CBSE Class 11

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 10 Internal Trade Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Internal Trade NCERT Solutions for Class 11 Business Studies Chapter 10

Internal Trade Questions and Answers Class 11 Business Studies Chapter 10

Question 1.
What is meant by internal trade?
Answer:
Buying and selling of goods and services within the boundaries of a nation are referred to as internal trade. No customs duty or import duty is levied on such trade as goods are part of domestic production and consumption. Internal trade can be classified into two broad categories:

• Wholesale trade
• Retail trade

Question 2.
Specify the characteristics of fixed shop retailers.
Answer:
Fixed Shops – Fixed shop retailers have a fixed place of business and do not move from one place to another. Their shops are situated in market places or residential localities. They are of two types (a) small-scale shops, and (b) large-scale shops.
Small-scale Fixed Retail Shops – Small-scale retail shops are the most common form of retail trade. Such shops are found in every nook and corner of cities. They are of the following types :

(1) Street Stalls – These are located at street crossing or in the busy streets. A stall is an improvised structure a table or a temporary platform to display the goods for sale. They deal in a wide variety of low-priced articles such as bread, butter, stationery, hosiery, toys, etc.

(2) Second-hand Goods Shops – These shops deal in second-hand goods or used articles such as books, utensils, furniture, garments, etc. They buy goods from private and public auctions. Such shops cater mainly to the needs of poor people who cannot afford to buy new articles. Well-to-do people too visit such shops in search of rare books or antiques. Persons with modest mean make purchases from such stores.

(3) General Stores – General stores are small shops located mainly in residential areas. They deal in the wide variety of products of everyday use. Such stores cater to the daily requirements of local residents for articles like tooth brush, soaps, detergents, electric bulb. etc. A general store may be a single line store or a multi-line store.

(4) Single Line Stores – Such stores deal in one line of goods. They are located generally in shopping centres. Medical stores, cloth stores, grocery shops, book shops, jewellery shops, sweetshops, etc. are examples of these stores.

(5) Speciality Stores – These stores deal in a particular category of products in one product line. For example, a store may be selling sarees only instead of all types of garments. They provide a wide variety of the product and cater to the needs of particular customers. Another example of a speciality store is a shop dealing in children’s books only. Speciality stores are generally located in central places so as to attract a large number of customers.

Question 3.
What purpose is served by wholesalers providing ware¬housing facilities?
Answer:
Two-way purposes are served by wholesalers providing warehousing facilities in the following manner:

1. Wholesalers take delivery of goods when goods are manufactured in a factory and keep them in their godowns/warehouses which reduce the burden of manufacturers of providing storage facilities for the finished products.
2. Warehousing by wholesalers relieves the retailers of the work of collecting goods from several producers and keeping a big inventory of the same for maintaining adequate stock of varied commodities for the customers.

Question 4.
How does market information provided by the wholesalers benefit the manufacturers?
Answer:
Wholesalers provide various services to the manufacturers as well as the retailers and consumers. The major services offered by wholesalers in relation to marketing function may be cleared from the below-mentioned facts: The wholesalers take care of the distribution of goods to a number of retailers who, in turn, sell to a large number of customers spread over a large geographical area. This relieves the manufacturers of many of the marketing activities and enable them to concentrate on the production activity.

Wholesalers are in direct contact with the retailers, they are in a position to advice the manufacturers about various aspects including customer’s tastes and preferences, market conditions, competitive activities and the features of the product preferred by the customers. They serve as an important source of market information on these and related aspects.

Wholesalers take delivery of goods when these are produced in a factory and keep them in their godowns or warehouses. This reduces the burden of manufacturers of providing storage facilities till the market requirements for the finished products.

Wholesalers make suggestions-about the type and quality of goods required by the consumers. Such information enables the manufacturers to regulate production in accordance with the changing requirements of the market. A manufacturer can make necessary improvements in his/her product.

Question 5.
How do the wholesalers help the manufacturer in availing the economies of scale?
Answer:
A wholesaler buys goods in bulk and thereby enables the manufacturers to carry on large-scale production. Large-scale production results in a lower cost of production per unit. By operating on a large scale the wholesaler relieves the manufacturers of innumerable duties which they find difficult and expensive to performs.

Wholesalers collect small orders from a number of retailers and pass on the pool of such orders to manufacturers and make purchases in lots. This provides help to producers to undertake production on large scale and take advantage of the economies of scale. The manufacturer is assured of the sale of his product by the wholesaler.

Question 6.
Distinguish between single Line shops and specialty stores. Can you identify such stores in your locality?
Answer:
Single Line stores:

1. The store which is dealing in general category product lines is called single-line store e.g., Garments, medicines, etc.
2. There is no such advantage of specialization.
3. They are situated in market places.

Specialty Stores:

1. The stores which are dealing in a particular type of product under one product line e.g., jeans shop have all brands of Jeans only.
2. They take advantage of specialization in a particular segment of the market.
3. They are located in a central place of market.

Question 7.
How would you differentiate between street traders and street shops?
Answer:
Small Scale Fixed Shop Vendors:
(1) Street Stalls – These are located at street crossings or in the busy streets. TV starts an improvised structure — a table or a temporary platform to display the goods for sale. The stallholders generally deal in cheaper products like newspapers, magazines, toys, pens, cheap hosiery, etc.

(2) General Stores – General stores are set up in residential areas and they stock all kinds of products needed by the local residents for their daily use. A general store is owned and managed by a sole proprietor who keeps personal contact with his customers.

The general store may be a single-line store or a multi-line store. A single line store specialises in selling only products of a single line. For instance, medical stores deal in medicines only and stationery stores deal in stationery items only.

Question 8.
Explain the services offered by wholesalers to manufacturers.
Answer:
Services to Manufacturers-Wholesalersrenderthe following services to manufacturers :
(1) Bulk Buying-A wholesaler collects orders from a large number of retailers. He buys goods in large quantities and avails of discounts on bulk buying.

Therefore, the producer is saved from the trouble of collecting small orders from a large number of widely scattered retailers. He also saves the costs of packing and despatching goods in small lots. He need not spend much on advertising and publicity.

(2) Concentration on Production – A wholesaler relieves the producer from the botheration of finding buyers for his goods. The manufacturer can, therefore, pay undivided attention to the main task of manufacturing. The wholesaler facilities round the year production by the manufacturer.

(3) Economies of Scale – The wholesalers facilities large-scale production of goods and reap the economies of large-scale operations. A wholesaler buys goods in bulk and thereby enables the manufacturer to carry on large-scale production. Large-scale production results in lower cost of production per unit. By operating on a large scale the wholesaler relieves the manufacturers of innumerable duties which they find difficult and expensive to perform.

(4) Regular Production – Wholesalers often place advance orders before the seasonal demand and keep stock of seasonal products. In this way they enable manufacturers to continue production steadily even during periods of slack demand. The wholesaler keeps the goods in his own warehouse till are required in the market.

(5) Storage – By buying goods in bulk, a wholesaler relieves the producer of the need for carrying large stocks. Producers do not have to make arrangements for warehousing because goods are lifted by wholesalers immediately after they are produced. Producers are assured of a quick turnover of their capital because they do not have to block their capital in carrying large stocks.

(6) Market Information – Wholesalers keep the manufacturers aware of market demand, competitive products, changes in tastes and fashions in the market. They make suggestions about the type and quality of goods required by the consumers. Such information enables the manufacturers to regulate production in accordance with the changing requirements of the market. A manufacturer can then make necessary improvements in his products. ”

(7) Price Stability – Wholesalers stock goods during the slack season and sell them during the period of peak demand. As a result, they prevent violent fluctuations in prices. ,

(8) Financial Assistance-Wholesalers make prompt and sometimes even advance payments to manufacturers. Therefore, producers have to invest lesser capital in their business. The manufacturer need not block his capital in the stocks which are immediately purchased by the wholesalers.

Question 9.
What are the services offered by retailers to wholesalers and consumers?
Answer:
The invaluable services that the retailers render to the wholesalers and producers are given as hereunder:
1. Help in the distribution of goods:
A retailer’s most important service to the wholesalers and manufacturers is to provide help in the distribution of their products by making these available to the final consumers, who may be scattered over a large geographic area. They thus provide place utility.

2. Personal selling:
In the process of the sale of most consumer goods, some amount of personal selling effort is necessary. By undertaking personal selling efforts, the retailers relieve the producers of this activity and greatly help them in the process of actualizing the sale of the products.

3. Enabling large-scale operations:
On account of retailer’s services, the manufacturers and wholesalers are freed from the trouble of making individual sales to consumers in small quantities. This enables them to operate on, a relatively large scale, and thereby fully concentrate on their other activities.

4. Collecting market information:
As retailers remain in direct and constant touch with the buyers, they serve as an important source of collecting market information about the tastes, preferences, and attitudes of customers. Such information is considered very useful in making important marketing decisions in an organisation.

5. Help in promotion:
From time-to-time, manufacturers and distributors have to carry on various promotional activities in order to increase the sale of their products. For example, they have to advertise their products and offer short-term incentives in the form of coupons, free gifts, sales contests, and so on. Retailers participate in these activities in various ways and, thereby, help in promoting the sale of the products.

Services to Consumers:
Some of the important services of retailers from the point of view of Consumers are as follows:
1. Regular availability of products:
The most important service of a retailer to consumers is to maintain the regular availability of various products produced by different manufacturers. This enables the buyers to buy products as and when needed.

2. New products information:
By arranging for effective display of products and through their personal selling efforts, retailers provide important information about the arrival, special features, etc., of new products to the customers, This serves as an important factor in the buying decision-making process of the purchase of such goods.

3. Convenience in buying:
Retailers generally buy goods in large quantities and sell these in small quantities, according to the requirements of their customers. Also, they are normally situated very near to the residential areas and remain open for long hours. This offers great convenience to the customers in buying products of their requirements.

4. Wide selection:
Retailers generally keep stock of a variety of products of different manufacturers. This enables the consumers to make their choice out of a wide selection of goods.

5. After-sales services:
Retailers provide important after-sales services in the form of home delivery, the supply of spare parts, and attending to customers. This becomes an important factor in the buyers ’ decision for repeat purchase of the products.

6. Provide credit facilities:
The retailers sometimes provide credit facilities to their regular buyers. This enables the latter to increase their level of consumption and, thereby, their standard of living.

