public sector, file private sector consists of business enterprises owned by individuals or a group of individuals.

The various forms of organization are sole proprietorship, partnership, joint Hindu Family. Co-operative and company. The public sector consists of business enterprises owned and managed by the government. These organizations may either be partly or wholly owned by the Central or State Government with an equity stake of at least 51 % with the government.

They may also be a part of the ministry or might have come into existence by a special Act of the Parliament. The government participates in the economic activities of the country through the public sector. Industrial policy resolutions announced by the government from time – to – time define the area of activities in which the private sector and public sector are allowed to operate.

Question 2.
State the various types/forms of organizations in the private sector.
Answer:
Forms of Private Sector Enterprises – Following forms covered by Private Sector Enterprises:
(1) Sole Proprietorship – He is a person who carries on business exclusively by and for himself. He is the provider of capital and management to the business. He does not share the business profits with anybody. He himself is responsible for all the business activities.

(2) Joint Hindu Family – The business of a Hindu is inherited by his heirs under the Hindu Law. Such a business is known as Joint Hindu Family Business. The head of the family, known as Karta, manages the affairs of the business. The other male members of the Hindu family are known as coparceners. This business is governed by the provisions of Hindu Law.

(3) Partnership Firms-Partnership is a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. An A-partnership firm comes into existence when two or more persons enter into an agreement to carry lawful business and share its profits and losses. The maximum number of members of a partnership shall not exceed twenty.

(4) Joint Stock Company – It is an artificial person created by law (Companies Act, 1956). It is invisible, and intangible person and exists only in the eyes of law. Being created by law, it possesses only those characteristics which the charter of its creation known as Memorandum of Association confers upon it. It acts according to the Companies Act 1956.

(5) Cooperative Society – It is also a body corporate. It is formed and registered under the Cooperative Societies Act, 1912. It is a voluntary organisation of its members. Its success depends upon the cooperation among its members formed the cooperative society.

Question 3.
What are the different kinds of organizations that come under the public sector?
Answer:
The forms of organization which a public enterprise may take are as follows:
(i) Departmental Undertaking:
These enterprises are established as departments of the ministry and are considered as part of an extension of the ministry itself. These undertakings may be under the Central or the State Government. Examples: Railways and Post and Telegraph Department.

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

(iii) Government Company:
According to the Companies Act, 1956, a government company means any company in which not less than 51 percent of the paid-up capital is held by the Central Government, or by any State Government or partly by Central Government and partly by one or more State Governments. These are established purely for business purposes.

Question 4.
List the names of some enterprises under the public sector and classify them.
Answer:
Followings are the undertaking covered by public enterprises :
Departmental Undertaking – A departmental enterprise is organised, financed, and controlled in as much the same way as any Government department. It may be run either by the Central Government or by a State Government. Examples of such departments are :

• Posts and Telegraphs Works
• Indian Railways
• The Integral Coach Factory, Perambur
• The Diesel Locomotive Works Varanasi
• National Instruments Factory, Calcutta
• Precision Instruments Factory, Kolkata
• U.P. Cement Factory.

Statutory Corporation – A statutory or public corporation is an autonomous business enterprise created by law to conduct the activities assigned to it. It is a body corporate set up under a special act passed by the Central or State Legislature. Thus, it is known as a statutory corporation as it is created by statute. The statute defines its objects, powers, and functions.

Some important examples of statutory corporations are:

• Life Insurance Corporation of India
• Air India International Corporation
• Indian Airlines Corporation
• Food Corporation of India
• Employees’ State Insurance Corporation
• Central Warehousing Corporation
• State Financial Corporations
• State Bank of India.

Government Company – A government company is a company in which not less than 51 percent of the paid up share capital is held by the Central Government or by one or more State Governments or both. The remaining amount of paid-up capital of a government company can be subscribed to by private individuals or institutions.

It is formed and registered under the Companies Act, 1956 which contains special provisions relating to the government companies. But the Central Government has been empowered to direct through a notification in the Official Gazette that any of the provisions of the Companies Act as may be specified therein shall not apply to any government company or shall apply with certain exceptions, modifications, and approvals.

Some of the examples of government companies are :

• Bharat Heavy Electricals Ltd.
• Hindustan Steels Ltd.
• Hindustan Insecticides Ltd.
• Hindustan Cables Ltd.
• Hindustan Shipyard Ltd.
• Sindri Fertilizers Ltd.
• Indian Oil corporation.

Question 5.
Why is the Government Company form of organization preferred to-other type in the Public Sector?
Answer:
The government company form of organization is preferred to other types in the public sector because of the following advantages it offers:
(i) Simple Procedure of Establishment:
A government company can be easily formed as compared to other public enterprises. There is no need to get a bill passed by the Parliament or State Legislature. It can be formed simply by following the procedure laid down by the Companies Act.