Long Answer Questions

Question 1.
Itinerants traders have been an integral part of internal trade in India. Analyse the reasons for their survival in spite of competition from large-scale retailers.
Answer:
Itinerant retailers are traders who do not have a fixed place of business to operate from. They keep on moving with their wares from street to street or place to place, in search of customers. Following are the reasons for their survival in spite of competition from large scale retailers:

1. They are small traders operating with limited resources.
2. They normally deal in consumer products of daily use such as toiletry products, fruits and vegetables, and so on.
3. The emphasis of such traders is on providing greater customer service by making the products available at the very doorstep of the customers.
4. As they do not have any fixed business establishment to operate from, these retailers have to keep their limited inventory of merchandise either at home or at some other place.

Question 2.
Discuss the features of the departmental store. How are they different from multiple shops or chain stores.
Answer:
Departmental Store (Meaning) – A departmental store is a large retail establishment having, in the same building, a number of departments each of which confines its activities to one particular line of goods. It deals in a wide variety of merchandise under one roof.

The merchandise is grouped into well-defined departments which are centrally controlled. Thus, a departmental store is a combination of several small stores under one roof and unified control. Everything from a pin to an airplane is the spirit behind a typical department store. In India, some stores include ‘A K. liberally in Mumbai and ‘Spencer’ in Chennai are examples of departmental stores.

Essential Features – The distinctive features of a departmental store are as follows :

(1) Large size – A departmental store is a large retail establishment with huge capital investment. It deals in a wide range of products.

(2) Central location – A departmental store is located in the centre of the city so that people from different parts of the city may easily reach it.

(3) Wide variety – A departmental store deals in a wide range of goods practically from “pinto plane”. It is a complete shopping centre. The merchandise offered for sale is classified into Several classes and each departmental specialise in one line.

(4) Services and amenities – A departmental store provides several facilities such as a post office, restaurant, public telephone, reading room, free home delivery, credit, parking, etc.

(5) Attractive appearance – A departmental store is housed in a big and impressive building which is elegantly furnished and tastefully decorated and easily accessible to customers.

(6) Unified control – All purchases are made centrally while selling is decentralised.

(7) Extensive advertising – A departmental store undertakes advertising and publicity on a large scale to attract customers from far and wide.

(8) Elimination of middlemen – A departmental store buys goods directly from manufacturers. Therefore, it eliminates middlemen.

(9) Centralized buying – Generally purchases are made centrally. This saves time and effort of customers.

(10) Decentralized selling – Sales are decentralized to departments.

Difference between Departmental Store and Chain Stores

Question 3.
Why are consumers cooperative stores considered to be less expensive? What are its relative advantages over other large-scale retailers?
Answer:
A consumer co-operative store is an organization owned, managed, and controlled by consumers themselves. The co-operative stores generally buy in large quantities, directly from manufacturers or wholesalers, and sell them to the consumers at reasonable prices. Members get products of good quality at cheaper rates since the middlemen are eliminated or reduced.

The major advantages of a consumer cooperative store are as follows:

1. Ease information: It is easy to form a consumer cooperative society. Any ten people can come together to form a voluntary association and get themselves registered with the Registrar of Cooperative Societies by completing certain formalities.
2. Limited liability: The liability of the members in a cooperative store is limited to the extent of the capital contributed by them. Over and above that amount, they are not liable personally to pay for the debts of society, in case the liabilities are greater than its assets.
3. Democratic management: Cooperative societies are democratically managed through management committees which are elected by the members. Each member has one vote, irrespective of the number of shares held by him/her.
4. Lower prices: A cooperative store purchases goods directly from the manufacturers or wholesalers and sells them to members and others. The elimination of middlemen results in lower prices for the consumer goods to the members.
5. Cash sales: The consumer cooperative stores normally sell goods on a cash basis. As a result, the requirement for working capital is reduced.
6. Convenient location: The consumer cooperative stores are generally opened at convenient public places where the members and others can easily buy the products as per their requirements.

Question 4.
Imagine life without your local market. What difficulties would a consumer face if there is no retail shop?
Answer:
Life without a local market would be very difficult because of the following points:

1. Non-Availability of Products: Without a local market, the regular availability of goods to the consumers would be hampered. There would not be a mechanism through which products could reach consumers from the manufacturers as and when required.
2. Information about New Products: Information about new products reaches the consumers through the local markets. The new products even after being advertised would not be available to consumers easily if there were no local markets.
3. Inconvenience: Local markets provide consumers the convenience’ of place and time in buying products.
   In the absence of local markets, the Consumers will have to go long distances for buying products directly from the manufacturer’s warehouse.
4. Lack of Variety of Products: Local markets provide consumers with a wide variety of products for choice-based selection. This would not be available in one place in the absence of local markets.
5. Lack of After Sales Services: The retailers in the local market provide after-sales service to the consumers for goods purchased from the retail shops. This service would become difficult in case there are no local markets.

Question 5.
Explain the usefulness of mail-order houses. What type of products are generally handled by them? Specify.
Answer:
Mail Order House :
Meaning – Mail order houses are retail outlets which carry on business through the mail. Mail-order business is also known as “selling through post’ for the retailer and ‘shopping by post’ for the consumer. Under this, the retailers contact the prospective customers through some sort of advertising. Advertising is carried through the press, T.V., or by sending leaflets and catalogues giving the necessary details about the product.

Mail order houses maintain mailing lists of potential customers. Then send the literature about their products through mail. They also mail reply paid cards to prospective customers. When they receive orders, they will procure the goods and despatch them to the customers usually by V.P.P. (Value Payable Post). Sometimes, the goods are sent by railway parcel and the railway receipt is forwarded to the customer by V.P.P.

Many mail-order houses also send the goods ordered through couriers. This type of business is not suitable for all types of products. For example, goods that are perishable in nature or are bulky and cannot be easily handled, are not recommended for mail house trading.

Only the goods that can be graded and standardised, easily transported at low cost, having ready demand in the market and available throughout the year, having least possible competition in the market are suitable for this type of trading.

Mail order business is suitable under the following conditions:

• Goods are identified by brand name and are of standardised quality;
• Goods enjoy popular demand by the customers scattered over wide areas.
• Goods do not require demonstration or special skills in handling and use; and
• Goods are durable and do not get spoiled in the course of transit.

Books, drugs and medicines, sports articles, cosmetics and beauty aids, electronic gadgets of small value, and cameras are some of the goods which are sold through the mail.

The following factors have contributed to the growth of mail-order business:

• growth of postal facilities and development of railways and other means of transportation;
• increased circulation of newspaper and journals; and
• the growing desire of people to have wider varieties and better qualities of goods.

In India, the mail order business is not so popular because of poverty and illiteracy among people, lack of effective advertising, lack of standardised products, and deceitful practices by unscrupulous traders. However, some of the business houses in India have started advertising their product through T.V. to generate interest of the people in their products. They also book orders over the phone. This is also known as teleshopping.

Features – The features of a mail-order house are as under:

(i) No personal contact – Goods are sold without any personal contact between the seller and the buyer. Orders for goods are received and executed by post by approaching the customers through advertisements in newspapers or magazines.

(ii) Mode of payment – Goods are usually sent to customers by V.P.P. (Valued payable post). The postman will deliver the goods after receiving the payment from the buyer. Thus, post office acts as an agent of the mail-order house as it collects payment on behalf of the mail-order house. The goods may be sent through a bank which is instructed to deliver the articles to the customers.

(iii) Role of Brand name — In mail-order business, the customer can’t inspect the goods. He will send the order by describing the brand name and code number of the product he requires.

(iv) Role of advertisement – Advertisement is the backbone of mail-order business. Information about the availability of various products is provided to the prospective customers through advertisement in different media such as Press, Journal and Magazines. All the relevant information about the products such as price features, delivery terms, terms of payment, etc. are described in the advertisement.

(v) Capital requirement – Mail order business can be started with a small amount of capital as there is no need to keep huge stocks. Goods could be manufactured on receipt of orders. Moreover, it is not at all necessary to have a business establishment in some central location. It could be started even at the residence of its proprietor. It can be started with a relatively low amount of capital.

Advantages: Mail order business offers the following advantages to the seller and the buyer:

(i) The buyer needs not travel a long distance to reach the retail store to get the delivery of goods. He can get them at the place of his residence. He is generally given a money-back guarantee. He can return the goods if the goods are not upto the mark.

(ii) The mail-order business houses can be located in less expensive localities. There is no need to maintain a large sales, force and to have showrooms for the display of goods. Thus, the cost of operation of the business is quite low.

(iii) Goods can be procured after receiving orders from the customers. Thus, blocking of capital can be avoided and a businessman can operate with a small investment. It need not require heavy expenditure on building and other infrastructural facilities.

(iv) The seller is able to establish direct touch with his customers. He can directly know the reactions of his customers and satisfy them if they have any grievance or misapprehension. The biggest advantage of mail-order business from the point of view of consumers is that unnecessary middlemen between the buyers and sellers are eliminated.

(v) Mail order business is very much suitable where prospective customers are scattered over a wide area. Under this system, the goods can be sent to all the places having postal services.

(vi) The post office acts as the carrier of goods and the collector of sale proceeds. The chances of bad debts are nil. A businessman can meet the needs of a large number of customers scattered throughout the country with the help of a facility provided by the post office.

Goods suitable for Mail Order Business – Only those goods are suitable for sale through the post which has the following characteristics:

1. Goods should be durable and not perishable.
2. Goods should be standardised or graded.
3. Goods should bear a brand name or trademark.
4. Goods should be easy to handle.
5. Goods should be light and not bulky or heavy.
6. Goods should have a steady and wide demand.
7. Goods should be easily explained to buyers through descriptions or pictures.
8. Goods should be relatively valuable in proportion to weight. Books, footwear, artificial jewellery, watches, readymade garments, fountain pens, toys, hosiery products, and toilet goods are suitable for the mail-order business.
9. Goods which involve the least possible competition in the market, and
10. Goods which can be described through pictures etc are suitable for this type of business. Goods should be easily transported at a low cost.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 1 Nature and Significance of Management Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Nature and Significance of Management NCERT Solutions for Class 11 Business Studies Chapter 1

Nature and Significance of Management Questions and Answers Class 11 Business Studies Chapter 1

Question 1.
Which of the following does not characterise business activity?
(a) Production of goods & Services.
(b) Presence of risk
(c) Sale or exchange of goods & Services
(d) Salary or wages.
Answer:
(d) Salary or wages.