(ii) Working on Business Principles:
The government company works on business principles. It is independent in financial and administrative matters. Its Board of Directors usually consists of professionals and persons of repute.

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

(iv) Competition:
These companies pose a healthy competition to the private sector which ensures the availability of goods and services at reasonable prices and good quality.

Question 6.
How does the government maintain; a regional balance in the country?
Answer:
The government is responsible for developing all regions and states in a balanced way and removing regional disparities. Most of the industrial progress was limited to a few areas like the port towns in the pre-independence period. After 1951, the government laid down in its five-year plans, that particular attention would be paid to those sectors and regions which were lagging behind and public sector industries were deliberately set up.

Four major steel plants were set up in the backward areas to accelerate economic development, provide employment to the workforce and develop ancillary industries. This was achieved to some extent but there is scope for a lot more.

Development of backward regions so as to ensure a regional balance in the country is one of the major objectives of planned development. Therefore, the government had to locate new enterprises in backward areas and at the same time prevent the mushrooming growth of private sector units in already advanced areas.

Private sectors are not keen to set up industries in remote and backward regions because they lack infrastructural facilities such as electricity, transport, banks, communications, etc. As a result, these areas remain underdeveloped and industries get concentrated in urban areas. Public sectors should set up in backward areas to remove ’ regional disparities in development and to ensure balanced development in different parts of the country.

Long Answer Questions

Question 1.
Describe the Industrial Policy 1991, towards the public sector.
Answer:
Public sector in India was created to achieve the objectives of speeding up economic growth and more equitable distribution of income and wealth. The New Industrial Policy 1991 fay certain conditions to streamline public sector.

Public Sector and New Industrial Policy of 1991 – The government of India announced ‘New Industrial Policy’ in July, 1991. The important decisions have been taken in this policy with regards to public sector enterprises, which are as under:
(i) Sick public sector enterprises will be subject to the adoption of same policy as adopted by private sector enterprises.

(ii) Public sector enterprises will be made more efficient and : accountable through the medium of memorandum of understanding executed between these enterprises.

(iii) Share of public sector enterprises wi 11 be is in vested, that is sold to the ownership of public sector enterprises.

(iv) Only four industries have been reserved exclusively for public sector in place of 17 industries at present.
Recent Changes in the Role of Public Sector – U.S.S.R. was the firstcountry governed by socialism. Its disintegration shattered the concept of socialism. No country is prepared to accept socialism in its old form. It is a hard fact that economic growth at faster rate cannot be achieved without the active participation of private sector.

Simultaneously with the Public Sector – Previously in the fifty’s and sixty’s every developing country felt that, public sector should play dominant and major role in the economic growth of a country’s economy. It was felt during these years that the private sector has more interested in profit motive. It will result unbalanced growth of economy, ft will create wide gap between haves and the have-not.

After more than fifty years of independence it was seriously felt that the public sector has got its own drawbacks and limitations, ft can never be taken as the remedy of all economic evils. It was also seen that more capitalistic economies have flourishing economic growth.

Therefore, it was decided that public sector units running on losses should be closed. Importance should be given to private sector. Public sector should have narrow growth in areas of strategic defence works and infrastructure sector. Therefore, the slogan for privatisation has become the order of the day.

We cannot and should not dispense with the valuable contribution of public sector, but its unplanned expansion should be checked. There should be proper balancing between the public sectorand private sector.

It should be taken as granted that both public and private sectors are the two blade of a scissor, and both of them will be required to operate optimally. It will not be out of place to mention that no economy in the world is completely

socialisti corcapitalistic. In the light of above experiences, the government adopted a new approach to public enterprises. The important steps in the field of public enterprises are as follows :

(1) Industries Reserved for Public Sector – Since 1956-91, 17 industries had been reserved for the public sector. Private sector was not granted licences for the establishment of these, industries, so the public sector controlled these 17 industries. These industries were reduced in 1991 and further 5 industries reduced in 1993. At present only four industries have been reserved for public sector.

Since 1970 the licensing policy has been liberalised and simplified. Industrialists can also expand and develop their industries according to their wishes and this has had a very favourable effect on industrialisation in the country. As a result, industrialists now have complete freedom to establish any industry by obtaining licence easily and in case of some industries, even obtaining licence is not required.

List of Industries Reserved for the Public Sector

Private Sector will not be granted licences for under-mentioned industries

• Atomic energy
• Railway transport
•  The subsistences specified in the schedule to the Notification Number S.0.212(E) dated March 15,1995 of the Government of India in the Department of Atomic Energy.
• Arms and ammunition and allied items of defence equipment, defence aircraft and warships etc.