Question 2.
Which of the broad categories of industries cover oil refinery and sugar miles?
(a) Primary
(b) Secondary
(c) Territory
(d) None of them.
Answer:
(b) Secondary

Question 3.
Which of the following cannot be classified as an auxiliary to trade?
(a) Mining
(b) Insurance
(c) Warehousing
(d) Transport.
Answer:
(a) Mining

Question 4.
The occupation in which people work for others and get remunerated in return is known as –
(a) Business
(b) Employment
(c) Profession
(d) None of them.
Answer:
(b) Employment

Question 5.
The industries which provide support services to other industries are known as –
(a) Primary industries
(b) Secondary Industries
(c) Commercial industries
(d) Territory industries.
Answer:
(d) Territory industries.

Question 6.
Which of the following cannot be classified as an objective of business?
(a) Investment
(b) Secondary Productivity
(c) Innovation
(d) Profit earning.
Answer:
(a) Investment

Question 7.
Business risk is not likely to arise due to –
(a) Changes in government policy
(b) Good management
(c) Employee dishonesty
(d) Power-failure.
Answer:
(b) Good management

Short Answer Type Questions

Question 1.
State the different types of economic activities.
Answer:
Economic activities are those by which we can earn our livelihood. Economic activities may be further divided into three categories, namely business, profession, and employment, e.g., a person running a garment business, a doctor operating in his clinic, and a teacher teaching in a school – all three are doing so to earn their livelihood and are, therefore, engaged in economic activity.

Question 2.
Why is business considered an economic activity?
Answer:
Business is essentially an economic activity because it involves the production and distribution of goods and services for earning profits.

Business As An Economic Activity

(1) Efficient use of Resources: A business enterprise makes efficient use of scarce resources like men, money, material and machine. Business involves the efficient utilisation of various resources for the production of goods and services. Labour, materials, capital, and machinery are important inputs of the business. The businessman organizes these resources to utilise them for producing and supplying the goods desired by society.

(2) Creation of Utilities: Business makes goods more useful by creating utility, such as form utility, place utility, and time utility. When raw materials are converted into finished goods, form utility is created. Goods are transported from the producer to the consumer and thus place utility is created. Moreover, business firms carry on production throughout the year and store goods in warehouses to make them available when demanded by the consumers. This is how time utility is created.

(3) Satisfaction of Human needs: Business activities are intended to serve the general public. They do so by making available those goods and services which can satisfy the needs of society. Moreover, the business also satisfies the needs of businessmen through economic gains or profits. The satisfaction of customers is an important economic activity of a business.

(4) Regular dealings: A single transaction cannot a business firm is continuously engaged in production and exchange goods and services for its customers.

(5) Profit motive: People pursue business as an occupation o means of livelihood. The main purpose of every business activity is to earn profits. In other words, business is a source of income for t businessman. It keeps him busy in an economic occupation. A business that does no earn profits cannot survive for long. Profits are essential for growth and expansion.

(6) Risk element: As an economic activity, business involves an element of risk of economic loss. Such loss might occur because of theft, fire, earthquake, flood, etc. Various other risk factors are chan in consumers tastes, fashion and demands changes in technology increase in competition, shortage of raw-material, etc. affect the business.

Question 3.
Explain the concept of business.
Answer:
The term ‘business’ is derived from the word ‘busy’. Thus, business means being busy. However, in a specific sense, business refers to any occupation in which people regularly engage in an activity with an objective of earning profit: The activity may consist of production or purchase of goods for sale or exchange of goods or supply of services to satisfy the needs of other people in the society.

Question 4.
How would you classify business activities?
Answer:
Business Activities – Classification

All business activities may be classified mainly into two groups
(i) Industry
(ii) Commerce.

The industry covers production, manufacturing, or processing of goods and services, while commerce is concerned will d distribution of goods and services to ultimate users or consumers. Industry 3 and commerce may further sub-divided into the followings:

Question 5.
What are various types of industries?
Answer:
The industry refers to economic activities, which are connected with the conversion of resources into useful goods. Industries may be divided into three broad categories namely primary, secondary and tertiary. Primary Industries include all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants, etc.

Question 6.
Explain any two business activities which are auxiliaries to trade. .
Answer:
Auxiliaries to trade
These are services facilitating trade. In other words, these services remove the hindrances before the business and are known as transportation, communication, banking, insurance, warehousing and marketing, etc.

(1) Transportation – It creates a place of utility in goods by overcoming the business of distance. From each other. The hindrance of this distance is removed by transportation facilities. Goods produced at one place may be transported to different comers of the world. The means of transport available to us are as under:

Transport widens the market and helps to equalise prices at different places.

(2) Communication – The successful operation of the business requires that there must be contact between buyers and sellers of the commodity. Communication between diem is required for placing order, making complaints, making payments, deciding the terms of transactions and other related information. The various means of communication are correspondence, telegram and telephone services. The modem means of communication are fax, STD services, pagers and cellular phones etc. Communication facilities like postal services, telephone and others are necessary’, so that producers, traders and consumers, interact with each other.

(3) Insurance – There is risk in every walk of business. There is risk from fire, damage, accident and storms etc. Loss of goods due to misshaping damages the prospects of the business. It is, therefore, necessary that there must be certain agencies to undertake these risks. Insurance is based on the pooling of risks. There are insurance companies, which issue fire, marine, accident and other policies and undertake the responsibility to compensate for the loss upon payment of certain premiums.

(4) Warehousing – There is time gap between the production and consumption of goods, so it is necessary that goods must be kept safe, secured and intact for this period. This hindrance of the business is removed by storing the goods in various private and public godowns. Certain goods are stored in cold storage for their off-season use. Warehousing these days has become an important element of the business. Warehousing helps to stablise prices through the continuous supply of goods.

(5) Marketing – Marketing in modern business has assumed a very’ important place. In order to accelerate the pace of growth of the business, it is necessary that sales should go on multiplying. Competition being in the market it is very difficult to push sales. It has now been necessary for the business to adopt sales promotion and advertising measures together with attractive packaging and standard quality of goods. Advertising and publicity are the tools helpful in marketing the products and to create the demand of the product in the consumer’s minds.

Question 7.
What is the role of profit in business?
Answer:
An objective is the starting point of business. Every business is directed to the achievement of certain objectives. Objectives refer to all the business people want to get in return for what they do. It is generally believed that business activity is carried on only for profit.

Businesspersons themselves proclaim that their primary objective is to produce or distribute goods or services for a profit. Every business is said to be an attempt on the part of business people to get more than what has been spent or invested or, in other words, to earn profit which is the excess of revenue over cost.

However, it is being increasingly realized nowadays that business enterprises are part of society and need to have several objectives, including social responsibility to survive and prosper in the long run. Profit is found to be a leading objective but not the only one.

Although earning a profit cannot be the only objective of a business its importance cannot be ignored. Every business is an attempt to reap more than what has been invested, and profit is the excess of revenue over cost.

Profit may be regarded as an essential objective of business for various reasons:

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

But, earning a profit cannot be the sole objective of a truly successful business. In the words of Urwick, “Earning of profit cannot be the objective of business more than eating is the objective of living. In fact, service to the community is the real objective of the business.

Therefore, modem business houses aim at making a profit through service. As Ford had observed mere money chasing is not business’. This may result in the neglect of social objectives. However, too much emphasis on profit to the exclusion of other objectives can be dangerous for good business.

Obsessed with profit, Business managers may neglect all other responsibilities towards customers, employees, investors, and society at large. They may even be inclined to exploit various sections of society to earn an immediate profit.

This may result in the non-cooperation or even opposition from the affected people against the malpractices of business enterprises. The enterprises might lose business and may be unable to earn a profit. That is the reason why there is hardly any sizable business enterprise whose only objective is the maximization of profit.

Question 8.
What is business risk? What is its nature?
Answer:
Business Risks – Meaning & Nature
Business risk arises due to uncertainly about the future course of action. It has already been observed that one of the basic features of the business is ‘risk’, i.e.. possibility of some loss or adverse happening. There is always a possibility- of loss in business because of uncertainties in the natural, political, economic, social, and technological environment.

For instance, who could foresee the terrorist attack on the World Trade Centre (WTC) in New York on 11th September 2001,? This single happening had adverse effects on investors, stockbrokers, airlines, hotels, importers, exporters, and other business firms throughout the world. There are uncertainties regarding prieefall, technological changes, competition, and change in government policies, etc.

Meaning and Types of Business Risk – According to B O. Wheeler, ”Business risk means the possibility of some occurrence which might lead to some loss for the business”. In other words, business risk refers to the possibility of loss or inadequate profits due to some unexpected events which are beyond the control of the businessman. For example, the demand for a firm’s product may go down due to changes in fashion or the availability of better substitutes. This might lead to a loss for the firm.

In the words of C.O. Hardy “Business risk refers to uncertainty as regards cost, loss or damage.” In fact, the risk is an inherent feature of any business. Business risks are common to all businessmen from a small vendor to a big industrialist. There may, however, be differences in degrees of different types of risks. The possibility of loss for the business does exist though it is not measurable.

The most common types of business risks include :

• Purl and Speculative Risks.
• Property and Personal Risks
• Internal and External Risks
• Static and Dynamic Risks.
• Insurable and Non-insurable Risks.

Nature of Business Risks – The nature of business risks shall be clear from the following features :
(i) Uncertainty – Uncertainty is an important feature of any business. Fluctuations in demands or prices, the possibility of book debts turning into bad debts, wrong estimates of demand and supply, changes in Government policies, improvements in technology, natural calamities, etc., are some of the examples of uncertainties which influence the business.

(ii) Risk is an essential element of business – Risk is an inevitable feature of the business. No business can be run without some element of risk in it. In fact, business means assuming risk Peter F.Drucker remarked, “Bearing of risk is an essential element of the business.” For example, when a businessman decides to introduce a new product, he is taking a calculated risk. Business activities are planned for the future and the future is always uncertain. Therefore, the risk is inherent in the business.

(iii) Reward for undertaking risks is profit – ‘No risk, no gain is an important principle which is applicable to all types of business. An entrepreneur assumes risks and in consideration, he gets a reward, that is profit. Generally, heavy risks result in higher profits.