(2) Financial Restructuring – Financial requirements of public sector can be met through mutual funds, financial institutions, general public and workers.

(3) Provision of National Renewal Fund – Provision of funds through National Renewal Fund (NRF) was also made to protect the interest of public sector workers. National Renewal Fund was set up on 1 February 1992 to assist the employees in retraining, re-employment and counselling in case a public sector units is liquidated or dissolved.

(4) Redwelling through BIFR- Board for Industrial and Financial Reconstruction (BIFR) is established for the formation of rehabilitation schemes by which residential facilities can be provided to the workers of public sector enterprises.

(5) Privatization – The government of India has also experienced capitalised economy, where producing units are operated under private ownership. Though the speed of privatization is slow and clumsy but it will pick up soon by making a simple procedural mechanism, transparent, and stating the disinvestment Objectives clearly in each case.

The following table shows the disinvestment in public sector enterprises:

(1) Growth of subsidiary industries – Growth of subsidiary industries owes to the growth of public enterprises. Public enterprises provide more opportunities to the subsidiary industries. Moreover, 500 cottage industries are selling their products to public enterprises. During 1998-99, goods worth more than Rs. 1,230 crores were purchased from the subsidiary industries.

(2) Employment opportunities – The employment opportunities are also generated by the public sector enterprises. The average welfare expenditure incurred on the public sector employees is estimated to be Rs. 2,030 per annum and average income of public enterprises employees increased from 5,920 in 1970-71 to Rs. 78,841 in 1999-00. During the period of 1999-00 the public enterprises offered employment to 20.6 lakh of people. The government has set up public enterprises in various regions to provide employment.

(3) Capital formation – In India, the spread of public enterprises has stimulated capital formation. During first five year plan the share of public sector enterprises in gross capital formation stood at 84%; during second plan, it was 56%; during third plan, it was 59% and so on.

(4) Basic industries- Public sector laid sound foundation for basic, huge investment and defense and strategic importance industries in India. The public sector also established large-scale industries such as atomic energy, fertilizers, iron and steel, arms and ammunition, heavy machines etc. The contribution of public sector in attaining self-sustained growth cannot be over-emphasized and this sector is now striving for the growth of consumer industries along with basic and heavy industries.

(5) Resources of economic development-India is a less developed country, so it needs a lot of resources for economic development, but the small percentage of profit in the private sector is reinvested, the rest is distributed as dividend among the shareholders. The surplus of the public sector enterprises is largely reinvested on development of enterprises or on the economic progress of the country. Thus, the Government of India generates resources for the development of public enterprises. In order to speed up the process of economic development, the direct participation of Government is necessary.

(6) Progress of Infrastructure – The expenditure on the development of infrastructure is known as “social overhead costs” which are generally very high and beyond the means of private sector. The progress of infrastructure comprising of power, capital goods, basic industries, transport, communication etc. is a precondition of growth.

The private sector is reluctant to undertake the projects which do not involve high profits, their development is possible only in the public sector. Many of the public sector enterprises are extremely helpful in creating infrastructure for development.

(7) Establishment of socialistic pattern of society – Indian industrial policy of 1956 aims at establishing the socialistic pattern of society. In such system inequality of distribution is kept within the stipulated limits and public enterprises are expected to generate the much needed surplus for growth.

Investment in public sector would serve as a hand stock of check on the private sector. The government can sell essential goods to the poor at cheaper rates by adopting the policy of price discrimination. Public sector enterprises may set a trend for the socialistic pattern of the society and thus, wages of the low-paid employees can be raised to a reasonable standard.

(8) Development of backward regions- Public sector enterprises is set up to provide industries in the least or undeveloped regions in order to maintain regional balances in the area of industrial development This is done to create infrastructure and employment opportunities in economically backward regions.

(9) Taking over of sick industrial units – Public sector enterprises also formed to take over or merged the sick industrial undertakings so that wastage of social resources and loss of employment may be checked. National Textile Corporation establishment is an example of setting up of such enterprise.

Question 3.
Can the public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer.
Answer:
The profitability and efficiency of any enterprise can be measured with the help of certain indicators of revenue or surplus obtained and developmental activities operated by that enterprise. The profitability of Public Enterprises – Profitability is not the sole motivating force of development programme in case of public enterprises.

(Source : Economic Survey 2000) Reasons for Low Profitability in Public Sector- The main reasons of low profitability of public sector enterprises are given below:
Profit plays an important role. Profitability also measures the efficiency of management shown with the help of the following Table:

(1) Industrial Disputes – Public sector workers oftenly indulge in industrial disputes. The role of profit remains low due to the disputes between workers and management. It adversely affects production and efficiency resulting in low output and high cost which ultimately lower down the profits.