(iv) Degree of risk depends upon the nature of business – The nature of business (/.<?., types of goods and services produced and sold) and the volume of operations determine the degree of risk. For instance, a business dealing in fashionable items has a higher degree of risk as the current fashion may not last long.

(v) Variability – The degree of risk is influenced by the time factor. For instance, a business may experience a greater degree of risk when there is political instability in the country or fear of terrorism, communal riots, natural calamity, etc. The degree of risk also varies with the time period and degree of competition.

(vi) Difficult to measure – It is very difficult to measure accurately the degree of business risks. A businessman cannot predict all the risks likely to arise in business.

Long Answer Questions

Question 1.
Explain the characteristics of the business.
Answer:
The features or essential characteristics of business activities are:

1. Economic activity: Business is an economic activity of the production and distribution of goods and services. It provides employment opportunities
2. Buying and Selling: The business involves the purchase of raw material, plants, and machinery, stationary, property, etc. And also, it sells the finished products to the consumers, wholesalers, retailers, etc.
3. Continuous process: Business is not a one-time activity. A single transaction of trade cannot be termed as a business. It is a continuous process of production and distribution of goods and services.
4. Profit Motive: The primary goal of a business is usually to obtain the highest possible level of profit, Profit is an indicator of success and failure of business. It is a return on investment. Profit acts as a driving force behind all business activities.
5. Risk and Uncertainties: Risk is defined as the effect of uncertainty arising on the objectives of the business. Risk is associated with every business.

Question 2.
Compare business with profession and employment.
Answer:
Comparison Between Business, Profession And Employment
Given below are the main points of difference between business and other economic activities, e.g. profession and employment or service.

(1) Mode of Establishment-A business enterprise is established when an entrepreneur takes a decision to start some business activity. In a profession, on the other hand, the membership or enrolment of a recognised professional association or institution is essential. In order to take up employment, a person has to enter into a contract of service between employer & employee.

(2) Nature of Activity – A business deals with providing goods and services to satisfy human wants. On the other hand, a professional renders personalised service of a specialised nature to his clients. An employee performs the work assigned by the employer under the contract of service.

(3) Qualifications – No formal education is required in order to carry on a business. But for a profession, specialised knowledge and training are essential. Minimum educational qualifications are prescribed for every profession. In the case of employment, the qualifications required depend upon the nature of the job.

(4) Main Objective – In business, the basic motive is to earn profits. Every business involves the element of profit on capital invested. A professional, on the other hand, is expected to emphasise the service motive and sense of mission. That is why a rigorous code of ethical behaviour is laid down in every profession. In case of service, the motive of an employee is to earn salary and receive other benefits.

(5) Capital – A business can’t be run without the amount of capital. Every business requires capital depending upon the nature and scale of operations. A professional also has to invest some capital to establish an office for rendering professional services. There is no need for capital in case of employment.

(6) Degree of Risk Involved – There is an inherent element of risk in business and profession, but practically no risk is involved in case of employment. There can be losses in business, but returns are never negative in profession and employment.

Comparison between Business, Profession and Employment

Question 3.
Explain with examples the various types of Industries.
Answer:
Industries may be divided into three broad categories namely primary, secondary and tertiary.
1. Primary industries:
These include all those activities which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants etc. These industries may be further subdivided as follows.

(i) Extractive industries:
These industries extract or draw out products from natural sources. Extractive industries supply some basic raw materials that are mostly products of the geographical or natural environment. Products of these industries are usually transformed into many other useful goods by manufacturing industries. Important extractive industries include farming, mining, lumbering, hunting, and fishing operations.

(ii) Genetic industries:
These industries remain engaged in breeding plants and animals for their use in further reproduction. For the breeding of plants, the seeds and nursery companies are typical examples of genetic industries. In addition, activities of cattle, breeding farms, poultry farms, and fish hatchery come under the class of genetic industries.

2. Secondary industries:
These are concerned with using the materials, which have already been extracted at the primary stage. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. For example, mining of iron ore is a primary industry, but manufacturing of steel by way of further processing of raw irons is a secondary industry.

Secondary industries may be further divided as follows:
(i) Manufacturing industries:
These industries are engaged in producing goods through the processing of raw materials and thus creating form utilities. They bring out diverse finished products that we consume or use through the conversion of raw materials or partly finished materials in their manufacturing operations.

Manufacturing industries may be further divided into four categories on the basis of the method of operation for production. E.g.: Iron and steel industry, Cotton. Textile Industry, sugar Industry.

• Analytical industry analyses and separates different elements from the same materials as in the case of oil refinery.
• Synthetically industry combines various ingredients into a new product, as in the case of cement.
• The processing industry involves successive stages for manufacturing finished products, as in the case of sugar and paper.
• Assembling industry which assembles different component parts to make a new product, as in the case of television, car, computer.

(ii) Construction of industries:
These industries are involved in the construction of buildings, dams, bridges, roads as well as tunnels and canals. Engineering and architectural skills are an important part of the construction industry.

Tertiary industries:
These are concerned with support services to primary and secondary industries that provide service facilities. As business activities, these may be considered part of commerce because as auxiliaries trade these activities assist trade. Included in this category are transport, banking, insurance, warehousing, communication, packaging, and advertising.

Question 4.
Describe the activities relating to commerce.
Answer:
Commerce:
Commerce deals with the buying and selling of goods, exchange of commodities, and distribution of finished goods. In other words, commerce is the sum total of trade and auxiliaries to trade. It means that commerce is the combination of trade and distribution activities of goods and services.

Commerce links producers and consumers. The main object of commerce is to ensure smooth distribution of goods and services to satisfy consumer needs.

Definition of Commerce:
“Commerce is a term that embraces all those functions involved in making, buying, selling and transport of goods. “- Dr.E. Thomas

According to J.Stephenson, “Commerce means the sum total of those processes which are engaged in the removal of the hindrances of person (trade) place (transport and insurance) and time (Warehousing) in the exchange (Bank and finance) of commodities. ”

It means that commerce is not restricted to trade but it includes all those activities which, facilitate trade, and aids of the trade such as transportation, communication, financing, insurance, warehousing, and marketing

Trade
Trade means the purchase and sale of goods with a profit motive. It involves the exchange of goods and services between buyers and sellers. It is the nucleus of commerce as all activities revolve around trade.

Trade activities must be performed to earn a profit. It means that activities having service motive and emotional aspect are not trade activities.

Trade is the central activity of commerce. Other activities of commerce such as transportation, communication, financing, insurance, warehousing the marketing are the supporting activities of trade.

Trade activities may be shown as under

Internal/Home trade – Purchase and sale of goods within the boundaries of the country is called internal trade. The purchaser and seller of the commodity belong to the same country and the payment is

made in the currency of the country, to which buyers and sellers belong. For example, the trade between two cities, two villages, villages, and cities or even between two persons of the same place within the boundaries of the country is called internal trade. On the basis of volume. Internal trade is classified as wholesale and retail trade:

(1) Wholesale trade – It involves the purchase and sale of goods belonging to a specific type of variety, in bulk. A wholesaler purchases a huge quantity of goods from producers/manufacturers, stores it in the big godowns, and sells in small quantities to retailers. Wholesalers constitute a link between producers and retailers provides useful services to both the manufacturers and retailers. They are criticized for hoarding goods, creating artificial scarcity, indulging in black-marketing and other malpractices. In spite of all these defects, they render valuable services to society and must remain in the market.

(2) Retail trade – It relates to the selling of goods by retailers to ultimate consumers. They acting as a link between wholesalers and consumers and render valuable services to both. The retail trade is situated among consumers. It arranges different goods from different places and makes them available to members of the society residing in its locality. These traders inform the producers through the wholesalers about the attitudes, likes and dislikes, preferences, traditions, and habits of the consumers.

They educate consumers about the utility and working of new products. They are organised in the forms of Departmental Stores, Multiple Shops, Cooperative Store, Super Bazars and self-service stores, etc.

Foreign Trade or International Trade – The trade between two countries is known as foreign trade. The purchasers and sellers in this type of trade belong to different countries. The payment in foreign trade is made in foreign currency. The foreign trade may be sub-divided into import and export and entrepot! or re-export trade.

(1) Import trade – It involves the purchase of foreign goods for use in the domestic market. Purchasing goods by an Indian trader from a trader of USA, Russia, UK and Japan etc. is the example of import trade.

(2) Export trade – The type of trade in which goods are sold and sent to firms located outside the country is known as export trade. Selling and sending goods by Indian firms to other firms located outside India, say Germany, Iraq and Saudi Arabia, etc. is export trade.

(3) Entrepot trade – It involves the import of foreign goods with a view to re-exporting them. For example, importing goods from Germany and Japan by Indian firms and “exporting it to Nepal and Bhutan is entrepot trade. There are certain countries I five Nepal and Bhutan, which do not have seaports. These countries import their goods through third countries. Nepal and Bhutan also import their goods from abroad through India for which we charge a certain commission.

Auxiliaries To Trade

Activities which assist or support business and trade are known as auxiliaries to trade. They are an integral part of commerce as they remove various hindrances in the production and distribution of goods. These include Transport. Insurance, Financing, Banking, and marketing discussed as follows

(1) Transportation and Communication – It helps in removing the hindrance of place in the exchanges of goods and services. It facilitates trade by assembling and distributing goods. It overcomes the barrier of distance and creates place utility. Transport widens the market and helps to equalise prices at different places.

It makes available the distribution of goods among far-flung areas. Quick and economical means of transport such as railway s, roadways, airways and shipping have widened the scope of trade to include international transactions. Communication facilities such as postal services, telephone and others are also necessary so that producers, traders, and consumers may exchange information with one another.

(2) Warehousing – There is generally a line lag between the production and consumption of goods. This problem can be solved by storing the goods in warehouses. Many products such as wheat, sugar, rice, etc. are produced in a particular season but they are needed throughout the year.

Proper storage arrangements must be made in order to make such goods available. Besides, it is necessary to store commodities such as woolen garments and umbrellas to meet the desired
seasonal demand. Warehousing removes the hindrance of time and thereby creates time utility. It helps to stabilise prices through the process of continuous supply of goods.

Warehouses are of three types, namely, private, public and bonded. Private warehouses are owned by merchants and producers for their own ‘storage needs. Public warehouses are owned by wharfingers, port trusts, etc. Bonded warehouses are set up by customs authorities to store goods which are liable to customs duty.

(3) Banking and Finance – There is usually a time gap between production/purchase and sale of goods. During this period businessmen need funds to carry on their business. Banks and other financial institutions facilitate the required credit in various forms.

Banks also perform the business activity by providing safe and quick means for the remittance of money. They collect bills, cheques, etc. from their customers. Banking removes the hindrance of raising finance and credit on one’s own. Therefore, banks may be regarded as traders in money and credit.

(4) Insurance – Business involves several types of risks — due to fire, flood, theft, etc. Insurance removes the hindrance of risk. Insurance provides a cover against the loss of goods in transit and storage. Insurance is based on the “pooling of risks.” A large number of people who are subject to a particular risk contribute to a common fund, out of which compensation is paid to those few who actually suffer the loss.

There are various types of insurance, e.g. fire insurance, marine insurance, workmen’s compensation insurance, life insurance, etc. Insurance company performs the useful service of compensating the loss to the insured goods through fire, theft, flood or any other hazard.

(5) Advertising and Publicity – It is a useful function of bridging the knowledge gap about the availability and use of goods. They remove the hindrance of knowledge. The main purpose of advertising is to create and sustain demand. Advertising has become essential for quick disposal of goods in the modern era of large-scale production.

In the absence of advertising, consumers may remain ignorant of the availability of goods and services and businessmen may not be able to sell their products. There are various forms of advertising and publicity, such as the press, outdoor displays, radio, television, letters to customers, fairs, exhibitions, cinema, etc.-Advertising facilitates mass consumption of goods. Advertising is necessary to bridge the information gap.

(6) Packaging – Good packaging facilitates delivery’ of quality products to the consumers and also increase the like of the product. Packaging helps protect the goods from damage during transport and warehousing. It also makes the goods attractive. Packaging helps in the conveyance and handling of goods.

It removes the hindrance diFrisk by keeping goods safe and free from spoilage. Trade and transport of goods have become easier and safer due to improvements in the art and methods of packaging.

Question 5.
Why does the business need multiple objectives? Explain any five such objectives.
Answer:
Objectives Of Business
The objective of business means the purpose for which a business is established and carried on. The objective provides the direction towards which all business activities will be directed. Therefore, every businessman must select and define the objectives carefully and cleanly.

Though profit motive constitutes the primary objective of business activities, it should not lead us to conclude that profit is the sole objective of business. Objectives of a business are multi-dimensional in nature. They can be classified into three categories, namely,
(1) economic objectives
(2) social objectives and
(3) human objectives.

Business Objectives
Economic Objectives – Business is an economic activity and following are the economic objective of a business.
(i) Earning of Profits – No business can survive without making adequate profits. Profit is essential to meet the cost of factors of production. Entrepreneurship is one of the important factors of production. Just as other factors get their rewards, the entrepreneur must get reward for his efforts and taking of risk. Moreover, every businessman will like to see that the business he is managing should grow. This is possible only if the business earns sufficient profits for investing them into the business for expansion.

(ii) Creation of Customers or Markets – A business can earn profits by satisfying consumer needs. Thus, the business must aim at winning and satisfying the customers. Peter F. Drucker has rightly said, “There is only one valid definition of business purpose, i.e., to create a customer. ” Customers are created through advertisement and sales promotion and delivering them ‘want satisfaction.’

(iii) Innovations – Innovation is the activity of exploring and discovering ways and means of making products more useful, exploring new markets etc. A business can succeed only with the help of new designs, improved techniques, better machinery etc. Innovation is the result of creative thinking, research and development, computer-aided design and computer-aided manufacturing.

(iv) Best use of Resources – Business is expected to make best use of scarce resources of men, machine, material, methods and money. Proper allocation and efficient planning to use these resources achieve the purpose of profitability and sustainability in the business.

Social Objectives – Business does not exist in a vacuum. It is an integral point of society. In other words, the business must be socially responsible. The decision taken by the business has a great influence on the socio-economic conditions in the country. For example, the quality of the product offered and its prices will have an influence on the standard of living of the people.

The type of technique of production (labour intensive or capital-intensive) will have an influence on employment opportunities for the job-seekers. Therefore, it is in the interest of businesses to pursue certain objectives expected by the society.

Social objectives of a business denote its obligations to society including customers, employees and the government. The important social objectives include the following:
(i) Better Quality Goods – The business must provide better quality products as desired by the customers. The products should be durable, genuine (not duplicate) and safe. The prices charged for the goods should also be reasonable. The important objective of a business is to produce and supply goods of proper quality to satisfy consumer’s expectations.

(ii) Fair Trade Practices-The business should follow fair business practices at all times. It should avoid anti-social practices like hoarding, black-marketing, over-charging the buyers, etc. Businessmen must avoid unfair trade practices like spurious products or misleading advertisements to mislead or exploit the people.

(iii) Generation of employment opportunities – A business is expected to provide means of livelihood to members of society. Business has tremendous scope for the generation of employment opportunities for the unemployed. Further, a business should employ suitable people without any discrimination based on caste, creed, sex or religion. Business firms pursue this objective can improve their public image.

(iv) Employees’ Welfare – success of any business depends on significant contribution towards the welfare of employees. Besides providing fair wages, the business should also provide good working conditions, canteen facility, housing, transport and medical facilities, etc. to the employees. These measures would increase the productive efficiency of the workers.

Human Objectives :
A business is directly linked with two important groups, namely, (a) customers, and (b) employees. Both these groups must have a feeling of having been treated as human beings by the business enterprise. As human beings, customers expect courteous service and fair dealings from the business. The employees look forward to the business enterprise for the following objectives:

(i) the employees are treated as partners in the business and not as inferior lot; they should get fair wages and healthy working conditions;
(ii) they are able to acquire and develop new skills in the process of employment; and
(ii) they derive job satisfaction.

Question 6.
Explain the concept of business risk and its causes.
Answer:
Business Risks – Meaning
Business activities are not very safe. Business units are surrounded by innumerable risks generated by economic, natural, physical and human aspects.

“Business risks may be defined as uncertainty in regard to cost, loss or damage.” — C.O.Hardy
“Risk is the chance of loss. It is the possibility of some unfavourable occurrence.” — Wheeler

Causes of Business Risks :
Business risks arise due to a variety of causes which may be classified into the following categories:
(1) Natural Causes – Nature is an important cause of business risks. Human beings have no control over the nature. Natural calamities such as flood, drought, famine, earthquake, volcanic eruption, lightning, snowfall, hailstorm, tide, epidemic, etc. result in heavy loss of life, property and income.

Even the death of the owner or a partner may cause the business to be shut down. Human beings have little control over nature. Therefore, natural causes of business risks are beyond the control of a businessman.

(2) Human Causes – Human causes are very important causes of business risks. Negligence or carelessness on the part of an employee may lead to serious fire or accidents involving loss of life and property. There may be loss due to spoilage, breakage, etc. Ignorance may result in grave errors in estimating demand for products. A feeling of false pride or prejudice may lead to strike or lockout. Inefficient management is often the cause of loss in business.

Irrational approach of the management, or the owners of business is also a type of human failure causes business risk. A business like Enron Corporation in U.S.A. incurs heavy losses which leads to bankruptcy mainly due to unplanned decision of the management at the top.

(3) Economic Causes – Economic causes relates to changes in market conditions. Fluctuations in demand and prices are well-known. Availability’ of cheaper substitutes may affect the sale of relatively costly products. Excessive competition may bring down the prices of products.

Competing businesses may employ more effective techniques of sales promotion. For example, Colour T.V. has replaced Black & White T.V. from the market.

(4) Physical and Technical Causes – Technical changes and mechanical defects also result in business risks. Changes in technology may make the machines obsolete before their expected life. Mechanical failures such as the explosion a boiler, leakage of gas, etc. may lead to heavy loss of life and property. Assets used in business may depreciate in value due to shrinkage, loss in weight, vaporisationvgtc. Stoppage of work due to power failure may cause loss. There be loss or damage to goods in transit.

(5) Political and Legal Causes – Such causes of risk include changes in government policies, policies relating to foreign trade, collaboration of MNC’s licencing and taxation policies and changes in law. A businessman may suffer loss due to restrictions on imports and exports and fluctuations in exchange rates. Government control on production and distribution of certain products may deprive businessmen from profits. Changes in government policies and laws are, thus, an important cause of business risks.

Question 7.
What factors are important to be considered while starting a new business. Explain.
Answer:
Starting A New Business
The person who undertakes to bear the risk and uncertainty of a new business is known as ‘entrepreneur. Webster’s dictionary defines an entrepreneur as one who organises, manages and assumes the risks of a business enterprise. At the time of starting a new business, a businessman must take decisions regarding the various factors of production and resources like men, machines & materials.

The entrepreneur going to start a new enterprise must have various qualities like wide knowledge, skills, experience, foresightedness, dynamism outlook, self-confidence, and willingness to take risks. If an entrepreneur or businessman lacks these qualities, he cannot successfully launch a new enterprise.

Starting a new business is complex and as difficult as the birth of a child. The entrepreneur has to act both as a mother and a midwife. The ultimate success of a business depends upon the various considerations essential for the successful running of a business enterprise.

Factors to be Considered for Starting a Business – While starting a business following factors have to be considered
(1) Selection of Line of Business – He will determine the market demand for the products, he wants to produce and the margin of profit he expects from the sale of products. He will prepare a systematic report of the exercise he undertakes. This is known as ‘feasibility report’ or ‘project report’.

While selecting the line of business, a number of criteria must be kept in view. The most important criterion is the expected rate of return on capital to be invested. That line of business will be preferred which is expected to yield higher rate of return on capital invested and has chances of further growth: Besides this, the degree of risk involved in the line of business is also important. The businessman has to decide what type of risk he can afford to take. The line of business chosen must be technically feasible.

(2) Choice of Form of Ownership – A good form of ownership should be easy to form simple to operate flexible & durable. The choice of the form of organisation will determine the authority of the entrepreneur starting the business. However, in certain lines of business, there is no choice left in the selection of the form of organisation. For instance, the insurance and banking business can be done only by the joint-stock companies.

Size of the business will also determine the form of organisation. Company form of organisation is more suitable in case of large scale operations. Sole tradership or partnership is suitable for small scale and medium scale operations. The other factors which affect the choice of the form of ownership are capital, requirements, managerial skills requirement, the limit of liability, tax liability, legal formalities, etc. A careful analysis and reconciliation of technical, managerial, financial, market & other factors should be determined by the size of the unit.