(2) Idle Capacity – Public sector enterprises operate at less than their full production capacity. Hence, the cost of production per unit remains high and the rate of profit low. The idle capacity is one of the most important cause of less profitability of public sector enterprises.

(3) Heavy expenditure on construction-Public sector enterprises have a lot of expenditure incurred on the construction of residential houses for the workers and managers. About Rs. 108 crores have been spent through public enterprises on the construction of houses and related welfare projects. It is not possible to cover the interest rate involved in the investment of construction, such investments miserably reduce the profits.

(4) Location effect – Private sector enterprises are located at places that suits the objectives of profit maximization. On the other hand, public enterprises are located in backward areas with a view to avoid regional imbalances. These places fail to offer developed and economically viable environment. As a result,cost factor is pushed up and profitability reduced.

(5) Lack of efficiency – Public enterprises generally have low efficiency, because of lack of professionalism of management and organisers. The managers of public enterprises are generally evasive of their responsibilities.Late Prime Minister Rajiv Gandhi held the view that in efficient management the fundamental weakness of public enterprises. Their delay-delaying tactics takes long time. This adversely affects the efficiency. These enterprises suffer from red-tapism syndrome.

(6) Inefficient management – Public enterprises fail to achieve their objectives due to the lack of good and professional management. Generally retired bureaucrats or defeated politicians in elections are appointed on managerial posts of the public enterprises. These politicians use public enterprises as a means to train the management staff of public enterprises to improve the quality of management by which the government can achieve its objectives.

Attempts are being made to improve the efficiency and profitability of public enterprises which are considered necessary. Staff strength and labour costs are being reduced through a freeze on new recruitment and voluntary retirement schemes. Professionalisation of management, functional autonomy and improvement in work culture are being made to improve the efficiency and profitability of the public sector.

Question 4.
Why are global enterprises considered superior to other business organizations?
Answer:
Global enterprises are industrial organizations which extend their industrial and marketing operations through a network of their branches or subsidiaries in several countries, these enterprises are considered superior to other private sector companies and public sector enterprises because of certain features which are as follows:
(i) Availability of Funds:
These enterprises can survive in crises and register higher growth as they possess huge financial resources as they have the ability to raise funds from different sources such as equity shares, debentures or bonds. They are also in a position to borrow from financial institutions and international banks as they have high credibility.

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

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

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

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

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

Question 5.
What are the benefits of entering into joint ventures?
Answer:
Businesses can achieve unexpected gains through joint ventures with a partner. Joint ventures can prove to be extremely beneficial for both parties involved. One party may have strong potential for growth and innovative ideas but is still likely to benefit from entering into a joint venture because it enhances its capacity, resources, and technical expertise.

The major benefits of joint ventures are as follows:
(i) Increased resources and capacity:
Joining hands with another or. teaming up adds to existing resources and capacity enabling the joint venture company to grow and expand more quickly and efficiently. The new business pools in financial and human resources and is able to face market challenges and take advantage of new opportunities.

(ii) Access to new markets and distribution networks:
When a business enters into a joint venture with a partner from another country, it opens up a vast growing market. For example, when foreign companies form joint venture companies in India they gain access to the vast Indian market. Their products which have reached saturation point in their home markets can be easily sold in new markets.

They can also take advantage of the established distribution channels i.e., the retail outlets in different local markets. Otherwise establishing their own retail outlets may prove to be very expensive. .

(iii) Access to technology:
Technology is a major factor for most businesses to enter into joint ventures. Advanced techniques of production leading to superior quality products save a lot of time, energy, and investment as they do not have to develop their own technology. Technology also adds to efficiency and effectiveness, thus leading to a reduction in costs.

(iv) Innovation:
The markets are increasingly becoming more demanding in terms of new and innovative products. Joint ventures allow businesses to come up with something new and creative for the same market. Especially foreign partners can come up with innovative products because of new ideas and technology.

(v) Low cost of production:
When international corporations invest in India, they benefit immensely due to the lower cost of production. They are able to get quality products for their global requirements. India is becoming an important global source and extremely competitive in many products.

There are many reasons for this, lowcost of raw materials and labour, technically qualified workforce management professionals, excellent manpower in different cadres like lawyers, chartered accountants, engineers, scientists. The international partner thus gets the products of required quality Mid specifications at a much lower cost than what is prevailing in the home country.

(vi) Established brand name:
When two businesses enter into a joint venture one of the parties benefits from the other’s goodwill which has already been established in the market. If the joint venture is in India and with an Indian company, the Indian company does not have to spend time or money in developing a brand name for the product or even a distribution system. There is a ready market waiting for the product to be launched. A lot of investment is saved in the process.