(3) Financial Planning – Proper planning and control of finance are essential to success in business. Adequate funds must be provided at the right time for the start and continuity of the business unit.

Capital is required for investment in fixed assets like land, buildings, machines, and equipment and in current assets like materials, supplies and book debts. Capital is also needed for meeting the day-to-day expenses of the business. In the case of small enterprises, the promoters can provide funds from their own savings.

But in case of large enterprises, funds have to be raised from various sources like the general public, commercial banks, financial institutions, etc. It is of utmost importance to have adequate capital for meeting the initial needs and future requirements of the business.

(4) Location of Business – The location of a business enterprise is an important decision as it influences the costs, profitability and growth needs for expansion diversification & modernisation, etc. should be taken into account. As far as possible, the location must be optimized so that the costs of production and distribution are the lowest possible. Location is selected on the basis of access of raw-material, availability of labour, transportation & banking facilities.

(5) Size of Business Unit. The size of the firm is influenced by various factors like technical, managerial, financial and marketing facilities. Some factors favour the larger size while others operate to restrict the scale of operations. An attempt should be made to achieve the size at which the average cost per unit is minimum.

Usually, businessmen start their operations at a small or medium scale. If new ideas are to be tried out, it is preferable to start with a small-scale operation. This will help in adapting to changes without much loss. Thus, the entrepreneur must determine the size of business operations before he arranges capital and other resources for the business.

(6) Machines and Equipment – Machinery and Equipment should be placed in a proper sequence so as to permit a smooth flow of materials through necessary operations. It will depend upon various factors like availability of funds, size of production, and the nature of the production process.

The benefits to be derived from the machine and equipment must justify the amount of investment made on therti. Availability of repair and maintenance services and spare parts is also an important consideration while selecting a particular machine or equipment.

(7) Workforce – The entrepreneur cannot run the business himself alone. He has to take the help of a number of persons including skilled and unskilled workers and managerial staff. The employment of the right types of persons fertile enterprise is necessary, otherwise, there will be a huge wastage of time, money, and efforts.

They have to be given the necessary training to increase their efficiency. The workforce must be motivated through monetary and non-monetary incentives to make their best possible contribution towards the accomplishment of organizational objectives.

(8) Procedural Formalities – In the case of a sole proprietorship or a partnership, there are practically no procedural formalities. Only permission from the municipality is to be taken to start the specified line of business. Registration of a partnership firm is also not compulsory.

Government regulation is the minimum possible if the partnership firm operates on a small or medium scale. But a joint-stock company is exposed to greater procedural formalities both at the time of incorporation and during its life. Incorporation of a company is compulsory. For this purpose, many documents have to be prepared and fee deposited with the Registrar of Companies. A public company also needs a ‘Certificate to Commence Business’ before it could start business operations.

(9) Launching the Enterprise – The completion of physical, organizational, and financial aspects leads ultimately to the actual launching of the enterprise.

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 2 Forms of Business Organisation Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Forms of Business Organisation NCERT Solutions for Class 11 Business Studies Chapter 2

Forms of Business Organisation Questions and Answers Class 11 Business Studies Chapter 2

Tick the appropriate answer :

Question 1.
The structure in which there is the separation of ownership and management is called
(a) Sole Proprietorship
(b) Partnership
(c) Company
(d) All business organizations
Answer:
(c) Company

Question 2.
The Karta in Join Hindu Family -business has
(a) Limited liability
(b) Unlimited liability
(c) No liability for debts
(d) Joint liability
Answer:
(b) Unlimited liability

Question 3.
In a cooperative society the principle followed is
(a) One share one vote
(b) One man one vote
(c) No vote
(d) Multiple vote
Answer:
(b) One man one vote

Question 4.
The board of directors of a joint stock company is elected by
(a) General public
(b) Government bodies
(c) Share-holders
(d) Employees
Answer:
(c) Share-holders

Question 5.
The maximum number of partners allowed’in the banking business are ………….
(a) Twenty
(b) Ten
(c) No limit
(d) Two
Answer:
(b) Ten

Question 6.
Profits do not have to be shared. This statement refers to
(a) Partnership
(b) Joint Hindu Family business
(c) Sole Proprietorship
(d) Company
Answer:
(c) Sole Proprietorship

Question 7.
The capital of a company is divided into number of parts each one of which are called
(a) Dividend
(b) Profits
(c) Interest
(d) Shares
Answer:
(d) Shares

Question 8.
The Head of the Joint Hindu Family business is called
(a) Proprietor
(b) Director
(c) Karta
(d) Manager
Answer:
(c) Karta

Question 9.
Provision of residential accommodation to the members at reasonable rates is the objective of
(a) Producer’s Cooperative
(b) Consumer’s Cooperate
(c) Housing Cooperative
(d) Credit Cooperation
Answer:
(c) Housing Cooperative

Question 10.
A partner whose association with the firm is unknown to the general public is called
(a) Active Partner
(b) Sleeping Partner
(c) Nominal Partner
(d) Secret Partner
Answer:
(d) Secret Partner

Short Answer Questions

Question 1.
For which of the following types of business do you think a sole proprietorship form of organisation would be more suitable and why?
(a) Grocery store
(b) Medical store
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm
Answer:
(a) Grocery store – For grocery’ store, sole proprietorship is suitable form of business as it does not require large capital, lire individual management is required to run the store. It does not require professional skills and the business needs personal touch and control with customers and no legal formalities required to start the business.

(b) Medical store – It is suitable for sole proprietorship as it does not need any legal formalities to start the business except to obtain licence from medical association. It does not require huge amount of capital and no professional management is needed.

(c) Chartered accountancy firm – Sole proprietorship is suitable firm of business as it needs personal contact with the firms or customers, having technical knowledge, skill and professional degree are required.

Question 2.
For which of the following types of business do you think a partnership form of organisation would be more suitable, and why?
(a) Grocery store
(b) Medical clinic
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm
Answer:
(a) Legal consultancy – For legal consultancy, partnership form of business is suitable as it needs large volume of capital. Partners can accomplished different functions according to the area or division. The accounts are not published so it has more secrecy also.

(b) Craft centre- For craft centre also, partnership firm is suitable as more financial resources are required. In craft Centre, partners may divide the work according to the suitability of the partner.

(c) Internet cafe – In internet cafe, both sole proprietorship or partnership firm are suitable, but it will be more profitable in partnership as it require large amount of capital and to some extent involves risk also which will be shared among the partners.

Question 3.
Explain the following terms in brief.

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

Answer:
1. Perpetual succession:
A company is a legal entity separate from its owners or members. It can be brought to an end only by law as it is created by the law. It will only cease to exist when a specific procedure for its closure, called winding up, is completed.

Members may come and go, but the company continues to exist through a consecutive succession of old members by new members on a continuous basis. We can say that ‘perpetual succession’ implies permanent existence which is not affected by death, retirement insolvency of members.

2. Common Seal:
A company is a creation of law and exists independent of its members. The company is thus considered to be an artificial person who acts through its Board of Directors. When the Board of Directors enters into an agreement with others, it indicates the company’s approval through a common seal.

The common seal is the engraved equivalent of an official signature. Any agreement which does not have the company seal put on it is not legally binding on the company.

3. Karta:
The head of the Joint Hindu Family who is the eldest member and controls the Joint Hindu Family business which is a specific form of business organization found only in India is called Karta. Joint Hindu Family business refers to a form of organization wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF).

It is governed by Hindu Law. The control of the family business lies with the Karta. He takes all the decisions and is authorized to manage the business. His decisions are binding on the other members. The Karta has unlimited liability while the liability of all other members is limited to their share of coparcenary property of the business.

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

Question 4.
Compare the status of a minor In a Joint Hindu Family business with that in a partnership firm.
Answer:
When the inclusion of an individual into the business occurs due to the birth in the Hindu Undivided Family (HUF) is known as Minor. On the other hand, the partnership is based on a legal contract between two persons who agree to share the profits or losses of a business carried on by them and a minor is incompetent to enter into such a valid contract with others. Hence, a minor cannot become a partner in any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent of all other partners.

Question 5.
If registration is optional, why do partnership firm willingly go through this legal formality and get themselves registered? Explain.
Answer:
Registration of Partnership – Under law, it is not compulsory to get the partnership firm registered. It is optional for the partners to get their firm registered. If they so desire, they can get their firm registered with the Registrar of Firms of the relevant State. The registration of a firm is a simple process. In order to get registered, a firm must submit an application to the Registrar of firms containing the followings:

• the firm name
• the principal place of business
• the names of other places where firm carries on business;
• the date when each partner joined the firm;
• the names and addresses of the partners; and
•  the duration of the firm.

The application must be duly signed by all the partners and should be accompanied by the partnership deed and the necessary registration fee. After being satisfied, the Registrar of Firms will enter the name of the firm in the Register of Firms and will issue a Registration Certificate to the firm.

Consequences of Non-registration – A partnership arises out of an agreement between two or more persons and not out of registration. Registration provides only a reliable evidence and a conclusive proof of the existence of a partnership firm. Non-registration of a firm does not make the partnership agreement or any transaction between the partners and outsiders void. However, according to Sec. 69 of the Partnership Act, the consequences of non-registration are as follows :

1. It cannot enforce its claim against a third party in a court of law.
2. Partners of unregistered firms cannot sue the firm to enforce their claims.
3. An unregistered firm cannot file a suit against a third party for the recovery of claims. It cannot claim a set-off in a suit filed against it.
4. An unregistered firm can’t file a suit against any of its partners.

Because of the above disabilities due to non-registration, it is desirable to get the firm registered. The registered firm and its partners will have the rights to file suits mentioned above. Another effect of registration is that any statement, intimation or notice recorded in the Register of Firms is a conclusive proof of the facts stated there in.

Advantages of Registration:
The advantages of registration of a firm are as follows:

• Partners of a registered firm can file suits against the firm to enforce their rights.
• Partners can file suits against each other and against outsides.
• The firm can file a suit against any of its partners to enforce its rights in a court of law.
• The firm can enforce its claim against third parties in a court of law. It can also claim a set-off in a suit filed against it.
• Third parties can obtain information about the firm and its partners from the Registrar of Firms before dealing with it.
• A person intending to join as a partner can obtain necessary information from the Registrar of firms.

Question 6.
State the important privileges available to a private company.
Answer:
The following are some of the privileges of a private limited company as compared to a public limited company

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

Question 7.
How does a cooperative society exemplify democracy and secularism? Explain.
Answer:
Cooperative is an association of persons usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled business organizations. Cooperative societies enjoy the various advantages specially democracy and secularism.

Democratic Management – Every member has one vote irrespective of the amount of shares subscribed by him. The principle of “one vote one man” is followed. Office bearers are the elected , representative of the members.

Secularism Principle – A person having common interest may join and leave the society at his own will. Membership is open irrespective of religion, caste and sex. Mutual cooperation, distributive justice, decentralization of power, open membership makes cooperative societies asocial utility.

Question 8.
What is meant by ‘Partner of Estoppel’. Explain.
Answer:
A partner by estoppel is a person who gives an impression to others that he/she is a partner of the firm through his / her own initiative, conduct, or behavior. Such partners are held liable for the debts of the firm because in the eyes of others, they are considered partners, even though they do not contribute capital or take part in its management, e.g., Mr. Sharma is a friend of Mr. Mathur who is a partner in a pharmaceutical firm Health First.

On Mr. Mathur’s request, Mr. Sharma accompanies him to a business meeting with Wellness Pharmaceuticals and actively participates in the process of negotiation for a business deal and gives the impression that he is also a partner in Health First. If credit is extended to Health First on the basis of these negotiations, Mr. Sharma would also be liable for repayment of such debt, as if he is acting as the partner of the firm.

Long Answer Questions

Question 1.
What do you understand by sole proprietorship? Explain its merits and limitations. .
Answer:
Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the incipient of all profits and bearer of all risks. The word “Sole’’ implies “only” and “proprietor” refers to “owner”. Hence, a sole proprietor is the only owner of a business. This form of business is particularly common in small-scale businesses and areas of personalized services.

Merits:
A sole proprietorship offers many advantages. Some of the important ones are as follows:
(i) Quick decision making:
A sole proprietor enjoys a considerable degree of freedom in making business decisions. Further, the decision-making is prompt because there is no need to consult others. This may lead to timely capitalisation of market opportunities as and when they arise.

(ii) Confidentiality of information:
Sole decision-making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy. A sole trader is also not bound by law to publish a firm’s accounts.

(iii) Direct incentive:
A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit. The need to share profits does not arise as he/she is the single owner. This provides a maximum incentive to the sole trader to work hard.

(iv) Sense of accomplishment:
There is personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instills in the individual a sense of accomplishment and confidence in one’s abilities.

(v) Ease of formation and closure:
An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.

Limitations:
Notwithstanding various advantages, the sole proprietorship form of organization is not free from limitations. Some of the major limitations of sole proprietorship are as follows:
(i) Limited resources:
Resources of a sole proprietor are limited to his/her personal savings and borrowings from others. Banks and other lending institutions may hesitate to extend a long-term loan to a sole proprietor. Lack of resources is one of the major reasons why the size of the business rarely grows much and generally remains small.

(ii) Limited life of a business concern:
In the eyes of the law, the proprietorship and the owner are considered one and the same. Death, insolvency or illness of a proprietor affects the business and can lead to its closure.

(iii) Unlimited liability:
A major disadvantage of a sole proprietorship is that the owner has unlimited liability If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor. A poor decision or unfavourable circumstances can create a serious financial burden on the owners. That is why a sole proprietor is less inclined to take risks in the form of innovation or expansion.

(iv) Limited managerial ability:
The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual who excels in all these areas. Thus decision-making may not be balanced in all cases. Also, due to limited resources, sole proprietors may not be able to employ and retain talented and ambitious employees.

Though sole proprietorship suffers from various shortcomings, many entrepreneurs opt for this form of organisation because of its inherent advantages. It requires less amount of capital. It is best suited for businesses which are carried out on a small scale and where customers demand personalised services.

Question 2.
Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
Answer:
Advantages of Partnership – Along with sold proprietorship, partnership firm also gained popularity because of many advantages. Partnership allows raising more amount of capital. The strains on the sole proprietor can be relieved by sharing the work between two or more partners.

Each partner can look after those matters for which he is best fitted. This will lead to benefits of specialisation. The partners can consult each other and they can represent other partners in dealings with third parties. The fear of discontinuance of business is less as compared to sole tradership because of a number of partners who can take care’of the business in case of ill-health, insolvency, insanity or death of a partner.

The partnership firm has greater chances of survival as it can operate in a number of business lines to secure its interests. It can raise more funds because of the personal reputation of the partners.

As compared with a sole, leadership and company, the advantages of a partnership firm are discussed below :
(i) Ease of Formation – Partnership is simple to form, inexpensive to establish and easy to operate. No legal formalities are required. An agreement, which may be oral or written, is sufficient to enter into partnership. Registration of the firm is not compulsory. But if a firm wants to get itself registered, the procedure is very simple.

(ii) Large Financial Resources – A partnership firm can raise larger capital as compared to sole trader. All the partners contribute to the capital of the firm. Moreover, new partner can be admitted to raise further capital of firm whenever necessary.

(iii) Better Management – A firm can conduct business on a large scale. It can afford to employ competent managers. Moreover, the partners also bring managerial skills for the business of the firm. Thus, the business is managed better as compared to sole tradership.

(iv) Better Decisions – Two heads are always better than one. This principle applies to partnership firms. The important decisions are taken with the mutual consent of all the partners.

(v) Sharing of Risks – The risks of the firm’s business are shared by a number of partners. The burden of risks on each partner is much less as compared to a sole proprietor.

(vi) Flexibility – Partnership business is free from legal restrictions and government control. Partners can make changes m the size of business, capital and managerial structure without any approval. Capital, profit-sharing ratio, price policy and other terms and conditions of the partnership can be changed very easily.

(vii) Matching of Ownership and Capital – The skill and experience of all the partners are pooled together. Moreover, there is a relationship between the efforts and rewards as in case of a sole trader. This acts as a motivating factor for the partners to work hard for the success of the business.

(viii) Impact of Unlimited Liability – The partners are severally and jointly liable for the debts of the firm up to an unlimited extent. This compels them to conduct business carefully. This acts as a brake on hasty and reckless decisions. Each partner tends to be cautious and adopts sound business practices in the interest of the partnership business.

(ix) Secrecy – Important secrets of a partnership firm can be maintained as it is not compulsory for it to get its accounts audited and published.

(x) Easy Dissolution – Partnership business suffers from instability, insolvency, insanity, retirement or death of a partner may cause abrupt end to business. There are no legal hurdles involved in dissolution. This helps in protection of minority interest. If a partner feels that his interests are not secured in the firm, he cannot be compelled by the majority partners to remain in the business. He can demand dissolution of the partnership firm.

Limitations or Disadvantages of Partnership – The partnership form of organisation suffers from the following disadvantages:
(i) Limited Resources – There is a limit to the maximum number of partners in a firm. Therefore, it is not possible to collect huge financial resources. Blowing capacity of partners is also limited.

(ii) Unlimited Liability- Every partner is fully liable for the debts. Fear of risks may restrict initiative and growth of business. Private properties of partners can also be taken up for business losses.

(iii) Mutual Conflicts – All the partners can participate in the management of the business. But difference in their skills, capacity and foresightedness may make a ‘mess’ of the business of the firm.

(iv) Delay in Decision-making – The consent of all the partners is required in order to take all policy decisions. It may create delays in taking decisions.

(v) Risk of Implied Authority’ – Every’ partner is an agent of the firm. A dishonest partner may cause a great loss to the firm, All the partners may suffer due to the negligence.of one partner.

(vi) Non-transferability of Interest – A partner cannot transfer his interest in the firm to outsiders without the unanimous consent of all other partners. This discourages people from investing in partnership firms.

Suitability of Partnership – Despite its various disadvantages or limitations, partnership firm has not lost popularity. It is a simple and convenient form of proprietorship. This form of or|anisation is suitable where the size the business is relatively ginal I and I the capital requirements are low.

It is also suitable where the partners use their professional skills; That is why this form of organisation’s the most popular among chartered accountants, lawyers, stock brokers, estate agents, solicitors and doctors.

Partnership firm ¡s suitable under the following conditions:

• The business is run on a smàll or medium scale.
• Personal touch with the customers or clients is essential.
• lt is convenient Ibr the professionals to form partnership.
• lt facilitates partnership between those having capital and those having technical qualifications.

Question  3.
Why Is It Important to choose an appropriate form of organization? Discuss the factors that determines the choice of form of organization.
Answer:
The important factors determining the choice of organization are discussed below:
(i) Cost and ease in setting up the organisation:
As far as initial business setting-up costs are concerned, sole proprietorship is the most inexpensive way of starting a business. However, the legal requirements are minimum and the scale of operations is small. In the case of partnership also, the advantage of fewer legal formalities and lower cost is there because of the limited scale of operations.

Cooperative societies and companies have to be compulsorily registered. The formation of a company involves a lengthy and expensive legal procedure. From the point of view of initial cost, therefore, sole proprietorship is the preferred form as it involves least expenditure. Company form of organisation, on the other hand, is more complex and involves greater costs.

(ii) Liability:
In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may call for paying the debt from personal assets of the owners. In joint Hindu family business, only the Karta has unlimited liability.

In cooperative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets. Hence, from the point of view of investors, the company form of organisation is more suitable as the risk involved is limited.

(ii) Continuity:
The continuity of sole proprietorship and partnership firms is affected by such events as death, insolvency or insanity of the owners. However, such factors do not affect the continuity of business in the case of organisations like joint Hindu family business, cooperative societies and companies.

In case the business needs a permanent structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred.

(iv) Management ability:
A sole proprietor may find it difficult to have expertise in all functional areas of management. In other forms of organisations like partnership and company, there is no such problem. Division of work among the members in such organisations allows the managers to specialise in specific areas, leading to better decision making.

But this may lead to situations of conflicts because of differences of opinion amongst people. Further, if the organisation’s operations are complex in nature and require professionalised management, the company form of organisation is a better alternative.

Proprietorship or partnership may be suitable, where the simplicity of operations allow even people with limited skills to run the business. Thus, the nature of operations and the need for professionalised management affect the choice of the form of organisation.

(v) Capital considerations:
Companies are in a better position to collect large amounts of capital by issuing shares 10 a large number of investors. Partnership firms also have the advantage of the combined resources of all partners. But the resources of a sole proprietor are limited.

Thus, if the scale of operations is large, company form may be suitable whereas for medium and small-sized business one can opt for partnership or sole proprietorship. Further, from the point ’ of view of expansion, a company is more suitable because of its capability to raise more funds and invest in expansion plans.

It is precisely for this purpose that in our opening case Neha’s father suggested she should consider switching over to the company form of organisation.

(vi) Degree of control:
If direct control over operations and absolute decision-making power is required, proprietorship may be preferred. But if the owners do not mind sharing control and decision making, partnership or company form of organisation can be adopted.

The added advantage in the case of a company form of organisation is that there is complete separation of ownership and management and it is professionals who are appointed to independently manage the affairs of a company.

(vii) Nature of business:
If direct personal contact is needed with the customers such as in the case of a grocery store, proprietorship maybe more suitable. For large manufacturing units, however, when direct personal contact with the customer is not required, the company form of organisation may be adopted.

Similarly, in cases where services of a professional nature are required, a partnership form is much more suitable. It would not be out of place to mention here that the factors stated above are inter-related. Factors like capital contribution and risk vary with the size and nature of the business, and hence a form of business organization that is suitable from the point of view of the risks for a given business when run on a small scale might not be appropriate when the same business is carried on a large scale.

It is, therefore, suggested that all the relevant factors must be taken into consideration while making a decision with respect to the form of organisation that should be adopted.

Question  4.
Discuss the characteristic, merits and limitations of cooperative firm of organization. Also describe breifly different types of cooperative societies.
Answer:
Characteristics of Cooperatives – The essential features of a cooperative form of organisation are discussed below

(1) Voluntary Association – A cooperative society is a voluntary organization of persons desirous of improving their economic status on cooperative basis. They can become the members of the cooperative society on their own and can leave it whenever they feel like, by giving a notice to the society,

(2) Open Membership – There is no restriction on entry into a cooperative society. Its membership isopen to all persons having certain common interests. Caste, creed, religion or sex is no bar on membership.

(3) Separate Legal Entity – A cooperative society is required to be registered with the Registrar of Cooperative Societies under the Cooperative Societies Act, 1912. On registration, it becomes a body corporate. It can own property in its own name. It can enter into contracts with other persons; It becomes an autonomous and self-governing organisation. It can also sue and be sued in its own name.-

(4) Service Motive – The primary aim of a cooperative society is
to provide service to its members. Its motto is “each for all and all for each”. However, a cooperative society may earn some profits for the benefit of its members. ,

(5) Democratic Management – A cooperative society is a democratic form of organisation because each member has equal voting rights. One member, one vote ensures democratic management and control of a cooperative society. The organisation of a cooperative society is democratic and all members have an equal voice in the management.

(6) Disposal of surplus – The surplus arising out of year’s working is not distributed among the members by way of dividend. A specified portion of the profits is transferred to Statutory Reserve Fund and then a fair rate of interest is paid on the capital subscribed by the members. The remaining profits are distributed equitably among the members according to the extent of the business transacted with it by each member.

Advantages and Disadvantages of Cooperative Organisation

Advantages of Cooperative Organisation – The cooperative form of organisation is gaining popularity because of the following advantages:

(1) Mutual Benefit Association Cooperatives are formed on the basis of voluntary association of persons to provide them with certain services at ‘no profit, no loss’ basis. The members form a society on the basis of mutual help. This promotes a feeling of cooperation and selflessness among the members.

(2) Steady Supply of Goods and Services – Consumers’ cooperative stores ensure a steady and regular supply of goods at reasonable prices by eliminating middlemen and thus avoiding their excessive profits.

(3) Fair Dealings – Cooperatives ensure fair and honest business practices. They do not indulge in overstocking and speculative buying of goods.

(4) Open Membership – Any person having a common interest can become a member of a cooperative society having one share. Moreover, the shares are non-transferable. Hence, the shares are free from Speculation.

(5) Democratic Management – Management of cooperative is fully democratic in nature because of the principle of ‘one man, one vote’. It prevents the domination of the rich shareholders having greater number of shares over the other shareholders of the society.

(6) Equitable Distribution of Surplus – The entire surplus is not distributed in the form of dividend on capital. The rate of dividend cannot exceed a certain limit. The yearly profit or surplus is utilised in transferring apart of it to the reserve fund and the remaining in the form of bonus to the members on the basis of their transactions with the society. This leads to the equitable distribution of surplus.

(7) Limited Liability- The liability of the members in a cooperative organisation is limited to the extent of their capital contribution. The effect of limited liability is mentioned in the bye-laws of the cooperatives which is checked by the registrar at the time of registering the same.

(8) Continuity – The cooperative society enjoys a separate legal
entity of its own independent of the entity of its members who own it. The death, leniency or insolvency of a member does not affect its existence.

(9) Government Assistance – Since cooperatives have been accepted by the Government as an instrument of economic policy, a number of grants, loans and financial assistance are offered to them to make them function efficiently.

Disadvantages of Cooperative Organisation – The cooperatives suffer from the following drawbacks:

(1) Limited Capital – Cooperative societies is not able to mobilise adequate capital for their large-scale operations because the rate of dividend on capital is low and every member has equal voting rights irrespective of the member of shares held by him. A cooperative society often faces shortage of funds.

(2) Inefficient Management – The guaranteed market for the cooperatives slackens the efforts of the management. Moreover, the management may not comprise of competent and efficient persons to deal with the business problems. A cooperative society cannot afford to employ expert management at high salaries.

(3) Excessive Government Regulations — The cooperatives are subjected to a variety of regulations from the cooperative department of the State Government partly because the Government offers a number of financial grants and partly because it is always anxious to see that the movement succeeds. All this has led to excessive Government regulations in the day-to-day functioning of the cooperative which, at times, amounts to interference.

(4) Lack of Motivation – Honorary office-bearers of a cooperative society have very little incentive to work hard for the society. The members of the managing committee with whom rests the responsibility of managing the cooperative do not feel sufficiently motivated to do their best to see the cooperative a grant success.

(5) Lack of Secrecy – As is usually common with the forms of organisation which enjoy separate legal entity and as such as under obligation to make full disclosures of their operations to their members, the cooperatives too being corporate in status fail to preserve their business secrets. Therefore, it becomes difficult to keep the secrets of business.

(6) Conflicts – Quite often disputes arise among the managing committee and members. Moreover, some members are indifferent towards the working of the cooperative society which gives unrestricted power to the managing committee.

(7) Misuse of Funds – Ignorance of business principles and misuse of funds for personal ends may lead to recurring losses. This may put the survival of the cooperative society in danger. The cooperative credit societies may advance loans to the members without sufficient security.

Types, of Cooperative Societies – Cooperatives Societies may be classified into different categories according to the nature of the services rendered by them. Following are the main types of cooperative societies:

1. Consumers’cooperative societies.
2. Cooperative credit societies.
3. Producers’cooperative societies.
4. Marketing cooperative societies.
5. Cooperative fanning societies.
6. Cooperative housing societies.

(1) Consumers’ Cooperative Societies – A consumer cooperative store is set up to ensure a steady supply of essential commodities at fair prices. A consumers’ cooperative store purchases the consumer goods either from the manufacturers or the wholesalers and then sells them to its members a reasonable prices.

The profits made by the society during a year are utilised for strengthening the reserve fund of the society, for declaring a moderate rate of dividend and for declaring a bonus to the members according to the purchases made by them. Such societies are formed to provide residential accommodation to their members either on ownership basis or at fair rents.

(2) Cooperative Credit Societies – Cooperative credit societies are formed to provide financial assistance in the form of direct loans to their members. These societies are organised both in rural and urban areas. Funds are pooled together by members’ contributions and are utilised in giving loans to needy members on easy terms. Thus, the members are protected from the clutches of the money-lenders who charge very high rates of interest. Another equally important purpose of credit cooperatives is to encourage the habit of thrift among their members.

(3) Producers’ Cooperative Societies – An industrial or producer’s cooperative is organised on small scale producers to face competition and to increase the production. The society sells the output in the market and distributes the profits by each member. Thus, a producers’ society not only provides money and materials to the small artisans but also undertakes to sell their products.

(4) Cooperative Marketing Societies – Cooperative marketing is of great importance to the small producers and agriculturists who face many difficulties in selling their output at remunerative profits. Marketing cooperatives seek to ensure a steady and favourable market for the output of their members. The output of its members is pooled together and sold according to market conditions. The profits on sales are distributed according to the contribution of the members to the pool. Marketing cooperatives eliminate middlemen and ensure honest trading practices as regards weight, measurement and accounting.

(5) Cooperative Farming Societies – These are voluntary associations of small farmers who join together to avail the benefits of large scale mechanised farming. It provides economic and social security to farmers. They aim at scientific organization of agriculture involving use of improved seeds, fertilizers, irrigation, soil conservation and other modem techniques.

(6) Cooperative Housing Societies – These societies are formed mostly in urban areas where the problem of housing is acute. These societies are allotted land by the land authority or by the Urban Development Authority at concessional prices. Such societies can also negotiate loans for its members on easy terms from financial institutions.

Question 5.
Distinguish between a Joint Hindu family business and a partnership.
Answer:
Joint Hindu family business is the form of business owned by the members of a family. It is managed by the head of the family, known as karta, whose liability is unlimited. The liability of other members is limited. The membership attains since birth of a child in the family.

Partnership firm is an agreement between two or more persons to carry on legal business with profit motive, carried on by all or any one of them acting for all.

Difference between joint Hindu family business and partnership firm:
Following are the bases of difference between Joint Hindu family business and partnership- .

Difference between Partnership and Joint Hindu Family Business :

Question 6.
Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organizations? Why?
Answer:
Sole proprietorship refers to a form of business organization which is owned, managed, and controlled by an individual who bears all risks and receives all profits. This form of business is suited mainly in areas of personalized services and small-scale activities due to a shortage of capital and limited abilities of an individual who is the proprietor.

Still, many people continue to prefer sole proprietorship over other form organization as sole proprietorship offers many advantages such as:
(i) Prompt Decision Making:
The decision-making is prompt under sole proprietorship as there is a considerable degree of freedom in making business decisions and there is no need to consult others as in the case of a partnership or co-operative societies. This results in the effective capitalization of market opportunities as and when they arise.

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

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

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

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